<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 0-25741
PROXICOM, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 52-1770631
-------------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11600 Sunrise Valley Drive
Reston, VA 20191
-------------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
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 per share
-----------------------------------------------------------------
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
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's common stock as of
March 24, 2000, is $1,232,190,709.
As of March 24, 2000, there were 53,737,000 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Proxy Statement for the 2000 Annual Meeting of
Stockholders of the registrant is incorporated by reference into Part III
hereof.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PART I
<S> <C> <C>
Item 1. Business.......................................................... 2
Item 2. Properties........................................................ 17
Item 3. Legal Proceedings................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................... 19
Item 6. Selected Financial Data........................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 28
Item 8. Financial Statements and Supplementary Data....................... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant................ 30
Item 11. Executive Compensation............................................ 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 30
Item 13. Certain Relationships and Related Transactions.................... 30
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 31
SIGNATURES................................................................................. 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................. F-1
</TABLE>
1
<PAGE> 3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans and forecasted demographic and economic trends relating to our
industry are forward-looking statements. These statements can sometimes be
identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," or "intend." We cannot promise you that our
expectations in such forward-looking statements will turn out to be correct.
Important factors that could cause our actual results to be materially different
from our expectations include those discussed under the caption "Business --
Risk Factors." We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS.
In January 2000, Proxicom's Board of Directors approved a two-for-one stock
split in the form of a stock dividend paid on February 24, 2000 to the
stockholders of record on February 9, 2000. Information in this report with
respect to common shares and common share prices reflects the stock split.
OVERVIEW
Proxicom is a leading provider of Internet solutions to Global 1000
companies and other large organizations. Since 1994, we have focused exclusively
on the Internet and have successfully completed over 800 client engagements.
Our Internet solutions have included
- business-to-consumer electronic commerce Internet sites for Calphalon
Corporation, Marriott International and Owens Corning;
- business-to-business electronic commerce extranets for Harman
International, Mercedes-Benz Credit Corp. and McKessonHBOC; and
- company-specific intranets for GE Plastics, Hoffmann-La Roche, Inc.
and Merrill Lynch & Co., Inc.
We apply our proprietary methodology, the Proxicom Process, in all of our
client engagements. Using the Proxicom Process, we integrate strategy,
technology and creative design to help our clients transform their businesses
with Internet solutions.
INDUSTRY BACKGROUND
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit its potential to extend and enhance their
business activities. Companies are using the Internet to communicate and
transact business on a one-to-one basis with existing customers and to target
and acquire new customers. At the same time, companies are using the Internet to
collaborate with their supply-chain partners, enable electronic commerce and
manage distribution relationships. The Internet has also allowed businesses to
identify new product and service offerings that extend and complement their core
markets. As a result, organizations are investing in the strategic use of
Internet solutions to transform their core business and technology strategies.
2
<PAGE> 4
Faced with growing competition, deregulation and globalization, companies
are increasingly looking to the Internet to help build competitive advantage.
Much as client/server technologies opened information access within
organizations in the late 1980s, the Internet now offers the potential for
organizations to extend their businesses beyond traditional limits. The Internet
extends the business role of technology from employee-focused productivity
enhancement to customer-focused revenue generation, raising the importance and
complexity of new technology deployment.
Successful adoption of the Internet in this new context poses strategic,
technical and creative design challenges. Alignment of business and Internet
strategies requires an understanding of how the Internet transforms
relationships between businesses and their internal organizations, customers and
business partners. Also, companies facing technology investment decisions often
need outside expertise to prioritize and stage alternative investment options.
For these investments to succeed, companies must also be able to integrate new
Internet applications with their existing systems. Finally, a successful
solution requires that the Internet application, particularly the user
interface, be engaging and easy to use.
Few businesses have the range of skills necessary to successfully transform
the way they use technology and implement Internet solutions. Moreover, it is
difficult to find these skills externally in the supply-constrained Internet
professional services market. Even if businesses obtain skills in all three of
the strategy, technology and creative disciplines, they often have little
experience coordinating them to exploit fully the Internet and other advanced
technologies.
The combination of these factors is creating a significant and growing
demand for Internet professional services. International Data Corp., a
technology industry research firm, forecasts that the market for Internet and
electronic commerce professional services worldwide will grow from $4.6 billion
in 1997 to $54 billion by 2002. Forrester Research, Inc., another technology
industry research firm, estimates the market for Internet and electronic
commerce professional services will grow from $10.6 billion in 1999 to $78.6
billion by 2003. These projections represent a compound annual growth rate of
more than 50% over these periods. Forrester Research predicts that the Internet
will be one of the fastest-growing areas within the information technology
services industry. While business-to-consumer solutions are expected to continue
to be a large part of the Internet and electronic commerce services market,
business-to-business solutions will represent a growing percentage of the
overall market as companies externalize their internal processes. According to
Forrester Research, Inc., business-to-business sales will increase
to $2.7 trillion in 2004.
Vendors addressing the Internet professional services market can be broadly
divided into four major categories:
- Large systems integrators provide technology expertise across a wide
range of offerings.
- Specialty systems integrators offer more focused expertise related to
specific components of Internet-based solutions.
- Strategy consulting firms help companies define business models that
allow their customers to successfully use the Internet as a new
channel to reach customers and suppliers.
- Internet professional services providers bring creative, technology or
strategy expertise related to the Internet together in a single firm.
Different firms will place varying degrees of emphasis in these three
areas of expertise.
Proxicom believes organizations are increasingly searching for a single-source
professional services firm that can deliver integrated strategy, technology and
creative design skills specifically for the Internet. We believe firms in the
Internet professional services providers category, such as Proxicom, best meet
this demand. Furthermore, Proxicom believes that organizations will increasingly
look to Internet solutions providers that can leverage industry best practices,
increase predictability of success for Internet solutions and decrease risks
associated with implementation.
3
<PAGE> 5
PROXICOM'S SOLUTION
Proxicom is an Internet solutions provider that focuses on creating
business value for its clients. Proxicom's solution has five essential elements:
- integrated Internet strategy, technology and creative design services;
- industry and business domain expertise;
- in-depth Internet and advanced technologies expertise;
- a structured methodology, the Proxicom Process; and
- knowledge management and knowledge sharing infrastructure.
INTEGRATED INTERNET STRATEGY, TECHNOLOGY AND CREATIVE DESIGN SERVICES
Proxicom delivers its solutions through collaborative, multi-disciplinary
teams that apply the collective strengths of their strategy, technology and
creative design professionals. Proxicom believes that this approach results in
coordinated planning among its professionals from all three disciplines, a
challenge that many organizations struggle to address. Proxicom's delivery
process fosters collaboration within its multi-disciplinary teams to help
clients achieve internal cooperation among previously independent business
functions. Proxicom believes its multi-disciplinary approach results in better,
more efficient Internet solutions in which business and communications
strategies are consistently balanced with the opportunities and capabilities of
Internet technologies.
INDUSTRY AND BUSINESS DOMAIN EXPERTISE
Over the course of more than 800 engagements since 1994, Proxicom has
gained significant expertise in specific industries and types of business
solutions. Proxicom's expertise provides clients with a clear vision of the
Internet's potential to improve their business processes and competitive
positions. Proxicom organizes its delivery of services into vertical industry
groups: energy and telecommunications, financial services, retail and
manufacturing and service industries. Through strategic hires and numerous
engagements, Proxicom has developed significant knowledge and expertise in its
targeted industries. Proxicom complements its industry specialization with
expertise in cross-industry solution areas such as electronic commerce, supply
chain management and interactive marketing. Proxicom leverages its experience in
these industries and solution areas across the entire company through best
practices as well as proprietary solution frameworks, software tools and
components to provide clients the full value of Proxicom's industry and business
domain expertise.
IN-DEPTH INTERNET AND ADVANCED TECHNOLOGY EXPERTISE
Proxicom has developed an in-depth understanding of the specific challenges
of deploying Internet solutions. Proxicom is expert at building, extending and
complementing technologies that have the ability to transform businesses.
Proxicom helps its clients utilize leading-edge technologies and minimize the
expenses associated with hiring, training and retaining scarce information
technology skill sets. Because Proxicom's expertise is not limited to a single
technology or architecture, Proxicom is able to help clients choose the
appropriate technology to provide the best long-term business solution.
PROXICOM PROCESS: PROPRIETARY METHODOLOGY AND MANAGED RISK
The Proxicom Process is Proxicom's proprietary methodology for managing
client engagements that integrates strategy, technology and creative design
services. The Proxicom Process emphasizes an iterative development cycle with
multiple incremental releases to incorporate user feedback and to keep pace with
the Internet's ongoing technological changes. The four phases of the Proxicom
Process' development cycle are (a) Define Internet Strategy,
4
<PAGE> 6
(b) Design Solution, (c) Develop Solution and (d) Deploy Solution. Using the
Proxicom Process, Proxicom structures projects tightly and offers mostly
time-and-materials and some fixed-price, fixed-timeframe engagements as is most
appropriate for the project. Proxicom's approach improves quality of delivery
and alignment of an Internet initiative with a client's business. This approach
is geared toward minimizing the risk of technical or competitive obsolescence
faced by companies using the Internet.
KNOWLEDGE MANAGEMENT AND KNOWLEDGE SHARING INFRASTRUCTURE
Through the Proxicom Process, Proxicom continuously incorporates the
multi-disciplinary knowledge gained in Proxicom's engagements. This intellectual
capital is tracked and stored in Proxicom's corporate intranet through
Proxicom's Digital Network of Assets, or "DNA" , which acts as an integrated
knowledge management repository. DNA is a solutions library that facilitates the
dissemination of intellectual capital across Proxicom. Additionally, Proxicom's
intranet serves as an internal project management system that captures detailed
information on the resources required to achieve specific tasks on a project. In
this way, Proxicom's clients can benefit from industry best practices as well as
Proxicom's experiences. DNA and the project management system improve Proxicom's
ability to predict project completion requirements and increase the reusability
of its intellectual capital, thereby reducing risk for its clients. Proxicom's
"boot camp" orientation and training program for all new employees also
facilitates knowledge sharing.
PROXICOM'S GROWTH STRATEGY
Proxicom's strategy is to build upon its position as a leading provider of
transformational Internet solutions that add significant and measurable business
value to Global 1000 companies and other large organizations. The following are
the key elements of Proxicom's strategy.
LEVERAGE EXISTING CLIENTS
Proxicom believes it must continue to satisfy its customers. A strong track
record of delivering high quality Internet solutions often increases the amount,
scope and sophistication of services requested by existing clients. This
reinforces Proxicom's growing reputation as an innovative provider of
mission-critical Internet solutions. Proxicom also believes that maintaining a
reputation for delivering innovative Internet solutions and client satisfaction
will increase its ability to attract new clients through increased
referral-driven sales and strong references.
FURTHER PENETRATE AND BROADEN OUR VERTICAL MARKETS
Proxicom believes that its expertise in specific industry dynamics and
solutions considerably enhances its ability to help companies apply the Internet
to gain competitive advantage. In each of its vertical industry groups, Proxicom
employs industry experts, pursues targeted sales and marketing, develops
industry-specific offerings and capitalizes on referrals from existing clients.
Proxicom will continue to emphasize this focus and seek to expand the scope of
its industry expertise.
CONTINUE GEOGRAPHIC EXPANSION
Proxicom believes that expanding geographically will increase its ability
to attract and better service clients. Proxicom has already established offices
in Reston, VA, San Francisco, CA, New York, NY, Munich, Germany, Sausalito, CA,
Chicago, IL, Houston, TX, Los Angeles, CA and London, England. All of these
offices have contributed to Proxicom's continued ability to attract large
clients. Proxicom plans to continue establishing offices in key geographic
locations through an integrated process of organic growth and targeted
acquisitions.
Proxicom has also entered into agreements with Ericsson Telecommunicazioni
SpA and Iberdola SA pursuant to which it has made investments in joint venture
companies. Through these joint venture companies, Proxicom is delivering its
Internet consulting services in both Italy and Spain.
5
<PAGE> 7
HIRE AND RETAIN SKILLED PROFESSIONALS
Proxicom believes its delivery of integrated strategy, technology and
creative design services distinguishes it from other Internet professional
services providers. To deliver these services, Proxicom must hire and retain
skilled professionals in all three disciplines and continue to foster
collaboration among them. Proxicom has a dedicated organizational development
team that initiates and oversees the training and development of Proxicom's
professionals. Key organizational development initiatives include a "boot camp"
orientation and training program for all new employees and "Proxicom
University," which provides ongoing technical and project management classes as
well as career path management and guidance. Proxicom is committed to recruiting
and hiring quality professionals and to maintaining a culture that motivates its
staff while cultivating collaboration and retention.
EVOLVE THE PROXICOM PROCESS
Proxicom believes that continued evolution of the Proxicom Process will
strengthen its competitive position. Proxicom enhances the Proxicom Process by
incorporating best practices identified over numerous engagements. This enables
clients to benefit from Proxicom's cumulative experience. Proxicom will continue
to refine and enhance the Proxicom Process to enable continued delivery of high
quality solutions to clients on time and on budget.
LEVERAGE TECHNOLOGY PARTNERSHIPS
Proxicom believes its relationships with leading technology vendors, such
as America Online, Inc. and Microsoft Corporation, will provide increased
visibility and sales opportunities. Proxicom's status as a Microsoft Certified
Solution Provider Partner has yielded considerable sales opportunities. Proxicom
has also formed strategic alliances with leading hosting and co-location
providers, such as Intel Online Services. Proxicom is committed to furthering
these relationships and building other strategic partnerships that can
contribute to its growth.
PROXICOM'S SERVICES
Proxicom's range of Internet solutions includes business-to-consumer
electronic commerce Internet sites, business-to-business electronic commerce
extranets and company-specific intranets. Proxicom's solutions may also extend a
packaged application to the Internet. Proxicom provides Internet solutions
through an integrated set of strategy, technology and creative design services.
Proxicom sells and delivers its solutions through its vertical industry groups.
Through these vertical groups, Proxicom leverages its experience, best practices
and sales and delivery skills across clients with similar needs.
STRATEGY
Proxicom uses its business and interactive marketing strategy services to
align a client's Internet strategy with its business and marketing goals.
Business strategy services include business case development, business process
consulting and competitive benchmarking. Interactive marketing strategy services
focus on understanding our clients' customers, competitors, target markets and
opportunities, and advising them on appropriate strategies to take advantage of
the Internet. Proxicom works with clients to evolve, understand and analyze
business and marketing goals, operational methods and success criteria.
Proxicom's industry and solution expertise contributes significantly to its
ability to create Internet strategies that offer distinct competitive advantage.
TECHNOLOGY
Proxicom develops Internet solutions that exploit the latest proven
technologies to transform business processes. Proxicom has extensive experience
providing technology implementation services, including systems and network
architecture design, custom application development, legacy and third party
software integration, as well as technology advisory services. Proxicom is
experienced at designing, developing and deploying mission-critical Internet
solutions and integrating these applications with legacy systems to capitalize
on existing technology investments.
6
<PAGE> 8
CREATIVE DESIGN
Proxicom's creative design services address navigation, layout, information
architecture, personalization and branding. Proxicom's creative design services
also ensure that its Internet solutions have direct, immediate and relevant
appeal and utility. As the Internet has become an important point of contact
with customers, employees and business partners, the user interface of these
applications is an increasingly visible component of a company's brand and
identity. Proxicom creates Internet solutions that maximize the ease and quality
of experience for a variety of users.
THE PROXICOM PROCESS
Proxicom delivers its services using a proprietary multi-phase methodology
called the Proxicom Process, which serves as a roadmap to define, develop and
manage Internet solutions. Using the Proxicom Process, Proxicom structures
projects tightly and offers mostly time-and-materials and some fixed-price,
fixed-timeframe engagements as is most appropriate for the project. The
iterative nature of the Proxicom Process enables Proxicom to refine applications
through the extensive use of prototypes and phased application releases.
Proxicom also uses the Proxicom Process to reduce the time-to-market of a
deployed solution. The Proxicom Process fully integrates working groups and
emphasizes collaboration between the Proxicom team and the client.
Proxicom uses the Proxicom Process to manage project scope and client
expectations and to deliver solutions on time and on budget. The Proxicom
Process offers mechanisms for rapid adoption of best practices and reinforces
consistent quality across all projects. It provides for quality assurance with
unit, integration and system testing procedures throughout design, development
and deployment to ensure quality delivery and client satisfaction. The Proxicom
Process also aggregates and replenishes the intellectual capital of Proxicom's
entire organization, thereby leveraging Proxicom's cumulative experience.
Proxicom continually seeks to evolve the Proxicom Process by identifying best
practices during project reviews with Proxicom's delivery teams and clients.
All of Proxicom's client engagements utilize the Proxicom Process, which
Proxicom customizes to suit specific project needs. The inclusion, timing and
cost of any phase will depend on the type of solution and the scope of work. The
Proxicom Process is scalable and may be used effectively for projects of all
sizes. The following are the phases of the Proxicom Process:
DEFINE INTERNET STRATEGY
The scope of the Define Internet Strategy phase ranges from defining an
Internet vision for the client's overall business to developing a strategy for a
specific Internet solution or offering. The Internet vision is a business
strategy engagement where Proxicom assesses the client's opportunities to
leverage the Internet both as a technology and as a profitable business medium.
The Internet vision engagement often involves Proxicom's interactive marketing
and strategy disciplines, which assess market opportunities and competition. For
a specific Internet solution, the Define Internet Strategy deliverables examine
the strategic objectives of the solution, how its success will be measured, and
how the solution will be marketed, launched and publicized.
The Define Internet Strategy phase also determines the scope and nature of
the engagement and articulates the project's tactical and strategic objectives.
Project scope and nature are determined by documenting business, function,
technical and creative requirements. Project objectives are refined over the
course of multiple working sessions with the client. This phase results in a
project plan outlining tasks, deliverables and key milestones, which are
translated into a detailed contractual agreement for the next phases of the
engagement. The plan includes detailed cost estimates as well as organizational
roles and responsibilities for Proxicom, the client and other parties.
DESIGN SOLUTION
The Design Solution phase uses rapid prototyping techniques in an iterative
fashion to determine and refine application requirements and specifications. A
multi-disciplinary team works in tandem with the client to translate
7
<PAGE> 9
the business, marketing, technical and creative requirements of the solution
into a cohesive design. This phase generally has four major parts.
- Creative Design Composition. Content and information for the solution
are defined and organized. The look and feel of the solution is
designed in a series of detailed site flow compositions that show page
content, navigation and links. Proxicom works closely with the client
to coordinate the brand image and advertising campaigns on an ongoing
basis.
- Technical Architecture Definition. The solution is analyzed from a
technical viewpoint, including the development, test and operational
architectures required. The technical, application and data
architectures of the solution are documented, addressing the
requirements for hardware, software and network environments,
databases and third-party products.
- Specification and Prototype Development. Rapid prototyping is used to
construct portions of the solution. A visual prototype is used to
define page style, layout, information architecture and navigation.
Functional prototypes are used to test complex processing requirements
and the effectiveness of the application and data architectures. This
iterative process enables the client to review and refine the
application as it takes shape during the development process.
- Testing, Documentation and Training. Detailed plans are developed to
address requirements for solutions testing at all development stages,
creation of necessary on-line and printed documentation for users and
administrators, and training programs for customers and solution
users.
DEVELOP SOLUTION
The Develop Solution phase involves the creation of a production-ready
solution by developing necessary software and creative components, and
completing systems integration activities. Unit and integration testing and
quality assurance procedures are incorporated throughout the development process
to verify that the solution conforms to the design specifications. Testing is
performed across multiple browsers and environments to ensure uniform
accessibility.
DEPLOY SOLUTION
Following completion of integration testing activities in the development
environment, the solution is staged to the production environment where it
undergoes a final system test of security, performance and reliability. Once the
client gives final approval of the developed solution, Proxicom works with the
client through release and rollout. This work may include system migration, data
conversion and training. Marketing programs build awareness of the solution and
ensure the solution meets business goals.
SALES AND MARKETING
Proxicom's sales and marketing activities are aligned with its vertical
industry groups. Each vertical industry group vice president is responsible for
developing Proxicom's business within each respective industry, targeting new
clients and cultivating repeat business with existing clients. Proxicom believes
that its vertical approach is a differentiating factor during the sales process,
as it demonstrates Proxicom's understanding of the client's specific business
and technology issues. Proxicom's sales approach is highly consultative and
involves industry and solutions experts who draw on their practical experiences
with other clients that have faced similar challenges. Proxicom also assigns
senior client executives to strategic accounts to support and expand client
relationships.
Proxicom has 15 dedicated direct sales professionals to support the
vertical industry groups. These professionals are assigned to specific
geographic regions in order to maximize responsiveness to clients. They work
jointly with the vertical industry groups to secure new opportunities and manage
the sales process. Service directors responsible for
8
<PAGE> 10
delivery collaborate with the sales professionals to form a joint sales approach
for identifying and winning follow-on business.
Proxicom's marketing efforts are designed to create brand recognition and
demand for Proxicom's services. Proxicom's nine person marketing team is
organized to provide support for each vertical industry group. Marketing
programs include promoting customer success stories, creating industry and
solution specific campaigns, advertising, pursuing public relations
opportunities and promoting Proxicom's executives for speaking opportunities and
Proxicom-sponsored event management.
Proxicom complements its internal sales and marketing efforts with selected
industry partnerships. Several Internet product vendors, such as Microsoft
Corporation, America Online, Inc., Oracle Corporation and BroadVision, Inc., and
high-end hosting vendors, such as Intel Online Services, recommend Proxicom
services to their clients. See "--Marketing and Technology Relationships."
CLIENTS
As of December 31, 1999, we had approximately 163 ongoing client
engagements. In 1999, our five largest clients accounted for approximately 36%
of our revenue. Our two largest clients in 1999, Merrill Lynch and General
Motors, contributed approximately 14.7% and 7.7%, respectively, of our revenue.
Within each vertical group, Proxicom targets Global 1000 companies and
other large organizations. The following is a representative sample of
Proxicom's current clients.
ENERGY AND TELECOMMUNICATIONS RETAIL AND MANUFACTURING
Aramco Services Company Calphalon Corporation
Buckeye Pipe Line Company L.P. GAP, Inc.
GE Plastics General Motors Corp.
KN Energy, Inc. Harman International Industries, Inc.
Iberdola SA Hoffmann-La Roche, Inc.
Pacific Gas and Electric Company McKessonHBOC
TransCanada Pipelines Ltd. NewSub Services, Inc.
Transport4 Owens Corning
Wyeth-Ayerst Laboratories
Play Co. Toys, Inc.
FINANCIAL SERVICES
American International Group, Inc. SERVICE INDUSTRIES
GE Capital Corporation America Online, Inc.
Kemper Insurance Companies Marriott International, Inc.
Mercedes-Benz Credit Corp. Travel Planners
Merrill Lynch & Co., Inc. Ziff-Davis Inc.
BMW Financial Services GmbH Prudential California Realty
MARKETING AND TECHNOLOGY RELATIONSHIPS
Proxicom complements its internal sales and marketing efforts with formal
and selected industry partnerships. A number of Internet product vendors,
including Microsoft Corporation, America Online, Inc. and Oracle Corporation,
and high-end hosting providers, including Intel Online Services and Exodus
Communications, Inc., recommend Proxicom services to their clients. In addition,
Proxicom began in 1999 to build partnerships with wireless technology companies,
including Ericsson Professional Services and Aether Systems, Inc., to provide
Proxicom with the technology and partners to develop mobile e-business strategy,
applications development and operations for our client base.
9
<PAGE> 11
Proxicom has arrangements with a number of technology vendors to obtain
privileged access to their technologies. By establishing these alliances,
Proxicom has broadened its client base and gained access to pre-release
technology, which enables it to maintain leading-edge technical skills. Our
partners have provided advance versions of their technologies to Proxicom.
Obtaining the validation by industry leaders such as Microsoft and America
Online has added considerably to Proxicom's visibility, credibility and brand
image.
Proxicom has been a Microsoft Certified Solution Provider Partner since
1995, when it began actively cultivating a broad base of Microsoft products,
skills and certifications. In the spring of 1998, Proxicom was promoted to
Solutions Provider Partner, the highest level within that program. The Solution
Provider Partner program provides Internet-specific technical assistance.
Through this program, Microsoft and Proxicom conduct joint marketing efforts,
training programs and sales initiatives, in particular targeting Proxicom's
specialty industries.
In February 2000, Proxicom announced an agreement with Aether Systems,
Inc., a provider of wireless data services and systems, to provide comprehensive
wireless Internet solutions to Fortune 1000 companies. Under the terms of the
alliance, Aether and Proxicom will both receive preferred support and access to
each other's technology and resources. The two companies will jointly develop,
test and deploy custom wireless e-business platforms and solutions.
In December 1999, Proxicom signed an agreement with Ericsson Professional
Services and Consulting, a U.S. Market Unit of LM Ericsson, to establish a
strategic alliance to deliver comprehensive mobile e-business solutions to the
U.S. corporate market.
In October 1999, Proxicom signed an agreement with Intel Online Services,
Inc., a subsidiary of Intel Corporation, to establish a preferred relationship
for integrated hosting and Internet solutions development. Under the agreement,
Proxicom will receive preferred support and access to Intel Online Services'
marketing, solution validation and technology resources, and Intel Online
Services will be the preferred hosting provider for Proxicom's Internet
engagements. In addition, under the agreement, Proxicom will engage in joint
marketing activities with Intel Online Services and will work with Intel Online
Services to define a standard development and hosting platform for Internet
solutions.
In July 1999, Proxicom entered into an agreement with affiliates of
Iberdrola SA pursuant to which Proxicom made a 19.9% investment in a Spanish
joint venture company, named Kristina, Services de Internet, SA. Proxicom
contributed approximately $1.4 to fulfill its initial share capital obligation.
Affiliates of Iberdrola SA own the remaining 80.1% interest. Kristina, Services
de Internet, SA provides Internet solutions to Spain-based businesses. The
initial share capital of Kristina, Services de Internet, SA was approximately
$7.4 million, which Proxicom and the affiliates of Iberdrola SA contributed in
proportion to their shareholder percentage interests.
In March 1999, Proxicom entered into an agreement with Ericsson
Telecommunicazioni SpA pursuant to which Proxicom made a 19.9% investment in an
Italian joint venture company. Proxicom contributed $336,000 to fulfill its
initial share capital obligation. Ericsson owns the remaining 80.1% interest.
Proxicom provides Internet solutions to Italian-based businesses through the
joint venture company.
PERSONNEL AND CULTURE
As of December 31, 1999, Proxicom had 692 employees. Of these, 568 were
consulting and service delivery professionals, and 124 were management and
administrative personnel performing marketing, sales, human resources, finance,
accounting, legal, internal information systems and administrative functions.
Proxicom believes that its ability to provide integrated business strategy,
technology and creative design services is dependent upon the continuation of
its culture of mutual respect among the three disciplines. As a result,
Proxicom's employees and its culture are fundamental to the value proposition it
offers clients. Proxicom's culture is predicated on personal integrity, open
communications, collaboration and professional development. Proxicom
10
<PAGE> 12
fosters an entrepreneurial spirit that attracts talented professionals, creates
innovative solutions and provides the opportunity for every individual to
succeed.
Proxicom has a particular emphasis on recruiting and retaining people with
leading-edge technical skills and project management experience. Proxicom has
been very successful with internal referral-driven recruiting, which has
accounted for nearly one-third of its hires to date. Proxicom continues to
encourage employee referrals with monetary incentives. Proxicom has developed a
structured recruiting program, including a staff of dedicated recruiters tasked
with bringing in experienced professionals, MBA and college hires, and maintains
a tracking database of potential candidates. Proxicom runs a year-round
internship program with several leading undergraduate and MBA programs.
In addition to recruiting, Proxicom is committed to employee training and
retention. Proxicom has a dedicated organizational development team that
initiates and oversees the training and development of Proxicom's professionals.
Key organizational development initiatives include a week-long "boot camp"
orientation and training program for all new employees and "Proxicom
University," which provides ongoing technical and project management classes as
well as career path management and guidance. To support its internal initiatives
for employee development, Proxicom has also instituted programs such as tuition
reimbursement and external training. Proxicom plans to continue to invest in
attracting the best employees and in maintaining a low turnover rate.
None of Proxicom's employees is represented by a labor union, nor has
Proxicom ever experienced a work stoppage. Proxicom believes its employee
relations are good.
COMPETITION
The market for Proxicom's services is subject to rapid technological change
and increased competition from large existing players, new entrants and internal
information systems groups. Traditional players competing in this space can be
broken down into four major categories -- large systems integrators (e.g.,
International Business Machines Corporation, Andersen Consulting and Computer
Sciences Corporation), specialty systems integrators (e.g., Cambridge Technology
Partners, Inc. and Sapient Corporation), strategy consulting firms (e.g.,
McKinsey & Company, Inc. and Boston Consulting Group, Inc.), and Internet
professional services providers (e.g., USWeb/CKS, Viant Corporation, Scient
Corporation and iXL Enterprises, Inc.) -- many of which have considerably more
financial resources, marketing depth and name recognition than Proxicom.
Occasionally Proxicom competes with newer entrants including interactive
marketing firms (e.g., Agency.com, Ltd., Modem Media.Poppe Tyson, Inc., Organic,
Inc. and Razorfish, Inc.). Proxicom expects future consolidation in the Internet
professional services market to create larger, more viable competitors.
Potential clients' internal information systems groups also compete with
Proxicom.
Proxicom believes the principal competitive factors in the Internet
professional services market include Internet expertise and talent, client
references, integrated strategy, technology and creative design services,
quality, pricing, speed of service delivery and vertical industry knowledge.
Proxicom believes it competes favorably with respect to these factors. Proxicom
believes it is in a good position to attract talent with its growth and an
entrepreneurial culture. Proxicom believes it offers its clients a unique
combination of integrated strategy, technology and creative design services. In
addition, Proxicom believes it has established itself as a leader in
Internet-specific industry and domain expertise. Through its quality delivery
and its attention to client satisfaction, Proxicom has created a strong track
record of customer successes. Proxicom believes the market will continue to
offer significant opportunity for multiple players.
INTELLECTUAL PROPERTY RIGHTS
Proxicom's success is dependent, in part, upon its proprietary Proxicom
Process, its solution components, and other intellectual property rights. We do
not have any patents or patent applications pending. Proxicom relies on a
combination of trade secret, nondisclosure and other contractual agreements, and
copyright and trademark laws to protect its proprietary rights. Existing trade
secret and copyright laws afford us only limited protection. Proxicom enters
into confidentiality agreements with its employees, generally requires that its
consultants and clients enter
11
<PAGE> 13
into such agreements, and limits access to and distribution of Proxicom's
proprietary information. There can be no assurance that the steps Proxicom has
taken in this regard will be adequate to deter misappropriation of its
proprietary information or that Proxicom will be able to detect unauthorized use
and take appropriate steps to enforce its intellectual property rights.
Proxicom's business generally involves the development of software
applications for specific client engagements. Ownership of such software is
frequently assigned to the client, with Proxicom retaining a license or other
contractual rights for limited uses.
RISK FACTORS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in any forward-looking statements made by or on
behalf of us, whether oral or written. We wish to ensure that any
forward-looking statements are accompanied by meaningful cautionary statements
in order to maximize to the fullest extent possible the protections of the safe
harbor established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause our
actual results to differ materially from those projected in our forward-looking
statements.
WE ARE GROWING QUICKLY. FUTURE GROWTH OF OUR BUSINESS COULD MAKE IT
DIFFICULT TO MANAGE OUR RESOURCES.
Our business is growing substantially, both through increased sales and
recent acquisitions. For instance, our revenue has increased from $1.5 million
in 1994 to $82.7 million in 1999. Our rapid growth has stretched, and could
continue to stretch, our resources. We expect that we will need to continue to
hire and retain management personnel and other employees. Our management has
limited experience managing a business of Proxicom's size or a public company.
In order to manage our growth effectively, we must establish offices in
new geographic locations, set fixed-price fees accurately, maintain high
employee utilization rates, maintain project quality and successfully negotiate
rates, particularly if the average size of our projects continues to increase.
Our performance may depend on the effective integration of acquired
businesses. This integration, even if successful, may be expensive and time
consuming and could strain our resources.
WE MAY NOT BE ABLE TO HIRE AND RETAIN HIGHLY SKILLED EMPLOYEES, WHICH COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
To succeed, we must hire, train, motivate, retain and manage employees who
are highly skilled in the Internet and its rapidly changing technology. Because
of the recent and rapid growth of the Internet, individuals who have Internet
expertise and can perform the services we offer are scarce. Competition for
these individuals, therefore, is intense. We might not be able to hire enough of
them or to train, motivate, retain and manage the employees we do hire. This
could hinder our ability to complete existing projects and bid for new projects.
In addition, because the competition for qualified employees in the Internet
industry is intense, hiring, training, motivating, retaining and managing
employees with the strategic, technical and creative skills we need is both
time-consuming and expensive.
OUR FINANCIAL RESULTS WILL FLUCTUATE FROM PERIOD TO PERIOD DEPENDING ON
VARIOUS BUSINESS FACTORS.
Our financial results may fluctuate from quarter to quarter. In future
quarters, our operating results may not meet public market analysts' and
investors' expectations. If that happens, the price of our common stock may
fall. Many factors can cause these fluctuations, including
- the number, size, timing and scope of our projects;
12
<PAGE> 14
- customer concentration;
- long and unpredictable sales cycles;
- contract terms of projects;
- degrees of completion of projects;
- project delays or cancellations;
- competition for and utilization of employees;
- how well we estimate the resources we need to complete projects;
- the integration of acquired businesses;
- pricing changes in the industry; and
- economic conditions specific to the Internet and information
technology consulting.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, if we
experience unanticipated changes in our projects or in our employee utilization
rates, we could experience large variations in quarterly operating results and
losses in any particular quarter. Due to these factors, we believe you should
not compare our quarter-to-quarter operating results to predict our future
performance.
We have generally realized lower revenue in the first quarter of the year
than in the other quarters. We believe that this has been due primarily to
client budget cycles and the short-term nature of our contracts.
WE FAILED TO GENERATE CASH FROM OPERATIONS DURING 1998 AND COULD FAIL TO
GENERATE CASH FROM OPERATIONS IN THE FUTURE.
We did not generate cash from operations in 1998 largely due to the
expansion of our business. That year, we also increased the number of our
Internet solutions professionals and support personnel. We also incurred
expenses in connection with mergers. We plan to continue to expand and develop
our business, both internally and possibly through future acquisitions. This
could cause us to fail to generate cash from operations in the future.
WE HAVE A NUMBER OF SIGNIFICANT CLIENTS. IF WE LOSE A MAJOR CLIENT OR
SIGNIFICANT PROJECT, OUR REVENUES COULD BE ADVERSELY AFFECTED.
We generate much of our revenue from a limited number of major clients. As
a result, if we lose a major client or large project, our revenues could be
adversely affected. In 1999, for example, our two largest clients, Merrill Lynch
and General Motors, accounted for approximately 14.7% and 7.7% respectively, of
our revenue. During 1999, our five largest clients contributed approximately 36%
of our revenue.
We perform varying amounts of work for specific clients from year to year.
A major client in one year may not use our services in another year. In
addition, we may derive revenue from a major client that constitutes a large
portion of a particular quarter's total revenue. If we lose any major clients or
any of our clients cancel or significantly reduce a large project's scope, our
business, financial condition and results of operations could be materially and
adversely affected. Also, if we fail to collect a large account receivable, we
could be subjected to significant financial exposure.
13
<PAGE> 15
WE HAVE MANY SHORT-TERM CONTRACTS THAT CAN BE CANCELLED WITHOUT PENALTY. IF
CLIENTS TERMINATE CONTRACTS WITH US ON SHORT NOTICE, OUR RESULTS OF
OPERATIONS COULD SUFFER.
Our contracts with clients are generally short-term. Also, most clients can
reduce or cancel their contracts for our services without penalty and with
little or no notice. If a significant client or a number of small clients
terminate, significantly reduce or modify business relationships with us, our
business, financial condition and results of operations could be materially and
adversely affected. Consequently, you should not predict or anticipate our
future revenue based on the number of clients we have or the number and size of
our existing projects. When a client postpones, modifies or cancels a project,
we have to shift our employees to other projects and minimize the resulting
adverse impact on our operating results. In addition, our operating expenses are
relatively fixed and cannot be reduced on short notice.
IF WE FAIL TO MEET OUR CLIENTS' EXPECTATIONS, WE COULD DAMAGE OUR
REPUTATION AND HAVE DIFFICULTY ATTRACTING NEW BUSINESS.
Many of our projects are complex and critical to our clients. As a result,
if we fail or are unable to meet a client's expectations, we could damage our
reputation. This could adversely affect our ability to attract new business from
that client or others. If we fail to perform adequately on a project, a client
could sue us for economic damages.
WE MAY NOT COMPETE SUCCESSFULLY WITH OUR COMPETITORS, WHICH COULD RESULT IN
REDUCED REVENUES.
We compete in markets that are new, intensely competitive and rapidly
changing. We may not compete successfully with our competitors. We currently
compete for client assignments and experienced personnel principally with large
and specialty systems integrators, strategy consulting firms and Internet
professional services providers. Many of these businesses have longer operating
histories and significantly greater financial, technical, marketing and
managerial resources than we do.
Our markets have relatively low barriers to entry. We expect to continue to
face competition from new market entrants, including interactive marketing
firms.
Competition in our market is based primarily on the following factors:
- Internet expertise and talent;
- quality, pricing and speed of service delivery;
- client references;
- integrated strategy, technology and creative design services; and
- vertical industry knowledge.
Some competitive factors are outside of our control. These factors include
our competitors' hiring and retention of senior staff, development of software
that is competitive with our products and services and response to client needs.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE COULD CAUSE OUR BUSINESS TO
SUFFER.
We have derived most of our revenue from projects involving the Internet.
The Internet is new and rapidly evolving. Our business will be adversely
affected if Internet usage does not continue to grow. A number of factors may
inhibit Internet usage. These factors include inadequate network infrastructure,
security concerns, inconsistent service quality and lack of cost-effective,
high-speed service. On the other hand, if Internet usage grows, the Internet
infrastructure may not support the demands this growth will place on it. The
Internet's performance and reliability may decline. In addition, outages and
delays have occurred throughout the Internet network infrastructure and
14
<PAGE> 16
have interrupted Internet service. If these outages or delays occur frequently
in the future, Internet usage could grow more slowly or decline.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
- security;
- cost and ease of Internet access;
- intellectual property ownership;
- privacy;
- taxation; and
- liability issues.
Any costs we incur because of these factors could materially and adversely
affect our business, financial condition and results of operations.
IF WE FAIL TO KEEP PACE WITH CHANGING TECHNOLOGIES, WE MAY LOSE CLIENTS.
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. If we cannot
keep pace with these changes, our business could suffer. The Internet's recent
growth and intense competition in our industry exacerbate these characteristics.
To achieve our goals, we need to develop strategic business and Internet
solutions that keep pace with continuing changes in industry standards,
information technology and client preferences. We will have to improve the
performance features and reliability of our services to adapt to rapidly
changing technologies. Also, as part of our business strategy, we reuse elements
of our Internet solutions for which there is repeat customer demand. We could
incur substantial costs if we need to modify our reusable solutions to adapt to
technological changes.
IF WE LOSE THE SERVICES OF OUR FOUNDER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER RAUL J. FERNANDEZ, OR OTHER KEY PERSONNEL, OUR BUSINESS AND STOCK
PRICE COULD SUFFER.
Our future success depends in large part on the continued services of a
number of our key personnel, including our founder, Chairman and Chief Executive
Officer, Raul J. Fernandez. We have no employment contract with Mr. Fernandez or
many of our other key personnel. The loss of the services of Mr. Fernandez or
any of our other key personnel could have a material adverse effect on our
business, financial condition and results of operations. We might not be able to
prevent key personnel, who may leave our employ in the future, from disclosing
or using our technical knowledge, practices or procedures. One or more of our
key personnel might resign and join a competitor or form a competing company.
As a result, we might lose existing or potential clients.
WE DEPEND ON INTELLECTUAL PROPERTY WHICH MAY BE DIFFICULT TO PROTECT. THIS
COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
Our success depends, in part, upon our intellectual property rights. We do
not have any patents or patent applications pending. Existing trade secret and
copyright laws afford us only limited protection. Third parties may attempt to
disclose, obtain or use our solutions or technologies. This is particularly true
in foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. Others may independently
develop and obtain patents or copyrights for technologies that are similar or
superior to our technologies. If that happens, we may not be able to license
those technologies on reasonable terms, or at all.
15
<PAGE> 17
Generally, we develop software applications for specific client
engagements. We generally assign software ownership to the client and retain
only a license for limited uses. Issues relating to ownership of and rights to
use software applications and frameworks can be complicated. We may become
involved in disputes that affect our ability to resell or reuse these
applications and frameworks. Also, we may have to pay economic damages in these
disputes.
FUTURE ACQUISITIONS OR INVESTMENTS COULD DISRUPT OUR ONGOING BUSINESS,
DISTRACT OUR MANAGEMENT AND EMPLOYEES, INCREASE OUR EXPENSES AND ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We have made three material acquisitions and investments in two joint
ventures in the last 24 months. Any acquisitions or investments we make in the
future will involve risks. We may not be able to make acquisitions or
investments on commercially acceptable terms. If we do buy a company, we could
have difficulty retaining and assimilating that company's personnel. In
addition, we could have difficulty assimilating acquired products, services or
technologies into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
materially and adversely affect our results of operations. Furthermore, we may
incur debt or issue equity securities to pay for any future acquisitions. If we
issue equity securities, your ownership share of Proxicom could be reduced.
THE MARKET PRICE OF OUR STOCK MAY FLUCTUATE WIDELY.
The market price of our common stock could fluctuate substantially due to:
- future announcements concerning us or our competitors;
- quarterly fluctuations in operating results;
- announcements of acquisitions or technological innovations; or
- changes in earning earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. Fluctuations in our
common stock's market price may affect our visibility and credibility in the
Internet solutions market.
WE HAVE STARTED EXPANDING OUR BUSINESS OVERSEAS. OUR INTERNATIONAL
EXPANSION COULD RESULT IN FINANCIAL LOSSES DUE TO CHANGES IN FOREIGN
ECONOMIC CONDITIONS AS WELL AS FLUCTUATIONS IN CURRENCY AND EXCHANGE RATES.
We expect to expand our international operations and international sales
and marketing efforts. Recently, we commenced operations in Germany and England
and began servicing clients in Spain and Italy. We have limited experience in
marketing, selling and distributing our services internationally. International
operations are subject to other inherent risks, including the following:
- recessions in foreign economies;
- political and economic instability;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign operations;
- potentially adverse tax consequences;
16
<PAGE> 18
- reduced protection for intellectual property rights in some countries;
- changes in regulatory requirements; and
- reductions in business activity during the summer months in Europe.
NON-DIRECTOR EXECUTIVE OFFICERS OF PROXICOM
The following is a list of the executive officers of Proxicom, who are not
also directors of Proxicom, together with biographical summaries of their
experience. Executive officers serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. The ages of the persons set forth below are as of March 24, 2000.
Heiner Rutt, age 49, has served as President of Proxicom since February
2000. Prior to joining Proxicom, Mr. Rutt had an extensive career with Boston
Consulting Group (BCG). From 1997 to 2000, he served as the Chair of BCG's
operation in the Americas. Prior to this position, Mr. Rutt served as a senior
BCG executive in Europe, building the German and European practice and serving
on a number of world-wide committees.
Larry D. Clark, age 42, has been Executive Vice President, Services since
March 1998. Prior to joining Proxicom, from May 1992 until March 1998, Mr. Clark
held various executive positions with MCI Systemhouse Corporation, the systems
integration, technology development and information technology outsourcing arm
of MCI Communications Corp., where he was, most recently, Vice President and
General Manager of the United States East Region and was responsible for
managing the company's East Region business unit. From 1990 until 1992, Mr.
Clark was a Senior Engagement Manager at McKinsey & Company, Inc., a consulting
firm. Prior to that, Mr. Clark held various management positions with The
Information Consulting Group and Andersen Consulting.
Michael A. Pusateri, age 47, has been Executive Vice President, Sales and
Marketing since June 1999. Prior to joining Proxicom, Mr. Pusateri served as
Vice President of Interactive Sales and Marketing for Marriott International,
Inc. Prior to that, from 1986 to 1989, Mr. Pusateri was Corporate Director of
Interbrand Marketing for Holiday Corporation.
Kenneth J. Tarpey, age 47, has been Executive Vice President and Chief
Financial Officer of Proxicom since March 1997. Prior to joining Proxicom, from
August 1996 until March 1997, Mr. Tarpey served as Vice President and Chief
Financial Officer of Nat Systems International, Inc., a developer and vendor of
software application development tools. From April 1995 to August 1996, Mr.
Tarpey served as Vice President, Finance, Chief Financial Officer, Treasurer and
Assistant Secretary of SQA, Inc., a developer and marketer of automated quality
testing software products. From November 1989 to April 1995, Mr. Tarpey held
various executive positions at Symbolics, Inc., a hardware and software company,
including Chairman of the board of directors, President, Chief Executive Officer
and Chief Financial Officer.
Christopher Capuano, age 38, has been Senior Vice President, Corporate
Development of Proxicom since October 1999. Prior to this position, from June
1996, Mr. Capuano was General Counsel of Proxicom. Mr. Capuano has served as
Proxicom's Corporate Secretary since June 1996 and was a member of Proxicom's
Board of Directors from August 1996 until August 1998. Prior to joining
Proxicom, from 1993 until June 1996, Mr. Capuano was a Manager and Senior
Manager with Price Waterhouse LLP. From 1994 to 1997, Mr. Capuano was also an
Adjunct Professor of Law at Georgetown University Law Center. Mr. Capuano was
associated previously with the law firm of Willkie, Farr & Gallagher.
ITEM 2. PROPERTIES.
Proxicom's headquarters and principal administrative, finance, legal, sales
and marketing operations are located in approximately 65,000 square feet of
leased office space in Reston, VA. Proxicom's lease is for a term of seven years
17
<PAGE> 19
and expires on July 13, 2002. Mario M. Morino, one of our stockholders and a
member of our board of directors, beneficially owns the building. Proxicom also
leases office space in San Francisco, CA, New York, NY, Munich, Germany, London,
England, Chicago, IL, Sausalito, CA, Houston, TX and Los Angeles, CA. Proxicom
expects that it will need additional space as it expands its business and
believes that it will be able to obtain space as needed.
ITEM 3. LEGAL PROCEEDINGS.
Proxicom is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Proxicom's common stock has been quoted on The Nasdaq National Market under
the symbol PXCM since Proxicom's initial public offering on April 19, 1999. The
following table presents, for the periods indicated, the high and low sales
prices per share of our common stock as reported on The Nasdaq National Market
(as adjusted for our two-for-one stock split effected on February 24, 2000).
<TABLE>
1999 HIGH LOW
---- ---- ---
<S> <C> <C>
Second Quarter (beginning April 19, 1999)................ $ 13.88 $ 8.50
Third Quarter ........................................... $ 33.00 $ 12.50
Fourth Quarter........................................... $ 64.25 $ 24.63
</TABLE>
On March 24, 2000, the last reported sale price of our common stock on The
Nasdaq National Market was $48.50. As of March 24, 2000, there were 182 holders
of record of our common stock.
DIVIDEND POLICY
With the exception of distributions that three current Proxicom
subsidiaries made before Proxicom acquired them, Proxicom has never declared or
paid any cash dividends on its capital stock. Proxicom intends to retain future
earnings, if any, to finance the expansion of its business and does not expect
to pay any cash dividends in the foreseeable future. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources."
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
The following tables contain selected consolidated financial data as of
December 31 for each of the years 1995 through 1999 and for each of the years in
the five-year period ended December 31, 1999. The selected consolidated
financial data for each of the years in the five-year period ended December 31,
1999 have been derived from Proxicom's audited Consolidated Financial
Statements. The selected financial data are qualified by reference to, and
should be read in conjunction with, Proxicom's consolidated financial statements
and the notes to those financial statements, included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 6,273 $ 13,372 $ 28,452 $ 44,006 $ 82,688
Cost of revenue..................................... 2,757 5,085 12,736 24,928 43,561
---------- ---------- ---------- ---------- ----------
Gross profit........................................ 3,516 8,287 15,716 19,078 39,127
---------- ---------- ---------- ---------- ----------
Operating expenses:
General and administrative........................ 2,177 5,746 10,180 16,397 28,650
Selling and marketing............................. 244 670 1,710 2,919 5,553
Research and development.......................... -- 404 961 692 --
Acquisition and merger costs...................... -- -- -- 2,886 300
Stock-based and other compensation (1)............ -- 8 44 18,308 434
---------- ---------- ---------- ---------- ----------
Total.......................................... 2,421 6,828 12,895 41,202 34,937
---------- ---------- ---------- ---------- ----------
Income (loss) from operations....................... 1,095 1,459 2,821 (22,124) 4,190
Interest income (expense), net...................... 5 55 80 (121) 2,770
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes................... 1,100 1,514 2,901 (22,245) 6,960
Income tax provision (benefit)...................... 294 185 330 (900) 2,936
---------- ---------- ---------- ---------- ----------
Net income (loss)................................... 806 1,329 2,571 (21,345) 4,024
Non-cash dividend on beneficial conversion
of convertible preferred stock.................... -- -- -- -- (4,873)
---------- ---------- ---------- ----------- -----------
Net income (loss) available to common
stockholders....................................... $ 806 $ 1,329 $ 2,571 $ (21,345) $ (849)
========== ========== ========== ========== ===========
Basic net income (loss) per common share............ $ 0.03 $ 0.05 $ 0.10 $ (0.73) $ (0.02)
========== ========== ========== ========== ===========
Diluted net income (loss) per common share.......... $ 0.03 $ 0.05 $ 0.08 $ (0.73) $ (0.02)
========== ========== ========== ========== ===========
Weighted average common shares outstanding.......... 27,546 27,480 26,748 29,152 44,532
========== ========== ========== ========== ===========
Weighted average common shares and common
share equivalents.................................. 27,546 28,620 34,256 29,152 44,532
========== ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ 802 $ 1,160 $ 2,343 $ 2,586 $ 113,819
Working capital .................................... 693 5,808 7,534 1,927 132,045
Total assets ....................................... 2,463 8,985 16,317 22,551 160,114
Stockholders' equity ............................... 1,131 7,344 10,496 6,629 143,259
</TABLE>
- --------------------------
(1) Stock-based and other compensation in 1998 was associated with a merger
transaction with IBIS Consulting and includes (a) a $17.2 million non-cash
charge relating to the elimination of a repurchase requirement for formula
stock; (b) $1.0 million in cash bonus payments required under the
historical IBIS Consulting plan; and (c) a $100,000 non-cash charge
relating to rights to receive stock granted by ad hoc Interactive.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Our revenue generally consists of fees generated from professional
services. We provide our services on a time and materials basis and fixed-price,
fixed-timeframe basis. When we provide services on a time and materials basis,
we recognize revenue as we incur costs. In time and materials service
situations, we also use our estimation process and a Proxicom senior management
member approves these proposals. When we provide services on a 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.
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.
As of March 26, 1999, Proxicom merged with ad hoc Interactive, Inc., a
California-based Internet solutions provider, by exchanging 1,659,542 shares of
Proxicom common stock and rights to receive 78,666 shares of Proxicom common
stock for all of the outstanding stock and stock rights of ad hoc Interactive.
Proxicom incurred acquisition and merger costs of $300,000 in connection with
this transaction. In August 1998, Proxicom completed a merger with IBIS
Consulting, Inc. by exchanging 9,976,594 shares of Proxicom common stock for all
the common stock of IBIS Consulting. In addition, IBIS Consulting options were
converted into options to purchase 690,068 shares of Proxicom common stock.
Proxicom incurred acquisition and merger costs of $2.8 million and stock-based
and other compensation expense of $18.2 million associated with IBIS Consulting.
In connection with this transaction, the president of IBIS Consulting was
elected to Proxicom's board of directors. In January 1998, Proxicom completed a
merger with Square Earth, Inc. by exchanging 1,069,998 shares of Proxicom common
stock for all the common stock of Square Earth. In addition, Square Earth
options were converted into options to purchase 82,948 shares of Proxicom common
stock. Proxicom incurred acquisition and merger costs of $130,000 in connection
with this transaction. Proxicom accounted for each of these transactions as a
pooling of interests. All prior period consolidated financial statements have
been restated to include ad hoc Interactive's, IBIS Consulting's and Square
Earth's results of operations, financial position and cash flows.
In March 1999, Proxicom signed an agreement with Ericsson
Telecommunicazioni SpA. Under the agreement, Proxicom made a 19.9% investment in
an Italian joint venture company. This investment is accounted for on a cost
basis of accounting. In June 1999, the Company contributed $336,000 to fulfill
its initial share capital obligation. Ericsson owns the remaining 80.1%
interest. Proxicom provides Internet solutions to Italian-based businesses
through the joint venture company.
In July 1999, Proxicom signed an agreement with affiliates of Iberdrola
SA. Under the agreement, Proxicom purchased 19.9% of a Spanish joint venture
company, named Kristina, Services de Internet, SA. This investment is accounted
for on a cost basis of accounting. In late July 1999, Proxicom contributed
approximately $740,000 to fulfill one half of its initial share capital
obligation. In March 2000, Proxicom contributed approximately $697,000 to
fulfill the second half of its initial share capital obligation. Affiliates of
Iberdrola SA own the remaining 80.1% interest. Kristina, Services de Internet,
SA provides Internet solutions to Spain-based businesses. The initial share
capital of Kristina, Services de Internet, SA was approximately $7.4 million,
which Proxicom and the affiliates of Iberdrola SA contributed in proportion to
their shareholder percentage interests.
21
<PAGE> 23
On September 24, 1999, Proxicom and General Electric Company entered into a
Master Services Agreement. Under this agreement, General Electric has agreed to
have Proxicom perform Internet services for fees totaling no less than $6.0
million during the 12-month period ending September 24, 2000. As part of the
agreement, Proxicom issued General Electric a warrant to purchase 300,000 shares
of common stock at an exercise price of $24.94 per share, the closing price of
the common stock on the date of the agreement. The value of the warrant has been
reflected as a reduction to the related contract revenue. In February 2000,
General Electric exercised this warrant and received net 156,122 shares of
common stock of the Company.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue.............................................................. 100.0% 100.0% 100.0%
Cost of revenue...................................................... 44.8 56.6 52.7
---- ---- ----
Gross profit......................................................... 55.2 43.4 47.3
---- ---- ----
Operating expenses:
General and administrative......................................... 35.8 37.3 34.6
Selling and marketing.............................................. 6.0 6.6 6.7
Research and development........................................... 3.4 1.6 --
Acquisition and merger costs....................................... -- 6.5 0.4
Stock-based and other compensation................................. 0.1 41.6 0.5
---- ---- ----
Total........................................................... 45.3 93.6 42.2
---- ---- ----
Income (loss) from operations........................................ 9.9 (50.2) 5.1
Interest income (expense), net....................................... 0.3 (0.3) 3.3
---- ----- ----
Income (loss) before income taxes.................................... 10.2 (50.5) 8.4
Income tax provision (benefit)....................................... 1.2 (2.0) 3.5
---- ----- ----
Net income (loss).................................................... 9.0% (48.5)% 4.9%
=== ====== ===
</TABLE>
1999 COMPARED TO 1998
Revenue. In 1999, revenue increased by $38.7 million, or 87.9%, to $82.7
million from $44.0 million in 1998. This increase in 1999 was attributable to a
100% increase in the number of engagements compared to 1998. The overall size of
each engagement remained consistent compared to the year ended December 31,
1998. Our largest client contributed 14.7% of our revenue for the year ended
December 31, 1999. No other individual client contributed 10% or more for the
year ended December 31, 1999. For the year ended December 31, 1998, our two
largest clients contributed 14.2% and 13.2% of our revenue. No other individual
client contributed 10% or more for the year ended December 31, 1998. We believe
that period-to-period comparisons of our revenue and operating results are not
meaningful and that you should not rely on these comparisons as indicators of
future performance.
Cost of Revenue. Cost of revenue consists primarily of compensation 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. Cost of revenue
increased $18.6 million, or 74.7%, to $43.6 million in 1999 from $24.9 million
in 1998. The increase was due primarily to increases in the number of personnel
needed to service our client engagements. Service project personnel increased
from 340 at December 31, 1998 to 568 at December 31, 1999. As a percentage of
revenue, cost of revenue decreased to 52.7% during 1999 as compared to 56.6%
during 1998.
Gross Profit. In 1999, gross profit increased $20.0 million, or 105.1%, to
$39.1 million from $19.1 million in 1998. The gross profit dollar increase
reflects an increase in revenue during the year ended December 31, 1999. As a
percentage of revenue, gross profit increased to 47.3% during 1999 as compared
to 43.4% during 1998. The percentage increase reflects increased overall billing
rates and improvements in gross profit per billable consulting and delivery
personnel.
22
<PAGE> 24
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 $12.3 million, or 74.7%, to $28.7 million in 1999 from $16.4 million
in 1998. This increase was due primarily to increased facilities and related
expenses incurred to support our growth. Approximately 20% of the increase is
attributable to increased personnel cost for the year ended December 31, 1999.
As a percentage of revenue, general and administrative expenses decreased to
34.6% in 1999 as compared to 37.3% in 1998. We wrote off $283,000 in doubtful
accounts in 1999. We believe the current allowance for doubtful accounts balance
of $655,000 is sufficient for other doubtful accounts.
Selling and Marketing. Selling and marketing costs consist primarily of
salaries, benefits and travel expenses of selling and marketing personnel and
promotional expenses. Selling and marketing costs increased $2.6 million, or
90.2%, to $5.6 million in 1999 from $2.9 million in 1998. Approximately 25% of
this increase was attributable to increased marketing and promotion initiatives
for the year ended December 31, 1999. The remainder was primarily due to
increases in the number of sales and marketing personnel. As a percentage of
revenue, selling and marketing costs increased to 6.7% during 1999 from 6.6%
during 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. Given the sale
of the software product rights, no research and development costs were incurred
in 1999. Research and development costs for 1998 were $692,000. During 1998, we
charged all of our costs for research and development to operations as incurred.
We did this because the period between technological feasibility and general
release was relatively short and the costs incurred during this period were not
significant.
Acquisition and Merger Costs. We incurred charges of approximately $300,000
in 1999 for costs associated with the ad hoc Interactive transaction. We
incurred charges of approximately $2.9 million in 1998 for costs associated with
the Square Earth and IBIS Consulting transactions. These transaction costs
related to professional fees and other direct expenses.
Stock-based and Other Compensation. We incurred charges of $434,000 in 1999
for costs associated with various stock rights and stock options issued for less
than fair market value under the historical ad hoc Interactive and IBIS
Consulting plans. We incurred charges of $18.3 million in 1998 for costs
associated with our IBIS Consulting and ad hoc Interactive transactions. Of
these charges, $17.2 million related to the elimination of a repurchase
requirement for formula stock options and $1.0 million consisted of cash bonus
payments required under the historical IBIS Consulting plan.
Interest Income (Expense), Net. Interest income (expense), net increased
$2.9 million to interest income of $2.8 million in 1999 from interest expense of
$121,000 in 1998. This increase was due primarily to interest income earned on
proceeds raised in our initial and follow-on public offerings during 1999.
Interest expense of $102,000 was offset by interest income of $2.9 million
earned during 1999. We generally invest in the highest-rated commercial paper,
U.S. Treasury bills and money market accounts. The amount of interest income
fluctuates based upon the amount of funds available for investment and
prevailing interest rates.
Income Tax Provision (Benefit). The $2.9 million income tax provision in
1999 represents combined federal and state income taxes at an effective rate of
42.2%. The $900,000 income tax benefit in 1998 represents a benefit from
combined federal and state income taxes at an effective rate of 4.0%, or 18.0%
excluding the $17.3 million non-deductible stock-based compensation charge. Our
effective tax rate was favorably impacted in both 1998 and 1999 by the
transactions with Square Earth, IBIS Consulting and ad hoc Interactive, which
were Subchapter S corporations with pass-through tax status before the
transactions.
23
<PAGE> 25
1998 COMPARED TO 1997
Revenue. In 1998, revenue increased $15.5 million, or 54.7%, to $44.0
million from $28.5 million in 1997. This increase in revenue reflects increases
in both the size and number of our client engagements. Approximately 65.0% of
this increase is attributable to increased engagement size and the remainder is
attributable to increased numbers of engagements. IBIS Consulting accounted for
$8.9 million, or 59.0%, of the increase in Proxicom's 1998 revenues. Square
Earth's contribution was not separately accounted for because its operations
were fully integrated into ours following the merger in January 1998.
Cost of Revenue. Cost of revenue increased $12.2 million, or 95.7%, to
$24.9 million in 1998 from $12.7 million in 1997. The increase during 1998 was
due primarily to increases in the number of personnel needed to service these
engagements and the related complexity of the engagements. Approximately 76.0%
of the increase was attributable to personnel cost increases. Service project
personnel increased from 216 at December 31, 1997 to 340 at December 31, 1998.
We usually do not fully utilize our consulting and delivery personnel on
billable projects during their initial months of employment. During this time,
they undergo training and become integrated into our operations. Additionally,
in 1998, we re-deployed engineers who were active in developing and enhancing
replicable frameworks. During this transition phase, the engineer utilization
was lower due to start-up requirements. Also, during the second half of 1998,
due to market conditions, customer demand in our financial services and energy
industry groups softened, which adversely affected service utilization. As a
percentage of revenue, cost of revenue increased to 56.6% during 1998 as
compared to 44.8% during 1997.
Gross Profit. In 1998, gross profit increased $3.4 million, or 21.4%, to
$19.1 million from $15.7 million in 1997. The gross profit dollar increase
reflects the increase in revenue during 1998. As a percentage of revenue, gross
profit decreased to 43.4% during 1998 as compared to 55.2% during 1997. The
percentage decrease reflects reduced overall utilization of consulting and
delivery personnel as discussed in the cost of revenue section.
General and Administrative. General and administrative costs increased $6.2
million, or 61.1%, to $16.4 million in 1998 from $10.2 million in 1997. This
increase was due primarily to increases in personnel and facilities and related
costs due to expanded leasing commitments in Reston, VA, New York, NY, San
Francisco, CA and the establishment of new offices in Chicago, IL and Munich,
Germany to support the internal growth of our operations. Approximately 68.0% of
the increase is attributable to the facilities and related cost increases. As a
percentage of revenue, general and administrative expenses increased to 37.3% in
1998 as compared to 35.8% in 1997. We wrote off $959,000 in doubtful accounts in
1998, which included approximately $600,000 from disputes with two customers. We
believe the current allowance for doubtful accounts balance of $669,000 is
sufficient for other doubtful accounts.
Selling and Marketing. Selling and marketing costs increased $1.2 million,
or 70.7%, to $2.9 million in 1998 from $1.7 million in 1997. Approximately 59.0%
of this increase was due to marketing program expenditures and the remaining
increase was due to increased personnel-related costs incurred in sales
promotion efforts. As a percentage of revenue, selling and marketing increased
to 6.6% during 1998 from 6.0% during 1997.
Research and Development. Research and development costs decreased
$269,000, or 28.0%, to $692,000 in 1998 from $961,000 in 1997. We attribute this
decrease to our re-deploying engineers and technicians active in developing and
enhancing replicable frameworks to client service projects during the third
quarter of 1998. For 1998 and 1997, we charged all of our costs for research and
development to operations as incurred. We did this because the period between
technological feasibility and general release was relatively short and the costs
incurred during this period were not significant.
Acquisition and Merger Costs. We incurred charges of approximately $2.9
million in 1998 for costs associated with the Square Earth and IBIS Consulting
transactions. These transaction costs related to professional fees and other
direct expenses. We did not record any such expenses for the year ended December
31, 1997 because we did not acquire any entities during that year.
24
<PAGE> 26
Stock-based and Other Compensation. We incurred charges of $18.3 million in
1998 for costs associated with our IBIS Consulting and ad hoc Interactive
transactions. Of these charges, $17.2 million related to the elimination of a
repurchase requirement for formula stock options and $1.0 million consisted of
cash bonus payments required under the historical IBIS Consulting plan. For the
year ended December 31, 1997 we incurred charges of $44,000 for stock rights
issued for less than fair market value under the historical ad hoc Interactive
plan.
Interest Income (Expense), Net. Interest income (expense), net decreased
$201,000, or 251.3%, to interest expense of $121,000 in 1998 from interest
income of $80,000 in 1997. This decrease was due primarily to interest expense
we incurred from borrowings under our lines of credit during 1998 to support our
internal growth. Interest expense of $238,000 was offset by interest income of
$117,000 earned during 1998. We generally invest in U.S. Government 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). Operating losses generated in 1998 were
carried back for tax purposes creating a tax benefit. The $900,000 income tax
benefit in 1998 represents a benefit from combined federal and state income
taxes at an effective rate of 4.0%, or 18.0% excluding the $17.3 million
non-deductible stock-based compensation charge. Income tax expenses of $330,000
in 1997 represented combined federal and state income taxes at an effective rate
of 11.4%. Our effective tax rate was favorably impacted in both 1997 and 1998 by
the transactions with Square Earth, IBIS Consulting and ad hoc Interactive,
which were Subchapter S corporations with pass-through tax status before the
transactions.
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated quarterly financial
data for the periods indicated. We derived this data from unaudited consolidated
financial statements, and, in the opinion of our management, they include all
adjustments, which consist only of normal recurring adjustments, necessary to
present fairly the financial results for the periods. Results of operations for
any previous fiscal quarter do not necessarily indicate what results may be for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- ---------- ----------- ---------- ----------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 8,043 $ 10,508 $ 12,568 $ 12,887 $ 13,254 $ 16,221 $ 23,592 $ 29,621
Cost of revenue................ 4,653 5,690 7,036 7,549 7,792 8,911 12,070 14,788
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit................... 3,390 4,818 5,532 5,338 5,462 7,310 11,522 14,833
-------- -------- --------- -------- -------- -------- --------- --------
Operating expenses:
General and administrative.... 3,326 4,266 4,384 4,421 4,562 5,596 7,833 10,659
Selling and marketing......... 712 651 916 640 650 787 1,696 2,420
Research and development...... 228 220 244 -- -- -- -- --
Acquisition and merger
costs....................... 130 -- 2,756 -- 300 -- -- --
Stock-based and other
compensation................ 15 42 18,211 40 117 108 106 103
-------- -------- --------- -------- -------- -------- --------- --------
Total................... 4,411 5,179 26,511 5,101 5,629 6,491 9,635 13,182
-------- -------- --------- -------- -------- -------- --------- --------
Income (loss) from
operations.................... (1,021) (361) (20,979) 237 (167) 819 1,887 1,651
Interest income (expense),
net........................... 43 (26) (66) (72) (65) 476 701 1,658
-------- -------- --------- -------- -------- -------- --------- --------
Income (loss) before income
taxes......................... (978) (387) (21,045) 165 (232) 1,295 2,588 3,309
Income tax provision
(benefit)..................... (491) (452) (132) 175 (84) 531 1,066 1,423
-------- -------- --------- -------- -------- -------- --------- --------
Net income (loss).............. $ (487) $ 65 $ (20,913) $ (10) $ (148) $ 764 $ 1,522 $ 1,886
======== ======== ========= ======== ======== ======== ========= ========
AS A PERCENTAGE OF REVENUE:
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 57.9 54.1 56.0 58.6 58.8 54.9 51.2 49.9
-------- -------- --------- -------- -------- -------- --------- --------
Gross profit................... 42.1 45.9 44.0 41.4 41.2 45.1 48.8 50.1
-------- -------- --------- -------- -------- -------- --------- --------
Operating expenses:
General and administrative.... 41.4 40.6 34.9 34.3 34.4 34.5 33.2 36.0
Selling and marketing......... 8.8 6.2 7.3 5.0 4.9 4.9 7.2 8.2
Research and development...... 2.8 2.1 1.9 -- -- -- -- --
Acquisition and merger
cost........................ 1.6 -- 21.9 -- 2.3 -- -- --
Stock-based and other
compensation................ 0.2 0.4 144.9 0.3 0.9 0.6 0.4 0.4
-------- -------- --------- -------- -------- -------- --------- --------
Total................... 54.8 49.3 210.9 39.6 42.5 40.0 40.8 44.6
-------- -------- --------- -------- -------- -------- --------- --------
Income (loss) from
operations.................... (12.7) (3.4) (166.9) 1.8 (1.3) 5.1 8.0 5.5
Interest income (expense),
net........................... 0.5 (0.3) (0.5) (0.5) (0.5) 2.9 3.0 5.6
-------- -------- --------- -------- -------- -------- --------- --------
Income (loss) before income
taxes......................... (12.2) (3.7) (167.4) 1.3 (1.8) 8.0 11.0 11.1
Income tax provision
(benefit)..................... (6.1) (4.3) (1.0) 1.4 (0.7) 3.3 4.5 4.8
-------- -------- --------- -------- -------- -------- --------- --------
Net income (loss).............. (6.1)% 0.6% (166.4)% (0.1)% (1.1)% 4.7% 6.5% 6.3%
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
We have generally realized lower revenue in the first quarter of the year
than in the other quarters. We believe that this has been due primarily to
client budget cycles and the short-term nature of our contracts.
26
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
In October 1998, Proxicom entered into a $10.0 million revolving credit
facility with Bank of America, N.A., as amended in November 1999, to be used for
working capital purposes and permitted acquisitions. The interest rate on
amounts borrowed under the credit agreement is the Eurodollar Daily Floating
Rate plus 1.25%. The credit facility expires on August 31, 2000 and will renew
automatically for one additional year at the sole discretion of Bank of America,
N.A. The credit facility requires Proxicom to maintain liquid assets of at least
$10.0 million. As of the date of this report, Proxicom had no outstanding
borrowings under the credit facility.
At December 31, 1999, the Company had approximately $113.8 million in cash
and cash equivalents and $5.8 million in short-term investments. For the period
ended December 31, 1999, net cash provided by operating activities and financing
activities was approximately $2.0 million and $118.1 million, respectively. Net
cash used in investing activities was approximately $9.0 million.
Unbilled services decreased $2.4 million from $4.3 million at December 31,
1998 to $1.9 million at December 31, 1999. This decrease was primarily due to a
shift to more engagements billed on a time and materials basis rather than fixed
price arrangements.
Capital expenditures of approximately $2.1 million, $1.8 million and $3.4
million for 1997, 1998 and 1999, respectively, were used primarily for computer
equipment, office equipment and leasehold improvements related to Proxicom's
growth. Capital expenditures for 2000 are expected to be approximately $10
million and will be made principally for computer equipment, internally used
software purchases and leasehold improvements to support our growth.
In February 1999, Proxicom completed the sale of 1,218,333 shares of Series
D convertible preferred stock for $7.3 million. At the closing of Proxicom's
initial public offering, all of these shares converted into common stock on a
one-for-one basis and subsequently adjusted for the Company's two-for-one stock
split. Proxicom was required to take a $4.9 million charge to additional paid-in
capital for the difference between the conversion feature and the estimated fair
value of the underlying common stock. Although not reflected on the statement of
operations, the charge was reflected as a reduction to income and earnings per
share available for common stockholders.
In connection with the issuance of Series A convertible preferred stock,
Proxicom issued warrants to purchase 1,011,378 shares of Series A convertible
preferred stock. The warrants were exercised for a purchase price of $8.0
million on April 13, 1999, and the shares of Series A convertible preferred
stock issued upon their exercise were converted into shares of common stock on a
one-for-one basis immediately before Proxicom closed its initial public
offering of securities and subsequently adjusted for the Company's two-for-one
stock split.
On April 23, 1999, Proxicom completed its initial public offering of
securities. After deducting expenses, Proxicom received approximately $46.9
million in proceeds from this transaction. In connection with the initial public
offering, Proxicom offered the underwriters of the offering an option to
purchase an additional 1,350,000 shares of common stock at the offering's $6.50
per share offering price. Proxicom received approximately $8.2 million in
proceeds from this option, which was exercised on May 21, 1999.
On October 14, 1999, Proxicom completed another underwriten public offering
of its securities. After deducting expenses, Proxicom received approximately
$49.0 million in proceeds from this transaction.
Proxicom anticipates that existing sources of liquidity and funds generated
from operations should provide adequate cash to fund its currently anticipated
cash needs through at least the next 18 months. To the extent Proxicom is unable
to fund its operations from cash flows, it may need to obtain financing from
external sources in the form of either additional equity or indebtedness. There
can be no assurance that additional financing will be available at all, or that,
if available, such financing will be obtainable on terms favorable to Proxicom.
27
<PAGE> 29
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal
year ending December 31, 2001. The Company has no derivative or hedging activity
in any of the periods presented.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting Bulletin is effective for the year
beginning January 1, 2000. The initial adoption of this guidance is not
anticipated to have a material impact on the Company's results of operations or
financial position, however, the guidance may impact the way in which the
Company will account for future transactions.
YEAR 2000
To date the Company has experienced no significant adverse effects related
to the Year 2000 computer issue. All important internal information technology
systems made a seamless transition into the Year 2000 and there were no notable
problems with equipment or systems which may have been affected by faulty
embedded chips or other Year 2000 problems. The Company is not aware of any
significant Year 2000 problems at any of its vendors.
The Company implemented a comprehensive project plan to identify internal
and external information technology and non-information technology systems which
required modification or upgrade to be made Year 2000 compliant.
Prior to December 31, 1999, the Company completed contingency plans for
critical individual information technology systems and non-informational
technology systems for implementation. As of March 2000, the Company has not
experienced any adverse effects of its systems. Furthermore, our management
believes that the Year 2000 risk will not pose significant future operational
problems for Proxicom computer systems. However, there is no guarantee that the
Company's Year 2000 program, including consulting with third parties, will avoid
any future material adverse effects on the Company's operations, customer
relations or financial condition. The Company's total cost of its Year 2000
program was approximately $325,000 as of March 20, 2000. However, there is no
guarantee that additional cost will not be incurred.
INFLATION
Proxicom does not believe that inflation has had a significant impact on
Proxicom's consolidated operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Proxicom is exposed to interest rate risk related to its borrowings under
the credit facility with Bank of America, N.A. There were no borrowings
outstanding under the credit facility as of December 31, 1999.
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and cash equivalents and debt
agreements. The Company's investment policy calls for investment in short-term,
low risk instruments. At December 31, 1999, the Company had $119.6 million
invested in commercial paper. A rise in interest rates would have an adverse
impact on the fair market value of fixed rate securities. If interest rates
fall, floating rate securities may generate less interest income. The Company
manages its exposure to interest rate risk through investing in securities with
maturities of one year or less.
The Company's international operations are subject to foreign exchange
rate fluctuations. The Company derived 1.0%, 6.8% and 8.0% of its revenues for
1997, 1998 and 1999, respectively, from services performed in Germany, Italy and
Spain. Since the revenue and expenses of the Company's international operations
generally are denominated in local currencies, exchange rate fluctuations
between such local currencies and the United States dollar will subject the
Company to currency translation risk with respect to the reported results of its
foreign operations as well as to risk sometimes associated with international
operations. In addition, the Company may be subject to currency risk when the
Company's service contracts are denominated in a currency other than the
currency in which the Company incurs expenses related to such contracts.
Germany, Spain and Italy have
28
<PAGE> 30
traditionally had relatively stable currencies. The Company does not hedge its
foreign currency exposure. Management does not believe that the Company's
exposure to foreign currency rate fluctuations is material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Proxicom, including Proxicom's
consolidated balance sheets as of December 31, 1999 and 1998, and consolidated
statements of operations, consolidated statements of cash flows, and
consolidated statements of stockholders' equity for the years ended December 31,
1999, 1998 and 1997, and notes to consolidated financial statements, together
with a report thereon of PricewaterhouseCoopers LLP, dated January 26, 2000,
except as to the stock split discussed in Note 1 which is as of February 24,
2000, are filed as part of this report and appear on pages F-1 through F-23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information responsive to this Item is incorporated herein by reference to
Proxicom's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information responsive to this Item is incorporated herein by reference to
Proxicom's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information responsive to this Item is incorporated herein by reference to
Proxicom's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information responsive to this Item is incorporated herein by reference to
Proxicom's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following Consolidated Financial Statements and report of independent
public accountants appear on pages F-2 through F-23 of this report and are
incorporated by reference in Part II, in Item 8:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable accounting
regulations of the Commission either have been included in the Consolidated
Financial Statements of Proxicom or the notes thereto, are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are either provided with this report or are
incorporated herein by reference:
EXHIBIT INDEX
3.1+ Restated Certificate of Incorporation of the Registrant
3.2+ Bylaws of the Registrant
4.1+ Form of Common Stock Certificate of the Registrant
10.1+ Preferred Stock and Warrant Purchase Agreement, dated August
30, 1996, among the Registrant, General Atlantic Partners 34,
L.P. and GAP Coinvestment Partners, L.P.
10.2+ Preferred Stock Purchase Agreement, dated February 20, 1997,
among the Registrant, General Atlantic Partners 34, L.P., GAP
Coinvestment Partners, L.P., FBR Venture Capital Managers,
Inc. and The Mario M. Morino Trust
10.3+ Preferred Stock Purchase Agreement, dated November 24, 1997,
between the Registrant and General Electric Capital
Corporation
10.4+ Preferred Stock Purchase Agreement, dated February 1, 1999,
among the Registrant, Jack Kemp, Theodore J. Leonsis, John
McKinley, The Washington Post Company, General Atlantic
Partners 52, L.P., GAP Coinvestment Partners II, L.P., The
Mario M. Morino Trust and GE Capital Equity Investments, Inc.
10.5+ Third Amended and Restated Registration Rights Agreement,
dated February 1, 1999,
31
<PAGE> 33
among the Registrant, General Atlantic Partners 34, L.P.,
General Atlantic Partners 52, L.P., GAP Coinvestment Partners,
L.P., GAP Coinvestment Partners II, L.P., Raul Fernandez, The
Mario M. Morino Trust, FBR Venture Capital Managers Inc.,
General Electric Capital Corporation, GE Capital Equity
Investments, Inc., Brenda Wong, Scott McDonald, Vincent
Hoenigman, Jack Kemp, Theodore J. Leonsis, John McKinley, and
The Washington Post Company
10.6+ Proxicom, Inc. 1996 Stock Option Plan
10.7+ Proxicom, Inc. 1997 Stock Option Plan for Non-employee
Directors
10.8+ Proxicom, Inc. Employee Stock Purchase Plan
10.9+ Lease Agreement, dated July 14, 1997 between Sunrise Limited
Partnership and the Registrant
10.10+ Secured Credit Agreement, dated as of October 30, 1998,
between the Registrant and NationsBank, N.A.
10.11* Amendment to Secured Credit Agreement, dated as of October 30,
1998, between the Registrant and NationsBank, N.A.
10.12+ Severance Agreement between the Registrant and Christopher
Capuano
10.13+ Severance Agreement between the Registrant and Larry Clark
10.14+ Severance Agreement between the Registrant and Kenneth
J. Tarpey
10.15* Fourth Amended and Restated Registration Rights Agreement,
dated September 24, 1999, among the Registrant and the
stockholders named therein
10.16 Amendment to Secured Credit Agreement, dated as of November
29, 1999, between the Registrant and Bank of America (formerly
NationsBank, N.A.)
21.1+ Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
- ----------
+ Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-72297, dated April 19, 1999.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-87671, dated October 1, 1999.
(b) Reports on Form 8-K.
None.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Reston,
Commonwealth of Virginia, on March 29, 2000.
PROXICOM, INC.
By: /s/ RAUL J. FERNANDEZ
---------------------------------
Raul J. Fernandez
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
Form 10-K has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RAUL J. FERNANDEZ
- ----------------------------- Chairman, President and Chief Executive Officer
Raul J. Fernandez (Principal Executive Officer) March 29, 2000
/s/ BRENDA WAGNER
- -----------------------------
Brenda Wagner Senior Vice President, Human Resources and Director March 29, 2000
/s/ KENNETH J. TARPEY Executive Vice President, Chief Financial Officer and Treasurer
- -----------------------------
Kenneth J. Tarpey (Principal Financial and Accounting Officer) March 29, 2000
/s/ DAVID C. HODGSON
- -----------------------------
David C. Hodgson Director March 29, 2000
/s/ JACK KEMP
- -----------------------------
Jack Kemp Director March 29, 2000
- -----------------------------
Theodore J. Leonsis Director
/s/ JOHN A. MCKINLEY, JR.
- -----------------------------
John A. McKinley, Jr. Director March 29, 2000
/s/ MARIO M. MORINO
- -----------------------------
Mario M. Morino Director March 29, 2000
</TABLE>
33
<PAGE> 35
PROXICOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants...................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999........................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999..................................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999..................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999..................................................F-6
Notes to Consolidated Financial Statements..........................................F-7
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Proxicom, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Proxicom, Inc. and its subsidiaries at December 31, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
January 26, 2000, except as to the stock
split discussed in Note 1
which is as of February 24, 2000
F-2
<PAGE> 37
PROXICOM, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................................ $ 2,586 $ 113,819
Investments...................................................................................... 278 5,819
Accounts receivable, net of allowance of $669 and $655, respectively............................. 9,893 24,043
Unbilled services................................................................................ 4,259 1,865
Prepaid income taxes............................................................................. 130 173
Prepaid expenses................................................................................. 402 1,886
Deferred tax and other current .................................................................. 301 1,295
------------ ------------
Total current, assets........................................................................ 17,849 148,900
Property and equipment, net...................................................................... 2,944 5,063
Deferred tax and other non-current............................................................... 1,758 6,151
------------ ------------
Total assets................................................................................. $ 22,551 $ 160,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................................................................. $ 5,554 $ --
Trade accounts payable........................................................................... 662 1,345
Accrued compensation............................................................................. 3,779 8,298
Employee withholdings, stock purchase plan ...................................................... -- 2,140
Deferred revenue................................................................................. 1,889 3,533
Note payable..................................................................................... 1,400 --
Deferred tax liability........................................................................... 1,423 --
Other accrued liabilities........................................................................ 1,215 1,539
------------ ------------
Total liabilities............................................................................ 15,922 16,855
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized at
December 31, 1998; 10,000,000 shares authorized at December 31,
1999; no shares issued and outstanding at
December 31, 1999:.......................................................................... -- --
Series A convertible preferred stock; 1,629,969 shares issued and 1,222,469 shares
outstanding at December 31, 1998; none issued and outstanding at December 31, 1999:... 12 --
Series B convertible preferred stock; 359,712 shares authorized, issued and outstanding
at December 31, 1998 and none issued and outstanding at December 31, 1999: ........... 4 --
Series C convertible preferred stock; 419,302 shares authorized, issued and
outstanding at December 31, 1998, and none issued and outstanding at December 31, 1999: 4 --
Common stock, $0.01 par value, 20,000,000 shares authorized; 30,862,612 shares issued
and 30,756,354 shares outstanding at December 31,1998; 100,000,000 shares authorized,
52,642,482 shares issued and 52,536,224 shares outstanding at December 31, 1999:............ 308 526
Additional paid-in capital......................................................................... 25,424 162,715
Retained earnings (deficit)........................................................................ (18,904) (19,884)
Accumulated other comprehensive income............................................................. 3 124
Treasury stock..................................................................................... (222) (222)
------------ ------------
Total stockholders' equity................................................................... 6,629 143,259
------------ ------------
Total liabilities and stockholders' equity................................................... $ 22,551 $ 160,114
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 38
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------- ------------- -----------
<S> <C> <C> <C>
Revenue ......................................................................... $ 28,452 $ 44,006 $ 82,688
Cost of revenue (exclusive of non-cash compensation expense
of $44, $352 and $434, respectively)......................................... 12,736 24,928 43,561
----------- ------------ ------------
Gross profit .................................................................... 15,716 19,078 39,127
----------- ------------ ------------
Operating expenses:
General and administrative..................................................... 10,180 16,397 28,650
Selling and marketing.......................................................... 1,710 2,919 5,553
Research and development....................................................... 961 692 --
Acquisition and merger costs................................................... -- 2,886 300
Stock-based and other compensation............................................. 44 18,308 434
----------- ------------ ------------
Total.................................................................. 12,895 41,202 34,937
----------- ------------ ------------
Income (loss) from operations.................................................... 2,821 (22,124) 4,190
Interest income (expense), net................................................... 80 (121) 2,770
----------- ------------ ------------
Income (loss) before income taxes................................................ 2,901 (22,245) 6,960
Income tax provision (benefit)................................................... 330 (900) 2,936
----------- ------------ ------------
Net income (loss)................................................................ 2,571 (21,345) 4,024
Non-cash dividend on beneficial conversion
of convertible preferred stock................................................. -- -- (4,873)
----------- ------------ -------------
Net income (loss) available to common
stockholders .................................................................. $ 2,571 $ (21,345) $ (849)
=========== ============ ============
Basic net income (loss) per common share......................................... $ 0.10 $ (0.73) $ (0.02)
=========== ============ ============
Diluted net income (loss) per common
share ......................................................................... $ 0.08 $ (0.73) $ (0.02)
=========== ============ ============
Weighted average common shares
outstanding ................................................................... 26,748 29,152 44,532
Weighted average common shares and common
share equivalents.............................................................. 34,256 29,152 44,532
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 39
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- --------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........................ 27,546,886 $ 275 1,629,969 $ 16 $ 5,202
Issuance of preferred Series B...................... -- -- 359,712 4 1,496
Stock-based compensation............................ -- -- -- -- 63
Unearned stock-based compensation................... -- -- -- -- (19)
Exercise of stock options and issuance of
restricted shares.................................. 5,976 -- -- -- --
Treasury stock acquired............................. -- -- -- -- --
Issuance of preferred Series C...................... -- -- 419,302 4 1,967
Unrealized investment gain.......................... -- -- -- -- --
Net income.......................................... -- -- -- -- --
Subchapter S Corporation distributions.............. -- -- -- -- --
---------- ------- ----------- ------- -----------
Balance at December 31, 1997........................ 27,552,862 275 2,408,983 24 8,709
Conversion of preferred Series A.................... -- -- (407,500) (4) (1,604)
Exercise of stock options and issuance of
restricted shares.................................. 316,762 3 -- -- 300
Subchapter S Corporation distributions.............. -- -- -- -- --
Stock-based compensation............................ 2,992,988 30 -- -- 18,516
Unearned stock-based compensation................... -- -- -- -- (497)
Net loss............................................ -- -- -- -- --
---------- ------- ----------- ------- -----------
Balance at December 31, 1998........................ 30,862,612 308 2,001,483 20 25,424
Issuance of preferred Series D...................... -- -- 1,218,333 12 7,267
Exercise of warrants................................ -- -- 1,011,378 10 7,990
Conversion of preferred stock....................... 8,462,388 84 (4,231,194) (42) (42)
Exercise of stock options and issuance of
restricted shares.................................. 1,967,482 20 -- -- 5,117
Subchapter S Corporation distributions.............. -- -- -- -- --
Amortization of stock-based
compensation and warrant cost...................... -- -- -- -- 989
Beneficial conversion of preferred
Series D........................................... -- -- -- -- 4,873
Issuance of common stock, net of issuance costs .... 11,350,000 114 -- -- 103,154
Income tax benefit from deductible stock based award -- -- -- -- 7,943
Change in unrealized investment income.............. -- -- -- -- --
Translation adjustment.............................. -- -- -- -- --
Net income.......................................... -- -- -- -- --
---------- ------- ----------- ------- -----------
Balance at December 31, 1999 ....................... 52,642,482 $ 526 -- $ -- $ 162,715
========== ======= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER RETAINED TOTAL
COMPREHENSIVE TREASURY STOCK EARNINGS STOCKHOLDERS'
INCOME/(LOSS) SHARES AMOUNT (DEFICIT) EQUITY
------------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........................ $ (4) 201,834 $ (330) $ 2,185 $ 7,344
Issuance of preferred Series B...................... -- -- -- -- 1,500
Stock-based compensation............................ -- -- -- -- 63
Unearned stock-based compensation................... -- -- -- -- (19)
Exercise of stock options and issuance of
restricted shares.................................. -- -- -- -- --
Treasury stock acquired............................. -- 719,424 (1,500) -- (1,500)
Issuance of preferred Series C...................... -- -- -- -- 1,971
Unrealized investment gain.......................... 7 -- -- -- 7
Net income.......................................... -- -- -- 2,571 2,571
Subchapter S Corporation distributions.............. -- -- -- (1,441) (1,441)
--------- --------- ---------- ---------- -----------
Balance at December 31, 1997........................ 3 921,258 (1,830) 3,315 10,496
Conversion of preferred Series A.................... -- (815,000) 1,608 -- --
Exercise of stock options and issuance of
restricted shares.................................. -- -- -- -- 303
Subchapter S Corporation distributions.............. -- -- -- (874) (874)
Stock-based compensation............................ -- -- -- -- 18,546
Unearned stock-based compensation................... -- -- -- -- (497)
Net loss............................................ -- -- -- (21,345) (21,345)
--------- --------- ---------- ---------- -----------
Balance at December 31, 1998........................ 3 106,258 (222) (18,904) 6,629
Issuance of preferred Series D...................... -- -- -- -- 7,279
Exercise of warrants................................ -- -- -- -- 8,000
Conversion of preferred stock....................... -- -- -- -- --
Exercise of stock options and issuance of
restricted shares.................................. -- -- -- -- 5,137
Subchapter S Corporation distributions.............. -- -- -- (131) (131)
Amortization of stock-based
compensation and warrant cost..................... -- -- -- -- 989
Beneficial conversion of preferred
Series D.......................................... -- -- -- (4,873) --
Issuance of common stock, net of issuance costs .... -- -- -- -- 103,268
Income tax benefit from deductible stock based award -- -- -- -- 7,943
Change in unrealized investment income.............. 34 -- -- -- 34
Translation adjustment.............................. 87 -- -- -- 87
Net income.......................................... -- -- -- 4,024 4,024
--------- --------- ---------- ---------- -----------
Balance at December 31, 1999 ....................... $ 124 106,258 $ (222) $ (19,884) $ 143,259
========= ========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 40
PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ 2,571 $ (21,345) $ 4,024
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................................. 904 1,516 1,296
Income tax benefit from tax deductible stock based award................... -- -- 7,943
Increase (decrease) in deferred income taxes............................... 320 (667) (5,195)
Provision for stock compensation........................................... 264 17,555 434
Non-cash warrant expense................................................... -- -- 555
Increase (decrease) in provision for doubtful accounts..................... 384 9 (14)
Common stock issued for services........................................... -- 166 --
Changes in assets and liabilities:
Increase in accounts receivable......................................... (5,483) (2,047) (14,136)
(Increase) decrease in unbilled services................................ (649) (2,890) 2,394
Decrease (increase) in prepaid income taxes............................. 77 77 (43)
Increase in prepaid expenses............................................ (175) (97) (1,484)
Increase in other assets................................................ (52) (126) (1,615)
Increase (decrease) in trade accounts payable........................... 957 (587) 683
Increase in accrued compensation........................................ 769 2,375 4,519
Increase in employee withholdings....................................... -- -- 2,140
Increase (decrease) in note payable..................................... -- 1,400 (1,400)
Increase in deferred revenue............................................ 719 671 1,644
Increase in other accrued liabilities................................... 722 168 324
---------- ----------- -----------
Net cash provided by (used in) operating activities................... 1,328 (3,822) 2,069
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (2,079) (1,782) (3,415)
Purchases of investments..................................................... (104) (390) (5,782)
Sales of investments......................................................... 1,288 1,213 275
---------- ----------- -----------
Net cash used in investing activities................................. (895) (959) (8,922)
---------- ----------- -----------
Cash flows from financing activities:
Issuance of preferred stock, Series B........................................ 1,500 -- --
Issuance of preferred stock, Series C........................................ 1,971 -- --
Issuance of preferred stock, Series D........................................ -- -- 7,279
Proceeds from public offerings............................................... -- -- 103,268
Exercise of stock warrants................................................... -- -- 8,000
Exercise of stock options.................................................... -- 631 5,137
Purchase of treasury stock................................................... (1,500) - --
Borrowings under line of credit.............................................. 6,713 11,976 4,550
Payments under line of credit................................................ (6,493) (6,709) (10,104)
Subchapter S Corporation distributions....................................... (1,441) (874) (131)
----------- ----------- -----------
Net cash provided by financing activities............................. 750 5,024 117,999
---------- ----------- -----------
Effect of exchange rate changes................................................ -- -- 87
Net increase in cash and cash equivalents...................................... 1,183 243 111,233
Cash and cash equivalents at beginning of period............................... 1,160 2,343 2,586
---------- ----------- -----------
Cash and cash equivalents at end of period..................................... $ 2,343 $ 2,586 $ 113,819
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 41
PROXICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Proxicom, Inc. ("Proxicom") is a leading provider of Internet solutions to
Global 1000 companies and other large organizations. Since 1994, Proxicom has
focused exclusively on the Internet. Proxicom's Internet solutions include
business-to-consumer electronic commerce Internet sites, business-to-business
electronic commerce extranets, and company-specific intranets.
In August 1996, Proxima, Inc., a Maryland corporation, reincorporated as a
Delaware corporation, through a merger transaction, changing its name to
Proxicom, Inc.
On January 24, 2000, the Board of Directors approved a two-for-one stock split,
effective February 24, 2000, for common shareholders of record as of February 9,
2000. The financial statements of the Company, including references to all
common stock shares and per share data, have been retroactively restated.
2. MERGERS
On March 26, 1999, Proxicom completed a merger with ad hoc Interactive, Inc.
("ad hoc"), a Subchapter S Corporation incorporated during 1994, by exchanging
1,659,542 shares of Proxicom's common stock and rights to receive 78,666 shares
of Proxicom common stock for all the outstanding stock and stock rights of ad
hoc. Each share of ad hoc stock was exchanged for 19.910446 shares of Proxicom
common stock. In addition, outstanding rights to receive ad hoc stock were
exchanged for rights to receive Proxicom common stock. (Note 9).
There were no transactions between Proxicom and ad hoc prior to the combination.
No material adjustments were made to conform to Proxicom's accounting policies.
In August 1998, Proxicom completed a merger with IBIS Consulting, Inc. ("IBIS
Consulting"), a Subchapter S corporation incorporated during 1994, by exchanging
9,976,594 shares of Proxicom's common stock for all the common stock of IBIS
Consulting. Each share of IBIS Consulting was exchanged for 0.4655736 shares of
Proxicom common stock. In addition, outstanding IBIS Consulting employee stock
options were converted at the same exchange factor into options to purchase
690,068 shares of Proxicom common stock. (Note 9).
There were no transactions between Proxicom and IBIS Consulting prior to the
combination. No material adjustments were made to conform to Proxicom's
accounting policies.
Effective January 1, 1998, Proxicom completed a merger with Square Earth, Inc.
("Square Earth"), a Subchapter S corporation incorporated during 1996, by
exchanging 1,069,998 shares of its common stock for all the common stock of
Square Earth. Each share of Square Earth was exchanged for 0.891666 shares of
Proxicom common stock. In addition, outstanding Square Earth employee stock
options were converted at the same exchange factor into options to purchase
82,948 shares of Proxicom common stock. (Note 9).
There were no transactions between Proxicom and Square Earth prior to the
combination. No material adjustments were made to conform to Proxicom's
accounting policies.
F-7
<PAGE> 42
2. MERGERS (CONTINUED)
Stand-alone financial information is shown in the following table.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1997 1998
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Revenue
IBIS Consulting................................. $ 10,170 $ *
Square Earth.................................... 1,403 *
ad hoc.......................................... 1,095 1,601
Net income (loss)
IBIS Consulting................................. $ 2,078 $ *
Square Earth.................................... 2 *
ad hoc.......................................... (122) (702)
</TABLE>
For the six month period ended June 30, 1998, IBIS Consulting had revenue and
net income of $8.1 million and $1.4 million, respectively.
- ----------
* Not applicable to reporting period based on acquisition date.
The IBIS Consulting, ad hoc and Square Earth mergers constituted tax-free
reorganizations and have been accounted for as poolings of interests under
Accounting Principles Board Opinion No. 16, "Business Combinations".
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of IBIS Consulting, ad hoc and Square Earth as though they had
been a part of Proxicom since their inception.
Proxicom incurred charges of approximately $2.9 million in 1998 for costs
associated with the IBIS Consulting and Square Earth transactions and $300,000
in 1999 for the ad hoc transaction. Those transaction costs related to
professional fees and other direct expenses relating to the acquisitions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results may differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
balances of Proxicom, IBIS Consulting, Square Earth, ad hoc and the Company's
wholly owned foreign subsidiaries (hereafter collectively the "Company" or
"Proxicom"). All significant intercompany transactions and balances have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Highly liquid investments having original maturities of 90 days or less at the
date of acquisition are classified as cash equivalents. The carrying values of
cash equivalents approximate fair values.
F-8
<PAGE> 43
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from Internet professional services is recognized based on the nature of
the contract. Revenue from fixed-price contracts is recognized using the
percentage-of-completion method based on the ratio of costs incurred to total
estimated costs.
Revenue from time-and-materials contracts is accounted for as time is incurred
and billed. Net revenues exclude reimbursable expenses charged to clients.
The Company periodically evaluates cost and revenue assumptions in fixed-price
contracts. Provisions for estimated losses on uncompleted contracts are made on
a contract by contract basis and are recognized in the period in which such
losses are determined. Most contracts are cancelable by either the Company or
the customer upon 30 days notice, with payment due for services completed
through the date of termination. No significant losses have been incurred on
cancelled contracts.
Deferred revenue is recognized on fixed-price contracts to reflect billings in
excess of revenue recognized under the percentage-of-completion method.
Unbilled services on contracts are comprised of cost plus earnings in excess of
contractual billings on such contracts. Billings in excess of cost plus earnings
are classified as deferred revenue.
RESEARCH AND DEVELOPMENT EXPENSES FOR SOFTWARE PRODUCTS
Research and development costs are expensed as incurred. Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility and prior to general release of the software. Based on
the Company's development process, technological feasibility is established upon
completion of a working model. The period between technological feasibility and
general release is relatively short and the costs incurred during this period
have been insignificant for capitalization. The Company is not currently
developing stand-alone software products.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Leasehold improvements are
amortized on a straight-line method over the shorter of the improvements'
estimated useful lives or related remaining lease term. Long-lived assets held
and used by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be recoverable.
INVESTMENTS
The Company has a cash management program, which provides for the investment of
excess cash balances primarily in short-term money market and debt instruments
with contractual maturities of one year or less. Accordingly, the Company
classifies its investments as available-for-sale as defined by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
Statement further requires that available-for-sale securities be reported at
fair value, with unrealized gains and losses excluded from earnings but reported
as comprehensive income within stockholders' equity (net of the effect of income
taxes) until they are sold.
F-9
<PAGE> 44
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The provision for income taxes is determined in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), which requires the use of the
asset and liability approach. Under this approach, deferred taxes represent the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. A new measurement date for purposes of
determining compensation is established when there is a substantive change to
the terms of an underlying option. (Note 9).
BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic net income per common share is based on the weighted average number of
shares of common stock outstanding during each year. Diluted net income per
common share is based on the weighted average number of shares of common stock
outstanding during each year, adjusted for the effect of common stock
equivalents arising from the assumed exercise of stock options, if dilutive.
(Note 15).
Additionally, all per share amounts have been restated to reflect the
re-incorporation and stock split discussed at Note 1 and the mergers of IBIS
Consulting, ad hoc and Square Earth discussed at Note 2.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and cash equivalents, accounts
receivable, trade accounts payable and note payable approximate fair value due
to the short maturity and ready liquidity of those instruments.
CONCENTRATION OF CREDIT RISK
Revenues in the years ended 1997, 1998 and 1999 and receivables as of December
31, 1998 and 1999 were concentrated with four customers as follows (amounts
represent percentage of total revenues and accounts receivable, respectively):
<TABLE>
<CAPTION>
REVENUES ACCOUNTS
--------------------------- RECEIVABLE
YEAR ENDED -----------
DECEMBER 31, DECEMBER 31,
--------------------------- --------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Customer A.......... 22.9% 14.2% * * *
Customer B.......... * 13.2% * 13.2% 13.1%
Customer C.......... * * 14.7% * *
Customer D.......... * * * * 20.4%
</TABLE>
- ----------
* Represents less than 10% of total.
F-10
<PAGE> 45
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performs initial credit evaluations of its new customers and
generally does not require collateral from its customers. The Company maintains
an allowance for potential losses when identified.
REPORTING
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of An Enterprise and Related Information". This Statement changes the way public
companies report information about segments of their business in annual
financial statements and requires disclosure of selected segment information. It
also requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. The Company currently operates in one operating and
geographic segment.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries are measured using local currency as
the functional currency. The assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date, and revenues and expenses are translated at average rates of
exchange in effect during the year. The resulting cumulative translation
adjustments have been recorded as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in consolidated net
income. The net gain (loss) on foreign currency remeasurement and exchange rate
changes for 1997, 1998 and 1999 was immaterial for separate financial statement
presentation.
PRO FORMA NET INCOME AND EARNINGS PER SHARE (unaudited)
As discussed in Note 2, the Company merged with IBIS Consulting and Square
Earth during 1998, and ad hoc during 1999; all previously Subchapter S
corporations. Pro forma net income (loss) assuming that IBIS Consulting, ad hoc
and Square Earth were taxable entities during the periods presented is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes................ $ 2,901 $ (22,245) $ 6,960
Pro forma income tax provision (benefit)......... 1,241 (900) 3,080
-------- ---------- -------
Pro forma net income (loss)...................... $ 1,660 $ (21,345) 3,880
======== ========== =======
</TABLE>
4. INVESTMENTS
The following is a summary of investments classified as current assets (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury securities and obligations of U.S.
government agencies.................................. $ 275 $ 3 $ -- $ 278
DECEMBER 31, 1999
Commercial paper........................................ $ 5,782 $ 37 $ -- $ 5,819
</TABLE>
F-11
<PAGE> 46
4. INVESTMENTS (CONTINUED)
The cost and fair value of available-for-sale securities by contractual
maturity are as follows (in thousands):
<TABLE>
<CAPTION>
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
DECEMBER 31, 1998
Due in one year or less............................... $ 200 $ 202
Due after one year through three years................ 75 76
----------- -----------
$ 275 $ 278
=========== ===========
DECEMBER 31, 1999
Due in one year or less............................... $ 5,782 $ 5,819
Due after one year through three years................ -- --
----------- -----------
$ 5,782 $ 5,819
=========== ===========
</TABLE>
The Company realized gains from the sale of investments of $9,000 and $0
for the years 1998 and 1999, respectively, and realized losses from the sales of
investments of $2,000 and $3,000 in 1998 and 1999, respectively.
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable..................... $ 10,562 $ 24,698
Allowance for doubtful accounts......... (669) (655)
----------- -----------
Net accounts receivable................. $ 9,893 $ 24,043
=========== ===========
</TABLE>
No accounts receivable at December 31, 1998 or 1999 were the result of
long-term contracts.
The Company wrote-off doubtful accounts of $71,000, $959,000 and $283,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment........................................ $ 3,635 $ 4,356
Office and other equipment................................ 729 1,291
Purchased software........................................ 596 2,072
Leasehold improvements.................................... 934 1,590
---------- ----------
5,894 9,309
Less: Accumulated depreciation and amortization (2,950) (4,246)
---------- ----------
Total property and equipment, net......................... $ 2,944 $ 5,063
========== ==========
</TABLE>
7. LINES OF CREDIT
In July 1998, IBIS Consulting entered into a line of credit with a bank in
the amount of $500,000. The line expired in August 1999. This line of credit
replaced a previously existing $200,000 line of credit with the same bank. No
borrowings were outstanding under this facility as of December 31, 1998.
F-12
<PAGE> 47
7. LINES OF CREDIT (CONTINUED)
In October 1998, the Company entered into a $10.0 million revolving line of
credit with a bank. All prior existing lines of credit were paid in full and
terminated. The use of the line generally is restricted to working capital
requirements and approved acquisitions as defined in the line of credit
agreement. Interest on this line is payable on a monthly basis at a variable
rate of LIBOR plus 2%. The line of credit is secured by the Company's
consolidated real and personal property, including intellectual property rights
and all cash and non-cash proceeds of these assets. Included in the line of
credit are various customary financial and other covenants including maintenance
of a minimum level of tangible net worth.
During 1999, the interest rate on the $10.0 million line of credit was
changed to the Eurodollar Daily Floating Rate plus 1.25%. Additionally, in
November 1999, the Company amended its covenants on this line of credit to
delete all pre-existing financial covenants and to include a new financial
covenant, in which the Company is required to maintain a minimum $10.0 million
amount of cash.
The $10.0 million line of credit expires on August 31, 2000. At December
31, 1998 and 1999, the Company had outstanding letters of credit of $205,000 and
$803,000, respectively, which reduce amounts available under the line.
Borrowings of $5.6 million and $4.2 million were outstanding and available,
respectively, against the line as of December 31, 1998. There were no borrowings
and $9.2 million was available against the line as of December 31, 1999.
Commitment fees of 0.25% paid on the unused line of credit during 1998 and 1999
were not material. Interest expense was $94,000, $227,000 and $102,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
As of May 1998, ad hoc entered into a line of credit with a bank in the
amount of $100,000. The line expired in November 1999. The line of credit
replaced a previously existing $50,000 line of credit with the same bank.
Interest on this line was payable on a monthly basis at a fixed rate of 10.25%.
Advances under the line of credit were secured by substantially all assets of ad
hoc. Borrowings of approximately $96,000 were outstanding under the line of
credit as of December 31, 1998. ad hoc had an additional $25,000 equipment line
which was established in March 1998. As of December 31, 1998, approximately
$22,000 remained outstanding under this equipment line. Interest expense was
$11,000 for the year ended December 31, 1998. There were no amounts outstanding
in 1999.
8. NOTE PAYABLE
On August 10, 1998, the Company entered into a $1.4 million note payable
with an investment banking firm in connection with professional services for the
IBIS Consulting transaction. The note accrues interest at 7.0% per annum and
matured the earlier of August 21, 1999 or upon completion of an initial public
offering. This unsecured note is subordinated only to the Company's senior bank
facilities. The $1.4 million note was paid in full in 1999 with a portion of the
proceeds from the Company's initial public offering.
9. STOCK OPTION PLANS
PROXICOM STOCK OPTION PLANS FOR EMPLOYEES AND NON-EMPLOYEES
In 1996, Proxicom established a stock option plan (the "Plan") under which
eligible employees and eligible non-employees may be granted options to purchase
shares of the Company's common stock. In January 2000, the Plan was amended to
increase the number of reserved common shares from 14,000,000 to 28,000,000.
F-13
<PAGE> 48
9. STOCK OPTION PLANS (CONTINUED)
Under the Plan, the option purchase price for each grant is equal to the
fair value of the common stock at the date of the grant as determined by the
Board of Directors. Options granted under the plan generally vest ratably over a
four-year period and expire 10 years from the date of the grant.
IBIS CONSULTING
In January and August 1997, IBIS Consulting granted options to two key
employees to purchase 3,518,062 shares with an exercise price of $0.11 per
share. Options for 2,992,988 shares became exercisable upon grant, with the
remaining 525,074 shares vesting over a two-year period commencing January 1,
1999. Under the terms of the option agreement, prior to the completion of an
initial public offering or sale of IBIS Consulting, IBIS Consulting was required
to repurchase and the employee was required to sell the shares or vested options
upon termination of employment, based on a pre-determined formula. After
exercise, IBIS Consulting retained the right and obligation to reacquire the
shares based on the formula price upon termination of the employee prior to the
completion of an initial public offering or sale of IBIS Consulting.
In July 1998, one employee exercised his option to acquire 2,992,988
shares. The employee paid IBIS Consulting $330,000 to exercise the options and
received $275,000, less applicable taxes under a tax reimbursement cash bonus
arrangement.
The Company recognized compensation expense in 1997 and a liability related
to both these options and the underlying cash bonus arrangement in the amount of
$220,000.
In January 1997, IBIS Consulting granted options to purchase 512,130 shares
to another employee with an exercise price of $0.202 per share. These options
were subject to a vesting schedule. Employment was terminated in 1997 and the
unvested options lapsed upon termination.
In January 1998, IBIS Consulting announced the grant of options under a
1998 plan and the conversion of options outstanding under the 1997 plan. In July
1998, IBIS Consulting granted such options to employees covering 164,994 shares
with an exercise price of $2.36 per share. The options are subject to an
18-month vesting schedule. Concurrent with this 1998 option grant, the remaining
1997 options of 525,074 shares were converted to the 1998 Plan. IBIS
Consulting's previous obligation to repurchase and the employees obligation to
sell the vested options upon termination of employment was eliminated.
In connection with the Company's merger with IBIS Consulting, the Company
assumed all outstanding options to purchase shares of common stock of IBIS
Consulting. These options were converted into options to purchase equivalent
shares of the Company's common stock based on the merger exchange formula and
subsequently included under the Proxicom Stock Option Plan for employees and
non-employees.
SQUARE EARTH, INC.
In connection with the Company's merger with Square Earth, the Company
assumed all outstanding options to purchase shares of common stock of Square
Earth. These options were converted into options to purchase equivalent shares
of the Company's common stock based on the merger exchange formula and
subsequently included under the Proxicom Stock Option Plan for employees and
non-employees.
IBIS CONSULTING STOCK-BASED AND OTHER COMPENSATION
In early 1997, prior to Proxicom's merger with in IBIS Consulting, IBIS
Consulting entered into an arrangement with an employee providing that
individual with 2,992,988 fully vested stock options which were subject to
certain conditions, including provisions requiring IBIS Consulting to
F-14
<PAGE> 49
9. STOCK OPTION PLANS (CONTINUED)
buy back the common stock resulting from exercise of the options and requiring
the employee to sell such shares to IBIS Consulting at a pre-determined formula
upon termination of employment. The employee exercised these options in July
1998.
Due to a change of control provision in the initial option agreement,
concurrent to the merger of IBIS Consulting and Proxicom, the repurchase
requirement on the stock and stock options was eliminated allowing the employees
to freely trade the stock.
As a consequence of the above change of control provision triggered by the
merger, and the conversion of options from the 1997 plan to the 1998 plan, the
Company recorded non-cash stock-based compensation of approximately $17.0
million equal to the difference between the pre-determined formula price and the
then fair value of the underlying stock or stock options. As the shares were
fully vested, the compensation expense was recognized at the time of the merger.
In connection with other stock option grants and amortization of deferred
stock-based compensation, the Company recognized additional stock-based
compensation totaling $219,000, and $219,000 for the years ended December 31,
1998 and 1999, respectively. The Company did not recognize any amortization
expense during the year ended December 31, 1997.
AD HOC INTERACTIVE, INC.
During 1997, 1998 and 1999, ad hoc granted employees the right to receive
28,870 shares and 124,452 shares of common stock, respectively, at no cost on
the first or second anniversary of their employment start date, provided that
they remain full-time employees during such period. In March 1999, the then
remaining outstanding rights were converted into rights to receive Proxicom
common stock. ad hoc recognized non-cash compensation expense related to these
rights of $44,000, $133,000 and $215,000 for the years ended December 31, 1997,
1998 and 1999, respectively. Unearned stock compensation of $278,000 and $63,000
is recorded as of December 31, 1998 and 1999, respectively, which will be
amortized in 1999 and 2000.
PROXICOM STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In February 1997, the Company established a stock option plan for
non-employee directors (the "Directors Plan") and has reserved 700,000 shares of
common stock for issuance under the provisions of this plan. Options granted
prior to December 15, 1998 generally vest over the three-year term as a
director. Options under the Directors Plan issued subsequent to December 15,
1998 are expected to be issued on a fully vested basis. Options outstanding as
of December 31, 1998 and 1999 were 350,000 and 263,000, respectively, under the
Directors Plan.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS
The Company accounts for its stock options and rights to receive stock
issued to employees and non-employee directors in accordance with APB 25 under
which compensation expense of $264,000, $17.3 million and $434,000 was
recognized for the options and rights to receive stock granted in 1997, 1998 and
1999, respectively. The Company has provided additional pro forma disclosures as
required by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123").
For disclosure purposes, the fair value of each stock option and right to
receive stock is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options and rights to receive stock in 1997, 1998 and 1999; no annual
dividends, risk-free interest rate ranging from 5.1% to 6.1% and expected life
of one to five years. The assumed volatility was 0% and 90% for the pre-IPO
grants and post-IPO grants, respectively.
F-15
<PAGE> 50
9. STOCK OPTION PLANS (CONTINUED)
The weighted-average fair values of the stock options granted in 1997, 1998 and
1999 were $1.59, $0.61 and $12.91, respectively. The weighted average fair
values of the rights to receive stock granted in 1997, 1998 and 1999 were $1.88,
$3.20 and $5.43, respectively.
Under the above model, the total value of stock options and rights to
receive stock granted in 1997, 1998 and 1999 were $8.9 million, $2.8 million and
$70.5 million, respectively, which would be amortized on a pro forma basis over
the option vesting period. Had the Company determined compensation cost for
these plans in accordance with SFAS No. 123, the Company's pro forma net (loss)
income would have been approximately ($796,000), ($7.2 million) and $1.0 million
in 1997, 1998 and 1999, respectively, and pro forma basic and diluted loss per
common share would have been $0.03, $0.25 and $0.09 in 1997, 1998 and 1999,
respectively.
ACCOUNTING FOR STOCK OPTIONS ISSUED TO NON-EMPLOYEES
The Company accounts for its stock options granted to eligible
non-employees on the fair value method in accordance with SFAS No. 123. In
January 1998, ad hoc issued 69,686 shares of stock to a non-employee consultant
for services in lieu of cash. The Company recognized non-cash compensation
expense of $166,302 as general and administrative expenses in 1998 related to
this grant.
STOCK OPTION ACTIVITY
The following tables summarize stock option activity for Proxicom and IBIS
Consulting option grants:
<TABLE>
<CAPTION>
PROXICOM IBIS CONSULTING
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
---------------------------------- -----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE
---------------- -------------- --------------- ----------------
<S> <C> <C> <C>
December 31, 1996 1,305,500 $ 1.65 -- $ --
Grants .................... 1,512,648 2.13 4,030,192 0.12
Exercised ................. -- -- -- --
Cancellations.............. (323,100) 1.71 (512,130) 0.20
----------- ------------
December 31, 1997 2,495,048 1.93 3,518,062 0.11
Grants .................... 4,103,168 3.97 164,994 2.36
Exercised ................. (173,404) 1.75 (2,992,988) 0.11
Cancellations.............. (707,066) 2.88 -- --
----------- ------------
December 31, 1998 5,717,746 3.29 690,068 0.65
Grants..................... 9,557,556 12.91 -- --
Exercised.................. (1,777,936) 2.66 (152,706) 0.89
Cancellations.............. (1,390,556) 4.80 (27,840) 2.36
----------- --------
December 31, 1999 12,106,810 10.35 509,522 0.48
============== ============
Options exercisable at:
December 31, 1999.......... 1,183,622 2.06 509,522 0.48
December 31, 1998.......... 730,060 1.87 608,366 0.42
December 31, 1997.......... 264,230 1.65 2,992,988 0.11
</TABLE>
The weighted-average exercise price for Proxicom options outstanding at
December 31, 1997, 1998 and 1999 were $1.93, $3.29 and $10.35, respectively, and
exercise prices for options exercised in 1999 ranged from $0.11 - $5.00. The
weighted-average exercise price for IBIS Consulting options at December 31,
1997, 1998 and 1999 were $0.11, $0.65 and $0.48 and exercise prices ranged from
$0.11 - $2.36 at December 31, 1999. These options will expire if not exercised
at specific dates ranging from January 1998 to December 2008 and the
weighted-average remaining contractual life of the options outstanding was
approximately nine years.
F-16
<PAGE> 51
9. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ ----------------------------------------
Range of Number Weighted-Average Weighted- Number Weighted-
Prices Outstanding Remaining Life Average Exercisable Average
Exercise at 12/31/99 Exercise Price at 12/31/99 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.11 - 0.11 425,074 8.7 $0.11 425,074 $0.11
1.65 - 2.39 1,692,962 7.6 2.17 461,434 2.11
3.50 - 5.00 5,014,182 8.9 4.89 297,114 4.97
5.50 - 6.50 1,753,558 9.3 5.88 -- --
9.13 - 12.85 696,756 9.4 10.24 -- --
14.94 - 19.66 1,006,000 9.6 17.94 -- --
22.75 - 33.94 1,183,000 9.8 27.85 -- --
34.50 - 51.13 844,800 9.9 40.21 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$ 0.11 - 51.13 12,616,332 9.0 $10.35 1,183,622 $2.06
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes rights to receive stock of ad hoc:
<TABLE>
<CAPTION>
AD HOC
STOCK RIGHTS OUTSTANDING
------------------------------
NUMBER OF
SHARES OPTION PRICE
----------- ------------
<S> <C> <C>
December 31, 1996....... 62,724 --
Grants.................. 28,870 --
Exercised............... (5,976) --
Cancellations........... -- --
--------
December 31, 1997....... 85,618 --
Grants.................. 124,452 --
Exercised............... (143,358) --
Cancellations........... -- --
--------
December 31, 1998....... 66,712 --
--
Grants.................. 28,878 --
Exercised............... (36,840) --
Cancellations........... (1,992) --
---------
December 31, 1999 56,758 --
========
</TABLE>
10. CAPITAL STOCK AND WARRANTS
On August 30, 1996, the Company consummated a transaction whereby: (i) the
Company repurchased from the Company's Chief Executive Officer 201,834 shares of
common stock at a price of $1.64 per share, for a total purchase price of
approximately $330,000; and, (ii) the Company issued a total of 1,629,969 shares
of Series A convertible preferred stock (the "Series A Preferred Stock") at a
price of $3.27 per share, or approximately $5.3 million. At the stockholders'
option, but in any event automatically upon an initial public offering of the
Company's common stock, each share of Series A Preferred Stock is convertible
into one share of common stock, subsequently adjusted for the two-for-one stock
split. The Series A Preferred Stock has a liquidation preference and is not
entitled to any dividends (unless cash dividends are declared and paid on the
common stock, in which case the Series A Preferred Stock will share on an "as
if" converted basis). The holders of the Series A Preferred Stock have
registration rights and are entitled to place two persons on the Company's
Board.
In connection with the issuance of Series A Preferred Stock in August 1996,
Proxicom issued warrants to purchase 1,011,378 shares of Series A Preferred
Stock at $7.91 per share. The warrants were exercised for a purchase price of
$8.0 million on April 13, 1999, and the shares of Series A Preferred Stock
issued upon their exercise were converted into shares of common stock
immediately before Proxicom closed its initial public offering of securities.
F-17
<PAGE> 52
10. CAPITAL STOCK AND WARRANTS (CONTINUED)
In February 1997, the Company consummated a transaction whereby: (i) the
Company repurchased from the Company's Chief Executive Officer 719,424 shares of
common stock at a price of $2.08 per share, for a total purchase price of
approximately $1.5 million; (ii) the Company issued a total of 359,712 shares of
Series B convertible preferred stock (the "Series B Preferred Stock") at a price
of $4.17 per share or approximately $1.5 million. The Series B Preferred Stock
has essentially the same rights and privileges as the Series A Preferred Stock.
In December 1997, the Company issued a total of 419,302 shares of Series C
convertible preferred stock (the "Series C Preferred Stock") at a price of $4.77
per share or approximately $2.0 million. The Series C Preferred Stock has
essentially the same rights and privileges as the Series A and B Preferred
Stock.
In January 1998, the Company issued 815,000 shares of treasury stock in
conjunction with the conversion of 407,500 shares of Series A Preferred Stock
into common stock.
In February 1999, the Company issued a total of 1,218,333 shares of Series
D convertible preferred stock (the "Series D Preferred Stock") at a price of
$6.00 per share or approximately $7.3 million. In connection with this
transaction, 1,517,334 shares of common stock were purchased by the investors
from selling stockholders in amounts proportionate to the investors
participation in the Series D Preferred Stock issuance. The Series D Preferred
Stock has essentially the same rights and privileges as the Series A, B, and C
Preferred Stock. Because the Series D Preferred Stock was sold at a price of
$6.00, the securities have been accounted for giving effect to their beneficial
conversion features. Under such accounting, the Company has recorded a charge of
$4.9 million against additional paid-in-capital to reflect the difference
between the conversion feature and the fair value of the underlying common
stock. Although not reflected in net income from operations, the beneficial
conversion charge is reflected as a reduction to income and earnings per share
available for common shareholders.
On April 23, 1999, the Company completed its initial public offering of
securities and issued 8,000,000 shares of common stock at $6.50 per share. An
additional 1,000,000 shares were sold by certain existing stockholders at $6.50
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 8,462,388 shares of common stock. At the same time, Proxicom
amended its Certificate of Incorporation to authorize an increase in the number
of authorized common shares from 20,000,000 to 100,000,000 shares and to
increase the number of authorized shares of preferred stock from 5,000,000 to
10,000,000 shares.
In connection with the initial public offering, Proxicom offered the
underwriters of the offering an option to purchase an additional 1,350,000
shares of common stock at the offering's $6.50 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.
On October 14, 1999, the Company completed a follow-on public offering of
its securities, which resulted in the issuance of 2,000,000 shares of common
stock at $26.19 per share. An additional 5,200,000 shares were sold by certain
existing stockholders at $26.19 per share. In connection with the follow-on
offering, the selling shareholders offered the underwriters an option to
purchase 1,080,000 additional shares of common stock ("Underwriters
Over-allotment") at the offering's $26.19 per share offering price. Proceeds to
the Company from the follow-on offering, net of underwriting discounts and costs
of the offering, were approximately $49.0 million. The Company did not receive
any proceeds from the sale of the common stock or the related Underwriters
Over-allotment by the selling stockholders.
F-18
<PAGE> 53
10. CAPITAL STOCK AND WARRANTS (CONTINUED)
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 the Company 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, the Company issued General Electric a warrant to
purchase 300,000 shares of common stock at an exercise price of $24.94 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 Black Scholes option-pricing
model. The related pro-rata charge will be recorded as contra revenue over the
service period of the agreement.
11. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT TAXES:
Federal..................................................... $ -- $ (155) $ 2,259
State....................................................... 10 (52) 562
Foreign..................................................... -- -- 185
------- --------- --------
Total current income tax provision (benefit)........ 10 (207) 3,006
------- -------- --------
DEFERRED TAXES:
Federal..................................................... 249 (589) (59)
State....................................................... 71 (104) (11)
Foreign..................................................... -- -- --
------- -------- ---------
Total deferred income tax provision (benefit)....... 320 (693) (70)
------- -------- --------
Total provision (benefit) for income taxes.......... $ 330 $ (900) $ 2,936
======= ======== ========
</TABLE>
The reconciliation of the Company's income tax provision to the federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory tax $ 321 $ (7,324) $ 2,366
rate of 34%.......................................................
State income taxes, net............................................. 57 (34) 278
Subchapter S Corporation income..................................... (72) (455) (115)
Stock option revaluation............................................ -- 4,905 --
Acquisition costs................................................... -- 646 68
Meals and Entertainment & other permanent differences............... -- 53 6
Adjustment to tax accounting method................................. -- -- 469
Foreign rate differential........................................... -- 8 62
Increase (decrease) in valuation allowance.......................... -- 944 (388)
Other............................................................... 24 357 190
------ ---------- ----------
Income tax provision (benefit)...................................... $ 330 $ (900) $ 2,936
====== ========== ==========
</TABLE>
F-19
<PAGE> 54
11. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
NOL carryforward......................................................... $ 107 $ 1,796 $ 5,048
Minimum and foreign tax credits.......................................... -- -- 180
Vacation accrual......................................................... 49 81 68
Accrued expat fringe benefit............................................. -- -- 492
R&E and investment credits............................................... -- 20 70
Contribution carryforward................................................ -- 4 --
Bad debt expense......................................................... 149 137 256
Depreciation............................................................. -- 176 109
Other accrued expenses................................................... -- 241 --
Revaluation of stock options............................................. -- 1,083 869
State tax accrual........................................................ -- 13 --
-------- ---------- ----------
Total gross deferred tax assets.................................. 305 3,551 7,092
Valuation allowance........................................................ -- (1,083) (694)
--------- ---------- ----------
Net deferred tax assets.......................................... 305 2,468 6,398
--------- ---------- ----------
LIABILITIES:
Depreciation............................................................. 5 -- --
Unbilled service revenue................................................. (665) (1,654) (280)
Subchapter S Corporation cash to accrual adjustment...................... -- (479) (588)
Other.................................................................... (2) -- --
-------- ---------- ----------
Total gross deferred tax liabilities............................. (662) (2,133) (868)
-------- ---------- ----------
Net deferred tax (liability) asset............................... $ (357) $ 335 $ 5,530
======== ========== ==========
</TABLE>
The Company paid $196,000 for income taxes in 1997. The company received a
tax refund of $207,000 and $0 for the years ended 1998 and 1999, respectively.
The Company has U.S. net operating loss carryforwards of approximately
$12.9 million for tax purposes. The net operating loss and research and
development tax credit carryforwards expire in 2018 and 2019. The Company also
has $177,000 in foreign tax credits which expire in 2004 and $4,000 of minimum
tax credits which have no expiration date.
The net operating loss ("NOL") carryforwards are primarily attributable to
tax deductions available related to the exercise of stock options. Because stock
option deductions are not recognized as an expense for financial reporting
purposes, the tax benefit of stock option deductions must be credited to
additional paid-in-capital.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109. The Company continually reviews the adequacy of the
valuation allowance.
12. RELATED PARTY TRANSACTIONS
In February 1997, the Company entered into a lease for office space in
Reston, VA. The lease commenced on July 1, 1997 and has a term of seven years.
Rent payments for the years ended December 31, 1997, 1998 and 1999 were
approximately $331,000, $864,000 and $1.3 million respectively, and increase at
an annual rate of 3.0%. The lessor is a company wholly owned by a member of the
Company's Board of Directors and stockholder. In accordance with the lease
agreement, the Company must maintain a letter of credit in the amount of
$131,000 as a security deposit during the term of the lease. The Company's
current letter of credit expires in December 2000.
F-20
<PAGE> 55
12. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has provided Internet professional services to one of its
stockholders. Revenue generated from this stockholder totaled $1.1 million,
$775,000 and $4.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The Company recorded receivable balances of $316,000 and $3.2
million as of December 31,1998 and 1999.
13. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND BONUS PLANS
In August 1996, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 18 years
of age. Participants may contribute up to 15.0% of pretax compensation, subject
to certain limitations. The Company may make discretionary annual profit sharing
contributions up to the total of each participant's annual contribution. The
Company did not make any profit sharing contributions in 1997 and 1998.
In January 1996, IBIS Consulting adopted a 401(k) defined contribution
profit sharing plan. The plan covers all full-time employees who are at least 21
years of age. Participants may contribute up to 15.0% of pretax compensation,
subject to certain limitations. The Company may make discretionary annual profit
sharing contributions up to 25.0% of each participant's annual contribution, up
to 6.0% of the respective participant's annual compensation. Company
contributions vest ratably over five years. No contributions were made in 1997.
The Company made profit sharing contributions of $71,000 in 1998.
The Company recorded $1.0 million in bonuses due under the 1998 IBIS
Consulting plan. No bonus plan existed in 1997.
In December 1996, ad hoc adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age and have completed at least one year of employment with ad hoc.
Participants may contribute up to 15.0% of pretax compensation, subject to
certain limitations. Beginning in 1997 ad hoc may make discretionary annual
profit sharing contributions equal to 4.0% of each participant's annual
contribution, up to 6.0% of the respective participant's annual compensation.
For the years ended December 31, 1997 and 1998 ad hoc has contributed $500 and
$1,200 in profit sharing contributions, respectively.
In October 1999, the Company began the process of merging the three 401(k)
defined contribution profit sharing plans into the Proxicom 401(k) Plan (the
"Plan"). Under this Plan, all of the Company's full-time employees and part-time
employees who work at least 1,000 hours and at least 18 years of age can elect
to participate. Participants may contribute up to 15% of pretax compensation,
subject to certain limitations. The Company may make discretionary annual profit
sharing contributions up to 25% of each participant's annual contribution, up to
6.0% of the respective participants annual deferral. Company contributions vest
ratably over 4 years. The Company made profit sharing contributions of $474,000
in 1999.
EMPLOYEE STOCK PURCHASE PLAN
In February 1999, the Company's Board of Directors authorized an Employee
Stock Purchase Plan ("ESPP"). The ESPP, which commenced upon completion of the
Company's initial public offering, provides substantially all full time
employees an opportunity to purchase shares of Proxicom Common Stock through
payroll deductions of up to 15.0% of eligible compensation, not to exceed
$25,000 annually. Semi-annually, participant account balances will be used to
purchase stock at the lesser of 85.0% of the fair market value on the trading
day before the participation period starts or the trading day preceding the day
on which the participation period ends. A total of 2,000,000 shares are
available for purchase under the ESPP.
F-21
<PAGE> 56
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
For the semi-annual period ended December 31, 1999, participants purchased
385,388 shares at $5.53 per share under the ESPP. These shares are available for
distribution to participants in January 2000.
14. COMMITMENTS AND CONTINGENCIES
The Company leases certain office space in Virginia, California, New York,
Texas, Illinois, the United Kingdom and Germany under non-cancelable operating
leases expiring in various years through 2005. Total rent expense for all
operating leases amounted to approximately $926,000, $2.7 million and $4.7
million in 1997, 1998 and 1999, respectively. Future minimum lease payments
under non-cancelable operating leases as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
2000.............. $ 6,042
2001.............. 4,719
2002.............. 3,545
2003.............. 2,958
2004.............. 2,839
Thereafter........ 2,963
-----------
Total... $ 23,066
===========
</TABLE>
The Company's leased office space in Virginia, New York and Illinois are
secured by a letters of credit which amount to $205,000 and $803,000 in 1998 and
1999, respectively, in lieu of a cash deposit. The current letters of credit
will expire in December 2000.
15. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Company implemented SFAS No. 128, Earnings per Share ("SFAS No. 128"),
in 1997, which requires certain disclosures relating to the calculation of
earnings per common share. The following is a reconciliation of the numerators
and denominators of the basic and diluted earnings per common share computations
for net income.
BASIC NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) available to common
stockholders....................................... $ 2,571 $ (21,345) $ (849)
=========== ============ ============
Weighted average shares of common stock outstanding.. 26,748 29,152 44,532
=========== =========== ============
Basic net income (loss) per common share............. $ 0.10 $ (0.73) $ (0.02)
=========== ============ ============
</TABLE>
SFAS No. 128 replaces primary earnings per share with basic net income per
share and excludes the effect of common stock equivalents when computing basic
net income per share.
F-22
<PAGE> 57
15. BASIC AND DILUTED EARNINGS PER COMMON SHARE (CONTINUED)
DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) available to common stockholders....... $ 2,571 $ (21,345) $ (849)
=========== =========== ============
Adjustment of shares outstanding:
Weighted average shares of common stock outstanding.... 26,748 29,152 44,532
Shares of common stock issuable upon the assumed
conversion of preferred stock........................ 3,930 -- --
Incremental shares for rights to receive
shares and options assumed exercised
under common stock option plans...................... 3,578 -- --
----------- ------------ ------------
Adjusted shares of common stock and common stock
equivalents for computation.......................... 34,256 29,152 44,532
=========== =========== ============
Diluted net income (loss) per common share............... $ 0.08 $ (0.73) $ (0.02)
=========== =========== ============
</TABLE>
SFAS No. 128 replaces fully diluted earnings per share with diluted net
income per share which reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Approximately 6.5 million and 12.7 million
options and rights were outstanding as of December 31, 1998 and 1999,
respectively, but were not included in the computation of diluted net income
(loss) per common share as the effect would be anti-dilutive.
16. INVESTMENT IN JOINT VENTURE
In April 1999, the Company signed an agreement with Ericsson
Telecommunicazioni SpA ("Ericsson"). Under the agreement, the Company made a
19.9% investment in an Italian joint venture company. Ericsson owns the
remaining 80.1% 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 interest. In June 1999, the Company contributed $336,000 to fulfill
our initial share capital obligation. Eunosia was formed to deliver Internet
professional services in Italy. The Company also has an option to buy an
additional 20.0% share in the common stock of Eunosia, subject to certain
conditions and restrictions. The Company will not participate in the management
or policy making of the business. In as much as the Company will not have the
ability to influence significantly the entity or its operations, the Company has
accounted for its investment on a cost basis.
In July 1999, the Company signed an agreement with affiliates of Iberdrola
SA. Under the agreement, the Company made a 19.9% investment in a Spanish joint
venture company, named Kristina, Services de Internet, SA. Affiliates of
Iberdrola SA own the remaining 80.1% interest. Kristina, Services de Internet,
SA provides Internet solutions to Spain-based businesses. The initial share
capital of Kristina, Services de Internet, SA was approximately $7.4 million,
which the Company and the affiliates of Iberdrola SA contributed in proportion
to their shareholder percentage interests. In late July 1999, the Company
contributed approximately $740,000 to fulfill one half of its initial share
capital obligation. The Company will not participate in the management or policy
making of the business. In as much as the Company will not have the ability to
influence significantly the entity or its operations, the Company has accounted
for its investment on a cost basis.
17. FOREIGN SALES
The Company has sales, marketing and service delivery operations outside of
the United States in Germany and the United Kingdom. The Company has joint
venture arrangements in Italy and Spain. Included in revenues are foreign sales
of approximately $316,000, $3.0 million and $6.6 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-23
<PAGE> 1
NOTE MODIFICATION AGREEMENT
BY AND BETWEEN BANK OF AMERICA, N.A.
("BANK"/"LENDER") AND
PROXICOM, INC.
("BORROWER")
EFFECTIVE AS OF: NOVEMBER 29, 1999
On or about October 30, 1998, (Note Date), Borrower executed a Promissory Note
315 ("Note") in favor of Bank/Lender. This note was in the original principal
face amount of $10,000,000.00 bearing interest at Libor plus 1.50% per annum
with a stated final maturity date (including all prior renewals, if any) of
August 31, 2000. Bank/Lender remains the owner and holder of the Note and has
agreed with Borrower to modify certain provisions of the Note. Now, therefore,
in consideration of these promises and the exchange of other good and valuable
consideration, the receipt of which is hereby acknowledged, Bank/Lender and
Borrower agree to modify the Note as follows:
The interest rate is changed to:
EURODOLLAR DAILY FLOATING RATE. The Rate shall be the Eurodollar Daily
Floating Rate plus 1.25 percent, per annum. The "Eurodollar Daily Floating
Rate" is a fluctuating rate of interest equal to the one month rate of interest
(rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate
Page 3750 (or any successor page) as the one month London interbank offered
rate for deposits in Dollars at approximately 11:00 a.m. (London time) on the
second preceding business day, as adjusted from time to time in Bank's sole
discretion for then-applicable reserve requirements, deposits insurance
assessment rates and other regulatory costs. If for any reason such rate is not
available, the term "Eurodollar Daily Floating Rate" shall mean the fluctuating
rate of interest equal to the one month rate of interest (rounded upwards, if
necessary to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the one month London interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) on the second preceding business day, as
adjusted from time to time in Bank's sole discretion for then-applicable
reserve requirements, deposits insurance assessment rates and other regulatory
costs; provided, however, if more than one rate is specified on Reuters Screen
LIBO page, the applicable rate shall be the arithmetic mean of all such rates.
The payment terms are changed to: SINGLE PRINCIPAL PAYMENT. Principal shall
be paid in full in a single payment on August 31, 2000. Interest thereon shall
be paid monthly, commencing on January 15, 2000, and continuing on the same day
of each successive month thereafter, with a final payment of all unpaid
interest at the stated maturity of this Note.
The term Borrower as used in this Agreement shall be construed as singular or
plural to correspond with the number of persons executing this Agreement as
Borrower.
All other terms, conditions and covenants in the Note shall be and remain in
full force and effect. When executed by Bank/Lender and Borrower, this
Agreement shall be attached to and become a part of the Note.
NOTICE OF FINAL AGREEMENT.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN BORROWER AND
BANK/LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS BETWEEN BORROWER AND BANK/LENDER. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN BORROWER AND BANK/LENDER.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned has caused this Note Modification Agreement
to be executed under seal by Borrower on this 15th day of December 1999.
Bank of America, N.A.
By /s/ JEAN REAVIS CROSS
--------------------------------
Name: Jean Reavis Cross
Title: Vice President
Corporate or Partnership Borrower: Proxicom, Inc.
--------------
By: /s/ CHRISTOPHER CAPUANO (Seal)
- ---------------------------------- -------------------------
Attest (if Applicable)
Name: Christopher Capuano
(Corporate Seal) Title: Vice President
<PAGE> 3
BANK OF AMERICA, N.A.
SECOND MODIFICATION OF LOAN AGREEMENT
S1-657824RC
THIS SECOND MODIFICATION OF LOAN AGREEMENT (this "Agreement") is made as of
December , 1999, but is in all respects effective November 29, 1999, by and
between Proxicom, Inc. (the "Borrower") and Bank of America, N.A. (the "Bank"),
witnesseth:
WHEREAS, the Borrower executed a loan agreement (the "Loan Agreement")
outlining specific terms and conditions governing the Loan, and
WHEREAS, the Borrower has requested and the Bank has agreed to renew the Loan
provided that the Borrower executed this Agreement.
NOW, THEREFORE, in consideration of the premises, the sum of $1.00 and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1) The statement set forth above are true and accurate in every respect and
are incorporated herein by reference.
2) The Loan Agreement is hereby amended as follows:
Paragraph 6.1.(ix) is hereby deleted in its entirety.
3) Except as expressly amended herein, all of the provisions of the Loan
Agreement shall remain in full force and effect. This Agreement shall in
no way operate as a novation, release, or discharge of any of the
provisions of the Loan Agreement (except as amended herein), or any
indebtedness thereby evidenced.
IN WITNESS WHEREOF, and intending to create an instrument executed under seal,
the Borrower and the Bank have duly executed this Agreement under seal as of
the day and year first written above.
BORROWER,
Proxicom, Inc.
BY: /s/ CHRISTOPHER CAPUANO (SEAL)
--------------------------------
Christopher Capuano, Vice President
BANK:
BANK OF AMERICA, N.A.
BY: /s/ Jean Reavis Cross (SEAL)
--------------------------------
Jean Reavis Cross, Vice President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (No. 333-79525, No. 333-95741) of Proxicom, Inc. of our
report dated January 26, 2000, except as to the stock split discussed in Note 1
which is as of February 24, 2000, appearing on page F-2 of this Annual Report on
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF PROXICOM, INC. FOR THE TWELVE MONTHS ENDED 12/31/99
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 113,819
<SECURITIES> 5,819
<RECEIVABLES> 24,698
<ALLOWANCES> 655
<INVENTORY> 0
<CURRENT-ASSETS> 148,900
<PP&E> 9,309
<DEPRECIATION> 4,246
<TOTAL-ASSETS> 160,114
<CURRENT-LIABILITIES> 16,855
<BONDS> 0
0
0
<COMMON> 526
<OTHER-SE> 142,733
<TOTAL-LIABILITY-AND-EQUITY> 160,114
<SALES> 82,688
<TOTAL-REVENUES> 82,688
<CGS> 43,561
<TOTAL-COSTS> 43,561
<OTHER-EXPENSES> 34,937
<LOSS-PROVISION> 655
<INTEREST-EXPENSE> 2,770
<INCOME-PRETAX> 6,960
<INCOME-TAX> 2,936
<INCOME-CONTINUING> 4,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,873)<F1>
<NET-INCOME> (849)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
<FN>
<F1>Non-cash dividend on beneficial conversion on convertible preferred stock
</FN>
</TABLE>
