<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 16, 1999
-----------------
VerticalNet, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant specified in Charter)
Pennsylvania 000-25269 23-2815834
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employee
jurisdiction of File Number) Identification No.)
incorporation)
700 Dresher Road
Horsham, PA 19044
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone, including area code: 215-328-6100
(Former name and former address, if changed since last report)
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This Form 8-K/A amends the current Report on Form 8-K filed by the on December
29, 1999.
ITEM 2. ACQUISITION OF ASSETS
(a) On December 16, 1999 (the "Closing Date"), the Registrant completed its
previously announced acquisition of substantially all of the assets (the
"Acquisition") of NECX Exchange Trust (the "Seller"). The Acquisition was
consummated by NECX.com LLC (the "Acquisition Sub"), a wholly-owned subsidiary
of the Registrant. The Acquisition was accomplished pursuant to the terms of the
Asset Purchase Agreement (the "Purchase Agreement"), dated as of November 16,
1999 (the "Execution Date") by and among the Registrant, the Acquisition Sub,
New England Circuit Sales, Inc., NECX Exchange, LLC, the Seller and the sole
stockholder of New England Circuit Sales, Inc. The terms of the Purchase
Agreement were the result of arm's length negotiations among the parties.
The consideration paid by the Registrant for the Acquisition included the
repayment of approximately $36,016,000 of indebtedness, $10,000,000 in cash and
the issuance of $70 million of notes convertible into shares of the Registrant's
common stock. If the convertible notes were converted on the Execution Date, the
convertible notes would have converted into 1,004,369 shares of the Registrant's
common stock. Since the notes are required to be paid in common stock and it is
the Company's intention to convert the notes once a registration statement is
declared effective, the notes have been accounted for as equity of the
Registrant and the assumed number of shares to be issued upon conversion have
been included in pro forma earnings per share calculations. The value of the
shares underlying the convertible notes fluctuates based on the average market
price of the Registrant's common stock during a period prior to the conversion
of such notes. The convertible notes will be automatically converted upon the
U.S. Securities and Exchange Commission declaring effective a registration
statement (the "Registration Statement") covering the shares underlying the
convertible notes. Under the terms of the Purchase Agreement, the Registrant
must prepare and use its best efforts to file the Registration Statement on or
prior to February 24, 2000. The maximum number of shares of the Registrant's
common stock issuable under the convertible notes is 1,838,458. The Registrant's
working capital was used to repay the aforementioned indebtedness and to make
the cash payment.
(b) The Seller operates a business-to-business marketplace for the
electronics industry. Specifically, the Seller services the open market segment
of the electronics industry buying and selling semiconductors, electronic
components, computer products and networking equipment. The Registrant intends
to continue such business.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of NECX:
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Equity
Statements of Cash Flows
Notes to Financial Statements
(b) Pro Forma Financial Information.
Pro Forma Financial Statements (unaudited):
Basis of Presentation
Pro Forma Condensed Consolidated Balance Sheet
Pro Forma Consolidated Statements of Operations
Notes to Pro Forma Condensed Consolidated Financial
Statements
2
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(c) Exhibits.
2.1 Asset Purchase Agreement dated as of November 16, 1999.*
4.1 Convertible Promissory Note in the Principal Amount of $10.5
million.*
4.2 Convertible Promissory Note in the Principal Amount of $34.5
million.*
4.3 Convertible Promissory Note in the Principal Amount of $25.0
million.*
23.1 Consent of Arthur Andersen LLP
99.1 Press Release dated December 16, 1999*
*Filed as part of the Registrant's current Report on Form 8-K dated
December 16, 1999, filed December 29, 1999, and incorporated herein by
reference.
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Report of Independent Public Accountants
To NECX Exchange, LLC:
We have audited the accompanying balance sheets of NECX Exchange, LLC (a
subsidiary of New England Circuit Sales, Inc.) as of December 31, 1998 and
November 30, 1999, and the related statements of income, equity and cash flows
for the years ended December 31, 1997 and 1998 and the 11 months ended November
30, 1999. 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 NECX Exchange, LLC as of
December 31, 1998 and November 30, 1999, and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1998 and the 11 months
ended November 30, 1999, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
December 23, 1999
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NECX EXCHANGE, LLC
Balance Sheets
as of December 31, 1998 and November 30, 1999
<TABLE>
<CAPTION>
Assets
1998 1999
(Dollars in Thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,055 $ 1,319
Accounts receivable, net of allowance for doubtful accounts of $200 and $1,128,
respectively 34,791 39,888
Inventory 5,314 4,782
Cash deposits on inventory 1,123 1,252
Other current assets, including a receivable from an affiliate of $0 and $187,
respectively 306 1,288
--------------- ---------------
Total current assets 42,589 48,529
--------------- ---------------
Property, Plant and Equipment, at Cost:
Computer equipment 1,498 3,848
Equipment 780 910
Leasehold improvements 607 1,712
Motor vehicles 98 98
--------------- ---------------
2,983 6,568
Less--Accumulated depreciation and amortization 1,347 1,741
--------------- ---------------
Net property, plant and equipment 1,636 4,827
--------------- ---------------
Other Assets 258 1,730
--------------- ---------------
Total assets $ 44,483 $ 55,086
=============== ===============
Liabilities and Equity
Current Liabilities:
Note payable--Credit line $ 11,784 $ 24,884
Notes payable--Affiliates - 10,000
Accounts payable 12,688 13,132
Accrued compensation 932 946
Other accrued expenses and current liabilities 1,336 3,912
--------------- ---------------
Total current liabilities 26,740 52,874
--------------- ---------------
Notes Payable--Affiliates 6,000 -
--------------- ---------------
Commitments and Contingencies
Equity:
Divisional equity 11,743 -
Member's equity - 2,212
--------------- ---------------
Total equity 11,743 2,212
--------------- ---------------
Total liabilities and equity $ 44,483 $ 55,086
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NECX EXCHANGE, LLC
Statements of Income
for the Years Ended December 31, 1997 and 1998 and
for the Eleven Months Ended November 30, 1999
<TABLE>
<CAPTION>
Eleven Months
Years Ended Ended
1997 1998 1999
(Dollars in Thousands)
<S> <C> <C> <C>
Sales, Net $ 352,462 $ 349,098 $ 336,105
Cost of Sales 314,192 311,545 301,636
--------------- --------------- ---------------
Gross profit 38,270 37,553 34,469
Selling Expenses 17,284 16,185 17,022
General and Administrative Expenses 12,308 13,652 13,972
--------------- --------------- ---------------
Income from operations 8,678 7,716 3,475
Other Income (Expense):
Investment income (expense), net 34 (2) (453)
Interest (expense) income-
Bank (880) (986) (1,395)
Affiliates, net 642 1,307 (736)
Other, net (65) - -
--------------- --------------- ---------------
Income before provision for state income taxes 8,409 8,035 891
Provision for State Income Taxes 77 30 -
--------------- --------------- ---------------
Net income $ 8,332 $ 8,005 $ 891
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NECX EXCHANGE, LLC
Statements of Equity
for the Years Ended December 31, 1997 and 1998 and
for the Eleven Months Ended November 30, 1999
<TABLE>
<CAPTION>
Total Equity
(Dollars in
Thousands)
<S> <C>
Divisional Equity Balance, December 31, 1996 $ 5,348
Net income 8,332
Distributions /loans to parent (4,554)
------------
Divisional Equity Balance, December 31, 1997 9,126
Net income 8,005
Distributions /loans to parent (5,388)
------------
Divisional Equity Balance, December 31, 1998 11,743
Net income for the six months ended June 30, 1999 2,793
Distributions to parent (10,333)
------------
Divisional equity balance transferred to member's equity on July 1, 1999 4,203
Net loss for the five months ended November 30, 1999 (1,902)
Distributions to parent (89)
------------
Member's Equity Balance, November 30, 1999 $ 2,212
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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NECX EXCHANGE, LLC
Statements of Cash Flows
for the Years Ended December 31, 1997 and 1998, and for the Eleven Months Ended
November 30, 1999
<TABLE>
<CAPTION>
Eleven Months
Years Ended Ended
1997 1998 1999
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 8,332 $ 8,005 $ 891
Adjustments to reconcile net income to net cash provided by
operating activities-
Provision for doubtful accounts 240 2,828 920
Depreciation and amortization 354 438 614
Equity in loss of joint venture - - 454
Changes in assets and liabilities-
Accounts receivable (3,095) (4,556) (6,017)
Inventory (1,286) 599 532
Cash deposits on inventory (541) (485) (129)
Other current assets 575 (138) (982)
Other assets (66) (108) (1,926)
Accounts payable (4,091) 5,904 444
Accrued compensation (4) (42) 14
Other accrued expenses and current liabilities (145) 241 2,576
--------------- --------------- ---------------
Net cash (used in) provided by operating activities 273 12,686 (2,609)
--------------- --------------- ---------------
Cash Flows Used in Investing Activities:
Acquisition of property, plant and equipment (695) (147) (3,805)
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Net (repayments) borrowings--Credit line 4,609 (6,034) 13,100
Net (repayments) borrowings of note payable--Affiliates - (2,000) 4,000
Distributions to parent (4,554) (5,388) (10,318)
Cash dividend to parent - - (104)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 55 (13,422) 6,678
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (367) (883) 264
Cash and Cash Equivalents, beginning of year 2,305 1,938 1,055
--------------- --------------- ---------------
Cash and Cash Equivalents, end of year $ 1,938 $ 1,055 $ 1,319
=============== =============== ===============
Cash Paid For:
Interest $ 1,806 $ 1,575 $ 1,974
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
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NECX EXCHANGE, LLC
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999
(1) Summary of Significant Accounting Policies
Organization and Financial Presentation
NECX Exchange, LLC (the Company), a wholly owned subsidiary of New
England Circuit Sales, Inc. (NECS or the Parent Company), was
incorporated as a limited liability corporation on July 1, 1999. Prior to
this date, the Company was a division of NECS, a Massachusetts
corporation. The Company is engaged in the sale of electronic circuits,
systems, semiconductors and computer peripheral equipment under the trade
name of NECX. Merchandise is purchased from various vendors, including
original equipment manufacturers, for resale to foreign and domestic
companies. The Company grants credit to its customers, substantially all
of whom operate in the electronics industry. The Company has two overseas
subsidiaries in Sweden and Ireland (established in 1998 and 1999,
respectively) that serve as sales offices to the Company's European
customers.
The financial statements presented herein include the assets, liabilities
and results of operations of the Company (including its overseas
subsidiaries). Operating expenses include all direct expenses of the
Company and certain allocated charges from the Parent Company.
Allocations of shared operating expenses (primarily occupancy-related
costs) have been made to the Company based upon various factors
consistent with the nature of the expense. The Company believes the
allocated charges approximate arm's-length charges.
Prior to incorporation of the Company as an LLC, divisional equity
represented the initial investment of the Parent Company plus the
historical retained earnings of the Company. In addition, since 1995, the
Company has transferred funds to the Parent, which in turn transferred
funds to an affiliated division, to fund the affiliate's operations. The
accumulated transfers to the Parent are netted in divisional equity, as
the Company determined that the transfers would not be repaid. Other
short-term advances with the Parent Company and affiliates are included
in Other Current Assets.
The Company charged interest on the transfers at the prime rate through
August 1998 and then discontinued charging interest. Interest income
related to interdivisional transfers, which amounted to $1,339,000 and
$1,930,000 for the years ended December 31, 1997 and 1998, respectively,
is included in Interest Income (Expense)--Affiliates, net in the
accompanying statements of income and also presented as a reduction of
divisional equity. In addition, Notes Payable--Affiliates consists of
advances borrowed from the primary shareholders of the Parent Company
(see Note 5).
Consolidation
All significant interdivisional and intercompany balances and
transactions have been eliminated in consolidation.
9
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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.
Revenue Recognition
Revenues are comprised of product sales, net of returns and allowances,
and other revenue. Product sales typically involve electronic components,
computer products and connectivity equipment, and revenue is recognized
when the products are shipped to customers. The Company records a reserve
for sales returns at the time of shipment, based on estimated return
rates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
initial maturity of three months or less to be cash equivalents. Cash and
cash equivalents are carried at cost, which approximates market value at
December 31, 1998 and November 30, 1999.
Fair Value of Financial Instruments
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosure about Fair Value of Financial
Instruments, the Company has determined the estimated fair value of its
financial instruments using appropriate market information and valuation
methodologies. The Company's financial instruments consist of cash,
accounts receivable, accounts payable, affiliates' notes and bank debt.
Considerable judgment is required to develop the estimates of fair value;
thus, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. However, the Company
believes the carrying values of these assets and liabilities is a
reasonable estimate of their fair market values at December 31, 1998 and
November 30, 1999.
Impairment of Long-lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances, such as a change
in market value, indicate that the assets' carrying amounts may not be
recoverable. In performing the review for recoverability, if future
undiscounted cash flows (excluding interest charges) from the use and
ultimate disposition of the assets are less than their carrying values,
impairment losses should be recognized. Impairment losses are to be
measured based on the carrying value of the asset less its respective
fair value. No such impairment of assets was indicated at December 31,
1998 and November 30, 1999.
Inventory
Inventory consists of merchandise purchased for resale and is recorded at
the lower of cost or market with the cost determined on the first-in,
first-out basis.
Cash Deposits on Inventory
Cash deposits on inventory represent amounts advanced to vendors for the
purchase of inventory.
Investments
10
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During 1999, the Company invested in two Asian joint ventures, which are
initiating a similar business to NECX. The following is a summary of the
joint ventures:
<TABLE>
<CAPTION>
Balance in Other
Original Ownership Assets at November
Investment Percentage Equity in Loss 30, 1999
<S> <C> <C> <C> <C>
Investment A $ 996,190 50% $ 453,580 542,610
Investment B 937,592 6 - 937,592
</TABLE>
The Company accounts for Investment A under the equity method. The equity
in the 1999 losses of the joint venture is included in Investment Income
(Expense) on the statement of income. The Company accounts for its
minority interest in Investment B using the cost method and believes that
there has been no impairment of its investment at November 30, 1999.
Property, Plant and Equipment
All property, plant and equipment are recorded at cost and depreciated
over their estimated useful lives, using the straight-line and
accelerated methods. Upon sale or retirement of an asset, the cost and
related accumulated depreciation are eliminated from the respective
accounts, and the resulting gain or loss is included in the statement of
income of the current period.
Expenditures for repairs and maintenance that do not increase the useful
lives of the assets are charged to expense as incurred.
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Estimated useful lives of property, plant and equipment are as follows:
Estimated
Asset Classification Useful Life
Computer equipment 3-5 years
Other equipment 5-7 years
Motor vehicles 5 years
Leasehold improvements and equipment under capital leases are depreciated
over the remaining life of the lease or their estimated useful life,
whichever is shorter.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets
and liabilities are recognized for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. The amounts of deferred tax assets or liabilities are based on
the difference between the financial statement carrying amounts and the
tax basis of assets and liabilities, and are not material at December 31,
1998 and November 30, 1999.
The Parent Company, with the consent of its shareholders, has elected to
be taxed under the provisions of Subchapter S of the Internal Revenue
Code (IRC). Under these provisions, the Parent Company (and, therefore,
the Company) does not pay federal income taxes on its taxable income.
Instead, the shareholders of the Parent Company are liable for individual
income taxes on their proportionate share of the Company's taxable
income.
The provision for state income tax of approximately $77,000 and $30,000
for the years ended December 31, 1997 and 1998, respectively, represents
a Massachusetts-imposed corporate excise tax on tangible assets and an
income tax on certain S corporations with sales in excess of $6,000,000.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Comprehensive income is the total of net income and
all other nonowner changes in equity. The statement requires that all
items that are required to be recognized under generally accepted
accounting principles as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements in the year-end financial statements. The
statement does not require a specific format for that financial
statement. There were no components of other comprehensive income during
1997, 1998 and 1999 and, thus, the comprehensive income for the years
ended December 31, 1997 and 1998 and for the eleven months ended November
30, 1999, is the same as the net income for each period presented.
Segment Reporting
The Financial Accounting Standards Board (FASB) issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, and
the Company adopted this standard as of January 1, 1998. This statement
introduces a new model for segment reporting called the management
approach. The management approach is based on the way that the chief
operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are
defined in any manner in which management disaggregates the Company, for
example, based on products and services, geography, legal structure, etc.
Based upon the Company's analysis of its business, the Company believes
that it operates in one segment
12
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and does not analyze its operations based upon separate geographical or
product line information. See Note 2 for the enterprisewide disclosures
required by SFAS No. 131.
Derivatives
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, in June 1998. The statement requires companies to
record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Amending
SFAS No. 133, The FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133, in July 1999. SFAS No. 133 is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000,
although earlier adoption is allowed. The Company has not yet determined
the effect that adoption of SFAS No. 133 will have or when the provisions
of the statement will be adopted if prior to the required adoption date.
However, the Company currently expects that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a
material effect on the Company's results of operations or financial
position.
(2) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents in bank deposit accounts, marketable securities and trade
receivables. The Company has not experienced losses related to cash and
cash equivalents and marketable securities and does not believe it is
exposed to any significant credit risks relating to its cash and cash
equivalents. The Company's trade receivables are derived primarily from
sales of hardware and software products to a large number of customers
across a wide range of diversified industries and countries worldwide.
The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when deemed
necessary but generally requires no collateral. The Company establishes
an allowance for doubtful accounts based on factors surrounding the
credit risk of specific customers, historical trends and other
information. The Company's historical experience in collection of its
trade receivables falls within the recorded allowances. At November 30,
1999, approximately 2% of receivables (denominated in U.S. dollars) is
due from customers whose economies are considered highly inflationary.
The Company does not currently anticipate any losses from these
receivables in excess of the provided allowances.
The Company recorded approximate sales to the following customers that
represented greater than 10% of net sales (in thousands):
<TABLE>
<CAPTION>
For the Eleven
For the Years Ended Months Ended
December 31, December 31, November 30,
1997 1998 1999
<S> <C> <C> <C>
Company A $ 4,448 $ 24,169 $ 60,749
Company B - 62,102 41,490
Company C 42,641 14,433 4,953
</TABLE>
The Company did not have any other significant sale concentrations for
the years ended December 31, 1997 and 1998 or for the eleven months ended
November 30, 1999.
Approximate net sales by country, denominated in U.S. dollars, were as
follows, based on the location to which the products were shipped (in
thousands):
For the Eleven
For the Years Ended Months Ended
13
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, November 30,
1997 1998 1999
<S> <C> <C> <C>
United States $ 252,716 $ 230,938 $ 255,995
Russia 5,737 2,967 3,377
Taiwan 6,890 4,720 7,738
Canada 13,209 6,099 5,388
United Kingdom 9,705 7,482 8,289
Brazil 13,692 12,380 2,723
France 7,542 12,845 4,389
Germany 11,163 41,224 12,895
Other 31,808 30,443 35,311
--------------- --------------- ---------------
Total $ 352,462 $ 349,098 $ 336,105
=============== =============== ===============
</TABLE>
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(3) Note Payable--Credit Line
In 1997, the Company had a line of credit which allowed it to borrow an
amount calculated under the borrowings base of eligible assets, as
defined. In August 1997, the line of credit was modified to limit the
loan to only one lender bank. The amended agreement allowed the Company
to borrow the lesser of $25,000,000 or an amount calculated under the
borrowings base of eligible assets, as defined.
During 1999, the Company further amended its line of credit with the bank
to, among other matters, approve the reorganization, approve the
transaction discussed in Note 8, waive certain covenant violations and
adjust the maximum borrowings to $40,000,000 in increments.
Borrowings under the line of credit at December 31, 1998 and November 30,
1999 were $11,784,392 and $24,883,854, respectively. Borrowings bear
interest at the bank's monthly base lending rate (7.75% at December 31,
1998 and 8.5% at November 30, 1999). Interest is payable monthly. The
weighted average interest rate was 8.4% and 7.9% for the year ended
December 31, 1998 and for the eleven months ended November 30, 1999,
respectively. The line of credit is secured by all assets of the Company,
to the extent of the Company's indebtedness.
Under the terms of the modified agreement, the Company has agreed, among
other things, to maintain certain financial ratios and to meet certain
performance ratios and measurements, as defined in the agreement. In
addition, the credit agreement restricts certain activities with related
parties, unless the Company meets certain requirements, as defined. In
connection with the acquisition of the Company by VerticalNet, Inc. (as
described in Note 9), the outstanding borrowings from the line of credit
as of December 16, 1999 have been repaid to the bank.
(4) Lease Commitments
Operating Lease Commitments
The Parent Company is obligated under an operating lease with a related
party for space rented at its corporate headquarters that expires on
November 30, 2003. The Parent Company is also contingently liable as
guarantor on a loan to a related party in the amount of approximately
$1,000,000 in connection with the facility. The annual rent paid by the
Parent Company under this operating lease is $1,200,000. The building
lease requires the Parent Company to pay certain costs such as
maintenance and insurance. Rental expense for operating leases allocated
to the Company was $772,000, $829,000 and $861,000 for the eleven months
ended November 30, 1999 and for the years ended December 31, 1998 and
1997, respectively. Rent expense for the space occupied by the Company
has been, and will be, allocated for the remaining term of the lease
based on its relative proportion of space utilized.
15
<PAGE>
The Parent Company leases phone equipment under an operating lease that
requires monthly installment payments of $7,900 through December 2000, of
which $5,200 will be allocated to the Company on a monthly basis.
The Parent Company's future minimum lease payments for these operating
leases are as follows:
Year Amount
2000 $ 1,294,800
2001 1,200,000
2002 1,200,000
2003 1,100,000
---------------
$ 4,794,800
===============
(5) Related Party Transactions
Rent
The Parent Company leases facilities from the related party partnership
controlled by an officer of the Company, as described in Note 4.
Notes Payable--Affiliates
As of January 1, 1998, Notes Payable--Affiliates consisted of an
$8,000,000 advance to the Company from the shareholders of the Parent
Company. In 1998, the Company repaid the $4,000,000 note payable due to a
previous shareholder of the Parent Company. The sole remaining
shareholder of the Parent Company at December 31, 1998, loaned an
additional $2,000,000 to the Company during 1998. This loan is payable
upon demand, with interest at the prime rate (7.75% at December 31, 1998
and 8.5% at November 30, 1999). The weighted average interest rate was
8.4% and 7.9% for the year ended December 31, 1998 and for the eleven
months ended November 30, 1999, respectively.
On January 8, 1999, the Parent Company exercised an option to redeem all
of the 100 shares of its no par common stock owned by a 50% shareholder
for $11,000,000. The Company funded the option transaction through an
$8,000,000 cash payment and a $3,000,000 subordinated promissory note
with the selling shareholder for the remaining balance. Of the $8,000,000
paid to the selling shareholder in cash, $7,000,000 was funded from the
Company's operating line of credit and $1,000,000 was funded by the
remaining shareholder, who received a subordinated promissory note
payable upon demand and bearing interest quarterly at the prime rate.
16
<PAGE>
On February 23, 1999, the Company repaid the $3,000,000 subordinated note
in full to the selling shareholder and executed a subordinated note with
the remaining shareholder for the same amount. On December 16, 1999, in
connection with the sale to VerticalNet, Inc. (as described in Note 9),
the Note Payable--Affiliates was repaid and, as a result, has been
classified as a short-term liability in the accompanying balance sheets.
(6) Profit Sharing Plan
The Company maintains a combined Profit Sharing and Employee Savings Plan
(the Plan) covering substantially all employees. Employer and employee
contributions are discretionary and are not to exceed, in total, 15% of
the total compensation earned by the plan participants for the year. The
Plan is tax-exempt under Sections 401(a) and 401(k) of the IRC. For the
twelve months ended December 31, 1997 and 1998, there were no charges to
the income statement relating to the Plan. The Company expensed $150,000
relating to the Plan during the eleven months ended November 30, 1999.
(7) Commitments and Contingencies
Officer Compensation
The Company has compensation agreements with its executive officers,
which provide for discretionary bonuses plus a commission as a percentage
of gross profit. The agreements provide that all federal and state income
taxes paid by the executive officers resulting from the flow-through of
corporate taxable income to the executive officers will be reimbursed as
a discretionary bonus.
For the years ended December 31, 1997 and 1998, and the eleven months
ended November 30, 1999, the Company expensed $1,600,000, $828,000 and
$1,000,000 relating to the agreements.
Legal Matters
On February 5, 1997, the Parent Company received a Notice of Intention to
Assess from the Commonwealth of Massachusetts Department of Revenue
related to allowable officers' compensation and the Parent Company's 1993
state income tax return. In September 1998, the Parent Company received a
partial assessment in the amount of approximately $377,000 plus interest,
which was paid in full by the Company in October 1998. It is the opinion
of management that any future exposure will not be material to the
Company's financial statements.
The Company is also party to various pending legal claims and proceedings
that arise in the normal course of business. In the opinion of
management, the final resolution of these claims and proceedings is not
expected to materially affect the Company's financial statements.
17
<PAGE>
(8) Incorporation as a Limited Liability Corporation
On July 1, 1999, the Company, which, prior to this date, was a division
of NECS, was incorporated as a limited liability corporation (LLC) under
the trade name NECX Exchange, LLC. As part of this incorporation, NECS
contributed all of the assets and liabilities of the division to the
newly formed LLC.
(9) Subsequent Events
Sale of NECX Exchange, LLC
On November 16, 1999, the sole shareholder of NECX Exchange, LLC signed a
purchase and sale agreement with VerticalNet, Inc. (the Buyer) whereby
the Buyer will purchase the net assets of the Company for $10,000,000 in
cash and $70,000,000 in convertible debt. The sale closed on December 16,
1999. In addition to the amounts received as part of the net asset sale,
the Buyer repaid the $10,000,000 Note Payable--Affiliate and the
outstanding credit line borrowings as of the close date.
18
<PAGE>
VERTICALNET, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet
as of September 30, 1999, and the related unaudited pro forma consolidated
statements of operations for the year ended December 31, 1998 and for the nine
months ended September 30, 1999, give effect to the asset purchase of NECX
Exchange Trust ("NECX"), as described in Note 2 of the Notes to Pro Forma
Condensed Consolidated Financial Statements, as if the transaction had occurred
as of September 30, 1999, in the case of the unaudited pro forma condensed
consolidated balance sheet, and as of January 1, 1998, in the case of the
unaudited pro forma consolidated statements of operations.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998 and for the nine months ended September 30, 1999, also
give effect to the acquisitions of Isadra, Inc. ("Isadra"), CertiSource, Inc.
("CertiSource"), LabX Technologies Inc. ("LabX") and Techspex, Inc.
("Techspex"), completed on August 25, 1999, August 10, 1999, July 29, 1999 and
June 14, 1999, respectively, as described in Notes 3, 4, 5 and 6 of the Notes to
the Pro Forma Condensed Consolidated Financial Statements, respectively, as if
the transactions had occurred as of January 1, 1998.
In addition, the unaudited pro forma consolidated statement of operations
for the year ended December 31, 1998 also gives effect to the acquisitions of
Boulder Interactive Technology Services Company ("BITC") and Informatrix
Worldwide, Inc. ("Informatrix"), completed in 1998, as described in Note 7 of
the Notes to the Pro Forma Condensed Consolidated Financial Statements, as if
the transactions had occurred as of January 1, 1998.
The unaudited pro forma condensed consolidated financial statements have been
prepared by the management of the Company and should be read in conjunction with
the Company's historical consolidated financial statements, which have been
previously filed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, the historical financial statements of NECX, which are
included elsewhere in this Form 8-K/A, the historical financial statements of
Isadra, CertiSource, LabX and Techspex, filed on Forms 8-K dated August 25,
1999, August 10, 1999, July 29, 1999 and June 14, 1999, respectively, and the
historical financial statements of BITC and Informatrix filed in the Company's
Registration Statement filed on Form S-1 effective February 11, 1999. Since the
unaudited pro forma financial statements which follow are based upon the
financial condition and operating results of NECX, Isadra, CertiSource, LabX,
Techspex, BITC and Informatrix during periods when they were not under the
control or management of VerticalNet, the information presented may not be
indicative of the results which would have actually been obtained had the
acquisitions been completed on January 1, 1998 nor are they indicative of future
financial or operating results.
19
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Historical (Note 1)
-------------------------
Pro Forma
VerticalNet NECX Adjustments Pro Forma
------------- ---------- ------------- ------------
Dollars in Thousands
<S> <C> <C> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 91,710 $ 4,143 $ (13,162) (a) $ 53,344
(25,204) (c)
(4,143) (d)
Short-term investments 21,799 - - 21,799
Accounts receivable, net of allowance for doubtful accounts 7,869 35,779 - 43,648
Inventory, net of reserve - 6,106 - 6,106
Prepaid expenses and other assets 3,099 965 - 4,064
------------ --------- ----------- -----------
Total current assets 124,477 46,993 (42,509) 128,961
Restricted Cash
Due from NECX Direct 1,220 - 1,220
Property and equipment, net - 199 199
Goodwill and other intangibles, net of accumulated 4,583 4,145 (43) (d) 8,685
amortization 44,893 - 112,291 (b) 157,184
Long-term investments 13,843 - - 13,843
Deferred charges and other assets 5,075 2,220 - 7,295
------------ --------- ----------- -----------
Total assets $ 194,091 $ 53,557 $ 69,739 $ 317,387
============ ========= =========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,357 $ - $ - $ 1,357
Lines of credit - 14,948 (14,948) (c) -
Notes payable - 10,000 (10,000) (c) -
Accounts payable 3,840 20,058 - 23,898
Accrued expenses 4,502 3,948 (256) (c) 8,194
Deferred revenues 7,427 - - 7,427
------------ --------- ----------- -----------
Total current liabilities 17,126 48,954 (25,204) 40,876
Long-term debt, net of current portion 1,739 - 1,739
Convertible notes 100,000 - 100,000
Shareholders' equity 75,226 4,603 99,546 (a) 174,772
(4,603) (e)
------------ --------- ----------- -----------
Total liabilities and shareholders' equity $ 194,091 $ 53,557 $ 69,739 $ 317,387
============ ========= =========== ===========
</TABLE>
The accompanying notes are an intregral part of these statements.
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical (Note 1)
-----------------------------------------------------------------------------------------
VerticalNet BITC Informatrix Techspex LabX CertiSource Isadra NECX
----------- -------- ----------- -------- --------- ----------- -------- ---------
Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Exchange sales transactions $ - $ - $ - $ - $ - $ - $ - $ 349,098
Cost of exchange sales
transactions - - - - - - - 311,545
--------- -------- --------- -------- ------- --------- -------- ---------
Net exchange revenue - - - - - - - 37,553
Advertising and e-commerce revenue 3,135 438 32 308 91 944 125 -
--------- -------- --------- -------- ------- --------- -------- ---------
Combined net revenues 3,135 438 32 308 91 944 125 37,553
--------- -------- --------- -------- ------- --------- -------- ---------
Other Costs and Expenses
Cost of revenues 3,238 122 254 73 20 469 - -
Product development 1,405 - 75 22 8 190 855 -
Sales and marketing 7,895 123 426 218 18 351 362 16,187
General and administrative 3,823 328 93 184 21 236 707 13,650
Amortization of goodwill and other
intangibles 283 - - - - - - -
--------- -------- --------- -------- ------- --------- -------- ---------
Operating loss (13,509) (135) (816) (189) 24 (302) (1,799) 7,716
--------- -------- --------- -------- ------- --------- -------- ---------
Interest, net (85) - (38) (43) - - (78) 319
--------- -------- --------- -------- ------- --------- -------- ---------
Income taxes - - - - 4 - - 30
--------- -------- --------- -------- ------- --------- ------- ---------
Net loss $ (13,594) $ (135) $ (854) $ (232) $ 20 $ (302) $(1,877) $ 8,005
========= ======== ========= ======== ======= ========= ======= =========
Basic and diluted net loss per share $ (2.64)
=========
Weighted average shares outstanding
used in basic and diluted per-share
calculation (Note 8) 5,141
=========
<CAPTION>
Pro Forma
Adjustments Pro Forma
----------- -----------
<S> <C> <C>
Revenues
Exchange sales transactions $ - $ 349,098
Cost of exchange sales
transactions - 311,545
Net exchange revenue - 37,553
----------- -----------
Advertising and e-commerce revenue - 5,073
----------- -----------
Combined net revenues - 42,626
----------- -----------
Other Costs and Expenses
Cost of revenues (180) (o) 3,996
Product development - 2,555
Sales and marketing - 25,580
General and administrative - 19,042
Amortization of goodwill and other
intangibles 23,233 (f) 38,581
10,324 (h)
1,131 (j)
1,586 (k)
1,102 (m)
922 (q)
----------- -----------
Operating loss (38,118) (47,128)
----------- -----------
Interest, net 43 (n) 153
35 (p)
----------- -----------
Income taxes (4)(l) -
30
----------- -----------
Net loss $ (38,036) $ (47,005)
=========== ===========
Basic and diluted net loss per share $ (6.30)
===========
Weighted average shares outstanding
used in basic and diluted per-share
calculation (Note 8) 7,461
===========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Historical (Note 1)
---------------------------------------------------------------------------
VerticalNet Techspex LabX CertiSource Isadra NECX
------------- ---------- ---------- ---------- ---------- -----------
Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C>
Revenues
Exchange sales transactions $ - $ - $ - $ - $ - $ 270,895
Cost of exchange sales transactions - - - - - 242,857
---------- -------- -------- -------- -------- -----------
Net exchange revenue - - - - - 28,038
Advertising and e-commerce revenue 10,667 151 155 765 - -
---------- -------- -------- -------- -------- -----------
Combined net revenues 10,667 151 155 765 - 28,038
Other Costs and Expenses
Cost of revenues 5,438 33 40 215 - -
Product development 4,920 10 30 97 1,573 -
Sales and marketing 17,100 96 19 295 257 13,560
General and administrative 6,434 54 30 613 3,728 9,510
In-process research and development 13,600 - - - - -
Amortization of goodwill and other
intangibles 2,703 - - - - -
---------- -------- -------- -------- -------- -----------
(39,528) (42) 36 (455) (5,558) 4,968
Operating loss ---------- -------- -------- -------- -------- -----------
Other Income - - - 327 - -
Interest, net 1,332 (13) - - (63) (1,731)
---------- -------- -------- -------- -------- -----------
Income taxes - 8 - - 59
---------- -------- -------- -------- -------- -----------
Net loss $ (38,196) $ (55) $ 28 $ (128) $ (5,621) $ 3,178
========== ======== ======== ======== ======== ===========
Basic and diluted net loss per share $ (1.29)
==========
Weighted average shares outstanding
used in basic and diluted per-share
calculation (Note 8) 29,596
==========
<CAPTION>
Pro Forma
Adjustments Pro Forma
----------- ----------
<S> <C> <C>
Revenues
Exchange sales transactions $ - $ 270,895
Cost of exchange sales transactions - 242,857
----------- ----------
Net exchange revenue - 28,038
Advertising and e-commerce revenue - 11,738
----------- ----------
Combined net revenues - 39,776
----------- ----------
Other Costs and Expenses
Cost of revenues - 5,726
Product development - 6,630
Sales and marketing - 31,327
General and administrative - 20,369
In-process research and development - 13,600
Amortization of goodwill and other
intangibles 17,425 (f) 29,148
6,883 (h)
707 (j)
925 (k)
505 (m)
----------- ----------
Operating loss (26,445) (67,024)
----------- ----------
Other Income - 327
----------- ----------
Interest, net 63 (i) (399)
13 (n)
----------- ----------
Income taxes (8)(l) -
(59)(g)
----------- ----------
Net loss $ (26,302) $(67,096)
=========== ==========
Basic and diluted net loss per share $ (2.12)
==========
Weighted average shares outstanding
used in basic and diluted per-share
calculation (Note 8) 31,642
==========
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
VERTICALNET, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: HISTORICAL FINANCIAL STATEMENTS:
The historical balances of VerticalNet, Inc. ("VerticalNet" or the "Company")
reflect the consolidated balance sheet as of September 30, 1999, and the
consolidated results of operations for the year ended December 31, 1998 and for
the nine months ended September 30, 1999, as reported in the consolidated
financial statements which have been previously filed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and Quarterly Report on
Form 10-Q for the three and nine months ended September 30, 1999. The historical
balances of Boulder Interactive Technology Services ("BITC") and Informatrix
Worldwide, Inc. ("Informatrix") for the year ended December 31, 1998, represent
the results of operations for BITC and Informatrix prior to their acquisition by
the Company during the year ended December 31, 1998, and were derived from their
historical financial statements included in the Company's Registration Statement
filed on Form S-1 effective February 11, 1999. The historical balances of
Isadra, Inc. ("Isadra") for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 represent the results of operations for the year
ended December 31, 1998 and for the nine months ended September 30, 1999, which
were derived from the historical financial statements filed in the Form 8-K
dated August 25, 1999. The historical balances of CertiSource, Inc.
("CertiSource") for the year ended December 31, 1998 and for the nine months
ended September 30, 1999 represent the results of operations for the year ended
December 31, 1998 and for the nine months ended September 30, 1999, which were
derived from the historical financial statements filed in the Form 8-K dated
August 10, 1999. The historical balances of LabX Technologies Inc. ("LabX") for
the year ended December 31, 1998 and for the nine months ended September 30,
1999, which were derived from the historical financial statements for the year
ended September 30, 1998 and the period ended June 30, 1999 filed in the Form
8-K dated July 29, 1999. The historical balances of Techspex, Inc. ("Techspex")
for the year ended December 31, 1998 and nine months ended September 30, 1999,
represent the results of operations for the year ended December 31, 1998 and for
the nine months ended September 30, 1999, which were derived from the historical
financial statements filed in the Form 8-K dated June 14, 1999 and reflect the
results of its operations prior to its acquisition by the Company. The period
results for the period subsequent to the acquisition dates for Isadra,
CertiSource, LabX and Techspex are included in the Company's results. The
historical balances of NECX, Exchange Trust ("NECX") as of December 31, 1999 and
for the year ended December 31, 1998 and the nine months ended September 30,
1999, were derived from the historical financial statements.
Note 2: ACQUISITION OF NECX EXCHANGE TRUST:
On December 16, 1999, VerticalNet acquired substantially all of the assets of
NECX. The acquisition was consummated by NECX.com LLC (the "Acquisition Sub"), a
wholly-owned subsidiary of VerticalNet. The Acquisition was accomplished
pursuant to the terms of the Asset Purchase Agreement (the "Purchase
Agreement"), dated as of November 16, 1999 by and among VerticalNet, the
Acquisition Sub, New England Circuit Sales, Inc., NECX Exchange, LLC, NECX and
the sole stockholder of New England Circuit Sales, Inc. The transaction was
completed for approximately $112.7 million, including transaction costs. The
acquisition will be accounted for under the purchase method of accounting. Under
this method, the purchase price is allocated to the assets acquired and
liabilities assumed based on the fair values at the acquisition date. Such
allocation has been based on estimates that may be revised at a later date.
Therefore, actual amounts may differ from those in the unaudited pro forma
condensed consolidated financial statements. The excess of the purchase price
over the fair value of the assets acquired was approximately $112.3 million,
which has been allocated to assembled workforce, strategic relationships and
goodwill in the amounts of approximately $2.5 million, $13.0 million and $96.8
million, respectively. The assembled work force and strategic relationships will
be amortized on a straight line basis over 48 months, while goodwill will be
amortized on a straight line basis over 60 months.
23
<PAGE>
The following pro forma adjustments for the NECX acquisition are reflected in
the unaudited pro forma condensed consolidated balance sheet as of September 30,
1999, and the unaudited pro forma statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999:
Unaudited Pro Forma Adjustments to Consolidated Balance Sheet
(a) Reflects the consideration issued by the Company to consummate the
acquisition:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash $ 10,000
Transaction costs 3,162
Convertible notes* (market value) 99,546
--------
$112,708
========
</TABLE>
*Included in equity on a pro forma basis since notes are convertible into
VerticalNet common stock. Market value was determined based on the assumed
number of share to be issued to the seller, pursuant to the terms of the
convertible notes and the average closing price of the Registrant's
Common Stock for a few dates before and after November 16, 1999, the date
on which the terms of the transaction were agreed to and publically
announced.
(b) Reflects the recording of the purchase transaction.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Total purchase price $112,708
Fair value of tangible assets acquired
417
--------
Excess purchase price to be allocated $112,291
========
</TABLE>
The excess purchase price was allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Assembled work force (estimated useful life of 48 months) $ 2,500
Strategic relationships, including customer/supplier lists
(estimated useful life of 48 months) 13,000
Goodwill (estimated useful life of 60 months) 96,791
--------
$112,291
========
</TABLE>
(c) Reflects the Company's payment of NECX's line of credit and note payable to
shareholder, including accrued interest for both
(d) Reflects elimination of certain excluded assets, including cash balance and
motorized vehicles.
(e) Reflects the elimination of the historical equity account of NECX.
Unaudited Pro Forma Adjustments to Condensed Consolidated Statements of
Operations
(f) Represents additional amortization expense for the year ended December
31,1998 and the nine months ended September 30, 1999, respectively,
relating to the assembled workforce and the strategic relationsips acquired
in the transaction based upon estimated useful lives of 48 months and
goodwill based upon the estimated useful life of 60 months.
(g) Represents the elimination of tax expense of NECX
24
<PAGE>
Note 3: ACQUISITION OF ISADRA, INC:
On August 25, 1999, we acquired all of the capital stock of Isadra for
approximately $42.3 million, including transaction costs. The consideration for
the acquisition was $3.0 million in cash (including estimated transaction costs
of $600,000), 1,000,000 shares of our common stock having a fair market value of
$37.8 million and options to purchase 40,763 shares of our common stock valued
at $1.5 million. The acquisition was accounted for under the purchase method of
accounting. The purchase price plus the net liabilities assumed was
approximately $43.9 million, which was allocated to in-process research and
development, existing technology, assembled workforce and goodwill in the
amounts of approximately $13.6 million, $2.1 million, $500,000 and $27.7
million, respectively. The $13.6 million of in-process research and development
was charged to expense as a non-recurring charge upon consummation of the
acquisition since the in-process research and development has not yet reached
feasibility and has no alternative future uses. The existing technology and
assembled work force will be amortized on a straight-line basis over 24 months,
while goodwill will be amortized on a straight-line basis over 36 months.
The following pro forma adjustments for the Isadra acquisition are reflected in
the unaudited pro forma statements of operations for the year ended December 31,
1998 and the nine months ended September 30, 1999:
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
(h) Represents additional amortization expense relating to the existing
technology, the assembled work force acquired and goodwill.
(i) Represents the elimination of interest expense incurred on Isadra's line of
credit from VerticalNet.
Note 4: ACQUISITION OF CERTISOURCE, INC:
On August 10, 1999, we acquired all of the capital stock of CertiSource for
approximately $3.3 million, including transaction costs. The consideration for
the acquisition was $601,000 in cash (including transaction costs of
approximately $125,000) and 83,712 shares of our common stock having a fair
market value of approximately $2.7 million. The acquisition was accounted for
under the purchase method of accounting. The purchase price plus the net
liabilities assumed was approximately $3.4 million which was allocated to a
covenant not-to-compete and goodwill of approximately $500,000 and $2.9 million,
respectively. The covenant not-to-compete and goodwill will be amortized on a
straight-line basis over 36 months.
The following pro forma adjustment for the CertiSource acquisition is reflected
in the unaudited pro forma consolidated statements of operation for the year
ended December 31, 1998 and the nine months ended September 30, 1999:
Unaudited Pro Forma Adjustment to Consolidated Statements of Operations
(j) Represents additional amortization expense relating to the covenant not-to-
compete and goodwill.
Note 5: ACQUISITION OF LABX TECHNOLOGIES, INC:
On July 29, 1999, we acquired all of the capital stock of LabX for approximately
$4.7 million, including transaction costs. The consideration for the acquisition
was $1.8 million in cash (including transaction costs of approximately $240,000)
and 69,794 shares of our common stock with a fair market value of approximately
$2.8 million. The acquisition was accounted for under the purchase method of
accounting. The purchase price less the net assets acquired was approximately
$4.6 million, which was allocated to a covenant not-to-compete, existing
technology and goodwill of approximately $350,000, $500,000 and
25
<PAGE>
$3.75 million, respectively. The covenant not-to-compete will be amortized on a
straight-line basis over 24 months, while the existing technology and goodwill
will be amortized on a straight-line basis over 36 months.
The following pro forma adjustments for the LabX acquisition are reflected in
the unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999:
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
(k) Represents additional amortization expense relating to goodwill, the
covenant not-to-compete and existing technology.
(l) Represents the elimination of tax expense of LabX.
Note 6: ACQUISITION OF TECHSPEX, INC:
On June 14, 1999, we acquired all of the capital stock of Techspex for
approximately $3.3 million, including transaction costs. The consideration for
the acquisition was $311,000 in cash (including transaction costs of
approximately $100,000) and 89,994 shares of our common stock with a fair market
value of approximately $3.0 million. The acquisition has been accounted for
under the purchase method of accounting. The purchase price plus the net
liabilities assumed was approximately $3.3 million, which was recorded as
goodwill and will be amortized on a straight-line basis over 36 months.
The following pro forma adjustments for the Techspex acquisition are reflected
in the pro forma consolidated statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999:
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
(m) Represents additional amortization expense relating to goodwill.
(n) Represents the elimination of interest expense associated with the notes
payable of Techspex.
NOTE 7: BOULDER INTERACTIVE TECHNOLOGY SERVICES AND INFORMATRIX WORLDWIDE, INC
ACQUISITION INFORMATION
On September 1, 1998, we acquired all of the outstanding stock capital stock of
BITC (known as RF GlobalNet) for $1.8 million in cash. On September 30, 1998, we
acquired all outstanding capital stock of Informatrix for 92,308 shares of our
common stock valued at $153,000. Contingent on achieving future sales targets
during 1998, Informatrix shareholders later received 7,476 additional shares of
our common stock valued at approximately $32,000. Both acquisitions were
accounted for using the purchase method of accounting. The purchase price plus
net liabilities assumed, which was recorded as goodwill and is being amortized
on a straight-line basis over 36 months, was approximately $1.9 million and
$903,000 for RF GlobalNet and Informatrix, respectively.
The following pro forma adjustments for the RF GlobalNet and Informatrix
acquisitions are reflected in the pro forma consolidated statement of operations
for the year ended December 31, 1998:
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
(o) Reflects the elimination of editorial and operational costs charged by
VerticalNet to Informatrix to maintain Informatrix's vertical trade
community.
(p) Reflects the elimination of interest expense incurred by Informatrix on
indebtedness to VerticalNet.
26
<PAGE>
(q) Represents additional amortization expense relating to goodwill.
Note 8: PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
The weighted average shares outstanding used in the pro forma basic and diluted
net loss per share calculation for the year ended December 31, 1998, includes
1,004,369, 1,000,000, 83,712, 69,794, and 89,994 shares of our common stock
issued or to be issued in the acquisition of NECX, Isadra, CertiSource, LabX and
Techspex, respectively, and 72,440 incremental shares that would have been
outstanding from the acquisition of Informatrix, as if all of the acquisitions
had occurred on January 1, 1998. For the nine months ended September 30, 1999,
the weighted average shares outstanding used in the pro forma basic and diluted
net loss per share calculation includes 1,004,369 shares of our common stock
issued in the acquisition of NECX, incremental shares of 864,469, 68,073,
53,432, 54,062, and 1,341 for the acquisitions of Isadra, CertiSource and LabX,
respectively, and the additional consideration given to Informatrix
shareholders, that would have been outstanding if these acquisitions had
occurred on January 1, 1999.
Note 9: Stock Split
On August 20, 1999, we effected a two-for-one split of our common stock. All
share and per share data have been restated to reflect the stock split.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 1, 2000 VERTICALNET, INC.
By: /s/ Gene S. Godick
--------------------
Name: Gene S. Godick
Title: Chief Financial Officer
28
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Asset Purchase Agreement dated as of November 16, 1999.*
4.1 Convertible Promissory Note in the Principal Amount of $10.5
million.*
4.2 Convertible Promissory Note in the Principal Amount of $34.5
million.*
4.4 Convertible Promissory Note in the Principal Amount of $25.0
million.*
23.1 Consent of Arthur Andersen LLP
99.1 Press Release dated December 16, 1999*
*Filed as part of the Registrant's current Report on Form 8-K
dated December 16, 1999, filed December 29, 1999, and incorporated
herein by reference.
29
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 8-K, into VerticalNet, Inc.'s previously filed
Form S-8 Registration Statement File No. 333-72143.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 2000
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