<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1999
REGISTRATION NO. 333-86433
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
AGENCY.COM LTD.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 13-3808969
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
------------------------
665 BROADWAY, 9TH FLOOR
NEW YORK, NEW YORK 10012
(212) 358-8220
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
MR. CHAN SUH
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
AGENCY.COM LTD.
665 BROADWAY, 9TH FLOOR
NEW YORK, NEW YORK 10012
(212) 358-8220
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. KEITH F. HIGGINS, ESQ.
SCOTT L. KAUFMAN, ESQ. JANE D. GOLDSTEIN, ESQ.
BROBECK, PHLEGER & HARRISON LLP ROPES & GRAY
1633 BROADWAY, 47(TH) FLOOR ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02110
(212) 581-1600 (617) 951-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED DECEMBER 2, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
5,900,000 Shares
[LOGO]
Common Stock
-------------
This is an initial public offering of shares of common stock of
AGENCY.COM Ltd. All of the 5,900,000 shares of common stock are being sold by
AGENCY.COM.
Before this offering, there has been no public market for the common stock.
AGENCY.COM currently anticipates that the initial public offering price will be
between $22.00 and $24.00 per share. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "ACOM", subject to
official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to AGENCY.COM.................... $ $
</TABLE>
To the extent that the underwriters sell more than 5,900,000 shares of
common stock, the underwriters have the option to purchase up to an additional
885,000 shares from AGENCY.COM at the initial public offering price less the
underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
HAMBRECHT & QUIST
------------
Prospectus dated , 1999.
<PAGE>
[Front Inside Cover--AGENCY.COM logo located at the top of the page. Below the
caption is a vertical column of text captioned "Our Values". Below the caption
"Our Values" is the following text: We succeed only when our clients benefit
from our work. We deliver excellence with the highest standards of integrity. We
honor the dignity and value of individuals working as a team. We celebrate
diversity of people, ideas and cultures. We seek to grow through learning and
knowledge gathering. We embrace change and encourage innovation.
Gatefold--Located in the left of the page is the AGENCY.COM logo with the
words "We are an Internet professional services company" beneath the logo. Below
the words "We are an Internet professional services company" is the following
text: We help our clients in four key areas of online business--Branding,
Content, Electronic Commerce and Customer Service. For example, we have
delivered these services to British Airways since 1996 and continue to work with
British Airways, developing strategies and fulfilling its needs for Internet
services around the world.
Across the top of the page are four photographs of a computer monitor
showing different Web pages from the British Airways Website, with the captions
"Branding", "Content", "Electronic Commerce", and "Customer Service" underneath
one photograph each from left to right.
Located in the bottom left is the Company's Integrated Capabilities graphic.
Next to the graphic is a caption "Integrated Capabilities". Below the caption
"Integrated Capabilities" is the following text: We deliver services through
teams of professionals who have expertise in strategy, creative and technology
disciplines, supported by project management and client services staff. Located
in the bottom right is a graphic depicting the Company's Compass Methodology.
Next to the graphic is a caption "Compass-TM- Methodology." Below the caption
"Compass Methodology" is the following text: Our Compass-TM- methodology
provides a common way of delivering services to clients across all our offices.
Located along the bottom right of the page is the following text: For the
first nine months of 1999, British Airways represented 13.5% of our actual
revenues.
Located in the upper right is a map of the world. Next to the map is the
caption "International Scale". Below the caption is the following text: With
offices in the U.S. and Europe and resources in Asia as well as a structure that
allows cross-office collaboration we provide local service to our global
clients.]
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE
THE OPTION WE HAVE GRANTED TO THEM TO PURCHASE ADDITIONAL SHARES IN THIS
OFFERING. PLEASE SEE "UNDERWRITING".
AGENCY.COM
OUR COMPANY
AGENCY.COM is an international Internet professional services firm. We
provide our clients with an integrated set of strategy, creative and technology
services that take them from concept to launch and operation of their Internet
businesses.
Our strategy services include advising clients on business models for their
online businesses, devising strategies so that clients can open new online
distribution and sales channels, identifying opportunities to achieve
operational efficiencies by pursuing online initiatives, and planning for the
operations and organization necessary to support an online business. Our
creative services include advising clients on how to effectively bring their
brands online, developing graphic designs and Web site structure for client Web
sites, and coordinating online marketing campaigns with clients' traditional
advertising agencies. Our technology services include recommending and
installing appropriate hardware and software networks, integration between
Internet and older information technology systems, and implementation of
electronic commerce systems to enable online sales, support and communication.
We seek to empower our clients to gain competitive advantage by using the
Internet to create and enhance interactive relationships with their customers,
staff, business partners and suppliers. We accomplish this by enabling more
timely, convenient and efficient communications and transactions between a
company and these constituents. Since our founding in 1995, we have focused
exclusively on Internet technologies and their implications for businesses. We
serve a broad and diversified client base in a variety of industries, including
emerging Internet-focused businesses and businesses comprising Business Week
magazine's "Global 1000" list of companies with the largest market
capitalizations worldwide. We have worked with more than 200 companies to help
them develop and implement their Internet businesses. Our five largest clients
during the nine months ended September 30, 1999, on an actual basis, were
British Airways, Compaq, FT Group, Sprint and Unilever. We currently employ more
than 1,000 people in 10 offices in the United States and one office each in
Amsterdam, Copenhagen, London and Paris.
OUR MARKET OPPORTUNITY
Based on our experience, we believe many companies outsource some or all of
their growing Internet businesses, creating a large and expanding market for
providers of Internet professional services. Worldwide demand for Internet
professional services is expected to grow from $7.8 billion in 1998 to $78.5
billion in 2003, according to a report by International Data Corporation
("IDC"), a technology and Internet research and consulting company, titled
"Worldwide Internet Services Market and Trends Forecast, 1998-2003", published
in May 1999.
3
<PAGE>
A new breed of professional services firm devoted to the Internet has
emerged to provide companies with strategy, planning, design, development and
deployment services for their Internet resources. We believe these Internet
professional services providers must be able to serve their clients on an
international basis and offer integrated strategy, creative and technology
services.
RISK FACTORS
There are many risk factors associated with an investment in our common
stock. The market for Internet professional services is intensely competitive,
highly fragmented and subject to rapid technological change. Many of our
competitors have advantages over us. There are no substantial barriers to entry
into our business. We expect that competition will intensify and increase over
time. We have incurred significant losses since we were formed and have an
accumulated deficit of approximately $7.6 million as of September 30, 1999. We
incurred net losses of $6.8 million for the nine months ended September 30, 1999
on an actual basis and $17.5 million on a pro forma basis giving effect to our
recent acquisitions. Our directors, executive officers and affiliates will
beneficially own approximately 75% of our common stock after the offering, which
will limit the ability of unaffiliated stockholders to influence corporate
matters. Our largest stockholder has significant ownership positions in some of
our direct competitors and one of our directors is also a director of one of our
direct competitors. This ownership and directorship may create conflicts of
interests. These and other risks are addressed under the caption "Risk Factors"
beginning on page 8 of this prospectus.
OUR HISTORY
We were incorporated in New York on February 10, 1995. We reincorporated in
Delaware on August 30, 1999. Our principal executive offices are located at 665
Broadway, 9th Floor, New York, New York 10012 and our telephone number is
(212) 358-8220. Our Web site is WWW.AGENCY.COM. The information on our Web site
is not a part of this prospectus.
OUR TRADEMARK
AGENCY.COM is our registered trademark. All other trademarks and service
marks used in this prospectus are the property of their respective owners.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered by AGENCY.COM................. 5,900,000 shares
Shares to be outstanding after this
offering................................... 33,747,812 shares
Proposed Nasdaq National Market symbol....... ACOM
Use of proceeds.............................. To repay amounts borrowed under our credit
facility, expand our operations and for
general corporate purposes, including working
capital. We may also use a portion of the
proceeds for strategic investments or
acquisitions. Please see "Use of Proceeds".
</TABLE>
This information is based on our shares of common stock outstanding as of
November 30, 1999. This information does not include:
- 5,775,527 shares subject to options outstanding as of November 30, 1999 at
a weighted average exercise price of $3.06 per share;
- 4,908,531 additional shares that could be issued under our stock option
plans; and
- 7,400,000 shares subject to warrants to purchase our common stock at an
exercise price of $0.005 per share.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the financial data for our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. The pro forma data for the year ended December 31, 1998 and the nine
months ended September 30, 1998 give effect to the following acquisitions as if
each of these acquisitions had occurred on January 1, 1998:
- Ketchum Interactive, which was completed in April 1998;
- The Primary Group, which was completed in August 1998;
- Interactive Solutions, which was completed in April 1999;
- Eagle River Interactive, which was completed in April 1999;
- Digital Vision, which was completed in May 1999;
- Twinspark Interactive People, which was completed in August 1999;
- Interactive Traffic, known as "I-traffic", which was completed in
October 1999; and
- Visionik, which was completed in November 1999.
The pro forma data for the nine months ended September 30, 1999 give effect to
the acquisitions of Interactive Solutions, Eagle River Interactive, Digital
Vision, Twinspark Interactive People, I-traffic and Visionik as if each had
occurred on January 1, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 -------------------------------------------------
-------------- 1996 1997 1998 1998
ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues............ $ 2,162 $ 6,095 $ 12,975 $ 26,452 $ 76,130
Gross profit........ 1,511 3,878 6,775 10,522 32,112
Income (loss) from
operations........ 868 2,862 2,056 (3,052) (21,259)
Net income (loss)... 791 1,502 1,182 (2,481) (21,960)
Minority interest... -- -- 167 (282) (282)
Basic net income
(loss) per common
share............. $ 439.47 $ 0.32 $ 0.07 $ (0.15) $ (0.82)
Diluted net income
(loss) per common
share............. $ 439.47 $ 0.31 $ 0.07 $ (0.15) $ (0.82)
Weighted average
shares outstanding
used in basic net
income (loss) per
common share
calculation....... 2 4,750 16,200 16,854 26,865
Weighted average
shares outstanding
used in diluted
net income (loss)
per common share
calculation....... 2 4,797 16,297 16,854 26,865
OTHER DATA:
EBITDA(1)........... $ 874 $ 2,923 $ 2,601 $ (1,301) $ (4,388)
Cash flows provided
by (used in) (2):
Operating
activities...... 186 952 632 902 (4,142)
Investing
activities...... (62) (515) (3,153) (9,583) (39,005)
Financing
activities...... (66) 18 2,396 9,071 46,216
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1999 1998 1999
ACTUAL ACTUAL PRO FORMA PRO FORMA
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues............ $ 18,956 $ 56,499 $55,962 $74,808
Gross profit........ 8,601 27,715 24,403 33,616
Income (loss) from
operations........ (796) (4,420) (13,791) (14,798)
Net income (loss)... (942) (6,783) (14,942) (17,521)
Minority interest... (282) -- (282) 51
Basic net income
(loss) per common
share............. $ (0.06) $ (0.29) $ (0.56) $ (0.60)
Diluted net income
(loss) per common
share............. $ (0.06) $ (0.29) $ (0.56) $ (0.60)
Weighted average
shares outstanding
used in basic net
income (loss) per
common share
calculation....... 16,587 23,187 26,597 29,242
Weighted average
shares outstanding
used in diluted
net income (loss)
per common share
calculation....... 16,587 23,187 26,597 29,242
OTHER DATA:
EBITDA(1)........... $ 278 $ 3,416 $(1,441) $ (605)
Cash flows provided
by (used in) (2):
Operating
activities...... (1,599) (10,948) (5,160) (21,775)
Investing
activities...... (5,507) (6,834) (37,270) (1,575)
Financing
activities...... 7,136 17,773 44,911 23,011
</TABLE>
6
<PAGE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision for (benefit from) income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting depreciation and amortization, but includes non-cash
compensation expense, provision for doubtful accounts and deferred income
taxes. Other companies may calculate EBITDA differently from the way we do.
EBITDA is not a measurement of financial performance under GAAP. We believe
you should not consider EBITDA as an alternative to net income (loss) as an
indicator of our operating performance or as an alternative to cash flow as
a measure of our liquidity. You should be aware that items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance.
(2) You should read the information in the table together with information
regarding our cash flows from operating, investing and financing activities
appearing on pages 39-40 of this prospectus, which is also an important
measure of our financial condition.
The following table is a summary of our balance sheet as of September 30,
1999. The pro forma data give effect to the acquisitions of I-traffic and
Visionik as if each had occurred on September 30, 1999. The pro forma as
adjusted data reflect the sale of 5,900,000 shares of common stock at an assumed
initial public offering price of $23.00 per share, after deducting the
underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------- --------
<CAPTION>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 726 $ 3,117 $101,818
Working capital............................................. 17,873 19,197 117,898
Total assets................................................ 115,148 137,645 236,346
Notes payable, excluding current portion.................... 67,197 70,764 45,764
Capital leases, excluding current installments.............. 1,709 1,717 1,717
Total stockholders' equity.................................. 24,898 37,862 161,563
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS
OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR FUTURE SUCCESS IS UNCERTAIN BECAUSE WE ARE AN EARLY-STAGE COMPANY
Because we are in an early stage of development, we are subject to the risks
that we will fail to implement our business model and strategy successfully or
to revise our business model and strategy should industry conditions and
competition change. These risks are even greater because we are operating in a
new and rapidly evolving market. We cannot assure you that we will be successful
in addressing these risks. If we are not, our business, results of operations
and financial condition will be materially adversely affected.
OUR REVENUES COULD BE AFFECTED BY THE LOSS OF A MAJOR CLIENT
A substantial portion of our revenue is generated from a limited number of
major clients. In particular, on a pro forma basis our ten largest clients
accounted for approximately 42% of our revenues for the nine months ended
September 30, 1999 and 31% of our revenues for the year ended December 31, 1998.
For the nine months ended September 30, 1999, and for the year ended
December 31, 1998, British Airways accounted for more than 10% of our revenues
on an actual basis. For the nine months ended September 30, 1999, British
Airways accounted for more than 10% of our revenues on a pro forma basis. If one
of our major clients discontinues or reduces the use of our services, our
business, results of operations and financial condition could materially suffer.
We cannot assure you that our clients will continue to use our services in the
future. In addition, because a substantial portion of our revenue is generated
from a limited number of clients, the non-payment or late payment of amounts due
from a major client could have a material adverse effect on our business,
results of operations and financial condition.
IF CLIENTS PREMATURELY TERMINATE OR REDUCE THE SCOPE OF EXISTING CONTRACTS, OUR
REVENUES MAY DECLINE
Our services are often sold pursuant to short-term arrangements and most
clients can reduce or cancel their contracts for our services without penalty
and with little or no notice. These arrangements are in writing, are binding
contracts and typically range in term from three months to one year. If a major
client or a number of small clients were to terminate, significantly reduce or
modify their business relationships with us, then our business, results of
operations and financial condition would be materially adversely affected.
Consequently, you should not predict or anticipate our future revenue based upon
the number of clients we currently have or the number and size of our existing
projects.
OUR REVENUES ARE DIFFICULT TO PREDICT, WHICH COULD LEAD TO POOR OPERATING
RESULTS
We derive our revenues in part from fees for services generated on a
project-by-project basis. These projects vary in length and complexity, as well
as in the fee charged for our services. Revenues are recognized for time and
materials projects as services are provided. Revenues from fixed-fee contracts
8
<PAGE>
are recognized as services are provided upon the achievement of specified
milestones. Revenue is recognized on partially completed milestones in
proportion to the costs incurred for that milestone and only to the extent that
an irrevocable right to the revenue exists. Costs incurred under fixed fee
contracts are recognized as incurred which generally is in the same period that
revenue is recorded. Our methods of recognizing revenue also vary depending on
whether we enter into a retainer, time-and-materials or fixed fee arrangement
with the client. As a result, there may be significant fluctuation in the amount
of revenue generated by a particular client in different periods. Aggregate
quarterly results may fluctuate as well. We may be unable to adjust our cost
structure quickly enough to offset unexpected revenue shortfalls due to the fact
that many of our costs are fixed or are associated with commitments which cannot
be immediately terminated, which could cause our operating results to suffer.
OUR RECENT ACQUISITIONS MAKE EVALUATING OUR BUSINESS DIFFICULT
In April 1999, we acquired all of the issued and outstanding stock of
Interactive Solutions Incorporated. Immediately prior to the acquisition,
Interactive Solutions acquired Quadris Consulting, Inc. The historical revenue
of Interactive Solutions and Quadris combined was $3.6 million for the three
months ended March 31, 1999 and was $15.4 million for the year ended
December 31, 1998. In April 1999, we acquired all of the issued and outstanding
stock of Eagle River Interactive Inc. The historical revenue of Eagle River was
$5.1 million for the three months ended March 31, 1999 and was $23.4 million for
the year ended December 31, 1998. In May 1999, we acquired Digital Vision
Communications Inc. The historical revenue for Digital Vision was $326,000 for
the six months ended June 30, 1999. In August 1999, we acquired Twinspark
Interactive People B.V. The historical revenue for Twinspark Interactive was
$2.4 million for the six months ended June 30, 1999 and was $2.7 million the
year ended December 31, 1998. In October 1999, we acquired all of the
outstanding stock of I-traffic, Inc. The historical revenue for I-traffic was
$4.3 million for the nine months ended September 30, 1999 and $3.5 million for
the year ended December 31, 1998. In November 1999, we acquired all of the
outstanding stock of Visionik A/S. The historical revenue for Visionik was $2.2
million for the nine months ended September 30, 1999 and $2.0 million for the
year ended December 31, 1998.
In July 1997, we purchased 51% of the outstanding shares of Spiral Media,
Inc. We purchased the remaining portion of outstanding shares in July 1998. The
historical revenue of Spiral Media was $738,000 for the year ended December 31,
1997 and $3.8 million for the nine months ended September 30, 1998. In October
1997, we purchased 42.5% of the outstanding shares of Online Magic Limited. In
May 1998 and July 1998, we acquired all of the remaining outstanding shares of
Online Magic through two separate purchase agreements. The historical revenue of
Online Magic was $1.4 million for the year ended December 31, 1997 and
$8.5 million for the year ended December 31, 1998. In April 1998, we acquired
certain assets and assumed certain liabilities from Ketchum Advertising Inc. The
historical revenue of Ketchum for the year ended December 31, 1998 was $680,000.
In August 1998, we acquired certain assets from Primary Group and assumed
certain liabilities. The historical revenue of Primary for the year ended
December 31, 1998 was $130,000.
Our historical results of operations do not fully give effect to the
operations of the companies we have acquired and the pro forma financial
information included in this prospectus is based in part on the separate
pre-acquisition financial reports of these acquired companies. Consequently, our
historical results of operations and pro forma
9
<PAGE>
financial information may not give you an accurate indication of how AGENCY.COM,
together with these combined entities, will perform in the future.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE TO US AND
MAY LIMIT OUR GROWTH
Our future liquidity and capital requirements are difficult to predict as
they depend upon numerous factors, including the success of our existing and new
service offerings and competing technological and market developments. We may
need to raise additional funds in order to meet additional working capital
requirements, support additional capital expenditures or take advantage of
acquisition opportunities. Our ability to obtain additional financing will be
subject to a number of factors, including market conditions, our operating
performance and investor sentiment. These factors may make the timing, amount,
terms and conditions of additional financing unattractive for us. If we are
unable to raise additional funds when needed or the terms are not favorable, our
growth could be impeded.
IF WE FAIL TO ACCURATELY ESTIMATE COSTS OF FIXED-FEE PROJECTS, OUR OPERATING
RESULTS
MAY SUFFER
We derive our revenues from services performed under one of three pricing
arrangements: retainer, time-and-materials and fixed-fee. The majority of our
revenues are derived from time and materials contracts. On a pro forma basis at
September 30, 1999 5.4% of our revenue was derived from retainer contracts,
71.8% of our revenue was derived from time and materials contracts and 22.8% was
derived from fixed-fee contracts. We assume greater financial risks on a
fixed-fee project than on a time-and-materials project because we may
miscalculate the resources or time we need for these projects, which may cause
the costs of completing these projects to exceed the fixed fee we receive and
result in our performing contracts that are not profitable, or which result in a
lower gross margin. The extent to which our operating results may be adversely
affected depends on the extent to which we miscalculate our expenses for
completing the contract. We recognize revenues from fixed-fee projects as
services are provided upon the achievement of specified milestones. Revenue is
recognized on partially completed milestones in proportion to the costs incurred
for that milestone and only to the extent that an irrevocable right to the
revenue exists. Costs incurred under fixed-fee contracts are recognized as
incurred which generally is in the same period that revenue is recorded. To the
extent our estimates of the costs associated with each fixed-fee project are
inaccurate, the revenues and operating profits, if any, that we report for
periods during which we are working on that project may not accurately reflect
the final results of the project. In this case, we may be required to record an
expense in the period in which additional anticipated costs are identified.
RISKS RELATED TO OUR STRATEGY AND MARKET
FAILURE TO PROPERLY MANAGE OUR EXPANDING OPERATIONS MAY ADVERSELY IMPACT OUR
BUSINESS
Our rapid growth has placed a significant strain on our managerial and
operational resources. From January 1, 1997 to November 4, 1999, our staff
increased from approximately 60 to approximately 1,000 employees. If we cannot
effectively manage our expanding operations, we may not be able to continue to
grow, or may grow at a slower pace. To manage any future growth we must continue
to improve our financial and management controls, reporting systems and
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procedures, and expand and train our work force. We cannot assure you that our
controls, systems or procedures will be able to support our expanding operations
or that we will be able to manage both internal and acquisition-based growth
effectively.
IF WE ARE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES, OUR GROWTH COULD BE
IMPEDED
Our ability to identify and invest in suitable acquisition and investment
candidates on acceptable terms is crucial to our strategy. We cannot assure you
that we will be able to continue to identify, acquire or make investments in
promising acquisition candidates on acceptable terms. Moreover, in pursuing
acquisition and investment opportunities, we may be in competition with other
companies having similar growth and investment strategies. Competition for these
acquisitions or investment targets could also result in increased acquisition or
investment prices and a diminished pool of businesses, technologies, services or
products available for acquisition or investment.
OUR ACQUISITION STRATEGY COULD SUBJECT US TO SIGNIFICANT RISKS, ANY OF WHICH
COULD HARM OUR BUSINESS
Acquisitions involve a number of risks and present financial, managerial and
operational challenges, including:
- adverse effects on our reported operating results due to the amortization
of goodwill associated with acquisitions;
- diversion of management attention from running our existing business;
- increased expenses, including compensation expenses resulting from
newly-hired employees; and
- potential disputes with the sellers of acquired businesses, technologies,
services or products.
We may not be successful in integrating the technology, operations and
personnel of any acquired business. Client satisfaction or performance problems
with an acquired business, technology, service or product could also have a
material adverse impact on our reputation as a whole. In addition, any acquired
business, technology, service or product could significantly underperform
relative to our expectations. For all these reasons, our pursuit of an overall
acquisition and investment strategy or any individual acquisition or investment
could have a material adverse effect on our business, results of operations and
financial condition. In four of our eleven acquisitions, we have acquired
companies owned or controlled by Omnicom Inc., our largest stockholder. In the
future, we expect to primarily acquire companies not owned or controlled by
Omnicom, which may make acquiring companies materially more difficult.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS, WHICH
LIMITS OUR BUSINESS OPPORTUNITIES
We have agreed with approximately ten of our clients, including three of our
20 largest clients, to limit our right to enter into business relationships with
competitors of that client for a specific time period. These provisions
typically prohibit us from performing a broad range of our Internet professional
services which we might otherwise be willing to perform for potential clients.
These provisions are generally limited to six months and are sometimes further
limited by office location or apply only to specific employees. These provisions
may limit our ability to enter into engagements with new clients for specified
periods of time. This may adversely affect our business opportunities and our
revenues.
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WE FACE INTENSE COMPETITION, WHICH COULD HARM OUR BUSINESS
Our market is new, intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase over
time because
- there are no substantial barriers to entering the Internet professional
services market;
- our industry is consolidating; and
- many of our competitors are forming cooperative relationships.
We compete against other Internet professional services firms, as well as a
number of different types of companies that are not exclusively in the Internet
professional services business. These competitors, which generally offer some of
the Internet professional services we offer, include:
- traditional strategic consulting firms;
- interactive advertising agencies;
- professional services groups of computer equipment companies;
- traditional systems integrators; and
- internal groups of current or potential clients.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential clients, employees and strategic partners. Further, our
competitors may perform Internet services that are equal or superior to our
services or that achieve greater market acceptance than our services. We have no
patented or other proprietary technology that would preclude or inhibit
competitors from duplicating our services. We must rely on the skills of our
personnel and the quality of our client service.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on our business, results of operations and financial condition. We cannot
assure you that we will be able to compete successfully against existing or
future competitors.
IF WE ARE UNABLE TO IDENTIFY, HIRE, TRAIN AND RETAIN HIGHLY QUALIFIED INTERNET
PROFESSIONALS AND RETAIN CURRENT KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL
SUFFER
Our success depends on our ability to identify, hire, train and retain
highly qualified Internet professionals. These individuals are in high demand
and we may not be able to attract and retain the number of highly qualified
Internet professionals that we need. Historically, we have experienced
significant employee turnover. If we cannot retain, attract and hire the
necessary Internet professionals, our ability to grow, complete existing
projects and bid for new projects would be adversely affected and our business,
results of operations and financial condition would suffer.
In addition, our future success depends, in part, upon the continued service
and performance of Chan Suh, our Chairman, Chief Executive Officer and
President, Kyle Shannon, our Chief Creative Officer, Kevin Rowe, our
President--North America and Eamonn Wilmott, our President--Europe. Particularly
in light of our relatively early stage of development, the fact that many of our
key personnel have worked together for only a short period of time and the
competitive nature of our industry, we cannot assure you that we will be able to
retain the services of our senior management and other key personnel. Losing the
services of any of these individuals at our
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current stage would impair our ability to effectively deliver our services and
manage our company. These problems would negatively affect our business, results
of operations and financial condition, as well as our ability to grow.
IF NOT MANAGED EFFICIENTLY, OUR RAPID GROWTH IN PERSONNEL MAY DIVERT
MANAGEMENT'S ATTENTION FROM THE OPERATION OF OUR BUSINESS
From January 1, 1997 to November 4, 1999, our employee base has grown from
approximately 60 to over 1,000 employees. Our growth has placed significant
demands on our managerial and operational resources. Our failure to manage our
growth efficiently may further divert management's attention from the operation
of our business, which may result in increased expenses and interruptions in our
operations.
OUR EFFORTS TO RAISE AWARENESS OF THE AGENCY.COM BRAND MAY NOT BE SUCCESSFUL,
WHICH MAY LIMIT OUR ABILITY TO EXPAND OUR CLIENT BASE AND ATTRACT ACQUISITION
CANDIDATES AND EMPLOYEES
We believe that building the AGENCY.COM brand is critical for attracting and
expanding our targeted client base and attracting acquisition candidates and
employees. If we do not continue to build the AGENCY.COM brand on a global
basis, we may not be able to effect our strategy. We also believe that
reputation and name recognition will grow in importance as the number of
companies competing in the market for Internet professional services increases.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide high quality, reliable and cost-effective services. If
clients do not perceive our services as meeting their needs, or if we fail to
market our services effectively, we will be unsuccessful in maintaining and
strengthening our brand. If we fail to promote and maintain our brand, or incur
excessive expenses to do so, our business, results of operations and financial
condition will materially suffer.
OUR INTERNATIONAL EXPANSION STRATEGY COULD SUBJECT US TO SIGNIFICANT RISKS, MANY
OF WHICH COULD HARM OUR BUSINESS
We expect to expand our international operations and international sales and
marketing efforts. We commenced operations in Denmark in November 1999, the
Netherlands in August 1999, France in April 1999 and the United Kingdom in
October 1997, and made minority investments in a company in Singapore in
December 1998 and July 1999 and in a company in Paris in October 1999. Our
international offices offer Internet professional services similar to our
domestic offices. We have had limited experience in marketing, selling and
distributing our services internationally, and we cannot assure you that we will
be able to maintain and expand our international operations or successfully
market our services internationally. Failure to do so may negatively affect our
business, results of operations and financial condition, as well as our ability
to grow.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE DIFFERENCES
ASSOCIATED WITH OPERATING INTERNATIONALLY
Our international operations began in October 1997 and we are initially
focusing our international operations in Europe and Asia. We have no current
plans to expand to any specific location internationally. Operating
internationally may require us to modify the way we conduct our business and
deliver our services in these markets. If we do not appropriately anticipate
changes and adapt our practices, our business, results of operations and
financial condition could materially suffer.
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We anticipate that we will face the following challenges internationally:
- the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
- potentially adverse tax consequences;
- longer payment cycles and problems in collecting accounts receivable;
- technology export and import restrictions or prohibitions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity, especially during the summer
months in Europe and certain other parts of the world.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME LESS
COMPETITIVE AND OUR BUSINESS COULD SUFFER
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, and evolving industry standards. If we cannot
keep pace with these changes our services could become less competitive and our
business could suffer. To achieve our goals, we need to provide strategic
business and Internet services that keep pace with continuing changes in
industry standards, information technology and client preferences. We may be
unable, for technological or other reasons, to develop and introduce new
services or enhancements to existing services in a timely manner or in response
to changing market conditions or client requirements. This would materially and
adversely affect our business, results of operations and financial condition.
THE MARKET FOR OUR SERVICES AND OUR REVENUE GROWTH DEPEND ON OUR CURRENT AND
POTENTIAL CLIENTS ACCEPTING AND EMPLOYING THE INTERNET
Since we expect to derive most of our revenues from providing Internet
professional services, our future success is dependent on the increased use of
the Internet. If the Internet fails to develop into a viable marketplace, or
develops more slowly than expected, our business, results of operations and
financial condition could materially suffer. Most of our current or potential
clients have limited experience with the Internet and may determine that the
Internet is not an effective method for expanding their businesses. We cannot
assure you that the market for Internet professional services will continue to
grow or become sustainable.
The Internet may not develop into a viable commercial marketplace because of
many factors, including:
- the inadequate development of the necessary infrastructure;
- a lack of development of complementary products (such as high speed modems
and high speed communication lines); and
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. We cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it by this continued growth. In addition to the Internet's uncertain
ability to expand to accommodate increasing traffic, critical issues concerning
the use of the Internet (including security, reliability, cost,
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ease of deployment and administration and quality of service) remain unresolved.
For example, a number of states have recently permitted telephone companies to
charge increased rates for consumers connecting to the Internet. Concerns
regarding these issues may affect the growth of the use of Internet technologies
to solve business problems.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
The Year 2000 problem is the potential for system and processing failures of
date-related data. Many currently installed computer systems and software
products are coded to accept or recognize only two-digit entries in the date
code field. These systems may mistakenly interpret a date entered as "00" as the
year 1900 rather than the year 2000. As a result, it is necessary to update the
computer systems and/or software used by many companies and governmental
agencies to comply with Year 2000 requirements. Companies that do not update
their systems and/or software risk system failure or miscalculation that could
cause disruptions of normal business activity.
Year 2000 problems could require us, or our clients, to incur delays and
unanticipated expenses. We, and many of our clients, rely on third party vendors
for service and equipment. A significant Year 2000 disruption of these services
or this equipment could require us to seek alternative providers. We may not be
able to immediately find alternative providers and we may not be able to enter
into commercially reasonable agreements with these providers. Similarly, our
clients may face the same obstacles. If our clients are not able to find
alternative providers for their normal business activities, they will likely not
seek to expand their business or utilize the Internet. This could decrease their
demand for our services.
Our failure to correct a material Year 2000 problem could have a material
adverse effect on our business, results of operations and financial condition.
We may experience operations difficulties because of undetected errors or
defects in the technology we use in our internal systems. Additionally, clients'
and future clients' purchasing patterns, especially in the fourth quarter of
1999, may be affected by Year 2000 issues as companies expend significant
resources to correct or replace their current systems for Year 2000 compliance.
The services we provide to our clients integrate software and other
technology from different providers. If there is a Year 2000 problem with
respect to a service performed by us, it may be difficult to determine whether
the problem relates to services which we have performed or is due to the
software, technology or services of other providers. Furthermore, we have
entered into a few contracts, including contracts with some of our largest
clients, which have express or implied warranties with respect to Year 2000
readiness without limitation as to liability. We may be subjected to Year
2000-related lawsuits, whether or not the services that we have performed are
Year 2000 compliant. We cannot be certain what the outcomes of these types of
lawsuits may be.
Failure to provide to our clients services that are Year 2000 compliant,
whether or not in violation of any warranty, could have a material adverse
effect on our business, results of operations and financial condition.
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RISKS RELATED TO LEGAL UNCERTAINTY
GOVERNMENTAL REGULATIONS REGARDING THE INTERNET MAY BE ENACTED WHICH COULD
IMPEDE OUR BUSINESS
To date, governmental regulations have not materially restricted the use of
the Internet by our clients in their markets. However, the legal and regulatory
environment that pertains to the Internet may change. New laws and regulations,
or new interpretations of existing laws and regulations, could impact us
directly, by regulating our operations or imposing additional taxes on the
services we provide, which could adversely impact our results and operations.
These regulations could restrict our ability to provide our services or increase
our costs of doing business.
In addition, new laws could impact us indirectly by preventing our clients
from delivering products and services over the Internet or slowing the growth of
the Internet. In particular, our business may be indirectly affected if new laws
inhibit the growth of the Internet. New laws relating to sales and other taxes,
user privacy, pricing controls, consumer protection and international commerce
may dampen the growth of the Internet as a communications and commercial medium.
For example, a number of proposals have been made at the federal, state and
local levels and by foreign governments that could impose taxes on the online
sales of goods and services and other Internet activities. In addition,
unfavorable judicial interpretation of existing laws, and the adoption of new
laws, regarding liability for libel and defamation and copyright, trademark and
patent infringement may extend liability to Web site owners. If these new laws
decrease the acceptance of e-commerce and other aspects of the Internet, our
clients may be harmed and, as a consequence, our revenue growth and growth in
demand for our services would be limited and our business, results of operations
and financial condition would be adversely affected.
WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS, WHICH
COULD SUBJECT US TO INCREASED EXPENSES
Because we have employees, property and business operations in the United
States, Denmark, France, the Netherlands, Singapore and the United Kingdom, we
are subject to the laws and the court systems of multiple jurisdictions. We may
become subject to claims in foreign jurisdictions for violations of their laws.
In addition, these laws may change or new laws may be enacted in the future.
International litigation is often expensive, time-consuming and distracting, and
could have a material adverse effect on our business, financial condition and
results of operations.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
Unauthorized use of our intellectual property by third parties may damage
our brand and our reputation. We do not have any patents or patent applications
pending and existing trade secret, trademark and copyright laws afford us only
limited protection. It may be possible for third parties to obtain and use our
intellectual property without our authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign jurisdictions may not protect our intellectual property rights to the
same extent as do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE
AND DISRUPTIVE TO OUR BUSINESS
We cannot be certain that our services, the finished products that we
deliver or materials provided to us by our clients for use in our finished
products do not or will not infringe
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valid patents, copyrights or other intellectual property rights held by third
parties. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business. Intellectual property litigation is expensive and time consuming and
successful infringement claims against us may result in substantial monetary
liability or may materially disrupt the conduct of our business.
IF WE FAIL TO DELIVER QUALITY SERVICES OR FULFILL CLIENT NEEDS, OR IF OUR
SERVICES HARM OUR CLIENTS' BUSINESSES, WE MAY FACE ADDITIONAL EXPENSES, LOSSES
OR NEGATIVE PUBLICITY
Many of our engagements involve projects that are critical to the operations
of our clients' businesses. If we cannot complete engagements to our clients'
expectations, we could materially harm our clients' operations. This could
damage our reputation, subject us to increased risk of litigation or force us to
redesign the project. Any of these events could have a material adverse effect
on our business, results of operations and financial condition. While our
agreements with clients often limit our liability for damages arising from our
rendering of services, we cannot assure you that these provisions will be
enforceable in all instances or would otherwise protect us from liability.
Although we carry general liability insurance coverage, our insurance may not
cover all potential claims to which we are exposed or may not be adequate to
indemnify us for all liability that may be imposed. The successful assertion of
one or more significant claims against us could have a material adverse effect
on our business, results of operations and financial condition.
WE MAY BE SUBJECT TO CLAIMS FOR PAST ACTS OF THE COMPANIES THAT WE ACQUIRE,
WHICH MAY SUBJECT US TO INCREASED EXPENSES
We could experience financial or other setbacks if any of the businesses
that we acquire had problems in the past of which we are not aware. We are not
aware of any material legal liabilities of the companies we have acquired to
date. However, to the extent any client or other third party asserts any legal
claim against any of the companies we have acquired, our business, results of
operations and financial condition could be materially adversely affected.
RISKS RELATED TO THIS OFFERING
MANAGEMENT MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU DO NOT AGREE
Our management will have significant flexibility in applying the net
proceeds of this offering and may use the proceeds in ways with which
stockholders disagree. If we do not apply the funds we receive effectively, our
accumulated deficit may increase and we may lose significant business
opportunities.
AS AN INTERNET-RELATED COMPANY, OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
AND COULD DROP UNEXPECTEDLY
Following this offering, the price at which our common stock will trade is
likely to be highly volatile and may fluctuate substantially. As a result,
investors in our common stock may experience a decrease in the value of their
common stock regardless of our operating performance or prospects. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have affected the market prices for the securities of
technology companies, particularly Internet companies. In the past, following
periods of volatility in the
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market price of a particular company's securities, securities class action
litigation was often brought against that company. Many technology-related
companies have been subject to this type of litigation. We may also become
involved in this type of litigation. Litigation is often expensive and diverts
management's attention and resources, which could have a material adverse effect
upon our business, financial condition and results of operations.
OUR DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES OWN ENOUGH OF OUR SHARES TO
CONTROL AGENCY.COM, WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS
Our directors, executive officers and affiliates currently beneficially own
approximately 86% of our common stock, and after the offering will beneficially
own approximately 75% of our common stock. Accordingly, these stockholders could
control the outcome of any corporate transaction or other matter submitted to
the stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of our assets, and also could prevent or cause a change
in control. Third parties may be discouraged from making a tender offer or bid
to acquire us because of this concentration of ownership. The interests of these
stockholders may differ from the interests of the other stockholders. Omnicom,
together with its wholly-owned subsidiary Communicade, currently beneficially
own 49.9% of our common stock. Omnicom's and Communicade's beneficial ownership
of our common stock will only slightly decrease after the offering due to their
ability to purchase additional shares underlying their warrants and will be
approximately 47%, allowing them to continue to effectively control AGENCY.COM.
OUR STOCKHOLDERS COULD BE ADVERSELY AFFECTED AS A RESULT OF OMNICOM'S AND ITS
TWO DESIGNATED DIRECTORS' POTENTIAL CONFLICTS OF INTERESTS
Under a stockholders agreement that terminates upon the closing of this
offering, Communicade has the right to designate two of our five directors.
In addition, Omnicom has significant ownership positions in some of our
direct competitors. These ownership positions may create conflicts of interest
for Omnicom and its director nominees as a result of their access to information
and business opportunities possibly useful to us and to these competitors.
ONE OF OUR DIRECTORS IS ALSO A DIRECTOR OF ONE OF OUR DIRECT COMPETITORS
John D. Wren, one of Communicade's nominees to our Board of Directors, is
also a director of Razorfish, Inc., one of our direct competitors. This
directorship may create actual and perceived conflicts of interest for Mr. Wren
as a result of his access to information and business opportunities possibly
useful to us and this competitor.
OMNICOM HAS PROVIDED US WITH FINANCING AND IT HAS NO OBLIGATION TO RENEW OUR
CREDIT FACILITY BEYOND ITS TERMINATION DATE
We have received significant benefits from our relationship with Omnicom,
our largest shareholder. To date, our working capital and many of our
acquisitions have been financed on favorable terms by lines of credit advanced
by Omnicom. We currently have $73 million outstanding under our credit facility
provided by Omnicom. We are required to use 35% of the net proceeds of this
offering, up to a maximum of $25.0 million, to repay amounts borrowed under the
term loan portion of the credit facility. This credit facility provides for a
$25.0 million term loan facility, a $54.0 million revolving credit line and a
real property lease
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credit support facility providing letters of credit and/or guarantees up to
$6.0 million in the aggregate. The credit facility bears interest at Omnicom's
commercial paper rate, which was 5.3% on November 4, 1999, plus 1.25%. The
credit facility places restrictions on the conduct of our business that
stockholders may not consider favorable, including our ability to pay dividends
and incur additional debt. Omnicom is not obligated to extend this credit
facility beyond September 30, 2001. We cannot assure you that upon termination
of this facility we will be able to obtain any additional financing. As a
result, our financial condition might suffer.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
Based on shares outstanding on November 30, 1999, from time to time after
this offering, a total of 27,847,812 additional shares of common stock may be
sold in the public market by existing stockholders. The market price of our
common stock could decline as a result of sales by these existing stockholders
of their shares of common stock in the market after this offering, or the
perception that these sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. In addition, Omnicom and Communicade together
hold warrants to purchase an aggregate of 6.0 million shares of our common
stock. If they exercise these warrants and sell the underlying shares of common
stock in the market, the market price of our common stock could decline.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws, including those that provide for a
classfied board of directors, authorized but unissued shares of common and
preferred stock and notice requirements for stockholder meetings, and Delaware
law, regarding the ability to conduct specific types of mergers within specified
time periods, may have the effect of delaying or preventing a change of control
or changes in our management that stockholders may consider favorable or
beneficial or that would provide stockholders with a premium to the market price
of their common stock. A classified board of directors may inhibit acquisitions
in general and a tender offer not endorsed by our board in particular since only
one-third of our directors are reelected annually, thereby requiring two annual
meetings before a majority of the directors could be replaced. The authorization
of undesignated preferred stock gives our board the ability to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of the company. If a change of control or
change in management is delayed or prevented, this premium may not be realized
or the market price of our common stock could decline.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate dilution of their investment equal to $20.49
per share.
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FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward looking-statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors".
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation
except as required by law, to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
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USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are estimated to be $123.7 million, assuming an initial public
offering price of $23.00 per share and after deducting the underwriting discount
and estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, we estimate that the net proceeds will be $142.6 million.
We have agreed under our credit facility to use 35% of the net proceeds from
this offering, up to a maximum of $25.0 million, to repay amounts borrowed under
the term loan portion of this credit facility. This credit facility bears
interest at Omnicom's commercial paper rate plus 1.25% and terminates on
September 30, 2001. As of November 4, 1999, Omnicom's commercial paper rate was
5.3%. We currently have approximately $73 million outstanding under this credit
facility, of which $25 million consists of term loans.
As of the date of this prospectus, we have not made any specific plans with
respect to the remaining proceeds of the offering. However, we currently intend
to use the remaining net proceeds of this offering over time:
- to expand our operations;
- for general corporate purposes, including working capital; and
- to expand through strategic investments or acquisitions.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest-bearing securities.
We cannot specify with certainty the particular uses for the net proceeds to
be received upon completion of this offering. Accordingly, our management will
have significant flexibility in applying the net proceeds of this offering.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate future access to
the public capital markets and to increase our visibility in the marketplace.
Although we engage in discussions with potential acquisition candidates from
time to time, we have no present commitments with respect to any acquisition. In
addition, as part of our overall acquisition strategy, we are currently engaged
in discussions with respect to the possible acquisition of a U.S. based
interactive direct marketing company. Based on the status of the negotiations
with this company, the consummation of this acquisition is not currently
probable.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock other
than a distribution to our stockholders prior to the September 1996 termination
of our status as an S-corporation. We currently intend to retain future
earnings, if any, to finance the expansion of our business. As a result, we do
not intend to pay cash dividends in the foreseeable future. Furthermore, our
credit facility prohibits us and our subsidiaries from paying cash dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the acquisitions of I-traffic, which was
completed in October 1999, and Visionik, which was completed in November
1999; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an assumed initial public offering price of $23.00 per share,
after deducting the underwriting discount and estimated offering expenses
payable by us. Please see "Use of Proceeds".
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------- -------- --------
<CAPTION>
(IN THOUSANDS)
Long-term debt, excluding current portion. $ 67,197 $ 70,764 $ 45,764
<S> <C> <C> <C>
------- -------- --------
Capital lease obligations under capital leases, excluding
current portion.......................................... 1,709 1,717 1,717
------- -------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding (actual,
pro forma and pro forma as adjusted)...................
Common stock, $.001 par value, 200,000,000 shares
authorized; 26,789,538 shares issued and 26,666,164
shares outstanding (actual); 27,830,858 shares issued
and 27,707,484 shares outstanding (pro forma);
33,730,858 shares issued and 33,607,484 shares
outstanding (pro forma as adjusted).................... 26 28 34
Additional paid-in capital................................. 36,437 49,399 173,094
Accumulated deficit........................................ (7,629) (7,629) (7,629)
Deferred compensation...................................... (3,892) (3,892) (3,892)
Cumulative foreign currency translation.................... (44) (44) (44)
------- -------- --------
Total stockholders' equity................................. 24,898 37,862 161,563
------- -------- --------
Total capitalization................................... $93,804 $110,343 $209,044
======= ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999. It does
not include:
- The following shares issued or to be issued in the merger with I-traffic:
- 160,680 shares underlying assumed stock options;
- 60,000 shares subject to newly-granted options at an exercise price of
$8.50; and
- 320,000 shares which may be issued on the first anniversary of closing
the I-traffic merger if I-traffic's business achieves specified revenue
and profitability targets;
- 140,328 shares issued upon option exercises between October 1, 1999 and
November 30, 1999;
- 5,775,527 shares subject to options outstanding as of November 30, 1999 at
a weighted average exercise price of $3.02 per share and any exercises
since this date;
- 4,908,531 additional shares that could be issued under our stock option
plans; and
- 7,400,000 shares subject to warrants to purchase our common stock at an
exercise price of $0.005 per share.
22
<PAGE>
DILUTION
Giving effect to our acquisition of I-traffic and Visionik, our pro forma
net tangible book value (deficit) as of September 30, 1999 was approximately
$(39.5) million, or $(1.42) per share of common stock. Pro forma net tangible
book value (deficit) per share is determined by dividing the amount of our total
tangible assets less total liabilities by the pro forma number of shares of
common stock outstanding at that date. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the underwriting discount and estimated
offering expenses payable by us, our pro forma net tangible book value as of
September 30, 1999 would have been $84.2 million, or $2.51 per share. This
represents an immediate increase in pro forma net tangible book value of $3.93
per share to existing stockholders and an immediate dilution of $20.49 per share
to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $23.00
Pro forma net tangible book value (deficit) per share at
September 30, 1999...................................... $(1.42)
Increase in pro forma net tangible book value per share
attributable to this offering........................... 3.93
------
Pro forma net tangible book value per share after this
offering.................................................. 2.51
------
Dilution per share to new investors......................... $20.49
======
</TABLE>
------------------------
The following table summarizes, on a pro forma basis giving effect to our
acquisition of I-traffic and Visionik, as of September 30, 1999, the differences
between the number of shares of common stock purchased from us, the aggregate
cash consideration paid to us and the average price per share paid by existing
stockholders and new investors purchasing shares of common stock in this
offering. The calculation below is based on an assumed initial public offering
price of $11.00 per share, before deducting the underwriting discount and
estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 27,707,484 82% $ 35,166,276 21% $ 1.27
New investors................... 5,900,000 18 135,700,000 79% $23.00
---------- ----- ------------ -----
Total......................... 33,607,484 100% $170,866,276 100%
========== ===== ============ =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of September 30, 1999 and exclude 7,400,000 shares subject to
warrants to purchase our common stock at an exercise price of $0.005 per share.
As of September 30, 1999, there were options outstanding to purchase a total of
4,938,161 shares of common stock with a weighted average exercise price of $1.98
per share. The discussion and table also exclude 160,680 shares underlying stock
options assumed in the I-traffic merger and 60,000 shares subject to
newly-granted options issued to I-traffic employees. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization".
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of December 31, 1996 is derived from
our consolidated audited financial statements not included in this prospectus
and the selected consolidated balance sheet as of December 31, 1995 and the
selected consolidated statement of operations data for the period from
February 10, 1995 (inception) to December 31, 1995 are derived from our
unaudited consolidated financial statements not included in this prospectus.
The selected actual and pro forma consolidated balance sheet data as of
September 30, 1999 and the pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the actual and pro forma consolidated
statement of operations data for the nine months ended September 30, 1998 and
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The pro forma consolidated balance sheet data give
effect to the acquisitions of I-traffic and Visionik, which were completed in
October and November 1999, respectively, as if these acquisitions had occurred
on September 30, 1999. The pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the nine months ended September 30,
1998 give effect to the acquisitions of Ketchum Interactive, which was completed
in April 1998, The Primary Group, which was completed in August 1998,
Interactive Solutions, which was completed in April 1999, Eagle River
Interactive, which was completed in April 1999, Digital Vision, which was
completed in May 1999, Twinspark Interactive People, which was completed in
August 1999, I-traffic, which was completed in October 1999 and Visionik, which
was completed in November 1999, as if the acquisitions had occurred on
January 1, 1998. The pro forma consolidated statement of operations data for the
nine months ended September 30, 1999 give effect to the acquisition of Eagle
River Interactive, Interactive Solutions, Digital Vision, Twinspark Interactive
People, I-traffic and Visionik as if these acquisitions had occurred on
January 1, 1998.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for the fair presentation of our consolidated
financial position and the consolidated results of operations for those periods.
Results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
or for any future period.
You should read the following discussion of our financial condition and
results of operations in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the AGENCY.COM audited
consolidated financial statements and unaudited pro forma condensed consolidated
financial statements, the Interactive Solutions, Quadris Consulting, Eagle River
Interactive, Twinspark Interactive People, I-traffic and Visionik audited
financial statements, and the notes to those statements included elsewhere in
this prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------
1995 1996 1997 1998 1998
ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $ 2,162 $6,095 $12,975 $26,452 $ 76,130
Direct salaries and costs........... 651 2,217 6,200 15,930 44,018
------- ------ ------- ------- --------
Gross profit........................ 1,511 3,878 6,775 10,522 32,112
Operating Expenses:
General and administrative........ 519 955 3,815 10,944 32,390
Sales and marketing............... 118 -- 528 596 3,819
Amortization of intangibles....... -- -- 72 893 15,540
Depreciation and amortization..... 6 61 304 1,141 1,622
------- ------ ------- ------- --------
Total operating expenses............ 643 1,016 4,719 13,574 53,371
------- ------ ------- ------- --------
Income (loss) from operations....... 868 2,862 2,056 (3,052) (21,259)
Other income (expense), net......... (77) 28 10 (360) (3,047)
Minority Interest................... -- -- 167 (282) (282)
Other............................... -- -- -- -- (9)
------- ------ ------- ------- --------
Income (loss) before provision for
(benefit from) income taxes....... 791 2,890 2,233 (3,694) (24,597)
Provision for (benefit from) income
taxes............................. -- 1,388 1,051 (1,213) (2,637)
------- ------ ------- ------- --------
Net income (loss)................... $ 791 $1,502 $ 1,182 $(2,481) $(21,960)
======= ====== ======= ======= ========
Basic net income (loss) per common
share(1).......................... $439.47 $ 0.32 $ 0.07 $ (0.15) $ (0.82)
Diluted net income (loss) per common
share(1).......................... $439.47 $ 0.31 $ 0.07 $ (0.15) $ (0.82)
======= ====== ======= ======= ========
Weighted average shares outstanding
used in basic net income (loss)
per common share calculation...... 2 4,750 16,200 16,854 26,865
======= ====== ======= ======= ========
Weighted average shares outstanding
used in diluted net income (loss)
per common share calculation...... 2 4,797 16,297 16,854 26,865
======= ====== ======= ======= ========
OTHER DATA:
EBITDA(2)......................... $ 874 $2,923 $ 2,601 $(1,301) $ (4,388)
======= ====== ======= ======= ========
Cash flows provided by (used
in)(3):
Operating activities............ $ 186 $ 952 $ 632 $ 902 $ (4,142)
Investing activities............ (62) (515) (3,153) (9,583) (39,005)
Financing activities............ (66) 18 2,396 9,071 46,216
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1999 1998 1999
ACTUAL ACTUAL PRO FORMA PRO FORMA
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $18,956 $ 56,499 $ 55,962 $ 74,808
Direct salaries and costs........... 10,355 28,784 31,559 41,192
------- -------- -------- --------
Gross profit........................ 8,601 27,715 24,403 33,616
Operating Expenses:
General and administrative........ 7,744 21,708 22,904 30,173
Sales and marketing............... 298 2,591 2,658 4,090
Amortization of intangibles....... 583 4,687 11,502 10,784
Depreciation and amortization..... 772 3,149 1,130 3,367
------- -------- -------- --------
Total operating expenses............ 9,397 32,135 38,194 48,414
------- -------- -------- --------
Income (loss) from operations....... (796) (4,420) (13,791) (14,798)
Other income (expense), net......... (325) (2,125) (2,273) (2,965)
Minority Interest................... (282) -- (282) 51
Other............................... -- -- -- (10)
------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes....... (1,403) (6,545) (16,346) (17,722)
Provision for (benefit from) income
taxes............................. (461) 238 (1,404) (201)
------- -------- -------- --------
Net income (loss)................... $ (942) $ (6,783) $(14,942) $(17,521)
======= ======== ======== ========
Basic net income (loss) per common
share(1).......................... $ (0.06) $ (0.29) $ (0.56) $ (0.60)
Diluted net income (loss) per common
share(1).......................... $ (0.06) $ (0.29) $ (0.56) $ (0.60)
======= ======== ======== ========
Weighted average shares outstanding
used in basic net income (loss)
per common share calculation...... 16,587 23,187 26,597 29,242
======= ======== ======== ========
Weighted average shares outstanding
used in diluted net income (loss)
per common share calculation...... 16,587 23,187 26,597 29,242
======= ======== ======== ========
OTHER DATA:
EBITDA(2)......................... $ 278 $ 3,416 $ (1,441) $ (605)
======= ======== ======== ========
Cash flows provided by (used
in)(3):
Operating activities............ $(1,599) $(10,948) $ (5,160) $(21,775)
Investing activities............ (5,507) (6,834) (37,270) (1,575)
Financing activities............ 7,136 17,773 44,911 23,011
</TABLE>
25
<PAGE>
- ------------------------
(1) The number of shares used to calculate basic and diluted net income or loss
per share was calculated in accordance with the treasury stock method. The
treasury stock method is a method for calculating outstanding shares that
adds to the actual number of shares outstanding additional shares issuable
upon the exercise of stock options and warrants based on a calculation that
assumes that any proceeds that could be obtained upon the exercise of
outstanding stock options and warrants during the applicable period would be
used to purchase common stock at the average market price during the period.
(2) EBITDA represents earning or loss before other income and expense
(consisting of provision for (benefit from) income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting depreciation and amortization, but includes non-cash
compensation expense, provision for doubtful accounts and deferred income
taxes. Other companies may calculate EBITDA differently from the way we do.
EBITDA is not a measurement of financial performance under GAAP. We believe
you should not consider EBITDA as an alternative to net income (loss) as an
indicator of our operating performance or as an alternative to cash flow as
a measure of our liquidity. You should be aware that items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance.
(3) You should read the information in the table together with information
regarding our cash flows from operating, investing and financing activities
appearing on pages 39-40 of this prospectus, which is also an important
measure of our financial condition.
The following balance sheet data are presented:
- on an actual basis;
- on a pro forma basis to reflect the acquisitions of I-traffic and
Visionik; and
- on a pro forma as adjusted basis as of September 30, 1999 to give effect
to the sale of 5,900,000 shares in this offering after deducting the
underwriting discount and estimated offering expenses payable by us,
assuming an initial public offering price of $23.00 per share.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF DECEMBER 31, --------------------------------------
----------------------------------------- PRO FORMA
1995 1996 1997 1998 ACTUAL PRO FORMA AS ADJUSTED
-------- -------- -------- -------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 58 $ 513 $ 388 $ 769 $ 726 $ 3,117 $101,818
Working capital.............................. 734 1,633 4,353 1,327 17,873 19,197 117,898
Total assets................................. 1,083 4,100 11,291 24,860 115,148 137,645 236,346
Notes payable, excluding current portion..... -- -- 2,425 11,989 67,197 70,764 45,764
Capital leases, excluding current
installments............................... -- -- 116 848 1,709 1,717 1,717
Total stockholders' equity................... 791 2,260 3,449 2,060 24,898 37,862 161,563
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL
DATA", THE AGENCY.COM CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, THE INTERACTIVE SOLUTIONS, QUADRIS
CONSULTING, EAGLE RIVER INTERACTIVE, TWINSPARK INTERACTIVE PEOPLE, I-TRAFFIC AND
VISIONIK FINANCIAL STATEMENTS, AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
AGENCY.COM is an international Internet professional services firm. Our
revenues have grown from $2.2 million in 1995 to $26.5 million in 1998 on an
actual basis. We achieved this growth through significant long-term
relationships with multiple clients. Other than British Airways, no client
accounted for more than 10% of our revenues on an actual basis in 1998. For the
nine months ended September 30, 1999, British Airways, Compaq and Sprint
accounted for approximately 13%, 9% and 9% of our revenues, respectively, on an
actual basis. We have acquired 11 companies while expanding our geographic reach
to 12 cities in the United States and Europe and have made minority investments
in a company based in Singapore and a company based in France. Please see
note 9 to the AGENCY.COM consolidated financial statements for a summary of our
operations by geographic area.
We derive our revenues from services performed under one of three pricing
arrangements: retainer, time-and-materials and fixed-fee. The services performed
under any of these arrangements are substantially identical.
We bill and recognize revenues from retainer agreements on a monthly basis
while the agreement is in effect. We believe that retainer arrangements are
indicative of our strong, long-term relationships with clients which yield
significant benefits both to our clients and to us. We believe that we will
achieve greater predictability of revenues and higher revenue growth with
clients who engage us in retainer-based relationships. Retainer agreements are
generally one year in length and include a renewal clause. Typically, retainer
relationships with clients result in additional fixed-fee and time-and-materials
projects since retainer arrangements may not cover the full cost of specific
projects. Retainer fees represented approximately 5.4% of our revenues for the
nine months ended September 30, 1999 on an actual basis. Revenue from clients
with whom we have retainer relationships represented approximately 40.7% of our
revenues during this period. Consistent with our focus on long-term
relationships, our goal is to increase our number of retainer-based
arrangements. To the extent we acquire companies in the future that differ in
their allocation of contract types, the percentage of revenue we derive from
each type of contract may differ from that anticipated.
We bill and recognize revenues from time-and-materials projects as services
are provided on the basis of costs incurred in the period. We estimate these
costs according to an internally developed process. This process takes into
account the type and overall complexity of the project, the anticipated number
of personnel of various skill sets needed and their associated billing rates,
and the estimated duration of and risks associated with the project. Management
personnel familiar with the production process evaluate and price all project
proposals.
We recognize revenues from fixed-fee projects as services are provided upon
the achievement of specified milestones. Revenue is recognized on partially
completed milestones in proportion to the costs incurred
27
<PAGE>
for that milestone and only to the extent that an irrevocable right to the
revenue exists. Fees are billed to the client over the course of the project. We
estimate the price for fixed-fee projects using the same methodology as
time-and-materials projects. All fixed-fee proposals must first be approved by a
member of our senior management team.
Provisions for estimated losses on all three types of contracts are made
during the period in which such losses become probable and can be reasonably
estimated. To date, such losses have not been significant. We report revenue net
of reimbursable expenses.
Our net income on an actual basis decreased from $791,000 for the year ended
December 31, 1995 to a net loss of $(6.8 million) for the nine months ended
September 30, 1999. This significant increase in net loss is primarily
attributable to increased amortization of intangible assets resulting from our
acquisitions, and to a lesser extent, increased general and administrative
expenses related to growth in our infrastructure, increased depreciation and
amortization expense from capital expenditures incurred as a result of our
continued growth and increased interest expense resulting from financing our
acquisitions. The increased expenses were partially offset by increased
revenues. We expect the trend toward increased expenses in absolute dollar terms
to continue as we further expand our operations. However, we expect these
increased expenses as a percentage of our revenue to decrease in the future.
For the nine month period ended September 30, 1999, we incurred a net loss
of $(6.8 million). As a result of this and prior losses, our accumulated deficit
was $(7.6 million) at September 30, 1999. These losses resulted primarily from
amortization of intangibles of $4.7 million associated with our most recent
acquisitions, and to a lesser extent, increased costs due to an increase in the
number of billable and non-billable employees from approximately 300 to
approximately 900 at September 30, 1998 and 1999, respectively, as a result of
our decision to continue to build our infrastructure, and an increase in
depreciation and amortization expense due to significant capital expenditures.
Our revenues and earnings are affected by a number of factors, including:
- the amount of business developed from existing relationships;
- our ability to meet the changing needs of the marketplace;
- employee retention;
- billing rates;
- our ability to deliver complex projects on time; and
- efficient utilization of our employees.
Many of our business initiatives, including our acquisition strategy, are aimed
at enhancing these factors. Further, we believe that our focus on retainer-based
arrangements will continue to improve the predictability of our
quarter-to-quarter results.
Our expenses include direct salaries and costs, sales and marketing, general
and administrative, depreciation and amortization of tangible assets, and
amortization of goodwill. Direct salaries and costs include salaries, benefits
and incentive compensation of billable employees. Billable employees are full
time employees whose time spent working on client projects is charged to that
client at agreed upon rates. Billable employees are our primary source of
revenue. Direct salaries and costs also include other direct costs associated
with revenue generation. Sales and marketing expenses include promotion and new
business generation expenses and the salary and benefit costs of personnel in
these functions. General and administrative expenses include the salaries and
benefits costs of management and other non-billable employees, rent, accounting,
legal and human resources costs. Depreciation and amortization expenses
primarily include depreciation of technology equipment, furniture and fixtures,
and
28
<PAGE>
leasehold improvements. Amortization of goodwill expenses includes charges for
the excess of purchase price over net tangible book value of acquired companies.
Personnel compensation and facilities costs represent a high percentage of our
operating expenses and are relatively fixed in advance of each quarter.
We disclose EBITDA because it is a measure of financial performance commonly
used in the Internet professional services industry. EBITDA shows available cash
before debt service and before deducting depreciation and amortization, but
includes non-cash compensation expense, provision for doubtful accounts and
deferred income taxes. We believe that EBITDA is a useful measure for analyzing
the company's financial results because it shows our historical ability to
service our debt. EBITDA on a pro forma and an actual basis for the nine months
ended September 30, 1999 was approximately $(605,000) and $3.4 million,
respectively, compared to $(1.4 million) and $278,000, respectively, for the
same period in the prior year. We believe that the increase in EBITDA will
continue as revenues continue to increase, our margins continue to increase as a
result of increased utilization of billable employees and our fixed costs
continue to decrease as a percentage of our revenue.
We have achieved growth in revenues by pursuing a strategy of increasing
revenues from existing lines of businesses and through augmenting existing lines
of business with acquisitions.
Revenue from our international operations on an actual basis was $824,000 in
1997 and increased to $7.5 million in 1998, an increase of 810%. Net loss from
international operations on an actual basis was $70,929 in 1997 versus $155,000
in 1998, an increase of 118%. Revenue from our international operations on an
actual basis was $13.2 million for the nine month period ended September 30,
1999, compared to $5.6 million for the nine month period ended September 30,
1998. This represents an increase of 136% for the nine month period. Net income
from international operations on an actual basis was $170,000 for the nine month
period ended September 30, 1998 compared to $812,000 for the nine month period
ended September 30, 1999. This represents an increase of 1055% for the nine
month period. All of our international revenues for 1997 and 1998 came from
Online Magic, which we acquired in 1997. Of the increase in our international
revenue for the nine months ended September 30, 1999 over the nine months ended
September 30, 1998, $2.2 million was contributed by Eagle River Interactive
following our acquisition in April 1999 and $1.2 million was contributed by
Twinspark Interactive People following our acquisition in August 1999. The
remaining $4.2 million of this increase is attributable to an increase in
revenue from new and existing clients of Online Magic. We expect the trend of
increased international revenue to continue as we continue to expand our
international base.
To date, we have experienced success in growing the size and scale of our
business by attracting new clients, attracting new professional staff and adding
to the services that we offer. We have added to our services by offering
integration services relating to wireless technologies, adapting Web site
content for foreign audiences and by increasing the complexity of services
already provided, such as integrating Internet-related applications into
clients' older systems. We have accomplished these additions through hiring new
staff and taking advantage of the expertise developed by the companies that we
have acquired.
ACQUISITIONS AND INVESTMENTS
A key component of our overall growth strategy is the acquisition of, or
investment in, complementary businesses, technologies, services and products. We
have acquired 11 companies since inception and intend to continue acquiring
similar businesses. We
29
<PAGE>
acquired Spiral Media, Online Magic, Ketchum Interactive, The Primary Group,
Interactive Solutions, Quadris Consulting (Quadris became a wholly owned
subsidiary of Interactive Solutions immediately prior to our acquisition of
Interactive Solutions), Eagle River Interactive, Digital Vision, Twinspark
Interactive People, I-traffic and Visionik. We have also made minority
investments in both The Edge Consultants, a technology and services company
based in Singapore, and Pictoris Interactive, a Paris-based Internet
professional services firm company. We are also in discussions with respect to a
possible acquisition of a U.S. based interactive direct marketing company, the
consummation of which is not currently probable based on the status of the
negotiations.
All of the companies and businesses in which we have acquired a 100%
ownership interest have been incorporated into our operations or, with respect
to our two most recent acquisitions, are being incorporated into our operations.
In July 1997, we acquired 51% of Spiral Media, Inc., and in July 1998, we
acquired the remaining 49%. The total consideration for the acquisition was
approximately $6.2 million, consisting of a cash payment of $5.5 million,
relinquishment of debt due from Spiral Media stockholders of $128,000 and the
issuance of 480,626 shares of our common stock valued at $1.12 per share. Spiral
Media created new media services for businesses and consumers by offering
Internet-based and digital media communications strategies and development for
clients. Spiral Media broadened our ability to offer complex technology
services, such as implementing electronic commerce systems. Spiral Media has
been incorporated into the operations of our New York office.
In October 1997, we acquired 42.5% of Online Magic Limited and acquired the
remaining equity interest in two steps in May 1998 and July 1998. The total
consideration for the acquisition was $2.2 million. The consideration was
comprised of a cash payment of $1.6 million and the issuance of 498,434 shares
of our common stock valued at $1.12 per share. Online Magic designed, built and
managed web sites for their clients. Online Magic contributed to our growth by
increasing our U.K. staff by approximately 75 people and by significantly
increasing our client base in the U.K. We incorporated the U.S. operations of
Online Magic into the operations of our New York office. The U.K. office of
Online Magic operates as a separate subsidiary.
In April 1998, we acquired assets from Ketchum Advertising Inc. The
consideration consisted of a cash payment of approximately $643,000. Ketchum
Interactive was an interactive marketing and branding agency, which developed
interactive communications for clients by utilizing strategic consulting, design
and production. We incorporated the operations of Ketchum into our operations
and it currently operates as our San Francisco office. Ketchum contributed to
our growth by expanding our presence in San Francisco.
In August 1998, we acquired assets from Web Partners (doing business as The
Primary Group Inc). In consideration of the assets acquired, we paid
approximately $53,220 in cash. The Primary Group focused on online marketing
needs for luxury and style brands. Primary contributed to our growth by
increasing our client base within the fashion and retail markets. Primary has
been incorporated into the operations of our New York office.
In December 1998, we entered into an agreement to acquire up to 60% of The
Edge Consultants PTE. LTD. in a staged transaction. In December 1998, we
consummated our investment of 12% of Edge's outstanding shares and in
July 1999, consummated our investment of an additional 18%. The total cash
consideration for the 30% investment was $3.1 million. The remaining 30% must be
purchased prior to January 2002 or our option
30
<PAGE>
will expire. The Edge offers strategic, creative and technology services to its
clients. Its core businesses include Internet and electronic commerce
applications and wireless/mobile services. Our relationship with The Edge
enhances the technology services that we are able to offer, such as our ability
to integrate applications based on wireless technologies. Our investment also
allows us to have a presence in Singapore. The Edge is a separate legal entity
and will be accounted for under the equity method of accounting.
In April 1999, we acquired Interactive Solutions Incorporated through a
merger in exchange for an aggregate of 4,171,846 shares of our common stock and
a warrant to purchase 3,071,248 shares of our common stock at a purchase price
of $0.005 per share. The total consideration of the acquisition was
approximately $8.2 million. Interactive Solutions created digital communications
strategies to help its clients increase sales, improve communications and create
brand identities. Interactive Solutions contributed to our growth by increasing
the complexity of our technology services, such as system integration services.
It also contributed by increasing our client base in the financial services and
healthcare markets and by expanding our presence in the Boston market. We
incorporated the operations of Interactive Solutions into our operations and it
currently operates as our Boston office.
In April 1999, we acquired Eagle River Interactive Inc. through a merger in
exchange for an aggregate of 3,659,548 shares of our common stock and a warrant
to purchase 4,328,752 shares of our common stock at a purchase price of $0.005
per share. In addition, we issued 80,690 shares of our common stock to Kevin
Rowe, the former President of Eagle River, in connection with his employment
agreement with Eagle River. The total consideration of the acquisition was
approximately $8.1 million. Eagle River created, developed and deployed online
marketing strategies to assist a variety of companies, primarily in the United
States, in communicating effectively with their targeted audiences. Eagle River
contributed to our growth by improving our project management capabilities and
by expanding our presence in Chicago, Portland, Dallas, Avon, New York and
Paris. We incorporated the operations of Eagle River into our operations and it
currently operates as our Portland, Dallas, Avon and Paris offices. In addition,
a portion of Eagle River's operations have been integrated into our New York
office.
In May 1999, we purchased all of the issued and outstanding shares of
capital stock of Digital Vision Communications Inc. for $1.1 million in cash.
Digital Vision was an interactive services firm that provided web site design
and development. Digital Vision contributed to our growth by increasing our
presence in the Chicago market. We incorporated the operations of Digital Vision
into our operations and it currently operates as our Chicago office.
In August 1999, we purchased all of the issued and outstanding shares of
capital stock of Twinspark Interactive People B.V. for $700,000 in cash and
1,057,226 shares of our common stock valued at $11.00 per share, of which
1,047,226 shares were issued to the shareholders of Twinspark Interactive People
and 10,000 shares were issued to former employees of Twinspark Interactive
People, for a total aggregate purchase price of $11.6 million. Additional
consideration may be paid based upon future performance of Twinspark in the form
of 168,066 additional shares. Twinspark delivered Internet strategies to global
organizations including electronic commerce and strategic consultancy, building
and maintenance of Web sites, Intranet and Extranet and enterprise Web site
management systems. Twinspark contributed to our growth by increasing our
presence in the Dutch market. Twinspark operates as a separate subsidiary.
31
<PAGE>
In October 1999, we consummated our investment of 5% of the outstanding
equity in Pictoris Interactive from its existing shareholders for $500,000. We
have an option to purchase the remaining 95%, which expires October 1, 2000.
Pictoris' existing shareholders have the right, subject to conditions, to
require us to purchase all of their shares. The total value of the transaction
could be as high as $13.5 million, which includes a 10% contingent payment
payable upon Pictoris' achieving operating targets. Pictoris consults with its
clients to develop their overall Internet strategy and helps them implement that
strategy through design, programming and production of Internet sites.
In October 1999, we acquired Interactive Traffic, Inc., known as as
"I-traffic", through a merger. The consideration paid to the stockholders of
I-traffic could total $16.2 million, which includes $3.0 million in cash paid at
closing, $1.0 million to be paid on December 31, 1999, 469,320 shares of our
common stock valued at $11.00 per share, the assumption of options to purchase
160,680 shares of our common stock and the issuance of newly-granted options to
purchase 60,000 shares of our common stock. The total consideration to be paid
also includes performance-based payments consisting of $2.0 million to be paid
in four quarterly payments starting in the fourth quarter of 1999 and 320,000
shares to be issued one year from closing. I-traffic is a full service online
direct marketing company headquartered in New York with an office in San
Francisco. They provide strategic marketing services through media planning,
development, tracking and the creation of affiliation programs. I-traffic
contributed to our growth by increasing the complexity of our strategy and
creative services, such as advising clients on online direct marketing.
I-traffic operates as a separate subsidiary.
In November 1999, we acquired all of the issued and outstanding equity of
Visionik, a company based in Denmark. The total consideration for the
acquisition was $6.8 million, consisting of $500,000 in cash and 572,000 shares
of our common stock valued at $11.00 per share. Visionik is located in
Copenhagen, Denmark and concentrates on providing complete interactive
television and Internet services to its clients. Visionik contributed to our
growth by broadening our services to include advising clients on interactive
television applications. Visionik also expanded our presence in the Danish
market. Visionik operates as a separate subsidiary.
We believe our acquisitions have supported our ability to grow rapidly while
continually enhancing the quality of services we offer our clients. Our
acquisitions have allowed us to rapidly build our base of professionals in the
context of a tight labor market for experienced technical and creative
professionals. From January 1, 1997, to November 4, 1999, our staff increased
from approximately 60 to over 1,000 employees. The acquired entities
collectively employed approximately 650 individuals at the time we acquired
them.
Our acquisition of Eagle River led to the development of our Chicago,
Portland, Dallas, Avon and Paris offices. Our acquisition of Digital Vision
further expanded our Chicago office. Our acquisition of Interactive Solutions
and Twinspark led to the development of our Boston and Amsterdam offices,
respectively, and our acquisitions of Online Magic and Visionik led to the
development of our U.K. and Denmark offices, respectively. Broadening our
geographic coverage, both within the United States and internationally, allows
us to better meet the needs of our global clients and to attract new clients who
seek integrated services across diverse geographic areas. We have also been able
to expand our service offerings through the acquisition of companies with
complementary products and skill sets. Additionally, we expect to achieve cost
synergies by consolidating management and
32
<PAGE>
back-office operations, and sharing technical infrastructure. As a result of
these synergies, we expect our general and administrative expenses to decrease.
Please see "Business--AGENCY.COM Strategy" and "--Acquisition and Integration".
We evaluate acquisitions based on numerous quantitative and qualitative
factors. Quantitative factors include historical and projected revenues and
profitability, geographic coverage and backlog of projects under contract.
Qualitative factors include strategic and cultural fit, management skills,
customer relationships and technical proficiency. We used cash as the primary
consideration for our early acquisitions but, more recently, have used our
common stock as the primary consideration. We anticipate that we will use common
stock as the primary form of consideration for future acquisitions.
We fully integrate all acquired companies into our operating organization.
This integration includes business development, delivery of services, managerial
and administrative support, benefits, purchasing and all other areas.
A significant differentiating factor in our growth strategy is that we
manage regional locations based on key success factors rather than traditional
profit-loss statements. In order to facilitate cooperation across our company
and prevent territorial conflicts, we evaluate Regional Presidents on the basis
of key success factors, including project profitability, utilization, retention,
client satisfaction and revenue per billable employee. We believe that managing
by these key success factors enables our offices to function more effectively as
a team and to jointly take advantage of greater opportunities for synergies and
additional revenues.
All of our acquisitions have been accounted for using the purchase method.
Under the purchase method, the financial data of the acquired entities are
consolidated with our financial results from the effective dates of their
acquisition. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair market values on the acquisition date.
The remaining unallocated portion of the purchase price of each of the
acquisitions is allocated to intangible assets, primarily goodwill, and
amortized on a straight-line basis over the estimated period of benefit, which
ranges from three to seven years. We evaluate the period of benefit on a
company-by-company basis. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, amortization of intangibles expense was
$0.9 million and $4.7 million, respectively. We expect to incur amortization
expense on currently recorded intangibles of $3.0 million for the three months
ending December 31, 1999 and $12.6 million for the year ending December 31,
2000. In addition, we expect to incur additional acquisition-related
amortization expenses as a result of our acquisition program. Our investment in
Pictoris, where we own less than 20% of its equity, has been accounted for using
the cost method and our investment in The Edge, where we own greater than 20%
but less than 50% of its equity, has been accounted for using the equity method.
33
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in our statement of operations for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA:
Revenues................................................. 100% 100% 100% 100% 100%
Direct salaries and costs................................ 36 48 60 55 51
--- --- --- --- ---
Gross profit............................................. 64 52 40 45 49
Operating Expenses:
General and administrative............................. 16 30 42 41 38
Sales and marketing.................................... -- 4 2 2 5
Amortization of intangibles............................ -- -- 3 2 8
Depreciation and amortization.......................... 1 2 5 4 6
--- --- --- --- ---
Total operating expenses................................. 17 36 52 49 57
--- --- --- --- ---
Income (loss) from operations............................ 47 16 (12) (4) (8)
Interest income (expense), net........................... -- -- (1) (2) (4)
Minority interest........................................ -- 1 (1) (1) --
--- --- --- --- ---
Income (loss) before provision for (benefit from) income
taxes.................................................. 47 17 (14) (7) (12)
Provision (benefit) for income taxes..................... 22 8 (5) (2) --
--- --- --- --- ---
Net income (loss)........................................ 25% 9% (9)% (5)% (12)%
=== === === === ===
OTHER DATA:
EBITDA (1)............................................. 48% 20% (5)% 1% 6%
=== === === === ===
Cash flows provided by (used in) (2):
Operating activities................................. 16% 5% 3% (8)% (19)%
=== === === === ===
Investing activities................................. (8)% (24)% (36)% (29)% (12)%
=== === === === ===
Financing activities................................. --% 18% 34% 38% 31%
=== === === === ===
</TABLE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision for (benefit from) income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting depreciation and amortization, but includes non-cash
compensation expense, provision for doubtful accounts and deferred income
taxes. Other companies may calculate EBITDA differently from the way we do.
EBITDA is not a measurement of financial performance under GAAP. We believe
you should not consider EBITDA as an alternative to net income (loss) as an
indicator of our operating performance or as an alternative to cash flow as
a measure of our liquidity. You should be aware that items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance.
(2) You should read the information in the table together with information
regarding our cash flows from operating, investing and financing activities
appearing on pages 39-40 of this prospectus, which is also an important
measure of our financial condition.
34
<PAGE>
COMPARISON OF THE FISCAL YEARS 1996, 1997 AND 1998
The following discussion relates to our actual operating results for the
periods noted. The operating results discussed include the operations of
acquired companies from the effective dates of their acquisitions. Given that
each year includes revenues and expenses from new acquisitions, we believe that
the operating results for 1998 are not directly comparable to the operating
results for 1997, and, similarly, that 1997 results are not directly comparable
to those for 1996.
REVENUES. Revenues were $6.1 million in 1996 and grew to $13.0 million in
1997, an increase of 113%. $4.6 million of this growth, or 67%, was attributed
to existing operations and $2.3 million of this growth, or 33%, was attributed
to acquisitions. We made no acquisitions in 1996. Of the $2.3 million or 33% of
the growth attributed to acquisitions, $700,000 relates to Spiral Media and
$1.6 million relates to Online Magic. We added approximately 100 billable
employees as a result of our acquisitions in 1997. We began operations outside
the United States during 1997. International revenues in 1997 were
$1.1 million. Revenues were $26.5 million in 1998, an increase of 104% compared
to 1997 revenue. $11.4 million, or 84%, of this growth was attributed to
existing operations, of which $4.7 million and $6.7 million was attributed to
domestic and international growth, respectively. $2.1 million, or 16%, of this
growth was attributed to acquisitions, of which $2.0 million and $100,000
relates to the Ketchum Interactive and The Primary Group, respectively. The
$11.4 million, or 84%, increase in revenues in 1998 primarily reflected the
increase in the number of billable employees from approximately 170 in 1997 to
approximately 230 in 1998 to support growing demand for Internet professional
service. Additionally, we added approximately 10 billable employees as a result
of our acquisitions in 1998. Our revenues increase as the number of our billable
employees increases because we are able to use them on existing and new client
projects and bill their time to clients.
DIRECT SALARIES AND COSTS. Direct salaries and costs were $2.2 million in
1996 and grew to $6.2 million in 1997, an increase of 182%. This increase is
mainly attributed to an increase in billable employees. Direct salaries and
costs grew to $15.9 million in 1998, an increase of 156% from 1997. The increase
in direct salaries and costs of $9.7 million, or 156%, in 1998 compared to 1997
was primarily due to the planned investment in additional employees of
approximately $9.2 million in anticipation of future growth and other costs of
$500,000. Direct salaries and costs represented 36%, 48% and 60% of revenues in
1996, 1997 and 1998, respectively. For the years ended December 31, 1996, 1997
and 1998, there were approximately 45, 170 and 240 employees, respectively,
included in direct salaries and costs. In the future, we expect direct salaries
and costs to increase in absolute dollar terms but to decrease as a percentage
of revenues due to our improved scale and the utilization of billable
professionals. Increases in utilization result in increased revenues. Therefore,
direct salaries and costs as a percentage of revenues decreases as employee
utilization increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.0 million in 1996 and grew to $3.8 million in 1997, an increase of 280%.
Spiral Media and Online Magic consisted of $1.1 million of the increase. The
remaining $1.7 million of the increase primarily consists of increased employee
costs. Non-billable employees increased from approximately 15 in 1996 to 50 in
1997. General and administrative expenses were $3.8 million in 1997 and grew to
$10.9 million in 1998, an increase of 187%. General and administrative expenses
represented 16% of revenues in 1996, 30% in 1997 and 42% in 1998. The increase
in general and administrative expenses in absolute dollar
35
<PAGE>
terms of $7.1 million in 1998 compared to 1997 consists of approximately
$1.1 million due to an increase in the number of non-billable employees and
changes in salary rates, $900,000 due to additional rent expense, $2.9 million
due to the full year impact of the acquisition of Spiral Media and Online Magic
and other net increases of $2.2 million. In the future, we expect general and
administrative expenses to increase in absolute dollars but to decrease as a
percentage of revenues due to our improved scale, utilization of billable
professionals, increased efficiency of non-billable staff and higher overall
revenues.
SALES AND MARKETING EXPENSES. We did not incur sales and marketing expenses
in 1996. Sales and marketing expenses were $528,000 in 1997 and grew to $596,000
in 1998, an increase of 13%. Sales and marketing expenses represented 4% of
revenues in 1997 and 2% in 1998. The decrease in sales and marketing expenses as
a percentage of revenues from 1997 to 1998 was primarily due to higher overall
revenues. The increase of sales and marketing expenses in absolute dollar terms
from 1997 to 1998 was attributable to the increase in the number of sales
personnel and an overall increase in our marketing and branding efforts. We
expect sales and marketing expenses to increase in absolute dollar terms as we
continue to invest in building our brand. We do not anticipate that sales and
marketing expenses will increase significantly as a percentage of revenue in
future periods.
AMORTIZATION OF INTANGIBLES. We did not amortize intangibles in 1996.
Amortization of intangibles was approximately $72,000 in 1997 and grew to
$893,000 in 1998. Amortization of intangibles represented approximately 3% of
revenues in 1998 and less than 1% of revenues in 1997. The increase in
amortization of intangibles was due to an incremental increase in 1998 for a
full year of goodwill amortization of $80,000 for Spiral Media and $97,000 for
Online Magic, in which we made our original investments in 1997, as well as
goodwill amortization of $529,000 resulting from the acquisition of additional
equity of Spiral Media, $81,000 from the acquisition of additional equity of
Online Magic, $69,000 resulting from the acquisition of Ketchum and $5,000
resulting from the acquisition of The Primary Group, all of which were completed
in 1998. We anticipate amortization of intangibles to increase by $6.7 million
to approximately $7.6 million for 1999 as a result of additional acquisitions.
Of this anticipated increase, we expect $3.0 million to be for Eagle River
Interactive, $1.3 million for Interactive Solutions, $740,000 for Quadris
Consulting, $757,000 for Twinspark, $251,000 for I-traffic, $155,000 for
Visionik and $137,000 for Digital Vision, and the issuance of contingent
consideration to former shareholders of Online Magic resulting in additional
amortization of intangibles of $356,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $61,000 in
1996. Depreciation and amortization expenses were $304,000 in 1997 and grew to
$1.1 million in 1998, an increase of 262%. Depreciation and amortization
expenses represented 1% of revenues in 1996, 2% of revenues in 1997 and 4% in
1998. The increases in absolute dollar terms from year to year were related to
the investment in, and related depreciation of, technology equipment, furniture
and fixtures, and leasehold improvements. There was no depreciation and
amortization in 1996 relating to acquisitions. The increase in depreciation and
amortization from 1996 to 1997 included approximately $62,000 in depreciation
and amortization attributable to acquisitions made in 1997. The increase in
depreciation and amortization from 1997 to 1998 included approximately $1,000 in
depreciation and amortization attributable to acquisitions made in 1998. We
expect these expenses to continue to grow in absolute dollar terms as we
continue to invest in growth and technology and training to yield more efficient
operations. As a result of our acquisitions in 1999, we expect these expenses to
significantly increase in 1999 and future years.
36
<PAGE>
NET INCOME (LOSS). Net income for 1996 was $1.5 million and $1.2 million in
1997. A net loss of $(2.5) million was incurred in 1998. For the year ended
December 31, 1998, our acquisitions contributed $180,000 of profit and our
continuing operations contributed ($2.7) million of net losses to our total net
loss of $(2.5) million. For the year ended December 31, 1997, our acquisitions
contributed $(80,000) of net losses and our continuing operations contributed
$1.3 million to our total net income of $1.2 million. There were no acquisitions
in 1996. The decrease in net income from period to period was primarily caused
by increased direct salaries and costs, general and administrative expenses and
depreciation and amortization, which together increased at a greater rate than
our increase in revenues, all of which are discussed above.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
REVENUES. Revenues were $19.0 million for the nine months ended
September 30, 1998 and grew to $56.5 million for the nine months ended
September 30, 1999, an increase of 197%. $16.7 million, or 44%, of this growth
was attributed to existing operations, of which $13.3 million and $3.4 million
relates to domestic and international growth, respectively. $20.8 million, or
56%, of this growth relates to acquisitions, of which $12.1 million,
$7.5 million and $1.2 million was attributed to Eagle River Interactive,
Interactive Solutions, Inc., and Twinspark, respectively. All of the growth from
acquisitions came from locations that were new to us in 1999. The
$16.7 million, or 87%, increase in revenues in 1998 primarily reflected the
increase in the number of billable employees from approximately 220 at
September 30, 1998 to approximately 350 at September 30, 1999 to support growing
demand for Internet professional service. Additionally, we added approximately
320 billable employees as a result of our acquisitions for the nine months ended
September 30, 1999. Our revenues increase as the number of our billable
employees increases because we are able to use them on existing and new client
projects and bill their time to clients.
DIRECT SALARIES AND COSTS. Direct salaries and costs were $10.4 million for
the nine months ended September 30, 1998 and grew to $28.8 million for the nine
months ended September 30, 1999, an increase of 177%. The increase in direct
salaries and costs of $8.4 million for the nine months ended September 30, 1999
compared to September 30, 1998 was due to the planned investment in additional
employees and acquisitions in anticipation of future growth. As a percentage of
revenues, direct salaries and costs decreased from 55% for the nine months ended
September 30, 1998 to 51% for the nine months ended September 30, 1999. For the
nine months ended September 30, 1998 and 1999, there were approximately 230 and
670 employees, respectively, included in direct salaries and costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $7.7 million for the nine months ended September 30, 1998 and grew to
$21.7 million for the nine months ended September 30, 1999, an increase of 182%.
As a percentage of revenues, general and administrative expenses decreased from
41% for the nine months ended September 30, 1998 to 38% for the nine months
ended September 30, 1999. The increase in general and administrative expenses in
absolute dollar terms of $14.0 million in 1999 compared to 1998 was primarily
due to an increase in the number of non-billable employees from approximately
180 to 250, salaries and benefits of $4.5 million, rent expense of $1.8 million
and general and administrative costs from our acquisitions of $4.8 million.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $298,000
for the nine months ended September 30, 1998 and grew to $2.6 million for the
nine months ended September 30, 1999, an increase of 772%. As a percentage of
revenues, sales and marketing expenses increased from 2% for the nine
37
<PAGE>
months ended September 30, 1998 to 5% for the nine months ended September 30,
1999. Sales and marketing expenses increased in absolute dollar terms and as a
percentage of revenues primarily as a result of the increase in the number of
sales personnel and an overall increase in our marketing and branding efforts,
such as an increase in the number of our marketing personnel from two to five,
increased participation in electronic commerce trade shows and entering into
approximately 30 co-marketing agreements.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $583,000 for
the nine months ended September 30, 1998 and grew to $4.7 million for the nine
months ended September 30, 1999, an increase of 706%. As a percentage of
revenues, amortization of intangibles represented 2% of revenues in the first
nine months of 1998 and 8% of revenues in the first nine months of 1999. The
increase was due to the acquisitions of Eagle River Interactive, Interactive
Solutions (including Quadris), Twinspark and Digital Vision, the remainder of
stock of Spiral Media and Online Magic and the acquisition of all of the assets
of Ketchum Interactive and The Primary Group.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$772,000 for the nine months ended September 30, 1998 and grew to $3.1 million
for the nine months ended September 30, 1999, an increase of 302%. As a
percentage of revenues, depreciation and amortization represented 4% of revenues
in the nine months ended September 30, 1998 and 6% of revenues in the nine
months ended September 30, 1999. The increases in absolute dollar terms from
year to year resulted from depreciation of growth related infrastructure
investments, including technology equipment, furniture and fixtures and
leasehold improvements and the depreciation of the assets of the companies that
we acquired, which totaled $550,000 for the nine months ended September 30, 1999
as compared to $1,000 for the nine months ended September 30, 1998. We expect
these expenses to continue to grow in absolute dollar terms as we continue to
invest in growth and technology and training to yield more efficient operations
and as a result of our acquisitions in 1999, we expect these expenses to
significantly increase in the fourth quarter of 1999 and future years.
NET INCOME (LOSS). Net loss for the nine months ended September 30, 1999
was $(6.8 million) compared to a net loss of $(950,000) for the same period in
1998. For the nine months ended September 30, 1999, our acquisitions contributed
$(2.7 million) of net losses and our continuing operations contributed $(5.9)
million of net losses for a total net loss of $(6.8) million. For the nine
months ended September 30, 1998, our acquisitions contributed $150,000 of net
income and our continuing operations contributed $(1.1) million of net losses to
our total net losses of $(950,000). The increase in net loss between the periods
was primarily caused by increased direct salaries and costs, general and
administrative expenses, sales and marketing expenses, and depreciation and
amortization, which together increased at a greater rate than our increase in
revenues, all of which are discussed above.
QUARTERLY PRO FORMA RESULTS OF OPERATIONS
The following selected unaudited pro forma results of operations data gives
effect to our acquisitions since January 1, 1998 as if they had occurred on
January 1, 1998. We have included this table and the discussion below to assist
investors in evaluating our financial performance.
The pro forma financial statements do not purport to represent what the
results of our operations or financial condition would actually have been had
the acquisitions in fact occurred on January 1, 1998. The pro forma quarterly
results of operations should not be construed as being representative of future
results of operations. These pro forma amounts include the same adjustments that
are reflected in the pro forma consolidated
38
<PAGE>
statement of operations. The unaudited pro forma consolidated financial data are
based upon currently available information, assumptions and estimates which our
management believes are reasonable. These assumptions and estimates, however,
are subject to change, including adjustments for potential cost savings or other
synergies arising from acquisitions we have made.
Investors should read these pro forma results of operations with the
unaudited pro forma condensed consolidated statement of operations and the
AGENCY.COM consolidated financial statements and unaudited pro forma condensed
consolidated financial statements, the Interactive Solutions, Quadris
Consulting, Eagle River Interactive, Twinspark Interactive People, I-traffic and
Visionik financial statements, and the notes to those statements appearing
elsewhere in this prospectus.
PRO FORMA RESULTS OF OPERATIONS
The following tables set forth pro forma dollar amounts and percentage of
pro forma revenues of certain items included in our statement of operations for
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Revenues................................. $16,571 $19,853 $19,538 $20,168 $20,504 $ 25,048 $ 29,256
Direct salaries and costs................ 9,365 10,356 11,838 12,459 11,766 13,345 16,081
------- ------- ------- ------- ------- -------- --------
Gross profit............................. 7,206 9,497 7,700 7,709 8,738 11,703 13,175
Operating expenses:
General and administrative............. 7,234 8,126 7,544 9,486 8,015 9,765 12,393
Sales and marketing.................... 717 937 1,004 1,161 1,190 1,344 1,556
Amortization of intangibles............ 3,512 3,951 4,039 4,038 4,702 3,122 2,960
Depreciation and amortization.......... 372 405 353 492 1,231 962 1,174
------- ------- ------- ------- ------- -------- --------
Total operating expenses................. 11,835 13,419 12,940 15,177 15,138 15,193 18,083
------- ------- ------- ------- ------- -------- --------
Loss from operations..................... (4,629) (3,922) (5,240) (7,468) (6,400) (3,490) (4,908)
Interest expense, net.................... 673 712 888 774 901 921 1,143
Minority interest........................ 212 70 -- -- -- (51) --
Other.................................... -- -- -- 9 -- 10 --
------- ------- ------- ------- ------- -------- --------
Loss before provision for (benefit from)
income taxes........................... (5,514) (4,704) (6,128) (8,251) (7,301) (4,370) (6,051)
Provision for (benefit from) income
taxes.................................. (298) (158) (948) (1,233) (487) 52 234
------- ------- ------- ------- ------- -------- --------
Net (loss)............................... $(5,216) $(4,546) $(5,180) $(7,018) $(6,814) $ (4,422) $ (6,285)
======= ======= ======= ======= ======= ======== ========
Revenues................................. 100% 100% 100% 100% 100% 100% 100%
Direct salaries and costs................ 57 52 61 62 57 53 55
------- ------- ------- ------- ------- -------- --------
Gross profit............................. 43 48 39 38 43 47 45
Operating expenses:
General and administrative............. 44 41 39 47 39 39 42
Sales and marketing.................... 4 5 5 6 6 5 5
Amortization of intangibles............ 21 20 20 20 23 13 10
Depreciation and amortization.......... 2 2 2 2 6 4 4
------- ------- ------- ------- ------- -------- --------
Total operating expenses................. 71 68 66 75 74 61 61
------- ------- ------- ------- ------- -------- --------
Loss from operations..................... (28) (20) (27) (37) (31) (14) (16)
Interest expense, net.................... 4 4 5 4 4 4 4
Minority interest........................ 1 -- -- -- -- -- --
Other.................................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- -------- --------
Loss before provision for (benefit from)
income taxes........................... (33) (24) (32) (41) (35) (18) (20)
Provision for (benefit from) income
taxes.................................. (2) (1) (5) (6) (2) -- 1
------- ------- ------- ------- ------- -------- --------
Net (loss)............................... (31%) (23%) (27%) (35%) (33%) (18%) (21%)
======= ======= ======= ======= ======= ======== ========
</TABLE>
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As a result of our limited operating history, rapid growth and the emerging
nature of the markets in which we compete, we believe that quarter-to-quarter
comparisons of results of operations are not necessarily meaningful. Investors
should not rely on the results of any one quarter as an indication of our future
performance. Additionally, quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside of our control.
COMPARISON OF 1998 AND 1999 QUARTERLY PRO FORMA RESULTS OF OPERATIONS
REVENUES. Pro forma revenues increased $3.3 million, or 20%, for the
quarter ended June 30, 1998 over the prior quarter. The increase in revenues
primarily reflects the increase in the number of billable employees from
approximately 480 in the quarter ended March 31, 1998 to approximately 530 in
the quarter ended June 30, 1998.
Pro forma revenues for the quarters ended June 30, 1998, September 30, 1998,
December 31, 1998 and March 31, 1999 were relatively stable.
Pro forma revenues for the quarters ended June 30, 1999 and September 30,
1999 increased $4.5 million, or 22%, and $4.2 million or 17%, respectively, over
the prior quarter. The $4.5 million increase in revenues primarily reflects the
increase in billable employees from approximately 660 in the quarter ended
March 31, 1999 to approximately 725 in the quarter ended June 30, 1999. The
$4.2 million increase in revenues in the quarter ended September 30, 1999
primarily reflects increases related to our acquisition of I-Traffic and
Twinspark of $900,000, an increase in billable hours contributing $2.6 million
and other increases of $700,000.
Pro forma revenues increased $18.8 million, or 34%, for the nine month
period ended September 30, 1999 compared to the same period for 1998.
$8.8 million, or 47%, of the increase was attributable to international
operations. $4.2 million, $1.4 million, $2.5 million and $700,000 of the
increase relates to the London, Paris, Amsterdam, and Denmark locations,
respectively. $10.0 million, or 53%, of the increase in revenues relates to
domestic operations and primarily reflects the increase in the number of
billable employees from approximately 560 for the period ended September 30,
1998 to approximately 790 for the period ended September 30, 1999.
Our revenues increase as the number of billable employees increases because
we are able to use them on existing and new client projects and bill their time
to clients.
DIRECT SALARIES AND COSTS. Pro forma direct salaries and costs increased in
absolute dollar terms from the quarter ended March 31, 1998, through the quarter
ended December 31, 1998. This reflected our planned investment in additional
billable employees from approximately 480 employees as of March 31, 1998 to over
600 as of December 31, 1998. The increase in pro forma direct salaries and costs
in absolute dollar terms and as a percentage of pro forma revenues in the
quarter ended December 31, 1998 was due to increased costs associated with
one-time charges of approximately $690,000 related to the Interactive Solutions
merger. These charges related primarily to one time payments made for accrued
vacation, special bonuses, travel bonuses and fringe benefits. Approximately
$390,000 of these charges were recorded as direct salaries and costs and
approximately $300,000 of these charges were included in general and
administrative expenses. The increase in direct salaries and costs from
March 31, 1999 to September 30, 1999 of $4.3 million reflects additional
billable employes from approximately 660 as of March 31, 1999 to 790 as of
September 30, 1999.
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GENERAL AND ADMINISTRATIVE EXPENSES. The overall increase in pro forma
general and administrative expenses was primarily attributable to an increase in
the number of non-billable employees, from 60 as of March 31, 1998 to 228 as of
September 30, 1999. The significant increase in pro forma general and
administrative expenses for the quarter ended December 31, 1998 compared to the
quarter ended September 30, 1998 was due to an increase in bad debt expense of
$600,000 primarily attributable to accounts of clients of Eagle River, $300,000
of one-time charges related to reconciliation of employee benefits in connection
with acquisitions, including payments made for accrued vacation, special bonus,
travel bonus and fringe benefits, and charges associated with additional
staffing.
The significant increase in pro forma general and administrative expenses
for the quarter ended September 30, 1999 compared to June 30, 1999 was primarily
due to $1.0 million in employee costs, a $400,000 increase in recruiting
expenses due to an increased use of outside employment agencies to recruit new
employees and $300,000 for rent expense.
SALES AND MARKETING EXPENSES. The overall increase in pro forma sales and
marketing expenses in absolute dollar terms through the third quarter of 1999
was primarily a result of the increase in the number of sales and marketing
personnel from 17 at March 31, 1998 to approximately 25 at September 30, 1999,
and an overall increase in our marketing and branding efforts.
AMORTIZATION OF INTANGIBLES. Pro forma amortization of intangibles expense
increased in absolute dollar terms through the quarter ended December 31, 1998
due to goodwill recorded in connection with the Spiral Media, Online Magic,
Ketchum and Primary Group acquisitions. As a percentage of revenues,
amortization of intangibles remained relatively constant through the quarter
ended December 31, 1998 as acquired companies contributed revenues consistent
with acquired goodwill. Pro forma amortization of intangibles increased from the
quarter ended December 31, 1998 to the quarter ended March 31, 1999, as the
result of $700,000 in additional amortization of goodwill generated by
Interactive Solutions in the first quarter of 1999. Pro forma amortization of
intangibles for the quarters ended June 30, 1999 and September 30, 1999
decreased significantly compared to the same quarters in the prior year as the
goodwill and customer base generated from the acquisitions of Eagle River and
Interactive Solutions by us in April 1999 are being amortized over a seven and
five-year life, respectively, and were previously amortized over a three-year
period in the financial statements of Eagle River and Interactive Solutions
during 1998, thus generating more amortization in 1998.
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization
generally increased over the period reflecting growth-related infrastructure
investment. On a year-over-year basis, third quarter depreciation and
amortization expenses increased as a percentage of revenue.
NET INCOME (LOSS). Net loss increased for the quarter ended September 30,
1999 by $1.1 million compared to the same quarter for the prior year on a pro
forma basis primarily due to increased direct salaries and costs, general and
administrative expenses, sales and marketing expenses and depreciation and
amortization, which together increased at a greater rate than our increase in
revenues, all of which are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and investments in property
and equipment primarily through cash from
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operations, borrowings from Omnicom, and capital leases.
At year end our cash and cash equivalents were $513,000 in 1996, $388,000 in
1997 and $769,000 in 1998, and our cash balance was approximately $726,000 at
September 30, 1999.
Cash provided by operating activities was $902,000 in 1998 compared to cash
provided by operating activities of $632,000 in 1997 and cash provided by
operating activities of $952,000 in 1996. Cash provided by operating activities
in 1998 was primarily due to depreciation and amortization of $2.0 million and
an increase in accounts payable and accrued expenses of $3.2 million offset by a
net loss of $2.5 million, deferred taxes of $1.6 million and an increase in
unbilled charges of $1.6 million. Cash provided by operating activities in 1997
was primarily due to net income of $1.2 million and an increase in accounts
payable and accrued expenses of $1.2 million offset by an increase in accounts
receivable of $3.0 million. Cash provided by operating activities in 1996 was
primarily due to net income of $1.5 million and deferred taxes of $1.2 million
offset by an increase in accounts receivable of $1.6 million.
Cash used in operating activities was $10.9 million for the nine months
ended September 30, 1999 compared to $1.6 million for the nine months ended
September 30, 1998. Cash used in operating activities for the nine months ended
September 30, 1999 was primarily due to an increase in accounts receivable of
$17.3 million which was the result of an increase of revenues of $30.0 million
for the nine months ended September 30, 1999, and an increase in prepaid
expenses and other current assets of $2.5 million, resulting from an increase in
net current deferred income taxes of $2.5 million. These changes were offset by
an increase in depreciation and amortization of $6.5 million, which consists of
additional depreciation of $1.9 million for new expenditures and amortization
and depreciation from the 1999 acquisitions of $2.4 million for Eagle River
Interactive, $1.0 million for Interactive Solutions, Inc., $494,000 for Quadris
Consulting, $323,000 for Twinspark, $87,000 for Digital Vision and due to an
incremental increase in the nine months ended September 30, 1999 for a full nine
months of goodwill amortization of $264,000 for Spiral Media and $74,000 for
Online Magic. In addition, there was an increase of $3.2 million in accounts
payable and accrued expenses, which was the result of accrued initial public
offering costs of $1.3 million, accrued bonuses of $600,000 and an increase in
accounts payable of $1.3 million, which was a direct result of the increase in
our operations during the nine months ended September 30, 1999. Cash used in
operating activities for the nine months ended September 30, 1998 was affected
by an increase in accounts receivable and unbilled charges of $3.0 million and
deferred income taxes of $1.3 million offset by an increase in accounts payable
and accrued expenses of $1.3 million.
Cash used in investing activities was $9.6 million in 1998 compared to
$3.2 million in 1997 and $515,000 in 1996. Cash used in investing activities in
1998 was primarily the result of capital expenditures of $1.9 million and
acquisitions of $7.7 million. Cash used in investing activities in 1997 was
primarily the result of capital expenditures of $1.6 million and acquisitions of
$1.5 million. Cash used in investing activities in 1996 was primarily the result
of capital expenditures of $515,000.
Cash used in investing activities was $6.8 million for the nine months ended
September 30, 1999 compared to $5.5 million for the nine months ended
September 30, 1998, and was primarily due to capital expenditures, additional
investment in The Edge and acquisitions.
Cash provided by financing activities was $9.1 million in 1998 compared to
$2.4 million
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in 1997 and $18,000 in 1996. Cash provided by financing activities in 1998 was
primarily the result of an increase in borrowings from Omnicom of $9.6 million.
Cash provided by financing activities in 1997 was primarily the result of an
increase in borrowings from Omnicom of $2.4 million. Cash provided by financing
activities in 1996 was primarily the result of the repayment of shareholder
advances offset by a capital distribution.
Cash provided by financing activities was $17.8 million for the nine months
ended September 30, 1999 compared to cash provided by financing activities of
$7.1 million for the nine months ended September 30, 1998. Cash provided by
financing activities for the nine months ended September 30, 1998 and 1999 was
primarily the result of an increase in borrowings from Omnicom of $19.2 million
and $7.7 million, respectively.
On November 4, 1999, we entered into an $85.0 million credit facility with
Omnicom Finance, a wholly owned subsidiary of Omnicom, to replace our revolving
credit line and consolidate all of our previously outstanding indebtedness due
to Omnicom Finance. As of September 30, 1999, we had approximately
$66.8 million due to Omnicom Finance. The new credit facility, which terminates
on September 30, 2001, provides for a $25.0 million term loan facility, a
$54.0 million revolving credit line and a real property lease credit support
facility providing letters of credit and/or guarantees up to $6.0 million in the
aggregate. We are required by the credit facility to use 35% of the net proceeds
from this offering, up to a maximum of $25.0 million, to repay amounts borrowed
under the term loan portion of the new credit facility. This credit facility
bears interest at Omnicom's commercial paper rate plus 1.25%. As of November 4,
1999, Omnicom's commercial paper rate was 5.3%. The credit facility is secured
by substantially all of our assets, including the shares of our subsidiaries, is
guaranteed by our domestic subsidiaries and prohibits us and our subsidiaries
from paying dividends other than in shares of our stock. The credit facility
requires compliance with a number of covenants, including restrictions on asset
sales, liens, the incurrence of debt, making of loans and the repurchase,
redemption or other acquisition of our stock.
As of December 31, 1998 unbilled charges were $2.3 million compared to
$6.7 million as of September 30, 1999. As a percentage of revenue, unbilled
charges increased from approximately 8.8% to 11.8% as of the same dates.
Unbilled charges represent labor costs incurred and estimated earnings
production and other client reimbursable costs that have not yet been invoiced
to our clients. This significant increase in unbilled charges from the prior
year reflected our acquisitions completed in 1999, which have resulted in a
significant increase in projects. The increase in unbilled charges was funded
partially from operations and borrowings from Omnicom. This impacted our
liquidity by reducing available borrowings under our credit facility and
increasing our interest expense. Unbilled charges decreased from $17.3 million
at June 30, 1999 to $6.7 million at September 30, 1999 as a result of continued
focus by management on timely billing.
To date, our main sources of liquidity have been cash from operations and
borrowings from Omnicom. We believe that on a short-term basis we will have
sufficient funds for working capital and capital expenditures through additional
borrowings from Omnicom and increased cash flow from operations resulting from
the collection of outstanding accounts receivable and the billing and collection
of unbilled charges. We believe that on a long-term basis our liquidity will be
funded from increased cash flow from operations and, if necessary, equity
financings or borrowings from Omnicom. Omnicom has indicated that in the event
that our operations do not provide sufficient cash flows,
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<PAGE>
$15 million in additional financial support above the current credit facility
will be made available in the form of either further debt or equity investments
until November 2000 on market terms. In connection with our two acquisitions
since September 30, 1999, we borrowed an additional $3.5 million from Omnicom.
The borrowings directly reduced our available working capital. We believe that
our current cash, cash equivalents and short-term investments, available
borrowings under our credit facility and the net proceeds from this offering
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. However, we cannot assure you that
we will not require additional financing within this time frame or that such
additional financing, if needed, will be available on terms acceptable to us, if
at all.
MARKET RISK
INTEREST RATE RISK. To date, we have not utilized derivative financial
instruments or derivative commodity instruments. We invest our cash in money
market funds, which are subject to minimal credit and market risk. We believe
the market risks associated with these financial instruments are immaterial.
FOREIGN CURRENCY RISK. We face foreign currency risks primarily as a result
of the revenues we receive from services delivered through our foreign
subsidiaries. These subsidiaries incur most of their expenses in the local
currency. Accordingly, our foreign subsidiaries use the local currency as their
functional currency.
We are also exposed to foreign exchange rate fluctuations, primarily with
respect to the British Pound and the Euro, as the financial results of foreign
subsidiaries are translated into United States dollars for consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact net income (loss) and overall profitability. The effect of
foreign exchange rate fluctuation for the year ended December 31, 1998 was not
material.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS
We have completed a preliminary assessment of our Year 2000 readiness and
are conducting ongoing testing and implementation of any necessary upgrades in
order to become Year 2000 compliant. Our assessment and testing has focused on
four areas as follows:
- MISSION CRITICAL SYSTEMS. Our mission critical systems are used for
timekeeping, accounting, and the production of financial statements.
Testing of this system is ongoing and final testing will be completed by
November 1999. We have received a Year 2000 warranty from the vendor who
licenses the mission critical systems to us, however monetary liability
may be limited.
- CRITICAL SYSTEMS. Our critical systems consist of Domain Name Services
(DNS), email, routers and switches, telephone, voice mail systems, and
desktop computers. All critical infrastructure machines have been verified
by their vendors as Year 2000
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compliant. In addition, we are testing all of our desktop computer systems
and will install upgrades if appropriate. DNS allow computers to find one
another on the Internet by matching alpha-numeric domain names to exact
computer network addresses.
- EXTERNAL AGENTS. Our external agents include vendors and licensors of
other material hardware and software utilized by us. We are in the process
of contacting these vendors and licensors to request the status of Year
2000 readiness for those products. We will continue to attempt to obtain
verification from all remaining distributors, suppliers, and vendors that
their systems are Year 2000 compliant. If we do not receive verification
that the systems are compliant, we will upgrade to compliant products.
- INTERNALLY DEVELOPED PROPRIETARY SOFTWARE. Our internally developed
proprietary software consists of our software and hardware and includes
date-dependent code. We have evaluated and tested proprietary systems used
by us and believe that all material files and systems are Year 2000
compliant. Although we believe that substantially all of the software
developed by us is Year 2000 compliant, we have only performed compliancy
evaluation and testing for the clients that have requested us to do so.
We completed our testing in November 1999 and replaced and remediated
mission critical non-Year 2000 compliant technologies.
In addition, we face non-information technology Year 2000 related risks,
both internally and externally based. Internal non-information technology risks
include disruption to our security and mailing systems, mail room facilities,
fire and backup generator systems. External non-information technology risks
include the possible interruption of electrical power, water, sewage,
telecommunications, mass transportation and garbage collection. If a disruption
in either internal or external non-information technology systems occurs, we
could experience a material disruption in our business similar to other
businesses in our geographic locations.
COSTS
The total cost for our Year 2000 compliance efforts was approximately
$250,000. Most of these expenses relate to the operating costs associated with
time spent by our employees in Year 2000 compliance matters.
RISKS
Although we have received compliance information from many of our material
third-party vendors, we have not received compliance information from all of our
third-party vendors. In addition, it is possible that our third-party vendors
were mistaken in certifying that their systems are Year 2000 compliant. If we
fail to fix our internal systems or to fix or replace material third-party
software, hardware or services on a timely basis, we may suffer lost revenues,
increased operating costs and other business interruptions, any of which could
have a material adverse effect on our business, results of operations and
financial condition. Moreover, if we fail to adequately address Year 2000
compliance issues, we may be subject to claims of mismanagement and related
litigation, which would be costly and time-consuming to defend. Furthermore, if
services we provided a client cause damage or injury to that client because the
service was not Year 2000 compliant, we could be liable to the client for breach
of warranty.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic
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failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could have a material adverse effect on our business,
results of operations and financial condition.
CONTINGENCY PLAN
We are engaged in an ongoing Year 2000 testing and have developed a
contingency plan to address the worst-case scenario that might occur if critical
technologies we depend upon actually are not Year 2000 compliant.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received from third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are our outsourcing service
providers, suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income". This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
offers alternatives for presentation of disclosures required by the standard. We
adopted this statement in 1998 and the adoption of this statement did not have
an impact on our financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosure about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997 and need not be applied to interim periods in the initial year
of application. Comparative information for earlier years presented is to be
restated. We currently believe that we operate in one segment and that the
adoption of SFAS No. 131 will not materially affect our current disclosure of
geographic information.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for
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computer software developed or obtained for internal use. SOP 98-1 is effective
for fiscal years beginning after December 31, 1998. We adopted SOP 98-1 in 1999
and there has not been any material effect on our consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contrats, and for hedging activities. We do not currently engage in
derivative activity and do not expect the adoption of this standard to have a
material effect on our results of consolidated operations, financial position or
cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
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BUSINESS
OVERVIEW
OUR COMPANY
AGENCY.COM is an international Internet professional services firm. We
provide our clients with an integrated set of strategy, creative and technology
services that take them from concept to launch and operation of their Internet
business. We deliver our services through our multidisciplinary teams of
strategy, creative and technology specialists. These services help our clients
create and enhance relationships with their customers, staff, business partners
and suppliers.
Our strategy services include advising clients on business models for their
online businesses, devising strategies so that clients can open new online
distribution and sales channels, identifying opportunities to achieve
operational efficiencies by pursuing online initiatives, and planning for the
operations and organization necessary to support an online business. Our
creative services include advising clients on how to effectively bring their
brands online, developing graphic designs and Web site structure for client Web
sites, and coordinating online marketing campaigns with clients' traditional
advertising agencies. Our technology services include recommending and
installing appropriate hardware and software networks, integration between
Internet and older information technology systems, and implementation of
electronic commerce systems to enable online sales, support and communication.
We believe that our experience in providing Internet professional services
enhances our ability to meet the needs of clients. Since our inception in 1995,
we have provided services to more than 200 clients. Our five largest clients
during the nine months ended September 30, 1999, on an actual basis, were
British Airways, Compaq, FT Group, Sprint and Unilever. We believe that our
focus on long-term relationships with clients allows us to provide a broader and
more effective range of services.
Since 1997, we have acquired 11 companies and integrated them and now
deliver our services through ten offices located in the United States (including
I-traffic's New York and San Francisco offices which will be combined with our
existing offices in these cities next year) and one office each in Amsterdam,
Copenhagen, Paris and London. We also have minority investments in a technology
company in Singapore and an Internet professional services company in Paris.
We believe the Internet is particularly effective when used to extend and
enhance the relationship that exists between a company and its customers, staff,
partners and suppliers. We intend to be the Internet professional services firm
of choice for companies comprising Business Week magazine's Global 1000, which
includes companies with the largest market capitalizations worldwide.
INDUSTRY BACKGROUND
The Internet is becoming an integral part of many people's lives.
Individuals and businesses are increasingly using the Internet to find
information, communicate and conduct business. In a report by IDC titled "The
Global Market Forecast for Internet Usage and Commerce: Based on Internet
Commerce Market Model-TM-, Version 5" published in June 1999, IDC estimates that
the number of Internet users worldwide will grow from an estimated 142 million
at the end of 1998 to approximately 500 million at the end of 2003. Also
according to IDC in this same report, worldwide commerce conducted over the
Internet totaled approximately $50 billion in 1998, with the business to
business market accounting for $35 billion and the consumer
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market accounting for $15 billion. IDC projects the overall market to exceed
$1.3 trillion by the end of 2003.
The increasing acceptance of the Internet has created numerous opportunities
for companies that seek to grow and are challenged by highly competitive and
rapidly changing markets, and demands for increased efficiencies. Already,
companies are taking advantage of the Internet's opportunities to strengthen
customer relationships, improve operational efficiency and spur product
innovation. Initially, companies developed "read-only," or brochure-ware, Web
sites that lowered marketing and service costs and that increased customer
awareness. Companies later added transaction and commerce capabilities to their
online resources to enable two-way sharing of data and information among
businesses and their constituents, including end-customers, suppliers, business
partners and employees. These transaction and commerce capabilities have changed
the business landscape by introducing new channels, catalyzing competition and
prompting new customer needs.
Today, many companies realize that the Internet is no longer an adjunct to
their operations and is redefining all aspects of their businesses, including
the way they interact with their customers. The Internet enables consumers,
business partners, suppliers and employees to transact on a one-to-one basis
with companies at any time and from any location.
We believe that companies have found that merely enabling online
transactions and commerce does not ensure success in doing business on the
Internet. Consumers want more than the mechanical ability to transact with a
company online. They want to interact with a company that not only markets to
them but is responsive to their needs. By successfully satisfying these needs,
we believe that businesses can build a long-lasting, ongoing interactive
relationship that fosters customer loyalty, increases margins and enables new
markets.
Developing successful Internet businesses that promote interactive
relationships requires a special set of capabilities. Developers of these
businesses must provide integrated strategy, creative and technology services.
In addition, developers must have the ability to understand the needs of
customers and fulfill them. Few companies possess this multi-disciplinary
expertise as it is usually divided into separate information technology,
marketing and planning groups. Further, companies lack the management and
technical infrastructure required to develop and support Internet services.
Therefore, companies seeking to do business on the Internet are increasingly
engaging Internet professional services firms to provide integrated strategy,
creative and technology services. We believe that companies are best served by
firms that have overcome the cultural and operational challenges of integrating
strategy, creative and technology services into a single offering and that have
a proven methodology centered on the needs of customers.
AGENCY.COM APPROACH
AGENCY.COM provides a broad range of integrated services that enable
businesses to use the Internet and Internet technologies to develop and enhance
long-term interactive relationships with their customers. AGENCY.COM's approach
includes the following key elements:
INTEGRATED FULL-SERVICE OFFERING
We provide integrated strategy, creative and technology services in a
seamless package. We start from the initial assessment of a client's positioning
and needs and work through post-implementation analysis and development. We
believe that our comprehensive integrated service offering results in time and
cost savings for our clients
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and also increases the likelihood that their projects will be completed
successfully.
INTERNET FOCUS AND EXPERIENCE
Since our founding in 1995, we have focused exclusively on Internet
technologies and their implications for businesses. Our Internet focus allows us
to best fulfill our clients' needs and continuously refine our services by
staying at the forefront of the Internet's rapid evolution.
CUSTOMER DRIVEN
In planning, designing and deploying Internet services and strategies, we
base our work on the needs of our clients' customers. We focus on our clients'
customers because these individuals ultimately determine the success of our
clients' Internet businesses. Our approach enables us to establish a solid and
effective base from which our clients may develop their interactive
relationships. We work with our clients to analyze their customers' needs to
create Internet strategies best-suited for the client and these customers. This
analysis includes usability studies.
RELATIONSHIPS WITH CLIENTS
We seek to develop long-term relationships with our clients. We become
familiar with their businesses and work closely with senior management to
understand, predict and address our clients' evolving strategic business needs.
Upon engagement, we assign to the client a dedicated multi-disciplinary team of
professionals which works with our client during each phase of the initial
project and on future projects. We share our experience and knowledge with our
clients to enhance their familiarity with the Internet and its capabilities. We
also establish extranets with our clients to improve the exchange of information
on all ongoing projects.
AGENCY.COM CULTURE
Our culture is based on the principles of honoring the value of individuals
working as a team, growing through learning and knowledge-gathering, embracing
change and encouraging innovation. We recognize that we succeed as a firm only
when clients benefit from our work. We believe that nurturing our culture and
values enables us to deliver innovative solutions and attract and retain top
professionals. Our management and operational infrastructure foster our culture.
For example, substantially all of our employees have an equity stake in the
company through our stock option plan, and we have developed and put into
practice a number of internal mentoring and learning programs.
AGENCY.COM STRATEGY
AGENCY.COM's goal is to build upon our position as an international provider
of Internet professional services. To achieve this goal, we are pursuing the
following strategies:
CONTINUE TO BUILD LONG-TERM RELATIONSHIPS WITH OUR CLIENTS AND OTHER
INTERNATIONAL COMPANIES
We believe that strong, long-term relationships with clients yield
significant benefits both to our clients and to our business. The depth and
breadth of our client relationships are demonstrated by our integral involvement
in developing Internet strategies, including the planning and budgeting process,
for a number of our large clients. In addition, we have retainer-based
relationships with a number of these clients and plan to increase the number of
clients on retainer. We believe that our record of client satisfaction has
contributed to an increase in the amount, scope and complexity of services
requested by many of our clients. As an indication of our success, 18 of our top
20 clients in 1998 continued to engage us in 1999.
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FURTHER ENHANCE OUR MULTI-DISCIPLINARY TEAM APPROACH
Because our work requires expert knowledge of multiple disciplines, we
believe that Internet professional services are most effective when delivered
through integrated, multi-disciplinary client teams. We provide all our services
through client-centered teams that include strategy, creative, technology,
project management and client services professionals. Our client teams, and the
culture of teamwork that they enforce, shape the overall structure and operation
of our company. In order to deliver to our clients a broad range of
sophisticated services on an international basis, all of our offices operate
together as a single, unified organization rather than a set of competing
entities. We will continue to invest in and nurture our team-based organization
in order to better fulfill our clients' needs.
DEVELOP STRONG POSITIONS IN SERVICES TO BENEFIT OUR CLIENTS
We will continue to build strong positions in services such as Internet
advisory, consulting and planning services, Internet commerce and communication
services and online branding and marketing services. We believe that these
services provide opportunities for strong growth, and help differentiate us from
our competitors. We have developed, and will continue to develop, new
interactive strategies as our clients' needs evolve and as new technologies
emerge. As with our current offerings, any new service that we offer to our
clients will incorporate a mix of our strategy, creative and technology
capabilities. We are currently working with many emerging technologies and stay
current with industry developments through our dedicated team of technical
specialists who continually evaluate new technologies and develop innovative
strategies. Our future strategies may incorporate technologies such as wireless
devices and devices suited to high bandwidth Internet connections for
transmission of voice, video, data and fax, known as broadband network devices.
COMPLEMENT OUR GROWTH WITH TARGETED ACQUISITIONS
We believe that expanding our skill set, geographic locations and industry
reach through acquisitions will enable us to better serve our existing clients,
attract new clients and take advantage of new markets for our services. We
integrate each acquired company into our operations and culture. All of our
acquisitions have met some or all of the following characteristics:
- cultural fit;
- quality management;
- highly motivated and skilled staff;
- market leadership position in complementary skills and/or in a
strategically important location;
- ability to provide service to a strong client base; and
- strong future revenue growth and profitability.
We have successfully acquired 11 companies over the last two years and made
minority investments in a company based in Paris and a company based in
Singapore.
EXTEND OUR GEOGRAPHIC REACH
We believe that significant opportunities exist for our services beyond our
current locations, including serving existing and new clients in other markets.
We have expanded, and intend to continue to expand, our geographic presence in
key locations based on our clients' needs and market opportunities. We will
continue to expand through a combination of organic growth and acquisitions.
Extending our geographic reach allows us to better serve our multi-national
clients by providing services locally through our regional offices while taking
advantage of our international resources and knowledge
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base. We believe our ability to provide Internet professional services
internationally provides us with a competitive advantage. We currently have
offices located in the United States and Europe, and have resources in
additional locations through our minority investments.
ATTRACT AND RETAIN THE HIGHEST QUALITY PROFESSIONALS AND FACILITATE EMPLOYEE
DEVELOPMENT THROUGH TRAINING, CULTURE AND SUPPORT
We believe that attracting and retaining high quality professionals is
critical to our success. Our culture is an integral part of our ability to
attract and retain quality professionals. We provide a stimulating and nurturing
work environment to increase employee satisfaction. We will continue to invest
in knowledge transfer, training and staff development resources for our
employees. In addition, we offer a competitive compensation package, including
broad-based equity ownership through our stock option plan.
ENHANCE AWARENESS OF AGENCY.COM AS AN INTERNATIONAL PROVIDER OF INTERNET
PROFESSIONAL SERVICES
AGENCY.COM has built a recognized brand in the Internet professional
services market. Our internal marketing and corporate communications teams
promote our brand through speaking engagements, event sponsorships, interviews
and industry conferences. We receive additional promotion from media coverage
and from the numerous awards we have received for our work. Our brand enables us
to more effectively attract clients, employees and acquisition candidates. We
seek to be the most recognized Internet professional services firm and to be
among the few firms that the Global 1000 consider when choosing an Internet
professional services provider.
AGENCY.COM SERVICES
We provide fully integrated Internet professional services to our clients
that enhance the development of their interactive relationships. We conceive and
implement Internet services and strategies that add value to our clients'
businesses. We deliver to our clients services that include strategic business
planning, Web site content development, graphic design and computer programming.
Each client benefits from our fully integrated service offering delivered by a
team of strategy, creative and technology professionals. Each engagement has a
project manager who coordinates and oversees the team. The project manager
reports to the relationship manager who has direct responsibility for the client
relationship. The following is a description of the primary components of our
service offerings:
STRATEGIC SERVICES
AGENCY.COM helps clients translate their corporate goals and objectives into
Internet strategies. We work closely with our clients to understand and analyze
their businesses. We help our clients formulate and execute their Internet
strategies in the context of their business and marketing goals, operational
methods and success criteria. Our strategic services include assisting our
clients in:
- establishing the operational guidelines and management structure necessary
to execute their Internet strategies;
- helping clients to formulate Internet strategies to reach new customers;
- reducing the costs of serving existing customers;
- improving the efficiency of internal operations; and
- promoting customer loyalty and designing appropriate and innovative ways
to extend our clients' brands on the Internet.
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INTERNET COMMERCE AND COMMUNICATION SERVICES
We help our clients use the Internet as an effective means of communicating
and transacting with customers. We create Internet resources such as Web sites
for our clients that encompasses the entire customer relationship, including:
- introducing relevant, customized information, products and services;
- demonstrating the benefits of their products and services and gaining
customer acceptance;
- facilitating transactions; and
- providing ongoing service tailored to the needs of and based on the
feedback from each customer.
CREATIVE SERVICES
We assist clients in designing online resources, including Web sites, that
are easy for customers and others to use and that effectively present our
clients' brands. In all of our creative work, we work closely with our clients
to understand their brands and the needs of their customers. We advise clients
on how they can bring their brands online in a manner consistent with their
other marketing and product branding. We often create the graphical elements for
our clients' Web sites and gauge their effectiveness through sample group
testing. We often coordinate online marketing campaigns with clients'
traditional advertising agencies.
SYSTEMS INTEGRATION
We recommend and install appropriate hardware and software networks that
support our clients' Internet strategies. We provide integration services to
link disparate third party systems. We often integrate Internet-based
technologies with our clients' older information technology systems, such as
legacy and client-server systems. We also adapt and develop custom software
solutions and build add-on components to our clients' existing software
applications. Systems integration projects have included the integration of
sales systems, accounting systems and inventory systems to function over the
Internet.
EMERGING AND OTHER TECHNOLOGIES
The Internet is constantly changing. AGENCY.COM employs emerging
technologies and capitalizes on new media developments to provide services that
improve its clients' businesses. For example, we provide our clients with
broadband and multimedia capabilities through our dedicated film, audio and
video (FAV) group, and provide clients with interactive television services
through our dedicated iTV group. These applications include live, realtime
Internet-based video broadcasts, known as Web-casting, motion graphics, music
and streaming media. We work with many emerging technologies and stay current
with industry developments through our dedicated team of technical specialists
who continually evaluate new technologies and develop innovative services.
AGENCY.COM COMPASS METHODOLOGY
[GRAPHIC DEPICTING THE AGENCY.COM COMPASS METHODOLOGY]
Our "Compass" methodology guides project management and execution. We
believe this methodology enables us to provide consistent quality on all
engagements and maximizes the value we deliver to our clients. Compass can be
employed on projects of all types, sizes and geographic boundaries. Our process
follows four distinct phases: DISCOVERY, DESIGN, PRODUCTION AND DEPLOYMENT.
Within
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any phase of our methodology, we incorporate a series of steps--Check, Adjust
and Assess--that ensure that our client's expectations for quality are met in
each stage. We refine our methods within Compass's four phases based on input
from clients and client teams. We also integrate the best practices of the
companies we acquire into Compass.
DISCOVERY
During the Discovery phase, we assess the client's positioning and needs,
with an emphasis on the client's customers, and analyze the tasks and resources
required to deliver an effective Internet strategy. Based on this understanding,
we develop an initial plan for designing and completing the project. AGENCY.COM
works closely with the client to formulate and finalize the strategy and
services to be provided.
DESIGN
During the Design phase, we define the creative components, technical design
and information architecture. These components are integrated and represented in
a detailed Design document, which is reviewed by the client at numerous stages.
We build a prototype and conduct usability testing during this phase to ensure
that the design is best suited to the client's needs. The final design document
serves as a blueprint for the ensuing phases.
PRODUCTION
During the Production phase, we develop and integrate all of the creative,
technical and information components. We then test the system jointly with the
client and optimize the performance of the hardware and software. At the end of
this phase, we deliver to our client a product that is ready for deployment.
DEPLOYMENT
During the Deployment phase, we formally "launch" the client's Internet
system following all final testing and acceptance. We also educate and train our
client to use and maintain the finished application and, where appropriate,
transfer full control of the product to our client. We finish projects with a
post-implementation evaluation, including measurement against initial benchmarks
and a client evaluation of AGENCY.COM's work. Following the completion of a
project, we document non-proprietary knowledge and experiences, such as revised
work plans or enhanced knowledge of a particular technology, through
post-engagement, internal reviews. This information is then disseminated to our
employees both through our internal intranet and specific training sessions. By
broadening our professionals' knowledge base and improving their understanding
of their field, we are able to assist them in better serving client needs.
Following the completion of the Deployment phase, at the request of the
client, the AGENCY.COM client team often returns to the Discovery phase in order
to further develop and evolve our client's Internet business.
PEOPLE AND CULTURE
We believe that our people and culture represent a significant competitive
advantage and that our ability to scale innovation and creativity is at the core
of our success to date. To successfully compete in the future, we must continue
to identify, recruit, hire and retain outstanding professionals. We continually
nurture, develop and evolve a culture that supports innovation and creativity.
RECRUITING, RETAINING AND GROWING
We promote and support each employee's personal growth through a variety of
career development programs. Internal knowledge management resources gather the
collective experience of client teams and individuals. Informal, internal
educational programs expose staff to new experiences. Examples include InspireU,
a collection of employee-led training courses, and URBAN DESIRES, an online
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magazine owned by our founders that is used to explore advanced and artistic
interactive experiences. More formal programs, involving internal and external
resources, focus growth along specific career tracks. Examples include seminars
with outside experts and multi-day training workshops.
Recruiting and training are important to us. A dedicated recruitment group
works with management to fulfill staffing objectives on a regional and
international basis. New hires are commonly obtained through referrals from
current and former staff as well as from recruiters and self-initiated
referrals.
Once we have hired an employee, our focus shifts to retention. In addition
to offering competitive compensation, we believe that we retain employees by
offering them a meaningful career path. Each employee is assigned a career
manager who provides regular coaching and helps the employee to establish goals
and objectives and to achieve them. Employees are reviewed by supervisors,
co-workers and employees they supervise in a 360-degree review process that is
integral to our team approach.
SCALING INNOVATION AND CREATIVITY
We believe that possessing a single, unified culture in all offices
internationally is critical to fulfilling our business objectives. We pursue a
number of initiatives to emphasize and reinforce our culture and values. We
encourage regional managers to share resources across offices. Our client teams
combine individuals with experience in a variety of backgrounds to collaborate,
innovate and deliver services as a single unit. We instill and maintain our
culture throughout our company by promoting our core values:
- - We succeed only when our clients benefit from our work
- - We deliver excellence with the highest standards of integrity
- - We honor the dignity and value of individuals working as a team
- - We celebrate diversity of people, ideas and cultures
- - We seek to grow through learning and knowledge gathering
- - We embrace change and encourage innovation
CLIENTS AND CASE STUDIES
We provide Internet professional services to a variety of clients in a range
of industries. We focus on long-term relationships with Global 1000 companies.
Our top ten clients provided approximately 31% of our revenues on a pro forma
basis. For the nine months ended September 30, 1999, our top ten clients
provided approximately 42% of our revenues on a pro forma basis and 51% on an
actual basis. For the nine months ended September 30, 1999, British Airways
accounted for more than 10% of our revenues on a pro forma basis. For the nine
months ended September 30, 1999 and year ended December 31, 1998, British
Airways accounted for more than 10% of our revenues on an actual basis. The
following lists companies that, in terms of pro forma revenues, were among our
largest 25 clients in 1998 and/or 1999:
<TABLE>
<S> <C> <C>
3M Countrywide SmithKline-Beecham
British Airways DIRECTV Sprint
Colgate-Palmolive FT Group (Financial Times) Texaco
Compaq Enron Unilever
</TABLE>
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BRITISH AIRWAYS: COMPREHENSIVE SERVICES
We began our relationship with British Airways in 1996 with a redesign and
redevelopment of its existing Web site. From that initial project, this
relationship has evolved to now include advising on the strategic, operational,
management, technological and creative elements of British Airways' Internet
strategy. We work with British Airways out of our New York and London offices,
as well as a number of other locations. We have expanded British Airways' online
commerce efforts, united its broad product range and global sales channels, and
extended its customer service operations online in a manner consistent with its
high-quality reputation.
[GRAPHIC DEPICTING SCREENSHOTS OF
BRITISH AIRWAYS' WEB SITE]
<TABLE>
<S> <C> <C> <C>
ONLINE BRANDING SYSTEMS DEVELOPMENT E-COMMERCE RELATIONSHIP
ENHANCEMENT
Extend one of the Establish a transaction Create selling Enhance relationships
world's most respected infrastructure that experiences that open between British Airways
brands online enables sales, service new channels for and its customers with
and distribution purchasing, including realtime, personalized
online sales online customer support
</TABLE>
We have provided to British Airways a wide range of services. Illustrative
work includes:
- working with British Airways staff and senior management to devise and
execute an Internet strategy to increase online sales, operating
efficiencies, repeat business and customer satisfaction;
- creating strategies and processes for managing sales, distribution and
service for multiple channels;
- establishing companywide guidelines so that internal British Airways
groups can autonomously develop resources, such as email systems, Web
sites and foreign language content for themselves and their customers and
suppliers;
- enabling online customer service; and
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- introducing the use of interactive TV as a medium for sales, distribution
and service.
Today, British Airways customers have access to customer service, flight
information and ticket sales 24 hours a day, seven days a week. British Airways
believes its Internet initiatives have successfully extended its brand and
enhanced its reputation for superior customer service. In May, 1999, British
Airways was judged one of the 100 "hottest companies on the Net" by BUSINESS
2.0, a United States magazine that covers the Internet industry and new
technologies. British Airways has won numerous awards for its Internet presence,
including the designation by CIO Magazine as one of the top 50 Internet sites of
1999, the 1998 @d:tech Gold award for "Best Direct Marketing Web Site" and the
1997 Advertising Age award for "Best Interactive Site".
We continue to work with British Airways, developing strategies and
fulfilling its needs for Internet services around the world.
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DIRECTV: IMPROVING OPERATIONS WITH EASE
DIRECTV is one of the nation's leading providers of digital television
entertainment with more than 7 million customers, including customers
subscribing to the PRIMESTAR by DIRECTV medium-power digital broadcast service.
We began our relationship with DIRECTV by creating a floppy disk-based
client-server application for order processing. Working with DIRECTV, we have
developed further applications that have improved the quality and decreased the
operation costs of DIRECTV's computerized ordering systems.
[GRAPHIC DEPICTING SCREENSHOTS OF
DIRECTV'S WINDOWS-BASED PROGRAMS AND WEB SITE]
<TABLE>
<S> <C> <C> <C>
TECHNICAL ARCHITECTURE E-COMMERCE, PRE- WEB WEB-BASED SEAMLESS SALES
Design and implement a Create an electronic Provide a web interface Use computer system to
technical architecture commerce dial up system to the system for automate cross- selling
that allows for a non- technical greater accessibility and up-selling for the
distribution and sales audience and lower costs sales force
through multiple
computer systems
</TABLE>
Our work for DIRECTV includes:
- creating a client-server application for then partner United States
Satellite Broadcasting, Inc. (USSB), to eliminate order processing
complications associated with its retailers' reliance on facsimile
transmission. Our solution to the often inaccurate and costly fax and data
entry method used by these companies was EASe, a client-server software
application which allowed retailers to enter orders and establish
subscriber accounts directly with USSB through a digital modem connection.
EASe provided automated customer sign-up and support functionalities
capable of guarding against fraudulent order entry. The system also
provided systematic feedback that enabled retailers to determine their
eligibility for commission credit;
- modifying the EASe system (prior to DIRECTV's merger with USSB in early
1999) to include business orders from DIRECTV, a significant
accomplishment given DIRECTV's presence in more than 26,000 retail
locations nationwide;
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- designing and developing a technical architecture that integrated the EASe
application with several enterprise systems. The integration allowed
DIRECTV to serve both its retail dealers and new customers more
efficiently by transmitting new customer accounts directly to DIRECTV's
billing system and thereby expediting the set-up process; and
- distributing the EASe software application to retailers over the Internet,
further cutting costs and facilitating business between DIRECTV and its
retailers.
Using EASe software from AGENCY.COM, DIRECTV dealers enjoyed a simplified
customer account set-up and benefited from fewer processing errors. As a result,
DIRECTV believes that it has achieved increased retailer loyalty and reduced
operating costs. Today, the majority of small-to-medium DIRECTV retailers and
franchise dealers use the EASe application to transmit new customer orders to
DIRECTV. One of our currently scheduled projects is to extend EASe to
Web-enabled access, which will allow dealers to work with the system on-line.
The projects illustrate the continuation of our successful relationship with
DIRECTV.
SPRINT: LEVERAGING THE INTERNET
In late 1997, Sprint first enlisted the help of AGENCY.COM to redesign its
existing web site. That initial relationship has expanded to include a range of
strategy, creative and technology services that support Sprint's online sales,
distribution, marketing and customer service efforts. We currently deliver
services to Sprint through client teams collaborating in three offices across
the United States. Through our relationship with Sprint, we have helped to
improve Sprint's ability to conduct business online, assisted in enabling Sprint
to present a consistent brand image across a diverse product range and begun the
process of helping Sprint to better fulfill the needs of customers online.
Sprint has enlisted the help of AGENCY.COM for a number of projects.
Illustrative work includes:
- redesigning the sprint.com Web site interface, information architecture
and branding to provide a more consistent and unified online experience
and to serve the needs of distinct customer groups across multiple Sprint
business units, as well as working with Sprint to maintain and update the
site;
- creating a set of Internet standards and guidelines for Sprint that allows
content and services to be added to Sprint's online presence in a
consistent manner;
- assisting Sprint in identifying and evaluating opportunities for
additional, enhanced interactions with customers and for increased
electronic commerce and customer service offerings for customers;
- participating in the Sprint steering organization that sets the strategic
Internet agenda across Sprint business units;
- developing an online strategy to support the launch of Sprint's ION
service, an integrated, broadband network that can support voice, video,
data, fax and Internet communications over a single connection; and
- enhancing online sales of Sprint products and services through online
media and marketing strategy and implementation.
As a result of this relationship, both Sprint and we believe that Sprint has
significantly improved its online presence and success in doing business on the
Internet. Both Sprint and we believe that Sprint has achieved substantial
increases in online sales, reduced cost of sales, more effective branding and a
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significant increase in customer satisfaction with Sprint's online services.
We continue to work with Sprint to anticipate the needs of its customers
online and to improve, extend and enhance its Internet presence.
SALES AND MARKETING
We seek to generate revenues from our existing and new clients. We continue
to work with many of our early clients. We target the Global 1000, top private
companies and new businesses focused on the Internet.
EXISTING RELATIONSHIPS
We focus on long-term relationships with our clients. To facilitate this, we
assign a relationship manager to each of our clients. This relationship manager
leads the client engagement and proactively works with the client to refine and
further develop its Internet strategies. Our client team, led by a relationship
manager, identifies areas for potential business growth and positions AGENCY.COM
as the provider of these services.
NEW BUSINESS DEVELOPMENT
To target new clients, we have more than 20 New Business Development
professionals located in our regional offices who seek to develop relationships
with companies that have businesses that can benefit from Internet services and
strategies, are willing to make a significant commitment to pursuing interactive
opportunities and are located in the same geographic regions as our offices.
MARKETING EFFORTS
Our marketing program focuses on extending our brand, generating incremental
revenue and increasing our visibility. We supplement our marketing efforts with
our marketing and technology alliances. Marketing and technology alliances
provide mutually beneficial staff cross-training opportunities and business
development opportunities to enhance the services we provide to our clients and
to increase our technical awareness and internal capabilities.
ACQUISITIONS AND INTEGRATION
We evaluate potential acquisitions based on strategic and geographic fit.
After determining that an acquisition candidate meets one of these two criteria,
we then focus on its cultural fit. We target companies that will help us become
the leading global provider of Internet professional services. Acquired
companies benefit from our management expertise, international infrastructure,
long-term client focus, track record, brand awareness and brand strength.
ACQUISITIONS
Since our founding in 1995, we have acquired the following companies:
- Spiral Media, completed in July 1998;
- Online Magic, completed in July 1998;
- Ketchum Interactive, completed in April 1998;
- Web Partners, doing business as The Primary Group, completed in August
1998;
- Interactive Solutions, completed in April 1999;
- Quadris Consulting, completed in April 1999;
- Eagle River Interactive, completed in April 1999;
- Digital Vision, completed in May 1999;
- Twinspark Interactive People, completed in August 1999:
- I-traffic, completed in October 1999; and
- Visionik, completed in November 1999.
In addition to these acquisitions, we have an investment in 30% of the
outstanding equity of The Edge Consultants and have an option to acquire an
additional 30% of its equity and have an investment in 5% of the outstanding
equity of Pictoris Interactive and have an option to acquire the remaining 95%.
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INTEGRATION
We are able to provide the flexible, seamless service demanded by our
clients by fully integrating acquired companies, both operationally and
culturally. One of our key strengths is our ability to successfully instill our
culture after we acquire new companies. Our acquisition and integration approach
includes the following elements:
- MANAGEMENT INTEGRATION. We integrate members of the acquired company's
senior management into AGENCY.COM's management. This allows the senior
management of the acquired company to learn our culture, increases the
effectiveness of the acquired company's integration and increases loyalty
to the combined organization.
- STAFF INTEGRATION. We integrate the acquired company's staff into our
existing structure. Strategy, creative and technology personnel are
assigned, where geography permits, to existing client teams in order to
integrate new skill sets into our knowledge base. We also meld the sales
staff of the acquired company into our New Business Development
organization. Additionally, where appropriate, we transfer staff between
new and old offices to further allow staff to share experiences and learn
from one another.
- OPERATIONAL INTEGRATION. Our financial and information technology
infrastructure are designed so that new acquisitions of any size can be
efficiently integrated into our financial control, accounting structure
and technology systems. We integrate the phones, computers and other
technology into our existing infrastructure in order to provide a seamless
working environment between AGENCY.COM and the acquired company. This
fosters the feeling of one firm and one culture and enables collaboration
among offices.
- INTERNAL COMMUNICATION. We use internal publications, Web-casts, online
chats and intranet initiatives as well as frequent office visits by our
senior management to facilitate communication between older and newer
offices and to encourage camaraderie among our employees.
- METHODOLOGY INTEGRATION. We study the methodology and practices of the
acquired company and may incorporate them into our Compass methodology,
allowing us to use the best practices of the combined entity.
COMPETITION
We compete with other providers of Internet professional services. The
market for these services has grown dramatically in recent years as a result of
the increasing use of the Internet by businesses for communication, marketing
and information dissemination to their customers, suppliers, business partners
and employees. Our market is intensely competitive, highly fragmented and
subject to rapid technological change. We expect competition to persist and
intensify in the future. Our current and potential competitors include:
- Internet professional services firms, such as iXL, Organic Online,
Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- traditional strategic consulting firms, such as Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey;
- interactive advertising agencies, such as Modem Media.Poppe Tyson and
OgilvyOne;
- professional services groups of computer equipment companies, such as
Hewlett-Packard and IBM;
- traditional systems integrators, such as Andersen Consulting, Cambridge
Technology Partners, EDS and Sapient; and
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- internal resources of current or potential clients.
We believe the principal competitive factors in our market are:
- breadth and integration of service offerings;
- cost and quality of service;
- client relationships;
- technical knowledge and creative skills;
- reliability;
- ability to attract and retain quality professionals;
- brand recognition;
- reputation; and
- vertical industry knowledge.
We believe that we compete favorably with respect to these factors, but we
cannot assure you that we will continue to do so in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may damage our brand and our reputation.
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without our authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We pursue the registration of our trademarks in the United States and
internationally in France, Germany, the Netherlands, Singapore, the United
Kingdom and the European Community. We may not be able to secure adequate
protection of our trademarks in the United States and other countries. We
currently hold trademark registrations in the United States, France, Germany,
the United Kingdom and the Netherlands for the AGENCY.COM trademark and have
applied for the registration of "Interactive Relationship Management" in the
United States, the United Kingdom and Singapore. Effective trademark protection
may not be available in all the countries in which we conduct business.
We have also filed applications to register the AGENCY.COM trademark in
Singapore and the European Community, however, we have not received any
responses to date. As we begin operations in new countries, it is our intention
to file trademark applications for the AGENCY.COM trademark in these countries.
We cannot assure you that any of these applications will be accepted.
Policing unauthorized use of our marks is difficult and expensive. In
addition, it is possible that our competitors will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We may be subject to legal proceedings and claims from time to time relating
to the intellectual property of others in the ordinary course of our business.
We may incur substantial expenses in defending against these third-party
infringement claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
EMPLOYEES
As of November 4, 1999, we had approximately 1,000 full-time employees. None
of our employees are represented by a labor union. We have experienced no work
stoppages and we believe our relationship with our employees is good.
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FACILITIES
Our principal executive offices are currently located in a leased facility
in New York, New York, consisting of an aggregate of approximately 37,000 square
feet. We expect to move our principal executive offices by January 2000 to
another leased facility in New York, New York, consisting of an aggregate of
approximately 100,000 square feet. The lease for this new office space expires
on April 15, 2014. We also lease space for our operations in California,
Colorado, Illinois, Massachusetts, New Jersey, Oregon and Texas, as well as in
Denmark, France, the Netherlands and the United Kingdom. While I-traffic
currently maintains offices in New York and San Francisco, we expect the
operations of I-traffic to be combined with our existing offices in these cities
in the second quarter of 2000. We believe that our existing facilities, together
with our newly-leased facilities, are adequate for our current needs and that
additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
The following table sets forth the executive officers, directors, director
nominee and key employees of AGENCY.COM, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------------------
<S> <C> <C>
Chan Suh.................. 38 Chairman of the Board, Chief Executive Officer and President
Kyle Shannon.............. 34 Chief Creative Officer and Director
Kenneth Trush............. 44 Executive Vice President, Treasurer and Director
Charles Dickson........... 45 Executive Vice President and Chief Financial Officer
Janet Ambrosi Wertman..... 37 Executive Vice President, General Counsel and Secretary
Kevin Rowe................ 40 President, North America
Eamonn Wilmott............ 38 President, Europe
Larry Krakauer............ 43 Chief Technology Officer
Gerald Bruce Redditt...... 48 Director
John D. Wren.............. 47 Director
Jeffrey Rayport........... 39 Director-Nominee
Thomas DeLong............. 49 Director-Nominee
</TABLE>
CHAN SUH co-founded AGENCY.COM in February 1995 and has served as the President,
Chief Executive Officer and Chairman of the board of directors since that time.
From June 1992 to January 1995, Mr. Suh was with Time Inc., most recently as
Marketing Director of VIBE MAGAZINE, where he was involved in the
conceptualization and launching of Pathfinder, Time Warner's service on the
World Wide Web, and created Vibe Online, the online service for VIBE MAGAZINE.
Prior to joining Time Inc., Mr. Suh held various marketing positions at Conde
Nast and NewsCorp. In addition, since February 1995, Mr. Suh has been publisher
of URBAN DESIRES, one of the first online magazines for art and culture.
KYLE SHANNON co-founded AGENCY.COM in February 1995 and has served as Chief
Creative Officer and a director since that time. From April 1993 to
January 1995, Mr. Shannon served as Manager, Image Processing for YAR
Communications, a communications agency specializing in multicultural
advertising. With a B.F.A. in performance from Penn State University,
Mr. Shannon pursued a professional acting and screenwriting career from 1987 to
1995. In addition, in November 1994, Mr. Shannon launched URBAN DESIRES, one of
the first online magazines for art and culture, and founded the World Wide Web
Artists' Consortium, a group dedicated to exploring new media in New York City.
KENNETH TRUSH has served as AGENCY.COM's Executive Vice President and Treasurer
since July 1997 and has served as a director since September 1996. Mr. Trush was
appointed Executive Vice President for Corporate Development in November 1999.
From July 1997 until November 1999, Mr. Trush served as Chief Financial Officer.
From November 1984 to June 1997, Mr. Trush owned his own certified public
accounting firm. Before founding his own accounting firm, Mr. Trush was a
Supervisor at Ernst & Young LLP.
CHARLES DICKSON has served as Executive Vice President and Chief Financial
Officer since November 1999. From December 1997 until October 1999, Mr. Dickson
served as Executive Vice President and Chief Financial Officer at WinStar
Communications Inc., a provider of broadband communications services to business
customers. From January 1994 until November 1997, Mr. Dickson served as Chief
Financial Officer at General Instrument
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Corporation, a broadband equipment and services provider. From April 1984 until
December 1993, Mr. Dickson served as a senior financial executive of MCI
Communications Corporation, most recently as Vice President for Finance and
Administration, National Accounts.
JANET AMBROSI WERTMAN has served as Executive Vice President, General Counsel
and Secretary of AGENCY.COM since January 1998. From 1988 until August 1997,
Ms. Ambrosi Wertman was an attorney with the law firm of Davis & Gilbert, most
recently as a partner in the firm.
KEVIN ROWE has served as AGENCY.COM's President of North American operations
since April 1999 and has acted in this capacity since June 1998, presiding over
Eagle River Interactive, an interactive agency acquired by AGENCY.COM. From
December 1996 to April 1999, Mr. Rowe served as President of Eagle River
Interactive. From October 1991 to September 1996, Mr. Rowe was Executive Vice
President and General Manager of the Midwest Region of MCI Systemhouse Inc., a
division of MCI Communications Inc. Prior to joining MCI Systemhouse, Mr. Rowe
held various positions at Andersen Consulting, most recently as an Associate
Partner, and Ferrin Corporation.
EAMONN WILMOTT has served as President of European operations since June 1999
and acted as Managing Director of the London office of AGENCY.COM from May 1997
until June 1999. Prior to joining AGENCY.COM, Mr. Wilmott served as Director of
Online Magic Limited, an interactive agency that he founded in the United
Kingdom in 1994, which was acquired by AGENCY.COM in July 1998. Prior to
founding Online Magic, Mr. Wilmott founded, and served as President of Supernet
International, one of the world's first commercial Internet service.
LARRY KRAKAUER has served as Chief Technology Officer since April 1999 and has
acted in such capacity since July 1998, presiding over Quadris Consulting until
it was acquired by AGENCY.COM in April 1999. From January 1995 to April 1999,
Mr. Krakauer served as President of Quadris Consulting, which began as a
division of JYACC, Inc., an information technology consulting company and became
an independent company in 1998. From 1989 to 1995, Mr. Krakauer served in
various capacities at JYACC.
GERALD BRUCE REDDITT has served as a director of AGENCY.COM since January 1999.
Since May 1998, Mr. Redditt has served as Executive Vice President of Omnicom.
From 1995 to 1998, Mr. Redditt served as Head of Communications and Governmental
Relations at Sony Pictures Entertainment. Prior to 1995, Mr. Redditt served for
nine years in various capacities at GTE, a global telecommunications company,
most recently as Head of Corporate Communications. Mr. Redditt has been
nominated to our board of directors by Communicade, a subsidiary of Omnicom,
pursuant to a shareholders agreement.
JOHN D. WREN has served as a director of AGENCY.COM since September 1996.
Mr. Wren has served as Chief Executive Officer of Omnicom since January 1997 and
has also been President of Omnicom since September 1995. From May 1993 until
June 1998, he served as Chairman and Chief Executive Officer of the Diversified
Agency Services division of Omnicom. Mr. Wren was appointed to Omnicom's Board
of Directors in May 1993. Mr. Wren also serves on the Board of Directors of
Razorfish, Inc. Mr. Wren has been nominated to our board of directors by
Communicade, a subsidiary of Omnicom, pursuant to a shareholders agreement.
JEFFREY RAYPORT has agreed to serve as a director of AGENCY.COM upon the
completion of the initial public offering. Mr. Rayport has been an associate
professor of business administration in the Service Management Unit at the
Harvard Business School since
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September 1991. Mr. Rayport has developed a specialized course on "Managing
Marketspace Service Interfaces", which focuses on electronic commerce and
technology-mediated service channels. Mr. Rayport currently serves as director
on the boards of Global Sports, Be Free, edu.com and Andrews McMeel Universal.
THOMAS DELONG has agreed to serve as a director of AGENCY.COM upon the
completion of the initial public offering. Mr. DeLong has been a senior lecturer
and professor of management at the Harvard Business School since January 1997.
From 1993 to December 1997, Mr. DeLong was the Chief Development Officer and
head of Human Resources at Morgan Stanley.
CLASSIFIED BOARD OF DIRECTORS
Upon the closing of this offering, our board of directors will be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
These provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees.
Messrs. Rayport and DeLong will be Class I directors whose terms expire at the
2000 annual meeting of shareholders; Messrs. Redditt, Trush and Shannon will be
class II directors whose terms expire at the 2001 annual meeting of
shareholders; and Messrs. Suh and Wren will be class III directors whose terms
expire at the 2002 annual meeting.
Messrs. Redditt and Wren had originally been elected to our board of
directors under an agreement we entered into with Communicade, a wholly-owned
subsidiary of Omnicom, in order for Omnicom as our majority stockholder to have
an active role in board decisions. The provision of the agreement providing
Communicade with the right to select two directors does not extend to future
elections.
BOARD COMMITTEES
The audit committee reports to the board regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls. Upon the completion of this offering, the audit committee will consist
of Jeffrey Rayport and Thomas DeLong. In compliance with Nasdaq National Market
rules and regulations, our audit committee will consist of at least two
independent directors after the closing of this offering.
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors. In
addition, the compensation committee reviews bonus and stock compensation
arrangements for all of our other employees. Upon the completion of this
offering, the members of the compensation committee will be Jeffrey Rayport and
Thomas DeLong. No interlocking relationships exist between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed in
the past. Our compensation committee will consist of at least two directors,
both of whom will be independent. This permits options granted by the
compensation committee to receive favorable treatment under applicable federal
securities and tax law.
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DIRECTOR COMPENSATION
We do not currently compensate directors for attending meetings of the board
of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings.
Under the automatic option grant program of the 1999 Stock Option/Stock
Issuance Plan, which is described below under "--1999 Stock Option/Stock
Issuance Plan", and subject to the last sentence of this paragraph, each
individual who is serving as a non-employee member of the board of directors on
the date the underwriting agreement is executed and who has not previously been
in our employ will receive at that time an option to purchase 50,000 shares of
common stock with an exercise price equal to the public offering price set forth
on the cover page of this prospectus. Each individual who first joins the board
of directors after the completion of this offering as a non-employee member of
the board of directors will also receive an option grant for 50,000 shares of
common stock at the time of his or her commence of service on the board of
directors, provided such individual has not otherwise been in our prior employ
and has not received options to purchase, in the aggregate, more than 40,000
shares of common stock in the last 12 months. In addition, at each annual
meeting of stockholders, beginning with the 2000 annual meeting, each individual
who is to continue to serve as a non-employee member of the board of directors
will receive an option to purchase 15,000 shares of common stock, provided such
individual has served as a non-employee board member for at least six months.
Messrs. Rayport and DeLong have agreed to be named as director-nominees for
this prospectus and to serve as directors of AGENCY.COM upon the closing of this
offering. Upon agreeing to serve as directors, Messrs. Rayport and DeLong were
issued options to purchase 50,000 shares of our common stock at an exercise
price of $1.225 and $9.35 per share, respectively, under our 1999 Stock
Option/Stock Issuance Plan. These options become exercisable at the time each
commences serving as a director of AGENCY.COM.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to our Chief
Executive Officer, Chief Creative Officer and our four most highly compensated
executive officers (collectively, the "named executive officers") during the
fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
--------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- --------- --------- ----------------- --------------
<S> <C> <C> <C> <C>
Chan Suh........................... $ 75,000 $ -- -- $ 563(1)
Chief Executive Officer
Kyle Shannon....................... 75,000 -- -- 563(1)
Chief Creative Officer
Kenneth Trush...................... 150,000 2,000 -- 1,140(2)
Chief Financial Officer
Kevin Rowe (3)..................... 250,000 320,000 -- 12,685
President, North America
Eamonn Wilmott..................... 107,868(4) -- -- --
President, Europe
Larry Krakauer (5)................. 146,410 39,646 185,144 13,421
Chief Technology Officer
</TABLE>
- ------------------------
(1) AGENCY.COM paid $563 in matching 401(k) contributions to each of
Messrs. Suh and Shannon.
(2) Mr. Trush received $378 as payment for long-term disability premiums and
$762 as matching 401(k) contributions.
(3) Mr. Rowe was appointed AGENCY.COM's President, North America, in April 1999.
The amounts stated above were paid to Mr. Rowe by Eagle River Interactive.
Mr. Rowe received a car allowance of $7,800, a matching 401(k) contribution
of $2,000 and $2,885 for unused time off.
(4) Mr. Wilmott's annual salary was paid in pounds sterling (L). The dollar
amount reflects a conversion rate of 1.6595 dollars per pound sterling as of
December 31, 1998.
(5) Mr. Krakauer was appointed AGENCY.COM's Chief Technology Officer in April
1999. The amounts stated above were paid to Mr. Krakauer by Quadris
Consulting. Mr. Krakauer received a $3,316 matching 401(k) contribution and
$10,105 for unused time off.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to each of the named executive officers. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
POTENTIAL
PERCENT REALIZABLE VALUE
OF FAIR AT ASSUMED ANNUAL
TOTAL MARKET RATES
NUMBER OF OPTIONS VALUE OF STOCK PRICE
SECURITIES GRANTED EXERCISE PER APPRECIATION
UNDERLYING TO PRICE SHARE ON FOR OPTION TERM
OPTIONS EMPLOYEES PER DATE EXPIRATION -------------------
NAME GRANTED IN 1998 SHARE OF GRANT DATE 5% 10%
- ------------------------------ --------- --------- -------- -------- -------- -------- --------
Chan Suh...................... -- --% $ -- $ -- -- $ -- $ --
Kyle Shannon.................. -- -- -- -- -- -- --
Kenneth Trush................. -- -- -- -- -- -- --
Kevin Rowe.................... -- -- -- -- -- -- --
Eamonn Wilmott................ -- -- -- -- -- -- --
Larry Krakauer (1)............ 185,144 9.8 0.44 0.44 12/30/08 51,232 129,832
</TABLE>
(1) These represent options issued to Mr. Krakauer while he was an employee of
Quadris Consulting which converted into AGENCY.COM options upon the closing
of the acquisition.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of the named executive officers at
December 31, 1998. There was no public trading market for the common stock as of
December 31, 1998. Accordingly, the values set forth below have been calculated
on the basis of an assumed initial public offering price of $23.00 per share,
less the applicable exercise price per share, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
----------------------- ------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------- -------- ---------- --------
Chan Suh.................................. -- -- $ -- $ --
Kyle Shannon.............................. -- -- -- --
Kenneth Trush............................. 278,730 -- 6,090,251 --
Kevin Rowe................................ -- -- -- --
Eamonn Wilmott............................ -- -- -- --
Larry Krakauer............................ 185,144 -- 4,176,849 --
</TABLE>
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EMPLOYMENT AGREEMENTS
In April 1999, we entered into employment agreements with each of
Messrs. Suh, Shannon, Trush, Rowe, Wilmott and Krakauer and Ms. Ambrosi Wertman.
In October 1999, we entered into an employment agreement with Mr. Dickson.
Mr. Suh's employment agreement provides for an annual base salary of
$155,000. If Mr. Suh's employment agreement is terminated for reasons other than
for cause or if Mr. Suh should resign for good reason, he will be entitled to
receive his annual base salary payable through March 31, 2004 if the date of
termination occurs on or prior to March 31, 2003 or one year from the date of
termination, if such termination occurs after March 31, 2003. In addition, all
stock options that would vest during this period are accelerated to vest and
become exercisable prior to the date of termination. Mr. Suh's employment
agreement has a term ending in March 2004, but will continue indefinitely until
terminated on one year's notice by either party.
Mr. Shannon's employment agreement provides for an annual base salary of
$150,000. If Mr. Shannon's employment agreement is terminated for reasons other
than for cause or if Mr. Shannon should resign for good reason, he will be
entitled to receive his annual base salary payable through March 31, 2004 if the
date of termination occurs on or prior to December 31, 2003 or 90 days from the
date of termination, if such termination occurs after December 31, 2003. In
addition, all stock options that would vest during this period are accelerated
to vest and become exercisable prior to the date of termination. Mr. Shannon's
employment agreement has a term ending in March 2004, but will continue
indefinitely until terminated on 90 days' notice by either party.
Mr. Rowe's employment agreement provides for an annual base salary of
$150,000. Mr. Rowe is entitled to receive an annual bonus of $100,000. In
addition, based on criteria agreed to by Mr. Rowe and the chief executive
officer, Mr. Rowe will be eligible to receive an annual discretionary
performance-based bonus of up to $250,000. Mr. Rowe also receives an automobile
allowance of $600 per month. If Mr. Rowe's employment agreement is terminated
for reasons other than for cause or if Mr. Rowe should resign for good reason,
he will be entitled to receive his annual base salary payable through April 30,
2002 if the date of termination occurs on or prior to January 31, 2002 or
90 days from the date of termination, if such termination occurs after
January 31, 2002. In addition, all stock options that would vest during this
period are accelerated to vest and become exercisable prior to the date of
termination. Mr. Rowe's employment has a term ending in April 2002 but will
continue indefinitely until terminated on 90 days' notice by either party.
At the time that Mr. Rowe became an employee of AGENCY.COM, we made a
restricted stock grant to him of 80,690 shares of our common stock. Provided
Mr. Rowe remains in our continuous employ, 33 1/3% of the restricted shares will
automatically vest on each of the first three anniversaries of the date of
grant. If Mr. Rowe retires or his employment is involuntarily terminated prior
to any of the first three anniversaries, the pro rata portion of the number of
restricted shares that would have vested as of such termination date will vest.
The board of directors has sole discretion to increase the number of shares that
will vest on retirement or involuntary termination.
Messrs. Trush, Wilmott and Krakauer and Ms. Ambrosi Wertman have employment
agreements with substantially the same terms. Messrs. Trush and Krakauer receive
annual base salaries of $150,000 and Ms. Ambrosi Wertman receives an annual base
salary of $120,000. Mr. Wilmott receives an annual base salary of L93,050, which
is approximately $150,000. Each agreement has a term ending on March 31, 2002,
but will continue
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indefinitely until terminated on 90 days' notice by either party. If any of
these persons should resign for good reason or are terminated for reasons other
than for cause, all stock options which would have vested during the term of the
agreement will automatically vest. In addition, in cases of termination other
than for cause or resignation for good reason, he or she will be entitled to
receive his or her annual base salary payable through March 31, 2002 if the date
of termination occurs on or prior to December 31, 2001 or 90 days from the date
of termination, if termination occurs after December 31, 2001.
Mr. Dickson's employment agreement provides for an annual base salary of
$250,000, with a guaranteed annual bonus of $100,000 and a discretionary annual
bonus of up to $100,000. The agreement has a term ending on October 31, 2002,
but will be automatically renewed for successive three year terms unless either
party gives the other party written notice no more than nine and no less than
six months before the expiration of the term. If Mr. Dickson is terminated for
cause, he will be entitled to all unpaid salary compensation and a pro rata
share of the guaranteed bonus through the termination date. In addition,
Mr. Dickson would have the right to exercise any vested stock options, and the
vesting of any unvested options will be determined in accordance with the plan
under which the options were granted. If Mr. Dickson is terminated without
cause, he will be entitled to severance compensation equal to his then-
applicable base salary and a pro-rated guaranteed bonus for twelve months
following the date of termination. In addition, Mr. Dickson would have the right
to exercise any vested options in accordance with the terms of the plan under
which the options were granted, and all unvested options which would have vested
during the year following the date of termination would be accelerated to
precede the date of termination.
Each executive officer serves at the discretion of the board of directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
INTRODUCTION
The 1999 Amended and Restated Stock Option/Stock Issuance Plan is the
successor program to our 1996 Stock Option Plan and 1997 Stock Option Plan. The
1999 plan was initially adopted by our board of directors and our stockholders
in February 1999 and became effective as of that date. All outstanding options
under our 1996 Stock Option Plan and 1997 Stock Option Plan will be transferred
to the 1999 plan upon the closing of this offering, and no further option grants
will be made under the predecessor plans. The transferred options will continue
to be governed by their existing terms. All outstanding options currently under
our 1996 and 1997 plans are currently exercisable in full. Except as otherwise
noted, the transferred options have substantially the same terms as those for
grants to be made under the discretionary option grant program of the 1999 plan.
SHARE RESERVE
9,676,178 shares of our common stock have been authorized for issuance under
the 1999 plan. This share reserve consists of the number of shares carried over
from the 1996 and 1997 plans plus an additional increase of 8,823,266 shares,
for a total of 9,676,178 shares. The share reserve will automatically increase
on the first trading day in January each year, by an amount equal to 3% of the
total number of shares of common stock outstanding on the last trading day of
the prior year, but in no event will this annual increase exceed 1,500,000
shares. In addition, no participant in the 1999 plan may be granted stock
options, separately exercisable stock
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appreciation rights or direct stock issuances for more than 1,100,000 shares of
common stock in total in any calendar year.
PROGRAMS
The 1999 plan has three separate programs:
- the discretionary option grant program, under which our board of directors
or compensation committee may grant eligible individuals in our service
(1) options to purchase shares of our common stock at an exercise price
determined by the plan administrator and (2) stock appreciation rights;
- the stock issuance program, under which eligible individuals may be issued
shares of common stock upon the attainment of performance milestones, upon
the completion of a period of service or as a bonus for past services; and
- the automatic option grant program, under which option grants will be made
at periodic intervals to eligible non-employee board members to purchase
shares of common stock at an exercise price equal to the fair market value
of those shares on the grant date.
The individuals eligible to participate in our 1999 plan include our
officers, employees, board members and consultants.
ADMINISTRATION
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a nonstatutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the automatic option grant program will be
self-executing in accordance with its terms.
PLAN FEATURES
The 1999 plan includes the following additional features:
- Options granted under the plan may be exercised by payment in cash or
(i) by payment of shares of our common stock valued at fair market value
on the exercise date or (ii) through a same-day sale program without any
cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options with the consent of the holder under the discretionary option
grant program, including any transferred options from our 1996 and 1997
plans, in return for the grant of new options for the same or different
number of options shares with an exercise price per share based upon the
fair market value of our common stock on the new grant date.
- Stock appreciation rights will provide the holders with the election to
surrender their outstanding options for a payment from AGENCY.COM equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the payment
in cash or in shares of our common stock.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program. Options with
this feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock or
a change in
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the majority of our board through one or more contested elections. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based upon
the fair market value per share upon the date of surrender or, if in
connection with a hostile tender offer, the highest price per share of our
common stock paid in that tender offer.
CHANGE IN CONTROL
The 1999 plan includes the following change in control provisions which may
result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that we are acquired by merger or asset sale or a board-
approved sale of more than 50% of our stock, each outstanding option under
the discretionary option grant program which is not to be assumed or
continued by the successor corporation will immediately become exercisable
for all the option shares, and all outstanding unvested shares will
immediately vest, except to the extent our repurchase rights with respect
to those shares are assigned to the successor corporation.
- The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with AGENCY.COM or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under the stock issuance
program may be accelerated upon similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections. Such accelerated
vesting may occur either at the time of such transaction or upon the
subsequent termination of the individual's service.
AUTOMATIC OPTION GRANT PROGRAM
Each eligible individual who is serving as a non-employee board member on
the date the underwriting agreement for this offering is executed will
automatically receive on such date an option to purchase 50,000 shares of our
common stock. Each eligible individual who first becomes a non-employee board
member at any time after this offering will automatically receive on the date of
his or her appointment, an option to purchase 50,000 shares of our common stock.
A non-employee board member will receive an option grant on the underwriting
agreement date for this offering or when he or she first joins the board only if
he or she (i) has not been in the prior employ of AGENCY.COM, (ii) had not
received options to purchase more than 40,000 shares of our common stock in the
12 month period preceding the underwriting agreement date for this offering or
the date of the initial appointment or election and (iii) is not a
representative of, or affiliated with, any of our shareholders who, directly or
indirectly, own 30% or more of our voting stock. On the date of each annual
stockholders meeting following this offering, each individual who is to continue
to serve as a non-employee board member will automatically be granted an option
to purchase 15,000 shares of our common stock, provided he or she has served on
the board for at least six months and is not a representative of, or affiliated
with, any of our shareholders who, directly or indirectly, own 30% or more of
our voting stock.
Each automatic grant will have a term of ten years, subject to earlier
termination
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following the optionee's cessation of board service. The option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by us, at the
exercise price paid per share, should the optionee cease board service prior to
vesting of those shares. The shares subject to each 50,000 share initial
automatic option grant will vest over a four-year period in successive equal
annual installments upon the individual's completion of each year of board
service over the four-year period measured from the option grant date. Each
15,000 share subsequent automatic option grant will vest upon the individual's
completion of one year of board service measured from the option grant date.
However, the shares subject to each automatic grant will immediately vest in
full upon certain changes in control or ownership of AGENCY.COM or upon the
optionee's death or disability while a board member.
The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later than
January 31, 2009.
ASSUMED OPTION PLANS
Pursuant to the terms of the merger agreement between AGENCY.COM and
Interactive Solutions, we assumed the Quadris Consulting 1998 Equity Incentive
Plan and all outstanding options thereunder and the Interactive Solutions
Incorporated 1996 Stock Option Plan and all outstanding options thereunder. In
connection with the merger, the plans were terminated, however, the assumed
options outstanding at the time of such termination will continue to be governed
by their existing terms. As of June 30, 1999 1,156,995 shares of AGENCY.COM
common stock were reserved for issuance pursuant to the assumed options. The
exercise price per share under each plan was determined by the Quadris
Consulting board or the Interactive Solutions board in its discretion and was
based upon the fair market value of the stock at the time of grant. Incentive
options granted under the plans have an exercise price per share not less than
100% of the fair market value at the time of grant. The exercise price for any
options granted the plans may be paid in cash or, after the initial public
offering, in shares of our common stock valued at fair market value on the
exercise date. In the event that we are acquired by merger or asset sale, each
outstanding option under the plans which is not assumed by the acquiring company
will immediately become exercisable for all the option shares, and all
outstanding unvested shares will immediately vest.
Pursuant to the terms of the merger agreement between AGENCY.COM and
I-traffic, all options outstanding at the effective time of the acquisition to
purchase I-traffic common stock were assumed and will be exercisable to purchase
an aggregate of 158,709 shares of AGENCY.COM common stock. In connection with
the acquisition, the I-traffic plan was terminated with respect to any future
option grants. However, the converted options will continue to be governed by
their existing terms. The exercise price of each I-traffic option under the plan
was based on the fair market value of the stock at the time of grant. Incentive
options granted under the plan have an exercise price of no less than 100% of
the fair market value at the time of grant. The exercise price for any options
granted under the plan may be paid in cash, or after the initial public
offering, in shares of our common stock valued at fair market value on the
exercise date. In the event we are acquired by merger or asset sale, each
outstanding option under the plan which is unvested will vest and shall be
terminated unless exercised at the effective time of any such transaction or
unless assumed by the successor corporation in connection with the transaction.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
OMNICOM'S ORIGINAL INVESTMENT IN AGENCY.COM
In September 1996, Communicade, Inc. (formerly known as JWL Associates
Corp.), a wholly owned subsidiary of Omnicom, paid $11.7 million for an
aggregate of 6,272,278 shares of the then outstanding shares of our common stock
from the holders of our outstanding shares, Chan Suh, Kyle Shannon, Kenneth
Trush and Paul Galli. Communicade's interest in AGENCY.COM as a result of this
transaction was 40% of the outstanding common stock of AGENCY.COM. Communicade
also consented to the creation of a stock option plan, which provided AGENCY.COM
the ability to issue up to 10% of AGENCY.COM's equity in the form of stock
options.
Under a shareholders agreement entered into by these parties in connection
with Communicade's investment:
- these individuals granted Communicade options to purchase additional
shares sufficient to give Communicade 51% or 80% of AGENCY.COM's
outstanding shares, depending on the circumstances;
- the parties agreed to a board of five members, two of whom would be
designated by Communicade as long as it owned less than 50% of
AGENCY.COM's outstanding capital stock; and
- the parties agreed that as long as Communicade owned less than 51% of
AGENCY.COM's common stock, specified transactions would require
Communicade's prior consent.
This shareholders agreement with Communicade was superseded by a new
shareholders agreement entered into in April 1999 which will terminate on the
closing of this offering. Under this new agreement, Communicade's options to
acquire additional shares were removed and the working capital line was
increased to $10.0 million. The other material provisions of the 1996
shareholders agreement such as the acquisition line, the director nomination
rights and the size of the board, and Communicade's consent rights on specified
transactions were continued on similar terms. Messrs. Redditt and Wren, the
executive vice president and chief executive officer of Omnicom, respectively,
also serve as directors of AGENCY.COM.
OMNICOM FINANCING ARRANGEMENTS
In November 1999, we entered into a new $85.0 million credit facility with
Omnicom Finance, a wholly owned subsidiary of Omnicom, which replaced our
revolving credit line and consolidated all of our previously outstanding
indebtedness due to Omnicom Finance. The credit facility, which terminates on
September 30, 2001, provides for a $25.0 million term loan facility, a
$54.0 million revolving credit line and a real property lease credit support
facility providing letters of credit and/or guarantees up to $6.0 million in the
aggregate. We are required by the credit facility to use 35% of the net proceeds
from this offering, subject to a maximum of $25.0 million, to repay amounts
borrowed under the term loan portion of the new credit facility. This credit
facility bears interest at Omnicom's commercial paper rate, which on
November 4, 1999 was 5.3%, plus 1.25%. The credit facility is secured by
substantially all of our assets including the shares of our subsidiaries, is
guaranteed by our domestic subsidiaries and prohibits us and our subsidiaries
from paying dividends other than in shares of our stock. The credit facility
requires compliance with a number of covenants, including restrictions on asset
sales, liens, the incurrence of debt, making of loans and the repurchase,
redemption or other acquisition of our stock.
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Under the 1996 shareholders agreement with Communicade, Communicade agreed
that it, or Omnicom or its affiliates, would lend AGENCY.COM $1.0 million on a
revolving basis for its working capital needs. Substantially all of AGENCY.COM's
assets, including the shares of its subsidiaries, were pledged to secure this
working capital line. Communicade also agreed that it, or Omnicom or its
affiliates, would provide financing to AGENCY.COM to finance "new media"
acquisitions approved by Communicade or its designated directors. Interest on
the revolving credit line and the acquisition line accrued on a non-cash basis
and was payable when the line terminated. As discussed above, this agreement was
superceded in April 1999. The credit agreement provisions under the shareholders
agreement were terminated upon the effectiveness of the new credit facility.
ACQUISITION OF OMNICOM SUBSIDIARIES
In April 1998, AGENCY.COM purchased certain assets and assumed certain
liabilities from Ketchum Advertising Inc., a wholly owned subsidiary of Omnicom,
relating to its Ketchum Interactive business. The purchase price was $643,000 in
cash.
In December 1998, Communicade purchased 60% of Interactive Solutions' shares
from Interactive Solutions' former President for a purchase price of $1.6975 per
share, resulting in Communicade holding all of Interactive Solutions'
outstanding shares, other than a de minimis number of shares held by third
parties as a result of stock option exercises. Before the AGENCY.COM-Interactive
Solutions merger, Communicade sold to a group of AGENCY.COM employees, Quadris
employees and Eagle River Interactive employees, including all of AGENCY.COM's
executive officers, a portion of the Interactive Solutions shares purchased from
Interactive Solutions' former President aggregating 4.47% of Interactive
Solutions' outstanding shares. The purchase price was $1.6975 per share, for an
aggregate purchase price of $412,492.
In April 1999, Interactive Solutions merged with Quadris Consulting, a
company in which it held preferred stock. The transaction was valued at
$1.9 million. The Quadris preferred stock held by Interactive Solutions was
convertible into 60% of Quadris's outstanding common stock. Quadris'
stockholders, other than Interactive Solutions, received Interactive Solutions
shares in the merger. Immediately after this merger, Interactive Solutions
merged with AGENCY.COM.
AGENCY.COM acquired Interactive Solutions through a merger. Pursuant to this
merger, the Interactive Solutions stockholders other than Communicade received
an aggregate of 330,860 shares of AGENCY.COM common stock and the former Quadris
stockholders received an aggregate of 1,244,534 shares of AGENCY.COM common
stock. The aggregate value of these shares was approximately $1.9 million.
AGENCY.COM also assumed $12.7 million of indebtedness owed by Interactive
Solutions to Omnicom and assumed the Quadris and Interactive Solutions stock
option plans covering options now exercisable for an aggregate of 1,399,410
shares of AGENCY.COM common stock. In connection with this merger, Communicade
received 2,596,452 shares of common stock and a 20-year warrant to purchase
3,071,248 shares of AGENCY.COM common stock at an exercise price of $0.005 per
share. The transaction was valued at $8.2 million. Following the consummation of
this transaction, Communicade held 35.4% of our outstanding shares of common
stock, in addition to the shares of common stock underlying their warrants. The
warrant provides that if Communicade and Omnicom beneficially own in the
aggregate less than 50% of AGENCY.COM's outstanding shares of common stock at
the time of exercise, the warrant may be exercised only to the extent that the
number of shares of common stock beneficially owned after such exercise remains
less than 50% of the outstanding shares.
In April 1999, AGENCY.COM merged with Eagle River Interactive, a wholly
owned
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subsidiary of Omnicom. In connection with the merger, AGENCY.COM assumed
$22.6 million of indebtedness owed by Eagle River Interactive to Omnicom.
Pursuant to this merger, Omnicom received 3,659,548 shares of AGENCY.COM common
stock and a 20-year warrant to purchase 4,328,752 shares of AGENCY.COM common
stock at an exercise price of $0.005 per share. In addition, we issued 80,690
shares of our common stock to Kevin Rowe in connection with his employment with
us. Following this transaction, Omnicom, together with Communicade, held 49.9%
of our outstanding shares of common stock, in addition to shares of common stock
underlying its and Communicade's warrants. The transaction was valued at
approximately $8.1 million. This value was established in July 1998 at the time
the transaction was announced. Omnicom negotiated the merger with AGENCY.COM's
directors, other than Communicade's two nominees. As a result of these
negotiations, each company was valued based on a multiple of revenues, and a
discount was applied to Eagle River Interactive's value based on its losses. The
warrant issued to Omnicom provides that if Communicade and Omnicom beneficially
own in the aggregate less than 50% of AGENCY.COM's outstanding shares of common
stock at the time of exercise, the warrant may be exercised only to the extent
that the number of shares of common stock beneficially owned after such exercise
remains less than 50% of the outstanding shares. In September 1997, a wholly
owed subsidiary of Omnicom acquired Eagle River Interactive's assets for an
aggregate of $13.5 million, which includes cash paid at closing and additional
payments based on Eagle River Interactive's earnings.
At the time of the AGENCY.COM-Eagle River merger, Eagle River settled
obligations due by it under an earn-out provision from an earlier transaction
with certain employees, including Kevin Rowe. Omnicom settled these obligations
by causing Communicade to transfer 13,322 shares of our common stock to these
employees, including 4,084 shares to Mr. Rowe. In connection with this
settlement, Rowe released Communicade, Omnicom, Eagle River and any or their
affiliates from any further obligations.
OMNICOM REGISTRATION RIGHTS
In November 1999, we entered into a registration rights agreement with
Omnicom. Under the registration rights agreement, from time to time after
180 days after the date of this prospectus, Omnicom and its affiliates may, on
up to three occasions, require us to register for sale under the securities laws
all or a portion of their shares of AGENCY.COM common stock. In addition, if at
any time we propose to file a registration statement under the securities laws
with respect to any class of equity securities, Omnicom and its affiliates may
require us to include in the registration as many shares as it shall request,
subject to reduction, based on the opinion of the managing underwriter of the
offering. The registration rights do not expire, but are not assignable. We may
not issue registration rights to any other person that are senior in right to
those of Omnicom under the registration rights agreement without Omnicom's
consent. We have agreed to bear all expenses associated with the registration of
Omnicom's and its affiliates' securities, other than underwriting discounts and
commissions and fees of Omnicom's counsel.
ACQUISITIONS AND INVESTMENTS FINANCED
BY OMNICOM
The table below sets forth the amount borrowed for each acquisition of or
investment in a "new media" company that AGENCY.COM funded with a loan from
Communicade or assumed in connection with an acquisition or investment:
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<TABLE>
<CAPTION>
ACQUISITION OR INVESTMENT AMOUNT BORROWED
- ------------------------- ---------------
(IN THOUSANDS)
<S> <C>
Spiral Media............................................... $ 5,480
Online Magic............................................... 1,450
Ketchum Interactive........................................ 643
The Primary Group.......................................... 53
The Edge Consultants....................................... 3,005
Eagle River Interactive (Omnicom debt assumed)............. 22,569
Interactive Solutions (Omnicom debt assumed)............... 12,646
Digital Vision............................................. 1,100
Twinspark Interactive People............................... 700
I-traffic.................................................. 3,000
Pictoris Interactive....................................... 500
Visionik................................................... 500
--------
Total................................................ $ 51,646
========
</TABLE>
AGREEMENT WITH UNDERWRITER
In the past, we provided Internet professional services to Salomon Smith
Barney pursuant to an agreement negotiated at arm's length. We entered into this
agreement prior to our selection of the underwriters for this offering. Our
revenues from this contract were $131,000 in 1998 and $110,000 for the nine
months ended September 30, 1999.
OTHER TRANSACTIONS
AGENCY.COM provides services on an informal basis to URBAN DESIRES, an
online magazine for art and culture. URBAN DESIRES was founded by Kyle Shannon,
our Chief Creative Officer and a director, and is owned by Mr. Shannon and Chan
Suh, our Chairman, Chief Executive Officer and President. We billed URBAN
DESIRES approximately $345,976, $244,219, $115,000 and $135,000 in 1996, 1997,
1998 and in the first nine months of 1999, respectively, for our services and
are providing services to URBAN DESIRES currently.
In September 1996, each of Messrs. Suh and Shannon agreed with Communicade
not to sell any portion of his interest in URBAN DESIRES to any competitor of
Communicade or Omnicom.
It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates be entered into only if they are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to us than could be obtained from unaffiliated parties and are
reasonably expected to benefit us.
We have entered into consulting agreements with Messrs. Rayport and DeLong
relating to their service as directors. The terms of each agreement are
substantially similar. Each agreement provides that each director-nominee will
serve as one of our directors and will render services to us on an as-needed
basis. In exchange for their services, Messrs. Rayport and DeLong were issued
options to purchase 50,000 shares of our common stock at an exercise price of
$1.225 and $9.35 per share, respectively, under our 1999 Stock Option/Stock
Issuance Plan. These options become exercisable at the time each commences
serving as a director of AGENCY.COM. In addition to the above-described options
issued to Mr. DeLong, we issued options to purchase 50,000 shares of our common
stock at an exercise price of $4.06 per share on September 8, 1999 to
Mr. DeLong as compensation for consulting services performed during the summer
of 1999.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of November 4, 1999 and as adjusted to reflect
the sale of common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors and our director-nominee; and
- all of our executive officers, directors, and director nominee as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o AGENCY.COM Ltd., 665 Broadway, 9th Floor, New York, New York
10012. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options held by such persons that are exercisable within 60 days of November 4,
1999, but excludes shares of common stock underlying options held by any other
person. Percentage of beneficial ownership is based on 27,774,562 shares of
common stock outstanding as of November 4, 1999, and 33,674,562 shares of common
stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED
--------------------
<S> <C> <C> <C>
SHARES BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ------------------------------------------------- ---------- ---- ----
Chan Suh (2)..................................... 4,755,902 17.1% 14.1%
Kyle Shannon (3)................................. 4,579,900 16.5 13.6
Kenneth Trush (4)................................ 599,856 2.1 1.8
Kevin Rowe (5)................................... 114,774 * *
Eamonn Wilmott (6)............................... 403,071 1.5 1.2
Larry Krakauer (7)............................... 934,692 3.3 2.7
Gerald Bruce Redditt (8)......................... 15,246,283 49.9 46.7
John D. Wren (9)................................. 15,246,283 49.9 46.7
Jeffrey Rayport (10)............................. 50,000 * *
Thomas DeLong (11)............................... 50,000 * *
Communicade Inc. (12)............................ 11,586,735 38.0 32.5
Omnicom Group Inc. (13).......................... 15,246,283 49.9 46.7
All directors, director-nominees and executive
officers as a group (12 persons) (14).......... 26,941,870 86.4 74.9
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
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(1) Assumes that the underwriters' over-allotment option to purchase up to an
additional 885,000 shares from AGENCY.COM is not exercised.
(2) Includes 190,000 shares of common stock held by the Chan Suh 1999
Grantor-Retained Annuity Trust.
(3) Includes 400,000 shares of common stock held by the Shannon Family Trust.
(4) Includes 278,730 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days. Also includes 30,000 shares of
common stock held by The Daniel N. Trush 1999 Trust and 30,000 shares of
common stock held by The Michael J. Trush 1999 Trust.
(5) Includes 80,690 shares of restricted common stock subject to a Restricted
Stock Agreement, dated April 16, 1999 between AGENCY.COM and Mr. Rowe.
(6) Does not include 76,977.80 shares of common stock held in an escrow account,
which are eligible to be released pending the financial results of
AGENCY.COM for fiscal 1999. Mr. Wilmott does not have voting or dispositive
control over these shares while held in escrow.
(7) Includes 185,986 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days and 2,500 shares held by
Mr. Krakauer's children.
(8) Includes 8,868,730 shares of common stock held by Communicade and 3,659,548
shares of common stock held by Omnicom. Shares beneficially owned prior to
the offering includes 2,718,005 shares of common stock issuable upon the
exercise of the currently exercisable portion of warrants to purchase
2,928,752 shares of common stock held by Omnicom and warrants to purchase
3,071,248 shares of common stock held by Communicade. Each warrant provides
that if Communicade and Omnicom beneficially own in the aggregate less than
50% of our outstanding shares of common stock at the time of exercise, it
may be exercised only to the extent that the number of shares of common
stock beneficially owned by Communicade and Omnicom remains less than 50% of
the outstanding shares. Shares beneficially owned after the offering will be
18,528,278, which includes all 6,000,000 shares of common stock issuable
upon the exercise of these warrants. Mr. Redditt serves as an Executive Vice
President of Omnicom. In this capacity, Mr. Redditt may be deemed to be the
beneficial owner of these shares, although he disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest. The address
of Mr. Redditt is c/o Omnicom Group Inc., 437 Madison Avenue, New York, New
York 10022.
(9) Includes 8,868,730 shares of common stock held by Communicade and 3,659,548
shares of common stock held by Omnicom. Shares beneficially owned prior to
the offering includes 2,718,005 shares of common stock issuable upon the
exercise of warrants to purchase 2,928,752 shares of common stock held by
Omnicom and warrants to purchase 3,071,248 shares of common stock held by
Communicade. Each warrant provides that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, it may be exercised only to the extent
that the number of shares of common stock beneficially owned by Communicade
and Omnicom remains less than 50% of the outstanding shares. Shares
beneficially owned after the offering will be 18,528,278, which includes
6,000,000 shares of common stock issuable upon the exercise of these
warrants. Mr. Wren serves as a Chief Executive Officer and President of
Omnicom. In this capacity, Mr. Wren may be deemed to be the beneficial owner
of these shares, although he
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disclaims ownership of these shares except to the extent of his pecuniary
interest. The address of Mr. Wren is c/o Omnicom Group Inc., 437 Madison
Avenue, New York, New York 10022.
(10) Shares beneficially owned after the offering include 50,000 shares of
common stock issuable upon the exercise of stock options that are
exercisable at the time Mr. Rayport is elected as a director, which is
expected to occur upon the closing of this offering.
(11) Shares beneficially owned after the offering include 50,000 shares of
common stock issuable upon the exercise of stock options that are
exercisable at the time Mr. DeLong is elected as a director, which is
expected to occur upon the closing of this offering.
(12) Shares beneficially owned prior to the offering include 2,718,005 shares of
common stock issuable upon the exercise of the currently exercisable portion
of a warrant to purchase 3,071,248 shares of common stock held by
Communicade. The warrant provides that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, the warrant may be exercised only to
the extent that the number of shares of common stock beneficially owned by
Communicade and Omnicom remains less than 50% of the outstanding shares.
Shares beneficially owned after the offering will be 11,939,978, which
includes all 3,071,248 shares of common stock issuable upon the exercise of
this warrant. The address of Communicade, Inc. is 437 Madison Avenue, New
York, New York 10022.
(13) Shares beneficially owned prior to the offering include 2,718,005 shares of
common stock issuable upon the exercise of the currently exercisable portion
of warrants to purchase 2,928,752 shares of common stock held by Omnicom and
warrants to purchase 3,071,248 shares of common stock held by Communicade.
Each warrant provides that if Communicade and Omnicom beneficially own in
the aggregate less than 50% of our outstanding shares of common stock at the
time of exercise, the warrant may be exercised only to the extent that the
number of shares of common stock beneficially owned by Communicade and
Omnicom does not exceed 50% of the outstanding shares. Shares beneficially
owned after the offering will be 18,528,278, which includes all 6,000,000
shares of common stock issuable upon the exercise of these warrants. The
address of Omnicom Group, Inc. is 437 Madison Avenue, New York, New York
10022.
(14) Shares beneficially owned prior to the offering includes 2,718,005 shares
of common stock issuable upon the exercise of currently exercisable portions
of the Omnicom and Communicade warrants. Also includes 100,000 shares of
common stock issuable upon the exercise of stock options granted to
Mr. Dickson that are exercisable within 60 days and 22,850 shares of common
stock issuable upon the exercise of stock options granted to
Ms. Ambrosi Wertman that are exercisable within 60 days. Shares beneficially
owned after the offering will be 30,223,865, which includes all 6,000,000
shares of common stock issuable upon the exercise of the warrants held by
Communicade and Omnicom described above.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
AGENCY.COM's amended and restated certificate of incorporation, which will
become effective upon the closing of this offering, authorizes the issuance of
up to 200,000,000 shares of common stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value $.001 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of November 4, 1999, 27,774,562 shares of common stock were
outstanding and we had 328 stockholders of record.
COMMON STOCK
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of AGENCY.COM, the holders of common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after payment of all of our liabilities and any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The rights, preferences
and privileges of holders of common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences, powers,
rights and restrictions of different series of preferred stock may differ. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock. Such
issuance may also have the effect of delaying, deferring or preventing a change
in control of AGENCY.COM. We have no current plans to issue any shares of
preferred stock.
WARRANTS
As of the date of this prospectus, Communicade held a warrant to purchase
3,071,248 shares of our common stock at an exercise price of $0.005 per share,
Omnicom held a warrant to purchase 2,928,752 shares of our common stock at an
exercise price of $0.005 per share and another holder holds warrants to purchase
1,400,000 shares of our common stock at an exercise price of $0.005 per share.
The Omnicom and Communicade warrants provide that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, the warrants may be exercised only to the
extent that the number of shares of common stock beneficially owned by
Communicade and Omnicom after such exercise remains less than 50% of the
outstanding shares. Each warrant expires on March 31, 2019.
82
<PAGE>
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which are summarized in the following paragraphs,
may have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when coupled with the
provision of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board of directors, may delay a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the ability
of stockholders to act by written consent. It further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
at our principal executive offices not less than 60 days nor more than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within thirty (30) days before or after the anniversary date, in order to be
timely, notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated by-laws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual or
special meeting of stockholders or from making nominations for directors at
these meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
83
<PAGE>
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes a two-thirds supermajority vote requirement in connection
with various corporate governance actions and the amendment of various
provisions of our amended and restated certificate of incorporation, including
those provisions relating to the classified board of directors, and special
meetings of stockholders. In addition, a two-thirds supermajority vote of
stockholders is required to amend our amended and restated bylaws.
REGISTRATION RIGHTS
In November 1999, we entered into a registration rights agreement with
Omnicom. Under the registration rights agreement, from time to time after
180 days after the date of this prospectus, Omnicom and its affiliates may, on
up to three occasions, require us to register for sale under the securities laws
all or a portion of their shares of AGENCY.COM common stock. In addition, if at
any time we propose to file a registration statement under the securities laws
with respect to any class of equity securities, Omnicom and its affiliates may
require us to include in the registration as many shares as it shall request,
subject to reduction, based on the opinion of the managing underwriter of the
offering. The registration rights do not expire, but are not assignable. We may
not issue registration rights to any other person that are senior in right to
those of Omnicom under the registration rights agreement without Omnicom's
consent. We have agreed to bear all expenses associated with the registration of
Omnicom's and its affiliates' securities, other than underwriting discounts and
commissions and fees of Omnicom's counsel.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for AGENCY.COM's common stock will be
American Stock Transfer & Trust Company, New York, New York.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "ACOM", subject to official notice of issuance.
84
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares held by our existing stockholders will be available for sale
shortly after this offering because of the contractual and legal restrictions on
resale described below, sales of substantial amounts of common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
33,747,812 shares of our common stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 27,847,812 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
following registration or pursuant to an exemption from registration under
Rule 144 promulgated under the Securities Act, which rules are summarized below.
LOCK-UP AGREEMENTS
All of our officers and directors and most of our stockholders, who together
hold an aggregate of at least 95% of our currently outstanding shares, have
signed lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, or hedge any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Goldman,
Sachs & Co.
As a result of these lock-up agreements and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:
- approximately 826,000 restricted securities will be eligible for sale
beginning 90 days after the date of this prospectus, subject in some cases
to compliance with Rule 144;
- approximately 24,760,000 additional restricted securities will be eligible
for sale beginning 180 days after the effective date of this offering upon
expiration of the lock-up agreements, subject in some cases to compliance
with Rule 144; and
- the remainder of the restricted securities will be eligible for sale from
time to time thereafter, subject in some cases to compliance with Rule
144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, which is the minimum period that we must be subject
to the reporting requirements of the Exchange Act as specified by Rule 144, a
person who has beneficially owned shares of our common stock for at least one
year, including the holding period of any prior owner other than an affiliate,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 337,478 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
85
<PAGE>
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at anytime during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us
pursuant to securities, prior to our public offering, issued under a
compensatory stock plan or other written agreement is eligible to resell such
shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with some of the restrictions, including the
holding period, contained in Rule 144.
STOCK PLANS
Promptly after this offering, we intend to file a registration statement
under the Securities Act covering 10,684,058 shares of common stock consisting
of 9,368,564 shares reserved for issuance under our 1999 Plan and 1,315,704
shares reserved for issuance upon the exercise of outstanding stock options
assumed by us in connection with our Interactive Solutions and I-traffic
acquisitions. This registration statement is expected to be filed as soon as
practicable after the effective date of this offering.
At November 30, 1999, options to purchase 5,775,527 shares were issued and
outstanding under our plans and otherwise. Once this registration statement has
been filed, all of these shares will be eligible for sale in the public market
from time to time, subject to vesting provisions, Rule 144 volume limitations
applicable to our affiliates and, in the case of some of the options, the
expiration of lock-up agreements.
REGISTRATION RIGHTS
Beginning 180 days after this offering, Omnicom and its affiliates will be
entitled to require us to register their shares of AGENCY.COM common stock for
sale under the Securities Act. See "Description of Capital Stock--Registration
Rights".
VALIDITY OF COMMON STOCK
The validity of the shares of the common stock offered hereby will be passed
upon for AGENCY.COM by Brobeck, Phleger & Harrison LLP, New York, New York and
for the underwriters by Ropes & Gray, Boston, Massachusetts. Attorneys at
Brobeck, Phleger & Harrison LLP are purchasing shares of common stock in this
offering.
86
<PAGE>
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement other than for I-traffic and
Visionik have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The audited financial statements of Interactive Traffic, Inc. presented in
this prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report thereon appears herein. Such financial statements have
been so included in reliance on the report of such independent accountants given
on the authority of said firm as experts in auditing and accounting.
The audited financial statements included in this prospectus and elsewhere
in the registration statement for Visionik have been audited by Moore Stephens,
Denmark, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
CHANGE IN ACCOUNTANTS
In July 1998, we determined to replace Ernst & Young LLP and engaged Arthur
Andersen LLP as our independent accountants to audit our financial statements as
of, and for the period ended December 31, 1997. The decision to change
independent accountants from Ernst & Young LLP to Arthur Andersen LLP was
approved by our board of directors. We believe, and have been advised by
Ernst & Young LLP that it concurs in this belief, that, for the period from
January 1, 1996 through the date of dismissal (the entire period of its
engagement), AGENCY.COM and Ernst & Young LLP did not have any disagreement on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, that if not resolved to the satisfaction of
Ernst & Young LLP, would have caused it to make reference in connection with its
report on our financial statements to the subject matter of the disagreement.
Ernst & Young LLP's report on our financial statements for the period from
January 1, 1996 through December 31, 1996 did not contain an adverse opinion or
a disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During that year there were no "reportable
events" within the meaning of Item 304(a)(1)(v)of Regulation S-K promulgated
under the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to us and our common stock, reference is made
to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549 and at the regional offices of the Commission located at
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Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our filings, including the registration
statement, will also be available to you on the Commission's Internet site
(www.sec.gov).
As a result of the offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance with these requirements, will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
Upon approval of the common stock for the quotation on the Nasdaq National
Market, these reports, proxy and information statements and other information
may also be inspected at the offices of Nasdaq Operations, 9801 Washingtonian
Boulevard, 5th Floor, Gaithersburg, MD, 20878.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and to make
available to our stockholders quarterly reports containing unaudited financial
data for the first three quarters of each fiscal year.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AGENCY.COM AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999..................................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999.......................... F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 and for the
nine months ended September 30, 1999....................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
EAGLE RIVER INTERACTIVE
Report of Independent Public Accountants.................... F-34
Report of Independent Public Accountants.................... F-35
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999......................................... F-36
Combined/Consolidated Statements of Operations for the
predecessor company for the year ended December 31, 1996
and for the period ended September 26, 1997; and for the
successor company for the period from inception
(September 26, 1997) through December 31, 1997, for the
year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999.................................... F-37
Combined/Consolidated Statements of Divisional Equity
(Deficit) and Stockholders' Deficit for the predecessor
company for the year ended December 31, 1996 and for the
period between January 1, 1997 through September 26, 1997;
and for the successor company for the period from inception
(September 26, 1997) through December 31, 1997, for the
year ended December 31, 1998 and for the three months ended
March 31, 1999............................................. F-38
Combined/Consolidated Statements of Cash Flows for the
predecessor company for the year ended December 31, 1996
and for the period between January 1, 1997 through
September 26, 1997; and for the successor company for the
period from inception (September 26, 1997) through
December 31, 1997, for the year ended December 31, 1998 and
for the three months ended March 31, 1998 and 1999......... F-39
Notes to Combined/Consolidated Financial Statements......... F-40
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
Report of Independent Public Accountants.................... F-54
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999......................................... F-55
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999.............................. F-56
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
for the three months ended March 31, 1999.................. F-57
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999.............................. F-58
Notes to Consolidated Financial Statements.................. F-59
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
QUADRIS CONSULTING
Report of Independent Public Accountants.................... F-76
Balance Sheets as of December 31, 1997 and March 15, 1998... F-77
Statements of Operations for the years ended December 31,
1996 and 1997 and for the period from January 1 to
March 15, 1998............................................. F-78
Statements of Divisional Equity for the years ended
December 31, 1996 and 1997 and for the period from
January 1 to March 15, 1998................................ F-79
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and for the period from January 1 to
March 15, 1998............................................. F-80
Notes to Financial Statements............................... F-81
TWINSPARK INTERACTIVE PEOPLE B.V.
Report of Independent Public Accountants.................... F-87
Balance Sheets as of December 31, 1997 and 1998 and
June 30, 1999.............................................. F-88
Statements of Operations for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1999................................................... F-89
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and for the six months ended
June 30, 1999.............................................. F-90
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1999................................................... F-91
Notes to Financial Statements............................... F-92
INTERACTIVE TRAFFIC, INC.
Report of Independent Accountants........................... F-100
Balance Sheets as of December 31, 1998 and September 30,
1999....................................................... F-101
Statements of Operations for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and
1999....................................................... F-102
Statements of Changes in Stockholders' Equity for the year
ended December 31, 1998 and for the nine months ended
September 30, 1999......................................... F-103
Statements of Cash Flows for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and
1999....................................................... F-104
Notes to Financial Statements............................... F-105
VISIONIK A/S
Report of Independent Public Accountants.................... F-113
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999..................................... F-114
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998 and for the nine months ended
September 30, 1999......................................... F-115
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1998 and for the nine
months ended September 30, 1999............................ F-116
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the nine months ended
September 30, 1999......................................... F-117
Notes to Financial Statements............................... F-118
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................. F-125
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1999......................................... F-126
Notes to Pro Forma Condensed Consolidated Balance Sheet..... F-127
Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1999................... F-130
Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1998................... F-131
Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998........................... F-132
Notes to Pro Forma Condensed Consolidated Statements of
Operations................................................. F-133
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGENCY.COM Ltd.:
We have audited the accompanying consolidated balance sheets of AGENCY.COM Ltd.
(a Delaware corporation) and subsidiaries, as of December 31, 1997 and 1998 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AGENCY.COM Ltd. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years ended December 31,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
November 10, 1999
F-4
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 387,739 $ 769,358 $ 725,863
Accounts receivable, net of allowance for doubtful
accounts of $43,362, $825,576 and $5,327,125,
respectively............................................ 5,484,004 4,658,365 24,141,609
Unbilled charges.......................................... 700,060 2,345,752 6,682,710
Prepaid expenses and other current assets................. 218,931 193,060 3,579,670
Income tax receivable..................................... -- -- 2,130,945
Due from related parties.................................. 298,484 141,847 295,968
----------- ----------- ------------
Total current assets.............................. 7,089,218 8,108,382 37,556,765
Property and Equipment, net of accumulated depreciation and
amortization of $486,092, $1,627,397 and $7,928,884,
respectively.............................................. 2,032,008 4,215,128 11,653,923
Intangibles, net of accumulated amortization of $72,264,
$965,029 and $5,651,613, respectively..................... 1,502,338 7,827,717 60,291,154
Deferred Tax Assets......................................... 558,660 2,758,610 1,010,396
Investments and other assets................................ 108,629 1,950,035 4,635,757
----------- ----------- ------------
Total assets...................................... $11,290,853 $24,859,872 $115,147,995
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 1,725,226 $ 4,879,775 $ 14,920,232
Line of credit............................................ 86,273 -- 177,000
Income taxes payable...................................... 202,528 194,631 1,061,458
Deferred revenue.......................................... 596,882 688,953 2,426,901
Current portion of capital lease obligations.............. 124,968 564,536 1,097,956
Due to related parties.................................... -- 453,408 --
----------- ----------- ------------
Total current liabilities......................... 2,735,877 6,781,303 19,683,547
----------- ----------- ------------
Long-Term Liabilities:
Due to Omnicom Group Inc.................................. 2,424,969 11,989,373 66,806,568
Deferred tax liabilities.................................. 2,418,790 2,967,008 458,498
Capital lease obligations................................. 115,599 848,321 1,709,425
Due to related parties.................................... -- -- 390,000
Other long-term liabilities............................... 146,806 213,786 1,202,042
----------- ----------- ------------
Total long-term liabilities....................... 5,106,164 16,018,488 70,566,533
----------- ----------- ------------
Total liabilities................................. 7,842,041 22,799,791 90,250,080
----------- ----------- ------------
Commitments And Contingencies (Note 10)
Stockholders' Equity (Note 8):
Common stock, $0.001 par value, 200,000,000 shares
authorized; 16,200,000, 17,425,810 and 26,789,538 shares
issued; and 16,200,000, 17,179,060 and 26,666,164 shares
outstanding at December 31, 1997, 1998 and
September 30, 1999 (unaudited), respectively............ 16,200 17,178 26,664
Additional paid-in capital................................ 1,797,691 2,898,270 36,436,603
Retained earnings (deficit)............................... 1,634,921 (846,059) (7,629,456)
Deferred compensation..................................... -- -- (3,891,762)
Cumulative foreign currency translation................... -- (9,308) (44,134)
----------- ----------- ------------
Total stockholders' equity........................ 3,448,812 2,060,081 24,897,915
----------- ----------- ------------
Total liabilities and stockholders' equity........ $11,290,853 $24,859,872 $115,147,995
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $6,094,784 $12,975,575 $26,452,191 $18,956,267 $56,499,289
Direct salaries and costs..................... 2,216,830 6,200,216 15,930,029 10,355,373 28,784,372
---------- ----------- ----------- ----------- -----------
Gross profit.............................. 3,877,954 6,775,359 10,522,162 8,600,894 27,714,917
General and administrative.................... 954,409 3,815,045 10,944,441 7,743,832 21,708,395
Sales and marketing........................... -- 527,432 595,886 297,942 2,590,637
Amortization of intangibles................... -- 72,264 892,765 582,855 4,686,584
Depreciation and amortization................. 61,356 304,491 1,141,305 772,094 3,149,130
---------- ----------- ----------- ----------- -----------
Income (loss) from operations............. 2,862,189 2,056,127 (3,052,235) (795,829) (4,419,829)
Interest income (expense), net................ 28,201 9,924 (359,761) (325,491) (2,124,962)
---------- ----------- ----------- ----------- -----------
Income (loss) before minority interest and
income taxes............................ 2,890,390 2,066,051 (3,411,996) (1,121,320) (6,544,791)
Minority interest............................. -- 167,468 (281,559) (281,559) --
---------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes........................ 2,890,390 2,233,519 (3,693,555) (1,402,879) (6,544,791)
Provision (benefit) for income taxes.......... 1,388,000 1,051,373 (1,212,575) (460,565) 238,606
---------- ----------- ----------- ----------- -----------
Net income (loss)......................... $1,502,390 $ 1,182,146 $(2,480,980) $ (942,314) $(6,783,397)
========== =========== =========== =========== ===========
Per share information:
Net income (loss) per common share
Basic..................................... $ 0.32 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Diluted................................... $ 0.31 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Weighted average common shares used in
computing per share amounts:
Basic..................................... 4,750,313 16,200,000 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
Diluted................................... 4,796,943 16,297,345 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
Pro forma net income (loss) data (Unaudited)
(Note 7):
Net income (loss) before provision
(benefit) for income taxes.............. $2,890,390
Pro forma income tax provision
(benefit)............................... 1,405,577
==========
Pro forma net income (loss)............... $1,484,813
==========
Pro forma per share information (Unaudited)
(Note 7):
Pro forma net income (loss) per common
share:
Basic..................................... $ 0.32
==========
Diluted................................... $ 0.31
==========
Weighted average common shares used in
computing pro forma per share amounts:
Basic..................................... 4,750,313
==========
Diluted................................... 4,796,943
==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL RETAINED FOREIGN TOTAL
--------------------- PAID-IN EARNINGS/ DEFERRED CURRENCY STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION TRANSLATION EQUITY
---------- -------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996...... 1,800 $ 2 $ 98 $ 791,048 $ -- $ -- $ 791,148
Distribution to
shareholders.............. -- -- -- (42,205) -- -- (42,205)
Common stock issued upon S-
Corporation termination... 16,198,200 16,198 (7,298) -- -- -- 8,900
Termination of
S-Corporation............. -- -- 1,798,458 (1,798,458) -- -- --
Net income.................. -- -- -- 1,502,390 -- -- 1,502,390
---------- ------- ----------- ----------- ----------- -------- -----------
Balance, December 31, 1996.... 16,200,000 16,200 1,791,258 452,775 -- -- 2,260,233
Capital contribution........ -- -- 6,433 -- -- -- 6,433
Net income.................. -- -- -- 1,182,146 -- -- 1,182,146
---------- ------- ----------- ----------- ----------- -------- -----------
Balance, December 31, 1997.... 16,200,000 16,200 1,797,691 1,634,921 -- -- 3,448,812
Common stock issued in
connection with Spiral
Media Inc. acquisition.... 480,626 480 535,425 -- -- -- 535,905
Common stock issued in
connection with Online
Magic Ltd. acquisition.... 498,434 498 555,255 -- -- -- 555,753
Capital contribution........ -- -- 9,899 -- -- -- 9,899
Foreign currency translation
adjustment................ -- -- -- -- -- (9,308) (9,308)
Net loss.................... -- -- -- (2,480,980) -- -- (2,480,980)
---------- ------- ----------- ----------- ----------- -------- -----------
Balance, December 31, 1998.... 17,179,060 17,178 2,898,270 (846,059) -- (9,308) 2,060,081
Common stock issued in
connection with Eagle
River Interactive
acquisition............... 3,740,238 3,740 4,497,584 -- -- -- 4,501,324
Warrants issued in
connection with Eagle
River Interactive
acquisition............... -- -- 3,428,471 -- -- -- 3,428,471
Common stock issued in
connection with
Interactive Solutions
acquisition............... 4,171,846 4,172 5,127,199 -- -- -- 5,131,371
Stock options issued in
connection with
Interactive Solutions
acquisition............... -- -- 722,191 -- -- -- 722,191
Warrants issued in
connection with
Interactive Solutions
acquisition............... -- -- 2,424,620 -- -- -- 2,424,620
Common stock issued in
connection with Twinspark
Interactive............... 1,057,226 1,057 11,628,429 -- -- -- 11,629,486
Common stock issued as
contingent consideration
in connection with Online
Magic Ltd. acquisition.... 123,376 123 1,357,794 -- -- -- 1,357,917
Foreign currency translation
adjustment................ -- -- -- -- -- (34,826) (34,826)
Deferred compensation....... -- -- 3,964,483 -- (3,891,762) -- 72,721
Exercise of stock options... 394,418 394 387,562 -- -- -- 387,956
Net loss (unaudited)........ -- -- -- (6,783,397) -- -- (6,783,397)
---------- ------- ----------- ----------- ----------- -------- -----------
Balance, September 30, 1999
(unaudited)................. 26,666,164 $26,664 $36,436,603 $(7,629,456) $(3,891,762) $(44,134) $24,897,915
========== ======= =========== =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $1,502,390 $ 1,182,146 $(2,480,980) $ (942,314) $ (6,783,397)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Allowance for doubtful accounts.................. 15,207 142,589 785,235 369,434 337,475
Depreciation and amortization.................... 61,356 376,755 2,034,070 1,354,949 7,835,714
Deferred income taxes............................ 1,198,000 529,863 (1,595,818) (1,336,380) (777,012)
Non-cash compensation expense.................... -- -- -- -- 72,721
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,600,317) (3,030,333) 43,425 (577,634) (17,331,647)
Unbilled charges................................. -- (700,060) (1,645,692) (2,446,642) 2,081,197
Prepaid expenses and other current assets........ (73,120) (139,455) 25,871 89,881 (2,503,690)
Income tax receivable............................ -- -- -- -- 945,055
Due from related parties......................... (383,693) 99,999 156,637 174,695 --
Other assets..................................... (117,126) 8,704 (123,904) (174,174) 202,605
Accounts payable and accrued expenses............ 280,325 1,244,575 3,154,549 1,268,875 3,212,327
Deferred revenue................................. -- 596,882 92,072 (304,698) 634,367
Due to related parties........................... -- -- 453,408 225,614 (728,866)
Income taxes payable............................. 69,046 173,517 (63,811) 648,671 866,827
Other long-term liabilities...................... -- 146,806 66,980 50,235 988,256
---------- ----------- ----------- ----------- ------------
Net cash provided by (used in) operating
activities................................. 952,068 631,988 902,042 (1,599,488) (10,948,068)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (514,658) (1,578,515) (1,880,846) (464,733) (5,017,854)
Trademark costs.................................... -- (112,222) (3,024) -- --
Acquisitions, net of cash acquired................. -- (1,462,380) (7,698,689) (5,043,205) (328,007)
Investment in Affiliate............................ -- -- -- -- (1,487,980)
---------- ----------- ----------- ----------- ------------
Net cash used in investing activities........ (514,658) (3,153,117) (9,582,559) (5,507,938) (6,833,841)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable due to Omnicom.......... -- 2,424,969 9,564,404 7,713,039 19,231,187
Payments under capital lease obligations........... -- (122,066) (271,290) (491,078) (670,117)
Net proceeds (borrowings) under line of credit..... -- 86,273 (86,273) (86,273) 121,934
Repayments of shareholder advances................. 60,213 -- -- -- --
Deferred registration costs........................ -- -- (145,296) -- (1,297,720)
Capital (distribution) contribution................ (42,205) 6,433 9,899 -- --
Proceeds from exercise of stock options............ -- -- -- -- 387,956
---------- ----------- ----------- ----------- ------------
Net cash provided by financing activities.... 18,008 2,395,609 9,071,444 7,135,688 17,773,240
---------- ----------- ----------- ----------- ------------
EFFECT OF EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS........................................ -- -- (9,308) 11,062 (34,826)
---------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................................ 455,418 (125,520) 381,619 39,324 (43,495)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 57,841 513,259 387,739 387,739 769,358
---------- ----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 513,259 $ 387,739 $ 769,358 $ 427,063 $ 725,863
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid.................................. $ 96,722 $ 472,637 $ 315,449 $ 337,328 $ 564,917
========== =========== =========== =========== ============
Interest paid...................................... $ -- $ 2,000 $ 1,805 $ 1,805 $ 119,493
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Equipment acquired under capital leases............ $ -- $ 362,633 $ 1,443,579 $ 470,150 $ 2,064,641
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Common stock issued for acquisitions............... $ -- $ -- $ 1,091,658 $ -- $ 22,620,098
========== =========== =========== =========== ============
Warrants issued for acquisitions................... $ -- $ -- $ -- $ -- $ 5,853,091
========== =========== =========== =========== ============
Stock options issued for acquisitions.............. $ -- $ -- $ -- $ -- $ 722,191
========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
AGENCY.COM Ltd. and subsidiaries (collectively the "Company" or
"AGENCY.COM") is an international Internet professional services firm. The
Company provides clients with an integrated set of strategy, creative and
technology services that take them from concept to launch and operation of their
Internet businesses. The Company's services include: advising, consulting and
planning on the strategic implications of the Internet for a company's business;
designing creative, content, interface and information architecture elements of
Internet resources such as Web sites; programming, technical architecture
development and systems integration to implement complex information technology
systems such as electronic commerce platforms; and planning and executing online
marketing strategies that build audiences and develop brand awareness of
Internet resources. In order to serve its global clients, AGENCY.COM has
completed nine acquisitions since 1997, and currently has offices in New York;
Avon, Colorado; Chicago; Dallas; Portland, Oregon; San Francisco; Cambridge,
Massachusetts; Woodbridge, New Jersey; London; Paris; and Amsterdam.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for using the equity method. Accordingly, the Company's share of
the earnings and losses of these companies is included in consolidated net
income (loss). As of December 31, 1998 and September 30, 1999, the Company had a
12% and 30% investment in an affiliate (Note 2) which was accounted for under
the cost method and the equity method, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized for time and materials projects as services are
provided. Revenues from fixed fee contracts are recognized as services are
provided upon the achievement of specified milestones. Revenue is recognized on
partially completed milestones in proportion to the costs incurred for that
milestone and only to the extent that an irrevocable right to the revenue
exists. Costs incurred under fixed fee contracts are recognized as incurred
which generally is in the same period that revenue is recorded. Revenues are
recorded on partially completed contracts to the
F-9
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
extent that an irrevocable right to the revenue exists under each client
contract. Unbilled charges represent labor costs incurred and estimated
earnings, production and other client reimbursable costs. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are probable. Amounts billed, which are not yet earned, are classified as
deferred revenue in the accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include investments in money market funds and are stated at cost,
which approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of three to seven years. Leasehold
improvements and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
INTANGIBLE ASSETS
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of seven years on a straight-line basis.
Customer base and workforce are being amortized over a period of five years and
three years, respectively, on a straight-line basis. The Company reviews its
intangible assets to be held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of the intangible asset
exceeds the fair value of the asset. If circumstances indicate that the carrying
amount of the intangible asset that the Company expects to hold and use may not
be recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash flows
are the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or determined by calculating the present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved. Management has evaluated the amortization periods in the current
period and has determined that no impairment currently exists. These
amortization periods will be evaluated by management on a continuing basis, and
will be adjusted if the lives of the related intangible assets are impaired.
F-10
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company reviews long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset exceeds
the fair value of the asset. If other events or changes in circumstances
indicate that the carrying amount of an asset that the Company expects to hold
and use may not be recoverable, the company will estimate the future cash flows
expected to result from the use of the asset and its eventual disposition.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying values has occurred as of
December 31, 1997 and 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period in which the
tax change occurs. The Company has elected to file its income tax returns using
the cash basis of accounting. Subsequent to the year ending December 31, 1998,
the Company has elected to file its income tax returns using the accrual basis
of accounting.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
equity in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from related parties and accounts payable approximate fair value due to the
short-term maturity of these instruments. The carrying amounts of due to Omnicom
Group Inc. and capital lease obligations, including current portions,
approximate fair value.
F-11
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States and Europe. The Company performs
ongoing credit evaluations, generally does not require collateral, and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information.
For the year ended December 31, 1996, 4 clients accounted for 26%, 19%, 12%
and 12%, of total revenues.
For the year ended December 31, 1997, 4 clients accounted for 18%, 17%, 14%
and 10%, of total revenues.
For the year ended December 31, 1998, 1 client accounted for 16% of total
revenues.
For the nine months ended September 30, 1998 (unaudited), 1 client accounted
for 13%, of total revenues.
For the nine months ended September 30, 1999 (unaudited), 1 client accounted
for 13% of total revenues.
As of December 31, 1997, 2 clients accounted for 22% and 12%, of total
accounts receivable and unbilled charges.
As of December 31, 1998, 1 client accounted for 31% of total accounts
receivable and unbilled charges.
As of September 30, 1999 (unaudited), 2 clients accounted for 14% and 12% of
total accounts receivable and unbilled charges.
NET INCOME (LOSS) PER COMMON SHARE
The Company computes net income (loss) per common share in accordance with
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98
("SAB No. 98"). Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted net
income (loss) per common share ("Diluted EPS") is computed by dividing net
income (loss) by the weighted average number of common shares and
F-12
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dilutive common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statements of operations.
A reconciliation between the numerator and denominator of Basic EPS and
Diluted EPS is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
WEIGHTED NET INCOME PER
NET INCOME AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $1,502,390 4,750,313 $0.32
Stock options.................................... -- 46,630 (0.01)
---------- --------- -----
Diluted EPS........................................ $1,502,390 4,796,943 $0.31
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
WEIGHTED NET INCOME PER
NET INCOME AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $1,182,146 16,200,000 $0.07
Stock options.................................... -- 97,345 --
---------- ---------- -----
Diluted EPS........................................ $1,182,146 16,297,345 $0.07
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
WEIGHTED NET (LOSS) PER
NET (LOSS) AVERAGE SHARES COMMON SHARE
----------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net (loss) attributable to common stock......... $(2,480,980) 16,854,499 $(0.15)
Stock options................................... -- -- --
----------- ---------- ------
Diluted EPS....................................... $(2,480,980) 16,854,499 $(0.15)
=========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
--------------------------------------------
WEIGHTED NET (LOSS) PER
NET (LOSS) AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $(942,314) 16,586,538 $(0.06)
Stock options.................................... -- -- --
--------- ------------- ------
Diluted EPS........................................ $(942,314) 16,586,538 $(0.06)
========= ============= ======
</TABLE>
F-13
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
---------------------------------------------
WEIGHTED NET (LOSS) PER
NET (LOSS) AVERAGE SHARES COMMON SHARE
----------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net (loss) attributable to common stock......... $(6,783,397) 23,186,818 $(0.29)
Stock options................................... -- -- --
----------- ---------- ------
Diluted EPS....................................... $(6,783,397) 23,186,818 $(0.29)
=========== ========== ======
</TABLE>
Diluted EPS for the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited), respectively, does not include the
impact of stock options then outstanding, as the effect of their inclusion would
be antidilutive.
STOCK-BASED COMPENSATION
In 1998, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB
No. 25") while providing the necessary pro forma disclosures as if the fair
value method had been applied (Note 8).
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)............. $1,502,390 $1,182,146 $(2,480,980) $(942,314) $(6,783,397)
Foreign currency translation
adjustment.................. -- -- (9,308) (6,981) (34,826)
---------- ---------- ----------- --------- -----------
Comprehensive income
(loss).................... $1,502,390 $1,182,146 $(2,490,288) $(949,295) $(6,818,223)
========== ========== =========== ========= ===========
</TABLE>
PROPOSED PUBLIC OFFERING
In connection with its contemplated initial public offering of Common Stock,
the Company has incurred approximately $145,000 and $1,298,000, respectively, in
registration related costs for the year ended December 31, 1998 and the nine
months ended September 30, 1999 (unaudited). These costs are being deferred
until the consummation of the offering, at which time they will be
F-14
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charged against additional paid-in capital. If the offering is not consummated,
the deferred registration costs will be expensed. These amounts are included in
other assets in the accompanying consolidated balance sheets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information
(Note 9).
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
September 30, 1999 for the nine months ended September 30, 1998 and 1999, have
been prepared in accordance with generally accepted accounting principles for
interim financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary,
F-15
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consisting of normal recurring adjustments, for a fair presentation of such data
on a basis consistent with that of the audited data presented herein. The
consolidated results for interim periods are not necessarily indicative of the
results expected for a full year.
2. ACQUISITIONS AND INVESTMENTS
SPIRAL MEDIA INC.
In July 1997, the Company purchased 51% of the outstanding shares of Spiral
Media Inc. ("Spiral Media"). The Company purchased the remaining portion of
outstanding shares in July 1998. The total consideration for all of the stock
acquired was $6,165,880. This consideration was comprised of a cash payment of
$5,501,766, relinquishment of debt due from Spiral Media stockholders totaling
$128,209 and the issuance of 480,626 shares of the Company's common stock valued
at $1.12 per share, which in management's opinion was the fair market value of
the common stock at the date of issuance. This acquisition has been accounted
for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
respective acquisition dates. As a result of this acquisition, the Company has
recorded goodwill of approximately $6,111,199, which is the cost in excess of
net assets acquired and is being amortized over a period of seven years.
ONLINE MAGIC LIMITED
In October 1997, the Company purchased 42.5% of the outstanding shares of
Online Magic Limited ("Online Magic"), a United Kingdom company, which
represented the controlling interest in Online Magic. The outstanding shares
acquired were deemed to be a controlling interest as after the investment, the
Company had the ability to direct or cause the direction of the management and
operating and financing policies of Online Magic. In May 1998 and July 1998, the
Company acquired all of the remaining outstanding shares of Online Magic through
two separate purchase agreements. The total consideration paid was approximately
$2,196,905. The consideration is comprised of a cash payment of $1,641,152 and
the issuance of 498,434 shares of the Company's common stock value at $1.12 per
share, which in management's opinion was the fair market value of the common
stock at the date of issuance. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the respective acquisition
dates. As a result of this acquisition, the Company has recorded goodwill of
approximately $1,872,456, which is the cost in excess of net assets acquired and
is being amortized over a period of seven years. Furthermore, the purchase
agreements call for certain earn-out payments to former shareholders of Online
Magic based upon the achievement of targeted operating performance of Online
Magic through December 1999. These payments are payable in the form of 246,750
shares of the Company's common stock which are currently held in escrow and are
considered issued but not outstanding (Note 8). No earn-out amounts have been
F-16
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
earned as of December 31, 1998. Future payments, if any, will be recorded as
additional purchase price and, as such, an adjustment to goodwill.
KETCHUM ADVERTISING INC.
In April 1998, the Company acquired certain assets and assumed certain
liabilities from Ketchum Advertising Inc. ("Ketchum"). Ketchum was a subsidiary
of the Omnicom Group Inc. ("Omnicom"), which is a significant shareholder of the
Company's common stock both directly and through a wholly owned subsidiary. In
consideration for the net assets acquired, the Company paid approximately
$643,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date. As a result of this
acquisition, the Company has recorded goodwill of approximately $643,000, which
is being amortized over a period of seven years.
PRIMARY GROUP INC.
In August 1998, the Company acquired certain assets from Primary Group Inc.
("Primary Group") and assumed certain liabilities. In consideration for the net
assets acquired, the Company paid approximately $53,220 in cash. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this acquisition,
the Company has recorded goodwill of approximately $50,845, which is being
amortized over a period of seven years.
The acquisitions described were valued based on management's estimate of the
fair value of the net assets acquired at the date of acquisition. Costs in
excess of net assets acquired were recorded as intangible assets. Presented
below is the allocation of the purchase price among assets acquired, liabilities
assumed and intangible assets.
<TABLE>
<CAPTION>
SPIRAL MEDIA ONLINE MAGIC KETCHUM PRIMARY GROUP
------------ ------------ --------- -------------
<S> <C> <C> <C> <C>
Accounts receivable....................... $ 402,412 $ 1,079,719 $ -- $ --
Fixed assets.............................. 201,973 345,299 -- 2,375
Other assets.............................. 131,627 797,202 -- --
Intangible assets......................... 6,111,199 1,872,456 643,000 50,845
Current liabilities....................... (615,277) (1,313,073) -- --
Long-term liabilities..................... (66,054) (584,698) -- --
---------- ----------- -------- -------
Total purchase price.................... $6,165,880 $ 2,196,905 $643,000 $53,220
========== =========== ======== =======
</TABLE>
THE EDGE CONSULTANTS PTE. LTD.
In December 1998, the Company entered into an agreement to acquire 60% of
the outstanding shares of The Edge Consultants PTE. LTD. ("Edge") in a step
transaction. In accordance with the
F-17
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
agreement, in December 1998, the Company purchased 12% of the outstanding shares
of Edge for $1,572,203 in cash. In July 1999, the Company purchased an
additional 18% under the agreement for a cash payment of approximately
$1,500,000 and will account for this investment under the equity method of
accounting in future periods. Prior to the additional 18% investment, the
Company accounted for this investment under the cost method of accounting. The
Company may purchase an additional 30% for an amount that is contingent upon the
achievement of targeted operating performance goals by Edge.
INTERACTIVE SOLUTIONS INCORPORATED AND QUADRIS CONSULTING, INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Interactive Solutions Incorporated ("ISI") from the ISI
shareholders (including Communicade Inc., a wholly owned subsidiary of Omnicom)
in exchange for an aggregate of 4,171,846 shares of the Company's common stock
and a warrant to purchase 3,071,248 shares of the Company's common stock at a
purchase price of $0.005 per share. Such warrant was valued at $0.80 per share
and the fair value of the Company's common stock on the date of purchase was
$1.23 per share, each as determined by an independent third-party valuation.
Immediately, prior to the acquisition of ISI, ISI acquired all of the issued
and outstanding shares of capital stock of Quadris Consulting, Inc. ("Quadris")
from the Quadris shareholders in exchange for an aggregate of 1,869,528 shares
of ISI common stock. Prior to both acquisitions, Communicade sold 485,999.64
shares of ISI common stock to certain of the Company's shareholders for an
aggregate price of $412,492.
Outstanding stock options under the stock option plans of Quadris and ISI
were converted into approximately 1,406,000 options to purchase the Company's
common stock. Included in these options were 557,978, 185,988 and 662,412
options which were converted at exercise prices of $0.41, $0.45 and $1.21,
respectively, which were lower than the fair market value of the Company's
common stock at the date of grant, which was $1.23. Accordingly, the Company has
recorded additional purchase price of approximately $623,000 for the difference
between the exercise price and the fair market value of the underlying common
shares relating to these options.
EAGLE RIVER INTERACTIVE INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Eagle River Interactive Inc. ("ERI") from Omnicom, ERI's
sole shareholder, in exchange for an aggregate of 3,659,548 shares of the
Company's common stock and a warrant to purchase 4,328,752 shares of the
Company's common stock at a purchase price of $0.005 per share. Such warrant was
valued at $0.80 per share and the fair value of the Company's common stock on
the date of purchase was $1.23 per share, each as determined by an independent
third-party valuation. In addition, at this time, Omnicom caused Communicade to
transfer 13,322 shares of the Company's common stock to certain participants of
the ERI Key Executive Incentive Program in settlement of all obligations due
under the program. 80,690 shares were issued to an executive of
F-18
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
ERI in connection with his employment agreement (Note 10). These shares have
been valued at $1.23 per share, the then fair market value of the Company's
common stock for a total value of approximately $99,000. Provided that the
employee remains in continuous service with the Company, one-third of the
restricted shares will automatically vest on each of the first three
anniversaries of the date of grant. If the employees retires or his employment
is involuntarily terminated prior to any of the first three anniversaries, the
pro rata portion of the number of restricted shares that would have vested as of
such termination date will vest. The Board of Directors has sole discretion to
increase the number of shares that will vest on retirement or involuntary
termination. The Company will amortize the fair value of the shares granted over
the three-year vesting period as compensation expense.
DIGITAL VISION COMMUNICATIONS INC.
In May 1999, the Company purchased all of the issued and outstanding shares
of capital stock of Digital Vision Communications Inc. ("Digital Vision") for
$1,100,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date.
TWINSPARK INTERACTIVE PEOPLE B.V.
In August 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Twinspark Interactive People B.V. ("Twinspark") for
$700,000 in cash and 1,057,226 shares of the Company's common stock valued at
$11.00 per share, of which 1,047,226 shares will be given to the shareholders of
Twinspark and 10,000 to former employees of Twinspark, for a total aggregate
purchase price of approximately $11,629,000. The Company also granted 75,000
stock options to former employees of Twinspark at an exercise price equal to the
then fair market value of the Company's common stock. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date. Furthermore, the purchase agreement calls for certain earn-out
payments to the former shareholders of Twinspark based upon the achievement of
certain targeted operating results of Twinspark through December 1999. These
payments are payable in the form of 168,066 shares of the Company's common stock
which are currently held in escrow. Future payments, if any, will be recorded as
additional purchase price and, accordingly, an adjustment to goodwill.
INTERACTIVE TRAFFIC, INC.
In October 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Interactive Traffic, Inc. ("I-traffic") for
$3,000,000 in cash, a $1,000,000 short-term note payable due at the earlier of
December 31, 1999 or thirty days following the completion of the Company's
initial public offering, 469,320 shares of the Company's common stock valued at
$11.00 per share, the assumption of options to purchase 160,680 shares of the
Company's common stock
F-19
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
at an average exercise price of $2.54 per share, and the issuance of
newly-granted options to purchase 60,000 shares of the Company's common stock at
an exercise price of $8.50 per share, which options were valued at less than the
fair market value of the Company's common stock on the date of grant, valued at
$1,509,353, for a total aggregate purchase price of $10,671,873. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair value on the acquisition date. Furthermore, the purchase
agreement calls for certain earn-out payments to the former shareholders of
I-traffic based upon the achievement of certain future targeted operating
results of I-traffic one year from the date of the closing of the transaction.
These payments are payable in cash and additional shares of the Company's common
stock and future payments, if any, will be recorded as additional purchase price
and, accordingly, an adjustment to goodwill.
VISIONIK A/S
In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation, for
$500,000 in cash and 572,000 shares of the Company's common stock valued at
$11.00 per share for a total aggregate purchase price of $6,792,000. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the nine months ended September 30,
1998 give effect to the acquisitions of Ketchum, Primary Group, ISI, ERI,
Digital Vision and Twinspark as if each of these acquisitions had occurred on
January 1, 1998. The pro forma consolidated statement of operations data for the
nine months ended September 30, 1999 give effect to the acquisition of Twinspark
as if it had occurred on January 1, 1999. All of the following unaudited pro
forma consolidated results of operations give effect to purchase accounting
adjustments. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 1998 and
January 1, 1999 and may not be indicative of future operating results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED -----------------------
DECEMBER 31, 1998 1998 1999
------------------------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro forma: Revenues...................... $ 76,130 $ 55,962 $ 74,808
Net loss...................... (21,960) (14,942) (17,521)
Basic net loss per share...... (0.82) (0.56) (0.60)
Diluted net loss per share.... (0.82) (0.56) (0.60)
</TABLE>
F-20
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS
On September 12, 1996, the controlling shareholders of the Company entered
into a shareholder's agreement (the "Shareholders Agreement") with
Communicade Inc., a wholly owned subsidiary of Omnicom. The Shareholders
Agreement provided a line of credit for working capital purposes of up to
$1,000,000 (subsequently amended to $2,500,000) at the same interest rate
charged by Omnicom to its subsidiaries under the Omnicom cash management system,
which was approximately 6.50%. Borrowings were secured by a first priority lien
on all assets. In addition, the Shareholders Agreement provided for additional
financing to the Company for "new media" acquisitions at the same interest rate
charged by Omnicom to its subsidiaries under the Omnicom cash management system.
On April 28, 1999, the Company entered into a new shareholder's agreement
(the "New Agreement") with Omnicom. The New Agreement nullified and superseded
the previous Shareholders Agreement dated September 12, 1996. The New Agreement
provides a line of credit for working capital purposes of not less than
$10,000,000 at the same interest rate charged by Omnicom to its subsidiaries
under the Omnicom cash management system, which was approximately 5.89%.
Borrowings are secured by a first priority lien on all assets. In addition, the
New Agreement provides for additional financing to the Company for "new media"
acquisitions at the same interest rate charged by Omnicom to its subsidiaries
under the Omnicom cash management system. Interest on any such loans shall be
paid quarterly on the then outstanding principal balance. Principal shall be
repaid quarterly in equal installments over a five-to-ten-year period.
At December 31, 1997 and 1998 and September 30, 1999 (unaudited), there were
approximately $1.0 million, $2.5 million and $27.8 million outstanding,
respectively, on the working capital line of credit at an interest rate of 6%.
At December 31, 1997 and 1998 and September 30, 1999 (unaudited), there were
approximately $1.4 million, $9.5 million and $39.0 million outstanding,
respectively, on the acquisition loans at an average rate of 6%. The amounts
owed as of September 30, 1999, include amounts assumed in the Eagle River and
ISI acquisitions. Related interest expense under the financing arrangements was
$0, $34,106 and $377,086, respectively, for the three years ended December 31,
1998 and approximately $309,000 and $2,019,000, respectively, for the nine
months ended September 30, 1998 and 1999 (unaudited).
In November 1999, the Company entered into a new credit facility with
Omnicom (See Note 13).
F-21
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
DUE FROM/TO RELATED PARTIES
Due from related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Urban Desires Inc........................ $272,322 $130,093 $266,871
ISI...................................... -- 11,754 --
Due from shareholders.................... 26,162 -- --
Other.................................... -- -- 29,097
-------- -------- --------
Due from related parties............. $298,484 $141,847 $295,968
======== ======== ========
</TABLE>
Certain of the primary shareholders of the Company own Urban Desires Inc.
The Company provides services at its normal rates to Urban Desires Inc. for
which the Company is reimbursed. The total amount billed to Urban Desires Inc.
was not material to the accompanying consolidated financial statements.
Due to related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Quadris.......................................... $252,680 $ --
ERI.............................................. 33,987 --
Loan payable to shareholders..................... 166,741 --
Tridion BV....................................... -- 390,000
-------- --------
Due to related parties....................... $453,408 $390,000
======== ========
</TABLE>
There were no outstanding amounts to related parties as of December 31,
1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Equipment under capital leases....... $ 362,633 $1,804,702 $ 2,807,381
Equipment............................ 936,711 801,932 1,734,262
Computer equipment................... 470,796 1,948,470 9,657,316
Furniture and fixtures............... 553,939 806,454 2,689,530
</TABLE>
F-22
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Leasehold improvements............... $ 194,021 $ 480,967 $ 2,694,318
---------- ---------- ------------
Total property and equipment..... 2,518,100 5,842,525 19,582,807
Less--Accumulated depreciation and
amortization....................... (486,092) (1,627,397) (7,928,884)
---------- ---------- ------------
Property and equipment, net...... $2,032,008 $4,215,128 $ 11,653,923
========== ========== ============
</TABLE>
Depreciation and amortization expense was $61,356, $304,491 and $1,141,305,
respectively, for the three years ended December 31, 1998 and $772,094 and
$3,149,130, respectively, for the nine months ended September 30, 1998 and
September 30, 1999 (unaudited).
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill.............................. $1,462,380 $8,677,500 $57,660,521
Customer base......................... -- -- 5,840,000
Workforce............................. -- -- 2,327,000
Trademark............................. 112,222 115,246 115,246
Less--Accumulated amortization.... (72,264) (965,029) (5,651,613)
---------- ---------- -----------
Intangible assets, net................ $1,502,338 $7,827,717 $60,291,154
========== ========== ===========
</TABLE>
Amortization expense was $0, $72,264 and $892,765, respectively, for the
three years ended December 31, 1998 and $582,855 and $4,686,584, respectively,
for the nine months ended September 30, 1998 and September 30, 1999 (unaudited).
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable...................... $1,130,815 $3,103,991 $10,253,054
Accrued expenses--other............... 467,716 1,370,289 4,564,579
Accrued professional fees............. 126,695 405,495 102,599
---------- ---------- -----------
$1,725,226 $4,879,775 $14,920,232
========== ========== ===========
</TABLE>
F-23
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES (CONTINUED)
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and September 30, 1999 (unaudited).
7. INCOME TAXES
Income (loss) before income taxes and minority interest and the provision
(benefit) for taxes on income (loss) consisted of the following:
<TABLE>
<CAPTION>
NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Income (loss) before income taxes and
minority interest:
Domestic............................... $2,890,390 $2,226,890 $(3,760,644) $(6,950,696)
International.......................... -- (160,839) 348,648 405,905
---------- ---------- ----------- -----------
$2,890,390 $2,066,051 $(3,411,996) $(6,544,791)
========== ========== =========== ===========
Provision (benefit) for taxes on income
(loss):
Current--
Federal.............................. $ 78,000 $ 257,568 $ 160,684 $ 1,184,307
State and local...................... 112,000 176,153 104,617 377,027
International........................ -- (56,294) 122,027 137,986
Deferred--
Federal.............................. 711,892 414,417 (971,405) (2,259,181)
State and local...................... 486,108 259,529 (628,498) (719,217)
International........................ -- -- -- --
Valuation Allowance.................. -- -- -- 1,517,684
---------- ---------- ----------- -----------
$1,388,000 $1,051,373 $(1,212,575) $ 238,606
========== ========== =========== ===========
</TABLE>
F-24
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Statutory federal income tax rate........ $1,011,636 $ 723,118 $(1,194,198) $(2,231,748)
State and local taxes on income, net of
federal income tax benefit............. 376,364 283,193 (340,523) (222,424)
Goodwill amortization.................... -- 25,292 286,449 1,109,998
Nondeductible expense.................... -- 19,770 30,595 69,177
Other.................................... -- -- 5,102 (4,081)
Valuation allowance...................... -- -- -- 1,517,684
---------- ---------- ----------- -----------
Effective rate........................... $1,388,000 $1,051,373 $(1,212,575) $ 238,606
========== ========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
----------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Current deferred income tax assets
(liabilities) net:
Accrual to cash adjustments........ $ (489,087) $ (182,048) $ (156,807)
Allowance for doubtful accounts and
other non-deductible accruals.... 14,939 541,494 3,893,030
Noncurrent deferred tax asset
(liabilities), net:
Accrual to cash adjustments........ (1,467,262) (546,144) (470,421)
Net operating loss................. 120,884 -- 967,463
Goodwill amortization.............. -- -- 302,266
Other.............................. (39,604) (21,700) 50,360
Valuation allowance................ -- -- (1,517,684)
----------- ---------- -----------
Total deferred income taxes,
net............................ $(1,860,130) $ (208,398) $ 3,068,207
=========== ========== ===========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book basis of assets and liabilities recorded in
F-25
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
The Company has concluded that it is probable that it will be able to
realize its deferred tax assets as of December 31, 1998, however a full
valuation allowance has been recorded as of September 30, 1999.
On September 12, 1996, pursuant to the Shareholder Agreement (Note 3), the
Company's S Corporation status was terminated and the Company began operations
as a C Corporation. Accordingly, the Company became subject to federal and state
income taxes and the retained deficit of the Company was transferred to
additional paid-in capital.
If the Company operated as a C corporation since its inception, the pro
forma income tax provision would have been $1,405,577 (unaudited), without
contemplating any applicable tax laws related to the utilization of net
operating losses. No pro forma adjustments are required for the years ended
December 31, 1997 and 1998 as the Company was operating as a C Corporation
during those years.
Management believes that amortization relating to certain goodwill generated
from international acquisitions is deductible under the Internal Revenue Code.
The Company may be restricted to the use of its net operating losses as a result
of the aforementioned acquisitions (Note 3).
8. STOCKHOLDERS' EQUITY
COMMON SHARES
In August 1999, the certificate of incorporation was amended to increase the
number of authorized shares of common stock, $0.001 par value, to 200,000,000.
STOCK SPLITS
On October 31, 1996, the Board of Directors authorized a 1.8 for 1 stock
split of the Company's common stock. On November 21, 1997, the Board of
Directors authorized a 5 for 1 stock split of the Company's common stock. On
July 15, 1998, the Board of Directors authorized a 1.8 for 1 stock split of the
Company's common stock. In June 1999, the Board of Directors authorized a 2 for
1 stock split of the Company's common stock. All share and per-share amounts in
the accompanying consolidated financial statements and footnotes have been
restated to give effect to these stock splits.
STOCK OPTIONS
On November 1, 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 1,800,000 shares of the
Company's common stock to be acquired by the holders of said awards, to key
employees.
F-26
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
On November 24, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 2,078,730 shares of the
Company's common stock to be acquired by the holders of said awards, to key
employees.
The awards under both plans take the form of nonqualified stock options and
expire five years from the date of grant. In the opinion of management, the
exercise price of options granted is equal to the fair market value of the
Company's common stock on the date of grant.
Options granted under the 1996 Plan and 1997 Plan vest upon the happening of
either an initial public offering of the common stock of the Company or a change
in control of the Company. Additionally, the 1997 Plan offers a discretionary
five-year vesting schedule in the event that either of the preceding events does
not occur, based upon the approval of the Board of Directors.
A summary of stock option activity for the 1996 Plan and 1997 Plan is as
follows:
<TABLE>
<CAPTION>
1996 PLAN 1997 PLAN
------------------------- -------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- ----- ------- -----
Balance at December 31, 1996................................ 154,800 $0.86 -- $ --
Granted................................................... 164,088 1.05 332,730 1.12
Exercised................................................. -- -- -- --
Canceled.................................................. (9,000) 0.86 -- --
-------- -------
Balance at December 31, 1997................................ 309,888 0.96 332,730 1.12
Granted................................................... 96,030 1.12 148,560 1.12
Exercised................................................. -- -- -- --
Canceled.................................................. (75,960) 0.99 (20,000) 1.12
-------- -------
Balance at December 31, 1998................................ 329,958 $1.00 461,290 $1.12
======== =======
</TABLE>
No options were exercisable at December 31, 1998. In the aggregate, at
December 31, 1998, there were 791,248 options outstanding. Of this amount,
149,688 were outstanding with an average remaining contractual life of
2.98 years, and a weighted average exercise price of $0.86, and 641,560 were
outstanding with an average remaining contractual life of 4.14 years, and a
weighted average exercise price of $1.12. At December 31, 1998, there were
1,470,042 options and 1,617,440 options available for future grant under the
1996 Plan and 1997 Plan, respectively.
The 1999 Stock Option/Stock Issuance Plan is the successor program to the
1996 Plan and 1997 Plan. The 1999 Plan was adopted in February 1999 and became
effective as of that date. All outstanding options under the 1996 Plan and 1997
Plan will be transferred to the 1999 Plan upon the closing of the Company's
initial public offering, and no further option grants will be made under the
predecessor plans. The transferred options will continue to be governed by their
existing terms.
F-27
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Except as otherwise noted, the transferred options have substantially the same
terms as those for grants to be made under the discretionary option grant
program of the 1999 Plan.
9,601,178 shares of our common stock have been authorized for issuance under
the 1999 Plan. This share reserve consists of the number of shares carried over
from the 1996 and 1997 Plans plus an additional increase of 8,748,266 shares.
The share reserve will automatically increase on the first trading day in
January each year, by an amount equal to 3% of the total number of shares of
common stock outstanding on the last trading day of the prior year, but in no
event will this annual increase exceed 1,500,000 shares. In addition, no
participant in the 1999 Plan may be granted stock options, separately
exercisable stock appreciation rights or direct stock issuances for more than
1,100,000 shares of common stock in total in any calendar year. Of the 9,601,178
shares 5,722,698 remained available for issuance at the close of business on
September 30, 1999.
The Company accounts for the stock option plans in accordance with APB
No. 25, under which no compensation has been recognized for stock options
granted. Had compensation for the stock option plans been determined consistent
with the provisions of SFAS No. 123, the effect on the Company's net income
(loss) and basic and diluted net income (loss) per common share would have been
the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
<S> <C> <C>
1997 1998
---------- ------------
Net income (loss), as reported................... $1,182,146 $ (2,480,980)
Net income (loss), pro forma..................... 1,182,146 (2,480,980)
Basic income (loss) per share, as reported....... 0.07 (0.15)
Basic income (loss) per share, pro forma......... 0.07 (0.15)
Diluted income (loss) per share, as reported..... 0.07 (0.15)
Diluted income (loss) per share, pro forma....... 0.07 (0.15)
</TABLE>
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
<S> <C> <C>
1997 1998
------- -------
Expected option lives..................................... 5 years 5 years
Risk-free interest rates.................................. 5.88% 5.04%
Expected volatility....................................... 99.89% 99.89%
Dividend yield............................................ 0% 0%
Fair value................................................ $0.85 $0.86
</TABLE>
F-28
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
On February 22, 1999, the Company's Board of Directors adopted and the
Company's shareholders approved the 1999 Stock Option/Stock Issuance Plan (the
"1999 Plan"). The 1999 Plan is divided into the following three separate equity
programs:
a) Discretionary Option Grant Program-under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase
shares of common stock.
b) Stock Issuance Program-under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of common stock
directly, either through the immediate purchase of such shares or as a
bonus for services rendered.
c) Automatic Option Grant Program-under which eligible non-employee Board
members shall automatically receive options at periodic intervals to
purchase shares of common stock.
The maximum number of shares of common stock initially reserved for issuance
over the term of the 1999 Plan is 9,601,178 shares. The number of shares
available for issuance automatically increase on the first trading day of each
calendar year during the term of the 1999 Plan, beginning with the 2000 calendar
year (by an amount equal to 3% of the shares outstanding on the last trading day
of the preceding calendar year, but in no event shall any such annual increase
exceed 1,500,000 shares). No option shall have a term in excess of 10 years
measured from the option grant date.
In April 1999, the Company issued options to purchase 50,000 shares of
common stock at an exercise price of $1.225 per share, which was then the fair
market value of the Company's common stock, to an individual who agreed to serve
as a director of the Company upon the closing of the Company's initial public
offering. The options will only become exercisable at the time the director-
nominee is elected to serve as a director of the Company.
9. GEOGRAPHIC REPORTING
The Company began operations outside of the United States during 1997. A
summary of the Company's operations by geographical area as of December 31, 1997
and 1998 and for the years then ended is presented below:
As of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues............................ $12,151,636 $ 823,939 $12,975,575
Income (loss) from operations....... 2,213,374 (157,247) 2,056,127
Net income (loss)................... 1,253,075 (70,929) 1,182,146
Long--lived assets.................. 3,337,743 196,603 3,534,346
Current assets...................... 6,100,383 988,835 7,089,218
Other assets........................ 107,261 1,368 108,629
</TABLE>
F-29
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC REPORTING (CONTINUED)
As of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues............................ $18,936,199 $ 7,515,992 $26,452,191
Income (loss) from operations....... (3,158,477) 106,242 (3,052,235)
Net income (loss)................... (2,325,823) (155,157) (2,480,980)
Long--lived assets.................. 11,645,479 397,366 12,042,845
Current assets...................... 6,460,598 1,647,784 8,108,382
Other assets........................ 1,945,464 4,571 1,950,035
</TABLE>
As of and for the nine months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Revenues. $43,276,409 $13,222,880 $56,499,289
<S> <C> <C> <C>
Income (loss) from operations....... (5,548,136) 861,552 (4,686,584)
Net income (loss)................... (7,595,299) 811,902 (6,783,397)
Long--lived assets.................. 70,022,861 1,482,216 71,505,077
Current assets...................... 31,512,175 6,044,590 37,556,765
Other assets........................ 4,426,054 209,703 4,635,757
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
As of December 31, 1998 and September 30, 1999 (unaudited), respectively,
the Company was committed under operating leases, principally for office space
and equipment, expiring through 2003. Subsequent to December 31, 1998, the
Company entered into a lease agreement for new office space for its headquarters
in New York and its Boston location. Certain leases are subject to rent reviews
and require payment of expenses under immaterial escalation clauses. Rent
expense was $71,000, $232,913 and $671,759, respectively, for the three years
ended December 31, 1998 and $503,819 and $2,134,000, respectively, for the nine
months ended September 30, 1998 and 1999 (unaudited). Future minimum base rents
under terms of noncancellable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 846,653
2000...................................................... 4,189,138
2001...................................................... 4,090,397
2002...................................................... 4,084,131
2003...................................................... 4,295,534
Thereafter................................................ 29,896,623
</TABLE>
F-30
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
In April 1999 the Company entered into employment agreements with Chan Suh,
Chief Executive Officer, and Kyle Shannon, Chief Creative Officer. Mr. Suh and
Mr. Shannon's agreements obligate the Company to pay an annual salary of
$155,000 and $150,000, respectively, through March 31, 2004. Under the
provisions of the agreements, if early termination occurs any options that would
have vested during this employment period are accelerated to vest and become
exercisable prior to the date of termination. The Company also has an employment
agreement with its President, North America, who was formerly with ERI, whereby
the executive receives an annual salary of $150,000, entitled to receive an
annual bonus of $100,000 and is eligible for an annual discretionary bonus of up
to $250,000. The Company also made a restricted stock grant to this executive of
80,690 shares of common stock in connection with the acquisition of ERI. These
shares have been valued at $1.23 per share, the then fair market value of the
Company's common stock for a total value of approximately $99,000. Provided that
the employee remains in continuous service with the Company, one-third of the
restricted shares will automatically vest on each of the first three
anniversaries of the date of grant. If the employee retires or his employment is
involuntarily terminated prior to any of the first three anniversaries, the pro
rata portion of the number of restricted shares that would have vested as of
such termination date will vest. The Board of Directors has sole discretion to
increase the number of shares that will vest on retirement or involuntary
termination. The Company will amortize the fair value of the shares granted over
the three-year vesting period as compensation expense. In addition during April
1999, the Company entered into employment agreements under similar terms with
five other key members of management that expire on various dates through March
2004.
Future minimum compensation for all of these agreements is as follows.
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 741,666
2000...................................................... 1,375,000
2001...................................................... 1,375,000
2002...................................................... 789,166
2003...................................................... 305,000
Thereafter................................................ 76,250
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
F-31
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL LEASE OBLIGATIONS
At December 31, 1997 and 1998, the Company was committed under capital
leases, principally for computer equipment and office equipment, expiring
through 2003. The assets and liabilities under the capital leases are recorded
at the lower of the present value of minimum lease payments or the fair market
value of the assets. The assets are depreciated over their estimated useful
lives. The average interest rate on the capital leases is 5.6%.
Future minimum payments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 613,021
2000...................................................... 529,532
2001...................................................... 317,363
2002...................................................... 21,395
2003...................................................... 15,825
-----------
Total minimum lease payments.......................... 1,497,136
Less--Amounts representing interest....................... 84,279
Less--Current portion..................................... 564,536
-----------
Present value of net minimum lease payments........... $ 848,321
===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in the U.S. The Plan was effective from January 1, 1996 and is
qualified under Section 401(k) of the Internal Revenue Code. Employees may begin
participation on monthly enrollment dates provided that they have reached
21 years of age and 6 months of service. The Company may make matching and/or
profit sharing contributions to the plan at its discretion. Contribution expense
was $16,095 and $45,320, respectively, for the years ended December 31, 1997 and
1998 and $0 and $417,833, respectively, for each of the nine months ended
September 30, 1998 and 1999 (unaudited).
13. SUBSEQUENT EVENTS
The Company is pursuing an initial public offering of its securities. The
offering contemplates the sale of shares of common stock at an offering price of
$11.00 per share, before underwriting discounts and commissions and offering
expenses. The Company plans to use 35% of the net proceeds of this offering
subject to a maximum of $25 million to repay amounts borrowed under the term
loan portion of the new Omnicom credit facility (see below).
In November 1999, the Company entered into a new $85 million credit facility
with Omnicom Finance, a wholly owned subsidiary of Omnicom, which replaced the
Company's revolving credit lines and consolidates all of the Company's
previously outstanding indebtedness due to Omnicom. The credit facility provides
for a $25 million term loan, a $54 million revolving credit line and a
F-32
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
$6,000,000 lease credit support facility. Under the term sheet, the Company must
use 35% of the net proceeds from its initial public offering, up to a maximum of
$25 million, to repay amounts borrowed under the term loan. The remaining
amounts will be due in full on September 30, 2001. This credit facility bears
interest at the rate of Omnicom's commercial paper rate plus 1.25% and
terminates in September 2001.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive:
We have audited the accompanying combined statements of operations, divisional
equity (deficit) and cash flows of Eagle River Interactive (formerly a division
of Mastering, Inc., the "Predecessor" see Note 1) for the year ended
December 31, 1996 and the period from January 1, 1997 through September 26,
1997. These financial statements are the responsibility of the management of
Eagle River Interactive Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Eagle River
Interactive (formerly a division of Mastering, Inc.) for the year ended
December 31, 1996 and the period from January 1, 1997 through September 26, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 19, 1999
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive Inc.:
We have audited the accompanying consolidated balance sheets of Eagle River
Interactive Inc. (a Delaware corporation) (the "Successor Company" see Note 1),
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from inception
(September 26, 1997) to December 31, 1997 and the year ended December 31, 1998.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eagle River Interactive Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception (September 26, 1997) to December 31, 1997
and the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 19, 1999
F-35
<PAGE>
EAGLE RIVER INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 632,000 $ 711,000 $ 683,000
Accounts receivable, net of allowance for doubtful
accounts of $184,000, $2,784,000 and $2,784,000
(unaudited), respectively............................... 3,600,000 4,525,000 521,000
Unbilled charges.......................................... 1,344,000 139,000 2,912,000
Prepaid expenses and other current assets................. 975,000 1,000 251,000
Due from affiliates....................................... -- 34,000 670,000
----------- ----------- -----------
Total current assets.................................. 6,551,000 5,410,000 5,037,000
Property and Equipment, net of accumulated depreciation and
amortization of $1,572,000, $2,888,000 and $3,280,000
(unaudited), respectively................................. 3,384,000 2,406,000 2,132,000
Goodwill, net of accumulated amortization of $1,076,000,
$5,398,000 and $6,479,000 (unaudited), respectively....... 11,889,000 7,567,000 6,486,000
Other Assets................................................ 64,000 52,000 43,000
----------- ----------- -----------
Total assets.......................................... $21,888,000 $15,435,000 $13,698,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses..................... $ 4,966,000 $ 7,300,000 $ 4,139,000
Line of credit due to Omnicom............................. 3,128,000 2,160,000 5,162,000
Deferred revenue.......................................... 1,012,000 429,000 115,000
Current portion of capital lease obligations.............. 352,000 150,000 150,000
Management fee due to Omnicom Finance Inc................. -- 182,000 182,000
Due to affiliates......................................... -- 111,000 710,000
Other current liabilities................................. 208,000 259,000 414,000
----------- ----------- -----------
Total current liabilities............................. 9,666,000 10,591,000 10,872,000
Long-term Liabilities:
Due to Omnicom Finance Inc................................ 15,968,000 17,063,000 17,407,000
Capital lease obligations................................. 103,000 -- --
Other long-term liabilities............................... 81,000 -- --
----------- ----------- -----------
Total liabilities..................................... 25,818,000 27,654,000 28,279,000
----------- ----------- -----------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, no par value, 1,500 shares authorized, 100
shares issued and outstanding, respectively............. -- -- --
Accumulated deficit....................................... (3,941,000) (12,194,000) (14,524,000)
Cumulative foreign currency translation................... 11,000 (25,000) (57,000)
----------- ----------- -----------
Total shareholders' deficit........................... (3,930,000) (12,219,000) (14,581,000)
----------- ----------- -----------
Total liabilities and shareholders' deficit........... $21,888,000 $15,435,000 $13,698,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-36
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------- ------------------------------------------------------------
PERIOD
PERIOD FROM FROM INCEPTION
JANUARY 1, (SEPTEMBER 26,
1997 1997) THREE MONTHS ENDED
YEAR ENDED THROUGH THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
-------------- -------------- --------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $15,439,000 $ 12,927,000 $ 4,984,000 $23,442,000 $ 5,063,000 $ 5,072,000
Direct salaries and
costs................. 14,327,000 10,252,000 3,347,000 11,782,000 2,742,000 2,885,000
----------- ------------ ----------- ----------- ----------- -----------
Gross profit........ 1,112,000 2,675,000 1,637,000 11,660,000 2,321,000 2,187,000
General and
administrative........ 2,957,000 6,649,000 3,755,000 12,022,000 2,275,000 2,452,000
Sales and marketing..... 2,987,000 4,631,000 427,000 1,958,000 355,000 602,000
Amortization of
goodwill.............. -- -- 1,076,000 4,322,000 1,081,000 1,081,000
----------- ------------ ----------- ----------- ----------- -----------
Loss from
operations........ (4,832,000) (8,605,000) (3,621,000) (6,642,000) (1,390,000) (1,948,000)
Other expense, net...... 500,000 1,100,000 5,000 10,000 -- --
Interest expense net.... -- -- 315,000 1,601,000 368,000 382,000
----------- ------------ ----------- ----------- ----------- -----------
Loss before income
taxes............. (5,332,000) (9,705,000) (3,941,000) (8,253,000) (1,758,000) (2,330,000)
Benefit for income
taxes................. -- -- -- -- -- --
----------- ------------ ----------- ----------- ----------- -----------
Net loss............ ($5,332,000) ($ 9,705,000) ($3,941,000) ($8,253,000) ($1,758,000) ($2,330,000)
=========== ============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements.
F-37
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996--
PREDECESSOR
COMPANY
------------
<S> <C>
Divisional Deficit, December 31, 1995....................... ($ 1,853,000)
Net loss for the period................................... (5,332,000)
Advances from Parent...................................... 13,664,000
------------
Divisional Equity, December 31, 1996........................ 6,479,000
Net loss for the period................................... (9,705,000)
Advances from Parent...................................... 5,140,000
------------
Divisional Equity, September 26, 1997....................... $ 1,914,000
============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION (SEPTEMBER 26, 1997)
THROUGH DECEMBER 31, 1998--SUCCESSOR COMPANY
-------------------------------------------------------------------------
COMMON STOCK CUMULATIVE TOTAL
------------------- ACCUMULATED FOREIGN CURRENCY STOCKHOLDERS'
SHARES AMOUNT DEFICIT TRANSLATION DEFICIT
-------- -------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 26,
1997.................. -- $ -- $ -- $ -- $ --
Common stock issued in
connection with
acquisition........... 100 -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- 11,000 11,000
Net loss.............. -- -- (3,941,000) -- (3,941,000)
--- ---- ------------ -------- ------------
Balance, December 31,
1997.................. 100 -- (3,941,000) 11,000 (3,930,000)
Foreign currency
translation
adjustment............ -- -- -- (36,000) (36,000)
Net loss.............. -- -- (8,253,000) -- (8,253,000)
--- ---- ------------ -------- ------------
Balance, December 31,
1998.................. 100 -- (12,194,000) (25,000) (12,219,000)
Foreign currency
translation
adjustment............ -- -- -- (32,000) (32,000)
Net loss
(unaudited)......... -- -- (2,330,000) -- (2,330,000)
--- ---- ------------ -------- ------------
Balance, March 31, 1999
(unaudited)........... 100 $ -- ($14,524,000) ($57,000) ($14,581,000)
=== ==== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements.
F-38
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------- ----------------------------------------------------------
PERIOD FROM
PERIOD FROM INCEPTION
JANUARY 1, (SEPTEMBER 26,
1997 1997) THREE MONTHS ENDED
YEAR ENDED THROUGH THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
------------ ------------- --------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ ($5,332,000) ($ 9,705,000) ($3,941,000) ($8,253,000) ($1,758,000) ($2,330,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Impairment of long-lived
assets........................ -- -- -- -- --
Loss on disposal of fixed
assets........................ -- -- 199,000 543,000 --
Write-off of software........... -- -- -- -- --
Write-off of prepaid expenses
and other current assets...... -- 344,000 -- -- -- --
Allowance for doubtful
accounts...................... -- 980,000 44,000 2,600,000 --
Amortization of goodwill........ -- -- 1,076,000 4,322,000 1,081,000 1,081,000
Depreciation and amortization... 1,096,000 1,086,000 234,000 1,686,000 391,000 393,000
Change in assets and
liabilities:
Increase (decrease) in
deferred revenue............ (60,000) 168,000 531,000 (583,000) 820,000 (314,000)
(Increase) decrease in
accounts receivable......... (2,444,000) 278,000 (846,000) (3,525,000) (1,283,000) 4,003,000
Increase (decrease) due
to/from affiliates.......... -- -- -- 77,000 -- (38,000)
(Increase) decrease in
unbilled charges............ (2,123,000) 219,000 330,000 1,205,000 (772,000) (2,774,000)
(Increase) decrease in prepaid
expenses and other current
assets...................... (143,000) 239,000 (814,000) 986,000 304,000 (238,000)
Increase (decrease) in other
current liabilities......... 58,000 (320,000) 77,000 233,000 82,000 155,000
Increase (decrease) in other
long-term liabilities....... -- -- (18,000) (81,000) (81,000) --
Increase (decrease) in
accounts payable and accrued
expenses.................... (599,000) 2,428,000 700,000 2,334,000 1,314,000 (3,161,000)
----------- ------------ ----------- ----------- ----------- -----------
Net cash (used in) provided
by operating activities... (9,547,000) (4,283,000) (2,428,000) 1,544,000 98,000 (3,223,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................ (3,140,000) (677,000) (520,000) (1,251,000) (265,000) (119,000)
Acquisition of subsidiary........... (349,000) (26,000) -- -- -- --
Acquisition of software............. (241,000) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- -----------
Net cash (used in) in
investing activities...... (3,730,000) (703,000) (520,000) (1,251,000) (265,000) (119,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease
obligations....................... (117,000) (154,000) (34,000) (305,000) (142,000) --
Payments under note payable......... (270,000) -- -- -- -- --
Net change in due to/from
corporate......................... 13,664,000 5,140,000 -- -- -- --
Proceeds from issuance of long-term
debt and line of credit........... -- -- 3,596,000 19,451,000 3,033,000 8,005,000
Repayment of long-term debt and line
of credit......................... -- -- -- (19,324,000) (2,000,000) (4,660,000)
----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing
activities................ 13,277,000 4,986,000 3,562,000 (178,000) 891,000 3,345,000
----------- ------------ ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH...... -- -- 11,000 (36,000) (34,000) (31,000)
----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
cash...................... -- -- 625,000 79,000 690,000 (28,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................... -- -- 7,000 632,000 632,000 711,000
----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................. $ -- $ -- $ 632,000 $ 711,000 $ 1,322,000 $ 683,000
=========== ============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING ACTIVITIES:
Equipment acquired under capital
leases............................ $ 452,000 -- -- -- -- --
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements
F-39
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Eagle River Interactive ("ERI") refers to the interactive marketing
solutions division of Eagle River Interactive, Inc., subsequently renamed
Mastering, Inc. ("Parent"). During 1996, the Parent completed a merger with
Graphic Media, Inc. ("GM"), which was accounted for as a pooling of interests.
In addition, during 1996, the Parent acquired SRC Localisation ("SRC"), a 99%
owned subsidiary, which is located in Paris, France. Collectively ERI, GM and
SRC are referred to as the "Predecessor." All significant intercompany accounts
and transactions have been eliminated in the accompanying financial statements.
For the year ended December 31, 1996, and for the period January 1, 1997
through September 26, 1997, the accompanying financial statements were derived
from the historical accounting records maintained by the Parent and were
prepared on the accrual basis of accounting. Historically, the Parent maintained
separate records of revenues of the Predecessor and direct expenses and costs
that were clearly identifiable for the Predecessor, were recorded as expenses of
the Predecessor. For purposes of the accompanying statements of operations, the
Predecessor has made an allocation of the expenses of centralized functions such
as human resources, in-house legal and other such shared services, based upon
the estimated expected usage of such services by the Predecessor. This
allocation was based on levels of relative employees, business activity and
similar measures, of the Predecessor as compared to the other businesses of the
Parent. No allocations of corporate expenses for corporate executives, corporate
functions and similar expenses were made. The results of operations for the
periods presented are not necessarily indicative of results to be expected in
the future.
The Predecessor created, developed and deployed interactive marketing
strategies to assist a variety of companies, primarily in the United States, in
communicating effectively with their targeted audiences. The Predecessor created
these strategies by combining its knowledge of leading technologies with its
creative expertise and strategic marketing experience.
On September 26, 1997, substantially all of the assets and liabilities of
the Predecessor were sold to a newly formed wholly-owned subsidiary of the
Omnicom Group Inc. ("Omnicom"), which was subsequently renamed Eagle River
Interactive Inc., which will be referred to hereafter as the "Company" or
"Successor." The transaction was accounted for as a purchase transaction. The
purpose of the business and its operations remained the same after the
acquisition.
In April 1999, the Company was purchased by AGENCY.COM Ltd. ("AGENCY.COM")
under a merger agreement (Note 14).
All footnotes to follow for the year ended December 31, 1996, and for the
period from January 1, 1997 through September 26, 1997, will refer to the
Predecessor while the footnotes for the period from September 27, 1997 through
December 31, 1997, the year ended December 31, 1998 and the three months ended
March 31, 1998 and 1999 will refer to the Successor.
F-40
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the operations of
Eagle River Interactive and its 99% owned subsidiary, SRC. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized for time and materials projects as services are
provided. Revenues from fixed fee contracts are recognized as services are
provided upon the achievement of specified milestones. Revenue is recognized on
partially completed milestones in proportion to the costs incurred for that
milestone and only to the extent that an irrevocable right to the revenue
exists. Costs incurred under fixed fee contracts are recognized as incurred
which generally is in the same period that revenue is recorded. Deferred
revenues represent billings of production and other client reimbursable
out-of-pocket costs in excess of revenues earned. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Revenue from time and material jobs is recognized on the basis of
costs incurred during the period.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost or fair market value as determined
when acquired on September 26, 1997, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over estimated useful lives of three to five years. Leasehold improvements and
equipment held under capital leases are amortized utilizing the straight-line
method over the lesser of the estimated useful life of the asset or the
remaining term of the related lease.
GOODWILL
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired on September 26, 1997, is presently being
amortized over a period of three years on a straight-line basis. Management has
evaluated the amortization period in the current period and has determined that
no impairment currently exists. This amortization period will be evaluated by
management on a continuing basis, and will be adjusted if the lives of the
related intangible assets are impaired.
F-41
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS
The Predecessor and Successor account for long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Company reviews long-lived assets and certain identifiable intangibles to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset exceeds the fair value of the
asset. If other events or changes in circumstances indicate that the carrying
amount of an asset that the Company expects to hold and use may not be
recoverable, the Company will estimate the future cash flows expected to result
from the use of the asset and its eventual disposition. Future cash flows are
the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying value has occurred
at December 31, 1998 and March 31, 1999 (unaudited).
INCOME TAXES
As a division of Mastering, Inc., the Predecessor was not directly subject
to Federal, state and local income taxes. Provisions for deferred taxes were not
reflected on the Predecessor's books and records, but were reflected on
Mastering, Inc.'s books and records. Mastering, Inc. and its subsidiaries filed
a consolidated Federal income tax return. SRC filed a separate return in Paris.
The Predecessor's results of operations were combined with those of the
remainder of the Parent for tax reporting purposes. The Predecessor was
allocated a portion of the Parent's tax benefit or provision determined as if
the Predecessor was a separate tax paying entity. Because the Predecessor has
reported net losses since inception, no tax benefit or provision was recorded.
Beginning September 26, 1997, the Successor became fully subject to income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases for
operating profit and tax liability carryforward. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those
F-42
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's foreign subsidiary are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of shareholders' deficit in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, due to/from affiliates,
accounts payable and the line of credit approximate fair value due to the
short-term maturity of these instruments. The carrying amounts of due to
Ominicom Finance Inc. and capital lease obligations approximate fair value.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and trade accounts receivable. The Company
maintains cash with various financial institutions. The Company performs
periodic evaluations of the relative credit standing of these institutions. The
Company's clients are primarily concentrated in the United States. The Company
performs ongoing credit evaluations, generally does not require collateral, and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information.
For the year ended December 31, 1996 and the period from January 1, 1997
through September 26, 1997 there were no customers whose revenues represented a
significant amount of total revenues.
For the period from September 27, 1997 through December 31, 1997, 1 client
accounted for 24% of total revenues.
For the year ended December 31, 1998, 1 client accounted for 21% of total
revenues.
For the three months ended March 31, 1998, 1 client accounted for 25% of
total revenues.
For the three months ended March 31, 1999, 2 clients accounted for 24% and
12%, respectively, of total revenues.
As of December 31, 1997, 1 client accounted for 24% of total accounts
receivable.
As of December 31, 1998, 3 clients accounted for 21%, 20% and 17%,
respectively, of total accounts receivable.
F-43
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
As of March 31, 1999, 1 client accounted for 14% of total accounts
receivable.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------------------------------
PREDECESSOR COMPANY PERIOD FROM
---------------------------------------------- INCEPTION
YEAR ENDED PERIOD FROM (SEPTEMBER 26, 1997) YEAR ENDED
DECEMBER 31, JANUARY 1, 1997 THROUGH THROUGH DECEMBER 31, DECEMBER 31,
1996 SEPTEMBER 26, 1997 1997 1998
------------------ ------------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Net loss................ $(5,332,000) $ (9,705,000) $(3,941,000) $(8,253,000)
Foreign currency
translation
adjustment............ -- -- 11,000 (36,000)
----------- ------------ ----------- -----------
Comprehensive loss.. $(5,332,000) $ (9,705,000) $(3,930,000) $(8,289,000)
=========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net loss.................................................... $(1,758,000) $ (2,330,000)
Foreign currency translation adjustment..................... (9,000) (32,000)
----------- ------------
Comprehensive loss...................................... $(1,767,000) $ (2,362,000)
=========== ============
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information
(Note 9).
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal
F-44
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Use" ("SOP 98-1"), which provides guidance for determining whether computer
software is internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then subsequently
sold to the public. It also provides guidance on capitalization of the costs
incurred for computer software developed or obtained for internal use. SOP 98-1
is effective for fiscal years beginning after December 31, 1998. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
2. MERGER
On June 21, 1996, pursuant to an Agreement and Plan of Merger, the Parent
completed a merger of a wholly-owned subsidiary with GM, an Oregon corporation.
As a result of the merger, GM became a wholly-owned subsidiary of the Parent and
a component of the Predecessor. The business combination was accounted for by
the Parent as a pooling of interests. The Parent incurred approximately $500,000
to complete the GM merger, which has been reflected as Other Expense in the
accompanying 1996 statement of operations.
The merger was accounted for as a pooling of interests and, accordingly, the
historical financial statements for the Parent and GM for periods prior to
consummation of the merger were restated as though the companies had been
combined for all periods reported. The Predecessor's financial statements have
been correspondingly restated.
F-45
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER (CONTINUED)
The following table provides information about revenues and earnings
reported by the Predecessor prior to the merger for the six months ended
June 30, 1996:
<TABLE>
<CAPTION>
ERI GM TOTAL
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................... $6,971,000 $2,519,000 $9,490,000
---------- ---------- ----------
Net loss............................................... $ (14,000) $ (150,000) $ (164,000)
========== ========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
OMNICOM FINANCE INC.
In September 1997, Omnicom Finance Inc. ("OFI"), a wholly-owned subsidiary
of Omnicom, loaned the Company $15,500,000 to acquire the assets of the
interactive services business of Mastering, Inc., then known as Eagle River
Interactive. This amount bears interest at the rate charged by Omnicom to its
subsidiaries under Omnicom's cash management program ("the Applicable Rate"),
which was 6.85%, 6.00%, 6.63% and 5.93% as of December 31, 1997 and 1998, and
for the three months ended March 31, 1998 and 1999, respectively.
In September 1997, OFI agreed to provide a line of credit to the Company.
Amounts borrowed under the line of credit bear interest at the rate then in
effect charged by Omnicom to its subsidiaries under Omnicom's cash management
program which ranged from 6.63% to 6.85%, 6.00% to 6.70%, 6.6% to 6.65% and
5.91% to 5.95% for the years ended December 31, 1997 and 1998 and for the three
months ended March 31, 1998 and 1999, respectively. The Company had
approximately $3,128,000, $2,160,000 and $5,162,000 of the line of credit
outstanding at December 31, 1997 and 1998 and March 31, 1999 (unaudited),
respectively. All outstanding amounts are repayable on demand.
Interest expense on all amounts due OFI amounted to approximately $315,000
and $1,601,000 for the years ended December 31, 1997 and 1998, respectively, and
$368,000 and $382,000 for the three months ended March 31, 1998 and 1999,
respectively.
On May 15, 1998, Omnicom entered into a letter of credit guarantee, not to
exceed approximately $645,000 on behalf of the Company. Under the terms of the
agreement, Omnicom guarantees the payment of all sums under one of ERI's leases
for office space. The letter of credit expires on May 31, 2001.
DUE FROM/TO AFFILIATES
The Company provides and receives consulting services from/to affiliated
companies.
F-46
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
AGENCY.COM.................................................. $34,000 $ --
Online Magic Limited........................................ -- 366,000
Quadris Consulting, Inc..................................... -- 234,000
Other affiliates............................................ -- 70,000
------- --------
$34,000 $670,000
======= ========
</TABLE>
Due to affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Interactive Solutions Inc................................... $111,000 $ 51,000
AGENCY.COM.................................................. -- 659,000
-------- --------
$111,000 $710,000
======== ========
</TABLE>
There were no outstanding amounts due from/to related parties as of
December 31, 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software............................................. $ 793,000 $ 833,000 $ 870,000
Furniture and fixtures............................... 2,473,000 3,032,000 3,054,000
Leasehold improvements............................... 1,690,000 1,429,000 1,488,000
----------- ----------- -----------
Total property and equipment..................... 4,956,000 5,294,000 5,412,000
Less--Accumulated depreciation and amortization...... (1,572,000) (2,888,000) (3,280,000)
----------- ----------- -----------
Property and equipment, net...................... $ 3,384,000 $ 2,406,000 $ 2,132,000
=========== =========== ===========
</TABLE>
Depreciation and amortization expense was approximately $1,096,000 and
$1,086,000 for the year ended December 31, 1996 and for the period from
January 1, 1997 through September 26, 1997, respectively. Depreciation and
amortization expense was approximately $234,000, $1,686,000, $391,000 and
$393,000 for the period September 27, 1997 through December 31, 1997, the year
ended 1998 and for the three months ended March 31, 1998 and 1999 (unaudited),
respectively.
F-47
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................ $12,965,000 $12,965,000 $12,965,000
Less--Accumulated amortization...................... (1,076,000) (5,398,000) (6,479,000)
----------- ----------- -----------
Goodwill, net................................... $11,889,000 $ 7,567,000 $ 6,486,000
=========== =========== ===========
</TABLE>
Amortization expense was approximately $1,076,000 and $4,322,000,
respectively, for the years ended December 31, 1997 and 1998 and $1,081,000 and
$1,081,000, respectively, for the three months ended March 31, 1998 and 1999.
The Predecessor did not have any goodwill or related amortization expense
prior to September 26, 1997.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable...................................... $ 376,000 $1,474,000 $ 429,000
Accrued stay bonuses.................................. 1,206,000 641,000 --
Accrued project costs................................. 327,000 561,000 --
Accrued merger expenses............................... 379,000 -- --
Accrued vacation...................................... 254,000 221,000 101,000
Accrued professional fees............................. -- 364,000 364,000
Accrued expenses...................................... 2,424,000 4,039,000 3,245,000
---------- ---------- ----------
Total............................................. $4,966,000 $7,300,000 $4,139,000
========== ========== ==========
</TABLE>
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).
F-48
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Loss before income taxes and the provision for (benefit from) income taxes
consisted of the amounts shown below:
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(SEPTEMBER 26, 1997) THREE MONTHS
THROUGH YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
-------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
Domestic........................ $(3,773,000) $(8,201,000) $(1,794,000) $(2,338,000)
International................... (168,000) (52,000) 36,000 8,000
----------- ----------- ----------- -----------
$(3,941,000) $(8,253,000) $(1,758,000) $(2,330,000)
=========== =========== =========== ===========
(Benefit from) income taxes:
Current--Federal................ $ (770,000) $(1,798,000) $ (356,000) $ (508,000)
Deferred--Federal............... (539,000) (1,064,000) (267,000) (303,000)
Valuation allowance............. 1,309,000 2,862,000 623,000 811,000
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 26, 1997) THREE MONTHS
THROUGH YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
---------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory Federal income
Tax Rate........................ $(1,380,000) $(2,889,000) $ (615,000) $ (816,000)
International operations........ 71,000 27,000 (8,000) 5,000
Valuation allowance............. 1,309,000 2,862,000 623,000 811,000
----------- ----------- ----------- -----------
Effective rate................ $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
F-49
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 26, 1997)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998 MARCH 31, 1999
---------------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Goodwill amortization...................... $298,000 $1,222,000 $1,525,000
Allowance for doubtful accounts............ 288,000 366,000 366,000
Other...................................... 15,000 15,000 15,000
-------- ---------- ----------
Total deferred tax assets.................... 601,000 1,603,000 1,906,000
-------- ---------- ----------
Deferred tax liabilities:
Other...................................... (62,000) -- --
-------- ---------- ----------
Total deferred tax liabilities............... (62,000) -- --
Less: Valuation allowance.................... (539,000) (1,603,000) (1,906,000)
-------- ---------- ----------
Net deferred tax asset....................... $ -- $ -- $ --
======== ========== ==========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes and
differences between the tax and book basis of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
The Company has concluded that it is probable that it will be able to
realize these net deferred tax assets in future periods.
8. STOCKHOLDERS' DEFICIT
The Company has 1,500 authorized shares of Common Stock, no par value, of
which 100 were issued and outstanding as of December 31, 1997 and 1998 and
March 31, 1999 (unaudited).
F-50
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC REPORTING
The Company began operations outside of the United States during 1996. A
summary of the Company's operations and financial position by geographical area
is presented below:
For the period January 1, 1997 through September 26, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 12,422,000 $ 505,000 $ 12,927,000
Income (loss) from operations...................... (8,277,000) (328,000) (8,605,000)
Net income (loss).................................. (9,712,000) 7,000 (9,705,000)
</TABLE>
For the period September 26, 1997 through December 31, 1997 and as of
December 31, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 4,791,000 $ 193,000 $ 4,984,000
Income (loss) from operations...................... (3,459,000) (162,000) (3,621,000)
Net income (loss).................................. (3,773,000) (168,000) (3,941,000)
Long-lived assets.................................. 15,189,000 84,000 15,273,000
Current assets..................................... 6,322,000 229,000 6,551,000
Other assets....................................... 45,000 19,000 64,000
</TABLE>
As of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 21,875,000 $1,567,000 $ 23,442,000
Income (loss) from operations...................... (6,601,000) (41,000) (6,642,000)
Net income (loss).................................. (8,201,000) (52,000) (8,253,000)
Long-lived assets.................................. 9,868,000 105,000 9,973,000
Current assets..................................... 4,947,000 463,000 5,410,000
Other assets....................................... 32,000 20,000 52,000
</TABLE>
As of and for the three months ended March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 4,575,000 $ 497,000 $ 5,072,000
Income (loss) from operations...................... (1,956,000) 8,000 (1,948,000)
Net income (loss).................................. (2,338,000) 8,000 (2,330,000)
Long-lived assets.................................. 8,501,000 117,000 8,618,000
Current assets..................................... 4,700,000 337,000 5,037,000
Other assets....................................... 26,000 17,000 43,000
</TABLE>
F-51
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under operating leases, principally for office
space. Certain leases are subject to rent reviews and require payment of
expenses under escalation clauses. Rent expense was approximately $281,000,
$1,070,000, $288,000 and $261,000 for the period from September 27, 1997 through
December 31, 1997, the year ended December 31, 1998 and for the three months
ended March 31, 1998 and 1999 (unaudited), respectively. Future minimum base
rents under terms of noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,244,000
2000........................................................ 1,259,000
2001........................................................ 984,000
2002........................................................ 688,000
2003........................................................ 634,000
Thereafter.................................................. 2,493,000
----------
$7,302,000
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
11. CAPITAL LEASE OBLIGATIONS
At December 31, 1998, the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. The interest rate on
the capital leases ranges from 5.00% to 10.25%.
Future minimum payments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999........................................................ $165,000
--------
Total minimum lease payments............................ 165,000
Less--Amounts representing interest......................... 15,000
--------
Present value of net minimum lease payments............. $150,000
========
</TABLE>
F-52
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "Plan") covering all of its
eligible employees in the U.S. The Plan became effective on October 1, 1997 and
is qualified under Section 401(k) of the Internal Revenue Code of 1996.
Employees may begin participation on monthly enrollment dates provided that they
have completed three months of service. The Company may make matching and/or
profit sharing contributions to the Plan at its discretion.
Contribution expense was $24,000, $225,000, $64,000, and $57,000 for the
period September 27, 1997 through December 31, 1997, the year ended
December 31, 1998 and for the three months ended March 31, 1998 and 1999
(unaudited), respectively.
13. ORGANIZATIONAL REALIGNMENT
In the second quarter of 1997 the Parent completed an organizational
realignment, which included moving the Parent's corporate office to Scottsdale,
Arizona and the Predecessor's headquarters to Chicago, Illinois. The Predecessor
incurred approximately $1.1 million of expenses in connection with the
realignment for severance charges, moving costs, and similar charges, which were
recorded in Other Expense in the accompanying statement of operations for the
period from January 1, 1997 through September 26, 1997. Substantially all of
this amount was disbursed prior to the sale to Omnicom on September 26, 1997.
14. SUBSEQUENT EVENT
Pursuant to an Agreement and Plan of Merger dated April 28, 1999, the
Company was acquired by AGENCY.COM effective April 1, 1999. As a result of the
sale, the separate existence of the Company ceased. Under the merger agreement,
the 100 outstanding shares of the Company's common stock was converted into
3,659,548 of AGENCY.COM common shares and a warrant to purchase 4,328,752
AGENCY.COM common shares.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interactive Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Interactive
Solutions, Inc. (a Massachusetts corporation) and subsidiary as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interactive Solutions, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
F-54
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 422,114 $ 880,663 $ 325,279
Accounts receivable, net of allowance for doubtful
accounts of $37,481, $310,000 and $310,000
(unaudited), respectively........................ 1,301,208 2,871,281 810,562
Unbilled charges................................... 206,277 219,228 3,281,020
Prepaid expenses and other current assets.......... 491 173,359 --
Due from affiliates................................ -- 351,770 --
Income tax receivable.............................. 54,262 147,992 147,992
---------- ----------- -----------
Total current assets........................... 1,984,352 4,644,293 4,564,853
Property and Equipment, net of accumulated
depreciation and amortization of $92,787,
$388,061 and $485,003 (unaudited),
respectively..................................... 357,539 1,109,914 1,026,136
Goodwill, net of accumulated amortization of $0,
$1,953,783 and $3,233,779 (unaudited),
respectively..................................... -- 5,450,026 14,446,736
Deferred Tax Assets.................................. 258,550 1,798,932 2,254,479
Other Assets......................................... -- 33,545 52,025
---------- ----------- -----------
Total assets................................... $2,600,441 $13,036,710 $22,344,229
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses.............. $ 627,855 $ 2,186,909 $ 1,298,297
Due to Omnicom Finance Inc......................... -- 2,358,106 2,786,024
Deferred revenue................................... 618,440 519,320 828,745
Due to affiliates.................................. -- -- 305,316
Deferred tax liabilities........................... 157,987 94,893 96,938
---------- ----------- -----------
Total current liabilities...................... 1,404,282 5,159,228 5,315,320
========== =========== ===========
Due To Omnicom Finance Inc........................... 828,346 9,737,645 9,904,727
---------- ----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.01 par value, 7,000,000 shares
authorized, 4,500,000, 4,505,500 and 4,505,500
(unaudited) shares issued and outstanding,
respectively..................................... 45,000 45,055 45,055
Additional paid-in capital......................... 486,375 495,120 10,771,825
Accumulated deficit................................ (163,562) (2,400,338) (3,692,698)
---------- ----------- -----------
Total stockholders' equity (deficit)........... 367,813 (1,860,163) 7,124,182
---------- ----------- -----------
Total liabilities and shareholders' equity
(deficit).................................... $2,600,441 $13,036,710 $22,344,229
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-55
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $1,513,027 $4,187,300 $15,370,470 $1,805,075 $ 3,598,106
Direct Salaries and Costs....................... 803,991 2,432,179 9,659,366 1,256,519 2,207,841
---------- ---------- ----------- ---------- -----------
Gross profit................................ 709,036 1,755,121 5,711,104 548,556 1,390,265
General and Administrative...................... 385,396 1,467,918 6,220,344 780,152 1,509,291
Sales and Marketing............................. 66,028 692,288 482,952 84,697 39,898
Amortization Of Goodwill........................ -- -- 1,953,783 102,771 1,279,996
Depreciation and Amortization................... 12,819 79,969 295,274 36,235 96,942
---------- ---------- ----------- ---------- -----------
Income (loss) from operations................. 244,793 (485,054) (3,241,249) (455,299) (1,535,862)
Interest Expense, net........................... -- 22,444 599,003 45,464 210,000
---------- ---------- ----------- ---------- -----------
Income (loss) before (provision) benefit for
income taxes................................ 244,793 (507,498) (3,840,252) (500,763) (1,745,862)
(Provision) Benefit For Income Taxes............ (100,192) 199,335 1,603,476 206,430 453,502
---------- ---------- ----------- ---------- -----------
Net income (loss)......................... $ 144,601 $ (308,163) $(2,236,776) $ (294,333) $(1,292,360)
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-56
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
-------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996....... 4,500,000 $45,000 $ (13,625) $ -- $ 31,375
Capital contribution......... -- -- 500,000 -- 500,000
Net income................... -- -- -- 144,601 144,601
--------- ------- ----------- ----------- -----------
Balance, December 31, 1996..... 4,500,000 45,000 486,375 144,601 675,976
Net income................... -- -- -- (308,163) (308,163)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1997..... 4,500,000 45,000 486,375 (163,562) 367,813
Exercise of stock options.... 5,500 55 8,745 -- 8,800
Net loss..................... -- -- -- (2,236,776) (2,236,776)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1998..... 4,505,500 45,055 495,120 (2,400,338) (1,860,163)
Allocation from parent of
costs over fair value of
assets acquired............ -- -- 10,276,705 -- 10,276,705
Net loss (unaudited)......... -- -- -- (1,292,360) (1,292,360)
--------- ------- ----------- ----------- -----------
Balance, March 31, 1999
(Unaudited).................. 4,505,500 $45,055 $10,771,825 $(3,692,698) $ 7,124,182
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-57
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 144,601 $(308,163) $(2,236,776) $ (294,333) $(1,292,360)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Amortization of goodwill........................ -- -- 1,953,783 102,771 1,279,996
Depreciation and amortization................... 12,819 79,969 295,274 36,235 96,942
Allowance for doubtful accounts................. 6,000 86,481 261,537 59,509 --
Changes in operating assets and liabilities:
Accounts receivable......................... (402,331) (730,680) (72,425) (611,044) 2,060,719
Unbilled charges............................ -- (206,277) 376,037 287,205 (3,061,792)
Prepaid expenses and other current assets... (557) 66 (172,868) (39,176) 173,359
Income tax receivable....................... (82,886) (54,262) (93,730) -- --
Due from affiliates......................... -- -- (351,770) -- 657,086
Deferred tax assets......................... -- (175,664) (1,041,037) (208,473) (455,547)
Other assets................................ (528) 836 35,566 35,866 (18,480)
Accounts payable and accrued expenses....... 66,634 561,221 929,954 281,316 (888,613)
Deferred revenue............................ 123,787 494,653 (485,975) 122,952 309,425
Deferred tax liabilities.................... 181,657 (23,670) (562,439) 2,044 2,045
--------- --------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities...................................... 49,196 (275,490) (1,164,869) (225,128) (1,137,220)
--------- --------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.............. -- (300,000) (8,827,538) (8,827,538) --
Capital expenditures............................ (98,403) (281,635) (825,249) (111,999) (13,164)
--------- --------- ----------- ----------- -----------
Net cash used in investing activities..... (98,403) (581,635) (9,652,787) (8,939,537) (13,164)
--------- --------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Omnicom Finance Inc.:........... -- 828,346 11,267,405 9,451,463 595,000
Proceeds from exercise of stock option.......... -- -- 8,800 --
Proceeds from capital contribution.............. 500,000 -- -- -- --
--------- --------- ----------- ----------- -----------
Net cash provided by financing activities..... 500,000 828,346 11,276,205 9,451,463 595,000
--------- --------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 450,793 (28,779) 458,549 286,798 (555,384)
CASH AND CASH EQUIVALENTS, beginning of year...... 100 450,893 422,114 422,114 880,663
--------- --------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year............ $ 450,893 $ 422,114 $ 880,663 $ 708,912 $ 325,279
========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Income taxes.................................. $ 160,400 $(104,620) $ 62,200 $ -- $ --
Interest...................................... -- -- 37,598 -- --
========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITY:
Increase in goodwill resulting from allocation
from Parent of cost over fair value of assets
acquired........................................ $ -- $ -- $ -- $ -- $10,276,705
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-58
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Interactive Solutions, Inc. and subsidiary (collectively known as the
"Company" or "Interactive") is a digital communications services provider. Prior
to December 31, 1998, Interactive was owned 60% by its majority shareholder and
40% by Communicade Inc. ("Communicade"), formerly known as JWL Associates,
Corp., a wholly-owned subsidiary of the Omnicom Group Inc. ("Omnicom")--See
Notes 3 and 12. The Company creates digital communications strategies to help
its clients increase sales, improve communications and create brand identities.
The Company's integrated service offering includes strategic consulting, design
of information architecture and end-user interfaces and customization and
implementation of enabling software technologies. The Company primarily uses
Internet-based technologies to create digital communications strategies and is
building capabilities in additional technologies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Interactive and its subsidiary, Quadris Consulting, Inc. ("Quadris"). The
Company had no subsidiary prior to March 16, 1998 (See Note 2). All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized for time and materials projects as services are
provided. Revenues from fixed fee contracts are recognized as services are
provided upon the achievement of specified milestones. Revenue is recognized on
partially completed milestones in proportion to the costs incurred for that
milestone and only to the extent that an irrevocable right to the revenue
exists. Costs incurred under fixed fee contracts are recognized as incurred
which generally is in the same period that revenue is recorded. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs in excess of related billings. Deferred revenue
represents billings of production and other client reimbursable out-of-pocket
costs in excess of revenues earned. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
F-59
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the remaining term of the related
lease.
GOODWILL
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is being amortized over a period of three
years on a straight-line basis. Management has evaluated the amortization period
in the current period and has determined that no impairment currently exists.
This amortization period will be evaluated by management on a continuing basis,
and will be adjusted if the life of the goodwill is impaired.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable tangibles to be disposed of. The Company reviews long-lived
assets and certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset exceeds the fair value of the asset. If other events or changes in
circumstances indicate that the carrying amount of an asset that the Company
expects to hold and use may not be recoverable, the Company will estimate the
future cash flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected to be
generated by an asset less the future cash outflows expected to be necessary to
obtain those inflows. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company will recognize an impairment loss equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The fair value
of the asset is the amount at which the asset could be bought or sold in a
current transaction between willing parties or can be determined by calculating
the present value of estimated expected future cash flows using a discount rate
commensurate with the risks involved. Management has performed a review of all
long-lived assets and has determined that no impairment of the respective
carrying value has occurred as of December 31, 1997 and 1998.
F-60
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of the SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their tax bases for operating profit and tax liability
carryforward. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in the period that
the tax change occurs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from affiliates, accounts payable and due to Omnicom Finance Inc. approximate
fair value due to the short-term maturity of these instruments. The carrying
amount of due to Omnicom approximates fair value.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock
awards granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and disclose pro forma income amounts which would
have resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB No. 25 and
make the required pro forma disclosures for compensation (See Note 8).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal
F-61
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use" ("SOP 98-1"), which provides guidance for determining whether computer
software is internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then subsequently
sold to the public. It also provides guidance on capitalization of the costs
incurred for computer software developed or obtained for internal use. SOP 98-1
is effective for fiscal years beginning after December 31, 1998. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
2. ACQUISITIONS
QUADRIS CONSULTING, INC.
On March 16, 1998, the Company purchased 60% of the equity of a newly formed
corporation, Quadris. Concurrent with this transaction, Quadris acquired
substantially all of the assets and liabilities of the Quadris division of
JYACC, Inc. The total consideration for the net assets acquired was $8,827,538.
The remaining 40% of Quadris is owned by Quadris' management.
This acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this acquisition,
the Company has recorded goodwill of $7,403,809, which is the cost in excess of
net assets acquired and is being amortized over a period of three years.
F-62
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
ECHO STRATEGIES GROUP
On June 20, 1997, the Company purchased substantially all of the assets of
Echo Strategies Group ("Echo") for cash consideration of $300,000. This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired on the basis of their respective fair values on the
acquisition date. In conjunction with the purchase of Echo, the Company signed
employment contracts with two former Echo employees and issued to them a total
of 200,000 stock options with a five-year vesting period, exercisable at $1.60
per share. These options vested and converted to options to acquire
AGENCY.COM LTD. ("AGENCY.COM") shares on April 28, 1999 (See Note 12). As a
result of the acquisition, the separate existence of the Company ceased to
exist.
The acquisitions described above were valued based on management's estimates
of the fair value of the assets and liabilities acquired at the date of
acquisition. An independent third party valuation corroborating management's
estimates for the Quadris acquisition was obtained. Assets and liabilities
acquired were recorded as follows:
<TABLE>
<CAPTION>
QUADRIS ECHO
---------------- ----------------
<S> <C> <C>
Accounts receivable..................................... $1,759,185 $229,403
Unbilled charges........................................ 388,988 --
Fixed assets............................................ 222,400 70,289
Other assets............................................ 69,111 308
Goodwill................................................ 7,403,809 --
Accounts payable and accrued expenses................... (385,986) --
Deferred revenue........................................ (386,855) --
Accrued loss on contracts............................... (243,114) --
---------- --------
Total purchase price.................................. $8,827,538 $300,000
========== ========
</TABLE>
The results of the acquired businesses have been included in the
consolidated financial statements from their respective acquisition dates.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated results of operations reflect
the results of operations as if Quadris had been acquired January 1, 1998 and
Echo had been acquired January 1, 1997, and after giving effect to purchase
accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of
F-63
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
what operating results would have been had the acquisitions actually taken place
on January 1, 1998 and 1997, respectively, or of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED MARCH 31,
1997 1998 1998
---------- ----------- ---------------
<S> <C> <C> <C>
Pro forma:
Revenues............................... $4,777,217 $17,097,861 $3,602,466
Net loss............................... 277,671 2,107,423 164,980
</TABLE>
3. RELATED PARTY TRANSACTIONS
COMMUNICADE, INC.
During December 1996, the Company entered into a shareholder agreement with
Communicade. The shareholder agreement stipulates that Omnicom Finance Inc., a
wholly owned subsidiary of Omnicom, provide the Company with a line of credit
for working capital purposes of up to $2.5 million and additional financing, in
connection with the Company's acquisition of "new media companies," as defined
in the shareholder agreement, provided that Communicade remains a shareholder of
the Company.
Amounts borrowed for working capital and acquisition funding under the line
of credit bear interest at the same rate charged by Omnicom Finance Inc. to
subsidiaries of Omnicom under a cash management program. The interest rates
ranged from 6.63% to 6.85%, 6.00% to 6.70%, for the years ended December 31,
1997 and 1998 and 6.60% to 6.65% and 5.91% to 5.95% for the three months ended
March 31, 1998 and 1999 (unaudited), respectively. Interest expense amounted to
$0, $22,444, $599,003 for the years ended December 31, 1996, 1997 and 1998 and
$45,464 and $210,000 for the three months ended March 31, 1998 and 1999
(unaudited), respectively. All outstanding amounts are secured by a priority
lien on all of the Company's assets.
At December 31, 1997 and 1998 and March 31, 1999, zero, $2,358,106 and
$2,786,024, respectively, were outstanding under the working capital line of
credit, repayable in full upon the closing of the initial public offering of
AGENCY.COM's common stock (See Note 12). In addition, the Company has $828,346,
$9,737,645 and $9,904,727 of acquisition funding outstanding as of December 31,
1997 and 1998 and March 31, 1999 (unaudited), respectively, in connection with
the acquisition of "new media companies" with repayments falling due in the
principal amount of $300,000 and $8,886,000 (unaudited) and accumulated interest
in the years 2003 and 2004, respectively.
AGENCY.COM
During the year ended December 31, 1998, the Company provided $240,928 of
consulting services to AGENCY.COM, an affiliated company. At December 31, 1998
and March 31, 1999, the
F-64
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Company had net receivables from and payables to AGENCY.COM of $240,928 and
$703,914 (unaudited), respectively.
EAGLE RIVER INTERACTIVE
During the year ended December 31, 1998, the Company provided $110,842 of
consulting services to Eagle River Interactive ("Eagle River"), an affiliated
company. At December 31, 1998, the Company had net receivables from Eagle River
of $110,842. At March 31, 1999 no amounts were due to or from Eagle River.
Prior to January 1, 1998, the Company had not provided any services to
AGENCY.COM and Eagle River and consequently, had no amounts receivable from
either company.
For the three months ended March 31, 1998 and 1999, the Company had not
provided any consulting services to AGENCY.COM or Eagle River.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment..................................... $312,925 $1,008,289 $1,021,453
Furniture and fixtures................................. 120,977 422,508 422,508
Leasehold improvements................................. 16,424 67,178 67,178
-------- ---------- ----------
Total property and equipment..................... 450,326 1,497,975 1,511,139
Less--Accumulated depreciation and amortization........ 92,787 388,061 485,003
-------- ---------- ----------
Property and equipment, net...................... $357,539 $1,109,914 $1,026,136
======== ========== ==========
</TABLE>
Depreciation and amortization expense aggregated $12,819, $79,969 and
$295,274 for the years ended December 31, 1996, 1997 and 1998 and $36,235 and
$96,942 for the three months ended March 31, 1998 and 1999 (unaudited),
respectively.
F-65
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. GOODWILL
Goodwill consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Goodwill.................................................... $7,403,809 $17,680,515
Less--Accumulated amortization............................ (1,953,783) (3,233,779)
---------- -----------
Goodwill, net........................................... $5,450,026 $14,446,736
========== ===========
</TABLE>
Amortization expense aggregated $1,953,783 and $1,279,996 for the year ended
December 31, 1998 and for the three months ended March 31, 1999 (unaudited),
respectively. The Company did not have any goodwill prior to March 15, 1998.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued bonuses.......................................... $173,055 $ 700,687 $ 60,008
Accrued payroll.......................................... 84,508 554,081 --
Accrued expenses......................................... 52,556 176,749 525,289
Accrued professional fees................................ 109,623 518,981 471,500
Accounts payable......................................... 208,113 163,403 241,500
Accrued loss on contract................................. -- 73,008 --
-------- ---------- ----------
$627,855 $2,186,909 $1,298,297
======== ========== ==========
</TABLE>
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).
F-66
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Income (loss) before (provision) benefit for income taxes and the
(provision) benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes:........................ $ 244,793 $(507,498) $(3,840,252) $(500,763) $(1,745,862)
========= ========= =========== ========= ===========
(Provision for) benefit from
income taxes:
Current--
Federal................... $ (1,086) $ 155,794 $ 598,816 $ 93,665 $ 160,155
State and local........... (335) 48,328 164,536 26,779 43,274
Deferred--
Federal................... (75,470) (3,658) 643,203 65,784 191,476
State and local........... (23,301) (1,129) 196,921 20,202 58,597
--------- --------- ----------- --------- -----------
$(100,192) $ 199,335 $ 1,603,476 $ 206,430 $ 453,502
========= ========= =========== ========= ===========
</TABLE>
The differences between the tax (provision) benefit from continuing
operations reflected in the financial statements and the amounts calculated at
the federal statutory income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax (provision) benefit at
statutory rate.................... $ (83,230) $172,549 $1,305,686 $170,259 $593,593
State and local taxes on income, net
of federal tax (provision)
benefit........................... (15,600) 30,412 303,985 38,290 86,923
Other............................... (1,362) (3,626) (6,195) (2,119) (227,014)
--------- -------- ---------- -------- --------
$(100,192) $199,335 $1,603,476 $206,430 $453,502
========= ======== ========== ======== ========
</TABLE>
F-67
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash basis to accrual basis adjustment............. $ -- $ -- $ --
Goodwill amortization.............................. -- 628,502 826,976
Bad debt........................................... 34,826 124,837 144,972
Net operating loss carryforward.................... 204,122 967,473 1,170,903
Others............................................. 19,602 78,120 111,628
---------- ---------- ----------
Total deferred tax assets.............................. 258,550 1,798,932 2,254,479
Less: valuation allowance.............................. -- -- --
---------- ---------- ----------
Net deferred tax assets................................ 258,550 1,798,932 2,254,479
---------- ---------- ----------
Deferred tax liabilities:
Cash basis to accrual basis adjustment............. (142,545) (71,273) (53,454)
Others............................................. (15,442) (23,620) (43,484)
---------- ---------- ----------
Total deferred tax liabilities......................... (157,987) (94,893) (96,938)
---------- ---------- ----------
Net deferred tax asset................................. $ 100,563 $1,704,039 $2,157,541
========== ========== ==========
</TABLE>
As of December 31, 1997 and 1998 and March 31, 1999, the Company has
$513,383, $2,418,683 and $2,927,258 (unaudited), respectively net operating loss
carryforwards available to offset future taxable income through 2012.
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book bases of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes but have not yet
been expensed in the financial statements.
Interactive has elected to file its income tax return using the accrual
basis of accounting for the year ended December 31, 1998. For the years ended
December 31, 1997 and 1996, the Company filed on the cash basis. Quadris has
elected to file its income tax return using the accrual basis of accounting from
inception (March 16, 1998) to December 31, 1998.
F-68
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT)
CAPITAL CONTRIBUTION
On December 6, 1996, the Company and Communicade entered into a Stock
Purchase Agreement (See Note 3) by which the Company received a $500,000 capital
contribution from Communicade, who had previously purchased shares of the
Company's common stock from the founder.
STOCK SPLITS
On January 10, 1996, the Company's Board of Directors authorized an 18 to 1
stock split of the Company's common stock effective immediately. This resulted
in the issuance of 170,000 additional shares of common stock.
On April 28, 1998, the Company's Board of Directors authorized a 25 to 1
stock split of its common stock effective immediately. This resulted in the
issuance of 4,320,000 additional shares of common stock.
All share amounts in the accompanying consolidated financial statements and
footnotes have been restated to give effect to these stock splits as of
December 31,1995.
STOCK OPTIONS
INTERACTIVE
Interactive has a Stock Option and Incentive Plan (the "Interactive Plan"),
that provides for the granting of stock options to employees. Pursuant to the
Interactive Plan, an aggregate of 500,000 shares of common stock has been
reserved for issuance. Under the Interactive Plan, the optionees will receive
options to purchase shares in Interactive if, and only if, Interactive merges
into AGENCY.COM (See Note 12).
F-69
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of the status of the Interactive Plan as of December 31, 1996,
1997, 1998 and March 31, 1999 and the changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 MARCH 31, 1999
-------------------- -------------------- -------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- --------- -------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ -- $ -- -- $ -- 420,000 $1.60 494,500 $1.60
Granted......................... -- -- 420,000 1.60 212,000 1.60 -- --
Exercised....................... -- -- -- -- (5,500) 1.60 -- --
Cancelled....................... -- -- -- -- (132,000) 1.60 -- --
---- ----- ------- ----- -------- ----- ------- -----
Outstanding at end of period.... -- $ -- 420,000 $1.60 494,500 $1.60 494,500 $1.60
==== ===== ======= ===== ======== ===== ======= =====
</TABLE>
The following table summarizes information on stock options outstanding and
exercisable under the Interactive Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- -------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$1.60..................................... 494,500 9 years $1.60 167,830 $1.60
</TABLE>
Options outstanding under the Interactive Plan have been granted at prices
above the fair market value of the stock on the date of grant.
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply the current accounting rules under APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for the stock option plan.
Had compensation for those awards been determined based on the fair value at
the grant dates for those awards consistent with the method in SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below. The pro forma effects of applying SFAS No. 123 are not indicative of
future amounts because this statement does not apply to
F-70
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
awards granted prior to fiscal year 1996. Additional stock option awards are
anticipated in future years.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998
--------- ----------
<S> <C> <C>
Net Loss
As reported............................................... $308,163 $2,236,776
Pro forma................................................. 308,458 2,237,366
</TABLE>
The plan was not in existence prior to December 31, 1997.
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made in 1997 and 1998. There were no grants made prior to
1997. The following assumptions were applied in determining the pro forma
compensation cost:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Expected option life....................................... 9.5 years 9.3 years
Risk free interest rate.................................... 6.36% 5.25%
Expected stock price volatility............................ 0.00% 0.00%
Expected dividend yield.................................... 0.00% 0.00%
Fair value of options granted.............................. $ 0.02 $ --
</TABLE>
QUADRIS
Quadris has a Stock Option and Incentive Plan (the "Quadris' Plan") that
provides for the granting of 1,500,000 of options to employees of Quadris. These
options give the optionee the right to purchase common stock of Quadris. Under
the Quadris' Plan, the optionees will receive options to purchase shares in
Interactive if, and only if, Interactive merges into AGENCY.COM (See Note 12).
F-71
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of the status of the Quadris' Plan as of December 31, 1998 and
March 31, 1999 and the changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning of period......... -- $ -- 1,500,000 $0.20
Granted.................................... 1,500,000 0.20 --
--------- ----- --------- -----
Outstanding at end of period............... 1,500,000 $0.20 1,500,000 $0.20
========= ===== ========= =====
</TABLE>
The plan was not in existence prior to 1998.
The following table summarizes information on stock options outstanding and
exercisable under the Quadris Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE AVERAGE AVERAGE AVERAGE
PRICE REMAINING EXERCISE EXERCISE
RANGE NUMBER LIFE PRICE NUMBER PRICE
- -------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.20-0.22............................... 1,500,000 10 years $0.20 -- $ --
</TABLE>
Options outstanding under the Quadris' Plan have been granted at prices at
or above the fair market value of the stock on the date of grant.
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply the current accounting rules under APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for the stock option plan.
Had compensation for those awards been determined based on the fair value at
the grant dates for those awards consistent with the method in SFAS No. 123,
there would have been no impact on the Company's net loss for December 31, 1998
as the options were granted on December 31, 1998. The pro forma effects of
applying SFAS No. 123 are not indicative of future amounts because this
statement does not apply to awards granted prior to fiscal year 1996. Additional
stock option awards are anticipated in future years.
F-72
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made in 1998. There were no grants made prior to 1998. The
following assumptions were applied in determining the pro forma compensation
cost:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Expected option life........................................ 10 years
Risk free interest rate..................................... 4.65%
Expected stock price volatility............................. 0.00%
Expected dividend yield..................................... 0.00%
Fair value of options granted............................... $0.06-0.07
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is committed under operating leases, principally for office
space and equipment. Certain leases are subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense and equipment rental
were $48,099, $203,042, $1,064,650 for the years ended December 31, 1996, 1997
and 1998 and $125,509 and $360,046 for the three months ended March 31, 1998 and
1999, (unaudited) respectively. Future minimum base rents under terms of
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
RENTAL
PAYMENTS
----------
<S> <C>
Years ending December 31:
1999........................................................ $ 726,861
2000........................................................ 598,735
2001........................................................ 603,968
2002........................................................ 603,968
2003........................................................ 298,401
Thereafter.................................................. 48,538
----------
$2,880,471
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
F-73
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees. The Plan became effective on February 1, 1997 and is qualified under
Section 401(k) of the Internal Revenue Code of 1996. The Company matches
employee contributions to the plan at a rate of 50%, up to a total match of 3%
of the participating employee's salary. Expenses related to the Company's
contributions to the Plan amounted to $125,850 for the year ended December 31,
1998 and $35,956 and $87,071 for the three months ended March 31, 1998 and 1999
(unaudited), respectively. The Company started the matching program in 1998 and,
therefore, there are no contributions for 1996 and 1997.
This plan was terminated in May of 1999 and replaced with the AGENCY.COM
401K plan. Under the AGENCY.COM plan, participants are eligible for a
discretionary employer match equal to 50% of the first 6% of the participating
employee's compensation, with vesting in this match occurring over a five-year
period.
11. BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consisted primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, one client accounted for 69% of total
revenues.
For the year ended December 31, 1997, one client accounted for 68% of total
revenues.
For the year ended December 31, 1998, two clients accounted for 25% and 11%,
respectively, of total revenues.
For the three months ended March 31, 1998, two clients accounted 31% and
17%, (unaudited) respectively, of total revenues.
For the three months ended March 31, 1999, one client accounted for 12% of
total revenues.
As of December 31, 1997, two clients accounted for 48% and 18%,
respectively, of total accounts receivable.
As of December 31, 1998, two clients accounted for 26% and 17%, (unaudited)
respectively, of total accounts receivable.
As of March 31, 1999, four clients accounted for 25%, 20%, 16% and 11%,
(unaudited) respectively, of total accounts receivable.
F-74
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
On January 27, 1999, the majority shareholder of Interactive sold 2,700,000
shares of common stock (100% of his interest) to Communicade. Communicade paid
$3,000,000 in consideration for the shares. As part of the transaction,
Communicade also paid this stockholder $1,500,000 to settle the earnout
associated with Communicade's initial investment in the Company, as noted in the
stock purchase agreement dated December 6, 1996. As a result of the transaction,
Interactive became a wholly-owned subsidiary of Communicade. This transaction
was accounted for by Communicade under the purchase method of accounting and
resulted in Communicade recording $10,276,706 of costs over fair value of the
assets acquired. As a result, Communicade allocated these costs to the Company.
These costs are reflected in the accompanying March 31, 1999 financial
statements as goodwill (net of amortization expense for the period) and
additional paid-in capital.
Pursuant to an Agreement and Plan of Merger dated April 1, 1999, a merger
was consummated between AGENCY.COM and the Company. The stock-for-stock
transaction was approved by the shareholders of both companies after which the
Company was merged with and into AGENCY.COM, with AGENCY.COM continuing as the
surviving corporation in the merger. As a result of the merger, the separate
existence of the Company ceased. Under the merger agreement, the Company
received 24.6% of the outstanding shares in AGENCY.COM.
In conjunction, with the transaction, the Company issued 934,763 shares of
common stock and created 558,742 new options to acquire the minority interest of
Quadris (See Note 8).
As a result of Interactive being acquired by AGENCY.COM, the options granted
under both the Interactive Plan and the Quadris Plan convert to options to
acquire AGENCY.COM shares.
F-75
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quadris Consulting:
We have audited the accompanying balance sheets of Quadris Consulting, a
division of JYACC, Inc. (a New York corporation) as of December 31, 1997 and
March 15, 1998, and the related statements of operations, divisional equity and
cash flows for each of the two years ended December 31, 1997 and the period from
January 1, 1998 to March 15, 1998. These financial statements are the
responsibility of the management of JYACC, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quadris Consulting as of
December 31, 1997 and March 15, 1998, and the results of its operations and its
cash flows for each of the two years ended December 31, 1997 and the period from
January 1, 1998 to March 15, 1998 and, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
F-76
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Accounts receivable....................................... $1,823,385 $1,750,197
Unbilled charges.......................................... -- 385,094
Prepaid expenses and other current assets................. 4,822 35,866
---------- ----------
Total current assets.................................. 1,828,207 2,171,157
Property and Equipment, net of accumulated depreciation and
amortization of $670,287 and $693,941, respectively....... 291,330 270,247
Other Assets................................................ 39,941 33,245
---------- ----------
Total assets.......................................... $2,159,478 $2,474,649
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 577,317 $ 385,986
Accrued loss on contract.................................. 249,277 243,113
Deferred revenue.......................................... 423,253 386,855
---------- ----------
Total current liabilities............................. 1,249,847 1,015,954
---------- ----------
Commitments and Contingencies (Note 6)
Divisional Equity........................................... 909,631 1,458,695
---------- ----------
Total liabilities and divisional equity............... $2,159,478 $2,474,649
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-77
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 TO
------------------------------------------------- MARCH 15,
1996 1997 1998
----------------------- ----------------------- ------------
<S> <C> <C> <C>
Revenues......................................... $8,138,275 $8,914,995 $1,727,391
Direct Salaries and Costs........................ 4,634,533 6,050,616 1,144,664
---------- ---------- ----------
Gross profit................................. 3,503,742 2,864,379 582,727
Sales and Marketing.............................. 18,714 5,560 1,577
General and Administrative....................... 1,707,854 1,585,467 362,872
---------- ---------- ----------
Income from operations....................... 1,777,174 1,273,352 218,278
Interest Expense, net............................ -- -- 1,925
---------- ---------- ----------
Income before provision for income taxes..... 1,777,174 1,273,352 216,353
Provision for Income Taxes....................... 711,000 509,000 87,000
---------- ---------- ----------
Net income................................... $1,066,174 $ 764,352 $ 129,353
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 TO
------------------------ MARCH 15,
1996 1997 1998
----------- ---------- ------------
<S> <C> <C> <C>
Divisional Equity, beginning of period.................. $ 722,626 $ 404,712 $ 909,631
Net income............................................ 1,066,174 764,352 129,353
Less-- Net (decrease) increase in investment with
JYACC, Inc.......................................... (1,384,088) (259,433) 419,711
---------- --------- ----------
Divisional Equity, end of period........................ $ 404,712 $ 909,631 $1,458,695
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1 TO
----------------------- MARCH 15,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income........................................... $1,066,174 $ 764,352 $ 129,353
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization.................... 122,680 123,749 23,654
Changes in assets and liabilities:
Accounts receivable............................ (573,616) (236,287) 73,188
Unbilled charges............................... -- -- (385,094)
Prepaid expenses and other current assets...... -- (4,822) (31,044)
Other assets................................... (3,250) (22,386) 6,696
Accounts payable and accrued expenses.......... 171,143 (143,765) (191,331)
Accrued loss on contracts...................... 406,769 (157,492) (6,164)
Deferred revenue............................... 299,439 123,814 (36,398)
---------- ---------- ---------
Net cash provided by (used in) operating
activities................................. 1,489,339 447,163 (417,140)
---------- ---------- ---------
Cash Flows From Investing Activities:
Capital expenditures................................. (105,251) (187,730) (2,571)
---------- ---------- ---------
Net cash received from (remitted to)
JYACC, Inc................................. $1,384,088 $ 259,433 $(419,711)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Quadris Consulting ("Quadris" or the "Company") is a division of
JYACC, Inc. ("JYACC") and is not a separate legal entity. On March 16, 1998,
Quadris was acquired by Quadris Consulting, Inc. (a majority--owned subsidiary
of Interactive Solutions, Inc.--See Note 9). Interactive Solutions, Inc. is
owned 40% by Communicade, Inc., formerly known as JWL Associates Corp., a
wholly--owned subsidiary of the Omnicom Group Inc. ("Omnicom") and 60% by its
majority shareholder. Quadris is a systems integrator and developer of custom
software solutions. Quadris creates digital communications strategies to help
its clients increase sales and improve communications. Quadris' integrated
service offering includes strategic consulting, user requirements analysis,
technical and functional systems design, software development and systems
integration, quality assurance, documentation, and software deployment services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Quadris has
estimated that all accounts receivable are collectible and, therefore, has not
recorded an allowance for doubtful accounts.
DIVISIONAL EQUITY
Divisional equity as used in these financial statements represents a summary
of all intercompany activity between Quadris and JYACC as well as the
accumulation of earnings.
REVENUE RECOGNITION
Revenues are recognized for time and materials projects as services are
provided. Revenues from fixed fee contracts are recognized as services are
provided upon the achievement of specified milestones. Revenue is recognized on
partially completed milestones in proportion to the costs incurred for that
milestone and only to the extent that an irrevocable right to the revenue
exists. Costs incurred under fixed fee contracts are recognized as incurred
which generally is in the same period that revenue is recorded. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs in excess of billings. Deferred revenue represents
billings of production and other client reimbursable out-of-pocket costs in
excess of
F-81
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenues earned. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of three to seven years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the remaining term of the related
lease.
ACCOUNTING FOR LONG-LIVED ASSETS
Quadris accounts for long-lived assets under the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement establishes financial accounting and
reporting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate that
the carrying amount of an asset that the Company expects to hold and use may not
be recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash flows
are the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying value has occurred
as of December 31, 1997 and March 15, 1998.
INCOME TAXES
As a division of JYACC, Quadris was not subject to federal, state and local
income taxes. The effective rate herein reflects the rate that would have been
applicable had Quadris been independent. Provisions for deferred taxes were not
reflected on Quadris' books, but were reflected on JYACC's books and records.
Going forward, Quadris will record deferred taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes."
F-82
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure.
2. RELATED PARTY TRANSACTIONS
JYACC has provided services to Quadris including, but not limited to,
financial, systems and legal services, administration of benefit and insurance
programs, income tax management, cash management and treasury services. These
financial statements include an allocation of JYACC's administrative expenses.
The allocation was based on a percentage of the number of employees working for
Quadris in relation to the total number of employees of JYACC taken as a whole.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment.................................. $731,974 $734,545
Furniture and fixtures.............................. 81,402 81,402
Computer software................................... 89,586 89,586
Leasehold improvements.............................. 58,655 58,655
-------- --------
Total property and equipment.................... 961,617 964,188
Less--Accumulated depreciation and amortization..... 670,287 693,941
-------- --------
Property and equipment, net..................... $291,330 $270,247
======== ========
</TABLE>
Depreciation and amortization aggregated $122,680, $123,749, and $23,654,
respectively, for the years ended December 31, 1996 and 1997 and the period from
January 1, 1998 to March 15, 1998, respectively.
F-83
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ---------
<S> <C> <C>
Accounts payable.................................... $ 77,855 $ 64,709
Accrued payroll..................................... 156,940 --
Accrued vacation.................................... 241,771 286,826
Accrued expenses--other............................. 100,751 34,451
-------- --------
$577,317 $385,986
======== ========
</TABLE>
5. INCOME TAXES
The financial statements reflect an effective tax rate of 40%, which
reasonably reflects what Quadris' tax rate would have been as a separate entity.
Deferred taxes are reflected as a component of divisional equity as JYACC is the
taxable legal entity. If Quadris were a separate taxable entity, the components
of the temporary differences would be primarily due to customer reserves and
allowances, unbilled charges, deferred revenue, depreciation, and accrued
vacation.
For the years ended December 31, 1996 and 1997 and the period from
January 1, 1998 to March 15, 1998, the following provisions for income taxes
were made:
<TABLE>
<CAPTION>
YEARS ENDED PERIOD
DECEMBER 31, FROM JANUARY 1
--------------------- TO MARCH 15,
1996 1997 1998
--------- --------- --------------
<S> <C> <C> <C>
Current:
Federal............................... $604,350 $432,650 $73,950
State................................. 106,650 76,350 13,050
-------- -------- -------
Provision for income taxes.......... $711,000 $509,000 $87,000
======== ======== =======
</TABLE>
F-84
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The difference between Quadris' effective tax rate and the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED PERIOD
DECEMBER 31, FROM JANUARY 1
----------------------- TO MARCH 15,
1996 1997 1998
---------- ---------- --------------
<S> <C> <C> <C>
Provision for income taxes.......... $ 711,000 $ 509,000 $ 87,000
Income before taxes................. 1,777,174 1,273,352 216,353
Effective tax rate.................. 40% 40% 40%
Net state tax....................... 6% 6% 6%
Federal statutory rate.............. 34% 34% 34%
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Quadris is committed under operating leases, principally for office space
and equipment. Rent expense and equipment rental were $222,973, $323,860 and
$116,599, respectively, for the years ended December 31, 1996 and 1997 and the
period from January 1, 1998 to March 15, 1998. Future minimum base rents under
the terms of the noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Period from March 16, 1998 to December 31, 1998............. $ 501,000
Year ending December 31:
1999...................................................... 636,000
2000...................................................... 616,000
2001...................................................... 604,000
2002...................................................... 604,000
Thereafter................................................ 347,000
----------
$3,308,000
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
7. EMPLOYEE BENEFIT PLAN
JYACC maintains a defined contribution plan covering all eligible employees,
which also covers Quadris employees. The plan is qualified under Section 401(k)
of the Internal Revenue Code. Under the plan, JYACC was required to make certain
matching contributions as defined.
F-85
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLAN (CONTINUED)
This plan was terminated in May of 1999 and replaced with the AGENCY.COM
401(k) plan. Under the AGENCY.COM plan participants are eligible for a
discretionary employer match equal to 50% of the first 6% of the participating
employees compensation.
8. BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments which subject Quadris to concentrations of credit risk
consist primarily of trade accounts receivable. Quadris' clients are primarily
concentrated in the United States. Quadris performs ongoing credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the year ended December 31, 1996, two clients accounted for 39% and 29%,
respectively, of total revenues.
For the year ended December 31, 1997, two clients accounted for 47% and 21%,
respectively, of total revenues.
For the period from January 1, 1998 to March 15, 1998, two clients accounted
for 40% and 18%, respectively, of total revenues.
As of December 31, 1997, five clients accounted for 27%, 16%, 14%, 13% and
10%, respectively, of total accounts receivable.
As of March 15, 1998, four clients accounted for 27%, 19%, 15% and 14%,
respectively, of total accounts receivable.
9. SUBSEQUENT EVENT
On March 16, 1998, Quadris Consulting, Inc. (a majority--owned subsidiary of
Interactive Solutions, Inc.) purchased the remaining 60% of Quadris for
approximately $8,828,000.
F-86
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Twinspark Interactive People B.V.:
We have audited the accompanying balance sheets of Twinspark Interactive People
B.V. (a Dutch corporation), as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
years ended December 31, 1997 and December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 1997 and 1998 financial statements based on our
audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Twinspark Interactive People
B.V. as of December 31, 1997 and 1998, and the results of their operations and
their cash flows for each of the years then ended in conformity with United
States generally accepted accounting principles.
ARTHUR ANDERSEN
Rotterdam, The Netherlands
August 9, 1999
F-87
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ -- $ 97,946 $ --
Accounts receivable, net of allowance for doubtful
accounts of $0, $44,090 and $181,370 (unaudited),
respectively......................................... 318,042 1,583,016 1,040,445
Unbilled charges....................................... 43,595 110,123 156,426
Prepaid expenses and other current assets.............. 48,548 97,416 141,399
Due from affiliates.................................... -- 19,589 279,030
-------- ---------- ----------
Total current assets............................... 410,185 1,908,090 1,617,300
Property and Equipment, net of accumulated depreciation
and amortization of $121,370, $211,245 and $256,810
(unaudited), respectively.............................. 81,245 292,778 511,086
Intangibles, net of accumulated amortization of $9,908,
$21,178 and $30,534(unaudited), respectively........... 39,631 31,766 100,996
-------- ---------- ----------
Total assets....................................... $531,061 $2,232,634 $2,229,382
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................. $193,699 $ 819,568 $1,380,124
Line of credit......................................... 93,629 -- 537,392
Income taxes payable................................... -- 55,591 --
Deferred revenue....................................... -- 362,135 108,982
Due to affiliates...................................... 80,749 10,059 32,413
-------- ---------- ----------
Total current liabilities.......................... 368,077 1,247,353 2,058,911
-------- ---------- ----------
Long-term Liabilities:
Bank loans............................................. 49,539 63,532 52,142
-------- ---------- ----------
Total long-term liabilities........................ 49,539 63,532 52,142
-------- ---------- ----------
Total liabilities.................................. 417,616 1,310,885 2,111,053
-------- ---------- ----------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, $0.05 par value, 15,000,000 shares
authorized; 0, 15,000,000 and 15,000,000 (unaudited)
shares issued respectively........................... -- 755,705 755,705
Retained earnings (deficit)............................ 152,773 158,819 (546,076)
Cumulative translation adjustment...................... (39,328) 7,225 (91,300)
-------- ---------- ----------
Total stockholder's equity......................... 113,445 921,749 118,329
-------- ---------- ----------
Total liabilities and stockholders' equity......... $531,061 $2,232,634 $2,229,382
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-88
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................... $1,287,802 $2,690,816 $ 746,270 $2,417,259
Direct salaries and costs.................. 1,020,127 1,771,878 582,120 1,467,849
---------- ---------- ---------- ----------
Gross profit............................. 267,675 918,938 164,150 949,410
General and administrative................. 360,646 469,545 150,920 1,524,269
Sales and marketing........................ -- -- -- 94,000
Depreciation and amortization.............. 73,049 91,189 34,300 79,659
---------- ---------- ---------- ----------
Income (loss) from operations............ (166,020) 358,204 (21,070) (748,518)
Interest expense........................... 8,173 12,091 6,370 6,164
---------- ---------- ---------- ----------
Income (loss) before (provision) benefit
for income taxes....................... (174,193) 346,113 (27,440) (754,682)
Provision for (benefit from) income
taxes.................................... -- 52,899 -- (49,787)
---------- ---------- ---------- ----------
Net income (loss)........................ $ (174,193) $ 293,214 $ (27,440) $ (704,895)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN RETAINED CURRENCY
SHARES AMOUNT CAPITAL EARNINGS/(DEFICIT) TRANSLATION TOTAL
---------- --------- ---------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.... -- $ -- $ -- $ 326,966 $ -- $ 326,966
Translation adjustment.... -- -- -- -- (39,328) (39,328)
Net loss.................. -- -- -- (174,193) -- (174,193)
---------- -------- ----- ---------- -------- ---------
Balance, December 31, 1997.. -- -- -- 152,773 (39,328) 113,445
Translation adjustment.... -- -- -- -- 46,553 46,553
Issuance of shares........ 15,000,000 287,168 -- (287,168) -- --
Capital contribution...... -- 468,537 -- -- -- 468,537
Net income................ -- -- -- 293,214 -- 293,214
---------- -------- ----- ---------- -------- ---------
Balance, December 31, 1998.. 15,000,000 755,705 -- 158,819 7,225 921,749
Translation adjustment.... -- -- -- -- (98,525) (98,525)
Net loss (unaudited)...... -- -- -- (704,895) -- (704,895)
---------- -------- ----- ---------- -------- ---------
Balance, June 30, 1999
(unaudited)............... 15,000,000 $755,705 $ -- $ (546,076) $(91,300) $ 118,329
========== ======== ===== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-90
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................... $(174,193) $ 293,214 $ (27,440) $ (704,895)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization......... 73,049 91,189 34,300 79,659
Allowance for doubtful accounts....... -- 44,090 -- 132,780
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.......................... (318,042) (1,309,064) (52,430) 405,291
(Increase) in unbilled charges........ (43,595) (66,528) (96,530) (46,303)
(Increase) decrease in prepaid
expenses and other current assets... (48,548) (48,868) 32,830 (43,983)
(Increase) in due from affiliates..... -- (19,589) -- (259,441)
Increase in accounts payable and
accrued expenses.................... 193,699 607,581 144,550 560,556
Increase (decrease) in deferred
revenue............................. -- 362,135 77,420 (253,153)
Increase in due to affiliates......... 80,749 (70,690) 19,600 22,354
Increase (decrease) in income taxes
payable............................. -- 55,591 -- (55,591)
--------- ----------- --------- ----------
Net cash provided by (used in)
operating activities.............. (236,881) (60,939) 132,300 (162,726)
--------- ----------- --------- ----------
Cash Flows From Investing Activities:
Capital expenditures, net................. 182,580 (277,092) (132,300) --
Acquisition of subsidiary, net of cash
acquired................................ (49,539) -- -- (362,697)
--------- ----------- --------- ----------
Net cash provided by (used in)
investing activities.............. 133,041 (277,092) (132,300) (362,697)
--------- ----------- --------- ----------
Cash Flows From Financing Activities:
Borrowings under bank loans, net.......... 49,539 13,993 -- (11,390)
Proceeds from capital contribution........ -- 468,537 -- --
Borrowings under line of credit........... 93,629 -- -- 537,392
--------- ----------- --------- ----------
Net cash provided by financing
activities........................ 143,168 482,530 -- 526,002
--------- ----------- --------- ----------
Net increase (decrease) in cash and cash
equivalents............................... 39,328 144,499 -- 579
Effect of Exchange Rates on Cash............ (39,328) (46,553) -- (98,525)
Cash and Cash Equivalents, beginning of
period.................................... -- -- -- 97,946
--------- ----------- --------- ----------
Cash and Cash Equivalents, end of period.... $ -- $ 97,946 $ -- $ --
========= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-91
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Twinspark Interactive People B.V. (the "Company" or "Twinspark") is an
Internet professional services firm. The Company provides a broad range of
interactive services that enable businesses to develop and implement interactive
media products.
Effective January 1, 1997, Topics Interactive factory B.V. (Topics)
contributed its business to Twinspark Interactive People B.V. i.c.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized for time and materials projects as services are
provided. Revenues from fixed fee contracts are recognized as services are
provided upon the achievement of specified milestones. Revenue is recognized on
partially completed milestones in proportion to the costs incurred for that
milestone and only to the extent that an irrevocable right to the revenue
exists. Costs incurred under fixed fee contracts are recognized as incurred
which generally is in the same period that revenue is recorded. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Amounts
billed, which are not yet earned, are classified as deferred revenue in the
accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of three to seven years. Leasehold
improvements and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
INTANGIBLES
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of five years on a straight-line basis.
The Company reviews its intangible assets to be held and used
F-92
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the intangible asset exceeds the fair value of the asset. If
circumstances indicate that the carrying amount of the intangible asset that the
Company expects to hold and use may not be recoverable, the Company will
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. Management has evaluated the amortization periods in
the current period and has determined that no impairment currently exists. These
amortization periods will be evaluated by management on a continuing basis, and
will be adjusted if the lives of the related intangible assets are impaired.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed. The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate that
the carrying amount of an asset that that the Company expects to hold and use
may not be recoverable, the Company will estimate the future cash flows expected
to result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less the
future cash outflows expected to be necessary to obtain those inflows. If the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss equal to the amount by which the carrying amount of
the asset exceeds the fair value of the asset. The fair value of the asset is
the amount at which the asset could be bought or sold in a current transaction
between willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying values has occurred
as of December 31, 1998 and March 31, 1999 (unaudited).
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs. The Company has elected to file its income tax returns using the
cash basis of accounting.
F-93
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into Dutch
guilders at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from/to affiliates and accounts payable approximate fair value due to the
short-term maturity of these instruments.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in The Netherlands. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information.
For the year ended December 31, 1997, 2 clients accounted for 22% and 12%,
respectively, of total revenues.
For the year ended December 31, 1998, 3 clients accounted for 16%, 10% and
10% of total revenues.
As of December 31, 1997, 1 client accounted for 26% of total accounts
receivable and unbilled charges.
As of December 31, 1998, 2 clients accounted for 18% and 9% respectively of
total accounts receivable and unbilled charges.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).............................. $(174,193) $293,214 $ (27,440) $(704,895)
Foreign currency translation adjustment........ (39,328) 46,553 23,276 (98,525)
--------- -------- --------- ---------
Comprehensive income (loss).................. $(213,521) $339,767 $ (4,164) $(803,420)
========= ======== ========= =========
</TABLE>
F-94
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company only has operations
in the Netherlands and currently believes that it operates in one segment,
therefore, the adoption of SFAS No. 131 will not materially affect the Company's
current disclosure.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
June 30, 1999 and for the three months ended June 30, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
F-95
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
COOL B.V.
As of January 9, 1999 the Company signed a letter of intent to acquire all
activities of a Dutch entity called Cool B.V. The goodwill which will be paid
and included in the letter of intent is approximately $95,300. Per date of the
issuance of these financial statements, the acquisition is not completed.
3. RELATED PARTY TRANSACTIONS
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
3WIS Beheer B.V............................................. $ -- $19,589 $ 17,850
Tridion B.V................................................. -- -- 261,180
----- ------- --------
Due from affiliates....................................... $ -- $19,589 $279,030
===== ======= ========
</TABLE>
Due to affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
3WIS Beheer B.V............................................. $49,044 $ -- $ --
Topics Interactive Factory B.V.............................. 31,705 10,059 32,413
------- ------- -------
Due to affiliates......................................... $80,749 $10,059 $32,413
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment.......................................... $ 24,274 $ 87,886 $ 574,972
Computer equipment........................................ 153,076 374,312 111,658
Technical infrastructure.................................. 25,265 41,825 81,266
--------- --------- ---------
Total property and equipment............................ 202,615 504,023 767,896
Less--Accumulated depreciation and amortization........... (121,370) (211,245) (256,810)
--------- --------- ---------
Property and equipment, net............................. $ 81,245 $ 292,778 $ 511,086
========= ========= =========
</TABLE>
Depreciation expense was approximately $62,832, $81,112 and $45,565,
respectively, for the years ended December 31, 1997 and 1998 and period ending
June 30, 1999 (unaudited).
F-96
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.................................................... $49,539 $52,944 $131,530
Less--Accumulated amortization.............................. (9,908) (21,178) (30,534)
------- ------- --------
Intangibles, net.......................................... $39,631 $31,766 $100,996
======= ======= ========
</TABLE>
Amortization expense was approximately $10,217, $10,076 and $9,356 for the
years ended December 31, 1997 and 1998 and the six months ended June 30, 1999
(unaudited), respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.......................................... $100,070 $360,546 $ 964,373
Accrued expenses--other................................... 85,703 441,021 401,659
Accrued professional fees................................. 7,926 18,001 14,092
-------- -------- ----------
$193,699 $819,568 $1,380,124
======== ======== ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes is based upon the regular corporate Dutch tax
rate of 35%. The pre incorporation result (January 1, 1997--December 22, 1998)
of Twinspark Interactive People B.V. in corporation can be contributed to
Twinspark Interactive People B.V.
Income (loss) before income taxes and the provision (benefit) per taxes on
income (loss) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
--------------------- ENDED
1997 1998 JUNE 30, 1999
--------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................... $ -- $ -- $ --
International.......................................... (174,193) 346,113 (754,682)
--------- -------- ---------
$(174,193) $346,113 $(754,682)
========= ======== =========
Provision (benefit) for taxes on income (loss):
Current--International................................. $ (47,968) $ 52,899 $ (49,787)
Deferred--International................................ -- -- --
--------- -------- ---------
$ (47,968) $ 52,899 $ (49,787)
========= ======== =========
</TABLE>
F-97
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
-------------------- ENDED
1997 1998 JUNE 30, 1999
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate......................... $(59,226) $117,678 $(256,592)
Local taxes on income (additional Dutch rate)............. (1,742) 3,461 (7,547)
Other..................................................... 13,000 (12,000) --
Valuation allowance....................................... 47,968 (56,240) 214,352
-------- -------- ---------
Effective rate............................................ $ -- $ 52,899 $ (49,787)
======== ======== =========
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred income tax assets (liabilities) net:
Other..................................................... $ -- $ -- $ 7,547
Noncurrent deferred income tax assets (liabilities) net:
Net operating loss........................................ 47,968 -- 256,592
Valuation allowance....................................... (47,968) -- (214,352)
-------- -------- ---------
Total deferred income taxes, net...................... $ -- $ -- $ 49,787
======== ======== =========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book basis of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
8. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company has 15,000,000 authorized shares of Common Stock, of which
15,000,000 shares were issued as of December 31, 1998 and June 30, 1999.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES AND RENT COMMITMENTS
The Company is committed under operating leases, principally for office
space and cars expiring through 2002. As of December 31, 1998, the Company has a
total car lease commitment of $126,455.
F-98
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In February 1999, the Company signed a letter of intent to rent an office
building in Diemen for a 10- year period. The rent will start between June 1,
2000 and August 31, 2000. The total rent commitment over the 10-year period is
$5,909,618.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 30,000
2000........................................................ 305,000
2001........................................................ 581,000
2002........................................................ 581,000
2003........................................................ 551,000
Thereafter.................................................. 3,581,000
</TABLE>
CREDIT FACILITIES
The Company has credit facilities available for an amount of $156,683 and a
5 year loan agreement with the bank of $50,380 to be repaid in 20 quarter terms,
commencing January 1, 1998. The Company pledged its office equipment and
accounts receivable. In addition the payables of the Company to related parties
at any date are subordinated against the payables of the Company to the bank.
Finally, the bank requires that the equity of the Company is at least 30% of
balance sheet total.
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in The Netherlands. The Plan is effective from March 18, 1999.
Employees may begin participation on monthly enrollment dates provided that they
have reached 25 years of age and permanent employment.
11. SUBSEQUENT EVENTS
Effective January 1, 1999, all assets and liabilities related to Interactive
Products Solutions will be transferred to a newly established company called
Tridion B.V. for approximately $100,000.
In August 1999, the Company was acquired by AGENCY.COM Ltd. ("AGENCY.COM")
for $700,000 in cash and 1,057,226 shares of AGENCY.COM's common stock valued at
$11.00 per share, of which 1,047,226 shares were given to the shareholders of
the Company and 10,000 shares to employees of the Company, for a total aggregate
purchase price of approximately $11,629,000. Employees of the Company also
received 75,000 stock options to purchase shares of AGENCY.COM's common stock.
Furthermore, the purchase agreement calls for certain earn-out payments to the
former shareholders of the Company based upon the achievement of certain
targeted operating results of the Company through December 1999. These payments
are payable in the form of 168,066 shares of AGENCY.COM's common stock which are
currently held in escrow.
F-99
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Interactive Traffic, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Interactive Traffic, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
September 23, 1999, except for Note 12,
as to which the date is October 21, 1999
F-100
<PAGE>
INTERACTIVE TRAFFIC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 742,151 $ 2,037,391
Accounts receivable, net of allowance for doubtful
accounts of $18,300 and $0.............................. 601,401 1,369,228
Prepaid expenses and other current assets................. 45,353 96,495
---------- -----------
Total current assets.................................... 1,388,905 3,503,114
Property and equipment, net................................. 345,042 469,391
Security deposits........................................... 71,298 110,004
---------- -----------
Total assets............................................ $1,805,245 $ 4,082,509
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 214,396 $ 395,077
Customer advances......................................... 1,088,025 2,450,329
Deferred revenues......................................... 259,500 677,276
Current portion of long-term debt......................... 36,217 41,151
Line of credit............................................ -- 200,000
Other..................................................... 41,710 26,710
Stockholder loans......................................... 42,475 84,064
---------- -----------
Total current liabilities............................... 1,682,323 3,874,607
Long-term debt.............................................. 69,495 67,204
---------- -----------
Total liabilities....................................... 1,751,818 3,941,811
========== ===========
Stockholders' equity:
Common stock, par value $.01, 300,000 and 500,000 shares
authorized in 1998 and 1999, respectively; 212,387 and
213,733 shares issued and outstanding in 1998 and 1999,
respectively............................................ 2,124 2,137
Series A Convertible Preferred stock, par value $.01, 0
and 37,041 shares authorized in 1998 and 1999,
respectively; 0 and 37,041 shares issued and outstanding
in 1998 and 1999, respectively.......................... -- 370
Stockholder receivable.................................... (26,461) (28,782)
Additional paid-in capital................................ 727,403 3,731,591
Deferred compensation..................................... -- (1,157,584)
Accumulated deficit....................................... (649,639) (2,407,034)
---------- -----------
Total stockholders' equity.............................. 53,427 140,698
---------- -----------
Total liabilities and stockholders' equity.............. $1,805,245 $ 4,082,509
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................ $3,506,833 $2,309,796 $ 4,286,931
Cost of revenues.................................... 2,788,220 1,836,845 4,045,756
---------- ---------- -----------
Gross profit...................................... 718,613 472,951 241,175
Operating expenses:
General and administrative........................ 1,189,557 775,216 1,703,707
Sales and marketing............................... 218,604 143,575 318,556
---------- ---------- -----------
Total operating expenses........................ 1,408,161 918,791 2,022,263
Operating loss.................................. (689,548) (445,840) (1,781,088)
Other income (expense)
Interest income................................... 42,108 30,683 57,941
Interest expense.................................. (14,257) (10,040) (24,248)
Loss on disposal of equipment..................... (9,399) -- (10,000)
---------- ---------- -----------
18,452 20,643 23,693
---------- ---------- -----------
Net loss............................................ $ (671,096) $ (425,197) $(1,757,395)
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1999
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED COMMON RETAINED
STOCK STOCK ADDITIONAL EARNINGS
------------------- ------------------- STOCKHOLDER PAID-IN DEFERRED (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL COMPENSATION DEFICIT)
-------- -------- -------- -------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... -- $ -- 195,523 $ 1,955 $(25,008) $ 181,947 $ -- $ 21,457
Issuance of common
stock.................. -- -- 9,009 90 -- 299,910 -- --
Stock-based compensation
on restricted shares... -- -- 7,855 79 -- 245,546 -- --
Advances to stockholder.. -- -- -- -- (1,453) -- -- --
Net loss................. -- -- -- -- -- -- -- (671,096)
------ ------- ------- ------- -------- ---------- ----------- -----------
Balance, December 31,
1998................... -- 212,387 2,124 (26,461) 727,403 -- (649,639)
Stock-based compensation
on restricted shares... -- -- 1,346 13 -- 175,766 -- --
Advances to stockholder.. -- -- -- -- (2,321) -- -- --
Issuance of preferred
stock.................. 37,041 370 -- -- -- 1,495,710 -- --
Issuance of stock
options................ -- -- -- -- -- 1,332,712 (1,332,712) --
Stock-based compensation
on stock options....... -- -- -- -- -- -- 175,128 --
Net loss................. -- -- -- -- -- -- -- (1,757,395)
------ ------- ------- ------- -------- ---------- ----------- -----------
Balance, September 30,
1999................... 37,041 $ 370 213,733 $ 2,137 $(28,782) $3,731,591 $(1,157,584) $(2,407,034)
====== ======= ======= ======= ======== ========== =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance, December 31,
1997................... $ 180,351
Issuance of common
stock.................. 300,000
Stock-based compensation
on restricted shares... 245,625
Advances to stockholder.. (1,453)
Net loss................. (671,096)
----------
Balance, December 31,
1998................... 53,427
Stock-based compensation
on restricted shares... 175,779
Advances to stockholder.. (2,321)
Issuance of preferred
stock.................. 1,496,080
Issuance of stock
options................ --
Stock-based compensation
on stock options....... 175,128
Net loss................. (1,757,395)
----------
Balance, September 30,
1999................... $ 140,698
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(671,096) $(425,197) $(1,757,395)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation.................................... 92,603 46,396 141,805
Provision for doubtful accounts................. (21,489) (39,789) (18,300)
Stock-based compensation........................ 245,625 151,327 350,907
Loss on disposal of equipment................... 9,399 -- 10,000
Changes in assets and liabilities:
Accounts receivable........................... (44,308) (66,271) (749,527)
Prepaid expenses and other.................... (15,026) (19,823) (41,046)
Accounts payable and accrued expenses......... 32,612 (607) 180,678
Customer advances............................. 543,479 401,933 1,362,305
Deferred revenues............................. 63,942 196,092 417,776
--------- --------- -----------
Net cash provided by (used in) operating
activities................................ 235,741 244,061 (102,797)
--------- --------- -----------
Cash flows from investing activities:
Purchases of fixed assets......................... (253,603) (199,157) (251,856)
Security deposits................................. (33,333) (13,703) (38,706)
--------- --------- -----------
Net cash used in investing activities....... (286,936) (212,860) (290,562)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings..................... 39,016 29,638 210,746
Payments of bank borrowings....................... (63,280) (47,658) (28,747)
Proceeds from stockholder loans................... 13,507 12,039 56,089
Payments of stockholder loans..................... -- -- (14,500)
Payments of other loans........................... -- -- (15,000)
Payments of capital lease obligation.............. (11,754) (8,700) (13,748)
Advances to stockholder........................... (20,787) (17,978) (10,321)
Proceeds from stockholder receivable.............. 19,336 12,247 8,000
Issuance of preferred stock....................... -- -- 1,496,080
Issuance of common stock.......................... 300,000 300,000 --
--------- --------- -----------
Net cash provided by financing activities... 276,038 279,588 1,688,599
--------- --------- -----------
Net increase in cash and cash equivalents........... 224,843 310,789 1,295,240
Cash and cash equivalents, beginning of period...... 517,308 517,308 742,151
--------- --------- -----------
Cash and cash equivalents, end of period............ $ 742,151 $ 828,097 $ 2,037,391
========= ========= ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest.......... $ 14,030 $ 10,040 $ 18,159
Supplemental disclosure of non-cash investing and
financing activities:
Capitalized lease obligations incurred............ 13,321 13,327 34,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Interactive Traffic, Inc. (the "Company") is an interactive direct marketing
agency and was organized as a Delaware corporation in July 1995 and commenced
operations on that date. The Company works with electronic commerce companies to
maximize the return on their investment in online marketing programs.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, recent development of the Internet
advertising market and unproven acceptance and effectiveness of web advertising,
unproven business model, risks associated with technological change, and the
limited history of commerce on the Internet. The Company's success may depend in
part upon the emergence of the Internet as a communications medium, prospective
product development efforts, and the acceptance of the Company's solutions by
the marketplace.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM BASIS OF PRESENTATION
The interim financial statements as of September 30, 1999 and for the nine
months ended September 30, 1998 and 1999 are unaudited and reflect adjustments,
consisting only of normal recurring accruals, which are, in the opinion of the
Company's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with a maturity of three
months or less to be cash equivalents.
REVENUE RECOGNITION
Revenues are derived primarily from the delivery of services rendered to
clients. For these services the Company receives base fees. In addition to these
base fees, certain client agreements contain incentive fee schedules, whereby
the Company receives additional revenues based on increased sales levels that
its clients achieve from the direct result of services performed by the Company.
Revenues are recognized in the period in which the services are performed and
the period in which any incentives are earned.
DEFERRED REVENUES
The Company bills its customers for base fees at the beginning of a month
for services to be rendered during the following month. The Company defers these
revenues until the services are performed. The Company has recorded deferred
revenues of $259,500 and $677,276 for such billings as of December 31, 1998 and
September 30, 1999, respectively.
F-105
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUSTOMER ADVANCES
In connection with performing direct marketing consulting services for its
customers, the Company purchases advertising on Web sites on behalf of its
customers. The Company invoices its customers for the cost of media placements
and remits payments to the Web sites but does not assume any credit risk
associated with the transactions. The Company does not recognize any revenue or
expenses associated with the purchasing and re-invoicing of advertising
placements in its statement of operations. As of December 31, 1998 and
September 30, 1999, the Company received $1,088,025 and $2,450,329,
respectively, of cash advances from its customers for the purchase of
advertising on Web sites.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies which have
stock-based compensation arrangements with employees to adopt a new fair-value
basis of accounting for stock options and other equity instruments, or to
continue to apply the existing accounting required by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has elected to account for its stock-based compensation arrangements for
employees under APB 25 and related interpretations. Under APB 25, compensation
is recorded on the date of grant to the extent the fair value of the underlying
stock exceeds the exercise price.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the assets. Leasehold
improvements are amortized over their estimated useful lives, or the term of the
leases, whichever is shorter.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash with high quality financial
institutions. The Company performs ongoing credit evaluations of its customers
and generally requires no collateral.
For the year ended December 31, 1998, five customers accounted for
approximately 69% of revenues, individually ranging from 10%--19%. Approximately
82% of accounts receivable at December 31, 1998 was due from five customers.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences
F-106
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and to operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the results of operations in the period that includes the
enactment date.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results may differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIFE 1998 1999
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and purchased software............. 3 years $315,411 $426,736
Furniture and fixtures................................ 5 years 114,324 238,555
Leasehold improvements................................ 4-5 years 37,387 46,427
--------- -------- --------
467,122 711,718
Less accumulated depreciation and amortization........ (122,080) (242,327)
-------- --------
$345,042 $469,391
======== ========
</TABLE>
4. LEASE COMMITMENTS
The Company leases its facilities pursuant to noncancellable operating
leases. The future minimum lease payments under such leases at December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999........................................................ $285,738
2000........................................................ 311,683
2001........................................................ 281,514
2002........................................................ 85,302
--------
$964,237
========
</TABLE>
F-107
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASE COMMITMENTS (CONTINUED)
Rent expense under operating leases for the year ended December 31, 1998 and
for the nine months ended September 30, 1998 and 1999 was approximately
$187,000, $131,000 and $321,000, respectively.
5. STOCKHOLDERS' EQUITY
In March 1999, the Board of Directors amended the Certificate of
Incorporation to effect an increase in the number of shares the Company has the
authority to issue to 537,041 shares, including 500,000 shares of Common Stock
and 37,041 shares of Series A Convertible Preferred Stock.
CONVERTIBLE PREFERRED STOCK
In March 1999, the Company issued 37,041 shares of Series A Convertible
Preferred Stock, (the "Series A shares") at a share price of $43.33. The
Series A shares were recorded at their fair value on the date of issuance of
approximately $1,605,000, net of related issuance costs of $108,920.
The principal terms of the Series A shares are as follows:
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holders of the Series A
shares are entitled to receive an amount equal to $43.33 per share, plus a
further amount per share equal to dividends, if any, then declared but unpaid on
the Series A shares, before any distribution or payment is made upon any shares
of Common Stock.
PARTICIPATION RIGHTS
In the event of a liquidation, dissolution, or winding up of the Company
(which includes a merger or acquisition where the Company is not the surviving
entity), the Series A stockholders initially receive the liquidation preference
noted above, and then any remaining amounts are distributed to all remaining
stockholders on a pro-rata basis after the Series A shares are converted to
common shares.
CONVERSION
The holders of the Series A shares have the right, at any time, to convert
such shares into common stock on a share-for-share basis. All outstanding
Series A shares shall automatically convert into common stock upon the
consummation of a firm commitment underwritten public offering of the Company's
common stock where the gross proceeds from the offering are not less than
$15 million.
F-108
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDENDS
The Company may not pay dividends to the common stockholders unless a
dividend has been paid or set aside on account of all Series A shares. No
dividends have been declared on the Series A shares.
VOTING RIGHTS
The Series A stockholders will have one vote for each full share of common
stock, into which their respective Series A shares are convertible on the record
date for the vote.
PREEMPTIVE RIGHTS
The Company grants to each holder of Series A shares the right to purchase
such holder's pro rata share of any new securities which the Company may, from
time to time, propose to sell and issue.
BOARD OF DIRECTORS REPRESENTATION
The holders of Series A shares, voting together as a class, shall be
entitled to elect one director of the Company at each annual election of
directors.
6. STOCK INCENTIVE PLAN
From July 1995 to December 30, 1998, certain employees were granted
restricted shares of common stock. The restricted shares generally vested 25%
after one year of service and 18.75% each six month period of service
thereafter. If employment was terminated prior to vesting, unless otherwise
determined by the Company, any unvested shares were forfeited. On December 30,
1998, the Company entered into an agreement with its employees to cancel their
unvested shares and replace them with stock options, at a future date, in
accordance with a stock incentive plan which was being implemented by the
Company. As of December 30, 1998, all unvested shares were canceled by the
Company.
The following table summarizes the restricted share awards activity during
1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Restricted share awards at December 31, 1997................ 17,984
Granted during 1998....................................... 55,320
Vested during 1998........................................ (7,855)
Forfeited during 1998..................................... (4,528)
Cancelled during 1998..................................... (60,921)
-------
Restricted share awards at December 31, 1998................ --
=======
</TABLE>
F-109
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK INCENTIVE PLAN (CONTINUED)
The Company continued to recognize compensation expense during the period
from December 31, 1998 through June 30, 1999, based on the terms of the original
restricted share awards.
In July 1999, the Company adopted the 1999 Stock Incentive Plan (the "Plan")
under which the Company may issue awards including shares, incentive stock
options or non-qualified stock options. The awards, other than incentive stock
options, may be granted to the Company's directors, employees and consultants.
Incentive stock options may only be granted to employees of the Company. The
maximum aggregate number of shares which may be issued pursuant to all awards is
200,000.
During July and August 1999, the Board granted 89,137 incentive stock
options to its employees, of which 87,937 have an exercise price of $4.33 and
1,200 have an exercise price of $10. The fair market value of the Company's
common stock, as determined by the Company's management, exceeded the exercise
price of the stock options on the date of grant, and accordingly the Company
recognized deferred compensation. The deferred compensation is being amortized
over the vesting period of the stock options. The options generally vest over a
three year period, 25% after one year and 18.75% each six month period
thereafter. In accordance with the plan, an option term will not be more than
10 years from the date of grant, with the exception of incentive stock options
in which the term will not exceed 5 years from the date of grant. Under certain
conditions, these options may vest on an accelerated basis.
In accordance with the Plan, all outstanding awards issued will become fully
vested and exercisable upon the consummation of a corporate transaction, as
defined in the Plan, which includes the acquisition of the Company.
7. LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, bearing interest at .75% above prime,
8.5% at December 31, 1998 and 9% at September 30, 1999,
maturing August 2002. The note requires certain members of
the Company's management to personally maintain a
compensating cash balance................................. $ 86,000 $ 68,000
Capitalized leases payable to various companies to be paid
ratably over periods of three years or less............... 19,712 40,355
-------- --------
105,712 108,355
Less current portion of note payable and capitalized
leases.................................................... (36,217) (41,151)
-------- --------
Total long-term debt........................................ $ 69,495 $ 67,204
======== ========
</TABLE>
F-110
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LINE OF CREDIT
During February 1999, the Company entered into a line of credit agreement
with a financial institution in the amount of $200,000. The line of credit is
collateralized by the Company's assets and personally guaranteed by certain
members of the Company's management. Borrowings under the line bear interest at
1% above prime, 9.25% at September 30, 1999. The line is required to be repaid
once a year. Subsequent to repayment, the Company may not borrow against the
line for a period of thirty days.
9. RELATED PARTY TRANSACTIONS
STOCKHOLDER RECEIVABLE
The stockholder receivable reflected as a reduction in stockholders' equity
consists of advances made to an officer who is also a stockholder of the
Company. The advances are non-interest bearing and have no established payment
terms.
STOCKHOLDER LOANS
Stockholder loans consists of amounts due to two stockholders of the
Company. The amounts bear interest, at rates ranging from 6% to 13.5%, and are
due on demand.
10. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under
SFAS 109, deferred income tax assets and liabilities are based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
F-111
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred income taxes are as
follows:
INCOME TAXES
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $341,040
Deferred income........................................... 110,275
Other..................................................... 99,918
--------
Total deferred tax assets................................... 551,233
Deferred tax liabilities:
Accounts receivable....................................... 263,342
Other..................................................... 37,888
--------
Total deferred tax liabilities.............................. 301,230
Deferred Tax Asset.......................................... 250,003
Valuation Allowance......................................... 250,003
--------
Net Deferred Tax Asset...................................... $ --
========
</TABLE>
A valuation allowance is required to reduce the existing deferred tax
assets, if, based on the weight of all positive and negative evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Management of the Company has evaluated the available evidence
regarding the realizability of its deferred tax assets and concluded that it is
more likely than not that the Company will not realize these favorable tax
attributes and accordingly, has provided a valuation allowance for the net
deferred tax asset. The Company has a net operating loss carryforward equal to
approximately $802,000 as of December 31, 1998. Under current Federal income tax
law approximately $217,000 and $585,000 of such carryforwards will expire on
December 31, 2013 and 2018, respectively.
11. SUBSEQUENT EVENT
The Company was acquired by AGENCY.COM Ltd. on October 21, 1999.
F-112
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO VISIONIK A/S:
We have audited the accompanying consolidated balance sheets of Visionik A/S
(a Danish corporation) and subsidiaries, as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 1997 and 1998 financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Visionik A/S and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
United States generally accepted accounting principles.
MOORE STEPHENS DENMARK
COPENHAGEN, DENMARK
November 2, 1999
F-113
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $273,757 $ 226,038 $ 354,221
Work in progress, net............................. 14,726 50,551 79,666
Accounts receivable............................... 205,526 544,288 686,486
Prepaid expenses and other current assets......... 19,231 31,296 128,614
Marketable securities available for sale.......... 111,553 122,424 66,690
-------- ---------- ---------------
Total current assets.......................... 624,793 974,597 1,315,677
======== ========== ===============
Property and Equipment, net of accumulated
amortization of $79,005, $77,046 and $35,439,
(unaudited) respectively.......................... 64,872 54,413 46,238
-------- ---------- ---------------
Total assets.................................. $689,665 $1,029,010 $ 1,361,915
======== ========== ===============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Subordinated debt................................. $ -- $ -- $ 287,203
Accounts payable and accrued expenses............. 311,912 508,029 465,201
Prepayments from customers........................ 54,016 103,934 33,698
Income taxes payable.............................. 73,949 93,778 177,981
Other current liabilites.......................... 12,818 7,829 107,701
-------- ---------- ---------------
Total current liabilities..................... 452,695 713,570 1,071,784
-------- ---------- ---------------
Long-term Liabilities:
Deferred tax...................................... -- 5,649 12,144
Other long-term liabilities....................... 19,294 14,994 7,504
-------- ---------- ---------------
Total long-term liabilities................... 19,294 20,643 19,648
-------- ---------- ---------------
Total liabilities............................. 471,989 734,213 1,091,432
-------- ---------- ---------------
Commitments (Note 7)
Stockholders' Equity:
Common stock, $168 par value, 500 shares
authorized, 500, 500 and 500 (unaudited) shares
issued and outstanding, respectively............ 84,055 84,055 84,055
Retained earnings................................. 162,183 216,448 220,894
Cumulative translation adjustment................. (28,562) (11,255) (40,352)
Unrealized gains on marketable securities......... -- 5,549 5,886
-------- ---------- ---------------
Total stockholders' equity.................... 217,676 294,797 270,483
-------- ---------- ---------------
Total liabilities and stockholders' equity.... $689,665 $1,029,010 $ 1,361,915
======== ========== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-114
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS,
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $1,811,295 $2,041,596 $2,242,049
Direct salaries and costs...................... 1,131,369 1,179,145 1,257,579
---------- ---------- ----------
Gross profit............................... 679,926 862,451 984,470
General and administrative..................... 371,427 436,873 492,561
Sales and marketing............................ 137,971 256,788 319,598
Depreciation and amortization.................. 79,005 77,046 39,653
---------- ---------- ----------
Income from operations..................... 91,523 91,744 132,658
Income from affiliated company................. -- -- 50,996
Interest income................................ 10,757 15,269 9,662
Interest expense............................... (3,813) (498) (17,243)
---------- ---------- ----------
Income before income taxes................. 98,467 106,515 176,073
Provision for income taxes..................... 35,716 38,872 63,589
---------- ---------- ----------
Net income................................. $ 62,751 $ 67,643 $ 112,484
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-115
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON COMMON GAINS ON CUMMULATIVE
STOCK STOCK MARKETABLE RETAINED FOREIGN CURRENCY
SHARES AMOUNT SECURITIES EARNINGS TRANSLATION TOTAL
-------- -------- ---------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... 500 $84,055 $ -- $106,757 $ -- $190,812
Translation adjustment......... -- -- -- -- (28,562) (28,562)
Net Income..................... -- -- -- 62,751 -- 62,751
Dividend....................... -- -- -- (7,325) -- (7,325)
--- ------- ------ -------- -------- --------
Balance, December 31, 1997....... 500 84,055 -- 162,183 (28,562) 217,676
Translation adjustment......... -- -- -- -- 17,307 17,307
Net Income..................... -- -- 5,549 62,094 -- 67,643
Dividend....................... -- -- -- (7,829) -- (7,829)
--- ------- ------ -------- -------- --------
Balance, December 31, 1998....... 500 84,055 5,549 216,448 (11,255) 294,797
Translation adjustment......... -- -- -- -- (29,097) (29,097)
Net Income (unaudited)......... -- -- 337 112,147 -- 112,484
Dividend....................... -- -- -- (107,701) -- (107,701)
--- ------- ------ -------- -------- --------
Balance, September 30, 1999
(unaudited).................... 500 $84,055 $5,886 $220,894 $(40,352) $270,483
=== ======= ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-116
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income........................................ $ 62,751 $ 67,643 $112,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 79,005 77,046 39,653
Dividend.......................................... (7,325) (7,829) (107,701)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (7,949) (338,762) (142,198)
(Increase) in work in progress.................... 222,598 (35,825) (29,115)
(Increase) decrease in prepaid expenses and other
current assets.................................. (8,344) 12,065 (97,318)
(Increase) in securities.......................... (42,219) (10,871) 55,734
Increase (decrease) in long-term liabilities...... (8,875) 1,349 (995)
Increase (decrease) in accounts payable and
accrued expenses................................ 136,939 196,117 (42,828)
Increase (decrease)in accounts prepayments from
customers....................................... (7,620) 49,918 (70,236)
Increase (decrease) in income taxes payable....... (5,335) 19,829 84,203
Increase (decrease) in dividend................... 4,412 (4,989) 99,872
-------- --------------- --------
Net cash provided by (used in) operating
activities.................................. 418,038 25,691 (98,445)
-------- --------------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures, net......................... (79,875) (90,717) (31,478)
-------- --------------- --------
Net cash (used in) investing activities....... (79,875) (90,717) (31,478)
-------- --------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in subordinated debt.......... (50,433) -- 287,203
-------- --------------- --------
Net cash provided by financing activities..... (50,433) -- 287,203
-------- --------------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 287,730 (65,026) 157,280
Effect of Exchange Rates on Cash.................... (28,562) 17,307 (29,097)
CASH AND CASH EQUIVALENTS, beginning of period...... 14,589 273,757 226,038
-------- --------------- --------
CASH AND CASH EQUIVALENTS, end of period............ $273,757 $ 226,038 $354,221
======== =============== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Income taxes.................................... $ 30,526 $ 20,527 $ --
======== =============== ========
Interest........................................ $ 6,944 $ 14,771 $ 7,581
======== =============== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-117
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Visionik A/S and subsidiaries (collectively known as the "Company") is a
digital business development partner. The Company develops and drives
interactive digital channels across different platforms for its customers.
Visionik A/S is owned 75% by Visionik Holding ApS and 25% by Associated
Management Services A/S. The Visionik Group consist of the parent company
Visionik A/S and the 100% owned subsidiaries Visionik E-COM ApS and Visionik
Interactive TV A/S. Visionik E-COM ApS is developing professional internet
services for The Copenhagen Stock Exchange and a number of other customers in
Denmark. Visionik Interactive TV A/S is a developer of interactive services and
backend systems for digital TV. The Company is working for clients in
Scandinavia, England, Ireland, Holland, Germany and France among others.
ACCOUNTING PRINCIPLES IN GENERAL
The Company's financial statements have been prepared in accordance with US
GAAP.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Visionik A/S and its subsidiaries, Visionik E-COM ApS and Visionik Interactive
TV A/S. All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized for time and materials arrangements on the basis of
costs incurred in the period. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Amounts
billed, which are not yet earned, are classified as deferred revenue in the
accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents.
F-118
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN MARKETABLE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In accordance with this
pronouncement, the investment and debt securities held by the Company and
included in the accompanying consolidated balance sheets that may be sold in
response to changes in interest rates, prepayments, and other factors have been
classified as available-for-sale. Such securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity (on an after-tax basis). Gains and
losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of two to five years. Leasehold improvements
and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying values has occurred
as of December 31, 1998 and September 31, 1999 (unaudited).
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs.
F-119
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into
Danish kroner at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates during the fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term maturity of these
instruments.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
concentrated in Denmark and throughout Europe. The Company performs ongoing
credit evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. There has been no
allowances for doubtful accounts in the periods presented.
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NINE MONTHS, ENDED
1997 1998 SEPTEMBER 30, 1999
------------ ------------ --------------------
(UNAUDITED)
<S> <C> <C> <C>
Net Income..................................... $ 62,751 $67,643 $112,484
Foreign currency translation adjustment........ (28,562) 17,307 (29,097)
Unrealized gains on marketable securities...... -- 5,549 337
-------- ------- --------
Comprehensive income......................... $ 34,189 $90,499 $ 83,724
======== ======= ========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and
F-120
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997 and need not be applied to interim
periods in the initial year of application. Comparative information for earlier
years presented is to be restated. The Company only has operations in the
Netherlands and currently believes that it operates in one segment, therefore,
the adoption of SFAS No. 131 will not materially affect the Company's current
disclosure.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of the
nine months ended September 30, 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited consolidated financial statements,
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented herein. The consolidated results for interim periods are
not necessarily indicative of the results expected for a full year.
2. SUBSIDIARIES
On July 1, 1998 the activity in Visionik A/S was transferred into two new
established 100% owned companies Visionik Interactive TV A/S (was established as
an ApS but has been changed to an A/S in 1999) and Visionik E-COM ApS by way of
a tax-free transfer of assets.
F-121
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Office and computer equipment....................... $271,554 $338,141 $365,405
-------- -------- --------
Total property and equipment.................... 271,554 338,141 365,405
Less--Accumulated depreciation and amortization..... 206,682 283,728 319,167
-------- -------- --------
Property and equipment, net..................... $ 64,872 $ 54,413 $ 46,238
======== ======== ========
</TABLE>
Depreciation expense was approximately $79,005, $77,046 and $35,439,
respectively, for the years ended December 31, 1997 and 1998 and the nine months
ending September 30, 1999 (unaudited).
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.................... $ -- $ -- $ 93,158
Accrued expenses--other............. 311,912 508,029 372,043
-------- -------- --------
$311,912 $508,029 $465,201
======== ======== ========
</TABLE>
5. INCOME TAXES
Income before (provision for) income taxes and the (provision for) income
taxes consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Income before income taxes:......... $ 98,467 $106,515 $176,073
======== ======== ========
(Provisions for) income taxes:
Current--State.................... $(35,716) $(33,223) $(56,627)
Deferred--State................... -- (5,649) (6,962)
-------- -------- --------
$(35,716) $(38,872) $(63,589)
======== ======== ========
</TABLE>
F-122
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Property and equipment............................ $ -- $30,787 $ 15,910
-------- ------- --------
Total deferred tax assets........................... -- 30,787 15,910
-------- ------- --------
Net deferred tax assets............................. -- 30,787 15,910
-------- ------- --------
Deferred tax liabilities:
Cash basis to accrual basis adjustment............ -- (2,858) (7,275)
Work in progress.................................. -- (33,578) (20,779)
-------- ------- --------
Total deferred tax liabilities...................... -- (36,436) (28,054)
-------- ------- --------
Net deferred tax liabilities........................ $ -- $(5,649) $(12,144)
======== ======= ========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book bases of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes but have not yet
been expensed in the financial statements.
6. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company has 500 authorized shares of Common Stock.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES AND RENT COMMITMENTS
The Company is committed under operating leases, principally for office
space and equipment expiring through 2002. As of December 31, 1998, the Company
has a total equipment lease commitment of $9,513.
F-123
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On November 1, 1999, the Company signed a contract to rent office space on a
new location in Copenhagen. There are two years security of tenure starting from
January 1, 2000, where the rent will start. The total rent commitment over the
2-year period is $254,796.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 2,216
2000........................................................ 130,031
2001........................................................ 130,031
2002........................................................ 2,031
</TABLE>
8. CREDIT FACILITIES
The Company has an overdraft facility available for an amount of $42,500.
The interest rate on the overdraft is 6%.
9. SUBORDINATED DEBT
There is a subordinated debt of $287,203 obtained by the shareholders. As an
effect of the AGENCY.COM acquisition of the Company, the loan will be redeemed.
A payment of the subordinated debt will not have any tax consequences for the
companies in the group.
10. SUBSEQUENT EVENTS
In November 1999, the Company was acquired by AGENCY.COM Ltd. ("AGENCY.COM")
for 572,000 shares of AGENCY.COM's common stock valued at $11.00 per share, and
$500,000 in cash, for a total aggregate purchase price of $6,792,000. Employees
of the Company also received 68,000 stock options to purchase shares of
AGENCY.COM's common stock.
F-124
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements as of September 30, 1999 and for the nine months ended September 30,
1998 and 1999 and the year ended December 31, 1998, have been derived from the
application of pro forma adjustments to the historical consolidated financial
statements of AGENCY.COM, Eagle River Interactive, Interactive Solutions,
Twinspark Interactive People, I-traffic and Visionik which are included
elsewhere in this prospectus and the historical financial statements of the
other acquisitions, which are not included in this prospectus. The unaudited pro
forma condensed consolidated balance sheet gives effect to the acquisition of
I-traffic and Visionik as if such transactions had occurred on September 30,
1999. The unaudited pro forma consolidated statement of operations information
for the nine months ended September 30, 1999 gives effect to the acquisitions
that AGENCY.COM completed in 1999 as if such transactions had occurred on
January 1, 1998. The unaudited pro forma consolidated statements of operations
information for the nine months ended September 30, 1998 and for the year ended
December 31, 1998, gives effect to the acquisitions that AGENCY.COM completed in
1998 and 1999 as if such transactions had occurred on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of what AGENCY.COM's actual results of operations or
financial condition would have been assuming the acquisitions that AGENCY.COM
completed in 1998 and 1999 had been completed on such dates, nor does it purport
to be indicative of results of operations or financial condition that may be
achieved in the future.
Each of the acquisitions that AGENCY.COM completed in 1998 and 1999 has been
accounted for using the purchase method of accounting. The purchase method of
accounting allocates the aggregate purchase price to the assets acquired and
liabilities assumed based upon their respective fair values. The excess purchase
price over the fair value of net assets acquired is as follows: $22.257 million
for Eagle River Interactive, of which $1.292 million was allocated to workforce,
$3.240 million to customer base and $17.725 million to goodwill; $1.718 million
for Interactive Solutions of which $1.035 million was allocated to workforce,
$2.600 million to customer base and $12.739 million to goodwill and,
$12.710 million for Twinspark Interactive People, $10,531 million for I-traffic,
$6.522 million for Visionik and an aggregate of $2.129 million for the other
acquisitions, all of which has been allocated to goodwill. Management considers
such estimates to be reasonable.
F-125
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
AGENCY.COM I-TRAFFIC VISIONIK ADJUSTMENTS PRO FORMA
------------- ---------- ---------- ------------ -------------
(A) (B)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 725,863 $2,037,391 $ 354,221 $ -- $ 3,117,475
Accounts receivable, net..................... 24,141,609 1,369,228 686,486 -- 26,197,323
Unbilled charges............................. 6,682,710 -- 79,666 -- 6,762,376
Prepaid expenses and other current assets.... 3,579,670 96,495 128,614 -- 3,804,779
Income tax receivable........................ 2,130,945 -- -- -- 2,130,945
Due from related parties..................... 295,968 -- -- -- 295,968
------------ ---------- ---------- ----------- ------------
Total current assets....................... 37,556,765 3,503,114 1,248,987 -- 42,308,866
Property and Equipment, net.................... 11,653,923 469,391 46,238 -- 12,169,552
Intangibles, net (a) (b)....................... 60,291,154 -- -- 17,052,692 77,343,846
Deferred Tax Assets............................ 1,010,396 -- -- -- 1,010,396
Investments and Other Assets................... 4,635,757 110,004 66,690 -- 4,812,451
------------ ---------- ---------- ----------- ------------
Total assets............................... $115,147,995 $4,082,509 $1,361,915 $17,052,692 $137,645,111
============ ========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........ $ 14,920,232 $ 395,077 $ 465,201 $ -- $ 15,780,510
Short-term debt.............................. 177,000 200,000 287,203 1,000,000 1,664,203
Income taxes payable......................... 1,061,458 -- 177,981 -- 1,239,439
Other current liabilities.................... -- 84,064 107,701 -- 191,765
Deferred revenue............................. 2,426,901 677,276 33,698 -- 3,137,875
Current portion of capital lease
obligations................................ 1,097,956 -- -- -- 1,097,956
------------ ---------- ---------- ----------- ------------
Total current liabilities.................. 19,683,547 1,356,417 1,071,784 1,000,000 23,111,748
Long-term Liabilities:
Due to Omnicom Group, Inc.................... 66,806,568 -- -- 3,500,000 70,306,568
Deferred tax liabilities..................... 458,498 -- 12,144 -- 470,642
Capital lease obligations.................... 1,709,425 -- 7,504 -- 1,716,929
Due to related parties....................... 390,000 -- -- -- 390,000
Bank loans................................... -- 67,204 -- -- 67,204
Other liabilities............................ 1,202,042 2,518,190 -- -- 3,720,232
------------ ---------- ---------- ----------- ------------
Total liabilities.......................... 90,250,080 3,941,811 1,091,432 4,500,000 99,783,323
------------ ---------- ---------- ----------- ------------
Stockholders' Equity (c):
Common stock................................. 26,664 2,137 84,055 (85,151) 27,705
Preferred stock.............................. -- 370 -- (370) --
Stockholder receivable....................... -- (28,782) -- 28,782 --
Additional paid-in capital................... 36,436,603 3,731,591 -- 9,231,241 49,399,435
Retained earnings (deficit).................. (7,629,456) (2,407,034) 220,894 2,186,140 (7,629,456)
Deferred compensation........................ (3,891,762) (1,157,584) -- 1,157,584 (3,891,762)
Unrealized gain on marketable securities..... -- -- 5,886 (5,886) --
Cumulative foreign translation adjustments... (44,134) -- (40,352) 40,352 (44,134)
------------ ---------- ---------- ----------- ------------
Total stockholders' equity................. 24,897,915 140,698 270,483 12,552,692 37,861,788
------------ ---------- ---------- ----------- ------------
Total liabilities and stockholders'
equity................................... $115,147,995 $4,082,509 $1,361,915 $17,052,692 $137,645,111
============ ========== ========== =========== ============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-126
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
(a) In October 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Interactive Traffic, Inc. ("I-traffic") for
$3,000,000 in cash, a $1,000,000 short-term note payable due at the earlier
of December 31, 1999 or thirty days following the completion of the
Company's initial public offering, 469,320 shares of the Company's common
stock valued at $11.00 per share, the assumption of options to purchase
160,680 shares of the Company's common stock at an average exercise price of
$2.54 per share, and the issuance of newly-granted options to purchase
60,000 shares of the Company's common stock at an exercise price of $8.50
per share, which options were valued at less than the fair market value of
the Company's common stock on the date of grant, valued at $1,509,353, for a
total aggregate purchase price of $10,671,873. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair
values on the acquisition date. Furthermore, the purchase agreement calls
for certain earn-out payments to the former shareholders of I-traffic based
upon the achievement of certain future targeted operating results for
I-traffic one year from the closing of the transaction. These payments are
payable in cash and additional shares of the Company's common stock and
future payments, if any, will be recorded as additional purchase price and,
accordingly, an adjustment to goodwill.
Set forth below is AGENCY.COM's allocation of the purchase price of the
I-traffic acquisition:
<TABLE>
<S> <C>
Aggregate purchase price.................................... $10,671,873
-----------
Less book value of net assets acquired.................... 140,698
-----------
Excess of cost over book value of net assets acquired....... $10,531,175
===========
Allocation of excess of cost over book value of assets
acquired:
Goodwill.................................................. $10,531,175
===========
</TABLE>
The allocation of excess cost over book value of net assets acquired to the
intangible assets relating to I-traffic will be amortized over a useful life of
seven years.
(b) In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation,
for $500,000 in cash and 572,000 shares of the Company's common stock valued
at $11.00 per share for a total aggregate purchase price of $6,792,000. This
acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
F-127
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
Set forth below is AGENCY.COM's allocation of the purchase price of the
Visionik acquisition:
<TABLE>
<S> <C>
Aggregate purchase price.................................... $6,792,000
Less book value of net assets acquired.................... 270,483
----------
Excess of cost over book value of net assets acquired....... $6,521,517
==========
Allocation of excess of cost over book value of net assets
acquired.................................................. $6,521,517
==========
</TABLE>
The allocation of excess cost over book value of net assets acquired to the
intangible assets relating to Visionik will be amortized over a period of seven
years.
(c) Reflects the adjustments to shareholders' equity as follows:
<TABLE>
<CAPTION>
ACQUISITIONS
------------
<S> <C>
Common stock
Elimination of I-traffic Common Stock..................... $ (2,137)
Elimination of Visionik Common Stock...................... (84,055)
Issuance of Common Stock in connection with the
acquisition of: I-traffic and Visionik.................. 1,041
-----------
Subtotal.............................................. (85,151)
-----------
Preferred stock:
Elimination of I-traffic preferred stock.................. (370)
-----------
Additional paid-in capital:
Elimination of I-traffic additional paid-in capital....... (3,731,591)
Additional paid-in capital from issuance of Common Stock
and stock options: I-traffic and Visionik............... 12,962,832
-----------
Subtotal................................................ 9,231,241
-----------
Retained earnings (accumulated deficit):
Elimination of I-traffic historical accumulated deficit... 2,407,034
Elimination of Visionik historical retained earnings...... (220,894)
-----------
Subtotal................................................ 2,186,140
-----------
Elimination of I-traffic deferred compensation.............. 1,157,584
Elimination of I-traffic stockholder receivable............. 28,782
Elimination of Visionik unrealized gain on marketable
securities................................................ (5,886)
Elimination of Visionik historical cumulative foreign
translation adjustment.................................... 40,352
-----------
Total................................................... $12,552,692
===========
</TABLE>
F-128
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
The following summarizes how the amounts relating to the issuance of shares
in connection with the acquisitions described above were determined:
<TABLE>
<S> <C> <C>
I-traffic
Total Common Stock issued................................... 469,320
Fair market value of Common Stock per share................. $ 11.00
----------
Total value of Common Stock issued.......................... $5,162,520
Total Common Stock issued................................... 469,320
Par value of Common Stock................................... $ 0.001
----------
Adjustment to Common Stock.................................. (469)
----------
Adjustment to additional paid-in capital.................... $5,162,051
==========
Visionik
Total Common Stock issued................................... 572,000
Fair market value of Common Stock per share................. $ 11.00
----------
Total value of Common stock issued.......................... $6,292,000
Total Common Stock issued................................... 572,000
Par value of Common Stock................................... $ 0.001
----------
Adjustment to Common Stock.................................. (572)
----------
Adjustment to additional paid-in capital.................... $6,291,428
==========
</TABLE>
F-129
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
EAGLE RIVER INTERACTIVE OTHER PRO FORMA
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS
---------- ----------- ----------- ----------- ------------ ------------
(A) (B) (C) (D)(E)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $56,499,289 $5,072,000 $ 3,598,106 $ 4,286,931 $ 5,352,108 $ --
Direct salaries and costs............. 28,784,372 2,885,000 2,207,841 4,045,756 3,268,534 --
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 27,714,917 2,187,000 1,390,265 241,175 2,083,574 --
General and administrative............ 21,708,395 2,452,000 1,509,291 1,703,707 2,800,030 --
Sales and marketing................... 2,590,637 602,000 39,898 318,556 538,706 --
Amortization of intangibles........... 4,686,584 1,081,000 1,279,996 -- -- 3,736,928 (h)
Depreciation and amortization......... 3,149,130 -- 96,942 -- 121,261 --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations....... (4,419,829) (1,948,000) (1,535,862) (1,781,088) (1,376,423) (3,736,928)
Interest income (expense), net........ (2,124,962) (382,000) (210,000) 33,693 (51,425) (230,033)(k)
Minority interest..................... -- -- -- -- 50,996 --
Loss on disposal...................... -- -- -- 10,000 -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes... (6,544,791) (2,330,000) (1,745,862) (1,757,395) (1,376,852) (3,966,961)
----------- ----------- ----------- ----------- ----------- -----------
Provision (benefit) for income
taxes............................... 238,606 (453,502) -- 13,802 --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................... $(6,783,397) $(2,330,000) $(1,292,360) $(1,757,395) $(1,390,654) $(3,966,961)
=========== =========== =========== =========== =========== ===========
Per share information:
Net loss per share--................
Basic................................. $ (0.29)
===========
Diluted............................... $ (0.29)
===========
Weighted average common shares
outstanding--.......................
Basic................................. 23,186,818
===========
Diluted............................... 23,186,818
===========
<CAPTION>
PRO FORMA
--------------
<S> <C>
Revenues.............................. $ 74,808,434
Direct salaries and costs............. 41,191,503
------------
Gross profit.......................... 33,616,931
General and administrative............ 30,173,423
Sales and marketing................... 4,089,797
Amortization of intangibles........... 10,784,508
Depreciation and amortization......... 3,367,333
------------
Income (loss) from operations....... (14,798,130)
Interest income (expense), net........ (2,964,727)
Minority interest..................... 50,996
Loss on disposal...................... 10,000
------------
Income (loss) before income taxes... (17,721,861)
------------
Provision (benefit) for income
taxes............................... (201,094)
------------
Net income (loss)................... $(17,520,767)
============
Per share information:
Net loss per share--................
Basic................................. $ (0.60)
============
Diluted............................... $ (0.60)
============
Weighted average common shares
outstanding--.......................
Basic................................. 29,241,541 (n)
============
Diluted............................... 29,241,541 (n)
============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-130
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
EAGLE RIVER INTERACTIVE OTHER PRO FORMA
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS
-------------- ----------- ----------- ----------- ------------ ------------
(A) (B) (C) (D)(F)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $18,956,267 $17,249,142 $10,869,920 $ 2,309,796 $6,577,369 $ --
Direct salaries and costs............. 10,355,373 8,525,789 6,891,620 1,836,845 3,949,469 --
----------- ----------- ----------- ----------- ---------- ------------
Gross profit.......................... 8,600,894 8,723,353 3,978,300 472,951 2,627,900 --
General and administrative............ 7,743,832 8,559,117 4,184,022 775,216 1,642,216 --
Sales and marketing................... 297,942 1,454,485 347,806 143,574 414,327 --
Amortization of intangibles........... 582,855 3,242,776 1,336,029 -- -- 6,340,484 (i)
Depreciation and amortization......... 772,094 -- 221,456 -- 136,468 --
----------- ----------- ----------- ----------- ---------- ------------
Income (loss) from operations....... (795,829) (4,533,025) (2,111,013) (445,839) 434,889 (6,340,484)
Interest income (expense), net........ (325,491) (1,137,424) (413,827) 20,642 (14,484) (402,693)(l)
Minority interests.................... (281,559) -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ------------
Income (loss) before income taxes... (1,402,879) (5,670,449) (2,524,840) (425,197) 420,405 (6,743,177)
Provision (benefit) for income
taxes............................... (460,565) -- (1,058,916) -- 115,139 --
----------- ----------- ----------- ----------- ---------- ------------
Net income (loss)................... $ (942,314) $(5,670,449) $(1,465,924) $ (425,197) $ 305,266 $(6,743,177)
=========== =========== =========== =========== ========== ============
Per share information:
Net loss per share--
Basic................................. $ (0.06)
===========
Diluted............................... $ (0.06)
===========
Weighted average common shares
outstanding--.......................
Basic................................. 16,586,538
===========
Diluted............................... 16,586,538
===========
<CAPTION>
PRO FORMA
--------------
<S> <C>
Revenues.............................. $ 55,962,494
Direct salaries and costs............. 31,559,096
------------
Gross profit.......................... 24,403,398
General and administrative............ 22,904,403
Sales and marketing................... 2,658,134
Amortization of intangibles........... 11,502,144
Depreciation and amortization......... 1,130,018
------------
Income (loss) from operations....... (13,791,301)
Interest income (expense), net........ (2,273,277)
Minority interests.................... (281,559)
------------
Income (loss) before income taxes... (16,346,137)
Provision (benefit) for income
taxes............................... (1,404,342)
------------
Net income (loss)................... $(14,941,795)
============
Per share information:
Net loss per share--
Basic................................. $ (0.56)
============
Diluted............................... $ (0.56)
============
Weighted average common shares
outstanding--.......................
Basic................................. 26,597,168 (o)
============
Diluted............................... 26,597,168 (o)
============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-131
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EAGLE
RIVER INTERACTIVE OTHER PRO FORMA PRO
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS FORMA
-------------- ----------- ----------- ---------- ------------ ------------ ------------
(A) (B) (C) (D)(G)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $26,452,191 $23,442,000 $15,370,470 $3,506,833 $8,706,557 $(1,348,436)(q) $ 76,129,615
Direct salaries and
costs.................... 15,930,029 11,782,000 9,659,366 2,788,220 5,206,710 (1,348,436)(q) 44,017,889
----------- ----------- ----------- ---------- ---------- ------------ ------------
Gross profit............... 10,522,162 11,660,000 5,711,104 718,613 3,499,847 -- 32,111,726
General and
administrative........... 10,944,441 12,022,000 6,220,344 1,189,557 2,013,958 -- 32,390,300
Sales and marketing........ 595,886 1,958,000 482,952 218,604 563,309 -- 3,818,751
Amortization of
intangibles.............. 892,765 4,322,000 1,953,783 -- -- 8,371,257(j) 15,539,805
Depreciation and
amortization............. 1,141,305 -- 295,274 -- 185,193 -- 1,621,772
----------- ----------- ----------- ---------- ---------- ------------ ------------
Income (loss) from
operations............... (3,052,235) (6,642,000) (3,241,249) (689,548) 737,387 (8,371,257) (21,258,902)
Interest income (expense),
net...................... (359,761) (1,611,000) (599,003) 27,851 (14,742) (491,167)(m) (3,047,822)
Minority interests......... (281,559) -- -- -- -- -- (281,559)
Loss on disposal........... -- -- -- (9,399) -- -- (9,399)
----------- ----------- ----------- ---------- ---------- ------------ ------------
Income (loss) before income
taxes.................... (3,693,555) (8,253,000) (3,840,252) (671,096) 722,645 (8,862,424) (24,597,682)
Provision (benefit) for
income taxes............. (1,212,575) -- (1,603,476) 178,771 -- (2,637,280)
----------- ----------- ----------- ---------- ---------- ------------ ------------
Net income (loss).......... $(2,480,980) $(8,253,000) $(2,236,776) $(671,096) $ 543,874 $(8,862,424) $(21,960,402)
=========== =========== =========== ========== ========== ============ ============
Per share information:
Net loss per share--
Basic...................... $ (0.15) $ (0.82)
=========== ============
Diluted.................... $ (0.15) $ (0.82)
=========== ============
Weighted average common
shares outstanding--
Basic...................... 16,854,499 26,865,129(p)
=========== ============
Diluted.................... 16,854,499 26,865,129(p)
=========== ============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-132
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) EAGLE RIVER INTERACTIVE INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Eagle River Interactive from the Eagle River Interactive
shareholder, Omnicom, in exchange for an aggregate 3,646,226 shares of
AGENCY.COM's common stock and a warrant to purchase 4,328,752 shares of
AGENCY.COM's common stock at a purchase price of $0.005 per share. Such warrant
was valued at $0.80 per share and the fair value of the Company's common stock
on the date of purchase was $1.23 per share, each as determined by an
independent third-party valuation. In addition, 13,322 shares of AGENCY.COM's
common stock were issued to certain participants of the Eagle River Interactive
Key Executive Incentive Program in settlement of all obligations due under the
program and 80,690 shares were issued to an executive of Eagle River
Interactive. These shares have been considered additional purchase price. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The acquisition is effective as
of March 31, 1999, and accordingly, the operating results of Eagle River since
March 31, 1999 have been included in AGENCY.COM's consolidated financial
statements.
(b) INTERACTIVE SOLUTIONS INCORPORATED AND QUADRIS CONSULTING, INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Interactive Solutions from the Interactive Solutions
shareholders (including Communicade Inc., a wholly owned subsidiary of Omnicom)
in exchange for an aggregate of 4,171,846 shares of AGENCY.COM's common stock
and a warrant to purchase 3,071,248 shares of AGENCY.COM's common stock at a
purchase price of $0.005 per share. Such warrant was valued at $0.80 per share
and the fair value of the AGENCY.COM's common stock on the date of purchase was
$1.23 per share, each as determined by an independent third-party valuation.
Immediately, prior to the acquisition of Interactive Solutions, Interactive
Solutions acquired all of the issued and outstanding shares of capital stock of
Quadris Consulting from the Quadris Consulting shareholders in exchange for an
aggregate of 1,869,528 shares of Interactive Solutions common stock. Prior to
both acquisitions, Communicade sold 485,999.64 shares of Interactive Solutions
common stock to certain of the AGENCY.COM's shareholders for an aggregate price
of $412,492.
Outstanding stock options under the stock option plans of Interactive
Solutions and Quadris Consulting were converted into approximately 1,402,382
options to purchase the AGENCY.COM's common stock. Certain of these options were
converted at excercise prices that were lower than the fair market value of the
Company's common stock at the date of grant. Accordingly, the Company has
recorded additional purchase price for the difference between the excercise
price and the fair market value of the underlying common shares relating to
these options.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition dates. These acquisitions are
effective as of March 31, 1999, and accordingly, the operating results of
Interactive since March 31, 1999 have been included in AGENCY.COM's consolidated
financial statements.
F-133
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(c) INTERACTIVE TRAFFIC, INC. In October 1999, the Company purchased all
of the issued and outstanding shares of capital stock of Interactive
Traffic, Inc. ("I-traffic") for $3,000,000 in cash, a $1,000,000 short-term note
payable due at the earlier of December 31, 1999 or thirty days following the
completion of the Company's initial public offering, 469,320 shares of the
Company's common stock valued at $11.00 per share, the assumption of options to
purchase 160,680 shares of the Company's common stock at an exercise price of
$2.54 per share, and the issuance of newly-granted options to purchase 60,000
shares of the Company's common stock at an exercise price of $8.50 per share
which options were valued at less than the fair market value of the Company's
common stock on the date of grant, valued at $1,509,353, for a total aggregate
purchase price of $10,671,873. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition date.
Furthermore, the purchase agreement calls for certain earn-out payments to the
former shareholders of I-traffic based upon the achievement of certain future
targeted operation results for I-traffic one-year from the date of the closing
of the transaction. These payments are payable in cash and additional shares of
the Company's common stock and future payments, if any, will be recorded as
additional purchase price and, accordingly, an adjustment to goodwill.
(d) OTHER ACQUISITIONS:
VISIONIK A/S
In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation, for
$500,000 in cash and 572,000 shares of the Company's common stock valued at
$11.00 per share for a total aggregate purchase price of $6,792,000. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
TWINSPARK INTERACTIVE
In August 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Twinspark Interactive for $700,000 in cash and
1,057,226 shares of the AGENCY.COM's common stock valued at $11.00 per share, of
which 1,047,226 shares were given to the shareholders of Twinspark and 10,000
shares to former employees of Twinspark, for a total aggregate purchase price of
approximately $11,629,000. The Company also granted 75,000 stock options to
former employees of Twinspark at an exercise price equal to the then fair market
value of the Company's common stock. This acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
Furthermore, the purchase agreement calls for certain earn-out payments to the
former shareholders of Twinspark based upon the achievement of certain targeted
operating results of Twinspark through December 1999. These payments are payable
in the form of 168,066 shares of the Company's common stock which are currently
held in escrow. Future payments, if any, will be recorded as additional purchase
price and, accordingly, an adjustment to goodwill.
F-134
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
DIGITAL VISION
On May 13, 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Digital Vision for $1,100,000 in cash. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The acquisition is effective as
of May 31, 1999, and accordingly, the operating results of Digital Vision since
May 31, 1999 have been included in AGENCY.COM's consolidated financial
statements.
KETCHUM ADVERTISING
On April 1, 1998, the Company acquired certain assets and assumed certain
liabilities from Ketchum Advertising. Ketchum was a subsidiary of Omnicom, which
is a significant shareholder of AGENCY.COM's common stock both directly and
through a wholly owned subsidiary. In consideration for the net assets acquired,
AGENCY.COM paid approximately $643,000 in cash. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date. As a result of this acquisition, AGENCY.COM has recorded
goodwill of approximately $643,000, which is being amortized over a period of
seven years. The acquisition is effective as of March 31, 1998, and accordingly,
the operating results of Ketchum Advertising since March 31, 1998 have been
included in AGENCY.COM's consolidated financial statements.
PRIMARY GROUP
On August 31, 1998, AGENCY.COM acquired certain assets from Primary Group
and assumed certain liabilities. In consideration for the net assets acquired,
the Company paid approximately $53,220 in cash. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date. As a result of this acquisition, the Company has recorded
goodwill of approximately $50,845, which is being amortized over a period of
seven years. The acquisition is effective as of August 31, 1998, and
accordingly, the operating results of the Primary Group since August 31, 1998
have been included in AGENCY.COM's consolidated financial statements.
F-135
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(e) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1999 through September 30, 1999:
<TABLE>
<CAPTION>
DIGITAL TWINSPARK TOTAL OTHER
VISION INTERACTIVE VISIONIK ACQUISITIONS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 325,800 $ 2,784,259 $ 2,242,049 $ 5,352,108
Direct salaries and costs............ 306,106 1,704,849 1,257,579 3,268,534
------------ ------------ ------------ ------------
Gross profit............... 19,694 1,079,410 984,470 2,083,574
General and administrative........... 231,200 2,076,269 492,561 2,800,030
Sales and marketing.................. 125,108 94,000 319,598 538,706
Amortization of intangibles.......... -- -- -- --
Depreciation and amortization........ 5,949 75,659 39,653 121,261
------------ ------------ ------------ ------------
Income (loss) from
operations................... (342,563) (1,166,518) 132,658 (1,376,423)
Interest income (expense), net....... (17,680) (26,164) (7,581) (51,425)
Minority interests................... -- -- 50,996 50,996
------------ ------------ ------------ ------------
Income (loss) before income
taxes........................ (360,243) (1,192,682) 176,073 (1,376,852)
Provision (benefit) for income
taxes........................ -- (49,787) 63,589 13,802
------------ ------------ ------------ ------------
Net income (loss).......... $ (360,243) $ (1,142,895) $ 112,484 $ (1,390,654)
============ ============ ============ ============
</TABLE>
F-136
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(f) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1998 through September 30, 1998:
<TABLE>
<CAPTION>
QUADRIS KETCHUM PRIMARY DIGITAL TWINSPARK TOTAL OTHER
CONSULTING ADVERTISING GROUP VISION INTERACTIVE VISIONIK ACQUISITIONS
----------- ----------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $1,727,391 $680,000 $ 167,057 $1,049,824 $1,458,770 $1,494,327 $6,577,369
Direct salaries and
costs.............. 1,144,664 353,600 131,790 458,454 1,018,120 842,841 3,949,469
---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit..... 582,727 326,400 35,267 591,370 440,650 651,486 2,627,900
General and
administrative..... 362,872 251,600 120,392 281,835 306,420 319,097 1,642,216
Sales and marketing.. 1,577 27 -- 221,442 -- 191,281 414,327
Amortization of
intangibles........ -- -- -- -- -- --
Depreciation and
amortization....... -- 14 3,869 12,059 56,800 63,726 136,468
---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss)
from
operations..... 218,278 74,759 (88,994) 76,034 77,430 77,382 434,889
Interest income
(expense), net..... (1,925) -- -- (14,136) (9,870) 11,447 (14,484)
Minority interests... -- -- -- -- -- -- --
---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before income
taxes.......... 216,353 74,759 (88,994) 61,898 67,560 88,829 420,405
Provision (benefit)
for income
taxes............ 87,000 -- -- -- -- 28,139 115,139
---------- -------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)......... $ 129,353 $ 74,759 $ (88,994) $ 61,898 $ 67,560 $ 60,690 $ 305,266
========== ======== ========== ========== ========== ========== ==========
</TABLE>
(g) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1998 through December 31, 1998:
<TABLE>
<CAPTION>
QUADRIS KETCHUM PRIMARY DIGITAL TWINSPARK TOTAL OTHER
CONSULTING ADVERTISING GROUP VISION INTERACTIVE VISIONIK ACQUISITIONS
----------- ----------- --------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $1,727,391 $680,000 $167,057 $1,399,697 $2,690,816 $2,041,596 $8,706,557
Direct salaries and costs........ 1,144,664 353,600 131,790 625,633 1,771,878 1,179,145 5,206,710
---------- -------- -------- ---------- ---------- ---------- ----------
Gross profit................. 582,727 326,400 35,267 774,064 918,938 862,451 3,499,847
General and administrative....... 362,872 251,600 120,392 372,676 469,545 436,873 2,013,958
Sales and marketing.............. 1,577 27 -- 304,917 256,788 563,309
Amortization of intangibles...... -- -- -- -- -- -- --
Depreciation and amortization.... -- 14 3,869 13,075 91,189 77,046 185,193
---------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) from
operations................. 218,278 74,759 (88,994) 83,396 358,204 91,744 737,387
Interest income (expense), net... (1,925) -- -- (15,497) (12,091) 14,771 (14,742)
Minority interests............... -- -- -- -- -- -- --
---------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... 216,353 74,759 (88,994) 67,899 346,113 106,515 722,645
Provision (benefit) for income
taxes.......................... 87,000 -- -- -- 52,899 38,872 178,771
---------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 129,353 $ 74,759 $(88,994) $ 67,899 $ 293,214 $ 67,643 $ 543,874
========== ======== ======== ========== ========== ========== ==========
</TABLE>
F-137
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(h) Amortization of intangibles for the nine months ended September 30, 1999,
for the following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $ 768,759
Interactive Solutions....................................... 147,802
Twinspark Interactive....................................... 907,879
Digital Vision.............................................. 85,414
I-traffic................................................... 1,128,340
Visionik.................................................... 698,734
----------
Total pro forma intangible amortization adjustments..... $3,736,928
==========
</TABLE>
(i) Amortization of intangibles for the nine months ended September 30, 1998,
for the following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $2,306,276
Interactive Solutions....................................... 443,407
Twinspark Interactive....................................... 1,361,818
Digital Vision.............................................. 153,745
Quadris Consulting.......................................... 220,351
Ketchum Advertising......................................... 22,964
Primary Group............................................... 4,849
I-traffic................................................... 1,128,340
Visionik.................................................... 698,734
----------
Total pro forma intangible amortization adjustments..... $6,340,484
==========
</TABLE>
(j) Amortization of intangibles for year ended December 31, 1998, for the
following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $3,075,034
Interactive Solutions....................................... 591,209
Twinspark Interactive....................................... 1,815,758
Digital Vision.............................................. 204,993
Quadris Consulting.......................................... 220,351
Ketchum Advertising......................................... 22,964
Primary Group............................................... 4,849
I-traffic................................................... 1,504,454
Visionik.................................................... 931,645
----------
Total pro forma intangible amortization adjustments..... $8,371,257
==========
</TABLE>
F-138
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(k) Interest expense (income), net
The following reflects additional interest expense for AGENCY.COM for
borrowings made from Omnicom to fund acquisitions. The funding would have been
in accordance with AGENCY.COM's Shareholders Agreement with Omnicom whereby
AGENCY.COM is to receive funding for the acquisition of "new media" companies at
the same interest rate charged by Omnicom to its subsidiaries under the Omnicom
cash management system. Interest on such loans is payable quarterly in equal
installments over a five-to-ten-year period.
Additional interest expense to fund acquisitions for the nine months ended
September 30, 1999 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Twinspark Interactive....................................... $ 23,450
Digital Vision.............................................. 30,708
I-traffic................................................... 150,750
Visionik.................................................... 25,125
--------
Total pro forma interest expense adjustments............ $230,033
========
</TABLE>
(l) Interest expense (income), net
Additional interest expense to fund acquisitions for the nine months ended
September 30, 1998 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Ketchum Advertising......................................... $ 10,770
Primary Group............................................... 2,380
Quadris Consulting.......................................... 123,218
Twinspark Interactive....................................... 35,175
Digital Vision.............................................. 55,275
I-traffic................................................... 150,750
Visionik.................................................... 25,125
--------
Total pro forma interest expense adjustments............ $402,693
========
</TABLE>
F-139
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(m) Interest expense (income), net
Additional interest expense to fund acquistions for the year ended December
31, 1998 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Ketchum Advertising......................................... $ 10,770
Primary Group............................................... 2,380
Quadris Consulting.......................................... 123,218
Twinspark Interactive....................................... 46,900
Digital Vision.............................................. 73,399
I-traffic................................................... 201,000
Visionik.................................................... 33,500
--------
Total pro forma interest expense adjustments............ $491,167
========
</TABLE>
(n) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the nine months
ended September 30, 1999:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 23,186,818
Shares issued in acquisition of Eagle River Interactive... 1,870,254
Shares issued in acquisition of Interactive Solutions..... 2,085,923
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
----------
Pro forma basic......................................... 29,241,541
==========
Diluted:
Historical AGENCY.COM diluted............................. 23,186,818
Shares issued in acquisition of Eagle River Interactive... 1,870,254
Shares issued in acquisition of Interactive Solutions..... 2,085,923
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
----------
Pro forma diluted....................................... 29,241,541
==========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the nine months ended September 30, 1999 does not include the
impact of stock options and warrants then outstanding, as the effect of their
inclusion would be antidilutive.
F-140
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(o) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the nine months
ended September 30, 1998:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 16,586,538
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma basic......................................... 26,597,168
===========
Diluted:
Historical AGENCY.COM diluted............................. 16,586,538
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma diluted....................................... 26,597,168
===========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the nine months ended September 30, 1998 does not include the
impact of stock options then outstanding, as the effect of their inclusion would
be antidilutive.
F-141
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(p) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the year ended
December 31, 1998:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 16,854,499
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma basic......................................... 26,865,129
===========
Diluted:
Historical AGENCY.COM diluted............................. 16,854,499
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma diluted....................................... 26,865,129
===========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the year ended December 31, 1998 does not include the impact of
stock options then outstanding, as the effect of their inclusion would be
antidilutive.
(q) Revenue/Direct salaries and costs
Reflects the elimination of revenues earned and costs incurred totaling
$996,666 between AGENCY.COM and Eagle River Interactive in the fourth quarter of
1998, totaling $240,928 between Interactive Solutions and AGENCY.COM for the
year ended December 31, 1998 and totaling $110,842 between Interactive Solutions
and Eagle River Interactive for the year ended December 31, 1998, respectively.
F-142
<PAGE>
UNDERWRITING
AGENCY.COM and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
conditions in the underwriting agreement, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., Salomon Smith Barney Inc. and Hambrecht & Quist LLC are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ -----------------
<S> <C>
Goldman, Sachs & Co......................................
Salomon Smith Barney Inc. ...............................
Hambrecht & Quist LLC....................................
--------
Total.................................................. 5,900,000
========
</TABLE>
------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 885,000
shares from AGENCY.COM to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
AGENCY.COM will sell the shares to the underwriters at a per share price of
$ , which represents a $ discount from the initial public offering price
set forth on the cover page of this prospectus. This discount is the
underwriters' compensation. The following table shows the per share and total
underwriting discounts to be paid to the underwriters by AGENCY.COM. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Underwriters' Discount
--------------------------
<S> <C> <C>
Full
No Exercise Exercise
-------- --------
Underwriting Discount
Per Share.......... $ $
Total Underwriting
Discount........... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may from time to time reduce the
offering price and change the other selling terms.
AGENCY.COM and its directors, officers and holders of substantially all of
its common stock have agreed with the underwriters not to dispose of or hedge
any of their common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This agreement does not
apply to any existing employee benefit plans. Please see "Shares Eligible for
Future Sale" for a discussion of transfer restrictions.
At AGENCY.COM's request, the underwriters have reserved up to 500,000 shares
of AGENCY.COM's common stock for
U-1
<PAGE>
sale to Intel Corporation at the initial public offering price. Intel has not
committed to purchase these shares. At AGENCY.COM's request, the underwriters
have reserved up to 413,000 shares of the common stock offered by this
prospectus for sale, at the initial public offering price, to certain of
AGENCY.COM's directors, employees and associates of AGENCY.COM through a
directed share program. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved shares.
There can be no assurance that any of the reserved shares will be so purchased.
Any reserved shares not so purchased will be offered to the general public on
the same basis as the other shares offered by this prospectus.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among AGENCY.COM and the
representatives. The primary factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be AGENCY.COM's historical performance, estimates of the
business potential and earnings prospects of AGENCY.COM, an assessment of
AGENCY.COM's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ACOM", subject to official notice of issuance.
AGENCY.COM has engaged Wasserstein Perella & Co., Inc. to provide it with
financial advisory services for which it will pay $250,000 plus expenses.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The representatives, on behalf of the underwriters, also may impose a
penalty bid. This occurs when a particular underwriter repays to the other
underwriters a portion of the underwriting discount received by it because the
representatives have repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
AGENCY.COM estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$2,500,000.
AGENCY.COM has agreed to indemnify the several underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
AGENCY.COM has in the past provided Internet professional services to
Salomon Smith Barney Inc., one of the Underwriters. Please see "Certain
Transactions--Agreement with underwriter".
U-2
<PAGE>
[Back Inside Cover--AGENCY.COM logo located in bottom right of the page with the
words "Our people are our power" located in the upper left of the page. In the
center of the page is a vertical column of photographs of 18 employees.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Forward Looking Statements........... 20
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected Consolidated Financial
Data............................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 27
Business............................. 48
Management........................... 64
Certain Relationships and Related
Party Transactions................. 75
Principal Stockholders............... 79
Description of Capital Stock......... 82
Shares Eligible for Future
Sale............................... 85
Validity of Common Stock............. 86
Experts.............................. 87
Changes in Accountants............... 87
Where You Can Find More Information.. 87
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25(th) day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
5,900,000 Shares
AGENCY.COM LTD.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the issuance and distribution of the common stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 22,635
NASD filing fee............................................. 9,300
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 1,500,000
Printing and engraving...................................... 300,000
Blue sky fees and expenses (including legal fees)........... 15,000
Transfer Agent and Registrar fees and expenses.............. 15,000
Miscellaneous............................................... 43,065
----------
Total..................................................... $2,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof (the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
Registrant has applied for liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director
II-1
<PAGE>
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest extent
permitted by Section 102(b)(7) of the DGCL and provides that the Registrant may
fully indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities since July 1,
1996:
In July 1998, as a result of Online Magic acquisition, the Registrant issued
an aggregate of 745,185 shares of its common stock in exchange for all of the
outstanding shares of Online Magic to Eamonn Wilmott and Andrew Hobsbawm, of
which 246,750 shares are being held in escrow pending financial results for
1999. Such shares of common stock were sold in reliance upon an exemption from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
In July 1997, the Registrant acquired 51% of the outstanding shares of
Spiral Media, Inc. In July 1998, the Registrant acquired the remaining 49% of
Spiral Media that it did not own. In connection with these purchases, the
Registrant issued an aggregate of 480,625 shares of its common stock in exchange
for all outstanding shares of Spiral Media to Arthur Williams, Mitchell Golden,
Bradford Justus, Thomas Lanzetta, Ralph Seaman, Eric Vallinsky and Pall Walton.
Such shares of common stock were sold in reliance upon an exemption from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
In April 1999, Interactive Solutions Incorporation merged with and into the
Registrant (the "Interactive Solutions Merger"), the Registrant issued an
aggregate of 1,568,070 shares of common stock in exchange for all outstanding
shares of Interactive Solutions to Lawrence Krakauer, Andrew Kerr, Jeffrey
Richman, Michael Benyo, John Morgan, Barry Goldberg, David Janowski, Jerry
Newmark, Priya Ramanathan, James Ronan, David Seitelmen, Lee Tuttle, Ting Tang
Wu and Betsy January, Christian Leland, Thomas Rohrer, Chan Suh, Kyle Shannon,
Kenneth Trush, Eamonn Wilmott, Janet Ambrosi Wertman, David Krunnfusz, Arthur
Williams, Andrew Hobsbawm, Aaron Sugarman, Rosemary Haefner, Monica Fried and
Peter Kestenbaum. In addition, in connection with the mergers, the Registrant
issued to Communicade, 2,596,452 shares of common stock. Communicade also
received a 20-year warrant to purchase 3,071,248 shares of the Registrant's
common stock at an exercise price of $0.005 per share. Such shares of common
stock were sold in reliance upon an exemption from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof.
II-2
<PAGE>
In April 1999, Eagle River Interactive merged with and into the Registrant
(the "Eagle River Merger"), the Registrant issued an aggregate of 80,690 shares
of common stock to Kevin Rowe and 3,659,548 shares of common stock to Omnicom
and a 20-year warrant to purchase 4,328,752 shares of the Registrant's common
stock at an exercise price of $0.005 per share. Such shares of common stock were
sold in reliance upon an exemption from registration under the Securities Act of
1933 pursuant to Section 4(2) thereof.
In August 1999, Twinspark Interactive People B.V. merged with and into the
Registrant (the "Twinspark Merger"). As a result of the Twinspark Merger, the
Registrant issued 1,047,226 shares of its common stock to Topics Interactive
Factory B.V. and 10,000 shares of its common stock to former employees of
Twinspark Interactive in exchange for all outstanding shares of Twinspark
Interactive. Such shares of common stock were sold in reliance upon an exemption
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof.
In October 1999, Interactive Traffic, Inc. merged with a wholly-owned
subsidiary of the Registrant (the "I-traffic Merger"). In connection with the
I-traffic Merger, the Registrant issued 469,320 shares of its common stock to
I-traffic's former stockholders, and issued 60,000 shares subject to stock
options to I-traffic employees. These securities were sold in reliance on an
exemption from registration under the Securities Act pursuant to Section 4(2)
thereof or Rule 701 promulgated under the Securities Act.
In November 1999, in connection with the Visionik A/S acquisition, the
Registrant issued 572,000 shares of common stock. Such securities were sold in
reliance upon an exemption from registration under the Securities Act pursuant
to Section 4(2) thereof.
OPTIONS. The Registrant from time to time has granted stock options to
employees in reliance upon exemption from registration pursuant to either
(i) Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) Rule 701 promulgated under the Securities Act. The following
table sets forth certain information regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
--------- ----------
<S> <C> <C>
January 1, 1996 to December 31, 1996................. 101,250 $0.86
January 1, 1997 to December 31, 1997................. 812,010 $0.86-1.21
January 1, 1998 to December 31, 1998................. 1,181,684 $0.41-1.67
January 1, 1999 to present........................... 3,878,313 $0.41-8.50
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
1.1+ Form of underwriting agreement.
3.1+ Amended and restated certificate of incorporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
3.2+ Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4+ Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1+ Specimen common stock certificate.
4.2+ See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Option/Stock Issuance Plan (as Amended Restated
on October 13, 1999).
10.2+ Interactive Solutions Incorporated 1996 Stock Option Plan.
10.3+ 1998 Quadris Consulting, Inc. Equity Incentive Plan.
10.4+ Employment Agreement, dated April 28, 1999, by and between
Chan Suh and the Registrant.
10.5+ Employment Agreement, dated April 28, 1999, by and between
Kyle Shannon and the Registrant.
10.6+ Employment Agreement, dated April 28, 1999, by and between
Kevin Rowe and the Registrant.
10.7+ Employment Agreement, dated April 28, 1999, by and between
Kenneth Trush and the Registrant.
10.8+ Employment Agreement, dated April 28, 1999, by and between
Eamonn Wilmott and the Registrant.
10.9+ Employment Agreement, dated April 28, 1999, by and between
Lawrence Krakauer and the Registrant.
10.10+ Employment Agreement, dated April 28, 1999, by and between
Janet Ambrosi Wertman and the Registrant.
10.11+ Restricted Stock Agreement, dated April 16, 1999, by and
between Kevin Rowe and the Registrant.
10.12+ Credit Agreement dated as of November 4, 1999 between
Omnicom Finance Inc. and the Registrant and Subsidiary
Guarantors.
10.13+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and Quadris
Consulting, Inc.
10.14+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and the
Registrant.
10.15+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Eagle River Interactive Inc. and the Registrant.
10.16+ Agreement, dated April 27, 1999, by and between Jeffrey
Rayport and the Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
10.17+ Stock Purchase Agreement, dated July 23, 1999, by and
between Topics Interactive Factory B.V. and the Registrant,
as amended.
10.18+ Registration Rights Agreement, dated November 23, 1999, by
and among the Registrant and Omnicom.
10.19+ Employment Agreement, dated October 28, 1999, by and between
Charles Dickson and the Registrant.
10.20+ Agreement and Plan of Merger, dated October 21, 1999, by and
among the Registrant ITI Acquisition Inc., Interactive
Traffic, Inc., and the Stockholders listed therein.
10.21+ Acquisition Agreement, dated October 23, 1999, by and
between the Registrant and the Stockholders listed therein
and In-Com.
10.22+ Stock Exchange Agreement, dated November 3, 1999, by and
between the Registrant and Visionik Holding ApS, Associated
Management Services A/S and Jrgen Lembke and Sren
Hougaard-Hansen.
10.23+ 1999 Employee Stock Purchase Plan.
10.24+ Consulting Agreement, dated November 22, 1999, by and
between Thomas DeLong and the Registrant.
10.25++ Warrant Agreement, dated November 24, 1999, by and between
Omnicom Group Inc. and the Registrant.
10.26+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Communicade, Inc. and the Registrant (formerly
Exhibit 4.4).
10.27+ Lease, dated April 15, 1999, by and between 20 Place
Associates LLC and the Registrant.
11.1 Statement re: Supplemental Net Loss Per Share.
16.1+ Letter from Ernst & Young LLP re Change in Certifying
Accountants.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP--New York, New York.
23.2 Consent of Arthur Andersen LLP--Denver, Colorado.
23.3 Consent of Arthur Andersen--Rotterdam, The Netherlands.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Moore Stephens Denmark.
23.6+ Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1+ Powers of attorney.
24.2+ Power of attorney of Charles Dickson.
27.1+ Financial Data Schedule.
99.1+ Consent of Director Nominee Jeffrey Rayport (included in
Exhibit 10.16).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
99.2+ Consent of Director Nominee Thomas DeLong (included in
Exhibit 10.24).
</TABLE>
- ------------------------
+ Previously filed.
++ Replaces exhibit previously filed as Exhibit 4.3.
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
Schedule II -- Schedule of Valuation and Qualifying Accounts (AGENCY.COM
Ltd. and Subsidiaries)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Eagle
River Interactive)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Eagle
River Interactive Inc.)
Schedule II -- Schedule of Valuation and Qualifying Accounts
(Interactive Solutions, Inc. and Subsidiary)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Twinspark
Interactive People B.V.)
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 6 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York, on this 2nd day of
December, 1999.
<TABLE>
<S> <C> <C>
AGENCY.COM LTD.
By: /s/ Kenneth Trush
-----------------------------------------
Name: Kenneth Trush
Title: Executive Vice President, Treasurer
and Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 6 to the Registration Statement has been signed by the following
persons in the capacities indicated on December 2, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
* President and Chief Executive Officer, and
------------------------------------------- Chairman of the Board of Directors
Chan Suh (principal executive officer)
*
------------------------------------------- Chief Creative Officer and Director
Kyle Shannon
/s/ Kenneth Trush
------------------------------------------- Executive Vice President, Treasurer and
Kenneth Trush Director
* Executive Vice President and Chief Financial
------------------------------------------- Officer
Charles Dickson (principal financial and accounting officer)
*
------------------------------------------- Director
Gerald Bruce Redditt
*
------------------------------------------- Director
John D. Wren
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Kenneth Trush
--------------------------------------
Kenneth Trush
Attorney-in-fact
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGENCY.COM Ltd.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of AGENCY.COM Ltd. and subsidiaries included
in this registration statement and have issued our report thereon dated
November 10, 1999. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule of valuation and
qualifying accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
November 10, 1999
S-1
<PAGE>
SCHEDULE II
AGENCY.COM LTD. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ 15 $ -- $ -- $ 15
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ 15 $143 $ -- $115 $ 43
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ 43 $785 $ -- $ 2 $826
==== ==== ==== ==== ====
</TABLE>
S-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Eagle River Interactive included in this
registration statement and have issued our report thereon dated July 19, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the management of Eagle River Interactive Inc. and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 19, 1999
S-3
<PAGE>
EAGLE RIVER INTERACTIVE
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
For the period January 1, 1997 through
September 26, 1997
Allowance for doubtful accounts.......... $ -- $980 $ -- $ -- $980
==== ==== ==== ==== ====
</TABLE>
S-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Eagle River Interactive Inc. included in this
registration statement and have issued our report thereon dated July 19, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
July 19, 1999
S-5
<PAGE>
SCHEDULE II
EAGLE RIVER INTERACTIVE INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the period from inception
(September 26, 1997) through
December 31, 1997
Allowance for doubtful accounts.......... $140 $ 44 $ -- $ -- $ 184
==== ====== ==== ==== ======
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $184 $2,600 $ -- $ -- $2,784
==== ====== ==== ==== ======
</TABLE>
S-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interactive Solutions, Inc. and Subsidiary:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Interactive Solutions, Inc. and Subsidiary
included in this registration statement and have issued our report thereon dated
July 16, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of valuation and
qualifying accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
S-7
<PAGE>
SCHEDULE II
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ 6 $ -- $ -- $ 6
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ 6 $ 86 $ -- $ 55 $ 37
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ 37 $273 $ -- $ -- $310
==== ==== ==== ==== ====
</TABLE>
S-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Twinspark Interactive People B.V.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Twinspark Interactive People B.V. included in this
registration statement and have issued our report thereon dated August 9, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN
New York, New York
August 9, 1999
S-9
<PAGE>
SCHEDULE II
TWINSPARK INTERACTIVE PEOPLE B.V.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ -- $ 44 $ -- $ -- $ 44
==== ==== ==== ==== ====
</TABLE>
S-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
1.1+ Form of underwriting agreement.
3.1+ Amended and restated certificate of incorporation.
3.2+ Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4+ Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1+ Specimen common stock certificate.
4.2+ See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Option/Stock Issuance Plan (as Amended Restated
on October 13, 1999).
10.2+ Interactive Solutions Incorporated 1996 Stock Option Plan.
10.3+ 1998 Quadris Consulting, Inc. Equity Incentive Plan.
10.4+ Employment Agreement, dated April 28, 1999, by and between
Chan Suh and the Registrant.
10.5+ Employment Agreement, dated April 28, 1999, by and between
Kyle Shannon and the Registrant.
10.6+ Employment Agreement, dated April 28, 1999, by and between
Kevin Rowe and the Registrant.
10.7+ Employment Agreement, dated April 28, 1999, by and between
Kenneth Trush and the Registrant.
10.8+ Employment Agreement, dated April 28, 1999, by and between
Eamonn Wilmott and the Registrant.
10.9+ Employment Agreement, dated April 28, 1999, by and between
Lawrence Krakauer and the Registrant.
10.10+ Employment Agreement, dated April 28, 1999, by and between
Janet Ambrosi Wertman and the Registrant.
10.11+ Restricted Stock Agreement, dated April 16, 1999, by and
between Kevin Rowe and the Registrant.
10.12+ Credit Agreement dated as of November 4, 1999 between
Omnicom Finance Inc. and the Registrant and Subsidiary
Guarantors.
10.13+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and Quadris
Consulting, Inc.
10.14+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and the
Registrant.
10.15+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Eagle River Interactive Inc. and the Registrant.
10.16+ Agreement, dated April 27, 1999, by and between Jeffrey
Rayport and the Registrant.
10.17+ Stock Purchase Agreement, dated July 23, 1999, by and
between Topics Interactive Factory B.V. and the Registrant,
as amended.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
10.18+ Registration Rights Agreement, dated November 23, 1999, by
and among the Registrant and Omnicom.
10.19+ Employment Agreement, dated October 28, 1999, by and between
Charles Dickson and the Registrant.
10.20+ Agreement and Plan of Merger, dated October 21, 1999, by and
among the Registrant ITI Acquisition Inc., Interactive
Traffic, Inc., and the Stockholders listed therein.
10.21+ Acquisition Agreement, dated October 23, 1999, by and
between the Registrant and the Stockholders listed therein
and In-Com.
10.22+ Stock Exchange Agreement, dated November 3, 1999, by and
between the Registrant and Visionik Holding ApS, Associated
Management Services A/S and Jrgen Lembke and Sren
Hougaard-Hansen.
10.23+ 1999 Employee Stock Purchase Plan.
10.24+ Consulting Agreement, dated November 22, 1999, by and
between Thomas DeLong and the Registrant.
10.25++ Warrant Agreement, dated November 24, 1999, by and between
Omnicom Group Inc. and the Registrant.
10.26+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Communicade, Inc. and the Registrant (formerly
Exhibit 4.4).
10.27+ Lease, dated April 15, 1999, by and between 20 Place
Associates LLC and the Registrant.
11.1 Statement re: Supplemental Net Loss Per Share.
16.1+ Letter from Ernst & Young LLP re Change in Certifying
Accountants.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP--New York, New York.
23.2 Consent of Arthur Andersen LLP--Denver, Colorado.
23.3 Consent of Arthur Andersen--Rotterdam, The Netherlands.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Moore Stephens Denmark.
23.6+ Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1+ Powers of attorney.
24.2+ Power of attorney of Charles Dickson.
27.1+ Financial Data Schedule.
99.1+ Consent of Director Nominee Jeffrey Rayport (included in
Exhibit 10.16).
99.2+ Consent of Director Nominee Thomas DeLong (included in
Exhibit 10.24).
</TABLE>
- ------------------------
+ Previously filed.
++ Replaces exhibit previously filed as Exhibit 4.3.
<PAGE>
Exhibit 11.1
AGENCY.COM LTD
SUPPLEMENTAL BASIC AND DILUTED NET LOSS
PER COMMON SHARE COMPUTATION
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
------------------------
(UNAUDITED)
<S> <C>
CALCULATION OF SUPPLEMENTAL SHARES OUTSTANDING:
Debt to be repaid by offering proceeds....................................... $ 25,000,000
Proceeds per share........................................................... 23.00
--------------------
Additional shares assumed outstanding........................................ 1,086,957
-------------------
Additional weighted average common shares outstanding........................ 1,086,957
Weighted average common shares outstanding................................... 23,186,818
-------------------
Supplemental weighted average common shares outstanding...................... 24,273,775
-------------------
-------------------
SUPPLEMENTAL BASIC AND DILUTED NET LOSS PER SHARE:
Net loss..................................................................... $ (6,783,397)
Pro forma impact of use of proceeds on interest expense...................... 1,218,750
-------------------
Supplemental basic and diluted net loss...................................... (5,564,647)
Supplemental weighted average common shares outstanding...................... (24,273,775)
-------------------
Supplemental basic and diluted net loss per common share..................... $ (0.23)
-------------------
-------------------
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated November 9, 1999 for AGENCY.COM Ltd. and subsidiaries, July 19,
1999 for Eagle River Interactive Inc., July 16, 1999 for Interactive Solutions,
Inc., July 16, 1999 for Quadris Consulting included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
December 1, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report July 19, 1999 for Eagle River Interactive included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
December 1, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report August 9, 1999 for Twinspark Interactive People B.V. included in
or made a part of this registration statement.
ARTHUR ANDERSEN
Rotterdam, The Netherlands
December 1, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the AGENCY.COM Ltd. Registration Statement on
Form S-1 Amendment No. 2 of our report dated September 23, 1999, except for
Note 12, as to which the date is October 21, 1999, relating to the financial
statements and financial statement schedules of Interactive Traffic, Inc.,
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, NY
November 30, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated November 2, 1999 for Visionik A/S and Subsidiaries included in
or made a part of this registration statement.
Moore Stephens, Denmark
/s/ Arne Nabe Poulsen
Arne Nabe Poulsen
State Authorized Public Accountant
Copenhagen, Denmark
November 30, 1999
