##### 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 March 31, 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
    
    91-1819567(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 821 Second Avenue,
18thFloorSeattle, Washington 98104(Address of principal executive offices) (206) 816-8800
(Registrants telephone number, including area code)    Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes þ No o The
number of shares of the registrants Common Stock outstanding as
of May 3, 2005 was
63,226,048.




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AQUANTIVE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 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
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 6. Exhibits
    
    
    30EXHIBIT 10.10EXHIBIT 10.23EXHIBIT 10.24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  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) March 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    22,457
    
    
    $
    24,555Short-term investments
    
    
    34,102
    
    
    
    34,692Accounts receivable, net of allowances
of $2,463 and $3,144 at March 31, 2005
and December 31, 2004, respectively
    
    
    113,726
    
    
    
    106,683Other receivables
    
    
    486
    
    
    
    1,486Prepaid expenses and other current assets
    
    
    2,667
    
    
    
    1,631Deferred tax asset
    
    
    7,204
    
    
    
    7,204Total current assets
    
    
    180,642
    
    
    
    176,251Property and equipment, net
    
    
    20,909
    
    
    
    17,569Goodwill
    
    
    138,636
    
    
    
    137,845Other intangible assets, net
    
    
    34,215
    
    
    
    36,226Other assets
    
    
    2,599
    
    
    
    2,690Deferred tax assets, net
    
    
    13,100
    
    
    
    15,642Total assets
    
    $
    390,101
    
    
    $
    386,223Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    71,657
    
    
    $
    68,542Accrued liabilities
    
    
    17,189
    
    
    
    21,066Pre-billed media
    
    
    10,321
    
    
    
    15,655Deferred rent, current portion
    
    
    603
    
    
    
    603Deferred revenue
    
    
    9,897
    
    
    
    10,394Total current liabilities
    
    
    109,667
    
    
    
    116,260Deferred rent, less current portion
    
    
    3,192
    
    
    
    3,010Long-term accrued liabilities
    
    
    437
    
    
    
    456Notes payable
    
    
    80,000
    
    
    
    80,000Total liabilities
    
    
    193,296
    
    
    
    199,726Shareholders equity:Common stock, $0.01 par value;
200,000 shares authorized 62,951 and
62,256 shares issued and outstanding at
March 31, 2005 and December 31, 2004,
respectively
    
    
    630
    
    
    
    623Paid-in capital
    
    
    237,808
    
    
    
    233,898Accumulated deficit
    
    
    (41,689
    )
    
    
    (48,099
    )Accumulated other comprehensive income
    
    
    56
    
    
    
    75Total shareholders equity
    
    
    196,805
    
    
    
    186,497Total liabilities and shareholders equity
    
    $
    390,101
    
    
    $
    386,223
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(in thousands except per share amounts)
(unaudited) Three Months endedMarch 31,2005
    
    
    2004Revenue
    
    $
    64,997
    
    
    $
    22,642Costs and expenses:Cost of revenue
    
    
    8,161
    
    
    
    4,038Client support
    
    
    30,656
    
    
    
    6,846Product development
    
    
    1,967
    
    
    
    1,492Sales and marketing
    
    
    2,939
    
    
    
    1,844General and administrative
    
    
    7,714
    
    
    
    4,069Amortization of intangible assets
    
    
    1,803
    
    
    
    513Client reimbursed expenses
    
    
    678
    
    
    
    Total costs and expenses
    
    
    53,918
    
    
    
    18,802Income from operations
    
    
    11,079
    
    
    
    3,840Interest and other income, net
    
    
    270
    
    
    
    580Interest expense
    
    
    590
    
    
    
    Income before provision for income taxes
    
    
    10,759
    
    
    
    4,420Provision for income taxes
    
    
    4,349
    
    
    
    273Net income
    
    $
    6,410
    
    
    $
    4,147Basic net income per share
    
    $
    0.10
    
    
    $
    0.07Diluted net income per share
    
    $
    0.09
    
    
    $
    0.06Shares used in computing basic net income per share
    
    
    62,790
    
    
    
    60,521Shares used in computing diluted net income per share
    
    
    74,083
    
    
    
    69,753Comprehensive income:Net income
    
    $
    6,410
    
    
    $
    4,147Items of comprehensive (loss) income
    
    
    (19
    )
    
    
    56Comprehensive income
    
    $
    6,391
    
    
    $
    4,203
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Three Months endedMarch 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,410
    
    
    $
    4,147Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,187
    
    
    
    1,554Changes in
operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (7,043
    )
    
    
    (6,220
    )Other receivables, prepaid expenses and other current assets
    
    
    (36
    )
    
    
    454Other assets
    
    
    (50
    )
    
    
    43Accounts payable
    
    
    3,115
    
    
    
    12,209Accrued liabilities
    
    
    (3,347
    )
    
    
    103Pre-billed media
    
    
    (5,334
    )
    
    
    6,057Deferred rent
    
    
    182
    
    
    
    114Deferred revenue
    
    
    (497
    )
    
    
    (1,231
    )Deferred taxes
    
    
    3,997
    
    
    
    48Net cash provided by operating activities
    
    
    1,584
    
    
    
    17,278CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (5,362
    )
    
    
    (525
    )Sales of marketable securities, net
    
    
    558
    
    
    
    10,869Acquisitions, less cash received of $60 in 2004
    
    
    (1,340
    )
    
    
    (4,243
    )Net cash (used in) provided by investing activities
    
    
    (6,144
    )
    
    
    6,101CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock related to exercises of common stock
options and the ESPP
    
    
    2,462
    
    
    
    1,641Net cash provided by financing activities
    
    
    2,462
    
    
    
    1,641Net (decrease) increase in cash and cash equivalents
    
    
    (2,098
    )
    
    
    25,020Cash and cash equivalents, beginning of period
    
    
    24,555
    
    
    
    32,797Cash and cash equivalents, end of period
    
    $
    22,457
    
    
    $
    57,817
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(in thousands except per share amounts)
(unaudited) 1. Organization and Operations of the Company aQuantive, Inc. (the Company) provides digital marketing services, technologies, and
performance media to businesses. The Company was founded on July 1, 1997 under the brand name
Avenue A and incorporated on February 27, 1998 in Washington State. The Companys headquarters are
located in Seattle,Washington. i-FRONTIER was acquired in November 2002, Atlas OnePoint (formerly
GO TOAST) was acquired in December 2003, Atlas NetConversions (formerly NetConversions) was
acquired in February 2004, and SBI.Razorfish, MediaBrokers and TechnologyBrokers were acquired in
July 2004. The results of operations for the three months ended
March 31, 2005 and 2004 include the
results of acquired businesses from their respective dates of acquisition. In early 2005, the
Company launched the rebranding of its collective digital marketing services offerings, including
i-FRONTIER, as Avenue A | Razorfish and its collective digital marketing technologies offerings as
Atlas. The Company operates in three lines of business: digital marketing services, digital marketing
technologies, and digital performance media. The Companys digital marketing services line of
business, including interactive advertising agency Avenue A | Razorfish provides service offerings
to clients that include web advertising, website development, email services, strategic portal
relationships, affiliate programs, customer targeting, analytical services, search engine
marketing, and creative. The Companys digital marketing
technologies line of business, which consists of Atlas, provides a digital marketing management system to manage digital marketing programs and
website effectiveness. The Companys digital performance media line of business, including DRIVEpm
and MediaBrokers, serves as a liaison between online publishers and advertisers by buying blocks of
online ad inventory from publishers and reselling the inventory to advertisers on a highly targeted
basis. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. These statements reflect all adjustments, consisting only of normal, recurring
adjustments that, in the opinion of the Companys management, are necessary for a fair presentation
of the results of operations for the periods presented. Operating results for the three months
ended March 31, 2005 and 2004 are not necessarily indicative of the results that may be expected
for any subsequent quarter or for the year ending December 31, 2005. Certain information and
footnote disclosures normally included in financial statements prepared in conformity with
generally accepted accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Companys audited financial
statements and the accompanying notes for the years ended December 31, 2004, 2003, and 2002, as
included in the Companys Annual Report on Form 10-K filed with the SEC. Use of Estimates in the Preparation of Financial Statements The preparation of the consolidated financial statements requires management to make a number
of estimates and assumptions relating to the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period.
Significant items subject to such estimates and assumptions include the carrying amount of property
and equipment, intangible assets and goodwill, valuation allowances for receivables, deferred
income tax assets and liabilities, state and city taxes, contingencies and obligations related to
employee benefits. Actual results could differ from those estimates. Revenue Recognition The Company follows Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements, as updated by SAB 104, Revenue Recognition which outlines the basic criteria that
must be met to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed with the SEC. In
addition, SAB 104 integrates the guidance in Emerging Issues Task Force Issue (EITF) 00-21,
Revenue Arrangements with Multiple Deliverables. The Company also follows SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts. In addition, the
Company follows the final consensus reached by the EITF in July 2000 on EITF 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent. 6




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Digital Marketing Services The Companys digital marketing services business line, interactive advertising agency Avenue
A | Razorfish, offers services to help clients use the Internet as an integrated online advertising
and business channel. The service offering includes a process anchored in strategic marketing,
user-centric design, dynamic technology platforms and channel integration and optimization. The
agencys core services include media management, website and web application development, and ad
creative. In addition, the agency also offers tools such as the Business Intelligence System,
ChannelScope, BrandOptics, Customer Targeting, Email and Customer Insights. Media management is comprised of several tasks including media planning and buying, ad
serving, campaign analysis, optimization, and search engine marketing. Each of these tasks is
executed on an ongoing basis, adding value throughout the duration of a campaign and representing
only one deliverable to the client. Avenue A | Razorfish earns fees for media management in two
different ways depending on the contractual terms with the client. The majority of revenue is
earned based on the dollar amount of advertising space purchased on behalf of its clients. The
Company recognizes this revenue as one accounting unit over the period of the campaign at the rate
at which the advertising is delivered. Certain contractual agreements with clients are structured
such that media management services are priced and earned on an hourly rate which is applied to the
hours worked on each client. In this case, revenue is recognized as one accounting unit over the
period of the campaign at the rate at which hours are worked. Revenue from website and web application development and ad creative are derived from either
fixed fee consulting contracts or from time and materials consulting contracts. Revenues derived
from fixed-fee consulting contracts are recognized as services and are rendered using the
percentage-of-completion method with progress-to-complete measured using labor hour inputs and
milestone outputs, as applicable. Cost estimates on percentage-of-completion contracts are reviewed
periodically with adjustments recorded in the period in which the revisions are made. Any
anticipated losses on contracts are charged to operations as soon as they are determinable.
Billings on uncompleted contracts may be greater than or less than the revenues recognized and are
recorded as either unbilled receivables (an asset) or deferred revenue (a liability) in the
accompanying condensed consolidated financial statements. Revenues derived from time and materials
consulting contracts are recognized as the services are performed. Customer Targeting is priced based on the dollar amount of advertising space purchased on
behalf of the client and is recognized over the period in which the campaign is delivered. E-mail and Business Intelligence System are volume based, and revenue is generally recognized
when impressions are delivered. The Company recognizes revenue from Search Engine Marketing
programs based on either volume or as a subscription. Revenue from the volume-based service is
generally recognized when impressions are delivered and revenue from the subscription-based service
is recognized ratably over the service period. Revenue is generally recognized for ChannelScope and
BrandOptics services under a proportional performance method of accounting. It is the Companys
policy to recognize any loss on services as soon as management estimates indicate a loss will
occur. Digital Marketing Technologies Our Digital Marketing Technologies segment encompasses our Atlas businesses. These include our
Atlas Digital Marketing Suite, our Atlas Search and Atlas OnePoint search marketing toolsets, Atlas
NetConversions web usability technology business, and our Atlas Publisher ad serving solution. Such
services are recognized based on either volume or subscription except for Atlas NetConversions
which is recognized using a proportional performance method of accounting. Revenue from the
volume-based services is recognized based on the volume in the period of usage. Revenue from
subscription-based services is recognized ratably over the service period. Digital Performance Media Digital performance media, which includes DRIVEpm and MediaBrokers, serves as a liaison
between online publishers and advertisers by securing blocks of online ad inventory from publishers
and reselling the inventory to advertisers on a highly targeted basis. DRIVEpm offers both the
Performance and Selector program and MediaBrokers offers both the MediaBrokers Pay For Performance
(PFP) and MediaBrokers Cost Per Impression (CPM) programs. Under the Performance and MediaBrokers
PFP programs, clients designate specific actions desired and pay once the specified actions are
achieved. Under the Selector and MediaBrokers CPM programs, clients can focus ad impressions on
those users that fit a predetermined customer segment. Revenue for these programs is volume-based and generally recognized based on the volume in the
period of usage. In accordance with EITF 99-19, revenue generated from digital performance media is
recognized under the gross method, which consists of the gross value of digital performance medias
billings to clients and includes the price of the advertising space that digital performance media
purchases from websites to resell to its clients. To generate revenue under gross method contracts,
the Company purchases advertising space from publisher websites whereby it is the primary obligor
to the arrangement and is solely responsible for payment even if the advertising space is not
utilized by its clients or funds are not collected from its clients. All Segments 7




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For all of the Companys lines of business, revenue is deferred in cases where the Company has
not yet earned revenue but has billed the customer or received payment from the customer prior to
providing the services. Revenue is recognized only when collection of the resulting receivable is
reasonably assured. Revenue also includes any reimbursements received from our clients related to expenses
incurred by our employees in servicing our clients. Such expenses include airfare, mileage, meals
and hotel stays. All reimbursable project expenses billed to customers are recorded as a component
of revenues and all reimbursable project expenses incurred are recorded as a component of operating
expenses. The percentage of sales to customers representing more than 10% of consolidated revenues is as
follows: March 31,2005
    
    2004Customer A
    
    
    12
    %
    
    
    19
    %
 The customer that represents sales of more than 10% of consolidated revenues is included
in both the digital marketing services and digital marketing technologies segments. The percentage
of accounts receivable representing more than 10% of consolidated accounts receivable is as follows
(if applicable): March 31,2005
    
    2004Customer A
Customer B
    
    *
*
    
    10%
15%
   *
    
    Less than 10% Recent Accounting
Pronouncements: In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payments (SFAS 123R), which requires the measurement of all share-based
payments to employees, including grants of employee stock options, using a fair-value-based method
and the recording of such expense in an entitys statement of income. The accounting provisions of
SFAS 123R are effective for annual reporting periods beginning after
June 30, 2005. The Company is
required to adopt SFAS 123R in the quarter ending March 31, 2006. The pro forma disclosures
previously permitted under SFAS 123, Accounting for Stock-Based Compensation, no longer will be
an alternative to financial statement recognition. See Stock-Based Compensation below for the pro
forma net income and net income per share amounts, for the three months ended March 31 2005 and
2004, as if the Company had applied the fair value recognition provisions of SFAS 123 to measure
compensation expense for employee stock incentive awards. The Company has completed a preliminary
evaluation of the impact of adopting SFAS 123R and estimates that it will have a material impact on
income from operations for the year ended December 31, 2006. This estimate is based on preliminary
information available to the Company and could materially change based on actual facts and
circumstances arising during the year ended December 31, 2006. Reclassifications Certain
prior year amounts have been reclassified to conform to the current
year presentation. 8




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3. Stock-Based Compensation The Company has elected to apply the disclosure-only provisions of SFAS No. 123. In
accordance with the provisions of SFAS No. 123 and SFAS No 148, Accounting for Stock-Based CompensationTransition and Disclosure, an Amendment of SFAS No. 123, the Company
applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25), and related interpretations in accounting for its stock option plans. The Company has not
issued any non-qualified stock options to non-employees during the quarters ended March 31, 2005
and 2004 and therefore has not recorded any compensation expense for those periods. The following table summarizes relevant information as to reported results under the
Companys intrinsic value method of accounting for stock awards, with supplemental information as
if the fair value recognition provisions of SFAS No. 123 had been applied: Three Months EndedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    6,410
    
    
    $
    4,147Deduct: total stock-based compensation determined under fair value
based method for all awards
    
    
    (2,323
    )
    
    
    (2,133
    )Pro forma net income, fair value method for all stock-based awards
    
    $
    4,087
    
    
    $
    2,014Basic net income per share:As reported
    
    $
    0.10
    
    
    $
    0.07Pro forma
    
    $
    0.06
    
    
    $
    0.03Diluted net income per share:As reported
    
    $
    0.09
    
    
    $
    0.06Pro forma
    
    $
    0.06
    
    
    $
    0.03
 The fair value for options granted under the Companys stock option plans was estimated
at the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends
and the following weighted average assumptions: March 31,2005
    
    
    2004Weighted average risk-free interest rate
    
    
    4.04
    %
    
    
    2.99
    %Expected lives (in years from vest date)
    
    
    4.5-7.0
    
    
    
    1-6.5Expected volatility
    
    
    104
    %
    
    
    106
    %
 The fair value of the shares granted under the Companys employee stock purchase plan was
estimated using the Black-Scholes option-pricing model, assuming no expected dividends and the
following weighted average assumptions: March 31,2005
    
    
    2004Weighted average risk-free interest rate
    
    
    2.36
    %
    
    
    1.08
    %Expected lives (in years)
    
    
    0.5-1.0
    
    
    
    0.5-1.0Expected volatility
    
    
    54.3
    %
    
    
    72.9
    %
 4. Net Income Per Share The following is a reconciliation of the numerators and denominators used in computing
basic and diluted earnings per share: Three Months EndedMarch 31,2005
    
    
    2004Net income (numerator for basic)
    
    $
    6,410
    
    
    $
    4,147Add: Interest expense on convertible notes
    
    
    359
    
    
    
    Adjusted net income (numerator for diluted)
    
    
    6,769
    
    
    
    4,147Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    62,790
    
    
    
    60,521Shares used in computation of basic net income per share
    
    
    62,790
    
    
    
    60,521Add: Dilutive effect of employee stock options
    
    
    5,130
    
    
    
    9,232Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    Shares used in computation of diluted net income per share
    
    
    74,083
    
    
    
    69,753Basic net income per share
    
    $
    0.10
    
    
    $
    0.07Diluted net income per share
    
    $
    0.09
    
    
    $
    0.06
 9




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Using the treasury stock method, during the three months ended March 31, 2005 and 2004,
908 and 763, respectively, weighted common stock equivalent shares related to stock options are
excluded in the calculation of diluted net income per share, as their effect is anti-dilutive. 5. Segment Reporting The Company reports selected segment information in its financial reports to shareholders
in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The segment information provided reflects the three distinct lines
of business within the Companys organizational structure: digital marketing services, which
consists of our interactive agency Avenue A | Razorfish, digital marketing technologies, which
consists of Atlas and digital performance media, which consists of DRIVEpm and MediaBrokers. Unallocated corporate expenses are centrally managed at the corporate level and not reviewed
by the Companys chief operating decision maker in evaluating results by segment. Segment information for the three months ended March 31, 2005 and 2004 is as follows: Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalThree Months ended March 31, 2005Revenue
    
    $
    39,087
    
    
    $
    20,641
    
    
    $
    5,269
    
    
    $
    
    
    
    $
    64,997Costs and expenses:Cost of revenue
    
    
    
    
    
    
    4,757
    
    
    
    3,212
    
    
    
    192
    1
    
    
    8,161Client support
    
    
    29,727
    
    
    
    
    
    
    
    929
    
    
    
    
    
    
    
    30,656Product development
    
    
    
    
    
    
    1,967
    
    
    
    
    
    
    
    
    
    
    
    1,967Sales and marketing
    
    
    1,093
    
    
    
    1,846
    
    
    
    
    
    
    
    
    
    
    
    2,939General and administrative
    
    
    3,138
    
    
    
    1,795
    
    
    
    240
    
    
    
    2,541
    
    
    
    7,714Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Total costs and expenses
    
    
    34,636
    
    
    
    10,365
    
    
    
    4,381
    
    
    
    4,536
    
    
    
    53,918Income (loss) from operations
    
    $
    4,451
    
    
    $
    10,276
    
    
    $
    888
    
    
    $
    (4,536
    )
    
    $
    11,079Three Months ended March 31, 2004Revenue
    
    $
    9,862
    
    
    $
    11,995
    
    
    $
    785
    
    
    $
    
    
    
    $
    22,642Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,066
    
    
    
    972
    
    
    
    
    
    
    
    4,038Client support
    
    
    6,643
    
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    6,846Product development
    
    
    
    
    
    
    1,492
    
    
    
    
    
    
    
    
    
    
    
    1,492Sales and marketing
    
    
    177
    
    
    
    1,667
    
    
    
    
    
    
    
    
    
    
    
    1,844General and administrative
    
    
    962
    
    
    
    1,529
    
    
    
    50
    
    
    
    1,528
    
    
    
    4,069Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    513
    
    
    
    513Total costs and expenses
    
    
    7,782
    
    
    
    7,754
    
    
    
    1,225
    
    
    
    2,041
    
    
    
    18,802Income (loss) from operations
    
    $
    2,080
    
    
    $
    4,241
    
    
    $
    (440
    )
    
    $
    (2,041
    )
    
    $
    3,840
   1
    
    For the three months ended March 31, 2005, 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. The Company recorded $6,631 and $1,188 of revenue to international customers during the
three months ended March 31, 2005 and 2004, respectively. Pursuant to SFAS No. 131, total segment assets have not been disclosed as this
information is not reported to or used by the chief operating decision maker. Additionally,
substantially all of the Companys assets are located in the United States as of March 31, 2005 and
2004. 10




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##### Table of Contents



6. Legal Proceedings The Company is currently the subject of a consolidated lawsuit alleging violations of the
federal securities laws in connection with disclosures contained in the Companys prospectus dated
February 28, 2000, for its initial public offering of common stock. SBI.Razorfish is also similarly
the subject of this consolidated lawsuit relating to its initial public offering in April 1999. The
lawsuit generally relates to underwriting practices and disclosure of commissions to be earned by
the underwriters. The parties have entered into a settlement agreement relating to this lawsuit,
which has received preliminary approval from the Court but remains subject
to a number of procedural conditions.
The Company is also currently the subject of purported class action
litigation that alleges that certain other named defendants
deceptively downloaded harmful software to the plaintiffs computers,
and that the Company sent intrusive advertisements to plaintiffs
computers. The claims asserted against the Company are unjust
enrichment and trespass to chattels. An adverse result in either of
these pending lawsuit could seriously harm the Companys business. In addition, the
Company may be
subject to additional suits in the future by government entities or other third parties regarding
the Companys collection and use of Internet user information,
Internet advertising practices intellectual property
rights, alleged violations of the federal securities laws or other
matters, any of which could seriously
harm the Companys business. 
 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. We begin Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with an introduction to aQuantives lines of business and an overview of the
significant highlights for the three months ended March 31, 2005 and 2004. In the next section,
beginning on page 14, we discuss our results of operations for the three months ended March 31,
2005 compared to the three months ended March 31, 2004. We then provide an analysis of changes in
our cash flows, discuss our financial commitments in the section titled Liquidity and Capital
Resources, and provide our outlook for the remainder of 2005. Overview We are a digital marketing services and technology company that helps marketers acquire,
retain, and grow customers across digital media. We are organized into three lines of business,
digital marketing services, digital marketing technologies, and digital performance media. Acquisitions and Comparability of Operations Our results of operations for the three months ended March 31, 2005 include the results
of several acquisitions during the past year including NetConversions (now Atlas NetConversions) in
February 2004 and MediaBrokers, TechnologyBrokers (now Atlas Europe) and SBI.Razorfish (now Avenue
A | Razorfish) in July 2004. The results of these acquisitions must be factored into any comparison
of our 2005 results of operations to 2004 results. Digital Marketing Services The Companys digital marketing services line of business consists of our interactive
advertising agency Avenue A | Razorfish. Avenue A | Razorfish offers advertisers a suite of digital
marketing services to help clients use the Internet as an integrated online business channel. All
of our capabilities include a process anchored in strategy, user-centric design, dynamic technology
platforms, channel integration and optimization. We provide digital marketing services through our
media and search business that offers media planning and buying, ad serving, campaign analysis,
optimization, search engine marketing, customer targeting and email, using proprietary tools
including Business Intelligence System, ChannelScope and BrandOptics and through our creative and
web development business acquired from the acquisition of SBI.Razorfish. Digital Marketing Technologies 11




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##### Table of Contents



Atlas provides digital marketing technologies to manage digital marketing programs and
website effectiveness for advertising agencies and enterprise marketers, small and mid-size
businesses and select publishers. We provide the following Atlas services for managing digital
marketing programs:  
    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 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 Digital performance media includes DRIVEpm and MediaBrokers. We purchased MediaBrokers in
July 2004. DRIVEpm and MediaBrokers serve as a liaison between online publishers and advertisers by
buying blocks of online advertising inventory from publishers and reselling that inventory to
advertisers on a highly targeted basis. We provide the following services for managing targeting
programs:  
    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 The preparation of financial statements in conformity with generally accepted accounting
principles in the United States requires estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a
companys most critical accounting policies as the ones that are most important to the portrayal of
the companys financial condition and results of operations, and that require managements most
difficult, subjective, or complex judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available. Actual results may
differ significantly from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies during the three
months ended March 31, 2005 as compared to what was previously disclosed in our Form 10-K for the
year ended December 31, 2004. 12




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##### Table of Contents



Estimates and Assumptions Related to Financial Statements The discussion and analysis of our financial condition and results of operations is based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including those affecting
revenues, the allowance for doubtful accounts, allowance for sales credits, intangible assets,
goodwill, state, local and federal income taxes and general business contingencies. We base our
estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form our basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. 13




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##### Table of Contents



Results of Operations The following table presents statements of operations data for each of our lines of business
for the three months ended March 31, 2005 and 2004. Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(in thousands)
    
    Three months ended March 31, 2005Revenue
    
    $
    39,087
    
    
    $
    20,641
    
    
    $
    5,269
    
    
    $
    
    
    
    $
    64,997Costs and expenses:Cost of revenue
    
    
    
    
    
    
    4,757
    
    
    
    3,212
    
    
    
    1921
    
    
    
    8,161Client support
    
    
    29,727
    
    
    
    
    
    
    
    929
    
    
    
    
    
    
    
    30,656Product development
    
    
    
    
    
    
    1,967
    
    
    
    
    
    
    
    
    
    
    
    1,967Sales and marketing
    
    
    1,093
    
    
    
    1,846
    
    
    
    
    
    
    
    
    
    
    
    2,939General and administrative
    
    
    3,138
    
    
    
    1,795
    
    
    
    240
    
    
    
    2,541
    
    
    
    7,714Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Total costs and expenses
    
    
    34,636
    
    
    
    10,365
    
    
    
    4,381
    
    
    
    4,536
    
    
    
    53,918Income (loss) from operations
    
    $
    4,451
    
    
    $
    10,276
    
    
    $
    888
    
    
    $
    (4,536
    )
    
    $
    11,079Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    590Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,349Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,410Three months ended March 31, 2004Revenue
    
    $
    9,862
    
    
    $
    11,995
    
    
    $
    785
    
    
    $
    
    
    
    $
    22,642Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,066
    
    
    
    972
    
    
    
    
    
    
    
    4,038Client support
    
    
    6,643
    
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    6,846Product development
    
    
    
    
    
    
    1,492
    
    
    
    
    
    
    
    
    
    
    
    1,492Sales and marketing
    
    
    177
    
    
    
    1,667
    
    
    
    
    
    
    
    
    
    
    
    1,844General and administrative
    
    
    962
    
    
    
    1,529
    
    
    
    50
    
    
    
    1,528
    
    
    
    4,069Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    513
    
    
    
    513Total costs and expenses
    
    
    7,782
    
    
    
    7,754
    
    
    
    1,225
    
    
    
    2,041
    
    
    
    18,802Income (loss) from operations
    
    $
    2,080
    
    
    $
    4,241
    
    
    $
    (440
    )
    
    $
    (2,041
    )
    
    $
    3,840Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,147
   1
    
    For the three months ended March 31, 2005, 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. Revenue Due to the acquisition of our creative and web development business in July 2004 and the
development of the existing Avenue A media and search business, the digital marketing services line
of business has experienced significant growth when comparing the first quarter of 2005 to the
first quarter of 2004. This growth resulted in revenues of $39.1 million during the three months
ended March 31, 2005 compared to $9.9 million during the three months ended March 31, 2004. While
the acquisition of the web development business increased our client base significantly, the
existing Avenue A media and search business also gained new clients and experienced increased
spending from its existing clients. The acquired creative and web development business contributed $25.3
million in revenue while the existing media and search business of Avenue A contributed $13.7
million for the three months ended March 31, 2005. This represents a 39% increase in revenue from
our existing media and search business during the three months 14




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##### Table of Contents



ended March 31, 2005 compared to the three months ended March 31, 2004. As the integration
of the creative and web development business progressed during the first quarter of 2005, we began to
see cross selling between the media and search customers and the web development customers and
expect to see more clients utilizing our full-service offering in the future. Our digital marketing technologies line of business increased revenues to $20.6
million during the three months ended March 31, 2005, compared to $12.0 million during the three
months ended March 31, 2004. This increase was primarily due to the increased use of Atlas
technology by existing clients combined with a consistent increase in client base during the past
several quarters of both agencies and direct advertisers. Revenue from digital performance media increased to $5.3 million during the three months ended
March 31, 2005 from $785,000 during the three months ended March 31, 2004 and is comprised of the
gross value of the advertising space that was purchased for our clients and our fee for providing
such service. The increase was primarily due to the acquisition of MediaBrokers and increased
client and publisher base at DRIVEpm over the last several quarters. As this business is still in the early stages of development, we expect increased
growth and improved profitability to continue in future periods. Cost of revenue Cost of revenue associated with our digital marketing technologies line of business
consists primarily of the salaries and related expenses of the digital marketing technologies
client support personnel and personnel directly supporting the maintenance of our ad serving
system. In addition, cost of revenue associated with our digital marketing technologies line of
business includes bandwidth and technology infrastructure costs associated with delivering
advertisements over the Internet. Cost of revenue associated with digital marketing technologies
increased to $4.8 million for the three months ended March 31, 2005 from $3.1 million for the three
months ended March 31, 2004. This increase was primarily due to increased headcount associated with
client support for our digital marketing technologies line of business, resulting from the
acquisition of TechnologyBrokers in July 2004 and additional client support personnel needed to
support new Atlas clients. As of March 31, 2005, there were 59 client support personnel and 31
production support personnel compared to 40 and 20, respectively, as of March 31, 2004. Cost of revenue associated with our digital performance media was $3.2 million for the
three months ended March 31, 2005 compared to $972,000 for the three months ended March 31, 2004,
and relates to the cost of the advertising space that is purchased from websites to resell to our
clients. The increase was primarily due to increased purchases of advertising space associated
with new clients added over the previous several quarters in addition to the acquisition of
MediaBrokers in July 2004. Client Support Client support expenses associated with our digital marketing services line of business
consist primarily of salaries and related expenses for client support personnel for Avenue A |
Razorfish. Client support expenses associated with our digital marketing services line of business
also include expenses for contractors retained for their specialized skill set to work on client
projects. Client support expenses associated with digital marketing services increased to $29.7
million for the three months ended March 31, 2005 from $6.6 million for the three months ended
March 31, 2004. The increase in client support expenses was primarily due to the acquisition of the
creative and web development business in July 2004. During the three months ended March 31, 2005,
the acquired creative and web development business contributed $21.1 million in client support expenses to
the digital marketing services line of business. In addition, the increase was due to increased
headcount necessary to support new clients and increased spending by our existing media and search
clients. As of March 31, 2005, there were 778 client support personnel in our digital marketing
services line of business, including 486 from the acquisition of SBI.Razorfish, compared to 228 as
of March 31, 2004. Client support expenses associated with digital performance media consist primarily of
salaries and related expenses for client support personnel for DRIVEpm and MediaBrokers. Client
support expenses associated with digital performance media were $929,000 during the three months
ended March 31, 2005 compared to $203,000 during the three months ended March 31, 2004. The
increase in client support expenses was primarily due to increased headcount from the acquisition
of MediaBrokers in July 2004 and additional client support personnel needed to support new DRIVEpm
clients. MediaBrokers contributed $366,000 to client support expenses during the three months
ended March 31, 2005. As of March 31, 2005, there were 24 client support personnel in our digital
performance media line of business, including 8 from the acquisition of MediaBrokers, compared to 7
as of March 31, 2004. Product Development Product development expenses consist primarily of salaries and related expenses for
product development personnel. In addition, product development expenses include the costs of
software development and the costs incurred in preparing new versions of our Atlas Digital
Marketing Suite for marketing to external clients. Product development expenses increased to $2.0
million for the three months ended March 31, 2005 compared to $1.5 million for the three months
ended March 31, 2004. This increase was primarily due to an increase in product development
personnel as we continued to integrate the technologies purchased to support our search 15




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##### Table of Contents



engine and rich media capabilities, enhance our existing Atlas Digital Marketing Suite and
invest in new technologies. As of March 31, 2005, there were 69 product development personnel
compared to 43 as of March 31, 2004. Sales and Marketing Our
digital marketing services line of business acquires clients through
both a consultative
approach using our existing client service teams and through dedicated sales and marketing personnel. Sales
and marketing expenses associated with our digital marketing services line of business consist
primarily of salaries and related expenses for personnel dedicated entirely to the sales and
marketing efforts of Avenue A | Razorfish. In addition, sales and marketing expenses include
professional service fees and marketing costs such as trade shows and the costs of advertising our
services in trade publications. Sales and marketing expenses associated with digital marketing
services increased to $1.1 million for the three months ended March 31, 2005 from $177,000 for the
three months ended March 31, 2004. This increase was primarily due to the acquisition of the
creative and web development business. During the three months ended March 31, 2005, the creative
and web development business contributed $895,000 in sales and marketing expenses to the digital
marketing services line of business. As of March 31, 2005, there were 17 sales and marketing
personnel in our digital marketing services line of business, including 13 from the acquisition of
SBI.Razorfish, compared to 3 as of March 31, 2004. Sales and marketing expenses associated with our digital marketing technologies line of
business consist primarily of salaries and related expenses for our sales force, including a prior
agreement with TechnologyBrokers to provide sales of the Atlas Digital Marketing Suite in the U.K.
This agreement was ended in July 2004 in connection with our acquisition of TechnologyBrokers. In
addition, these expenses include salaries of marketing personnel and marketing costs such as trade
shows and the costs of advertising our services on the Internet. Sales and marketing expenses
associated with digital marketing technologies increased to $1.8 million during the three months
ended March 31, 2005 from $1.7 million for the three months ended March 31, 2004. This increase was
primarily due to the addition of sales personnel headcount and their related sales and marketing
efforts. The increase in sales and marketing expenses was partially
offset by the termination
of our agreement with TechnologyBrokers to provide sale support for of the Atlas Digital Marketing Suite. As
of March 31, 2005 there were 32 sales and marketing personnel in our digital marketing technologies
line of business, including 2 from the acquisition of TechnologyBrokers, compared to 22 as of March
31, 2004. General and Administrative General and administrative expenses consist of the salaries and related expenses for
executive, legal, finance, human resource, corporate information technology and administrative
personnel, professional fees, and other general corporate expenses such as rent for our corporate
headquarters in Seattle. General and administrative expenses included in our digital marketing
services, technologies, and performance media lines of business consist primarily of a direct
allocation of these costs based on several allocation methods including headcount and the
percentage of revenue generated by a particular business unit. In addition, these expenses consist
of certain executive and finance personnel dedicated entirely to the operations of a particular
business unit. General and administrative expenses increased to $7.7 million for the three months
ended March 31, 2005 from $4.1 million for the three months ended March 31, 2004. The increase in
general and administrative expenses was primarily due to the acquisition of the creative and web
development business as we acquired certain general and administrative personnel from
SBI.Razorfish. This increase was also due to increased headcount necessary to support the growth of
our operating units including costs associated with continued development and support of a new
corporate financial system. In addition, we experienced increased expenses associated with efforts
to comply with new corporate governance requirements, and increases in performance-based
compensation expenses. As of March 31, 2005, there were 111 general and administrative personnel,
compared to 56 as of March 31, 2004. Amortization of Intangible Assets Amortization of intangible assets relates to the intangible assets primarily consisting
of customer relationships purchased through various acquisitions. Amortization of intangible assets
was $1.8 million and $513,000 during the three ended March 31, 2005 and 2004, respectively. The
increase is due to the acquisition of NetConversions in February 2004 and SBI.Razorfish,
MediaBrokers and TechnologyBrokers in July 2004. Client Reimbursed Expenses Client reimbursed expenses include all reimbursable project expenses billed to customers.
These expenses are also recorded as a component of revenue. We recorded $678,000 of client
reimbursed expenses for the three months ended March 31, 2005 compared to an immaterial amount for
the three months ended March 31, 2004. The increase in client reimbursed expenses during the year
ended December 31, 2004 is due to the SBI.Razorfish acquisition. Interest and Other Income, Net Interest and other income, net consists primarily of earnings on our cash, cash
equivalents, and short-term investments. Interest and other income, net was $270,000 and $580,000
for the three months ended March 31, 2005 and 2004, respectively. The decrease was primarily due to
the decrease in cash, cash equivalents, and short-term investments associated with our various
acquisitions. Interest Expense 16




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##### Table of Contents



Interest expense was $590,000 and $0 during the three months ended March 31, 2005 and
2004, respectively. During the three months ended March 31, 2005, interest expense related to the sale and
issuance of interest-bearing convertible debt in August and September 2004. Provision for Income Taxes The provision for income taxes was $4.3 million and $273,000 during the three months ended
March 31, 2005 and 2004, respectively. During the three months ended March 31, 2005, we recorded
a provision for income taxes based on an estimated effective tax rate of 40%. During the three
months ended March 31, 2004, we had a valuation allowance offsetting the majority of our net
deferred tax assets and the provision for income taxes consisted primarily of state and local taxes
and certain deferred taxes related to our acquired intangibles. We have been selected by the City of Seattle for a routine business and occupation tax audit.
The period under audit is January 1, 1999 through September 30, 2003. The audit has not been
completed. We believe that we have complied with the Seattle
Municipal Tax Code. The tax could result in findings that change taxes payable, directly impacting position or result of
operations. Income From Operations During the three months ended March 31, 2005, the digital
marketing services line of business generated $4.5 million of income from operations, or 11% of
revenue compared to $2.1 million, or 21% of revenue, during the three months ended March 31, 2004.
This decrease in income from operations as a percentage of revenue is due to lower operating
margins generated from the creative and web development business due to the nature of its
operations. While we expect the operating margins of the creative and web development portion of
our business to be lower than the operating margins of our media and search business, we have
implemented long-term initiatives to improve creative and web development margins and
profitability. During the first quarter of 2005, we began to see results of these initiatives as
the digital marketing services line of business increased its income from operations as a
percentage of revenue to 11% compared to 10% during the three months ended December 31, 2004. We
anticipate the income from operations of our creative and web development business to continue to
increase as a percentage of revenue to approximately 15% over the
next several years. The digital marketing technologies line of business generated $10.3 million of
income from operations, or 50% of revenue, during the three months ended March 31, 2005 compared to
$4.2 million, or 35% of revenue, during the three months ended March 31, 2004. The increase in
operating income as a percentage of revenue is due to the relatively low incremental cost of
providing Atlas services to new clients and providing higher volumes of services to existing
clients. The digital performance media line of business generated $888,000 of income from operations,
or 17% of revenue during the three months ended March 31, 2005. An analysis of the change from the
three months ended March 31, 2004 is not meaningful because DRIVEpm began operations during the
three months ended March 31, 2005 and the acquisition of MediaBrokers did not occur until July
2005. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through the net proceeds
from private sales of equity securities, which raised $30.4 million through December 31, 1999, and
our initial public offering of common stock, which raised $132.5 million during the first quarter
of 2000. In addition, we issued $74.7 million in convertible
debt to the sellers of SBI.Razorfish
in connection with the acquisition in July 2004. This was subsequently paid off with the proceeds
from the sale in September and August 2004 of $80.0 million in convertible senior subordinated
notes due 2024. As of March 31, 2005, we had cash and cash equivalents of $22.5 million, short-term
investments of $34.1 million, and $80 million of convertible debt on our consolidated balance sheet Net Cash from Operating Activities Net cash provided by operating activities was $1.6 and $17.3 million during the three
months ended March 31, 2005 and 2004, respectively. Our net cash provided by operating activities
is primarily a result of the changes in the balances of our accounts receivable, accrued expenses
and pre-billed media. Our accounts receivable balance on March 31, 2005 increased by $7.0 million
from the balance on December 31, 2004, primarily due to several large outstanding client balances.
During the first two weeks of April 2005, we collected a significant amount of cash from clients.
Accrued liabilities related to operating activities decreased by $3.3 million during the three months ended March 31, 2005,
primarily due to payments of employee bonuses related to 2004 and a semi-annual interest payment on
our notes payable that were made during the three months ended March 31, 2005. Pre-billed media
decreased by $5.3 million during the three months ended March 31, 2005 as the amount of cash
collected from our clients for media purchases was less than the amount of cash we paid to
publishers on their behalf. 17




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Net Cash from Investing Activities Our investing activities primarily relate to the purchase and sale of short-term
investments, purchases of property and equipment, and acquisition-related activities. Net cash used
in investing activities was $6.1 million for the three months ended March 31, 2005 and net cash
provided by investing activities was $6.1 million for the three months ended March 31, 2004. We purchase primarily investment-grade marketable securities with maturities of less than
two years. Net cash from investing activities is effected by the timing of the purchases and sales
of these marketable securities. During the three months ended March 31, 2005, and 2004 we had net
sales of marketable securities of $558,000 and $10.9 million, respectively. This decrease is
primarily due to the need to liquidate investments during the three months ended March 31, 2005 to
meet the funding requirements of our various acquisitions during the year ended December 31, 2004. Capital expenditures relate primarily to the purchase of computers and software for
general operational purposes, including our ad serving capabilities, computer hardware and software
for the development of our proprietary technology, and leasehold improvements for our facilities.
During the three months ended March 31, 2005 and 2004, capital expenditures were $5.4 million and
$525,000 respectively. This increase was primarily due to the construction of a data center to
support and grow the digital marketing technologies business line, the development our technology
infrastructure to support the growth of our business, and the integration of our technology
platforms with those acquired with our creative and web development business. In February 2004, we purchased NetConversions for $4.6 million. We acquired $60,000 of cash
and incurred acquisition costs of $136,000. During the three months ended March 31, 2005,
NetConversions earned an interim milestone payment of $188,000 based on its earnings through March
31, 2005. This amount is accrued on the consolidated balance sheet as of March 31, 2005. We
expect to make this payment during the three months ending June 30, 2005. The GO TOAST purchase agreement provides for future contingent payments based on actual
revenue results of GO TOAST through December 31, 2005. An interim payment of $500,000 was made
during the three months ended March 31, 2005 based on GO TOASTs actual revenue results for the
year ended December 31, 2004. In July 2004, we purchased TechnologyBrokers and MediaBrokers. During the three months ended
March 31, 2005, we paid the previous owners $759,000 of excess working capital as defined by the
purchase and sale agreement. Net Cash from Financing Activities Our financing activities primarily relate to proceeds from issuance of common stock
through our stock option and employee stock purchase plans. Proceeds from the exercises of common stock options and issuance of common stock through
our employee stock purchase plan were $2.5 million and $1.6 million for the three months ended
March 31, 2005 and 2004, respectively. This increase was due to the increase in our stock price
during the three months ended March 31, 2005 compared to the three months ended March 31, 2004. With the acquisition of SBI.Razorfish, we have experienced a significant increase in
operating expenditures including the addition of interest expense associated with the convertible
notes. This has resulted in a material use of our cash resources. We estimate an increase in
revenue during the remainder of 2005 from all of a Quantives service lines. We believe that our
current cash, cash equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least the next 12
months. 18




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Commitments As of March 31, 2005, we had material commitments related to our convertible debt and
operating leases for office space and office equipment. In addition, we had material obligations
related to ad content delivery services. The following are our contractual commitments and
obligations as of March 31, 2005 (in thousands): Nine Months endedDecember 31,
    
    
    Year Ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCommitments:Operating leases
    
    $
    3,656
    
    
    $
    5,394
    
    
    $
    4,473
    
    
    $
    3,631
    
    
    $
    2,784
    
    
    $
    5,038Sublease rental income
    
    
    (143
    )
    
    
    (190
    )
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    Ad content delivery services
    
    
    860
    
    
    
    27
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    Convertible debt (including interest payments)
    
    
    900
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000Total commitments
    
    $
    5,273
    
    
    $
    7,031
    
    
    $
    6,234
    
    
    $
    5,431
    
    
    $
    4,584
    
    
    $
    112,038
 In August and September 2004,
we issued $80 million of convertible senior subordinated
notes (the Notes) in a private placement. The Notes bear interest of 2.25 percent per year,
payable semi-annually, and are convertible into 6.2 million shares of our common stock at a
conversion price of $12.98 per share. On or after August 15, 2009, we may at its option redeem all
or a portion of the notes for cash at a redemption price equal to 100 percent of the principal
amount of the notes to be redeemed, plus any accrued and unpaid interest. In addition, on each of
August 15, 2009, August 15, 2014, and August 15, 2019, holders may require us to purchase all or a
portion of their notes for cash at 100 percent of the principal amount of the notes to be
purchased, plus any accrued and unpaid interest. As of December 31, 2004, outstanding convertible
debt was $80,000. The i-FRONTIER purchase agreement provides for a future contingent payment in 2006, which
will be determined based upon the operating results of i-FRONTIER through December 31, 2005. The
contingent payment will be recorded as goodwill when the actual amount is determined, due to the
uncertainty of achieving these results. The calculation of the contingent payments is based upon a
combination of a multiple of earnings through December 31, 2005 and an amount equal to the value of
net assets at the date of acquisition. The agreement includes an interim payment based upon
i-FRONTIER earnings during the two years ending December 31, 2003, which is partially refundable
based upon i-FRONTIER earnings during the four years ending December 31, 2005. In October 2004, we
paid the previous owner of i-FRONTIER consideration in the amount of $1.5 million for this interim
payment. In the event that i-FRONTIER achieves results consistent with managements estimates, we
estimate that the final contingency payment will be between $22.0 million and $26.0 million and
there is no maximum payment specified in the agreement. The GO TOAST purchase agreement provides for future contingent payments in 2005 and 2006,
which will be determined based upon the actual revenue results of GO TOAST through December 31,
2005. These payments will be recorded when the actual amounts are determined, due to the
uncertainty of achieving these results. Any contingent payments will be recorded as goodwill. The
agreement includes an interim payment based upon GO TOAST revenue during the year ended December
31, 2004 and a final payment based on revenue during the two years ending December 31, 2005.
During the three months ended March 31, 2005, we paid the previous owners of GO TOAST consideration
in the amount of $500,000 for the 2005 interim payment. In the event that GO TOAST achieves
results consistent with managements estimates, we estimate the final contingency payment to be
between $83,000 and $2.4 million with a maximum potential payment of $4.0 million. The NetConversions purchase agreement provides for contingent payments from 2004 to 2006 based
on actual earnings results of NetConversions through January 31, 2006. These payments will be
recorded when the actual amounts are determined, due to the uncertainty of achieving these results.
The first contingency payment shall be paid after the month in which a certain operating income
milestone is met and the second contingency payment shall be made in 2006 based upon the cumulative
earnings of NetConversions through January 31, 2006. During the three months ended March 31, 2005,
NetConversions earned an interim milestone payment of $188,000 based on its earnings through March
31, 2005. In the event that NetConversions achieves results consist with managements estimates,
we estimate the final contingency payment will be between $188,000 and $1.1 million with a maximum
potential payment of $2.5 million. The TechnologyBrokers and MediaBrokers purchase agreement provides for future contingent
payments, which shall be paid provided certain earnings thresholds are met through July 31, 2006.
These payments will be recorded when the actual amounts are determined, due to the uncertainty of
achieving these results. The payments will be adjusted based on actual earnings through July 31,
2006. In the event that TechnologyBrokers and MediaBrokers achieve results consist with
managements estimates, we estimate these payments will be between $5.5 and $10.5 million and there
is no maximum payment specified in the agreement. Outlook for 2005 For
the three months ending June 30, 2005, we anticipate revenue
between $65.0 million and $70.0
million and net income between $0.08 and $0.10 per diluted share. For the year ended December 31,
2005, we anticipate revenue between $265.0 million and $275.0 million and net income between $0.36 and
$0.40 per diluted share. 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 19




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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. Our prospects for financial and operational success must be considered in light of the risks
frequently encountered by companies in the Internet marketing and advertising industry. These risks
include the need to:  
    attract new clients and maintain current client relationships;
    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. If we do not successfully address these risks, our business could suffer. We have a history of losses and may not maintain profitability. We incurred net losses of $105.1 million for the period from our inception on July 1, 1997
through September 30, 2002. As of March 31, 2005, our accumulated deficit was $41.7 million. We
expect to continue to make additional operating and capital expenditures and, as a result, we will
need to generate additional revenue to maintain profitability, which we first achieved in the
quarter ended December 31, 2002. If our revenue grows more slowly than we anticipate or declines,
or if our operating expenses exceed our expectations, we may be unable to maintain profitability. Our quarterly operating results are subject to fluctuations that may cause our stock price to
decline. Our quarterly operating results have fluctuated in the past and are likely to continue to do
so in the future. It is possible that in the future our operating results in a particular quarter
or quarters will not meet the expectations of securities analysts, investors or us. If our
operating results fail to meet these expectations, the market price of our common stock could
decline. We believe that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance and should not be relied upon to predict the future
performance of our stock price. Our operating results may fluctuate from quarter to quarter and we cannot assure you that we will
be profitable in subsequent quarters. Our revenue, expenses and operating results could vary significantly from quarter to quarter
for several reasons, including:  
    addition of new clients or loss of current clients;
    seasonal fluctuations in advertising spending;
    timing variations on the part of advertisers with regard to implementing advertising campaigns;
    changes in the availability and pricing of advertising space;
    timing and amount of our costs; and
    costs related to any possible future acquisitions of technologies or businesses.
    timing in the completion of web development projects or in the recognition of revenue on those projects. 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. 20




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Our business would be harmed by the loss of any of our major clients, a reduction in the
Internet advertising or marketing budgets of any of these clients or any significant reduction in
revenue generated from these clients. Current clients may decide not to continue purchasing
advertising or marketing services from us or may significantly reduce their advertising or
marketing spending, and we may not be able to successfully attract additional clients. In addition,
the non-payment of amounts due to us from one or more of our significant clients could harm our
business. 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 derive a significant portion of our revenue from the sale of advertising services under
advertising campaign services contracts, all of which are terminable upon 90 days or less notice.
In addition, these contracts generally do not contain penalty provisions for termination before the
end of the contract term. As a result of our acquisition of SBI.Razorfish, a significant portion of
our revenue is now derived from the provision of Internet marketing and consulting services, which
tend to be project based and terminable on short notice. The non-renewal, termination or deferral
of a significant number of these contracts or the termination or deferral of engagements for
Internet marketing and consulting services in any one period could cause an immediate and
significant decline in our revenue and harm our business. We buy inventory for our performance media business that has to be resold. In our DRIVEpm and MediaBrokers performance media businesses we purchase publisher inventory
that has to be resold. Generally, we purchase this inventory on a CPM basis, which means we pay
based on the number of ad impressions we serve, and often sell it on a CPA basis, under which we
are compensated only if a specific action (such as a sale of a customers product) results from
serving an ad. Our ability to resell this inventory at a profit depends on the price at which we
bought it, the price that our customers are willing to pay for it, and the successful use of our
technology. While we often negotiate relatively short-term outs to our purchase obligations,
there can be no guarantees that we will be successful in selling the inventory profitably. The Internet advertising or marketing market may deteriorate, or develop more slowly than
expected, which could harm our business. If the market for Internet advertising or marketing deteriorates, or develops more slowly than
we expect, our business could suffer. Our future success is highly dependent on an increase in the
use of the Internet, the commitment of advertisers and marketers to the Internet as an advertising
and marketing medium, the willingness of our potential clients to outsource their Internet
advertising and marketing needs, and our ability to sell technology services to advertising
agencies. The Internet advertising and marketing market is relatively new and rapidly evolving. As
a result, demand and market acceptance for Internet advertising, marketing and technology services
is uncertain. Many of our current or potential clients have little or no experience using the
Internet for advertising or marketing purposes and have allocated only a limited portion of their
advertising or marketing budgets to Internet advertising or marketing. Also, we must compete with
traditional advertising media, including television, radio, cable and print, for a share of our
clients total advertising budgets. Businesses, including current and potential clients, may find
Internet advertising or marketing to be less effective than traditional advertising media or
marketing methods for promoting their products and services, and therefore the market for Internet
advertising, marketing and technology services may deteriorate or develop more slowly than
expected. In addition, filter software programs are available that limit or prevent advertising
from being delivered to an Internet users computer. Further,
legitimate online businesses may not be able to adequately protect
and distinguish themselves from those who are pursuing illegal
activities using the Internet. The widespread adoption of such
software, or the inability of legitimate businesses to address
challenges to the online advertising business model posed by
activities such as click fraud, could
significantly undermine the commercial viability of Internet advertising and seriously harm our
business. Acquisitions or investments may be unsuccessful and may divert our managements attention and
consume significant resources. We have completed several acquisitions, including: GO TOAST, a Denver-based provider of paid
search management and optimization tools; NetConversions, a Seattle-based provider of website
usability technology; SBI.Razorfish, a provider of internet marketing and consulting services;
TechnologyBrokers, a UK-based company that resells Atlas technologies, and MediaBrokers, a UK-based
company that provides performance media. We may in the future acquire or make investments in other
businesses, or acquire products and technologies, to complement our current businesses. Any future
acquisition or investment may require us to use significant amounts of cash, issue potentially
dilutive equity securities or incur debt. In addition, acquisitions involve numerous risks, any of
which could harm our business, including:  
    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; 21




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
    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. We have been subject to class action lawsuits alleging, among other things, that our
collection and use of Internet user information, or that other
internet business practices, violate federal and state laws, and we may be
subject to additional suits in the future. Class action litigation is often expensive and
time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of
their outcome, may cause us to incur significant expenses and divert the attention of our
management and key personnel from our business operations. In addition, such lawsuits may require
us to pay substantial damages or prevent us from conducting targeted advertising and aggregating
data from our clients advertising campaigns. Furthermore, several Internet-related companies,
including some in the Internet advertising industry, have had claims brought against them before
the Federal Trade Commission regarding the collection and use of Internet user information, and we
may be subject to similar claims. Such claims, and any other claim by a government entity or other
third party against us regarding our collection and use of Internet
user information, or other business practices, could
seriously harm our business. 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. Privacy concerns could lead to legislative and other limitations on our ability to conduct
targeted advertising campaigns and compile data that we use to formulate campaign strategies for
our clients. Our systems use cookies and action tags to track Internet users and their online
behavior, which allows us to build anonymous user profiles. A cookie is a small file of information
stored on a users computer that allows us to recognize that users browser when we serve
advertisements. An action tag functions similarly to a banner ad, except that the action tag is not
visible. Our action tags may be placed on specific pages of our clients or prospective clients
websites. This enables us to measure an advertising campaigns effectiveness in driving consumers
to take specific actions. We are substantially dependent on cookie and action tag technology to target our clients
advertising campaigns and measure their effectiveness. Any reduction in our ability to use cookies
or action tags or other means to build anonymous user profiles could harm our business. Such a
reduction may result from several causes, including governmental action, technology or litigation.
First, governmental bodies concerned with the privacy of Internet users have suggested limiting or
eliminating the use of cookies, action tags or user profiling. Bills aimed at regulating the
collection and use of personal data from Internet users are currently pending in Congress and many
state legislatures. Other bills, which are intended to regulate spyware, may be drafted in such a
way as to include technology like cookies and action tags in the definition of spyware, thereby
creating restrictions that could reduce our ability to use them. In addition, the Federal Trade
Commission and the Department of Commerce have conducted hearings regarding user profiling, the
collection of non-personally identifiable information and online privacy. Outside the United
States, privacy concerns have led to legal and technical limitations on the use of cookies, action
tags and user profiling. For example, the European Union has adopted a directive addressing data
privacy that limits the collection, disclosure and use of information regarding European Internet
users. In addition, the European Union has enacted an electronic communications directive that
imposes certain restrictions on the use of cookies and action tags and also places restrictions on
the sending of unsolicited communications. Each European Union member country was required to enact
legislation to comply with the provisions of the electronic communications directive by October 31,
2003 (though not all have done so). Germany has imposed its own laws limiting the use of user
profiling, and other countries (both in and out of the European Union) may impose similar
limitations. Second, users may limit or eliminate the placement of cookies on their computers by
using third-party software that blocks cookies, or by disabling or restricting the cookie functions
of their Internet browser software. Internet browser software upgrades may also result in
limitations on the use of cookies or action tags. Technologies like the Platform for Privacy
Preferences (P3P) Project may limit collection of cookie and action tag information. In addition,
third parties have brought class action lawsuits against us and other companies relating to the use
of cookies, and we may be subject to similar lawsuits in the future. The results of such lawsuits
could limit or eliminate our ability to use cookies and action tags. In certain instances at the
request of some of our Avenue A | Razorfish clients, we collect personally identifiable information
of Internet users. We disclose our information collection and dissemination practices in a
published privacy statement on our websites, which we may modify from time to time to meet
operational needs or changes in the law or industry best practices. We may be subject to legal
claims, government action and damage to our reputation if we act or are perceived to be acting
inconsistently with the terms of our privacy statement, customer expectations or the law. 22




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If our ability to use cookies or action tags or to build user profiles were substantially
restricted, we would likely have to use other technology or methods that allow the gathering of
user profile data in other ways in order to provide our services to our clients. This change in
technology or methods could require significant reengineering time and resources, and might not be
done in time to avoid negative consequences to our business. In addition, alternative technology or
methods might not be available on commercially reasonable terms, if at all. Our business may be seriously harmed by litigation alleging violations of federal and state
securities laws. We and some of the underwriters of our initial public offering of common stock in February
2000 are defendants in a consolidated class action lawsuit that alleges violations of federal
securities laws in connection with our initial public offering. Razorfish is similarly involved in
this lawsuit relating to its public offering in April 1999. The claims in the lawsuit include,
among other things, allegations of misrepresentations or failures to disclose alleged facts
relating to the defendant underwriters compensation and commissions in connection with our initial
public offering and alleged agreements between the underwriters and their customers relating to
future purchases of our stock and/or the stock of other companies. In 2004 we accepted a settlement
proposal for this litigation. In February 2005 the court gave preliminary approval of the motion
for approval of the settlement, over the objections of the co-defendant underwriters. The final
settlement remains subject to a number of procedural conditions and cannot be assured. Class action
litigation is often expensive and time-consuming, and the outcome of such litigation is often
uncertain. Such lawsuits, regardless of their outcome, may cause us to incur significant expenses
and divert the attention of our management and key personnel from our business operations. In
addition, such lawsuits may result in the payment by us of substantial damages and may otherwise
seriously harm our business. 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. Patents have been issued to third parties that may cover some of the technologies, processes
or methods that we use. We cannot assure you that we would be able to distinguish our technologies,
processes or methods from those covered under any of these third-party patents or that these
patents would be invalidated if challenged. The patent field covering Internet-related technologies
is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent
applications relating to the delivery of Internet advertising may exist of which we are unaware. Several companies in the Internet advertising field have brought patent infringement suits
against competitors in connection with patents relating to ad serving technologies, and we expect
this type of litigation to increase in the future. Any patent infringement claims brought against
us may cause us to incur significant expenses and, if successfully asserted against us, may cause
us to pay substantial damages and prevent us from using the intellectual property subject to these
claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and
divert the attention of our management and key personnel from our business operations. Furthermore,
as a result of a patent infringement suit, we may be prevented from providing some of our services,
including our core ad serving services, unless we enter into royalty or license agreements. We may
not be able to obtain royalty or license agreements on terms acceptable to us, if at all. 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. Our use of our trademarks may result in infringement claims and other legal challenges, which
could cause us to incur significant expenses, pay substantial damages and be prevented from using
these marks. We are aware of third parties that use marks or names, including Internet domain
names, that are the same or similar to the names for which we have sought trademark protection.
There may be other third parties using names similar to ours of whom we are unaware. As a result of
any infringement claims or challenges, we may incur significant expenses, pay substantial damages
and be prevented from using our trademarks unless we enter into royalty, license or coexistence
agreements. We may not be able to obtain such royalty, license or coexistence agreements on terms
acceptable to us, if at all. Use of our trademarks by third parties may also cause confusion to our
clients and confusion in the market, which could decrease the value of our brand and harm our
reputation. 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. In addition to patent and trademark claims, third parties may claim that we are infringing or
violating their other intellectual property rights, including their copyrights and trade secrets,
or otherwise challenge our intellectual property, which may cause us to incur significant expenses
and, if successfully asserted against us, pay substantial damages and be prevented from providing
our services. Even if we were to prevail, any litigation regarding our intellectual property could
be costly and time-consuming and divert the attention of our management and key personnel from our
business operations. Furthermore, as a result of an intellectual property 23




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challenge, we may be prevented from providing some of our services unless we enter into
royalty, license or coexistence agreements. We may not be able to obtain such royalty, license or
coexistence agreements on terms acceptable to us, if at all. 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. If our services fail to perform properly for our clients, we may be exposed to liability to
our clients or to the customers for whom our clients used our
services. We may also be subject to liability if we are unable to
adequately identify and address invalid activity on the Internet,
such as click fraud or actions of other illegal or legitimate
Internet technologies, that affects the services we perform for
clients or the manner in which we bill clients. In addition, our clients
may use our technology-based services in a manner that fails to comply with applicable laws,
including but not limited to laws and regulations surrounding the Internet. For example, because
our services may be used by clients to transmit information over the Internet, our services might
be used by clients to transmit information that violates laws or regulations, or to transmit
negative messages, unauthorized reproduction of copyrighted material, inaccurate data, harmful
applications or computer viruses to end-users in the course of delivery. Any claims made against us
arising in connection with our clients use of our services, regardless of their outcome, may cause
us to incur significant expenses and divert the attention of our management and key personnel from
business operations. In addition, such claims may require us to pay substantial damages, modify or
discontinue some of our services and otherwise seriously harm our business and 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. The loss of the services of members of our management team or other key personnel could harm
our business. Our future success depends to a significant extent on the continued service of our
key management, client service, product development, sales and technical personnel. We do not
maintain key person life insurance on any of our executive officers and do not intend to purchase
any in the future. Although we generally enter into non-competition agreements with our employees,
our business could be harmed if one or more of our officers or key employees decided to join a
competitor or otherwise compete with us. Our business of delivering Internet professional services is dependent upon the expertise of
highly skilled personnel. Accordingly, our future success also depends in large part on our ability
to identify, attract, hire, train, retain and motivate highly skilled personnel who can provide the
Internet strategy, technology, marketing and creative skills required by our clients. If we fail to
hire and retain a sufficient number of qualified client service, product development, sales and
technical personnel, we may not be able to maintain or expand our business. We may not be able to compete successfully in the market for Internet advertising. The market for Internet advertising and consulting services is relatively new, yet
competitive. In the digital marketing services segment, Avenue A | Razorfish competes with
interactive advertising agencies, traditional advertising agencies that perform Internet
advertising and marketing as part of their services to clients, and companies that provide
marketing services, such as Digitas. We also compete in the digital marketing services market with
several technology system integrators, such as IBM Global Solutions and Accenture. Our digital
marketing technologies, through Atlas, compete with third-party ad serving companies and campaign
management technology companies, such as DoubleClick and ValueClick. In addition, the Atlas
OnePoint offering competes with providers of search management capabilities, such as Did It and Bid
Rank, and Atlas NetConversions competes with providers of website usability and effectiveness
metrics tools, such as Keynote Systems, Optimost and Offermatica. Our digital performance media,
through DRIVEpm and MediaBrokers competes with providers of performance media such as
Advertising.com and Aptimus, Inc. Many of our competitors have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing resources than we have.
Also, many of our current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. In addition, several of our competitors have
combined or may combine in the future with larger companies with greater resources than ours. These
competitors may engage in more extensive research and development, undertake more far-reaching
marketing campaigns and make more attractive offers to existing and potential employees and clients
than we do. They could also adopt more aggressive pricing policies and may even provide services
similar to ours at no additional cost by bundling them with their other product and service
offerings. They may also develop services that are equal or superior to our services or that
achieve greater market acceptance than our services. Increased competition is likely to result in
price reductions, reduced margins and loss of market share. We cannot assure you that we will be
able to compete successfully, and competitive pressures may harm our business. In addition, our ability to maintain existing client relationships and generate new clients
will depend to a significant degree on the quality of our services and our reputation among clients
and potential clients, as compared with our competitors. To the extent we lose clients to our
competitors because of dissatisfaction with our services or because our reputation is harmed for
any other reason, our business could be negatively affected. 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. 24




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The consolidation of Internet advertising networks, web portals, Internet search engine sites
and web publishers could harm our business. This type of consolidation could eventually lead to a
concentration of desirable advertising space on a very small number of networks and websites. This
type of concentration could substantially impair our ability to serve advertisements if these
networks or websites decide not to permit us to serve, track or manage advertisements on their
websites, or if they develop ad placement systems that are not compatible with our ad serving
systems. These networks or websites could also use their greater bargaining power to increase their
rates for advertising space or prohibit or limit our aggregation of advertising campaign data. In
addition, concentration of desirable advertising space in a small number of networks and websites
could diminish the value of our advertising campaign databases, as the value of these databases
depends to some degree on the continuous aggregation of data from advertising campaigns on a
variety of different advertising networks and websites. Sustained or repeated system failures could significantly impair our operations and lead to client
dissatisfaction. Sustained or repeated system failures could significantly impair our operations and reduce the
attractiveness of our services to our current and potential clients. The continuous and
uninterrupted performance of our systems is critical to our success. Our operations depend on our
ability to protect these systems against damage from fire, power loss, water damage, earthquakes,
telecommunications failures, viruses, vandalism and other malicious acts and similar unexpected
adverse events. Clients may become dissatisfied by any system failure that interrupts our ability
to provide our services to them. In particular, the failure of our ad serving systems, including
failures that delay or prevent the delivery of targeted advertisements to websites and advertising
networks, could reduce client satisfaction and damage our reputation. Our services are substantially dependent on certain systems provided by third parties over
whom we have little control. Interruptions in our services could result from the failure of
telecommunications providers and other third parties to provide the necessary data communications
capacity in the time frame required. Our ad serving systems and computer hardware are primarily
located in the Seattle, Washington metropolitan area and in Weehawken, New Jersey, Dallas, Texas
and London, England at facilities operated by Savvis, Inc. and MCI Worldcom Communications, Inc.
Additionally, Speedera Networks Inc. provides content delivery for us at its facilities. We depend
on these third-party providers of Internet communication services to provide continuous and
uninterrupted service. We also depend upon Internet service providers that provide access to our
services. In the past, we have occasionally experienced significant difficulties delivering
advertisements to Internet advertising networks and websites due to system failures unrelated to
our own systems. Any disruption in the Internet access provided by third-party providers or any
failure of third-party providers to handle higher volumes of user traffic could impair our ability
to deliver advertisements and harm our business. Clients may attempt to prohibit us from providing services to their competitors, limiting our
business opportunities. To use our services more effectively, clients often provide us with confidential business and
marketing information. Many companies are wary of third parties having access to this information,
because access by third parties increases the risk that confidential business and marketing
information may become known, even if unintentionally, to these companies competitors. These
confidentiality concerns may prompt our clients to attempt to contractually prohibit us from
managing the Internet advertising campaigns of their competitors. Limitation of our client base in
a particular industry in this manner could limit the growth of our business. 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. 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. The legal and regulatory
environment governing the Internet and Internet advertising is uncertain and may change. Laws,
regulations and standards may be adopted or amended covering issues such as privacy, pricing,
acceptable content, consumer protection and quality of products and services on the Internet. These
laws, regulations and standards could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as an advertising medium. Also, due to the global nature of
the Internet, it is possible that multiple federal, state or foreign jurisdictions might
inconsistently regulate our activities or the activities of advertising networks or websites. Any
of these developments could harm our business. In addition, laws, regulations and standards may be adopted or amended relating to the
taxation of our services. We received reporting instructions from Washington State tax authorities
that require us to pay Washington State business and occupation tax on the media we purchase on
behalf of our clients. We expect to assert administrative remedies with the Washington State tax
authorities and evaluate tax strategies that might allow deduction of media purchases in connection
with the measure of business and occupation tax. If these efforts are not successful, this business
and occupation tax requirement, and any other tax-related requirements, could substantially
increase our cost of conducting business. In conjunction with third-party contractors, our service offerings include email advertising
and marketing services. The market for email advertising and marketing in general is vulnerable to
the negative public perception associated with unsolicited email. Federal, state and foreign
governments have enacted legislation, including the CAN-SPAM Act of 2003 that limits or prohibits
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unsolicited email and imposes liability on those that assist sending such email. The Federal
Trade Commission, under the CAN-SPAM Act, is commencing rulemaking that may further limit the use
of email for advertising. Government action, public perception or press reports related to
solicited or unsolicited email could reduce the overall demand for email advertising and marketing
in general and our email services in particular. The negative public perception surrounding
providers and users of email advertising, which may include us and our clients, may also lead third
party vendors and/or partners to choose not to work with us, or to discontinue current
relationships. In addition, although our email delivery program is based on the email addressees
consent or other indication of willingness to receive such email where required by law, it is
possible that laws, regulations or standards may be adopted or amended that may require us to
change or discontinue our current practices or may subject us to liabilities. Furthermore, we may
be the target of lawsuits or enforcement actions if a plaintiff or government agency believes that
legal requirements regarding the delivery of email have not been followed by us, our clients or a
third-party contractor or that emails have been received contrary to the email addressees wishes.
Any of these circumstances could harm our business. We may not be able to adapt to rapidly changing Internet technology trends and evolving industry
standards. The Internet and Internet advertising markets are characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service introductions and
changing client demands, particularly in the areas of search marketing and rich media. The
introduction of new products and services embodying new technologies and the emergence of new
industry standards may render our services obsolete. Our future success will depend on our ability
to adapt to rapidly changing technologies, enhance our existing Internet advertising services and
develop and introduce a variety of new services to address our clients changing demands. We may
experience difficulties that could delay or prevent the successful design, development,
introduction or marketing of our services. In addition, any new services or enhancements must meet
the requirements of our current clients and must achieve market acceptance. Material delays in
introducing new services and enhancements may cause clients to discontinue use of our services and
to use the services of our competitors. Our stock price has been and may continue to be volatile. The trading price of our common stock has been and is likely to continue to be highly
volatile. For example, during the 52-week period ended March 2, 2005, the closing price of our
common stock ranged from $7.56 to $11.69 per share. The market price of our common stock may
fluctuate significantly in response to a number of factors, including:  
    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. In the past, many companies that have experienced volatility in the market price of their
stock have been subject to securities class action litigation. We have been the subject of
securities class action litigation in the past and may be the target of additional lawsuits in the
future. Any securities class action litigation against us could result in substantial costs and
divert our managements attention from business concerns, which could harm our business. We have significant debt as a result of the sale of convertible notes. In August and September 2004, we incurred $80.0 million of indebtedness through the sale of
convertible notes, substantially all of the proceeds of which were used to repay in full certain
indebtedness incurred in connection with the closing of the acquisition of SBI.Razorfish in July
2004. As a result of this indebtedness, we have substantial principal and interest payment
obligations, which we previously did not have. The degree to which we are leveraged could
materially and adversely affect our ability to obtain financing for working capital, acquisitions
or other purposes and could make us more vulnerable to industry downturns and competitive
pressures. Our ability to meet our debt service obligations will depend on our future performance,
which will be subject to financial, business and other factors affecting our operations, many of
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We may need additional financing in the future, which we may be unable to obtain. We may need additional funds to finance our operations in the future, as well as to enhance
our services, respond to competitive pressures or acquire complementary businesses or technologies.
We may be unable to obtain financing on terms favorable to us, if at all. Poor financial results,
unanticipated expenses or unanticipated opportunities that require financial commitments could give
rise to additional financing requirements sooner than we expect. If we raise additional funds
through the issuance of equity or convertible debt securities, this may reduce the percentage
ownership of our existing shareholders, and these securities might have rights, preferences or
privileges senior to those of our common stock. If adequate funds are not available or are not
available on acceptable terms, our ability to enhance our services, respond to competitive
pressures or take advantage of business opportunities would be significantly limited, and we might
need to significantly restrict our operations. We rely on strategic relationships that could be terminated easily. In the website design and development portion of our digital marketing services, we have a
number of strategic relationships with leading hardware and software companies. The loss of any one
of these strategic relationships would deprive us of the opportunity to gain early access to
leading-edge technology, cooperatively market products with the vendor, cross-sell additional
services and gain enhanced access to vendor training and support. Maintenance of our strategic
relationships is based primarily on an ongoing mutual business opportunity and a good overall
working relationship. The legal contracts associated with these relationships would not be
sufficient to force the strategic relationship to continue effectively if the strategic partner
wanted to terminate the relationship. In the event that any strategic relationship is terminated,
our business may be harmed. The infringement or misuse of intellectual property rights could harm our business. We regard our intellectual property rights, such as copyrights, trademarks, trade secrets,
practices and tools, as important to our success. To protect our intellectual property rights, we
rely on a combination of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with our employees, affiliates, clients, strategic
partners, acquisition targets and others. Effective trademark, copyright and trade secret
protection may not be available in every country in which we intend to offer our services. The
steps we have taken to protect our intellectual property rights may not be adequate, third parties
may infringe or misappropriate our intellectual property rights and we may not be able to detect
unauthorized use and take appropriate steps to enforce our rights. If we do not perform to our clients expectations, we face potential liability. Many of our consulting engagements regarding website design and development in our digital
marketing services business involve the development, implementation and maintenance of applications
that are critical to the operations of our clients businesses. Our failure or inability to meet a
clients expectations in the performance of its services could injure our business reputation or
result in a claim for substantial damages against us, regardless of our responsibility for the
failure. In addition, we possess technologies and content that may include confidential or
proprietary client information. Although we have implemented policies to prevent this client
information from being disclosed to unauthorized parties or used inappropriately, any unauthorized
disclosure or use of this information could result in a claim for substantial damages. Contractual
damages limitation provisions that we attempt to implement to limit our damages from negligent
acts, errors, mistakes or omissions in rendering professional services may not be enforceable or
may not otherwise protect us from liability for damages. 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. Clients often hire us for complex development engagements that they cannot complete
themselves. These projects often involve the use of new technology that has not been extensively
tested or used in actual applications. We attempt to negotiate appropriate provisions into our
professional services agreements to protect us against unexpected delays or failures caused by this
new technology, but we are often unable to do so. In any event, if we fail to successfully complete
projects according to the agreed upon schedule and budget, our client relationships suffer, and our
business could be harmed. Our business may suffer if we have disputes over our right to reuse intellectual property
developed for specific clients. Part of our business involves the development of software applications for discrete client
engagements. Ownership of client-specific software is generally retained by the client, although we
typically retain the right to reuse some of the applications, processes and other intellectual
property developed in connection with client engagements. Issues relating to the rights to
intellectual property can be complicated, and disputes may arise that could adversely affect our
ability to reuse these applications, processes and other intellectual property. These disputes
could damage our relationships with our clients and our business reputation, divert our
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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. The website design and development portion of our digital marketing services business performs
some of its services on a fixed fee basis. Because of the complexity of many of these fixed fee
engagements, accurately estimating the cost, scope, expectations and duration of a particular fixed
fee engagement can be a difficult task. If we fail to appropriately structure one or more fixed fee
engagements, we could be forced to devote additional resources to these engagements for which we
will not receive additional compensation. To the extent that an expenditure of additional resources
is required on a fixed fee engagement, this could harm our reputation and result in a loss on the
engagement. Our billable employees may be underutilized if clients do not retain our services, which could
reduce our revenues and margins. The website design and development portion of our digital marketing services business derives
much of its revenue from projects that use billable employees. If clients who use our services fail
to retain us for future projects or if clients or prospective clients delay planned projects, we
may be unable to quickly reassign billable employees to other engagements so as to minimize
under-utilization of these employees. This under-utilization could reduce our revenues and gross
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. Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our auditors to
evaluate and assess the effectiveness of our internal controls. These Sarbanes-Oxley requirements
may be modified, supplemented or amended from time to time. Implementing these changes may take a
significant amount of time and may require specific compliance training of our directors, officers
and other personnel. If we fail to maintain the adequacy of our internal controls we could be
subject to regulatory scrutiny and investors could lose confidence in the accuracy and completeness
of our financial reports. We cannot assure you that we will be able to complete the work necessary
to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our auditors
will conclude that our internal controls are effective. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is limited to interest income sensitivity, which is affected
by changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term, investment-grade debt securities issued by corporations. We place
our investments with high-quality issuers and limit the amount of credit exposure to any one
issuer. Due to the nature of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any foreign currency or other derivative financial
instruments. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our chief executive officer and our chief financial
officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our
chief executive officer and our chief financial officer have concluded that, as of the date of the
evaluation, our disclosure controls and procedures were effective. It should be noted that the
design of any system of controls and procedures is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of how remote. Changes in Internal Controls No
change was made to our internal controls over financial reporting for
the three months ended March 31, 2005 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS IPO
Securities Litigation. Both aQuantive and Razorfish are defendants in consolidated securities class action
complaints filed in the United States District Court for the Southern District of New York. These
consolidated complaints are among over 300 similar consolidated class action lawsuits filed against
underwriters and other issuers of stock in initial public offerings. The lawsuit
generally relates to underwriting practices and disclosure of commissions to be earned
by the underwriters. The parties have entered into a settlement agreement relating to
this lawsuit, which has received preliminary approval from the Court, but remains subject
to a number of procedural conditions. Please see the Companys Annual Report on Form 10-K
for the year ended December 31, 2004 for a more detailed description of this litigation. Sotelo Purported Class
Action Litigation. In April 2005, the Company was named as a defendant in a lawsuit filed
in Circuit Court of Cook County, Illinois, Chancery Division, captioned Stephen Sotelo v.
DirectRevenue, LLC, et. al, Case No. 05CH 05883. A petition for
removal of this case to the United States District Court
for the Northern District of Illinois, Eastern Division was filed in
late April 2005 Plaintiff has filed a motion to remind the action to
state court. The
complaint alleges that DirectRevenue and certain other named defendants deceptively
downloaded harmful spyware to plaintiffs and putative class
members computers. The two claims asserted against
the Company, unjust enrichment and trespass to chattels, relate to allegations that the
Company sent intrusive advertisements. The Company has filed a motion
to dismiss these claims. The Company believes
that the claims against it are without merit and intends to vigorously defend itself in
this litigation. 28




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ITEM 6. EXHIBITS  10.10
    Restated Stock Option Grant Program for Nonemployee Directors under the 1999 Stock Incentive
Compensation Plan together with the Forms of option letter agreements*10.21
    Summary of 2005 Executive Incentive Program (incorporated by reference to the registrants
Annual Report on Form 10-K for the year ended December 31, 2004)*10.22
    Summary of annual base salaries for certain of the aQuantives executive officers for 2005
(incorporated by reference to the second paragraph under Item 1.01 of the registrants Current
Report on Form 8-K filed February 10, 2005)*10.23
    Form of Option Agreement between aQuantive and Clark Kokich, Mike Galgon and
Brian McAndrews*10.24
    Option Agreement between aQuantive and Brian McAndrews, dated
March 28, 2005*10.25
    Summary of certain changes to aQuantives program for compensating nonemployee directors
(incorporated by reference to the first paragraph under Item 1.01 of the registrants Current
Report on Form 8-K filed April 6, 2005)*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   *
    
    Management contract or compensating plan or arrangement. 29




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized,
on May 9, 2005. AQUANTIVE, INC.By:

/s/ MICHAEL VERNONMichael VernonChief Financial Officer
(Authorized Officer and Principal Financial Officer)