<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VERTICALNET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
PENNSYLVANIA 7319 23-2815834
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL(I.R.S EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NO.) IDENTIFICATION
INCORPORATION OR NO.)
ORGANIZATION)
2 WALNUT GROVE DRIVE
HORSHAM, PA 19044
(215) 328-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARK L. WALSH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2 WALNUT GROVE DRIVE
HORSHAM, PA 19044
(215) 328-6100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
JAMES W. MCKENZIE, JR. BARBARA L. BECKER
MORGAN, LEWIS & BOCKIUS LLP CHADBOURNE & PARKE LLP
1701 MARKET STREET 30 ROCKEFELLER PLAZA
PHILADELPHIA, PA 19103-2921 NEW YORK, NY 10112
(215) 963-5000 (212) 408-5100
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value................. $30,000,000 $8,850
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT +
+SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated November 27, 1998
PROSPECTUS
(LOGO)
SHARES
VERTICALNET, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
shares.
No public market currently exists for our shares.
We propose to list the shares on the
Nasdaq National Market under the
symbol "VERT." Price Range $ to
$ per share.
Investing in the shares involves risks. Risk Factors begin on page 8.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discount.......................................... $ $
Proceeds to VerticalNet........................................ $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
, 1999
<PAGE>
[GRAPHIC SHOWING MULTIPLE SCREEN SHOTS OF HOME PAGES FOR
OUR VERTICAL TRADE COMMUNITIES.]
<PAGE>
[GRAPHIC SHOWING A STOREFRONT ADVERTISEMENT
ON ONE OF OUR VERTICAL TRADE COMMUNITIES.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 8
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Selected Financial Data............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Our Business........................ 31
Management.......................... 49
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Transactions.................................................. 58
Principal Shareholders................................................ 60
Description of Capital Stock.......................................... 61
Shares Eligible for Future Sale....................................... 66
Underwriting.......................................................... 68
Experts............................................................... 70
Legal Matters......................................................... 70
Additional Information................................................ 71
Reports to Security Holders........................................... 71
Index to the Company's Financial Statements........................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, the information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option;
. all outstanding shares of our convertible preferred stock will be
converted into shares of common stock at or immediately before the
closing of the offering;
. a -for- reverse stock split of our outstanding capital stock will
become effective before the closing of the offering; and
. no exercise of outstanding options or warrants to purchase common stock.
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes our company as we
currently expect it to exist at the time of this offering.
Unless the context in which such terms are used would require a different
meaning, all references to "VerticalNet," "we" or "our" refer to VerticalNet,
Inc. and its subsidiaries. Our subsidiaries include Boulder Interactive
Technology Services Co., known as RF GlobalNet, and Informatrix Worldwide,
Inc., both of which we acquired in September 1998. The acquisition of RF
GlobalNet is reflected in the financial information contained in this
prospectus on a pro forma basis giving effect to the acquisition as if it had
occurred on January 1, 1997, and the acquisition of Informatrix as if it had
occurred on October 15, 1997 ("on a pro forma basis").
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in the common
stock offered in this prospectus. All trademarks and trade names appearing in
this prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
VerticalNet is the largest creator, owner and operator of vertical trade
communities, which are targeted business-to-business communities of commerce on
the Internet. Our vertical trade communities are Web sites that act as
industry-specific comprehensive sources of information, interaction and
electronic commerce, also known as e-commerce. Vertical trade communities
combine:
. product . directories;
information;
. requests for . classifieds;
proposals;
. discussion . job listings;
forums;
. e-commerce . online professional education courses; and
opportunities;
. industry news; . virtual trade shows.
Each vertical trade community is individually branded, focuses on one
industrial sector and caters to individuals with similar professional
interests. We design each of our vertical trade communities to attract
technical and purchasing professionals with highly specialized product and
specification requirements, and purchasing authority or influence.
We satisfy a developing market not currently being adequately served through
traditional channels, such as trade publishers, trade shows and trade
associations. We also believe that this market is not currently being served by
Internet companies, which tend to focus on the consumer market and not on the
business-to-business market. Our vertical trade communities exploit the
interactive features and global reach of the Internet, allowing buyers to
research, source, contact and purchase from suppliers.
----------------
OUR 29 VERTICAL TRADE COMMUNITIES
<TABLE>
<CAPTION>
<S> <C>
ENVIRONMENT & UTILITY PROCESS INDUSTRIES
Water Online (wateronline.com) Chemical Online (chemicalonline.com)
Pollution Online Pharmaceutical Online (pharmaceuticalonline.com)
(pollutiononline.com) Semiconductor Online
Solid Waste Online (solidwaste.com) (semiconductoronline.com)
Pulp and Paper Online Hydrocarbon Online
(pulpandpaperonline.com) (hydrocarbononline.com)
Power Online (poweronline.com) Paint and Coatings Online
Public Works Online (paintandcoatings.com)
(publicworks.com) Food Online (foodonline.com)
ELECTRONICS Adhesives and Sealants Online
Computer OEM Online (adhesivesandsealants.com)
(computeroem.com) LIFE SCIENCES
Medical Design Online Bioresearch Online
(medicaldesignonline.com) (bioresearchonline.com)
Test and Measurement Online Laboratory Network Online
(testandmeasurement.com) (laboratorynetwork.com)
SERVICES FOOD & PACKAGING
Property and Casualty Online Food Ingredients Online (foodingredientsonline.com)
(propertyandcasualty.com) Packaging Network (packagingnetwork.com)
TELECOMMUNICATIONS Beverage Online (beverageonline.com)
RF GlobalNet (rfglobalnet.com) Bakery Online (bakeryonline.com)
Wireless Design Online Dairy Network (dairynetwork.com)
(wirelessdesignonline.com) Meat and Poultry Online (meatandpoultryonline.com)
Photonics Online
(photonicsonline.com)
Fiber Optics Online
(fiberopticsonline.com)
</TABLE>
3
PROSPECTUS SUMMARY
<PAGE>
We believe we are currently the only company operating a portfolio of
business-to-business vertical trade communities. Our portfolio strategy permits
us to:
. offer a comprehensive, consistent set of features and functionality in our
existing vertical trade communities, and replicate these offerings to new
vertical trade communities;
. leverage infrastructure, technology, marketing and management resources to
achieve economies of scale; and
. attract an increased audience, making our individual sites more appealing to
a broad array of advertisers and e-commerce enabled suppliers.
Our objective is to continue to be the largest creator, owner and operator of
a portfolio of targeted business-to-business vertical trade communities on the
Internet. Our strategy includes:
. expanding our user base and enhancing the user's experience with new
features, functionality and content;
. establishing and expanding multiple revenue streams;
. continuing to rapidly develop new vertical trade communities;
. forming strategic alliances for distribution and technology;
. pursuing strategic acquisitions; and
. expanding internationally.
We currently generate most of our revenues from Internet trade advertising,
including the development of "storefronts" (Web pages posted on our vertical
trade communities that focus on an advertiser's products and provide a link to
the advertiser's Web site). As our vertical trade communities expand, we expect
to generate increasing revenues from services such as:
. banner ads;
. education/career services;
. sponsored newsletters and discussion forums;
. virtual trade shows;
. e-commerce;
. online industrial auctions; and
. other special services.
Internet advertising and e-commerce are projected to experience significant
growth in the future:
. Internet advertising is projected to grow from $1.9 billion in 1998 to $7.7
billion in 2002 (Source: Jupiter Communications);
. Business-to-business Internet advertising is projected to grow from $290
million in 1998 to $2.6 billion in 2002 (Source: Forrester Research);
. Business-to-business e-commerce is projected to grow from $17 billion in 1998
to $327 billion in 2002 (Source: Forrester Research); and
. Online business auctions are projected to grow from $8.7 billion in 1998 to
$52.6 billion in 2002 (Source: Forrester Research).
We believe that the communities of professionals drawn to our vertical trade
communities are attractive audiences for targeted business-to-business
advertising on the Internet, as well as for the emerging business-to-business
e-commerce market. As of October 31, 1998, our advertising customers included,
among others, Asea Brown Boveri, FMC Corporation, Hewlett-Packard, Koch
Industries, Motorola, Schlumberger and U.S. Filter.
4
PROSPECTUS SUMMARY
<PAGE>
STRATEGIC ALLIANCES
As part of our strategy to increase the number of users that visit our
vertical trade communities and to develop e-commerce activities, we actively
pursue strategic alliances. To date, we have entered into several strategic
alliances including a content distribution alliance with Excite, Inc. and
e-commerce alliances with Junglee Corp. and ONSALE, Inc.
ACQUISITIONS
As part of our growth strategy, we acquire other vertical trade communities.
On September 1, 1998, we acquired RF GlobalNet. RF GlobalNet operates
rfglobalnet.com, a vertical trade community focused on professionals in the
radio frequency and wireless communications industry. We also acquired
Informatrix on September 30, 1998. Informatrix operates a vertical trade
community, propertyandcasualty.com, that caters to risk managers, agents,
brokers and other professionals in the insurance industry.
ABOUT OUR COMPANY
Principal Executive Offices:
VerticalNet, Inc.
2 Walnut Grove Drive
Horsham, Pennsylvania 19044
Phone: (215) 328-6100
Incorporation: 1995 in Pennsylvania.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among other
things, e-commerce strategy, acquisition and expansion strategy, development of
services, use of proceeds, projected capital expenditures, liquidity,
development of additional revenue sources, development and maintenance of
profitable strategic alliances, market acceptance of the Internet, acquisition
and/or development of profitable new vertical trade communities, technological
advancement, ability to develop "brand" identification, and global expansion.
These statements may be found in the sections of this prospectus entitled
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and in this prospectus generally. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including all the risks discussed in "Risk Factors"
and elsewhere in this prospectus.
This summary highlights some information from this prospectus and may not
contain all the information that is important to you.
5
PROSPECTUS SUMMARY
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered hereby........... shares
Common Stock to be outstanding after
the offering (1)..................... shares
Use of proceeds....................... to repay debt and for investments in
existing and future
vertical trade communities, general
corporate purposes and
potential strategic acquisitions. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol..............................."VERT"
</TABLE>
- --------
(1) Excludes:
. shares of common stock issuable upon the exercise of options
outstanding as of October 31, 1998 under our Amended and Restated 1996
Equity Compensation Plan at a weighted average exercise price of $ per
share;
. shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 1998 at a weighted average exercise price
of $ per share;
. shares reserved for future grants under the equity compensation plan;
and
. shares earned but not yet distributed to the former shareholders of
Informatrix pursuant to the terms of a purchase agreement with
Informatrix.
6
PROSPECTUS SUMMARY
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 28, 1995
(INCEPTION) YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
TO ----------------------------- ----------------------------------------
DECEMBER 31, 1997 1998
1995 1996 1997 PRO FORMA (1) 1997 1998 PRO FORMA (1)
------------- ------ ------ ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................ $ 16 $ 285 $ 792 $ 1,118 $ 551 $ 1,862 $ 2,332
Operating loss.......... (210) (702) (4,664) (5,675) (2,813) (8,350) (9,813)
Net loss................ (211) (709) (4,779) (5,789) (2,842) (8,334) (9,801)
Basic and diluted net
loss per share.........
Shares used in basic and
diluted net loss per
share calculation......
Pro forma basic and di-
luted net loss per
share (2)..............
Shares used in pro forma
basic and diluted net
loss per common share
calculation (2)........
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA (3) AS ADJUSTED (3)(4)
------ --------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $3,794 $10,794
Working capital............................ 1,122 1,122
Total assets............................... 9,158 16,358
Long-term debt, less current portion....... 374 374
Total shareholders' equity................. 4,709 4,909
</TABLE>
- --------
(1) Pro forma gives effect to our acquisition of RF GlobalNet as if it had
occurred on January 1, 1997 and our acquisition of Informatrix as if it had
occurred on October 15, 1997 (inception).
(2) See Note 1 to the financial statements for a description of the computation
of the pro forma basic and diluted net loss per share and the number of
shares used in computing the pro forma basic and diluted net loss per share
data.
(3) Pro forma gives effect to the issuance of the notes to ICG and Progress
Bank and the issuance of warrants to Internet Capital Group, L.L.C. and
Progress Bank valued at $200,000.
(4) Adjusted to reflect the sale of shares of common stock offered hereby
(at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and commissions, and
offering expenses) and the anticipated application of the net proceeds
therefrom.
7
PROSPECTUS SUMMARY
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares of our common stock.
OUR LIMITED OPERATING HISTORY
We launched our first vertical trade community in October 1995. Accordingly,
we have a limited operating history upon which you may evaluate us. In
addition, our revenue model is evolving. Currently, our revenues are primarily
generated from the initial construction of Web sites and from the sale of
advertising on our vertical trade communities. In the future, we expect to
generate revenue from multiple sources, including e-commerce and business
services. We may not be able to sustain our current revenues or successfully
generate e-commerce or business services revenue. If we do not generate such
revenue, our business will be materially adversely affected.
OUR ANTICIPATED CONTINUED LOSSES
Our limited operating history makes predicting our future operating results
difficult. Although our revenues have grown in recent periods, they may not
continue to grow or even continue at their current level. To date, we have not
been profitable. We may never be profitable or, if we become profitable, we may
be unable to sustain profitability. We have incurred significant losses since
inception. We reported a net loss of $8.3 million for the nine months ended
September 30, 1998. We expect to continue to incur significant losses for the
foreseeable future. As of September 30, 1998, our accumulated deficit was $14.0
million.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS
As a result of our limited operating history, we do not have historical
financial data for any significant period of time on which to base planned
operating expenses. Some of our expenses are fixed, including certain non-
cancellable agreements with content and navigational service providers, as well
as equipment leases and real estate leases. If our revenues do not increase, we
may not be able to compensate by reducing expenses in a timely manner. In
addition, we plan to significantly increase our operating expenses to:
. launch additional vertical trade communities;
. increase our sales and marketing operations;
. enter into additional sponsorship agreements;
. broaden our customer support capabilities; and
. pursue strategic alliances.
Expenses may also increase due to the potential impact of goodwill and other
charges resulting from completed and future acquisitions.
Additionally, leading Web sites, browser providers and other distribution
channels may begin to charge us to provide access to our products and services.
If any of these expenses are not accompanied by increased revenues, our
business, financial condition and operating results would be materially
adversely affected.
We expect that our quarterly operating results will fluctuate significantly
due to many factors, a number of which are discussed in these "Risk Factors."
Many of these factors are beyond our control.
Due to the limited history of businesses relying on the Internet as a
commercial medium, we believe that period-to-period comparisons of our
operating results are not meaningful. Additionally, if our operating results in
one or more quarters do not meet the securities analysts' or your expectations,
the price of our common stock could be materially adversely affected.
RISK FACTORS 8
<PAGE>
SEASONALITY OF OUR REVENUES
Some of our revenue is seasonal. We experience seasonality in our
advertising revenue because advertising and media buying tends to be highest
in the first and fourth quarters of each calendar year. We also experience
seasonality in our traffic. User traffic on our vertical trade communities and
the Web sites of our partners is lower during the summer and year-end vacation
and holiday periods, when usage of the Web and our services typically
declines.
RELIANCE ON ADVERTISING REVENUES; UNCERTAIN ADOPTION OF THE INTERNET AS AN
ADVERTISING MEDIUM
We currently rely on revenues generated from the sale of advertising on our
vertical trade communities for substantially all of our revenues. To be
successful, we must continue to develop advertising and other sources of
revenues. Our ability to increase our advertising revenues may depend, among
other things, on many factors, including:
. advertisers' acceptance of the Internet as a legitimate advertising medium;
. the development of a large base of users on our vertical trade communities
who possess demographic characteristics attractive to advertisers; and
. the expansion of our advertising sales force.
It is difficult to predict advertising revenues because a wide range of
rates are quoted and a variety of pricing models are offered by different
vendors for a variety of advertising services. For example, we currently base
our storefront advertising rates on a variety of factors including: the
maturity of the particular vertical trade community, the number of storefronts
and amount of other advertising purchased and the length of the advertising
contract. In the future, advertising rates may be based on different
parameters such as the number of sales leads or "click throughs" from our
vertical trade communities to advertisers' Web sites. Changes in industry
pricing practices could materially adversely affect our revenues in the
future. Other factors could also affect our revenues. For example, widespread
use of "filter" software programs that limit access to storefront advertising
from the Internet user's browser could reduce advertising on the Internet,
which would materially adversely affect our business, financial condition and
operating results.
The growth of Internet advertising requires validation of the Internet as an
effective advertising medium. This validation has yet to fully occur.
Acceptance of the Internet among advertisers will also depend on growth in the
commercial use of the Internet. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective and
measurable medium for advertising, our business, financial condition and
operating results could be materially adversely affected.
No standards have been widely accepted to measure the effectiveness of
Internet advertising. If such standards do not develop, existing advertisers
may not continue their current levels of Internet advertising and advertisers
who are not currently advertising on the Internet may be reluctant to do so.
Our business, financial condition and operating results would be adversely
affected if the market for Internet advertising fails to develop or develops
slower than expected.
9
RISK FACTORS
<PAGE>
EXPECTATION OF DEVELOPING ADDITIONAL REVENUE SOURCES; POTENTIAL DEPENDENCE ON
DEVELOPMENT OF THE E-COMMERCE MARKET
We plan to generate revenues through revenue-sharing relationships with
commerce partners in addition to selling advertising. To date, we have not
generated any material revenues from e-commerce. We do not anticipate
generating significant revenues from e-commerce until, at the earliest, 2000,
if ever. To generate significant e-commerce revenues, we will have to build or
license an e-commerce platform. We currently have entered into agreements with
certain commerce partners. For example, we have entered into an agreement with
ONSALE, to run industrial auction Web sites. To date, we have not earned, and
may never earn any revenues under this agreement. Pursuant to our agreement
with ONSALE, we may not enter into auction services agreements with other
commerce partners. If we do not generate any revenue from commerce related
arrangements, it could have a material adverse impact on our business,
financial condition and operating results.
Our long-term success depends on widespread market-acceptance of e-commerce.
A number of factors could prevent such acceptance, including the following:
. e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors;
. the necessary network infrastructure for substantial growth in usage of the
Internet may not be adequately developed;
. increased government regulation may adversely affect the viability of e-
commerce;
. insufficient availability of telecommunications services or changes in
telecommunication services could result in slower response times; and
. adverse publicity and consumer concern about the security of e-commerce
transactions could discourage its acceptance and growth.
If e-commerce does not grow or grows slower than expected, our business will
suffer.
INTENSE COMPETITION
Competition for Internet products and services, advertising and e-commerce is
intense. We expect that competition will continue to intensify. Barriers to
entry are minimal, and competitors can launch new Web sites at a relatively low
cost. We compete for a share of a customer's advertising budget with online
services and traditional off-line media, such as print and trade associations.
Although we believe that there may be opportunities for several suppliers of
products and services similar to ours, a single supplier may dominate the
market. Although to date there are no companies with a portfolio of vertical
trade communities, several companies offer competitive vertical trade
communities targeting certain of our target markets. We expect that additional
companies will offer competing vertical trade communities on a standalone or
portfolio basis.
Our competitors may develop Internet products or services that are superior
to or have greater market acceptance than our solutions. If we are unable to
compete successfully against our competitors, our business, financial condition
and operating results will be adversely affected.
Many of our competitors have much greater brand recognition and greater
financial, marketing and other resources than ours. This may place us at a
disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives.
10
RISK FACTORS
<PAGE>
SECURITY OF TRANSACTIONS AND CONFIDENTIAL INFORMATION
We believe that concern regarding the security of confidential information
transmitted over the Internet (such as credit card numbers) prevents many
potential customers from engaging in online transactions. We have included
basic security features in certain of our products to protect the privacy and
integrity of customer data, such as password requirements for access to
certain portions of our vertical trade communities. We do not currently use
authentication technology (which requires certain passwords and other
information to prevent unauthorized persons from accessing a customer's
information) or encryption (which transforms information into a "code"
designed to be unreadable by third parties) to protect confidential
information such as credit card numbers. However, we intend to license
encryption technology to protect confidential transaction data.
Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems.
If a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more prevalent (and consequently
becomes the focus of our development of direct marketing products), our
customers will become more concerned about security. If we do not add
sufficient security features to future product releases, our products may not
achieve an acceptable level of market acceptance or if purchased by customers,
may result in additional legal exposure. The occurrence of any of the
foregoing could materially adversely affect our business, financial condition
and operating results.
POTENTIAL DEPENDENCE ON THIRD PARTY RELATIONSHIPS
We use strategic alliances with other Internet companies to create traffic
on our vertical trade communities and consequently, to generate revenues.
These strategic alliances allow us to link our vertical trade communities to
navigation services such as those offered by Excite, and on other Web sites
such as ONSALE. The success of these relationships depends on the amount of
increased traffic we receive from the alliance partners' Web sites. These
arrangements may not generate the expected number of new customers.
Our agreement with Excite has a term of three years (and is renewable for
annual periods thereafter), but is terminable on 15 days prior written notice
at the end of any year. Our agreement with ONSALE has a term of two years, but
may be terminated on 90 days written notice after completion of the initial
six months. If any of these agreements, or other agreements we enter into, are
terminated, the traffic on our vertical trade communities could decrease or
our advertising revenues derived from the sales of advertising on co-branded
pages could decrease. We cannot assure you we will be able to renew successful
strategic alliance agreements or enter into new arrangements with others.
Additionally, we rely upon relationships with several third parties that are
not based upon a written agreement and may be terminated at any time by either
party. If any of these relationships are terminated the traffic on our
vertical trade communities could decrease. If we are unable to further develop
11
RISK FACTORS
<PAGE>
and successfully administer our strategic alliances and advertising campaigns,
our business will suffer.
DEPENDENCE ON THE INTERNET
Our market is new and rapidly evolving. Our business would be adversely
affected if Internet usage does not continue to grow. Internet usage may be
inhibited by a number of reasons, such as:
. infrastructure;
. security concerns;
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, Web sites may from time to time
experience interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well as
usage of our vertical trade communities, could be adversely affected.
UNCERTAIN ACCEPTANCE OF OUR INTERNET CONTENT
Our future success depends upon our ability to deliver compelling Internet
content about various industries to attract users with demographic
characteristics valuable to our advertising customers. We may be unable to
anticipate or respond to rapidly changing buyer preferences to attract enough
users to our vertical trade communities. Internet users can freely navigate and
instantly switch among a large number of Internet sites. Many of these Internet
sites offer original content. Thus, it is difficult for us to distinguish our
content and attract users. If we are unable to develop Internet content that
attracts a loyal user base possessing demographic characteristics attractive to
advertisers, it could have a material adverse effect on our business, financial
condition and operating results.
OUR DEPENDENCE ON CONTENT PROVIDERS
We rely on third party content providers, such as trade publications and news
wires. It is critical to our business that we maintain and build our existing
relationships with content providers. Many of our agreements with third party
content providers are for initial terms of one to two years. The content
providers may choose not to renew the agreements or may terminate the
agreements early if we do not fulfill our contractual obligations, including
our payment obligations. If a significant number of content providers terminate
our agreements with them, it could result in decreased traffic on our vertical
trade communities and decreased advertising revenue. Because our agreements
with certain of our content providers are nonexclusive, a competitor could
offer content similar to or the same as ours.
LICENSEE FEES PAYABLE TO CONTENT PROVIDERS
License fees to content providers may increase as competition for such
content increases. Our content providers may not enter into new agreements with
us on similar terms as our current agreements. If licensing fees increase, it
could materially adversely affect our business, financial condition and
operating results.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
To be successful, we must establish and strengthen the brand awareness of the
"VerticalNet" brand as well as the brands
12
RISK FACTORS
<PAGE>
associated with each individual vertical trade community (e.g.
wateronline.com). We believe that brand recognition will become more important
in the future with the growing number of Internet sites. Our brand awareness
could be diluted, which could adversely affect our business, if users do not
perceive our products and services to be of high quality. If our brand
awareness is diluted, it could decrease the attractiveness of our audiences to
advertisers, thus decreasing advertising revenues.
MANAGEMENT OF OUR GROWTH
We have grown, and expect to continue to grow rapidly. This growth is likely
to place a significant strain on our resources and systems. To manage our
growth, we must implement systems and train and manage our employees. Many of
our senior management have only recently joined us. These individuals have not
previously worked together and are in the process of becoming integrated as a
management team. We cannot assure you that they will be able to effectively or
successfully manage our growth.
RISKS OF INFRINGEMENT AND PROPRIETARY RIGHTS
Proprietary rights are important to our success and our competitive
position. Although we have applied for several trademarks, none have been
issued to date. We currently have two pending trademark applications.
Generally, our domain names for our vertical trade communities are not
protectible as trademarks because they are too generic. Although we seek to
protect proprietary rights, our actions may be inadequate to protect our
trademarks and other proprietary rights or to prevent others from claiming
violations of their trademarks and other proprietary rights. In addition,
effective copyright and trademark protection may be unenforceable or limited
in certain countries, and the global nature of the Internet makes it
impossible to control the ultimate destination of our work. We also license
content from third parties and it is possible that we could become subject to
infringement actions based upon the content licensed from these third parties.
We generally obtain representations as to the origin and ownership of such
licensed content; however, this may not adequately protect us. Any of these
claims, with or without merit, could subject us to costly litigation and the
diversion of our technical and management personnel.
RISKS ASSOCIATED WITH DOMAIN NAMES
We currently hold various Internet domain names relating to our brand. These
domain names include wateronline.com, wirelessdesignonline.com,
pollutiononline.com and other domain names. The acquisition and maintenance of
domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the
".com," ".net" and ".org" generic top-level domains. The regulation of domain
names in the United States and in foreign countries is subject to change. As a
result, we may not be able to acquire or maintain relevant domain names in all
countries where we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks is unclear.
We may not be able to prevent third parties from acquiring domain names that
are similar to our domain names, which could materially adversely affect our
business, financial condition and operating results.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
We have made and plan to continue to make investments in complementary
companies, technologies and assets. Recently
13
RISK FACTORS
<PAGE>
we acquired Informatrix and RF GlobalNet. These companies are in an early stage
of development and we expect them to incur substantial losses. Our acquisitions
may not result in any return on our investment and we may lose our entire
investment. Our acquisition strategy is subject to the following risks:
. we may not be able to identify additional suitable acquisition candidates
available for sale at reasonable prices;
. we may not be able to consummate any acquisition or successfully integrate
services products and personnel of any acquisition into our operations;
. acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures in acquisitions;
. we may acquire companies in markets in which we have little experience; and
. we may be required to incur debt or issue equity securities, which may be
dilutive to existing shareholders, to pay for acquisitions.
POSSIBLE LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE INTERNET
We may be subject to legal claims relating to the content in our vertical
trade communities, or the downloading and distribution of such content. For
example, persons may bring claims against us if material that is inappropriate
for viewing by young children can be accessed from our vertical trade
communities. Claims could also involve matters such as defamation, invasion of
privacy, and copyright infringement. Providers of Internet products and
services have been sued in the past (sometimes successfully) based on the
content of material. In addition, some of the content provided on our vertical
trade communities is drawn from data compiled by other parties, including
governmental and commercial sources, and we re-key the data. This data may have
errors. If our content is improperly used or if we supply incorrect
information, it could result in unexpected liability. Our insurance may not
cover claims of this type, or may not provide sufficient coverage. Our business
financial condition and operating results could suffer a material adverse
effect if costs resulting from these claims are not covered by our insurance or
exceed our coverage.
RISK OF SYSTEM FAILURE; ABSENCE OF REDUNDANT FACILITIES
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. We maintain most of our computer
systems in two Web-hosting facilities in New Jersey. Interruptions could result
from natural disasters as well as power loss, telecommunications failure and
similar events. Any system interruptions that cause our vertical trade
communities to be unavailable, and reduce the attractiveness of our vertical
trade communities to advertisers, could materially adversely affect our
business, financial condition and operating results.
CAPACITY CONSTRAINTS
As traffic in our vertical trade communities continues to increase, we must
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate of increase
in our vertical trade communities. In addition, we may not be able to expand
and upgrade our systems and infrastructure capabilities to accommodate
increased use of our vertical trade communities. If we do not appropriately
upgrade our systems and infrastructure, our business will suffer a material
adverse effect.
RAPID TECHNOLOGICAL CHANGE
Our market is characterized by rapid technological change and frequent new
product
14
RISK FACTORS
<PAGE>
announcements. Significant technological changes could render our existing
vertical trade community technology obsolete. To be successful, we must adapt
to our rapidly changing market by continually improving the responsiveness,
functionality and features of our vertical trade communities and by developing
new features to meet customer needs. Our success will depend, in part, on our
ability to license leading technologies useful in our business, enhance our
existing services, develop new services and technology that address the needs
of our customers, and respond to technological advances and emerging industry
standards in a cost-effective and timely basis. If we are unable to
successfully respond to these developments or do not respond in a cost-
effective way, our business, financial condition and operating results will be
adversely affected.
DEPENDENCE ON OUR KEY PERSONNEL
We believe that our success will depend on continued employment of our
senior management team and key technical personnel. If one or more members of
our senior management team were unable or unwilling to continue in their
present positions, our business, financial condition and operating results
could be materially adversely affected. Most of our senior management do not
have employment agreements. We carry key person life insurance on certain, but
not on all, of our senior management personnel.
Our success also depends on having a highly trained sales force and
telesales group. Our telesales group was formed recently. We will need to
continue to hire additional personnel as our business grows. A shortage in the
number of trained salespeople could limit our ability to increase sales in our
existing vertical trade communities and to sell as we launch new vertical
trade communities.
We plan to expand our employee base to manage our anticipated growth.
Competition for personnel, particularly for employees with technical
expertise, is intense. Our business, financial condition and operating results
will be materially adversely affected if we cannot hire and retain suitable
personnel.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices or engage in
similar normal business activities.
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include certain products purchased from third parties, computers,
software, telephone systems and other equipment used internally. We are
currently in the process of analyzing whether our systems are Year 2000
compliant. We expect to resolve Year 2000 compliance issues primarily through
normal upgrades of our software or by replacing existing software with Year
2000 compliant applications. The cost of these upgrades or replacements, is
not expected to be material to our financial position or results of
operations. However, we cannot assure you that such upgrades and replacements
can be completed on schedule or within estimated costs or will successfully
address our Year 2000 compliance issues.
In addition, we are currently conducting an analysis to determine the extent
to which key
15
RISK FACTORS
<PAGE>
distributors, vendors and suppliers have Year 2000 issues. If they are not yet
Year 2000 compliant, we are asking them to provide a description of their plans
to become so. If our present efforts to address the Year 2000 compliance issues
are not successful, or if distributors, suppliers and other third parties with
which we conduct business do not successfully address such issues, our
business, financial condition and operating results could be materially and
adversely affected.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
We are subject to various laws and regulations relating to our business. Few
laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations with respect to the Internet may be adopted. Such laws and
regulations may cover issues such as:
. user privacy;
. pricing;
. content;
. copyrights;
. distribution; and
. characteristics and quality of products and services.
In addition, the growth of the Internet and e-commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations may impede the
growth of the Internet, which could decrease our potential revenues from e-
commerce or otherwise adversely affect our business, financial condition and
operating results.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding on-line copyright infringement. Although not
yet enacted, the Congress is considering laws regarding Internet taxation. The
European Union recently enacted new privacy regulations. These are all recent
enactments, and there is uncertainty regarding their marketplace impact. In
addition, various jurisdictions already have enacted laws that are not
specifically directed to e-commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
expose us to substantial liability. Any new legislation or regulation regarding
the Internet, or the application of existing laws and regulations to the
Internet, could materially adversely affect us. If we were alleged to violate
federal, state or foreign, civil or criminal law, even if we could successfully
defend such claims, it could materially adversely affect us.
We believe that our use of third party material on our vertical trade
communities is permitted under current provisions of copyright law. However,
because legal rights to certain aspects of Internet content and commerce are
not clearly settled, our ability to rely upon certain exemptions or defenses
under copyright law is uncertain.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission in the
same manner as other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on such providers.
If either of these petitions are granted, the costs of communicating on the
16
RISK FACTORS
<PAGE>
Internet could increase substantially. This, in turn, could slow the growth of
use of the Internet. Any such legislation or regulation could materially
adversely affect our business, financial condition and operating results.
BENEFITS OF THE OFFERING TO OUR CURRENT SHAREHOLDERS
Our current shareholders, including members of management, will benefit from
the creation of a public market for our common stock and the increase in the
market value of any shares they hold. The excess of market value of the
publicly traded shares over amounts paid for common stock (including common
stock issuable upon conversion of the convertible preferred stock) by our
executive officers and directors is approximately $ million. In addition,
the excess of the assumed initial public offering price over the aggregate
exercise price of options and warrants held by our executive officers and
directors is approximately $ million.
SHARES ELIGIBLE FOR FUTURE SALE
If our shareholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following the offering, then the market price of our common
stock could fall. Restrictions under the securities laws and certain lock-up
agreements limit the number of shares of common stock available for sale in
the public market. The holders of shares of common stock, shares of
convertible preferred stock (that will automatically convert to shares of
common stock before the offering) and warrants and options exercisable into an
aggregate of shares of common stock have agreed not to sell any such
securities for 180 days after the offering without the prior written consent
of Lehman Brothers Inc. However, Lehman Brothers may, in its sole discretion,
release all or any portion of the securities subject to such lock-up
agreements.
The holders of shares of preferred stock (that will automatically
convert to shares of common stock prior to the offering) and certain
warrants have demand and piggy-back registration rights. The exercise of such
rights could adversely affect the market price of our common stock. We also
may shortly file a registration statement to register all shares of common
stock under our stock option plans. After such registration statement is
effective, shares issued upon exercise of stock options will be eligible for
resale in the public market without restriction.
CERTAIN ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
VerticalNet is a Pennsylvania corporation. Certain provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to
shareholders. Our articles of incorporation provide that our board of
directors may issue preferred stock without shareholder approval. In addition,
our bylaws provide for a classified board, with each board member serving a
staggered three year term. The issuance of preferred stock and the existence
of a classified board could make it more difficult for a third-party to
acquire us.
NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiations between representatives of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
17 RISK FACTORS
<PAGE>
POSSIBLE VOLATILITY OF OUR COMMON STOCK PRICE
The market price of our common stock is likely to be highly volatile. Factors
that could cause such volatility may include, among other things:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new sales formats or new products or services;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet industry;
. changes in the market valuations of other Internet companies;
. announcements by us or our competitors of significant acquisitions, strategic
partnerships or joint ventures;
. capital commitments;
. additions or departures of key personnel; and
. sales of common stock.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
In addition, the stock market in general, and the market for Internet-related
and technology companies in particular, has been highly volatile. Investors may
not be able to resell their shares following periods of volatility. The trading
prices of many technology and Internet-related companies' stocks have reached
historical highs within the last 52 weeks and have reflected relative
valuations substantially above historical levels. These trading prices may not
be sustained.
DILUTION
The initial public offering price per share will exceed the net tangible book
value per share. Accordingly, purchasers of the shares sold in the offering
will experience immediate and substantial dilution in their investment.
Additional dilution will occur upon exercise of outstanding warrants and
options.
NO INTENTION TO PAY DIVIDENDS
We do not expect to pay any cash dividends on our common stock in the
foreseeable future.
18
RISK FACTORS
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately $
million ($ million if the underwriters' exercise their over-allotment option
in full), assuming an initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and expenses of the
offering.
We expect to use the net proceeds from the offering to repay the debt
described below and for investments in existing and future vertical trade
communities, and for general corporate purposes and potential strategic
acquisitions. We expect to use $5.0 million of the net proceeds to repay a
convertible note issued to Internet Capital Group, L.L.C. ("ICG"). This note
bears interest at the prime rate, which was 7.75% as of November 24, 1998. We
also expect to use $2.0 million of the net proceeds to repay a note issued to
Progress Bank. This note bears interest at the prime rate plus 1.5%. As of the
date of this prospectus, we cannot specify with certainty all of the particular
uses for the remaining net proceeds we will have upon completion of the
offering. Accordingly, our management will have broad discretion in the
application of the net proceeds.
Pending such uses, we intend to invest the net proceeds in interest-bearing,
investment-grade instruments, certificates of deposit, or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings to finance operations and the expansion of our
business. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, operating results, capital requirements and such other factors as
the board of directors deems relevant.
19
USE OF PROCEEDS/DIVIDEND POLICY
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1998.
Our capitalization is presented:
(1) on an actual basis;
(2) on a pro forma basis to give effect to: (a) the automatic conversion of
all outstanding shares of preferred stock into common stock at or
immediately before the consummation of the offering, (b) the loans from
ICG and Progress Bank and (c) the issuance of warrants to ICG and
Progress Bank valued at $200,000; and
(3) on a pro forma basis as adjusted to reflect our receipt of the
estimated net proceeds from the sale of shares of common stock offered
in the offering (at an assumed initial public offering price of $ per
share), after deducting underwriting discounts and commissions and
estimated offering expenses.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(1)
-------- -------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt............................ $ -- $ 7,000 $
Long-term debt, less current portion....... $ 374 $ 374 $
Shareholders' equity:
Preferred stock, $.01 par value;
40,000,000 shares authorized; 15,221,048
shares issued and outstanding, actual;
none issued and outstanding, pro forma
and pro forma as adjusted............... 152 --
Common stock, $.01 par value; 40,000,000
shares authorized; 5,128,497 shares
issued and outstanding, actual;
24,111,445 shares issued and
outstanding, pro forma; and shares
issued and outstanding, pro forma as
adjusted(1)............................. 51 241
Additional paid-in capital................. 18,738 18,900
Deferred compensation...................... (139) (139)
Accumulated deficit........................ (14,033) (14,033)
Treasury stock (at cost)................... (60) (60)
-------- -------- ------
Total shareholders' equity............. 4,709 4,909
-------- -------- ------
Total capitalization................. $ 5,083 $ 5,283
======== ======== ======
</TABLE>
- --------
(1) Excludes:
. shares of common stock issuable upon the exercise of options
outstanding as of October 31, 1998 under the equity compensation plan at
a weighted average exercise price of $ per share;
. shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 1998 at a weighted average exercise price
of $ per share;
. shares reserved for future grants under the plan; and
. shares earned but not yet distributed to the former shareholders of
Informatrix pursuant to the terms of a purchase agreement with
Informatrix. See "Description of Capital Stock--Warrants" and
"Management--Amended and Restated 1996 Equity Compensation Plan."
20
CAPITALIZATION
<PAGE>
DILUTION
As of September 30, 1998, our net tangible book value was $ or $ per
share of common stock. "Net tangible book value" per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the number of shares of common stock outstanding. As of
September 30, 1998, our net tangible book value, on a pro forma basis as
adjusted for the sale of the shares offered in the offering and application
of the net proceeds from such sale of $ million (based on an assumed initial
public offering price of $ per share and after deducting the underwriting
discounts and commissions and other estimated offering expenses), would have
been approximately $ per share. This represents an immediate increase of $
per share to existing shareholders and an immediate dilution of $ per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $
Pro forma net tangible book value per share as of September
30, 1998.................................................. $
-----
Increase per share attributable to new investors...........
Net tangible book value per share after the offering.........
-----
Dilution per share to new investors.......................... $
=====
</TABLE>
The following table summarizes on a pro forma basis as of September 30, 1998
the differences between the total consideration paid and the average price per
share paid by the existing shareholders and the new investors with respect to
the number of shares of common stock purchased from us (based on an assumed
initial public offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ % $ % $
New investors...........
-------- ------- ---------- -------- ------
Total................. % $ % $
======== ======= ========== ======== ======
</TABLE>
- --------
(1) The above tables exclude:
. shares of common stock issuable upon the exercise of options
outstanding as of October 31, 1998 under the equity compensation plan at
a weighted average exercise price of $ per share;
. shares of common stock issuable upon the exercise of warrants
outstanding as of October 31, 1998 at a weighted average exercise price
of $ per share;
. shares reserved for future grants under the equity compensation
plan; and
. shares earned but not yet distributed to the former shareholders of
Informatrix pursuant to the terms of a purchase agreement with
Informatrix.
21
DILUTION
<PAGE>
SELECTED FINANCIAL DATA
We derived the selected historical and pro forma financial data presented
below from our historical and pro forma financial statements (and related
notes) included elsewhere in this prospectus. You should read the selected
financial data together with our historical and pro forma financial statements
and the section of the prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
KPMG Peat Marwick LLP, independent certified public accountants, audited our
historical financial statements for the period from July 28, 1995 (inception)
to December 31, 1995 and as of and for the years ended December 31, 1996 and
December 31, 1997. Their report appears elsewhere in this prospectus. Our
historical financial statements as of and for the nine months ended September
30, 1997 and September 30, 1998 are unaudited, and in our opinion include all
adjustments, consisting of normal adjustments, necessary for a fair
presentation of the results for the unaudited periods. You should not rely on
unaudited interim results as being indicative of results we may expect for the
full year.
We prepared the unaudited pro forma financial information for the year ended
December 31, 1997 and for the nine months ended September 30,1998 by combining
the historical results of the two companies we acquired, RF GlobalNet and
Informatrix, with our historical results using the purchase method of
accounting. This is described in the notes accompanying the information below.
We have presented this information to give you a better picture of what our
business might have looked like if we had owned RF GlobalNet since January 1,
1997 and Informatrix since October 15, 1997 (inception). These companies may
have performed differently if they had actually been combined with our
operations. You should not rely on the unaudited pro forma information as being
indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions.
22
SELECTED FINANCIAL DATA
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 28, 1995 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ---------------------------- ------------------------------
DECEMBER 31, 1997 1998
1995 1996 1997 PRO FORMA(1) 1997 1998 PRO FORMA(1)
-------------- ----- ------- ------------ ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................ $ 16 $ 285 $ 792 $ 1,118 $ 551 $ 1,862 $ 2,332
EXPENSES:
Editorial and
operational............ 24 214 1,056 1,234 674 2,101 2,296
Product development..... 22 214 711 740 451 798 874
Sales and marketing..... 147 268 2,301 2,464 1,348 4,406 4,955
General and
administrative......... 33 292 1,388 2,354 891 2,907 4,020
----- ----- ------- ------- ------- ------- -------
Operating loss.......... (210) (703) (4,664) (5,674) (2,813) (8,350) (9,813)
Interest, net........... (1) (6) (115) (115) (29) 15 12
----- ----- ------- ------- ------- ------- -------
Net loss................ $(211) $(709) $(4,779) $(5,789) $(2,842) $(8,335) $(9,801)
===== ===== ======= ======= ======= ======= =======
Basic and diluted net
loss per share.........
Shares outstanding used
in basic and diluted
net loss per share
calculation............
Pro forma basic and
diluted net loss per
share(2)...............
Shares outstanding used
in pro forma basic and
diluted net loss per
common share
calculation(2).........
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF SEPTEMBER 30, 1998
------------ -------------------------------------
PRO FORMA
1996 1997 ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
---- ------- ------ ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $329 $ 755 $3,794 $10,794
Working capital
(deficit)................ 150 (2,536) 1,122 1,122
Total assets.............. 637 2,104 9,158 16,358
Short-term borrowings..... -- 2,500 -- 7,000
Deferred revenues......... 216 710 1,507 1,507
Long-term debt, less
current portion.......... 167 400 374 374
Total shareholders' equity
(deficit)................ 105 (2,424) 4,708 4,909
</TABLE>
- --------
(1) Pro forma gives effect to our acquisition of RF GlobalNet as if it had
occurred on January 1, 1997, and our acquisition of Informatrix as if it
had occurred on October 15, 1997 (inception).
(2) See Note 1 to the financial statements for a description of the computation
of the pro forma basic and diluted net loss per share and the number of
shares used in the pro forma basic and diluted net loss per share
calculation.
(3) Pro forma gives effect to the issuance of the notes to ICG and Progress
Bank and the issuance of warrants to ICG and Progress Bank valued at
$200,000.
(4) Adjusted to reflect the sale of shares of common stock offered hereby (at
an assumed initial offering price of $ per share, after deducting the
estimated underwriting discounts and commissions and offering expenses) and
the anticipated application of the net proceeds therefrom.
23
SELECTED FINANCIAL DATA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and the related notes
thereto included in another part of this prospectus and which are deemed to be
incorporated into this section. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including but not limited to, those set forth under
"Risk Factors" and included in other portions of this prospectus.
We are the largest creator, owner and operator of targeted business-to-
business vertical trade communities on the Internet. Our vertical trade
communities are Web sites that act as industry-specific comprehensive sources
of information, interaction and e-commerce. From our founding and incorporation
on July 28, 1995 to October 1995, our principal operating activities consisted
primarily of recruiting employees, performing product and technology
development, raising capital and engaging in marketing activities. We currently
operate 29 vertical trade communities, which include seven major industrial
groups: environment and utility; electronics; services; telecommunications;
process industries; life sciences; and food and packaging.
To date, most of our revenues have been derived from selling storefronts to
industry suppliers in our vertical trade communities, which generally include a
12-month advertising commitment. Advertising revenues and Web site development
fees contributed most of the revenues for the period from July 28, 1995 to
December 31, 1995 (the "Inception Period") and in the years ended December 31,
1996 and December 31, 1997. We sell storefront advertisements, banner
advertising and event sponsorships on our vertical trade communities.
Currently, the duration of the storefront advertisements is typically a period
of one year and the banner advertisements are typically for a period of three
months. All advertising revenues are recognized ratably in the period in which
the advertisement is displayed, provided that the collection is reasonably
assured. As of September 30, 1998, we had approximately $1.5 million of
deferred revenue. In addition to advertising revenues, we generate revenues
from career services, education and e-commerce, specifically the sale of books
and third party software.
We incurred net losses of approximately $211,000 for the Inception Period,
$709,000 for the year ended December 31, 1996, $4.8 million for the year ended
December 31, 1997, and $8.3 million for the nine months ended September 30,
1998 on an actual basis and $9.8 million for the nine months ended September
30, 1998 on a pro forma basis. At September 30, 1998, we had an accumulated
deficit of $14.0 million. The net losses and accumulated deficit resulted from
our lack of substantial revenues, the costs of the significant operating
infrastructure and other costs incurred for the development and initial rollout
of our vertical trade communities. Because of our aggressive expansion plans,
we expect to incur significant operating losses for the foreseeable future.
Although we have experienced revenue growth in recent periods, such growth may
not be sustainable and, therefore, these recent periods should not be
considered indicative of future performance. We
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE>
may never achieve significant revenues or profitability, or if we achieve
significant revenues they may not be sustained.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 and September 30, 1998
Revenues. Revenues increased from $551,000 for the nine months ended
September 30, 1997 to $1.9 million for the nine months ended September 30,
1998. The increase in revenues was due primarily to an increase in the number
of advertisers as a result of our marketing efforts and the increase in the
number of vertical trade communities from 16 as of September 30, 1997 to 29 as
of September 30, 1998. Advertising revenues, including the development of the
storefronts, accounted for the majority of revenues for the periods ended
September 30, 1997 and September 30, 1998. At September 30, 1998, we had
deferred revenues of $1.5 million. We expect that advertising revenue will
continue to account for a substantial share of revenues for the foreseeable
future.
Editorial and Operational Expenses. Editorial and operational expenses
primarily consist of Internet connection charges, Web site equipment leasing
costs, depreciation, salaries and benefits of operating and editorial
personnel and other related operating costs. Editorial and operational
expenses increased from $674,000 for the nine months ended September 30, 1997
to $2.1 million for the nine months ended September 30, 1998. The increases
were primarily related to the increased number of personnel and amount of
equipment required to maintain our increased number of vertical trade
communities.
Product Development Expenses. Product development expenses consist primarily
of salaries and benefits, consulting expenses and related equipment. Product
development expenses increased from $451,000 as of September 30, 1997 to
$798,000 for the nine months ended September 30, 1998. This was primarily due
to the increased staffing and the associated costs related to enhancing the
features, content and functionality of our vertical trade communities, as well
as increasing the overall number of trade communities. To date, we have
charged to expense all of the product development costs as such costs have
been incurred. We believe that continued investment in product development is
critical to attaining our strategic objectives, and therefore expect product
development expenses to increase significantly in absolute dollars.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and commissions for sales and marketing personnel, advertising,
travel and entertainment, and costs of attending trade shows. Sales and
marketing expenses increased from $1.3 million for the nine months ended
September 30, 1997 to $4.4 million for the nine months ended September 30,
1998. This was primarily due to the increase in the number of sales and
marketing personnel, increased sales commissions and increased expenses
related to the promotion of our vertical trade communities. We expect that the
sales and marketing expenses will continue to grow significantly, as we
continue to pursue an aggressive growth strategy and hire additional
sales/marketing personnel.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, human
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE>
resources and business development personnel, as well as support services and
professional service fees. General and administrative expenses increased from
$891,000 for the nine months ended September 30, 1997 to $2.9 million for the
nine months ended September 30, 1998. The increase in general and
administrative expenses was primarily due to increases in the number of
personnel to support the growth of our business. We expect to incur additional
general and administrative expenses as additional personnel are hired and
additional expenses are incurred. These expenses would relate to the growth of
the business and our operations as a public company.
Interest, Net. Interest income net of expense includes income from our cash
and cash equivalents and from investments and expenses related to our financing
obligations. Interest income net of interest expense increased from an expense
of $29,000 for the nine months ended September 30, 1997 to income of $15,000
for the nine months ended September 30, 1998. The increase was primarily due to
a higher investment balance as a result of our sale of preferred stock, which
was partially offset by increased interest expense due to borrowings on our
line of credit, and increased amounts of capital lease obligations in May and
June of 1998. Currently, we invest our cash balances in money market funds.
Inception Period and Years ended December 31, 1996 and December 31, 1997
Revenues. Revenues were $16,000 for the Inception Period, $285,000 for the
year ended December 31, 1996 and $792,000 for the year ended December 31, 1997.
The increases in advertising revenues were due to the increase in the number of
advertisers on our vertical trade communities and the increase in the number of
vertical trade communities.
Editorial and Operational Expenses. Editorial and operational expenses were
$24,000 for the Inception Period, $214,000 for the year ended December 31, 1996
and $1.1 million for the year ended December 31, 1997. The increases were
primarily related to the increased number of personnel and amount of equipment
required to maintain our increased number of vertical trade communities.
Product Development Expenses. Product development expenses were $22,000 for
the Inception Period, $214,000 for the year ended December 31, 1996 and
$711,000 for the year ended December 31, 1997. This was primarily due to the
increased staffing and the associated costs related to enhancing the features,
content and functionality of our vertical trade communities, as well as
increasing the overall number of trade communities.
Sales and Marketing Expenses. Sales and marketing expenses were $148,000 for
the Inception Period, $268,000 for the year ended December 31, 1996 and $2.3
million for the year ended December 31, 1997. These increases were primarily
due to the increased sales force, participation in additional tradeshows, and
other marketing programs. We expect that sales and marketing expenses will
continue to increase as we expand our direct sales force, hire additional
marketing personnel and increase expenditures for marketing and promotional
activities.
General and Administrative Expenses. General and administrative expenses
were $33,000 for the Inception Period, $292,000 for the year ended December 31,
1996 and $1.4 million for the year ended December 31, 1997. These increases
were due primarily to increased
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE>
staffing levels, higher facility costs and professional fees to support the
growth of our infrastructure. We expect to hire additional support personnel
and will incur additional costs related to being a public company, including
directors and officer's insurance, investor relations programs and other
related professional fees.
Interest, Net. Interest income net of expense consists primarily of interest
expense on our line of credit and capital lease obligations. We incurred net
interest expense of $1,000 for the Inception Period, $6,000 for the years ended
December 31, 1996 and $115,000 for the year ended December 31, 1997. Currently,
we invest our cash balances in money market funds.
Income Taxes. As of December 31, 1997, we had approximately $4.1 million of
federal net operating loss carryforwards and $3.9 million of state net
operating loss carryforwards for tax reporting purposes to offset future
taxable income. Our federal net operating loss carryforwards expire beginning
2012 and our state net operating loss carryforwards expire beginning 2000. Due
to the change in our ownership interest in 1997 and 1998, our net operating
loss carryforwards are expected to be subject to certain limitations or annual
restrictions. See Note 12 of Notes to the Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
quarters ended March 31, 1997, June 30, 1997, September 30, 1997 and December
31, 1997; and March 31, 1998 and June 30, 1998 and September 30, 1998. The
information for each quarter has been prepared on substantially the same basis
as the audited statements included in other parts of this prospectus and, in
the opinion of management, includes all adjustments, consisting of only normal
recurring adjustments necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and the results of the interim
periods are not indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- --------- ------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 163,263 $ 196,561 $ 190,824 $ 241,174 $ 377,371 $ 587,422 $ 897,006
Operating loss.......... (551,416) (907,733) (1,354,081) (1,850,453) (2,008,935) (2,885,803) (3,454,845)
Interest income
(expense).............. (2,778) (12,493) (13,913) (85,922) (75,934) 14,291 76,809
--------- --------- ----------- ----------- ----------- ----------- -----------
Net loss................ $(514,194) $(920,226) $(1,367,994) $(1,936,375) $(2,084,869) $(2,871,512) $(3,378,036)
========= ========= =========== =========== =========== =========== ===========
</TABLE>
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future. In addition,
the results of any quarter do not indicate results to be expected for a full
fiscal year. Finally, as a result of the foregoing factors, our annual or
quarterly results of operations may be below the expectations of public market
analysts or investors, in which case the market price of the common stock could
be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our operations through the
private placement of our preferred stock, borrowings
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE>
under a line of credit arrangement with a commercial bank and capital equipment
leases. To date we have raised approximately $19.2 million from the sale of
preferred stock. At September 30, 1998, we had approximately $3.8 million in
cash and cash equivalents. We have had significant negative cash flows from
operating activities for each fiscal and quarterly period to date. Net cash
used in operating activities was $48,000 for the Inception Period, $663,000 for
the year ended December 31, 1996, $3.9 million for the year ended December 31,
1997; and was $2.3 million for the nine months ended September 30, 1997 and
$6.7 million for the nine months ended September 30, 1998. Cash used in
operating activities from inception through September 30, 1998 consisted
primarily of net operating losses and increases in accounts receivable and
prepaid expenses, which were partially offset by increases in deferred
revenues, accrued expenses, and accounts payable.
Net cash used in investing activities was $57,000 for the Inception Period,
$64,000 for the year ended December 31, 1996, $320,000 for the year ended
December 31, 1997; and was $148,000 for the nine months ended September 30,
1997 and $2.8 million for the nine months ended September 30, 1998. Net cash
used in investing activities in these periods consisted primarily of capital
expenditures for purchased software, office equipment and leasehold
improvements. Net cash provided by (used in) financing activities was $136,000
for the Inception Period, $1.0 million for the year ended December 31, 1996 and
$4.6 million for the year ended December 31, 1997; and was $2.3 million for the
nine months ended September 30, 1997 and $12.5 million for the nine months
ended September 30, 1998. Cash provided by financing activities consisted
primarily of sales of our preferred stock, which was partially offset by
payment on our capital lease obligations.
We have a line of credit arrangement with a commercial bank for $500,000. As
of September 30, 1998, there were no borrowings under the line of credit. The
facility bears interest at the bank's prime rate of interest plus 1.5%. Any
borrowings under the line of credit will be secured by most of our assets.
We believe that the net proceeds from the offering, together with our
existing cash and cash equivalents, will be sufficient to meet our working
capital and capital expenditures requirements for at least the next 12 months.
Thereafter, we may be required to raise additional funds. We may also be
required to raise additional financing before such time. If additional funds
are raised through the issuance of equity securities, our existing shareholders
may experience significant dilution. Furthermore, additional financing may not
be available when needed or, if available, such financing may not be on terms
favorable to us or shareholders. If such financing is not available when
required or is not available on acceptable terms, we may be unable to develop
or enhance our products or services, take advantage of business opportunities
or respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition or results of operations.
In November 1998, we issued a convertible note to ICG in an aggregate
principal amount of $5.0 million. The convertible note is required to be repaid
in six months, or upon the closing of the offering if earlier. At ICG's option,
it can convert the principal balance of the convertible note into our common
stock at the initial public offering price. In connection with the issuance of
the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
28
<PAGE>
convertible note, we granted ICG warrants to purchase shares of our common
stock at the initial public offering price.
In November, 1998, we issued a note to Progress Bank in an aggregate
principal amount of $2.0 million. The note is required to be repaid in six
months or upon the closing of the offering, if earlier. In connection with the
issuance of the note, we granted Progress Bank warrants to purchase shares
of our common stock at the initial public offering price. We valued the
warrants at the date of grant to ICG and Progress Bank and will amortize the
cost over the period we expect the warrants to be outstanding.
YEAR 2000 COMPLIANCE
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. We are currently in the
process of analyzing whether our systems are Year 2000 compliant. We expect to
resolve Year 2000 compliance issues primarily through normal upgrades of our
software or, when necessary, through replacement of existing software with
Year 2000 compliant applications. The cost of these upgrades or replacements
is not expected to be material to our financial position or results of
operations. However, such upgrades and replacements may not be completed on
schedule or within estimated costs or may not successfully address our Year
2000 compliance issues. In addition, we are in the process of seeking
verification from our key distributors, vendors and suppliers that they are
Year 2000 compliant or, if they are presently compliant, to provide a
description of their plans to become so. If our present efforts to address the
Year 2000 compliance issues are not successful, or if distributors, suppliers
and other third parties with which we conduct business do not successfully
address such issues, our business, operating results and financial position
could be materially and adversely affected.
ACQUISITIONS
In September 1998, we acquired all of the outstanding capital stock of RF
GlobalNet for $1.8 million in cash. Also in September 1998, we acquired all of
the outstanding capital stock of Informatrix for 90,000 shares of our common
stock (pre-split) (and up to 22,500 of additional shares of our common stock
(pre-split) if Informatrix achieves certain sales targets through December
1998). See "Certain Transactions." These sales targets were met for the period
ended September 30, 1998 and we will be required to issue 4,290 additional
shares of common stock (pre-split) pursuant to this arrangement.
We have reported pro forma results of operations as if we had consummated
the acquisition of RF GlobalNet on January 1, 1997 and the acquisition of
Informatrix on October 17, 1997 (inception date). The pro forma net loss for
the year ended December 31, 1997 was $5.8 million compared to the actual net
loss of $4.8 million. The increase in the net loss results from the net losses
of the acquired companies and the pro forma amortization of the goodwill
associated with the acquisitions. The pro forma net loss for the nine months
ended September 30, 1998 was $9.8 million compared to the actual net loss of
$8.3 million. The increase in the net loss is primarily related to the losses
of the companies acquired and the pro forma amortization of the goodwill
associated with the acquisitions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
29
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board ("FASB") issued "Reporting
Comprehensive Income" ("SFAS No. 130"), which establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 offers
alternatives for presentation of disclosures required by the standard. The
adoption of SFAS No. 130 will have no impact on our results of operations,
financial position or cash flows.
In June 1997, FASB issued "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which establishes standards for
reporting information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 is
not expected to have an impact on our results of operations, financial position
or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits", which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 is not expected to have an impact on our results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). Statement of Position 98-
1 is effective for financial statements for years beginning after December 15,
1998. Statement of Position 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. We do not expect
this standard to have a material effect on our capitalization policy.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Position 98-5, which is effective for fiscal years beginning after December 15,
1998, provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start up activities and organization
costs to be expensed as incurred. As we have expensed these costs historically,
the adoption of this standard is not expected to have a significant impact on
our results of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As we do not currently engage or plan to engage
in derivative or hedging activities, there will be no impact to our results of
operations, financial position or cash flows upon the adoption of this
standard.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE>
OUR BUSINESS
We are the largest creator, owner and operator of targeted business-to-
business communities of commerce ("vertical trade communities") on the
Internet. Our vertical trade communities are Web sites that act as industry
specific comprehensive sources of information, interaction and e-commerce.
Vertical trade communities combine:
. product information;
. requests for proposals ("RFPs");
. discussion forums;
. e-commerce opportunities;
. industry news;
. directories;
. classifieds;
. job listings;
. online professional education courses; and
. virtual trade shows.
Each vertical trade community is individually branded, focuses on one
industrial sector and caters to individuals with similar professional
interests. We designed each of our vertical trade communities to attract
technical and purchasing professionals with highly specialized product and
specification requirements, and purchasing authority or influence.
INDUSTRY OVERVIEW
Growth of the Internet, Online Advertising and E-Commerce
The Internet has emerged as a mass communications and commerce medium
enabling millions of people worldwide to share information, create community
among individuals with similar interests and conduct business electronically.
International Data Corporation projects that the number of Internet users will
grow from 100 million in 1998 to 320 million in 2002. In addition to its
emergence as a mass communications medium, the Internet has features and
functions that are unavailable in traditional media, which enable online
merchants to communicate effectively with customers and advertisers to target
users with specific needs and interests.
As a result, the Internet has emerged as an attractive medium for advertising
and e-commerce. Jupiter Communications estimates that Internet advertising will
grow from $1.9 billion in 1998 to $7.7 billion in 2002. Forrester Research
projects that business-to-business Internet advertising will grow from $290
million in 1998 to $2.6 billion in 2002.
Along with the impressive overall growth of the Internet, business-to-
business usage is also growing rapidly, as businesses are increasingly
leveraging the Internet's ability to reach highly targeted audiences globally,
deliver personalized content and open new distribution channels. Forrester
forecasts that business-to-business e-commerce will grow from $17.0 billion in
1998 to $327 billion in 2002. Of that amount, Forrester forecasts that the
value of goods and services purchased through online business auctions will
increase from $8.7 billion in 1998 to $52.6 billion in 2002.
Traditionally, companies have employed a variety of well-recognized media in
business-to-business advertising, information delivery and communications to
identify, qualify and facilitate commerce opportunities. Of the media serving
the business-to-business community,
31
OUR BUSINESS
<PAGE>
Veronis, Suhler & Associates estimates that magazines/trade journals are
expected to generate revenues of $10.8 billion in 1998, and trade shows are
expected to generate revenues of $8.0 billion in 1998. Other media used by
buyers and sellers include, buyer's guides, direct mail and catalogs. In many
industries, particularly in highly specialized, technically-oriented
industries, these media have performed a variety of functions in the
distribution channel to enable buyers and sellers to meet, exchange information
and ultimately conduct business with one another.
Need for Online Vertical Trade Communities
While traditional media have historically served a valuable purpose in
facilitating commerce, information delivery, and communications between buyers
and sellers, they have inherent inefficiencies, including the following:
. Trade magazines have limited circulation and are not published in real-time;
. Trade shows are held infrequently and are expensive for attendees and
exhibitors;
. Buyer's guides are cumbersome to search through and provide limited depth of
vendor content;
. Direct mail responses generally provide limited information from the
prospective customer, and
. Trade journals advertising can be cost prohibitive for smaller advertisers.
The Internet provides a new medium to meet the specific needs of businesses
and professionals through vertical trade communities. These vertical trade
communities provide avenues for highly targeted content and services. In
addition, e-commerce is a natural extension of these communities, a function
not easily replicated through traditional media.
OUR SOLUTION
Our solutions transfer traditional "off-line" trade services to the Internet.
We operate a portfolio of vertical trade communities targeted at separate
industrial sectors to provide businesses and professionals with high quality
content, community and commerce that include the following attributes:
. Comprehensive content, functionality and features: The editors of our
vertical trade communities provide valuable information on products,
technology, industry regulations, news and management. We archive historical
content, enabling users to research through large databases of information.
We also operate RFP posting/response areas, real-time discussion forums,
bulletin boards and career centers.
. Active community participation: We provide features and services such as "Ask
the Experts," discussion forums, bulletin boards and career centers to foster
active community participation among our users. We believe that active
community participation creates loyalty and affinity among our users.
. Targeted cost-effective medium for business-to-business advertising: The
concentrated audiences of vertical trade communities permit us to command
premium advertising rates. Comparative statistics show that advertisers pay
more for targeted ads than for general ones. We also are able to attract
small to mid-sized advertisers due to our cost-effective advertising reach
and highly targeted user base.
. High quality sales leads: Our vertical trade communities generate high
quality sales leads that are timely and effective and contain
32
OUR BUSINESS
<PAGE>
detailed buyer information. Robust sales leads left by buyers allow sellers to
respond more effectively.
. Connects buyers and sellers globally: Vertical trade communities provide an
online market place that we believe will allow buyers and sellers worldwide
to exchange information, source products and execute online transactions.
We believe that targeted content, focused audiences and robust sales leads,
combined with our interactive platform, create a premier marketplace for e-
commerce.
OUR STRATEGIES
Our objective is to continue to be the world's leading creator, owner and
operator of targeted business-to-business communities of commerce. Our key
strategies to achieve our objective include:
Expand User Base and Enhance User Experience with New Features, Functionality
and Content
We intend to continue increasing the number of users that visit each
community by:
. introducing additional services and features that appeal to the specific
needs of professionals using the Internet;
. continuing to direct users to our vertical trade communities through
alliances with our strategic partners;
. providing professionals the opportunity to buy products online that satisfy
their product-sourcing needs; and
. creating brand awareness through industry trade shows, conferences,
advertising campaigns with trade publications and alliances with key industry
trade associations.
As our user base grows, we anticipate advertisers and suppliers will find our
vertical trade communities an attractive cost-effective medium for advertising
and sales.
Establish and Expand Multiple Revenue Streams
. Advertising. To date, most of our revenues have been derived from selling
storefronts to the industry suppliers of our vertical trade communities. We
also have sold, and intend to grow our sales of, banner advertisements,
sponsorships and push e-mail.
. E-commerce. We believe that e-commerce is a natural extension of our vertical
trade communities. By creating a medium where business users interact,
exchange information and source products, we will be able to create
significant potential for users to buy products online and for us to generate
fees on such transactions. We intend to expand our partnerships with
merchants, software vendors and service providers to integrate their products
and services into the vertical trade community. We expect to receive a
transaction fee for selling books, software and other related items in our
marketplace.
. Career Services. We sell sponsorships in our career center and charge
employers to post help wanted advertisements. We believe recruiters and
employers specializing in each industry are natural advertisers and sponsors
in this area.
. Education. We have partnered with content providers for various engineering
courses, and are paid a transaction fee for every
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student taking the course. With the acquisition of RF GlobalNet, we acquired
technology that allows professionals to complete educational courses over the
Internet. We are in the process of scaling this technology with other vertical
trade communities and expect to form partnerships with courseware providers
for industry professionals.
Continue to Identify and Rapidly Develop New Vertical Trade Communities
We intend to expand our portfolio of vertical trade communities by building
and launching new vertical trade communities in industry segments that we
believe possess significant opportunities for advertising and e-commerce.
We determine whether or not a potential vertical trade community fits our
strategy by looking for specific industry characteristics including:
. a substantial number of buyers and suppliers;
. a high degree of fragmentation on both the supply and demand sides;
. defined target audiences (e.g. chemical engineers) with similar product and
informational needs;
. meaningful growth in trade advertising spending;
. significant new product introductions;
. online access;
. growth in trade show attendance; and
. international components both on the buyer and supplier side.
Leverage the Benefits of a Portfolio Approach
We believe that operating a portfolio of vertical trade communities permits
us to:
. offer a comprehensive, consistent set of features and functionality;
. attract a large business-to-business audience, in aggregate, making our
individual sites appealing to a broad array of advertisers and e-commerce
suppliers; and
. leverage infrastructure, technology, marketing and management resources to
achieve economies of scale.
Form Strategic Alliances for Distribution, Technology, and New Services
To extend our vertical trade community brands and increase visits to our
vertical trade communities, we intend to form additional strategic partnerships
with navigational service providers and other distribution channel partners.
Pursue Strategic Acquisitions
We intend to pursue acquisitions of companies that operate vertical trade
communities which would fit into our portfolio, as well as companies that
possess certain complementary technologies.
Expand Globally
We believe that the anticipated growth of Internet usage internationally
presents significant opportunities to extend the global reach of our
communities. For the nine month period ended September 30, 1998, more than 25%
of the visits to our vertical trade communities originated outside the United
States. As is shown by their usage levels, international users represent
significant opportunity to our domestic advertisers,
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providing both sources of leads and, eventually, purchasers of their products
and services. Our vertical trade communities also provide foreign advertisers
access to our targeted audience in the United States. We intend to pursue the
localization of our vertical trade communities through strategic partnerships.
OUR VERTICAL TRADE COMMUNITIES
We operate 29 vertical trade communities in seven major industry groups:
environment and utility; electronics; services; telecommunications; process
industries; life sciences; and food and packaging.
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As of October 31, 1998, we had established the following vertical trade
communities:
ENVIRONMENT & UTILITY
WATER ONLINE (wateronline.com)
Municipal Water Supply and Municipal and Wastewater Treatment
POLLUTION ONLINE (pollutiononline.com)
Industrial Pollution Control
SOLID WASTE ONLINE (solidwaste.com)
Disposal of Solid Waste
PULP AND PAPER ONLINE (pulpandpaperonline.com)
Manufacturing, Processing and Treatment of Pulp and Paper
POWER ONLINE (poweronline.com)
Power generation, Electric Utility Deregulation, Emissions Control, Alternative
Fuels, Power Industry Legislation
PUBLIC WORKS ONLINE (publicworks.com)
Services Public Works and Municipal Maintenance Professionals
ELECTRONICS
COMPUTER OEM ONLINE (computeroem.com)
Design and Manufacturing of Computers and Computerized Electronics Devices
MEDICAL DESIGN ONLINE (medicaldesignonline.com)
Design, Manufacturing and Procurement of Medical Devices
TEST AND MEASUREMENT ONLINE (testandmeasurement.com)
Design, Manufacturing and Procurement of Test, Measurement, Data Acquisition,
Data Analysis and Instrumentation Equipment
SERVICES
PROPERTY AND CASUALTY ONLINE (propertyandcasualty.com)
Property and Casualty Insurance
TELECOMMUNICATIONS
RF GLOBALNET (rfglobalnet.com)
Information, Bookstore and Educational Center for Radio Frequency, Wireless and
Microwave Engineers
WIRELESS DESIGN ONLINE (wirelessdesignonline.com)
Design and Development of Wireless Communications Systems and Equipment
PHOTONICS ONLINE (photonicsonline.com)
Design and Manufacturing of Lasers, Optics, Optoelectronics, Fiber Optics and
Imaging Devices
FIBER OPTICS ONLINE (fiberopticsonline.com)
Design and Production of Fiber Optic Networks and Network Components
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PROCESS INDUSTRIES
CHEMICAL ONLINE (chemicalonline.com)
Manufacturing and Processing Chemicals
PHARMACEUTICAL ONLINE (pharmaceuticalonline.com)
Development, Design and Manufacturing of Pharmaceuticals
SEMICONDUCTOR ONLINE (semiconductoronline.com)
Applications, Manufacturing and Processing of Semiconductor Components
HYDROCARBON ONLINE (hydrocarbononline.com)
Processing Hydrocarbons and Petrochemicals
PAINT AND COATINGS ONLINE (paintandcoatings.com)
Manufacturing and Production of Paint Coatings, Inks and Thick Film Printable
Conductors
FOOD ONLINE (foodonline.com)
Manufacturing and Processing of Food Products
ADHESIVES AND SEALANTS ONLINE (adhesivesandsealants.com)
Manufacturing and Production of Adhesive, Sealant, and Grout Materials
LIFE SCIENCES
BIORESEARCH ONLINE (bioresearchonline.com)
Provides information on Drug Discovery, Research and Development, University
Industry Collaborations and Regulatory Issues Relating to Worldwide Bioresearch
and Life Sciences
LABORATORY NETWORK ONLINE (laboratorynetwork.com)
Production and Manufacturing of Laboratory Equipment, Chemicals and Supplies
FOOD AND PACKAGING
FOOD INGREDIENTS ONLINE (foodingredientsonline.com)
Manufacturing and Processing of Food Products Ingredients
PACKAGING NETWORK (packagingnetwork.com)
Production, Purchase, Design and Marketing of Packaging for all Consumer and
Industrial Products
BEVERAGE ONLINE (beverageonline.com)
Production and Procurement of Equipment used in the Production of Beverages
BAKERY ONLINE (bakeryonline.com)
Production and Procurement of Baking Ingredients
DAIRY NETWORK (dairynetwork.com)
Production, Procurement and Distribution of Dairy Products
MEAT AND POULTRY ONLINE (meatandpoultryonline.com)
Production, Procurement and Distribution of Meat and Poultry Products
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<PAGE>
[GRAPHIC SHOWING HOME PAGE FOR
CHEMICAL ONLINE VERTICAL TRADE COMMUNITIES.]
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FEATURES OF OUR VERTICAL TRADE COMMUNITIES
Listed below is a selection of features of a vertical trade community, which
correspond to the home page illustrated on the opposite page.
. Online Buyer's Guide and Search Engine--Comprehensive buyer's guide fully
searchable by product name and supplier. In response to a key word search,
companies serving the industry are listed with storefront advertisers
presented first. Links to company storefronts allow users to research
advertisers' products and services, and send direct inquiries to advertisers
about pricing, delivery and product specifications (i.e., ultimately submit
sales leads).
. Marketplace--Advertisers' storefronts listed alphabetically with descriptions
of products and services and direct links to storefronts.
. News and Analysis--Current news and commentary by the vertical trade
community's editorial team. Includes feature articles and product case
studies; daily update of press releases and news stories targeted to each
respective industry.
. Products--Comprehensive resource for industry professionals with information
on the latest products in the industry. Site editors act as third parties
with objective analysis of products and their uses.
. Community--Suite of interactive features: real-time discussion forums for
industry professionals; bulletin boards; trade show information and other
useful industry events.
. Resources--"Freeware" and demo-software download library; industry
association guides; links to virtual trade shows we operate.
. Career Center--Resume postings for job seekers, help-wanted listings and
career support material.
. Requests for Proposals/Quotations/Bids--Internationally posted projects open
to bid.
RECENT ENHANCEMENTS
We have created a series of products and services for users of our vertical
trade communities.
Auctions: Through ONSALE and others, we plan to launch online industrial
auctions for each vertical trade community. New and used equipment, products
and services will be listed on the co-branded sites for auction. We will
receive a fixed percentage of each transaction based on transaction size.
Education/Training: We offer a series of products in the continuing
professional education, licensing/certification maintenance, and skills upgrade
markets, specifically:
. online courses/courseware: books, software, focused content and research
available for use or purchase in conjunction with reputable courses offered
by third party vendors;
. online instruction: forum or live chat based educational products and
services, including real time testing for license and certification
maintenance; and
. company-specific: customized intranet or extranet-based educational/training
services for specific clients by vertical trade community.
Career Center: Career centers currently active on each of our vertical trade
communities include such services as: resume bundling (selling or offering
certain groups of candidate types to specific employers for a fee), and career
planning/assistance (market reports on companies a candidate is investigating,
resume software, salary surveys, etc.).
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"Push" Newsletters: We offer subscription-based e-mail services with specific
content focus. Subscribers are able to receive e-mail-based newsletters on
topics of interest to them.
PLANNED SERVICES
We plan to offer the following services:
E-commerce: As part of our long term strategy, we plan to provide a broad
array of commerce-related services for our advertisers and users of our
vertical trade communities, specifically:
. online stores: through simple-to-use store creation software we plan to
offer any current or future advertiser an interactive platform to sell
certain products in easy to manage environments;
. catalog-platforms: we plan to work with current and future advertisers as
well as industry-specific distributors to create and populate Internet-based
catalogs; and
. classifieds: we plan to launch classified sections in each vertical trade
community listing individual products and a path to the specific seller.
E-mail Service: We plan to offer free e-mail accounts to users/registrants
in each vertical trade community. We expect that the actual address will be
indicative of the specific vertical trade community (e.g.,
[email protected]). We believe that this service will be provided by a
third-party partner, and will be supported by the sale of advertising and
sponsorships on the e-mail pages.
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<PAGE>
[GRAPHIC OF A CUSTOMER STOREFRONT WITH A BRIEF
DESCRIPTION OF THE RELATED BENEFITS TIED TO TEXT UNDER FEATURES OF OUR
STOREFRONTS]
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FEATURES OF OUR STOREFRONTS
The following are descriptions of the features of a typical advertiser's
storefront which correspond to the boxes on the storefront on the opposite
page.
. Corporate Profile--Information on advertiser's background and overview of its
products.
. Need to Contact Us?--Enables buyers and specifiers to request further
information via e-mail. Requests are often regarded as sales leads by
advertisers. Requests are typically for product pricing and other inquiries
about the advertiser's products.
. Career Center--Advertisers list open employment opportunities.
. Purchase Online--Advertisers with e-commerce capabilities sell their products
online.
. Associated Articles--Feature articles, case studies and other informational
materials about the advertiser.
. Products and Press Releases--Feature new product announcements and
advertiser-issued press releases.
. Auction--Advertiser's products offered for sale via competitive auctions.
. For More Information--Hyperlinked gateway into advertiser's Web site.
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CASE STUDIES OF THREE VERTICAL TRADE COMMUNITIES
Set forth below is certain information about three of our fastest growing
vertical trade communities:
WATER ONLINE (WWW.WATERONLINE.COM)
<TABLE>
<S> <C>
</TABLE>
Target Audience: Engineers and environmental managers in the water and
wastewater industry in the United States and around
the world.
History: Our first vertical trade community, launched in
October 1995; currently, the largest Internet
community for the water and wastewater industry.
Editorial Director: Ian Lisk has two decades of experience as editor of
two of the industry's trade publications.
<TABLE>
<CAPTION>
October
1998
Usage and Advertising Statistics: -------
<S> <C>
. Unique Visits: 83,006
. Storefront Advertisers: 237
. Sales Leads: 2,816
</TABLE>
CHEMICAL ONLINE (WWW.CHEMICALONLINE.COM)
Target Audience: Engineers and environmental managers in the chemical
processing industry in the United States and around
the world.
History: Our fourth vertical trade community, launched in May
1997; currently, the largest Internet community for
the chemical processing industry.
Editorial Director: Nick Basta has 17 years of experience as editor with
McGraw Hill's Chemical Engineering magazine.
<TABLE>
<CAPTION>
October
1998
Usage and Advertising Statistics: -------
<S> <C>
. Unique Visits: 49,011
. Storefront Advertisers: 138
. Sales Leads: 1,660
</TABLE>
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WIRELESS DESIGN ONLINE (WWW.WIRELESSDESIGNONLINE.COM)
Target Audience: Engineers and business managers involved in the
design of wireless electronic components in the
United States and around the world.
History: Our tenth vertical trade community, launched in
September 1997.
Managing Editor: Rob Keenan, formerly associate editor with Penton
Publishing's Wireless System Design.
<TABLE>
<S> <C>
</TABLE>
<TABLE>
<CAPTION>
October
1998
Usage and Advertising Statistics: -------
<S> <C>
. Unique Visits: 2,816
. Storefront Advertisers: 30
. Sales Leads: 888
</TABLE>
----------------
STRATEGIC ALLIANCES AND ACQUISITIONS
We have recently entered into the following strategic alliances:
Excite Agreement
We have entered into a three-year renewable sponsorship agreement with
Excite, a leading Internet navigational service provider, to build and operate
an industrial "channel" on the Excite service for each of up to 30 of our
vertical trade communities. These channels are highlighted summaries of much of
the content and features of the home page of each of VerticalNet's individual
vertical trade communities, and provide a preview of the content and services
offered on each vertical trade community. For an annual fee, Excite will
deliver guaranteed minimum performance levels for exposures (or impressions) in
each year. In connection with the Excite agreement, we and Excite have
committed to provide advertising on each others' Web sites.
Junglee Agreement
We have an agreement with Junglee Corp., a subsidiary of Amazon.com, which
allows our visitors to utilize Junglee's technology in order to easily compare
product price and features from various suppliers and complete transactions
online.
ONSALE Agreement
We have an agreement with ONSALE, a market-leading provider of online
auctions and retail sales services. We intend to launch auction sites together
with ONSALE aimed at the buyer and seller community of a particular vertical
trade community. To the extent products are sold through an online auction, we
will receive a percentage of the sale price.
As part of our strategy to acquire vertical trade communities we recently
completed the following acquisitions:
RF GlobalNet
We acquired RF GlobalNet on September 1, 1998. RF GlobalNet operates the
vertical trade community, rfglobalnet.com, that caters to professionals in the
radio frequency and wireless communications industry.
Informatrix
We acquired Informatrix on September 30, 1998. Informatrix operates the
vertical trade community, propertyandcasualty.com, that
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<PAGE>
caters to professionals in the insurance industry. We believe that the
fragmented nature of the insurance industry provides us a platform into an
industry with attractive demographics.
Motorola
In October 1998, we entered into an agreement with Motorola pursuant to which
we provide intranet-based educational services to engineers at Motorola. The
courses in our course portfolio are available via the internet and/or Motorola's
corporate Intranet to authorized students registered by Motorola.
CUSTOMERS
As of October 31, 1998, more than 500 companies advertised in one or more of
our vertical trade communities. Advertising customers purchase storefront
advertisements, which can be found in the marketplace section of every vertical
trade community. As of October 31, 1998, the current advertisers have purchased
a total of 1,274 storefronts across our portfolio of vertical trade
communities. We sold advertisements to the following customers, among others,
as of October 31, 1998:
Asea Brown Boveri Ltd.
Bailey-Fisher & Porter
BetzDearborn Inc.
Calgon Corporation
Canon U.S.A., Semiconductor
Culligan Water Technologies, Inc.
Dresser Instruments Division
Rosemont Analytical
FMC Corporation
Hewlett-Packard Company
Ionics, Incorporated
ITT Standard
Koch Industries
Milltronics, Inc.
Motorola, Inc.
Nokia Group, Inc.
Osmonics, Inc.
Richardson Electronics, Ltd.
Schlumberger Industries
Siemens Microelectronics, Inc.
U.S. Filter
Waterlink
Wheelabrator Air Pollution Control, Inc.
Zurich-American Insurance Group
For the years ended December 31, 1996, December 31, 1997 and the nine months
ended September 30, 1998, no single customer accounted for more than 10% of our
revenues.
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SALES AND MARKETING
Sales and Distribution
We use a variety of programs to stimulate demand for our products, including
telesales, a direct sales force and reseller arrangements with advertising
agencies.
Direct Sales. Our direct sales force targets organizations that sell the
products and services that are utilized and purchased by the audiences that
comprise the vertical trade communities. As of October 31, 1998, we had 34
direct sales and support personnel. We often employ individuals with a
background in advertising sales with trade publishing companies.
Telesales. We currently maintain an in-house telesales group for use in
customer prospecting, lead generation and lead follow-up. As of October 31,
1998, we had 11 persons in our telesales group and we are expanding the
products sold by the group, such as job listings, banner advertisements and
other sponsorship opportunities.
International. We intend to market our products and services to international
markets directly over the Internet, as well as through resellers and affiliate
relationships. Currently, we derive less than 3% of revenues from international
customers. For the nine month period ended September 30, 1998, more than 25% of
the visits to our vertical trade communities originated outside the United
States. We believe that the large percentage of international users are
attractive to advertisers who want to reach customers globally. See "--Our
Strategy--Establish and Expand Multiple Revenue Streams."
Marketing
We use a variety of marketing programs to increase brand awareness. Our
marketing goals are to create and enhance the awareness of each branded
vertical trade community as a destination for professionals in each industry
sector and to promote the VerticalNet brand with suppliers, media buyers, and
interactive services companies. Our marketing strategy for each contains a mix
of print advertising, outbound e-mail, telemarketing, new media banner
campaigns, trade shows and direct mail. We also participate in industry
specific events, industry association activities and strategic partnerships
with interactive services companies. We believe that forming strategic
marketing alliances with partners in the Internet, print publishing and
industry associations will be important for rapid market penetration.
TECHNOLOGY
We have developed and implemented a broad array of technologies including
site management, search, customer interaction and transaction processing
systems using a combination of our own proprietary technologies and
commercially available, licensed technologies. Our current strategy is to
license commercially available technology whenever possible rather than seek
internally developed systems.
Scalability. The scalable structure of our hardware and software is designed
to allow for rapid deployment of multiple vertical trade communities while
maintaining desired user performance standards. In the rapidly changing
Internet environment, the ability to update an application to stay current with
new technologies is important. The system's template technology and modular
database design allow for the addition, modification, or replacement of server
based applications in a cost-efficient and expeditious manner.
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Reliability and Security. We use CheckPoint's Firewall-1 software to protect
our Web servers. We also use Netscape software as our Web server. Our
production machines are located at ICon CMT Corp., which provides a
professional data center hosting facility and redundant high-bandwidth
connectivity to the Internet. ICon provides monitoring 24 hours a day, seven
days a week and support supplementing our system administrators.
We maintain most of our computer systems in two Web-hosting facilities in New
Jersey.
We have developed our own content and Web site management tools to facilitate
the maintenance and updating of our vertical trade communities. This technology
results in the separation of the page look and feel from the individual data
elements and their associated database lookups, thus reducing software updates
for Web site changes and minimizing the engineering required to maintain a
growing amount of vertical trade communities, documents and applications.
PROPRIETARY RIGHTS
Proprietary rights are important to our success and our competitive position.
To protect our proprietary rights, we rely generally on copyright, trademark,
and trade secret laws, confidentiality agreements with employees and third
parties, and license agreements with consultants, vendors, and customers.
Despite such protections, a third party could, without authorization, copy or
otherwise appropriate information from our vertical trade community sites. Our
agreements with employees, consultants and others who participate in
development activities could be breached, we may not have adequate remedies for
any breach, and our trade secrets may otherwise become known or independently
developed by competitors.
We rely upon license agreements for the majority of our content and
technology. Such license agreements may not continue to be available to us on
acceptable terms, or at all. We do not, however, believe that we are dependent
upon any single licensor of technology or content.
We have applied for numerous trademarks, none of which have been issued to
date. We currently have two pending applications for trademarks. Generally, our
domain names for our vertical trade communities are not protectible as
trademarks due to the fact that they are too generic. The laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and effective copyright, trademark and trade secret
protection may not be available in such jurisdictions. In general, our efforts
to protect our intellectual property rights through copyright, trademark, and
trade secret laws may not be effective to prevent misappropriation of our
content, and our failure to protect our proprietary rights could materially
adversely affect our business, financial condition and operating results. See
"Risk Factors--Intellectual Property."
There have been substantial amounts of litigation in the computer industry
regarding intellectual property assets. Third parties may claim infringement by
us with respect to current and future products, trademarks or other proprietary
rights, or we may counterclaim against such parties in such actions. Any such
claims or counterclaims could be time-consuming, result in costly litigation,
diversion of management's attention, cause product release delays, require us
to redesign our products or require us to enter into royalty or
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licensing agreements, any of which could have a material adverse effect upon
our business, financial condition and operating results. Such royalty and
licensing agreements, if required, may not be available in terms acceptable to
us or not at all. See "Risk Factors--Intellectual Property."
COMPETITION
The market for vertical trade communities is new and rapidly evolving.
Competition for advertising, e-commerce and business users is intense and is
expected to increase significantly in the future. Technological barriers to
entry are relatively insubstantial. We believe that the principal competitive
factors for companies seeking to create vertical trade communities on the
Internet are targeted advertising, functionality and features, real-time
information access, quality sales leads, detailed user information, global
reach and business user affinity and loyalty. Several companies are primarily
focused on operating business-to-business trade communities on the Internet,
but most existing online competition is ancillary to the traditional business
of trade publishers, industry and trade associations and directory companies.
We will likely face intensified competition in the future from traditional
trade publishers, such as McGraw Hill and Reed Elsevier, directory registry
companies, such as Thomas Register, as well as from Internet navigational
service companies, trade associations and e-commerce technology suppliers.
Further, our potential competitors may develop vertical trade communities that
are equal or superior to ours. We also compete with traditional forms of
business-to-business advertising and commerce, such as trade magazines, trade
shows, and trade associations for advertisers and advertising revenue. We
believe that the principal competitive factors in attracting advertisers
include the demographics of our users, our ability to offer targeted audiences
and the overall cost-effectiveness of the advertising medium offered by us. We
believe that the number of business-to-business Internet companies relying on
Internet-based advertising revenue will increase greatly in the future, which
would increase pricing pressure on our advertising rates.
EMPLOYEES
As of October 31, 1998, we had 150 full-time employees. We consider our
relationships with our employees to be good. None of our employees are covered
by collective bargaining agreements.
PROPERTIES
Our corporate headquarters are located at 2 Walnut Grove Drive in an office
facility in Horsham, Pennsylvania, where we lease approximately 13,343 square
feet. We also maintain a sales and editorial office in Parsippany, New Jersey,
under a lease that expires July 15, 1999. We also lease a corporate facility in
Washington, D.C. under a lease that expires April 14, 2000 and a sales and
editorial office in Deerfield, Illinois under a lease that expires July 31,
2001. We also lease a corporate office for RF GlobalNet in Boulder, Colorado,
under a lease that expires February 28, 1999. We believe that our current
facilities are adequate for our current needs.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
DIRECTORS AND EXECUTIVE
OFFICERS
-----------------------
<S> <C> <C>
President, Chief Executive Officer and
Mark L. Walsh............. 44 Director
Senior Vice President, Co-Founder and
Michael J. Hagan.......... 35 Director
Michael P. McNulty........ 35 Senior Vice President, Co-Founder
Barry E. Wynkoop.......... 47 Senior Vice President
Gene S. Godick............ 33 Vice President and Chief Financial Officer
Douglas A. Alexander...... 37 Chairman of the Board and Director
Jeffrey C. Ballowe........ 43 Director
Walter W. Buckley, III.... 38 Director
Matthew J. Warta.......... 29 Director
<CAPTION>
KEY EMPLOYEES
-------------
<S> <C> <C>
C.H. Low.................. 38 Vice President and Chief Technology Officer
Mario V. Shaffer.......... 36 Vice President of New Business Development
George Jankovic........... 31 Vice President of Product Development
Nicholas Basta............ 44 Vice President of Editorial Services
</TABLE>
MARK L. WALSH has served as our President and Chief Executive Officer and as
one of our directors since August 1997. Prior to joining us, he was the Senior
Vice President and corporate officer at America Online, Inc. ("AOL") from 1995
to 1997. He founded and managed AOL Enterprise, the business-to-business
division of AOL. Prior to his position with AOL, Mr. Walsh was the President of
GEnie, General Electric's online service from 1994 to 1995. He also was the
President of Information Kinetics, Inc., a venture capital backed interactive
information company focusing on the recruitment and classified advertising
market from 1993 to 1994. He received his MBA from Harvard Business School and
B.A. from Union College of Schenectady, N.Y. He is the past chairman of the
Interactive Services Association. Mr. Walsh is currently a board member of the
Information Industry Association, a 500 member-company trade group for the
business information market.
MICHAEL J. HAGAN co-founded VerticalNet in 1995 and currently serves as our
Senior Vice President of Merger and Acquisitions and Product Development. He
also serves as one of our directors. Prior to our founding, Mr. Hagan was Vice
President and Senior Manager at Merrill Lynch Asset Management from 1990 to
1995. He served at Merrill Lynch in the areas of finance, technology and
accounting. Prior to that time, Mr. Hagan worked for Bristol Myers Squibb from
1988 to 1990. Mr. Hagan received a B.S. from St. Joseph's University and is a
Certified Public Accountant.
MICHAEL P. MCNULTY co-founded VerticalNet in 1995 and currently serves as one
of our Senior Vice Presidents. Prior to 1995, Mr. McNulty worked from 1985 to
1995 in the trade publishing industry. He held both sales and sales management
positions for various industry leaders, including the Raben Publishing Company,
Scranton Gillete Communications, and the PennWell Publishing Company. Mr.
McNulty received a B.S. from St. Joseph's University.
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MANAGEMENT
<PAGE>
BARRY E. WYNKOOP has served as our Senior Vice President of Sales and Market
Development since August 1998. Prior to joining us, Mr. Wynkoop worked for
Bell Atlantic Corporation. From 1993 to 1998 he was the Vice President of
Marketing, National Accounts and Customer Services, for Bell Atlantic
Directory Services, Inc. From 1991 to 1993, he was the Vice President and
General Manager of Bell Atlantic Mobile Services, Inc.'s New England division.
Mr. Wynkoop served as the General Manager for U.S. Sales for the GEC Business
Systems Group of General Electric Company plc, from 1986 to 1991. From 1983 to
1986, Mr. Wynkoop served as the Vice President of U.S. Operations for Krone
GmbH, a West German telecommunications manufacturer, and from 1973 to 1983 he
held several positions, ultimately becoming Director of Marketing from 1979 to
1983, for Phelps Dodge Corporation, an industrial copper mining and
fabricating company. Mr. Wynkoop received a B.A. from Iona College, and
graduated from the Program for Management Development at the Harvard Business
School.
GENE S. GODICK has served as our Vice President of Finance and Chief
Financial Officer since June 1998. Prior to joining us, he worked from 1997
until 1998 as a senior manager at KPMG Peat Marwick LLP, where he worked in
their information, communications and entertainment practice, with a focus on
high technology companies. During 1997, prior to joining KPMG Peat Marwick,
Mr. Godick provided consulting services advising companies on financing and
turnaround strategies. Prior thereto, Mr. Godick served as CFO of Industrial
Construction, Inc. ("Industrial") from 1994 until 1996, and as President and
CFO of Industrial from 1996 until 1997. Industrial filed for Chapter 7
bankruptcy in May 1997. From 1987 until 1994, Mr. Godick was an accountant and
manager for Arthur Andersen LLP's Enterprise Group, which provided services to
emerging growth companies in high technology, biotechnology and software. Mr.
Godick also serves on the board of directors of Novasoft Information
Technology Corp. Mr. Godick received a B.S. from Villanova University and is a
Certified Public Accountant.
DOUGLAS A. ALEXANDER has served as one of our directors since September 1996
and has served as the Chairman of the Board since 1997. Mr. Alexander is a
Managing Director of ICG. He co-founded Reality Online, Inc. in 1986 and later
sold it to Reuters in 1994. Reality Online developed financial planning tools
and online services aimed at the individual investor and then later became a
provider of Internet solutions to the retail brokerage industry. Prior to
co-founding Reality Online, Mr. Alexander was a partner with Strategic
Management Group, a corporate training firm. Mr. Alexander sits on the boards
of several Internet companies including DejaNews, Linkshare, and SageMaker.
Mr. Alexander was also chairman of WiseWire, which was sold to Lycos, Inc. in
April 1998. Mr. Alexander received a B.A.S. from the University of
Pennsylvania and B.S. from the Wharton School of Business.
JEFFREY C. BALLOWE has served as one of our directors since July 1998. Mr.
Ballowe retired at the end of 1997 from Ziff-Davis, Inc., where during his 11
years at the company he worked to transform Ziff-Davis into an international,
integrated media company. At Ziff-Davis he held several magazine publishing
roles, including Publisher of PC Magazine and a number of corporate posts in
which he was responsible for establishing Ziff-Davis's
50
MANAGEMENT
<PAGE>
European operations, managing Ziff-Davis's largest magazine group, launching
Ziff-Davis's Internet publications, creating ZDNet, and launching ZDTV. At his
retirement he was President, Interactive Media and Development Group, in charge
of Ziff-Davis's Internet publications, ZDNet, ZDTV, and all development at the
company. His development activities included spearheading Ziff-Davis's and
Softbank's investments in Yahoo!, USWeb, Gamespot, and Herring Communications.
Prior to joining Ziff-Davis, Mr. Ballowe worked as a marketing executive at
various technology and marketing services companies. Currently Mr. Ballowe is
Chairman of DejaNews,Inc. and serves as a director on the boards of USWeb,
Personalogic, Inc. and Xoom.com, Inc. He received an MBA from the University of
Chicago, a master's degree from the University of Wisconsin-Madison and a
bachelor's degree from Lawrence University.
WALTER W. BUCKLEY, III has served as one of our directors since 1996. Mr.
Buckley is a co-founder and the President and CEO of ICG. Prior to co-founding
ICG, Mr. Buckley worked for Safeguard Scientifics, Inc. as Vice President of
Acquisitions. Prior to joining Safeguard, Mr. Buckley was President and co-
founder of Centralized Management Systems, Inc., a medical supply company,
which was sold in 1987. Prior thereto, he was a commercial loan officer at
CoreStates Bank, N.A. Mr. Buckley sits on the boards of ICG, Sky/Alland
Marketing, Who? Vision Systems, Inc., Syncra Software, Inc. and e-Chemicals,
Inc. Mr. Buckley received his B.A. from the University of North Carolina,
Chapel Hill.
MATTHEW J. WARTA has served as one of our directors of since June 1998. In
his current position, Mr. Warta is a Director, of Koch Ventures, Inc., a
subsidiary of Koch Industries, Inc. ("Koch") where he is responsible for
investing in and managing the firm's applied technology investments. From 1996
through 1997, he was with Koch's Capital Services Group, where he provided
advisory services on mergers and acquisitions, strategic consulting, and
corporate partnering to various Koch companies. Prior to joining Koch, Mr.
Warta worked as a management consultant at Deloitte & Touche Consulting Group
from 1995 to 1996, where he provided strategic and operational consulting
services to clients. Prior thereto, Mr. Warta served as an account executive
for Valentine Radford Communications, Inc., an advertising and marketing agency
in Kansas City, Missouri. Mr. Warta received an MBA and a B.S. from the
University of Kansas.
C.H. LOW has served as our Vice President and Chief Technology Officer of
Product Development and Engineering since February 1998. From 1988 to 1998 he
was Senior Vice President with Reality Online, a Reuters company, where he was
responsible for designing and developing over 30 projects and gained expertise
in defining host data systems, features and architectures. Previously, Mr. Low
was co-owner of Gnosis, Inc., where he developed a job-shop manufacturing
control system for small to medium sized companies. Mr. Low received a B.A.S.
from the University of Pennsylvania and a B.S. from the Wharton School of
Business.
MARIO V. SHAFFER has served as our Vice President of Business Development
since May 1998. From 1995 to 1998 he served as Group Director of Marketing and
Business Development at America Online Internet Service where he was
responsible for membership marketing and strategic relationships. Previously,
Mr. Shaffer was Vice President of ContentWare, Inc. From 1992 to 1994, he was
Director of Business
51
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<PAGE>
Development of EON Corporation and from 1988 to 1992 he was regional sales
manager of R. R. Donnelley & Sons Co. Mr. Shaffer received a B.A. from the
College of William and Mary.
GEORGE JANKOVIC has served as our Vice President of Product Development since
September 1998. Prior to joining the Company, he was President and founder of
RF Globalnet, which we acquired in September 1998. Prior to founding RF
Globalnet, Mr. Jankovic was Director of Business Development and Marketing
Manager for Boulder Microwave Technology Inc. (now part of Ansoft Corp.), a
start-up focused on CAE software for RF engineers. Mr. Jankovic holds a
M.S.E.E. degree from University of Colorado at Boulder.
NICHOLAS BASTA has served as our Vice President of Editorial Services since
June 1997. Mr. Basta was a senior editor and conference manager at McGraw-Hill,
Inc. where he was employed since 1980. Prior to joining us, he launched the
Chemputers Conferences, a semi-annual meeting on trends in software and
information technology for the chemical process industries. During 1990, he was
an adjunct professor at the Columbia University School of Journalism and
remains an adjunct teacher at the New School for Social Research in New York.
Since 1980, Mr. Basta has been a contributing editor for several trade
publications and has published several career guides. Mr. Basta received a
B.S.E. from Princeton University.
CLASSES OF THE BOARD
Our Board of Directors are divided into three classes that serve staggered
three-year terms. Class I consists of Messrs. and ; Class II of
Messrs. and ; and Class III of Messrs. and .
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors recently created a compensation committee and an audit
committee. The compensation committee of the board of directors evaluates our
compensation policies and administers our stock option plan. The members of the
compensation committee are Messrs. Alexander and Warta. The audit committee
will review the scope of our audit, the engagement of our independent auditors
and their audit reports. The audit committee will also meet with the financial
staff to review accounting procedures and reports. The audit committee
currently consists solely of Mr. Buckley. We intend to appoint another board
member to the audit committee.
DIRECTOR COMPENSATION
We do not pay directors cash compensation, however they are reimbursed for
the expenses they incur in attending meetings of the board or board committees.
Non-employee directors are eligible to receive options to purchase common stock
awarded under our equity compensation plan. See "--Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended December
31, 1997 concerning compensation we paid to the executive officers we employed
during such fiscal year.
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<PAGE>
SUMMARY COMPENSATION TABLE(/1/)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
FISCAL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ------ -------- ------- ------------
<S> <C> <C> <C> <C>
Mark L. Walsh, President and Chief
Executive Officer(2)..................... 1997 $ 70,833 $33,333 --
Michael J. Hagan, Senior Vice President... 1997 $101,933 $ -- --
Michael P. McNulty, Senior Vice
President................................ 1997 $101,516 $ -- --
</TABLE>
- --------
(1) This table lists executive officers who were employed by us in 1997. We
expect that in 1998, we will employ at least four additional executive
officers who will receive more than $100,000 in compensation in 1998.
(2) Mr. Walsh commenced employment with us in August, 1997.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning option
exercises by executive officers named in the Summary Compensation Table during
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END(#) FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE ---------------------------------- -------------------------
NAME EXERCISED (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ----------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Walsh........... -- -- -- -- -- --
Michael J. Hagan........ -- -- -- -- -- --
Michael P. McNulty...... -- -- -- -- -- --
</TABLE>
- --------
(1) Based on an assumed initial public offering price of $ per share, minus
the exercise price, multiplied by the number of shares underlying the
option.
STOCK OPTION PLAN
We have adopted the Amended and Restated 1996 Equity Compensation Plan,
effective as of December 18, 1996. The plan provides for grants of incentive
stock options, nonqualified stock options, and restricted stock to our
designated employees, advisors and consultants, and to non-employee directors.
By encouraging stock ownership, we seek to motivate such individuals to
contribute materially to our success.
General. Subject to adjustment in certain circumstances as discussed below,
the plan authorizes up to shares of common stock for issuance pursuant to
the terms of the plan; no more than shares in the aggregate may be subject
to grants made to any individual in any calendar year. If and to the extent
options granted under the plan expire or are terminated for any reason without
being exercised, or shares of restricted stock are forfeited, the shares of
common stock subject to such grant will again be available for purposes of the
plan.
Administration of the Plan. The plan is administered and interpreted by the
compensation committee (the "Committee") of the board of directors, consisting
of not less than two persons appointed by the Board of Directors from among its
members, each of
53
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<PAGE>
whom must be a "non-employee director" as defined by Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, and an "outside director" as
defined by Section 162(m) of the Internal Revenue Code of 1986, as amended, and
related Treasury regulations. The Committee has the sole authority to:
(1) determine the individuals to whom grants shall be made under the plan;
(2) determine the type, size and terms of the grants to be made to each such
individual, set forth in the "Granting Instrument;"
(3) determine the time when the grants will be made and the duration of any
applicable exercise or restriction period, including the criteria for
vesting and the acceleration of vesting;
(4) determine the total number of shares of common stock available for
grants; and
(5) deal with any other matters arising under the plan.
The Committee may require that a Grantee execute a shareholder's agreement,
with such terms as the Committee deems appropriate. See "Committees of the
Board of Directors."
Grants. Grants under the Plan may consist of (1) options intended to qualify
as incentive stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code, (2) so-called "nonqualified stock options" that are not
intended to so qualify ("NQSOs"), and (3) restricted stock.
Eligibility for Participation. Grants may be made to any of our employees
(including officers and directors) or employees of any of our subsidiaries and
to any non-employee member of the board of directors. Key consultants and
advisors who perform services for us or any of our subsidiaries are eligible if
they render bona fide services, not in connection with the offer or sale of
securities in a capital-raising transaction. As of , 1998, options were
outstanding under the plan.
Options. ISOs may be granted only to employees. NQSOs may be granted to
employees, non-employee directors, and key advisors. The exercise price of
common stock subject to an option shall be determined by the Committee, and may
be equal to, greater than, or less than the fair market value but in no event
less than 80% of fair market value; provided that (a) the exercise price of an
ISO shall be equal to or greater than the fair market value of a share of
common stock on the date such ISO is granted and (b) the exercise price of an
ISO granted to an employee who owns more than 10% of the common stock may not
be less than 110% of the fair market value of the underlying shares of common
stock on the date of grant. The participant may pay the exercise price:
(1) in cash;
(2) with the approval of the Committee, by delivering shares of common stock
owned by the Grantee and having a fair market value on the date of
exercise equal to the Exercise Price; or
(3) by such other method as the Committee shall approve, including payment
through a broker in accordance with procedures permitted by Regulation T
of the Federal Reserve Board.
Options vest according to the terms and conditions determined by the
Committee and specified in the grant instrument.
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The Committee will determine the term of each option; provided, however,
that the term may not exceed ten years from the date of grant, and the term of
an ISO granted to an employee who owns more than 10% of the common stock may
not exceed five years from the date of grant. The Committee may accelerate the
exercisability of any or all outstanding options at any time for any reason.
Restricted Stock. The number of shares granted to each participant shall be
determined by the Committee, subject to the maximum limit described above.
Grants of restricted stock will be made subject to such performance
requirements, vesting provisions, transfer restrictions or other restrictions
and conditions as the Committee may determine in its sole discretion, which
shall remain in force during a restricted period set by the Committee (the
"Restricted Period"). If the grantee ceases to be employed by us during the
Restriction Period or if any other conditions are not met, the restricted
stock grant will terminate as to all shares covered by the grant as to which
the restrictions have not lapsed, and those shares must be immediately
returned to us.
Amendment and Termination of the Plan. The Committee may amend or terminate
the plan at any time; provided, however, that, it may not make any amendment
that requires stockholder approval pursuant to Rule 16b-3 of the Securities
Exchange Act of 1934 or Section 162(m) of the Internal Revenue Code without
stockholder approval. The plan will terminate on the day immediately preceding
the tenth anniversary of its effective date, unless terminated earlier by the
Committee or extended by the Committee with approval of the stockholders.
Adjustment Provisions. Subject to the change of control provisions below, in
the event of certain transactions identified in the plan, the Committee may
appropriately adjust:
(1) the maximum number of shares available for grants;
(2) the maximum number of shares that any participant may be granted in any
year;
(3) the number of shares covered by outstanding grants;
(4) the kind of shares issued under the plan; and
(5) the price per share or the applicable market value of such grants.
Change of Control. In the event of a change of control, the Committee may
determine that (1) all outstanding options shall immediately vest, and (2) the
restrictions and conditions on all outstanding restricted stock shall
immediately lapse. Upon a Change of Control where we are not the surviving
entity or where we survive only as a subsidiary of another entity, unless the
Committee determines otherwise, all outstanding grants shall be assumed by or
replaced with comparable options or stock by the surviving corporation. In
addition, the Committee may (a) require that grantees surrender their
outstanding options in exchange for payment by us, in cash or common stock, at
an amount equal to the amount by which the then fair market value of the
shares of common stock subject to the grantee's unexercised options exceeds
the exercise price of those options, and/or (b) after giving grantees an
opportunity to exercise their outstanding options, terminate any or all
unexercised options.
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A "Change of control" is defined to have occurred if:
(1) any "person" (as defined in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934) (other than persons who are our shareholders of the
effective date of the plan) becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of common stock representing more than 50% of the voting
power of the then-outstanding shares of common stock; or
(2) the shareholders or the directors, as appropriate, approve:
(a) any merger or consolidation of us with another corporation where the
shareholders, immediately prior to such transaction, will not
beneficially own, immediately after the transaction, shares entitling
such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the
election of directors (without consideration of the rights of any
class of stock to elect directors by a separate class vote);
(b) the sale or other disposition of all or substantially all our assets;
or
(c) our liquidation or dissolution.
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may be
precluded from claiming a federal income tax deduction for total remuneration
in excess of $1.0 million paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total remuneration
would include amounts received upon the exercise of stock options granted under
the plan and the value of shares received when the shares of restricted stock
became transferable (or such other time when income is recognized). An
exception does exist, however, for "performance-based compensation," including
amounts received upon the exercise of stock options pursuant to a plan approved
by stockholders that meets certain requirements. The plan has been approved by
stockholders and is intended to make grants of options thereunder meet the
requirements of "performance-based compensation." Awards of restricted stock
generally will not qualify as "performance-based compensation."
EMPLOYMENT AGREEMENTS
In August 1997, we executed an employment letter (the "Walsh Letter") with
Mark L. Walsh, whereby Mr. Walsh is employed as our President and Chief
Executive Officer. Pursuant to the Walsh Letter, Mr. Walsh receives a base
salary of $200,000 per year, and a bonus of up to $100,000 per year based on
our attainment of certain performance objectives. In connection with the Walsh
Letter, we granted Mr. Walsh stock options to purchase shares of common
stock. The Walsh Letter provides that if Mr. Walsh is terminated for any reason
other than for cause, he is entitled to a severance payment equivalent to one
year of his base salary. ICG has guaranteed up to $500,000 of any such
severance payment.
In July 1998, we executed an employment offer letter (the "Wynkoop Letter")
with Barry Wynkoop, whereby Mr. Wynkoop is employed as our Senior Vice
President of Sales and Market Development. Pursuant to the Wynkoop Letter, Mr.
Wynkoop is entitled to receive an annual salary of $175,000, and a bonus of up
to $100,000: 30% of it being attributable to us
56
MANAGEMENT
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meeting certain overall revenue and margin objectives and 70% of it being
attributable to our attainment of certain annual sales targets. The Wynkoop
Letter grants Mr. Wynkoop stock options to purchase shares of common stock.
The Wynkoop Letter provides that if Mr. Wynkoop is terminated for any reason
other than for cause, he is entitled to a severance payment equal to six months
of his base salary.
57
MANAGEMENT
<PAGE>
CERTAIN TRANSACTIONS
Both Michael J. Hagan and Michael P. McNulty were involved in our founding
and organization and may be considered as our promoters. Described below are
items of value received by each of Mr. Hagan and Mr. McNulty. At our inception
in July 1995, we issued shares of common stock to Mr. Hagan and shares
of common stock to Mr. McNulty. Mr. Hagan and Mr. McNulty each contributed a
nominal amount of capital for our initial capitalization. In January 1998, each
of Mr. Hagan and Mr. McNulty received an incentive stock option grant under the
equity compensation plan to purchase shares of common stock.
In 1996, we borrowed an aggregate principal amount of $100,000 evidenced by
three unsecured term notes from certain shareholders. One of the notes was held
by a member of our board of directors who also serves as an officer and
director of ICG. The notes bore interest at a rate of 7%. The notes were to
mature on February 2001, however, all of the Notes were repaid in full,
including interest of $15,771, in May 1998.
During 1996 and 1997, ICG made loans to us, pursuant to a total of 15 demand
notes, in an aggregate principal amount of $3.2 million and interest of
$28,803. We have subsequently either repaid these loans or exchanged them for
shares of our capital stock in subsequent financings.
In 1997, ICG guaranteed repayment of up to $2.0 million of a line of credit
with our bank under the line of credit agreement. We repaid all amounts
outstanding under this facility in May 1998 and consequently, our bank released
the guarantee from ICG.
In 1997, in connection with our entering into an employment letter agreement
with Mark L. Walsh, ICG guaranteed the payment of approximately $500,000 in
potential severance payments in the event his employment is terminated for any
reason other than cause. See "Management--Employment Agreements."
During 1997, we entered into a $250,000 Web site development contract with
Informatrix. In addition, under the contract we were to maintain the Web site
for $20,000 per month. In connection with this contract, we advanced
Informatrix $160,000 in 1997, as evidenced by a demand note. During the nine
months ended September 30, 1998, we advanced an additional $550,000 to
Informatrix as part of the demand note. Mr. McNulty's brother was a member of
the board of directors of Informatrix. Subsequently, in September 1998, we
acquired all of the outstanding capital stock of Informatrix for 90,000 shares
of our common stock (pre-split) (and up to 22,500 of additional shares of our
common stock (pre-split) to the former Informatrix shareholders if Informatrix
achieves certain sales targets through December 1998). These sales targets were
met for the period ended September 30, 1998 and we will be required to issue
4,290 additional shares of common stock (pre-split) pursuant to this
arrangement. In connection with the acquisition, we canceled the account
receivable and the note receivable from Informatrix.
In May 1998, we issued warrants to ICG that will, in the aggregate, entitle
ICG to purchase shares of common stock at $ per share. We issued the
warrants in connection with certain guarantees of our bank debt by ICG. Such
warrants are currently exercisable, and will expire on November 30, 2008. The
exercise price and number of shares of common stock issuable upon the exercise
of each of the warrants are subject to adjustment upon the occurrence of
certain events, including
58
CERTAIN TRANSACTIONS
<PAGE>
stock splits, stock dividends, reorganization, recapitalization, merger or sale
of all or substantially all of our assets. All shares of common stock issuable
upon exercise of all warrants are subject to certain registration rights. See
"Description of Capital Stock--Registration Rights."
In July 1998, Mr. Hagan sold an
aggregate of shares of common stock to one of our shareholders for an
aggregate purchase price of $250,000, or $ per share.
In July 1998, Mr. McNulty sold an aggregate of shares of common stock to
one of our shareholders for an aggregate purchase price of $250,000, or $ per
share.
Since inception, we have issued, in private placement transactions, shares of
preferred stock that will convert into an aggregate of shares of common
stock upon or immediately before the closing of the offering. The holders of
such converted shares of common stock are entitled to certain demand and piggy-
back registration rights. See "Description of Capital Stock--Registration
Rights."
The following table sets forth information about our preferred stock.
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
SERIES A PREFERRED PREFERRED PREFERRED PREFERRED
------------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Date of issuance........ September 1996 July 1997 October 1997 May/June 1998
Shares of preferred
stock issued........... 1,000,000 5,030,181 301,978 8,888,889
Aggregate purchase price
for preferred stock.... $1.0 million $2.0 million $200,000 $16.0 million
Shares of common stock
to be received upon
conversion.............
</TABLE>
ICG owns all of the shares of Series A Preferred Stock, all of the shares of
Series B Preferred Stock and 2,222,223 shares of Series D Preferred Stock. The
purchase price for the shares of Series A, Series B and Series D Preferred
Stock was paid by ICG in cash and/or by the exchange of the principal amount
plus accrued interest of notes. Douglas A. Alexander, our Chairman of the
Board, is a Managing Director of ICG. He joined our board of directors in
September 1996 after the completion of the issuance of the Series A Preferred
Stock.
In November 1998 we issued a $5.0 million convertible note to ICG. In
connection with the issuance of the convertible note, we issued warrants to
purchase shares of common stock at the initial public offering price per
share.
59 CERTAIN TRANSACTIONS
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to beneficial
ownership of the common stock as of October 31, 1998:
(1) by each person who beneficially owns more than 5% of the common stock;
(2) by each of our executive officers and directors; and
(3) by all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF OWNERSHIP
COMMON STOCK ------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------ --------------------- --------------- --------------
<S> <C> <C>
Internet Capital Group,
LLC(2)................... 49.0%
Koch Ventures, Inc.(3).... 6.9
Wheatley Partners,
L.P.(4).................. 6.9
Mark L. Walsh(5).......... 1.4
Michael J. Hagan.......... 4.8
Michael P. McNulty........ 3.9
Douglas A. Alexander(6)... 1.3
Jeffrey C. Ballowe........ -- *
Walter W. Buckley, III.... *
Matthew J. Warta.......... -- *
*All executive officers
and directors as a group
(10 persons)(2)(5)(6).... 11.3%
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares beneficially
owned by them. All figures include shares of common stock issuable upon the
exercise of options or warrants exercisable within 60 days of October 31,
1998.
(2) The address of the shareholder is 800 Safeguard Building, 435 Devon Park
Drive, Wayne, PA 19087. Includes shares of common stock issuable upon
the exercise of warrants exercisable within 60 days of October 31, 1998.
(3) The address of the shareholder is 4111 East 37th Street North, Wichita, KS
67220.
(4) The address of the shareholder is 21st Century Communications Partners, 767
Fifth Avenue, 45th Floor, New York, NY 10153. Includes shares held by
Wheatley Foreign Partners, L.P.
(5) Includes shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of October 31, 1998.
(6) Includes shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of October 31, 1998.
60
PRINCIPAL SHAREHOLDERS
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $.01 per share, and 40,000,000 shares of preferred stock, par value
$.01 per share.
COMMON STOCK
Holders of the common stock are entitled to receive, as, when and if
declared by the board of directors from time to time, such dividends and other
distributions in cash, stock or property from our assets or funds legally
available for such purposes subject to any dividend preferences that may be
attributable to preferred stock that may be authorized. Holders of common
stock are entitled to one vote for each share held of record on all matters on
which shareholders may vote, except with respect to the election of directors
in which case shareholders are entitled to multiply the number of shares held
of record by the number of directors to be elected and distribute such number
of votes for one or among two or more nominees.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable. In the event of our liquidation, dissolution or
winding up, holders of common stock are entitled to share ratably in the
assets available for distribution.
PREFERRED STOCK
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 40,000,000 shares of preferred stock. No
shares of preferred stock are outstanding and we have no plans to issue a new
series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights
and any other preferences, which rights and preferences could adversely affect
the voting power of the holders of common stock. Issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
or other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage or delay a third party from
acquiring, a majority of our outstanding stock.
COMMON STOCK WARRANTS
We have warrants outstanding for the purchase of shares of our common
stock with a weighted average exercise price of per share.
Warrants issued to ICG on May 12, 1998 will, in the aggregate, entitle ICG
to purchase shares of common stock at $ per share. Warrants issued to
Progress Capital, Inc. on May 12, 1998 will entitle Progress Capital to
purchase shares of common stock for $ per share. Such warrants are
currently exercisable, and expire on November 30, 2008.
Additional warrants to purchase shares of common stock at $ per share
were issued on March 31, 1998 to Progress Capital. Such Warrants are currently
exercisable, and expire April 1, 2007.
Additional warrants to purchase shares of common stock at the initial
public offering price per share were issued to ICG in November, 1998.
Additional warrants to purchase shares of common stock at the initial
public offering price per share were issued to Progress Bank in November,
1998.
61
DESCRIPTION OF CAPITAL STOCK
<PAGE>
The exercise price and number of shares of common stock issuable upon the
exercise of each of the aforementioned warrants are subject to adjustment upon
the occurrence of certain events, including stock splits, stock dividends,
reorganization, recapitalization, merger, or sale of all or substantially all
of our assets. All warrants and shares of stock issuable upon exercise of all
warrants are subject to certain registration rights as described under
"Registration Rights" below.
CLASSIFIED BOARD OF DIRECTORS
Our bylaws, as amended and restated, divide our board of directors into three
classes, with regular three-year staggered terms and initial terms of three
years for the class I directors, two years for the class II directors and one
year for the class III directors.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Our bylaws provide that any action that may be taken at a meeting of the
shareholders may be taken without a meeting if:
(1) such action is authorized by the unanimous written consent of all
shareholders entitled to vote at a meeting for such purposes; or
(2) such action is authorized by written consent of such number of
shareholders required by law who are entitled to vote thereon at a
meeting of the shareholders or of a class of shareholders.
SPECIAL MEETINGS
Our bylaws provide that special meetings of our shareholders may be called
only by the board or by our president. This provision may make it more
difficult for shareholders to take action opposed by the board.
AMENDMENTS TO OUR BYLAWS
Our bylaws provide that the vote of a majority of all directors or the vote
of the majority of the outstanding stock entitled to vote is required to alter,
amend or repeal our bylaws.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1741 of the PBCL provides the power to indemnify any officer or
director acting in his capacity as our representative who was or is a party or
is threatened to be made a party to any action or proceeding against expenses,
judgments, penalties, fines and amounts paid in settlement in connection with
such action or proceeding whether the action was instituted by a third party or
arose by or in our right. Generally, the only limitation on our ability to
indemnify our officers and directors is if the act violates a criminal statute
or if the act or failure to act is finally determined by a court to have
constituted willful misconduct or recklessness.
Our bylaws provide a right to indemnification to the full extent permitted by
law, for expenses (including attorney's fees), damages, punitive damages,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by any director or officer whether or not the indemnified
liability arises or arose from any threatened, pending or completed proceeding
by or in our right (a derivative action) by reason of the fact that such
director or officer is or was serving as our director, officer or employee or,
at our request, as a director, officer, partner, fiduciary or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, unless the act or failure to act giving rise to the claim
for indemnification is finally determined by a court to have constituted
willful misconduct or
62
DESCRIPTION OF CAPITAL STOCK
<PAGE>
recklessness. Our bylaws provide for the advancement of expenses to an
indemnified party upon receipt of an undertaking by the party to repay those
amounts if it is finally determined that the indemnified party is not entitled
to indemnification.
Our bylaws authorize us to take steps to ensure that all persons entitled to
the indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
LIMITATION OF LIABILITY
Our articles of incorporation provide that none of our directors shall be
personally liable to us or our shareholders for monetary damages for a breach
of fiduciary duty as a director, except for liability:
(1) for any breach of such person's duty of loyalty;
(2) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
(3) for the payment of unlawful dividends and certain other actions
prohibited by Pennsylvania corporate law; and
(4) for any transaction resulting in receipt by such person of an improper
personal benefit.
We maintain directors and officers' liability insurance to provide directors
and officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts. At present, there
is no pending litigation or proceeding, and we are not aware of any threatened
litigation or proceeding, involving any director, officer, employee or agent
where indemnification will be required or permitted under the articles of
incorporation or our bylaws.
PENNSYLVANIA CONTROL-SHARE ACQUISITIONS LAW
Generally, subchapters 25E, F, G, H, I and J of the PBCL place certain
procedural requirements and establish certain restrictions upon the
acquisition of voting shares of a corporation which would entitle the
acquiring person to cast or direct the casting of a certain percentage of
votes in an election of directors. Subchapter 25E of the PBCL provides
generally that, if a company were involved in a "control transaction,"
shareholders of the company would have the right to demand from a "controlling
person or group" payment of the fair value of their shares. For purposes of
subchapter 25E, a "controlling person or group" is a person or group of
persons acting in concert that, through voting shares, has voting power over
at least 20% of the votes which shareholders of the company would be entitled
to cast in the election of directors. A control transaction arises, in
general, when a person or group acquires the status of a controlling person or
group.
In general, Subchapter 25F of the PBCL delays for five years and imposes
conditions upon "business combinations" between an "interested shareholder"
and us. The term "business combination" is defined broadly to include various
merger, consolidation, division, exchange or sale transactions, including
transactions utilizing our assets for purchase price amortization or
refinancing purposes. An "interested shareholder," in general, would be a
beneficial owner of at least 20% of our voting shares.
In general, Subchapter 25G of the PBCL suspends the voting rights of the
"control shares" of a shareholder that acquires for the first time 20% or
more, 33 1/3% or more, or 50% or more of a company's shares entitled to be
63
DESCRIPTION OF CAPITAL STOCK
<PAGE>
voted in an election of directors. The voting rights of the control shares
generally remain suspended until such time as the "disinterested" shareholders
of the company vote to restore the voting power of the acquiring shareholder.
Subchapter 25H of the PBCL provides in certain circumstances for the recovery
by a company of profits made upon the sale of its common stock by a
"controlling person or group" if the sale occurs within 18 months after the
controlling person or group became such and the common stock was acquired
during such 18 month period or within 24 months prior thereto. In general, for
purposes of Subchapter 25H, a "controlling person or group" is a person or
group that:
(1) has acquired;
(2) offered to acquire; or
(3) publicly disclosed or caused to be disclosed an intention to acquire
voting power over shares that would entitle such person or group to cast
at least 20% of the votes that shareholders of the company would be
entitled to cast in the election of directors.
If the disinterested shareholders of a company vote to restore the voting
power of a shareholder who acquires control shares subject to Subchapter 25G,
such company would then be subject to subchapters 25I and J of the PBCL.
Subchapter 25I generally provides for a minimum severance payment to certain
employees terminated within two years of such approval. Subchapter 25J, in
general, prohibits the abrogation of certain labor contracts prior to their
stated date of expiration.
The foregoing descriptions of certain subchapters of the PBCL do not purport
to be complete.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the board of directors to establish the rights of, and to
issue, substantial amounts of Preferred Stock without the need for shareholder
approval, which Preferred Stock, among other things, may be used to create
voting impediments with respect to any changes in control or to dilute the
stock ownership of holders of common stock seeking to obtain control, may have
the effect of discouraging, delaying or preventing a change in control. See
"Risk Factors--Control by Management and Existing Shareholders; Anti-Takeover
Provisions," "--Common Stock" and "--Preferred Stock."
REGISTRATION RIGHTS
After the consummation of the offering, the holders (the "Holders") of
shares of common stock and warrants to purchase shares of common stock
(the "Registrable Securities") or their transferees, will be entitled to
certain registration rights with respect to the Registrable Securities. These
rights are provided under the terms of the Registrable Securities and
agreements between us and the Holders. Such agreements and Registrable
Securities provide, in certain instances, demand registration rights (the
"Demand Registration Rights"), however, Holders of of these shares will be
restricted from exercising such rights until 180 days after the date of this
prospectus. In addition, pursuant to these agreements, the Holders are
entitled, subject to certain limitations, to require us to include their
Registrable Securities in future registration statements we file under the
Securities Act of 1933 (the "Piggyback Registration Rights"), however, Holders
of of these shares will be restricted from exercising such rights until
180 days after the date of this prospectus.
64
DESCRIPTION OF CAPITAL STOCK
<PAGE>
In accordance with the terms of such Piggyback Registration Rights, we have
elected to exclude all Registrable Securities from the offering. The Holders
also are entitled, subject to certain limitations, to require us to register
their Registrable Securities on a Registration Statement on Form S-3 once we
are eligible to use a Form S-3 in connection with such registrations (the "S-3
Registration Rights"), however, Holders of of these shares will be
restricted from exercising such rights until 180 days after the date of this
prospectus. Registration of shares of common stock pursuant to the exercise of
Demand Registration Rights, Piggyback Registration Rights or S-3 Registration
Rights under the Securities Act of 1933 would result in such shares becoming
freely tradable without restriction under the Securities Act of 1933
immediately upon the effectiveness of such registration. "Risk Factors--Shares
Eligible for Future Sale" and "Shares Eligible for Future Sale."
TRANSFER AGENT
The transfer agent for our common stock is .
CREATION OF SUBSIDIARIES
Immediately prior to the consummation of the offering, we will form a wholly
owned subsidiary, , a Delaware corporation, to which it will transfer
the proceeds of the offering.
In addition, after the offering, we intend to form another wholly owned
subsidiary, , a Delaware corporation, and transfer our intangible assets
to this subsidiary.
65 DESCRIPTION OF CAPITAL STOCK
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us.
Of the shares to be outstanding after the offering (assuming that the
Underwriters do not exercise their over-allotment option), the shares of
common stock offered hereby and an additional shares of common stock will
be freely tradeable without restriction in the public market unless such shares
are held by "affiliates", as that term is defined in Rule 144(a) under the
Securities Act of 1933. For purposes of Rule 144, an "affiliate" of an issuer
is a person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, such issuer. The
remaining shares of common stock to be outstanding after the offering are
"restricted securities" under the Securities Act of 1933 and may be sold in the
public market upon the expiration of certain holding periods under Rule 144,
subject to the volume, manner of sale and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," as
that term is defined in the Securities Act, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
one percent of the then outstanding shares of our common stock (approximately
shares immediately following the offering), or (2) the average weekly
trading volume during the four calendar weeks preceding filing of notice of
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. A shareholder who is deemed not to have been an
"affiliate" of ours at any time during the 90 days preceding a sale, and who
has beneficially owned restricted shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions or public information requirements.
In addition, as of , 1998, there were outstanding warrants to purchase
shares of common stock and options to purchase shares of common
stock, of which options were fully vested and exercisable. An additional
shares were reserved for issuance under our equity compensation plan. We
intend to register the shares of common stock issued, issuable or reserved for
issuance under the plan as soon as practicable following the date of this
prospectus.
Certain holders of shares of common stock and holders of warrants to
purchase shares of common stock are entitled to certain registration
rights with respect to such shares for resale under the Securities Act. If such
holders, by exercising their registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the common stock. Such rights may not be
exercised prior to the expiration of 180 days from the date of this prospectus.
See "Description of Capital Stock--Registration Rights."
66
SHARES ELIGIBLE FOR FUTURE SALE
<PAGE>
LOCK-UP ARRANGEMENTS
Along with our officers and directors, and certain other shareholders, we
have agreed not to sell or otherwise dispose of any shares of common stock for
a period of 180 days after the date of this prospectus without the prior
written consent of Lehman Brothers Inc.
67
SHARES ELIGIBLE FOR FUTURE SALE
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions in, the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement (the "Registration Statement") of which this prospectus is a part,
the underwriters named below (the "Underwriters"), for whom Lehman Brothers
Inc., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from us the
respective number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITERS COMMON STOCK
------------ ------------
<S> <C>
Lehman Brothers Inc...........................................
Hambrecht & Quist LLC.........................................
Volpe Brown Whelan & Company, LLC.............................
----
Total.......................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of common stock are subject to certain conditions, and that
if any of the foregoing shares of common stock are purchased by the
Underwriters pursuant to an Underwriting Agreement, then all of the shares of
common stock agreed to be purchased by the Underwriters pursuant to the
Underwriting Agreement, must be so purchased.
We have been advised by the Representatives that the Underwriters proposed to
offer the shares of common stock directly to the public at the public offering
price set forth on the cover page of this prospectus, and to certain selected
dealers (who may include the Underwriters) at such public offering price less a
selling concession not in excess of $ per share. The Underwriters may allow,
and the selected dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the offering, the offering price
and other selling terms may be changed by the Underwriters.
We have granted to the Underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that such option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of additional shares of common stock proportionate to such Underwriter's
initial commitment as indicated in the preceding table and we will be
obligated, pursuant to such over-allotment option, to sell such shares of
common stock to the Underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, subject to certain limited exceptions, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities
convertible into or exchangeable for any such shares of common stock for a
period of 180
68
UNDERWRITING
<PAGE>
days from the date of this prospectus. All of our executive officers and
directors and certain other shareholders have agreed pursuant to lock-up
agreements that, without the prior written consent of Lehman Brothers Inc.,
they will not, subject to certain limited exceptions, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable for any such shares for the period
ending 180 days after the date of this prospectus. See "Shares Eligible for
Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
Representatives and us. Among the factors to be considered in determining the
initial public offering price of the common stock, in addition to prevailing
market conditions, will be our historical performance and capital structure,
estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Application has been made to have the common stock approved for quotation on
the Nasdaq National Market under the symbol "VERT."
We have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute, under
certain circumstances, to payments that the Underwriters may be required to
make in respect thereof.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of common
stock. As an exception to these rules, the Representative are permitted to
engage in certain transactions that stabilize the price of the common stock.
Such transactions may consist of bids or purchases for the purposes of pegging,
fixing or maintaining the price of the common stock.
If the Underwriters create a short position in the common stock in connection
with the offering (i.e., they sell more shares than are set forth on the cover
page of this prospectus), the Representatives may reduce that short position by
purchasing common stock in the open market. The Representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option described herein. The Underwriters have informed us that they do not
intend to confirm sales to discretionary accounts that exceed 5% of the total
number of shares of common stock offered by them.
The Representatives also may impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representatives purchase shares
of common stock in the open market to reduce the Underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the Underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
69
UNDERWRITING
<PAGE>
Neither we nor any of the Underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover hereof.
The Representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered hereby to any accounts over which they
exercise discretionary authority.
At our request, the Underwriters have reserved up to shares of common
stock offered hereby for sale to certain of our officers, directors, employees,
business associates and related parties at the initial public offering price
set forth on the cover page of this prospectus. Such persons must commit to
purchase no later than the close of business on the day following the date of
this prospectus. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares.
EXPERTS
The financial statements and schedule of VerticalNet, Inc. as of December 31,
1996 and 1997 and for the period from July 28, 1995 (inception) through
December 31, 1995 and for the years ended December 31, 1996 and 1997, the
financial statements of Boulder Interactive Technology Services Co. as of
December 31, 1996 and 1997 and for the period from March 22, 1996 (inception)
through December 31, 1996 and for the year ended December 31, 1997, and the
financial statements of Informatrix Worldwide, Inc. as of December 31, 1997 and
for the period from October 15, 1997 (inception) through December 31, 1997,
have been included herein and in the registration statement in reliance upon
the reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters
in connection with the offering will be passed upon for the Underwriters by
Chadbourne & Parke LLP, New York, New York.
70
UNDERWRITING/EXPERTS/LEGAL MATTERS
<PAGE>
ADDITIONAL INFORMATION
We file annual, quarterly, and special reports, proxy statements, and other
information with the Securities and Exchange Commission. Such reports, proxy
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 7 World Trade Center, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Our common stock is quoted on The Nasdaq National Market.
Reports, proxy statements and other information concerning the Company can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site that
contains all information filed electronically by the Company. The address of
the Commission's Web site is (http://www.sec.gov.).
This prospectus constitutes a part of a registration statement on Form S-1
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") filed by us with the Commission under the Securities
Act, with respect to the securities offered in this prospectus. This prospectus
does not contain all the information set forth in the Registration Statement.
Certain parts of the Registration Statement omitted in accordance with the
rules and regulations of the Commission. We refer to the Registration Statement
and to the exhibits to such Registration Statement for further information with
respect to the Company and the securities offered in this prospectus. Copies of
the Registration Statement and the exhibits to such Registration Statement are
on file at the offices of the Commission and may be obtained upon payment of
the prescribed fee or may be examined without charge at the public reference
facilities of the Commission described above. Statements contained in this
prospectus concerning the provisions of documents are necessarily summaries of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission.
REPORTS TO SECURITY HOLDERS
We intend to distribute to our shareholders annual reports containing audited
financial statements and will make available copies of quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
71
ADDITIONAL INFORMATION/REPORTS TO SECURITY HOLDERS
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
VerticalNet, Inc.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and September
30, 1998 (unaudited)................................................... F-3
Consolidated Statements of Operations for the period from July 28, 1995
(inception) through December 31, 1995, the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 (unaudited)
and 1998 (unaudited)................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period
from July 28, 1995 (inception) through December 31, 1995, the years
ended December 31, 1996 and 1997, and the nine months ended September
30, 1998 (unaudited)................................................... F-5
Consolidated Statements of Cash Flows for the period from July 28, 1995
(inception) through December 31, 1995, the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 (unaudited)
and 1998 (unaudited)................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Boulder Interactive Technology Services Company
Independent Auditors' Report............................................ F-23
Balance Sheets at December 31, 1996 and 1997............................ F-24
Statements of Operations for the period from March 22, 1996 (inception)
through December 31, 1996 and the year ended December 31, 1997......... F-25
Statements of Shareholders' Equity for the period from March 22, 1996
(inception) through December 31, 1996 and the year ended December 31,
1997................................................................... F-26
Statements of Cash Flows for the period from March 22, 1996 (inception)
through December 31, 1996 and the year ended December 31, 1997......... F-27
Notes to Financial Statements........................................... F-28
Informatrix Worldwide, Inc.
Independent Auditors' Report............................................ F-33
Balance Sheets at December 31, 1997 and September 30, 1998 (unaudited).. F-34
Statements of Operations for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-35
Statements of Shareholders' Deficit for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-36
Statements of Cash Flows for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-37
Notes to Financial Statements........................................... F-38
Unaudited Pro Forma Combined Financial Statements
VerticalNet, Inc. and subsidiaries
Unaudited Pro Forma Financial Information Basis of Presentation......... F-42
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997...................................................... F-43
Unaudited Pro Forma Combined Statement of Operations for the nine months
ended
September 30, 1998..................................................... F-44
Notes to Pro Forma Condensed Combined Financial Statements.............. F-45
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
VerticalNet, Inc.:
We have audited the accompanying consolidated balance sheets of VerticalNet,
Inc. and subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from July 28, 1995 (inception) to December 31, 1995 and
for the years ended December 31, 1996 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
VerticalNet, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for the period from July 28,
1995 (inception) through December 31, 1995 and for the years ended December 31,
1996 and 1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
August 21, 1998
Philadelphia, Pennsylvania
F-2
<PAGE>
VERTICALNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998
------------ ------------ ------------- -------------
(UNAUDITED) (PRO FORMA)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 329,451 $ 754,716 $ 3,793,964 $ 10,793,964
Accounts receivable,
net of allowance for
doubtful accounts of
$18,575, $30,000,
$58,066 and $58,066,
respectively.......... 178,942 607,611 1,064,777 1,064,777
Loan receivable, net of
allowance of $80,000
and $0 in 1997 and
1998, respectively.... -- 84,086 3,500 3,500
Prepaid expenses....... 6,474 145,678 335,011 335,011
---------- ----------- ------------ ------------
Total current as-
sets................ 514,867 1,592,091 5,197,252 12,197,252
---------- ----------- ------------ ------------
Property and equipment,
net..................... 106,409 491,853 1,003,541 1,003,541
Goodwill and other intan-
gibles, net of accumu-
lated amortization of
$103,565 and $103,565 in
1998 and pro forma, re-
spectively.............. -- -- 2,663,640 2,663,640
Deferred charges and
other assets............ 15,927 20,143 293,811 493,811
---------- ----------- ------------ ------------
Total assets......... $ 637,203 $ 2,104,087 $ 9,158,244 $ 16,358,244
========== =========== ============ ============
LIABILITIES AND SHARE-
HOLDERS' EQUITY (DEFI-
CIT)
Current liabilities:
Current portion of
long-term debt........ $ 26,515 $ 150,856 $ 301,570 $ 301,570
Convertible notes...... -- -- -- 7,000,000
Line of credit......... -- 2,500,000 -- --
Accounts payable....... 98,045 607,479 1,209,966 1,209,966
Accrued expenses....... 23,879 158,936 1,056,901 1,056,901
Deferred revenues...... 216,433 710,393 1,506,878 1,506,878
---------- ----------- ------------ ------------
Total current liabil-
ities............... 364,872 4,127,664 4,075,315 11,075,315
---------- ----------- ------------ ------------
Long-term debt, net of
current portion......... 167,067 399,948 374,128 374,128
---------- ----------- ------------ ------------
Commitments and contin-
gencies (Note 8)
Shareholders' Equity
(Deficit):
Preferred stock Series
A, B, C, and D: $.01
par value, 40,000,000
shares authorized,
1,000,000, 6,332,159,
15,221,048 and 0
shares issued and
outstanding in 1996,
1997, 1998, and
proforma,
respectively.......... 10,000 63,322 152,211 --
Common stock $.01 par
value, 40,000,000
shares authorized
4,927,386, 4,927,386,
5,128,497, and
24,111,445 shares
issued and outstanding
in 1996, 1997, 1998,
and pro forma,
respectively.......... 49,274 49,274 51,285 241,115
Additional paid-in
capital............... 1,025,812 3,222,490 18,737,739 18,900,120
Deferred compensation.. -- -- (139,406) (139,406)
Accumulated deficit.... (919,822) (5,698,611) (14,033,028) (14,033,028)
---------- ----------- ------------ ------------
165,264 (2,363,525) 4,768,801 4,968,801
Treasury stock at cost,
314,514 shares........ (60,000) (60,000) (60,000) (60,000)
---------- ----------- ------------ ------------
Total shareholders'
equity (deficit).... 105,264 (2,423,525) 4,708,801 4,908,801
---------- ----------- ------------ ------------
Total liabilities and
shareholders' equity
(deficit)........... $ 637,203 $ 2,104,087 $ 9,158,244 $ 16,358,244
========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 28, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------- ----------------------- ------------------------
1995 1996 1997 1997 1998
--------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 15,642 $ 285,140 $ 791,822 $ 550,648 $ 1,861,799
---------- ---------- ----------- ----------- -----------
COSTS AND EXPENSES:
Editorial and
operational............ 23,949 213,544 1,055,725 673,784 2,100,885
Product development..... 21,550 213,926 711,292 451,008 797,815
Sales and marketing..... 147,609 268,417 2,300,365 1,348,318 4,405,407
General and
administrative......... 32,656 291,660 1,388,123 890,768 2,907,275
---------- ---------- ----------- ----------- -----------
Operating loss.......... (210,122) (702,407) (4,663,683) (2,813,230) (8,349,583)
---------- ---------- ----------- ----------- -----------
Interest and dividend
income ................ -- 7,491 10,999 7,714 164,535
Interest expense........ (853) (13,931) (126,105) (36,898) (149,369)
---------- ---------- ----------- ----------- -----------
Interest, net........... (853) (6,440) (115,106) (29,184) 15,166
---------- ---------- ----------- ----------- -----------
Net loss................ $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
---------- ---------- ----------- ----------- -----------
Basic and diluted net
loss per share......... $ (0.10) $ (0.14) $ (0.97) $ (0.58) $ (1.68)
========== ========== =========== =========== ===========
Weighted average shares
outstanding used in
per-share calculation
(basic and diluted).... 2,137,521 5,032,624 4,927,384 4,927,384 4,973,705
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED PREFERRED COMMON STOCK
----------------- ----------------- -------------- ----------------- -----------------
ADDITIONAL
PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July
28, 1995 (in-
ception)....... -- $ -- -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of com-
mon stock...... -- -- -- -- -- -- -- -- 3,826,686 38,267 31,819 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1995... -- -- -- -- -- -- -- -- 3,826,686 38,267 31,819 --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of com-
mon stock...... -- -- -- -- -- -- -- -- 1,100,700 11,007 3,993 --
Issuance of
Series A
preferred
stock, net of
issuance cost.. 1,000,000 10,000 -- -- -- -- -- -- -- -- 990,000 --
Repurchase of
common stock... -- -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1996... 1,000,000 10,000 -- -- -- -- -- -- 4,927,386 49,274 1,025,812 --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of Se-
ries B pre-
ferred stock... -- -- 5,030,181 50,302 -- -- -- -- -- -- 1,949,698 --
Issuance of Se-
ries C pre-
ferred stock... -- -- -- -- 301,978 3,020 -- -- -- -- 196,980 --
Issuance of
warrants in
connection with
debt
financing...... -- -- -- -- -- -- -- -- -- -- 50,000 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1997... 1,000,000 10,000 5,030,181 50,302 301,978 3,020 -- -- 4,927,386 49,274 3,222,490 --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of
Series D
preferred
stock, net of
transaction
costs
(unaudited).... -- -- -- -- -- -- 8,888,889 88,889 -- -- 15,046,465 --
Issuance of
common stock as
consideration
for private
placement fees
(unaudited).... -- -- -- -- -- -- -- -- 111,111 1,111 148,889 --
Issuance of
fully vested
options to non
employees
(unaudited).... -- -- -- -- -- -- -- -- -- -- 19,095 --
Consideration
for purchase of
Informatrix
(unaudited).... -- -- -- -- -- -- -- -- 90,000 900 152,100 --
Unearned
compensation
(unaudited).... -- -- -- -- -- -- -- -- -- -- 148,700 (148,700)
Amortization of
unearned
compensation
(unaudited).... -- -- -- -- -- -- -- -- -- -- -- 9,294
Net loss (unau-
dited)......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Septem-
ber 30, 1998
(unaudited).... 1,000,000 $10,000 5,030,181 $50,302 301,978 $3,020 8,888,889 $88,889 5,128,497 $51,285 $18,737,739 $(139,406)
--------- ------- --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
<CAPTION>
ACCUMULATED TREASURY TOTAL SHAREHOLDERS'
DEFICIT STOCK EQUITY(DEFICIT)
------------- --------- -------------------
<S> <C> <C> <C>
Balance, July
28, 1995 (in-
ception)....... $ -- $ -- $ --
Issuance of com-
mon stock...... -- -- 70,086
Net loss........ (210,975) -- (210,975)
------------- --------- -------------------
Balance, Decem-
ber 31, 1995... (210,975) -- (140,889)
------------- --------- -------------------
Issuance of com-
mon stock...... -- -- 15,000
Issuance of
Series A
preferred
stock, net of
issuance cost.. -- -- 1,000,000
Repurchase of
common stock... -- (60,000) (60,000)
Net loss........ (708,847) -- (708,847)
------------- --------- -------------------
Balance, Decem-
ber 31, 1996... (919,822) (60,000) 105,264
------------- --------- -------------------
Issuance of Se-
ries B pre-
ferred stock... -- -- 2,000,000
Issuance of Se-
ries C pre-
ferred stock... -- -- 200,000
Issuance of
warrants in
connection with
debt
financing...... -- -- 50,000
Net loss........ (4,778,789) -- (4,778,789)
------------- --------- -------------------
Balance, Decem-
ber 31, 1997... (5,698,611) (60,000) (2,423,525)
------------- --------- -------------------
Issuance of
Series D
preferred
stock, net of
transaction
costs
(unaudited).... -- -- 15,135,354
Issuance of
common stock as
consideration
for private
placement fees
(unaudited).... -- -- 150,000
Issuance of
fully vested
options to non
employees
(unaudited).... -- -- 19,095
Consideration
for purchase of
Informatrix
(unaudited).... -- -- 153,000
Unearned
compensation
(unaudited).... -- -- --
Amortization of
unearned
compensation
(unaudited).... 9,294
Net loss (unau-
dited)......... (8,334,417) -- (8,334,417)
------------- --------- -------------------
Balance, Septem-
ber 30, 1998
(unaudited).... $(14,033,028) $(60,000) $ 4,708,801
------------- --------- -------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 28, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------- ----------------------- ------------------------
1995 1996 1997 1997 1998
--------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net loss............... $(210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
--------- ---------- ----------- ----------- -----------
Adjustments to recon-
cile net loss to net
cash used in operating
activities:
Loss from disposal of
fixed assets.......... -- -- 3,278 -- --
Depreciation, amortiza-
tion and other noncash
charges............... 6,137 62,142 388,058 183,444 411,712
Change in assets:
Accounts receivable... (34,800) (144,142) (428,669) (703,741) (332,010)
Prepaid expenses and
other assets......... (3,092) (15,632) (143,420) (39,681) (459,021)
Change in liabilities:
Accounts payable...... 87,219 10,825 509,434 294,188 570,941
Accrued expenses...... 37,903 (14,024) 135,057 56,908 878,354
Deferred revenues..... 69,333 147,100 493,960 733,220 579,915
--------- ---------- ----------- ----------- -----------
Net cash used in operat-
ing activities......... (48,275) (662,578) (3,821,091) (2,318,076) (6,684,526)
--------- ---------- ----------- ----------- -----------
Cash flows from invest-
ing activities:
Acquisitions, net of
cash acquired......... -- -- -- -- (1,858,389)
Loan to Infomatrix
prior to acquisition.. -- -- -- -- (550,914)
Loan receivable........ -- -- (160,000) -- (4,086)
Capital expenditures... (56,720) (63,646) (235,671) (148,340) (399,038)
--------- ---------- ----------- ----------- -----------
Net cash used in invest-
ing activities......... (56,720) (63,646) (395,671) (148,340) (2,812,427)
--------- ---------- ----------- ----------- -----------
Cash flows from financ-
ing activities:
Borrowings under line
of credit............. -- -- 2,500,000 375,000 --
Repayment of line of
credit................ -- -- -- -- (2,500,000)
Loans from related par-
ties.................. 15,914 100,000 -- -- --
Loans from ICG......... -- -- 1,600,000 650,000 1,550,000
Repayment of loans from
related parties....... -- (20,000) -- -- (100,000)
Principal payments on
obligations under cap-
ital leases........... (139) (2,182) (48,834) (43,130) (122,909)
Borrowings under long-
term debt............. 50,000 -- -- -- --
Repayment of long-term
debt.................. -- (8,009) (9,139) (6,764) (32,852)
Repayment of loans from
ICG................... -- -- (950,000) -- --
Net proceeds from issu-
ance of preferred
stock................. -- 1,000,000 1,550,000 1,350,000 13,741,962
Proceeds from issuance
of common stock....... 70,086 15,000 -- -- --
Repurchase of treasury
stock................. -- (60,000) -- -- --
--------- ---------- ----------- ----------- -----------
Net cash provided by fi-
nancing activities..... 135,861 1,024,809 4,642,027 2,325,106 12,536,201
--------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash................ 30,866 298,585 425,265 (141,310) 3,039,248
Cash and cash equiva-
lents--beginning of pe-
riod................... -- 30,866 329,451 329,451 754,716
--------- ---------- ----------- ----------- -----------
Cash and cash equiva-
lents--end of period... $ 30,866 $ 329,451 $ 754,716 $ 188,141 $ 3,793,964
========= ========== =========== =========== ===========
Supplemental disclosure
of cash flow informa-
tion:
Cash paid during the
year for interest..... $ 853 $ 13,931 $ 52,925 $ 17,483 $ 57,079
========= ========== =========== =========== ===========
Supplemental schedule of
noncash investing and
financing activities:
Equipment acquired un-
der capital leases.... $ 4,407 $ 53,595 $ 415,195 $ 418,316 $ 353,479
Issuance of common
stock as consideration
for purchase of
Informatrix........... $ -- $ -- $ -- $ -- $ 153,000
Issuance of common
stock as consideration
of private placement
fees.................. $ -- $ -- $ -- $ -- $ 150,000
Issuance of warrants in
connection with debt
financing............. $ -- $ -- $ 50,000 $ -- $ --
========= ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
VerticalNet, Inc. (VerticalNet or the Company) is a creator, owner and
operator of vertical trade communities, which are targeted business-to-business
communities of commerce on the Internet. The Company's vertical trade
communities are Web sites that act as industry-specific comprehensive sources
of information, interaction and electronic commerce. Vertical trade communities
combine product information; industry news; requests for proposals;
directories; classifieds; job listings; discussion forums; a variety of
electronic commerce opportunities for buyers and sellers; and other services,
such as online professional education courses and virtual trade shows. Each
trade community is individually branded, focuses on one industrial sector and
caters to individuals with similar professional interest. The virtual trade
communities are designed to attract technical and purchasing professionals with
highly specialized product and specification requirements and purchasing
authority or influence. The Company was founded on July 28, 1995 and currently
operates 29 vertical trade communities in seven major industry groups:
environment and utility; electronics; services; telecommunications; process
industries; life sciences; and food and packaging.
The Company currently generates substantially all of its revenue from
Internet advertising including the development of "storefronts" (Web pages that
focus on advertisers products and provide a link to the advertisers Web sites).
The Company is a majority-owned subsidiary of the Internet Capital Group LLC
(ICG).
The Company has sustained significant net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations
in the ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financing, bank financing, or other sources of capital. During 1998 the
Company sold an additional $15.2 million of its preferred stock. Management
believes that its current funds combined with other available sources of
funding will be sufficient to enable the Company to meet its planned
expenditures through at least December 31, 1998. If financial resources are not
sufficient, management has the intent and believes it has the ability to reduce
expenditures as to not require additional financial resources if such resources
are not available on terms acceptable to the Company.
Unaudited Interim Financial Information
The interim financial statements of the Company for the nine months ended
September 30, 1997 and 1998, included herein, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. In the opinion of management, the accompanying
unaudited interim financial statements reflect all
F-7
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at September 30, 1998 and
the results of its operations and its cash flows for the nine months ended
September 30, 1997 and 1998. The accompanying unaudited interim financial
statements are not necessarily indicative of full year results.
Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software......................... 3 years
Office equipment and furniture.................................... 5 years
Trade show equipment.............................................. 7 years
Leasehold improvements............................................ 3 years
</TABLE>
Revenue and Editorial and Operational Expenses
The Company's revenues are derived principally from advertising contracts
which include the initial construction of storefronts. The advertising
contracts do not extend beyond one year. Advertising revenues are recognized
ratably over the period of the advertising contract.
Revenues from educational courses are recognized in the period in which the
course is completed and revenues from the sale of books are recognized in the
period in which the books are shipped.
Barter transactions are recorded at the lower of estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given. From July 28, 1995 (inception) through the year ended December 31, 1997,
barter transactions have been immaterial. For the nine months ended September
30, 1998, the Company recognized $350,677 of advertising revenues from barter
transactions.
Editorial and operational expenses include editorial costs, which are
principally payroll and related costs, the cost of purchased content and the
costs for Internet related computer equipment.
F-8
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations. No single customer accounted for greater than 10% of
total revenues during the period from July 28, 1995 (inception) through
December 31, 1995 and the years ended December 31, 1996 and 1997 and the nine
month periods ended September 30, 1997 and 1998.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital lease obligations that
are carried at cost which approximates fair value.
Product Development
Product development costs consists principally of salaries and related costs,
which are charged to expense as incurred.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was approximately $38,000, $21,000 and $198,000 for the period from
July 28, 1995 (inception) through December 31, 1995 and the years ended
December 31, 1996 and 1997, respectively, and $126,000 and $1,315,000 for the
nine months ended September 30, 1997 and 1998, respectively.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded against deferred
tax assets if it is more likely than not that such assets will not be realized.
Accounting for Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
F-9
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Goodwill and Intangibles
Goodwill is amortized using the straight-line method from the date of
acquisition over the expected period to be benefited, estimated at 36 months.
The Company periodically assesses the recoverability of goodwill, as well as
other long-lived assets, based upon expectations of future undiscounted cash
flows.
Deferred Offering Costs
At September 30, 1998, specific incremental cost directly attributable to the
planned initial public offering (IPO) process has been deferred. These costs
will be charged against additional paid-in-capital in connection with this
offering.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Options
The Company accounts for the grant of employee options to purchase common
stock in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options or to continue to account for stock options and stock-
based awards using the intrinsic value method, as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and to make pro forma disclosures of net loss as if the fair value method
had been applied. The Company elected to apply APB 25 to account for stock
options and has disclosed the pro forma net loss as if the fair value method
had been applied.
Stock Splits
In February 1996 and February 1997, the Company's Board of Directors
authorized and implemented an 11,008 for one and a 4.7619 for one, stock split,
respectively. All share amounts have been retroactively restated to reflect
these events in the accompanying financial statements.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share
The Company adopted Computation of Earnings Per Share, (SFAS No. 128), during
the year ended December 31, 1997. In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Dilutive earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
F-10
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the if-
converted method). Common equivalent shares are excluded from the calculation
if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share as if
they were outstanding for all periods presented. To date, the Company has not
had any issuances or grants for nominal consideration.
Pro forma net loss per share is computed using the weighted average number of
shares of common stock outstanding, including common equivalent shares from the
convertible preferred stock (using the if-converted method), which will
automatically convert into common stock upon an IPO as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is antidilutive.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
JULY 28, 1995 (INCEPTION)
BASIC AND DILUTED NET LOSS PER SHARE TO DECEMBER 31, 1995 1996 1997 1997 1998
- ------------------------------------ ------------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss...... $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
Denominator:
Weighted-average shares
outstanding basic and
diluted............... 2,137,521 5,032,624 4,927,384 4,927,384 4,973,705
Basic and diluted net
loss per share.......... $ (0.10) $ (0.14) $ (0.97) $ (0.58) $ (1.68)
========== ========== =========== =========== ===========
PRO FORMA NET LOSS PER
SHARE
Numerator: Net loss...... $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
Denominator:
Weighted-average shares
outstanding basic and
diluted............... 2,137,521 6,480,764 12,059,433 11,071,202 19,601,749
Basic and diluted net
loss per share $ (0.10) $ (0.11) $ (0.40) $ (0.26) $ (0.43)
========== ========== =========== =========== ===========
</TABLE>
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows, as the amount of comprehensive loss is the same as the net loss for
all periods presented.
F-11
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
In June 1997 the FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 will not
have an impact on the Company's results of operations, financial position or
cash flows.
In February 1998 the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits (SFAS No. 132), which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not have an impact on the Company's results of operations,
financial position or cash flows.
In March 1998 the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance on accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
In June 1998 the FASB issued Accounting for Derivatives and Hedging
Activities (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As the Company does not currently engage or plan
to engage in derivative or hedging activities, there will be no impact to the
Company's results of operations, financial position or cash flows upon the
adoption of this standard.
(2) UNAUDITED PRO FORMA BALANCE SHEET
The Company is planning on filing a registration statement with the
Securities and Exchange Commission (SEC) that would permit the Company to sell
shares of the Company's common stock
F-12
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
in connection with a proposed IPO. In addition, in November of 1998, the
Company obtained a $5.0 million convertible note from ICG and a $2.0 million
note from a bank.
The unaudited pro forma balance sheet as of September 30, 1998 reflects:
(a) The Company's capitalization, if the IPO is consummated under terms
presently anticipated. Upon closing of the proposed IPO, all of the
then outstanding shares of the Company's convertible preferred stock
will automatically convert into shares of common stock. The conversion
of the convertible preferred stock has been reflected in the
accompanying pro forma balance sheet as if it had occurred on September
30, 1998.
(b) The convertible note from ICG and the note from a bank are more fully
described in Note 4. In connection with these loans the Company issued
warrants to purchase an aggregate of 200,000 shares of the Company's
common stock.
(3) ACQUISITIONS
In September 1998 the Company acquired all of the outstanding capital stock
of Boulder Interactive Technology Services Company (BITC) for $1.8 million in
cash. BITC operates a vertical trade community for professionals in the radio
frequency and wireless communications industry. The acquisition was accounted
for using the purchase method of accounting. The excess of the purchase price
over the fair value of the net assets acquired of $1,864,173 was recorded as
goodwill and is being amortized over 36 months.
In September 1998 the Company acquired all of the outstanding capital stock
of Informatrix Worldwide, Inc. (Informatrix) for 90,000 shares of the Company's
common stock valued at $153,000. Informatrix operates a vertical community in
the property and casualty insurance industry that caters to risk managers,
agents, brokers and other professionals in the insurance industry. The
acquisition was accounted for under the purchase method of accounting. The
estimated excess of the purchase price over the fair value of the net assets
acquired of $910,325 was recorded as goodwill and will be amortized over 36
months. The purchase agreement also provides for the Company to issue up to
22,500 additional shares of the Company's common stock to the Informatrix
shareholders in the event that Informatrix achieves certain sales targets
through December 1998. As of October 31,1998, the former shareholders of
Informatrix earned 4,290 shares of common stock which was valued at $7,293. The
additional consideration was accounted for as additional goodwill.
The following unaudited pro forma financial information presents the combined
results of operations of VerticalNet, BITC and Informatrix as if the
acquisitions occurred on January 1, 1997, after giving effect to certain
adjustments including amortization of goodwill. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had VerticalNet, BITC and Informatrix constituted a single entity
during such periods.
F-13
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ------------------------
1997 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................. $ 1,118,030 $ 779,458 $ 2,331,869
=========== =========== ===========
Net loss.............................. $(5,789,177) $(3,405,718) $(9,800,563)
=========== =========== ===========
Net loss per share.................... $ (1.17) $ (.69) $ (1.94)
=========== =========== ===========
</TABLE>
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1996 1997 1998
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and purchased soft-
ware................................... $148,028 $ 654,157 $ 1,409,196
Office equipment and furniture.......... 6,645 102,279 148,189
Trade show equipment.................... 19,605 34,079 40,587
Leasehold improvements.................. 0 29,401 43,198
-------- --------- -----------
174,278 819,916 1,641,170
Less: accumulated depreciation and amor-
tization............................... (67,869) (328,063) (637,629)
-------- --------- -----------
Property and equipment, net............. $106,409 $ 491,853 $ 1,003,541
======== ========= ===========
</TABLE>
(5) LINE OF CREDIT
The Company had a line of credit with a bank in the amount of $2,500,000 at
December 31, 1997. Borrowings under the facility were collateralized by a
security interest in all assets of the Company and required the Company to meet
specified financial ratios. As of December 31, 1997, the Company was in
technical default, as it did not meet the specified financial ratios. The bank
waived these violations for the year ended December 31, 1997. The facility
bears interest at prime plus 1.5% (10% at December 31, 1997). The weighted
average interest rate for borrowings under this facility was 10% for the year
ended December 31, 1997. In connection with obtaining these facilities, the
Company issued warrants to purchase its common stock (Note 9). ICG has
guaranteed repayment of $2.0 million under the line of credit agreement. The
Company repaid all amounts outstanding under this facility in May 1998 and
consequently, the guarantee from ICG was cancelled. Subsequently, the bank
provided a $500,000 line of credit, which expires on June 30, 1999 and is
collateralized by a security interest in all of the assets of the Company with
an interest rate prime plus 1.5%.
F-14
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
(6) ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation and related costs...... $ -- $ 90,833 $ 699,226
Accrued professional fees................... 14,500 25,698 282,499
Other....................................... 9,379 42,405 75,176
------- -------- ----------
$23,879 $158,936 $1,056,901
======= ======== ==========
</TABLE>
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Term notes with related parties............ $100,000 $100,000 $ --
Term bank note............................. 41,991 32,852 --
Capital leases............................. 51,591 417,952 675,698
-------- -------- --------
193,582 550,804 675,698
Less: current portion...................... (26,515) (150,856) (301,570)
-------- -------- --------
Long-term debt............................. $167,067 $399,948 $374,128
======== ======== ========
</TABLE>
The Company had a term loan with another bank with an interest rate at prime
plus 2.75% (11.25% at December 31, 1997) which was payable in 36 monthly
installments. This note was repaid in May 1998.
In May, June and July 1997, ICG lent an aggregate of $650,000 to the Company
at a rate of 9.5%. These amounts were repaid on July 17, 1997.
In October, November and December 1997, ICG lent an aggregate of $950,000 to
the Company also at a rate of 9.5%. These amounts were repaid on December 30,
1997.
In February, March and April 1998, ICG lent an aggregate of $1,550,000 to the
Company, also at a rate of 9.5%. These amounts were repaid on May 11, 1998.
The Company had three unsecured term notes due to shareholders with an
interest rate of 7%. The notes were to mature on February 2001. One of the
holders of these notes is a board member of ICG. These notes were repaid in May
1998.
F-15
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
The Company has several capital leases on its equipment with lease terms
ranging from three to five years. The interest rates implicit in the leases are
8% to 20%. At December 31, 1996, 1997 and September 30, 1998, the book value of
assets held under capital leases were approximately $49,000, $300,000 and
$494,000, respectively, and the aggregate remaining minimum lease payments at
December 31, 1997 were approximately $474,000 including interest of
approximately $56,000.
At December 31, 1997, long-term debt will mature as follows:
<TABLE>
<S> <C>
1998............................................................. $150,856
1999............................................................. 162,019
2000............................................................. 100,279
2001............................................................. 125,340
2002............................................................. 12,310
--------
Total.......................................................... $550,804
========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating lease agreements expiring
through 2001. Future minimum lease payments as of December 31, 1997 under the
leases are as follows:
<TABLE>
<S> <C>
1998............................................................. $170,604
1999............................................................. 160,987
2000............................................................. 124,700
2001............................................................. 9,840
========
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$5,100, $24,300, and $81,200 for the period from July 28, 1995 (inception) to
December 31, 1995 and the years ended December 31, 1996 and December 31, 1997,
respectively, and $78,000 and $228,000 for the nine months ended September 30,
1997 and 1998, respectively.
On June 30, 1998, the Company entered into a three year Sponsorship Agreement
with Excite, Inc. (Excite). The Sponsorship Agreement provides for the Company
and Excite to sponsor and promote thirty co-branded Web pages and for each
company to sell advertising on the Web pages. Excite has guaranteed a minimum
number of advertising impressions for each of the three years. The agreement is
cancelable by either party, as defined, and requires the Company to pay Excite
$0.9 million, $2.0 million and $3.0 million, respectively, in year one, two and
three under the agreement. Such payments will be charged to expense as the
advertising impressions are provided by Excite. In addition, each Company will
provide the other with $200,000 in barter advertising during the term of the
Sponsorship Agreement.
F-16
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
The Company has entered into non-cancelable obligations with several content
service providers and internet search engines. Under these agreements,
exclusive of the Excite agreement discussed above, the Company's obligations
are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,140,456
1999........................................................... 137,978
2000........................................................... 24,000
==========
</TABLE>
The Company has entered into employment agreements with several employees.
The agreements are cancelable, but require severance upon termination. As of
December 31, 1997, the Company would be required to pay approximately $950,000
in severance (of which $500,000 has been guaranteed by ICG) in the event that
these employment agreements are cancelled. As part of the employment agreement
with the Company's president and chief executive officer, the Company had
committed to grant options to purchase 6% of the Company's common stock.
Pursuant to this agreement, the Company granted $600,000, 383,137 and 451,483
options in October 1997, January 1998 and June 1998, respectively, at an
exercise price of $0.41 and $1.35, respectively, which was the then fair value
of the Company's common stock. At September 30, 1998, the Company has satisfied
its obligations under this agreement.
The Company is a party to legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of management, the amount of the
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.
(9) CAPITAL STOCK
The Company's restated Certificate of Incorporation provides the Company with
the authority to issue 40,000,000 shares of common stock and 40,000,000 shares
of preferred stock.
Preferred Stock
In September 1996 the Company sold 1,000,000 shares of Series A preferred
stock (Series A) for $1,000,000. In July 1997 the Company sold 5,030,181 shares
of Series B preferred stock (Series B) for $2,000,000. In October 1997 the
Company sold 301,978 shares of Series C preferred stock (Series C) for
$200,000.
On May 11, 1998 and June 10, 1998, the Company sold 7,777,778 and 1,111,111
shares of Series D preferred stock (Series D), respectively, for an aggregate
amount of approximately $15.2 million. If the Company does not complete an IPO
as defined, by May 1, 2000, the Series D has a cumulative dividend rate equal
to 6% of the original purchase price ($1.80 per share) which is due and payable
on May 1, 2000. Thereafter, the Series D cumulative dividends will continue to
accrue and are payable quarterly until the closing of an IPO. The holders of
the Series D preferred have demand and piggy-back registration rights as
defined.
F-17
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Holders of preferred stock have the option to convert such shares into shares
of common stock on a 1:1 ratio, except for the Series A preferred stock which
converts on a ratio of 4.7619:1. The conversion rate on a particular series of
preferred stock is subject to an adjustment in the event that any additional
common stock, or other shares convertible into common stock, are issued for a
per share price less than the particular series conversion price. Mandatory
conversion occurs upon the closing of an IPO of the Company's common stock, as
defined. The Series D is senior to the Company's Series A, Series B and Series
C in liquidation and the holders of Series A, Series B and Series C are
entitled to receive an amount equal to their respective redemption price prior
to the distribution to the common shareholders.
The preferred stock votes on an as if converted basis. The Series A, Series B
and Series C, together have the right to elect two directors of the Company and
the Series D holders have the right to elect two directors of the Company.
Preferred stock consists of the following at December 31, 1996, 1997 and
September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- 1998
PER SHARE 1996 1997 (UNAUDITED)
LIQUIDATION --------- --------- -------------
PREFERRED CLASS VALUE AUTHORIZED ISSUED AND OUTSTANDING
--------------- ----------- ---------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Series A........... $1.00 1,000,000 1,000,000 1,000,000 1,000,000
Series B........... .40 5,100,000 -- 5,030,181 5,030,181
Series C........... .67 400,000 -- 301,978 301,978
Series D........... 1.80 9,000,000 -- -- 8,888,889
---------- --------- --------- ----------
15,500,000 1,000,000 6,332,159 15,221,048
========== ========= ========= ==========
</TABLE>
Common Stock
At September 30, 1998, 18,982,948 shares of common stock are reserved for the
conversion of preferred stock.
Warrants
On April 30, 1997, the Company issued a warrant to its bank (Note 5) to
purchase 37,726 shares of common stock at a price $0.39 per share. The warrant
expires on April 1, 2007.
In connection with the Company obtaining additional financing from its bank,
in December 1997, the Company issued to its bank a warrant to purchase a
maximum of 150,989 shares of common stock at an exercise price of $0.66 per
share. The exercise price and number of shares to be purchased are subject to
adjustment, based upon the Company's next round of equity financing. The
warrant expires on November 30, 2008.
In December 1997 the Company issued a warrant to ICG, the Company's majority
shareholder, to purchase a maximum 301,978 shares of common stock at an
exercise price of $0.66 per share. In
F-18
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
March 1998 the Company issued an additional warrant to ICG to purchase a
maximum of 150,989 shares of common stock at an exercise price of $0.66 per
share. The warrants were issued in connection with certain guarantees of the
Company's bank debt by ICG. The exercise price and number of shares are subject
to adjustment, based upon the Company's next round of equity financing. The
warrant expires on November 30, 2008.
In May 1998 in connection with the Company's equity financing, the Company
cancelled the warrants issued to ICG and its bank in December 1997 and issued
new warrants to purchase an aggregate of 259,949 shares of common stock at an
exercise price of $1.80 per share.
The estimated fair value of the warrants issued to the Company's bank and ICG
is $50,000 and was recorded as interest expense in the accompanying statement
of operations for the year ended December 31, 1997.
(10) STOCK OPTION PLAN
In December 1996 the Company's Board of Directors adopted the 1996 stock
option plan (the Plan). A total of 1,200,000 shares of common stock were
reserved for issuance under this Plan and this amount was increased to
3,600,000 in January 1998 and 3,950,000 in August 1998.
The exercise price for the options is determined by the Board of Directors,
but shall not be less than 100% of the fair market value of the common stock on
the date the option is granted. Generally, the options vest over a four-year
period after the date of grant and expire ten years after the date of grant.
Option holders that terminate their employment with the Company generally
forfeit all non-vested options. Employees, key advisors and non-employee
directors of the Company are eligible to receive awards under the Plan.
The following table summarizes the activity of the Company's stock option
plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997.................... -- $ --
Options granted................................... 1,082,666 0.33
Options cancelled................................. -- --
--------- ------
Outstanding at December 31, 1997.................. 1,082,666 0.33
Options granted................................... 2,738,620 1.02
Options cancelled................................. (101,500) 0.73
--------- ------
Outstanding at September 30, 1998 (unaudited)..... 3,719,786 $ 0.83
========= ======
</TABLE>
F-19
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
At December 31, 1997, there were no options exercisable under the Plan. At
September 30, 1998, there were 589,450 options exercisable with a weighted
average exercise price of $0.54 per share:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------
NUMBER WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING CONTRACTUAL
PRICE DECEMBER 31, 1997 LIFE (IN YEARS)
-------- ----------------- ---------------------
<S> <C> <C>
$0.15........................ 351,666 10
0.41........................ 731,000 10
---------
1,082,666
=========
</TABLE>
The Company applies APB 25 and related interpretations in accounting for its
stock option plan. Had compensation cost been recognized pursuant to SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below for the year ended December 31, 1997:
Net loss:
<TABLE>
<S> <C>
As reported...................................................... $(4,778,789)
Pro forma........................................................ $(4,785,358)
</TABLE>
The per share weighted-average fair value of options issued by the Company
during 1997 was $0.10.
The following range of assumptions were used by the Company to determine the
fair value of stock options granted using the minimum value option-price model:
<TABLE>
<S> <C>
Dividend yield.................................................... 0%
Expected volatility............................................... 0%
Average expected option life...................................... 5 years
Risk-free interest rate........................................... 5.9%
</TABLE>
(11) DEFINED CONTRIBUTION PLAN
In 1997 the Company established a defined contribution plan for qualified
employees as defined under the plan. Participants may contribute 1% to 15% of
pre-tax compensation, as defined. Under the plan, the Company can make
discretionary contributions. To date, the Company has not made any
contributions to the plan.
(12) INCOME TAXES
Prior to June 1996, the Company elected to be treated for federal income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code
(the Code). As a result, the Company's earnings for prior tax years and through
September 12, 1996, the date of termination of
F-20
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
the Company's S Corporation status (the termination date) had been taxed for
federal income tax purposes directly to the Company's shareholders, rather than
to the Company.
The components of the net deferred tax assets as of December 31, 1996 and
1997 consists of the following:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1996 1997
-------------------- --------- -----------
<S> <C> <C>
Net operating losses................................. $ 52,803 $ 1,655,741
Reserves............................................. -- 103,200
Depreciation......................................... 14,921 42,856
Deferred revenue and other........................... 128,603 287,979
--------- -----------
196,327 2,089,776
Valuation allowance.................................. (196,327) (2,089,776)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1996 and 1997.
As of December 31, 1997, the Company has approximately $4,145,000 of net
operating loss carryforwards for federal tax purposes. These carryforwards will
begin expiring in 2012 if not utilized. In addition, the Company has net
operating loss carryforwards in certain states with various expiration periods
beginning in 2000.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carrryforward period.
(13) INFORMATRIX WORLDWIDE, INC.
During 1997 the Company entered into a $250,000 Web site development contract
with Informatrix. In addition, under the contract the Company was to maintain
the Web site for $20,000 per month, until either the Company or Informatrix
terminated the agreement. The Company substantially completed all of its
obligations under the development portion of the contract as of December 31,
1997, but deferred recognition of revenue until the amounts were deemed
collectible from Informatrix. Such development costs were charged to expense,
as incurred.
F-21
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
In addition, the Company advanced Informatrix $160,000 in 1997, as evidenced
by a demand note. The Company had provided a reserve of $80,000 against this
note. The note is unsecured and bears interest at prime plus 1.5% (10% at
December 31, 1997).
During the nine months ended September 30, 1998, the Company advanced an
additional $555,000 to Informatrix.
(14) SUBSEQUENT EVENTS (UNAUDITED)
Options Granted
On November 11, 1998, the Company granted 225,500 options, with an exercise
price of $1.70 per share.
Banknote
On November 25, 1998 the Company executed a $2.0 million note with a bank.
The note has an interest rate of prime plus 1.5% and matures at the earlier of
March 31, 1999 or the completion of the Company's next financing. In connection
with the loan, the Company issued warrants to purchase 40,000 shares of the
Company's common stock. The exercise price of the warrants will be equal to the
price in the Company's next financing as defined.
ICG Convertible Note
On November 25, 1998, ICG lent the Company $5.0 million in the form of a
convertible note. The note matures on the earlier of (i) closing of an IPO or
(ii) closing of the next round of private equity financing or (iii) May 31,
1999. In addition, ICG has the right to convert the convertible note into
shares of the Company's common stock at the price per share of common stock in
the IPO or the price per share in the next round of financing, whichever occurs
first. In connection with the loan, the Company issued warrants to purchase
160,000 shares of the Company's common stock. The exercise price of the
warrants will be equal to the price in the Company's next round financing as
defined.
Initial Public Offering
In November 1998 the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC) that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed IPO.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Boulder Interactive Technology Services Company:
We have audited the accompanying balance sheets of Boulder Interactive
Technology Services Company d/b/a Microwave Online Services Company and RF
Globalnet as of December 31, 1996 and 1997 and the related statements of
operations, shareholders' equity and cash flows for the period from March 22,
1996 (inception) through December 31, 1996 and for the year ended December 31,
1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Boulder Interactive Technology
Services Company d/b/a Microwave Online Services Company and RF Globalnet as of
December 31, 1996 and 1997, and the results of its operations and its cash flow
for the period from March 22, 1996 (inception) through December 31, 1996 and
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
August 21, 1998
Philadelphia, Pennsylvania
F-23
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 60,657 $ 99,035
Accounts receivable................................ -- 66,277
--------- ---------
Total current assets............................. 60,657 165,312
--------- ---------
Property and equipment, net.......................... 15,119 19,185
Other assets......................................... 4,331 3,208
--------- ---------
Total assets..................................... $ 80,107 $ 187,705
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable--shareholder.......................... 13,852 --
Accounts payable................................... 91 14,108
Accrued expenses................................... 19,255 7,806
Deferred revenues.................................. -- 85,909
--------- ---------
Total current liabilities........................ 33,198 107,823
--------- ---------
Commitments and contingencies (note 3)
Shareholders' equity:
Common stock $.01 par value, 10,000,000 shares au-
thorized, 324,148 and 518,000 shares issued and
outstanding in 1996 and 1997, respectively........ 3,241 5,180
Additional paid-in capital......................... 196,167 388,080
Accumulated deficit................................ (152,499) (313,378)
--------- ---------
Total shareholders' equity....................... 46,909 79,882
--------- ---------
Total liabilities and shareholders' equity....... $ 80,107 $ 187,705
========= =========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 22, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
REVENUES............................................ $ 14,661 $ 326,208
COSTS AND EXPENSES:
Editorial and operational........................... 16,738 157,645
Sales and marketing................................. 34,274 78,218
General and administrative.......................... 117,010 252,811
--------- ---------
Operating loss...................................... (153,361) (162,466)
Interest income, net of interest expense............ 862 1,587
--------- ---------
Net loss............................................ $(152,499) $(160,879)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock, at
par value................... 126,000 $1,260 $ -- $ -- $ 1,260
Issuance of common stock..... 198,148 1,981 196,167 -- 198,148
Net loss..................... -- -- -- (152,499) (152,499)
------- ------ -------- --------- ---------
Balance at December 31,
1996........................ 324,148 3,241 196,167 (152,499) 46,909
Issuance of common stock..... 193,852 1,939 191,913 193,852
Net loss..................... -- -- -- (160,879) (160,879)
------- ------ -------- --------- ---------
Balance at December 31,
1997........................ 518,000 $5,180 $388,080 $(313,378) $ 79,882
======= ====== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 22, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(152,499) $(160,879)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 2,792 9,077
Change in assets:
Accounts receivable............................ -- (66,277)
Prepaid expenses and other assets.............. (4,757) 510
Change in liabilities:
Accounts payable............................... 91 14,017
Accrued expenses............................... 19,255 (11,449)
Deferred revenues.............................. -- 85,909
--------- ---------
Net cash used in operating activities.............. (135,118) (129,092)
--------- ---------
Cash flows from investing activities:
Capital expenditures.............................. (17,485) (12,530)
--------- ---------
Net cash used in investing activities.............. (17,485) (12,530)
--------- ---------
Cash flows from financing activities:
Increase in note payable--shareholder............. 13,852 --
Proceeds from issuance of common stock............ 199,408 180,000
--------- ---------
Net cash provided by financing activities.......... 213,260 180,000
--------- ---------
Net increase in cash............................... 60,657 38,378
Cash--beginning of period.......................... -- 60,657
--------- ---------
Cash--end of period................................ $ 60,657 $ 99,035
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 2 $ 13
========= =========
Supplemental schedule of noncash investing and fi-
nancing activities:
Issuance of stock in repayment of note payable.... $ -- $13,852
========= =========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Boulder Interactive Technology Services Company (d/b/a Microwave Online
Services Company and RF Globalnet) (the Company) was formed in March 1996. The
Company operates a Vertical trade community for professionals in the radio
frequency and wireless communications industry. This Web Site gives engineers
access to the latest product and technical information, leading edge education
resources, expert-hosted technical forums and career opportunities in the
field.
Property and Equipment
Property and equipment are stated at cost, net of depreciation. Property and
equipment are depreciated on a straight-line basis over the estimated useful
lives of the assets (three to five years).
Revenue and Cost Recognition
The Company's advertising revenues are derived principally from advertising
contracts which generally do not extend beyond one year. Advertising revenues
are recognized ratably over the term of the contract. Online courses, book
sales and other revenues are generally recognized upon delivery provided that
no significant Company obligations remain and collection of the receivable is
probable. In cases where there are significant remaining obligations, the
Company defers such revenues until those obligations are satisfied.
Barter transactions are recorded at the lower of estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given. Revenue recorded under barter transactions for the year ended December
31, 1997 was $30,000.
Editorial and operational expenses include editorial costs,which are
principally payroll and related costs, the cost of purchased content and the
costs for Internet related computer equipment.
Concentration of Credit Risk
The Company does not require collateral on accounts receivable. The Company
maintains allowances for credit losses and such losses have been within
management's expectations. No single customer accounted for greater than 10% of
total revenues for the period from March 22, 1996 (inception) through December
31, 1996 and for the year ended December 31, 1997.
Advertising Costs
The Company expenses advertising costs as incurred. For the period from March
22, 1996 (inception) through December 31, 1996 and for the year ended December
31, 1997, advertising expense was approximately $1,600 and $34,000,
respectively.
F-28
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Effective January 1, 1998, the Company records income taxes using the asset
and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and the tax effect of net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121, the
Company records impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable and a loan payable that are carried at cost which
approximates fair value.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows.
In June 1997 the FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating
F-29
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 131 will not have an impact on the Company's
results of operations, financial position or cash flows.
In February l998 the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits (SFAS No. 132), which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not have an impact on the Company's results of operations,
financial position or cash flows.
In March l998 the American Institute of Certified Public Accounts (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
Stock Options
The Company accounts for the grant of employee options to purchase common
stock in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). This statement gives
companies the option to adopt the fair value method for expense recognition of
employee stock options or to continue to account for stock options and stock-
based awards using the intrinsic value method, as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and to make pro forma disclosures of net loss as if the fair value method
had been applied. The Company elected to apply APB 25 to account for stock
options and disclose the pro forma net loss as if the fair value method had
been applied (Note 5).
F-30
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Computer equipment and purchased software................. $17,013 $ 29,543
Office equipment and furniture............................ 472 472
------- --------
17,485 30,015
Less: accumulated depreciation............................ (2,366) (10,830)
------- --------
Property and equipment, net............................... $15,119 $ 19,185
======= ========
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company leases its facility under an operating lease agreement expiring
in 1999. Future minimum lease payments as of December 31, 1997 under the lease
is as follows:
<TABLE>
<S> <C>
1998............................................................... $18,600
1999............................................................... 3,200
=======
</TABLE>
Rent expense under this noncancelable operating lease was approximately
$7,600 and $17,000 for the period from March 22, 1996 (inception) through
December 31, 1996 and for the year ended December 31, 1997, respectively.
In addition, the Company has an advertising commitment from the period August
1998 through December 1998, totaling approximately $10,000.
(4) STOCK OPTION PLAN
In July 1998 the Company's Board of Directors adopted the 1998 stock option
plan (the 1998 Plan). A total of 80,000 shares of common stock were reserved
for issuance under this Plan.
The exercise price and the vesting period for the options is determined by
the Board of Directors. All options expire ten years after the date of grant.
On January 8, 1998, options for 9,750 shares of common stock were granted,
outside of the 1998 Plan, at an exercise price of $0.60 that vested
immediately. On July 2, 1998, options for 15,832 shares of common stock were
granted at an exercise price of $0.60, under the 1998 Plan, that vest over a
four-year period. Compensation expense of $47,700 was recorded by the Company
in July 1998 in connection with the options granted on July 2, 1998 as the
vesting on these options was accelerated due to the Company being acquired in
September 1998 (Note 6).
(5) INCOME TAXES
The Company elected "C" corporation status in March 1998, effective on
January 1, 1998. Prior to that election, the Company was an "S" corporation.
F-31
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
D/B/A MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) SUBSEQUENT EVENT
On September 1, 1998, the Company was acquired by VerticalNet, Inc.
(VerticalNet). Under the terms of that transaction, VerticalNet acquired all of
the outstanding stock of the Company in exchange for approximately $1.8 million
in cash.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Informatrix Worldwide, Inc.:
We have audited the accompanying balance sheet of Informatrix Worldwide, Inc.
as of December 31, 1997 and the related statements of operations, shareholders'
deficit and cash flows for the period from October 15, 1997 (inception) to
December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Informatrix Worldwide, Inc. as
of December 31, 1997 and the results of its operations and its cash flows for
the period from October 15, 1997 (inception) to December 31, 1997 in conformity
with generally accepted accounting principles.
August 21, 1998
Philadelphia, Pennsylvania
F-33
<PAGE>
INFORMATRIX WORLDWIDE, INC.
BALANCE SHEETS
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 6,196 $ --
Accounts receivable............................... -- 53,200
Officer loan receivable........................... 3,500 3,500
--------- -----------
Total current assets............................ 9,696 56,700
--------- -----------
Computer equipment, net........................... 27,020 19,856
Other assets...................................... 1,003 1,003
--------- -----------
Total assets.................................... $ 37,719 $ 77,559
========= ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............. $ 17,750 $ 38,964
Accounts payable to related party................. 250,000 430,000
Current portion of lease obligation............... 8,298 9,336
Loans payable to related party.................... 160,000 751,994
Deferred revenues................................. -- 106,725
--------- -----------
Total current liabilities....................... 436,048 1,337,019
--------- -----------
Lease obligation, net of current portion.......... 19,052 11,915
--------- -----------
Commitments and contingencies
Shareholders' deficit:
Common stock no par value, 200 shares authorized,
issued and
outstanding...................................... -- --
Accumulated deficit............................... (417,381) (1,271,375)
--------- -----------
Total shareholders' deficit..................... (417,381) (1,271,375)
--------- -----------
Total liabilities and shareholders' deficit..... $ 37,719 $ 77,559
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 15, 1997 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
---------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES......................................... $ -- $ 32,442
--------- ---------
COST AND EXPENSES:
Editorial and operational........................ 20,948 253,503
Product development.............................. 279,144 75,766
Sales and marketing.............................. 85,408 426,058
General and administrative....................... 29,162 93,131
--------- ---------
Operating loss................................... (414,662) (816,016)
Interest expense................................. (2,719) (37,978)
--------- ---------
Net loss......................................... $(417,381) $(853,994)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock, October
15, 1997 (inception)............... 200 $-- $ -- $ --
Net loss............................ -- -- (417,381) (417,381)
--- ---- ----------- -----------
Balance at December 31, 1997........ 200 -- (417,381) (417,381)
--- ---- ----------- -----------
Net loss (unaudited)................ -- -- (853,994) (853,994)
--- ---- ----------- -----------
Balance at September 30, 1998 (unau-
dited)............................. 200 $-- $(1,271,375) $(1,271,375)
=== ==== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 15, 1997 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
---------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(417,381) $(853,994)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,592 7,164
Change in assets:
Accounts receivable......................... -- (53,200)
Officer loan receivable..................... (3,500) --
Other assets................................ (1,003) --
Change in liabilities:
Accounts payable and accrued expenses....... 17,750 21,214
Accounts payable to related party........... 250,000 180,000
Deferred revenues........................... -- 106,725
--------- ---------
Net cash used in operating activities........... (152,542) (592,091)
--------- ---------
Cash flows from financing activities:
Issuance of common stock....................... -- --
Loans from related party....................... 160,000 591,994
Payment of capital lease....................... (1,262) (6,099)
--------- ---------
Net cash provided by financing activities....... 158,738 585,895
--------- ---------
Net decrease in cash............................ 6,196 (6,196)
Cash at beginning of period..................... -- 6,196
--------- ---------
Cash at end of period........................... $ 6,196 $ --
========= =========
Supplemental disclosure of cash flow informa-
tion:
Cash paid during the year for interest......... $ 746 $ 2,957
========= =========
Supplemental schedule of noncash investing and
financing activities:
Equipment acquired under capital leases........ $ 28,612 $ --
========= =========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 IS UNAUDITED)
(1) ORGANIZATION
Informatrix Worldwide, Inc. (the Company) was formed in October 15, 1997. The
Company operates a vertical trade community in the property and casualty
insurance industry that caters to risk managers, agents, brokers and other
professionals in the insurance industry. A vertical trade community is a Web
site that acts as a source of information and dialogue for a particular
vertical market.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Computer Equipment
Computer equipment are stated at cost, net of accumulated amortization and
depreciation. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets (three years). Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue and Cost Recognition
The Company's advertising revenues are derived principally from advertising
contracts which generally do not extend beyond one year. Advertising revenues
are recognized ratably over the term of the contract.
Editorial and operational costs include editorial costs which are principally
payroll and related costs.
Product Development
Product development costs consists principally of salaries and related costs,
which are expensed as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$0 for the period from October 15, 1997 (inception) to December 31, 1997 and
approximately $57,126 for the nine months ended September 30, 1998.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial
F-38
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 IS UNAUDITED)
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax laws; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
No federal or state income taxes are due as of December 31, 1997. The net
deferred tax asset, primarily related to net operating losses, is fully offset
by a valuation allowance at December 31, 1997.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital asset obligations that
are carried at cost which approximates fair value.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows.
In the June 1997 FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 will not
have an impact on the Company's results of operations, financial position or
cash flows.
In February l998 FASB issued SFAS No. 132, Employers' Disclosures about
Pension and Other Postretirement Benefits (SFAS No. 132), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
The
F-39
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 IS UNAUDITED)
adoption of SFAS No. 132 will not have an impact on the Company's results of
operations, financial position or cash flows.
In March l998 the American Institute of Certified Public Accounts (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position, or cash flows.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Computer equipment under capital leases........... $28,612 $28,612
Less: accumulated depreciation.................... (1,592) (8,756)
------- -------
Property and equipment, net....................... $27,020 $19,856
======= =======
</TABLE>
Amortization expense of equipment under capital lease is included in
depreciation expense.
(4) CAPITAL LEASE OBLIGATION
The Company leases its computer equipment under a capital lease agreement
expiring in 2000. Future minimum lease payments as of December 31, 1997 under
the lease are as follows:
<TABLE>
<S> <C>
1998............................................................... $12,039
1999............................................................... 12,039
2000............................................................... 10,032
-------
Minimum lease payments............................................. 34,110
Less: amounts representing interest................................ 6,760
-------
Present value of minimum lease payments............................ 27,350
Less: current portion.............................................. 8,298
-------
Long-term portion.................................................. $19,052
=======
</TABLE>
F-40
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 IS UNAUDITED)
(5) DEBT-RELATED PARTY
The Company was acquired by VerticalNet, Inc. (VerticalNet) on September 30,
1998 (Note 7). At December 31, 1997, the Company had borrowed $160,000 from
VerticalNet and a total of $715,000 as of September 30, 1998. The interest rate
on the debt was prime plus 1.5% percent and the debt was payable on demand.
The Company also had an accounts payable balance due to VerticalNet of
$250,000 at December 31, 1997 and $430,000 at September 30, 1998 for certain
Web site development and maintenance services.
(6) RELATED PARTY TRANSACTIONS
The Company paid approximately $29,800 and $63,700 for the period from
October 15, 1997 (inception) through December 31, 1997 and the nine months
ended September 30, 1998, respectively, for consulting services to an entity
whose shareholders are also shareholders of the Company.
The Company paid $39,700 and $122,000 for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended September 30,
1998, respectively, for advertising services to an entity whose shareholders
are also shareholders of the Company.
The Company recorded $250,000 in product development expense for Web site
development services provided by VerticalNet during the period from October 15,
1997 (inception) through December 31, 1997. In addition, the Company recorded
$180,000 in cost of revenues for Web site maintenance services provided by
VerticalNet for the nine months ended September 30, 1998.
(7) SUBSEQUENT EVENT
On September 30, 1998, the Company was acquired by VerticalNet. Under the
terms of that transaction, VerticalNet acquired all of the outstanding stock of
the Company in exchange for 90,000 shares of common stock of VerticalNet.
F-41
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION BASIS OF PRESENTATION
The following unaudited pro forma data is filed herewith: Unaudited condensed
combined pro forma statements of operations for the year ended December 31,
1997 and nine months ended September 30, 1998.
The unaudited condensed combined pro forma statements of operations reflect
the acquisitions of Boulder Interactive Technology Services Company (BITC) as
if it occurred on January 1, 1997 and Informatrix as if it had occurred on its
inception of October 15, 1997. Since the pro forma financial statements which
follow are based upon the financial condition and operating results of the BITC
and Informatrix during periods when they were not under the control or
management of VerticalNet, Inc. (VerticalNet), the information presented may
not be indicative of the results which would have actually been obtained had
the acquisitions been completed as of January 1, 1997 nor are they indicative
of future financial or operating results. The unaudited pro forma financial
information does not give effect to any synergies that may occur due to the
integration of VerticalNet, BITC and Informatrix. The condensed combined pro
forma financial statements should be read in conjunction with the historical
audited financial statements of VerticalNet and the notes thereto, as well as
the audited historical financial statements of BITC and Informatrix and the
notes thereto included elsewhere in this prospectus. The acquisitions have been
accounted for by the purchase method of accounting. A pro forma balance sheet
as of September 30, 1998 has not been presented herein since both acquisitions
were completed in September of 1998 and have been reflected in VerticalNet's
consolidated balance sheet as of September 30, 1998 appearing elsewhere herein.
F-42
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
VERTICALNET BITC INFORMATRIX ADJUSTMENTS COMBINED
----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 791,822 $ 326,208 $ -- $ -- $ 1,118,030
----------- --------- --------- --------- -----------
COST AND EXPENSES:
Editorial and opera-
tional ................ 1,055,725 157,645 20,948 -- 1,234,318
Product development..... 711,292 -- 279,144 (250,000)(a) 740,436
Sales and marketing..... 2,300,365 78,218 85,408 -- 2,463,991
General and administra-
tive................... 1,388,123 252,811 29,162 684,102 (b) 2,354,198
----------- --------- --------- --------- -----------
Operating loss.......... (4,663,683) (162,466) (414,662) (434,102) (5,674,913)
----------- --------- --------- --------- -----------
Interest income, net of
interest expense....... (115,106) 1,587 (2,719) 1,974 (c) (114,264)
----------- --------- --------- --------- -----------
Net loss................ $(4,778,789) $(160,879) $(417,381) $(432,128) $(5,789,177)
=========== ========= ========= ========= ===========
Pro forma net loss per
share:
Basic and diluted..... $ (0.97) $ (1.17)
=========== ===========
Weighted average
shares outstanding
(basic and diluted).. 4,927,384 4,946,134
=========== ===========
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
F-43
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
VERTICALNET BITC INFORMATRIX ADJUSTMENTS COMBINED
----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $1,861,799 $437,628 $ 32,442 $ -- $ 2,331,869
---------- -------- -------- -------- ------------
COSTS AND EXPENSES:
Editorial and operation-
al..................... 2,100,885 121,726 253,503 (180,000)(d) 2,296,114
Product development..... 797,815 -- 75,766 -- 873,581
Sales and marketing..... 4,405,407 123,542 426,058 -- 4,955,007
General and administra-
tive................... 2,907,275 327,879 93,131 691,801 (e) 4,020,086
---------- -------- -------- -------- ------------
Operating loss.......... (8,349,583) (135,519) (816,016) (511,801) (9,812,919)
---------- -------- -------- -------- ------------
Interest income, net of
interest expense....... 15,166 143 (37,978) 35,025 (f) 12,356
---------- -------- -------- -------- ------------
Net loss................ (8,334,417) (135,376) (853,994) (476,776) (9,800,563)
========== ======== ======== ======== ============
Pro forma net loss per
share:
Basic and diluted..... $ (1.68) $ (1.94)
========== ============
Weighted average
shares outstanding
(basic and diluted).. 4,973,705 5,063,375
========== ============
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
F-44
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations for the
nine months ended September 30, 1998 and the year ended December 31, 1997 give
effect to the acquisition of BITC as if it had occurred on January 1, 1997 and
Informatrix as if has occurred on its inception of October 15, 1997.
The effects of the acquisitions have been presented using the purchase method
of accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best preliminary
estimate of their fair value. The preliminary allocation of the purchase price
will be subject to further adjustments, which are not anticipated to be
material, as VerticalNet finalizes its allocation of its purchase price in
accordance with generally accepted accounting principles. The pro forma
adjustments related to the purchase price allocation of the acquisition
represent management's best estimate of the effects of the acquisition.
2. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS CONSIST OF:
The pro forma statement of operations adjustments for the year ended December
31, 1997 consist of:
(a) Product development expense has been adjusted to reflect the elimination
of the costs charged by VerticalNet to Informatrix to develop Informatrix's
vertical trade community.
(b) General and administrative expense has been adjusted to reflect the
amortization of goodwill associated with the acquisitions which has an
estimated useful life of 36 months.
(c) Interest expense has been adjusted to reflect the elimination of the
interest expense incurred by Informatrix on indebtedness to VerticalNet.
The pro forma statement of operations adjustments for the nine months ended
September 30, 1998 consist of:
(d) Cost of editorial and operational has been adjusted to reflect the
elimination of the costs charged by VerticalNet to Informatrix to maintain
Informatrix's vertical trade community.
(e) General and administrative expense has been adjusted to reflect the
amortization of goodwill associated with the the acquisitions which has an
estimated useful life of 36 months.
(f) Interest expense has been adjusted to reflect the elimination of the
interest expense incurred by Informatrix on indebtedness to VerticalNet.
(g) No income tax provision is required due to the Company's current tax loss
and the inability of the Company to currently use the benefits of the net
operating loss carryforward.
F-45
<PAGE>
[GRAPHIC SHOWING THE LOGOS OF THE 29 VERTICAL
TRADE COMMUNITIES THAT WE OPERATE]
<PAGE>
SHARES
[LOGO] VERTICALNET, INC.
COMMON STOCK
-----------
PROSPECTUS
, 1999
-----------
LEHMAN BROTHERS
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Common Stock being registered, all of which will
be paid by the Company:
<TABLE>
<S> <C>
Registration fee................................................... $8,850
NASD filing fee.................................................... 3,500
Transfer agent and registrar fees..................................
Printing and engraving.............................................
Legal fees.........................................................
Blue sky fees and expenses.........................................
Nasdaq National Market listing fee.................................
Accounting fees....................................................
Miscellaneous......................................................
------
Total............................................................ $
======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Articles of Incorporation provide that
pursuant to and to the extent permitted by Pennsylvania law, the Company's
directors shall not be personally liable for monetary damages for breach of any
duty owed to the Company and its shareholders. This provision does not
eliminate the duty of care, and, in appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Pennsylvania law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
knowing violations of law, or for actions resulting in improper personal
benefit to the director, the provision also does not affect a director's
responsibilities under any other law, such as federal securities laws or state
or federal environmental laws. The Company's Amended and Restated Bylaws
provide that the Company shall indemnify its officers and directors to the
fullest extent permitted by Pennsylvania law, including some instances in which
indemnification is otherwise discretionary under Pennsylvania law. Pennsylvania
law permits the Registrant to provide similar indemnification to employees and
agents who are not directors or officers. The determination of whether an
individual meets the applicable standard of conduct may be made by the
disinterested directors, independent legal counsel or the shareholders.
Pennsylvania law also permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its
favor. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in that Act and is therefore unenforceable.
In general, any officer or director of the Company shall be indemnified by
the Company against expenses including attorneys' fees, judgments, fines and
settlements actually and reasonably incurred by that person in connection with
a legal proceeding as a result of such relationship, whether or not
II-1
<PAGE>
the indemnified liability arises from an action by or in the right of the
Company, if the officer or director acted in good faith, and in the manner
believed to be in or not opposed to the Company's best interest, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. Such indemnity is limited to the extent that
(i) such person is not otherwise indemnified and (ii) such indemnifications not
prohibited by Pennsylvania law or any other applicable law.
Any indemnification under the previous paragraph (unless ordered by a court)
shall be made by the Company only as authorized in the specific case upon the
determination that indemnification of the director or officer is proper in the
circumstances because that person has met the applicable standard of conduct
set forth above. Such determination shall be made (i) by the Board of Directors
by a majority vote of a quorum of disinterested directors who are not parties
to such action or (ii) if such quorum is not obtainable or, even if obtainable
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion. To the extent that a director or officer of the Company
shall be successful in prosecuting an indemnity claim, the reasonable expenses
of any such person and the fees and expenses of any special legal counsel
engaged to determine the possibility of indemnification shall be borne by the
Company.
Expenses incurred by a director or officer of the Company in defending a
civil or criminal action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that person is not entitled to
be indemnified by the Company as authorized by our Bylaws.
The indemnification and advancement of expenses provided by, or granted
pursuant to Article of our Bylaws is not deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled, both as to action in that person's official capacity and as to action
in another capacity while holding such office.
The Board of Directors has the power to authorize the Company to purchase and
maintain insurance on behalf of the Company and others to the extent that power
to do so has not been prohibited by the Pennsylvania law, create any fund to
secure any of its indemnification obligations and give other indemnification to
the extent permitted by law. The obligations of the Company to indemnify a
director or officer under Article of our Bylaws is a contract between the
Company and such director or officer and no modification or repeal of our
Bylaws shall detrimentally affect such officer or director with regard to that
person's acts or omissions prior to such amendment or repeal.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in July 1995, the Company has issued and sold
unregistered securities in the transactions described below. Share amounts have
been restated to give effect to all of the Company's stock splits.
II-2
<PAGE>
Shares of Common Stock
1. In September 1995, the Company issued shares of Common Stock to Mr.
McNulty in an organizational subscription for an aggregate purchase price of
$255.
2. In September 1995, the Company issued shares of Common Stock to Mr.
Hagan in an organizational subscription for an aggregate purchase price of
$255.
3. In October and November of 1995, the Company issued an aggregate of
shares of Common Stock to four investors for an aggregate purchase price of
$60,000.
4. In November 1995, the Company issued shares of Common Stock to one
investor for an aggregate purchase price of $70.
5. In January 1996, the Company issued shares of Common Stock to one
investor for an aggregate purchase price of $ .
6. In January 1996, the Company issued shares of Common Stock to one
investor for an aggregate purchase price of $ .
7. In January and February 1996, the Company issued an aggregate of
shares of Common Stock to five investors, including shares to Mr. Buckley,
a director of the Company, for an aggregate purchase price of $110,000.
8. In June 1998, the Company issued shares of Common Stock to Lehman
Brothers Inc. in consideration for services rendered as private placement agent
in the Series D private placement.
Shares of Series A Preferred Stock
9. In September 1996, the Company issued 1,000,000 shares of Series A
Preferred Stock to ICG for an aggregate purchase price of $1,000,000, which
shares will be automatically converted into shares of Common Stock upon or
immediately prior to the consummation of the Offering.
Shares of Series B Preferred Stock
10. In July 1997, the Company issued 5,030,181 shares of Series B Preferred
Stock to ICG for an aggregate purchase price of $2,000,000, which shares will
be automatically converted into shares of Common Stock upon or immediately
prior to the consummation of the Offering.
Shares of Series C Preferred Stock
11. In October 1997, the Company issued 301,978 shares of Series C Preferred
Stock to one accredited investor for an aggregate purchase price of $200,000,
which shares will be automatically converted into shares of Common Stock
upon or immediately prior to the consummation of the Offering.
Shares of Series D Preferred Stock
12. From May 1998 to June 1998, the Company issued 8,888,889 shares of Series
D Preferred Stock to various accredited investors, including 1,666,667 shares
to Koch Ventures, Inc., 1,536,162
II-3
<PAGE>
shares to Wheatley Partners, L.P., and 2,222,223 shares to ICG, for an
aggregate purchase price of $16,000,000, which shares will be automatically
converted into shares of Common Stock upon or immediately prior to the
consummation of the Offering.
Warrants to Purchase Common Stock
13. In May 1998, the Company granted Warrants to purchase an aggregate of
shares of Common Stock for a purchase price of per share to ICG in
connection with certain guarantees of the Company's bank debt by ICG.
14. In April 1997, the Company granted Warrants to purchase an aggregate of
shares of Common Stock for a purchase price of per share to Progress in
connection with Progress' provision of a line of credit.
15. In December 1997, the Company granted Warrants to purchase an aggregate
of shares of Common Stock for a purchase price of per share to Progress
in connection with Progress' extension of additional credit.
Options to Purchase Common Stock
16. The Company from time to time has granted stock options to employees,
directors and consultants. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
NO. OF RANGE OF
SHARES EXERCISE PRICES
----------- ---------------
<S> <C> <C>
1995........................................... None
1996........................................... None
1997........................................... 1,378,803.6 $.14 to $ .41
1998........................................... 1,894,733 $.41 to $1.35
</TABLE>
The Company believes that the issuance of shares and grants of options
described above did not involve a public offering and were exempt from
registration under Section 4(2) of the Securities Act because such issuances
and grants were made to a limited group of persons, each of whom was believed
to have been a sophisticated investor or had a pre-existing business or
personal relationship with the Company or its management and because each such
person was purchasing for investment without a view to further distribution.
Restrictive legends were placed on stock certificates and are contained in
stock option agreements evidencing the securities described above.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration statement:
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
5 Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
shares of Common Stock being registered
10.1 Amended and Restated 1996 Equity Compensation Plan
10.2 Employment Agreement with Mark L. Walsh
10.3 Employment Agreement with Barry E. Wynkoop
10.4 Share Purchase Agreement dated September 1, 1998, between Boulder
Interactive Technology Services Co. and VerticalNet, Inc.
10.5 Agreement and Plan of Merger dated September 30, 1998, among
VerticalNet, Inc., Informatrix Acquisition Corp., Informatrix
Worldwide, Inc., and the Stockholders of Informatrix Worldwide, Inc.
10.6 ONSALE & VerticalNet Letter Agreement dated June 4, 1998, between
ONSALE, Inc. and VerticalNet, Inc.+
10.7 Sponsorship Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.+
10.8 Comparison Shopping Service Subscription Agreement dated September
, 1998, between Junglee Corp. and VerticalNet, Inc.+
21 Subsidiaries
23.1* Consent of KPMG Peat Marwick LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion
filed as Exhibit 5 hereto)
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27* Financial Data Schedule
</TABLE>
- --------
*Filed herewith
+ Portions of this Exhibit have been omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 under the Act.
(b) Except as follows, financial statement schedules have been omitted
because they are inapplicable, are not required under applicable provisions of
Regulation S-X, or the information that would otherwise be included in such
schedules is contained in the registrant's financial statements or accompanying
notes.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(b) (continued)
VERTICALNET, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
PERIOD FROM JULY 28, 1995 (INCEPTION) TO DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT THE CHARGED TO BALANCE AT THE
BEGINNING OF THE COSTS AND END OF THE
DESCRIPTION PERIOD EXPENSES WRITE-OFFS YEAR
- ----------- ---------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Period from July 28, 1995
(inception) to
December 31, 1995....... $ -- $ -- $ -- $ --
Year ended December 31,
1996.................... $ -- $18,575 $ -- $18,575
Year ended December 31,
1997.................... $18,575 $11,425 $ -- $30,000
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2)For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HORSHAM, PENNSYLVANIA
ON NOVEMBER 27, 1998.
Verticalnet, Inc.
/s / Mark L. Walsh
By: _________________________________
MARK L. WALSH
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Each person in so signing also makes, constitutes and appoints Mark L. Walsh
and Gene S. Godick, and each of them acting alone, his or her true and lawful
attorney-in-fact, with full power of substitution, to execute and cause to be
filed with the Securities and Exchange Commission pursuant to the requirements
of the Securities Act of 1933, as amended, any and all amendments and post-
effective amendments to this registration statement, and including any
registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his or her substitute or substitutes may do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ Mark L. Walsh President and Chief November 27, 1998
______________________________________ Executive Officer
MARK L. WALSH (principal executive
officer)
/s/ Michael J. Hagan Senior Vice President and November 27, 1998
______________________________________ Director
MICHAEL J. HAGAN
/s/ Gene S. Godick Vice President and Chief November 27, 1998
______________________________________ Financial Officer
GENE S. GODICK (principal financial and
accounting officer)
/s/ Douglas A. Alexander Director November 27, 1998
______________________________________
DOUGLAS A. ALEXANDER
/s/ Jeffrey C. Ballowe Director November 27, 1998
______________________________________
JEFFREY C. BALLOWE
/s/ Walter W. Buckley, III Director November 27, 1998
______________________________________
WALTER W. BUCKLEY, III
/s/ Matthew J. Warta Director November 27, 1998
______________________________________
MATTHEW J. WARTA
</TABLE>
II-7
<PAGE>
Exhibit 23.1
The Board of Directors
VerticalNet, Inc.:
The audits referred to in our report dated August 21, 1998, included the related
financial statement schedule for the period from July 28, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997, included
in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 754,716
<SECURITIES> 0
<RECEIVABLES> 637,611
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,592,091
<PP&E> 819,916
<DEPRECIATION> 328,063
<TOTAL-ASSETS> 2,104,087
<CURRENT-LIABILITIES> 4,127,664
<BONDS> 550,804
63,322
0
<COMMON> 49,274
<OTHER-SE> (2,526,121)
<TOTAL-LIABILITY-AND-EQUITY> 2,104,087
<SALES> 0
<TOTAL-REVENUES> 791,822
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,455,505
<LOSS-PROVISION> 32,550
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,778,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,778,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,778,789)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
