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, 2000 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> <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 February 16, 2001, is $272,337,279. As of February 16, 2001, there were 56,944,817 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the Proxy Statement for the 2001 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III hereof. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------

2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 16 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 16 Item 6. Selected Financial Data..................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 24 Item 8. Financial Statements and Supplementary Data................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 25 PART III Item 10. Directors and Executive Officers of the Registrant.......... 25 Item 11. Executive Compensation...................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 25 Item 13. Certain Relationships and Related Transactions.............. 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 25 SIGNATURES............................................................ 27 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-1 </TABLE>

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, our 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 this stock split. OVERVIEW Proxicom is a leading e-business consulting and development company, delivering innovative multi-channel solutions to Global 1000 companies and other large businesses. Since 1994, we have focused exclusively on the Internet and have successfully completed over 1,000 client engagements. Our Internet solutions have included - business-to-consumer electronic commerce Internet sites for Toyota Motor Sales, USA, Elisabeth by Liz Claiborne, ColeHaan and Chase Manhattan Bank; - business-to-business electronic commerce extranets for Merrill Lynch & Co. and McKesson HBOC; - company-specific intranets for GE Plastics and Marriott International; and - multi-channel solutions such as a wireless e-commerce application for Abbey National Bank. We apply our proprietary methodology, the Proxicom Process, in all of our client engagements. Using the Proxicom Process, we integrate strategy, technology and creative services to help our clients transform their businesses with multi-channel Internet solutions. We organize the delivery of our services into seven vertical industry groups: Automotive and Manufacturing; Communications and High Tech; Consumer Goods and Retail; Energy; Financial Services; Media and Entertainment; and Service Industries. INDUSTRY BACKGROUND The Internet provides opportunities to transform businesses and entire industries. Companies are using the Internet and related emerging technologies 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. Faced with growing competition, deregulation and globalization, companies are increasingly looking to the Internet to build and retain 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 1

4 employee-focused productivity enhancement to customer-focused revenue generation. As a result, organizations are investing in the strategic use of Internet solutions to transform their core business and technology strategies. Successful adoption of the Internet in this new context poses strategic, technical and marketing 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. In addition, companies must be able to integrate new Internet applications with their existing systems. Furthermore, a successful result requires that the Internet solution be appropriately targeted to align with current and potential customers. Few companies have the range of skills necessary to successfully transform the way they use technology and implement Internet solutions. Internet-based solutions are frequently more complex than traditional systems implementations and require not only technical skills but exceptional creative and information design skills to convey desired information in a user-friendly and meaningful manner. In addition, the rapid pace of technical advancement makes it difficult for businesses to effectively assess and deploy constantly evolving technologies. Developing, integrating and managing the skill sets required to successfully implement Internet solutions is a complex and challenging undertaking, particularly for large businesses with legacy information technology divisions. The combination of these factors has created a significant and growing demand for Internet professional services. Gartner Dataquest, an industry research group, estimates that the market for worldwide consulting and development and integration services will grow at a compound annual growth rate of 46% from $41 billion in 2000 to $272 billion in 2005. In addition, according to Datamonitor, another industry research group, the global market for mobile commerce solutions is expected to be $4.7 billion by 2005. Vendors addressing the Internet professional services market can be broadly divided into three major categories: - Large systems integrators that provide either technology expertise across a wide range of offerings or more focused expertise related to specific components of Internet-based solutions. - Strategy consulting firms that help companies define business models that allow their clients to successfully use the Internet as a new channel to reach customers and suppliers. - Internet professional services providers, or e-services firms, that 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. We believe companies are increasingly searching for a single-source professional services firm that can deliver integrated strategy, technology and creative skills specifically targeted at developing multi-channel e-business solutions. We believe firms in the Internet professional services providers' category, such as Proxicom, best meet this demand. Furthermore, we believe that companies will increasingly look to e-services firms that can leverage industry best practices, scale to suit the needs of clients, demonstrate increased predictability of success for e-business solutions and decrease risks associated with implementation. PROXICOM'S SOLUTION We are an e-business consulting and development firm that focuses on creating business value for our clients. Our solution has six essential elements: - integrated e-business strategy, technology and creative services; - industry and business domain expertise; - in-depth Internet and emerging technologies expertise; - a structured, proprietary methodology, the Proxicom Process; - a knowledge management and knowledge sharing infrastructure; and 2

5 - expertise in solution architectures that take advantage of strategic alliances that we have developed with companies such as Aether Systems, Intel, iPlanet, Microsoft, and Sun Microsystems. INTEGRATED E-BUSINESS STRATEGY, TECHNOLOGY AND CREATIVE SERVICES We develop and deliver our solutions using highly integrated, multi-disciplinary teams that apply the collective strengths of strategy, technology and creative services professionals. We focus on ensuring that business processes, perspectives and organizations are seamlessly integrated in a way that speeds solution delivery and provides significant strategic business value to our clients. In addition, we believe our integrated expertise helps our clients "see around corners" to anticipate and proactively manage the impact of their multi-channel e-business activities on customers, processes, competitors and organizations. This is increasingly critical as clients move forward with deploying emerging technologies and multi-channel solutions that require more holistic planning and implementation in order to achieve the optimal return on technology investment. An added benefit of our focus on integrated solutions is that it fosters a higher level of collaboration within a client among previously independent business functions and channels. INDUSTRY AND BUSINESS DOMAIN EXPERTISE Over the course of more than 1,000 engagements since 1994, we have gained significant expertise in specific industries and types of business solutions. Our experience and expertise provide clients in these industries with a clear vision of the Internet's potential to improve their business processes and competitive positions. To effectively draw upon and add to this expertise, we organize our delivery of services into vertical industry groups. In 2000, we expanded and added to our vertical industry groups such that they now include: Automotive and Manufacturing; Communications and High Tech; Consumer Goods and Retail; Energy; Financial Services; Media and Entertainment; and Service Industries. We complement our industry specialization with expertise in cross-industry e-business critical areas such as supply chain management, customer experience and creative strategy, customer relationship management, value modeling, channel planning, organizational design and change management. This allows us to deliver cross-industry best practices and expertise to clients in addition to industry expertise. IN-DEPTH INTERNET AND EMERGING TECHNOLOGY EXPERTISE We have developed an in-depth understanding of the specific challenges involved in deploying Internet solutions and have become expert at building, extending and complementing Internet-related technologies that have the ability to transform businesses. In addition, we continuously train our employees on innovations in Internet-related technology and cutting-edge solutions. In this way, we are able to help our clients utilize leading-edge technologies and minimize the expenses associated with hiring, training and retaining scarce information technology skill sets. Because our expertise is not limited to a single technology or architecture, we are 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 our proprietary methodology for managing client engagements that integrates strategy, technology and creative 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 six phases of the Proxicom Process' development cycle are (a) Plan, (b) Define Internet Strategy, (c) Design Solution, (d) Develop Solution, (e) Deploy Solution and (f) Conclude. Using the Proxicom Process, we structure projects tightly and offer both time-and-materials and fixed-price, fixed-schedule engagements as is most appropriate for the project. We believe this 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 We continuously incorporate the multi-disciplinary knowledge gained in our engagements into our organizational knowledge base. This intellectual capital is tracked and stored in our corporate intranet through 3

6 our 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, our 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, our clients can benefit from industry best practices as well as our experiences. DNA and the project management system improve our ability to predict project completion requirements and increase the reusability of our intellectual capital, thereby reducing risk for our clients. In addition, we use internal and external training programs to increase our knowledge capital. Our internal training program, "Proxicom University," conducts hundreds of classes each year to share knowledge and increase individual capabilities in e-strategy, Internet and multi-channel technologies, creative design and Internet solutions management. PROXICOM'S GROWTH STRATEGY Our strategy is to build upon our 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 our strategy. LEVERAGE EXISTING CLIENTS We must continue to satisfy our existing customers. A strong track record of delivering high quality Internet solutions often increases the amount, scope and sophistication of services requested by such clients. This reinforces our growing reputation as an innovative provider of mission-critical Internet solutions. We also believe that maintaining a reputation for delivering innovative Internet solutions and client satisfaction will increase our ability to attract new clients through increased referral-driven sales and strong references. FURTHER PENETRATE AND BROADEN OUR VERTICAL MARKETS We believe that our expertise in specific industry groups and industry-specific solutions considerably enhances our ability to help companies apply the Internet to gain competitive advantage. In each of our vertical industry groups, we employ industry experts, pursue targeted sales and marketing, develop industry-specific offerings and capitalize on referrals from existing clients. We will continue to emphasize this focus and seek to expand the scope of our industry expertise. CONTINUE GEOGRAPHIC EXPANSION We believe that expanding geographically will increase our ability to attract and better service clients. We have already established offices in Boston, Detroit, Chicago, Houston, London, Los Angeles, Munich, New York, Paris, San Francisco, Sausalito, California and Reston, Virginia. All of these offices have contributed to our continued ability to attract large clients. In April 2000, we expanded our London presence through our acquisition of London-based Clarity IBD Limited, adding U.K. clients, management talent and delivery capabilities to our existing office. We plan to continue establishing offices in key geographic locations through an integrated process of organic growth and targeted acquisitions. HIRE AND RETAIN SKILLED PROFESSIONALS We believe our ability to deliver sophisticated integrated strategy, technology and creative services distinguishes us from other Internet professional services providers. To deliver these services, we must hire and retain skilled professionals in all three disciplines and continue to foster collaboration among them. We have a dedicated organizational development team that initiates and oversees the training and development of our 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. We are committed to recruiting and hiring quality professionals and to maintaining a culture that motivates our staff while cultivating collaboration and retention. In 2000, we expanded our executive management team by hiring 4

7 individuals for several strategic positions, including president, chief technology officer, and senior vice president for client services, international. EVOLVE THE PROXICOM PROCESS We believe that continued evolution of the Proxicom Process will strengthen our competitive position. We enhance the Proxicom Process by incorporating best practices identified over numerous engagements. Through a continuous improvement program of standardized and comprehensive project launches and phase-end and project-end review sessions, we continually update project methodologies in real-time. Additionally, periodic trend analyses of project reviews and online user surveys provide valuable feedback for process improvements. This enables clients to benefit from our cumulative experience. We will continue to enhance the Proxicom Process by updating the methodologies used to deliver high quality solutions to clients on time and on budget. All refinements to the Proxicom Process are stored in our Digital Network of Assets, or "DNA." LEVERAGE TECHNOLOGY PARTNERSHIPS We believe our relationships with leading technology vendors provide increased visibility and sales opportunities. We currently maintain strategic partnerships and alliances with Aether Systems, AOL Time Warner, LoudCloud, Intel Online Services, iPlanet, Microsoft, and Sun Microsystems. We intend to continue to maintain and develop such relationships with leading technology vendors. PROXICOM'S SERVICES We provide a wide range of advisory and development services to deliver multi-channel e-business solutions. These solutions and applications include business-to-consumer electronic commerce and content sites, business-to-business electronic commerce extranets and company-specific intranets. We develop and deploy these solutions through an integrated set of strategy, technology and creative services. STRATEGY SERVICES Working closely with the client, we help companies develop and improve the way in which they leverage Internet-based technologies to achieve competitive advantage, increase profits and enhance customer relationships. Leveraging expertise in areas such as customer experience, branding, process design and e-business development, we are able to define multi-channel e-business strategies for clients and create roadmaps to the execution of such strategies. These roadmaps are immediately usable by our clients and our creative and technology consultants to implement such strategies. Our strategy consultants continue to work with the client throughout the lifecycle of solution development to refine the client's e-business strategy to ensure achievement of the client's business goals. TECHNOLOGY SERVICES We develop and integrate multi-channel e-business solutions that incorporate proven and emerging technologies to transform our clients' business processes. We combine sophisticated application development skills (Microsoft, Java and others) with broad capabilities in systems and network architecture design, enterprise application integration, data warehousing, business intelligence and packaged software implementation to design, develop, and deploy highly scalable, mission-critical systems for clients. Our technology consultants work closely with their client counterparts to create solutions appropriate for the client's infrastructure and business processes and which capitalize on existing technology investments. We continuously monitor emerging technology trends and implement timely training for our employees in order to deliver the best possible solutions for our clients. CREATIVE SERVICES The user/customer experience is the most (and many times, the only) visible part of a client's e-business and multi-channel strategy and is critical to the success of any e-business application. Our creative services teams focus on creating the optimal user experience in both business-to-consumer and business-to-business environments. By working closely with clients and their customers, our creative services teams address, among 5

8 other things, creative strategy, information architecture, branding, design and content management. This ensures that the final product captures the power of the client's brand and maximizes the ease and quality of experiences for a variety of users. MULTI-CHANNEL CAPABILITIES Recognizing a shift in emerging technologies in 2000, we undertook to develop leading multi-channel capabilities to further provide strategic business value to our clients. Our multi-channel consultants work with the other services groups to provide multi-channel perspective and solutions. In particular, they help clients optimize business processes across channels, balance investment and customer alignment needs, provide research insight into marketplace and customer demand for multi-channel technologies, and assist clients in better understanding emerging technologies, infrastructures and alliance players. We focus on designing multi-channel technology solutions that include emerging digital communication channels such as PC, web, wireless device, interactive television (iTV), kiosks and other information appliances. THE PROXICOM PROCESS We deliver our services using a proprietary multi-phase methodology called the Proxicom Process, which serves as a roadmap to define, develop and manage multi-channel e-business solutions. Using the Proxicom Process, we structure projects tightly and offer both time-and-materials and fixed-price, fixed-schedule engagements as is most appropriate for the project. The iterative nature of the Proxicom Process enables us to refine applications through the extensive use of prototypes and phased application releases. We also use 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. We use 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 our entire organization, thereby leveraging our cumulative experience. We continually seek to evolve the Proxicom Process by identifying best practices during project reviews with our delivery teams and clients. All of our client engagements utilize the Proxicom Process, which we customize 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. PLAN We start all client engagements with standardized and comprehensive project launch activities, often before any consultants set foot on the client site. Team members hold kickoff meetings, reaffirm client expectations, identify critical success factors, refine team roles and responsibilities, develop initial workplans and review planned deliverables. By conducting these activities in a structured yet flexible manner, project teams can focus on Define Internet Strategy phase activities immediately. 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 we assess the client's opportunities to leverage the Internet both as a technology and as a profitable business medium. The Internet vision engagement often involves our 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. 6

9 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, functional, technical and creative requirements. Project objectives are refined over the course of multiple working sessions with the client. This phase results in a project plan outlining tasks, deliverables and key milestones, which are translated into a detailed contractual agreement for the next phases of the engagement. The plan includes detailed cost estimates as well as organizational roles and responsibilities for Proxicom, the client and other parties. DESIGN SOLUTION The Design Solution phase uses rapid prototyping techniques in an iterative fashion to determine and refine application requirements and specifications. A multi-disciplinary team works in tandem with the client to translate the business, marketing, technical and creative requirements of the solution into a cohesive design. This phase generally has four major parts. - CREATIVE DESIGN COMPOSITION. Content and information for the solution are defined and organized. The look and feel of the solution is designed in a series of detailed site flow compositions that show page content, navigation and links. We work 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, we work 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. CONCLUDE We are committed to delivering a complete client solution, including taking measure of the successfulness of the team. During the Conclude phase, a client satisfaction survey is performed with the client, all client and project documentation is completed, and a project review is performed to contribute to Proxicom's continuous improvement program. Finally, during this phase, all appropriate information is added to our Digital Network of Assets (DNA). 7

10 SALES AND MARKETING Our sales and marketing activities are aligned with our vertical industry practices. Each vertical industry practice vice president is responsible for developing Proxicom's business within the respective industry, targeting new clients and cultivating repeat business with existing clients. We believe that our vertical industry knowledge and approach is a differentiating factor during the sales process as it demonstrates our understanding of the client's specific business and technology issues. Our 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. We also assign senior client executives to strategic accounts to support and expand client relationships. Our sales organization, which spans our seven vertical industry groups, includes more than 65 professionals dedicated to direct sales and client relationship management. These professionals are assigned to specific vertical industry practices to maximize responsiveness to clients and pursue new business opportunities. Our marketing efforts are focused on developing the Proxicom brand and generating business opportunities. The marketing function consists of corporate and vertical market programs and teams that span our U.S. and European regions. Our marketing initiatives encompass thought leadership programs and publishing, direct mail, public and industry analyst relations, and event and speaking programs for our executives. Proxicom complements its internal sales and marketing efforts with selected industry partnerships. See "Marketing and Technology Alliance Relationships." CLIENTS As of December 31, 2000, we had approximately 90 ongoing client relationships. In 2000, our five largest clients accounted for approximately 34.6% of our revenue, and no single client accounted for more than 10% of total revenues for the year. The following is a representative sample of our current clients. <TABLE> <S> <C> A&E Television Networks Home Box Office Abbey National Bank, plc JPMorganChase & Co. and subsidiaries Aether Systems, Inc. Kristina Internet Business Solutions, S.A. AMVEST Corporation Marriott International Bayer Merrill Lynch Black & Decker Metrocall, Inc. BMW Financial Services Primedia, Inc. Calpine Corporation Renault Carlson Wagonlit Travel Royal & SunAlliance Chelsea Property Group School Specialty, Inc. Deutsche Bank AG Supralift Dresdner Kleinwort Wasserstein Surplex.com AG E.I. Dupont de Nemours Company The Topps Company, Inc. Enron Corporation Travel Planners, Inc. General Electric Company USA TODAY Grolier Incorporated WitSoundView Europe </TABLE> MARKETING AND TECHNOLOGY ALLIANCE RELATIONSHIPS We complement our internal sales and marketing efforts with formal and selected industry partnerships. A number of Internet product vendors, including Microsoft Corporation, Sun Microsystems, AOL Time Warner, BroadVision, Inc. and Oracle Corporation, and high-end hosting providers, including Intel Online Services and LoudCloud, recommend our services to their clients. In addition, we continue to establish and develop partnerships with wireless and other multi-channel technology companies, including Ericsson Professional Services and Aether Systems, Inc., to provide us with the technology and partners to develop mobile e-business strategies, applications and operations for our client base. 8

11 We have arrangements with a number of technology vendors to obtain early access to their technologies. By establishing these alliances and gaining access to pre-release technology, we have been able to maintain leading-edge technical skills and broaden our client base. We believe that demonstrating an ongoing ability to work with new and emerging technologies is a significant competitive advantage. In addition to increasing technical competency and broadening our client base, obtaining the validation by industry leaders such as Microsoft, Intel, Sun Microsystems and AOL Time Warner has added considerably to our visibility, credibility and brand image. In February 2000, we announced an agreement with Aether Systems, Inc., a provider of wireless data services and systems, to provide comprehensive wireless Internet solutions to Global 1000 companies. Under the terms of the alliance, Aether and Proxicom both receive preferred support and access to each other's technology and resources and jointly develop, test and deploy custom wireless e-business platforms and solutions. In May 2000, after several years of working with Sun Microsystems servers in client engagements, we entered into a strategic alliance agreement with Sun Microsystems that designates Proxicom as one of Sun's iForce eIntegrators. Through this alliance, we continue to develop skills based on Sun's hardware and software offerings. As a participant in Sun's iForce program, we receive access to Sun technical resources, assistance for jointly developed marketing, sales and training initiatives and access to Sun's extensive worldwide sales force. We have been a Microsoft Certified Solution Provider Partner since 1995, when we began actively cultivating a broad base of Microsoft products, skills and certifications. Since 1998, we have been at the highest level of Microsoft's Solution Provider Program and recognized as one of Microsoft's leading integration partners. The Solution Provider Partner program provides technical assistance on enterprise, client server and internet solutions. Through this program, we conduct joint marketing efforts, training programs and sales initiatives with Microsoft. We continue to develop our preferred relationship with Intel Online Services, Inc., a subsidiary of Intel Corporation, for integrated hosting and Internet solutions development. Under an alliance agreement with Intel Online Services, we receive preferred support and access to Intel Online Services' marketing, solution validation and technology resources, and Intel Online Services is the preferred hosting provider for our Internet engagements. In addition, under the alliance agreement, we engage in joint marketing activities with Intel Online Services and work with Intel Online Services to define a standard development and hosting platform for Internet solutions. PERSONNEL AND CULTURE As of December 31, 2000, we had 1,194 employees. Of these, 969 were consulting and service delivery professionals, and 225 were management and administrative personnel performing marketing, sales, human resources, finance, accounting, legal, internal information systems and administrative functions. We believe that our ability to provide integrated business strategy, technology and creative services is dependent upon the continuation of our culture of mutual respect among the three disciplines. As a result, our employees and our culture are fundamental to the value proposition we offer clients. Our culture is predicated on personal integrity, open communications, collaboration and professional development. We foster an entrepreneurial spirit that attracts talented professionals, creates innovative solutions and provides the opportunity for every individual to succeed. We have a particular emphasis on recruiting and retaining people with leading-edge technical skills and project management experience. We have been very successful with internal referral-driven recruiting, which has accounted for nearly 40% of our hires to date. We continue to encourage employee referrals with monetary incentives. We have developed a structured recruiting program, including a staff of dedicated recruiters tasked with bringing in experienced professionals, MBA and college hires, and maintain a tracking database of potential candidates. We run a year-round internship program with several leading undergraduate and MBA programs. 9

12 In addition to recruiting, we are committed to employee training and retention. We have a dedicated organizational development team that initiates and oversees the training and development of our 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. We plan to continue to invest in attracting the best employees and in maintaining a low turnover rate. None of our employees are represented by a labor union, nor have we ever experienced a work stoppage. We believe our employee relations are good. COMPETITION The market for our 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 three major categories -- large systems integrators (e.g., International Business Machines Corporation, Accenture, KPMG Consulting, Cap Gemini Ernst & Young, Deloitte Consulting, and PricewaterhouseCoopers), strategy consulting firms (e.g., McKinsey & Company and The Boston Consulting Group), and Internet professional services providers (e.g., Sapient, DiamondCluster, Viant Corporation, Scient Corporation, Razorfish, marchFIRST and iXL Enterprises, Inc.) -- many of which have more financial resources, marketing depth and name recognition than Proxicom. Occasionally we compete with other related firms including interactive marketing firms (e.g., Agency.com Ltd., Digitas, Inc., Modem Media, Inc., and Organic, Inc.). We expect further consolidation in the Internet professional services market to create larger, more viable competitors. Potential clients' internal information systems groups also compete with us. We believe the principal competitive factors in the Internet professional services market include Internet expertise and talent; quality, pricing and speed of service delivery; client references; integrated strategy, technology and creative design services; and vertical industry knowledge. We believe we compete favorably with respect to these factors and have established ourselves as a leader in Internet-specific industry and domain expertise. INTELLECTUAL PROPERTY RIGHTS Our success is dependent, in part, upon our proprietary Proxicom Process, our solution components, and other intellectual property rights. We do not have any patents or patent applications pending. We rely on a combination of trade secret, nondisclosure and other contractual agreements, and copyright and trademark laws to protect our proprietary rights. Existing trade secret and copyright laws afford us only limited protection. We enter into confidentiality agreements with our employees, generally require that our consultants and clients enter into such agreements, and limit access to and distribution of our proprietary information. There can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Our 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 10

13 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 total annual revenue has increased from $1.5 million in 1994 to approximately $207.1 million in 2000. 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 continue to 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 BUSINESS IS SENSITIVE TO NATIONAL AND REGIONAL ECONOMIC CONDITIONS. ECONOMIC DOWNTURNS COULD HAVE AN ADVERSE IMPACT ON THE DEMAND FOR OUR SERVICES. The market for Internet professional services is sensitive to national and regional economic conditions. Economic downturns could cause our clients to reduce or cease their investment in Internet-related technologies and related consulting and development services such as those we provide. Any decrease in the demand for our services could adversely affect our operating results and financial condition. Our operating results and financial condition may also be adversely affected by difficulties we may encounter in collecting our accounts receivable and maintaining our profit margins during an economic downturn. Operating lease commitments for 2001 approximate $35 million, of which approximately $27 million relate to office space for which we have non-cancelable commitments. Our anticipated utilization of this office space is based upon our estimates regarding the growth of our business in 2001 and beyond. If our business does not grow as we anticipate, we may need to consider other options for this office space. Such options may include subleasing or renegotiating the lease terms for this office space. If this occurs, there can be no assurance that we will be able to sublease this office space or renegotiate the terms of these leases on terms favorable to the Company, or at all. 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; - customer concentration; - long and unpredictable sales cycles; - contract terms of projects; 11

14 - 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 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 2000, for example, our two largest clients, General Motors and Toyota Motor Sales, USA, accounted for approximately 9.6% and 9.5%, respectively, of our total revenue for the year. During 2000, our five largest clients contributed approximately 34.6% of our total revenue. We perform varying amounts of work for specific clients from year to year. A major client in one year may not use our services in another year. In addition, we may derive revenue from a major client that constitutes a large portion of a particular quarter's total revenue. If we lose any major clients or any of our clients cancel or significantly reduce a large project's scope, our business, financial condition and results of operations could be materially and adversely affected. Also, if we fail to collect a large account receivable, we could be subjected to significant financial exposure. WE HAVE MANY SHORT-TERM CONTRACTS THAT CAN BE CANCELLED WITHOUT PENALTY. IF CLIENTS TERMINATE CONTRACTS WITH US ON SHORT NOTICE, OUR RESULTS OF OPERATIONS COULD SUFFER. Our contracts with clients are generally short-term. Also, most clients can reduce or cancel their contracts for our services without penalty and with little or no notice. If a significant client or a number of small clients terminate, significantly reduce or modify business relationships with us, our business, financial condition and results of operations could be materially and adversely affected. Consequently, you should not predict or anticipate our future revenue based on the number of clients we have or the number and size of our existing projects. When a client postpones, modifies or cancels a project, we have to shift our 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. 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 systems integrators, strategy consulting firms and Internet professional services 12

15 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 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. 13

16 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. 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 four material acquisitions and investments in two joint ventures in the last three years. 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 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 CONTINUE TO EXPAND 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. 14

17 We expect to expand further our international operations and international sales and marketing efforts. Our experience in marketing, selling and distributing services internationally remains limited. International operations are subject to inherent risks, including the following: - recessions in foreign economies; - political and economic instability; - fluctuations in currency exchange rates; - difficulties and costs of staffing and managing foreign operations; - potentially adverse tax consequences; - reduced protection for intellectual property rights in some countries; - changes in regulatory requirements; and - reductions in business activity during the summer months in Europe. NON-DIRECTOR EXECUTIVE OFFICERS OF PROXICOM The following is a list of 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 December 31, 2000. Michael D. Beck, age 41, has been Executive Vice President, Client Services for the Americas since January 2001. From June 1999 to January 2001, Mr. Beck served as Senior Vice President, Retail and Manufacturing Practice. From October 1998 to June 1999, Mr. Beck served as Vice President and General Manager of the Retail & Manufacturing Practice, Chicago Regional Operations. From January 1997 to October 1998, Mr. Beck served as Vice President and General Manager of the Financial Services Practice, New York Regional Operations. Mr. Beck served as Vice President of Delivery and Production from June 1996 to December 1996. Christopher Capuano, age 39, has been Senior Vice President, Corporate Development of Proxicom since October 1999. From June 1996 to February 2000, Mr. Capuano was General Counsel of Proxicom. Mr. Capuano served as Proxicom's Corporate Secretary from June 1996 to February 2001 and was a member of Proxicom's Board of Directors from August 1996 until August 1998. Prior to joining Proxicom, Mr. Capuano was a Manager and Senior Manager with Price Waterhouse LLP from 1993 until June 1996. 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. E. Michael Hansen, age 39, has been Proxicom's Senior Vice President, International Operations since February 2000. Prior to joining Proxicom, Mr. Hansen served as The Boston Consulting Group, Inc.'s Vice President and Director from 1995 to 2000 and as co-leader of The Boston Consulting Group's e-commerce practice from 1998 to 2000. Heiner Rutt, age 50, has served as President of Proxicom since February 2000. Prior to joining Proxicom, Mr. Rutt had an extensive career with The Boston Consulting Group, Inc. from 1977 to 2000. From 1997 to 2000, he served as the Chair of The Boston Consulting Group's operation in the Americas. Prior to that, Mr. Rutt served as a senior Boston Consulting Group executive in Europe, building the German and European practice. He has served on a number of worldwide management committees for The Boston Consulting Group. Kenneth J. Tarpey, age 48, has been Executive Vice President and Chief Financial Officer of Proxicom since March 1997. Prior to joining Proxicom, 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 August 1996 until March 1997. 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 15

18 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. Jay E. Thomas, age 38, has been Executive Vice President of Operations since January 2001. Mr. Thomas served as Vice President or Senior Vice President of Service Industries from September 1997 until January 2001. From February 1999 to December 1999, Mr. Thomas also served as Vice President of Eastern Region Delivery. In addition, Mr. Thomas served as Vice President of Production from July 1997 to March 1998. Mr. Thomas served as a Senior Director of Production from March 1997 to July 1997. Prior to joining Proxicom, Mr. Thomas was a consulting manager with Andersen Consulting from 1986 to 1997. 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. Our lease is for a term of seven years and expires on December 31, 2005. The office space is indirectly owned by Mario M. Morino, one of our stockholders and a member of our board of directors. We also lease office space in three additional buildings in Reston, VA and in the following cities: Boston, MA, Chicago, IL, Houston, TX, London, England, Munich, Germany, New York, NY, Paris, France, San Francisco, CA, San Jose, CA, Sausalito, CA and Southfield, MI. We expect that we will need additional space as we expand our business and believe that we 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 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on The Nasdaq National Market under the symbol PXCM since our initial public offering on April 20, 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> <CAPTION> 1999 HIGH LOW ---- ------ ------ <S> <C> <C> Second Quarter (beginning April 20, 1999)................... $13.88 $ 8.50 Third Quarter............................................... $33.00 $12.50 Fourth Quarter.............................................. $64.25 $24.06 </TABLE> <TABLE> <CAPTION> 2000 HIGH LOW ---- ------ ------ <S> <C> <C> First Quarter............................................... $67.50 $35.88 Second Quarter.............................................. $51.88 $20.64 Third Quarter............................................... $57.25 $18.38 Fourth Quarter.............................................. $19.63 $ 2.63 </TABLE> On February 16, 2001, the last reported sale price of our common stock on The Nasdaq National Market was $6.938. As of February 16, 2001, there were 197 holders of record of our common stock. 16

19 DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the expansion of our business and do 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." ITEM 6. SELECTED FINANCIAL DATA. The following tables contain selected consolidated financial data as of December 31 for each of the years 1996 through 2000 and for each of the years in the five-year period ended December 31, 2000. The selected consolidated financial data for each of the years in the five-year period ended December 31, 2000 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, -------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue..................................... $13,372 $28,452 $ 44,006 $ 82,688 $207,067 Cost of revenue............................. 5,093 12,780 25,280 43,995 100,604 ------- ------- -------- -------- -------- Gross profit................................ 8,279 15,672 18,726 38,693 106,463 ------- ------- -------- -------- -------- Operating expenses: General and administrative................ 5,746 10,180 34,353 28,650 81,099 Selling and marketing..................... 670 1,710 2,919 5,553 15,072 Amortization of intangible assets......... -- -- -- -- 11,936 Acquisition and merger costs.............. -- -- 2,886 300 -- Foreign currency transaction loss, net.... -- -- -- -- 101 Research and development.................. 404 961 692 -- -- ------- ------- -------- -------- -------- Total............................. 6,820 12,851 40,850 34,503 108,208 ------- ------- -------- -------- -------- Income (loss) from operations............... 1,459 2,821 (22,124) 4,190 (1,745) Interest income (expense), net.............. 55 80 (121) 2,770 6,379 ------- ------- -------- -------- -------- Income (loss) before income taxes........... 1,514 2,901 (22,245) 6,960 4,634 Income tax provision (benefit).............. 185 330 (900) 2,936 9,862 ------- ------- -------- -------- -------- Net income (loss)........................... 1,329 2,571 (21,345) 4,024 (5,228) Non-cash dividend on beneficial conversion of convertible preferred stock............ -- -- -- (4,873) -- ------- ------- -------- -------- -------- Net income (loss) available to common stockholders.............................. $ 1,329 $ 2,571 $(21,345) $ (849) $ (5,228) ======= ======= ======== ======== ======== Basic net income (loss) per common share.... $ 0.05 $ 0.10 $ (0.73) $ (0.02) $ (0.09) ======= ======= ======== ======== ======== Diluted net income (loss) per common share..................................... $ 0.05 $ 0.08 $ (0.73) $ (0.02) $ (0.09) ======= ======= ======== ======== ======== Weighted average common shares outstanding............................... 27,480 26,748 29,152 44,532 55,140 ======= ======= ======== ======== ======== Weighted average common shares and potential common shares outstanding................. 28,620 34,256 29,152 44,532 55,140 ======= ======= ======== ======== ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, -------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................... $ 1,160 $ 2,343 $ 2,586 $113,819 $ 45,635 Working capital............................. 5,808 7,534 1,927 132,045 128,184 Total assets................................ 8,985 16,317 22,551 160,114 234,980 Stockholders' equity........................ 7,344 10,496 6,629 143,259 196,331 </TABLE> 17

20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Proxicom is a leading e-business consulting and development company, delivering innovative multi-channel solutions to Global 1000 companies and other large businesses. Since 1994, we have focused exclusively on the Internet and have successfully completed over 1,000 client engagements. Our Internet solutions include business-to-consumer electronic commerce Internet sites, business-to-business electronic commerce extranets, company-specific intranets and multi-channel solutions such as wireless e-commerce applications. Using our proprietary methodology, which we call the Proxicom Process, we integrate strategy, technology and creative services, to help our clients transform their businesses with Internet solutions. Our revenue generally consists of fees generated from professional services. We provide our services either on a time-and-materials basis or a fixed-price, fixed-schedule basis. When we provide services on a time-and-materials basis, we recognize revenue as we incur costs. In time-and-materials engagements, we use our internally-developed estimation process to develop cost proposals which are then approved by a senior management member. 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. When we provide services on a fixed-price, fixed-schedule basis, we use our estimation process to propose fixed prices for such projects. A senior management member must approve all of our fixed-price proposals. For these contracts, we recognize revenue using the percentage-of-completion method primarily based on the ratio of costs incurred to total estimated costs. 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, we completed our acquisition of Clarity IBD Limited, or "Clarity," a United Kingdom e-business development consultancy company, 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 our closing stock price for the week ended April 14, 2000. 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. 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 subject to such employees' continued employment. At the date of acquisition, we recorded deferred compensation charges of $18.5 million, which are being amortized on a straight-line basis over this two-year vesting period. In March 1999, we acquired 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. We incurred acquisition and merger costs of $300,000 in connection with this transaction. In August 1998, we acquired 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. We 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 January 1998, we acquired 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. We incurred acquisition and merger costs of $130,000 in connection with this transaction. We 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. 18

21 In April 1999, we signed an agreement with Ericsson Telecommunicazioni SpA. Under this agreement, we agreed to create an Italian joint venture company in which we acquired a 19.9% interest. In connection with this agreement, we contributed $336,000 to the joint venture to fulfill our initial share capital obligation. This investment is accounted for on the cost basis of accounting. Ericsson owns the remaining 80.1% interest in the joint venture company. We provide Internet solutions to Italian-based businesses through the joint venture company. In September 2000, we recorded an allowance to fully reserve this investment. In July 1999, we signed an agreement with affiliates of Iberdrola SA. Under this agreement, we purchased 19.9% of a Spanish joint venture company, named Kristina, Services de Internet, SA, which provides Internet solutions to Spain-based businesses. This investment is accounted for on the cost basis of accounting. In 1999 and 2000, we contributed approximately $1.4 million to the joint venture to fulfill our initial share capital obligation. Affiliates of Iberdrola SA own the remaining 80.1% interest in Kristina, Services. On September 24, 1999, we entered into a Master Services Agreement with General Electric Company. Under this agreement, General Electric 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, we issued General Electric a warrant to purchase 300,000 shares of Proxicom common stock at an exercise price of $24.94 per share, the closing price of our 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 a net of 156,122 shares of Proxicom common stock. 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, ------------------------- 1998 1999 2000 ----- ----- ----- <S> <C> <C> <C> Revenue..................................................... 100.0% 100.0% 100.0% Cost of revenue............................................. 57.4 53.2 48.6 ----- ----- ----- Gross profit................................................ 42.6 46.8 51.4 ----- ----- ----- Operating expenses: General and administrative................................ 78.1 34.6 39.2 Selling and marketing..................................... 6.6 6.7 7.3 Amortization of intangible assets......................... -- -- 5.7 Acquisition and merger costs.............................. 6.5 0.4 -- Foreign currency transaction loss, net.................... -- -- 0.1 Research and development.................................. 1.6 -- -- ----- ----- ----- Total............................................. 92.8 41.7 52.3 ----- ----- ----- Income (loss) from operations............................... (50.2) 5.1 (0.9) Interest income (expense), net.............................. (0.3) 3.3 3.1 ----- ----- ----- Income (loss) before income taxes........................... (50.5) 8.4 2.2 Income tax provision (benefit).............................. (2.0) 3.5 4.7 ----- ----- ----- Net income (loss)........................................... (48.5)% 4.9% (2.5)% ===== ===== ===== </TABLE> 2000 COMPARED TO 1999 REVENUE. In 2000, revenue increased $124.4 million, or 150.4%, to $207.1 million from $82.7 million in 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 in 2000, and one client contributed 14.7% in 1999. 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, including non-cash stock-based compensation, 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 $56.6 million, or 128.7%, to $100.6 million in 2000, from $44.0 million in 1999. This increase was 19

22 due primarily to an increase in the number of personnel needed to service our client engagements. Service project personnel increased from 568 at December 31, 1999 to 969 at December 31, 2000. As a percentage of revenue, cost of revenue decreased to 48.6% for the year ended 2000, as compared to 53.2% for the year ended 1999. Non-cash stock-based compensation was $63,000 and $434,000 in 2000 and 1999, respectively. These costs are related to various stock rights and stock options issued for less than fair market value under the historical ad hoc Interactive and IBIS Consulting benefit plans. GROSS PROFIT. In 2000, gross profit increased $67.8 million, or 175.1%, to $106.5 million from $38.7 million in 1999. This increase reflects the increase in revenue during the year ended December 31, 2000. As a percentage of revenue, gross profit increased from 46.8% to 51.4% for the year ended December 31, 2000, as compared to the year ended December 31, 1999. This percentage increase primarily reflects increased overall utilization of consulting and delivery personnel. GENERAL AND ADMINISTRATIVE. General and administrative costs consist of salaries, non-cash stock-based compensation and associated employee benefits for executive and selected senior management, finance, recruiting and administrative personnel, facilities costs including depreciation and amortization, computer and office equipment operating leases, training, travel, bad debt and all other branch and corporate costs. These costs increased $52.4 million, or 183.1%, to $81.1 million for the year ended December 31, 2000 from $28.7 million for the year ended December 31, 1999. This increase was due primarily to increased non-cash stock-based compensation and facilities and related expenses to support our growth. As a percentage of revenue, general and administrative expenses increased from 34.6% to 39.2% for the year ended December 31, 2000, as compared to the year ended December 31, 1999. For the year ended December 31, 2000, we wrote off $3.4 million in uncollectible accounts (of which approximately $1.0 million relates to provisions made for doubtful accounts) as compared to $283,000 for the year ended December 31, 1999. This $3.1 million increase was attributable to higher bad debt reserve requirements resulting from the growth of the company's revenue and insolvency issues with respect to two customers during the year ended December 31, 2000. We believe the current allowance for doubtful accounts balance of $1.7 million is sufficient for other doubtful accounts. For the year ended December 31, 2000, we incurred non-cash stock based compensation charges of $6.4 million, or 3.1% as a percentage of revenue, related to the acquisition of Clarity in April 2000. In connection with this 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. There were no such charges in 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 $9.5 million, or 171.4%, to $15.1 million for the year ended December 31, 2000 from $5.6 million for the year ended December 31, 1999. Approximately 68.8% of this increase was attributable to increased marketing and promotional initiatives for the year ended December 31, 2000. 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 from 6.7% to 7.3% for the year ended December 31, 2000, as compared to the year ended December 31, 1999. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets consists 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 year ended December 31, 2000 was $11.9 million. The Company did not have any amortization costs related to intangible assets in 1999. Intangible assets related to the Clarity acquisition will be amortized over three years. ACQUISITION AND MERGER COSTS. We incurred acquisition and merger related charges of approximately $300,000 for the year ended December 31, 1999 with respect to the ad hoc Interactive transaction. All transaction costs were related to investment banking fees, professional fees and other direct expenses. Direct acquisition costs related to the Clarity transaction are included in the purchase price and accordingly are being amortized over three years. FOREIGN CURRENCY TRANSACTION LOSS, NET. Foreign currency transaction loss incurred in the years ended December 31, 2000 and December 31, 1999 was $101,000 and $0, respectively. This loss was a result of the change in exchange rates between the transaction date and the settlement date of foreign entity transactions denominated in currencies other than the foreign entity's functional currency. 20

23 INTEREST INCOME, NET. Interest income, net increased $3.6 million to $6.4 million for the year ended December 31, 2000 from $2.8 million for the year ended December 31, 1999. This increase was 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. INCOME TAX PROVISION (BENEFIT). The $2.9 million income tax provision for the year ended December 31, 1999 represents combined federal, state and foreign income taxes at an effective rate of 42.2%. The $9.9 million income tax provision for the year ended December 31, 2000 represents combined federal, state and foreign income taxes at an effective rate of 212.8%, or 42.9% excluding $18.4 million of non-deductible amortization and stock compensation charges. 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 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 increased $18.7 million, or 74.0%, to $44.0 million in 1999 from $25.3 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 53.2% during 1999 as compared to 57.5% during 1998. We incurred non-cash stock-based compensation charges of $434,000 and $352,000 in 1999 and 1998, respectively, 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. GROSS PROFIT. In 1999, gross profit increased $20.0 million, or 106.6%, to $38.7 million from $18.7 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 46.8% during 1999 as compared to 42.6% during 1998. The percentage increase reflects increased overall billing rates and improvements in gross profit per billable consulting and delivery personnel. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased $5.7 million, or 16.6%, to $28.7 million in 1999 from $34.4 million in 1998. This decrease primarily was due to a one-time charge of $17.9 million in 1998 for non-cash stock-based compensation related to the elimination of a repurchase requirement for formula stock options associated with our IBIS Consulting and ad hoc Interactive transactions. As a percentage of revenue, general and administrative expenses decreased to 34.6% in 1999 as compared to 78.1% 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 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 promotional 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 21

24 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. 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 primarily was due 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 affected 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. 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, 1999 1999 1999 1999 2000 2000 2000 2000 -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenue.............................. $13,254 $16,221 $ 23,592 $29,621 $38,167 $50,923 $60,076 $57,901 Cost of revenue...................... 7,909 9,019 12,176 14,891 18,417 23,965 28,192 30,030 ------- ------- -------- ------- ------- ------- ------- ------- Gross profit......................... 5,345 7,202 11,416 14,730 19,750 26,958 31,884 27,871 ------- ------- -------- ------- ------- ------- ------- ------- Operating expenses: General and administrative......... 4,562 5,596 7,833 10,659 13,097 20,438 24,114 23,450 Selling and marketing.............. 650 787 1,696 2,420 3,594 4,201 3,915 3,362 Amortization of intangible assets........................... -- -- -- -- -- 3,486 4,225 4,225 Acquisition and merger costs....... 300 -- -- -- -- -- -- -- Foreign currency transaction loss (gain), net...................... -- -- -- -- -- -- 360 (259) ------- ------- -------- ------- ------- ------- ------- ------- Total........................ 5,512 6,383 9,529 13,079 16,691 28,125 32,614 30,778 ------- ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations........ (167) 819 1,887 1,651 3,059 (1,167) (730) (2,907) Interest income (expense), net....... (65) 476 701 1,658 1,689 1,455 1,393 1,842 ------- ------- -------- ------- ------- ------- ------- ------- Income (loss) before income taxes.... (232) 1,295 2,588 3,309 4,748 288 663 (1,065) Income tax provision (benefit)....... (84) 531 1,066 1,423 2,056 2,346 3,108 2,352 ------- ------- -------- ------- ------- ------- ------- ------- Net income (loss).................... $ (148) $ 764 $ 1,522 $ 1,886 $ 2,692 $(2,058) $(2,445) $(3,417) ======= ======= ======== ======= ======= ======= ======= ======= Basic net (loss) income per common share.............................. $ (0.16) $ 0.02 $ 0.03 $ 0.04 $ 0.05 $ (0.04) $ (0.04) $ (0.06) ======= ======= ======== ======= ======= ======= ======= ======= Diluted net (loss) income per common share.............................. $ (0.16) $ 0.01 $ 0.03 $ 0.03 $ 0.04 $ (0.04) $ (0.04) $ (0.06) ======= ======= ======== ======= ======= ======= ======= ======= </TABLE> 22

25 <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------------------------------------------------- MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, 1999 1999 1999 1999 2000 2000 2000 2000 -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> 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...................... 59.7 55.5 51.6 50.3 48.3 47.1 46.9 51.9 ------- ------- -------- ------- ------- ------- ------- ------- Gross profit......................... 40.3 44.5 48.4 49.7 51.7 52.9 53.1 48.1 ------- ------- -------- ------- ------- ------- ------- ------- Operating expenses: General and administrative......... 34.4 34.5 33.2 36.0 34.3 40.1 40.2 40.5 Selling and marketing.............. 4.9 4.9 7.2 8.2 9.4 8.3 6.5 5.8 Amortization of intangible assets........................... -- -- -- -- -- 6.8 7.0 7.3 Acquisition and merger costs....... 2.3 -- -- -- -- -- -- -- Foreign currency transaction loss (gain), net...................... -- -- -- -- -- -- 0.6 (0.4) Total........................ 41.6 39.4 40.4 44.2 43.7 55.2 54.3 53.2 ------- ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations........ (1.3) 5.1 8.0 5.5 8.0 (2.3) (1.2) (5.1) Interest income (expense), net....... (0.5) 2.9 3.0 5.6 4.4 2.9 2.3 3.2 ------- ------- -------- ------- ------- ------- ------- ------- Income (loss) before income taxes.... (1.8) 8.0 11.0 11.1 12.4 0.6 1.1 (1.9) Income tax provision (benefit)....... (0.7) 3.3 4.5 4.8 5.4 4.6 5.2 4.0 ------- ------- -------- ------- ------- ------- ------- ------- Net income (loss).................... (1.1)% 4.7% 6.5% 6.3% 7.0% (4.0)% (4.1)% (5.9)% ======= ======= ======== ======= ======= ======= ======= ======= </TABLE> We have generally realized lower revenue in the first quarter of the year than in the other quarters. We believe that this has been due primarily to client budget cycles and the short-term nature of our contracts. LIQUIDITY AND CAPITAL RESOURCES We have primarily funded our operations from cash flows generated from operations and the proceeds from our public stock offerings. In addition, we have 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, 2002 and will renew automatically for one additional year at the sole discretion of Bank of America, N.A. The credit facility requires us to maintain a ratio of liquid assets to total bank commitments of no less than 1.5 to 1.0 as of the end of each fiscal quarter. As of December 31, 2000, we had no outstanding borrowings under the credit facility. Additionally, we have a Committed Standby Letter of Credit ("Standby Letter of Credit") with Bank of America, N.A. for $25.0 million. This credit facility expires on August 31, 2002. The letter of credit fee is 1% annually of the outstanding letters of credit written on this facility. As of December 31, 2000, the entire $25.0 million Standby Letter of Credit was fully committed. We also have an additional $3.9 million committed under separate outstanding letters of credit with Bank of America, N.A. which reduces the amounts available for borrowing under the aforementioned $10.0 million line of credit with Bank of America, N.A. At December 31, 2000, we had approximately $105.8 million in cash, cash equivalents and short-term investments compared to approximately $119.5 million at December 31, 1999. Short-term investments consist primarily of instruments that are highly liquid, investment grade securities that have maturities of less than one year. Cash provided by operating activities for the year ended December 31, 2000 was approximately $17.2 million, which resulted primarily from non-cash charges of $34.4 million, an increase in trade accounts payable of $8.0 million and an increase in deferred rent credits of $2.8 million, offset by a net loss of $5.2 million, an increase in accounts receivable of $23.9 million and an increase in unbilled services of $1.5 million, all of which were primarily related to the overall growth of the Company. Cash used in investing activities for the year-ended December 31, 2000 was $98.7 million. This was due primarily to capital expenditures of $25.0 million for leasehold improvements, office equipment, and computer equipment; $54.4 million for purchases (net of maturities) of short-term investments, and $19.3 million used in the Clarity acquisition. 23

26 Net cash provided by financing activities was $13.2 million for the year-ended December 31, 2000 compared to $118.0 million for the year-ended December 31, 1999. This decrease was primarily attributable to $103.3 million of cash received in 1999 from our public equity offerings. Operating lease commitments for 2001 are expected to total approximately $34.5 million, of which approximately $27.4 million relate to office space for which we have non-cancelable commitments. Capital expenditures for 2001, which will be made principally for leasehold improvements to support our growth, are expected to total up to approximately $30.0 million, subject to the timing of the implementation of our planned office expansion. On April 20, 1999, we completed our initial public offering of securities. After deducting expenses, we received $46.9 million in proceeds from this transaction. In connection with the initial public offering, we 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. We received approximately $8.2 million in proceeds from this option, which was exercised on May 21, 1999. On October 14, 1999, we completed another underwritten public offering of our securities. After deducting expenses, we received approximately $49.0 million in proceeds from this transaction. During the year ended December 31, 2000, we issued 2,629,211 shares of common stock (net of treasury shares) pursuant to the exercise of stock options and stock rights and the sale of stock through our Employee Stock Purchase Plan. We received net proceeds of approximately $13.2 million from these issuances. We anticipate that existing cash, cash equivalents and short-term investments, funds generated from operations and borrowings available under our revolving line of credit will be sufficient to meet our currently anticipated cash needs through at least the next 18 months. To the extent we are unable to fund our operations from cash flows and existing sources of liquidity, we may need to obtain financing from external sources in the form of either additional equity or debt issuances. 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. NEW 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 were 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 October 2000, we adopted the Financial Accounting Standards Board SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 No. 133 has not had 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 was July 1, 2000. The provisions of the interpretation apply prospectively, but they will also cover certain events occurring after December 15, 1998 and after January 12, 2000. We believe the adoption of FIN. 44 has not had a material adverse effect on our current or historical consolidated financial statements, but may affect future accounting regarding stock option transactions. 24

27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to interest rate risk related to our borrowings under the credit facility with Bank of America, N.A. There were no borrowings outstanding under the credit facility as of December 31, 2000. We are exposed to interest rate risk primarily through our investments in short-term marketable securities and cash equivalents and debt agreements. Our investment policy calls for investment in short-term, low risk instruments. At December 31, 2000, we had $79.6 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. We manage our exposure to interest rate risk through investing in securities with maturities of one year or less. Our international operations are subject to foreign exchange rate fluctuations. We derived 6.8%, 8.0% and 14.4% of our revenues for 1998, 1999 and 2000, respectively, from services performed in France, Germany, Italy, Spain and the United Kingdom. Since the revenue and expenses of our international operations generally are denominated in local currencies, exchange rate fluctuations between such local currencies and the United States dollar will subject us to currency translation risk with respect to the reported results of our foreign operations as well as to risk sometimes associated with international operations. In addition, we may be subject to currency risk when our service contracts are denominated in a currency other than the currency in which we incur expenses related to such contracts. France, Germany, Italy, Spain and the United Kingdom have traditionally had relatively stable currencies. We do not hedge our foreign currency exposure. Management does not believe that Proxicom'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 2000, and consolidated statements of operations, consolidated statements of cash flows, and consolidated statements of changes in stockholders' equity for the years ended December 31, 1998, 1999 and 2000, and notes to consolidated financial statements, together with a report thereon of PricewaterhouseCoopers LLP, dated February 6, 2001, are filed as part of this report and appear on pages F-2 through F-24. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders. 25

28 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-24 of this report and are incorporated by reference in Part II, Item 8: Report of Independent Accountants. Consolidated Balance Sheets as of December 31, 1999 and 2000. Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000. 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 <TABLE> <C> <S> 3.1+ Amended and Restated Certificate of Incorporation of Proxicom, Inc. 3.2+ Amended and Restated Bylaws of Proxicom, Inc. 4.1+ Form of Common Stock Certificate of Proxicom, Inc. 10.1* Proxicom, Inc. Amended and Restated 1996 Stock Option Plan, as amended 10.2* Proxicom, Inc. 1997 Stock Option Plan for Non-employee Directors, as amended 10.3+ Proxicom, Inc. Employee Stock Purchase Plan 10.4++ Fourth Amended and Restated Registration Rights Agreement, dated September 30, 1999, among Proxicom, Inc., 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 Wagner, Scott McDonald, Vincent Hoenigman, Jack Kemp, Theodore J. Leonsis, John McKinley, The Washington Post Company, the ad hoc stockholders and General Electric Company 10.5+ Lease Agreement, dated July 14, 1997 between 11600 Sunrise Limited Partnership and Proxicom, Inc. 10.6+ Secured Credit Agreement, dated as of October 30, 1998, between Proxicom, Inc. and NationsBank, N.A. (which has been succeeded by Bank of America) 10.7++ Modification of Secured Credit Agreement, dated as of June 1, 1999, between Proxicom, Inc. and NationsBank, N.A. (which has been succeeded by Bank of America) 10.8 Second Modification of Secured Credit Agreement, effective as of November 29, 1999, between Proxicom, Inc. and Bank of America (formerly NationsBank, N.A.) 10.9 Third Modification and Extension of Secured Credit Agreement, effective as of August 31, 2000, between Proxicom, Inc. and Bank of America (formerly NationsBank, N.A.) 10.10** Uncommitted Standby Letter of Credit, dated March 27, 2000, with Bank of America, N.A. 10.11+ Severance Agreement between Proxicom, Inc. and Christopher Capuano 10.12+ Severance Agreement between Proxicom, Inc. and Kenneth J. Tarpey 10.13** Executive Employment Agreement between Proxicom, Inc. and Heiner Rutt 10.14 Executive Employment Agreement between Proxicom, Inc. and E. Michael Hansen 10.15 Executive Severance Agreement between Proxicom, Inc. and Michael Beck </TABLE> 26

29 <TABLE> <C> <S> 10.16 Executive Severance Agreement between Proxicom, Inc. and Jay Thomas 21.1 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP </TABLE> --------------- + Incorporated by reference to Proxicom, Inc.'s Registration Statement on Form S-1, File No. 333-72297, dated April 19, 1999. * Incorporated by reference to Proxicom, Inc.'s Form 10-Q for the Quarterly Period Ended June 30, 2000, File No. 000-25741, filed August 14, 2000. ++ Incorporated by reference to Proxicom, Inc.'s Registration Statement on Form S-1, File No. 333-87671, dated October 1, 1999. ** Incorporated by reference to Proxicom, Inc.'s Form 10-Q for the Quarterly Period Ended March 31, 2000, File No. 000-25741, filed May 15, 2000. (b) Reports on Form 8-K. None. 27

30 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 February 23, 2001. PROXICOM, INC. By: /s/ RAUL J. FERNANDEZ ------------------------------------ Raul J. Fernandez Chairman 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 ---- ----- ---- <C> <S> <C> /s/ RAUL J. FERNANDEZ Chairman and Chief Executive February 23, 2001 ------------------------------------------------ Officer Raul J. Fernandez (Principal Executive Officer) /s/ KENNETH J. TARPEY Executive Vice President, Chief February 23, 2001 ------------------------------------------------ Financial Officer and Treasurer Kenneth J. Tarpey (Principal Financial and Accounting Officer) /s/ J. L. DAVIES Director February 23, 2001 ------------------------------------------------ J. L. Davies /s/ DAVID C. HODGSON Director February 23, 2001 ------------------------------------------------ David C. Hodgson /s/ JACK KEMP Director February 23, 2001 ------------------------------------------------ Jack Kemp /s/ THEODORE J. LEONSIS Director February 23, 2001 ------------------------------------------------ Theodore J. Leonsis /s/ JOHN A. MCKINLEY, JR. Director February 23, 2001 ------------------------------------------------ John A. McKinley, Jr. /s/ MARIO M. MORINO Director February 23, 2001 ------------------------------------------------ Mario M. Morino </TABLE> 28

31 PROXICOM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <S> <C> Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 2000...................................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000.......................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000...... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000.......................... F-6 Notes to Consolidated Financial Statements.................. F-8 </TABLE> F-1

32 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, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PRICEWATERHOUSECOOPERS LLP McLean, Virginia February 6, 2001 F-2

33 PROXICOM, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31, ------------------- 1999 2000 -------- -------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents................................. $113,819 $ 45,635 Investments............................................... 5,819 60,143 Accounts receivable, net of allowance of $655 and $1,662, respectively........................................... 24,043 46,310 Unbilled services......................................... 1,865 3,384 Prepaid income taxes...................................... 173 -- Prepaid expenses.......................................... 1,886 2,851 Deferred tax and other current............................ 1,295 4,331 -------- -------- Total current assets.............................. 148,900 162,654 Property and equipment, net................................. 5,063 27,076 Goodwill and other intangibles.............................. -- 38,025 Deferred tax and other non-current.......................... 6,151 7,225 -------- -------- Total assets...................................... $160,114 $234,980 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable.................................... $ 1,345 $ 9,378 Accrued compensation...................................... 8,298 15,602 Employee withholdings, stock purchase plan................ 2,140 520 Deferred revenue.......................................... 3,533 3,651 Other accrued liabilities................................. 1,539 5,319 -------- -------- Total current liabilities......................... 16,855 34,470 Deferred tax liability...................................... -- 1,629 Deferred rent credits....................................... -- 2,550 -------- -------- Total liabilities................................. 16,855 38,649 Commitments and contingencies (Note 14) Stockholders' equity: Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding........... -- -- Common stock, $0.01 par value, 100,000,000 shares authorized; 52,642,482 shares issued and 52,536,224 shares outstanding at December 31, 1999; 56,718,861 shares issued and outstanding at December 31, 2000..... 526 567 Additional paid-in capital................................ 162,715 232,669 Retained deficit.......................................... (19,884) (25,112) Accumulated other comprehensive income.................... 124 232 Deferred compensation..................................... -- (12,025) Treasury stock............................................ (222) -- -------- -------- Total stockholders' equity........................ 143,259 196,331 -------- -------- Total liabilities and stockholders' equity........ $160,114 $234,980 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3

34 PROXICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 -------- ------- -------- <S> <C> <C> <C> Revenue..................................................... $ 44,006 $82,688 $207,067 Cost of revenue (inclusive of non-cash compensation expense of $352, $434 and $63, respectively)...................... 25,280 43,995 100,604 -------- ------- -------- Gross profit................................................ 18,726 38,693 106,463 -------- ------- -------- Operating expenses: General and administrative (inclusive of non-cash compensation expense of $17,044, $0 and $6,450, respectively).......................................... 34,353 28,650 81,099 Selling and marketing..................................... 2,919 5,553 15,072 Amortization of intangible assets......................... -- -- 11,936 Acquisition and merger costs.............................. 2,886 300 -- Foreign currency transaction loss, net.................... -- -- 101 Research and development.................................. 692 -- -- -------- ------- -------- Total............................................. 40,850 34,503 108,208 -------- ------- -------- Income (loss) from operations............................... (22,124) 4,190 (1,745) Interest income (expense), net.............................. (121) 2,770 6,379 -------- ------- -------- Income (loss) before income taxes........................... (22,245) 6,960 4,634 Income tax provision (benefit).............................. (900) 2,936 9,862 -------- ------- -------- Net income (loss)........................................... (21,345) 4,024 (5,228) Non-cash dividend on beneficial conversion of convertible preferred stock........................................... -- (4,873) -- -------- ------- -------- Net loss available to common stockholders................... $(21,345) $ (849) $ (5,228) ======== ======= ======== Basic net loss per common share............................. $ (0.73) $ (0.02) $ (0.09) ======== ======= ======== Diluted net loss per common share........................... $ (0.73) $ (0.02) $ (0.09) ======== ======= ======== Weighted average common shares outstanding.................. 29,152 44,532 55,140 ======== ======= ======== Weighted average common shares and potential common shares outstanding............................................... 29,152 44,532 55,140 ======== ======= ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4

35 PROXICOM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> ACCUMULATED COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER ------------------- ------------------- PAID-IN DEFERRED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME/(LOSS) ---------- ------ ---------- ------ ---------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1997....... 27,552,862 $275 2,408,983 $ 24 $ 8,709 $ -- $ 3 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 -- 3 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............................ -- -- -- -- -- -- 34 Translation adjustment............. -- -- -- -- -- -- 87 Net income......................... -- -- -- -- -- -- -- ---------- ---- ---------- ---- -------- -------- ---- Balance at December 31, 1999....... 52,642,482 526 -- -- 162,715 -- 124 Exercise of warrants............... 156,122 -- -- -- -- -- -- Exercise of stock options and issuance of restricted shares..... 2,185,471 23 -- -- 8,445 -- -- Shares issued in conjunction with acquisition of subsidiary......... 1,291,046 13 -- -- 45,716 -- -- Unearned stock-based compensation...................... -- -- -- -- -- (18,475) -- Amortization of stock-based compensation and warrant cost..... -- -- -- -- 1,605 6,450 -- Issuance of common stock under the employee stock purchase plan...... 443,740 5 -- -- 4,511 -- -- Income tax benefit from deductible stock based award................. -- -- -- -- 9,677 -- -- Change in unrealized investment income............................ -- -- -- -- -- -- (37) Translation adjustment............. -- -- -- -- -- -- 145 Net loss........................... -- -- -- -- -- -- -- ---------- ---- ---------- ---- -------- -------- ---- Balance at December 31, 2000....... 56,718,861 $567 -- $ -- $232,669 $(12,025) $232 ========== ==== ========== ==== ======== ======== ==== <CAPTION> TREASURY STOCK RETAINED TOTAL ------------------ EARNINGS STOCKHOLDERS' SHARES AMOUNT (DEFICIT) EQUITY -------- ------- ---------- ------------- <S> <C> <C> <C> <C> Balance at December 31, 1997....... 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....... 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 Translation adjustment............. -- -- -- 87 Net income......................... -- -- 4,024 4,024 -------- ------- -------- -------- Balance at December 31, 1999....... 106,258 (222) (19,884) 143,259 Exercise of warrants............... -- -- -- -- Exercise of stock options and issuance of restricted shares..... (106,258) 222 -- 8,690 Shares issued in conjunction with acquisition of subsidiary......... -- -- -- 45,729 Unearned stock-based compensation...................... -- -- -- (18,475) Amortization of stock-based compensation and warrant cost..... -- -- -- 8,055 Issuance of common stock under the employee stock purchase plan...... -- -- -- 4,516 Income tax benefit from deductible stock based award................. -- -- -- 9,677 Change in unrealized investment income............................ -- -- -- (37) Translation adjustment............. -- -- -- 145 Net loss........................... -- -- (5,228) (5,228) -------- ------- -------- -------- Balance at December 31, 2000....... -- $ -- $(25,112) $196,331 ======== ======= ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5

36 PROXICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1998 1999 2000 -------- -------- -------- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss)......................................... $(21,345) $ 4,024 $ (5,228) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization.......................... 1,516 1,296 15,453 Income tax benefit from tax deductible stock based award................................................ -- 7,943 9,677 Decrease in deferred income taxes...................... (667) (5,195) (2,188) Provision for stock compensation....................... 17,555 434 6,513 Write-off of accounts receivable....................... -- -- 2,393 Non-cash warrant expense............................... -- 555 1,542 Increase (decrease) in provision for doubtful accounts............................................. 9 (14) 1,007 Common stock issued for services....................... 166 -- -- Changes in assets and liabilities: Increase in accounts receivable...................... (2,047) (14,136) (23,947) (Increase) decrease in unbilled services............. (2,890) 2,394 (1,519) Decrease (increase) in prepaid income taxes.......... 77 (43) 173 Increase in prepaid expenses......................... (97) (1,484) (777) Increase in other assets............................. (126) (1,615) (2,733) (Decrease) increase in trade accounts payable........ (587) 683 8,033 Increase in accrued compensation..................... 2,375 4,519 7,124 Increase (decrease) in employee withholdings......... -- 2,140 (1,620) Increase (decrease) in note payable.................. 1,400 (1,400) -- Increase in deferred revenue......................... 671 1,644 118 Increase in deferred rent credit..................... -- -- 2,757 Increase in other accrued liabilities................ 168 324 399 -------- -------- -------- Net cash (used in) provided by operating activities...................................... (3,822) 2,069 17,177 -------- -------- -------- Cash flows from investing activities: Investment in subsidiary, net of cash..................... -- -- (19,323) Purchases of property and equipment....................... (1,782) (3,415) (25,028) Purchases of investments.................................. (390) (5,782) (138,125) Sales of investments...................................... 1,213 275 83,764 -------- -------- -------- Net cash used in investing activities............. (959) (8,922) (98,712) -------- -------- -------- Cash flows from financing activities: Issuance of preferred stock, Series D..................... -- 7,279 -- Proceeds from public offerings............................ -- 103,268 -- Exercise of stock warrants................................ -- 8,000 -- Issuance of shares through ESPP........................... -- -- 4,516 Exercise of stock options................................. 631 5,137 8,690 Borrowings under line of credit........................... 11,976 4,550 4,900 Payments under line of credit............................. (6,709) (10,104) (4,900) Subchapter S Corporation distributions.................... (874) (131) -- -------- -------- -------- Net cash provided by financing activities......... 5,024 117,999 13,206 -------- -------- -------- Effect of exchange rate changes............................. -- 87 145 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 243 111,233 (68,184) Cash and cash equivalents at beginning of period............ 2,343 2,586 113,819 -------- -------- -------- Cash and cash equivalents at end of period.................. $ 2,586 $113,819 $ 45,635 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-6

37 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 2000 ------- ------- ------- <S> <C> <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 ======= ======= ======= Supplemental disclosure of business acquisition: Cash paid for business acquisition........................ $ -- $ -- $19,812 Less: cash acquired....................................... -- -- (489) ------- ------- ------- Cash paid for business acquisition, net................... -- -- 19,323 Issuance of common stock for business acquisition......... -- -- 27,254 ------- ------- ------- Total purchase price...................................... -- -- 46,577 Fair value of net liabilities assumed, net of cash........ -- -- (944) ------- ------- ------- Excess of fair value over net assets acquired............. $ -- $ -- $47,521 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-7

38 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Proxicom, Inc., a Delaware corporation ("Proxicom" or the "Company"), is a leading e-business consulting and development company, delivering innovative multi-channel solutions to Global 1000 companies and other large businesses. Since 1994, Proxicom has focused exclusively on the Internet and has successfully completed over 1,000 client engagements. Proxicom's Internet solutions include business-to-consumer electronic commerce Internet sites, business-to-business electronic commerce extranets, company-specific intranets and multi-channel solutions such as wireless e-commerce applications. The Company currently operates in one operational segment. 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. ACQUISITIONS AND MERGERS Purchase 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 of Proxicom common stock 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 shares were valued at $18.5 million as of the closing date, 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 $6.5 million during the year ended December 31, 2000. Remaining unamortized deferred compensation at December 31, 2000 is $12.0 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 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 $11.9 million during the year-ended December 31, 2000. Remaining unamortized intangible assets as of December 31, 2000 is $38.0 million. F-8

39 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITIONS AND MERGERS -- (CONTINUED) 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> TWELVE MONTHS ENDED DECEMBER 31, ------------------------- 1999 2000 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> Revenues.................................................... $ 89,032 $209,621 Net Loss.................................................... $(26,444) $(11,184) Net Loss per basis share.................................... $ (0.58) $ (0.20) Net Loss per diluted share.................................. $ (0.58) $ (0.20) </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. Poolings Each of the following transactions were accounted for as a pooling of interests. On March 26, 1999, Proxicom completed its acquisition of 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 its acquisition of 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 its acquisition of 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 F-9

40 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITIONS AND MERGERS -- (CONTINUED) 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. 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. For the year ended December 31, 1998, ad hoc had revenue and net loss of $1.6 million and $702,000, respectively. The IBIS Consulting, ad hoc and Square Earth acquisitions 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 consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany transactions and balances. Certain prior year information has been reclassified to conform with the current year presentation. Cash and Cash Equivalents Highly liquid investments having original maturities of 90 days or less at the date of acquisition are classified as cash equivalents. The carrying values of cash equivalents approximate fair values. Revenue Recognition Revenue from Internet professional services 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. F-10

41 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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. 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 the 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. Derivative Financial Instruments The Company does not engage in derivatives trading, market-making or other speculative activities. To mitigate the effect of changes in foreign currency exchange rates, the Company, from time to time, may enter into currency exchange contracts. The fair value of the currency exchange contract is recorded on the Company's balance sheet as an asset with fair value adjustment gains and losses recorded on the Company's statement of operations. The Company has currency exchange exposure for the U.S. dollar compared to the British Pound, French Franc, Euro Dollar and the German Deutchmark. 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). F-11

42 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Research and Development Expense for Software Products Research and development costs are expensed as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development cost 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 cost incurred during this period have been insignificant for capitalization. The Company is not currently developing stand-alone software products. 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 potential 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 1998, 1999 and 2000 and receivables as of December 31, 1999 and 2000 were concentrated with five customers as follows (amounts represent percentage of total revenues and accounts receivable, respectively): <TABLE> <CAPTION> REVENUES ACCOUNTS ------------------------ RECEIVABLE YEAR ENDED ------------- DECEMBER 31, DECEMBER 31, ------------------------ ------------- 1998 1999 2000 1999 2000 ---- ---- ---- ----- ----- <S> <C> <C> <C> <C> <C> Customer A..................................... 14.2% * * * * Customer B..................................... 13.2% * * 13.1% * Customer C..................................... * 14.7% * * * Customer D..................................... * * * 20.4% 11.8% Customer E..................................... * * * * 15.9% </TABLE> -------------------- * Represents less than 10% of total. The Company performs initial credit evaluations of its new customers and generally does not require collateral from its customers. The Company maintains an allowance for potential losses when identified. 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 F-12

43 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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. Pro Forma Net Income (Loss) (Unaudited) As discussed in Note 2, the Company acquired 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, ----------------- 1998 1999 -------- ------ (IN THOUSANDS) <S> <C> <C> Income (loss) before income taxes........................... $(22,245) $6,960 Pro forma income tax provision (benefit).................... (900) 3,080 -------- ------ Pro forma net income (loss)................................. $(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, 1999 Commercial paper.................................... $ 5,782 $ 37 $ -- $ 5,819 DECEMBER 31, 2000 Commercial paper.................................... $60,143 $ -- $ -- $60,143 </TABLE> 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, 1999 Due in one year or less................................... $ 5,782 $ 5,819 Due after one year through three years.................... -- -- ------- ------- $ 5,782 $ 5,819 ======= ======= DECEMBER 31, 2000 Due in one year or less................................... $60,143 $60,143 Due after one year through three years.................... -- -- ------- ------- $60,143 $60,143 ======= ======= </TABLE> The Company realized gains from the sale of investments of $0 for both 1999 and 2000 and realized losses from the sales of investments of $3,000 and $0 in 1999 and 2000, respectively. F-13

44 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCOUNTS RECEIVABLE <TABLE> <CAPTION> DECEMBER 31, ----------------- 1999 2000 ------- ------- (IN THOUSANDS) <S> <C> <C> Accounts receivable......................................... $24,698 $47,972 Allowance for doubtful accounts............................. (655) (1,662) ------- ------- Net accounts receivable..................................... $24,043 $46,310 ======= ======= </TABLE> No accounts receivable at December 31, 1999 or 2000 were the result of long-term contracts. The Company wrote-off uncollectible accounts of $959,000, $283,000 and $3.4 million for the years ended December 31, 1998, 1999 and 2000, respectively. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: <TABLE> <CAPTION> DECEMBER 31, ----------------- 1999 2000 ------- ------- (IN THOUSANDS) <S> <C> <C> Computer equipment.......................................... $ 4,356 $ 7,942 Office and other equipment.................................. 1,291 2,276 Purchased software.......................................... 2,072 6,088 Leasehold improvements...................................... 1,590 18,533 ------- ------- 9,309 34,839 Less: Accumulated depreciation and amortization............. (4,246) (7,763) ------- ------- Total property and equipment, net........................... $ 5,063 $27,076 ======= ======= </TABLE> 7. LINES OF CREDIT 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, 2002 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 a ratio of liquid assets to total bank commitments of no less than 1.5 to 1.0 as of the end of each fiscal quarter. As of December 31, 2000, the Company had no outstanding borrowings under the credit facility. Additionally, the Company has a Committed Standby Letter of Credit ("Standby Letter of Credit") with Bank of America, N.A. for $25.0 million. This credit facility expires on August 31, 2002. The letter of credit fee is 1% annually of the outstanding letters of credit written on this facility. As of December 31, 2000, the entire $25.0 million Standby Letter of Credit was fully committed. The Company also has an additional $3.9 million committed under separate outstanding letters of credit with Bank of America, N.A. which reduces the amounts available for borrowing under the aforementioned $10.0 million line of credit with Bank of America, N.A. Interest expense was $227,000, $102,000 and $39,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Commitment fees of 1% paid on the outstanding letters of credit for the year ended 2000 were $196,000. Commitment fees paid on outstanding letters of credit for 1998 and 1999 were not material. F-14

45 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 accrued interest at 7.0% per annum and matured upon completion of the Company's initial public offering. This unsecured note was 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. 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 to new employees generally vest over a four year period with 25 percent vesting at the end of the first year and one sixteenth of the shares subject to the option vesting quarterly thereafter. Refresh options granted to continuing employees generally vest on a quarterly basis over a four year period. IBIS Consulting In connection with the Company's acquisition of 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 Plan for employees and non-employees. Square Earth, Inc. In connection with the Company's acquisition of 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 Plan for employees and non-employees. IBIS Consulting Stock-Based and Other Compensation In early 1997, prior to Proxicom's merger with 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 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 August 1998 acquisition of IBIS Consulting by Proxicom, the repurchase requirement on the stock and stock options was eliminated, allowing the employee to freely trade the stock. As a consequence of the above change of control provision triggered by the acquisition and the conversion of options from the IBIS 1997 stock option plan to the IBIS 1998 stock option plan in 1998, 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. F-15

46 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTION PLANS -- (CONTINUED) In connection with other stock option grants and amortization of deferred stock-based compensation, the Company recognized additional stock-based compensation totaling $219,000, $219,000 and $0 for the years ended December 31, 1998, 1999 and 2000, respectively. ad hoc Interactive, Inc. During 1997 and 1998, ad hoc granted employees the right to receive 28,870 shares and 124,452 shares of ad hoc common stock, respectively, at no cost on the first or second anniversary of their employment start date, provided that they remained 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 $133,000, $215,000 and $63,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Unearned stock compensation of $278,000, $63,000 and $0 is recorded as of December 31, 1998, 1999 and 2000, respectively. 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 1,200,000 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, 1999 and 2000 were 350,000, 263,000 and 350,000, 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 $17.3 million, $434,000 and $6.5 million was recognized for the options and rights to receive stock granted in 1998, 1999 and 2000, 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 1998, 1999 and 2000: no annual dividends, risk-free interest rate of 5.1%, 6.1% and 6.4%, respectively, and expected life of one to five years. The assumed volatility was 0% and 90.0% for the pre-IPO grants and post-IPO grants, respectively, in 1998 and 1999. The assumed volatility was 107.0% in 2000. The weighted-average fair values of the stock options granted in 1998, 1999 and 2000 were $0.61, $12.91 and $40.10, respectively. The weighted average fair values of the rights to receive stock granted in 1998, 1999 and 2000 were $3.20, $5.43 and $0, respectively. Under the above model, the total value of stock options and rights to receive stock granted in 1998, 1999 and 2000 was $2.8 million, $70.5 million and $267.5 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 ($7.2 million), $1.0 million and ($66.7 million) in 1998, 1999 and 2000, respectively, and pro forma basic and diluted loss per common share would have been $0.25, $0.09 and $1.21 in 1998, 1999 and 2000, respectively. F-16

47 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTION PLANS -- (CONTINUED) 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 $166,000 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- NUMBER OF AVERAGE NUMBER OF AVERAGE SHARES OPTION PRICE SHARES OPTION PRICE ---------- ------------ ---------- ------------ <S> <C> <C> <C> <C> 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 Grants......................................... 9,713,818 40.10 -- -- Exercised...................................... (1,809,967) 4.69 (468,816) 0.42 Cancellations.................................. (2,176,567) 24.21 -- -- ---------- ---------- December 31, 2000.............................. 17,834,094 24.29 40,706 1.25 ========== ========== Options exercisable at: December 31, 2000.............................. 3,021,052 20.15 40,706 1.25 December 31, 1999.............................. 1,183,622 2.06 509,522 0.48 December 31, 1998.............................. 730,060 1.87 608,366 0.42 </TABLE> The weighted-average exercise price for Proxicom options outstanding at December 31, 1998, 1999 and 2000 was $3.29, $10.35 and $24.29, respectively, and exercise prices for options exercised in 2000 ranged from $0.11 to $41.75. The weighted-average exercise price for IBIS Consulting options at December 31, 1998, 1999 and 2000 was $0.65, $0.48 and $1.25, respectively, and exercise prices ranged from $0.11 to $2.36 at December 31, 2000. These options will expire if not exercised at specific dates ranging from January 1998 to December 2008. The weighted-average remaining contractual life of the options outstanding was approximately 8.6 years. F-17

48 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTION PLANS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2000: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- RANGE OF NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED- EXERCISE OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE PRICES AT 12/31/00 REMAINING LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE ------------ ----------- -------------- -------------- ----------- -------------- <S> <C> <C> <C> <C> <C> $ 0.11- 0.11 20,000 7.7 $ 0.11 20,000 $ 0.11 0.17- 0.17 42,976 8.5 0.17 13,775 0.17 1.65- 2.39 973,086 6.6 2.16 378,946 1.93 3.50- 5.03 3,706,852 7.8 4.88 753,404 4.84 5.50- 8.00 1,279,646 8.3 5.94 122,860 5.74 9.13-13.56 722,698 8.7 10.69 99,682 10.17 14.94-22.22 1,325,730 8.9 18.65 191,775 18.31 22.63-33.94 1,995,795 9.0 27.52 442,000 26.17 34.00-50.50 7,534,517 9.1 43.23 1,039,129 41.86 53.25-62.16 273,500 9.2 55.63 187 56.81 ------------ ---------- --- ------ --------- ------ $ 0.11-62.16 17,874,800 8.6 $25.52 3,061,758 $21.13 ========== ========= </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, 1997........................................... 85,618 -- Grants...................................................... 124,452 -- Exercised................................................... (143,358) -- Cancellations............................................... -- -- -------- -------- December 31, 1998........................................... 66,712 -- Grants...................................................... 28,878 -- Exercised................................................... (36,840) -- Cancellations............................................... -- -- -------- -------- December 31, 1999........................................... 58,750 -- -------- -------- Grants...................................................... -- -- Exercised................................................... (12,946) -- Cancellations............................................... -- -- -------- -------- December 31, 2000........................................... 45,804 -- ======== ======== </TABLE> 10. CAPITAL STOCK AND WARRANTS 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. 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 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. F-18

49 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. CAPITAL STOCK AND WARRANTS -- (CONTINUED) On April 20, 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 Company's 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. 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. The Company's treasury stock was re-issued to employees in January 2000 through the Company's 1996 Stock Option Plan. F-19

50 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INCOME TAXES The provision for income taxes is as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 2000 ----- ------ ------ (IN THOUSANDS) <S> <C> <C> <C> Current taxes: Federal................................................... $(155) $2,259 $8,565 State..................................................... (52) 562 1,652 Foreign................................................... -- 185 451 ----- ------ ------ Total current income tax provision (benefit)...... (207) 3,006 10,668 ----- ------ ------ Deferred taxes: Federal................................................... (589) (59) (202) State..................................................... (104) (11) (36) Foreign................................................... -- -- (568) ----- ------ ------ Total deferred income tax benefit................. (693) (70) (806) ----- ------ ------ Total provision (benefit) for income taxes........ $(900) $2,936 $9,862 ===== ====== ====== </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, ------------------------- 1998 1999 2000 ------- ------ ------ (IN THOUSANDS) <S> <C> <C> <C> Income tax provision (benefit) at federal statutory tax rate of 34%.................................................... $(7,324) $2,366 $1,622 State income taxes, net..................................... (34) 278 1,074 Subchapter S Corporation income............................. (455) (115) -- Stock option revaluation.................................... 4,905 -- -- Acquisition costs........................................... 646 68 -- Meals and entertainment & other permanent differences....... 53 6 161 Change in federal tax rate.................................. -- -- 16 Amortization of non-deductible goodwill, subsidiary......... -- -- 3,515 Amortization of contingent stock compensation............... -- -- 2,256 UK expatriate payments...................................... -- -- 225 Imputed interest on intercompany loans...................... -- -- 55 Adjustment to tax accounting method......................... -- 469 -- Foreign rate differential................................... 8 62 1,377 Increase (decrease) in valuation allowance.................. 944 (388) (520) Other....................................................... 357 190 81 ------- ------ ------ Income tax provision (benefit).............................. $ (900) $2,936 $9,862 ======= ====== ====== </TABLE> F-20

51 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INCOME TAXES -- (CONTINUED) Deferred tax assets (liabilities) were comprised of the following: <TABLE> <CAPTION> DECEMBER 31, -------------------------- 1998 1999 2000 ------- ------ ------- (IN THOUSANDS) <S> <C> <C> <C> Assets: NOL carryforward.......................................... $ 1,796 $5,048 $15,218 Minimum and foreign tax credits........................... -- 180 4 Vacation accrual.......................................... 81 68 614 Accrued expatriate fringe benefit......................... -- 492 341 R&E and investment credits................................ 20 70 70 Contribution carryforward................................. 4 -- 10 Accrued bonuses........................................... -- -- 93 Warranty reserve.......................................... -- -- 19 Bad debt expense.......................................... 137 256 553 Investment in JV reserve.................................. -- -- 137 Depreciation.............................................. 176 109 36 Other accrued expenses.................................... 241 -- -- Revaluation of stock options.............................. 1,083 869 -- State tax accrual......................................... 13 -- -- ------- ------ ------- Total gross deferred tax assets................... 3,551 7,092 17,095 Valuation allowance......................................... (1,083) (694) (8,774) ------- ------ ------- Net deferred tax assets........................... 2,468 6,398 8,321 ------- ------ ------- Liabilities: Depreciation.............................................. -- -- -- Unbilled service revenue.................................. (1,654) (280) (876) Subchapter S Corporation cash to accrual adjustment....... (479) (588) (294) Other..................................................... -- -- -- ------- ------ ------- Total gross deferred tax liabilities.............. (2,133) (868) (1,170) ------- ------ ------- Net deferred tax asset............................ $ 335 $5,530 $ 7,151 ======= ====== ======= </TABLE> The Company received a tax refund of $207,000 for 1998 and there was $0 tax liability for both 1999 and 2000. In addition, the Company has a $435,000 U.K. tax liability and a $15,000 German tax liability for the 2000 tax year. The Company has U.S. net operating loss carryforwards of approximately $38.5 million and French net operating loss carryforwards of approximately $499,000 for tax purposes. In 2000, valuation allowances of approximately $8.6 million and $174,000 have been provided for both the U.S. and France, respectively, to offset the related deferred tax assets based on the uncertainty of realizing the benefits of the net operating loss carryforwards. The U.S. net operating loss and research and development tax credit carryforwards expire between the years 2018 and 2020. The French net operating loss carryforwards have no expiration date. The Company also has $3,900 in minimum tax credits which have no expiration date. In 1999, the Company recorded $177,000 in foreign tax credits along with a related valuation allowance. It has since been determined that the credits will expire prior to their use. The Company had decided to F-21

52 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INCOME TAXES -- (CONTINUED) convert the credits to current deductions. Subsequently, the deferred tax asset and valuation allowance has been eliminated in 2000. The net operating loss 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, 1998, 1999 and 2000 were approximately $864,000, $1.3 million and $1.4 million, respectively, and increase at an annual rate of 3.0%. The lessor is a company indirectly 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 2001. The Company has provided Internet professional services to one of its stockholders. Revenue generated from this stockholder totaled $775,000, $4.5 million and $5.5 million for the years ended December 31, 1998, 1999 and 2000, respectively. The Company recorded receivable balances of $316,000, $3.2 million and $467,000 as of December 31, 1998, 1999 and 2000, respectively. 13. EMPLOYEE BENEFIT PLANS Profit Sharing and Bonus Plans In January 2000, the Company merged the three legacy Proxicom, IBIS and ad Hoc 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 are 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 and up to 6.0% of the respective participant's annual deferral. Company contributions vest ratably over 4 years. The Company made profit sharing contributions of $71,000, $474,000 and $921,000 in 1998, 1999 and 2000, respectively. 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 are 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. For the year ended December 31, 2000, employee participants have purchased 443,740 shares of the Company's common stock. F-22

53 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases office space in Virginia, California, New York, Michigan, Massachusetts, Texas, Illinois, the United Kingdom, France and Germany under non-cancelable operating leases expiring in various years through 2013. Total rent expense for all operating leases amounted to approximately $2.7 million, $4.7 million and $13.9 million in 1998, 1999 and 2000, respectively. Future minimum lease payments under non-cancelable operating leases as of December 31, 2000 are as follows (in thousands): <TABLE> <CAPTION> AMOUNT -------- <S> <C> 2001........................................................ $ 34,508 2002........................................................ 31,367 2003........................................................ 28,614 2004........................................................ 28,241 2005........................................................ 26,909 Thereafter.................................................. 155,615 -------- Total............................................. $305,254 ======== </TABLE> The Company's leased office space in Virginia, New York, California, Texas, Massachusetts and Illinois are secured by letters of credit which amount to $205,000, $803,000 and 28.9 million in 1998, 1999 and 2000, respectively, in lieu of a cash deposit. Foreign Currency Exchange Contracts On November 17, 2000, the Company entered into a forward commitment (the "Contract"), with an external bank to purchase 4 million British pound sterling at the then forward exchange rate. The Contract is effective for a 90-day period. As of December 31, 2000, the Company made two purchases against the Contract totaling approximately $1.8 million (1.25 million British pound sterling). These amounts have been structured as loans to the Company's U.K. subsidiary. At December 31, 2000, the Company included the fair value of the forward commitment in the balance sheet with a corresponding gain of approximately $165,000 recognized in the statement of operations. The Company's intent is for the U.K. subsidiary to repay the loan to the Company. Therefore, as of December 31, 2000, the Company recognized a foreign currency exchange gain of approximately $75,000. 15. BASIC AND DILUTED 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. Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect. Basic and Diluted Net Loss Per Common Share <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------- 1998 1999 2000 --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> Net loss available to common stockholders................... $(21,345) $ (849) $(5,228) ======== ======= ======= Weighted average shares of common stock outstanding......... 29,152 44,532 55,140 ======== ======= ======= Basic and diluted net loss per common share................. $ (0.73) $ (0.02) $ (0.09) ======== ======= ======= </TABLE> F-23

54 PROXICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. BASIC AND DILUTED EARNINGS PER COMMON SHARE -- (CONTINUED) Approximately 6.5 million, 12.7 million and 17.9 million options and rights were outstanding as of December 31, 1998, 1999 and 2000, respectively, but were not included in the computation of diluted net 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"), provides 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 its initial share capital obligation. 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. 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 September 2000, the Company recorded an allowance to fully reserve this investment. 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 1999 and 2000, the Company contributed approximately $1.4 million to fulfill its share capital obligation. The Company will not participate in the management or policy making of the business. 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, France and the United Kingdom. The Company has joint venture arrangements in Italy and Spain. Included in revenues are foreign sales of approximately $3.0 million, $6.6 million and $29.7 for the years ended December 31, 1998, 1999 and 2000, respectively. F-24

1 EXHIBIT 10.8 BANK OF AMERICA N.A. SECOND MODIFICATION OF LOAN AGREEMENT 51-557924RC 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 REEVIS CROSS (SEAL) ----------------------------------------- Jean Reevis Cross, Vice President

1 EXHIBIT 10.9 THIRD MODIFICATION AGREEMENT THIS THIRD MODIFICATION AND EXTENSION AGREEMENT (this "Agreement"), effective as of the 31st day of August 2000, is by and among BANK OF AMERICA, N.A., a national banking association and successor to NationsBank, N.A. (the "Bank"); and PROXICOM, INC., a Delaware corporation (the "Borrower"). WITNESSETH THAT: WHEREAS, the Bank is the owner and holder of that certain Revolving Commercial Note dated October 30, 1998, made by the Borrower and payable to the order of the Bank, in the original principal amount of Ten Million and no/100 Dollars ($10,000,000.00) and bearing interest and being payable in accordance with the terms and conditions therein set forth (as amended pursuant to certain Note Modification Agreements dated as of May 5, 1999 and November 29, 1999, the "Note"); and WHEREAS, the Note was issued pursuant to a certain Secured Credit Agreement dated October 30, 1998 between the Borrower and the Bank (as amended pursuant to a certain Modification of Secured Credit Agreement dated June 1, 1999 and by a certain Second Modification of Loan Agreement effective as of November 29, 1999, the "Credit Agreement"); and WHEREAS, as of the effective date hereof, the principal balance of the Note is $0, the outstanding amount of issued Inside Letters of Credit (as defined below) is $13,316,147.46, the outstanding amount of issued Outside Letters of Credit (as defined below) is $4,154,929.51 and the parties hereto desire to modify the terms of the Credit Agreement and the Note. NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The Credit Agreement is hereby modified as follows: (a) In Section 1.1, (i) by adding the following definitions: "ADVANCE" MEANS A LOAN UNDER THE COMMITMENT OTHER THAN AN INSIDE LETTER OF CREDIT, AND "ADVANCES" MEANS ALL OF SAID LOANS.

2 "APPLICATION" MEANS ANY APPLICATION AND AGREEMENT FOR STANDBY LETTER OF CREDIT EXECUTED AND DELIVERED BY THE BORROWER TO THE BANK ON THE BANK'S FORM THEREFOR (AS FROM TIME TO TIME IN EFFECT) AND APPROPRIATELY COMPLETED, AND ALL EXTENSIONS, SUPPLEMENTS AND MODIFICATIONS THERETO, AND RENEWALS AND REPLACEMENTS THEREOF. "INSIDE LETTER OF CREDIT" MEANS A LETTER OF CREDIT ISSUED UNDER THE LETTER OF CREDIT COMMITMENT; AND "INSIDE LETTERS OF CREDIT" MEANS ALL OF SAID LETTERS OF CREDIT. "LETTER OF CREDIT" MEANS ANY IRREVOCABLE STANDBY LETTER OF CREDIT ISSUED BY THE BANK FOR THE ACCOUNT OF THE BORROWER PURSUANT TO THE TERMS OF AN APPLICATION (AND, IN THE CASE OF AN INSIDE LETTER OF CREDIT, THIS AGREEMENT), AND ALL EXTENSIONS, SUPPLEMENTS AND MODIFICATIONS THERETO, AND RENEWALS THEREOF; AND "LETTERS OF CREDIT" MEANS ALL OF SAID LETTERS OF CREDIT. "LETTER OF CREDIT COMMITMENT" HAS THE MEANING SET FORTH IN SECTION 2.8. "OBLIGATION" MEANS A LOAN, AN OUTSTANDING LETTER OF CREDIT, OR ANY AMOUNT DUE UNDER AN APPLICATION, AND "OBLIGATIONS" MEANS ALL OF SAID OBLIGATIONS. "OUTSIDE LETTER OF CREDIT" MEANS A LETTER OF CREDIT WHICH IS NOT ISSUED UNDER THE LETTER OF CREDIT COMMITMENT; AND "OUTSIDE LETTERS OF CREDIT" MEANS ALL OF SAID LETTERS OF CREDIT. "OUTSTANDING INSIDE LETTER OF CREDIT BALANCE" MEANS THE AGGREGATE OF (I) THE UN-DRAWN AMOUNT OF ALL OUTSTANDING INSIDE LETTERS OF CREDIT, PLUS (II) ALL AMOUNTS PAID BY THE BANK IN CONNECTION WITH DRAWINGS UNDER INSIDE LETTERS OF CREDIT FOR WHICH THE BANK HAS NOT BEEN REIMBURSED IN ACCORDANCE WITH THE RELATED APPLICATION. "OUTSTANDING OUTSIDE LETTER OF CREDIT BALANCE" MEANS THE AGGREGATE OF (I) THE UN-DRAWN AMOUNT OF ALL OUTSTANDING OUTSIDE LETTERS OF CREDIT, PLUS (II) ALL AMOUNTS PAID BY THE BANK IN CONNECTION WITH DRAWINGS UNDER OUTSIDE LETTERS OF CREDIT FOR WHICH THE BANK HAS NOT BEEN REIMBURSED IN ACCORDANCE WITH THE RELATED APPLICATION. (ii) by amending the following definitions: -2-

3 (A) The definition of "Bank" is hereby amended in its entirety to read: " 'BANK' MEANS BANK OF AMERICA, N.A., A NATIONAL BANKING ASSOCIATION AND SUCCESSOR TO NATIONSBANK, N.A., AND ITS SUCCESSORS". (B) The definition of "Revolving Credit Period" is hereby amended in its entirety to read: " 'REVOLVING CREDIT PERIOD' MEANS THE PERIOD FROM AND INCLUDING THE EFFECTIVE DATE TO BUT EXCLUDING AUGUST 31, 2002". (C) The definition of "Loan" is hereby amended in its entirety to read: " 'LOAN' MEANS AN INSIDE LETTER OF CREDIT OR AN ADVANCE; AND 'LOANS' MEANS ALL OF SUCH EXTENSIONS OF CREDIT"; and (iii) by deleting the definitions of "Collateral", "Collateral Documents", Intellectual Property Assignment", Mortgage", "Net Income", "Pledge Agreement" and "Security Agreement". (b) In Article II, (i) by replacing the words "loans ("Loans")" in Section 2.1 with "LOANS"; (ii) by replacing the content of Section 2.3 with "[INTENTIONALLY DELETED]"; (iii) in Sections 2.4(a) and 2.7, by replacing the word "Loans" with "ADVANCES"; (iv) in Section 2.5, by changing the title of the section to "FEES", by designating the current content of that section as subsection (a), and by adding a new subsection (b), as follows: (b) UPON THE ISSUANCE, AND UPON THE RENEWAL, OF EACH LETTER OF CREDIT, THE BORROWER SHALL PAY THE BANK A NON-REFUNDABLE LETTER OF CREDIT FEE IN THE AMOUNT OF 1.0% OF THE AMOUNT OF THE LETTER OF CREDIT. and (v) by adding a new Section 2.8, as follows: SECTION 2.8. LETTER OF CREDIT SUBFEATURE. AS A SUBFEATURE UNDER THE COMMITMENT, THE BANK AGREES, ON THE TERMS AND CONDITIONS SET FORTH IN THIS AGREEMENT AND IN THE APPLICABLE APPLICATIONS (THE FORM AND CONTENT OF WHICH MUST BE ACCEPTABLE TO BE BANK IN ITS SOLE DISCRETION), TO MAKE -3-

4 LOANS TO THE BORROWER BY ISSUING LETTERS OF CREDIT FOR THE ACCOUNT OF THE BORROWER. AT NO TIME SHALL THE OUTSTANDING INSIDE LETTER OF CREDIT BALANCE EXCEED THE COMMITMENT MINUS THE OUTSTANDING BALANCE OF ADVANCES (THE "LETTER OF CREDIT COMMITMENT"). EACH INSIDE LETTER OF CREDIT SHALL BE ISSUED FOR A TERM NOT TO EXCEED 365 DAYS, UNLESS APPROVED BY THE BANK, AND ANY INSIDE LETTER OF CREDIT MAY BE AUTOMATICALLY RENEWED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF SAID LETTER OF CREDIT AND THE RELATED APPLICATION. AN INSIDE LETTER OF CREDIT MAY BE DENOMINATED ONLY IN U.S. DOLLARS. EACH DRAFT PAID BY THE BANK UNDER A LETTER OF CREDIT SHALL, IF SUCH AMOUNT IS AVAILABLE UNDER THE LETTER OF CREDIT COMMITMENT, BE DEEMED AN ADVANCE AND SHALL ACCRUE INTEREST AT THE RATE THEN APPLICABLE UNDER THE NOTE. TO THE EXTENT THE AMOUNT OF A DRAFT PAID BY THE BANK AS AFORESAID IS UNAVAILABLE UNDER THE LETTER OF CREDIT COMMITMENT, SAID AMOUNT SHALL BE PAYABLE BY THE BORROWER ON DEMAND AND UNTIL PAID IN FULL SHALL ACCRUE INTEREST AT THE RATE THEN APPLICABLE UNDER THE NOTE. THE BANK IS HEREBY AUTHORIZED AND DIRECTED TO DEBIT ANY DEPOSIT ACCOUNT OR ACCOUNTS OF THE BORROWER WITH THE BANK, AT ITS OPTION, TO REIMBURSE THE BANK FOR PAYMENT OF ALL OR ANY PART OF SAID AMOUNT. UPON THE TERMINATION OF THE LETTER OF CREDIT COMMITMENT FOR ANY REASON WHATSOEVER, THE BANK MAY, AT ITS OPTION, DEMAND THAT THE BORROWER, WITHIN TEN (10) DAYS OF SUCH DEMAND, ARRANGE FOR THE CANCELLATION OF EACH OUTSTANDING LETTER OF CREDIT SUCH THAT THE BANK HAS NO FURTHER LIABILITY UNDER ANY LETTER OF CREDIT, OR IN THE EVENT THE BORROWER FAILS TO PROCURE THE CANCELLATION OF ANY LETTER OF CREDIT WITHIN SUCH TEN (10) DAY PERIOD, DEMAND THAT THE BORROWER PAY TO THE BANK, AS CASH COLLATERAL, THE REMAINING AMOUNTS AVAILABLE TO BE DRAWN, IF ANY, UNDER ALL LETTERS OF CREDIT NOT SO CANCELED AND SUCH AMOUNTS SHALL THEREUPON BECOME IMMEDIATELY DUE AND PAYABLE. IN THE EVENT THE BORROWER PAYS TO THE BANK OR THE BANK COLLECTS FROM THE BORROWER SUMS REPRESENTING THE REMAINING AMOUNTS AVAILABLE TO BE DRAWN UNDER SAID OUTSTANDING LETTERS OF CREDIT, THE BANK SHALL HOLD SUCH SUMS IN A NONINTEREST-BEARING ACCOUNT AS SECURITY FOR THE BORROWER'S OBLIGATION TO REIMBURSE THE BANK FOR AMOUNTS PAID BY THE BANK UNDER THE LETTERS OF CREDIT OR OTHERWISE DUE HEREUNDER. UPON THE EXPIRATION OF EACH OF THE LETTERS OF CREDIT AND THE BANK'S REASONABLE DETERMINATION THAT IT HAS NO FURTHER LIABILITY THEREUNDER, THE BANK SHALL REPAY SUCH SUMS TO THE BORROWER TO THE EXTENT THEY EXCEED THE REMAINING AMOUNTS ACTUALLY PAID BY THE BANK UNDER SAID LETTER OF CREDIT. THE BANK'S RIGHTS UNDER THIS SECTION 2.8 ARE IN ADDITION TO OTHER RIGHTS AND REMEDIES WHICH THE BANK MAY HAVE. -4-

5 SUBJECT TO THE FOREGOING, THE BORROWER MAY BORROW UNDER THIS SECTION 2.8, PREPAY AND RE-BORROW. (c) In Article III, (i) by replacing Section 3.1(iv) with "[INTENTIONALLY DELETED]"; and (ii) by adding a new Section 3.4, as follows: -5-

6 SECTION 3.4. LETTER OF CREDIT LOANS. IN THE CASE OF EACH LETTER OF CREDIT (AND IN ADDITION TO THE REQUIREMENTS OF SECTION 3.1): (i) RECEIPT BY THE BANK OF A DULY EXECUTED APPLICATION, TOGETHER WITH ALL AGREEMENTS AND DOCUMENTS REQUIRED TO BE DELIVERED TO THE BANK AS SET FORTH THEREIN. THE BANK, UPON RECEIPT OF THE ABOVE INFORMATION, WILL DETERMINE, IN ITS SOLE AND ABSOLUTE DISCRETION, WHETHER THE LETTER OF CREDIT, IF THE APPLICATION IS APPROVED, WILL BE AN INSIDE LETTER OF CREDIT OR AN OUTSIDE LETTER OF CREDIT, AND WILL NOTIFY THE BORROWER ACCORDINGLY. (d) By replacing Article V in its entirety with the following: ARTICLE V FINANCIAL COVENANT THE BORROWER AGREES THAT SO LONG AS THE BANK IS COMMITTED TO MAKE LOANS HEREUNDER OR ANY OBLIGATION OR AMOUNT PAYABLE HEREUNDER OR UNDER THE NOTE, OR ANY APPLICATION REMAINS UNPAID: SECTION 5.1. CERTAIN DEFINITIONS. AS USED IN THIS ARTICLE V AND HEREAFTER IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS: "LIQUID ASSETS" MEANS ALL CASH, UNRESTRICTED BANK DEMAND DEPOSITS, READILY MARKETABLE SECURITIES (e.g., UNITED STATES TREASURY BILLS AND MONEY MARKET FUND SHARES), AND OTHER ASSETS THAT CAN BE CONVERTED INTO CASH IN A SHORT TIME PERIOD (NOT TO EXCEED ONE YEAR) WITHOUT A MATERIAL CONCESSION IN PRICE. "LIQUID ASSETS" DOES NOT INCLUDE ACCOUNTS RECEIVABLE OR INVENTORY. "TOTAL BANK COMMITMENTS" MEANS, AT ANY TIME, THE COMMITMENT PLUS THE OUTSTANDING OUTSIDE LETTER OF CREDIT BALANCE AT SUCH TIME. SECTION 5.2. LIQUIDITY RATIO. AS OF THE END OF EACH FISCAL QUARTER OF THE BORROWER, THE RATIO OF LIQUID ASSETS OF THE BORROWER AND ITS CONSOLIDATED SUBSIDIARIES TO TOTAL BANK COMMITMENTS SHALL BE NO LESS THAN 1.5 TO 1.0. (e) In Article VI, by: (i) inserting "OBLIGATION OR" before "amount payable" and replacing "Notes or any Collateral Document" with "NOTE OR ANY APPLICATION" in the preamble; -6-

7 (ii) replacing the text of Section 6.l(iii) with "[INTENTIONALLY DELETED]"; (iii) deleting "ANY COLLATERAL DOCUMENT" from Section 6.1(v); (iv) by replacing Sections 6.3(b) and 6.8(i) with "[INTENTIONALLY DELETED]"; (v) by deleting the proviso in Section 6.12(v); (vi) in Section 6.17(a), by: (A) deleting the words "a pro forma certificate of the Borrower described in Section 6.l(iii) and supporting" from the first sentence of paragraph (i); (B) replacing the second sentence of paragraph (i) with the following: "SAID DOCUMENTATION SHALL REFLECT THE FACT THAT, AFTER GIVING EFFECT TO SUCH ACQUISITION, THE BORROWER AND ITS SUBSIDIARIES WILL BE IN COMPLIANCE WITH THE FINANCIAL COVENANT SET FORTH IN ARTICLE V OF THIS AGREEMENT."; and (C) by replacing paragraph (ii) with "[INTENTIONALLY DELETED]". (vii) in Section 6.17(b), by: (A) deleting all of paragraph (i) after the words "a Guaranty"; and (B) replacing paragraphs (iv), (vii), (ix), (x) and (xi) with "[INTENTIONALLY DELETED]". (viii) in Section 6.17(c), by replacing "$1,000,000" with "$10,000,000" and "$5,000,000" with "$25,000,000"; by inserting the word "AND" before clause (ii); and by deleting clause (iii); and (ix) deleting "President and" in Section 6.18. (f) In Section 7.4, by inserting "OR ANY OTHER OBLIGATION" after "Note". (g) In Section 8.1(v), by inserting "OBLIGATION, OR ANY OTHER" before the word "Debt". (h) By replacing Section 8.1(xi) with "[INTENTIONALLY DELETED]". (i) By adding the following to the end of Section 8.1: -7-

8 UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT, THEN, OR AT ANY TIME AFTER THE HAPPENING OF THE SAME, THE BANK MAY, AT ITS OPTION, DEMAND THAT THE BORROWER, WITHIN TEN (10) DAYS OF SUCH DEMAND, ARRANGE FOR THE CANCELLATION OF EACH OUTSTANDING LETTER OF CREDIT SUCH THAT THE BANK HAS NO FURTHER LIABILITY UNDER ANY LETTER OF CREDIT, OR IN THE EVENT THE BORROWER FAILS TO PROCURE THE CANCELLATION OF ANY LETTER OF CREDIT WITHIN SUCH TEN (10) DAY PERIOD, DEMAND THAT THE BORROWER PAY TO THE BANK, AS CASH COLLATERAL, THE REMAINING AMOUNTS AVAILABLE TO BE DRAWN, IF ANY, UNDER ALL LETTERS OF CREDIT NOT SO CANCELED AND SUCH AMOUNTS SHALL THEREUPON BECOME IMMEDIATELY DUE AND PAYABLE. IN THE EVENT THE BORROWER PAYS TO THE BANK OR THE BANK COLLECTS FROM THE BORROWER SUMS REPRESENTING THE REMAINING AMOUNTS AVAILABLE TO BE DRAWN UNDER SAID OUTSTANDING LETTERS OF CREDIT, THE BANK SHALL HOLD SUCH SUMS IN A NON-INTEREST-BEARING ACCOUNT AS SECURITY FOR THE BORROWER'S OBLIGATION TO REIMBURSE THE BANK FOR AMOUNTS PAID BY THE BANK UNDER THE LETTERS OF CREDIT OR OTHERWISE DUE HEREUNDER. UPON THE EXPIRATION OF EACH OF THE LETTERS OF CREDIT AND THE BANK'S REASONABLE DETERMINATION THAT IT HAS NO FURTHER LIABILITY THEREUNDER, THE BANK SHALL REPAY SUCH SUMS TO THE BORROWER TO THE EXTENT THEY EXCEED THE REMAINING AMOUNTS ACTUALLY PAID BY THE BANK UNDER SAID LETTER OF CREDIT. THE BANK'S RIGHTS UNDER THIS SECTION 8.1 ARE IN ADDITION TO OTHER RIGHTS AND REMEDIES WHICH THE BANK MAY HAVE. 2. The Note is hereby amended by changing the definition of "Date of Maturity" from "August 31, 2000" to "AUGUST 31, 2002". 3. The Borrower hereby acknowledges and agrees that, as of the effective date hereof, the unpaid principal balance of the Note, the outstanding amount of issued Inside Letters of Credit, and the outstanding amount of issued Outside Letters of Credit, are as set forth in the third Recital to this Agreement, and that there are no set-offs or defenses against the Note, the Credit Agreement, or any Application. 4. The Borrower represents and warrants to the Bank that the "Guarantors" of the Loans, IBIS CONSULTING, INC., SQUARE EARTH, INC. and AD HOC INTERACT, INC., are no longer in existence. 5. The parties to this Agreement do not intend that this Agreement be construed as a novation of the Note, the Credit Agreement or any Application. 6. Except as hereby expressly modified, the Credit Agreement and the Note shall otherwise be unchanged, shall remain in full force and effect, and is hereby expressly approved, ratified and confirmed. A legend shall be placed on the face of the Note indicating -8-

9 that its terms have been modified hereby, and the original of this Agreement shall be affixed to the original of the Note. 7. This Agreement shall be governed in all respects by the laws of the Commonwealth of Virginia and shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. WITNESS the following signatures and seals. PROXICOM, INC. [SEAL] By /s/ KENNETH J. TARPEY ------------------------------------- Name: Kenneth J. Tarpey Title: EVP & CFO BANK OF AMERICA, N.A. [SEAL] By: /s/ JEAN CROSS ------------------------------------- Jean Reavis Cross, Vice President -9-

1 EXHIBIT 10.14 HANSEN EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "AGREEMENT") is made as of June 19, 2000, between PROXICOM, INC., a Delaware corporation (the "COMPANY"), and Ekkehard Michael Hansen (the "EXECUTIVE"). RECITALS A. The Company wishes Executive to serve as Senior Vice President, International Operations on and after the effective date hereof on the terms and conditions hereof. B. This Agreement replaces and supercedes any prior employment agreement entered into between Executive, the Company and any Affiliates. AGREEMENT NOW, THEREFORE, in consideration of the promises and mutual obligations of the parties contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. ENGAGEMENT. The Company hereby engages Executive to serve as Senior Vice President, International Operations, and Executive agrees to serve the Company in the capacities, and subject to the terms and conditions, set forth in this Agreement. 2. SERVICES. While employed by the Company or an Affiliate, Executive, as Senior Vice President, International Operations, shall have all the duties and responsibilities customarily rendered by executives of similar rank at companies of similar size and nature and as may be delegated from time to time by the Board of Directors (hereinafter, "the Board") in its sole discretion. Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and periods of illness or other incapacity) to the business of the Company and its Affiliates. Notwithstanding the foregoing, and provided that such activities do not interfere with the fulfillment of Executive's obligations hereunder, Executive may (A) serve as a director or trustee of any charitable or non-profit entity; (B) acquire investment interests in one (1) or more entities which are not, directly or indirectly, in competition with the Company or its Affiliates and which do not provide supplies to the Company; or (C) own up to one percent (1%) of the outstanding voting securities of any publicly held company regardless of whether such publicly held company is in competition with the Company. Unless the Company and Executive agree to the contrary, Executive's place of employment shall be at the Company's offices in New York City, New York; provided, however, that Executive will travel to such other locations of the Company

2 and its Affiliates as may be reasonably necessary and/or as required by the Board in its sole discretion in order to discharge his duties hereunder. 3. COMPENSATION (a) SALARY BONUS AND BENEFITS. The Company or an Affiliate will pay Executive a base salary (the "ANNUAL BASE SALARY") as the Board may designate from time to time, which initial Annual Base Salary shall be at the rate of three hundred thousand dollars ($300,000) per annum. Executive's Annual Base Salary may be reviewed by the Board (or its Compensation Committee) periodically but shall be reviewed at least annually. Executive's first scheduled performance and compensation review, including a review of option grants, shall be in July 2000. Executive shall be eligible to receive a bonus of up to fifty percent (50%) of Executive's Annual Base Salary for each year as determined by the Board in its sole discretion, based upon the Company's achievement of budgetary and other objectives set by the Board. In addition, while employed, Executive will be entitled to such other benefits approved by the Board and made generally available to the Company's or Affiliate's senior management (including health, dental, vision, life insurance, three weeks accrued vacation, sick leave accrual and paid holidays). Executive will also receive life insurance and disability insurance consistent with that provided by comparable companies to similarly situated executives. (b) STOCK OPTIONS. On February 4, 2000, the Executive was granted an option to purchase five hundred and sixty thousand (560,000) post-stock split shares of Company common stock at an option exercise price equal to the fair market value of the shares of stock on the date of grant pursuant to the terms of the Proxicom Stock Option Plan. These options vest in accordance with the following schedule: One hundred and forty thousand (140,000) options will vest on February 4, 2001, and thirty five thousand (35,000) options will vest at the end of each quarter thereafter until full vesting. On April 17, 2000, Executive received an option to purchase one hundred thousand (100,000) shares of Company common stock at an option exercise price equal to the fair market value of the stock on the date of grant pursuant to the terms of the Proxicom Stock Option Plan. These options vest in accordance with the following schedule: Fifty thousand (50,000) options on the date of grant, four thousand one hundred and sixty seven (4,167) options at the end of each quarter beginning in the second year as measured from the grant date until full vesting. In the event of a change of control of the Company (defined as the sale of greater than fifty percent (50%) of the common stock or assets of the Company to a purchaser), Executive will be credited with an additional twelve (12) months towards vesting in the stock options (both the five hundred and sixty thousand (560,000) share grant and the one hundred thousand (100,000) share grant) if, after the change of control, any of the following occur: (i) Executive's employment is terminated; (ii) Executive's then-current position, authority, duties or responsibilities are diminished; (iii) Executive's base salary is reduced (other than as a general management reduction in salary); or (iv) Executive is required to move his primary office more than fifty (50) miles from the metropolitan area in which it was located immediately before the change of control. 2

3 4. TERMINATION. (a) EVENTS OF TERMINATION. Executive's employment with the Company or its Affiliates shall cease upon: (i) Executive's death. (ii) Executive's disability, which means his incapacity due to physical or mental illness such that he is unable to perform the duties and services required of his position for a continuous period of ninety (90) days or for a period of one hundred twenty (120) days out of any twelve (12) month period. (iii) Termination by the Company or an Affiliate by the delivery to Executive of a written notice from the Board that Executive has been terminated ("NOTICE OF TERMINATION") with or without Cause. "CAUSE" shall mean: Executive's (aa) conviction for a felony offense; (bb) chronic alcoholism or substance abuse; or (cc) neglect of Executive's duties and responsibilities to the Company after written notice of such neglect and an opportunity to cure, all as determined in good faith by the Company. (iv) Executive's voluntary resignation by the delivery to the Board of a written notice from Executive that Executive has resigned with or without a "Constructive Discharge." In order to constitute a Constructive Discharge, Executive must resign within three (3) months of an event that constitutes a Constructive Discharge. "Constructive Discharge" shall mean (aa) any action by the Company that results in a diminution in Executive's position, authority, duties or responsibilities; or (bb) a reduction in Executive's base salary (except as part of a general company or management reduction in salaries). (b) RIGHTS ON TERMINATION. (i) In the event that Executive is terminated or removed from the position of Senior Vice President, International Operations by the Company or an Affiliate without Cause or in the event that a termination of employment occurs by Executive due to a Constructive Discharge, the Company or an Affiliate will continue to pay Executive an amount equal to Executive's Annual Base Salary for a one year period commencing on the date of termination of employment (the "SEVERANCE PERIOD") on regular salary payment dates (the "SEVERANCE PAYMENTS"). Executive will continue to be provided health benefits for the Severance Period. To the extent that Executive is not allowed to participate in the Company's or an Affiliate's health benefit programs following his termination of employment, the Company or an Affiliate will pay his COBRA premiums for the Severance Period. 3

4 (ii) If the Company or an Affiliate terminates Executive's employment for Cause, if Executive dies or is disabled, or if Executive resigns other than due to a Constructive Discharge, the Company's or an Affiliate's obligations to pay any compensation or benefits under this Agreement will cease effective the date of termination. Executive's right to receive any other benefits will be determined under the provisions of applicable plans, programs or other coverages. (iii) During (aa) the period in which Executive is receiving Severance Payments from the Company or any Affiliate and (bb) thereafter, Executive shall not make disparaging statements, whether oral or written, regarding the Company or any Affiliate. Executive acknowledges that (cc) the restriction contained in this Section 4(b)(iii) of this Agreement is reasonable and necessary to protect the business and interests of the Company, (dd) the Company is relying upon the enforceability of such restriction in entering into this Agreement, (ee) any violation of this restriction will cause substantial irreparable injury to the Company, (ff) the full extent of Company's damages will be impossible to ascertain and (gg) monetary damages will not be an adequate remedy for Company. Therefore, Executive agrees that a violation of this Section 4(b)(iii) will result in a forfeiture of the Severance Payments and benefits provided to Executive in this Section 4(b) and that the Company is entitled, in addition to other remedies, to preliminary and permanent injunctive relief to secure specific performance, and to prevent a breach or contemplated breach, of this Section 4(b)(iii), to the fullest extent permissible under state law. The restriction set forth herein shall be construed as an independent covenant, and the existence of any claim or cause of action against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the restriction contained in this Section 4(b)(iii). Executive hereby consents to the jurisdiction over his person by any courts within the Commonwealth of Virginia with respect to any proceedings in equity arising out of this Agreement. If any court of competent jurisdiction shall hold that the restriction contained in this Section 4(b)(iii) is unreasonable as to time or scope, said restriction shall be deemed to be reduced to the extent necessary in the opinion of such court to make it reasonable. 5. AT WILL EMPLOYMENT. Except as set forth in this Agreement, the terms and conditions of employment with the Company or an Affiliate do not constitute an employment contract or guarantee of continued employment, and either Executive, the Company or an Affiliate has the right to end the employment relationship at will. 6. CONFIDENTIALITY AND NONSOLICITATION. Executive agrees that he is subject to the Company's or its Affiliates' standard agreement governing confidentiality and nonsolicitation and that he will execute such agreement. 4

5 7. LEGAL FEES. The Company shall reimburse the Executive for the Executive's reasonable legal fees in the case of any litigation initiated by Boston Consulting Group against the Executive for a violation of the non-compete clause contained in his employment contract with Boston Consulting Group. GENERAL PROVISIONS 8. DEFINITIONS. "AFFILIATE" of any particular person or entity means any other person or entity controlling, controlled by or under common control with such particular person or entity. "BOARD" means the Board of Directors of the Company. "PERSON" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 9. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered or sent by reputable overnight courier service (charges prepaid) to the recipient at the address below indicated: If to the Company or an Affiliate: Proxicom, Inc. 11600 Sunrise Valley Drive Reston, Virginia 20191 Attention: David R. Fontaine Tel No.: (703) 262-3200 Fax No.: (703) 262-3201 with a copy to: Hogan & Hartson L.L.P. 555 13th Street, N.W. Washington, D.C. 20004 Attention: Peter Romeo, Esq. Tel. No.: (202) 637-5600 Fax No.: (202) 637-5910 5

6 If to Executive: E. Michael Hansen 815 Park Avenue Apt. 9B New York, N.Y. 10021 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or, if mailed, five (5) days after deposit in the U.S. mail. 10. GENERAL PROVISIONS. (a) SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (b) COMPLETE AGREEMENT. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and pre-empt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (c) COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. (d) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company, its Affiliates and their respective successors and assigns; provided that the rights and obligations of Executive under this Agreement shall not be assignable and, provided further that, the rights and obligations of the Company may be assigned to any Affiliate of the Company. (e) CHOICE OF LAW. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia (but not including the choice of law rules thereof). 6

7 (f) AMENDMENT AND WAIVER. The provisions of this Agreement may be amended and or waived only with the prior written consent of the Company or its Affiliate and Executive. (g) BUSINESS DAYS. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the state in which the Company's chief executive office is located, the time period shall be automatically extended to the business day immediately following, such Saturday, Sunday or holiday. (h) NO WAIVER. A waiver by any party hereto of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that such party would otherwise have on any future occasion. No failure to exercise or any delay in exercising on the part of any party hereto, any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. (i) INSURANCE. The Company or an Affiliate, at its discretion, may apply for and procure in its own name for its own benefit life and/or disability insurance on Executive in any amount or amounts considered available. Executive agrees to cooperate in any medical or other examination, supply any information, and to execute and deliver any applications or other instruments in writing as may be reasonably necessary to obtain and constitute such insurance. Executive hereby represents that he has no reason to believe that his life is not insurable at rates now prevailing for healthy men of his age. (j) WITHHOLDING TAXES. The Company and its Affiliates shall be entitled to deduct or withhold from any amounts owing from the Company or any of its Affiliates to Executive any federal, state, provincial, local or foreign withholding taxes, excise taxes, or employment taxes ("TAXES") imposed with respect to Executive's compensation or other payments from the Company or any of its Affiliates or Executive's ownership interest in the Company, including, but not limited to, wages, bonuses, dividends, the receipt or exercise of stock options and/or the receipt or vesting of restricted stock. (k) FURTHER ASSURANCES. Executive shall execute and deliver all documents, provide all information, and take or refrain from taking such actions as may be necessary or appropriate to achieve the purposes of this Agreement. (l) ARBITRATION. Except as provided in Section 4(b)(iii), any dispute arising out of this Agreement, the Executive's relationship with the Company or any of its Affiliates, or the Executive's separation from employment shall be subject to binding arbitration. The arbitration shall be governed by, and conducted in accordance with, the American Arbitration Association Labor Arbitration Rules. Within ninety (90) days after the dispute, controversy or claim arises, the party demanding arbitration shall give the other party written notice of his/its intention to arbitrate, which notice shall contain a statement setting forth the 7

8 nature of the dispute and the remedy sought. Immediately following a demand for arbitration, the parties shall request a list of arbitrators from the American Arbitration Association. The list shall be limited to arbitrators who are members of the National Academy of Arbitrators and who are familiar with labor and employment disputes. Within fourteen (14) days after the mailing date of the list, the parties shall select one arbitrator from the list. The arbitration shall be confidential. The arbitration hearing shall be held in the Commonwealth of Virginia, and shall be private and not open to the public. The parties shall share the arbitrator's fees and expenses equally during the arbitration. In the arbitrator's final award, the arbitrator may award, in the arbitrator's discretion, the party substantially prevailing all costs incurred by that party in connection with the arbitration, including reasonable attorneys' fees and that party's share, if any, of the fees charged by the arbitrator, and all filing and/or arbitration administration fees incurred by that party in connection with the arbitration. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. PROXICOM, INC. By: KENNETH J. TARPEY ------------------------------ Name: Kenneth J. Tarpey ------------------------- Title: Exec. Vice President & CFO ----------------------------- EXECUTIVE EKKEHARD MICHAEL HANSEN ----------------------------------- EKKEHARD MICHAEL HANSEN 8

1 EXHIBIT 10.15 PROXICOM, INC. EXECUTIVE SEVERANCE AGREEMENT This SEVERANCE AGREEMENT (the "Agreement") is dated as of February 16, 1999, between Proxicom, Inc., (the "Employer"), and Michael Beck (the "Executive"), a resident of Illinois. WHEREAS, the Executive serves as a Senior Vice President of the Employer, and in that role has been important in developing and expanding the business and operations of the Employer and possesses valuable knowledge and skills with respect to such business; and WHEREAS, the Board of Directors of the Employer (the "Board") believes that it is in the best interests of the Employer to encourage the Executive's continued employment with and dedication to the Employer, including in the face of potentially distracting circumstances arising from the possibility of a change in control of the Employer; and WHEREAS, the Board has adopted a policy which authorizes the Employer to enter into this Agreement with the Executive; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the payment of compensation to the Executive in the event of a termination of the Executive's employment during the term of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements of the parties contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. TERM. The initial term of this Agreement shall be for a period commencing on February 16, 1999 and will remain in effect until terminated or amended by the parties hereto; provided, however, that, in the event of a Change in Control Event during the initial term of this Agreement, the term of this Agreement shall be automatically extended, if necessary, so that this Agreement remains in full force and effect for the Change in Control Period (as defined in Section 10) and until all payments required to be made hereunder have been made. This Agreement may be renewed or amended by written agreement of the parties. References herein to the term of this Agreement shall include the initial term and any additional period for which this Agreement is extended or renewed. SECTION 2. TERMINATION OF EMPLOYMENT OTHER THAN FOLLOWING A CHANGE IN CONTROL EVENT. Subject to the terms of this Agreement, the Executive shall be entitled to receive severance payments from the Employer for services previously rendered to the Employer and its affiliates in the event the Executive's employment is terminated by the Employer other than for Cause (as defined in Section 8):

2 (a) OTHER THAN FOR CAUSE. If, during the term of this Agreement, but prior to a Change in Control Event, the Employer terminates the Executive's employment other than for Cause: (i) the Employer shall pay to the Executive the following amounts: A. the sum of (1) the Executive's Annual Base Salary (as defined in Section 7) through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Annual Bonus (as defined in Section 7) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the effective date of termination of the Executive's employment (the "Date of Termination"), and the denominator of which is 365, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid, (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations") in a lump sum in cash in accordance with applicable, but in any event within 30 days of the Date of Termination; and B. an amount equal to the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus, in substantially equal proportionate installments in accordance with the Employer's normal payroll practices, commencing with the first payroll period in the month following the month in which the Date of Termination occurs, for a period of one year; and (ii) for one year after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Employer shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the welfare benefit plans, practices, policies and programs provided by the Employer and its affiliated companies (including, without limitation, medical, prescription, dental, disability, Executive life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer Executives of the Employer and its affiliated companies, as if the Executive's employment had not been terminated; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. The cost for these welfare benefits shall be paid by the Executive and Employer in the same proportion as paid by other peer Executives and the Employer as if the Executive had not been terminated. and (iii) to the extent not theretofore paid or provided, the Employer shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Employer and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) CAUSE. If the Executive's employment is terminated for Cause during the term of this Agreement, this Agreement shall terminate without further obligations to the Executive, other than the obligation to pay to the Executive (x) his Current Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other -2-

3 Benefits through the Date of Termination, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the term of this Agreement this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits through the Date of Termination. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination. SECTION 3. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL EVENT. Subject to the terms of this Agreement, the Executive shall be entitled to receive severance payments from the Employer for services previously rendered to the Employer and its affiliates if a Change in Control Event occurs during the term of this Agreement and the Executive's employment is terminated by the Executive for Good Reason or by the Employer other than for Cause during the period commencing upon such Change in Control Event (as defined in Section 10) and ending one year after a Change in Control (as defined in Section l0)(the "Change in Control Period"). (a) GOOD REASON: OTHER THAN FOR CAUSE. If a Change in Control Event occurs during the term of this Agreement and the Employer terminates the Executive's employment other than for Cause or the Executive terminates employment for Good Reason during the Change in Control Period: (i) the Employer shall pay to the Executive the following amounts: A. the "Accrued Obligations" in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination; and B. the amount equal to the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus, in a lump sum in cash within 30 days of the Date of Termination; and (ii) for one (1) year after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Employer shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the welfare benefit plans, practices, policies and programs provided by the Employer and its affiliated companies (including, without limitation, medical, prescription, dental, disability, Executive life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer Executives of the Employer and its affiliated companies, as if the Executive's employment had not been terminated; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. The cost for these welfare benefits shall be paid by the Executive and Employer in the same proportion as paid by other peer Executives and the Employer as if the Executive had not been terminated. and (iii) to the extent not theretofore paid or provided, the Employer shall timely pay or provide to the Executive all Other Benefits. (b) CAUSE: OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Change in Control Period, this Agreement shall terminate without further obligations to the Executive, other than the obligation to pay to the Executive (x) his Annual Base Salary -3-

4 through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits through the Date of Termination, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Change in Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits through the Date of Termination. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination. SECTION 4. ADDITIONAL PAYMENTS BY THE EMPLOYER. (a) Notwithstanding anything in this Agreement to the contrary and except as set forth in this Section 4, in the event it shall be determined that any compensation, benefit, payment or distribution by the Employer to or for the benefit of the Executive (whether paid or payable, or accrued or accruing, or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (including any succeeding provision) and/or any regulations, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax (including any interest or penalties imposed with respect to such taxes) imposed upon the Payments. (b) Subject to the provisions of Section 4(c), all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made a certified public accounting firm as may be designated by the Executive and reasonably acceptable to the Employer (the "Accounting Firm") which shall provide detailed supporting calculations both to the Employer and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Employer. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the Change in Control, the Executive may, in his/her discretion, appoint another nationally recognized accounting firm and reasonably acceptable to the Employer to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Employer. Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Employer to the Executive within five business days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Employer and the Executive. If as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, there are Gross-Up Payments which will not have been made by the Employer but should have been made ("Underpayment"), consistent with the calculations required to be made hereunder, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Employer to or for the benefit of the Executive. (c) The Executive shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of the Gross-Up -4-

5 Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim, (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by attorneys reasonably selected by the Employer, (iii) cooperate with the Employer in good faith in order effectively to contest such claim, and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(c), the Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Executive to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Employer pursuant to Section 4(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Employer's complying with the requirements of Section 4(c)) promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Employer pursuant to Section 4(c), a determination is made that the Executive shall not be entitled to -5-

6 any refund with respect to such claim and the Employer does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. SECTION 5. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Employer all secret or confidential information, knowledge or data relating to the Employer or any of its affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Employer or any of its affiliates and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Employer, the Executive shall not, without the prior written consent of the Employer or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Employer and those designated by it. SECTION 6. NON-SOLICITATION. The Executive covenants and agrees that the Executive will not, during the Executive's employment hereunder and for a period of one year thereafter, induce or attempt to induce any employee of the Employer or any the Employer's affiliates to render services for any other person. SECTION 7. DEFINITION OF "ANNUAL BASE SALARY", "ANNUAL BONUS" AND "RECENT ANNUAL BONUS". Annual base salary ("Annual Base Salary") means the greater of (a) the annual base salary payable to the Executive by the Employer and its affiliates as of the Date of Termination of employment (the "Current Annual Base Salary") or (b) the amount equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Employer and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Date of Termination occurs. Annual bonus (the "Annual Bonus") means the greater of (i) the targeted annual bonus that would be payable to the Executive for the fiscal year including the Date of Termination of employment if all performance targets under the Employer's annual incentive plan were met at the highest level of achievement or (ii) the Executive's highest bonus under the Employer's annual incentive plan, or any comparable bonus under any predecessor or successor plan, for the last fiscal year prior to fiscal year including the Date of Termination (annualized in the event that the Executive was not employed by the Employer for the whole of such fiscal year) (the "Recent Annual Bonus"). SECTION 8. DEFINITION OF "CAUSE". For purposes of this Agreement, "Cause" for termination of the Executive's employment by the Employer hereunder shall be deemed to exist if (a) the Executive is found guilty by a court of having committed fraud or theft against the Employer or having committed a felony involving moral turpitude, and such conviction is affirmed on appeal or the time for appeal has expired; (b) the Executive is found guilty by a court of having committed a crime involving moral turpitude and such conviction is affirmed on appeal or the time for appeal has expired; (c) in the reasonable judgment of the Board, the Executive has compromised trade secrets or other similarly valuable proprietary information of the Employer; (d) in the reasonable judgment of the Board, the Executive has continuously engaged in gross or willful misconduct that causes substantial and material harm to the business and operations of the Employer or any of its affiliated companies, the continuation of which will continue to substantially and materially harm the business and operations of the Employer or any of its affiliated companies in the future. -6-

7 SECTION 9. DEFINITION OF "GOOD REASON". "Good Reason" shall mean (1) any proposed reduction in the Executive's base salary, fringe benefits or bonus eligibility, except, in the case of fringe benefits or bonus eligibility, in connection with a reduction in such compensation generally applicable to peer Executives of the Employer; (2) the Executive has his responsibilities or areas of supervision with the Employer substantially reduced (in the Executive's reasonable judgment) or the Executive is requested to report to a lower level supervisor after a Change in Control; (3) the Executive has his responsibilities or areas of supervision with the Employer substantially increased without an appropriate increase in Executive's compensation (in the Executive's reasonable judgment); (4) the Executive is required to move his office or perform significant services outside the metropolitan area in which the office of the Executive was located or the Executive's services were primarily performed immediately prior to the Change in Control; or (5) after a Change in Control, the Executive is required to report to a supervisor other than the supervisor to whom the Executive was reporting prior to the Change in Control and the Executive and the successor supervisor have irreconcilable working relationship problems or difficulties. SECTION 10. DEFINITION OF "CHANGE IN CONTROL" AND "CHANGE IN CONTROL EVENT". A "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then outstanding shares of common stock of the Employer (the "Outstanding Employer Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Employer entitled to vote generally in the election of directors (the "Outstanding Employer Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Employer, (ii) any acquisition by any Executive benefit plan (or related trust) sponsored or maintained by the Employer or any corporation controlled by the Employer or (iii) any acquisition by any entity pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 10; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Employer's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Employer (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Employer Common Stock and Outstanding Employer Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Employer or all or substantially all of the Employer's assets either directly or through one or more subsidiaries) in - 7 -

8 substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Employer Common Stock and Outstanding Employer Voting Securities, as the case may be, and (ii) no Person (excluding any corporation resulting from such Business Combination or any Executive benefit plan (or related trust) of the Employer or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Employer of a complete liquidation or dissolution of the Employer. A "Change in Control Event" shall mean the earlier of (i) a Change in Control or (ii) the execution and delivery by the Employer of a document evidencing an intent to engage in a particular Change of Control that is subsequently effected. SECTION 11. EXPENSES. The Employer shall pay any and all reasonable legal fees and expenses incurred by the Executive in seeking to obtain or enforce, by bringing an action against the Employer, any right or benefit provided in this Agreement if the Executive is successful in whole or in part in such action. SECTION 12. WITHHOLDING. Notwithstanding anything in this Agreement to the contrary , all payments required to be made by the Employer hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Employer reasonably may determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Employer may, in its sole discretion, accept other provisions for the payment of taxes and any withholdings as required by law, provided that the Employer is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. SECTION 13. NO DUTY TO MITIGATE. The Executive's payments received hereunder shall be considered severance pay in consideration of past service, and pay in consideration of continued service from the date hereof and entitlement thereto shall not be governed by any duty to mitigate damages by seeking further employment. SECTION 14. AMENDMENTS OR ADDITIONS; ACTION BY BOARD OF DIRECTORS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. The prior approval by the Board shall be required in order for the Employer to authorize any amendments or additions to this Agreement. SECTION 15. GOVERNING LAW. This Agreement shall be governed by the laws of United States to the extent applicable and otherwise by the laws of the State of New York, excluding the choice of law rules thereof. SECTION 16. ASSIGNMENT. The rights and obligations of the Employer under this Agreement shall be binding upon its successors and assigns and may be assigned by the Employer to the successors in interest of the Employer. The rights and obligations of the Executive under this Agreement - 8 -

9 shall be binding upon his heirs, legatees, personal representatives, executors or administrators. This Agreement may not be assigned by the Executive, but any amount owed to the Executive upon his death shall inure to the benefit of his heirs, legatees, personal representatives, executors, or administrators. SECTION 17. NOTICE. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered, sent by overnight courier, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by telegram, telecopy, or telex, addressed as follows: If to the Employer: Proxicom, Inc. 11600 Sunrise Valley Drive Reston, VA 20191 Attn: Legal Department If to the Executive: Michael Beck 2242 N. Southport Chicago, IL 60614 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. SECTION 18. OTHER AGREEMENTS. This Agreement constitutes the entire agreement between the parties hereto providing for severance payments in connection with a termination of employment. This Agreement supersedes any other agreements, whether written or oral, providing for the payment of severance benefits by the Employer to the Executive. SECTION 19. SEVERABILITY. If any part of any provision of this Agreement shall be invalid or unenforceable under applicable law, such part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way affecting the remaining parts of such provision or the remaining provisions of this Agreement. - 9 -

10 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, or have caused this Agreement to be executed and delivered, to be effective as of February 16, 1999. PROXICOM, INC. By: /s/ KENNETH J. TARPEY ---------------------------------------- Name: Kenneth J. Tarpey Title: Executive Vice President & CFO EXECUTIVE By: /s/ MICHAEL O. BECK ---------------------------------------- Michael O. Beck ---------------------------------------- Print Name - 10 -

1 EXHIBIT 10.16 PROXICOM, INC. EXECUTIVE SEVERANCE AGREEMENT This SEVERANCE AGREEMENT (the "Agreement") is dated as February 16, 1999, between Proxicom, Inc., (the "Employer"), and Jay Thomas (the "Executive"), a resident of Virginia. WHEREAS, the Executive serves as a Senior Vice President of the Employer, and in that role has been important in developing and expanding the business and operations of the Employer and possesses valuable knowledge and skills with respect to such business; and WHEREAS, the Board of Directors of the Employer (the "Board") believes that it is in the best interests of the Employer to encourage the Executive's continued employment with and dedication to the Employer, including in the face of potentially distracting circumstances arising from the possibility of a change in control of the Employer; and WHEREAS, the Board has adopted a policy which authorizes the Employer to enter into this Agreement with the Executive; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the payment of compensation to the Executive in the event of a termination of the Executive's employment during the term of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements of the parties contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. TERM. The initial term of this Agreement shall be for a period commencing on February 16, 1999 and will remain in effect until terminated or amended by the parties hereto; provided, however, that, in the event of a Change in Control Event during the initial term of this Agreement, the term of this Agreement shall be automatically extended, if necessary, so that this Agreement remains in full force and effect for the Change in Control Period (as defined in Section 10) and until all payments required to be made hereunder have been made. This Agreement may be renewed or amended by written agreement of the parties. References herein to the term of this Agreement shall include the initial term and any additional period for which this Agreement is extended or renewed. SECTION 2. TERMINATION OF EMPLOYMENT OTHER THAN FOLLOWING A CHANGE IN CONTROL EVENT. Subject to the terms of this Agreement, the Executive shall be entitled to receive severance payments from the Employer for services previously rendered to the Employer and its affiliates in the event the Executive's employment is terminated by the Employer other than for Cause (as defined in Section 8):

2 (a) OTHER THAN FOR CAUSE. If, during the term of this Agreement, but prior to a Change in Control Event, the employer terminates the Executive's employment other than for Cause: (i) the Employer shall pay to the Executive the following amounts: A. the sum of (1) the Executive's Annual Base Salary (as defined in Section 7) through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Annual Bonus (as defined in Section 7) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the effective date of termination of the Executive's employment (the "Date of Termination"), and the denominator of which is 365, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid, (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations") in a lump sum in cash in accordance with applicable, but in any event within 30 days of the Date of Termination; and B. an amount equal to the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus, in substantially equal proportionate installments in accordance with the Employer's normal payroll practices, commencing with the first payroll period in the month following the month in which the Date of Termination occurs, for a period of one year; and (ii) for one year after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Employer shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the welfare benefit plans, practices, policies and programs provided by the Employer and its affiliated companies (including, without limitation, medical, prescription, dental, disability, Executive life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer Executives of the Employer and its affiliated companies, as if the Executive's employment had not been terminated; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. The cost for these welfare benefits shall be paid by the Executive and Employer in the same proportion as paid by other peer Executives and the Employer as if the Executive had not been terminated. and (iii) to the extent not theretofore paid or provided, the Employer shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Employer and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) CAUSE. If the Executive's employment is terminated for Cause during the term of this Agreement, this Agreement shall terminate without further obligations to the Executive, other than the obligation to pay to the Executive (x) his Current Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other -2-

3 Benefits through the Date of Termination, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the term of this Agreement this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits through the Date of Termination. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination. SECTION 3. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL EVENT. Subject to the terms of this Agreement, the Executive shall be entitled to receive severance payments from the Employer for services previously rendered to the Employer and its affiliates if a Change in Control Event occurs during the term of this Agreement and the Executive's employment is terminated by the Executive for Good Reason or by the Employer other than for Cause during the period commencing upon such Change in Control Event (as defined in Section 10) and ending one year after a Change in Control (as defined in Section l0)(the "Change in Control Period"). (a) GOOD REASON: OTHER THAN FOR CAUSE. If a Change in Control Event occurs during the term of this Agreement and the Employer terminates the Executive's employment other than for Cause or the Executive terminates employment for Good Reason during the Change in Control Period: (i) the Employer shall pay to the Executive the following amounts: A. the "Accrued Obligations" in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination; and B. the amount equal to the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus, in a lump sum in cash within 30 days of the Date of Termination; and (ii) for one (1) year after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Employer shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the welfare benefit plans, practices, policies and programs provided by the Employer and its affiliated companies (including, without limitation, medical, prescription, dental, disability, Executive life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer Executives of the Employer and its affiliated companies, as if the Executive's employment had not been terminated; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. The cost for these welfare benefits shall be paid by the Executive and Employer in the same proportion as paid by other peer Executives and the Employer as if the Executive had not been terminated. and (iii) to the extent not theretofore paid or provided, the Employer shall timely pay or provide to the Executive all Other Benefits. (b) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Change in Control Period, this Agreement shall terminate without further obligations to the Executive, other than the obligation to pay to the Executive (x) his Annual Base Salary -3-

4 through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits through the Date of Termination, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Change in Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits through the Date of Termination. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash in accordance with applicable law, but in any event within 30 days of the Date of Termination. SECTION 4. ADDITIONAL PAYMENTS BY THE EMPLOYER. (a) Notwithstanding anything in this Agreement to the contrary and except as set forth in this Section 4, in the event it shall be determined that any compensation, benefit, payment or distribution by the Employer to or for the benefit of the Executive (whether paid or payable, or accrued or accruing, or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (including any succeeding provision) and/or any regulations, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax (including any interest or penalties imposed with respect to such taxes) imposed upon the Payments. (b) Subject to the provisions of Section 4(c), all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made a certified public accounting firm as may be designated by the Executive and reasonably acceptable to the Employer (the "Accounting Firm") which shall provide detailed supporting calculations both to the Employer and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Employer. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the Change in Control, the Executive may, in his/her discretion, appoint another nationally recognized accounting firm and reasonably acceptable to the Employer to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Employer. Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Employer to the Executive within five business days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Employer and the Executive. If as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, there are Gross-Up Payments which will not have been made by the Employer but should have been made ("Underpayment"), consistent with the calculations required to be made hereunder, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Employer to or for the benefit of the Executive. (c) The Executive shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of the Gross-Up -4-

5 Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim, (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by attorneys reasonably selected by the Employer, (iii) cooperate with the Employer in good faith in order effectively to contest such claim, and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(c), the Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Executive to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Employer pursuant to Section 4(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Employer's complying with the requirements of Section 4(c)) promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Employer pursuant to Section 4(c), a determination is made that the Executive shall not be entitled to -5-

6 any refund with respect to such claim and the Employer does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. SECTION 5. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Employer all secret or confidential information, knowledge or data relating to the Employer or any of its affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Employer or any of its affiliates and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Employer, the Executive shall not, without the prior written consent of the Employer or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Employer and those designated by it. SECTION 6. NON-SOLICITATION. The Executive covenants and agrees that the Executive will not, during the Executive's employment hereunder and for a period of one year thereafter, induce or attempt to induce any employee of the Employer or any the Employer's affiliates to render services for any other person. SECTION 7. DEFINITION OF "ANNUAL BASE SALARY", "ANNUAL BONUS" AND "RECENT ANNUAL BONUS". Annual base salary ("Annual Base Salary") means the greater of (a) the annual base salary payable to the Executive by the Employer and its affiliates as of the Date of Termination of employment (the "Current Annual Base Salary") or (b) the amount equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Employer and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Date of Termination occurs. Annual bonus (the "Annual Bonus") means the greater of (i) the targeted annual bonus that would be payable to the Executive for the fiscal year including the Date of Termination of employment if all performance targets under the Employer's annual incentive plan were met at the highest level of achievement or (ii) the Executive's highest bonus under the Employer's annual incentive plan, or any comparable bonus under any predecessor or successor plan, for the last fiscal year prior to fiscal year including the Date of Termination (annualized in the event that the Executive was not employed by the Employer for the whole of such fiscal year) (the "Recent Annual Bonus"). SECTION 8. DEFINITION OF "CAUSE". For purposes of this Agreement, "Cause" for termination of the Executive's employment by the Employer hereunder shall be deemed to exist if (a) the Executive is found guilty by a court of having committed fraud or theft against the Employer or having committed a felony involving moral turpitude, and such conviction is affirmed on appeal or the time for appeal has expired; (b) the Executive is found guilty by a court of having committed a crime involving moral turpitude and such conviction is affirmed on appeal or the time for appeal has expired; (c) in the reasonable judgment of the Board, the Executive has compromised trade secrets or other similarly valuable proprietary information of the Employer; (d) in the reasonable judgment of the Board, the Executive has continuously engaged in gross or willful misconduct that causes substantial and material harm to the business and operations of the Employer or any of its affiliated companies, the continuation of which will continue to substantially and materially harm the business and operations of the Employer or any of its affiliated companies in the future. -6-

7 SECTION 9. DEFINITION OF "GOOD REASON". "Good Reason" shall mean (1) any proposed reduction in the Executive's base salary, fringe benefits or bonus eligibility, except, in the case of fringe benefits or bonus eligibility, in connection with a reduction in such compensation generally applicable to peer Executives of the Employer; (2) the Executive has his responsibilities or areas of supervision with the Employer substantially reduced (in the Executive's reasonable judgment) or the Executive is requested to report to a lower level supervisor after a Change in Control; (3) the Executive has his responsibilities or areas of supervision with the Employer substantially increased without an appropriate increase in Executive's compensation (in the Executive's reasonable judgment); (4) the Executive is required to move his office or perform significant services outside the metropolitan area in which the office of the Executive was located or the Executive's services were primarily performed immediately prior to the Change in Control; or (5) after a Change in Control, the Executive is required to report to a supervisor other than the supervisor to whom the Executive was reporting prior to the Change in Control and the Executive and the successor supervisor have irreconcilable working relationship problems or difficulties. SECTION 10. DEFINITION OF "CHANGE IN CONTROL" AND "CHANGE IN CONTROL EVENT". A "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then outstanding shares of common stock of the Employer (the "Outstanding Employer Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Employer entitled to vote generally in the election of directors (the "Outstanding Employer Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Employer, (ii) any acquisition by any Executive benefit plan (or related trust) sponsored or maintained by the Employer or any corporation controlled by the Employer or (iii) any acquisition by any entity pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 10; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Employer's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Employer (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Employer Common Stock and Outstanding Employer Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Employer or all or substantially all of the Employer's assets either directly or through one or more subsidiaries) in -7-

8 substantially the same proportions as their ownership, immediately prior to such business Combination of the Outstanding Employer Common Stock and Outstanding Employer Voting Securities, as the case may be, and (ii) no Person (excluding any corporation resulting from such Business Combination or any Executive benefit plan (or related trust) of the Employer or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Employer of a complete liquidation or dissolution of the Employer. A "Change in Control Event" shall mean the earlier of (i) a Change in Control or (ii) the execution and delivery by the Employer of a document evidencing an intent to engage in a particular Change of Control that is subsequently effected. SECTION 11. EXPENSES. The Employer shall pay any and all reasonable legal fees and expenses incurred by the Executive in seeking to obtain or enforce, by bringing an action against the Employer, any right or benefit provided in this Agreement if the Executive is successful in whole or in part in such action. SECTION 12. WITHHOLDING. Notwithstanding anything in this Agreement to the contrary, all payments required to be made by the Employer hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Employer reasonably may determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Employer may, in its sole discretion, accept other provisions for the payment of taxes and any withholdings as required by law, provided that the Employer is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. SECTION 13. NO DUTY TO MITIGATE. The Executive's payments received hereunder shall be considered severance pay in consideration of past service, and pay in consideration of continued service from the date hereof and entitlement thereto shall not be governed by any duty to mitigate damages by seeking further employment. SECTION 14. AMENDMENTS OR ADDITIONS; ACTION BY BOARD OF DIRECTORS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. The prior approval by the Board shall be required in order for the Employer to authorize any amendments or additions to this Agreement. SECTION 15. GOVERNING LAW. This Agreement shall be governed by the laws of United States to the extent applicable and otherwise by the laws of the State of New York, excluding the choice of law rules thereof. SECTION 16. ASSIGNMENT. The rights and obligations of the Employer under this Agreement shall be binding upon its successors and assigns and may be assigned by the Employer to the successors in interest of the Employer. The rights and obligations of the Executive under this Agreement -8-

9 shall be binding upon his heirs, legatees, personal representatives, executors or administrators. This Agreement may not be assigned by the Executive, but any amount owed to the Executive upon his death shall inure to the benefit of his heirs, legatees, personal representatives, executors, or administrators. SECTION 17. NOTICE. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered, sent by overnight courier, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by telegram, telecopy, or telex, addressed as follows: If to the Employer: Proxicom, Inc. 11600 Sunrise Valley Drive Reston, VA 20191 Attn: Legal Department If to the Executive: Jay Thomas 3800 Moss Brooke Court Fairfax, VA 22031 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. SECTION 18. OTHER AGREEMENTS. This Agreement constitutes the entire agreement between the parties hereto providing for severance payments in connection with a termination of employment. This Agreement supersedes any other agreements, whether written or oral, providing for the payment of severance benefits by the Employer to the Executive. SECTION 19. SEVERABILITY. If any part of any provision of this Agreement shall be invalid or unenforceable under applicable law, such part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way affecting the remaining parts of such provision or the remaining provisions of this Agreement. -9-

10 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, or have caused this Agreement to be executed and delivered, to be effective as of February 16, 1999. PROXICOM, INC. By: /s/ KENNETH J. TARPEY --------------------------------------- Name: Kenneth J. Tarpey Title: Executive Vice President & CFO EXECUTIVE By: /s/ JAY E. THOMAS --------------------------------------- Jay E. Thomas --------------------------------------- Print Name -10-

1 EXHIBIT 21.1 PROXICOM, INC. SUBSIDIARIES Proxicom GmbH Proxicom International LLC Proxicom France, SAS Proxicom U.K. Ltd. C1arity IBD Limited

1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-79525, 333-95741, 333-37736) of Proxicom, Inc. of our report dated February 6, 2001 relating to the financial statements, which appear in this Form 10-K. /s/PricewaterhouseCoopers LLP McLean, Virginia February 23, 2001