##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 R
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 £
    
    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, 18th Floor
Seattle, Washington 98104
(Address of principal executive offices)
(206) 816-8800
(Registrants telephone number, including area code)
 R £
  R £ £
 £ R




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##### 



AQUANTIVE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
 PageItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 6.
    
    Exhibits
    
    
    26EXHIBIT 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 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    234,995
    
    
    $
    77,272Short-term investments
    
    
    35,980
    
    
    
    35,617Accounts receivable, net of allowances of $3,333 and $3,146, respectively
    
    
    175,412
    
    
    
    160,370Other receivables
    
    
    1,598
    
    
    
    968Prepaid expenses and other current assets
    
    
    2,725
    
    
    
    2,108Deferred tax asset
    
    
    5,416
    
    
    
    5,416Total current assets
    
    
    456,126
    
    
    
    281,751Property and equipment, net
    
    
    29,390
    
    
    
    27,370Goodwill
    
    
    168,977
    
    
    
    141,075Other intangible assets, net
    
    
    29,801
    
    
    
    32,078Other assets
    
    
    1,175
    
    
    
    1,245Deferred financing costs, net
    
    
    1,256
    
    
    
    1,386Deferred tax assets, net
    
    
    25,702
    
    
    
    23,755Total assets
    
    $
    712,427
    
    
    $
    508,660Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    94,659
    
    
    $
    94,327Accrued liabilities
    
    
    31,837
    
    
    
    38,976Pre-billed media
    
    
    35,104
    
    
    
    18,254Deferred rent, current portion
    
    
    677
    
    
    
    670Deferred revenue
    
    
    13,125
    
    
    
    14,310Total current liabilities
    
    
    175,402
    
    
    
    166,537Long-term accrued liabilities
    
    
    683
    
    
    
    430Notes payable
    
    
    80,000
    
    
    
    80,000Deferred rent, less current portion
    
    
    4,824
    
    
    
    4,753Total liabilities
    
    
    260,909
    
    
    
    251,720Shareholders equity:Common stock, $0.01 par value; 200,000 shares authorized
74,885 and 66,495 shares issued and outstanding,
respectively
    
    
    749
    
    
    
    665Paid-in capital
    
    
    456,276
    
    
    
    269,382Accumulated deficit
    
    
    (5,303
    )
    
    
    (12,918
    )Accumulated other comprehensive loss
    
    
    (204
    )
    
    
    (189
    )Total shareholders equity
    
    
    451,518
    
    
    
    256,940Total liabilities and shareholders equity
    
    $
    712,427
    
    
    $
    508,660
  3




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(in thousands except per share amounts)
(unaudited)
 Three Months endedMarch 31,2006
    
    
    2005Revenue
    
    $
    92,185
    
    
    $
    64,997Costs and expenses:Cost of revenue
    
    
    13,378
    
    
    
    8,020Client support
    
    
    45,868
    
    
    
    30,442Product development
    
    
    3,680
    
    
    
    1,967Sales and marketing
    
    
    6,640
    
    
    
    3,294General and administrative
    
    
    8,562
    
    
    
    7,714Amortization of intangible assets
    
    
    2,036
    
    
    
    1,803Client reimbursed expenses
    
    
    868
    
    
    
    678Total costs and expenses
    
    
    81,032
    
    
    
    53,918Income from operations
    
    
    11,153
    
    
    
    11,079Interest and other income, net
    
    
    1,699
    
    
    
    270Interest expense
    
    
    582
    
    
    
    590Income before provision for income taxes
    
    
    12,270
    
    
    
    10,759Provision for income taxes
    
    
    4,655
    
    
    
    4,349Net income
    
    $
    7,615
    
    
    $
    6,410Basic net income per share
    
    $
    0.11
    
    
    $
    0.10Diluted net income per share
    
    $
    0.10
    
    
    $
    0.09Shares used in computing basic net income per share
    
    
    68,275
    
    
    
    62,790Shares used in computing diluted net income per share
    
    
    80,010
    
    
    
    74,083Comprehensive income:Net income
    
    $
    7,615
    
    
    $
    6,410Items of comprehensive loss
    
    
    (15
    )
    
    
    (19
    )Comprehensive income
    
    $
    7,600
    
    
    $
    6,391
  4




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##### Table of Contents



AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months endedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    7,615
    
    
    $
    6,410Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,937
    
    
    
    4,187Stock-based compensation expense
    
    
    4,749
    
    
    
    Tax benefit from exercise of common stock options
    
    
    
    
    
    
    1,455Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net
    
    
    (15,042
    )
    
    
    (7,043
    )Other receivables, prepaid expenses and other current assets
    
    
    (1,247
    )
    
    
    (36
    )Other assets
    
    
    70
    
    
    
    (50
    )Accounts payable
    
    
    332
    
    
    
    3,115Accrued liabilities
    
    
    (7,990
    )
    
    
    (3,347
    )Pre-billed media
    
    
    16,850
    
    
    
    (5,334
    )Deferred rent
    
    
    78
    
    
    
    182Deferred revenue
    
    
    (1,185
    )
    
    
    (497
    )Deferred taxes
    
    
    (1,947
    )
    
    
    2,542Net cash provided by operating activities
    
    
    8,220
    
    
    
    1,584Cash flows from investing activities:Purchases of property and equipment
    
    
    (5,536
    )
    
    
    (5,362
    )(Purchases) proceeds from short term investments, net
    
    
    (386
    )
    
    
    558Acquisitions and acquisition earn-out payments, less cash received of $0
    
    
    (27,058
    )
    
    
    (1,340
    )Net cash used in investing activities
    
    
    (32,980
    )
    
    
    (6,144
    )Cash flows from financing activities:Proceeds from equity offering, net of issuance costs
    
    
    172,710
    
    
    
    Proceeds from exercises of common stock options and issuance of common stock under the ESPP
    
    
    5,086
    
    
    
    2,462Tax benefit from exercise of common stock options
    
    
    4,687
    
    
    
    Net cash provided by financing activities
    
    
    182,483
    
    
    
    2,462Net increase (decrease) in cash and cash equivalents
    
    
    157,723
    
    
    
    (2,098
    )Cash and cash equivalents, beginning of period
    
    
    77,272
    
    
    
    24,555Cash and cash equivalents, end of period
    
    $
    234,995
    
    
    $
    22,457
  5




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##### Table of Contents



AQUANTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(in thousands except per share amounts)
(unaudited)
 1. Organization and Operations of the Company
   Digital Marketing Services (DMS).
 Digital Marketing Technologies (DMT).
 Digital Performance Media (DPM).
 2. Summary of Significant Accounting Policies
 Basis of Presentation
    Reclassifications
  Use of Estimates in the Preparation of Financial Statements
  6




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Change in Contingent Tax Liability
  Revenue Recognition
  Digital Marketing Service
     7




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Digital Marketing Technologies. Atlas Digital Marketing Suite, Atlas Media Console Atlas Rich Media Atlas Search Atlas Site Optimization Atlas Publisher Atlas
Site Optimization
 Digital Performance Media.
   All Segments
   For the three monthsended March 31,2006
    
    
    2005Customer A
    
    
    10
    %
    
    
    12
    %
  Stock-Based Compensation
 8




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Three months ended March 31, 2006As Reported
    
    
    If ReportedFollowing SFAS No.
    
    
    Following APB No.123(R)
    
    
    25Condensed consolidated statement of operations:Income from operations
    
    $
    11,153
    
    
    $
    15,902Income before income taxes
    
    
    12,270
    
    
    
    17,019Net income
    
    
    7,615
    
    
    
    10,512Net income per share:Basic
    
    $
    0.11
    
    
    $
    0.15Diluted
    
    $
    0.10
    
    
    $
    0.14Condensed consolidated statement of cash flows:Net cash provided by operating activities
    
    
    8,220
    
    
    
    12,907Net cash provided by financing activities
    
    $
    182,483
    
    
    $
    177,796
 3. Goodwill
  Acquisition/PurchaseAccountingAdjustments/ForeignBalance as of
    
    
    Currency
    
    
    Balance as ofMarch 31,
    
    
    Translation
    
    
    December 31,2006
    
    
    Adjustments
    
    
    2005Digital marketing services
    
    $
    147,362
    
    
    $
    26,487
    
    
    $
    120,875Digital marketing technologies
    
    
    17,397
    
    
    
    1,431
    
    
    
    15,966Digital performance media
    
    
    4,218
    
    
    
    (16
    )
    
    
    4,234$
    168,977
    
    
    $
    27,902
    
    
    $
    141,075
 9




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##### Table of Contents



4. Stock-Based Compensation
 Stock Option Plans
   Nonvested Share Award
  Employee Stock Purchase Plan
  Valuation of Awards
   10




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##### Table of Contents



March 31,2006
    
    
    2005Weighted average risk-free interest rate
    
    
    4.41
    %
    
    
    4.04
    %Expected term, in years
    
    
    4.1-7.2
    
    
    
    4.5--7.0Weighted average expected volatility
    
    
    64
    %
    
    
    104
    %Dividend yield
    
    
    0
    
    
    
    0
  March 31,2006
    
    
    2005Weighted average risk-free interest rate
    
    
    4.51
    %
    
    
    2.36
    %Expected lives (in years)
    
    
    0.5-1.0
    
    
    
    0.5-1.0Weighted average expected volatility
    
    
    47
    %
    
    
    54
    %Dividend yield
    
    
    0
    
    
    
    0
  Pro Forma Information for Periods Prior to the Adoption of SFAS No. 123(R)
   Three monthsendedMarch 31,2005Net income, as reported
    
    $
    6,410Deduct: Total stock-based compensation determined under fair
value based method for all awards, net of tax effect of $1,485
    
    
    (2,323
    )Pro forma net income, fair value method for all stock-based awards
    
    $
    4,087Basic net income per share:As reported
    
    $
    0.10Pro forma
    
    $
    0.06Diluted net income per share:As reported
    
    $
    0.09Pro forma
    
    $
    0.06
 Impact of the Adoption of 123(R)
  11




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##### Table of Contents



Three monthsended March 31,2006Cost of revenue
    
    $
    143Client support
    
    
    2,307Product development
    
    
    574Sales and marketing
    
    
    370General and administrative
    
    
    1,355Total stock-based compensation expense
    
    
    4,749Total income tax benefit recognized for stock-based compensation expense
    
    $
    1,852Total stock-based compensation expense, net of tax
    
    $
    2,897Impact on net income per share:Basic
    
    $
    (0.04
    )Diluted
    
    $
    (0.04
    )
  Award Activity
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingOptions
    
    
    Exercise
    
    
    Contractual Term
    
    
    Aggregate IntrinsicOutstanding
    
    
    Price
    
    
    (Years)
    
    
    ValueBalance, December 31, 2005
    
    
    13,169
    
    
    $
    7.17Granted
    
    
    1,300
    
    
    
    24.60Exercised
    
    
    (616
    )
    
    
    4.41Forfeited
    
    
    (128
    )
    
    
    11.58Balance, March 31, 2006
    
    
    13,725
    
    
    $
    8.90
    
    
    
    6.34
    
    
    $
    202,921Exercisable at March 31, 2006
    
    
    7,115
    
    
    $
    4.92
    
    
    
    5.12
    
    
    $
    132,841
    Nonvested SharesOutstandingNonvested at December 31, 2005
    
    
    Granted
    
    
    115Vested
    
    
    (6
    )Forfeited
    
    
    Nonvested at March 31, 2006
    
    
    109
 12




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##### Table of Contents



5. Shareholders Equity
  TotalShareholdersEquityBalance, December 31, 2005
    
    $
    256,940Exercise of common stock options
    
    
    2,716Issuance of common stock  Employee Stock Purchase Plan
    
    
    2,370Tax benefit of exercise of common stock options
    
    
    4,687Unrealized
gain on available for sale investments
    
    
    11Currency translation loss
    
    
    (26
    )Stock-based compensation expense
    
    
    4,749Proceeds from follow-on equity offering, net of issuance costs
    
    
    172,456Net income
    
    
    7,615Balance, March 31, 2006
    
    $
    451,518
 6. Net Income Per Share
  Three Months endedMarch 31,2006
    
    
    2005Net income (numerator for basic)
    
    $
    7,615
    
    
    $
    6,410Add: Interest expense on convertible notes, net of tax
    
    
    354
    
    
    
    359Adjusted net income (numerator for diluted)
    
    $
    7,969
    
    
    $
    6,769Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    68,386
    
    
    
    62,790Less: weighted average shares issued and unvested
    
    
    (111
    )
    
    
    Shares used in computation of basic net income per share
    
    
    68,275
    
    
    
    62,790Add: Dilutive effect of employee stock options and stock awards
    
    
    5,572
    
    
    
    5,130Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    6,163Shares used in computation of diluted net income per share
    
    
    80,010
    
    
    
    74,083Basic net income per share
    
    $
    0.11
    
    
    $
    0.10Diluted net income per share
    
    $
    0.10
    
    
    $
    0.09
  7.
    
    Segment Reporting
 13




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Three Months ended March 31, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    TotalRevenue
    
    $
    55,212
    (1)
    
    $
    27,669
    
    
    $
    9,304
    
    
    $
    
    
    
    $
    92,185Costs and expenses:Cost of revenue
    
    
    727
    (1)
    
    
    7,037
    
    
    
    5,279
    
    
    
    335
    (2)
    
    
    13,378Client support
    
    
    42,819
    
    
    
    
    
    
    
    742
    
    
    
    2,307
    
    
    
    45,868Product development
    
    
    
    
    
    
    2,924
    
    
    
    
    
    
    
    756
    
    
    
    3,680Sales and marketing
    
    
    1,589
    
    
    
    3,715
    
    
    
    966
    
    
    
    370
    
    
    
    6,640General and administrative
    
    
    1,504
    (4)
    
    
    2,438
    
    
    
    412
    
    
    
    4,208
    
    
    
    8,562Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,036
    
    
    
    2,036Client reimbursed expenses
    
    
    868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    868Total costs and expenses
    
    
    47,507
    
    
    
    16,114
    
    
    
    7,399
    
    
    
    10,012
    
    
    
    81,032Income (loss) from operations
    
    $
    7,705
    
    
    $
    11,555
    
    
    $
    1,905
    
    
    $
    (10,012
    )
    
    $
    11,153
 14




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Three Months ended March 31, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalRevenue
    
    $
    39,087
    
    
    $
    20,641
    
    
    $
    5,269
    
    
    $
    
    
    
    $
    64,997Costs and expenses:Cost of revenue
    
    
    
    
    
    
    4,616
    
    
    
    3,212
    
    
    
    192
    (2)
    
    
    8,020Client support
    
    
    29,727
    
    
    
    
    
    
    
    715
    
    
    
    
    
    
    
    30,442Product development
    
    
    
    
    
    
    1,967
    
    
    
    
    
    
    
    
    
    
    
    1,967Sales and marketing
    
    
    1,093
    
    
    
    1,987
    
    
    
    214
    
    
    
    
    
    
    
    3,294General 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
    )
    
    $
    11,079
 
 1)
    
    DNA, acquired in December 2005, generates revenue that is recognized under the gross method
of accounting and includes the cost of media purchased for DNA clients.(2)
    
    For the three months ended March 31, 2006 and 2005, cost of revenue classified as unallocated
corporate expenses included $192 related to the amortization of developed technology resulting
from the acquisition of GO TOAST and NetConversions.(3)
    
    Unallocated corporate expenses include stock-based compensation expense. This expense is not
allocated to our segments, as it is centrally managed at the corporate level and not reviewed by the our chief operating
decision maker in evaluating results by segment. For the three months ended March 31, 2006, stock-based compensation expense was as
follows: Three months endedMarch 31, 2006Cost of revenue
    
    $
    143Client support
    
    
    2,307Product development
    
    
    574Sales and marketing
    
    
    370General and administrative
    
    
    1,355Total stock-based compensation expense
    
    $
    4,749
  (4)
    
    For the three months ended March 31, 2006, general and administrative expense for the digital
marketing services line of business
includes the $1.9 million reversal of a contingent business tax
liability. See Footnote 2 for additional information about this change in contingent tax liability.   8. Legal Proceedings
  15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such
as anticipates, expects, intends, plans, believes, estimates, may, will and similar
expressions are intended to identify forward-looking statements. In addition, any statements that
refer to expectations, projections or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking statements. Our actual results could
differ materially and adversely from those discussed in any forward-looking statements as a result
of various factors. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled Risk Factors, included in our Annual Report
on Form 10-K ,for the year ended December 31, 2005 as filed with the SEC.. 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.
   Overview
  Acquisitions and Comparability of Operations
  Digital Marketing Services (DMS)
  Digital Marketing Technologies (DMT)
  16




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Digital Performance Media (DPM)
  Recent Developments
 Public Offering of Common Stock
  New Chief Financial Officer
  Critical Accounting Policies and Judgments
   Accounting for Stock-Based Compensation
   17




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Estimates and Assumptions Related to Financial Statements
  Results of Operations
  Three Months ended March 31, 2006Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses (3)
    
    
    Total(amounts in thousands)Revenue
    
    $
    55,212
    (1)
    
    $
    27,669
    
    
    $
    9,304
    
    
    $
    
    
    
    $
    92,185Costs and expenses:Cost of revenue
    
    
    727
    (1)
    
    
    7,037
    
    
    
    5,279
    
    
    
    335
    (2)
    
    
    13,378Client support
    
    
    42,819
    
    
    
    
    
    
    
    742
    
    
    
    2,307
    
    
    
    45,868Product development
    
    
    
    
    
    
    2,924
    
    
    
    
    
    
    
    756
    
    
    
    3,680Sales and marketing
    
    
    1,589
    
    
    
    3,715
    
    
    
    966
    
    
    
    370
    
    
    
    6,640General and administrative
    
    
    1,504
    (4)
    
    
    2,438
    
    
    
    412
    
    
    
    4,208
    
    
    
    8,562Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,036
    
    
    
    2,036Client reimbursed expenses
    
    
    868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    868Total costs and expenses
    
    
    47,507
    
    
    
    16,114
    
    
    
    7,399
    
    
    
    10,012
    
    
    
    81,032Income (loss) from operations
    
    $
    7,705
    
    
    $
    11,555
    
    
    $
    1,905
    
    
    $
    (10,012
    )
    
    $
    11,153Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,699Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,655Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,615
 18




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##### Table of Contents



Three Months ended March 31, 2005Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    Total(amounts in thousands)Revenue
    
    $
    39,087
    
    
    $
    20,641
    
    
    $
    5,269
    
    
    $
    
    
    
    $
    64,997Costs and expenses:Cost of revenue
    
    
    
    
    
    
    4,616
    
    
    
    3,212
    
    
    
    192
    (2)
    
    
    8,020Client support
    
    
    29,727
    
    
    
    
    
    
    
    715
    
    
    
    
    
    
    
    30,442Product development
    
    
    
    
    
    
    1,967
    
    
    
    
    
    
    
    
    
    
    
    1,967Sales and marketing
    
    
    1,093
    
    
    
    1,987
    
    
    
    214
    
    
    
    
    
    
    
    3,294General 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,410
 
 1)
    
    DNA, acquired in December 2005, generates revenue that is recognized under the gross method
of accounting and includes the cost of media purchased for DNA clients.(2)
    
    For the three months ended March 31, 2006 and 2005, cost of revenue classified as unallocated
corporate expenses included $192 related to the amortization of developed technology
resulting from the acquisition of GO TOAST and NetConversions.(3)
    
    Unallocated corporate expenses include stock-based compensation expense. This expense is not
allocated to our segments, as it is centrally managed at the corporate level and not reviewed
by the our chief operating decision maker in evaluating results by segment. For the three
months ended March 31, 2006, stock-based compensation expense was as follows: Three months endedMarch 31, 2006Cost of revenue
    
    $
    143Client support
    
    
    2,307Product development
    
    
    574Sales and marketing
    
    
    370General and administrative
    
    
    1,355Total stock-based compensation expense
    
    $
    4,749
  (4)
    
    For the three months ended March 31, 2006, general and administrative expense for the digital
marketing services line of business
includes the $1.9 million reversal of a contingent business tax liability. See Footnote 2 in
the Notes to Condensed Consolidated
Financial Statements for additional information about this change in contingent tax liability. Revenue
   Total
    
    
    Digital Marketing ServicesThree months ended March 31,
    
    
    Three months ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue, as reported
    
    $
    92,185
    
    
    $
    64,997
    
    
    $
    55,212
    
    
    $
    39,087Less cost of media purchases
    
    
    (727
    )
    
    
    
    
    
    
    (727
    )
    
    
    Revenue, net of digital
marketing services media
purchases
    
    $
    91,458
    
    
    $
    64,997
    
    
    $
    54,485
    
    
    $
    39,087
 19




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##### Table of Contents



Cost of Revenue
   Total
    
    
    Digital Marketing ServicesThree months ended March 31,
    
    
    Three months ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of revenue, as reported
    
    $
    13,378
    
    
    $
    8,020
    
    
    $
    727
    
    
    $
    Less cost of media purchases
    
    
    (727
    )
    
    
    
    
    
    
    (727
    )
    
    
    Cost of revenue, net of digital
marketing services media
purchases
    
    $
    12,651
    
    
    $
    8,020
    
    
    $
    
    
    
    $
    
   20




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##### Table of Contents



Client Support
    Product Development
 Atlas Publisher Atlas Rich Media Atlas Digital Marketing Suite
  Sales and Marketing
  21




---



##### Table of Contents



General and Administrative
  Amortization of Intangible Assets
  Client Reimbursed Expenses
  Interest and Other Income, Net
  Interest Expense
 22




---



##### Table of Contents



Provision for Income Taxes
  Income from Operations
    Liquidity, Capital Resources and Commitments
   Net Cash from Operating Activities
  23




---



##### Table of Contents



Net Cash from Investing Activities
     (in thousands)
    
    Three months endedMarch 31,2006
    
    
    2005NetConversions
    
    $
    582
    
    
    $
    SBI.Razorfish
    
    
    
    
    
    
    81TechnologyBrokers/Media Brokers
    
    
    
    
    
    
    759GO TOAST
    
    
    
    
    
    
    500iFRONTIER
    
    
    26,460
    
    
    
    Total cash payments
    
    $
    27,042
    
    
    $
    1,340
  (in thousands)
    
    Nine months endingDecember 31,
    
    
    Year ending December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    HighDNA(1)
    
    $
    8,500
    
    
    $
    9,100
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,000
    
    
    $
    35,000TechnologyBrokers/Media
Brokers(2)
    
    
    33,000
    
    
    
    37,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    GO TOAST(3)
    
    
    1,333
    
    
    
    1,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    42,833
    
    
    $
    47,433
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,000
    
    
    $
    35,000
 24




---



##### Table of Contents



(1)
    
    The DNA future contingent payments due in 2009 will be determined based
on actual earnings results of DNA through December 5, 2008. Payments in 2006 will include a contingent payment based on DNAs earnings
through March 31, 2006. Approximately $1,721 of the first payment due in October 2006 is
guaranteed and is accrued on the consolidated balance sheet as of March 31, 2006. There
is no maximum payment specified in the agreement.(2)
    
    The TechnologyBrokers and MediaBrokers future contingent payment will
be paid provided certain earnings thresholds are met through
July 31, 2006. There is no maximum payment specified in the agreement.(3)
    
    The GO TOAST future contingent payment was determined based on the
revenue results of GO TOAST through December 31, 2005.
This amount was finalized during the three months ended March 31, 2006, accrued on the
condensed consolidated balance sheet as of March 31, 2006, and was paid in April 2006. Net Cash from Financing Activities
      Commitments and Contingencies
  Nine Monthsended
    
    
    Year ended December 31,December 31,
    
    
        
    
    20102006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    and Thereafter
    
    
    TotalCommitments:Operating leases
    
    $
    5,777
    
    
    $
    6,530
    
    
    $
    5,438
    
    
    $
    4,703
    
    
    $
    16,606
    
    
    $
    39,054Ad content delivery services
    
    
    1,160
    
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,894Convertible debt (including interest payments)
    
    
    900
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000
    
    
    
    113,300Total commitments
    
    $
    7,837
    
    
    $
    9,064
    
    
    $
    7,238
    
    
    $
    6,503
    
    
    $
    123,606
    
    
    $
    154,248
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  25




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 10.1
    
    Summary of 2006 Executive Committee bonus program (incorporated by
reference to the first paragraph under Item 1.01 of aQuantives
Current Report on Form 8-K filed February 3, 2006)*10.2
    
    Restricted Stock Award Agreement between Brian McAndrews and
aQuantive dated January 2, 2006 (incorporated by reference to
aQuantives Current Report on Form 8-K filed March 4, 2006)*10.3
    
    Summary of annual base salaries for certain executive officers for
2006 (incorporated by reference to the second paragraph under Item
1.01 of aQuantives Current Report on Form 8-K filed February 3,
2006)*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 M. Wayne Wisehart 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 M. Wayne Wisehart Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
 *
    
    Management contract or compensatory plan or arrangement. 26




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##### Table of Contents



SIGNATURES
  AQUANTIVE, INC.By:
    
    /s/ M. WAYNE WISEHARTM. Wayne Wisehart
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
 27