<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-28166
marchFIRST, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3797833
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
311 South Wacker Drive, Suite 3500, Chicago, Illinois 60606-6618
----------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(312) 922-9200
--------------
(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 [x] No [ ]
As of July 31, 2000, there were 150,214,123 shares of common stock of the
registrant outstanding.
<PAGE>
marchFIRST, Inc.
FORM 10-Q
Quarter ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 3
and December 31, 2000
Condensed Consolidated Statements of Operations 4
for the six months ended June 30, 2000
and June 30, 1999
Condensed Consolidated Statements of Cash Flows 5
for six months ended June 30, 2000
and June 30, 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
marchFIRST, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------------- ----------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 127,557 $ 147,816
Short-term investments 48,877 80,424
Trade accounts receivable, net of allowance for doubtful accounts 462,901 90,709
Prepaid expenses and other current assets 39,545 11,542
Deferred income taxes - 1,956
---------------------- ----------------------
Total current assets 678,880 332,447
---------------------- ----------------------
Property and equipment 180,113 84,350
Less accumulated depreciation and amortization (44,640) (16,331)
---------------------- ----------------------
Property and equipment, net 135,473 68,019
Long-term investments 136,445 56,095
Deferred income taxes - 16,896
Intangible assets, net 6,434,429 29,250
Other assets 14,305 1,501
---------------------- ----------------------
Total assets $ 7,399,532 $ 504,208
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,316 $ 5,469
Accrued compensation and related costs 92,331 28,290
Accrued expenses and other liabilities 145,664 15,738
Deferred revenue 47,577 57
Current maturities of long-term debt 17,786 -
---------------------- ----------------------
Total current liabilities 335,674 49,554
---------------------- ----------------------
Deferred income taxes, net 45,927 -
Long-term debt, less current maturities 2,211 -
---------------------- ----------------------
Total liabilities 383,812 49,554
---------------------- ----------------------
Stockholders' equity:
Common stock, $.001 par value; 500,000 shares
authorized, 149,625 and
61,934 shares issued at June 30, 2000, and
December 31,1999, respectively 150 62
Additional paid-in capital 7,513,765 388,517
Retained earnings (deficit) (423,961) 67,490
Treasury stock, at cost ; 3,000 shares held in treasury June 30, 2000 (65,016) -
Deferred compensation (539) (1,209)
Accumulated other comprehensive loss (8,679) (206)
---------------------- ----------------------
Total stockholders' equity 7,015,720 454,654
---------------------- ----------------------
Total liabilities and stockholders' equity $ 7,399,532 $ 504,208
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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marchFIRST, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- ------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 380,201 $ 116,016 $ 607,596 $ 224,690
Cost of services 192,793 65,140 307,307 126,700
----------------- ----------------- ----------------- -----------------
Gross profit 187,408 50,876 300,289 97,990
----------------- ----------------- ----------------- -----------------
Costs and expenses:
Selling and marketing (excluding stock
compensation) 25,931 7,051 40,774 12,499
General and administrative (excluding
stock compensation) 116,363 31,145 182,856 61,009
Stock compensation 26,756 - 41,970 -
Acquired in-process technology - - 4,800 -
Amortization of intangible assets 355,903 90 474,177 180
Merger, branding and integration costs 28,970 1,635 35,894 4,287
----------------- ----------------- ----------------- -----------------
Total costs and expenses 553,923 39,921 780,471 77,975
----------------- ----------------- ----------------- -----------------
Income (loss) from operations (366,515) 10,955 (480,182) 20,015
Other income, net 3,526 1,645 6,853 3,376
----------------- ----------------- ----------------- -----------------
Net income (loss) before provision for
income taxes (362,989) 12,600 (473,329) 23,391
Provision for income taxes 11,458 5,657 18,450 10,433
----------------- ----------------- ----------------- -----------------
Net income (loss) $(374,447) $ 6,943 $(491,779) $ 12,958
================= ================= ================= =================
Basic earnings (loss) per share $ (2.44) $ 0.12 $ (4.01) $ 0.23
================= ================= ================= =================
Diluted earnings (loss) per share $ (2.44) $ 0.11 $ (4.01) $ 0.21
================= ================= ================= =================
Weighted average number of common shares
outstanding - basic 153,659 55,731 122,667 55,166
================= ================= ================= =================
Weighted average number of common shares
outstanding - diluted 153,659 61,544 122,667 61,865
================= ================= ================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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marchFIRST, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------
JUNE 30, JUNE 30,
2000 1999
---------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (491,779) $ 12,958
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,321 2,644
Amortization of intangible assets 474,177 90
Deferred income taxes 55 (654)
Tax benefit of stock options 14,198 10,801
Acquired in-process technology 4,800 -
Unrealized holding loss on investments (4,030) -
Stock compensation expense 41,970 1,090
Changes in assets and liabilities, net of acquisition:
Trade accounts receivable, net (123,839) (9,226)
Prepaid expenses and other current assets 1,707 (4,170)
Other assets (10,181) (12)
Accounts payable (5,447) (701)
Accrued compensation and related costs 22,368 9,958
Income taxes payable 6,274 (2,423)
Accrued expenses and other liabilities (18,537) (2,618)
Deferred revenue (17,324) -
Other, net (676) 567
---------------------- ---------------------
Net cash provided by (used in) operating activities (94,943) 18,304
---------------------- ---------------------
Cash flows from investing activities:
Purchases of short-term investments (52,753) (59,227)
Sales of short-term investments 143,063 64,744
Investments in non-marketable equity securities (59,710) -
Cash acquired in acquistion 162,102 -
Cash paid for acquistion costs (58,267) -
Purchases of property and equipment, net (39,281) (20,405)
---------------------- ---------------------
Net cash provided by investing activities 95,154 (14,888)
---------------------- ---------------------
Cash flows from financing activities:
Proceeds from debt line of credit, net 2,314 (1,495)
Proceeds from issuance of common stock 40,476 11,886
Purchase of treasury stock (65,016) -
Proceeds form issuance of ESPP 5,777 2,058
Partnership capital distributions - (1,185)
---------------------- ---------------------
Net cash provided by (used in) financing activities (16,449) 11,264
---------------------- ---------------------
Effect of foreign exchange rate changes (4,021) -
Net increase (decrease) in cash and cash equivalents (20,259) 14,680
Cash and cash equivalents at beginning of period 147,816 50,710
---------------------- ---------------------
Cash and cash equivalents at end of period $ 127,557 $ 65,390
====================== =====================
Supplemental disclosures of cash flow information:
Interest paid $ - $ 25
Income taxes paid 1,884 2,356
Supplemental disclosures of non-cash investing activity:
Common stock issued for acquisition $ 5,286,615 $ -
Transfer of non-marketable equity securities to Bluevector 23,746 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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marchFIRST, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of marchFIRST, Inc. ("marchFIRST" or the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The information furnished herein includes all adjustments, which
are, in the opinion of management, necessary for a fair presentation of
results for these interim periods. All such adjustments are of a normal
recurring nature, except for the adjustments relating to the acquisition
discussed in Note 4. The results of operations for the three and six months
ended June 30, 2000 are not necessarily indicative of the results to be
expected for the year ending December 31, 2000.
These financial statements should be read in conjunction with the
Company's historical audited consolidated financial statements and notes
thereto for the year ended December 31, 1999 included in the Annual Report on
Form 10-K filed by the Company with the Securities and Exchange Commission.
NOTE 2. BALANCE SHEET COMPONENTS (in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- -------------
<S> <C> <C>
Trade accounts receivable, net:
Accounts receivable $ 377,508 $ 88,230
Media receivable 8,466 -
Unbilled revenues 97,704 5,998
Less: Allowance for doubtful accounts (20,777) (3,519)
-------------- -------------
$ 462,901 $ 90,709
=============== =============
Intangible assets, net:
Workforce in place $ 139,702 $ 12,602
Goodwill 6,698,368 15,640
Customer lists 50,360 1,260
Purchased technology 18,600 -
--------------- -------------
$ 6,907,030 $ 29,502
Less: Accumulated amortization (472,601) (252)
--------------- -------------
$ 6,434,429 $ 29,250
=============== =============
Accrued expenses and other liabilities:
Professional fees $ 1,217 $ 980
Merger and related costs 102,440 -
Other 39,969 12,893
--------------- -------------
$ 143,626 $ 13,873
=============== =============
</TABLE>
NOTE 3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items
that are reported directly as a separate component of stockholders' equity in
the condensed consolidated balance
6
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sheets. marchFIRST, Inc. has comprehensive income (loss) comprised of net
unrealized loss on marketable securities and foreign currency translation
adjustments. The components of comprehensive income (loss) for the six months
ended June 30, 2000, and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 2000 2000 1999
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(374,447) $6,943 $ (491,779) $ 12,958
Foreign currency translation adjustments (893) (119) (2,020) 73
Net unrealized loss on marketable securities (4,030) 28 (6,453) (149)
----------- ------- ------------ ---------
Comprehensive income (loss) $(379,370) $6,852 $ (500,252) $ 12,882
========== ====== ============ =========
</TABLE>
The components of accumulated other comprehensive loss at June 30, 2000
and December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ --------------
<S> <C> <C>
Net unrealized loss on marketable securities $ (6,546) $ (93)
Foreign currency translation adjustments (2,133) (113)
------------ -------------
Accumulated other comprehensive loss $ (8,679) $ (206)
============ ==============
</TABLE>
NOTE 4. EQUITY INVESTMENT
On March 1, 2000, the Company announced the formation of a venture
capital organization, Bluevector L.L.C. ("Bluevector"). Bluevector will
invest in the technology industry and will also provide financial advisory
services as well as business strategy and branding to its clients. During the
six months ended June 30, 2000, the Company contributed $49.8 million of cash
and transferred $23.7 million of its non-marketable equity securities to
Bluevector. At June 30, 2000, the Company's investment in Bluevector was
$71.5 million representing an approximately 50% interest. The investment is
classified as a long-term investment and is being accounted for using the
equity method of accounting. The carrying value of its investment at June 30,
2000 has been reduced to record the amortization of the difference between
the Company's investment balance and its percentage ownership in the underlying
net assets of Bluevector.
NOTE 5. STOCKHOLDERS' EQUITY
During the three month period ended June 20, 2000, the Company
purchased 3.0 million shares of its common stock to be held as treasury stock
at a cost of $65.1. The treasury stock is intended for issuance under the
Company's employee stock option and stock purchase plan.
NOTE 6. BUSINESS COMBINATIONS
On March 1, 2000, the Company (which was then named Whittman-Hart,
Inc.), and USWeb/CKS completed a merger. Under the terms of the merger
agreement, approximately 82,431,300 shares of Company common stock were
exchanged for all the outstanding common stock of USWeb/CKS. In addition,
employee options and warrants to purchase shares of USWeb/CKS common stock
were assumed by Whittman-Hart and became options to purchase
7
<PAGE>
approximately 34,010,426 shares of the Company's common stock and warrants to
purchase approximately 2,058,700 shares of the Company's common stock. These
amounts reflect an exchange ratio of 0.865 of a share of the Company's common
stock for each share of USWeb/CKS common stock. This transaction was
accounted for as a purchase business combination in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations"
and, accordingly, the results of operations of USWeb/CKS have been included
in the Company's financial statements from March 1, 2000.
The total consideration for the transaction was valued at approximately
$7.1 billion as of February 29, 2000, which includes the value of Company
common stock issued in the merger, options and warrants assumed by the
Company, and other direct acquisition costs.
The purchase price was preliminarily allocated to the following (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired
and liabilities assumed $ 233,466
Workforce in place 127,100
Existing and in-process technology 18,600
Customer list 49,100
Goodwill 6,652,072
-------------
Total $ 7,080,338
=============
</TABLE>
The above intangible asset amounts are being amortized over their
estimated useful lives of 3 to 5 years. The following unaudited pro forma
financial information presents the combined results of operations of the
Company and USWeb/CKS as if the acquisition had occurred as of the beginning
of fiscal 2000 and 1999, after giving effect to certain adjustments,
including amortization of goodwill, and related income tax effects. The pro
forma financial information does not reflect the results of operations that
would have occurred had the Company and USWeb/CKS constituted a single entity
during such periods.
<TABLE>
<CAPTION>
Six months ended
(unaudited)
(in thousands)
June 30, June 30,
2000 1999
------------- ------------
<S> <C> <C>
Revenue $ 732,239 $ 409,658
Net loss $ (747,957) $ (701,597)
Basic and diluted loss per share $ (6.10) $ (5.89)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS
SUCH TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934)
THAT ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS
ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S
MANAGEMENT. THE COMPANY'S RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 2000 AND
BEYOND COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY
SUCH FORWARD-LOOKING STATEMENTS. SEE "CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 16.
OVERVIEW
8
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On March 1, 2000, the Company merged with USWeb/CKS. As a result of the
merger, the Company's revenue and operating expenses increased substantially
during the first quarter and in the current period, and the Company believes
that such increases are likely to continue to increase in future periods as
compared to pre-merger periods. This business combination was accounted for
by the purchase method, and accordingly, the results of operations of
USWeb/CKS have been included in the Company's financial statements and
reflected in the Company's results of operations since March 1, 2000. Prior
to the consummation of the merger on March 1, 2000, the Company filed a
registration statement on Form S-4 on January 27, 2000, Registration No.
333-94565, which was declared effective by the Securities and Exchange
Commission on February 20, 2000. This registration statement contains
unaudited pro forma information for the combined company.
marchFIRST is the new name for the company which was formerly known as
Whittman-Hart, and reflects the merger of Whittman-Hart and USWeb/CKS,
completed on March 1, 2000. As a leading information technology services
company prior to the merger, Whittman-Hart provided technology-based
e-Business solutions, including back office business systems integration,
supply-chain management and business-to-business processes and technologies.
USWeb/CKS was a leading provider of Internet professional services, with an
emphasis on emerging e-commerce companies and the Fortune 500
business-to-consumer marketplace, and offered strong strategy and creative
capabilities.
marchFIRST, Inc. is now an Internet professional services firm that
helps companies build business models, brands, systems and processes to
capitalize on the opportunities created by the Internet and related computer
and communications technologies. marchFIRST has more than 70 offices in 14
countries and employs more than 9,000 employees. The professional services
provided by marchFIRST include business strategy and management consulting,
creative branding and marketing, Web application design and development,
packaged software implementation and integration, and Web and network
infrastructure design and implementation. marchFIRST also provides integrated
application hosting services and, through an affiliated company, provides
access to venture capital and external funding sources. marchFIRST provides
services to clients ranging from early-stage Internet start-up companies to
Global 2000 companies, reflecting management's belief that the Internet has
narrowed the range of technology needs among small, middle-market and global
companies.
The Company's revenues are generated primarily from professional fees,
which are generally billed at a contracted hourly rate and are recognized as
services are provided. marchFIRST's revenues are generated on both a time and
materials and on a fixed-bid or fee-capped basis. Revenues from fixed bid
arrangements are recognized by the percentage of completion method. Billable
rates vary by service provided and geographic region. Historically,
engagements were primarily billed on a time and material basis, but since the
merger with USWeb/CKS, the Company has increased the percentage of its
engagements that are based on a fixed price. These arrangements subject the
Company to the risk of cost overruns; however, historically, such overruns
have not been significant. The Company typically bills on a weekly basis to
monitor client satisfaction and manage its outstanding accounts receivable
balances. The Company's most significant cost is project cost of services,
which consists of consultant salaries and benefits. Thus, the Company's
financial performance is primarily based upon billing margin (billable hourly
rate less the consultant's hourly cost) and personnel utilization rates
(billable hours divided by paid hours).
To date, the Company has been able to maintain its billing margins by
offsetting increases in consultant salaries with increases in its hourly
rates. Because most of the Company's engagements are billed on a time and
materials basis, increases in its cost of services are
9
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generally passed along to the Company's clients and, accordingly, do not have
a significant impact on the Company's financial results. In addition, the
Company attempts to control expenses that are not passed through to its
clients. Furthermore, profitability is improved by tying significant
incentive compensation to achieving performance goals.
The Company establishes standard billing guidelines based on the type
of service offered. Actual billing rates are established on a
project-by-project basis and may vary from the standard guidelines. Over the
last three years, the Company's average revenue per assignment hour has
steadily increased. The growth in average revenue per assignment hour
reflects a higher percentage of value-added services, such as strategic
consulting, brand building, and other technical projects.
The Company manages its personnel utilization rates by monitoring
project requirements and timetables. The number of consultants assigned to a
project will vary according to the size, complexity, duration and demands of
the project. Project terminations, completions and scheduling delays may
result in periods in which consultants are not fully utilized. An
unanticipated termination of a project could result in a higher than expected
number of unassigned consultants or, if the Company were to terminate such
consultants, increased severance expenses. Although the number of the
Company's consultants can be adjusted to correspond to the number of active
projects, marchFIRST must maintain a sufficient number of senior consultants
to oversee existing client projects and assist the Company's sales force in
securing new client assignments. The Company's merger with USWeb/CKS doubled
the number of professionals employed by the Company. marchFIRST consultants
are subject to employment contracts that may be terminated upon two weeks'
notice without substantial penalty or further expense to the Company.
Historically, the Company's revenue growth has been attributable to the
addition of new clients and the growth of current client relationships at
existing and new office locations supplemented by acquisitions. During the
remainder of 2000, the Company intends to continue to achieve growth
primarily through the addition of new clients and growth of current client
relationships at both existing and new office locations.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Consolidated statement of operations data:
Revenues 100% 100% 100% 100%
Cost of services 51 56 51 56
----- ------ ----- -----
Gross profit 49 44 49 44
Costs and expenses:
Selling and marketing 7 6 7 6
General and administrative 31 27 30 27
Stock compensation 7 - 7 -
Acquired in-process technology - - 1 -
Amortization of intangible assets 94 - 78 -
Merger, branding and integration costs 8 1 6 2
----- ------ ----- -----
Total costs and expenses 147 34 129 35
----- ------ ----- -----
Income (loss) from operations (98) 10 (80) 9
Other income, net 1 1 1 2
----- ------ ----- -----
Net income (loss) before provision
for income taxes: (97) 11 (79) 11
Provision for income taxes 3 5 3 5
----- ------ ----- -----
Net income (loss) (100)% 6% (82)% 6%
====== ====== ====== =====
</TABLE>
REVENUES. Revenues increased 228%, or $264.2 million, to $380.2 million
for the three month period ended June 30, 2000, up from $116.0 million for
the three month period ended June 30, 1999. Additionally, revenues increased
170%, or $382.9 million, to $607.6 million for the six month period ended
June 30, 2000, up from $224.7 million for the six month period ended June 30,
1999. The increases during both the three and six month comparison periods
were primarily attributable to the revenues of the former USWeb/CKS, which
are combined with those of the former Whittman-Hart effective March 1, 2000.
In the 1999 periods, reported revenues only include those of the former
Whittman-Hart. The revenues recognized resulting from the former USWeb/CKS
were $299.1 million for the six-month period ending June 30, 2000. The
remaining increase in revenue was due to the addition of new clients and to
the growth of current client relationships at existing and new office
locations and to the acquisition of Fulcrum Solutions, Ltd. ("Fulcrum") in
November 1999.
Revenues from the Company's ten most significant clients as a
percentage of total revenues increased to 15% for the three and six months
ended June 30, 2000. This compares to 12% for both the three and six months
ended June 30, 1999. The increase in revenue from the Company's ten most
significant clients is attributable to revenues generated from clients
of the former USWeb/CKS.
GROSS PROFIT. Gross profit consists of revenues less cost of services,
which includes consultant salaries and benefits and other incentives for
employees engaged in delivering professional services. Gross profit for the
three months ended June 30, 2000 grew 268% to $187.4 million from $50.9
million for the three months ended June 30, 1999. Gross profit for the six
months ended June 30, 2000 grew 206% to $300.3 million from $98.0 million for
the six months ended June 30, 1999. Gross profit as a percentage of revenues
was 49% for both the three and six months ended June 30, 2000, and 44% for
the same periods in 1999. The increase in gross profit for both the three and
six month periods ending June 30, 2000 was largely attributable to higher
gross profit margins on services provided by the former USWeb/CKS, acquired
by the Company on March 1, 2000. Gross profit recognized subsequent to March
1, 2000 attributable to the former USWeb/CKS was $160.2 million. The
remaining increase in gross profit was due to a change in the sales mix
toward higher-end service offerings, the Company's established offices
reaching critical mass, and the acquisition of Fulcrum in November 1999,
partially offset by lower margins in recently opened offices.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include
the salaries, benefits, commissions, travel, entertainment and all other
direct costs associated with the direct sales force as well as advertising,
branding, and other marketing costs. During the six month period ended June
30, 2000, costs related to branding and marketing resulted primarily from the
merger and integration of Whittman-Hart and USWeb/CKS. Accordingly, the costs
were classified as merger and integration costs.
11
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Selling and marketing expenses for the three months ended June 30, 2000
increased approximately 268% to $25.9 million from $7.1 million for the three
months ended June 30, 1999 and increased approximately 226% to $40.8 million
from $12.5 million for the six months ended June 30, 2000. These increases
were related to the period subsequent to March 1, 2000 and were largely
attributable to additional sales and marketing personnel expenses resulting
from the merger with USWeb/CKS. It was also due to increased efforts in the
area of sales and marketing. As a percentage of revenues, selling expenses in
the three and six month periods ending June 30, 2000 were 7%, compared to 6%
in both the three and six month periods ending June 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include salaries and benefits of management and support personnel,
facilities costs, training, travel, outside professional fees and all other
office and corporate costs, including recruiting costs. General and
administrative expenses for the three months ended June 30, 2000 increased
274% to $116.4 million from $31.1 million for the three months ended June 30,
1999. General and administrative expenses for the six months ended June 30,
2000 increased 200% to $182.9 million, from $61.0 million for the six months
ended June 30, 1999. The increase in general and administrative expenses was
due to increased costs incurred subsequent to March 1, 2000 as a result of
the merger. In the 1999 periods, reported general and administrative expenses
only include those of the former Whittman-Hart. As a percentage of revenues,
general and administrative expenses increased to 31% for the three month
period ended June 30, 2000, compared to 27% for the three month period ended
June 30, 1999, and increased to 30% for both the six month period ended June
30, 2000, compared to 27% for the six month period ended June 30, 1999. The
increase in general and administrative expenses as a percentage of revenues
for both the three- and six- month periods resulted largely from duplicative
administrative functions during the integration of the two companies. The
Company expects decreases in general and administrative expenses as a
percentage of revenues as the Company continues its integration efforts.
ACQUIRED IN-PROCESS TECHNOLOGY. Acquired in-process technology expenses
resulted from the Company's March 1, 2000 merger with USWeb/CKS and totaled
$4.8 million for the six month period ended June 30, 2000. Acquired
in-process technology represents purchased technology that had not reached
the stage of technological feasibility as of the merger and had no
alternative future use. Accordingly, such amounts were charged to operations
in March 2000 when the Company acquired the technology.
STOCK COMPENSATION. Stock compensation resulted principally from
certain stock compensation arrangements assumed when the Company merged with
USWeb/CKS. The expense resulted primarily from stock bonuses awarded to
employees of companies previously acquired by USWeb/CKS, prior to March 1,
2000, as well as from options granted by USWeb/CKS with exercise prices below
the fair value of the common stock on the date of grant. Such expense is
recognized ratably over the vesting period, which is generally three to four
years. Stock compensation expense totaled $26.7 million during the three
months ended June 30, 2000 and $42.0 million during the six months ended June
30, 2000, and related principally to stock compensation arrangements entered
into by the former USWeb/CKS prior to March 1, 2000. The Company did not
incur stock compensation expense in the three- or six- month periods ended
June 30, 1999. The Company expects to continue to incur similar stock
compensation expense during the remainder of 2000 as a result of these
existing agreements.
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AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
consists primarily of amortization of purchased technology, workforce in
place, and goodwill resulting from acquisitions, substantially all of which
arose from the Company's acquisition of USWeb/CKS. Amortization of intangible
assets totaled $355.9 million in the three months ended June 30, 2000 and
$474.2 million in the six months ended June 30, 2000 and included
amortization of intangible assets capitalized as a result of the merger with
USWeb/CKS. Amortization of intangible assets for the three months ended June
30, 1999 totaled $0.1 million and $0.2 for the six months ended June 30,
1999. The Company will continue to amortize its intangible assets related to
the merger with USWeb/CKS during the next five years and expects amortization
expense related to intangible assets to approximate $1.4 billion annually
during that five year period.
MERGER BRANDING AND INTEGRATION COSTS. Merger, branding and integration
costs includes legal, accounting, other transaction-related fees and
expenses, and severance payments and costs directly related to integrating
acquired companies, primarily USWeb/CKS. Also included in merger, branding
and integration costs in the three and six month periods ended June 30, 2000
were expenses related to the creation, launch and promotion of the Company's
new brand.
Merger, branding and integration costs were $29.0 million for the three
months ended June 30, 2000 and $1.6 million for the three months ended June
30, 1999. Merger, branding and integration costs were $35.9 million for the
six months ended June 30, 2000 and $4.3 million for the six months ended June
30, 1999. As a percentage of revenue, merger, branding and integration costs
accounted for 8% of revenues for the three months ended June 30, 2000, and 1%
for the three months ended June 30, 1999; 6% for the six months ended June
30, 2000 and 2% for the six months ended June 30, 1999. During the three and
six month periods ended June 30, 2000, the increase in merger, branding and
integration costs related to the Company's merger with USWeb/CKS on March 1,
2000. In the first half of 1999, merger and integration costs related to the
Company's acquisition of Waterfield in March 1999 and POV Partners Inc. in
May 1999. The Company anticipates that merger branding and integration costs
related to the merger with USWeb/CKS will total approximately $80 million in
2000.
OPERATING INCOME (LOSS) FROM OPERATIONS. Operating income (loss) from
operations decreased $377.4 million to a loss of $366.5 million for the three
months ended June 30, 2000, down from operating income of $11.0 million in
the three months ended June 30, 1999. Operating income (loss) also decreased
$500.2 million to a loss of $480.2 million for the six months ended June 30,
2000, down from operating income of $20.0 million in the six months ended
June 30, 1999. The increased operating loss is due principally to expenses
associated with the amortization of intangible assets, stock compensation
expense and merger and integration costs associated with the merger with
USWeb/CKS.
OTHER INCOME, NET. Other income, net increased 114% to $3.5 million for
the three months ended June 30, 2000, from $1.6 million for the three months
ended June 30, 1999. Other income, net also increased 103% to $6.9 million
for the six months ended June 30, 2000 from $3.4 million for the six months
ended June 30, 1999. The three and six month periods ended June 30, 2000
included increased interest income on investments related to the net proceeds
of $98.2 million from the Company's issuance of common stock to Novell, Inc.
in November 1999 and the cash acquired from the acquisition of USWeb/CKS.
INCOME TAXES. For the three and six months ended June 30, 2000, the
provision for income taxes represents U.S. federal, foreign and state taxes
accrued for marchFIRST and subsidiaries. The tax expense represents taxes
related to foreign jurisdictions and the effect of certain items affecting
taxable income that do not affect the provision for income taxes. For the
three and six
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months ended June 30, 1999, the provision for income taxes represents the
actual provision for income taxes of Whittman-Hart prior to its merger with
USWeb/CKS.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had approximately $312.9 million of cash
and cash equivalents, and short-term and long-term investments compared to
$284.3 million at December 31, 1999. Long-term investments at June 30, 2000
included $97.1 million in non-marketable equity securities and $39.4 million
in marketable equity securities. During the six months ended June 30, 2000
the Company's cash and cash equivalents as well as short and long term
investments increased $28.6 million resulting primarily from cash acquired
from its merger with USWeb/CKS. Prior to its merger with USWeb/CKS, the
Company's primary source of liquidity has been cash provided through equity
offerings and cash from operations.
As of June 30, 2000, marchFIRST had a loan agreement for up to $10.0
million of unsecured credit with interest, at the Company's option, at LIBOR
plus 1.5% or the lender's prime rate. There were no borrowings under this
loan agreement as of June 30, 2000. On April 30, 2000, the above loan
agreement was extended to April 30, 2001, and the available amount of
borrowings was increased to $20.0 million. In connection with the Company's
merger with USWeb/CKS, the Company assumed two revolving credit lines with a
maximum borrowing capacity of $35 million, of which approximately $16.9
million was outstanding as of June 30, 2000. The credit agreements are
scheduled to expire on August 31, 2000.
Net cash used in operating activities was $94.9 million during the
six-month period ended June 30, 2000. The use of cash during the three months
ended June 30, 2000 was due to several factors, including increases in
accounts receivable resulting from revenue growth and slightly slower
collection of cash since the merger of USWeb/CKS and Whittman-Hart. During
the six months ended June 30, 1999, operating activities provided $10.5
million due primarily to net income generated during the period.
Capital expenditures of $39.3 million and $10.7 million for the six
month periods ended June 30, 2000 and 1999, respectively, consisted primarily
of real estate, computer equipment and software and office furniture and
equipment to support the growth and expansion of the Company.
During the remainder of 2000, marchFIRST expects to make similar types
of expenditures relating to the expansion of offices and the improvement of
information systems. The Company also expects to make expenditures of
approximately $50.0 million in 2000 related to the expansion of marchFIRST's
new Chicago facility, which will house marchFIRST's education center, the
Chicago office, and its corporate headquarters. Total capital expenditures
for marchFIRST during 2000 are expected to approximate $100.0 million.
During the six-month period ended June 30, 2000, the Company invested
$83.5 million in non-marketable equity securities consisting primarily of an
investment in Bluevector L.L.C. ("Bluevector"). On March 1, 2000, when the
merger closed, the Company announced the formation of a venture capital
organization, Bluevector. Bluevector provides marchFIRST with access to
venture capital for its clients. Bluevector is managed by investment banking
professionals and plans to invest in wireless, broadband and technology
infrastructure companies and technology start-ups. The venture capital
organization, in addition to receiving capital, will also gain access to
financial advisory services from Bluevector and business strategy and
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branding and technology support services from marchFIRST. The Company expects
to invest a total of approximately $100.0 million in Bluevector and will
eventually hold a slightly lower than 50% interest in the venture. During the
six months ended June 30, 2000, the Company contributed $49.8 million of cash
and transferred $23.7 million of non-marketable equity securities to
Bluevector. The investment in Bluevector is being accounted for using the
equity method of accounting.
The Company purchased 3.0 million shares of its common stock to be held
as treasury stock during the second quarter of 2000 at a cost of $65.1
million. The treasury stock is intended for issuance of shares under the
Company's employee stock option and employee stock purchase plan.
During the three-month periods ended June 30, 2000 and June 30, 1999,
$46.3 million and $7.6 million, respectively, of cash was provided by the
exercise of stock options and the purchase of common stock through the
Company's employee stock purchase plan.
On April 26, 2000, the Company entered into an operating lease
agreement which engaged Bank One Capital Markets, Inc. as administrative
agent to structure, arrange and syndicate a $93 million lease facility. The
financing will be utilized to develop previously acquired property into the
new corporate headquarters of marchFIRST. Included as part of this lease
facility is the financing for construction of a parking facility. The lease
agreement provides a construction period of up to 27 months. Upon completion
of the structures, the five-year lease term will commence. The Company's
lease obligation is dependent upon the ultimate cost of the facility. The
lease contains certain restrictive covenants related to change in control and
also various financial covenants. In addition, the Company has the option to
renew the lease at the end of the term or purchase the lessor's interest in
the property.
The Company anticipates its current cash resources, together with
existing sources of liquidity and funds generated from operations, will
provide adequate cash to fund the Company's anticipated cash needs at least
through the next 12 months as well as its long term liquidity needs.
STRATEGIC ALLIANCES
As a result of the Company's merger with USWeb/CKS, the Company
renegotiated its strategic alliance with Microsoft Corporation effective
April 1, 2000. The alliance was formed to assist in the development of the
Internet framework ("iFrame"), a standardized architecture for developing
integrated e-business solutions. Under the terms of the renegotiated alliance
agreement, Microsoft has agreed to pay the Company a total of $58.0 million
for certain system and methodology development initiatives. As of June 30,
2000, Microsoft has paid the Company $33.8 million related to these
initiatives, with the remainder to be paid by the end of 2000. Under the
terms of the renegotiated alliance agreement, the Company recognized as
revenue $14.1 million of the $33.8 million during the second quarter of 2000.
In addition, $12.2 million of the $33.8 million payment is recorded as
deferred revenue at June 30, 2000. Also, Microsoft will provide a joint
technology application services lab to assist in such development and will
provide certain other funding including a joint marketing fund. As part of
the original alliance agreement, Microsoft purchased, for $15.0 million, a
warrant allowing Microsoft to acquire shares of USWeb/CKS common stock. This
warrant was assumed by Whittman-Hart and became a warrant to purchase up to
865,000 shares of marchFIRST common stock at an exercise price of $31.90 per
share, which represented the fair value of the Company's common stock at the
date of the alliance. The warrant is exercisable anytime prior to its
expiration in September 2004. Should the Company be successful in developing
iFrame and its associated applications, the Company will pay to Microsoft a
royalty at a variable rate of certain revenues, if any, from July 2001 until
the earlier of December 31, 2007 or when the aggregate royalty paid totals
$107.7 million.
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Finally, in connection with the renegotiated agreement, Microsoft agreed to
loan the Company $12.0 million on an interest free basis. This loan shall be
due and payable in four equal installments of $3.0 million each beginning on
December 31, 2002 and ending June 30, 2004.
ACQUISITIONS
On March 1, 2000, the Company and USWeb/CKS completed a merger. Under
the terms of the merger agreement, approximately 82,431,300 shares of
Whittman-Hart common stock were exchanged for all the outstanding common
stock of USWeb/CKS. In addition, employee options and warrants to purchase
shares of USWeb/CKS common stock were assumed by Whittman-Hart and became
options to purchase approximately 34,010,426 shares of the Company's common
stock and warrants to purchase approximately 2,058,700 shares of the
Company's common stock. These amounts reflect an exchange ratio of 0.865 of a
share of Whittman-Hart common stock for each share of USWeb/CKS common stock.
This transaction was accounted for as a purchase business combination in
accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations." The total consideration for the transaction was valued at
approximately $7.1 billion, which includes the value of common stock issued
in the merger, options and warrants, and other direct acquisition costs.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and SFAS No. 138, is effective for financial statements for
fiscal years beginning after June 15, 2000, but may be adopted in earlier
periods. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The Company does not believe
that SFAS No. 133 will have a significant impact on its financial statements.
Financial Accounting Standards Board Interpretation "FIN" No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of Accounting Principles Board Opinion No. 25, is effective
for financial statements beginning after July 1, 2000. The company does not
believe FIN No. 44 will have a significant impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, as amended, which is effective no later than the fourth quarter
of fiscal 2000. The Company is in the process of determining the impact of
this accounting pronouncement on its results of operations, financial
position and cash flows.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that reflect
marchFIRST's current expectations about its future operating results,
performance, and opportunities that involve substantial risks and
uncertainties. When used in this Form 10-Q, the words "anticipate,"
"believe," "estimate," "plan," "intend," and "expect," and similar
expressions, as they relate to marchFIRST or its management, are intended to
and generally identify such forward-looking
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statements. These forward-looking statements are based on information
currently available to marchFIRST and are subject to a number of risks,
uncertainties, and other factors that could cause marchFIRST's actual
results, performance, prospects, and opportunities to differ materially from
those expressed in, or implied by, these forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, integration and other risks related to the merger with USWeb/CKS,
difficulties in attracting and retaining highly skilled employees,
marchFIRST's ability to manage rapid growth and expansion into new geographic
areas and service lines, marchFIRST's ability to manage the risk associated
with client projects, and risks related to possible acquisitions. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 for further description of factors that
could affect the Company's operating results, performance and opportunities.
Except as required by the Federal Securities law, the Company does not
undertake any obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date
of this Form 10-Q or for any other reason.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the Company maintained investments in marketable
securities. The securities are classified as available for sale on the
consolidated balance sheet and reported at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity, net of
applicable deferred income taxes. As of June 30, 2000, the fair value of the
Company's marketable securities portfolio was $209.9 million, all of which
was invested in equity and debt securities.
As a result of the merger with USWeb/CKS, the Company assumed certain
additional risks, including changes in interest rates affecting the return on
its investments and, to a lesser extent, risks associated with foreign
currency fluctuations. In the normal course of business, the Company
establishes policies and procedures to manage its exposure to fluctuations in
interest rates and foreign currency values.
INTEREST RATE RISK. The Company's exposure to interest rate risks
results primarily from its short-term investments. To minimize exposure to
interest rate risks, the Company invests predominately in instruments that
are highly liquid, are of investment grade and generally have maturities of
less than one year. The Company intends to make such funds readily available
for operating purposes. At June 30, 2000, the Company had investments with
maturities and weighted-average interest rates as follows (in thousands):
<TABLE>
<CAPTION>
Maturities
2000 2001
------- -------
<S> <C> <C>
Balance $37,036 $11,841
Interest Rate 5.8% 5.3%
</TABLE>
FOREIGN CURRENCY RISKS. As of June 30, 2000, the Company had operating
subsidiaries located in several countries including the United Kingdom,
Germany, France, Canada, Switzerland, Spain, Australia, and South Africa.
These subsidiaries operate primarily in the functional currency of their
individual countries. As a result, the Company does not have exposure to
significant foreign currency risk related to the ongoing operations of these
subsidiaries.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following summarizes the votes of the Annual Meeting of the Company's
stockholders held on May 24, 2000:
Matter
------
Election of two directors of the first class to the Company's Board of
Directors.
For Against Abstentions Broker Non-Votes
----------- -------- ----------- ----------------
Mark D. Kvamme 113,089,694 387,844 0 0
Joseph Marengi 113,089,694 387,844 0 0
Matter
------
Approval of the marchFIRST, Inc. Amended and Restated Employee Stock Purchase
Plan.
For Against Abstentions Broker Non-Votes
----------- --------- ----------- ----------------
111,164,318 1,795,612 517,607 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
10.1 Operating Lease Agreement between the Company and Bank One Capital
Markets, Inc. as Administrative Agent.
10.2 Indemnification Agreement between marchFIRST, Inc. and Indemnitee.
(a) Exhibits
(27.1) Financial Data Schedule
(27.2) Financial Data Schedule (restated)
(b) No reports on Form 8-K were filed during the three month period ended
June 30, 2000.
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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.
marchFIRST, Inc.
Date: August 14, 2000 By: /s/ Robert F. Bernard
----------------- ---------------------
Robert F. Bernard
Chairman of the Board
Date: August 14, 2000 By: /s/ Bert B. Young
----------------- -----------------
Bert B. Young
Chief Financial Officer and Treasurer
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