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PROSPECTUS
[PROXICOM(R) LOGO]
3,600,000 Shares
Common Stock
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This is an offering of shares of common stock of Proxicom, Inc. We are offering
1,000,000 shares in this offering. The selling stockholders that we identify in
this prospectus are offering an additional 2,600,000 shares. Proxicom will not
receive any proceeds from the sale of the shares by the selling stockholders.
Proxicom's common stock is traded on the Nasdaq National Market under the symbol
"PXCM." On October 7, 1999, the last reported sale price for the common stock on
the Nasdaq National Market was $52.38 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
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<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price $52.38 $188,288,000
Underwriting discount and commissions $ 2.62 $ 9,170,000
Proceeds, before expenses, to Proxicom $49.76 $ 49,755,000
Proceeds to the selling stockholders $49.76 $129,363,000
</TABLE>
We assume in this table that Intel Corporation will purchase 100,000 shares in
this offering at $49.76 per share, on which no underwriting discount or
commissions would be paid.
The underwriters have an option to purchase 540,000 additional shares of common
stock from four of the selling stockholders to cover any over-allotments of
shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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THOMAS WEISEL PARTNERS LLC
FIRST UNION SECURITIES, INC.
FRIEDMAN BILLINGS RAMSEY
PRUDENTIAL SECURITIES
E*OFFERING
THE DATE OF THIS PROSPECTUS IS OCTOBER 8, 1999
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[INSIDE FRONT COVER PAGE]
GRAPHIC:
Two-page design with "Internet" in large lettering across the top of both
pages. The upper left corner of the graphic's left page contains the statement
"what makes us different". Directly beneath this statement is the following
paragraph:
In 1994, Proxicom developed some of the first Internet commerce
storefronts and discovered the key to successful Internet solutions - a
seamless integration of strategy, technology and creative design skills.
Proxicom has continued to grow these traditionally disparate talents
within an iterative process that shares best practices and incorporates
industry expertise. The result is a culture where people work together
to create business-critical Internet solutions that improve processes
and create new business opportunities.
The phrase "Integrated Internet Skills" is beneath this paragraph. A circle
with three pegs and the words "strategy", "technology" and "creative design" is
contained in the lower half of the left page.
The upper half of the graphic's right page contains a pyramid with five
levels. A level of the pyramid corresponds to each of the following items:
- Business Critical Internet Solutions
- Proxicom Process
Certainty of Time, Cost and Quality
- e-Experience
Sharing Our Collective Internet Knowledge Since 1994
- Industry Knowledge
Internet Focus with Vertical Industry Expertise
- Integrated Skills
Strategy, Technology and Creative Design
Proxicom's logo is in the lower right corner of this page.
FRONT COVER GRAPHIC:
Contains pictures of projects Proxicom has completed for
three clients. This page is separated into three rows. The first row contains a
picture of the extranet Proxicom designed for a premium audio products
manufacturer. Next to this picture is the following statement:
Premium Audio Products Manufacturer
E-Commerce and Back Office Integration
The second row contains a picture of the Internet site Proxicom designed
for a premier affinity marketing company and the following statement:
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Premier Affinity Marketing Company
New Internet Distribution Channel
The third row contains a picture of the Internet site Proxicom designed for
a leading hospitality company and the following statement:
Leading Hospitality Company
E-Branding & E-Commerce
The lower right corner of the graphic contains Proxicom's logo.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary................... 1
Risk Factors......................... 5
Use of Proceeds...................... 11
Price Range of Common Stock.......... 11
Dividend Policy...................... 11
Capitalization....................... 12
Selected Consolidated Financial
Data............................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Business............................. 25
</TABLE>
<TABLE>
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PAGE
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Management........................... 37
Certain Transactions................. 42
Principal and Selling Stockholders... 44
Description of Capital Stock......... 46
Underwriting......................... 49
Legal Matters........................ 51
Experts.............................. 51
Where You Can Find More
Information........................ 51
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and the related notes included elsewhere in
this prospectus. All information in this prospectus relating to the number of
shares of our common stock and options is based upon information as of September
15, 1999. Unless otherwise specifically stated, the information in this
prospectus does not take into account the possible sale of additional shares of
common stock to the underwriters to cover over-allotments.
OUR COMPANY
Proxicom is a leading provider of Internet solutions to Global 1000
companies and other large organizations. Since 1994, we have focused exclusively
on the Internet and have successfully completed over 750 client engagements. As
of June 30, 1999, we had approximately 130 ongoing client engagements.
In all of our client engagements we apply the Proxicom Process, a four-step
methodology that we use to deliver Internet solutions. Using the Proxicom
Process, we integrate strategy, technology and creative design to help our
clients transform their businesses with Internet solutions.
We sell and deliver our services and expertise through teams organized into
four industry groups, or vertical markets:
- energy and telecommunications;
- financial services;
- retail and manufacturing; and
- service industries.
This structure allows us to build industry expertise, develop
market-specific solutions for clients and replicate business solutions across
client engagements.
Our Internet solutions have included
- business-to-business electronic commerce extranets for Harman
International Industries, Incorporated, McKessonHBOC and Mercedes-Benz
Credit Corp., enabling these clients to transact business with other
businesses;
- business-to-consumer electronic commerce Internet sites for Calphalon
Corporation, MagazineOutlet.com, a subsidiary of NewSub Services, Inc.,
and Marriott International, Inc. enabling these clients to provide
information about and sell products to consumers; and
- company-specific intranets for GE Plastics, Hoffmann-La Roche, Inc. and
Merrill Lynch & Co., Inc., enabling persons within these organizations to
exchange information electronically.
OUR MARKET OPPORTUNITY
The Internet presents opportunities to transform businesses and entire
industries. The Internet has allowed businesses to identify new product and
service offerings which extend and complement their core markets. As a result,
organizations invest in Internet solutions to transform their core business and
technology strategies.
These opportunities are creating a significant and growing demand for
third-party Internet professional services. International Data Corp., a
technology industry research firm, forecasts that the market for Internet and
electronic commerce services worldwide will grow from $7.8 billion in 1998 to
$78.6 billion by 2003, representing a compound annual growth rate of more than
58% over this period.
Proxicom believes organizations are increasingly searching for a
single-source professional services firm that can deliver integrated strategy,
technology and creative design skills specifically for the Internet.
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OUR STRATEGY
Our strategy is to build upon our position as a leading Internet solutions
provider. To do this, we plan to
- leverage existing client relationships;
- further penetrate and broaden our vertical markets;
- continue geographic expansion;
- hire and retain skilled professionals;
- evolve the Proxicom Process;
- leverage technology relationships; and
- extend reusable solutions.
We service our engagements with multi-disciplinary teams that work as
cohesive units. We facilitate collaboration among our client's business,
information technology and marketing functions. We believe our coordinated
approach results in better Internet solutions.
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THE OFFERING
Common stock offered by Proxicom...... 1,000,000 shares
Common stock offered by the selling
stockholders.......................... 2,600,000 shares
Common stock outstanding after the
offering.............................. 25,925,792 shares
Use of proceeds....................... Proxicom will use the proceeds of
this offering for general corporate
purposes, including working capital,
expansion of operations and sales and
marketing capabilities and possible
acquisitions. Proxicom will not
receive any proceeds from the sale of
shares by the selling stockholders.
See "Use of Proceeds."
Nasdaq National Market symbol......... PXCM
------------------------
"Proxicom" is a registered trademark of Proxicom, Inc. In addition,
Proxicom has filed for trademark registration of "Proxicom Process" and other
marks. This prospectus also includes trademarks and trade names of other
parties.
------------------------
We started our business in 1991 as a Maryland corporation. We reorganized
as a Delaware corporation in 1996. Our principal offices are located at 11600
Sunrise Valley Drive in Reston, VA 20191. Our telephone number is 703-262-3200.
We maintain a Web site at www.proxicom.com. Information contained on our Web
site is not incorporated by reference into this prospectus.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the financial data for our business. In
1998, our loss from operations and net loss included an $18.3 million
compensation expense associated with our mergers with IBIS Consulting, Inc. and
ad hoc Interactive, Inc. Of this expense, $17.3 million related to the exchange
of stock options and rights to receive stock originally granted to IBIS
Consulting and ad hoc Interactive employees, which did not result in cash
payments. We provide more detail about this expense in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" section of this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $1,508 $6,273 $13,372 $28,452 $44,006 $18,551 $29,475
Gross profit.............................. 616 3,516 8,287 15,716 19,078 8,208 12,772
Income (loss) from operations............. 144 1,095 1,459 2,821 (22,124) (1,382) 652
Net income (loss)......................... 109 806 1,329 2,571 (21,345) (422) 616
Non-cash dividend on beneficial conversion
of convertible preferred stock.......... -- -- -- -- -- -- (4,873)
Net income (loss) available to common
stockholders............................ 109 806 1,329 2,571 (21,345) (422) (4,257)
Basic net income (loss) per common
share................................... $0.01 $0.06 $0.10 $0.19 $(1.46) $(0.03) $(0.22)
======= ======= ======= ======= ======== ======= =======
Diluted net income (loss) per common
share................................... $0.01 $0.06 $0.09 $0.15 $(1.46) $(0.03) $(0.22)
======= ======= ======= ======= ======== ======= =======
Weighted average common shares
outstanding............................. 13,238 13,773 13,740 13,374 14,576 13,790 19,117
Weighted average common shares and common
share equivalents....................... 13,238 13,773 14,310 17,128 14,576 13,790 19,117
</TABLE>
The first column of the following table summarizes our balance sheet on an
actual basis. The second column is adjusted to reflect Proxicom's sale of
1,000,000 shares of common stock in this offering at the public offering price
of $52.38 per share and application of the estimated net proceeds.
<TABLE>
<CAPTION>
JUNE 30, 1999
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ACTUAL ADJUSTED
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,643 $ 51,779
Short-term investments...................................... 56,402 56,402
Working capital............................................. 73,450 122,586
Total assets................................................ 88,130 137,266
Stockholders' equity........................................ 78,846 127,982
</TABLE>
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RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the risks described below and the other information in this prospectus
including our financial statements and the notes to those financial statements
before you decide to buy our common stock. The trading price of our common stock
could decline due to any of these risks, and you could lose all or part of your
investment.
Except for any historical information, the matters we discuss in this
prospectus concerning Proxicom contain forward-looking statements. Any
statements in this prospectus that are not statements of historical fact, are
intended to be, and are, "forward-looking statements" under the safe harbor
provided by Section 27(a) of the Securities Act of 1933. Without limitation, the
words "anticipates," "believes," "estimates," "expects," "intends," "plans" and
similar expressions are intended to identify forward-looking statements. The
important factors we discuss below and under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as other factors identified in Proxicom's filings with the SEC and those
presented elsewhere by its management from time to time, could cause actual
results to differ materially from those indicated by the forward-looking
statements made in this prospectus.
WE ARE GROWING QUICKLY. FUTURE GROWTH OF OUR BUSINESS COULD MAKE IT DIFFICULT TO
MANAGE OUR RESOURCES.
Our business is growing substantially, both through increased sales and
recent acquisitions. For instance, our revenue has increased from $1.5 million
in 1994 to $44.0 million in 1998. Our revenue during the first six months of
1999 was $29.5 million compared to $18.6 million for the same period in 1998.
Our rapid growth has stretched, and could continue to stretch, our resources. We
expect that we will need to continue to hire and retain management and sales and
marketing personnel, and other employees. Our management has limited experience
managing a business of Proxicom's size or a public company.
In order to manage our growth effectively, we must establish offices in new
geographic locations, maintain high employee utilization rates, maintain project
quality and successfully negotiate rates, and set fixed-price fees accurately,
particularly if the average size of our projects continues to increase.
Our performance may depend on the effective integration of acquired
businesses. This integration, even if successful, may be expensive and time
consuming and could strain our resources.
WE MAY NOT BE ABLE TO HIRE AND RETAIN HIGHLY SKILLED EMPLOYEES, WHICH COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
To succeed, we must hire, train, motivate, retain and manage employees who
are highly skilled in the Internet and its rapidly changing technology. Because
of the recent and rapid growth of the Internet, individuals who have Internet
expertise and can perform the services we offer are scarce. Competition for
these individuals, therefore, is intense. We may not be able to hire enough of
them or to train, motivate, retain and manage the employees we do hire. This
could hinder our ability to complete existing projects and bid for new projects.
In addition, because the competition for qualified employees in the Internet
industry is intense, hiring, training, motivating, retaining and managing
employees with the strategic, technical and creative skills we need is both time
consuming and expensive.
WE HAVE LOST MONEY IN THREE OF THE LAST FOUR QUARTERS AND COULD LOSE MONEY IN
THE FUTURE.
Our financial results may fluctuate from quarter to quarter. In fact, we
have incurred net losses in three of our last four quarters. In future quarters,
our operating results may not meet public market analysts' and investors'
expectations. If that happens, the price of our common stock may fall. Many
factors can cause these fluctuations, including
- the number, size, timing and scope of our projects;
- customer concentration;
- long and unpredictable sales cycles;
- contract terms of projects;
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- degrees of completion of projects;
- project delays or cancellations;
- competition for and utilization of employees;
- how well we estimate the resources we need to complete projects;
- the integration of acquired businesses;
- pricing changes in the industry; and
- economic conditions specific to the Internet and information-technology
consulting.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, if we
experience unanticipated changes in our projects or in our employee utilization
rates, we could experience large variations in quarterly operating results and
losses in any particular quarter. Due to these factors, we believe you should
not compare our quarter-to-quarter operating results to predict our future
performance.
We have generally realized lower revenue in the first quarter of the year
than in the other quarters. We believe that this has been due primarily to
client budget cycles and the short-term nature of our contracts.
WE FAILED TO GENERATE CASH FROM OPERATIONS DURING 1996, 1998 AND DURING THE
SIX-MONTH PERIOD ENDED JUNE 30, 1999, AND COULD FAIL TO GENERATE CASH FROM
FUTURE OPERATIONS.
We did not generate cash from operations in these years largely due to the
expansion of our business. We have continued to increase our number of Internet
solutions professionals and support personnel. We have also incurred expenses in
connection with mergers. We plan to continue to expand and develop our business,
both internally and possibly through future acquisitions. This could cause us to
fail to generate cash from operations in the future.
WE HAVE A NUMBER OF SIGNIFICANT CLIENTS. IF WE LOSE A MAJOR CLIENT OR
SIGNIFICANT PROJECT, OR FAIL TO COLLECT A LARGE ACCOUNT RECEIVABLE, OUR REVENUE
COULD BE ADVERSELY AFFECTED.
We generate much of our revenue from a limited number of major clients. As
a result, if we lose a major client or large project, our revenue could be
adversely affected. In 1998, for example, our two largest clients, Pacific Gas
and Electric Company and General Electric Company, accounted for approximately
14.2% and 13.2%, respectively, of our revenue. That year, our five largest
clients contributed approximately 36.8% of our revenue. For the six months ended
June 30, 1999, our two largest clients, Pacific Gas and Electric Company and
Merrill Lynch & Co., Inc., accounted for approximately 9.5% and 5.7%,
respectively, of our revenue. During that same time period, our five largest
clients contributed approximately 28.5% of our revenue.
We perform varying amounts of work for specific clients from year to year.
A major client in one year may not use our services in another year. In
addition, we may derive revenue from a major client that constitutes a large
portion of a particular quarter's total revenue. If we lose any major clients or
any of our clients cancel or significantly reduce a large project's scope, our
business, financial condition and results of operations could be materially and
adversely affected. Also, if we fail to collect a large account receivable, we
could be subjected to significant financial exposure.
WE HAVE MANY SHORT-TERM CONTRACTS THAT CAN BE CANCELLED WITHOUT PENALTY. IF
CLIENTS TERMINATE CONTRACTS WITH US ON SHORT NOTICE, OUR RESULTS OF OPERATIONS
COULD SUFFER.
Our contracts with clients are generally short-term. Also, most clients can
reduce or cancel their contracts for our services without penalty and with
little or no notice. If a significant client or a number of small clients
terminate, significantly reduce or modify business relationships with us, our
business, financial condition and results of operations could be materially and
adversely affected. Consequently, you should not predict or anticipate our
future revenue based on the number of clients we have or the number and size of
our existing projects. When a client postpones, modifies or cancels a project,
we have to shift our
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employees to other projects and minimize the resulting adverse impact on our
operating results. In addition, our operating expenses are relatively fixed and
cannot be reduced on short notice.
IF WE FAIL TO MEET OUR CLIENTS' EXPECTATIONS, WE COULD DAMAGE OUR REPUTATION AND
HAVE DIFFICULTY ATTRACTING NEW BUSINESS.
Many of our projects are complex and critical to our clients. As a result,
if we fail or are unable to meet a client's expectations, we could damage our
reputation. This could adversely affect our ability to attract new business from
that client or others. If we fail to perform adequately on a project, a client
could sue us for economic damages.
WE COULD LOSE MONEY ON OUR FIXED-PRICE, FIXED-TIMEFRAME CONTRACTS.
Many of our contracts are fixed-price, fixed-timeframe contracts, rather
than contracts based on payment for time and materials. Often, we fix the price
or timeframe before we finalize the design specifications. If we miscalculate
the resources or time we need, we could lose money on these projects.
WE MAY NOT COMPETE SUCCESSFULLY WITH OUR COMPETITORS, WHICH COULD RESULT IN
REDUCED REVENUES.
We compete in markets that are new, intensely competitive and rapidly
changing. We may not compete successfully with our competitors. We currently
compete for client assignments and experienced personnel principally with large
and specialty systems integrators, strategy consulting firms and Internet
professional services providers. Many of these businesses have longer operating
histories and significantly greater financial, technical, marketing and
managerial resources than we do. Our markets have relatively low barriers to
entry. We expect to continue to face competition from new market entrants.
Competition in our market is based primarily on the following factors:
- Internet expertise and talent;
- quality, pricing and speed of service delivery;
- client references;
- integrated strategy, technology and creative design services; and
- vertical industry knowledge.
Some competitive factors are outside of our control. These factors include
our competitors' hiring and retention of senior staff, development of software
that is competitive with our products and services and response to client needs.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE COULD CAUSE OUR BUSINESS TO SUFFER.
We have derived most of our revenue from projects involving the Internet.
The Internet is new and rapidly evolving. Our business will be adversely
affected if Internet usage does not continue to grow. A number of factors may
inhibit Internet usage. These factors include inadequate network infrastructure,
security concerns, inconsistent service quality and lack of cost-effective,
high-speed service. On the other hand, if Internet usage grows, the Internet
infrastructure may not support the demands this growth will place on it. The
Internet's performance and reliability may decline. In addition, outages and
delays have occurred throughout the Internet network infrastructure and have
interrupted Internet service. If these outages or delays occur frequently in the
future, Internet usage could grow more slowly or decline.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
- security;
- cost and ease of Internet access;
- intellectual property ownership;
- privacy;
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- taxation; and
- liability issues.
Any costs we incur because of these factors could materially and adversely
affect our business, financial condition and results of operations.
IF WE FAIL TO KEEP PACE WITH CHANGING TECHNOLOGIES, WE MAY LOSE CLIENTS.
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 business could suffer. The Internet's recent
growth and intense competition in our industry exacerbate these characteristics.
To achieve our goals, we need to develop strategic business and Internet
solutions that keep pace with continuing changes in industry standards,
information technology and client preferences. We will have to improve the
performance features and reliability of our services to adapt to rapidly
changing technologies. Also, as part of our business strategy, we reuse elements
of our Internet solutions for which there is repeat customer demand. We could
incur substantial costs if we need to modify our reusable solutions to adapt to
technological changes.
IF WE LOSE THE SERVICES OF OUR FOUNDER, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER RAUL J. FERNANDEZ, OR OTHER KEY PERSONNEL, OUR BUSINESS AND STOCK PRICE
COULD SUFFER.
Our future success depends in large part on the continued services of a
number of our key personnel, including our founder, Chairman, President and
Chief Executive Officer, Raul J. Fernandez. We have no employment contract with
Mr. Fernandez or many of our other key personnel. The loss of the services of
Mr. Fernandez or any of our other key personnel could have a material adverse
effect on our business, financial condition and results of operations. We may
not be able to prevent key personnel, who may leave our employ in the future,
from disclosing or using our technical knowledge, practices or procedures. One
or more of our key personnel may resign and join a competitor or form a
competing company. As a result, we might lose existing or potential clients.
WE DEPEND ON INTELLECTUAL PROPERTY WHICH MAY BE DIFFICULT TO PROTECT. THIS COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
Our success depends, in part, upon our intellectual property rights. We do
not have any patents or patent applications pending. Existing trade secret and
copyright laws afford us only limited protection. Third parties may attempt to
disclose, obtain or use our solutions or technologies. This is particularly true
in foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. Others may independently
develop and obtain patents or copyrights for technologies that are similar or
superior to our technologies. If that happens, we may not be able to license
those technologies on reasonable terms, or at all.
Generally, we develop software applications for specific client
engagements. We generally assign software ownership to the client and retain
only a license for limited uses. Issues relating to ownership of and rights to
use software applications and frameworks can be complicated. We may become
involved in disputes that affect our ability to resell or reuse these
applications and frameworks. Also, we may have to pay economic damages in these
disputes.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD REQUIRE US TO INCUR UNANTICIPATED
DELAYS AND EXPENSES.
Year 2000 problems could require us to incur delays and unanticipated
expenses. These delays and expenses could harm our business. Clients' and
potential clients' purchasing patterns may be affected by year 2000 issues as
companies expend significant resources to correct or replace their current
systems for year 2000 compliance. These clients and potential clients may have
fewer funds available to purchase our services. We may experience operations
difficulties because of undetected errors or defects in the technology we use in
our internal systems. We have made representations to clients concerning year
2000
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compliance and may become involved in disputes regarding year 2000 problems
involving solutions that we have developed or implemented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Readiness Disclosure."
FUTURE ACQUISITIONS OR INVESTMENTS COULD DISRUPT OUR ONGOING BUSINESS, DISTRACT
OUR MANAGEMENT AND EMPLOYEES, INCREASE OUR EXPENSES AND ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We have made three acquisitions and investments in two joint ventures in
the last 21 months. Any acquisitions or investments we make in the future will
involve risks. We may not be able to make acquisitions or investments on
commercially acceptable terms. If we do buy a company, we could have difficulty
retaining and assimilating that company's personnel. In addition, we could have
difficulty assimilating acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and materially and adversely
affect our results of operations. Furthermore, we may incur debt or issue equity
securities to pay for any future acquisitions. If we issue equity securities,
your ownership share of Proxicom could be reduced.
WE HAVE STARTED EXPANDING OUR BUSINESS OVERSEAS. OUR INTERNATIONAL EXPANSION
COULD RESULT IN FINANCIAL LOSSES DUE TO CHANGES IN FOREIGN ECONOMIC CONDITIONS
AS WELL AS FLUCTUATIONS IN CURRENCY AND EXCHANGE RATES.
We expect to expand our international operations and international sales
and marketing efforts. We operate in Germany and recently started servicing
clients in Spain and Italy through our joint ventures. We have plans to commence
operations in the United Kingdom in the near future. We have limited experience
in marketing, selling and distributing our services internationally.
International operations are subject to other inherent risks, including the
following:
- recessions in foreign economies;
- political and economic instability;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign operations;
- potentially adverse tax consequences;
- reduced protection for intellectual property rights in some countries;
- changes in regulatory requirements; and
- reductions in business activity during the summer months in Europe.
THE MARKET PRICE OF OUR STOCK MAY FLUCTUATE WIDELY.
The market price of our common stock could fluctuate substantially due to
- future announcements concerning us or our competitors;
- quarterly fluctuations in operating results;
- announcements of acquisitions or technological innovations; or
- changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. Fluctuations in our
common stock's market price may affect our visibility and credibility in the
Internet solutions market.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
After this offering, we will have 25,925,792 shares of common stock
outstanding. Sales of a large number of shares could adversely affect the market
price of our common stock and could impair our ability to raise funds in
additional stock offerings.
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The shares of common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless the
shares are purchased by an affiliate of ours, sales of which will be limited by
Rule 144 under the Securities Act. Holders of restricted shares generally will
be entitled to sell these shares in the public market without registration
either under Rule 144 or any other applicable exemption under the Securities
Act.
Approximately 16,122,846 shares are subject to lock-up agreements that
expire 90 days after the date of this prospectus. At that time, the shares
released from lock-up restrictions will be freely tradable, subject to the
provisions of Rule 144 or Rule 701 under the Securities Act. The owners of all
locked-up shares have experienced substantial appreciation in the value of their
shares relative to the price paid for them. In the event all or a significant
portion of these stockholders elect to sell their shares, the price of our stock
could materially decline, irrespective of our performance.
On May 28, 1999, we filed a registration statement under the Securities Act
covering all 8,350,000 shares of common stock subject to outstanding stock
options or reserved for issuance under our stock plans. The registration
statement became effective upon filing. Accordingly, shares registered under the
registration statement are, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, available for sale in the open market,
and in the case of our officers, directors and stockholders who have entered
into lock-up agreements, available for sale after lock-up agreements expire. As
of September 15, 1999, options to purchase 5,995,655 shares of common stock were
outstanding.
In addition, following the closing of this offering, the holders of
16,065,012 shares of common stock have the right to request registration of
their shares in future public offerings of our equity securities.
IT MAY BE HARD FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD DEPRESS
OUR STOCK PRICE.
Provisions of our corporate instruments and Delaware law could make it
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. This could depress our stock price.
OUR DIRECTORS AND EXECUTIVE OFFICERS ARE CONTROLLING STOCKHOLDERS.
After this offering, our directors and executive officers will beneficially
own about 49.2% of our common stock. These stockholders can thus effectively
control matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
OUR BOARD OF DIRECTORS CAN ISSUE PREFERRED STOCK WITH RIGHTS ADVERSE TO THE
HOLDERS OF COMMON STOCK.
Our board of directors is authorized, without further stockholder approval,
to issue up to 10,000,000 shares of preferred stock. Issuance of preferred
shares with rights to distributions, voting rights or other rights superior to
the common stock would be adverse to the holders of common stock. See
"Description of Capital Stock."
10
<PAGE> 15
USE OF PROCEEDS
Proxicom will receive proceeds of approximately $49.1 million from the sale
of the 1,000,000 shares of common stock it is offering, net of estimated
expenses and the underwriting discount and based on the public offering price of
$52.38 per share. Proxicom will not receive any proceeds from the sale of common
stock by the selling stockholders.
Proxicom intends to use the majority of the offering's net proceeds for
working capital and general corporate purposes. Specifically, we plan to
increase our marketing and sales activities and hire more personnel in these
functional areas. We also plan to expand our operations and hire more Internet
solutions professionals. Proxicom may use a portion of the proceeds for
acquisitions. From time to time, in the ordinary course of business, Proxicom
evaluates potential acquisitions of businesses, products or technologies.
Proxicom has no present understandings or agreements with respect to any
acquisition of businesses, products or technologies.
Pending use of the net proceeds for the above purposes, Proxicom intends to
invest such funds in short-term, interest-bearing, investment-grade securities.
In addition to the use of the net proceeds received by it from the offering,
Proxicom also expects during the next 18 months to meet its working capital
requirements through existing cash and cash equivalents, investments, cash from
sales of services, its credit facility and possibly other borrowings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
Proxicom's common stock has been quoted on the Nasdaq National Market under
the symbol PXCM since Proxicom's initial public offering on April 19, 1999. The
following table presents, for the periods indicated, the high and low sales
prices per share of our common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
1999: ------ ------
<S> <C> <C>
Second Quarter (beginning April 19, 1999)................. $27.75 $17.00
Third Quarter............................................. $66.00 $25.00
Fourth Quarter (through October 7, 1999).................. $57.50 $48.13
</TABLE>
On October 7, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $52.38. As of September 15, 1999, there were 211
holders of record of our common stock.
DIVIDEND POLICY
With the exception of distributions that three current Proxicom
subsidiaries made before Proxicom acquired them, Proxicom has never declared or
paid any cash dividends on its capital stock. Proxicom intends to retain future
earnings, if any, to finance the expansion of its business and does not expect
to declare or pay any cash dividends in the foreseeable future. Also, Proxicom
is prohibited from paying cash dividends under the terms of its credit facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
11
<PAGE> 16
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999 on an
actual basis and an adjusted basis. The adjusted basis presentation reflects the
sale of 1,000,000 shares of common stock in this offering at the public offering
price of $52.38 per share and application of the estimated net proceeds of $49.1
million.
The adjusted basis presentation does not include 5,586,390 shares of common
stock issuable upon exercise of stock options outstanding as of June 30, 1999.
You should read this information together with the financial statements and
notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value: 10,000,000 shares
authorized; no shares issued and outstanding.............. $ -- $ --
Common stock, $.01 par value: 100,000,000 shares authorized;
24,797,902 shares issued and 24,744,773 shares outstanding
(actual); 25,797,902 shares issued and 25,744,773 shares
outstanding (adjusted).................................... 248 258
Additional paid-in capital.................................. 102,112 151,238
Retained deficit............................................ (23,292) (23,292)
Comprehensive income........................................ -- --
Treasury stock.............................................. (222) (222)
-------- --------
Total stockholders' equity............................. 78,846 127,982
-------- --------
Total capitalization.............................. $ 78,846 $127,982
======== ========
</TABLE>
12
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables contain selected consolidated financial data as of
December 31 for each of the years 1994 through 1998 and as of June 30, 1999, and
for each of the years in the five-year period ended December 31, 1998, and for
the six-month periods ended June 30, 1998 and 1999. The selected consolidated
financial data for each of the years in the five-year period ended December 31,
1998 have been derived from Proxicom's consolidated financial statements, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected consolidated financial data as of June 30, 1999 and for the six-month
periods ended June 30, 1998 and 1999 are unaudited and include all adjustments,
consisting only of normal, recurring adjustments that Proxicom considers
necessary for a fair presentation of the consolidated financial position and the
consolidated results of operations for those periods. Operating results for the
six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999. The
selected financial data are qualified by reference to, and should be read in
conjunction with, Proxicom's consolidated financial statements and the notes to
those financial statements, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue................................ $1,508 $6,273 $13,372 $28,452 $44,006 $18,551 $29,475
Cost of revenue........................ 892 2,757 5,085 12,736 24,928 10,343 16,703
------- ------- ------- ------- -------- ------- -------
Gross profit........................... 616 3,516 8,287 15,716 19,078 8,208 12,772
------- ------- ------- ------- -------- ------- -------
Operating expenses:
General and administrative........... 465 2,177 5,746 10,180 16,397 7,592 10,158
Selling and marketing................ 7 244 670 1,710 2,919 1,363 1,437
Research and development............. -- -- 404 961 692 448 --
Acquisition and merger costs......... -- -- -- -- 2,886 130 300
Stock-based and other
compensation(1).................... -- -- 8 44 18,308 57 225
------- ------- ------- ------- -------- ------- -------
Total.......................... 472 2,421 6,828 12,895 41,202 9,590 12,120
------- ------- ------- ------- -------- ------- -------
Income (loss) from operations.......... 144 1,095 1,459 2,821 (22,124) (1,382) 652
Interest income (expense), net......... 2 5 55 80 (121) 17 411
------- ------- ------- ------- -------- ------- -------
Income (loss) before income taxes...... 146 1,100 1,514 2,901 (22,245) (1,365) 1,063
Income tax provision (benefit)......... 37 294 185 330 (900) (943) 447
------- ------- ------- ------- -------- ------- -------
Net income (loss)...................... 109 806 1,329 2,571 (21,345) (422) 616
Non-cash dividend on beneficial
conversion of convertible preferred
stock................................ -- -- -- -- -- -- (4,873)
------- ------- ------- ------- -------- ------- -------
Net income (loss) available to common
stockholders......................... $109 $806 $ 1,329 $ 2,571 $(21,345) $ (422) $(4,257)
======= ======= ======= ======= ======== ======= =======
Basic net income (loss) per common
share................................ $0.01 $0.06 $0.10 $0.19 $(1.46) $(0.03) $(0.22)
======= ======= ======= ======= ======== ======= =======
Diluted net income (loss) per common
share................................ $0.01 $0.06 $0.09 $0.15 $(1.46) $(0.03) $(0.22)
======= ======= ======= ======= ======== ======= =======
Weighted average common shares
outstanding.......................... 13,238 13,773 13,740 13,374 14,576 13,790 19,117
Weighted average common shares and
common share equivalents............. 13,238 13,773 14,310 17,128 14,576 13,790 19,117
Unaudited pro forma data(2)(3)
Basic net loss per common share...... $(1.29) $(0.20)
======== =======
Diluted net loss per common share.... $(1.29) $(0.20)
======== =======
Weighted average common shares
outstanding........................ 16,577 20,814
Weighted average common shares and
common share equivalents........... 16,577 20,814
</TABLE>
13
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
------------------------------------------ ---------------------
1994 1995 1996 1997 1998 ACTUAL ADJUSTED(4)
---- ------ ------ ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $104 $ 802 $1,160 $ 2,343 $ 2,586 $ 2,643 $ 51,779
Short-term investments....................... 20 -- 2,285 1,101 278 56,402 56,402
Working capital.............................. 220 693 5,808 7,534 1,927 73,450 122,586
Total assets................................. 645 2,463 8,985 16,317 22,551 88,130 137,266
Stockholders' equity......................... 329 1,131 7,344 10,496 6,629 78,846 127,982
</TABLE>
- ---------------
(1) Stock-based and other compensation in 1998 was associated with a merger
transaction with IBIS Consulting and includes (a) a $17.2 million non-cash
charge relating to the elimination of a repurchase requirement for formula
stock; (b) $1.0 million in cash bonus payments required under the historical
IBIS Consulting plan; and (c) a $100,000 non-cash charge relating to rights
to receive stock granted by ad hoc Interactive.
(2) Pro forma data reflect the conversion of 4,231,194 shares of preferred stock
as if such conversion occurred as of the later of January 1, 1998 or the
date of issuance.
(3) Proxicom merged with two companies during 1998 and one company during 1999
in transactions accounted for as poolings of interests. The three companies
had elected a status under Subchapter S of the Internal Revenue Code that
exempted them from corporate income tax. The pro forma data reflect the
transactions as if these companies had been subject to taxation in 1998. See
Note 3 in the consolidated financial statements.
(4) Reflects Proxicom's sale of 1,000,000 shares of common stock in this
offering at the public offering price of $52.38 per share and application of
the estimated net proceeds.
14
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected
Consolidated Financial Data," and our consolidated financial statements and the
notes to those financial statements included elsewhere in this prospectus.
OVERVIEW
Our revenue generally consists of fees generated from professional
services. We provide our services on both a time and materials basis and
fixed-price, fixed-timeframe basis. When we provide services on a time and
materials basis, we recognize revenue as we incur costs. In time and materials
service situations, we also use our internally developed estimation process and
a Proxicom senior management member approves our proposals. The estimation
process accounts for standard billing rates for each project, the technology
environment and application type to be applied, and the project's timetable and
overall technical complexity. When we provide services on a fixed-fee,
fixed-timeframe basis, we use our estimation process and propose fixed prices
for projects. A Proxicom senior management member must approve all of our
fixed-price proposals. For these contracts, we recognize revenue using a
percentage-of-completion method primarily based on costs incurred. We make
provisions for estimated losses on uncompleted contracts on a
contract-by-contract basis and recognize these provisions in the period in which
the losses are determined.
Our financial results may fluctuate from quarter to quarter based on such
factors as the number, complexity, size, scope and lead time of projects in
which we are engaged. More specifically, these fluctuations can result from the
contractual terms and degree of completion of such projects, any delays incurred
in connection with projects, employee utilization rates, the adequacy of
provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects and general economic conditions. In addition, revenue
from large clients may constitute a significant portion of our total revenue in
a particular quarter.
As of March 26, 1999, Proxicom merged with ad hoc Interactive, Inc., a
California-based Internet solutions provider, by exchanging 829,771 shares of
Proxicom common stock and rights to receive 39,333 shares of Proxicom common
stock for all of the outstanding stock and stock rights of ad hoc Interactive.
Proxicom incurred acquisition and merger costs of $300,000 in connection with
this transaction. In August 1998, Proxicom merged with IBIS Consulting, Inc. by
exchanging 4,988,297 shares of Proxicom common stock for all the common stock of
IBIS Consulting. In addition, IBIS Consulting options were converted into
options to purchase 345,034 shares of Proxicom common stock. Proxicom incurred
acquisition and merger costs of $2.8 million and stock-based and other
compensation expense of $18.2 million associated with IBIS Consulting. In
connection with this transaction, the president of IBIS Consulting was elected
to Proxicom's board of directors. In January 1998, Proxicom merged with Square
Earth, Inc. by exchanging 534,999 shares of Proxicom common stock for all the
common stock of Square Earth. In addition, Square Earth options were converted
into options to purchase 41,474 shares of Proxicom common stock. Proxicom
incurred acquisition and merger costs of $130,000 in connection with this
transaction. Proxicom accounted for each of these transactions as a pooling of
interests. All prior period consolidated financial statements have been restated
to include ad hoc Interactive's, IBIS Consulting's and Square Earth's results of
operations, financial position and cash flows.
In March 1999, Proxicom signed an agreement with Ericsson
Telecommunicazioni SpA. Under the agreement, Proxicom made a 19.9% investment in
an Italian joint venture company, Eunosia Internet Architects SpA. Ericsson owns
the remaining 80.1% interest. Proxicom provides Internet solutions to businesses
based in Italy through the joint venture company.
In July 1999, Proxicom signed an agreement with affiliates of Iberdrola SA.
Under the agreement, Proxicom purchased 19.9% of a Spanish joint venture
company, Kristina, Internet Business Solutions SA. Affiliates of Iberdrola own
the remaining 80.1% interest. The initial share capital of Kristina, Internet
Business Solutions is approximately $7.4 million, which Proxicom and the
affiliates of Iberdrola will
15
<PAGE> 20
contribute in proportion to their stockholder percentage interests. In late July
1999, Proxicom contributed approximately $740,000 to fulfill one-half of its
initial share capital obligation. Kristina, Internet Business Solutions provides
Internet professional services to businesses based in Spain.
On September 24, 1999, Proxicom and General Electric Company entered into a
Master Services Agreement. Under this agreement, General Electric has agreed to
have Proxicom perform Internet services for fees totaling no less than $6.0
million during the 12-month period ending September 24, 2000. As part of the
agreement, Proxicom issued General Electric a warrant to purchase 150,000 shares
of common stock at an exercise price of $49.88 per share, the closing price of
the common stock on the date of the agreement. The warrant is fully vested and
is exercisable until September 24, 2000.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue...................................... 38.0 44.8 56.6 55.8 56.7
----- ----- ----- ----- -----
Gross profit......................................... 62.0 55.2 43.4 44.2 43.3
----- ----- ----- ----- -----
Operating expenses:
General and administrative......................... 43.0 35.8 37.3 40.9 34.4
Selling and marketing.............................. 5.0 6.0 6.6 7.3 4.9
Research and development........................... 3.0 3.4 1.6 2.4 --
Acquisition and merger costs....................... -- -- 6.5 0.7 1.0
Stock-based and other compensation................. -- 0.1 41.6 0.3 0.8
----- ----- ----- ----- -----
Total...................................... 51.0 45.3 93.6 51.6 41.1
----- ----- ----- ----- -----
Income (loss) from operations........................ 11.0 9.9 (50.2) (7.4) 2.2
Interest income (expense), net....................... 0.4 0.3 (0.3) -- 1.4
----- ----- ----- ----- -----
Income (loss) before income taxes.................... 11.4 10.2 (50.5) (7.4) 3.6
Income tax provision (benefit)....................... 1.4 1.2 (2.0) (5.1) 1.5
----- ----- ----- ----- -----
Net income (loss).................................... 10.0% 9.0% (48.5)% (2.3)% 2.1%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenue. For the six-month period ended June 30, 1999, revenue increased
$10.9 million, or 58.9%, to $29.5 million from $18.6 million for the six-month
period ended June 30, 1998. This increase in revenue reflects an increase in the
size and number of our client projects for the six-month period to period
comparison. Approximately 16% of this increase was attributable to increased
project size for the six-month period ended June 30, 1999, and the remainder is
attributable to an increase in the number of projects.
Cost of Revenue. Cost of revenue consists primarily of salaries and
associated employee benefits for personnel directly assigned to client projects,
non-research and development efforts and non-reimbursed direct expenses incurred
to complete projects, such as technical consulting fees. These costs increased
$6.4 million, or 61.5%, to $16.7 million for the six-month period ended June 30,
1999 from $10.3 million for the six-month period ended June 30, 1998. These
increases were due primarily to increases in the number of personnel needed to
service our client projects. Service project personnel increased to 392 at June
30, 1999 from 244 at June 30, 1998. As a percentage of revenue, cost of revenue
increased from 55.8% to 56.7% for the six-month period ended June 30, 1999, as
compared to the six-month period ended June 30, 1998.
16
<PAGE> 21
Gross Profit. For the six-month period ended June 30, 1999, gross profit
increased $4.6 million, or 55.6%, to $12.8 million from $8.2 million for the
six-month period ended June 30, 1998. The gross profit increase reflects an
increase in revenue during the six-month period ended June 30, 1999. As a
percentage of revenue, gross profit decreased from 44.2% to 43.3% for the
six-month period ended June 30, 1999, as compared to the six-month period ended
June 30, 1998. The percentage decrease primarily reflects reduced overall
utilization of consulting and delivery personnel, as discussed in the Cost of
Revenue subsection. Employee utilization can be affected by multiple factors,
including rapid growth and reductions in the number or size of projects in any
period. We usually do not fully utilize our consulting and delivery personnel on
billable projects during their initial months of employment. During this time,
they undergo training and become integrated into our operations. Reduction in
employee utilization rates could cause further decline in gross profit as a
percentage of revenue.
General and Administrative. General and administrative costs consist of
salaries for executive and selected senior management, finance, recruiting,
administrative groups and associated employee benefits, facilities costs
including depreciation and amortization, computer and office equipment operating
leases, training, travel and all other branch and corporate costs. These costs
increased $2.6 million, or 33.8%, to $10.2 million for the six-month period
ended June 30, 1999 from $7.6 million for the six-month period ended June 30,
1998. This increase was due primarily to increased facilities and related
expenses to support our growth. Approximately 7.8% of this increase was
attributable to increased personnel costs for the six-month period ended June
30, 1999. As a percentage of revenue, general and administrative expenses
decreased from 40.9% to 34.4% for the six-month period ended June 30, 1999, as
compared to the six-month period ended June 30, 1998.
Selling and Marketing. Selling and marketing costs consist primarily of
salaries and associated employee benefits, travel expenses of selling and
marketing personnel and promotional expenses. Selling and marketing costs
increased $74,000, or 5.4%, to $1.4 million for the six-month period ended June
30, 1999 from the six-month period ended June 30, 1998. This increase was
primarily due to an increase in the number of sales and marketing personnel. As
a percentage of revenue, selling and marketing costs decreased from 7.3% to 4.9%
for the six-month period ended June 30, 1999, as compared to the six-month
period ended June 30, 1998. We expect selling and marketing costs to increase as
a percentage of revenue.
Research and Development. Research and development costs, primarily
software development, consist of salaries assigned directly to research and
development projects, associated employee benefits and direct expenses incurred
to complete research projects, including non-employee consulting. Research and
development costs for the six-month period ended June 30, 1999, decreased
$448,000, or 100.0%, from the six-month period ended June 30, 1998. This
decrease was attributable to re-deploying engineers and technicians active in
developing and enhancing replicable frameworks to client service projects during
the third quarter of 1998. For the six-month period ended June 30, 1998, we
charged all of our costs for research and development to operations as incurred.
We did this because the period between technological feasibility and general
release was relatively short and the costs incurred during this period were not
significant.
Acquisition and Merger Costs. We incurred charges of approximately $300,000
for the six-month period ended June 30, 1999 for costs associated with the ad
hoc Interactive transaction. Also, we incurred charges of approximately $130,000
for the six-month period ended June 30, 1998 for costs associated with our
merger with Square Earth in January 1998. All transaction costs were related to
professional fees and other direct expenses.
Stock-Based and Other Compensation. For the six-month period ended June 30,
1999, stock-based and other compensation increased $168,000, or 294.7%, to
$225,000 from $57,000 for the six-month period ended June 30, 1998. These
incurred charges were for various stock rights and stock options issued for less
than fair market value under the historical ad hoc Interactive and IBIS
Consulting plans.
Interest Income (Expense), Net. Interest income (expense), net increased
$394,000 to interest income of $411,000 for the six-month period ended June 30,
1999 from interest income of $17,000 for the six-month period ended June 30,
1998. This increase was due primarily to interest income earned on
17
<PAGE> 22
proceeds raised in our initial public offering in April 1999. We generally
invest in the highest rated commercial paper, U.S. Treasury bills and money
market accounts. The amount of interest income fluctuates based upon the amount
of funds available for investment and prevailing interest rates.
Income Tax Provision (Benefit). The $447,000 income tax provision in the
six-month period ended June 30, 1999 represents combined federal, state and
foreign income taxes at an effective rate of 42.1%. Income tax benefit of
$943,000 in the six-month period ended June 30, 1998 represented combined
federal and state income taxes at an effective benefit rate of 69.1%. Our
effective tax rate was favorably impacted for the six-month period ended June
30, 1998 by our mergers with IBIS Consulting, Inc. in August 1998, and ad hoc
Interactive and Square Earth, which were Subchapter S corporations with
pass-through tax status before the mergers. We have recorded our income tax
provision (benefit) based on estimates of the effective tax rate expected to be
applicable for the full fiscal year. Estimated effective rates recorded during
interim periods may be periodically revised if necessary to reflect current
estimates.
1998 COMPARED TO 1997
Revenue. In 1998, revenue increased $15.5 million, or 54.7%, to $44.0
million from $28.5 million in 1997. This increase in revenue reflects increases
in both the size and number of our client engagements. Approximately 65.0% of
this increase is attributable to increased project size and the remainder is
attributable to increased numbers of projects. IBIS Consulting accounted for
$8.9 million, or 59.0% of the increase in Proxicom's 1998 revenues. Square
Earth's contribution was not separately accounted for because its operations
were fully integrated into Proxicom's following the merger in January 1998.
Cost of Revenue. Cost of revenue increased $12.2 million, or 95.7%, to
$24.9 million in 1998 from $12.7 million in 1997. The increase during 1998 was
due primarily to increases in the number of personnel needed to service these
projects and the related complexity of the projects. Approximately 76.0% of the
increase was attributable to personnel cost increases. Service project personnel
increased from 216 at December 31, 1997 to 340 at December 31, 1998. In 1998, we
re-deployed engineers who were active in developing and enhancing replicable
frameworks. During this transition phase, the engineer utilization was lower due
to start-up requirements. Also, during the second half of 1998, due to market
conditions, customer demand in our financial services and energy industry groups
softened, which adversely affected service utilization. As a percentage of
revenue, cost of revenue increased to 56.6% during 1998 as compared to 44.8%
during 1997.
Gross Profit. In 1998, gross profit increased $3.4 million, or 21.4%, to
$19.1 million from $15.7 million in 1997. The gross profit dollar increase
reflects the increase in revenue during 1998. As a percentage of revenue, gross
profit decreased to 43.4% during 1998 from 55.2% during 1997. The percentage
decrease reflects reduced overall utilization of consulting and delivery
personnel as discussed in the cost of revenue section.
General and Administrative. General and administrative costs increased $6.2
million, or 61.1%, to $16.4 million in 1998 from $10.2 million in 1997. This
increase was due primarily to increases in personnel and facilities and related
costs due to expanded leasing commitments in Reston, VA, New York, NY, San
Francisco, CA and the establishment of new offices in Chicago, IL and Munich,
Germany to support the internal growth of our operations. Approximately 68.0% of
the increase is attributable to the facilities and related cost increases. As a
percentage of revenue, general and administrative expenses increased to 37.3% in
1998 as compared to 35.8% in 1997. We wrote off $959,000 in doubtful accounts in
1998, which included approximately $600,000 from disputes with two customers. We
believe the current allowance for doubtful accounts balance of $669,000 is
sufficient for other doubtful accounts.
Selling and Marketing. Selling and marketing costs increased $1.2 million,
or 70.7%, to $2.9 million in 1998 from $1.7 million in 1997. Approximately 59.0%
of this increase was due to marketing program expenditures and the remaining
increase was due to increased personnel-related costs incurred in sales
promotion efforts. As a percentage of revenue, selling and marketing costs
increased to 6.6% from 6.0% during 1997.
18
<PAGE> 23
Research and Development. Research and development costs decreased
$269,000, or 28.0%, to $692,000 in 1998 from $961,000 in 1997. This decrease was
due to our re-deploying engineers and technicians active in developing and
enhancing replicable frameworks to client service projects during the third
quarter of 1998. For 1998 and 1997, we charged all of our costs for research and
development to operations as incurred. We did this because the period between
technological feasibility and general release was relatively short and the costs
incurred during this period were not significant.
Acquisition and Merger Costs. We incurred charges of approximately $2.9
million in 1998 for costs associated with the Square Earth and IBIS Consulting
transactions. These transaction costs related to professional fees and other
direct expenses. We did not record any such expenses for the year ended December
31, 1997 because we did not acquire any entities during that year.
Stock-based and Other Compensation. We incurred charges of $18.3 million in
1998 for costs associated with our IBIS Consulting and ad hoc Interactive
transactions. Of these charges, $17.2 million related to the elimination of a
repurchase requirement for formula stock options and $1.0 million consisted of
cash bonus payments required under the historical IBIS Consulting plan. For the
year ended December 31, 1997 we incurred charges of $44,000 for stock rights
issued for less than fair market value under the historical ad hoc Interactive
plan.
Interest Income (Expense), Net. Interest income (expense), net decreased
$201,000, or 251.3%, to interest expense of $121,000 in 1998 from interest
income of $80,000 in 1997. This decrease was due primarily to interest expense
we incurred from borrowings under our lines of credit during 1998 to support our
internal growth. Interest expense of $238,000 was offset by interest income of
$117,000 earned during 1998. The amount of interest income fluctuates based upon
the amount of funds available for investment and prevailing interest rates.
Income Tax Provision (Benefit). Operating losses generated in 1998 were
carried back for tax purposes creating a tax benefit. The $900,000 income tax
benefit in 1998 represents a benefit from combined federal and state income
taxes at an effective rate of 4.0%, or 18.0% excluding the $17.3 million
non-deductible stock-based compensation charge. Income tax expenses of $330,000
in 1997 represented combined federal and state income taxes at an effective rate
of 11.4%. Our effective tax rate was favorably impacted in both 1997 and 1998 by
the transactions with Square Earth, IBIS Consulting and ad hoc Interactive,
which were Subchapter S corporations with pass-through tax status before the
transactions.
1997 COMPARED TO 1996
Revenue. Revenue increased $15.1 million, or 112.8%, to $28.5 million in
1997 from $13.4 million in 1996. This increase is directly attributable to
increased client project size. IBIS Consulting and Square Earth accounted for
$6.3 million, or 41.7%, and $800,000, or 5.0%, respectively, of the increase in
Proxicom's 1997 revenue.
Cost of Revenue. Cost of revenue increased $7.6 million, or 150.5%, to
$12.7 million in 1997 from $5.1 million in 1996. This increase was due primarily
to increases in the size of our client projects and the cost of additional
consulting and delivery personnel. Approximately 84.0% of the increase was
attributable to the increased personnel costs. We had 139 consulting and
delivery personnel at December 31, 1996 and 216 at December 31, 1997. As a
percentage of revenue, cost of revenue increased to 44.8% during 1997 as
compared to 38.0% during 1996.
Gross Profit. In 1997, gross profit increased $7.4 million, or 89.6%, to
$15.7 million from $8.3 million in 1996. The gross profit dollar increase
reflects the increase in revenue during 1997. As a percentage of revenue, gross
profit decreased to 55.2% during 1997 as compared to 62.0% during 1996. The
percentage decrease reflects reduced utilization of consulting and delivery
personnel as discussed in the cost of revenue section.
General and Administrative. General and administrative costs increased $4.4
million, or 77.2%, to $10.2 million in 1997 from $5.8 million in 1996. This
increase was due primarily to increases in personnel, the leasing of a new
company headquarters in Reston, VA, costs incurred in connection with the
opening
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<PAGE> 24
of our New York, NY office in 1997 and related facility costs to support the
growth of our operations. Approximately 68.0% of the cost increase is
attributable to increased facility and related costs.
Selling and Marketing. Selling and marketing costs increased $1.0 million,
or 155.2%, to $1.7 million in 1997 from $670,000 in 1996. This increase was due
to the expansion of our selling and marketing personnel to 15 employees at
December 31, 1997 from 9 employees at December 31, 1996 and increased
promotional activities. Approximately 75.0% of the cost increase is attributable
to increased personnel costs.
Research and Development. Research and development costs increased
$557,000, or 137.9%, to $961,000 in 1997 from $404,000 in 1996. This increase is
attributable to increases in the number of engineers and technicians active in
developing and enhancing replicable frameworks. In 1997 and 1996, all of our
costs for research and development were charged to operations as incurred since
the period between technological feasibility and general release was relatively
short and the costs incurred during this period were not significant.
Stock-Based and Other Compensation. For 1997, stock-based and other
compensation increased $36,000, or 450.0%, to $44,000 from $8,000 for 1996.
These incurred charges were for various stock rights and stock options issued
for less than fair market value under the historical ad hoc Interactive and IBIS
Consulting plans.
Interest Income (Expense), Net. Interest income increased $25,000, or
45.5%, to $80,000 in 1997 from $55,000 in 1996. This increase was due primarily
to our interest income earned on the invested portion of the proceeds of our
private financings during 1997. Interest income of $174,000 was offset by
interest expense of $94,000 from increased drawings under our lines of credit
during 1997 to support our internal growth.
Income Tax Provision. Income tax expense increased $145,000, or 78.4%, to
$330,000 in 1997 from $185,000 in 1996 and represented combined federal and
state income taxes at an effective marginal rate of 11.4% in 1997 and 12.2% in
1996. The comparatively low tax rate of 11.4% was caused primarily by the
transactions with Square Earth, IBIS Consulting and ad hoc Interactive, which
were all Subchapter S corporations with pass-through tax status before the
transactions.
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<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated quarterly financial
data for the periods indicated. We derived this data from unaudited consolidated
financial statements, and, in the opinion of our management, they include all
adjustments, which consist only of normal recurring adjustments, necessary to
present fairly the financial results for the periods. Results of operations for
any previous fiscal quarter do not necessarily indicate what results may be for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $5,524 $7,070 $7,500 $8,358 $ 8,043 $10,508 $ 12,568
Cost of revenue................ 2,451 3,109 3,382 3,794 4,653 5,690 7,036
------ ------ ------ ------ ------- ------- --------
Gross profit................... 3,073 3,961 4,118 4,564 3,390 4,818 5,532
------ ------ ------ ------ ------- ------- --------
Operating expenses:
General and administrative.... 1,815 2,396 2,870 3,099 3,326 4,266 4,384
Selling and marketing......... 392 387 437 494 712 651 916
Research and development...... 90 82 182 607 228 220 244
Acquisition and merger
costs....................... -- -- -- -- 130 -- 2,756
Stock-based and other
compensation................ 8 11 11 14 15 42 18,211
------ ------ ------ ------ ------- ------- --------
Total................... 2,305 2,876 3,500 4,214 4,411 5,179 26,511
------ ------ ------ ------ ------- ------- --------
Income (loss) from
operations.................... 768 1,085 618 350 (1,021) (361) (20,979)
Interest income (expense),
net........................... 27 22 (16) 47 43 (26) (66)
------ ------ ------ ------ ------- ------- --------
Income (loss) before income
taxes......................... 795 1,107 602 397 (978) (387) (21,045)
Income tax provision
(benefit)..................... 4 91 86 149 (491) (452) (132)
------ ------ ------ ------ ------- ------- --------
Net income (loss).............. $ 791 $1,016 $ 516 $ 248 $ (487) $ 65 $(20,913)
====== ====== ====== ====== ======= ======= ========
AS A PERCENTAGE OF REVENUE:
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 44.4 44.0 45.1 45.4 57.9 54.1 56.0
------ ------ ------ ------ ------- ------- --------
Gross profit................... 55.6 56.0 54.9 54.6 42.1 45.9 44.0
------ ------ ------ ------ ------- ------- --------
Operating expenses:
General and administrative.... 32.9 33.9 38.3 37.1 41.4 40.6 34.9
Selling and marketing......... 7.1 5.5 5.8 5.9 8.8 6.2 7.3
Research and development...... 1.6 1.2 2.4 7.2 2.8 2.1 1.9
Acquisition and merger
costs....................... -- -- -- -- 1.6 -- 21.9
Stock-based and other
compensation................ 0.1 0.1 0.2 0.2 0.2 0.4 144.9
------ ------ ------ ------ ------- ------- --------
Total................... 41.7 40.7 46.7 50.4 54.8 49.3 210.9
------ ------ ------ ------ ------- ------- --------
Income (loss) from
operations.................... 13.9 15.3 8.2 4.2 (12.7) (3.4) (166.9)
Interest income (expense),
net........................... 0.5 0.3 (0.2) 0.6 0.5 (0.3) (0.5)
------ ------ ------ ------ ------- ------- --------
Income (loss) before income
taxes......................... 14.4 15.6 8.0 4.8 (12.2) (3.7) (167.4)
Income tax provision
(benefit)..................... 0.1 1.2 1.1 1.8 (6.1) (4.3) (1.0)
------ ------ ------ ------ ------- ------- --------
Net income (loss).............. 14.3% 14.4% 6.9% 3.0% (6.1)% 0.6% (166.4)%
====== ====== ====== ====== ======= ======= ========
<CAPTION>
THREE MONTHS ENDED
------------------------------
DEC. 31, MAR. 31, JUN. 30,
1998 1999 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue........................ $12,887 $13,254 $16,221
Cost of revenue................ 7,549 7,792 8,911
------- ------- -------
Gross profit................... 5,338 5,462 7,310
------- ------- -------
Operating expenses:
General and administrative.... 4,421 4,562 5,596
Selling and marketing......... 640 650 787
Research and development...... -- -- --
Acquisition and merger
costs....................... -- 300 --
Stock-based and other
compensation................ 40 117 108
------- ------- -------
Total................... 5,101 5,629 6,491
------- ------- -------
Income (loss) from
operations.................... 237 (167) 819
Interest income (expense),
net........................... (72) (65) 476
------- ------- -------
Income (loss) before income
taxes......................... 165 (232) 1,295
Income tax provision
(benefit)..................... 175 (84) 531
------- ------- -------
Net income (loss).............. $ (10) $ (148) $ 764
======= ======= =======
AS A PERCENTAGE OF REVENUE:
Revenue........................ 100.0% 100.0% 100.0%
Cost of revenue................ 58.6 58.8 54.9
------- ------- -------
Gross profit................... 41.4 41.2 45.1
------- ------- -------
Operating expenses:
General and administrative.... 34.3 34.4 34.5
Selling and marketing......... 5.0 4.9 4.9
Research and development...... -- -- --
Acquisition and merger
costs....................... -- 2.3 --
Stock-based and other
compensation................ 0.3 0.9 0.6
------- ------- -------
Total................... 39.6 42.5 40.0
------- ------- -------
Income (loss) from
operations.................... 1.8 (1.3) 5.1
Interest income (expense),
net........................... (0.5) (0.5) 2.9
------- ------- -------
Income (loss) before income
taxes......................... 1.3 (1.8) 8.0
Income tax provision
(benefit)..................... 1.4 (0.7) 3.3
------- ------- -------
Net income (loss).............. (0.1)% (1.1)% 4.7%
======= ======= =======
</TABLE>
We have generally realized lower revenue in the first quarter of the year
than in the other quarters. We believe that this has been due primarily to
client budget cycles and the short-term nature of our contracts.
LIQUIDITY AND CAPITAL RESOURCES
In October 1998, Proxicom entered into a $10.0 million revolving credit
facility with Bank of America, N.A., formerly NationsBank, N.A., as amended in
June 1999, to be used for working capital purposes and permitted acquisitions.
The interest rate on amounts borrowed under the credit agreement is LIBOR plus
1.5%. The credit facility expires on August 31, 2000 and will renew
automatically for one
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<PAGE> 26
additional year at the sole discretion of Bank of America. The credit facility
contains restrictions on Proxicom and its subsidiaries (including a prohibition
on the payment of cash dividends by Proxicom) and requires Proxicom to maintain
liquid assets of at least $10.0 million. The credit facility is secured by a
first priority lien on all current and future assets of Proxicom and its
subsidiaries and a first priority pledge of the stock of IBIS Consulting, Square
Earth and ad hoc Interactive. As of the date of this prospectus, Proxicom had no
outstanding borrowings under the credit facility.
Cash and cash equivalents increased to $2.6 million at December 31, 1998,
from $2.3 million at December 31, 1997. Net cash provided by operating
activities of $1.3 million for 1997 was attributable to the growth in our
revenue and operations. The net cash used in operating activities of $3.8
million for 1998 was primarily offset with borrowings under our credit facility.
Cash and cash equivalents were $2.6 million at June 30, 1999, which was
unchanged from $2.6 million at December 31, 1998.
Unbilled services increased $4.7 million from $2.0 million at June 30, 1998
to $6.7 million at June 30, 1999. This increase was primarily due to growth in
the size and complexity of our projects. Larger, more complex projects typically
require completion of specified performance milestones prior to billing clients,
as opposed to providing for monthly progress billing. A portion of our projects
require performance milestones to be reached before invoicing. We believe our
project size and complexity will continue to increase in the future. If this
occurs, our unbilled services receivables can be expected to increase.
Capital expenditures of approximately $1.5 million, $2.1 million, $1.8
million and $1.4 million for 1996, 1997 and 1998 and the first six months of
1999, respectively, were used primarily for computer equipment, office equipment
and leasehold improvements related to Proxicom's growth. Capital expenditures
for 1999 are expected to be approximately $3.0 million and will be made
principally for computer equipment, internally used software purchases and
leasehold improvements to support our growth.
In February 1999, Proxicom completed the sale of 1,218,333 shares of Series
D convertible preferred stock for $7.3 million. At the closing of Proxicom's
initial public offering, all of these shares converted into common stock on a
one-for-one basis. Proxicom was required to take a $4.9 million charge to
additional paid-in capital for the difference between the conversion feature and
the estimated fair value of the underlying common stock. Although not reflected
on the statement of operations, the charge was reflected as a reduction to
income and earnings per share available for common stockholders. See "Certain
Transactions -- Stock Purchase Agreements and Related Matters -- Series D
Purchase Agreement."
In connection with the issuance of Series A convertible preferred stock,
Proxicom issued warrants to purchase 1,011,378 shares of Series A convertible
preferred stock. The warrants were exercised for a purchase price of $8.0
million on April 13, 1999, and the shares of Series A convertible preferred
stock issued upon their exercise were converted into shares of common stock
immediately before Proxicom closed its initial public offering of securities.
On April 23, 1999, Proxicom completed its initial public offering of
securities. After deducting expenses, Proxicom received approximately $46.9
million in proceeds from this transaction. On May 21, 1999, the underwriters of
the initial public offering exercised their over-allotment option, resulting in
an additional $8.2 million in proceeds to Proxicom. Proxicom has invested the
majority of these proceeds in short-term, interest-bearing, investment-grade
securities.
Proxicom anticipates that the net proceeds of this offering, together with
existing sources of liquidity and funds generated from operations, should
provide adequate cash to fund its currently anticipated cash needs through at
least the next 18 months. To the extent Proxicom is unable to fund its
operations from cash flows, it may need to obtain financing from external
sources in the form of either additional equity or indebtedness. There can be no
assurance that additional financing will be available at all, or that, if
available, such financing will be obtainable on terms favorable to Proxicom.
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<PAGE> 27
YEAR 2000 READINESS DISCLOSURE
Background. Many computer systems and applications currently use two-digit
fields to designate a year. This inability to recognize, or properly treat, the
year 2000 may cause systems to process financial and operational information
incorrectly, resulting in system failures and other business problems.
Risk Factors. We may experience operations interruptions because of year
2000 problems. Also, we may experience operations difficulties caused by
undetected errors or defects in the technology we use in our internal systems.
We may become involved in disputes regarding year 2000 problems involving
solutions we developed or implemented or the interaction of our Internet
solutions with other applications. Year 2000 problems could require us to incur
delays and unforeseen expenses. While it is difficult to identify every
conceivable issue related to the year 2000, we have formulated an approach to
address our exposure to these risk factors.
Approach. We have completed assessing the impact of the year 2000 issue on
our current products, internal information systems and non-information
technology systems. We have largely completed the assessment of the year 2000
readiness of our information technology systems, including the hardware and
software we use to provide and deliver our Internet solutions. Based on these
results, we are verifying minor revisions to our solutions software code, and
replacing systems as needed.
We are communicating with the suppliers of our computer systems, as well
other goods and services providers, to verify their current compliance levels
and work with them on their plans, if needed. We require all vendors who provide
material hardware or software for our information technology systems to provide
assurances of their year 2000 compliance. We are also seeking final assurances
of year 2000 compliance from our material non-information technology providers.
We have requested that our vendors and providers provide us with final
assurances as to compliance by the end of the summer of 1999.
We have identified processes that will require year 2000 readiness testing,
and have established dedicated test environments for year 2000 readiness
testing.
Status. Our testing to date has included our major infrastructure items,
hardware platforms and operating systems in all of our offices. Desktop
computing, servers, switching and routing platforms have been inventoried in all
locations. Personal computer platforms have been identified and tested in our
Reston, VA and New York, NY locations. This effort is estimated to be 99%
complete. Inventory testing in San Francisco, Sacramento, and Sausalito, CA is
90% complete, and most of the hardware in these locations in less than two years
old. Equipment in Spain and Italy is either customer provided and warranted to
be year 2000 compliant, or already known to be compliant. Testing and
certification in these locations is 95% complete. Testing and compliance in our
New York and Chicago offices is considered to be 95% complete. In Munich, 70% of
our hardware and 95% of our software is compliant.
Our testing efforts will be completed by the end of September 1999, and any
new hardware we need will be ordered then. Installation of the software
components that will bring the computing platforms into compliance is estimated
to be 80% complete, with full completion scheduled in all locations by the
middle of October 1999. Embedded systems are tested at a 95% level, with full
compliance scheduled for completion in October 1999. In all locations, affected
servers have been identified for replacement and equipment has been ordered.
Other equipment (including personal computers and legacy software) will be
complete by the end of October 1999.
We have completed the implementation of year 2000 compliant internal
computer applications for our main financial and order processing systems with
the assistance and assurance of the software providers. Testing of affected
network hardware is complete, and all changes have been applied.
Based on information provided by our building management at our locations,
most building management systems are tested and compliant. We are awaiting
responses from our Los Angeles and Sacramento locations. Until our testing is
complete and all of our material vendors and providers are contacted, we will
not be able to evaluate completely whether affected HVAC, fire control and
related systems will need to be revised or replaced by the respective building
managers.
23
<PAGE> 28
Cost. Based on the work done to date, we predict that the cost to complete
our year 2000 certification process will be approximately $325,000. This
includes the cost of material upgrades, software modification and related
consulting fees.
Contingency Plans. As discussed above, we are engaged in an ongoing year
2000 assessment and have not yet developed any contingency plans. We are
continuing to assess the results of our year 2000 simulation testing and
third-party vendor and service provider responses to determine the nature and
extent of any contingency plans. At the end of October, after the testing and
assessment period, we will develop any necessary contingency plans.
24
<PAGE> 29
BUSINESS
OVERVIEW
Proxicom is a leading provider of Internet solutions to Global 1000
companies and other large organizations. Since 1994, we have focused exclusively
on the Internet and have successfully completed over 750 client engagements.
Our Internet solutions have included
- business-to-business electronic commerce extranets for Harman
International Industries, Incorporated, McKessonHBOC and Mercedes-Benz
Credit Corp., enabling these clients to transact business with other
businesses;
- business-to-consumer electronic commerce Internet sites for Calphalon
Corporation, MagazineOutlet.com, a subsidiary of NewSub Services, Inc.,
and Marriott International, Inc. enabling these clients to provide
information about and sell products to consumers; and
- company-specific intranets for GE Plastics, Hoffmann-La Roche, Inc. and
Merrill Lynch & Co., Inc., enabling persons within these organizations to
exchange information electronically.
We apply our proprietary methodology, the Proxicom Process, in all of our
client engagements. Using the Proxicom Process, we integrate strategy,
technology and creative design to help our clients transform their businesses
with Internet solutions.
INDUSTRY BACKGROUND
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit its potential to extend and enhance their
business activities. Companies are using the Internet to communicate and
transact business on a one-to-one basis with existing customers and to target
and acquire new customers. At the same time, companies are using the Internet to
collaborate with their supply-chain partners, enable electronic commerce and
manage distribution relationships. The Internet has also allowed businesses to
identify new product and service offerings which extend and complement their
core markets. As a result, organizations are investing in the strategic use of
Internet solutions to transform their core business and technology strategies.
Faced with growing competition, deregulation and globalization, companies
are increasingly looking to utilize Internet technology to help build
competitive advantage. Much as client/server technologies opened information
access within organizations beginning in the late 1980s, the Internet now offers
the potential for organizations to extend their businesses beyond traditional
limits. The Internet extends the business role of technology from
employee-focused productivity enhancement to customer-focused revenue
generation, raising the importance and complexity of new technology deployment.
Successful adoption of the Internet in this new context poses strategic,
technical and creative design challenges. Alignment of business and Internet
strategies requires an understanding of how the Internet transforms
relationships between businesses and their internal organizations, customers and
business partners. Also, companies facing technology investment decisions often
need outside technical expertise to recognize Internet tools, develop feasible
architectures and implement strategies. Companies must also be able to integrate
new Internet applications with their existing systems. Finally, a successful
solution requires that the Internet application, particularly the user
interface, be engaging and easy to use.
Few businesses have the range of skills necessary to successfully transform
the way they use technology and implement Internet solutions. Moreover, it is
difficult to find these skills externally in the supply-constrained Internet
professional services market. Even if businesses obtain skills in all three of
the strategy, technology and creative disciplines, they often have little
experience coordinating them to exploit fully the Internet and other advanced
technologies.
The combination of these factors is creating a significant and growing
demand for third-party Internet professional services. International Data Corp.,
a technology industry research firm, forecasts that the
25
<PAGE> 30
market for Internet and electronic commerce services worldwide will grow from
$7.8 billion in 1998 to $78.6 billion by 2003. These projections represent a
compound annual growth rate of more than 58% over this period. While
business-to-consumer solutions are expected to continue to be a large part of
the Internet and electronic commerce services market, Proxicom believes that
business-to-business solutions will represent a growing percentage of the
overall market.
Vendors addressing the Internet professional services market can be broadly
divided into four major categories.
- Large systems integrators provide technology expertise across a wide
range of offerings which address business process requirements.
- Specialty systems integrators frequently offer traditional distributed
computing models adapted to the Internet.
- Strategy consulting firms seek to help companies define models of how
they can use the Internet as a new channel and knowledge-sharing tool.
- Internet professional services providers bring Internet expertise, often
with a focus on either the creative, technology or strategy element.
While vendors in each category have specific strengths, each tends to
address only a piece of the Internet puzzle. Few vendors addressing the Internet
professional services market successfully integrate business and marketing
strategy with expertise in Internet-specific technology and creative design
services to help businesses achieve the full potential that the Internet offers.
Proxicom believes organizations are increasingly searching for a
single-source professional services firm that can deliver integrated strategy,
technology and creative design skills specifically for the Internet.
Furthermore, Proxicom believes that organizations will increasingly look to
Internet solutions providers that can leverage industry best practices, increase
predictability of success for Internet solutions and decrease risks associated
with implementation.
PROXICOM'S SOLUTION
Proxicom is an Internet solutions provider that focuses on creating
business value for its clients. Proxicom's solution has five essential elements:
- a structured methodology, the Proxicom Process;
- integrated Internet strategy, technology and creative design services;
- industry and business domain expertise;
- in-depth Internet and advanced technologies expertise; and
- knowledge management and knowledge sharing infrastructure.
PROXICOM PROCESS: PROPRIETARY METHODOLOGY AND MANAGED RISK
The Proxicom Process is Proxicom's proprietary methodology for managing
client engagements that integrates strategy, technology and creative design
services. The Proxicom Process emphasizes an iterative development cycle with
multiple incremental releases to incorporate user feedback and to keep pace with
the Internet's ongoing technological changes. The four phases of the Proxicom
Process' development cycle are (a) Define Internet Strategy, (b) Design
Solution, (c) Develop Solution and (d) Deploy Solution. Using the Proxicom
Process, Proxicom structures projects tightly and offers fixed-price,
fixed-timeframe or time-and-materials engagements as is most appropriate for the
project. This provides clients with greater certainty regarding the time and
cost of implementation. Proxicom's approach improves quality of delivery and
alignment of an Internet initiative with a client's business. This approach is
geared toward minimizing the risk of technical or competitive obsolescence faced
by companies using the Internet.
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<PAGE> 31
INTEGRATED INTERNET STRATEGY, TECHNOLOGY AND CREATIVE DESIGN SERVICES
Proxicom delivers its solutions through collaborative, multi-disciplinary
teams that apply the collective strengths of their strategy, technology and
creative design professionals. Proxicom believes that this approach results in
coordinated planning among its professionals from all three disciplines, a
challenge that many organizations struggle to address. Proxicom's delivery
process fosters collaboration within its multi-disciplinary teams to help
clients achieve internal cooperation among previously independent business
functions. Proxicom believes its multi-disciplinary approach results in better,
more efficient Internet solutions in which business and communications
strategies are consistently balanced with the opportunities and capabilities of
Internet technologies.
INDUSTRY AND BUSINESS DOMAIN EXPERTISE
Proxicom organizes its delivery of services into vertical industry groups:
energy and telecommunications, financial services, retail and manufacturing, and
service industries. Through strategic hires and over 750 completed client
projects since 1994, Proxicom has developed significant expertise in these
targeted industries and the types of business solutions organizations in these
industries require. Proxicom's expertise provides clients with a clear vision of
the Internet's potential to improve their business processes and competitive
positions. Proxicom complements its industry specialization with expertise in
cross-industry solution areas such as electronic commerce, supply chain
management and interactive marketing. Proxicom leverages its experience in these
industries and solution areas across the entire company through best practices
as well as proprietary solution frameworks, software tools and components to
provide clients the full value of Proxicom's industry and business domain
expertise.
IN-DEPTH INTERNET AND ADVANCED TECHNOLOGY EXPERTISE
Proxicom has developed an in-depth understanding of the specific challenges
of deploying Internet solutions. Proxicom is expert at building, extending and
complementing technologies that have the ability to transform businesses.
Proxicom helps its clients utilize advanced technologies and minimize the
expenses associated with hiring, training and retaining scarce information
technology resources. Because Proxicom's expertise is not limited to a single
technology or architecture, Proxicom is able to help clients choose the
appropriate technology to provide the best long-term business solution.
KNOWLEDGE MANAGEMENT AND KNOWLEDGE SHARING INFRASTRUCTURE
Through the Proxicom Process, Proxicom continuously incorporates the
multi-disciplinary knowledge gained in Proxicom's engagements. This intellectual
capital is tracked and stored in Proxicom's corporate intranet, which acts as an
integrated knowledge management repository. In this way, Proxicom's clients can
benefit from industry best practices as well as Proxicom's experiences.
Proxicom's intranet is both a solutions library that facilitates the
dissemination of intellectual capital across Proxicom and an internal project
management system that captures detailed information on the resources required
to achieve specific tasks on a project. This system improves Proxicom's ability
to predict project completion requirements and increases the reusability of its
intellectual capital, thereby reducing risk for its clients. Proxicom's week-
long "bootcamp" orientation and training program for all new employees also
facilitates knowledge sharing.
PROXICOM'S GROWTH STRATEGY
Proxicom's strategy is to build upon its position as a leading provider of
transformational Internet solutions that add significant and measurable business
value to Global 1000 companies and other large organizations. The following are
the key elements of Proxicom's strategy.
LEVERAGE EXISTING CLIENT RELATIONSHIPS
Proxicom believes it must continue to satisfy its clients. A strong track
record of delivering high quality Internet solutions often increases the amount,
scope and sophistication of services requested by existing clients. This
reinforces Proxicom's growing reputation as an innovative provider of
mission-critical
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Internet solutions. Proxicom also believes that maintaining a reputation for
delivering innovative Internet solutions and client satisfaction will increase
its ability to attract new clients through increased referral-driven sales and
strong references.
FURTHER PENETRATE AND BROADEN OUR VERTICAL MARKETS
Proxicom believes that its expertise in specific industry dynamics and
solutions considerably enhances its ability to help companies apply the Internet
to gain competitive advantage. In each of its vertical industry groups, Proxicom
employs industry experts, pursues targeted sales and marketing, develops
industry-specific offerings and capitalizes on referrals from existing clients.
Proxicom will continue to emphasize this focus and seek to expand the scope of
its industry expertise.
CONTINUE GEOGRAPHIC EXPANSION
Proxicom believes that expanding geographically will increase its ability
to attract and better service clients. Proxicom has already established offices
in Reston, VA, San Francisco, CA, New York, NY, Munich, Germany, Sausalito, CA,
Sacramento, CA, Chicago, IL, Houston, TX and Los Angeles, CA. All of these
offices have contributed to Proxicom's continued ability to attract large
clients. Proxicom plans to continue establishing offices in key geographic
locations through an integrated process of organic growth and targeted
acquisitions. Under agreements with Ericsson Telecommunicazioni SpA and
Iberdrola SA, Proxicom has invested in joint venture companies. Through these
joint venture companies, Proxicom is delivering its Internet consulting services
in both Italy and Spain. Proxicom intends to open an office in the United
Kingdom in the near future.
HIRE AND RETAIN SKILLED PROFESSIONALS
Proxicom believes its delivery of integrated strategy, technology and
creative design services distinguishes it from other Internet professional
services providers. To deliver these services, Proxicom must hire and retain
skilled professionals in all three disciplines and continue to foster
collaboration among them. Proxicom has a dedicated organizational development
team that initiates and oversees the training and development of Proxicom's
professionals. Key organizational development initiatives include a week-long
"bootcamp" orientation and training program for all new employees and "Proxicom
University," which provides ongoing technical and project management classes as
well as career path management and guidance. Proxicom is committed to recruiting
and hiring quality professionals and to maintaining a culture that motivates its
staff while cultivating collaboration and retention.
EVOLVE THE PROXICOM PROCESS
Proxicom believes that continued evolution of the Proxicom Process will
strengthen its competitive position. Proxicom enhances the Proxicom Process by
incorporating best practices identified over numerous engagements. This enables
clients to benefit from Proxicom's cumulative experience. Proxicom will continue
to refine and enhance the Proxicom Process to enable continued delivery of high
quality solutions to clients on time and on budget.
LEVERAGE TECHNOLOGY RELATIONSHIPS
Proxicom believes its relationships with leading technology vendors, such
as America Online, Inc. and Microsoft Corporation, will provide increased
visibility and sales opportunities. Proxicom's status as a Microsoft Certified
Solution Provider Partner has yielded considerable sales opportunities. Proxicom
has also formed strategic alliances with leading hosting and co-location
providers, such as Exodus Communications, Inc. Proxicom is committed to
enhancing these relationships and building other strategic partnerships that can
contribute to its growth.
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EXTEND REUSABLE SOLUTIONS
Proxicom leverages those elements of its Internet solutions for which there
is repeat customer demand. Reusable solutions increase productivity, accelerate
solutions development and enhance the profitability of Proxicom's engagements.
Proxicom's industry and business solutions experts develop replicable solutions
for target markets, including best practices, tools, functionality, software and
standard interfaces for leading third-party applications. Proxicom has a
dedicated framework reuse group that supports these efforts and leverages them
across the organization. The group also identifies software reuse opportunities
before and after client engagements, prepares code for reuse and maintains
version control. Proxicom intends to continue to leverage its experience to
create reusable solutions that can be used in future engagements. On most
engagements, Proxicom retains the right to reuse the solutions' underlying
components.
PROXICOM'S SERVICES
Proxicom's range of Internet solutions includes business-to-business
electronic commerce extranets, business-to-consumer electronic commerce Internet
sites, and company-specific intranets. Proxicom's solutions may also extend a
packaged application to the Internet. Proxicom provides Internet solutions
through an integrated set of strategy, technology and creative design services.
Proxicom sells and delivers its solutions through its vertical industry groups.
Through these vertical groups, Proxicom leverages its experience, best practices
and sales and delivery skills across clients with similar needs. Proxicom also
leverages its cross-industry specialties in electronic commerce, supply chain
management and interactive marketing. Using the Proxicom Process, Proxicom
services every engagement with a multi-disciplinary team headed by a dedicated
project manager who coordinates business strategy, technology and creative
design services.
STRATEGY
Proxicom uses its business and interactive marketing strategy services to
align a client's Internet strategy with its business and marketing goals.
Business strategy services include business case development, business process
consulting and competitive benchmarking. Interactive marketing strategy services
focus on understanding our clients' customers, competitors, target markets and
opportunities, and advising them on appropriate strategies to take advantage of
the Internet. Proxicom works with clients to evolve, understand and analyze
business and marketing goals, operational methods and success criteria.
Proxicom's industry and solution expertise contributes significantly to its
ability to create Internet strategies that offer distinct competitive advantage.
TECHNOLOGY
Proxicom develops Internet solutions that exploit the latest proven
technologies to transform business processes. Proxicom has extensive experience
providing technology implementation services, including systems and network
architecture design, custom application development, legacy and third party
software integration, as well as technology advisory services. Proxicom is
experienced at designing, developing and deploying mission-critical Internet
solutions and integrating these applications with legacy systems to capitalize
on existing technology investments.
CREATIVE DESIGN
Proxicom's creative design services address navigation, layout, information
architecture, personalization and branding. Proxicom's creative design services
also ensure that its Internet solutions have direct, immediate and relevant
appeal and utility. As the Internet has become an important point of contact
with customers, employees and business partners, the user interface of these
applications is an increasingly visible component of a company's brand and
identity. Proxicom creates Internet solutions that maximize the ease and quality
of experience for a variety of users.
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THE PROXICOM PROCESS
[A GRAPHIC DEPICTION OF THE PROXICOM PROCESS APPEARS HERE. FOUR OVALS, EACH
REPRESENTING A STEP IN THE PROXICOM PROCESS (DEFINE, DESIGN, DEVELOP AND DEPLOY)
ARE ARRANGED IN A CIRCLE AROUND THE WORD REPOSITORY.]
Proxicom delivers its services using a proprietary multi-phase methodology
called the Proxicom Process, which serves as a roadmap to define, develop and
manage Internet solutions. The iterative nature of the Proxicom Process enables
Proxicom to refine applications through the extensive use of prototypes and
phased application releases. Proxicom also uses the Proxicom Process to reduce
the time-to-market of a deployed solution. The Proxicom Process fully integrates
working groups and emphasizes collaboration between the Proxicom team and the
client.
Proxicom uses the Proxicom Process to manage project scope and client
expectations and to deliver solutions on time and on budget. The Proxicom
Process offers mechanisms for rapid adoption of best practices and reinforces
consistent quality across all projects. It provides for quality assurance with
unit, integration and systems testing procedures throughout design, development
and deployment to ensure quality delivery and client satisfaction. The Proxicom
Process also aggregates and replenishes the intellectual capital of Proxicom's
entire organization, thereby leveraging Proxicom's cumulative experience.
Proxicom continually seeks to evolve the Proxicom Process by identifying best
practices during project reviews with Proxicom's delivery teams and clients.
All of Proxicom's client engagements utilize the Proxicom Process, which
Proxicom customizes to suit specific project needs. The inclusion, timing and
cost of any phase will depend on the type of solution and the scope of work. The
Proxicom Process is scalable and may be used effectively for projects of all
sizes. The following are the phases of the Proxicom Process:
DEFINE INTERNET STRATEGY
The scope of the Define Internet Strategy phase ranges from defining an
Internet vision for the client's overall business to developing a strategy for a
specific Internet solution or offering. The Internet vision is a business
strategy engagement where Proxicom assesses the client's opportunities to
leverage the Internet both as a technology and as a profitable business medium.
For a specific Internet solution, the Define Internet Strategy deliverable
examines the strategic objectives of the solution, how its success will be
measured, and how the solution will be marketed, launched and publicized.
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The Define Internet Strategy phase also determines the scope and nature of
the engagement and articulates the project's tactical objectives. Project scope
and nature are determined by documenting business, function, technical and
creative requirements. Project objectives are refined over the course of
multiple working sessions with the client. This phase results in a project plan
outlining tasks, deliverables and key milestones, which are translated into a
detailed contractual agreement for the next phases of the engagement. The plan
includes detailed cost estimates as well as organizational roles and
responsibilities for Proxicom, the client and other parties.
DESIGN SOLUTION
The Design Solution phase uses rapid prototyping techniques in an iterative
fashion to determine and refine application requirements and specifications. A
multi-disciplinary team works in tandem with the client to translate the
business, marketing, technical and creative requirements of the solution into a
cohesive design. This phase generally has four major parts:
- Creative Design Composition. Content and information for the solution are
defined and organized. The look and feel of the solution is designed in a
series of detailed site flow compositions that show page content,
navigation and links. Proxicom works closely with the client to
coordinate the brand image and advertising campaigns on an ongoing basis.
- Technical Architecture Definition. The solution is analyzed from a
technical viewpoint, including the development, test and operational
architectures required. The technical, application and data architectures
of the solution are documented, addressing the requirements for hardware,
software and network environments, databases and third party products.
- Specification and Prototype Development. Rapid prototyping is used to
construct portions of the solution. A visual prototype is used to define
page style, layout, information architecture and navigation. Functional
prototypes are used to test complex processing requirements and the
effectiveness of the application and data architectures. This iterative
process allows the client to review and refine the application as it
takes shape during the development process.
- Testing, Documentation and Training. Detailed plans are developed to
address requirements for solutions testing at all development stages,
creation of necessary on-line and printed documentation for users and
administrators, and training programs for customers and solution users.
DEVELOP SOLUTION
The Develop Solution phase involves the creation of a production-ready
solution by developing necessary software and creative components, and
completing systems integration activities. Unit, integration and systems
testing, and quality assurance procedures are incorporated throughout the
development process to verify that the solution conforms with the design
specifications. Testing is performed across multiple browsers and environments
to ensure uniform accessibility.
DEPLOY SOLUTION
Following completion of integration testing activities in the development
environment, the solution is staged to the production environment where it
underdoes a final system test of security, performance and reliability. Once the
client gives final approval of the developed solution, Proxicom works with the
client through release and roll-out. This work may include system migration,
data conversion and training. Marketing programs build awareness of the solution
and ensure the solution meets business goals.
SALES AND MARKETING
Proxicom's sales and marketing activities are aligned with its vertical
industry groups. Each vertical industry group vice president is responsible for
developing Proxicom's business within each respective industry, targeting new
clients and cultivating repeat business with existing clients. Proxicom believes
that its vertical approach is a differentiating factor during the sales process,
as it demonstrates Proxicom's
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understanding of the client's specific business and technology issues.
Proxicom's sales approach is highly consultative and involves industry and
solutions experts who draw on their practical experiences with other clients
that have faced similar challenges. Proxicom also assigns senior client
executives to strategic accounts to support and expand client relationships.
Proxicom has 12 dedicated direct sales professionals to support the
vertical industry groups. These professionals are assigned to specific
geographic regions in order to maximize responsiveness to clients. They work
jointly with the vertical industry groups to secure new opportunities and manage
the sales process. Service directors responsible for delivery collaborate with
the sales professionals to form a joint sales approach for identifying and
winning follow-on business.
Proxicom's marketing efforts are designed to create brand recognition and
demand for the Proxicom's services. Proxicom's eight-person marketing team is
organized to provide support for each vertical industry group. Marketing
programs include advertising, promoting customer success stories, creating
industry and solution specific campaigns, pursuing public relations
opportunities and promoting Proxicom's executives for speaking opportunities and
Proxicom-sponsored event management.
Proxicom complements its internal sales and marketing efforts with selected
industry partnerships. Several Internet product vendors such as Microsoft
Corporation, America Online, Inc., Oracle Corporation, BroadVision, Inc. and
TRADE'ex Electronic Commerce Systems, Inc., and high-end hosting vendors, such
as Exodus Communications, Inc., recommend Proxicom services to their clients.
See "-- Marketing and Technology Relationships."
CLIENTS
As of June 30, 1999, we had approximately 130 ongoing client engagements.
In 1998, our five largest clients accounted for approximately 36.8% of our
revenue. Our two largest clients in 1998, Pacific Gas and Electric Company and
General Electric Company, contributed approximately 14.2% and 13.2%,
respectively, of our revenue. For the six months ended June 30, 1999, our five
largest clients accounted for approximately 28.5% of our revenue. Our two
largest clients, Pacific Gas and Electric Company and Merrill Lynch & Co., Inc.
contributed approximately 9.5% and 5.7%, respectively, of our revenue.
Within each vertical group, Proxicom targets Global 1000 companies and
other large organizations. The following is a representative sample of
Proxicom's current clients.
ENERGY AND TELECOMMUNICATIONS
Aramco Services Company
Buckeye Pipe Line Company L.P.
KN Energy, Inc.
Iberdrola SA
Pacific Gas and Electric Company
TransCanada Pipelines Ltd.
Transport4
FINANCIAL SERVICES
American International Group, Inc.
GE Capital Corporation
Kemper Insurance Companies
Mercedes-Benz Credit Corp.
Merrill Lynch & Co., Inc.
SERVICE INDUSTRIES
America Online, Inc.
Cox Interactive Media, Inc.
Marriott International, Inc.
Travel Planners
Ziff-Davis Inc.
RETAIL AND MANUFACTURING
Calphalon Corporation
GAP, Inc.
GE Plastics
Harman International Industries, Incorporated
Hoffmann-La Roche, Inc.
McKessonHBOC
NewSub Services, Inc.
Owens Corning
Wyeth-Ayerst Laboratories
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CASE STUDIES
MARRIOTT.COM
Marriott International, a leading worldwide hospitality company, sought to
grow its leadership position within online travel sales. In response, Proxicom
worked with Marriott to design and implement its new electronic branding
strategy. Proxicom focused on creating a comprehensive user experience to drive
consumer adoption, loyalty and use. The solution included extensive site
information architecture, an intuitive interface layout, enhanced graphic design
and a new logo and tagline. Visitors to Marriott.com can now easily find
information they need and directly transact business online, including making
reservations at Marriott's more than 1,800 properties worldwide. Additionally,
the positioning developed supports other Marriott communications initiatives.
The new Marriott.com site creates a rich and useful user experience that
strengthens customer loyalty and positions Marriott.com as a premier electronic
travel resource worldwide.
MAGAZINEOUTLET.COM
MagazineOutlet.com, the online subsidiary of NewSub Services, Inc., or NSS,
the leading U.S. magazine subscription agency with more than 12 million
customers, sought to expand its business through a new direct-to-consumer
channel. Proxicom created the company's Internet branding strategy, designed the
MagazineOutlet.com logo and developed an end-to-end system for online retail
commerce. This new Internet presence offers users more than 25,000 titles, a
strategy for marketing to users on a one-to-one basis and a process for targeted
additional sales. Proxicom integrated multiple processing and fulfillment
systems, and incorporated specialized performance monitoring tools to enable
MagazineOutlet.com to manage its business easily. MagazineOutlet.com uses the
positioning Proxicom developed for both online and offline marketing.
Additionally, Proxicom built an affiliates tool which enables other Internet
sites to offer MagazineOutlet.com's products to their customers. As a result,
MagazineOutlet.com is a significant new source of revenue, customers and
customer intelligence for NSS. This Internet business transforms NSS's
traditional business model, placing it in a position to become a leading seller
of magazines on the Internet.
HARMAN INTERNATIONAL INDUSTRIES
The Harman Consumer Systems Group of Harman International Industries, a
leader in the design, manufacture and marketing of audio products, including the
JBL and Infinity Systems brands, sought to streamline its supply chain and
develop more effective methods for dealers and consumers to purchase consumer
electronics. Proxicom built an integrated electronic commerce extranet and
Internet solution to serve Harman's dealer network and consumers. The solution
shares inventory pricing and availability in real time, manages order histories
and account status, allows users to process returns and completes transactions
directly online. Proxicom fully integrated the extranet with Harman's SAP
enterprise resource planning system, or ERP, thereby extending Harman's ERP
back-end processes to the Internet. The solution Proxicom developed increases
sales opportunities, improves customer support and creates a new marketing
channel for Harman's line of consumer products. Proxicom's solution also
significantly reduces overhead costs for order processing and accelerates
fulfillment turnaround time.
MARKETING AND TECHNOLOGY RELATIONSHIPS
Proxicom complements its internal sales and marketing efforts with formal
and selected industry partnerships. A number of Internet product vendors,
including Microsoft Corporation, America Online, Inc., Oracle Corporation,
BroadVision, Inc. and TRADE'ex Electronic Commerce Systems, Inc., and high-end
hosting providers, including Exodus Communications, Inc., recommend Proxicom
services to their clients.
Proxicom has arrangements with a number of technology vendors to obtain
privileged access to their technologies. By establishing these alliances,
Proxicom has broadened its client base and gained access to pre-release
technology which enables it to maintain leading-edge technical skills. Microsoft
and
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BroadVision have all provided advance versions of their technologies to
Proxicom. Obtaining the validation by industry leaders such as Microsoft and
America Online has added considerably to Proxicom's visibility, credibility and
brand image.
Proxicom has been a Microsoft Certified Solution Provider Partner since
1995, when it began actively cultivating a broad base of Microsoft products,
skills and certifications. In the spring of 1998, Proxicom was promoted to
Solutions Provider Partner, the highest level within that program. The Solution
Provider Partner program provides Internet-specific technical assistance.
Through this program, Microsoft and Proxicom conduct joint marketing efforts,
training programs and sales initiatives.
Also, Proxicom has become a BroadVision Integration Partner. BroadVision
and Proxicom work together to deploy BroadVision's "One-to-One" commerce
platform. In addition, several joint marketing events and sales activities are
planned. As an Integration Partner, Proxicom receives high-level technical and
sales support from BroadVision. Creating this relationship with BroadVision
allows Proxicom to enter the packaged applications systems integration market,
leveraging its Internet expertise with the market demand for rapid deployment of
new technology.
In March 1999, Proxicom signed an agreement with Ericsson
Telecommunicazioni SpA. Under the agreement, Proxicom made a 19.9% investment in
an Italian joint venture company, Eunosia Internet Architects. Ericsson owns the
remaining 80.1% interest. Proxicom provides Internet solutions to businesses
based in Italy through the joint venture company.
In July 1999, Proxicom signed an agreement with affiliates of Iberdrola.
Under the agreement, Proxicom will make a 19.9% investment in a Spanish joint
venture company, Kristina, Internet Business Solutions. Affiliates of Iberdrola
will own the remaining 80.1% interest. The initial share capital of Kristina,
Internet Business Solutions is approximately $7.4 million, which Proxicom and
the affiliates of Iberdrola will contribute in proportion to their shareholder
percentage interests. In late July 1999, Proxicom contributed approximately
$740,000 to fulfill half of its initial share capital obligation. Kristina,
Internet Business Solutions will provide Internet solutions to businesses based
in Spain.
On October 6, 1999, Proxicom signed an agreement with Intel Online
Services, Inc., a subsidiary of Intel Corporation, to establish a preferred
relationship for integrated hosting and Internet solutions development. Under
the agreement, Proxicom will receive preferred support and access to Intel
Online Services' marketing, solution validation and technology resources, and
Intel Online Services will be the preferred hosting provider for Proxicom's
Internet engagements. In addition, under the agreement, Proxicom will engage in
joint marketing activities with Intel Online Services and will work with Intel
Online Services to define a standard development and hosting platform for
Internet solutions.
PERSONNEL AND CULTURE
As of June 30, 1999, Proxicom had 481 employees. Of these, 392 were
consulting and service delivery professionals, and 89 were management and
administrative personnel performing marketing, sales, human resources, finance,
accounting, legal, internal information systems and administrative functions.
Proxicom believes that its ability to provide integrated business strategy,
technology and creative design services is dependent upon the continuation of
its culture of mutual respect among the three disciplines. As a result,
Proxicom's employees and its culture are fundamental to the value proposition it
offers clients. Proxicom's culture is predicated on personal integrity, open
communications, collaboration and professional development. Proxicom fosters an
entrepreneurial spirit that attracts talented professionals, creates innovative
solutions and provides the opportunity for every individual to succeed.
Proxicom places particular emphasis on recruiting and retaining people with
leading-edge technical skills and project management experience. Proxicom has
been very successful with internal referral-driven recruiting, which has
accounted for approximately one-third of its hires to date. Proxicom continues
to encourage employee referrals with monetary incentives. Proxicom has developed
a structured recruiting program including a staff of dedicated recruiters tasked
with bringing in experienced professionals, MBA
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and college hires, and maintaining a tracking database of potential candidates.
Proxicom runs a year-round internship program with several leading undergraduate
and MBA programs.
In addition to recruiting, Proxicom is committed to employee training and
retention. Proxicom has a dedicated organizational development team that
initiates and oversees the training and development of Proxicom's professionals.
Key organizational development initiatives include a week-long "bootcamp"
orientation and training program for all new employees and "Proxicom
University," which provides ongoing technical and project management classes as
well as career path management and guidance. To support its internal initiatives
for employee development, Proxicom has also instituted tuition reimbursement and
external training programs. Proxicom plans to continue to invest in attracting
the best employees and in maintaining a low turnover rate.
None of Proxicom's employees is represented by a labor union, nor has
Proxicom ever experienced a work stoppage. Proxicom believes its employee
relations are good.
COMPETITION
The market for Proxicom's services is subject to rapid technological change
and increased competition from large existing players, new entrants and internal
information systems groups. Traditional players competing in this space can be
broken down into four major categories -- large systems integrators (e.g.,
Andersen Consulting, Computer Sciences Corporation and International Business
Machines Corporation), specialty systems integrators (e.g., Cambridge Technology
Partners, Inc. and Sapient Corporation), strategy consulting firms (e.g., Boston
Consulting Group, Inc. and McKinsey & Company, Inc.), and Internet professional
services providers (e.g., iXL Enterprises, Inc., Scient Corporation, USWeb/CKS
and Viant Corporation -- many of which have considerably more financial
resources, marketing depth and name recognition than Proxicom. Occasionally
Proxicom competes with newer entrants including interactive marketing firms
(e.g., Agency.com, Ltd., Modem Media.Poppe Tyson, Inc., Organic, Inc. and
Razorfish, Inc.). Proxicom expects future consolidation in the Internet
professional services market to create larger, more viable competitors.
Potential clients' internal information systems groups also compete with
Proxicom.
Proxicom believes the principal competitive factors in the Internet
professional services market include Internet expertise and talent, quality,
pricing and speed of service delivery, client references, integrated strategy,
technology and creative design services and vertical industry knowledge.
Proxicom believes it competes favorably with respect to these factors. Proxicom
believes it is in a good position to attract talent with its growth and an
entrepreneurial culture. Proxicom believes it offers its clients a unique
combination of integrated strategy, technology and creative design services. In
addition, Proxicom believes it has established itself as a leader in
Internet-specific industry and domain expertise. Through its replicable solution
frameworks and its attention to client satisfaction, Proxicom has created a
strong track record of customer successes. Proxicom believes the market will
continue to offer significant opportunity for multiple players.
INTELLECTUAL PROPERTY RIGHTS
Proxicom's success is dependent, in part, upon its proprietary Proxicom
Process, its solution components, and other intellectual property rights. We do
not have any patents or patent applications pending. Proxicom relies on a
combination of trade secret, nondisclosure and other contractual agreements, and
copyright and trademark laws to protect its proprietary rights. Existing trade
secret and copyright laws afford us only limited protection. Proxicom enters
into confidentiality agreements with its employees, generally requires that its
consultants and clients enter into such agreements, and limits access to and
distribution of Proxicom's proprietary information. There can be no assurance
that the steps Proxicom has taken in this regard will be adequate to deter
misappropriation of its proprietary information or that Proxicom will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights.
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Proxicom's business generally involves the development of software
applications for specific client engagements. Ownership of such software is
frequently assigned to the client, with Proxicom retaining a license or other
contractual rights for limited uses.
FACILITIES
Proxicom's headquarters and principal administrative, finance, legal, sales
and marketing operations are located in approximately 65,000 square feet of
leased office space in Reston, VA. Proxicom's lease is for a term of seven years
and expires on July 13, 2002. The building is beneficially owned by Mario M.
Morino, one of our stockholders and a member of our board of directors. Proxicom
also leases office space in San Francisco, CA, New York, NY, Munich, Germany,
Chicago, IL, Sausalito, CA, Sacramento, CA, Houston, TX and Los Angeles, CA.
Proxicom expects that it will need additional space as it expands its business
and believes that it will be able to obtain space as needed.
LEGAL PROCEEDINGS
Proxicom is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information about each of Proxicom's executive
officers and directors. Proxicom's board of directors is divided into three
classes serving staggered three-year terms.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH COMPANY EXPIRES
- ------------------------------------- ---- ------------------------------------- --------
<S> <C> <C> <C>
Raul J. Fernandez.................... 33 President, Chief Executive Officer 2001
and Chairman
Larry D. Clark....................... 42 Executive Vice President, Chief
Operating Officer
Kenneth J. Tarpey.................... 46 Executive Vice President, Chief
Financial Officer and Treasurer
Brenda A. Wagner..................... 35 Senior Vice President, Organizational 2001
Strategies and Director
Michael A. Pusateri.................. 40 Senior Vice President, Sales and
Marketing
Christopher Capuano.................. 38 Senior Vice President, General
Counsel and Corporate Secretary
David C. Hodgson..................... 43 Director 2002
Jack Kemp............................ 64 Director 2000
Theodore J. Leonsis.................. 43 Director 2002
John A. McKinley, Jr. ............... 42 Director 2000
Mario M. Morino...................... 56 Director 2000
</TABLE>
Raul J. Fernandez founded Proxicom and has served as President, Chief
Executive Officer and Chairman of the board of directors of Proxicom since its
inception in 1991. Prior to starting Proxicom, Mr. Fernandez served as the
Director of Emerging Technologies at Digicon, Inc., a government contracting
firm. Mr. Fernandez is a member of the board of directors of the Northern
Virginia Technology Council, a trade organization.
Larry D. Clark has been Executive Vice President, Chief Operating Officer
since September 1999 and was Senior Vice President, Services from March 1998 to
September 1999. Prior to joining Proxicom, from May 1992 until March 1998, Mr.
Clark held various executive positions with MCI Systemhouse Corporation, the
systems integration, technology development and information technology
outsourcing arm of MCI Communications Corp., where he was, most recently, Vice
President and General Manager of the United States East Region and was
responsible for managing the company's East Region business unit. From 1990
until 1992, Mr. Clark was a Senior Engagement Manager at McKinsey & Company,
Inc., a consulting firm. Prior to that, Mr. Clark held various management
positions with The Information Consulting Group and Andersen Consulting.
Kenneth J. Tarpey has been Executive Vice President, Chief Financial
Officer and Treasurer of Proxicom since September 1999 and was Senior Vice
President, Chief Financial Officer and Treasurer from March 1997 to September
1999. Prior to joining Proxicom, from August 1996 until March 1997, Mr. Tarpey
served as Vice President and Chief Financial Officer of Nat Systems
International, Inc., a developer and vendor of software application development
tools. From April 1995 to August 1996, Mr. Tarpey served as Vice President,
Finance, Chief Financial Officer, Treasurer and Assistant Secretary of SQA,
Inc., a developer and marketer of automated quality testing software products.
From November 1989 to April 1995, Mr. Tarpey held various executive positions at
Symbolics, Inc., a hardware and software company, including Chairman of the
board of directors, President, Chief Executive Officer and Chief Financial
Officer.
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Brenda A. Wagner has been Senior Vice President, Organizational Strategies
and a director since August 1998. Prior to joining Proxicom, she was president
of IBIS Consulting, Inc., an Internet and information technology solutions
provider which she co-founded in February 1994 and which merged with Proxicom in
August 1998. From 1989 to 1993, Ms. Wagner was a Senior Consultant at Price
Waterhouse LLP.
Michael A. Pusateri has been Senior Vice President, Sales and Marketing
since June 1999. Prior to joining Proxicom, Mr. Pusateri served as Vice
President of Interactive Sales and Marketing for Marriott International, Inc.
from 1989 to June 1999. Prior to that, from 1986 to 1989, Mr. Pusateri was
Corporate Director of Interbrand Marketing for Holiday Corporation.
Christopher Capuano has been Senior Vice President, General Counsel and
Corporate Secretary of Proxicom since July 1999, was Vice President, General
Counsel and Corporate Secretary from June 1996 until July 1999 and was a
director from August 1996 until August 1998. Prior to joining Proxicom, from
1993 until June 1996, Mr. Capuano was a Manager and Senior Manager with Price
Waterhouse LLP. From 1994 to 1997, Mr. Capuano was also an Adjunct Professor of
Law at Georgetown University Law Center. Mr. Capuano was associated previously
with the law firm of Willkie, Farr & Gallagher.
David C. Hodgson has been a director of Proxicom since August 1996. Mr.
Hodgson is a managing member of General Atlantic Partners, LLC, a private equity
investment firm that invests in software services and Internet-related
information technology companies on a worldwide basis. Mr. Hodgson has been with
General Atlantic Partners, LLC (or its predecessor) since 1982. Mr. Hodgson is
also a director of Atlantic Data Services, Inc., a provider of professional
computer services for the banking industry, Baan Company N.V., a business
management software company, ProBusiness Services, Inc., an employee
administrative services company, and several private information technology
companies.
Jack Kemp has been a director of Proxicom since January 1997. Mr. Kemp has
been Co-Director of Empower America from 1993 to the present. Mr. Kemp served as
the Secretary of Housing and Urban Development from February 1989 until January
1992 and, before that, for 18 years as a member of the United States House of
Representatives. Mr. Kemp is also a director of Oracle Corporation, American
Bankers Insurance Group, Inc., Carson, Inc., a manufacturer and marketer of
personal care products, and The Sports Authority, Inc., a sporting goods
retailer.
Theodore J. Leonsis has been a director of Proxicom since January 1999. In
March 1999, Mr. Leonsis was appointed President, Interactive Properties Group of
America Online, Inc. From November 1996 to March 1999, Mr. Leonsis was President
of America Online Studios, a division of America Online, Inc. Prior to that, Mr.
Leonsis was President of America Online Services Company, also a division of
America Online, Inc. from 1994 to 1996. Mr. Leonsis was previously Chief
Executive Officer of Redgate Communications Corporation, a media marketing
company which was founded in 1987 and sold to America Online, Inc. in 1994. Mr.
Leonsis is also a director of U.S.A. Floral Products, Inc., a floral retailer,
and Preview Travel, Inc., an Internet travel company.
John A. McKinley, Jr. has been a director of Proxicom since January 1997.
Mr. McKinley has been Senior Vice President, Chief Technology Officer of Merrill
Lynch & Co., Inc. since October 1998. Prior to that, from 1995 to 1998, Mr.
McKinley was the Chief Technology and Information Officer for GE Capital
Corporation. From February 1982 until January 1995, Mr. McKinley held various
positions with Ernst & Young LLP, where he was most recently a partner
concentrating in the financial services and airline industries.
Mario M. Morino has been a director of Proxicom since January 1997. Mr.
Morino is an investor in and adviser to various firms in the information
technology sector. Mr. Morino was co-founder and Vice Chairman of Legent
Corporation until his retirement in September 1992.
BOARD COMMITTEES
The audit committee reviews, acts on and reports to the board of directors
with respect to various auditing and accounting matters. These matters include
the selection of Proxicom's auditors, the scope of
38
<PAGE> 43
the annual audits, fees to be paid to the auditors, the performance of
Proxicom's independent auditors and Proxicom's accounting practices. The audit
committee consists of Messrs. Hodgson and McKinley.
The compensation committee determines the salaries and incentive
compensation of Proxicom's officers and provides recommendations for the
salaries and incentive compensation of other employees and consultants. The
compensation committee also administers Proxicom's various incentive
compensation, stock and benefit plans. The compensation committee consists of
Messrs. Hodgson, Leonsis and Morino.
DIRECTOR COMPENSATION
Proxicom does not currently compensate its directors who are also employees
of Proxicom. Each non-employee director currently receives $1,500 of cash
compensation and is reimbursed for reasonable travel expenses for each board
meeting attended. For a description of the 1997 Stock Option Plan for Non-
Employee Directors, see "-- Stock Plans."
SEVERANCE AGREEMENTS
On February 16, 1999, Christopher Capuano, Larry D. Clark and Kenneth J.
Tarpey each entered into severance agreements with Proxicom. These agreements
provide that, in the event of termination, each of Messrs. Capuano, Clark and
Tarpey are to receive severance payments from Proxicom for services previously
rendered. These payments are to include the following amounts: (1) any
compensation accrued by the employee, but not yet paid by Proxicom, including
any unpaid salary, a pro rata portion of the employee's annual bonus and any
accrued vacation pay and (2) one year of the employee's salary and annual bonus.
Proxicom will also continue for a period of one year or such longer period as
may be required by law to provide benefits to the employee at least equal to
those that would have been provided to him had his employment not been
terminated. Messrs. Capuano, Clark and Tarpey are entitled to these payments and
benefits if (1) they are terminated other than for cause or (2) they terminate
their employment for good reason, as defined in the agreement, following a
change in control.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by
Proxicom's Chief Executive Officer and all other executive officers whose salary
and bonus for services rendered in all capacities to Proxicom for the fiscal
year ended December 31, 1998 exceeded $100,000. We will use the term "named
executive officers" to refer to these people later in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(S) SALARY BONUS OTHER OPTIONS/SARS
- -------------------------------------------------- -------- -------- ----- ------------
<S> <C> <C> <C> <C>
Raul J. Fernandez, Chairman, Chief Executive
Officer and President........................... $185,742 $ -- $720(1) --
Larry D. Clark, Executive Vice President, Chief
Operating Officer............................... 262,990 113,836 -- 300,000
Christopher Capuano, Senior Vice President,
General Counsel and Secretary................... 166,300 41,450 -- 25,000
Kenneth J. Tarpey, Executive Vice President, Chief
Financial Officer and Treasurer................. 154,553 44,250 -- 50,000
</TABLE>
- ---------------
(1) Pertains to an automobile allowance.
39
<PAGE> 44
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the options granted to each of Proxicom's
named executive officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE(2) DATE 5% 10%
- ---------------------------- ---------- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry D. Clark.............. 300,000 13.5% $4.77 3/30/08 $899,948 $2,280,645
Christopher Capuano......... 25,000 1.1% 4.77 1/23/08 74,996 190,054
Kenneth J. Tarpey........... 50,000 2.2% 7.00 4/1/08 220,113 557,810
</TABLE>
- ---------------
(1) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years). Assumed stock price appreciation of 5% and
10% is based on the fair value at the time of the grant. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the common stock, overall market conditions and the option holders'
continued employment through the vesting period. This table does not take
into account any appreciation in the price of the common stock from the date
of grant to date. Assuming the fair market value of the common stock at the
date of grant was the initial public offering price of $13.00 per share
(which is significantly less than the last sales price of the common stock
on June 30, 1999), the potential realizable value of these options at a 5%
assumed annual rate of stock price appreciation would be $4,921,687 for Mr.
Clark, $410,140 for Mr. Capuano and $708,781 for Mr. Tarpey.
(2) The exercise price equals the fair market value of the common stock as of
the grant date as determined by the board of directors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents information with respect to stock options
owned by the named executive officers at December 31, 1998 and with respect to
stock options exercised by the named executive officers during the fiscal year
ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Larry D. Clark................................ -- 300,000 $ -- $2,469,000
Christopher Capuano........................... 20,000 55,000 189,650 483,700
Kenneth J. Tarpey............................. 25,000 125,000 220,750 962,250
</TABLE>
- ---------------
(1) There was no public trading market for the common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of
Proxicom's initial public offering price of $13.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options.
STOCK PLANS
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan provides for the grant of options and other
stock-based compensation to employees, directors, officers and consultants of
Proxicom. There are 7,000,000 shares of common stock reserved for issuance under
this plan. Options granted under this plan typically vest over time, subject to
acceleration in the event of a change of control of Proxicom. No option granted
under this plan is exercisable after the tenth anniversary of the option's date
of grant.
40
<PAGE> 45
1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1997 Stock Option Plan for Non-Employee Directors provides for
automatic grants of stock options to eligible non-employee directors. There are
350,000 shares of common stock reserved for issuance under this plan. Under the
Directors Plan, each non-employee director is granted an option to purchase
35,000 shares of common stock upon first election to the board. Each
non-employee director is also granted an additional option to purchase 35,000
shares of common stock upon reelection to the board. See "-- Director
Compensation." Options granted under this plan before December 15, 1998 vest
over three years, subject to acceleration in the event of a change of control of
Proxicom. Options granted after December 15, 1998 vest on the date of grant. No
option granted under this plan is exercisable after the tenth anniversary of the
option's date of grant.
EMPLOYEE STOCK PURCHASE PLAN
Proxicom's Employee Stock Purchase Plan provides for the issuance of
1,000,000 shares of common stock. All Proxicom employees whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the Stock Purchase Plan, provided
that any employee who would own five percent or more of the total combined
voting power or value of Proxicom's stock immediately after any grant is not
eligible to participate. Eligible employees must authorize Proxicom to deduct an
amount from their pay during offering periods established by the compensation
committee. Common stock may be purchased at not less than 85% of the lesser of
the closing price of the common stock on the day preceding the first business
day or the last business day of each offering period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For more information about transactions and relationships between Proxicom
and Messrs. Hodgson, Leonsis and Morino, you should see the "-- Executive
Officers and Directors" and "Certain Transactions" subsections of this
prospectus.
41
<PAGE> 46
CERTAIN TRANSACTIONS
STOCK PURCHASE AGREEMENTS AND RELATED MATTERS
SERIES A PURCHASE AGREEMENT
On August 30, 1996, Proxicom sold the following numbers of shares of Series
A convertible preferred stock to the following purchasers at a price of $3.27
per share.
<TABLE>
<S> <C>
General Atlantic Partners 34, L.P. ....................... 1,389,218
GAP Coinvestment Partners, L.P. .......................... 240,751
</TABLE>
At the same time, Proxicom also granted General Atlantic Partners 34 and
GAP Coinvestment warrants exercisable for 861,834 shares and 149,544 shares,
respectively, of Series A preferred stock, or common stock in the event of an
initial public offering of securities, at an exercise price of $7.91 per share.
In this transaction, Proxicom repurchased from Mr. Fernandez, Proxicom's
Chairman, President and Chief Executive Officer, 100,917 shares of common stock
at a price of $3.27 per share. In addition, Proxicom, General Atlantic Partners
34, GAP Coinvestment and Mr. Fernandez entered into a registration rights
agreement. See "-- Registration Rights Agreement." Under the terms of the Series
A convertible preferred stock, Mr. Hodgson was elected to the board of
directors. See "Management." In January 1998, General Atlantic Partners 34 and
GAP Coinvestment converted 347,311 shares and 60,189 shares of Series A
preferred stock, respectively, into an equivalent number of shares of common
stock. General Atlantic Partners 34 and GAP Coinvestment exercised their
warrants on April 13, 1999. At the closing of Proxicom's initial public
offering, all shares of Series A convertible preferred stock were converted to
common stock on a one-for-one basis.
SERIES B PURCHASE AGREEMENT
On February 20, 1997, Proxicom sold the following numbers of shares of
Series B convertible preferred stock to the following purchasers at a price of
$4.17 per share.
<TABLE>
<S> <C>
General Atlantic Partners 34, L.P. ........................ 81,535
GAP Coinvestment Partners, L.P. ........................... 14,388
FBR Technology Venture Partners L.P. ...................... 23,981
The Mario M. Morino Trust.................................. 239,808
</TABLE>
In this transaction, Proxicom repurchased from Mr. Fernandez 359,712 shares
of common stock at a price of $4.17 per share. Also, FBR Technology Venture
Partners and the Morino Trust became parties to the above referenced
registration rights agreement. See "-- Registration Rights Agreement." Under the
stockholders agreement's terms, Mr. Morino was elected to the board of
directors. See "Management." At the closing of Proxicom's initial public
offering, all shares of Series B convertible preferred stock were converted to
common stock on a one-for-one basis.
SERIES C PURCHASE AGREEMENT
On November 24, 1997, Proxicom sold 419,302 shares of Proxicom Series C
convertible preferred stock to GE Capital Corporation at a price of $4.77 per
share. In this transaction, GE Capital became a party to the above referenced
registration rights agreement. See "-- Registration Rights Agreement." At the
closing of Proxicom's initial public offering, all shares of Series C
convertible preferred stock were converted to common stock on a one-for-one
basis.
42
<PAGE> 47
SERIES D PURCHASE AGREEMENT
On February 1, 1999, Proxicom sold the following number of shares of Series
D convertible preferred stock to the following purchasers at a purchase price of
$6.00 per share.
<TABLE>
<S> <C>
Jack Kemp................................................. 16,373
Theodore Leonsis.......................................... 43,660
John McKinley............................................. 43,660
General Atlantic Partners 52, L.P. ....................... 628,850
GAP Coinvestment Partners II, L.P. ....................... 141,571
The Mario M. Morino Trust................................. 54,575
GE Capital Equity Investments, Inc. ...................... 250,350
The Washington Post Company............................... 39,294
</TABLE>
In this transaction, all new investors became parties to the registration
rights agreement. See "-- Registration Rights Agreement." Also, simultaneously
with this transaction, Messrs. Fernandez, Hoenigman, McDonald and Ms. Wagner
sold a total of 698,667 shares of common stock to the purchasers of the Series D
preferred stock for aggregate consideration of $4.2 million. At the closing of
Proxicom's initial public offering, all shares of Series D convertible preferred
stock were converted to common stock on a one-for-one basis.
REGISTRATION RIGHTS AGREEMENT
Proxicom has a registration rights agreement with Messrs. Fernandez,
Hoenigman, McDonald and Ms. Wagner, the former stockholders of ad hoc
Interactive, Inc., each of its former preferred stockholders and General
Electric Company. After this offering closes, the stockholder parties to this
agreement will own beneficially an aggregate of 16,065,012 shares of common
stock. General Atlantic Partners 34 and 52, GAP Coinvestment and GAP
Coinvestment II are entitled to demand registration rights under the Securities
Act, subject to limitations. This means that they can demand that Proxicom
register the sale of their shares. In addition, in the event that Proxicom
proposes to register any shares of its common stock under the Securities Act,
either for its account or for the account of other security holders, all
stockholder parties are entitled to receive notice of the registration and are
entitled to include their shares in it. The underwriters of an offering can
limit the number of shares of common stock held by security holders with
registration rights to be included in the registration. Of the shares of common
stock being sold by the selling stockholders, 2,570,000 shares are being offered
pursuant to the exercise of these registration rights.
OTHER TRANSACTIONS
In December 1995, Proxicom loaned $155,000 to a partnership owned by Mr.
Fernandez. The partnership purchased computer equipment with the borrowed funds
and leased the equipment to Proxicom. The partnership ceased operations in 1997
and all assets and liabilities of the partnership were transferred to Proxicom
at book value of approximately $90,000.
In February 1997, Proxicom leased approximately 65,000 square feet of
office space in Reston, VA. The lessor is 11600 Sunrise Limited Partnership, a
limited partnership of which Mario M. Morino, a Proxicom director and
stockholder, is the general partner. The lease term commenced on July 1, 1997
and has a seven-year term. Lease payments totaled approximately $331,000 for
1997 and $864,000 for 1998 and will increase at an annual rate of 3.0%.
During the fiscal years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999, Merrill Lynch, of which Mr. McKinley is Senior Vice
President and Chief Technology Officer, paid Proxicom approximately $1,031,940,
$235,515 and $1,448,025 for Internet professional services. Proxicom expects to
continue to provide Internet professional services to Merrill Lynch.
We believe that all transactions disclosed above were made on terms no less
favorable to Proxicom than would have been obtained from unaffiliated third
parties.
43
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of September 15, 1999 and as adjusted to reflect the sale of
common stock in this offering by
- each person (or group of affiliated persons) who is the beneficial owner
of more than 5% of the outstanding common stock;
- each of the named executive officers;
- each Proxicom director;
- all of the executive officers and directors as a group; and
- each selling stockholder.
The persons named in this table have sole voting power for all shares of
common stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, or SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days after September 15, 1999 are deemed
outstanding. Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- SHARES -----------------------
NAME NUMBER PERCENTAGE TO BE SOLD NUMBER PERCENTAGE
- ---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Raul J. Fernandez(1)................. 8,101,759 32.5% 950,000 7,151,759 27.6%
General Atlantic Partners, LLC(2).... 3,917,664 15.7% 597,050 3,320,614 12.8%
General Atlantic Partners 34,
LP(1)(2)........................... 2,332,587 9.4% 508,788 1,823,799 7.0%
GAP Coinvestment Partners LP(1)(2)... 408,683 1.6% 88,262 320,421 1.2%
Christopher Capuano(3)............... 63,750 * 10,000 53,750 *
Larry D. Clark....................... 120,000 * -- 120,000 *
Kenneth J. Tarpey(4)................. 65,500 * 20,000 45,500 *
David C. Hodgson(2)(5)............... 3,940,998 15.8% 597,050 3,343,948 12.9%
Jack Kemp(6)......................... 48,334 * 20,000 28,334 *
Theodore J. Leonsis(7)............... 101,667 * -- 101,667 *
John A. McKinley, Jr.(8)............. 90,001 * 9,000 81,001 *
Mario M. Morino(9)................... 351,475 1.4% -- 351,475 1.4%
Brenda A. Wagner(10)................. 1,731,820 6.9% 173,000 1,558,069 6.0%
Jeremy Wagner(10).................... 1,736,069 7.0% 173,000 1,563,069 6.0%
Vincent Hoenigman.................... 1,196,494 4.8% 100,000 1,096,494 4.2%
Scott McDonald....................... 1,177,983 4.7% 117,000 1,060,983 4.1%
The Washington Post Company.......... 60,000 * 60,000 -- *
GE Capital Equity
Investments(1)(11)................. 918,241 3.7% 350,017 568,224 2.2%
Aaron Singer(12)..................... 398,209 1.6% 100,000 298,209 1.2%
Megan Wheeler(13).................... 348,433 1.4% 90,000 258,433 1.0%
Shawn McKee.......................... 2,489 * 489 2,000 *
Daphne Humes......................... 4,978 * 200 4,778 *
Chris Kelly.......................... 4,978 * 100 4,878 *
Scott Hartwig........................ 4,978 * 1,000 3,978 *
Sheryl Chapman....................... 3,484 * 400 3,084 *
Andrew Newell........................ 996 * 300 696 *
Steven Heard......................... 946 * 946 -- *
Roby Gilbert......................... 996 * 498 498 *
All executive officers and directors
as a group (11 persons)............ 14,615,304 58.3% 1,779,050 12,836,254 49.2%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares.
44
<PAGE> 49
(1) The numbers in the table above assume no exercise of the underwriters'
over-allotment option. If the option is exercised in full, Mr. Fernandez,
GE Capital Equity Investments, General Atlantic Partners 34, LP and GAP
Coinvestment Partners LP will sell 257,000, 50,000, 198,556 and 34,444
additional shares of common stock, respectively, reducing their beneficial
ownership after the offering to 6,894,759, 518,224, 1,625,243 and 285,977
shares, respectively.
(2) General Atlantic Partners 34 holds 2,332,587 shares of common stock. GAP
Coinvestment holds 408,683 shares of common stock. General Atlantic
Partners 52 holds 960,222 shares of common stock. GAP Coinvestment II holds
216,172 shares of common stock. The general partner of General Atlantic
Partners 34 and General Atlantic Partners 52 is GAP LLC, a Delaware limited
liability company. The managing members of GAP LLC are also the general
partners of GAP Coinvestment and GAP Coinvestment II. Mr. Hodgson is a
managing member of GAP LLC. Mr. Hodgson is a general partner of GAP
Coinvestment and GAP Coinvestment II. General Atlantic Partners 34, General
Atlantic Partners 52, GAP Coinvestment, GAP Coinvestment II and GAP LLC,
together, are a "group" within the meaning of Rule 13d-5 of the Securities
Exchange Act of 1934. Mr. Hodgson disclaims beneficial ownership of the
securities held by General Atlantic Partners 34, General Atlantic Partners
52, GAP Coinvestment and GAP Coinvestment II, except to the extent of his
respective pecuniary interest in those entities. The address of GAP LLC and
Mr. Hodgson is c/o General Atlantic Service Corporation, 3 Pickwick Plaza,
Greenwich, CT 06830.
(3) Includes 7,500 shares of common stock issuable upon the exercise of stock
options.
(4) Includes 12,500 shares of common stock issuable upon the exercise of stock
options and 3,000 shares of common stock owned by members of Mr. Tarpey's
immediate family.
(5) Includes all of the shares beneficially owned by GAP LLC and 23,334 shares
of common stock issuable upon the exercise of stock options.
(6) Includes 23,334 shares of common stock issuable upon the exercise of stock
options.
(7) Includes 35,000 shares of common stock issuable upon the exercise of stock
options.
(8) Includes 23,334 shares of common stock issuable upon the exercise of stock
options.
(9) Includes 23,334 shares of common stock issuable upon the exercise of stock
options.
(10) Includes 1,552,738 shares of common stock held in trust by Ms. Wagner and
her husband Jeremy Wagner. Mr. and Ms. Wagner share voting and investment
power with respect to these shares.
(11) GE Capital Equity Investments holds 498,939 shares of common stock. GE
Capital Corporation holds 419,302 shares of common stock. GE Capital Equity
Investments and GE Capital Corporation, together, are a "group" within the
meaning of Rule 13d-5 of the Securities Exchange Act of 1934.
(12) Includes 39,821 shares of common stock held in escrow over which Mr. Singer
has sole voting power.
(13) Includes 34,843 shares of common stock held in escrow over which Ms.
Wheeler has sole voting power.
45
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
Proxicom's authorized capital stock consists of 100,000,000 shares of
common stock, $.01 par value per share, and 10,000,000 shares of preferred
stock, $.01 par value per share.
COMMON STOCK
As of September 15, 1999, there were 24,925,792 shares of common stock
outstanding and held of record by 211 stockholders. Based upon the number of
shares outstanding as of September 15, 1999 and giving effect to the issuance of
1,000,000 shares of common stock by Proxicom in this offering, there will be
25,925,792 shares of common stock outstanding upon completion of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. They do not have cumulative voting
rights. As a result, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably,
dividends, if any, as the board of directors may declare out of funds legally
available, subject to any preferential dividend rights of any then-outstanding
preferred stock. Upon the liquidation, dissolution or winding up of Proxicom,
the holders of common stock are entitled to receive ratably the net assets of
Proxicom available after the payment of all debts and other liabilities and
subject to the prior rights of any then-outstanding preferred stock. Holders of
the common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares offered by
Proxicom in the offering will be, when issued in consideration for payment,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which Proxicom may
designate and issue in the future. See "-- Preferred Stock."
On September 24, 1999, Proxicom and General Electric Company entered into a
Master Services Agreement. As part of the agreement, Proxicom issued General
Electric a warrant to purchase 150,000 shares of common stock at an exercise
price of $49.88 per share, the closing price of the common stock on the date of
the agreement. The warrant is fully vested and is exercisable until September
24, 2000.
PREFERRED STOCK
The board of directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 10,000,000 shares of preferred
stock in one or more series. The board of directors may fix or alter the
designations, preferences, rights and any qualification, limitations or
restrictions of the shares of any series, including the dividend rights,
dividend rates, conversion rights, voting rights, redemption terms and prices,
liquidation preferences and the numbers of shares constituting any series. No
shares of preferred stock are currently outstanding. Although the ability of the
board of directors to designate and issue preferred stock could provide
flexibility in possible acquisitions or other corporate purposes, issuance of
preferred stock may have adverse effects on the holders of common stock. The
effects could include
- restrictions on dividends on the common stock if dividends on the
preferred stock have not been paid;
- dilution of voting power of the common stock to the extent the preferred
stock has voting rights; or
- deferral of participation in Proxicom's assets upon liquidation until
satisfaction of any liquidation preference granted to holders of the
preferred stock.
In addition, issuance of preferred stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock and
accordingly may be used as an "anti-takeover" device. The
46
<PAGE> 51
board of directors, however, currently does not contemplate the issuance of any
preferred stock and is not aware of any pending transactions that would be
affected by such issuance.
ANTI-TAKEOVER EFFECTS OF PROXICOM'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Proxicom's certificate of incorporation and bylaws and provisions of
Delaware corporate law may hinder or delay a third party's attempt to acquire
Proxicom. They may also make it difficult for the stockholders to remove
incumbent management.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL; VACANCIES
The certificate of incorporation divides the board of directors into three
classes. The directors in each class serve three-year terms. The directors'
terms are staggered by class. Proxicom's classified board of directors is
intended to provide continuity and stability in the board of director's
membership and policies. However, the classified board of directors makes it
more difficult for stockholders to change the board of directors' composition
quickly. Also, under the certificate of incorporation, directors may be removed
only for cause by a two-thirds stockholder vote. In addition, a majority of the
directors then in office can fill board vacancies and newly created
directorships resulting from any increase in the size of the board of directors.
This is true even if those directors do not constitute a quorum or if only one
director is left in office. These provisions could prevent stockholders,
including parties who want to take over or acquire Proxicom, from removing
incumbent directors without cause and filling the resulting vacancies with their
own nominees.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
The bylaws contain an advance notice procedure regarding nominations of
directors by stockholders and other stockholder proposals. For matters a
stockholder wishes to bring before an annual meeting of stockholders, the
stockholder must deliver Proxicom notice not less than 60 days nor more than 90
days before the first anniversary of the preceding year's annual meeting of
nominations and other business to be brought before a Proxicom annual meeting.
At a special meeting of stockholders called to elect directors,
stockholders can make a nomination only if they deliver to Proxicom a notice
that complies with the above requirements to Proxicom no later than the tenth
day following the day on which public announcement of the special meeting is
made. The bylaws could preclude a nomination for the election of directors or
the conduct of certain business at a particular meeting if the proper procedures
are not followed. This may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of Proxicom.
SPECIAL STOCKHOLDERS' MEETINGS
Proxicom's certificate of incorporation and bylaws permit special meetings
of the stockholders to be called only by the board of directors, the Chairman,
the Chief Executive Officer or the President or holders of at least 75% of
Proxicom's securities that are outstanding and entitled to vote in an election
of directors.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT
The certificate of incorporation places limits on the stockholders' ability
to act by written consent. Specifically, any action to be taken at a
stockholders' meeting may be taken without a meeting only if consented to
generally by stockholders having voting power of at least 75% of the voting
power of all shares of each class or series entitled to vote on the action.
47
<PAGE> 52
AUTHORIZED BUT UNISSUED SHARES
Proxicom, without stockholder approval, can issue shares of common stock
and preferred stock up to the number of shares authorized for issuance in its
certificate of incorporation, except as limited by Nasdaq rules. Proxicom could
use these additional shares for a variety of corporate purposes. These purposes
include future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. Proxicom's ability to issue these
shares of common stock and preferred stock could make it more difficult or
discourage an attempt to obtain control of Proxicom by means of a proxy contest,
tender offer, merger or otherwise.
SECTION 203 OF DELAWARE LAW
Section 203 of the Delaware General Corporation Law prohibits Proxicom from
engaging in a "business combination" with an "interested stockholder." This
restriction applies for three years after the date of the transaction in which
the person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes (1) mergers,
(2) asset sales and (3) other transactions resulting in a financial benefit to
an interested stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns, or within three years did
own, 15% or more of Proxicom's voting stock. Section 203 could delay, defer or
prevent a change in control of Proxicom. It might also reduce the price that
investors might be willing to pay in the future for shares of common stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The certificate of incorporation provides that directors of Proxicom will
not be personally liable to Proxicom or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (1) for any
breach of the director's duty of loyalty to Proxicom or its stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under a provision of Delaware law relating to
unlawful payment of dividends or unlawful stock purchase or redemption of stock
or (4) for any transaction from which the director derives an improper personal
benefit. As a result of this provision, Proxicom and its stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
The bylaws provide for the indemnification of directors and officers and
any person who is or was serving at the request of Proxicom as a director,
officer, employee, partner or agent of another corporation or of a partnership,
joint venture, limited liability company, trust or other enterprise to the
fullest extent authorized by, and subject to the conditions set forth in, the
Delaware General Corporation Law against all expenses, liabilities and losses.
The indemnification provided under the bylaws includes the right to be paid by
Proxicom the expenses in advance of any proceeding for which indemnification may
be had in advance of its final disposition.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is The Bank of New
York.
48
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set forth in an agreement among the
underwriters, and the selling stockholders and us, each of the underwriters
named below, through their representatives, Thomas Weisel Partners LLC, First
Union Securities, Inc., Friedman, Billings, Ramsey & Co., Inc., Prudential
Securities Incorporated and E*OFFERING Corp. has severally agreed to purchase
from us and the selling stockholders the aggregate number of shares of common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------- ---------
<S> <C>
Thomas Weisel Partners LLC............................... 1,621,500
First Union Securities, Inc.............................. 634,500
Friedman, Billings, Ramsey & Co., Inc. .................. 634,500
Prudential Securities Incorporated....................... 634,500
E*OFFERING Corp. ........................................ 75,000
---------
Total.......................................... 3,600,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions, such as approval of legal
matters by counsel. The nature of the underwriters' obligations is such that
they are committed to purchase and pay for all of the shares of common stock
listed above if any are purchased.
The underwriting agreement provides that we and the selling stockholders
will indemnify the underwriters against liabilities specified in the
underwriting agreement under the Securities Act of 1933, as amended, or will
contribute to payments that the underwriters may be required to make relating to
these liabilities.
OVER-ALLOTMENT OPTION
Four of the selling stockholders have granted a 30-day over-allotment
option to the underwriters to purchase up to an aggregate of 540,000 additional
shares of common stock at the public offering price less the underwriting
discount and commissions as set forth on the cover page of this prospectus. If
the underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to conditions described in the
underwriting agreement, to purchase the additional shares of common stock in
proportion to their respective purchase commitments set forth in the above
table.
DISCOUNT AND COMMISSIONS
The underwriters propose to offer the shares of common stock, except for
100,000 shares offered to Intel Corporation as described below, directly to the
public at the public offering price set forth on the cover page of this
prospectus, and at such price less a concession not in excess of $1.57 per share
of common stock to other dealers specified in a master agreement among
underwriters that are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and such dealers may reallow, concessions not
in excess of $0.10 per share of common stock to these other dealers. After this
offering, the offering price, concessions and other selling terms may be changed
by the underwriters. The common stock is offered subject to receipt and
acceptance by the underwriters and to other conditions, including the right to
reject orders in whole or in part.
49
<PAGE> 54
This table summarizes the compensation to be paid to the underwriters by us
and the selling stockholders and the expenses payable by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discount and commissions.................... $2.62 $9,170,000 $10,584,800
Expenses................................................. 0.17 620,000 620,000
</TABLE>
The above table assumes that Intel will purchase 100,000 shares of common
stock in this offering, on which no underwriting discount or commissions would
be paid.
PURCHASES BY INTEL
Intel has expressed an interest in purchasing, and the underwriters have
reserved for sale to Intel, 100,000 shares of common stock in this offering at
$49.76 per share. The underwriters will not receive any fees or commissions with
respect to any shares sold to Intel in this offering. The number of shares
available for sale to the general public in this offering will be reduced to the
extent Intel purchases such shares. There can be no assurance that Intel will
purchase any shares in this offering. The underwriters will offer to the general
public any shares Intel does not purchase in this offering on the same terms as
the other shares offered under this prospectus.
NO SALES OF SIMILAR SECURITIES
All of our officers and directors, and several of our stockholders and
option holders, have agreed that they will not offer, sell, agree to sell
(directly or indirectly) or otherwise dispose of any shares of common stock
without the prior written consent of Thomas Weisel Partners LLC for a period of
90 days after the date of this prospectus.
In addition, we have agreed that for a period of 90 days after the date of
this prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell or otherwise dispose of any shares of our capital
stock, except for the shares of common stock being offered and the shares of
common stock issuable upon the exercise of options and warrants outstanding on
the date of this prospectus.
INFORMATION REGARDING CERTAIN REPRESENTATIVES OF THE UNDERWRITERS
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead-manager or co-manager
on 75 public offerings of equity securities, of which 43 have been completed,
and has acted as a syndicate member in an additional 35 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except that Jack Kemp is a member of Proxicom's board of directors and a member
of the advisory board of Thomas Weisel Partners LLC and except with respect to
its contractual relationship with us under the underwriting agreement entered
into in connection with this offering.
FBR Technology Venture Partners L.P., an affiliate of Friedman, Billings,
Ramsey & Co., Inc., owns 23,981 shares of our common stock.
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In order to facilitate this offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may
50
<PAGE> 55
stabilize or maintain the price of the common stock by bidding for or purchasing
shares of common stock in the open market and may impose penalty bids. Under
these penalty bids, selling concessions that are allowed to syndicate members or
other broker-dealers participating in this offering are reclaimed if shares of
common stock previously distributed in this offering are repurchased, usually in
order to stabilize the market. The effect of these transactions may be to
stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and may
be discontinued at any time after they are commenced.
AVAILABILITY OF THIS PROSPECTUS IN ELECTRONIC FORMAT
A copy of this prospectus in electronic format will be made available on
the Internet web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc.
E*TRADE will accept conditional offers to purchase shares from all of its
customers that pass and complete an online eligibility profile. If the demand
for shares from the customers of E*TRADE exceeds the amount of shares allocated
to it, E*TRADE will use a random allocation methodology to distribute shares in
even lots of 100 shares per customer.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and other
legal matters will be passed upon for Proxicom by Hogan & Hartson L.L.P.,
Washington, D.C. Legal matters in connection with the offering will be passed
upon for the underwriters by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It
includes exhibits and schedules. This prospectus is part of the registration
statement. It does not contain all of the information that is in the
registration statement. The registration statement contains more information
about Proxicom and the common stock. Statements contained in this prospectus
concerning the provisions of documents filed as exhibits to the registration
statement are necessarily summaries which disclose the material terms of such
documents. Each of these statements is qualified in its entirety by reference to
the copy of the applicable document filed with the SEC. In addition, Proxicom
files annual, quarterly and current reports, proxy statements and other
information with the SEC.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information Proxicom files at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room's operations. Proxicom's SEC filings, including the
registration statement, are also available to you on the SEC's Internet site
(http://www.sec.gov).
51
<PAGE> 56
PROXICOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Proxicom, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Proxicom, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 2, on March 26, 1999, Proxicom, Inc. merged with ad
hoc Interactive, Inc. in a transaction accounted for as a pooling of interests.
The accompanying consolidated financial statements give retroactive effect to
the merger of Proxicom, Inc. with ad hoc Interactive, Inc.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 5, 1999, except as to the
pooling of interests with ad hoc Interactive, Inc.
which is as of March 26, 1999
F-2
<PAGE> 58
PROXICOM, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,343 $ 2,586 $ 2,643
Investments............................................. 1,101 278 56,402
Accounts receivable, net of allowance of $660, $669 and
$595, respectively..................................... 7,855 9,893 15,018
Unbilled services....................................... 1,369 4,259 6,681
Prepaid income taxes.................................... 207 130 209
Prepaid expenses........................................ 305 402 1,407
Other current assets.................................... 175 301 374
------- ------- -------
Total current, assets............................... 13,355 17,849 82,734
Property and equipment, net............................. 2,678 2,944 3,570
Deferred tax assets and other........................... 284 1,758 1,826
------- ------- -------
Total assets........................................ $16,317 $22,551 $88,130
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit......................................... $ 287 $ 5,554 $ --
Trade accounts payable.................................. 1,249 662 1,722
Accrued compensation.................................... 1,404 3,779 3,562
Deferred revenue........................................ 1,218 1,889 1,910
Deferred tax liabilities................................ 616 1,423 1,423
Note payable............................................ -- 1,400 --
Other accrued liabilities............................... 1,047 1,215 667
------- ------- -------
Total current liabilities........................... 5,821 15,922 9,284
------- ------- -------
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized at December 31, 1997 and 1998; 10,000,000
shares authorized at June 30, 1999 (unaudited); no
shares issued and outstanding at June 30, 1999
(unaudited):........................................... -- -- --
Series A convertible preferred stock; 1,629,969
shares issued and outstanding at December 31, 1997;
1,629,969 shares issued and 1,222,469 shares
outstanding at December 31, 1998; none issued and
outstanding at June 30, 1999 (unaudited):........... 16 12 --
Series B convertible preferred stock; 359,712 shares
authorized, issued and outstanding at December 31,
1997 and 1998 and none issued and outstanding at
June 30, 1999 (unaudited)........................... 4 4 --
Series C convertible preferred stock; 419,302 shares
authorized, issued and outstanding at December 31,
1997 and 1998 and none issued and outstanding at
June 30, 1999 (unaudited)........................... 4 4 --
Common stock, $.01 par value, 20,000,000 shares
authorized; 13,776,431 shares and 15,431,306 shares
issued at December 31, 1997 and 1998, respectively;
13,315,802 and 15,378,177 shares outstanding at December
31, 1997 and 1998, respectively; 100,000,000 shares
authorized, 24,797,902 shares issued and 24,744,773
shares outstanding at June 30, 1999 (unaudited)......... 138 154 248
Additional paid-in capital................................ 8,846 25,578 102,112
Retained earnings (deficit)............................... 3,315 (18,904) (23,292)
Comprehensive income...................................... 3 3 --
Treasury stock............................................ (1,830) (222) (222)
------- ------- -------
Total stockholders' equity.......................... 10,496 6,629 78,846
------- ------- -------
Total liabilities and stockholders' equity.......... $16,317 $22,551 $88,130
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 59
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................... $13,372 $28,452 $ 44,006 $18,551 $29,475
Cost of revenue............................. 5,085 12,736 24,928 10,343 16,703
------- ------- -------- ------- -------
Gross profit................................ 8,287 15,716 19,078 8,208 12,772
------- ------- -------- ------- -------
Operating expenses:
General and administrative................ 5,746 10,180 16,397 7,592 10,158
Selling and marketing..................... 670 1,710 2,919 1,363 1,437
Research and development.................. 404 961 692 448 --
Acquisition and merger costs.............. -- -- 2,886 130 300
Stock-based and other compensation........ 8 44 18,308 57 225
------- ------- -------- ------- -------
Total............................. 6,828 12,895 41,202 9,590 12,120
------- ------- -------- ------- -------
Income (loss) from operations............... 1,459 2,821 (22,124) (1,382) 652
Interest income (expense), net.............. 55 80 (121) 17 411
------- ------- -------- ------- -------
Income (loss) before income taxes........... 1,514 2,901 (22,245) (1,365) 1,063
Income tax provision (benefit).............. 185 330 (900) (943) 447
------- ------- -------- ------- -------
Net income (loss)........................... 1,329 2,571 (21,345) (422) 616
Non-cash dividend on beneficial conversion
of convertible preferred stock............ -- -- -- -- (4,873)
------- ------- -------- ------- -------
Net income (loss) available to common
stockholders.............................. $ 1,329 $ 2,571 $(21,345) $ (422) $(4,257)
======= ======= ======== ======= =======
Basic net income (loss) per common share.... $0.10 $0.19 $(1.46) $(0.03) $(0.22)
======= ======= ======== ======= =======
Diluted net income (loss) per common
share..................................... $0.09 $0.15 $(1.46) $(0.03) $(0.22)
======= ======= ======== ======= =======
Weighted average common shares
outstanding............................... 13,740 13,374 14,576 13,790 19,117
Weighted average common shares and common
share equivalents......................... 14,310 17,128 14,576 13,790 19,117
Unaudited pro forma data (Note 3):
Basic net loss per common share........... $(1.29) $(0.20)
======== =======
Diluted net loss per common share......... $(1.29) $(0.20)
======== =======
Weighted average common shares
outstanding............................ 16,577 20,814
Weighted average common shares and common
share equivalents...................... 16,577 20,814
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 60
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK PREFERRED STOCK ADDITIONAL GAIN
------------------- ------------------- PAID-IN (LOSS) ON
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES
---------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.............. 13,238,444 $133 -- $ -- $ -- $ --
Issuance of preferred Series A and
warrants................................. -- -- 1,629,969 16 5,314 --
Capitalization of Square Earth, Inc. ..... 534,999 5 -- -- 17 --
Stock-based compensation.................. -- -- -- -- 31 --
Unearned stock-based compensation......... -- -- -- -- (23) --
Treasury stock acquired................... -- -- -- -- -- --
Comprehensive income (loss)............... -- -- -- -- -- (4)
Net income................................ -- -- -- -- -- --
Subchapter S Corporation distributions.... -- -- -- -- -- --
---------- ---- ---------- ---- -------- ----
Balance at December 31, 1996.............. 13,773,443 138 1,629,969 16 5,339 (4)
Issuance of preferred Series B............ -- -- 359,712 4 1,496 --
Stock-based compensation.................. -- -- -- -- 63 --
Unearned stock-based compensation......... -- -- -- -- (19) --
Exercise of stock options and issuance of
restricted shares........................ 2,988 -- -- -- -- --
Treasury stock acquired................... -- -- -- -- -- --
Issuance of preferred Series C............ -- -- 419,302 4 1,967 --
Comprehensive income...................... -- -- -- -- -- 7
Net income................................ -- -- -- -- -- --
Subchapter S Corporation distributions.... -- -- -- -- -- --
---------- ---- ---------- ---- -------- ----
Balance at December 31, 1997.............. 13,776,431 138 2,408,983 24 8,846 3
Conversion of preferred Series A.......... -- -- (407,500) (4) (1,604) --
Exercise of stock options and issuance of
restricted shares........................ 158,381 1 -- -- 302 --
Subchapter S Corporation distributions.... -- -- -- -- -- --
Stock-based compensation.................. 1,496,494 15 -- -- 18,531 --
Unearned stock-based compensation......... -- -- -- -- (497) --
Net loss.................................. -- -- -- -- -- --
---------- ---- ---------- ---- -------- ----
Balance at December 31, 1998.............. 15,431,306 154 2,001,483 20 25,578 3
Issuance of preferred Series D
(unaudited).............................. -- -- 1,218,333 12 7,267 --
Conversion of preferred stock
(unaudited).............................. 3,219,816 32 (3,219,816) (32) -- --
Exercise of stock options and issuance of
restricted shares (unaudited)............ 460,402 5 -- -- 1,916 --
Subchapter S Corporation distributions
(unaudited).............................. -- -- -- -- -- --
Amortization of unearned stock-based
compensation (unaudited)................. -- -- -- -- 225 --
Beneficial conversion of preferred Series
D (unaudited)............................ -- -- -- -- 4,873 --
Issuance of common stock, net of issuance
costs (unaudited)........................ 4,675,000 47 -- -- 54,263 --
Exercise of warrants (unaudited).......... 1,011,378 10 -- -- 7,990 --
Comprehensive loss (unaudited)............ -- -- -- -- -- (3)
Net loss (unaudited)...................... -- -- -- -- --
---------- ---- ---------- ---- -------- ----
Balance at June 30, 1999 (unaudited)...... 24,797,902 $248 -- $ -- $102,112 $ --
========== ==== ========== ==== ======== ====
<CAPTION>
TREASURY STOCK RETAINED TOTAL
------------------ EARNINGS STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
-------- ------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.............. -- $ -- $ 999 $ 1,132
Issuance of preferred Series A and
warrants................................. -- -- -- 5,330
Capitalization of Square Earth, Inc. ..... -- -- (8) 14
Stock-based compensation.................. -- -- -- 31
Unearned stock-based compensation......... -- -- -- (23)
Treasury stock acquired................... 100,917 (330) -- (330)
Comprehensive income (loss)............... -- -- -- (4)
Net income................................ -- -- 1,329 1,329
Subchapter S Corporation distributions.... -- -- (135) (135)
-------- ------- -------- --------
Balance at December 31, 1996.............. 100,917 (330) 2,185 7,344
Issuance of preferred Series B............ -- -- -- 1,500
Stock-based compensation.................. -- -- -- 63
Unearned stock-based compensation......... -- -- -- (19)
Exercise of stock options and issuance of
restricted shares........................ -- -- -- --
Treasury stock acquired................... 359,712 (1,500) -- (1,500)
Issuance of preferred Series C............ -- -- -- 1,971
Comprehensive income...................... -- -- -- 7
Net income................................ -- -- 2,571 2,571
Subchapter S Corporation distributions.... -- -- (1,441) (1,441)
-------- ------- -------- --------
Balance at December 31, 1997.............. 460,629 (1,830) 3,315 10,496
Conversion of preferred Series A.......... (407,500) 1,608 -- --
Exercise of stock options and issuance of
restricted shares........................ -- -- -- 303
Subchapter S Corporation distributions.... -- -- (874) (874)
Stock-based compensation.................. -- -- -- 18,546
Unearned stock-based compensation......... -- -- -- (497)
Net loss.................................. -- -- (21,345) (21,345)
-------- ------- -------- --------
Balance at December 31, 1998.............. 53,129 (222) (18,904) 6,629
Issuance of preferred Series D
(unaudited).............................. -- -- -- 7,279
Conversion of preferred stock
(unaudited).............................. -- -- -- --
Exercise of stock options and issuance of
restricted shares (unaudited)............ -- -- -- 1,921
Subchapter S Corporation distributions
(unaudited).............................. -- -- (131) (131)
Amortization of unearned stock-based
compensation (unaudited)................. -- -- -- 225
Beneficial conversion of preferred Series
D (unaudited)............................ -- -- (4,873) --
Issuance of common stock, net of issuance
costs (unaudited)........................ -- -- -- 54,310
Exercise of warrants (unaudited).......... -- -- -- 8,000
Comprehensive loss (unaudited)............ -- -- -- (3)
Net loss (unaudited)...................... -- 616 616
-------- ------- -------- --------
Balance at June 30, 1999 (unaudited)...... 53,129 $ (222) $(23,292) $ 78,846
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 61
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 1,329 $ 2,571 $(21,345) $ (422) $ 616
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation and amortization.................. 397 904 1,516 767 741
Increase (decrease) in deferred income taxes... 52 320 (667) (911) (68)
Provision for stock compensation............... 8 264 17,555 57 225
Provision for doubtful accounts................ 260 384 9 574 (74)
Common stock issued for services............... -- -- 166 166 --
Changes in assets and liabilities:
Increase in accounts receivable............. (2,247) (5,483) (2,047) (2,178) (5,051)
Increase in unbilled services............... (383) (649) (2,890) (636) (2,422)
(Increase) decrease in prepaid income
taxes..................................... (276) 77 77 -- (79)
Increase in prepaid expenses................ (122) (175) (97) (30) (1,005)
(Increase) decrease in other assets......... (38) (52) (126) 60 (73)
Increase (decrease) in trade accounts
payable................................... 156 957 (587) (583) 1,060
(Decrease) increase in accrued
compensation.............................. (201) 769 2,375 932 (217)
Increase (decrease) in note payable......... -- -- 1,400 -- (1,400)
Increase (decrease) in deferred revenue..... 499 719 671 (350) 21
Increase (decrease) in other accrued
liabilities............................... 255 722 168 142 (548)
------- ------- -------- ------- ---------
Net cash (used in) provided by operating
activities.............................. (311) 1,328 (3,822) (2,412) (8,274)
------- ------- -------- ------- ---------
Cash flows from investing activities:
Purchases of property and equipment.............. (1,492) (2,079) (1,782) (1,157) (1,370)
Purchases of investments......................... (2,285) (104) (390) -- (414,534)
Sales of investments............................. -- 1,288 1,213 40 358,410
------- ------- -------- ------- ---------
Net cash used in investing activities..... (3,777) (895) (959) (1,117) (57,494)
------- ------- -------- ------- ---------
Cash flows from financing activities:
Issuance of preferred stock and warrants, Series
A.............................................. 5,330 -- -- -- --
Issuance of preferred stock, Series B............ -- 1,500 -- -- --
Issuance of preferred stock, Series C............ -- 1,971 -- -- --
Issuance of preferred stock, Series D............ -- -- -- -- 7,279
Proceeds from initial public offering............ -- -- -- -- 54,310
Issuance of common stock......................... 22 -- -- -- --
Exercise of stock warrants....................... -- -- -- -- 8,000
Exercise of stock options........................ -- -- 631 179 1,921
Purchase of treasury stock....................... (330) (1,500) -- -- --
Borrowings under line of credit.................. 3,585 6,713 11,976 3,474 4,550
Payments under line of credit.................... (3,826) (6,493) (6,709) (745) (10,104)
Subchapter S Corporation distributions........... (135) (1,441) (874) (754) (131)
Decrease in due to majority stockholder.......... (200) -- -- -- --
------- ------- -------- ------- ---------
Net cash provided by financing
activities.............................. 4,446 750 5,024 2,154 65,825
------- ------- -------- ------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 358 1,183 243 (1,375) 57
Cash and cash equivalents at beginning of period... 802 1,160 2,343 2,343 2,586
------- ------- -------- ------- ---------
Cash and cash equivalents at end of period......... $ 1,160 $ 2,343 $ 2,586 $ 968 $ 2,643
======= ======= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 62
PROXICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Proxicom, Inc. ("Proxicom") is a leading provider of Internet solutions to
Global 1000 companies and other large organizations. Since 1994, Proxicom has
focused exclusively on the Internet. Proxicom's Internet solutions include
business to consumer electronic commerce Internet sites, business to business
electronic commerce extranets, and company-specific intranets.
In August 1996, Proxima, Inc., a Maryland corporation, reincorporated as a
Delaware corporation, through a merger transaction, changing its name to
Proxicom, Inc.
Renaissance Leasing Corp. ("Renaissance") was a partnership substantially
owned by the majority stockholder of Proxicom. Renaissance purchased computer
equipment with funds borrowed from Proxicom and leased all such assets to
Proxicom. Renaissance ceased operations in 1997 and all assets and liabilities
of Renaissance were transferred to Proxicom at book value of approximately
$90,000. Proxicom and Renaissance were companies under common control and have
been accounted for in a manner similar to a pooling of interests.
2. MERGERS
On March 26, 1999, Proxicom completed a merger with ad hoc Interactive,
Inc. ("ad hoc"), a Subchapter S Corporation incorporated during 1994, by
exchanging 829,771 shares of Proxicom's common stock for all the common stock of
ad hoc. Each share of ad hoc stock was exchanged for 9.955223 shares of Proxicom
common stock. In addition, outstanding rights to receive ad hoc stock were
exchanged for rights to receive Proxicom common stock (Note 9).
There were no transactions between Proxicom and ad hoc prior to the
combination. No material adjustments were made to conform to Proxicom's
accounting policies.
In August 1998, Proxicom completed a merger with IBIS Consulting, Inc.
("IBIS Consulting"), a Subchapter S corporation incorporated during 1994, by
exchanging 4,988,297 shares of Proxicom's common stock for all the common stock
of IBIS Consulting. Each share of IBIS Consulting was exchanged for 0.2327868
shares of Proxicom common stock. In addition, outstanding IBIS Consulting
employee stock options were converted at the same exchange factor into options
to purchase 345,034 shares of Proxicom common stock (Note 9).
There were no transactions between Proxicom and IBIS Consulting prior to
the combination. No material adjustments were made to conform to Proxicom's
accounting policies.
Effective January 1, 1998, Proxicom completed a merger with Square Earth,
Inc. ("Square Earth"), a Subchapter S corporation incorporated during 1996, by
exchanging 534,999 shares of its common stock for all the common stock of Square
Earth. Each share of Square Earth was exchanged for 0.445833 shares of Proxicom
common stock. In addition, outstanding Square Earth employee stock options were
converted at the same exchange factor into options to purchase 41,474 shares of
Proxicom common stock (Note 9).
There were no transactions between Proxicom and Square Earth prior to the
combination. No material adjustments were made to conform to Proxicom's
accounting policies.
F-7
<PAGE> 63
2. MERGERS (CONTINUED)
Stand-alone financial information is shown in the following table.
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS
DECEMBER 31, ENDED YEAR ENDED
---------------- JUNE 30, DECEMBER 31,
1996 1997 1998 1998
------ ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
IBIS Consulting..................................... $3,884 $10,170 $8,054 $ *
Square Earth........................................ 593 1,403 * *
ad hoc.............................................. 941 1,095 * 1,601
Net income (loss)
IBIS Consulting..................................... $ 938 $ 2,078 $1,391 $ *
Square Earth........................................ (95) 2 * *
ad hoc.............................................. 246 (122) * (702)
</TABLE>
- ---------------
* Not applicable to reporting period.
The IBIS Consulting, ad hoc and Square Earth mergers constituted tax-free
reorganizations and have been accounted for as poolings of interests under
Accounting Principles Board Opinion No. 16, Business Combinations. Accordingly,
all prior period consolidated financial statements presented have been restated
to include the combined results of operations, financial position and cash flows
of IBIS Consulting, ad hoc and Square Earth as though they had been a part of
Proxicom since their inception.
Proxicom incurred charges of approximately $2.9 million in 1998 for costs
associated with the IBIS Consulting and Square Earth transactions. Those
transaction costs related to professional fees and other direct expenses
relating to the acquisitions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. Actual results may differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
balances of Proxicom, IBIS Consulting, Square Earth, ad hoc and Renaissance
(hereafter collectively the "Company" or "Proxicom"). All significant
intercompany transactions and balances have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited balance sheet as of June 30, 1999, the unaudited statements
of operations and cash flows for the six months ended June 30, 1998 and 1999 and
the statement of changes in stockholders' equity (deficit) for the six months
ended June 30, 1999, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999.
F-8
<PAGE> 64
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Highly liquid investments having original maturities of 90 days or less at
the date of acquisition are classified as cash equivalents. The carrying values
of cash equivalents approximate fair values.
REVENUE RECOGNITION
Revenue from Internet professional services are recognized based on the
nature of the contract. Revenue from fixed-price contracts is recognized using
the percentage-of-completion method based on the ratio of costs incurred to
total estimated costs. Revenue from time-and-materials contracts is accounted
for as time is incurred and billed. Net revenues exclude reimbursable expenses
charged to clients.
The Company periodically evaluates cost and revenue assumptions in
fixed-price contracts. Provisions for estimated losses on uncompleted contracts
are made on a contract by contract basis and are recognized in the period in
which such losses are determined. Most contracts are cancellable by either the
Company or the customer upon 30 days notice, with payment due for services
completed through the date of termination. No significant losses have been
incurred on cancelled contracts.
Deferred revenue is recognized on fixed-price contracts to reflect billings
in excess of revenue recognized under the percentage-of-completion method.
Unbilled services on contracts are comprised of costs plus earnings in
excess of contractual billings on such contracts. Billings in excess of cost
plus earnings are classified as deferred revenue.
RESEARCH AND DEVELOPMENT EXPENSES FOR SOFTWARE PRODUCTS
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility and prior to general release of the
software. Based on the Company's development process, technological feasibility
is established upon completion of a working model. The period between
technological feasibility and general release is relatively short and the costs
incurred during this period have been insignificant for capitalization.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed on the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Leasehold improvements are
amortized on a straight-line method over the shorter of the improvements'
estimated useful lives or related remaining lease term. Long-lived assets held
and used by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be recoverable.
INVESTMENTS
The Company classifies its investments as available-for-sale as defined by
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of taxes, reported as comprehensive income within
stockholders' equity. Comprehensive income is not materially different from net
income in any period presented.
INCOME TAXES
The provision for income taxes is determined in accordance with SFAS No.
109, Accounting for Income Taxes, which requires the use of the asset and
liability approach. Under this approach, deferred
F-9
<PAGE> 65
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
taxes represent the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the fair value of the Company's stock and the exercise price.
A new measurement date for purposes of determining compensation is established
when there is a substantive change to the terms of an underlying option. See
Note 9.
BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic net income per common share is based on the weighted average number
of shares of common stock outstanding during each year. Diluted net income per
common share is based on the weighted average number of shares of common stock
outstanding during each year, adjusted for the effect of common stock
equivalents arising from the assumed exercise of stock options, if dilutive. See
Note 15.
All per share amounts have been restated to reflect the re-incorporation
discussed at Note 1 and the mergers of IBIS Consulting, ad hoc and Square Earth
discussed at Note 2.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and cash equivalents,
investments, accounts receivable, trade accounts payable and note payable
approximate fair value due to the short maturity and ready liquidity of those
instruments.
CONCENTRATION OF CREDIT RISK
Revenues in the years ended 1996, 1997 and 1998 and receivables as of
December 31, 1997 and 1998 were concentrated with four customers as follows
(amounts represent percentage of total revenues and accounts receivable,
respectively):
<TABLE>
<CAPTION>
REVENUES ACCOUNTS
------------------ RECEIVABLE
YEAR ENDED -------------
DECEMBER 31, DECEMBER 31,
------------------ -------------
1996 1997 1998 1997 1998
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Customer A.................................................. 13.4% 22.9% 14.2% 19.9% 7.4%
Customer B.................................................. * * 13.2% 3.7% 13.2%
Customer C.................................................. 13.6% * * * *
Customer D.................................................. 12.6% * * * *
</TABLE>
- ---------------
* Represents less than 10% of total.
The Company performs initial credit evaluations of its new customers and
generally does not require collateral from its customers. The Company maintains
an allowance for potential losses when identified.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted FAS 131, Disclosures About Segments of An
Enterprise and Related Information. This Statement changes the way public
companies report information about segments of their business in annual
financial statements and requires disclosure of selected segment information. It
F-10
<PAGE> 66
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
also requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. The Company currently operates in one operating and
geographic segment. The adoption of SFAS No. 131 does not have a material effect
on the current reporting or disclosure requirements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
fiscal year ending December 31, 2001. The Company has no derivative or hedging
activity in any of the periods presented.
PRO FORMA NET INCOME AND EARNINGS PER SHARE (UNAUDITED)
The pro forma earnings per share presents the effect of the conversion of
the preferred stock as if such conversion occurred as of the later of January 1,
1998 or the date of issuance, as further described in Note 10.
As discussed in Note 2, the Company merged with IBIS Consulting and Square
Earth during 1998, and ad hoc during 1999; all previously Subchapter S
corporations. Pro forma net income (loss) assuming that IBIS Consulting, ad hoc
and Square Earth were taxable entities during the periods presented is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ -------- ------- ------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes.............. $1,514 $2,901 $(22,245) $(1,365) $1,063
Pro forma income tax provision (benefit)....... 683 1,241 (900) (529) 372
------ ------ -------- ------- ------
Pro forma net income (loss).................... 831 1,660 (21,345) (836) 691
====== ====== ======== ======= ======
</TABLE>
4. INVESTMENTS
The following is a summary of investments classified as current assets at
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury securities and obligations of U.S.
government agencies............................. $ 1,098 $ 4 $(1) $ 1,101
DECEMBER 31, 1998
U.S. Treasury securities and obligations of U.S.
government agencies............................. $ 275 $ 3 $-- $ 278
JUNE 30, 1999 (UNAUDITED)
Commercial paper................................... $56,402 $-- $-- $56,402
</TABLE>
F-11
<PAGE> 67
4. INVESTMENTS (CONTINUED)
The cost and fair value of available-for-sale securities by contractual
maturity are as follows (in thousands):
<TABLE>
<CAPTION>
FAIR
COST VALUE
------- -------
<S> <C> <C>
DECEMBER 31, 1997
Due in one year or less................................... $ 501 $ 501
Due after one year through three years.................... 597 600
------- -------
$ 1,098 $ 1,101
======= =======
DECEMBER 31, 1998
Due in one year or less................................... $ 200 $ 202
Due after one year through three years.................... 75 76
------- -------
$ 275 $ 278
======= =======
JUNE 30, 1999 (UNAUDITED)
Due in one year or less................................... $56,402 $56,402
Due after one year through three years.................... -- --
------- -------
$56,402 $56,402
======= =======
</TABLE>
The Company realized gains from the sale of investments of $2,000 and
$9,000 for the years 1997 and 1998, respectively, and realized losses from the
sales of investments of $2,000 in 1998.
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable......................................... $8,515 $10,562
Allowance for doubtful accounts............................. (660) (669)
------ -------
Net accounts receivable..................................... $7,855 $ 9,893
====== =======
</TABLE>
No accounts receivable at December 31, 1998 or 1997 were the result of
long-term contracts.
The Company wrote off doubtful accounts of $59,000, $71,000 and $959,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $2,794 $3,635
Office and other equipment.................................. 550 729
Purchased software.......................................... 397 596
Leasehold improvements...................................... 345 934
Automobile.................................................. 26 --
------ ------
4,112 5,894
Less: Accumulated depreciation and amortization............. (1,434) (2,950)
------ ------
Total property and equipment, net........................... $2,678 $2,944
====== ======
</TABLE>
F-12
<PAGE> 68
7. LINES OF CREDIT
At December 31, 1997, the Company had a $2.0 million revolving line of
credit with a bank. Interest is payable monthly at the bank's prime rate plus
0.5% (9.0% at December 31, 1997). The line of credit is secured by substantially
all of the Company's assets, and includes various customary financial and other
covenants including maintenance of a minimum level of tangible net worth. No
borrowings were outstanding under the line of credit as of December 31, 1997.
There are no commitment fees under this line of credit.
In February 1998, the Company increased the line of credit to $5.0 million
and the bank decreased the interest rate to prime. All other material financial
covenants remained unchanged. No borrowings were outstanding under this facility
as of December 31, 1998.
At December 31, 1997, Square Earth had a $350,000 line of credit with a
bank. The line of credit included various customary financial and other
covenants including maintenance of a minimum level of tangible net worth.
Borrowings of $264,000 and $0 were outstanding under the line of credit as of
December 31, 1997 and 1998, respectively.
In July 1998, IBIS Consulting entered into a line of credit with a bank in
the amount of $500,000. The line expires in August 1999. This line of credit
replaced a previously existing $200,000 line of credit with the same bank. No
borrowings were outstanding under this facility as of December 31, 1998.
In October 1998, the Company entered into a $10.0 million revolving line of
credit with a bank. All prior existing lines of credit were paid in full and
terminated. The use of the line generally is restricted to working capital
requirements and approved acquisitions as defined in the line of credit
agreement. Interest on this line is payable on a monthly basis at a variable
rate of LIBOR plus 2%. The line of credit is secured by the Company's
consolidated real and personal property, including intellectual property rights
and all cash and non-cash proceeds of these assets. Included in the line of
credit are various customary financial and other covenants including maintenance
of a minimum level of tangible net worth. The line of credit expires on August
31, 2000. At December 31, 1998, the Company has outstanding letters of credit of
$205,000 which reduce amounts available under the line. Borrowings of $5.4
million and $4.4 million were outstanding and available, respectively, against
the line as of December 31, 1998.
Commitment fees of 0.25% paid on the unused line of credit during 1998 were
not material. There were no commitment fees under the previous lines of credit
for 1997 and 1998.
Interest expense was $33,000, $94,000 and $227,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
As of May 1998, ad hoc entered into a line of credit with a bank in the
amount of $100,000. The line expires in November 1999. This line of credit
replaced a previously existing $50,000 line of credit with the same bank.
Interest on this line is payable on a monthly basis at a fixed rate of 10.25%.
Advances under the line of credit are secured by substantially all assets of ad
hoc. Borrowings of approximately $23,000 and $96,000 were outstanding under the
line of credit as of December 31, 1997 and 1998, respectively. ad hoc has an
additional $25,000 equipment line which was established in March 1998. Equipment
notes for the full amount of the line have been drawn with terms ranging from
three to five years at an interest rate of 13.5%. As of December 31, 1998,
approximately $22,000 remained outstanding under this equipment line. Interest
expense was $0, $136 and $11,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
8. NOTE PAYABLE
On August 10, 1998, the Company entered into a $1.4 million note payable
with an investment banking firm in connection with professional services for the
IBIS Consulting transaction. The note accrues interest at 7.0% per annum and
matures in the earlier of August 21, 1999 or upon completion of an initial
public offering. This unsecured note is subordinated only to the Company's
senior bank facilities.
F-13
<PAGE> 69
9. STOCK OPTION PLANS
PROXICOM STOCK OPTION PLANS FOR EMPLOYEES AND NON-EMPLOYEES
In 1996, Proxicom established a stock option plan (the "Plan") under which
eligible employees and eligible non-employees may be granted options to purchase
shares of the Company's common stock. The Plan provides for the issuance of a
maximum of 4,150,000 shares of common stock. Under the Plan, the option purchase
price for each grant is equal to the fair value of the common stock at the date
of the grant as determined by the Board of Directors. Options granted under the
plan generally vest ratably over a four-year period and expire 10 years from the
date of the grant.
IBIS CONSULTING
In January and August 1997, IBIS Consulting granted options to two key
employees to purchase 1,759,031 shares with an exercise price of $0.219 per
share. Options for 1,496,494 shares became exercisable upon grant, with the
remaining 262,537 shares vesting over a two-year period commencing January 1,
1999. Under the terms of the option agreement, prior to the completion of an
initial public offering or sale of IBIS Consulting, IBIS Consulting was required
to repurchase and the employee was required to sell the shares or vested options
upon termination of employment, based on a pre-determined formula. After
exercise, IBIS Consulting retained the right and obligation to reacquire the
shares based on the formula price upon termination of the employee prior to the
completion of an initial public offering or sale of IBIS Consulting.
In July 1998, one employee exercised his option to acquire 1,496,494
shares. The employee paid IBIS Consulting $330,000 to exercise the options and
received $275,000, less applicable taxes under a tax reimbursement cash bonus
arrangement.
The Company recognized compensation expense in 1997 and a liability related
to both these options and the underlying cash bonus arrangement in the amount of
$220,000.
In January 1997, IBIS Consulting granted options to purchase 256,065 shares
to another employee with an exercise price of $0.403 per share. These options
were subject to a vesting schedule. Employment was terminated in 1997 and the
unvested options lapsed upon termination.
In January 1998, IBIS Consulting announced the grant of options under a
1998 plan and the conversion of options outstanding under the 1997 plan. In July
1998, IBIS Consulting granted such options to employees covering 82,497 shares
with an exercise price of $4.72 per share. The options are subject to an
18-month vesting schedule. Concurrent with this 1998 option grant, the remaining
1997 options of 262,537 shares were converted to the 1998 Plan. IBIS
Consulting's previous obligation to repurchase and the employees obligation to
sell the vested options upon termination of employment was eliminated.
In connection with the Company's merger with IBIS Consulting, the Company
assumed all outstanding options to purchase shares of common stock of IBIS
Consulting. These options were converted into options to purchase equivalent
shares of the Company's common stock based on the merger exchange formula and
subsequently included under the Proxicom Stock Option Plan for employees and
non-employees.
SQUARE EARTH, INC.
In connection with the Company's merger with Square Earth, the Company
assumed all outstanding options to purchase shares of common stock of Square
Earth. These options were converted into options to purchase equivalent shares
of the Company's common stock based on the merger exchange formula and
subsequently included under the Proxicom Stock Option Plan for employees and
non-employees.
IBIS CONSULTING STOCK-BASED AND OTHER COMPENSATION
In early 1997, prior to Proxicom's merger with in IBIS Consulting, IBIS
Consulting entered into an arrangement with an employee providing that
individual with 1,496,494 fully vested stock options which
F-14
<PAGE> 70
9. STOCK OPTION PLANS (CONTINUED)
were subject to certain conditions, including provisions requiring IBIS
Consulting to buy back the common stock resulting from exercise of the options
and requiring the employee to sell such shares to IBIS Consulting at a
pre-determined formula upon termination of employment. The employee exercised
these options in July 1998. Due to a change of control provision in the initial
option agreement, concurrent to the merger of IBIS Consulting and Proxicom, the
repurchase requirement on the stock and stock options was eliminated allowing
the employees to freely trade the stock.
As a consequence of the above change of control provision triggered by the
merger, and the conversion of options from the 1997 plan to the 1998 plan, the
Company recorded non-cash stock-based compensation of approximately $17.0
million equal to the difference between the pre-determined formula price and the
then fair value of the underlying stock or stock options. As the shares were
fully vested, the compensation expense was recognized at the time of the merger.
In connection with other stock option grants during the year ended December
31, 1998, the Company recognized additional stock-based compensation totaling
$219,000, and deferred stock-based compensation which is being amortized through
December 31, 1999, the 18-month vesting period of the related options. The
Company did not recognize any amortization expense during the years ended
December 31, 1996 and 1997.
AD HOC
During 1997 and 1998, ad hoc granted employees the right to receive 14,435
shares and 62,226 shares of common stock, respectively, at no cost on the first
or second anniversary of their employment start date, provided that they remain
full-time employees during such period. ad hoc recognized non-cash compensation
expense of $44,000 and $133,000 in 1997 and 1998, respectively, related to these
rights. $19,000 and $278,000 were recorded as unearned stock compensation as of
December 31, 1997 and 1998, respectively, which will be amortized over 1999 and
2000.
PROXICOM STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In February 1997, the Company established a stock option plan for
non-employee directors (the "Directors Plan") and has reserved 350,000 shares of
common stock for issuance under the provisions of this plan. Options granted
prior to December 15, 1998 generally vest over the three-year term as a
director. Options under the Directors Plan issued subsequent to December 15,
1998 are expected to be issued on a fully vested basis. Options for 175,000
shares have been granted through December 31, 1998 under the Directors Plan.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS
The Company accounts for its stock options and rights to receive stock
issued to employees and non-employee directors in accordance with APB 25 under
which compensation expense of $8,000, $264,000, and $17.3 million was recognized
for the options and rights to receive stock granted in 1996, 1997 and 1998,
respectively. The Company has provided additional pro forma disclosures as
required by SFAS No. 123, "Accounting for Stock-Based Compensation."
For disclosure purposes, the fair value of each stock option and right to
receive stock is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options and rights to receive stock in 1996, 1997 and 1998; no annual
dividends, expected volatility of 0.0%, risk-free interest rate ranging from
5.1% to 6.1% and expected life of one to four years. The weighted-average fair
values of the stock options granted in 1996, 1997 and 1998 were $0.75, $3.18 and
$1.21, respectively. The weighted average fair values of the rights to receive
stock granted in 1996, 1997 and 1998 were $1.00, $3.76 and $6.39, respectively.
Under the above model, the total value of stock options and rights to
receive stock granted in 1996, 1997 and 1998 were $521,000, $8.9 million and
$2.8 million, respectively, which would be amortized on a
F-15
<PAGE> 71
9. STOCK OPTION PLANS (CONTINUED)
pro forma basis over the option vesting period. Had the Company determined
compensation cost for these plans in accordance with SFAS No. 123, the Company's
pro forma net income (loss) would have been approximately $1.3 million,
($796,000) and ($7.2 million) in 1996, 1997 and 1998, respectively, and pro
forma basic and diluted earnings per common share would have been $0.09, ($0.06)
and ($0.49) in 1996, 1997 and 1998, respectively.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO NON-EMPLOYEES
The Company accounts for its stock options granted to eligible
non-employees on the fair value method in accordance with SFAS No. 123. In
January 1998, ad hoc issued 34,843 shares of stock to a non-employee consultant
for services in lieu of cash. The Company recognized non-cash compensation
expense of $166,302 as general and administrative expenses in 1998 related to
this grant.
STOCK OPTION ACTIVITY
The following tables summarize stock option activity for Proxicom and IBIS
Consulting option grants:
<TABLE>
<CAPTION>
PROXICOM IBIS CONSULTING
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
------------------------ -------------------------
NUMBER OF NUMBER OF
SHARES OPTION PRICE SHARES OPTION PRICE
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1995
Grants................................ 652,750 $3.30 -- $ --
Exercised............................. -- -- -- --
Cancellations......................... -- -- -- --
--------- ----------
December 31, 1996..................... 652,750 3.30 -- --
Grants................................ 756,324 4.25 2,015,096 0.24
Exercised............................. -- -- -- --
Cancellations......................... (161,550) 3.41 (256,065) 0.40
--------- ----------
December 31, 1997..................... 1,247,524 3.86 1,759,031 0.22
Grants................................ 2,051,584 7.94 82,497 4.72
Exercised............................. (86,702) 3.49 (1,496,494) 0.22
Cancellations......................... (353,533) 5.75 -- --
--------- ----------
December 31, 1998..................... 2,858,873 6.57 345,034 1.30
========= ==========
Options exercisable at:
December 31, 1998..................... 365,030 3.73 304,183 0.83
December 31, 1997..................... 132,115 3.30 1,496,494 0.22
December 31, 1996..................... -- -- -- --
</TABLE>
The weighted-average exercise price for Proxicom options outstanding at
December 31, 1996, 1997 and 1998 were $3.30, $3.86 and $6.57, respectively and
exercise prices ranged from $3.30 to $4.78 at December 31, 1998. The
weighted-average exercise price for IBIS Consulting options at December 31,
1997, and 1998 were $0.22 and $1.30 and exercise prices ranged from $0.22 to
$4.72 at December 31, 1998. These options will expire if not exercised at
specific dates ranging from January 1998 to December 2008 and the
weighted-average remaining contractual life of the options outstanding was
approximately nine years.
F-16
<PAGE> 72
9. STOCK OPTION PLANS (CONTINUED)
The following table summarizes rights to receive stock of ad hoc:
<TABLE>
<CAPTION>
AD HOC
STOCK RIGHTS OUTSTANDING
------------------------
NUMBER OF
SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
December 31, 1995........................................... -- --
Grants...................................................... 31,362 --
Exercised................................................... -- --
Cancellations............................................... -- --
-------
December 31, 1996........................................... 31,362 --
Grants...................................................... 14,435 --
Exercised................................................... (2,988) --
Cancellations............................................... -- --
-------
December 31, 1997........................................... 42,809 --
Grants...................................................... 62,226 --
Exercised................................................... (71,679) --
Cancellations............................................... -- --
-------
December 31, 1998........................................... 33,356 --
=======
</TABLE>
10. CONVERTIBLE PREFERRED STOCK AND WARRANTS
On August 30, 1996, the Company consummated a transaction whereby: (i) the
Company repurchased from the Company's Chief Executive Officer 100,917 shares of
common stock at a price of $3.27 per share, for a total purchase price of
approximately $330,000; and, (ii) the Company issued a total of 1,629,969 shares
of Series A convertible preferred stock (the "Series A Preferred Stock") at a
price of $3.27 per share, or approximately $5.3 million. At the stockholders'
option, but in any event automatically upon an initial public offering of the
Company's common stock, each share of Series A Preferred Stock will be
convertible into one share of common stock. The Series A Preferred Stock has a
liquidation preference and is not entitled to any dividends (unless cash
dividends are declared and paid on the common stock, in which case the Series A
Preferred Stock will share on an "as if" converted basis). The holders of the
Series A Preferred Stock have registration rights and are entitled to place two
persons on the Company's Board.
One investor in the Series A Preferred Stock also received warrants to
purchase 1,011,378 additional shares of Series A Preferred Stock from the
Company at a price of $7.91 per share. The warrants expire in August 2003 and
are exercisable after December 31, 1997. After December 31, 1997, the warrants
may be converted into shares of common stock at the option of the warrant
holder. The conversion formula is based on the difference between the market
value of the common stock less the warrant exercise price divided by the market
value of the common stock. The value of the warrants was not material.
In February 1997, the Company consummated a transaction whereby: (i) the
Company repurchased from the Company's Chief Executive Officer 359,712 shares of
common stock at a price of $4.17 per share, for a total purchase price of
approximately $1.5 million; (ii) the Company issued a total of 359,712 shares of
Series B convertible preferred stock (the "Series B Preferred Stock") at a price
of $4.17 per share or approximately $1.5 million. The Series B Preferred Stock
has essentially the same rights and privileges as the Series A Preferred Stock.
In December 1997, the Company issued a total of 419,302 shares of Series C
convertible preferred stock (the "Series C Preferred Stock") at a price of $4.77
per share or approximately $2.0 million. The Series C Preferred Stock has
essentially the same rights and privileges as the Series A and B Preferred
Stock.
F-17
<PAGE> 73
10. CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED)
In January 1998, the Company issued 407,500 shares of treasury stock in
conjunction with the conversion of 407,500 shares of Series A Preferred Stock
into common stock.
In February 1999, the Company issued a total of 1,218,333 shares of Series
D convertible preferred stock (the "Series D Preferred Stock") at a price of
$6.00 per share or approximately $7.3 million. In connection with this
transaction, 758,667 shares of common stock were purchased by the investors from
selling stockholders in amounts proportionate to the investors participation in
the Series D Preferred Stock issuance. The Series D Preferred Stock has
essentially the same rights and privileges as the Series A, B and C Preferred
Stock. Because the Series D Preferred Stock was sold at a price of $6.00, it is
anticipated that such securities will be accounted for giving effect to its
beneficial conversion features. Under such accounting, the Company will record a
charge of $4.9 million against additional paid-in capital to reflect the
difference between the conversion feature and the estimated fair value of the
underlying common stock. Although not reflected on the statement of operations,
the beneficial conversion charge will be reflected as a reduction to income and
earnings per share available for common stockholders.
11. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT TAXES:
Federal................................................... $ 82 $ -- $(155)
State..................................................... 16 10 (52)
---- ---- -----
Total current income tax provision (benefit)...... 98 10 (207)
---- ---- -----
DEFERRED TAXES:
Federal................................................... 78 249 (589)
State..................................................... 9 71 (104)
---- ---- -----
Total current income tax provision (benefit)...... 87 320 (693)
---- ---- -----
Total provision (benefit) for income taxes........ $185 $330 $(900)
==== ==== =====
</TABLE>
The reconciliation of the Company's income tax provision to the federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory tax rate
of 34%.................................................... $144 $321 $(7,324)
State income taxes, net..................................... 17 57 (34)
Subchapter S Corporation income............................. -- (72) (455)
Stock option revaluation.................................... -- -- 4,905
Acquisition costs........................................... -- -- 646
Increase in valuation allowance............................. -- -- 944
Other....................................................... 24 24 418
---- ---- -------
Income tax provision (benefit).............................. $185 $330 $ (900)
==== ==== =======
</TABLE>
F-18
<PAGE> 74
11. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997 1998
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
NOL carryforward.......................................... $ -- $ 107 $1,796
Revenue recognition....................................... 349 -- --
Vacation accrual.......................................... 35 49 81
Bad debt expense.......................................... 14 149 137
Depreciation.............................................. -- -- 176
Other accrued expenses.................................... -- -- 241
Revaluation of stock options.............................. -- -- 1,083
Other..................................................... 2 -- 37
----- ----- ------
Total gross deferred tax assets................... 400 305 3,551
----- -----
Valuation allowance......................................... (1,083)
------
Net deferred tax assets........................... 2,468
------
LIABILITIES:
Depreciation.............................................. (30) 5 --
Unbilled service revenue.................................. (396) (665) (1,654)
Subchapter S Corporation cash to accrual adjustment....... -- -- (479)
Other..................................................... (11) (2) --
----- ----- ------
Total gross deferred tax liabilities.............. (437) (662) (2,133)
----- ----- ------
Net deferred tax (liability) asset................ $ (37) $(357) $ 335
===== ===== ======
</TABLE>
The Company paid $374,000, $196,000 and ($207,000) for income taxes for the
year ended December 31, 1996, 1997, and 1998, respectively.
At December 31, 1998, the Company has a $4.6 million net operating loss
carryforward and a $20,000 research and development tax credit carryforward both
expiring in 2018. The Company establishes valuation allowances in accordance
with the provisions of SFAS No. 109. The Company continually reviews the
adequacy of the valuation allowance.
12. RELATED PARTY TRANSACTIONS
In February 1997, the Company entered into a lease for office space in
Reston, VA. The lease commenced on July 1, 1997 and has a term of seven years.
Rent payments for the years ended December 31, 1997 and 1998 were approximately
$331,000 and $864,000, respectively, and increased at an annual rate of 3.0%.
The lessor is a company wholly-owned by a member of the Company's Board of
Directors and stockholder. In accordance with the lease agreement, the Company
must maintain a letter of credit in the amount of $131,000 as a security deposit
during the term of the lease. The Company's current letter of credit expires in
December 1999.
The Company has provided Internet professional services to two
stockholders. Revenue generated from one stockholder totalled $463,000,
$1,056,000 and $775,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company recorded receivable balances of $0 and $316,000 as of
December 31, 1997 and 1998, respectively. A second stockholder generated revenue
of $68,000 and $181,000 for the years ended December 31, 1997 and 1998,
respectively. The Company recorded receivable balances of $19,000 and $1,000 as
of December 31, 1997 and 1998, respectively.
F-19
<PAGE> 75
13. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND BONUS PLANS
In August 1996, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age. Participants may contribute up to 15.0% of pretax compensation, subject
to certain limitations. The Company may make discretionary annual profit sharing
contributions up to the total of each participant's annual contribution. The
Company has made no profit sharing contributions to date.
In January 1996, IBIS Consulting adopted a 401(k) defined contribution
profit sharing plan. The plan covers all full-time employees who are at least 21
years of age. Participants may contribute up to 15.0% of pretax compensation,
subject to certain limitations. The Company may make discretionary annual profit
sharing contributions up to 25.0% of each participant's annual contribution, up
to 6.0% of the respective participant's annual compensation. Company
contributions vest ratably over five years. No contributions were made in 1996
and 1997. The Company has made profit sharing contributions of $71,000 in 1998.
The Company recorded $1.0 million in bonuses due under the 1998 IBIS
Consulting plan. No bonus plan existed in 1997.
In December 1996, ad hoc adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age and have completed at least one year of employment with ad hoc.
Participants may contribute up to 15.0% of pretax compensation, subject to
certain limitations. Beginning in 1997 ad hoc may make discretionary annual
profit sharing contributions equal to 4.0% of each participant's annual
contribution, up to 6.0% of the respective participant's annual compensation.
For the years ended December 31, 1997 and 1998 ad hoc has contributed $500 and
$1,200 in profit sharing contributions, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In February 1999, the Company's Board of Directors authorized an Employee
Stock Purchase Plan ("ESPP"). The ESPP, which commences upon completion of an
initial public offering, provides substantially all full time employees an
opportunity to purchase shares of Proxicom Common Stock through payroll
deductions of up to 15.0% of eligible compensation, not to exceed $25,000
annually. Semi-annually, participant account balances will be used to purchase
stock at the lesser of 85.0% of the fair market value on the trading day before
the participation period starts or the trading day preceding the day on which
the participation period ends. A total of 1,000,000 shares are available for
purchase under the ESPP.
14. COMMITMENTS AND CONTINGENCIES
The Company leases certain office space in Virginia, California, New York
and Illinois under non-cancelable operating leases expiring in various years
through 2005. Total rent expense for all operating leases amounted to
approximately $303,000, $926,000 and $2,705,000 in 1996, 1997 and 1998,
respectively. Future minimum lease payments under non-cancelable operating
leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1999....................................................... $ 3,789
2000....................................................... 3,170
2001....................................................... 2,724
2002....................................................... 2,459
2003....................................................... 1,785
Thereafter................................................. 3,522
-------
Total............................................ $17,449
=======
</TABLE>
F-20
<PAGE> 76
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In March 1997 the Company entered into a lease for office space in New
York, NY ("Initial Lease") which was subsequently incorporated into the
September 1997 additional space agreement ("Amended Lease"). The Initial Lease
commenced July 1, 1997 and ends in August 2002 and has minimum annual lease
payments ranging from approximately $144,000 to approximately $160,000 over the
lease term. The Amended Lease approximately doubled the office space and
extended the initial lease term to seven years through March 2005. In accordance
with the Amended Lease, the Company is required to have a letter of credit as a
security deposit in the amount of $74,000 throughout the lease term. The current
letter of credit will expire in December 1999.
15. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Company implemented SFAS No. 128, Earnings per Share, in 1997, which
requires certain disclosures relating to the calculation of earnings per common
share. The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per common share computations for net income.
BASIC NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) available to common
stockholders.............................. $1,329 $2,571 $(21,345) $(422) $(4,257)
======= ======= ======== ======= =======
Weighted average shares of common stock
outstanding............................... 13,740 13,374 14,576 13,790 19,117
======= ======= ======== ======= =======
Basic net income (loss) per common share.... $0.10 $0.19 $(1.46) $(0.03) $(0.22)
======= ======= ======== ======= =======
</TABLE>
SFAS No. 128 replaces primary earnings per share with basic net income per
share and excludes the effect of common stock equivalents when computing basic
net income per share.
DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) available to common
stockholders.............................. $1,329 $2,571 $(21,345) $(422) $(4,257)
======= ======= ======== ======= =======
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................ 13,740 13,374 14,576 13,790 19,117
Shares of common stock issuable upon the
assumed conversion of preferred
stock.................................. 543 1,965 -- -- --
Incremental shares for rights to receive
shares and options assumed exercised
under common stock option plans........ 27 1,789 -- -- --
------- ------- -------- ------- -------
Adjusted shares of common stock and common
stock equivalents for computation...... 14,310 17,128 14,576 13,790 19,117
======= ======= ======== ======= =======
Diluted net income (loss) per common
share..................................... $0.09 $0.15 $(1.46) $(0.03) $(0.22)
======= ======= ======== ======= =======
</TABLE>
F-21
<PAGE> 77
15. BASIC AND DILUTED EARNINGS PER COMMON SHARE (CONTINUED)
SFAS No. 128 replaces fully diluted earnings per share with diluted net
income per share which reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
16. PENDING INVESTMENT
In December 1998, Proxicom executed a letter of intent to make a cash
investment of approximately $360,000 in a recently formed joint venture entity
in Italy, Eunosia Internet Architects SpA ("Eunosia"), created by Ericsson
Telecommunicazioni SpA ("Ericsson"). Proxicom will own 19.9% of the common stock
of Eunosia proportionate to its investment in relation to the total Eunosia
capitalization.
Eunosia was formed to deliver Internet professional services in Italy. It
is anticipated that Eunosia will contract with Proxicom for certain consulting
services, at arm's length market rates on a time and materials basis. Also,
Eunosia will utilize the "Proxicom Process," Proxicom's proprietary, multi-phase
methodology, which Proxicom will transfer to Eunosia for a fee. Proxicom will
not participate in the management or policy making of the business. Inasmuch as
Proxicom will not have the ability to influence significantly the entity or its
operations, Proxicom intends to account for its investment on the cost basis.
Proxicom also will have an option to buy an additional 20.0% share in the common
stock of Eunosia, subject to certain conditions and restrictions. In March and
April 1999, Proxicom signed final agreements relating to this transaction.
17. SUBSEQUENT EVENTS (UNAUDITED)
EMPLOYEE STOCK OPTION PLAN
During 1999, the Board of Directors amended the Company's 1996 stock option
plan to increase the number of reserved common shares from 4,150,000 to
7,000,000.
AMENDMENT TO CERTIFICATE OF INCORPORATION
During 1999, the Company's Certificate of Incorporation was amended to
increase the number of authorized common stock shares from 20,000,000 shares to
100,000,000 shares and to increase the number of authorized shares of preferred
stock from 5,000,000 shares to 10,000,000 shares.
EXERCISE OF SERIES A CONVERTIBLE PREFERRED STOCK WARRANTS
On April 13, 1999, the Series A convertible preferred stock warrants were
exercised into 1,011,378 shares of Series A convertible preferred stock at $7.91
per share. The Company received proceeds of $8.0 million upon the exercise.
INITIAL PUBLIC OFFERING
On April 23, 1999, the Company completed its initial public offering of
securities and issued 4,000,000 shares of common stock at $13.00 per share. An
additional 500,000 shares were sold by the existing stockholders at $13.00 per
share. Automatically upon the initial public offering of securities, all
4,231,194 of the then outstanding shares of convertible preferred stock were
converted to 4,231,194 shares of common stock.
In connection with the initial public offering, the Company offered the
underwriters of the offering an option to purchase an additional 675,000 shares
of common stock at the offering price of $13.00 per share at the offering's
$13.00 per share offering price, which was exercised on May 21, 1999. Proceeds
to the Company for the 4,675,000 shares issued, net of the underwriting
discounts and costs of the offering were approximately $55.0 million.
F-22
<PAGE> 78
17. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
A portion of the proceeds from the offering was used to pay off a $1.4
million note payable with an investment banking firm (See Note 8).
REGISTRATION OF COMMON STOCK SUBJECT TO STOCK OPTION PLAN
On May 28, 1999, the Company filed a registration statement under the
Securities Act covering all 8,350,000 shares of common stock subject to
outstanding stock options or reserved for issuance under the stock plans.
AGREEMENT WITH GENERAL ELECTRIC COMPANY
On September 24, 1999, Proxicom and General Electric Company entered into a
Master Services Agreement. Under this agreement, General Electric has agreed to
have Proxicom perform Internet services for fees totaling no less than $6.0
million during the 12-month period ending September 24, 2000. As part of the
agreement, Proxicom issued General Electric a warrant to purchase 150,000 shares
of common stock at an exercise price of $49.88 per share, the closing price of
the common stock on the date of the agreement. The warrant is fully vested and
is exercisable until September 24, 2000.
LEASES
In May 1999, the Company opened an office in Chicago, Illinois and entered
into an eight-year lease terminating in April 2007. Minimum annual lease
payments range from approximately $197,000 to approximately $323,000 per year
based upon increases in both rates and square footage over the lease term. In
connection with the lease agreement, the Company obtained a letter of credit for
$475,000 to be used as security. The letter of credit requirement is reduced
ratably over the lease term to $100,000, which will be released after lease
termination.
INVESTMENTS
In July 1999, the Company signed an agreement with affiliates of Iberdrola
SA. Under the agreement, the Company will make a 19.9% investment in a Spanish
joint venture company, Kristina, Internet Business Solutions SA ("Kristina").
Affiliates of Iberdrola SA will own the remaining 80.1% interest. Kristina
provides Internet solutions to Spain-based businesses. The initial share capital
of Kristina is approximately $7.4 million, which the Company and the affiliates
of Iberdrola SA will contribute in proportion to their shareholder percentage
interests. In late July 1999, the Company contributed approximately $740,000 to
fulfill one half of its initial share capital obligation. Kristina contracts
with Proxicom for certain consulting services, at arm's length market rates on a
time and materials basis. Also, Kristina will utilize the "Proxicom Process,"
Proxicom's proprietary, multi-phase methodology, which Proxicom will transfer to
Kristina for a fee. Proxicom will not participate in the management or policy
making of the business. Inasmuch as Proxicom will not have the ability to
influence significantly the entity or its operations, Proxicom intends to
account for its investment on the cost basis.
LINE OF CREDIT
In June 1999, the Company amended its $10 million line of credit with a
bank, discussed in note 7, to delete all pre-existing financial covenants and to
include a new financial covenant, in which the Company is required to maintain a
minimum $10 million amount of liquid cash.
F-23
<PAGE> 79
[INSIDE BACK COVER PAGE]
BACK COVER GRAPHIC:
Contains Proxicom's logo in the center of the page.
<PAGE> 80
PROSPECTUS October 8, 1999
[PROXICOM LOGO]
3,600,000 Shares
Common Stock
THOMAS WEISEL PARTNERS LLC
FIRST UNION SECURITIES, INC.
FRIEDMAN BILLINGS RAMSEY
PRUDENTIAL SECURITIES
E*OFFERING
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You may rely on the information contained in this prospectus. Neither we nor any
of the underwriters or the selling stockholders have authorized anyone to
provide information different from that contained in this prospectus. When you
make a decision about whether to invest in our common stock, you should not rely
upon any information other than the information in this prospectus. Neither the
delivery of this prospectus nor sale of common stock means that information
contained in this prospectus is correct after the date of this prospectus. This
prospectus is not an offer to sell or solicitation of an offer to buy these
shares of common stock in any circumstances under which the offer or
solicitation is unlawful.
