Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 000-29723

DIGITAS INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: 617-867-1000

NA

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of July 31, 2004 there were 66,036,011 shares of Common Stock, $.01 par value per share, outstanding.

Table of Contents

DIGITAS INC.

Form 10-Q

Table of Contents

June 30, 2004

Page 2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

DIGITAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

Page 3

Table of Contents

DIGITAS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

Page 4

Table of Contents

DIGITAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

Page 5

Table of Contents

DIGITAS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Digitas Inc. (the “Company”) in accordance with generally accepted accounting principles. They do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K for that period. The accompanying unaudited financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results of operations for the interim periods presented. The results for these periods are not necessarily indicative of the results for any future reporting period, including the fiscal year. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from these estimates.

Monetary assets and liabilities of the Company’s foreign branch are translated into U.S. dollars at the exchange rate in effect at period-end and nonmonetary assets and liabilities are remeasured at historical exchange rates. Income and expenses are remeasured at the weighted-average exchange rate for the period. Transaction gains and losses are reflected in selling, general and administrative expenses in the statements of operations.

2. NET INCOME AND LOSS PER SHARE

Basic and diluted earnings per share are computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” SFAS No. 128 requires both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common equivalent shares outstanding. The dilutive effect of options is determined under the treasury stock method using the average market price for the period. Common equivalent shares are included in the per share calculations where the effect of their inclusion would be dilutive.

For the three months ended June 30, 2004 and 2003 the share numbers used in computing diluted earnings per share included the weighted-average number of common shares outstanding plus 11,219,000 and 6,604,000 dilutive common equivalent shares outstanding, respectively, consisting of stock options and warrants. For the six months ended June 30, 2004 and 2003 the share numbers used in computing diluted earnings per share included the weighted-average number of common shares outstanding plus 11,720,000 and 6,315,000 dilutive common equivalent shares outstanding, respectively, consisting of stock options and warrants.

3. STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion (“APBO”) No. 25 as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” (“FIN 44”) and presents the pro forma disclosures required by SFAS No. 123 as amended by SFAS No. 148.

Page 6

Table of Contents

Had compensation costs for the 1998, 1999 and 2000 stock option plans been determined using the fair value method at the grant dates, the effect on the Company’s net income and earnings per share would have been as follows:

4. COMPREHENSIVE INCOME

The Company accounts for comprehensive income under SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive income is summarized below (in thousands):

5. RESTRUCTURING AND RELATED CHARGES

During 2001, the Company recorded restructuring expenses totaling $41.9 million, consisting of $16.7 million for workforce reduction and related costs and $25.2 million for the consolidation of facilities and abandonment of related leasehold improvements. The facility charge represented an estimate of future obligations under the terms of the leases for identified excess space less anticipated income from subleasing activities. In determining this estimate, management evaluated its potential to sublease its excess space and its ability to renegotiate various leases at more favorable terms and in some instances obtain relief through relocation of office space.

During 2002, the Company recorded restructuring expenses totaling $47.1 million, consisting of $3.3 million for workforce reduction and related costs and $43.8 million for the consolidation of facilities and abandonment of related leasehold improvements. These charges were recorded to further align the cost structure with changing market conditions and to update estimates originally made in 2001 for current information.

During 2003, the Company made significant progress towards eliminating its excess real estate, resulting in the recognition of $4.1 million of restructuring income in the fourth quarter of 2003 related to the reversal of restructuring expense initially recorded in 2001 and 2002. The restructuring expense was reversed because of savings of $7.2 million as compared to the Company’s original estimates. The $7.2 million in savings was offset by revisions in estimates of future sublease rates and terms for remaining leases resulting in an increase in expected future obligations of $3.1 million.

The Company continues to evaluate alternatives and monitor its restructuring accrual on a quarterly basis to reflect new developments and prevailing economic conditions in the real estate markets in which the Company leases office space. These sublease estimates, which were made in consultation with the Company’s real estate advisers, were based on current and projected conditions at the time in the real estate and economic markets in which the Company determined it had excess office space. At June 30, 2004, approximately 70,000 square feet of the approximately 300,000 square feet initially identified as excess office space remained available for sublease.

Page 7

Table of Contents

At June 30, 2004, the Company’s restructuring accrual totaled $24.4 million. Less than $0.1 million of this balance is workforce related for final payments of severance and will be fully utilized in the third quarter of 2004. The remaining balance is related to remaining real estate obligations net of expected sublease income. The Company believes the restructuring accrual of $24.4 million is appropriate and adequate to cover these remaining obligations.

The following is a summary of restructuring activity since December 31, 2003 (dollars in thousands):

As a result of all restructuring activity, which commenced in the second quarter of 2001, the Company has reduced its workforce by approximately 700 employees across all business functions and regions.

For the three months ended June 30, 2004 and 2003, cash expenditures related to restructuring activities were $2.4 million and $1.8 million, respectively. For the six months ended June 30, 2004 and 2003, cash expenditures related to restructuring activities were $4.9 million and $4.2 million, respectively. As of June 30, 2004, total remaining cash expenditures related to restructuring activities were $24.4 million. Of that amount, approximately $2.3 million in cash expenditures are expected in the third quarter of 2004, and the remaining cash expenditures of approximately $22.1 million, related to real estate rental obligations, over the following eleven years.

6. STOCK REPURCHASE PROGRAM

In November 2003, the Board of Directors authorized the Company to repurchase up to $20 million of common stock between December 13, 2003 and June 30, 2005 under a common stock repurchase program. As of June 30, 2004, the Company has not repurchased any shares under this program.

In conjunction with the announcement in July 2004 of the execution of a definitive agreement to acquire Modem Media, Inc. (see Note 9), the Board of Directors increased the Company’s stock repurchase program from $20 million to $70 million and extended the term through December 31, 2005, effective as of the closing of the acquisition.

7. COMMITMENTS

In April 2004, the Company entered into an agreement to lease approximately 200,000 square feet of office space in downtown Boston. The space will serve as the Company’s new headquarters. The lease commences upon the earlier of December 1, 2005 or the date the Company occupies the space. Regardless of when occupancy occurs, the Company is not required to commence rental payments until December 2005. The lease expires in November 2017. Total contractual obligations under the lease are $86.3 million. The Company’s current lease for approximately 275,000 square feet of office space in downtown Boston expires November 30, 2005.

8. LEGAL PROCEEDINGS

The Company is a party to stockholder class action law suits filed in the United States District Court for the Southern District of New York. Between June 26, 2001 and August 16, 2001, several stockholder class action complaints were filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and five underwriters of its initial public offering (the “Offering”). The purported class actions are all brought on behalf of purchasers of the Company’s common stock since March 13, 2000, the date of

Page 8

Table of Contents

the Offering. The plaintiffs allege, among other things, that the Company’s prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the underwriters had engaged in conduct designed to result in undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and also that this alleged conduct of the underwriters artificially inflated the Company’s stock price in the period after the Offering. The plaintiffs claim violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission and seek, among other things, damages, statutory compensation and costs of litigation. Effective October 9, 2002, the claims against the Company’s officers and directors were dismissed without prejudice. Effective February 19, 2003, the Section 10(b) claims against the Company were dismissed. The terms of a settlement have been tentatively reached between the plaintiffs in the suits and most of the defendants, including the Company, with respect to the remaining claims. If completed and if then approved by the court, the settlement would dismiss those claims against the Company and is expected to result in no material liability to it. The Company believes that the claims against it are without merit and, if they are not dismissed as part of a settlement, intends to defend them vigorously. Management currently believes that resolving these matters will not have a material adverse impact on the Company’s financial position or its results of operations; however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions.

9. SUBSEQUENT EVENTS

In July 2004, the Company entered into an agreement to acquire Modem Media, Inc. (“Modem”), a publicly traded interactive marketing strategy and services firm, in a stock-for-stock transaction. Modem has approximately 250 employees and has its headquarters in Norwalk, Connecticut. It also operates offices in London and San Francisco. For the year ended December 31, 2003, Modem reported revenues of $61.0 million. Under the terms of the agreement, at the closing, each outstanding share of Modem common stock will be exchanged for .70 shares of the Company’s common stock, and each outstanding option or warrant to purchase Modem common stock will be assumed by the Company and become exercisable into the Company’s common stock (except to the extent that holders of options issued under Modem’s United Kingdom option plan refuse the offer to have their options exchanged for options to purchase the Company’s common stock, in which case their options shall continue to be exercisable for Modem common stock), with appropriate adjustments based on the merger exchange ratio. Based on the closing price of the Company’s common stock at the time of the announcement, the acquisition is valued at approximately $200 million on a fully diluted basis. The transaction, which is subject to customary closing conditions, including regulatory approval and approval of the stockholders of both companies, is expected to close in the fourth quarter of 2004, although the Company cannot guarantee that the acquisition will close by that time.

In July 2004, AT&T Corp. (“AT&T”) announced that it will discontinue its marketing of local and long-distance telephone services to consumers. The Company’s fee revenue related to those services was approximately 60% of total fee revenue from AT&T for the year ended December 31, 2003 and 50% for the six months ended June 30, 2004. Total fee revenue from AT&T was approximately 13% of fee revenue from all clients during the year ended December 31, 2003 and 15% during the six months ended June 30, 2004. As a result of this change in AT&T’s business focus, the Company was notified that AT&T will reduce its marketing and advertising budget with respect to some services provided by Digitas. The company has not been informed of how this change will impact AT&T’s marketing and advertising budget for other lines of business for which the Company provides services or its overall budget for Digitas services.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We review and update these estimates, including those related to revenue recognition, the allowance for doubtful accounts, goodwill, stock-based compensation and

Page 9

Table of Contents

restructuring, on an ongoing basis. We base our estimates on historical experience, and on various other assumptions that we believe to be reasonable under the circumstances. Among other things, these estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and assumptions have remained substantially unchanged since December 31, 2003. For a detailed discussion of our critical accounting policies and estimates see our Annual Report on Form 10-K for the Year Ended December 31, 2003, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations “Critical Accounting Policies and Estimates.”

Results of Operations

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 AND 2003

Revenue. Total revenue for the three months ended June 30, 2004 increased by $23.7 million, or 33%, to $96.3 million from $72.6 million for the same period of 2003. Total fee revenue for the three months ended June 30, 2004 increased by $9.0 million, or 17%, to $60.6 million from $51.6 million for the same period in 2003. Some of our contracts include a discretionary annual bonus provision whereby we earn additional compensation based on our performance as evaluated by our clients. We are typically informed of bonus revenue in the first and second quarters of the fiscal year. For the three months ended June 30, 2004 and 2003, fee revenue included bonus revenue of $0.2 million and $2.8 million, respectively. The increases in total revenue and fee revenue are primarily due to an increase in demand for our services. Clients began to increase their spending with us in the second half of 2003.

We attempt to limit our concentration of credit risk by securing clients with significant assets or liquidity. While we enter into written agreements with our clients, most of these contracts are terminable by the client without penalty on 30 to 90 days written notice. For the three months ended June 30, 2004, our three largest clients accounted for approximately 60% of our fee revenue and our largest client accounted for approximately 24% of our fee revenue. We believe a loss or any significant reduction in the use of our services by any one of our significant clients could have a material adverse effect on our business, financial condition and results of operations.

Professional services costs. Professional services costs for the three months ended June 30, 2004 increased by $4.8 million, or 16%, to $35.2 million from $30.4 million in the same period of 2003. Professional services costs represented 58% of fee revenue in the three months ended June 30, 2004 compared to 59% in the three months ended June 30, 2003. The increase in costs was the result of adding headcount to meet the increased demand for our services. Professional services costs as a percentage of fee revenue decreased slightly due to the increase in fee revenue. We anticipate that professional services costs as a percentage of fee revenue will remain consistent at 57% to 59% of fee revenue for the remainder of 2004.

Pass-through expenses. Pass-through expenses are reimbursable costs incurred by Digitas on behalf of our clients. Pass-through expenses include payments to vendors for media and production services and postage and travel-related expenses. Pass-through expenses for the three months ended June 30, 2004 increased by $14.7 million, or 70%, to $35.7 million from $21.0 million in the same period of 2003. The increase in pass-through expenses was attributable to increased media programs and production costs for our clients during the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. Pass-through expenses are offset by pass-through revenue.

Page 10

Table of Contents

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $1.1 million, or 7%, to $17.3 million from $16.2 million in the same period of 2003. Selling, general and administrative expenses decreased as a percentage of fee revenue to 29% in the three months ended June 30, 2004 from 31% in the same period of 2003. That decrease in expenses as a percentage of revenue was a result of the increase in our fee revenue during that period. We anticipate that selling, general and administrative expenses as a percentage of fee revenue will remain consistent at 29% to 30% of fee revenue for the remainder of 2004.

Stock-based compensation. Stock-based compensation for the three months ended June 30, 2004 decreased by $1.5 million, or 79%, to $0.4 million from $1.9 million in the same period of 2003. The decrease is primarily due to a large number of options becoming fully expensed in the fourth quarter of 2003. We have not granted or repurchased any options nor issued common stock at a price below the estimated fair value subsequent to the initial public offering in March 2000. All remaining deferred stock-based compensation will be fully expensed during the remainder of 2004.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Revenue. Total revenue for the six months ended June 30, 2004 increased by $34.4 million, or 23%, to $186.1 million from $151.7 million for the same period in 2003. Total fee revenue for the six months ended June 30, 2004 increased by $16.9 million, or 16%, to $120.7 million from $103.8 million for the same period in 2003. Some of our contracts include a discretionary bonus provision whereby we earn additional compensation based on our performance as evaluated by our clients. We are typically informed of bonus revenue in the first and second quarters of the fiscal year. For the six months ended June 30, 2004 and 2003, fee revenue included bonus revenue of $5.4 million and $6.1 million, respectively. The increases in total revenue and fee revenue are due to an increase in demand for our services. Clients began to increase their spending with us in the second half of 2003.

For the six months ended June 30, 2004, our three largest clients accounted for approximately 61% of our fee revenue and our largest client accounted for approximately 23% of our fee revenue. We believe that a loss of any one of these significant clients or any significant reduction in the use of our services by a major client could have a material adverse effect on our business, financial condition, and results of operations.

Professional services costs. Professional services costs for the six months ended June 30, 2004 increased by $9.1 million, or 15%, to $70.1 million from $61.0 million in the same period of 2003. Professional services costs represented 58% of fee revenue in the six months ended June 30, 2004 and 59% of fee revenue in the six months ended June 30, 2003. The increase in costs was the result of adding headcount to meet the increased demand for our services. Professional services costs as a percentage of fee revenue decreased slightly due to the increase in fee revenue.

Pass-through expenses. Pass-through expenses for the six months ended June 30, 2004 increased by $17.5 million, or 37%, to $65.4 million from $47.9 million in the same period of 2003. The increase in pass-through expenses was attributable to increased media programs and production costs for our clients during the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. Pass-through expenses are offset by pass-through revenue.

Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2004 increased by $1.3 million, or 4%, to $34.4 million from $33.1 million in the same period of 2003. Selling, general and administrative expenses decreased to 29% of fee revenue in the six months ended June 30, 2004

Page 11

Table of Contents

from 32% of fee revenue in the same period of 2003. That decrease in expenses as a percentage of fee revenue is due to the increase in fee revenue, which is the result of increased demand for our services, and a decrease in depreciation expense, which is the result of fixed assets becoming fully depreciated during the second half of 2003.

Stock-based compensation. Stock-based compensation for the six months ended June 30, 2004 decreased by $2.9 million, or 77%, to $0.9 million from $3.8 million in the same period of 2003. The decrease is primarily due to a large number of options becoming fully expensed in the fourth quarter of 2003. We have not granted or repurchased any options nor issued common stock at a price below the estimated fair value subsequent to the initial public offering in March 2000. All remaining deferred stock-based compensation will be fully expensed during the remainder of 2004.

Liquidity and Capital Resources

We fund our operations primarily through cash generated from operations and proceeds from the exercise of stock options.

Cash and cash equivalents increased from $73.6 million at December 31, 2003 to $93.8 million at June 30, 2004. Cash provided by operations for the six months ended June 30, 2004 was $9.4 million. Cash provided by operations was primarily net income for the period plus the increase in accounts payable related to the increase in pass-through expenses offset by payments for restructuring activities and executive bonuses. During the six months ended June 30, 2004, we paid executive bonuses totaling $10.8 million. Cash used in investing activities for the six months ended June 30, 2004 was $2.3 million, consisting of capital expenditures relating primarily to computer equipment purchases. Cash provided by financing activities for the six months ended June 30, 2004 was $13.1 million, consisting primarily of proceeds from the issuance of approximately 3.0 million shares of common stock through the exercise of employee stock options and through the employee stock purchase plan.

At June 30, 2004, we had no borrowings under our revolving credit facility and approximately $11.6 million outstanding under standby letters of credit, leaving approximately $8.4 million available for future borrowings.

We continue to evaluate our alternatives and monitor our restructuring accrual on a quarterly basis to reflect new developments and prevailing economic conditions in the real estate markets in which we lease office space. At June 30, 2004, approximately 70,000 square feet of the approximately 300,000 square feet initially identified as excess office space remained available for sublease. For the six months ended June 30, 2004, cash expenditures related to restructuring activities were $4.9 million. As of June 30, 2004, total remaining cash expenditures related to restructuring activities were $24.4 million. Of that amount, approximately $2.3 million in cash expenditures are expected in the third quarter of 2004, and the remaining cash expenditures of approximately $22.1 million, related to real estate rental obligations, over the following eleven years.

The following table summarizes our contractual cash commitments as of June 30, 2004. (Note: interest expense is included in payments due by period where applicable.)

As of June 30, 2004, all minimum sublease income due in the future under non-cancelable subleases is related to restructured facilities.

In April 2004, we entered into an agreement to lease approximately 200,000 square feet of office space in downtown Boston. The space will serve as the Company’s new

Page 12

Table of Contents

headquarters. The lease commences upon the earlier of December 1, 2005 or the date we occupy the space. Regardless of when occupancy occurs, we are not required to commence rental payments until December 2005. The lease expires in November 2017. Total contractual obligations under the lease are $86.3 million, which are included in the table above. Our current lease for approximately 275,000 square feet of office space in downtown Boston expires November 30, 2005.

We expect that at current revenue projections, we will continue to generate cash from operations. We believe that cash from operations combined with current cash and cash equivalents and funds available under the credit facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

In July 2004, AT&T Corp. (“AT&T”) announced that it will discontinue its marketing of local and long-distance telephone services to consumers. Our fee revenue related to those services was approximately 60% of total fee revenue from AT&T for the year ended December 31, 2003 and 50% for the six months ended June 30, 2004. Total fee revenue from AT&T was approximately 13% of fee revenue from all clients during the year ended December 31, 2003 and 15% during the six months ended June 30, 2004. As a result of this change in AT&T’s business focus, we were notified that AT&T will reduce its marketing and advertising budget with respect to some services provided by Digitas. We have not been informed of how this change will impact AT&T’s marketing and advertising budget for other lines of business for which we provide services or its overall budget for Digitas services.

Forward-looking Statements

Statements contained in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. In some instances, you can identify forward-looking statements by the fact that they use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, any statements contained herein regarding expectations with respect to our future revenues, profitability, expenses or our restructuring of real estate are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected or implied in those forward-looking statements. Those factors include, without limitation, demand for our services (including the willingness and ability of our clients to maintain or expand their spending), overall economic and business conditions, our ability to sublease or renegotiate terms for our excess office space in the anticipated time frame, the ability of our sublease tenants to meet their obligations to us, resolution of ongoing litigation in which we are involved, continued uncertainty regarding an economic recovery, budgetary and spending decisions by our client base, ability to manage costs at anticipated levels, competitive factors in the market, our ability to effectively manage our size and our client relationships and our ability to effectively integrate the business of Modem Media, Inc. following consummation of the acquisition without excessive unanticipated costs and to achieve the anticipated benefits of the acquisition, among other factors. A further review of the risks and uncertainties potentially impacting our future performance can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial and Administrative Officer have concluded that they believe that as of the end of the period covered by this report, our disclosure controls and procedures were reasonably effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In connection with the new rules, we will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Page 13

Table of Contents

(b) Change in Internal Controls

None.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to stockholder class action law suits filed in the United States District Court for the Southern District of New York. Between June 26, 2001 and August 16, 2001, several stockholder class action complaints were filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and five underwriters of its initial public offering (the “Offering”). The purported class actions are all brought on behalf of purchasers of the Company’s common stock since March 13, 2000, the date of the Offering. The plaintiffs allege, among other things, that the Company’s prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the underwriters had engaged in conduct designed to result in undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and also that this alleged conduct of the underwriters artificially inflated the Company’s stock price in the period after the Offering. The plaintiffs claim violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission and seek, among other things, damages, statutory compensation and costs of litigation. Effective October 9, 2002, the claims against the Company’s officers and directors were dismissed without prejudice. Effective February 19, 2003, the Section 10(b) claim against the Company was dismissed. The terms of a settlement have been tentatively reached between the plaintiffs in the suits and most of the defendants, including the Company, with respect to the remaining claims. If completed and if then approved by the court, the settlement would dismiss those claims against the Company and is expected to result in no material liability to it. The Company believes that the claims against it are without merit and, if they are not dismissed as part of a settlement, intends to defend them vigorously. Management currently believes that resolving these matters will not have a material adverse impact on the Company’s financial position or its results of operations, however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders was held on May 13, 2004 to elect two directors. There was no solicitation in opposition to management’s nominees for director as listed in the Company’s proxy statement and these nominees were elected as Class I directors to hold office until the 2007 Annual Meeting of Stockholders and until their successors are duly elected and qualified. The results of the votes were as follows:

Election of Class I Directors:

There were no broker non-votes applicable to the election of the directors. The following other directors have terms as director that continue after the meeting: Arthur Kern, Gail J. McGovern, Gregor S. Bailar, Michael E. Bronner, and Philip U. Hammarskjold.

Page 14

Table of Contents

Item 6. Exhibits and Reports on Form 8-K

Current Report on Form 8-K, filed April 29, 2004, furnishing the Digitas Inc. press release dated April 29, 2004.

Current Report on Form 8-K, filed April 28, 2004, reporting a lease with Arch Street Tower LLC for office space in Boston, MA.

Page 15

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Page 16