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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Quarterly Report Pursuant to Section 13 or 15(d)
Of The Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-28293
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AGENCY.COM LTD.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 13-3808969
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
20 EXCHANGE PLACE, 15TH FLOOR 10005
NEW YORK, NEW YORK (ZIP Code)
(Address of Principal
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 358-2600
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(G) THE ACT:
Title of Class Name of Exchange on which Registered
-------------- ------------------------------------
Common Stock, $0.001 par value Nasdaq National Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes: |X| No |_|
There were 35,968,071 shares of Common Stock outstanding as of November 8,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 (audited)
and September 30, 2000 1
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1999 and 2000 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 2000 3
Notes to Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
ITEM 2A. Risk Factors 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II. OTHER INFORMATION 21
ITEM 1. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
December 31 September 30
1999 2000
----------- ------------
(audited) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 85,035 $ 70,301
Accounts receivable, net of allowances of $5,164
and $6,784, respectively 23,768 42,387
Unbilled charges 9,224 14,689
Prepaid expenses and other current assets 1,698 1,721
Due from related parties 255 1,163
--------- ---------
Total current assets 119,980 130,261
Property and equipment, net of accumulated
depreciation and amortization of $9,325 and
$13,486, respectively 18,554 25,478
Intangibles, net of accumulated amortization of
$8,749 and $21,909, respectively 85,244 91,341
Deferred tax assets 547 547
Investments and other assets 2,566 2,287
--------- ---------
Total assets $ 226,891 $ 249,914
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 18,075 $ 25,177
Income taxes payable 1,462 2,247
Deferred revenue 10,283 16,737
Current portion of capital lease obligations 1,511 1,898
Due to related parties 1,003 --
--------- ---------
Total current liabilities 32,334 46,059
Long-term Liabilities:
Deferred tax liabilities 482 490
Capital lease obligations 1,644 1,642
Due to related parties 1,217 209
Deferred rent 240 2,757
Other long-term liabilities 281 1,131
--------- ---------
Total long-term liabilities 3,864 6,229
--------- ---------
Total liabilities 36,198 52,288
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $0.001 par value 10,000,000,
shares authorized; none issued or outstanding
as of December 31, 1999 and September 30, 2000,
respectively -- --
Common stock, $0.001 par value, 200,000,000 shares
authorized; 34,849,641 and 35,739,511 shares issued;
and 34,726,265 and 35,739,511 shares outstanding
at December 31,1999 and September 30,2000,
respectively 35 36
Additional paid-in capital 204,554 216,977
Retained deficit (13,725) (19,282)
Cumulative foreign currency translation (171) (105)
--------- ---------
Total stockholders' equity 190,693 197,626
--------- ---------
Total liabilities and stockholders' equity $ 226,891 $ 249,914
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
1
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 26,110 $ 57,322 $ 56,499 $ 146,054
Direct salaries and costs 13,712 27,287 28,784 71,776
------------ ------------ ------------ ------------
Gross profit 12,398 30,035 27,715 74,278
General and administrative 10,982 19,444 21,636 51,824
Sales and marketing 1,336 3,952 2,591 9,477
Depreciation and amortization 1,165 1,939 3,149 5,211
Amortization of intangibles 2,352 4,374 4,687 12,834
Non-cash compensation 72 411 72 1,956
------------ ------------ ------------ ------------
Loss from operations (3,509) (85) (4,420) (7,024)
Interest (expense), income net (1,070) 810 (2,125) 2,582
------------ ------------ ------------ ------------
(Loss) income before income taxes (4,579) 725 (6,545) (4,442)
Provision for income taxes 185 764 238 1,115
------------ ------------ ------------ ------------
Net loss $ (4,764) $ (39) $ (6,783) $ (5,557)
============ ============ ============ ============
Per share information:
Net loss per common share
Basic $ (0.18) $ (0.00) $ (0.29) $ (0.16)
============ ============ ============ ============
Diluted $ (0.18) $ (0.00) $ (0.29) $ (0.16)
============ ============ ============ ============
Weighted average common shares used in computing per share amount
Basic 26,309,925 35,658,591 23,186,818 35,321,576
============ ============ ============ ============
Diluted 26,309,925 35,658,591 23,186,818 35,321,576
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (6,783) $ (5,557)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities-
Allowance for doubtful accounts 337 1,620
Depreciation and amortization 7,836 18,045
Deferred income taxes (777) 8
Non-cash compensation expense 73 1,956
Deferred rent -- 2,517
Changes in operating assets and liabilities:
Accounts receivable (17,332) (19,787)
Unbilled charges 2,081 (5,465)
Prepaid expenses and other current assets (2,504) (23)
Income tax receivable 945 --
Due from related parties -- (908)
Other assets 203 774
Accounts payable and accrued expenses 3,213 6,548
Income taxes payable 867 785
Deferred revenue 634 6,331
Due to related parties (729) (2,010)
Other long-term liabilities 988 550
-------- --------
Net cash (used in) provided by operating activities (10,948) 5,384
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (5,018) (10,467)
Acquisitions, net of cash acquired (328) (11,138)
Investment in Affiliate (1,488) (432)
-------- --------
Net cash used in investing activities (6,834) (22,037)
-------- --------
Cash Flows from Financing Activities:
Payments on note payable due to Omnicom 19,231 --
Proceeds from line of credit 122 --
Registration costs (1,298) (349)
Payments under capital lease obligations (670) (1,334)
Proceeds from issuance of shares under
employee stock purchase plan -- 2,567
Proceeds from exercise of stock options 388 969
-------- --------
Net cash provided by financing activities 17,773 1,853
-------- --------
Effect of Exchange Rate on Cash and Cash Equivalents (34) 66
-------- --------
Net decrease in cash and cash equivalents (43) (14,734)
-------- --------
Cash and Cash Equivalents, beginning of period 769 85,035
-------- --------
Cash and Cash Equivalents, end of period $ 726 $ 70,301
======== ========
Supplemental Disclosures of Cash Flow Information:
Income taxes paid $ 565 $ 874
======== ========
Interest paid $ 119 $ 110
======== ========
Supplemental Disclosure of Non-cash Investing
Activities:
Equipment acquired under capital leases $ 2,065 $ 1,719
======== ========
Retirements of Fixed Assets $ -- $ 1,122
======== ========
Supplemental Disclosure of Non-cash Financing
Activities:
Common stock issued for acquisitions $ 22,620 $ 7,282
======== ========
Warrants issued for acquisitions $ 5,853 $ --
======== ========
Stock options issued for acquisitions $ 722 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<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
interactive businesses. The Company provides these services on interactive
platforms including the Internet, wireless application protocol (or WAP), and
interactive broadband platforms such as interactive television. 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 currently has
offices in New York (New York); Vail (Colorado); Atlanta (Georgia); Chicago
(Illinois); Dallas (Texas); Portland (Oregon); San Francisco (California);
Cambridge (Massachusetts); Woodbridge (New Jersey); London (England); Paris
(France); Amsterdam (The Netherlands); Copenhagen (Denmark); affiliate offices
in Miami (Florida); Seoul (Korea) and we also have a minority investment in a
technology company in Singapore.
Principles of Consolidation
The accompanying unaudited consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Form 10-K (File No. 0-28293). In the opinion of
management, the accompanying unaudited consolidated financial statements reflect
all adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the results for the periods presented.
The results of operations presented for the three and nine month periods
ended September 30, 1999 and 2000, are not necessarily indicative of the results
to be expected for any other interim period or any future fiscal year.
2. Acquisitions
In January 2000, the Company exercised its option to purchase the
remaining 95% of Pictoris Interactive S.A. The total consideration for the
acquisition was approximately $12.4 million consisting of $8.7 million in cash
and 78,954 shares of the Company's common stock valued at approximately $46.00
per share which was the current fair market value of the Company's common stock
at the date of grant. As a result of this acquisition, the Company has recorded
goodwill of approximately $13.2 million which is being amortized over a period
of seven years. Pictoris is located in Paris, France and concentrates on helping
its clients develop their overall internet strategy and helping them implement
that strategy through design, programming and production of Internet sites.
In March 2000, the Company released the remaining 123,376 shares of its
common stock from escrow and issued them to the former shareholders of Online
Magic as a result of the earn-out being achieved. These shares were valued at
$29.50, which was the current fair market value of the Company's stock at the
date of the release. The total value of these shares of approximately $3.6
million was recorded as additional purchase price and has been reflected as
goodwill.
3. Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma consolidated statement of operations
data for the nine months ended September 30, 1999 give effect to the
acquisitions of Interactive Solutions (and Quadris Consulting), Eagle River
Interactive, Digital Vision Communications, Twinspark Interactive People,
I-traffic, Visionik and Pictoris Interactive S.A. as if each of these
acquisitions had occurred on January 1, 1999.
4
<PAGE>
The following unaudited pro forma consolidated statement of operations data for
the three months ended September 30, 1999 give effect to the acquisitions of
Digital Vision Communications, Twinspark Interactive People, I-traffic, Visionik
and Pictoris Interactive S.A. as if each of these acquisitions 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, 1999 and may not be indicative of future operating results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Pro forma: September 30, 1999 September 30, 1999
------------------ ------------------
(in thousands except per share data)
<S> <C> <C>
Revenues .......................................... $ 30,210 $ 77,116
Net loss .......................................... $ (7,009) $(20,009)
Basic and diluted net loss
per share ......................................... $ (0.25) $ (0.73)
Weighted average shares outstanding ............... 27,713 27,488
</TABLE>
Proforma Consolidated Statement of Operations for the three and nine months
ended September 30, 2000 are not presented because actual results are the same
as proforma for these periods.
4. Net Loss Per Common Share
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings Per Share". Under the provisions of SFAS No. 128, 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 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>
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
------------------------------------- ------------------------------------
(in thousands except per share data) (in thousands except per share data)
Net Loss Net Loss
Weighted Per Weighted Per
Average Common Average Common
Net Loss Shares Share Net Loss Shares Share
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock $(4,764) 26,310 $(0.18) $(6,783) 23,187 $(0.29)
Stock options and warrants -- -- -- -- -- --
------- ------ ------ ------- ------ ------
Diluted EPS $(4,764) 26,310 $(0.18) $(6,783) 23,187 $(0.29)
======= ======= ====== ======= ======= =====
<CAPTION>
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
------------------------------------- ------------------------------------
(in thousands except per share data) (in thousands except per share data)
Net Loss Net Loss
Weighted Per Weighted Per
Average Common Average Common
Net Loss Shares Share Net Loss Shares Share
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock $ (39) 35,659 $(0.00) $(5,557) 35,322 $(0.16)
Stock options and warrants -- -- -- -- -- --
------- ------ ------ ------- ------ ------
Diluted EPS $ (39) 35,659 $(0.00) $(5,557) 35,322 $(0.16)
======= ======= ====== ======= ======= =====
</TABLE>
Diluted EPS for the three months and nine months ended September 30, 1999 and
2000 does not include the impact of stock options and warrants then outstanding,
as the effect of their inclusion would be anti-dilutive.
5
<PAGE>
5. Comprehensive Income
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1999 2000 1999 2000
------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net loss $(4,764) $ (39) $(6,783) $(5,557)
Foreign currency translation adjustment (40) (159) (35) 66
------- ------- ------- -------
Comprehensive loss $(4,804) $ (198) $(6,818) $(5,491)
======= ======= ======= =======
</TABLE>
6. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101B, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. We are required to be in conformity with the provisions of SAB 101, as
amended by SAB 101B, no later than October 1, 2000. We believe the adoption of
SAB 101, as amended by SAB 101B, will not have a material effect on our
financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), as amended by FAS 137 and FAS 138. FAS 133,
as amended, is effective for the Company beginning January 1, 2001 and
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction. The Company believes that adoption of this statement, as
amended, will not have a material impact on the Company's financial position,
results of operations or cash flows.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25
"Accounting for Stock Issued to Employees." The effective date of the
interpretation is July 1, 2000. The provisions of the interpretation will apply
prospectively, but it will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The adoption of FIN. 44 did not have an
effect on the current or historical consolidated financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, and actual results
could be significantly different than those discussed in this Quarterly Report
on Form 10-Q. All forward-looking statements included in this document are made
as of the date hereof, based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any forward-looking
statements.
Overview
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
Interactive business. The Company provides these services as interactive
platforms including the Internet, wireless application protocol (or WAP) and
interactive broadband platforms such as interactive television. We deliver our
services through our multidisciplinary teams of strategy, creative, technology
and project management specialists. These services help our clients create and
enhance relationships with their customers, staff, business partners and
suppliers.
The company believes the following characteristics will differentiate it
from its competitors and deliver long-term value to shareholders:
6
<PAGE>
o a focus on large global clients. The company focuses on delivering
services to large, stable clients who need global solutions and who
provide long-term potential revenue streams with strong ability to
pay for services. The company believes that this client focus will
provide a long-term quality of revenue benefit to AGENCY.COM. For
the quarter ended September 30, 2000, approximately 98% of client
revenues came from non-dot com start up companies.
o a global presence to deliver services. The company has developed its
offices to deliver its services on a global basis. As of the end of
the third quarter 2000, the company had over 30% of its professional
staff and 25% of its revenue in offices outside of the United
States. The company believes that it benefits from this global
presence because its non-US clients are demanding services in
emerging technologies such as wireless application protocol (WAP)
and interactive broadband services (such as interactive television).
The Company believes that the experience gained outside the United
States will benefit the company as demand for these services grows
within the United States. Secondly, a large non-US presence will
benefit the company as demand for Internet-based services expands in
non-US markets, which currently lag the US market for Internet
services.
o experience in emerging digital platforms. The company is delivering
solutions for clients using WAP and interactive broadband services.
Today, these services represent 18% of consolidated company
revenues. As noted above, we believe this experience will provide
critical first mover advantage for AGENCY.COM as demand for these
services grow in the coming years.
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 conducting online marketing campaigns. 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 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 20% and 3% of our revenues for
the three months ended September 30, 2000 and 1999, respectively. Retainer fees
represented approximately 17% and 4% for the nine months ended September 30,
2000 and 1999, respectively. 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 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. Revenue is only recognized
when persuasive evidence of an arrangement exists, services have been rendered,
the fees are fixed or determinable and collectibility is reasonably assured. 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.
7
<PAGE>
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. We report revenue net of reimbursable expenses.
For the three months ended September 30, 2000, one client accounted for
more than 10% of our revenues and for the nine months ended September 30, 2000,
no client accounted for more than 10% of our revenues. For the three month
period ended September 30, 1999, no client accounted for more than 10% of our
revenues and for the nine months ended September 30, 1999, one client accounted
for more than 10% of our revenues.
For the three months ended September 30, 2000, we incurred a net loss of
$39 thousand. As a result of this and prior losses, our accumulated deficit was
$19.3 million at September 30, 2000. The net loss resulted from amortization of
intangibles of $4.4 million, due to our most recent acquisitions and non-cash
compensation expense of $0.4 million. These increases to the net loss were
partially offset by income from operations (excluding amortization of
intangibles and non-cash compensation) of $4.7 million, due to increased
revenue, improvement in gross margin and interest income of $0.8 million. For
the nine months ended September 30, 2000, we incurred a net loss of $5.6
million. The net loss resulted from amortization of intangibles of $12.8
million, due to our most recent acquisitions, non-cash compensation expense of
$2.0 million and provision for income taxes of $1.1 million. These increases to
the net loss were offset by income from operations (excluding amortization of
intangibles and non-cash compensation) of $7.8 million, due to increased revenue
and interest income of $2.6 million.
Included in the net loss for the three months and nine months ended
September 30, 2000 is non-cash compensation expense of $0.4 million and $2.0
million, respectively, which is the result of us granting approximately
1,783,000 stock options to employees prior to our initial public offering at
exercise prices ranging from $4.065 to $19.55 per share, which at the time of
grant, were below the fair market value of our common stock. As a result of
these grants we have estimated cumulative compensation expense of $6.5 million
which will be charged over the vesting period of such options. This will result
in future non-cash compensation expense of an additional $0.4 million for the
remainder of 2000, $1.6 million for the year ended December 31, 2001, $1.2
million for the year ended December 31, 2002 and $27 thousand for the year ended
December 31, 2003. We did not have any stock option grants with exercise prices
that were below the fair market value of our common stock prior to 1999.
For the three month period ended September 30, 2000, the decrease in net
loss per share of $0.18, compared to the same period in 1999, was primarily a
result of an increase in revenues due to the growth in our business, an
improvement in gross margin as a result of improved utilization, and increase in
rates offset by additional administrative expenses and increased amortization of
intangibles of $2.0 million, which went from $2.4 million to $4.4 million. For
the nine month period ended September 30, 2000, the decrease in net loss per
share of $0.13 compared to the same period in 1999, was primarily attributable
to increase in revenue due to growth in our business, an improvement in gross
margin as a result of improved utilization, and increase in rates offset by
additional administrative expenses and increased amortization of intangibles
which increased by $8.1 million, from $4.7 million to $12.8 million. This
increase was primarily attributable to our acquisitions as discussed above.
Our revenues and earnings are affected by a number of factors, including:
o the amount of business developed from existing relationships;
o our ability to meet the changing needs of the marketplace;
o employee retention;
o billing rates;
o our ability to deliver complex projects on time; and
o efficient utilization of our employees.
Many of our business initiatives, including our past 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 intangible assets. Direct salaries and costs include
salaries, benefits and
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incentive compensation of billable employees. Billable employees are full time
employees and subcontractors 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 leasehold improvements. Amortization of intangibles includes
charges for the excess of purchase price over net tangible book value of
acquired companies, customer base and work force amortized over a period of
seven, five, and three years respectively. Personnel compensation and facilities
costs represent a high percentage of our operating expenses and are relatively
fixed in advance of each quarter.
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 $5.6 and
$12.1 million for the three months and nine months ended September 30, 1999, and
increased to $14.3 and $35.6 million for the three months and nine months ended
September 30, 2000, an increase of 155% and 194%, respectively. Net loss from
international operations on an actual basis was approximately $0.6 and $0.1
million for the three months and nine months ended September 30, 1999 versus net
income of $1.1 and net loss of $0.9 million for the three months and nine months
ended September 30, 2000. Our international revenues for the three months and
nine months ended September 30, 1999 came from our London, Paris, and Amsterdam
(which we acquired in August 1999) locations. The increase in our international
revenue of $8.7 and $23.5 million for the three months and nine months ended
September 30, 2000, compared to three months and nine months ended September 30,
1999, was primarily due to increase in revenues from our Paris, Amsterdam, and
Copenhagen offices, which contributed $7.5 million for the three months ended
September 30, 2000, and $18.4 million for the nine months ended September 30,
2000. The remaining increase of $1.2 million and $5.1 million for the three and
nine months ended September 30, 2000, respectively, is attributable to an
increase in revenue from new and existing clients of our London office. 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.
Results of Operations
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
the periods include revenues and expenses from new acquisitions, we believe that
the operating results for the three months and nine months ended September 30,
2000 are not directly comparable to the operating results for the comparable
period in 1999.
Comparison of the Three Months ended September 30, 2000 and 1999
Revenues. The Company's revenues increased $31.2 million, or 120%, to
$57.3 million for the three months ended September 30, 2000 from $26.1 million
for the comparable period in 1999. $22.5 million was attributed to existing
operations and $8.7 million related to acquisitions. The $22.5 million
attributed to existing operations, primarily reflected increases in the number
of clients, average revenues per client and the number of billable employees to
meet the growing demand for our services. Our growth for the three months ended
September 30, 2000 was not materially impacted by foreign currency fluctuations.
Direct Salaries and Costs. The Company's direct salaries and costs
increased $13.6 million, or 99%, to $27.3 million for the three months ended
September 30, 2000 from $13.7 million for the comparable period in 1999. The
increase in direct salaries and costs of $13.6 million was due to the addition
of employees as a result of planned internal growth and the acquisition of
Pictoris. For the period ended September 30, 2000 and 1999, there were
approximately 1,250 and 670 employees, respectively, included in direct salaries
and costs. As a percentage of revenues, direct salaries and costs decreased to
48% for the three months ended September 30, 2000 from 53% for the comparable
period in 1999 primarily due to increases in utilization and billing rates
partially offset by increases in salaries.
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General and Administrative Expenses. The Company's general and
administrative expenses increased $8.4 million, or 76%, to $19.4 million for the
three months ended September 30, 2000 from $11.0 million for the comparable
period in 1999. As a percentage of revenues, general and administrative expenses
were 33.9% and 42.1% for the three months ended September 30, 2000 and 1999,
respectively. The increase in general and administrative expenses in absolute
dollar terms of $8.4 million was a result of an increase in the number of
non-billable employees and an increase in other types of general and
administrative expenses, such as rent expense, recruiting, training and other
operating expenses.
Sales and Marketing Expenses. The Company's sales and marketing expenses
increased $2.7 million, or 208%, to $4.0 million for the three months ended
September 30, 2000 from $1.3 million for the comparable period in 1999. As a
percentage of revenues, sales and marketing expenses increased to 6.9% for the
three months ended September 30, 2000 from 5.1% for the comparable period in
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 and marketing personnel and an overall increase in our marketing and
branding efforts, such as increased participation in electronic commerce trade
shows.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.7 million, or 58%, to $1.9 million for the three months ended
September 30, 2000 compared to $1.2 million for the comparable period in 1999.
As a percentage of revenues, depreciation and amortization represented 3.4% and
4.5% of revenues for the three months ended September 30, 2000 and 1999,
respectively. 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. We expect these
expenses to continue to grow in absolute dollar terms as we continue to invest
in growth, 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 future years.
Amortization of Intangibles. Amortization of intangibles increased $2.0
million, or 83%, to $4.4 million for the three months ended September 30, 2000
compared to $2.4 million for the comparable period in 1999. Intangible assets,
which primarily include goodwill, customer base and workforce, are amortized
over periods of seven, five and three years, respectively. As a percentage of
revenues, amortization of intangibles represented 7.6% and 9.0%, respectively,
of revenues for the three months ended September 30, 2000 and 1999. The $2.0
million increase was due to the acquisitions of Twinspark, I-traffic, Visionik,
Digital Vision and Pictoris and the issuance of contingent consideration to
former shareholders of Online Magic.
Non-cash Compensation. Non-cash compensation expense was $0.4 million and
$0.1 million, respectively, for the three months ended September 30, 2000 and
1999.
Interest Income (Expense), Net. Net interest improved $1.9 million to $0.8
million net interest income for the three months ended September 30, 2000 from
$1.1 million net interest expense for the comparable period in 1999. The
improvement was primarily the result of interest earned on the proceeds from our
initial public offering, which brought the Company from a net debt to net cash
position.
Net Loss. Net loss for the three months ended September 30, 2000 was $39
thousand compared to a net loss of $4.8 million for the comparable period in
1999. The decrease in net loss is attributable to an increase in gross margin
and interest income, partially offset by increased overhead expenses and
amortization of intangibles, all of which are discussed above.
Comparison of the Nine Months ended September 30, 2000 and 1999
Revenues. The Company's revenues increased $89.6 million, or 159%, to
$146.1 million for the nine months ended September 30, 2000 from $56.5 million
for the comparable period in 1999. Of this increase, $46.3 million was
attributed to existing operations and $43.3 million related to acquisitions. The
$46.3 million attributed to existing operations, primarily reflected increases
in the number of clients, average revenues per client and the number of billable
employees to meet the growing demand for our services. Our growth for the nine
months ended September 30, 2000 was not materially impacted by foreign currency
fluctuations.
Direct Salaries and Costs. The Company's direct salaries and costs
increased $43.0 million, or 149%, to $71.8 million for the nine months ended
September 30, 2000 from $28.8 million for the comparable period in 1999. The
increase in direct salaries and costs of $43.0 million was due to the planned
investment in additional employees and acquisitions in anticipation of future
growth. For the period ended September 30, 2000 and 1999, there were
approximately 1,250 and 670 employees, respectively, included in direct salaries
and costs. As a percentage of revenues, direct salaries and costs were 49.1% and
50.9% for the nine months ended September 30, 2000 and 1999, respectively.
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General and Administrative Expenses. The Company's general and
administrative expenses increased $30.2 million, or 140%, to $51.8 million for
the nine months ended September 30, 2000 from $21.6 million for the comparable
period in 1999. As a percentage of revenues, general and administrative expenses
decreased to 35.4% for the nine months ended September 30, 2000 from 38.3% for
the comparable period in 1999. The increase in general and administrative
expenses in absolute dollar terms of $30.2 million was a result of an increase
in the number of non-billable employees and an increase in other types of
general and administrative expenses, such as rent expense, utilities, equipment
rental and other operating expenses and general and administrative costs from
our acquisitions.
Sales and Marketing Expenses. The Company's sales and marketing expenses
increased $6.9 million, or 265%, to $9.5 million for the nine months ended
September 30, 2000 from $2.6 million for the comparable period in 1999. As a
percentage of revenues, sales and marketing expenses increased to 6.5% for the
nine months ended September 30, 2000 from 4.6% for the comparable period in
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 and marketing personnel and an overall increase in our marketing and
branding efforts, such as increased participation in electronic commerce trade
shows.
Depreciation and Amortization. Depreciation and amortization expense
increased $2.1 million, or 68%, to $5.2 million for the nine months ended
September 30, 2000 compared to $3.1 million for the comparable period in 1999.
As a percentage of revenues, depreciation and amortization represented 3.6% and
5.6% of revenues for the nine months ended September 30, 2000 and 1999,
respectively. 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. We expect these
expenses to continue to grow in absolute dollar terms as we continue to invest
in growth, technology and training to yield more efficient operations and as a
result of our acquisitions in 1999.
Amortization of Intangibles. Amortization of intangibles increased $8.1
million, or 172%, to $12.8 million for the nine months ended September 30, 2000
compared to $4.7 million for the comparable period in 1999. Intangible assets,
which primarily include goodwill, customer base and workforce, are amortized
over periods of seven, five and three years, respectively. As a percentage of
revenues, amortization of intangibles represented 8.8% and 8.3% of revenues for
the nine months ended September 30, 2000 and 1999, respectively. The $8.1
million increase was due to the acquisitions of Eagle River Interactive,
Interactive Solutions (including Quadris), Twinspark, I-traffic, Visionik,
Digital Vision and Pictoris and the issuance of contingent consideration to
former shareholders of Online Magic.
Non-cash Compensation. Non-cash compensation expense was $2.0 million for
the nine months ended September 30, 2000, compared to $0.1 million for the nine
months ended September 30, 1999.
Interest Income (Expense), Net. Net interest improved $4.7 million to $2.6
million net interest income for the nine months ended September 30, 2000 from
$2.1 million net interest expense for the comparable period in 1999. The
improvement was primarily the result of interest earned on the proceeds from our
initial public offering, which brought the Company from a net debt to net cash
position.
Net Loss. Net loss for the nine months ended September 30, 2000 was $5.6
million compared to a net loss of $6.8 million for the comparable period in
1999. The decrease in net loss of $1.2 million between the periods was primarily
attributable to the increase in gross margin and interest income, partially
offset by increased overhead expenses and amortization of intangibles, 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 operations, sales of equity
securities, borrowings from our shareholder Omnicom Group, Inc. ("Omnicom") and
capital leases.
At September 30, 2000 and December 31, 1999, our cash and cash equivalents
were approximately $70.3 million and $85.0 million, respectively.
The Company believes that its market risk exposures are immaterial as the
Company does not have instruments for trading purposes and reasonably possible
near-term changes in market rates or prices will not result in material
near-term losses in earnings, material changes in fair values or cash flows for
all other instruments.
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Cash provided by operating activities was $5.4 million for the nine months
ended September 30, 2000 compared to cash used in operating activities of $10.9
million for the comparable period in 1999. Cash provided by operating activities
for the nine months ended September 30, 2000 was primarily due to net income
after adjustments to reconcile net loss to net cash of $18.6 million, an
increase in accounts payable and accrued expenses of $6.5 million, and advanced
billings of $6.3 million, offset by an increase in accounts receivable of $19.8
million, which was attributable to our increased revenues, unbilled charges of
$5.5 million, and due to affiliates of $2.0 million. Cash used in operating
activities for the nine months ended September 30, 1999 was primarily due to net
income after adjustments to reconcile net loss to net cash of $0.7 million, an
increase in accounts receivable of $17.3 million, partially offset by a decrease
in unbilled charges of $2.1 million, and accounts payable and accrued expenses
of $3.2 million.
Cash used in investing activities was $22.0 million for the nine months
ended September 30, 2000 compared to $6.8 million for the comparable period in
1999. Cash used in investing activities for the nine months ended September 30,
2000 was primarily the result of capital expenditures of $10.5 million and
acquisitions and investments of $11.1 million. Cash used in investing activities
for the nine months ended September 30, 1999, was primarily the result of
capital expenditures of $5.0 million and investment in subsidiaries of $1.5
million.
Cash provided by financing activities for the nine months ended September
30, 2000 was $1.9 million compared to cash provided by financing activities of
$17.8 million for the comparable period in 1999. Cash provided by financing
activities for the nine months ended September 30, 2000, was primarily the
result of proceeds from purchases of stock under the Employee Stock Purchase
Plan of $2.6 million, proceeds from the exercise of stock options of $1.0
million, offset by payments of capital lease obligations of $1.3 million. Cash
provided by financing activities for the nine months ended September 30, 1999
was primarily the result of an increase in borrowings from a line of credit of
$19.2 million, offset by deferred registration costs of $1.3 million.
Prior to December 1999, our main sources of liquidity have been cash from
operations and borrowings from Omnicom and since that time, the main sources
have been from operations and our proceeds from our initial public offering. We
believe that on a short-term basis we will have sufficient funds for working
capital, capital expenditures from our existing working capital 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 by operations and
supplemented, if necessary, from additional equity financings or borrowings
under our credit facility. We believe that our current cash, cash equivalents
and short-term investments, available borrowings under our credit facility and
the net proceeds from our initial public offering will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 24
months.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101B, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. We are required to be in conformity with the provisions of SAB 101, as
amended by SAB 101B, no later than October 1, 2000. We believe the adoption of
SAB 101, as amended by SAB 101B, will not have a material effect on our
financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), as amended by FAS 137 and FAS 138. FAS 133,
as amended, is effective for the Company beginning January 1, 2001 and
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction. The Company believes that adoption of this statement, as
amended, will not have a material effect on the Company's financial position,
results of operations or cash flows.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25
"Accounting for Stock Issued to Employees." The effective date of the
interpretation is July 1, 2000. The provisions of the interpretation will apply
prospectively, but it will
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also cover certain events occurring after December 15, 1998 and after January
12, 2000. The adoption of FIN. 44 did not have an effect on the current or
historical consolidated financial statements.
Year 2000 Disclosure
The Company experienced no problems in connection with the introduction of
calendar year 2000 transactions to its operating, financial and other systems,
nor has it experienced difficulties from the effect, if any of the Year 2000
Problem on its customers and suppliers.
ITEM 2A. Risk Factors
You should carefully consider the following risks in your evaluation of
us. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties may also adversely impact and impair our
business. If any of the following risks actually occur, our business, results of
operations or financial condition would likely suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
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, our ten largest clients accounted for
approximately 49.7% and 38.7% of our revenues for the three and nine months
ended September 30, 2000, respectively. 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
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.
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Our Past Acquisitions Make Evaluating Our Business Difficult
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 report is based in part on the separate
pre-acquisition financial reports of these acquired companies. Consequently, our
historical results of operations and pro forma 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. Although
we believe that we have sufficient funds for working capital, 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. For the third quarter
ended September 30, 2000, approximately 19.7% of our revenue was derived from
retainer contracts, 75.7% of our revenue was derived from time and materials
contracts and 4.6% 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 September 30, 2000, our staff
increased from approximately 180 to 1,640 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 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.
Our Past And Future Acquisitions, If Any, 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:
o adverse effects on our reported operating results due to the
amortization of goodwill associated with acquisitions;
o diversion of management attention from running our existing
business;
o increased expenses, including compensation expenses resulting from
newly- hired employees; and
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o 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 past and future
acquisitions, if any, could have a material adverse effect on our business,
results of operations and financial condition.
We Sometimes Agree Not To Perform Services For Our Clients' Competitors, Which
Limits Our Business Opportunities
We have agreed with eleven of our 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.
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
o there are no substantial barriers to entering the Internet
professional services market;
o our industry is consolidating; and
o 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:
o traditional strategic consulting firms;
o interactive advertising agencies;
o professional services groups of computer equipment companies;
o traditional systems integrators; and
o 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
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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 People Officer, Kevin Rowe, our President"of
North America and Michael Mathews, our Chairman"of 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 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.
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 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 the United Kingdom in October
1997, France in April 1999, the Netherlands in August 1999 and Denmark in
November 1999, set up affiliate offices in Miami (Florida) and Seoul (Korea),
and made a minority investment in a company in Singapore in December 1998 and
July 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.
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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. We anticipate that we will face the
following challenges internationally:
o the burden and expense of complying with a wide variety of foreign
laws and regulatory requirements;
o potentially adverse tax consequences;
o longer payment cycles and problems in collecting accounts
receivable;
o technology export and import restrictions or prohibitions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o political and economic instability;
o cultural and language differences;
o fluctuations in currency exchange rates; and
o 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:
o the inadequate development of the necessary infrastructure;
o a lack of development of complementary products (such as high speed
modems and high speed communication lines); and
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o 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, 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.
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 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.
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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 Our Shares
As An Internet-Related Company, Our Stock Price Is Likely To Be Highly Volatile
And Could Drop Unexpectedly
The price at which our common stock trades is highly volatile and
fluctuates 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 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 69% 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 approximately 44% of our common stock, allowing them to significantly
influence the outcome of any matter submitted to a vote of AGENCY.COM
stockholders.
Our Stockholders Could Be Adversely Affected As A Result Of Omnicom's And Its
Two Designated Directors' Potential Conflicts Of Interests
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
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Gerald Bruce Redditt, one of Communicade's nominees to our Board of
Directors, is also a director of Organic, Inc., one of our direct competitors.
This directorship may create actual and perceived conflicts of interest for Mr.
Redditt as a result of this 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. We currently invest substantially all of the net
proceeds (after repayments of our outstanding debt due to Omnicom) from our
initial public offering with Omnicom Finance (a wholly owned subsidiary of
Omnicom Group Inc.). 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 no outstanding indebtedness under our credit facility provided by
Omnicom. This credit facility provides for 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. The credit facility bears
interest at Omnicom's commercial paper rate, which was 6.5% on September 30,
2000, 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 Could Adversely Affect Our Stock Price
Based on shares outstanding on September 30, 2000, in addition to the 6.8
million shares sold in our initial public offering, from time to time, a total
of approximately 28.7 million 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, 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
classified 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.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk. To date, we have not utilized derivative financial
instruments or derivative commodity instruments. We invest substantially all of
our cash with Omnicom Finance, a related party that is 100% owned by our largest
stockholder, Omnicom, and to a lesser extent 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
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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 quarter ended September 30, 2000 was
not material.
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are not a party to any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Report on Form 8-K
None.
Number Description
------ -----------
27.1 Financial Data Schedule.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on this 14th day of November 2000.
AGENCY.COM LTD.
/s/ Charles Dickson
-----------------------------------------------
Name: Charles Dickson
Title: Executive Vice President, Treasurer and
Chief Financial Officer (Signing both in
his capacity as Executive Vice President
on behalf of the registrant and Chief
Financial Officer on behalf of the
registrant)
/s/ Michael Jackson
-----------------------------------------------
Name: Michael Jackson
Title: Corporate Controller (Signing in his
capacity as Chief Accounting Officer of
the registrant)
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