<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 JUNE 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 August 8, 1999, the issuer had 24,752,853 shares of common stock
outstanding.
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PROXICOM, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I - CONSOLIDATED FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 and June 30, 1999 (Unaudited)................ 1
Consolidated Statements of Operations
for the Three-Month and Six-Month Periods Ended June 30, 1999
(Unaudited) and June 30, 1998 (Unaudited) ........................... 2
Consolidated Statements of Cash Flows
for the Six-Month Periods Ended June 30, 1999 (Unaudited)
and June 30, 1998 (Unaudited)........................................ 3
Notes to Consolidated Financial Statements (Unaudited)............... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................ 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
</TABLE>
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PART I.
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PROXICOM, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 2,586 $ 2,643
Investments.................................................................. 278 56,402
Accounts receivable, net of allowances of $669 and $595, respectively........ 9,893 15,018
Unbilled services............................................................ 4,259 6,681
Prepaid expenses............................................................. 402 1,407
Other current assets......................................................... 431 583
------------ ------------
Total current assets...................................................... 17,849 82,734
Property and equipment, net..................................................... 2,944 3,570
Deferred tax assets and other................................................... 1,758 1,826
------------ ------------
Total assets.............................................................. $ 22,551 $ 88,130
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.............................................................. $ 5,554 $ -
Trade accounts payable....................................................... 662 1,722
Accrued compensation......................................................... 3,779 3,562
Deferred revenue............................................................. 1,889 1,910
Deferred tax liabilities..................................................... 1,423 1,423
Note payable................................................................. 1,400 -
Other accrued liabilities.................................................... 1,215 667
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Total current liabilities................................................. 15,922 9,284
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Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized
at December 31, 1998; 10,000,000 shares authorized at
June 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 June 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, 24,797,902 shares issued and
24,744,773 shares outstanding at June 30, 1999............................ 154 248
Additional paid-in capital................................................... 25,578 102,112
Retained deficit............................................................. (18,901) (23,292)
Treasury stock............................................................... (222) (222)
------------ ------------
Total stockholders' equity................................................ 6,629 78,846
------------ ------------
Total liabilities and stockholders' equity...................................... $ 22,551 $ 88,130
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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PROXICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ------------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue .......................................... $ 10,508 $ 16,221 $ 18,551 $ 29,475
Cost of revenue.................................... 5,690 8,911 10,343 16,703
------------ ------------ ------------ ------------
Gross profit....................................... 4,818 7,310 8,208 12,772
------------ ------------ ------------ ------------
Operating expenses:
General and administrative...................... 4,308 5,704 7,649 10,383
Selling and marketing........................... 651 787 1,363 1,437
Research and development........................ 220 - 448 -
Acquisition and merger costs.................... - - 130 300
------------ ------------ ------------ ------------
Total........................................ 5,179 6,491 9,590 12,120
------------ ------------ ------------ ------------
Income (loss) from operations...................... (361) 819 (1,382) 652
Interest income (expense), net..................... (26) 476 17 411
------------- ------------ ------------ ------------
Income (loss) before income taxes.................. (387) 1,295 (1,365) 1,063
Income tax provision (benefit)..................... (452) 531 (943) 447
------------- ------------ ------------- ------------
Net income (loss).................................. 65 764 (422) 616
Non-cash dividend on beneficial conversion on
convertible preferred stock (see Note 4)........ - - - (4,873)
------------ ------------ ------------ -------------
Net income (loss) available to common stockholders. $ 65 $ 764 $ (422) $ (4,257)
============ ============ ============= =============
Basic net income (loss) per common share........... $ 0.00 $ 0.03 $ (0.03) $ (0.22)
============ ============ ============= =============
Diluted net income (loss) per common share......... $ 0.00 $ 0.03 $ (0.03) $ (0.22)
============ ============ ============= =============
Weighted average shares used in computing basic
income (loss) per share amount.................. 13,809 23,016 13,790 19,117
============ ============ ============ ============
Weighted average shares used in computing diluted
income (loss) per share amount.................. 13,809 26,615 13,790 19,117
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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e
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------------
1998 1999
------------------- --------------------
(UNAUDITED)
<S> <C> <C>
Cash flows used in operating activities:
Net (loss) income................................................................... $ (422) $ 616
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Non-cash stock compensation...................................................... 57 223
Depreciation and amortization.................................................... 767 740
Provision for (use of) doubtful accounts......................................... 574 (74)
Common stock issued for services................................................. 166 -
Decrease in deferred income taxes................................................ (911) (68)
Changes in assets and liabilities:
Increase in accounts receivable............................................... (2,178) (5,051)
Increase in unbilled services................................................. (636) (2,422)
Increase in prepaid expenses.................................................. (30) (1,005)
(Increase) decrease in other assets........................................... 60 (151)
Increase (decrease) in trade accounts payable................................. (583) 1,060
Increase (decrease) in accrued compensation................................... 932 (217)
Decrease in note payable...................................................... - (1,400)
(Decrease) increase in deferred revenue....................................... (350) 21
Increase (decrease) in other accrued liabilities.............................. 142 (548)
------------ ------------
Net cash used in operating activities...................................... (2,412) (8,276)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment................................................. (1,157) (1,365)
Purchases of investments............................................................ - (414,538)
Sales of investments................................................................ 40 358,410
------------ ------------
Net cash used in investing activities ..................................... (1,117) (57,493)
------------ ------------
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........................................................... 179 1,921
Borrowings on lines of credit....................................................... 3,474 4,550
Payments on lines of credit......................................................... (745) (10,104)
Subchapter S Corporation distributions.............................................. (754) (130)
------------ ------------
Net cash provided by financing activities.................................. 2,154 65,826
------------ ------------
Net (decrease) increase in cash and cash equivalents.................................. (1,375) 57
Cash and cash equivalents at beginning of period...................................... 2,343 2,586
------------ ------------
Cash and cash equivalents at end of period............................................ $ 968 $ 2,643
============ ============
</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. 333-72297). The consolidated
results of operations for the three and six-month periods ended June 30, 1999
are not necessarily indicative of results for the full year.
(2) INVESTMENTS
Investments represent available-for-sale securities, which are recorded at fair
market value. The difference between fair market value and cost is not material.
Realized gains and losses from sales of available-for-sale securities were not
material for any period presented.
(3) NET INCOME (LOSS) PER SHARE
According to Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," the Company presents both basic net income per share and diluted net
income per share. Basic net income per share is based on the weighted average
number of shares outstanding during the period. Diluted net income per share
reflects the per share effect of dilutive common stock equivalents.
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Potentially dilutive shares have not been included in the diluted per share
calculation for the three-month period ended June 30, 1998, nor the six-month
periods ended June 30, 1998 and 1999, respectively, because their effects would
be anti-dilutive. Accordingly, for the three and six-month periods ended June
30, 1998 and 1999, diluted net loss available per common share is the same as
basic net loss available per common share.
(4) 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 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 Company's other
three series of convertible preferred stock (Series A, B and C). 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 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.
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 approximately $54.3 million.
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(5) 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 caption "Risk Factors" in Proxicom's registration
statement on Form S-1 (SEC File No. 333-72297) (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:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue....................... 54.1 54.9 55.8 56.7
------- ------- ------- -------
Gross profit.......................... 45.9 45.1 44.2 43.3
------- ------- ------- -------
Operating expenses:
General and administrative.......... 41.0 35.2 41.2 35.2
Selling and marketing............... 6.2 4.8 7.3 4.9
Research and development............ 2.1 - 2.4 0.0
Acquisition and merger costs........ - - 0.7 1.0
------- ------- ------- -------
Total............................ 49.3 40.0 51.6 41.1
------- ------- ------- -------
Income (loss) from operations......... (3.4) 5.1 (7.4) 2.2
Interest income (expense), net........ (0.3) 2.9 - 1.4
-------- ------- ------- -------
Income (loss) before income taxes..... (3.7) 8.0 (7.4) 3.6
Income tax provision (benefit)........ 4.3 3.3 (5.1) 1.5
------- ------- -------- -------
Net income (loss)..................... 0.6% 4.7% (2.3)% 2.1%
======= ======= ======== =======
</TABLE>
THREE-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THE THREE-MONTH
PERIOD ENDED JUNE 30, 1998 AND SIX-MONTH PERIOD ENDED JUNE 30, 1999
COMPARED TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998
Revenue. For the three-month period ended June 30, 1999, revenue
increased $5.7 million, or 54.4%, to $16.2 million from $10.5 million for the
three-month period ended June 30, 1998. Approximately $700,000 of this revenue
increase was attributable to software sales, including our sale of development
and certain
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marketing rights of some of our software frameworks. 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. Both of these
increases in revenue reflect increases in the size and number of our client
engagements for the three-month and six-month period to period comparisons.
Approximately 52% and 16% of these increases were attributable to increased
engagement size for the three-month and six-month periods ended June 30, 1999,
respectively, and the remainder is attributable to an increase in the number of
engagements for both periods. We have generally realized lower revenue in the
first quarter of any calendar 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 believe that period to period comparisons of our revenue
and operating results are not necessarily meaningful and that you should not
rely on these comparisons as indicators of future performance.
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
$3.2 million, or 56.6%, to $8.9 million for the three-month period ended June
30, 1999 from $5.7 million for the three-month period ended June 30, 1998. 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 engagements. Service project personnel
increased from 244 at June 30, 1998 to 392 at June 30, 1999. As a percentage of
revenue, cost of revenue increased from 54.1% to 54.9% for the three-month
period ended June 30, 1999, as compared to the three-month period ended June
30, 1998, and 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.
Gross Profit. For the three-month period ended June 30, 1999, gross
profit increased $2.5 million, or 51.7%, to $7.3 million from $4.8 million for
the three-month period ended June 30, 1998. The gross profit increase reflects
an increase in revenue during the three-month period ended June 30, 1999. As a
percentage of revenue, gross profit decreased from 45.9% to 45.1% for the
three-month period ended June 30, 1999, as compared to the three-month period
ended June 30, 1998. The percentage decrease primarily reflects reduced overall
utilization of consulting and delivery personnel. 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
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delivery personnel. Employee utilization can be affected by multiple factors,
including rapid growth and reductions in the number or size of projects in any
period. 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 $1.4 million, or 32.4%, to $5.7 million for the three-month period
ended June 30, 1999 from $4.3 million for the three-month period ended June 30,
1998. These costs increased $2.7 million, or 35.7%, to $10.4 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 6.9% and 7.8% of these
increases were attributable to increased personnel costs for the three-month
and six-month periods ended June 30, 1998 and 1999, respectively. As a
percentage of revenue, general and administrative expenses decreased from 41.0%
to 35.2% for the three-month period ended June 30, 1999, as compared to the
three-month period ended June 30, 1998, and from 41.2% to 35.2% 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 $136,000, or 20.9%, to $787,000 for the three-month period ended June
30, 1999 from $651,000 for the three-month period ended June 30, 1998. Selling
and marketing costs increased $74,000, or 5.4%, to $1.4 million for the
six-month period ended June 30, 1999 from $1.4 million for the six-month period
ended June 30, 1998. These increases were primarily due to increases in the
number of sales and marketing personnel. As a percentage of revenue, selling and
marketing costs decreased from 6.2% to 4.8% for the three-month period ended
June 30, 1999, as compared to the three-month period ended June 30, 1998, and
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.
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 three months ended June 30, 1999, decreased $220,000,
or 100.0%, from the three-month period ended June 30, 1998. 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. These
decreases were attributable to re-deploying engineers and technicians active in
developing and enhancing replicable frameworks to client service projects during
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<PAGE> 13
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. No acquisition and merger costs were
incurred during the three-month periods ended June 30, 1999 and June 30, 1998,
as no acquisitions occurred during these periods. We incurred charges of
approximately $300,000 for the six-month period ended June 30, 1999 for costs
associated with the Ad Hoc 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, Inc. in January 1998. All
transaction costs were related to professional fees and other direct expenses.
Interest Income (Expense), Net. Interest income (expense), net
increased $502,000 to interest income of $476,000 for the three-month period
ended June 30, 1999 from interest expense of $26,000 for the three-month period
ended June 30, 1998. 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. These
increases were due primarily to interest income earned on proceeds raised in our
initial public offering in April 1999. We generally invest in 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 $531,000 income tax provision in
the three-month period ended June 30, 1999 represents combined federal, state
and foreign income taxes at an effective rate of 41.0%. Income tax benefit of
$452,000 in the three-month period ended June 30, 1998 represented combined
federal and state income taxes at an effective benefit rate of 116.8%. 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 both
three-month and six-month periods ended June 30, 1998 by our mergers with IBIS
Consulting, Inc. in August 1998, and Ad Hoc 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
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<PAGE> 14
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.
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, we 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, 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. The
transaction was accounted for as a pooling of interests.
In addition, in March 1999, Proxicom signed an agreement with
Ericsson Telecommunicazioni SpA. Under the agreement, we will make a 19.9%
investment in an Italian joint venture company. Ericsson will own the remaining
81.1% interest. The joint venture company, named Eunosia Internet Architects,
SpA ("Eunosia"), will provide Internet solutions to Italian-based businesses.
The initial share capital of Eunosia was approximately $1.7 million, which
Proxicom and Ericsson have contributed in proportion to their shareholder
percentage interests. In June 1999, we contributed $336,000 to fulfill our
initial share capital obligation. Under the joint venture agreement, Proxicom
has entered into a services agreement with the joint venture company under which
Proxicom will provide consulting, project management and technical design
services to the joint venture's clients.
In July 1999, Proxicom signed an agreement with affiliates of
Iberdrola SA. Under the agreement, Proxicom will make a 19.9% investment in a
Spanish joint venture company, named Kristina, Services de Internet, SA
("Kristina"). Affiliates of Iberdrola SA will own the remaining 81.1% interest.
Kristina will provide Internet solutions to Spain-based businesses. The initial
share capital of Kristina is approximately $7.4 million, which Proxicom and the
affiliates of Iberdrola SA will contribute in proportion to their shareholder
percentage interests. In late July 1999, Proxicom contributed approximately
$740,000 to fulfill one-half of its initial share capital obligation.
Cash and cash equivalents were $2.6 million at June 30, 1999, which
was unchanged from $2.6 million at December 31, 1998. Net cash used by operating
activities of $8.3 million and $2.4 million for the six-month periods ended June
30, 1999 and 1998, respectively, were attributable to the growth in our revenue
and operations. The net cash used in operating activities for the six-month
period ended
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<PAGE> 15
June 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 $1.9 million was raised through the
exercise of stock options in the six-month period ended June 30, 1999. Capital
expenditures of approximately $1.4 million and $1.2 million for the six-month
periods ended June 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 $3.0 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 initial public offering
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 July 27, 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. 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, and plan to
complete this assessment during the third quarter of 1999. Based on these
results, we are verifying minor revisions to our solutions software code, and
replacing systems as needed.
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<PAGE> 16
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
most locations. Personal computer platforms have been identified and tested in
our Reston, VA and New York, NY locations. This effort is estimated to be 95%
complete. Inventory testing in San Francisco, Sacramento, and Sausalito is 50%
complete, and most of the hardware in these locations in less than two years old
according to accounting records. 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 90%
complete. In Munich, 50% of our hardware, and 90% 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 end
of September 1999. Embedded systems are tested at a 95% level, with full
compliance scheduled for completion in October 1999. In all locations, impacted
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 September 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 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. 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 impacted HVAC, fire control
and related systems will need to be revised or replaced by the respective
building managers.
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<PAGE> 17
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 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 September, after the testing and
assessment period, we will develop necessary contingency plans.
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<PAGE> 18
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between April 1, 1999 and June 30, 1999, Proxicom granted options to
purchase a total of 770,617 shares of common stock under the 1996 Stock Option
Plan to certain of its employees. Between April 1, 1999 and May 27, 1999, 30
optionees exercised options to purchase 315,776 shares of common stock. These
securities were issued without registration under the Securities Act in reliance
upon exemptions from registration under Rule 701 and Section 4(2).
On April 13, 1999, Proxicom issued 1,011,378 shares of Series A
convertible preferred stock to two institutional investors upon the exercise of
warrants. Proxicom received $8.0 million upon the exercise of the warrants.
These securities were issued without registration under the Securities Act in
reliance upon an exemption from registration under Section 4(2). These shares of
Series A convertible preferred stock converted into 1,011,378 shares of common
stock upon the closing of Proxicom's initial public offering, on April 23, 1999.
These shares of common stock were issued without registration under the
Securities Act in reliance upon an exemption from registration under Section
3(a)(9).
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:
None
* 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.
/s/ KENNETH J. TARPEY
Date: August 16, 1999 ----------------------------------------
Kenneth J. Tarpey
Senior Vice President, Chief Financial
Officer and Treasurer (duly authorized
to sign on behalf of the Registrant)
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