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 MARCH 31, 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
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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 35,295,340 shares of Common Stock outstanding as of May 11,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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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 March 31, 2000 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 2000 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II. Other Information 21
ITEM 1. Legal Proceedings 21
ITEM 2. Changes In Securities 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 24
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
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(audited) (unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 85,035 $ 61,231
Accounts receivable, net of allowance for doubtful accounts
of $5,164 and $6,383 respectively 23,768 26,366
Unbilled charges 9,224 15,804
Prepaid expenses and other current assets 1,698 7,027
Due from related parties 255 342
--------- ---------
Total current assets 119,980 110,770
Property and equipment, net of accumulated depreciation and
amortization of $9,325 and $10,170, respectively 18,554 19,214
Intangibles, net of accumulated amortization of $8,749 and
$13,211, respectively 85,244 98,666
Deferred tax assets 547 547
Investments and other assets 2,566 1,500
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Total assets $ 226,891 $ 230,697
========= =========
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 18,075 $ 19,727
Income taxes payable 1,462 1,772
Deferred revenue 10,283 8,056
Current portion of capital lease obligations 1,511 1,288
Due to related parties 1,003 --
--------- ---------
Total current liabilities 32,334 30,843
Long-Term Liabilities:
Deferred tax liabilities 482 485
Capital lease obligations 1,644 1,671
Due to related parties 1,217 957
Other long-term liabilities 521 1,846
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Total long term liabilities 3,864 4,959
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Total liabilities 36,198 35,802
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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 March
31, 2000, respectively -- --
Common stock, $0.001 par value, 200,000,000 shares authorized;
34,849,641 and 35,093,884 shares issued; and 34,726,265 and
35,093,884 shares outstanding at December 31, 1999 and
March 31, 2000, respectively 35 35
Additional paid-in capital 204,554 212,793
Retained deficit (13,725) (17,877)
Cumulative foreign currency translation (171) (56)
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Total stockholders' equity 190,693 194,895
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Total liabilities and stockholders' equity $ 226,891 $ 230,697
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
Three Months Ended March 31,
----------------------------
1999 2000
-------- --------
(unaudited)
Revenues $ 8,922 $ 38,505
Direct salaries and costs 4,373 19,842
-------- --------
Gross profit 4,549 18,663
General and administrative 2,835 14,513
Sales and marketing 234 2,576
Amortization of intangibles 310 4,098
Depreciation and amortization 1,077 1,548
Non-cash compensation -- 773
-------- --------
Income (loss) from operations 93 (4,845)
Interest income (expense), net (208) 1,014
-------- --------
Loss before income taxes (115) (3,831)
Provision for income taxes 13 321
-------- --------
Net loss $ (128) $ (4,152)
======== ========
Per share information:
Net loss per common share
Basic $ (0.01) $ (0.12)
======== ========
Diluted $ (0.01) $ (0.12)
======== ========
Weighted average common shares used in
computing per share amounts
Basic 17,179,060 34,878,499
========== ==========
Diluted 17,179,060 34,878,499
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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AGENCY.COM LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (128) $ (4,152)
Adjustments to reconcile net loss to net cash used in operating activities-
Allowance for doubtful accounts 139 1,219
Depreciation and amortization 1,387 5,646
Deferred income taxes (47) 3
Non-cash compensation expense -- 773
Changes in operating assets and liabilities:
Accounts receivable 673 (3,364)
Unbilled charges (5,242) (6,580)
Prepaid expenses and other current assets (51) (5,329)
Due from related parties (409) (87)
Other assets (85) 1,239
Accounts payable and accrued expenses 1,564 1,099
Income taxes payable 101 310
Deferred revenue 66 (2,349)
Due to related parties 723 (1,264)
Other long-term liabilities (212) 1,324
-------- --------
Net cash used in operating activities (1,521) (11,512)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (277) (1,867)
Acquisitions, net of cash acquired -- (10,065)
Investment in Affiliate (17) (110)
-------- --------
Net cash used in investing activities (294) (12,042)
-------- --------
Cash Flows from Financing Activities:
Proceeds from note payable due to Omnicom 1,487 --
Payments under capital lease obligations (196) (550)
Proceeds from exercise of stock options -- 185
-------- --------
Net cash provided by (used in) financing activities 1,291 (365)
-------- --------
Effect of Exchange Rate on Cash and Cash Equivalents 3 115
-------- --------
Net decrease in cash and cash equivalents (521) (23,804)
-------- --------
Cash and Cash Equivalents, beginning of year 769 85,035
-------- --------
Cash and Cash Equivalents, end of year $ 248 $ 61,231
======== ========
Supplemental Disclosures of Cash Flow Information:
Income taxes paid $ 1 $ 182
======== ========
Interest paid $ 12 $ 43
======== ========
Supplemental Disclosure of Non-cash Investing Activities:
Equipment acquired under capital leases $ 444 $ 353
======== ========
Retirement of Equipment -- $ 869
======== ========
Supplemental Disclosure of Non-cash Financing Activities:
Common stock issued for acquisitions -- $ 7,282
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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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) and Copenhagen, (Denmark). 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 months ended March 31,
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 of 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)
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The following unaudited pro forma consolidated statement of operations
data for the three months ended March 31, 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 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.
Three Months Ended Three Months Ended
Pro forma: March 31, 1999 March 31, 2000
------------------ ------------------
(in thousands except per share data)
Revenues................................. $ 21,126 $ 38,505
Net loss................................. $ (7,724) $ (4,152)
Basic and diluted net loss per share..... $ (0.28) $ (0.12)
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 March 31, 1999
-----------------------------------------
Weighted Net Loss Per
Average Common
Net Loss Shares Share
-------- ------ -----
(in thousands except per share data)
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock......... $(128) 17,179 $(0.01)
Stock options................................. -- -- --
----- ------ ------
Diluted EPS...................................... $(128) 17,179 $(0.01)
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
-----------------------------------------
Weighted Net Loss Per
Average Common
Net Loss Shares Share
-------- ------ -----
(in thousands except per share data)
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock........... $(4,152) 34,878 $(0.12)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Stock options and warrants...................... -- -- --
------- ------ ------
Diluted EPS........................................ $(4,152) 34,878 $(0.12)
======= ====== ======
</TABLE>
Diluted EPS for the three months ended March 31, 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. 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:
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
(in thousands)
Net income (loss).............................. $ (128) $(4,152)
Foreign currency translation adjustment........ 3 115
------- -------
Comprehensive loss............................. $ (125) $(4,037)
======= =======
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:
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
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<PAGE>
long-term quality of revenue benefit to AGENCY.COM. For the quarter
ended March 31, 2000, 93% of client revenues came from non-dot com
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 first quarter, 2000, the company had over 30% of its
professional staff and 29% 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 experience gained here 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 lag the US
market for Internet services at the moment.
o experience in emerging digital platforms. The company is
delivering solutions for clients using WAP and interactive broadband
services. Today, these services represent 16% of consolidated
company revenues. As noted above, this experience provides 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 9.9% and 9.0% of our revenues
for the three months ended March 31, 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
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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.
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.
For the three months ended March 31, 2000, no client accounted for more
than 10% of our revenues as compared to the comparable period in 1999 when two
clients each accounted for more than 10% of our revenues.
For the three months ended March 31, 2000, we incurred a net loss of
$(4.2) million. As a result of this and prior losses, our accumulated deficit
was $(17.9) million at March 31, 2000. The net loss resulted primarily from
amortization of goodwill, customer base and workforce of $4.1 million associated
with our most recent acquisitions, which are amortized over a period of seven,
five and three years, respectively.
Included in the net loss for the three months ended March 31, 2000 is
non-cash compensation expense of $0.8 million, 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 $1.6 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.
The historical trend of increasing net loss per share was primarily a
result of our increased amortization of intangibles of $3.8 million which went
from $0.3 million for the three months ended March 31, 1999 to $4.1 million for
the three months ended March 31, 2000. This increase was primarily attributable
to our acquisitions as discussed above. In addition, this contributed to the
increase in our losses as a percentage of revenues by causing our losses to
increase at a quicker rate than the increase in our revenues. We do not expect
this trend of increased net loss per share and increased losses as a percentage
of revenues to continue as we expect our historical trend of increased revenue
and our recent trend of increased margin to offset any additional increase in
our amortization expense.
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.
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<PAGE>
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 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 $2.2
million for the three months ended March 31, 1999 and increased to $11.0 million
for the three months ended March 31, 2000, an increase of 400%. Net loss from
international operations on an actual basis was approximately $(0.3) million for
the three months ended March 31, 1999 versus net income of approximately $1.0
million for the three months ended March 31, 2000. All of our international
revenues for the three months ended March 31, 1999 came from Online Magic, (now
AGENCY.COM: London) which we acquired in 1997. The increase in our international
revenue of $8.8 million for the three months ended March 31, 2000, compared to
three months ended March 31, 1999, was due to our acquisitions in 1999 and
January 2000 which contributed $5.7 million. The remaining $3.1 million of this
increase is attributable to an increase in revenue from new and existing
clients. 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 -- Actual
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 ended March 31, 2000 are not directly
comparable to the operating results for the comparable period in 1999.
Comparison of the Three Months ended March 31, 2000 and 1999
Revenues. The Company's revenues increased $29.6 million, or 332%, to
$38.5 million for the three months ended March 31, 2000 from $8.9 million for
the comparable period in 1999. $13.4 million was attributed to existing
operations and $25.1 million related to acquisitions. The $13.4 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
March 31, 2000 was not materially impacted by foreign currency fluctuations.
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<PAGE>
Direct Salaries and Costs. The Company's direct salaries and costs
increased $15.4 million, or 350%, to $19.8 million for the three months ended
March 31, 2000 from $4.4 million for the comparable period in 1999. The increase
in direct salaries and costs of $15.4 million was due to the planned investment
in additional employees and acquisitions in anticipation of future growth. For
the period ended March 31, 2000 and 1999, there were approximately 860 and 260
employees, respectively, included in direct salaries and costs. As a percentage
of revenues, direct salaries and costs increased to 52% for the three months
ended March 31, 2000 from 49% for the comparable period in 1999.
General and Administrative Expenses. The Company's general and
administrative expenses increased $11.7 million, or 418%, to $14.5 million for
the three months ended March 31, 2000 from $2.8 million for the comparable
period in 1999. As a percentage of revenues, general and administrative expenses
increased to 38% for the three months ended March 31, 2000 from 32% for the
comparable period in 1999. The increase in general and administrative expenses
in absolute dollar terms of $11.7 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 $2.4 million, or 1,200%, to $2.6 million for the three months ended
March 31, 2000 from $0.2 million for the comparable period in 1999. As a
percentage of revenues, sales and marketing expenses increased to 7% for the
three months ended March 31, 2000 from 3% 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 personnel and an overall increase in our marketing and branding efforts,
such as an increase in the number of our marketing personnel and increased
participation in electronic commerce trade shows.
Amortization of Intangibles. Amortization of intangibles increased $3.8
million, or 1,267%, to $4.1 million for the three months ended March 31, 2000
compared to $0.3 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 11% and 3% of revenues for the
three months ended March 31, 2000 and 1999, respectively. The $3.8 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.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.4, or 36.4%, to $1.5 million for the three months ended March 31,
2000 compared to $1.1 million for the comparable period in 1999. As a percentage
of revenues, depreciation and amortization represented 4% and 12% of revenues
for the three months ended March 31, 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.
Non-cash Compensation. Non-cash compensation expense was $0.8 million for
the three months ended March 31, 2000 and $-0- for the comparable period in
1999.
Net Loss. Net loss for the three months ended March 31, 2000 was $(4.2)
million compared to a net loss of $(0.1) million for the comparable period in
1999. The increase in net loss of $4.1 million between the periods was primarily
attributable to the increase in the amortization of intangibles of $3.8 million
and operating expenses, both of which are discussed above.
Liquidity and Capital Resources
Since inception, we have funded our operations and investments in property
and equipment
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primarily through cash from operations, sales of equity securities, borrowings
from Omnicom, and capital leases.
At March 31, 2000 and December 31, 1999 our cash and cash equivalents were
approximately $61 million and $85 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.
Cash used in operating activities was $11.5 million for the three months
ended March 31, 2000 compared to cash used in operating activities of $1.5
million for the comparable period in 1999. Cash used in operating activities for
the three months ended March 31, 2000 was primarily due to net income after
adjustments to reconcile net loss to net cash of $3.5 million and an increase in
accounts receivable of $3.4 million, unbilled charges of $6.6 million, prepaid
expenses and other assets of $5.3 million and a decrease in accounts payable and
accrued expenses of $1.1 million and decrease in deferred revenue of $2.3
million. Cash used in operating activities for the three months ended March 31,
1999 was primarily due to depreciation and amortization of $1.4 million, an
increase in accounts payable and accrued expenses of $1.6 million and a decrease
in unbilled charges of $5.2 million.
Cash used in investing activities was $12.0 million for the three months
ended March 31, 2000 compared to cash used in investing activities of $0.3
million for the comparable period in 1999. Cash used in investing activities for
the three months ended March 31, 2000 was primarily the result of capital
expenditures of $1.9 million and acquisitions and investments of $10.1 million.
Cash used in investing activities for the three months ended March 31, 1999 was
primarily the result of capital expenditures of $0.3 million.
Cash used in financing activities for the three months ended March 31,
2000 was ($0.4) million compared to cash provided by financing activities of
$1.3 million for the comparable period in 1999. Cash provided by financing
activities for the three months ended March 31, 1999 was primarily the result of
an increase in borrowings from Omnicom of $1.5 million.
To date, our main sources of liquidity have been cash from operations,
borrowings from Omnicom 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, 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 recent offering will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months.
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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, on a pro forma basis our ten largest clients
accounted for approximately 38% of our revenues for the three months ended March
31, 2000 and 45% of our revenues for the three months ended March 31, 1999. 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
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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 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. On a pro forma basis at
March 31, 2000, approximately 10% of our revenue was derived from retainer
contracts, 84% of our revenue was derived from time and materials contracts and
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 March 31, 2000, our staff
increased from approximately 60 to over 1,280
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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
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;
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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
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 Eamonn Wilmott, our President"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.
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 March 31, 2000, our employee base has grown from
approximately 60 to over 1,280 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 employees. If we do not continue to
build the AGENCY.COM brand on a global
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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, 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.
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
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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
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
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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.
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'
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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 73% 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 45% 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.
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One Of Our Directors Is Also A Director Of One Of Our Direct Competitors
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. 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 6.0% on March 31, 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 March 31, 2000, in addition to the 6.8
million shares sold in our initial public offering from time to time, a total of
approximately 27.8 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.
-20-
<PAGE>
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
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 March 31, 2000 was not
material.
Part II. Other Information
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Change in Securities and Use of Proceeds
In October 1999, the Company entered into an Acquistion Agreement with
stockholders listed therein and In-Com (the "Acquisition Agreement") pursuant to
which the Company purchased 5% of the outstanding equity of Pictoris Interactive
SA ("Pictoris"). In January 2000, the Company exercised its option under the
Acquisition Agreement to purchase the remaining outstanding equity of Pictoris.
Pursuant to the Acquisition Agreement, the Company issued an aggregate of 78,954
shares of its common stock for the remaining outstanding equity of Pictoris.
The foregoing transaction did not involve a public offering, and the
Company believes that such transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof. These
sales were made without general solicitation or advertising. Each purchaser was
an accredited investor or a sophisticated investor with access to all relevant
information necessary. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions.
No underwriters were involved in connection with the sales of securities
referred to in this Item 2.
As of January 1, 2000, we had approximately $80 million of unapplied proceeds
from our initial public offering. Between January 1, 2000 and March 31, 2000, we
used a portion of these proceeds as follows, $8.2 million for acquisition of
Pictoris, $5.1 million for build outs of our existing and new office spaces,
$1.6 million of IPO expenses paid during this quarter and $8.9 million for
working capital.
Item 6. Exhibits and Report on Form 8-K
Number Description
------ -----------
3.1x Amended and restated certificate of incorporation.
3.3* Amended and restated By-laws.
4.1* Specimen common stock certificate.
4.2* See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining the rights
of holders of Common Stock of the Registrant.
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.
-21-
<PAGE>
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.
10.12A* Credit Agreement, dated as of November 4, 1999 between Omnicom
Finance Inc. and the Registrant and Subsidiary Guarantors.
10.12* Letter Agreement, dated January 26, 2000, by and between the
Registrant and Omnicom Finance, amending certain provisions of
the Credit Agreement.
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.
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 Jorgen Lembke and Soren 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.
10.27* Lease, dated April 15, 1999, by and between 20 Place Associates
LLC and the Registrant.
16.1* Letter from Ernst & Young LLP re Change in Certifying
Accountants.
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
* Incorporated by reference to the exhibits filed with the
Registrant's Registration Statement on Form S-1 (Reg.No.
333-986433), which was declared effective on December 8, 1999.
x Incorporated by reference to the exhibits filed with our report on
Form 10-K for the year ended December 31, 1999.
(b) Report of Form 8-K
We filed a Report on Form 8-K on January 25, 2000, announcing the exercise
of our option to purchase the remaining outstanding equity of Pictoris
Interactive SA pursuant to the Acquisition Agreement between the Company and
stockholders listed therein and In-Com.
-22-
<PAGE>
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 15th day of May 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)
-23-
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