<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25741
PROXICOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 52-1770631
-------- ----------
(State of Organization) (I.R.S. Employer Identification Number)
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
---------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
As of November 6, 2000, the issuer had 56,651,921 shares of common stock
outstanding.
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PROXICOM, INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
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<CAPTION>
PAGE NO.
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PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1999 and September 30, 2000................ 1
Consolidated Statements of Operations
for the Three-Month and Nine-Month Periods Ended
September 30, 1999 and September 30, 2000..................... 2
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended September 30, 1999
and September 30, 2000........................................ 3
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 14
</TABLE>
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PART I.
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
PROXICOM, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
(UNAUDITED)
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 113,819 $ 55,938
Investments................................................ 5,819 55,205
Accounts receivable, net of allowance of $655 and $1,247,
respectively............................................. 24,043 44,256
Unbilled services.......................................... 1,865 3,182
Prepaid income taxes....................................... 173 --
Prepaid expenses........................................... 1,886 2,588
Deferred tax and other current assets...................... 1,295 4,579
------------- ------------
Total current assets..................................... 148,900 165,748
Property and equipment, net................................... 5,063 14,225
Goodwill and other intangibles................................ - 42,250
Deferred tax assets and other................................. 6,151 10,741
------------- ------------
Total assets............................................. $ 160,114 $ 232,964
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable..................................... $ 1,345 $ 6,003
Accrued compensation....................................... 8,298 14,135
Employee withholdings, stock purchase plan................. 2,140 1,455
Deferred revenue........................................... 3,533 4,418
Deferred tax liability..................................... -- 3,000
Other accrued liabilities.................................. 1,539 5,319
------------- ------------
Total current liabilities................................ 16,855 34,330
Long term deferred tax liability.............................. -- 2,076
------------- ------------
Total liabilities........................................ 16,855 36,406
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1999 and September 30, 2000................. -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 52,642,482 shares issued and 52,536,224
outstanding at December 31, 1999; 56,643,309 shares
issued and outstanding at September 30, 2000............. 526 565
Additional paid-in capital................................. 162,715 232,039
Retained deficit........................................... (19,884) (21,309)
Accumulated other comprehensive income..................... 124 (398)
Deferred compensation...................................... -- (14,339)
Treasury stock............................................. (222) --
------------- ------------
Total stockholders' equity............................... 143,259 196,558
------------- ------------
Total liabilities and stockholders' equity.................... $ 160,114 $ 232,964
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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PROXICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
1999 2000 1999 2000
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenue........................................... $ 23,592 $ 60,076 $ 53,067 $149,166
Cost of revenue (inclusive of non-cash compensation
expense of $106, $14, $331 and $116,
respectively).................................. 12,176 28,192 29,104 70,574
------- ------- -------- --------
Gross profit...................................... 11,416 31,884 23,963 78,592
------- ------- -------- --------
Operating expenses:
General and administrative (exclusive of
non-cash compensation expense of $0, $2.3,
$0 and $4.1, respectively).................. 7,833 21,805 17,991 53,513
Selling and marketing.......................... 1,696 3,915 3,133 11,710
Stock-based compensation....................... - 2,309 - 4,136
Amortization of intangible assets.............. - 4,225 - 7,711
Foreign currency transaction loss.............. - 360 - 360
Acquisition and merger costs................... - - 300 -
------- ------- -------- --------
Total........................................ 9,529 32,614 21,424 77,430
------- ------- -------- --------
Income (loss) from operations..................... 1,887 (730) 2,539 1,162
Interest income, net.............................. 701 1,393 1,112 4,537
------- ------- -------- --------
Income before income taxes........................ 2,588 663 3,651 5,699
Income tax provision.............................. 1,066 3,108 1,513 7,510
------- ------- -------- --------
Net income (loss)................................. 1,522 (2,445) 2,138 (1,811)
Non-cash dividend on beneficial conversion of
convertible preferred stock.................... - - (4,873) -
------- ------- -------- --------
Net income (loss) available to common stockholders $ 1,522 $ (2,445) $ (2,735) $ (1,811)
======== ======== ======== ========
Basic net income (loss) per common share.......... $ 0.03 $ (0.04) $ (0.07) $ (0.03)
======== ======== ======== ========
Diluted net income (loss) per common share........ $ 0.03 $ (0.04) $ (0.07) $ (0.03)
======== ======== ======== ========
Weighted average shares used in computing basic
income (loss) per share amount................. 49,684 55,948 41,688 54,850
======== ======== ======== ========
Weighted average shares used in computing diluted
income (loss) per share amount................. 58,380 55,948 41,688 54,850
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
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PROXICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 2000
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(UNAUDITED)
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income (loss)............................... $ 2,138 $ (1,811)
Adjustments to reconcile net income
to net cash used in operating activities:
Non-cash stock compensation................... 328 4,205
Non-cash warrant expense...................... 300 1,555
Depreciation and amortization................. 986 9,863
Provision for doubtful accounts............... (71) 592
Income tax benefit from stock-based award..... - 9,670
Increase (decrease) in deferred income taxes.. 312 (6,107)
Changes in assets and liabilities:
Increase in accounts receivable............. (9,704) (19,086)
Decrease (increase) in unbilled services.... 2,355 (1,317)
Increase in prepaid expenses................ (806) (514)
Decrease in prepaid income taxes............ - 173
Increase in other assets.................... (1,315) (2,132)
Increase (decrease) in trade accounts
payable................................... (5) 4,658
Increase in accrued compensation............ 3,008 5,657
Increase in taxes payable................... - 2,281
Decrease in note payable.................... (1,400) -
Decrease in employee withholdings........... - (685)
Increase in deferred revenue................ 1,007 885
Increase in other accrued liabilities....... 781 1,326
--------- ---------
Net cash (used in) provided by operating
activities.............................. (2,086) 9,213
--------- ---------
Cash flows used in investing activities:
Investment in subsidiary, net of cash........... - (19,323)
Purchases of property and equipment............. (1,738) (10,811)
Purchases of investments........................ - (86,261)
Sales of investments............................ 278 36,862
--------- ---------
Net cash used in investing activities..... (1,460) (79,533)
--------- ---------
Cash flows from financing activities:
Issuance of convertible preferred stock,
Series D...................................... 7,279 -
Proceeds from initial public offering........... 54,310 -
Exercise of stock warrants...................... 8,000 -
Issuance of shares through ESPP................. - 4,516
Exercise of stock options....................... 3,196 8,432
Borrowings on lines of credit................... 4,550 4,900
Payments on lines of credit..................... (10,104) (4,900)
Subchapter S Corporation distributions.......... (131) -
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Net cash provided by financing activities. 67,100 12,948
--------- ---------
Effect of exchange rate change.................. - (509)
--------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 63,554 (57,881)
Cash and cash equivalents at beginning of period.. 2,586 113,819
--------- ---------
Cash and cash equivalents at end of period........ $ 66,140 $ 55,938
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 2000
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<S> <C> <C>
Supplemental disclosure of non-cash investing activities:
Common stock issued for acquisition of subsidiary....... - 27,254
Common stock issued for future services related
to acquisition of subsidiary.......................... - 18,475
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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PROXICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Proxicom, Inc.
("Proxicom" or the "Company") include the accounts of Proxicom and all of its
wholly owned subsidiaries. All material intercompany transactions and balances
have been eliminated in consolidation.
In the opinion of management, the consolidated financial statements for the
three-month and nine-month periods ended September 30, 1999 and 2000 reflect all
normal and recurring adjustments which are necessary for a fair presentation of
Proxicom's financial position, results of operations and of cash flows as of the
dates and for the periods presented. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Consequently, these consolidated statements do
not include all the disclosures normally required by generally accepted
accounting principles for annual financial statements. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
Proxicom's audited consolidated financial statements and notes thereto for the
period ended December 31, 1999 included in the Form 10-K filed by Proxicom with
the Securities and Exchange Commission (SEC File No. 0-25741). The consolidated
results of operations for the three and nine-month periods ended September 30,
2000 are not necessarily indicative of results that may be expected for the year
ending December 31, 2000.
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
to reflect the stock split.
2. ACQUISITION OF SUBSIDIARY
On April 19, 2000, Proxicom completed its acquisition of Clarity IBD
Limited, a United Kingdom e-business development consultancy company ("Clarity")
for approximately $47.0 million (including direct acquisition costs of $3.8
million) consisting of $16.0 million in cash and 769,440 shares of Proxicom
common stock with a value of $27.2 million. The Company announced the
acquisition on April 11, 2000. The common stock issued in the acquisition was
valued at $35.42 per share, which was determined as the average of the Company's
closing stock price for the week ended April 14, 2000.
In addition to the 769,440 shares of common stock issued in the
acquisition, 521,606 shares were issued to principal owners/employees of
Clarity. These shares are held in escrow and will be released on the first and
second anniversary date of the acquisition. The value of these shares is $18.5
million, which is included in stockholders' equity as deferred compensation and
is being amortized on a straight-line basis over the two-year vesting period.
The Company recognized stock compensation amortization expense of $2.3 million
during the three-months ended September 30, 2000. Remaining unamortized deferred
compensation at September 30, 2000 is $14.3 million.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed based on their respective fair values. Management
obtained an independent valuation for the allocation of the excess purchase
price over net tangible assets acquired. Based on this allocation, management
has attributed the excess purchase price to acquired service agreements,
customer relationships, assembled workforce and goodwill. The Company recorded a
deferred tax liability of $2.4 million for nondeductible expenses associated
with these intangible assets. This amount has
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been included as part of goodwill. The cost of these intangible assets will be
amortized on a straight-line basis over three years. The Company recognized
amortization expense on intangible assets (including goodwill) of $4.2 million
during the three-months ended September 30, 2000. Remaining unamortized
intangible assets as of September 30, 2000 is $42.3 million.
The results of operations of Clarity have been reflected in the financial
statements as of the acquisition date. The following table reflects unaudited
pro forma combined results of the Company and Clarity as if the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
--------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues..................................................... $ 57,737 $151,720
======== ========
Net Loss..................................................... $(21,418) $ (7,767)
======== ========
Net Loss per basis share..................................... $ (0.50) $ (0.14)
======== ========
Net Loss per diluted share................................... $ (0.50) $ (0.14)
======== ========
</TABLE>
These unaudited pro forma results of operations include adjustments to reflect
(1) additional amortization expense relating to intangible assets which result
from the purchase method of accounting; (2) additional non-cash compensation
expense related to the shares issued to the former Clarity owners and held in
escrow; (3) a net reduction in interest income; and (4) additional tax benefit
relating to conforming Clarity to the Company's tax position.
The unaudited pro forma combined results of operations may not be
comparable to and may not be indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of 1999 or at the
beginning of 2000 or of future operations of the combined companies because the
operating companies were not under common control of management and had
different tax and capital structures during the periods presented.
3. SUPPLEMENTAL CASHFLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
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<S> <C> <C>
Business acquisition:
Cash paid for business acquisition.......................... $ - $ 19,811
Less: cash acquired......................................... - (489)
-------- --------
Cash paid for business acquisition, net..................... - 19,322
Issuance of common stock for business acquisition........... - 27,254
-------- --------
Total purchase price........................................ - 46,576
Fair value of net liabilities assumed, net of cash.......... - (944)
-------- --------
Excess of fair value over net assets acquired................. $ - $ 47,520
======== ========
</TABLE>
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4. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per common share computations.
Basic Net Income (Loss) Per Common Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1999 2000
--------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) available to common stockholders................ $1,522 $(2,445)
====== =======
Weighted average shares of common stock outstanding............... 49,684 55,948
====== =======
Basic net income (loss)
per common share.................................................. $ 0.03 $ (0.04)
======== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1999 2000
----------------- --------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) available to common
stockholders................................................... $ (2,735) $ (1,811)
================= ============
Weighted average shares of common stock
outstanding...................................................... 41,688 54,850
================= ============
Basic net income (loss) per common share......................... $ (0.07) $ (0.03)
================= ============
</TABLE>
Basic net income per share is computed using the weighted average number of
common shares outstanding and excludes the effect of common stock equivalents.
Diluted Net Income (Loss) Per Common Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1999 2000
----------------- ---------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) available to common stockholders............... $ 1,522 $ (2,445)
============ ========
Weighted average shares of common stock outstanding.............. 49,684 55,948
Incremental shares for rights to receive shares and options
assumed exercised under common stock option plans................ 8,696 --
------------ --------
Adjusted shares of common stock equivalents for computation...... 58,380 55,948
============ ========
Diluted net income (loss) per common share....................... $ 0.03 $ (0.04)
============ ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1999 2000
----------------- ---------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) available to common stockholders................ $ (2,735) $ (1,811)
======== ========
Weighted average shares of common stock outstanding............... 41,688 54,850
Incremental shares for rights to receive shares and options
assumed exercised under common stock option plans................. -- --
-------- --------
Adjusted shares of common stock equivalents for computation....... 41,688 54,850
======== ========
Diluted net income (loss) per common share........................ $ (0.07) $ (0.03)
======== ========
</TABLE>
Diluted net income per share 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
would share in the earnings of the entity.
Diluted net income per share is computed using the weighted average number
of common shares outstanding, dilutive stock options and warrants using the
treasury stock method.
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5. CAPITAL STOCK
In February 1999, the Company issued a total of 1,218,333 shares of Series
D convertible preferred stock (the "Series D Preferred Stock") at a price of
$6.00 per share for an aggregate purchase price of approximately $7.3 million.
The Series D Preferred Stock had essentially the same rights and privileges as
the Company's other three then outstanding series of convertible preferred stock
(Series A, B and C). Because the Series D Preferred Stock was sold at a price of
$6.00, the securities were accounted for giving effect to their beneficial
conversion features. Under such accounting, the Company 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.
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.
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 increase the number of authorized common shares
from 50,000,000 to 100,000,000 shares and to increase the number of authorized
shares of preferred stock from 7,000,000 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 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. Proceeds to the Company from the follow-on offering,
net of underwriting discounts and costs of the offering, were approximately
$49.0 million.
In February 1999, the Company's board of directors authorized an Employee
Stock Purchase Plan ("ESPP"). A total of 2,000,000 shares are available for
purchase under the ESPP distributed on a semi-annual basis in January and July
of each year. Employee participants were distributed 385,388 shares of common
stock at $5.53 per share and 58,352 shares of common stock at $40.69 per share
under the ESPP in January and July 2000, respectively.
On September 24, 1999, Proxicom and General Electric Company entered into a
Master Services Agreement for the 12-month period ended 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 fair value
of the warrant has been reflected as a reduction to the related contract revenue
over the service period of the agreement. In February 2000, General Electric
exercised this warrant and received a net of 156,122 shares of common stock of
the Company.
On April 19, 2000, Proxicom completed its acquisition of Clarity IBD
Limited for approximately $47.0 million (including direct acquisition costs of
$3.8 million), consisting of $16.0 million in cash and 769,440 shares of
Proxicom common stock with a value of $27.2 million. The common stock issued in
the acquisition was valued at $35.42 per share, which was determined as the
average of the Company's closing stock price for the week ended April 14, 2000.
In addition to the 769,440 shares of common stock issued in the acquisition,
521,606 shares were issued to principal owners/employees of Clarity. These
shares are held in escrow and will be released on the first and second
anniversary date of the acquisition. The value of these shares is $18.5 million.
The Company's treasury stock was re-issued to employees in January 2000
through the ESPP and the 1996 Stock Option Plan.
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6. CONTINGENCIES
The Company has certain contingent liabilities that arise in the ordinary
course of its business activities. The Company accrues liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated. The Company doesn't believe that such liabilities,
individually or in the aggregate, will have a materially adverse effect on the
Company's consolidated financial position or results of operations.
7. COMPREHENSIVE INCOME
Comprehensive income (loss) includes net income, foreign currency
translation adjustments and unrealized gains and losses on investments. For the
three-month and nine-month periods ended September 30, 2000, comprehensive loss
was $3.1 million and $2.3 million, respectively.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The matters discussed in this Form 10-Q include forward-looking statements
that involve risks or uncertainties. While forward-looking statements are
sometimes presented with numerical specificity, they are based on various
assumptions made by management regarding future circumstances over many of which
Proxicom has little or no control. A number of important factors, including
those identified under the caption "Risk Factors" in Proxicom's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (SEC File No. 000-25741)
(the "Form 10-K") which hereby is incorporated by reference, as well as factors
discussed elsewhere in this Form 10-Q, could cause Proxicom's actual results to
differ materially from those in forward-looking statements or financial
information. Actual results may differ from forward-looking results for a number
of reasons, including the following: (a) changes in the demand for professional
Internet services; (b) Proxicom's ability to manage growth and hire and retain
skilled employees; (c) Proxicom's loss of a major client or significant project;
(d) competitive factors; (e) lack of growth or decline in Internet usage; (f)
Proxicom's failure to keep pace with changing technologies and protect its
intellectual property; and (g) future acquisitions or international expansion
(including the ability to integrate acquired businesses into Proxicom's
operations and the ability of acquired business to achieve satisfactory
operating results). Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.
OVERVIEW
Proxicom is a leading provider of Internet solutions to Global 1000
companies and other large organizations. Our Internet solutions include business
to consumer electronic commerce Internet sites, business to business electronic
commerce extranets, and company-specific intranets. We apply our proprietary
methodology, the Proxicom Process, in all of our client engagements. Using the
Proxicom Process, we integrate strategy, technology and creative design to help
our clients transform their businesses with Internet solutions.
Our revenue generally consists of fees generated from professional
services. We provide our services on a 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 pricing time and materials
engagements, we use our estimation process and a Proxicom senior management
member approves these proposals. When we provide services on a fixed-price,
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.
In April 2000, Proxicom completed its acquisition of Clarity IBD Limited, a
United Kingdom e-business development consultancy company for approximately
$65.5 million (including direct acquisition costs of $3.8 million). Proxicom
acquired all of the issued ordinary shares of Clarity in exchange for 1,291,046
shares of Proxicom common stock, par value $0.01 per share, and approximately
$16.0 million in cash. In addition, options outstanding under Clarity's share
option plan converted into options to acquire an aggregate
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of 43,558 shares of Proxicom common stock. A portion of the shares issued in
this transaction have been retained in escrow as security for the performance of
the indemnity obligations of the Clarity shareholders and a portion of the
shares issued have been retained subject to issuance upon the continued
employment of certain management shareholders of Clarity.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- ----------------------------
1999 2000 1999 2000
----------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 51.6 46.9 54.8 47.3
----- ----- ----- -----
Gross profit................... 48.4 53.1 45.2 52.7
----- ----- ----- -----
Operating expenses:
General and administrative.... 33.2 36.3 33.9 35.9
Selling and marketing......... 7.2 6.5 5.9 7.8
Stock-based compensation...... 0.0 3.9 0.0 2.8
Amortization of intangible
assets...................... 0.0 7.0 0.0 5.2
Foreign currency transaction
loss........................ 0.0 0.6 0.0 0.2
Acquisition and merger cost... 0.0 0.0 0.6 0.0
----- ----- ----- -----
Total.......................... 40.4 54.3 40.4 51.9
----- ----- ----- -----
Income (loss) from operations.. 8.0 (1.2) 4.8 0.8
Interest income, net........... 3.0 2.3 2.1 3.0
----- ----- ----- -----
Income (loss) before income
taxes........................ 11.0 1.1 6.9 3.8
Income tax (benefit) provision. 4.5 5.2 2.9 5.0
----- ----- ----- -----
Net income (loss).............. 6.5% (4.1)% 4.0% (1.2)%
===== ===== ===== =====
</TABLE>
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1999 AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED
TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
Revenue. For the three-month period ended September 30, 2000, revenue
increased $36.5 million, or 154.6%, to $60.1 million from $23.6 million for the
three-month period ended September 30, 1999. This increase was primarily
attributable to the increase in the average size of our engagements. Three
clients each contributed 11% of our revenue for the three-month period ended
September 30, 2000. No individual client contributed more than 10% of our
revenue for the three months ended September 30, 1999.
For the nine-month period ended September 30, 2000, revenue increased $96.1
million, or 181.1%, to $149.2 million from $53.1 million for the nine-month
period ended September 30, 1999. This increase was primarily attributable to the
increase in the average size of our engagements. No individual client
contributed more than 10% of our revenue for the nine months ended September 30,
2000 or 1999. We believe that period-to-period comparisons of our revenue and
operating results are not necessarily meaningful and that you should not rely on
these comparisons as indicators of future performance.
Cost of Revenue. Cost of revenue consists primarily of compensation and
associated employee benefits for personnel directly assigned to client projects,
and non-reimbursed direct expenses incurred to complete projects, such as
technical consulting fees. Cost of revenue increased $16.0 million, or 131.5%,
to $28.2 million for the three-month period ended September 30, 2000, from $12.2
million for the three-month period ended September 30, 1999. These costs
increased $41.5 million, or 142.5%, to $70.6 million for the nine-month period
ended September 30, 2000 from $29.1 million for the nine-month period ended
September 30, 1999. These increases were due primarily to increases in the
number of personnel needed to service our client engagements. Service project
personnel increased from 492 at September 30, 1999 to 989 at September 30, 2000.
As a percentage of revenue, cost of revenue decreased from 51.6% to 46.9% for
the three-month period ended September 30, 2000, as compared to the three-month
period ended September 30, 1999, and from 54.8% to 47.3% for the nine-month
period ended September 30, 2000, as compared to the nine-month period ended
September 30, 1999.
Gross Profit. For the three-month period ended September 30, 2000, gross
profit increased $20.5 million, or 179.4%, to $31.9 million from $11.4 million
for the three-month period ended September 30, 1999. For the nine-month period
ended September 30, 2000, gross profit increased $54.6 million, or 228.0%, to
$78.6 million from $24.0 million for the nine-month period ended September 30,
1999. These increases reflect the increase in revenue during the periods in
2000. As a percentage of revenue, gross profit increased from 48.4% to 53.1% for
the three-month period ended September
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<PAGE> 13
30, 2000, as compared to the three-month period ended September 30, 1999. As a
percentage of revenue, gross profit increased from 45.2% to 52.7% for the
nine-month period ended September 30, 2000, as compared to the nine-month period
ended September 30, 1999. These percentage increases primarily reflect increased
overall utilization of consulting and delivery personnel.
General and Administrative. General and administrative costs consist of
salaries for executive and selected senior management, finance, recruiting and
administrative personnel 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 $14.0 million, or 178.4%, to $21.8 million for the three-month period
ended September 30, 2000 from $7.8 million for the three-month period ended
September 30, 1999. These costs increased $35.5 million, or 197.4%, to $53.5
million for the nine-month period ended September 30, 2000 from $18.0 million
for the nine-month period ended September 30, 1999. These increases were due
primarily to increased facilities and related expenses to support our growth. As
a percentage of revenue, general and administrative expenses increased from
33.2% to 36.3% for the three-month period ended September 30, 2000, as compared
to the three-month period ended September 30, 1999, and from 33.9% to 35.9% for
the nine-month period ended September 30, 2000, as compared to the nine-month
period ended September 30, 1999.
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 $2.2 million, or
130.9%, to $3.9 million for the three-month period ended September 30, 2000 from
$1.7 for the three-month period ended September 30, 1999. Selling and marketing
costs increased $8.6 million, or 273.8%, to $11.7 million for the nine-month
period ended September 30, 2000 from $3.1 million for the nine-month period
ended September 30, 1999. Approximately 28.3% and 68.3% of these increases were
attributable to increased marketing and promotion initiatives for the
three-month and nine-month periods ended September 30, 2000, respectively. The
remainder was primarily due to increases in the number of sales and marketing
personnel. As a percentage of revenue, selling and marketing costs decreased
from 7.2% to 6.5% for the three-month period ended September 30, 2000, as
compared to the three-month period ended September 30, 1999, and increased from
5.9% to 7.8% for the nine-month period ended September 30, 2000, as compared to
the nine-month period ended September 30, 1999.
Stock-Based Compensation. We incurred charges of $2.3 million and $4.2
million in stock-based and other compensation in the three and nine-month
periods ended September 30, 2000 related to the Clarity acquisition. In
connection with the Clarity acquisition, certain employees/owners of Clarity
were issued 521,606 shares of common stock of the Company. These shares are held
in escrow and will be released on the first and second anniversary date of the
acquisition.
Amortization of Intangibles. Amortization of intangible assets consists
primarily of amortization of service agreements, customer lists, assembled
workforce and goodwill resulting from the acquisition of Clarity in April 2000.
Amortization of these costs for the three and nine-month periods ended September
30, 2000 was $4.2 million and $7.7 million, respectively. The Company did not
have any amortization cost related to intangible assets for the three and
nine-month periods ended September 30, 1999. Intangible assets related to the
Clarity acquisition will be amortized over three years.
Foreign Currency Transaction Loss. Foreign currency transaction losses
incurred in the three-month and nine-month periods ended September 30, 2000 were
$360,000. This loss was a result of the change in exchange rates between the
transaction date and the settlement date of foreign entity operations where the
transactions were denominated in currencies other than the foreign entities
functional currency.
Acquisition and Merger Costs. Acquisition costs were incurred in the
three-month and nine-month periods ended September 30, 2000 in connection with
the acquisition of Clarity which was accounted for using the purchase price
method of accounting. We incurred acquisition charges of approximately $300,000
for the nine-month period ended September 30, 1999 with respect to the ad hoc
Interactive transaction. All transaction costs were related to investment
banking fees, professional fees and other direct expenses.
Interest Income, Net. Interest income, net increased $693,000 to $1.4
million for the three-month period ended September 30, 2000 from $701,000 for
the three-month period ended September 30, 1999. Interest income, net increased
$3.4 million to $4.5 million for the nine-month period ended September 30, 1999
from $1.1 million for the nine-month period ended September 30, 1999. These
increases were due primarily to interest income earned on proceeds raised in our
initial and follow-on public offerings during 1999. We generally invest in
highly rated commercial paper, U.S. Treasury bills and money market accounts.
The amount of interest income fluctuates based upon the amount of funds
available for investment and prevailing interest rates.
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<PAGE> 14
Income Tax (Benefit) Provision. The $1.1 million and $1.5 million income
tax provision in the three and nine-month periods ended September 30, 1999,
respectively, represents combined federal, state and foreign income taxes at an
effective rate of 41.2%. The combined $3.1 million income tax provision for the
three-month period ended September 30, 2000 is an effective rate of 468.9%, or
43.1% excluding $6.5 million of non-deductible amortization and stock
compensation charges. The $7.5 million income tax provision in the nine-month
period ended September 30, 2000 represents combined federal, state and foreign
income taxes at an effective rate of 131.8%, or 42.7% excluding $11.9 million of
non-deductible amortization and stock compensation charges. We have recorded our
income tax provision based on estimates of the effective tax rate expected to be
applicable for the full fiscal year. Estimated effective rates recorded during
interim periods may be periodically revised if necessary to reflect current
estimates.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $10.0 million revolving credit facility with Bank of
America, N.A. to be used for working capital purposes and permitted
acquisitions. The interest rate on the amounts borrowed under the credit
agreement is the Eurodollar Daily Floating Rate plus 1.25%. The credit facility
expires on August 31, 2001 and will renew automatically for one additional year
at the sole discretion of Bank of America, N.A. The credit facility requires the
Company to maintain liquid assets of at least $10.0 million. As of September 30,
2000, the Company had no outstanding borrowings under the credit facility.
Additionally, the Company has an Uncommitted Standby Letter of Credit
("Standby Letter of Credit") with Bank of America, N.A. for $25.0 million. This
credit facility expires on March 31, 2002. The letter of credit fee is 1%
annually of the outstanding letters of credit written on this facility. As of
September 30, 2000, the entire $25.0 million Standby Letter of Credit was fully
committed. The Company also has an additional $9.9 million committed under
separate outstanding letters of credit with Bank of America which reduces the
amounts available for borrowing under the aforementioned $10.0 million line of
credit with Bank of America.
As of September 30, 2000, the Company had approximately $55.9 million in
cash and cash equivalents and $55.2 million in short-term investments. Net cash
provided by (used in) operating activities was $9.2 million and ($2.1) million
for the nine-months ended September 30, 2000 and 1999, respectively. Net cash
used in investing activities was $79.5 million and $1.5 million for the
nine-months ended September 30, 2000 and 1999, respectively. Net cash provided
by financing activities decreased $54.2 million to $12.9 million for the
nine-months ended September 30, 2000 from $67.1 million for the nine-months
ended September 30, 1999. This decrease was primarily attributable to $54.3
million of cash received in 1999 from the Company's initial public offering.
On April 23, 1999, the Company 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, the Company completed a follow-on public offering of
its securities. After deducting expenses, Proxicom received approximately $49.0
million in proceeds from this transaction.
In connection with the issuance of Series A convertible preferred stock in
August 1996, Proxicom issued warrants to purchase shares of Series A convertible
preferred stock that were exercised on April 13, 1999. Upon the exercise of the
warrants, the Company received proceeds of $8.0 million. The shares of Series A
convertible preferred stock received upon the exercise of the warrants were
converted into 1,011,378 shares of common stock upon the closing of our initial
public offering of securities on April 23, 1999.
During the nine-month period ended September 30, 2000, the Company issued
2,646,971 shares of common stock pursuant to the exercise of stock options under
the Company's Stock Option Plan and the sale of stock through the Company's
Employee Stock Purchase Plan. The Company received net proceeds of approximately
$13.0 million from these issuances.
Proxicom anticipates that existing sources of liquidity and funds generated
from operations should provide adequate cash to fund its current 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 the
Company.
12
<PAGE> 15
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No.101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101B, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. We are required to be in conformity with the provisions of SAB 101, as
amended by SAB 101B, no later than October 1, 2000. We believe the adoption of
SAB 101, as amended by SAB 101B, has not had a material adverse effect on our
financial position, results of operations or cash flows.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal year
2001. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. We believe the adoption of SFAS Nos. 133 and
137, as further amended by SFAS No. 138, will not have a material effect on our
financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25
"Accounting for Stock Issued to Employees." The effective date of the
interpretation is July 1, 2000. The provisions of the interpretation will apply
prospectively, but it will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The Company believes the adoption of FIN.
44 will not have an effect on the current or historical consolidated financial
statements, but may impact its future accounting regarding stock option
transactions.
ITEM 3. 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 September 30, 2000.
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 September 30, 2000, the Company had $78.3 million
invested in commercial paper and money market accounts. 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 15.6% of its revenues for the period ended
September 30, 2000 from services performed in Germany, Italy, Spain, France and
the United Kingdom. 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, the United Kingdom and Spain have 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.
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<PAGE> 16
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS:
27.1 Financial Data Schedule
b. REPORTS ON FORM 8-K:
On July 3, 2000, Proxicom amended its current report on Form 8-K, filed
with the Securities and Exchange Commission on April 21, 2000, to add financial
information for Proxicom reflecting the acquisition of Clarity IBD Limited.
Proxicom acquired Clarity on April 19, 2000 pursuant to the Share Exchange
Agreement, dated as of April 11, 2000, by and among Proxicom and Clarity's
shareholders. The Form 8-K was also amended to add a financial data schedule and
the consent of Grant Thornton, independent auditors of Clarity.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
PROXICOM, INC.
Date: November 14, 2000 /s/ Kenneth J. Tarpey
---------------------------
Kenneth J. Tarpey
Executive Vice President,
Chief Financial Officer and
Treasurer (duly authorized
to sign on behalf of the
Registrant)
14
