##### 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 September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-23137
 aQuantive, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
(State of Incorporation)
    
    91-1819567
(I.R.S. Employer Identification Number)
 821 Second Avenue, 18th Floor
Seattle, Washington 98104
(Address of principal executive offices)
(206) 816-8800
(Registrants telephone number, including area code)
 þ  o
 þ  o
 o þ




---



AQUANTIVE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



Item 1. Condensed Consolidated Financial Statements
 AQUANTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    51,227
    
    
    $
    24,555Short-term investments
    
    
    35,373
    
    
    
    34,692Accounts receivable, net of allowances of $2,818 and $3,144
    
    
    140,876
    
    
    
    106,683Other receivables
    
    
    545
    
    
    
    1,486Prepaid expenses and other current assets
    
    
    2,596
    
    
    
    1,631Deferred tax asset
    
    
    7,204
    
    
    
    7,204Total current assets
    
    
    237,821
    
    
    
    176,251Property and equipment, net
    
    
    24,733
    
    
    
    17,569Goodwill
    
    
    135,161
    
    
    
    137,845Other intangible assets, net
    
    
    30,194
    
    
    
    36,226Other assets
    
    
    2,461
    
    
    
    2,690Deferred tax assets, net
    
    
    16,534
    
    
    
    15,642Total assets
    
    $
    446,904
    
    
    $
    386,223Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    75,279
    
    
    $
    68,542Accrued liabilities
    
    
    27,979
    
    
    
    21,066Pre-billed media
    
    
    16,608
    
    
    
    15,655Deferred rent, current portion
    
    
    547
    
    
    
    603Deferred revenue
    
    
    10,304
    
    
    
    10,394Total current liabilities
    
    
    130,717
    
    
    
    116,260Deferred rent, less current portion
    
    
    3,934
    
    
    
    3,010Long-term accrued liabilities
    
    
    398
    
    
    
    456Notes payable
    
    
    80,000
    
    
    
    80,000Total liabilities
    
    
    215,049
    
    
    
    199,726Shareholders equity:Common stock, $0.01 par value; 200,000 shares authorized
65,299 and 62,256 shares issued
and outstanding
    
    
    653
    
    
    
    623Paid-in capital
    
    
    255,859
    
    
    
    233,898Accumulated deficit
    
    
    (24,492
    )
    
    
    (48,099
    )Accumulated other comprehensive (loss) income
    
    
    (165
    )
    
    
    75Total shareholders equity
    
    
    231,855
    
    
    
    186,497Total liabilities and shareholders equity
    
    $
    446,904
    
    
    $
    386,223
  3




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(unaudited)
 Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    78,762
    
    
    $
    46,740
    
    
    $
    220,948
    
    
    $
    97,231Costs and expenses:Cost of revenue
    
    
    10,444
    
    
    
    6,073
    
    
    
    28,080
    
    
    
    14,608Client support
    
    
    35,138
    
    
    
    22,661
    
    
    
    101,847
    
    
    
    36,900Product development
    
    
    2,482
    
    
    
    1,580
    
    
    
    6,615
    
    
    
    4,486Sales and marketing
    
    
    4,040
    
    
    
    3,027
    
    
    
    10,450
    
    
    
    7,011General and administrative
    
    
    8,047
    
    
    
    6,102
    
    
    
    25,749
    
    
    
    14,692Amortization of intangible assets
    
    
    1,803
    
    
    
    1,370
    
    
    
    5,409
    
    
    
    2,216Client reimbursed expenses
    
    
    1,103
    
    
    
    557
    
    
    
    2,740
    
    
    
    557Total costs and expenses
    
    
    63,057
    
    
    
    41,370
    
    
    
    180,890
    
    
    
    80,470Income from operations
    
    
    15,705
    
    
    
    5,370
    
    
    
    40,058
    
    
    
    16,761Interest and other income, net
    
    
    495
    
    
    
    268
    
    
    
    1,022
    
    
    
    1,325Interest expense
    
    
    580
    
    
    
    265
    
    
    
    1,753
    
    
    
    265Income before provision for income taxes
    
    
    15,620
    
    
    
    5,373
    
    
    
    39,327
    
    
    
    17,821Provision (benefit) for income taxes
    
    
    6,183
    
    
    
    (18,762
    )
    
    
    15,720
    
    
    
    (17,969
    )Net income
    
    $
    9,437
    
    
    $
    24,135
    
    
    $
    23,607
    
    
    $
    35,790Basic net income per share
    
    $
    0.15
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.59Diluted net income per share
    
    $
    0.13
    
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.53Shares used in computing basic net
income per share
    
    
    64,456
    
    
    
    61,411
    
    
    
    63,502
    
    
    
    60,966Shares used in computing diluted net
income per share
    
    
    77,113
    
    
    
    70,889
    
    
    
    75,665
    
    
    
    68,233Comprehensive income:Net income
    
    $
    9,437
    
    
    $
    24,135
    
    
    $
    23,607
    
    
    $
    35,790Items of comprehensive (loss) income
    
    
    (111
    )
    
    
    210
    
    
    
    (240
    )
    
    
    (144
    )Comprehensive income
    
    $
    9,326
    
    
    $
    24,345
    
    
    $
    23,367
    
    
    $
    35,646
  4




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AQUANTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months endedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    23,607
    
    
    $
    35,790Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    13,822
    
    
    
    6,051Stock option income tax benefit
    
    
    11,681
    
    
    
    5,388Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net
    
    
    (34,194
    )
    
    
    (22,136
    )Other receivables, prepaid expenses and other current assets
    
    
    (25
    )
    
    
    (70
    )Other assets
    
    
    (174
    )
    
    
    613Accounts payable
    
    
    6,737
    
    
    
    13,422Accrued liabilities
    
    
    8,066
    
    
    
    1,737Pre-billed media
    
    
    953
    
    
    
    9,101Deferred rent
    
    
    558
    
    
    
    662Deferred revenue
    
    
    (90
    )
    
    
    234Deferred taxes
    
    
    2,556
    
    
    
    (24,102
    )Net cash provided by operating activities
    
    
    33,497
    
    
    
    26,690CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (14,517
    )
    
    
    (7,089
    )(Purchases) proceeds from short term investments, net
    
    
    (956
    )
    
    
    56,297Acquisitions, less cash received of $408 in 2004
    
    
    (1,664
    )
    
    
    (96,689
    )Net cash used in investing activities
    
    
    (17,137
    )
    
    
    (47,481
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of notes payable
    
    
    
    
    
    
    (74,697
    )Payment of debt issuance costs
    
    
    
    
    
    
    (2,230
    )Proceeds from issuance of convertible debt
    
    
    
    
    
    
    80,000Proceeds from issuance of common stock related to exercises of common stock
options and the ESPP
    
    
    10,312
    
    
    
    4,020Net cash provided by financing activities
    
    
    10,312
    
    
    
    7,093Net increase (decrease) in cash and cash equivalents
    
    
    26,672
    
    
    
    (13,698
    )Cash and cash equivalents, beginning of period
    
    
    24,555
    
    
    
    32,797Cash and cash equivalents, end of period
    
    $
    51,227
    
    
    $
    19,099
  5




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##### Table of Contents



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




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##### Table of Contents



Digital Marketing Services
      Digital Marketing Technologies
  7




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##### Table of Contents



Digital Performance Media
   All Segments
    Three Months ended
    
    Nine Months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Customer A
    
    
    12
    %
    
    
    *
    
    
    
    12
    %
    
    
    10
    %
 
 *
    
    Less than 10%  Recent Accounting Pronouncements
  3. Stock-Based Compensation
  8




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##### Table of Contents



Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    9,437
    
    
    $
    24,135
    
    
    $
    23,607
    
    
    $
    35,790Deduct: total stock-based
compensation determined
under fair value based
method for all awards, net
of tax
    
    
    (2,780
    )
    
    
    (3,219
    )
    
    
    (7,013
    )
    
    
    (7,527
    )Pro forma net income, fair
value method for all
stock-based awards
    
    $
    6,657
    
    
    $
    20,916
    
    
    $
    16,594
    
    
    $
    28,263Basic net income per share:As reported
    
    $
    0.15
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.59Pro forma
    
    $
    0.10
    
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.46Diluted net income per share:As reported
    
    $
    0.13
    
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.53Pro forma
    
    $
    0.09
    
    
    $
    0.30
    
    
    $
    0.22
    
    
    $
    0.41
  Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average risk-free interest rate
    
    
    4.07
    
    
    
    3.51
    
    
    
    3.98
    
    
    
    3.34Expected lives (in years from vest date)
    
    
    4.5-8
    
    
    
    1-6.5
    
    
    
    4.5-8
    
    
    
    1-6.5Expected volatility
    
    
    91
    %
    
    
    102
    %
    
    
    101
    %
    
    
    104
    %
  Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average risk-free interest rate
    
    
    3.75
    
    
    
    1.87
    
    
    
    3.22
    
    
    
    2.27Expected lives (in years from vest date)
    
    
    0.5-1.0
    
    
    
    0.5-1.0
    
    
    
    0.5-1.0
    
    
    
    0.5-1.0Expected volatility
    
    
    47
    %
    
    
    60
    %
    
    
    50
    %
    
    
    55
    %
 4. Net Income Per Share
  Three Months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (numerator for basic)
    
    $
    9,437
    
    
    $
    24,135
    
    
    $
    23,607
    
    
    $
    35,790Add: Interest expense on convertible notes, net of tax
    
    
    354
    
    
    
    165
    
    
    
    1,068
    
    
    
    165Adjusted net income (numerator for diluted)
    
    $
    9,791
    
    
    $
    24,300
    
    
    $
    24,675
    
    
    $
    35,955Shares (denominator for basic and diluted):Gross weighted average common shares outstanding
    
    
    64,456
    
    
    
    61,411
    
    
    
    63,502
    
    
    
    60,966Shares used in computation of basic net income per shareAdd: Dilutive effect of employee stock options
    
    
    6,494
    
    
    
    5,504
    
    
    
    6,000
    
    
    
    5,933Add: Dilutive effect of convertible debt
    
    
    6,163
    
    
    
    3,974
    
    
    
    6,163
    
    
    
    1,334Shares used in computation of diluted net income per share
    
    
    77,113
    
    
    
    70,889
    
    
    
    75,665
    
    
    
    68,233Basic net income per share
    
    $
    0.15
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.59Diluted net income per share
    
    $
    0.13
    
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.53
 9




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##### Table of Contents



5. Segment Reporting
     Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalThree Months ended September 30, 2005Revenue
    
    $
    48,495
    
    
    $
    23,514
    
    
    $
    6,753
    
    
    $
    
    
    
    $
    78,762Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,982
    
    
    
    4,250
    
    
    
    212
    1
    
    
    10,444Client support
    
    
    34,344
    
    
    
    
    
    
    
    794
    
    
    
    
    
    
    
    35,138Product development
    
    
    
    
    
    
    2,482
    
    
    
    
    
    
    
    
    
    
    
    2,482Sales and marketing
    
    
    1,084
    
    
    
    2,539
    
    
    
    417
    
    
    
    
    
    
    
    4,040General and administrative
    
    
    3,113
    
    
    
    1,888
    
    
    
    320
    
    
    
    2,726
    
    
    
    8,047Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Total costs and expenses
    
    
    39,644
    
    
    
    12,891
    
    
    
    5,781
    
    
    
    4,471
    
    
    
    63,057Income (loss) from operations
    
    $
    8,851
    
    
    $
    10,623
    
    
    $
    972
    
    
    $
    (4,471
    )
    
    $
    15,705
 Three Months ended September 30, 2004Revenue
    
    $
    28,299
    
    
    $
    15,612
    
    
    $
    2,829
    
    
    $
    
    
    
    $
    46,740Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,815
    
    
    
    2,066
    
    
    
    192
    1
    
    
    6,073Client support
    
    
    22,116
    
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    22,661Product development
    
    
    
    
    
    
    1,580
    
    
    
    
    
    
    
    
    
    
    
    1,580Sales and marketing
    
    
    1,205
    
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    3,027General and administrative
    
    
    1,957
    
    
    
    1,679
    
    
    
    119
    
    
    
    2,347
    
    
    
    6,102Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,370
    
    
    
    1,370Client reimbursed expenses
    
    
    557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    557Total costs and expenses
    
    
    25,835
    
    
    
    8,896
    
    
    
    2,730
    
    
    
    3,909
    
    
    
    41,370Income (loss) from operations
    
    $
    2,464
    
    
    $
    6,716
    
    
    $
    99
    
    
    $
    (3,909
    )
    
    $
    5,370
 10




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##### Table of Contents



Nine Months ended September 30, 2005Revenue
    
    $
    135,834
    
    
    $
    66,637
    
    
    $
    18,477
    
    
    $
    
    
    
    $
    220,948Costs and expenses:Cost of revenue
    
    
    
    
    
    
    16,346
    
    
    
    11,138
    
    
    
    596
    1
    
    
    28,080Client support
    
    
    98,907
    
    
    
    
    
    
    
    2,940
    
    
    
    
    
    
    
    101,847Product development
    
    
    
    
    
    
    6,615
    
    
    
    
    
    
    
    
    
    
    
    6,615Sales and marketing
    
    
    3,259
    
    
    
    6,774
    
    
    
    417
    
    
    
    
    
    
    
    10,450General and administrative
    
    
    10,474
    
    
    
    5,978
    
    
    
    969
    
    
    
    8,328
    
    
    
    25,749Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,409
    
    
    
    5,409Client reimbursed expenses
    
    
    2,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,740Total costs and expenses
    
    
    115,380
    
    
    
    35,713
    
    
    
    15,464
    
    
    
    14,333
    
    
    
    180,890Income (loss) from operations
    
    $
    20,454
    
    
    $
    30,924
    
    
    $
    3,013
    
    
    $
    (14,333
    )
    
    $
    40,058
 Nine Months ended September 30, 2004Revenue
    
    $
    50,946
    
    
    $
    42,006
    
    
    $
    4,279
    
    
    $
    
    
    
    $
    97,231Costs and expenses:Cost of revenue
    
    
    
    
    
    
    10,486
    
    
    
    3,738
    
    
    
    384
    1
    
    
    14,608Client support
    
    
    35,861
    
    
    
    
    
    
    
    1,039
    
    
    
    
    
    
    
    36,900Product development
    
    
    
    
    
    
    4,486
    
    
    
    
    
    
    
    
    
    
    
    4,486Sales and marketing
    
    
    1,561
    
    
    
    5,450
    
    
    
    
    
    
    
    
    
    
    
    7,011General and administrative
    
    
    3,731
    
    
    
    4,727
    
    
    
    217
    
    
    
    6,017
    
    
    
    14,692Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,216
    
    
    
    2,216Client reimbursed expenses
    
    
    557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    557Total costs and expenses
    
    
    41,710
    
    
    
    25,149
    
    
    
    4,994
    
    
    
    8,617
    
    
    
    80,470Income (loss) from operations
    
    $
    9,236
    
    
    $
    16,857
    
    
    $
    (715
    )
    
    $
    (8,617
    )
    
    $
    16,761
 
 1
    
    For the three and nine months ended September 30,
2005 and 2004, cost of revenue classified as unallocated
corporate expenses relates to the amortization of
developed technology resulting from the acquisition of
GO TOAST and Atlas Site Optimization.   6. Legal Proceedings
   11




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##### Table of Contents



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 the Post-Effective
Amendment No. 2 on Form S-3 to Form
S-1 filed November 4, 2005. 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
  Digital Marketing Technologies
  
    
    Atlas Digital Marketing Suite,an end-to-end solution for managing Internet advertising that
consists of the Atlas Media Console, the Atlas Creative Management System, Atlas Delivery and
Tracking Services and the Atlas Analysis and Optimization Engine;
    
    Atlas Search,an integrated search marketing and online campaign management toolset;
    
    Atlas Rich Media, an integrated rich media and online campaign management toolset;
    
    Atlas Site Optimization,a website usability tool that allows our clients to optimize their websites;
    
    Atlas Publisher,a highly-scalable ad serving solution focused solely on helping publishers maximize
revenue and lower costs associated with performance-focused advertisers.
 12




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##### Table of Contents



Digital Performance Media
  
    
    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 a desired action by paying on a cost per action
basis.
 Critical Accounting Policies and Judgments
   Estimates and Assumptions Related to Financial Statements
  Results of Operations
  Digital
    
    
    Digital
    
    
    Digital
    
    
    UnallocatedMarketing
    
    
    Marketing
    
    
    Performance
    
    
    CorporateServices
    
    
    Technologies
    
    
    Media
    
    
    Expenses
    
    
    TotalThree Months ended September 30, 2005Revenue
    
    $
    48,495
    
    
    $
    23,514
    
    
    $
    6,753
    
    
    $
    
    
    
    $
    78,762Costs and expenses:Cost of revenue
    
    
    
    
    
    
    5,982
    
    
    
    4,250
    
    
    
    212
    1
    
    
    10,444Client support
    
    
    34,344
    
    
    
    
    
    
    
    794
    
    
    
    
    
    
    
    35,138Product development
    
    
    
    
    
    
    2,482
    
    
    
    
    
    
    
    
    
    
    
    2,482Sales and marketing
    
    
    1,084
    
    
    
    2,539
    
    
    
    417
    
    
    
    
    
    
    
    4,040General and administrative
    
    
    3,113
    
    
    
    1,888
    
    
    
    320
    
    
    
    2,726
    
    
    
    8,047Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,803
    
    
    
    1,803Client reimbursed expenses
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Total costs and expenses
    
    
    39,644
    
    
    
    12,891
    
    
    
    5,781
    
    
    
    4,471
    
    
    
    63,057Income (loss) from operations
    
    $
    8,851
    
    
    $
    10,623
    
    
    $
    972
    
    
    $
    (4,471
    )
    
    $
    15,705Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,183Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,437
 13




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##### Table of Contents



Three Months ended September 30, 2004Revenue
    
    $
    28,299
    
    
    $
    15,612
    
    
    $
    2,829
    
    
    $
    
    
    
    $
    46,740Costs and expenses:Cost of revenue
    
    
    
    
    
    
    3,815
    
    
    
    2,066
    
    
    
    192
    1
    
    
    6,073Client support
    
    
    22,116
    
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    22,661Product development
    
    
    
    
    
    
    1,580
    
    
    
    
    
    
    
    
    
    
    
    1,580Sales and marketing
    
    
    1,205
    
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    3,027General and administrative
    
    
    1,957
    
    
    
    1,679
    
    
    
    119
    
    
    
    2,347
    
    
    
    6,102Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,370
    
    
    
    1,370Client reimbursed expenses
    
    
    557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    557Total costs and expenses
    
    
    25,835
    
    
    
    8,896
    
    
    
    2,730
    
    
    
    3,909
    
    
    
    41,370Income (loss) from operations
    
    $
    2,464
    
    
    $
    6,716
    
    
    $
    99
    
    
    $
    (3,909
    )
    
    $
    5,370Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265Benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,762
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,135
 Nine Months ended September 30, 2005Revenue
    
    $
    135,834
    
    
    $
    66,637
    
    
    $
    18,477
    
    
    $
    
    
    
    $
    220,948Costs and expenses:Cost of revenue
    
    
    
    
    
    
    16,346
    
    
    
    11,138
    
    
    
    596
    1
    
    
    28,080Client support
    
    
    98,907
    
    
    
    
    
    
    
    2,940
    
    
    
    
    
    
    
    101,847Product development
    
    
    
    
    
    
    6,615
    
    
    
    
    
    
    
    
    
    
    
    6,615Sales and marketing
    
    
    3,259
    
    
    
    6,774
    
    
    
    417
    
    
    
    
    
    
    
    10,450General and administrative
    
    
    10,474
    
    
    
    5,978
    
    
    
    969
    
    
    
    8,328
    
    
    
    25,749Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,409
    
    
    
    5,409Client reimbursed expenses
    
    
    2,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,740Total costs and expenses
    
    
    115,380
    
    
    
    35,713
    
    
    
    15,464
    
    
    
    14,333
    
    
    
    180,890Income (loss) from operations
    
    $
    20,454
    
    
    $
    30,924
    
    
    $
    3,013
    
    
    $
    (14,333
    )
    
    $
    40,058Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,753Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,720Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,607
 Nine Months ended September 30, 2004Revenue
    
    $
    50,946
    
    
    $
    42,006
    
    
    $
    4,279
    
    
    $
    
    
    
    $
    97,231Costs and expenses:Cost of revenue
    
    
    
    
    
    
    10,486
    
    
    
    3,738
    
    
    
    384
    1
    
    
    14,608Client support
    
    
    35,861
    
    
    
    
    
    
    
    1,039
    
    
    
    
    
    
    
    36,900Product development
    
    
    
    
    
    
    4,486
    
    
    
    
    
    
    
    
    
    
    
    4,486Sales and marketing
    
    
    1,561
    
    
    
    5,450
    
    
    
    
    
    
    
    
    
    
    
    7,011General and administrative
    
    
    3,731
    
    
    
    4,727
    
    
    
    217
    
    
    
    6,017
    
    
    
    14,692Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,216
    
    
    
    2,216Client reimbursed expenses
    
    
    557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    557Total costs and expenses
    
    
    41,710
    
    
    
    25,149
    
    
    
    4,994
    
    
    
    8,617
    
    
    
    80,470Income (loss) from operations
    
    $
    9,236
    
    
    $
    16,857
    
    
    $
    (715
    )
    
    $
    (8,617
    )
    
    $
    16,761Interest and other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,325Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265Benefit from income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,969
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,790
 
 1
    
    For the three and nine months ended September 30,
2005 and 2004, cost of revenue classified as unallocated
corporate expenses relates to the amortization of
developed technology resulting from the acquisition of
GO TOAST and Atlas Site Optimization. 14




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Revenue
    Cost of Revenue
   15




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Client Support
   Product Development
  Sales and Marketing
   16




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General and Administrative
  Amortization of Intangible Assets
  Client Reimbursed Expenses
  Interest and Other Income, Net
  Interest Expense
  Provision for Income Taxes
  17




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Income from Operations
    Liquidity and Capital Resources
   Net Cash from Operating Activities
  Net Cash from Investing Activities
      18




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Net Cash from Financing Activities
     Commitments and Contingencies
  Three MonthsendedDecember 31,
    
    
    Year ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCommitments:Operating leases
    
    $
    1,181
    
    
    $
    6,056
    
    
    $
    5,427
    
    
    $
    4,497
    
    
    $
    3,731
    
    
    $
    14,729Sublease rental income
    
    
    (74
    )
    
    
    (216
    )
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    Ad content delivery services
    
    
    164
    
    
    
    87
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Convertible debt (including
interest payments)
    
    
    
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    1,800
    
    
    
    107,000Total commitments
    
    $
    1,271
    
    
    $
    7,727
    
    
    $
    7,214
    
    
    $
    6,297
    
    
    $
    5,531
    
    
    $
    121,729
   19




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##### Table of Contents



Outlook for 2005
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Securities Litigation.
 20




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Sotelo Purported Class Action Litigation.
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 31.1
    
    Certification of Brian P. McAndrews Pursuant to Rule 13a-14(a) of the
Securities and Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Michael Vernon Pursuant to Rule 13a-14(a) of the
Securities and Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Brian P. McAndrews Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Michael Vernon Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 21




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SIGNATURES
  AQUANTIVE, INC.By:
    /s/ MICHAEL VERNONMichael VernonChief Financial Officer
(Authorized Officer and Principal Financial Officer) 22