<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25741
---------------------------
PROXICOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1770631
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(State of Organization) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Reston, VA 20191
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 262-3200
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |.
As of November 2, 1999, the issuer had 26,115,956 shares of common stock
outstanding.
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PROXICOM, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 and September 30, 1999.................. 1
Consolidated Statements of Operations
for the Three-Month and Nine-Month Periods Ended
September 30, 1998 and September 30, 1999....................... 2
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended September 30, 1998
and September 30, 1999.......................................... 3
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 16
<PAGE> 3
PART I.
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PROXICOM, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 2,586 $ 66,140
Investments......................................................................... 278 -
Accounts receivable, net of allowances of $669 and $598, respectively............... 9,893 19,668
Unbilled services................................................................... 4,259 1,904
Prepaid expenses.................................................................... 402 1,208
Other current assets................................................................ 431 623
------------ ------------
Total current assets............................................................. 17,849 89,543
Property and equipment, net............................................................ 2,944 3,696
Other non-current...................................................................... - 1,123
Deferred tax assets and other.......................................................... 1,758 1,446
------------ ------------
Total assets..................................................................... $ 22,551 $ 95,808
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit..................................................................... $ 5,554 $ -
Trade accounts payable.............................................................. 662 657
Accrued compensation................................................................ 3,779 6,787
Deferred revenue.................................................................... 1,889 2,896
Deferred tax liabilities............................................................ 1,423 1,423
Note payable........................................................................ 1,400 -
Other accrued liabilities........................................................... 1,215 1,996
------------ ------------
Total current liabilities........................................................ 15,922 13,759
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized
at December 31, 1998; 10,000,000 shares authorized at
September 30, 1999:
Convertible preferred stock, $.01 par value; 2,408,983 shares
issued and 2,001,483 outstanding at December 31, 1998; no shares
issued and outstanding at September 30, 1999.................................. 20 -
Common stock, $.01 par value; 20,000,000 shares authorized,
15,431,306 shares issued and 15,378,177 outstanding at December 31,
1998; 100,000,000 shares authorized, 25,001,297 shares issued and
24,948,168 shares outstanding at September 30, 1999.............................. 154 250
Additional paid-in capital.......................................................... 25,578 103,790
Retained deficit.................................................................... (18,901) (21,769)
Treasury stock...................................................................... (222) (222)
------------ ------------
Total stockholders' equity....................................................... 6,629 82,049
------------ ------------
Total liabilities and stockholders' equity............................................. $ 22,551 $ 95,808
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PROXICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -----------------------------
1998 1999 1998 1999
--------------- -------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue ............................................. $ 12,568 $ 23,592 $ 31,119 $ 53,067
Cost of revenue....................................... 7,036 12,070 17,379 28,773
------------ ------------ ------------ ------------
Gross profit.......................................... 5,532 11,522 13,740 24,294
------------ ------------ ------------ ------------
Operating expenses:
General and administrative......................... 4,384 7,833 11,976 17,991
Selling and marketing.............................. 916 1,696 2,279 3,133
Research and development........................... 244 - 692 -
Acquisition and merger costs....................... 2,756 - 2,886 300
Stock-based and other compensation................. 18,211 106 18,268 331
------------ ------------ ------ ------------
Total........................................... 26,511 9,635 36,101 21,755
------------ ------------ ------ ------------
Income (loss) from operations......................... (20,979) 1,887 (22,361) 2,539
Interest income (expense), net........................ (66) 701 (49) 1,112
------------- ------------ ------------- ------------
Income (loss) before income taxes..................... (21,045) 2,588 (22,410) 3,651
Income tax provision (benefit)........................ (132) 1,066 (1,075) 1,513
------------- ------------ ------------- ------------
Net income (loss)..................................... (20,913) 1,522 (21,335) 2,138
Non-cash dividend on beneficial conversion of
convertible preferred stock (see Note 3)........... - - - (4,873)
------------ ------------ ------------- -------------
Net income (loss) available to common stockholders.... $ (20,913) $ 1,522 $ (21,335) $ (2,735)
============= ============ ============= =============
Basic net income (loss) per common share.............. $ (1.36) $ 0.06 $ (1.51) $ (0.13)
============ ============ ============= =============
Diluted net income (loss) per common share............ $ (1.36) $ 0.05 $ (1.51) $ (0.13)
============ ============ ============= =============
Weighted average shares used in computing basic
income (loss) per share amount..................... 15,349 24,842 14,132 20,844
============ ============ ============ ============
Weighted average shares used in computing diluted
income (loss) per share amount..................... 15,349 29,190 14,132 20,844
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows used in operating activities:
Net income (loss).................................................. $ (21,336) $ 2,138
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Non-cash stock compensation..................................... 17,828 328
Non-cash warrant expense........................................ - 300
Depreciation and amortization................................... 1,107 986
Provision for (use of) doubtful accounts........................ 524 (71)
Common stock issued for services................................ 166 -
Decrease (increase) in deferred income taxes.................... (1,290) 312
Changes in assets and liabilities:
Increase in accounts receivable.............................. (4,549) (9,704)
Decrease (increase) in unbilled services..................... (471) 2,355
Increase in prepaid expenses................................. (100) (806)
Decrease (increase) in other assets.......................... 6 (192)
Increase in other non-current................................ - (1,123)
Decrease in trade accounts payable........................... (579) (5)
Increase in accrued compensation............................. 1,198 3,008
Increase (decrease) in note payable.......................... 1,400 (1,400)
Increase (decrease) in deferred revenue...................... (432) 1,007
Increase in other accrued liabilities........................ 1,962 781
------------ ------------
Net cash used in operating activities..................... (4,566) (2,086)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment................................ (1,526) (1,738)
Sales of investments............................................... 423 278
------------ ------------
Net cash used in investing activities .................... (1,103) (1,460)
------------ ------------
Cash flows from financing activities:
Issuance of convertible preferred stock, Series D.................. - 7,279
Proceeds from initial public offering.............................. - 54,310
Exercise of stock warrants......................................... - 8,000
Exercise of stock options.......................................... 230 3,196
Borrowings on lines of credit...................................... 4,635 4,550
Payments on lines of credit........................................ - (10,104)
Distributions to stockholders...................................... (813) -
Subchapter S Corporation distributions............................. - (131)
------------ ------------
Net cash provided by financing activities................. 4,052 67,100
------------ ------------
Net increase (decrease) in cash and cash equivalents................. (1,617) 63,554
Cash and cash equivalents at beginning of period..................... 2,343 2,586
------------ ------------
Cash and cash equivalents at end of period........................... $ 726 $ 66,140
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PROXICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Proxicom, Inc. ("Proxicom"
or the "Company") include the accounts of Proxicom and all of its wholly owned
subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation. In the opinion of management, the consolidated
financial statements reflect all normal and recurring adjustments, which are
necessary for a fair presentation of Proxicom's financial position, results of
operations and of cash flows as of the dates and for the periods presented. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these consolidated statements do not include all the disclosures
normally required by generally accepted accounting principles for annual
financial statements. Accordingly, these unaudited consolidated financial
statements should be read in conjunction with Proxicom's audited consolidated
financial statements and notes thereto for the period ended December 31, 1998,
included in the Form S-1 filed by Proxicom with the Securities and Exchange
Commission (SEC File No. 333-87671). The consolidated results of operations for
the three and nine-month periods ended September 30, 1999 are not necessarily
indicative of results for the full year.
(2) NET INCOME (LOSS) PER SHARE
According to Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," the Company presents both basic net income (loss) per
share and diluted net income (loss) per share. Basic net income (loss) per share
is based on the weighted average number of shares outstanding during the period.
Diluted net income (loss) per share reflects the per share effect of dilutive
common stock equivalents.
(3) CAPITAL 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 for an aggregate of $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 had essentially
the same rights and privileges as the Company's other three series of
convertible preferred stock (Series A, B and C) which were outstanding at that
time. Because the Series D Preferred Stock was sold at a price of $6.00, a
non-cash charge of approximately $4.9 million was recorded to give effect to its
beneficial conversion features. The Company recorded a charge against additional
paid-in capital to reflect the difference between
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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 is recorded in a manner analogous to a dividend on preferred
stock and is reflected as a reduction to income and earnings per share available
for common stockholders.
(3)CAPITAL STOCK
In connection with the issuance of Series A convertible preferred stock in
August 1996, Proxicom issued warrants to purchase 1,011,378 shares of Series A
convertible preferred stock at $7.91 per share. These warrants were exercised on
April 13, 1999, and Proxicom received proceeds of $8.0 million upon exercise.
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 certain 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. At the same time, Proxicom
amended its Certificate of Incorporation to authorize 10,000,000 shares of
preferred stock. In connection with the initial public offering, Proxicom
offered the underwriters of the offering an option to purchase an additional
675,000 shares of common stock at the offering's $13.00 per share offering
price. This option was exercised on May 21, 1999. Proceeds to the Company from
its initial public offering, net of underwriting discounts and costs of the
offering, were $54.3 million. The Company did not receive any proceeds from the
sale of common stock by the selling stockholders.
On October 14, 1999, the Company completed a public offering of common stock
which resulted in the issuance of 1,000,000 shares of common stock at $52.38 per
share. An additional 2,600,000 shares were sold by certain existing stockholders
at $52.38 per share. In connection with this offering, four of the selling
shareholders offered the underwriters an option to purchase 540,000 additional
shares of common stock at the offering's $52.38 per share offering price. This
option was exercised on October 19, 1999. Proceeds to the Company from this
offering, net of underwriting discounts and costs of the offering, were $49.1
million. The Company did not receive any proceeds from the sale of common stock
by the selling stockholders.
(4) WARRANT ISSUANCE
On September 24, 1999, the Company 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. The fair value of this warrant has been
calculated using the
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Black-Scholes option pricing model. The related pro-rata charge will be recorded
as a contra revenue over the service period of the agreement.
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The Company has no material components of other
comprehensive income (loss) and, accordingly, the Company's comprehensive income
is the same as its net income for all periods presented.
(6) CONTINGENT LIABILITIES
The Company has certain contingent liabilities that arise in the ordinary course
of its business activities. The Company accrues liabilities when it is probable
that future expenditures will be made and such expenditures can be reasonably
estimated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this Form 10-Q include forward-looking statements
that involve risks or uncertainties. While forward-looking statements are
sometimes presented with numerical specificity, they are based on various
assumptions made by management regarding future circumstances over many of which
Proxicom has little or no control. A number of important factors, including
those identified under the section captioned "Risk Factors" in Proxicom's
registration statement on Form S-1 (SEC File No. 333-87671) (the "Registration
Statement") which hereby is incorporated by reference, as well as factors
discussed elsewhere in this Form 10-Q, could cause Proxicom's actual results to
differ materially from those in forward-looking statements or financial
information. Actual results may differ from forward-looking results for a number
of reasons, including the following: (i) changes in the demand for professional
Internet services; (ii) Proxicom's ability to manage growth and hire and retain
skilled employees; (iii) Proxicom's loss of a major client or significant
project; (iv) competitive factors; (v) lack of growth or decline in Internet
usage; (vi) Proxicom's failure to keep pace with changing technologies and
protect its intellectual property; (vii) year 2000 issues; and (viii) future
acquisitions or international expansion (including the ability to integrate
acquired businesses into Proxicom's operations and the ability of acquired
business to achieve satisfactory operating results). Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected.
OVERVIEW
Proxicom is a leading provider of Internet solutions to Global 1000
companies and other large organizations. Our Internet solutions include business
to consumer electronic commerce Internet sites, business to business electronic
commerce extranets, and company-specific intranets. 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.
Our revenue generally consists of fees generated from professional
services. We provide our services on a fixed-price, fixed-timeframe basis and on
a time and materials basis. When we provide fixed-fee, fixed-timeframe basis, we
use an internally developed process to estimate and propose fixed prices for
such projects. The estimation process accounts for standard billing rates
particular to each project, the technology environment and application type to
be applied, and the project's timetable and overall technical complexity. A
Proxicom 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 such
provisions in the period in which the losses are determined. When we provide
services on a time and materials basis,
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we recognize revenue as we incur costs. In time and materials service
situations, we also use our estimation process and a Proxicom senior management
member approves these proposals.
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 a large client may constitute a significant portion of our total revenue in
a particular quarter.
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. Given our recent and rapid growth, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful and that you should not rely on these comparisons as indicators of
future performance.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue......................... 56.0 51.2 55.8 54.2
-------- -------- -------- --------
Gross profit............................ 44.0 48.8 44.2 45.8
-------- -------- -------- --------
Operating expenses:
General and administrative............ 34.9 33.2 38.5 33.9
Selling and marketing................. 7.3 7.2 7.3 5.9
Research and development.............. 1.9 0.0 2.2 0.0
Acquisition and merger costs.......... 21.9 0.0 9.3 0.6
Stock-based and other
compensation....................... 144.9 0.4 58.7 0.6
-------- -------- -------- --------
Total.............................. 210.9 40.8 116.0 41.0
-------- -------- -------- --------
Income (loss) from operations........... (166.9) 8.0 (71.8) 4.8
Interest income (expense), net.......... (0.5) 3.0 (0.2) 2.1
-------- -------- -------- --------
Income (loss) before income taxes....... (167.4) 11.0 (72.0) 6.9
Income tax (benefit) provision.......... (1.0) 4.5 (3.4) 2.9
-------- -------- -------- --------
Net income (loss)....................... (166.4)% 6.5% (68.6)% 4.0%
======== ======== ======== ========
</TABLE>
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THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1998
Revenue. For the three-month period ended September 30, 1999, revenue
increased $11.0 million, or 87.7%, to $23.6 million from $12.6 million for the
three-month period ended September 30, 1998. This increase was primarily
attributable to the increase in the average size of our engagements. Our largest
client contributed approximately 24.6% of our revenue for the three-month period
ended September 30, 1999. No other individual client contributed 10% or more of
our revenue for that period. For the three-month period ended September 30,
1998, our two largest clients accounted for approximately 13.8% and 13.6%,
respectively, of our revenue. No other individual client contributed 10% or more
of our revenue for that period.
For the nine-month period ended September 30, 1999, revenue increased $21.9
million, or 70.5%, to $53.0 million from $31.1 million for the nine-month period
ended September 30, 1998. This increase was primarily attributable to a 79%
increase in the number of engagements and a 21% increase in the average size of
the engagements compared to the nine-month period ended September 30, 1998. Our
largest client contributed 14.1% of our revenue for the nine-month period ended
September 30, 1999. No other individual client contributed 10% or more of our
revenue for that period. For the nine-month period ended September 30, 1998, our
two largest clients contributed 15.3% and 14.9%, respectively, of our revenue.
No other individual client contributed 10% or more of our revenue for that
period.
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
$5.0 million, or 71.5%, to $12.1 million for the three-month period ended
September 30, 1999, from $7.0 million for the three-month period ended September
30, 1998. These costs increased $11.4 million, or 65.6%, to $28.8 million for
the nine-month period ended September 30, 1999 from $17.4 million for the
nine-month period ended September 30, 1998. These increases were due primarily
to increases in the number of personnel needed to service our client
engagements. Service project personnel increased from 330 at September 30, 1998
to 492 at September 30, 1999. As a percentage of revenue, cost of revenue
decreased from 56.0% to 51.2% for the three-month period ended September 30,
1999, as compared to the three-month period ended September 30, 1998, and from
55.8% to 54.2% for the nine-month period ended September 30, 1999, as compared
to the nine-month period ended September 30, 1998.
Gross Profit. For the three-month period ended September 30, 1999, gross
profit increased $6.0 million, or 108.3%, to $11.5 million from $5.5 million for
the three-month period ended September 30, 1998. For the nine-month period ended
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September 30, 1999, gross profit increased $10.6 million, or 76.8%, to $24.3
million from $13.7 million for the nine-month period ended September 30, 1998.
These increases reflect the increase in revenue during the periods in 1999. As a
percentage of revenue, gross profit increased from 44.0% to 48.8% for the
three-month period ended September 30, 1999, as compared to the three-month
period ended September 30, 1998. As a percentage of revenue, gross profit
increased from 44.2% to 45.8% for the nine-month period ended September 30,
1999, as compared to the nine-month period ended September 30, 1998. These
percentage increases primarily reflect increased overall utilization of
consulting and delivery personnel.
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 $3.4 million, or 78.7%, to $7.8 million for the three-month period
ended September 30, 1999 from $4.4 million for the three-month period ended
September 30, 1998. These costs increased $6.0 million, or 50.2%, to $18.0
million for the nine-month period ended September 30, 1999 from $12.0 million
for the nine-month period ended September 30, 1998. These increases were due
primarily to increased facilities and related expenses to support our growth.
Also, approximately 16% and 13% of these increases were attributable to
increased personnel costs for the three-month and nine-month periods ended
September 30, 1998 and 1999, respectively. As a percentage of revenue, general
and administrative expenses decreased from 34.9% to 33.2% for the three-month
period ended September 30, 1999, as compared to the three-month period ended
September 30, 1998, and from 38.5% to 33.9% for the nine-month period ended
September 30, 1999, as compared to the nine-month period ended September 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 $780,000, or 85.2%, to $1.7 million for the three-month period ended
September 30, 1999 from $916,000 for the three-month period ended September 30,
1998. Selling and marketing costs increased $854,000, or 37.5%, to $3.1 million
for the nine-month period ended September 30, 1999 from $2.3 million for the
nine-month period ended September 30, 1998. Approximately 70% and 45% of these
increases were attributable to increased marketing and promotion initiatives for
the three-month and nine-month periods ended September 30, 1999, respectively.
The remainder was primarily due to increases in the number of sales and
marketing personnel. As a percentage of revenue, selling and marketing costs
decreased from 7.3% to 7.2% for the three-month period ended September 30, 1999,
as compared to the three-month period ended September 30, 1998, and from 7.3% to
5.9% for the nine-month period ended September 30, 1999, as compared to the
nine-month period ended September 30, 1998.
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Research and Development. Research and development costs, primarily
software development, consist of salaries of personnel assigned directly to
research and development projects, associated employee benefits and direct
expenses incurred to complete research projects, including non-employee
consulting. No research and development costs were incurred during the
three-month and nine-month periods ended September 30, 1999. Research and
development costs for the three-month and nine-month periods ended September 30,
1998 were $244,000 and $692,000, respectively.
Acquisition and Merger Costs. No acquisition and merger costs were incurred
during the three-month period ended September 30, 1999 as no acquisitions
occurred during this period. We incurred charges of approximately $2.8 million
for the three-month period ended September 30, 1998 for the costs associated
with our merger with IBIS Consulting, Inc. For the nine-month period ended
September 30, 1999, we incurred charges of $300,000 related to our merger with
ad hoc Interactive, Inc. For the nine-month period ended September 30, 1998, we
incurred charges of $2.8 million related to the IBIS transaction and $130,000
related to our merger with Square Earth, Inc. All transaction costs were related
to professional fees and other direct expenses.
Stock-Based and Other Compensation. For the three-month period ended
September 30, 1999, stock-based and other compensation decreased $18.1 million,
or 99.4%, to $106,000 from $18.2 million for the three-month period ended
September 30, 1998. Stock-based and other compensation decreased $17.9 million,
or 98.2% to $331,000 for the nine-month period ended September 30, 1999 from
stock-based and other compensation of $18.3 million for the nine-month period
ended September 30, 1998. The Company incurred charges of $18.3 million in 1998
for costs associated with the 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.
Interest Income (Expense), Net. Interest income (expense), net increased
$767,000 to interest income of $701,000 for the three-month period ended
September 30, 1999 from interest expense of $66,000 for the three-month period
ended September 30, 1998. Interest income (expense), net increased $1.2 million
to interest income of $1.1 million for the nine-month period ended September 30,
1999 from interest expense of $49,000 for the nine-month period ended September
30, 1998. These increases were due primarily to interest income earned on
proceeds raised in our initial public offering in April 1999. We generally
invest in highly 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.
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<PAGE> 14
Income Tax (Benefit) Provision. The $1.1 million income tax provision in
the three-month period ended September 30, 1999 represents combined federal,
state and foreign income taxes at an effective rate of 41.2%. Income tax benefit
of $132,000 in the three-month period ended September 30, 1998 represented
combined federal and state income taxes at an effective benefit rate of 0.6%.
The $1.5 million income tax provision in the nine-month period ended September
30, 1999 represents combined federal, state and foreign income taxes at an
effective rate of 41.4%. Income tax benefit of $1.1 in the nine-month period
ended September 30, 1998 represented combined federal and state income taxes at
an effective benefit rate of 4.8%. Our effective tax rate was favorably impacted
for both three-month and nine-month periods ended September 30, 1998 by our
mergers with IBIS Consulting 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.
LIQUIDITY AND CAPITAL RESOURCES
On April 23, 1999, Proxicom completed its initial public offering of
securities. After deducting expenses, Proxicom received approximately $46.2
million in proceeds from this transaction. In connection with the initial public
offering, Proxicom offered the underwriters of the offering an option to
purchase an additional 675,000 shares of common stock at the offering's $13.00
per share offering price. Proxicom received approximately $8.1 million in
proceeds from this option, which was exercised on May 21, 1999.
Also on October 14, 1999, Proxicom completed another public offering
resulting in the issuance of 1,000,000 shares of common stock at $52.38 per
share. An additional 2,600,000 shares were sold by certain existing stockholders
for $52.38 per share. In October 1999, Proxicom received approximately $49.1
million from this secondary offering, net of underwriting discounts and costs.
In connection with the issuance of Series A convertible preferred stock in
August 1996, Proxicom issued warrants to purchase shares of Series A convertible
preferred stock that were exercised on April 13, 1999. Upon the exercise of the
warrants, the Company received proceeds of $8.0 million. The shares of Series A
convertible preferred stock received upon the exercise of the warrants were
converted into 1,011,378 shares of common stock upon the closing of our initial
public offering of securities on April 23, 1999.
As of March 26, 1999, Proxicom merged with ad hoc Interactive, 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.
The transaction was accounted for as a pooling of interests.
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<PAGE> 15
Cash and cash equivalents were $66.1 million at September 30, 1999, which
was an increase of $63.5 million from $2.6 million at December 31, 1998. Net
cash used by operating activities of $2.1 million and $6.0 million for the
nine-month periods ended September 30, 1999 and 1998, respectively, was
attributable to the growth in our revenue and operations. The net cash used in
operating activities for the nine-month period ended September 30, 1999 was
primarily offset with proceeds raised from our initial public offering, exercise
of stock warrants, borrowings under our credit facility and the issuance of
Series D convertible preferred stock for approximately $7.3 million. Also, a
total of approximately $3.2 million was raised through the exercise of stock
options in the nine-month period ended September 30, 1999. Capital expenditures
of approximately $1.7 million and $1.5 million for the nine-month periods ended
September 30, 1999 and 1998, respectively, were used primarily for computer
equipment, office equipment and leasehold improvements related to our growth.
Capital expenditures for fiscal year 1999 are expected to be approximately $3.5
million and will be made principally for computer equipment, internally used
software purchases and leasehold improvements to support our growth.
We anticipate that the net proceeds of our public offerings of securities,
together with existing sources of liquidity and funds generated from operations,
should provide adequate cash to fund our currently anticipated cash needs
through at least the next 18 months. To the extent we are unable to fund our
operations from cash flows, we may need to obtain financing from external
sources in the form of either additional equity or indebtedness. We may also
borrow money under our $10.0 million revolving credit facility with NationsBank,
N.A. As of November 10, 1999, we had no outstanding borrowings under our credit
facility. 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 us.
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. Also, errors or defects in the technology our
vendors use could cause us to experience operations difficulties. 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.
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<PAGE> 16
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 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 implementing the revisions to our solutions software code, and replacing
systems as needed.
We have communicated with the suppliers of our computer systems, as well
other goods and services providers to verify their current compliance levels and
have worked with them on their plans as 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 completed identification of the processes that required year 2000
readiness testing, and have both established dedicated test environments for
year 2000 readiness testing, and completed the testing for these processes.
Status. Our testing 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. Personal
computer platforms have been identified and tested in all of our offices.
Equipment in Spain and Italy is either customer provided and warranted to be
year 2000 compliant, or already known to be compliant. Replacement of impacted
equipment is virtually complete in all locations, the exception being delivery
of or in some cases final installation. Our overall hardware compliance is
complete.
Installation of the software components that will bring the computing
platforms into compliance is complete. Embedded systems are tested and complete.
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 impacted
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. However, we are
unable to test all elements of our material vendors, and we will not be able to
evaluate completely whether impacted HVAC, fire control and related systems will
need to be revised or replaced by the respective building managers.
Cost. Based on the work done to date, we predict that the cost for work and
material and upgrades needed to complete our year 2000 certification process was
approximately $325,000. This includes the cost of material upgrades, software
modification and related consulting fees.
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<PAGE> 17
Contingency Plans. We have developed a number of plans that will allow us
to operate in a relatively normal manner in the event we encounter any problems.
For the network to operate an internal basis, we have a variety of means to
ensure continued operation, ranging from turning off date and time functions
within the network while we resolve the issues; to simply changing the date and
adjusting output dates with simple date translation routines. Internal voice
systems have been recently (within 120 days) installed by Lucent Technologies
and are year 2000 certified, but we possess enough cell phones to operate on an
outbound call basis, and we have provided for switch redirect service in the
event of a switch compliance issue. Internet and voice traffic rely on AT&T for
transport. In the event that the voice and data fail to operate, it will be
because of a global transport failure. Firewalls installed at the edge points of
the network can be removed, and reinstalled upon resolution. E-mail uses both
Unix and NT based hosts, and either system can be used as host in the event of
an unknown compliance issue.
Financial systems applications have been rigorously tested, and we have
been assured of the certification. Because of the nature of this application,
simple workaround solutions are not possible, and we have positioned ourselves
with our vendors to provide priority support to resolve any issues. Other
systems that interface to finance have been individually tested and in most
cases an alternative process has been identified.
Our Human Resource programs are handled by the internal staff, and we can
draw upon our own resources to fix any program, or more likely reporting, issues
that arise. Since the number of reports and frequency of change of the reports
is very low, resolution times are forecasted to be very quick. Reports for
marketing and sales are similarly impacted and resolvable.
We are actively tracking the latest updates to Microsoft's operating
systems, as well as the various Unix variants. Additionally, Oracle and MS SQL
database updates are applied on a routine basis to ensure compliance. Should a
failure in any of the base code be determined, we will work with these vendors
to resolve the issues.
Tools and programming aids used by our staff to create our solutions are
kept at current operating levels, but in the event of an issue, alternative
tools are available, and in most cases our staff is trained to use the preferred
tool as well as the alternative products. We anticipate virtually no issues in
this regard. However, we have tested these systems and feel confident in our
primary tool selections.
Similarly, the products used in the creation of the creative process have
been tested, and alternatives made available. Since the creative toolkit is
changing quickly, many selections for alternative products are available.
-15-
<PAGE> 18
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
3.1* Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate of the Registrant
10.1* Proxicom, Inc. Employee Stock Purchase Plan
27.1 Financial Data Schedule
b. Reports on Form 8-K:
We filed a current report on Form 8-K on July 6, 1999, announcing the
amendment of our agreement to provide services to Merrill Lynch, Pierce, Fenner
& Smith Incorporated.
* Incorporated by reference to Proxicom's registration statement on Form S-1,
SEC file no. 333-72297.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
PROXICOM, INC.
Date: November 12, 1999 /s/ Kenneth J. Tarpey
---------------------
Kenneth J. Tarpey
Executive Vice President, Chief Financial
Officer and Treasurer (duly authorized to
sign on behalf of the Registrant)
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
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<RECEIVABLES> 20,266 20,266
<ALLOWANCES> 598 598
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