For the
year ended December 31, 1998 and the three months ended March 31,
1999, we recorded impairment charges of $2.0 million and $1.6
million, respectively, for the other than temporary decline in the
fair value of a cost method partner company. From the date we
initially acquired an ownership interest in this partner company
through December 31, 1998, our funding to this partner company
represented all of the outside capital the company had available to
fund its net losses and capital asset requirements. During the
three months ended March 31, 1999 we fully guaranteed the partner
company’s new bank loan and agreed to provide additional
funding. We acquired an additional ownership interest in this
partner company for $5.0 million in April 1999. The impairment
charges we recorded were determined by the decrease in net book
value of the partner company caused by its net losses, which were
funded entirely based on our funding and bank guarantee. Given its
continuing losses, we will continue to determine and record
impairment charges in a similar manner for this partner company
until the status of its financial position improves.
Our
cash and cash equivalents are invested primarily in money market
accounts. During 1998, we received $38.2 million of proceeds from
the sale of our common stock and $36.4 million of proceeds from the
sales of a portion of our holdings in Excite and Lycos. During the
three months ended March 31, 1999, we received $32 million of
proceeds from the sale of shares of our common stock. The increase
in interest income in 1998 and the three months ended March 31,
1999 was primarily due to the significant increase in our cash and
cash equivalents throughout 1998 and the three months ended March
31, 1999 as a result of these transactions.
From
our inception on March 4, 1996 to February 2, 1999, we were
organized as a limited liability company and were treated as a
partnership for income tax purposes. As a result of our
Reorganization as a corporation, we will be subject to corporate
federal and state income taxes. For informational purposes, the
Consolidated Statement of Operations for the year ended December
31, 1998 reflects pro forma income on an after-tax basis assuming
we had been taxed as a corporation since January 1, 1998. We did
not have any net operating loss carry forwards at December 31, 1998.
At the
time of our Reorganization, we recorded a deferred tax benefit and
related deferred tax asset of $7.7 million which primarily
represented the excess of tax basis over book basis of our partner
companies. For the period from the date of the Reorganization
through March 31, 1999, we recorded a tax provision of $7.0 million
related to our consolidated results of operations for that period,
including $10.5 million related to the $28.3 million gain on
VerticalNet’s initial public offering.
We have
not recorded a valuation allowance related to our gross deferred
tax assets because we believe it is more likely than not that we
will realize the benefits of these assets. The assets relate
primarily to the excess of tax basis over book basis of our partner
companies. These differences in basis represent capital losses for
tax purposes which, if recognized, can only be deducted to the
extent of capital gains. Additionally, these losses may be carried
back three years and carried forward five years from the year in
which they occur. While selling any portion of our ownership
interests in partner companies is something we will not do in the
ordinary course of business, we would consider pursuing such a sale
at the minimum amount necessary to prevent any capital losses from
expiring unutilized. If we do not believe such a strategy, or an
alternative strategy, will be available in the time periods allowed
for carrying back and carrying forward losses, we will establish a
valuation allowance at that time. Most of our partner companies are
in an early stage of development, currently generate significant
losses and are expected to generate significant losses in the
future. The marketability of the securities we own of our partner
companies is generally limited as they primarily represent
ownership interests in companies whose stock is not publicly
traded. As of June 30, 1999, our only publicly traded partner
company is VerticalNet. As a result, there is significant risk that
we may not be able to realize the benefits of expiring
carryforwards.
A
significant portion of our net results of operations is derived
from companies in which we hold a significant minority ownership
interest. These companies are accounted for under the equity method
of accounting. Equity income (loss) fluctuates with the number of
companies accounted for under the equity method, our voting
ownership percentage in these companies, the amortization of
goodwill related to newly acquired equity method companies, and the
net results of operations of these companies. During the year ended
December 31, 1998, the three months ended March 31, 1999, and the
three months ended June 30, 1999, we utilized $25.9 million, $18.3
million and $66.5 million to acquire partner companies accounted
for under the equity method of accounting which resulted in
goodwill of $14.2 million, $12.6 million and $44.2 million,
respectively, all of which will be amortized over 3 years.
In the
periods ended December 31, 1996 and 1997, Sky Alland was our only
partner company accounted for under the equity method. Sky Alland
’s net results of operations in 1997 improved compared to 1996.
The
significant change in equity income (loss) from 1997 to 1998
reflects a decrease in the net results of operations at Sky Alland
and the effect of equity method partner companies in which we
acquired an interest during 1998. One of these companies, Syncra
Software, Inc., represented approximately $4.3 million of our $5.9
million equity loss in 1998. As of December 31, 1998, we accounted
for eight of our partner companies under the equity method of
accounting. Most of these companies are in a very early stage of
development and incurred substantial losses in 1998, and our share
of these losses was substantial.
Our
ownership interest in VerticalNet is not consolidated in our
financial statements for periods after December 31, 1998 but is
accounted for under the equity method of accounting as a result of
our lower ownership interest in VerticalNet following the
completion of its initial public offering in February 1999.
VerticalNet recorded a loss of $5.6 million on $1.9 million of
revenue in the three months ended March 31, 1999 compared to a loss
of $2.1 million on $.4 million of revenue for the comparable period
in 1998. VerticalNet’s revenue increased period to period
primarily due to a significant increase in the number of
storefronts as it grew the number of its vertical trade communities
from 16 as of March 31, 1998 to 35 as of March 31, 1999. In
addition, barter transactions, in which VerticalNet received
advertising or other services in exchange for advertising on its
Web sites, accounted for 30% of revenues for the three months ended
March 31, 1999 compared to none for the same period in 1998.
VerticalNet’s losses increased period to period due to its
costs of maintaining, operating, promoting and increasing the
number of its vertical trade communities increasing more than
revenue.
During
the three months ended March 31, 1999 we accounted for 13 companies
under the equity method of accounting, including VerticalNet. All
13 of the companies incurred losses in the period. Our equity loss
of $7.4 million for the three months ended March 31, 1999 consisted
of $5.7 million related to our share of the equity method companies
’ losses and $1.7 million of amortization of the excess of
cost over net book value of these companies. Of the $5.7 million
loss of our share of the losses of companies accounted for under
the equity method, $2.5 million and $.9 million were attributable
to VerticalNet and Syncra Software, respectively, while the other
11 companies accounted for the remaining $2.3 million of equity
losses.
VerticalNet expects to incur significant net losses for the
foreseeable future because of its aggressive expansion plans.
Syncra Software is a development stage company that has not
generated revenue since its inception in early 1998. Due to the
early stage of development of the companies in which we acquire
interests, existing and new partner companies accounted for under
the equity method, including VerticalNet and Syncra Software, are
expected to incur substantial losses. Our share of these losses is
expected to be substantial in 1999.
While
VerticalNet and most of the companies accounted for under the
equity method of accounting have generated losses in each of the
years in the three-year period ended December 31, 1998 and the
three
months ended March 31, 1999, and therefore in most cases did not
incur income tax liabilities, these companies may generate taxable
income in the future. Our share of these companies’ net
income, if generated, would be reduced to the extent of our share
of these companies’ tax expense.
Liquidity and Capital Resources
We have
funded our operations with a combination of equity proceeds,
proceeds from the sales of a portion of our Excite and Lycos
holdings, borrowings under bank credit facilities, and proceeds
from the issuance of convertible notes.
We
received equity commitments of $40 million in 1996, of which $13.7
million and $20.1 million was received in 1996 and 1997,
respectively, and $6.2 million of which was funded with an in-kind
contribution of holdings of a partner company in 1996. We received
additional commitments of $70 million in 1998, of which $38 million
and $32 million was received in 1998 and during the three months
ended March 31, 1999, respectively.
Sales
of Excite and Lycos stock generated proceeds of $36.4 million in
1998 and sales of Excite stock generated proceeds of $2.5 million
during the three months ended March 31, 1999.
In
April 1999, we entered into a $50 million revolving bank credit
facility. In connection with the facility, we issued warrants to
purchase 200,000 shares of common stock for an exercise price of
$10.00 per share exercisable for seven years. We intend to value
these warrants and account for them as debt issuance costs. The
facility matures in April 2000, is subject to a .25% unused
commitment fee, bears interest, at our option, at prime and/or
LIBOR plus 2.5%, and is secured by substantially all of our assets
(including all of our holdings in VerticalNet). Borrowing
availability under the facility is based on the fair market value
of our holdings of publicly-traded partner companies (currently
only VerticalNet) and the value, as defined in the facility, of our
private partner companies. If the market price of VerticalNet
experiences a significant decline, availability under the credit
facility could be reduced significantly and could have an adverse
effect on our ability to borrow under the facility and could
require an immediate repayment of a portion of our outstanding
borrowings, if any. Based on the provisions of the borrowing base,
borrowing availability at June 30, 1999 was $50 million, none of
which was outstanding.
In May
1999, we issued $90 million principal amount of three-year
convertible notes. The notes bear interest at an annual rate of
4.99% during the first year and at the prime rate for the remaining
two years. Prior to May 2000, the notes will automatically convert
into shares of our common stock at our initial public offering
price upon consummation of an initial public offering. If the notes
are converted, all accrued interest is waived. We issued warrants
to the holders of these notes to purchase shares of our common
stock. The warrant holders will be entitled to purchase, at the
initial public offering price, 1,636,225 shares of our common stock
at an assumed initial public offering price of $11.00 per share.
The warrants expire in May 2002.
In July
1999, we entered into an agreement with IBM Corporation under which
they will purchase directly from us $45 million of shares of our
common stock at the initial public offering price. The private
placement is concurrent with and contingent upon the completion of
our initial public offering.
Proceeds from our initial public offering, proceeds from the
concurrent offering, proceeds from the issuance of our convertible
notes, availability under our revolving bank credit facility,
proceeds from the potential sales of all or a portion of our
minority interests and other internal sources of cash flow are
expected to be sufficient to fund our cash requirements through the
next 12 months, including commitments to new and existing partner
companies and general operations requirements. As of December 31,
1998, we were contingently obligated for approximately $3.2 million
of guarantee commitments that remain outstanding as of June 30,
1999. Beyond the next 12 months, we will likely have to raise
additional funds through the issuance of equity securities or
obtain additional bank financing. If additional funds are raised
through the issuance of equity securities, our existing
shareholders may experience significant dilution. Our revolving
bank credit
facility matures in April 2000, at which time we may not be able to
renew the facility or obtain additional bank financing, or may only
be able to do so on terms not favorable or acceptable to us.
From
its inception through its initial public offering, VerticalNet
funded its operations through a combination of equity, investor and
bank borrowings, and leases. These sources included amounts both
advanced and guaranteed by us. VerticalNet raised $58.3 million in
its initial public offering in February 1999. VerticalNet believes
that these initial public offering funds, together with its
existing cash and cash equivalents, should be sufficient to fund
its operations through March 2000. We have no obligation to provide
additional funding to VerticalNet, and we have no obligations with
respect to its outstanding debt arrangements.
Prior
to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and
leases. In January 1999, we acquired a majority voting interest in
Breakaway Solutions for $8.3 million, of which Breakaway Solutions
used $4.5 million to repurchase treasury stock. The net proceeds to
Breakaway Solutions of $3.8 million were used to fund its negative
cash flow from operations of $1.1 million for the three months
ended March 31, 1999. Breakaway Solutions is expanding through
organic growth and acquisitions. Breakaway Solutions recently
completed a private placement of equity securities of about $19.1
million, of which we contributed $4.0 million prior to June 30,
1999 and an additional $1.0 million in July 1999. Breakaway
Solutions expects these funds, together with its existing cash
resources, will be sufficient to fund its operations through June
2000. We have no obligation to provide additional funding to
Breakaway Solutions, and we have no obligations with respect to its
outstanding debt arrangements.
Consolidated working capital increased to $20.5 million at December
31, 1998, compared to $2.4 million at December 31, 1997. The
increase was primarily due to the net effect of the proceeds from
the equity we raised in 1998 and the proceeds from the sales of a
portion of our Excite and Lycos holdings, offset by the ownership
interests we acquired in 1998. Consolidated working capital
decreased to $17.7 million at March 31, 1999 from $20.5 million at
December 31, 1998 primarily as a result of equity we raised being
more than offset by the ownership interests we acquired and the
distribution to shareholders during the three months ended March
31, 1999.
Cash
used in operating activities increased in 1997 and 1998 compared to
each of the prior years primarily due to VerticalNet’s
increased losses in each of those years. Cash used in operating
activities in the three months ended March 31, 1999 compared to the
same prior year period increased due to the increased cost of
General ICG Operations general and administrative expenses.
Cash
used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner
companies, offset in 1998 and the three months ended March 31, 1999
by the proceeds of $36.4 million and $2.6 million, respectively,
from the sales of a portion of our available-for-sale securities,
Excite and Lycos.
We
utilized $57.6 million, including $9 million contributed to
VerticalNet, to acquire interests in new and existing partner
companies in 1998 and we expect this amount to more than double in
1999. In 1998, we acquired interests in the following partner
companies: Blackboard, CommerceQuest, CommerX, ComputerJobs.com,
Context Integration, Deja.com, e-Chemicals, Entegrity Solutions,
LinkShare, PrivaSeek, RapidAutoNet, SageMaker, ServiceSoft, Syncra
Software, US Interactive, VerticalNet and Vivant!.
We
utilized $32.7 million, including $8.3 million contributed to
Breakaway Solutions, to acquire interests in and make advances to
new and existing partner companies during the three months ended
March 31, 1999. These companies included: BidCom, ClearCommerce,
Collabria, Entegrity Solutions, Internet Commerce Systems,
ONVIA.com PlanSponsor Exchange, SageMaker, SMART Technologies and
Universal Access.
We
utilized $84.3 million, including $4.0 million contributed directly
to Breakaway Solutions and an additional $4.0 million used to
purchase an additional ownership interest in Breakaway Solutions
directly from
shareholders of Breakaway Solutions, to acquire interests in or make
advances to new and existing partner companies during the period
from April 1, 1999 through June 30, 1999. These companies included:
Arbinet Communications, Blackboard, ClearCommerce, CommerceQuest,
CommerX, Deja.com, e-Chemicals, eMarketWorld, iParts, PlanSponsor
Exchange, PointMent, PrivaSeek, SageMaker, ServiceSoft, Star-Cite!,
Syncra Software, Tradex Technologies, United Messaging and
Universal Access.
During
the period from April 1, 1999 to June 30, 1999 we acquired an
interest in a new partner company to be accounted for under the
equity method of accounting for initial consideration of about
$11.3 million. We purchased our ownership interest directly from
shareholders of the partner company. These shareholders have the
option, exercisable at any time through August 2000, of electing to
receive from us about $11.3 million in cash or a number of shares
of our common stock determined by dividing about $11.3 million by
the product that results from multiplying the initial public
offering price of our common stock by .90.
We will
divest our ownership interest in SMART Technologies, Inc. due to
the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger, our ownership
interest in and advances to SMART Technologies, Inc. will be
converted into cash, common stock and warrants to purchase common
stock of i2 Technologies, Inc. The transaction had not been
completed as of June 30, 1999. Our estimated non-operating gain
before taxes from this transaction will be approximately $2 million
and our holdings in i2 Technologies, Inc. will be accounted for as
available-for-sale securities.
In May
1999, @Home Corporation exchanged its shares for all of the
outstanding stock of Excite. As part of this merger, we will
receive shares of @Home Corporation in exchange for our shares in
Excite. Our estimated non-operating gain before taxes from this
transaction will be approximately $2.7 million and our holdings in
@Home Corporation will be accounted for as available-for-sale
securities.
In May
1999, VerticalNet announced it had signed a definitive agreement to
acquire all of the outstanding stock of Isadra, Inc. in exchange
for 500,000 shares of VerticalNet common stock and $3 million in
cash. Consummation of the merger is subject to shareholder and
regulatory approvals as well as customary closing conditions. The
transaction had not been completed as of June 30, 1999. Upon
completion of the transaction, our voting ownership in VerticalNet
will decrease from 36% to 35%. In addition, we expect to record a
non-operating gain due to the increase in our share of VerticalNet
’s net equity as a result of their issuance of shares.
Our
operations are not capital intensive, and capital expenditures in
any year normally will not be significant in relation to our
overall financial position. We expect to commit funds in 1999 to
the buildout of our larger new corporate headquarters in Wayne,
Pennsylvania and the development of our information technology
infrastructure. There were no material capital asset purchase
commitments as of June 30, 1999.
Recent Accounting Pronouncements
We do
not expect the adoption of recently issued accounting
pronouncements to have a significant impact on our net results of
operations, financial position or cash flows.
Year 2000 Readiness Disclosure
Many
computer programs have been written using two digits rather than
four digits to define the applicable year. This poses a problem at
the end of the century because these computer programs may
recognize a date using “00” as the year 1900, rather than
the year 2000. This in turn could result in major system failures
or miscalculations and is generally referred to as the Year 2000
issue.
We
currently use the information technology systems and many
non-information technology systems of Safeguard Scientifics, Inc.,
one of our principal shareholders. Safeguard has completed its
assessment of its computer information systems. Safeguard has
replaced all computer systems and software which were
determined to be Year 2000 non-compliant. Safeguard is in the process
of surveying its vendors of non-information systems including
telecommunications and security systems, and expects to complete
remediation, if necessary, during 1999. If Safeguard determines
that its non-information systems are non-compliant and are at risk
to not be remedied in time, it intends to develop a contingency
plan. We will not incur any material expenses in connection with
Safeguard’s Year 2000 efforts. We plan to survey our vendors
of the non-information technology systems that we use independently
of Safeguard and we expect to complete remediation, if necessary,
during 1999. If we determine that these systems are non-compliant
and are at risk to not be remedied in time, we will develop a
contingency plan.
The
Year 2000 readiness of VerticalNet is described below. Our partner
companies are in varying stages of assessing, remediating and
testing their internal systems and assessing Year 2000 readiness of
their vendors, business partners, and customers. Our partner
companies are also in varying stages of developing contingency
plans to operate in the event of a Year 2000 problem. The total
cost and time which will be incurred by our partner companies on
the Year 2000 readiness effort has not been determined. There can
be no assurance that all necessary work will be completed in time,
or that such costs will not materially adversely impact one or more
of such partner companies. In addition, required spending on the
Year 2000 effort will cause customers of most of our partner
companies to reallocate at least part of their information systems
budgets. Although some of our partner companies have offerings
which may be useful in such efforts, such reallocations could
materially adversely affect the results of operations of our
partner companies.
VerticalNet may realize exposure and risk if the systems on which
it is dependent to conduct its operations are not Year 2000
compliant. VerticalNet’s potential areas of exposure include
products purchased from third parties, information technology
including computers and software, and non-information technology
including telephone systems and other equipment used internally.
Additionally, all of the internally-developed production and
operation systems for VerticalNet’s Web sites are undergoing a
complete re-engineering. All new programs are being tested and
validated for Year 2000 compliance.
VerticalNet has taken steps to ensure that telephone systems and
other non-information technology are Year 2000 compliant.
VerticalNet has replaced its telephone and voicemail systems with
new systems which are Year 2000 compliant. VerticalNet believes all
non-information technology upon which it is materially dependent is
Year 2000 compliant. Additionally, with respect to information
technology, VerticalNet expects to resolve any Year 2000 compliance
issues primarily through normal upgrades of its software or, when
necessary, through replacement of existing software with Year 2000
compliant applications. The cost of these upgrades or replacements
is included in VerticalNet’s capital expenditure budget and is
not expected to be material to VerticalNet’s financial
position or results of operations. VerticalNet estimates that its
total cost to become Year 2000 compliant will not exceed $250,000,
which it expects will be funded from working capital or borrowings
under its bank line of credit. However, such upgrades and
replacements may not be completed on schedule or within estimated
costs or may not successfully address VerticalNet’s Year 2000
compliance issues.
VerticalNet has completed its Year 2000 compliance assessment plan.
This plan includes assessing both its information and
non-information technology as well as its internally-developed
production and operation systems. Based on this assessment,
VerticalNet believes that all non-information technology, all
internally-developed production and operations systems and 80% of
its technology are Year 2000 compliant. VerticalNet believes that
the remaining 20% of its information technology that is not Year
2000 compliant is not critical to its business. VerticalNet intends
to complete the replacement or remediation of these non-compliant
technologies, as well as the testing of any replacement or
corrected technologies, by the end of the second quarter of 1999.
In
addition, VerticalNet is in the process of seeking verification
from its key distributors, vendors and suppliers that they are Year
2000 compliant or, if they are not presently compliant, to provide
a description of their plans to become so. As of May 7, 1999,
VerticalNet has received certification from 95% of its
distributors,
vendors and suppliers that they are either Year 2000 compliant or are
taking the necessary steps to become Year 2000 compliant. To the
extent that vendors fail to provide certification that they are
Year 2000 compliant by July 1999, VerticalNet will seek to
terminate and replace those relationships.
In the
event that VerticalNet’s production and operational facilities
that support its Web sites are not Year 2000 compliant, small
portions of its Web sites may become unavailable. VerticalNet’
s review of its systems has shown that there is no single
application that would make its Web sites totally unavailable and
VerticalNet believes that it can quickly address any difficulties
that may arise.
In the
event that VerticalNet’s Web-hosting facilities are not Year
2000 compliant, its Web sites would be unavailable and it would not
be able to deliver services to its users.
VerticalNet does not currently have a contingency plan to deal with
the worst-case scenario that might occur if technologies it is
dependent upon are not Year 2000 compliant and fail to operate
effectively after the Year 2000. VerticalNet intends to develop a
plan for this scenario by the end of the second quarter of 1999.
If
VerticalNet’s present efforts to address the Year 2000
compliance issues are not successful, or if distributors, suppliers
and other third parties with which it conducts business do not
successfully address such issues, its business, operating results
and financial position could be materially and adversely affected.
Industry Overview
People
and businesses are increasingly relying on the Internet to access
and share information as well as to purchase and sell products and
services. International Data Corporation estimates that at the end
of 1998 more than 142 million people were using the Internet to
communicate, participate in discussion forums and obtain
information about goods and services. IDC projects that this user
base will grow to 502 million people by the end of 2003. A rapidly
growing number of businesses use the Internet to market and sell
their products and streamline business operations. According to
Forrester Research, 50% of all United States businesses will be
online by 2002.
The
Internet’s substantial growth creates tremendous market
opportunities for companies that connect buyers and sellers, and
companies that create applications and systems for traditional
businesses wishing to engage in e-commerce. Historically, B2B
e-commerce has occurred through electronic data interchange over
proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open
platform with common communication protocols to build efficient,
cost-effective networks that facilitate e-commerce. As
Internet-based network reliability, speed and security have
improved in recent years and as more businesses have connected to
the Internet, traditional businesses are beginning to use the
Internet to conduct e-commerce and exchange information with
customers, suppliers and distributors. While the
business-to-consumer e-commerce market currently is significant in
size, estimated by IDC to have been $15 billion in goods and
services in 1998, the B2B e-commerce market is larger and is
predicted to grow dramatically. Forrester Research projects that
the B2B e-commerce market, which Forrester Research defines as the
intercompany trade of hard goods over the Internet, will grow from
$43 billion in 1998 to over $1.3 trillion by 2003.
We
believe that the B2B e-commerce market is beginning a period of
rapid development and growth for the following reasons:
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Expanded Access to New and Existing Customers and Suppliers.
Traditional businesses have relied on their sales forces and
purchasing departments to develop and maintain customer and
supplier relationships. This model is constrained by the time and
cost required to exchange current information regarding
requirements, prices and product availability, and the difficulty
of cost-effectively locating new customers and suppliers and
managing existing relationships. Traditional businesses can
leverage the Internet to obtain real-time, accurate information
regarding requirements, prices and products to a global audience,
including suppliers, customers and business partners. This makes
it easier for businesses to attract new customers and suppliers,
improve service and increase revenue.
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Increased Efficiency and Reduced Cost. Traditional businesses
can utilize the Internet to automate their internal operations,
including manufacturing, finance, sales and purchasing functions.
The Internet can also be used to increase information flow and
access throughout an organization. This increases operational
efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement
costs, and improving responsiveness to customers and suppliers.
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Market
Opportunities for Emerging B2B E-Commerce Companies
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We
believe that there are significant opportunities for companies that
can assist traditional businesses in using the Internet to create
more efficient markets and enable e-commerce. We call these
companies B2B
e-commerce companies. We focus on two types of B2B e-commerce
companies: market makers and infrastructure service providers.
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Market Makers.
Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information in a particular industrial sector. Market makers
enable more effective and lower cost commerce for traditional
businesses by providing access through the Internet to a broader
range of buyers and sellers. Market makers typically operate in a
specific industry and tailor their business models to match a
target market’s distinct characteristics. To understand the
different types of markets, we divide market makers into three
categories: distributor, network and community.
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Distributor.
Distributor markets are characterized by comparatively
inefficient distribution channels. To service these markets,
distributor market makers act as principals in transactions,
distributing goods and services between buyers and sellers who
connect with each other over the Internet. Distributor market
makers may charge a fee based on the value of the transactions
facilitated.
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Network.
Network markets are characterized by comparatively efficient
distribution channels. Although network market makers do not act
as principals in transactions, they automate existing business
processes so as to make them more efficient. Network market
makers may generate revenue by charging fees for transactions
conducted on their Web sites, and may charge a fee for access to
their Web-based services.
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Community.
Community market makers bring together buyers and sellers that
are typically businesses and professionals with common interests.
Existing relationships among these businesses and professionals
are unstructured, but community market makers facilitate
interaction and transactions among them by providing an
electronic community. Community market makers may charge a fee
for facilitated transactions and receive advertising revenue.
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Infrastructure Service Providers.
Infrastructure service providers sell software and services to
businesses engaged in e-commerce. Many businesses need assistance
in designing business practices to take advantage of the
Internet, and in building and managing the technological
infrastructure needed to support B2B e-commerce. Infrastructure
service providers help businesses in the following ways:
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Strategic Consulting and Systems Integration.
Consultants assist traditional businesses in developing their
e-commerce strategies. Systems integrators develop and implement
a technological infrastructure that enables e-commerce. Systems
integrators also integrate e-commerce applications with existing
enterprise applications. Strategic consultants and systems
integrators typically charge their clients on a
project-by-project basis.
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Software Providers
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Software providers design and sell software applications, tools
and related services that support e-commerce and integrate
business functions. Software providers may sell or license their
products.
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Outsourced Service Providers.
Outsourced service providers offer software applications,
infrastructure and related services designed to help traditional
businesses reduce cost, improve operational efficiency and
decrease time to market. Outsourced service providers may charge
fees on a per-use or periodic basis.
|
Challenges Facing Emerging B2B E-Commerce Companies
We
believe that emerging B2B e-commerce companies face certain
challenges, including:
|
Ÿ
|
Developing a Successful Business Model.
B2B
e-commerce companies must develop business models that capitalize
on the Internet’s capabilities to provide solutions to
traditional companies in target industries. B2B e-commerce
companies require industry expertise because each industry has
distinct characteristics including existing distribution
channels, levels of concentration and fragmentation among buyers
and sellers, procurement policies, product information and
customer support requirements. B2B e-commerce companies also
require Internet expertise in order to apply its capabilities to
their target industries.
|
|
Ÿ
|
Building Corporate Infrastructure.
Many
B2B e-commerce companies have been recently formed and require
sales and marketing, executive recruiting and human resources,
information technology, and finance and business development
assistance. These companies also require capital as significant
resources may be required to build technological capabilities and
internal operations.
|
|
Ÿ
|
Finding the Best People.
Entrants into the B2B e-commerce market require management with
expertise in the applicable market, an understanding of the
Internet’s capabilities, the ability to manage rapid growth
and the flexibility to adapt to the changing Internet
marketplace. We believe that very few people have these skills,
and those that do are highly sought after. To be successful,
companies must attract and retain highly qualified personnel.
|
We
believe that the most successful B2B e-commerce companies will
rapidly identify market demands and move quickly to satisfy those
demands. B2B e-commerce companies that accomplish this goal may
establish new standards, gain market share, secure critical
partnerships and create a brand name, making competition more
difficult for new entrants. In addition, B2B e-commerce companies
must keep abreast of Internet and industry-specific developments
and adapt to a rapidly changing environment.
Our Solution and Strategy
Our
goal is to become the premier B2B e-commerce company by
establishing an e-commerce presence in major segments of the
economy. We believe that our sole focus on the B2B e-commerce
industry allows us to capitalize rapidly on new opportunities and
to attract and develop leading B2B e-commerce companies. As of June
30, 1999, we owned interests in 35 B2B e-commerce companies which
we refer to as our partner companies.
Our
operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and
resources. With the goal of holding our partner company interests
for the long-term, we use these collective resources to actively
develop the business strategies, operations and management teams of
our partner companies. Our resources include the experience,
industry relationships and specific expertise of our management
team, our partner companies and our Advisory Board.
Our
strategy is to:
|
Ÿ
|
create or identify companies with the potential to become
industry leaders;
|
|
Ÿ
|
acquire significant interests in partner companies and
incorporate them into our collaborative network;
|
|
Ÿ
|
provide strategic guidance and operational support to our partner
companies; and
|
|
Ÿ
|
promote collaboration among our partner companies.
|
In
implementing our strategy, we leverage the collective knowledge and
experience of our partner companies, strategic investors and
Advisory Board members. Our Advisory Board consists of over 15
experienced executives from various backgrounds who provide our
network with strategic guidance, sales, marketing and information
technology expertise and industry contacts. Ideally, we would like
to own 40% or more of our partner companies, with management and
public shareholders owning the remaining interests, but we believe
that we can have significant influence with lower ownership levels.
|
Create or
Identify Companies With the Potential to Become Market Leaders
|
Our
expertise in the B2B e-commerce market allows us to build or
identify companies that are positioned to succeed. We apply a
disciplined analysis that capitalizes on this competitive
advantage. When we evaluate whether to enter a market by building a
company or acquiring an interest in an existing company, we weigh
the following industry and partner company factors:
|
Ÿ
|
Inefficiency.
We
consider whether the industry suffers from inefficiencies that
may be alleviated through e-commerce. We also consider the
relative amount of inefficiency, as more inefficient industries
present greater profit potential.
|
|
Ÿ
|
Competition.
We
evaluate the amount of competition that a potential partner
company faces from e-commerce and traditional businesses.
|
|
Ÿ
|
Market Maker Profit Potential.
When
evaluating market makers, we consider the number and dollar value
of transactions in the industry. In the multi-billion dollar
industries that we target, offering even incremental efficiency
improvements presents significant profit potential.
|
|
Ÿ
|
Centralized Information Sources.
When
evaluating market makers, we consider whether the industry has
product catalogs, trade journals and other centralized sources of
information regarding products, prices, customers and other
factors. The availability of this information makes it easier for
a market maker to facilitate communication and transactions. We
generally avoid industries where this information is not
available.
|
|
Ÿ
|
Infrastructure Service Provider Profit Potential.
When evaluating infrastructure service providers, we examine the
size of the market opportunity, the profit potential in serving
the target market and whether the infrastructure service provider
can provide assistance to our market maker partner companies.
|
|
Ÿ
|
Partner Company Criteria
|
|
Ÿ
|
Industry Leader.
We
partner with a company only if we believe that it has the
products and skills to become a leader in its industry.
|
|
Ÿ
|
Management Quality.
We
assess the overall quality and industry expertise of a potential
partner company’s management.
|
|
Ÿ
|
Significant Ownership.
We
consider whether we will be able to obtain a significant position
in the company and exert influence over the company.
|
|
Ÿ
|
Network Synergy.
We
consider the degree to which a potential partner company may
contribute to our network, and benefit from our network and
operational resources.
|
|
Acquire
Interests in Partner Companies
|
After
we identify an attractive potential partner company, we negotiate
the acquisition of a significant interest in the company. As a
condition to an acquisition, we require representation on the
company’s board of directors to ensure our ability to provide
active guidance to the partner company. We structure acquisitions
to permit the partner company’s management and key personnel
to retain an equity stake in the company. As a result of our
experience, we believe that we have the ability to complete
acquisitions quickly and efficiently.
During
our negotiations with potential partner companies we emphasize the
value of our collaborative network, which we believe gives us a
competitive advantage over other acquirors in successfully
consummating transactions. Our partner companies, strategic
investors and Advisory Board members assist in these discussions
and assist in other stages of the acquisition process, including
the initial evaluation of potential partner companies and due
diligence.
|
Provide
Strategic Guidance and Operational Support to Our Partner
Companies
|
After
we make an acquisition or form a partner company, we take an active
role in its affairs by providing both strategic guidance and
operational support:
|
Ÿ
|
Strategic Guidance.
We
provide strategic guidance to our partner companies regarding
market positioning, business model development and market trends.
In addition, we advise partner company management and directors
on day-to-day management and operational issues. Our exclusive
focus on the B2B e-commerce market and the knowledge base of our
partner companies, strategic investors, management and Advisory
Board give us valuable experience that we share with our partner
company network. Advisory Board members who provide strategic
guidance to our partner companies include Jeff Ballowe, a former
President of Ziff-Davis Inc. and the current Chairman of
Deja.com, Inc., Alex W. Hart, a former Chief Executive Officer of
MasterCard International, Ron Hovsepian, Vice President of
Business Development at IBM Corporation and Yossi Sheffi, Ph.D.,
a co-founder of Syncra Software, Inc. and e-Chemicals, Inc. and
currently a Professor at the Massachusetts Institute of
Technology.
|
|
Ÿ
|
Operational Support.
B2B
e-commerce companies often have difficulty obtaining senior
executive level guidance in the many areas of expertise
successful companies need. We assist our partner companies by
providing access to skilled managers who guide our partner
companies in the following functional areas:
|
|
Ÿ
|
Sales and Marketing.
Several members of our Advisory Board and management team provide
guidance to our partner companies’ sales, marketing, product
positioning and advertising efforts. These individuals include
Michael H. Forster, a former Senior Vice President of Worldwide
Field Operations at Sybase, Inc. and currently one of our Senior
Partners, Christopher H. Greendale, a former Executive Vice
President at Cambridge Technology Partners and currently one of
our Managing Directors, Rowland Hanson, a former Vice President
of Corporate Communications at Microsoft Corporation and
currently founder of C. Rowland Hanson & Associates, Charles
W. Stryker, Ph.D., President, Marketing Information Solutions, at
IntelliQuest, Inc., and Sergio Zyman, a former Vice President and
Chief Marketing Officer of the Coca-Cola Company.
|
|
Ÿ
|
Executive Recruiting and Human Resources.
Members of our management team assist our partner companies in
recruiting key executive talent. These individuals include Rick
Devine, one of our Managing Directors and a former partner at
Heidrick & Struggles, Inc., an executive recruiting firm. In
providing this assistance, we leverage the contacts developed by
our network of partner companies, management and Advisory Board.
We believe that this is one of the most important functions that
we perform on behalf of our partner companies.
B2B e-commerce companies must locate executives with both industry
and Internet expertise. The market for these professionals is
highly competitive since few persons possess the necessary mix of
skills and experience.
|
|
Ÿ
|
Information Technology. Our Chief Technology Officer, Richard
G. Bunker, is dedicated to helping our partner companies with
their information systems strategies and solving problems
relating to their current information technology. Members of our
Board of Directors and Advisory Board who provide guidance in
this area include K.B. Chandrasekhar, Chairman of the Board of
Directors of Exodus Communications, and Peter A. Solvik, the
Chief Information Officer of Cisco Systems, Inc.
|
|
Ÿ
|
Finance. One of our Managing Directors, John N. Nickolas, an
experienced finance executive, is dedicated to providing
financial guidance to our partner companies in areas such as
corporate finance, financial reporting, accounting and treasury
operations. In providing these services, Mr. Nickolas leverages
the skills and experience of our internal finance and accounting
group, our partner company network and outside consultants.
|
|
Ÿ
|
Business Development. B2B e-commerce companies may be
involved in evaluating, structuring and negotiating joint
ventures, strategic alliances, joint marketing agreements,
acquisitions or other transactions. We provide assistance to our
partner companies in all these areas. Our management team,
Advisory Board, strategic investors and partner companies all
assist in this function.
|
|
Promote
Collaboration Among Our Partner Companies
|
One of
the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in
shared knowledge and business contacts among our partner companies
and the formation of numerous strategic alliances. We promote
collaboration formally by hosting regularly scheduled seminars
relating to partner company operational and business issues. At
these seminars, the executives of partner companies share their
experiences with each other, our management team and the Advisory
Board. For example, at a recent seminar, thirteen chief executive
officers of our market maker and infrastructure service provider
partner companies gathered to discuss e-commerce strategies and
business models. On an informal basis, we promote collaboration by
making introductions and recommending partner companies to each
other.
Recent
examples of collaboration among our partner companies include:
|
Ÿ
|
VerticalNet and e-Chemicals are collaborating to provide customer
leads for e-Chemicals. This relationship enables VerticalNet to
provide a greater breadth of services to its customers in the
chemicals business and provides more buyers for the products
distributed by e-Chemicals.
|
|
Ÿ
|
Deja.com, which provides a Web-based community for potential
purchasers to access user comments on a variety of products and
services, has formed a strategic alliance with VerticalNet to
provide VerticalNet’s Web sites with discussion content. In
addition, Deja.com and ComputerJobs.com have created a discussion
forum that accesses ComputerJobs.com’s database of
technology employment opportunities, increasing ComputerJobs.com
’s exposure to Deja.com’s broad user base.
|
The
collaboration of our partner companies is the result of our role as
the hub of our network. Through the network we identify prospective
alliances, make introductions, assist in strategic planning and
monitor the ongoing relationships among our partner companies. We
encourage and regulate the information flow among our partner
companies. We also control the information flow by determining the
composition of the
network. If we believe that a partner company is not contributing to
our network or has lost its strategic importance, we may sell our
interest in that partner company.
Overview of Current Partner Companies
We
focus our efforts on building and operating companies in two areas
of the B2B e-commerce
market—market makers and infrastructure service providers.
Market
makers operate in particular industries, such as chemicals, food or
auto parts. Each industry comprises a distinct market with its own
characteristics. Market makers must tailor their business models to
match their markets. To understand the different types of markets
and help our market maker partner companies position themselves, we
place market makers into one of three categories—distributor,
network or community.
|
Ÿ
|
Distributor.
Distributor markets are characterized by comparatively
inefficient distribution channels. To service these markets, our
distributor partner companies act as principals in transactions,
distributing goods and services between buyers and sellers who
connect with each other over the Internet. Our partner companies
in this category generate revenue by charging fees for
transactions conducted on their Web sites. An example of one of
our distributor partner companies is e-Chemicals. e-Chemicals
believes that traditional distribution channels for chemicals
burden customers with excessive transaction costs, high
administrative costs and inefficient logistics. To solve these
problems, e-Chemicals has developed a Web site through which it
will sell a wide range of industrial chemicals to business
customers. e-Chemicals provides products based on streamlined
Web-based ordering processes, outsourced logistics systems and
online support.
|
|
Ÿ
|
Network.
Network markets are characterized by comparatively efficient
distribution channels. Our network partner companies automate
existing business processes so as to make them more efficient.
Our partner companies in this category may charge a fee based on
the value of the transactions facilitated and an ongoing fee for
access to their Web sites. An example of one of our network
partner companies is Internet Commerce Systems, Inc. Internet
Commerce Systems is in the process of establishing an
Internet-based product introduction and promotion service for the
food industry. Internet Commerce Systems’ FoodOne system
seeks to replace the traditional practice of weekly distribution
of physical product catalogs and follow-up calls by
telemarketers, food brokers or field salespeople. Internet
Commerce Systems believes that it will increase retail store
sales coverage and provide market feedback to grocery
manufacturers while decreasing order entry, sales and marketing
costs.
|
|
Ÿ
|
Community.
Community market makers bring together buyers and sellers that
are typically businesses and professionals with common interests.
Existing relationships among these businesses and professionals
are unstructured, but our partner companies stimulate interaction
and facilitate transactions among them by providing an electronic
community. Our partner companies may charge a fee for each
facilitated transaction and receive advertising revenue. One
example of our community partner companies is VerticalNet. As of
June 30, 1999, VerticalNet owned and operated 43
industry-specific Web sites designed to act as online B2B
communities. These vertical trade communities act as
comprehensive sources of information, interaction and
e-commerce.
|
Table of Market Makers.
The
partner companies listed below are integral to our strategy of
owning numerous interests in distributor, network and community
market makers. We believe that establishing an
e-commerce presence in major industrial segments of the economy will
enable us to become the premier B2B e-commerce company. The table
shows certain information regarding our market maker partner
companies by category as of June 30, 1999. Our ownership positions
have been calculated based on the issued and outstanding common
stock of each partner company, assuming the issuance of common
stock on the conversion or exercise of preferred stock and
convertible notes, but excluding the effect of options and warrants.
Category
and Name
|
|
Industry
|
|
Description
of Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
| Distributor:
|
|
|
|
|
|
|
|
|
|
CommerX, Inc.
www.commerx.com
|
|
Plastics
|
|
Provides
Internet-based
procurement and sales of raw
materials, tools and maintenance
and repair products for the plastics
industry.
|
|
42
|
%
|
|
1998
|
|
|
|
e-Chemicals, Inc.
www.e-chemicals.com
|
|
Chemicals
|
|
Provides
Internet-based sales and
distribution of industrial chemicals.
|
|
36
|
%
|
|
1998
|
|
|
|
iParts
www.ipartsupply.com
|
|
Electronic Components
|
|
Provides
Internet-based sales and
distribution of electronic
components.
|
|
85
|
%
|
|
1999
|
|
|
|
ONVIA.com, Inc.
www.onvia.com
|
|
Small Business
Services
|
|
Provides small
businesses with a
wide breadth of tailored products
and services over the Internet.
|
|
20
|
%
|
|
1999
|
|
|
|
PaperExchange
www.paperexchange.com
|
|
Paper
|
|
Provides
Internet-based sales and
distribution of all grades of pulp
and paper.
|
|
27
|
%
|
|
1999
|
|
|
|
Universal Access, Inc.
www.universal
accessinc.com
|
|
Telecommunications
|
|
Provides
Internet-based ordering
for provisioning and access and
transportation exchange services
for network service providers
focused on business customers.
|
|
26
|
%
|
|
1999
|
|
|
|
| Network:
|
Arbinet Communications,
Inc.
www.arbinet.com
|
|
Telecommunications
|
|
Provides an
Internet-based trading
floor and clearinghouse for
telecommunications carriers to
purchase bandwidth.
|
|
16
|
%
|
|
1999
|
|
|
|
BidCom, Inc.
www.bidcom.com
|
|
Construction
|
|
Provides
Internet-based project
planning and management services
for the construction industry.
|
|
25
|
%
|
|
1999
|
|
|
|
Collabria Inc.
www.collabria.com
|
|
Printing
|
|
Provides
Internet-based
procurement and production
services for the commercial
printing industry.
|
|
10
|
%
|
|
1999
|
Category
and Name
|
|
Industry
|
|
Description
of Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
|
|
|
ComputerJobs.com, Inc.
www.computerjobs.com
|
|
Technology
Employment
|
|
Provides
Internet-based job
screening and resume posting for
information technology
professionals, corporations and
staffing firms.
|
|
33
|
%
|
|
1998
|
|
|
|
Internet Commerce
Systems, Inc.
www.icsfoodone.com
|
|
Food
|
|
Provides
Internet-based product
introduction and promotion services
to wholesale and retail food
distributors.
|
|
43
|
%
|
|
1999
|
|
|
|
PointMent, Inc.
www.pointment.com
|
|
Healthcare
|
|
Provides
Internet-based solutions
for employee health benefits
management across the health care
industry.
|
|
50
|
%
|
|
1999
|
|
|
|
RapidAutoNet
Corporation
www.rapidautonet.com
|
|
Auto Parts
|
|
Provides
Internet-based auto parts
procurement for professional
automotive and truck repair shops.
|
|
15
|
%
|
|
1998
|
|
|
|
Star-Cite!
www.starcite.com
|
|
Travel
|
|
Provide
Internet-based services for
planning and managing corporate
meetings for event planners.
|
|
43
|
%
|
|
1999
|
|
| Community:
|
|
|
|
|
|
|
|
|
|
Deja.com, Inc.
www.deja.com
|
|
Media
|
|
Provides a
Web-based community
for potential purchasers to access
user comments on a variety of
products and services.
|
|
29
|
%
|
|
1997
|
|
|
|
eMarketWorld, Inc.
www.emarketworld.com
|
|
Special Event Services
|
|
Provides industry
specific Web-
based conferences and expositions
that help businesses understand the
Internet.
|
|
42
|
%
|
|
1999
|
|
|
|
PlanSponsor Exchange
www.plansponsor
exchange.com
|
|
Asset Management
|
|
Provides a
Web-based community
for asset managers to reach fund
sponsors.
|
|
24
|
%
|
|
1999
|
|
|
|
VerticalNet, Inc.
www.verticalnet.com
|
|
Industrial Services
|
|
Provides
industry-specific Web-
based trade communities for
businesses and professionals.
|
|
36
|
%
|
|
1996
|
Set
forth below is a more detailed summary of some of our market maker
partner companies.
ComputerJobs.com, Inc.
ComputerJobs.com is a network market maker that provides
Internet-based job advertising and resume posting services for
information technology professionals, corporations and staffing
firms. Identifying and attracting information
technology professionals is an expensive and critical success
factor for many businesses. ComputerJobs.com is focused on
improving the online recruitment process for both information
technology job seekers and employers, including staffing firms and
corporations. Job seekers visit
ComputerJobs.com’s regional-specific Web sites to submit their
resume and pursue job opportunities free of charge.
ComputerJobs.com allows jobs seekers to scan job opportunities by
information technology-specific skill requirements, geographic
preferences and other job criteria. Job seekers also have access to
extensive career resources and industry news on the site. By
attracting a significant number of job seekers and their resumes,
ComputerJobs.com offers staffing firms and corporations seeking
information technology professionals the ability to post job
openings as well as search and receive daily resumes of information
technology candidates for a monthly fee. ComputerJobs.com
pre-screens job ads and resumes prior to placing them into its
database and before dissemination to its Web sites and clients.
ComputerJobs.com has Web sites for the information technology
markets in Atlanta, the Carolinas, Chicago, Florida, Texas, New
York and Washington, D.C. Based on more than 2,620 responses from
recruiters, ComputerJobs.com was ranked number one by Internet
Business Network as the top site in customer satisfaction in a 1998
study of the top 100 job sites. ComputerJobs.com plans to expand
into additional information technology markets by year end. We
identified ComputerJobs.com through a director of one of our
partner companies. We are assisting ComputerJobs.com with overall
strategy, operational management, recruiting, finance and
marketing. Douglas A. Alexander, one of our Managing Directors, is
a member of ComputerJobs.com’s Board of Directors.
ComputerJobs.com has formed a strategic alliance with Deja.com that
has enabled Deja.com to create a channel for accessing
ComputerJobs.com’s database of technology employment
opportunities. For 1998, ComputerJobs.com had revenue of $4.4
million and for the quarter ended March 31, 1999, revenue of $1.7
million.
Deja.com, Inc. Deja.com, formerly Deja News, is a community
market maker that is the Web’s leading source of shared
knowledge in the form of user-generated ratings and discussions.
With over 160 million page views per month, it is the leading
purveyor of online discussion, offering access to more than 43,000
discussion forums. These forums are populated by knowledgeable
participants who are interested in sharing their knowledge and
experience on a wide variety of subjects.
Deja.com recently extended its franchise in shared knowledge with
the consumer-driven feature Deja Ratings, a tool that extends the
site’s ability to support daily decision-making. Deja Ratings
captures consumer opinions on a wide range of products and services
through a scaled voting system that includes product comparisons.
The analytical tools that support decision-making are supplemented
by contextual links to e-commerce retailers and vendors.
Deja.com derives revenue from sponsors and e-commerce partners, and
provides the marketing community with the compelling proposition of
reaching a highly targeted, self-segmenting audience consisting of
highly active Internet consumers intent on investigating considered
purchases. Deja.com also delivers to those marketers a unique means
of programming to the specific interests of their target consumers,
all in the context of a commerce-friendly platform.
We have
been very active in recruiting Deja.com’s management team and
developing its business strategy. In addition, Kenneth A. Fox and
Douglas A. Alexander, two of our Managing Directors, are members of
Deja.com’s Board of Directors. Deja.com is in discussions with
several partner companies to provide services to its user
community. For 1998, Deja.com had revenue of $5.1 million, and for
the quarter ended March 31, 1999, revenue of $1.7 million.
Universal Access, Inc. Universal Access is a distributor
market maker that provides Internet-based ordering for provisioning
and access and transportation exchange services for network service
providers focused on business customers. For any network service
provider, such as Internet service providers or other
telecommunications carriers, to establish a dedicated connection
for its corporate customers, it must provide provisioning and
access. Provisioning is the initial establishment of a dedicated
connection, and access is the availability of a dedicated
connection after provisioning. Prior to significant deregulation in
the telecommunications industry, network service providers
typically selected one telecommunications carrier to service their
corporate customers. After deregulation, network service providers
faced increasing challenges in
dealing with a growing number of local and long-distance carriers to
establish dedicated connections. These challenges faced by network
service providers have been exacerbated by rapid growth in demand
from their business customers for dedicated Internet access.
Universal Access enables network service providers to deal with a
single provider, rather than multiple local and long distance
telecommunications carriers, for seamless provisioning and access
among multiple carriers. Universal Access’ proprietary
database contains more than 27 telecommunication carriers’
routing availability, pricing and service capabilities which allows
it to determine the most economical and efficient path for
bandwidth connectivity. By providing single party accountability
for all of their provisioning, access, billing and ongoing network
reliability needs, Universal Access enables network service
providers to offer their business customers faster provisioning and
superior customer service.
Network
service providers typically establish high-cost facilities on the
premises of a telecommunications carrier, which makes changing to
another carrier prohibitively expensive. As network service
providers expand nationwide, Universal Access’ transport
exchange services will allow these network service providers to
locate their equipment with Universal Access, which provides them
the flexibility to change telecommunications carriers. We are
actively providing Universal Access with overall strategy,
marketing and finance guidance. Robert Pollan, one of our Managing
Directors, is a member of Universal Access’ Board of
Directors. For 1998, Universal Access had revenue of $1.6 million,
and for the quarter ended March 31, 1999, revenue of $1.5 million.
VerticalNet, Inc.
VerticalNet is a community market maker that provides
industry-specific Web-based trade communities for businesses and
professionals. VerticalNet owns and operates 43 industry-specific
Web sites as of June 30, 1999 designed as online B2B communities,
known as vertical trade communities. These vertical trade
communities act as comprehensive sources of information,
interaction and e-commerce. VerticalNet’s objective is to
continue to be a leading owner and operator of industry-specific
vertical trade communities on the Internet.
VerticalNet’s 43 vertical trade communities are:
| Process Group
Ÿ
Adhesives and Sealants Online
(adhesivesandsealants.com)
Manufacturing and Production of Adhesive,
Sealant, and Grout Materials
Ÿ
Chemical Online
(chemicalonline.com)
Manufacturing and Processing Chemicals
Ÿ
Hydrocarbon Online
(hydrocarbononline.com)
Hydrocarbons and Petrochemicals Processing
Ÿ
Oil
and Gas Online
(oilandgasonline.com)
Production and Exploration of Oil and Gas
Ÿ
Paint and Coatings Online
(paintandcoatingsonline.com)
Manufacturing and Production of Paint Coatings,
Inks and Thick Film Printable Conductors
Ÿ
Pharmaceutical Online
(pharmaceuticalonline.com)
Development, Design and Manufacturing of
Pharmaceuticals
Ÿ
Semiconductor Online (
Semiconductoronline.com
)
Manufacturing of Semiconductors,
Photovoltaics and Magnetic Data Storage
Communication Group
Ÿ
Fiber Optics Online
(fiberopticsonline.com)
Design and Production of Fiber Optic
Networks and Network Components
Ÿ
Photonics Online (
photonicsonline.com
)
Design and Manufacturing of Lasers, Optics,
Optoelectronics, Fiber Optics and Imaging
Devices
Ÿ
Premises Networks.com
(premisesnetworks.com)
Facilities and Network Infrastructure
Design and Administration
Ÿ
RF
Globalnet
(rfglobalnet.com)
Information, Bookstore and Educational
Center for Radio Frequency, Wireless and
Microwave Engineers
Ÿ
Wireless Design Online
(wirelessdesignonline.com)
Design and Development of Wireless
Communications Systems and Equipment
Ÿ
Digital Broadcasting.com
(digitalbroadcasting.com)
Digital Television Marketplace for Broadcast,
Cable, Satellite and Telco Employees
|
|
Environmental Group
Ÿ
Pollution Online
(pollutiononline.com)
Industrial Pollution Control
Ÿ
Power Online (
poweronline.com
)
Power Generation, Electric Utility
Deregulation, Emissions Control, Alternative
Fuels, Power Industry
Ÿ
Public Works Online
(publicworks.com)
Public Works and Municipal Maintenance
Ÿ
Solid Waste Online
(solidwaste.com)
Solid Waste Disposal
Ÿ
Water Online
(wateronline.com)
Municipal Water Supply and Municipal
Wastewater Treatment
Ÿ
ElectricNet.com
(electricnet.com)
Online Buyer’s Guide and Other Information
for Power Transmission and Distribution Industry
Ÿ
Pulp and Paper Online (
pulpandpaperonline.com)
Manufacturing and Production of Pulp and Paper
Products
Ÿ
Safety Online
(safetyonline.com)
Industrial and Environmental Safety
Food & Packaging Group
Ÿ
Bakery Online
(bakeryonline.com)
Production and Procurement of Baking
Ingredients
Ÿ
Beverage Online
(beverageonline.com)
Production and Procurement of Equipment
used in the Production of Beverages
Ÿ
Dairy Network.com
(dairynetwork.com)
Production, Procurement and Distribution
of Dairy Products
Ÿ
Food Ingredients Online
(foodingredientsonline.com)
Manufacturing and Processing of Food
Ingredients
Ÿ
Food Online
(foodonline.com)
Manufacturing and Processing of Food
Products
Ÿ
Meat and Poultry Online
(meatandpoultryonline.com)
Production, Procurement and Distribution of
Meat and Poultry Products
Ÿ
Packaging Network.com
(packagingnetwork.com)
Production, Purchase, Design and Marketing
of Packaging for All Consumer and
Industrial Products
|
|
|
Foodservice/Hospitality Group
Ÿ
Foodservice Central.com (foodservicecentral.com)
Commercial and Institutional Foodservice
Healthcare Group
Ÿ
Hospital Network.com (hospitalnetwork.com)
Information for Hospital Purchasing
Decision-Makers
Ÿ
Nurses.com (nurses.com)
Clinical, Professional and Other
Information for Nurses
Ÿ
E-dental.com (e-dental.com)
Clinical, Professional, Educational and other
information for Dentists and Dentist Professionals
Advanced Technologies Group
Ÿ
Aerospace Online (aerospaceonline.com)
Design and Manufacturing of Products and
Services Relating to the Aerospace
Industry
Ÿ
Computer OEM Online (computeroemonline.com)
Design and Manufacturing of Computers
and Computerized Electronics Devices
Ÿ
Embedded Technology Online (embeddedtechnology.com)
Design and Manufacturing of Embedded
Systems, Computers, Software and Devices
Ÿ
Medical Design Online (medicaldesignonline.com)
Design, Manufacturing and Procurement of
Medical Devices
Ÿ
Plant Automation.com (plantautomation.com)
Hardware and Software Used in Industrial
Manufacturing Including Robotics and
Automated Control Systems
Ÿ
Test and Measurement (testandmeasurement.com)
Design, Manufacturing and Procurement of
Test, Measurement, Data Acquisition, Data
Analysis and Instrumentation Equipment
|
|
Sciences Group
Ÿ
Bioresearch Online (bioresearchonline.com)
Covers all Aspects of Experimental and
Applied Biology Including Biotechnology,
Genomics and Genetics
Ÿ
Drug Discovery Online (drugdiscoveryonline.com)
Early-Stage Pharmaceutical Discovery and
Development
Ÿ
Laboratory Network.com (laboratorynetwork.com)
Covers all Aspects of the Research Industry
Focusing on Analytical Instrumentation
and Materials Science
Services Group
Ÿ
Property and Casualty.com (propertyandcasualty.com)
Property and Casualty Insurance
Manufacturing and Metals Group
Ÿ
TechSpex (techspex.com)
Machine Tools and Related Peripherals
|
|
Each
VerticalNet community is individually branded, focuses on a single
business sector and caters to individuals with similar professional
interests. VerticalNet designs each of its vertical trade
communities to attract professionals responsible for selecting and
purchasing highly specialized industry related products and
services. VerticalNet’s communities combine product
information, requests for proposals, discussion forums, electronic
commerce opportunities, industry news, directories, classifieds,
job listings, and online professional education courses.
VerticalNet satisfies a developing market not currently being
adequately served through traditional channels, including trade
publishers, trade shows and trade associations. VerticalNet
believes that this market is not currently being served by Internet
companies, which tend to focus on the consumer and not on the B2B
market.
VerticalNet’s vertical trade communities take advantage of the
Internet’s ability to allow users around the world to contact
each other online, allowing buyers to research, source, contact and
purchase from suppliers. Although other companies offer B2B
services on the Internet, VerticalNet believes that it is currently
the only company operating a portfolio of specialized B2B
communities. A portfolio strategy permits VerticalNet to:
|
Ÿ
|
offer consistent content and services in its current vertical
trade communities and replicate these offerings as it launches
new communities;
|
|
Ÿ
|
realize cost savings and operating efficiencies in its
technology, marketing, infrastructure and management resources;
and
|
|
Ÿ
|
increase its overall audience, making its individual sites more
appealing to a broad array of advertisers and suppliers who sell
their goods and services over the Internet.
|
VerticalNet currently generates the majority of its revenue from
Internet advertising, including the development of “
storefronts.” A storefront is a Web page posted on one of its
vertical trade communities that provides information on an
advertiser’s products, links a visitor to the advertiser’
s Web site and generates sales inquiries from interested visitors.
VerticalNet believes that industry professionals using its vertical
trade communities possess the demographic characteristics that are
attractive to its advertisers.
We were
first introduced to VerticalNet through one of our major
shareholders. We helped to recruit several of VerticalNet’s
executive officers, and worked with them to develop VerticalNet
’s business strategy. Douglas A. Alexander, one of our
Managing Directors, currently serves as VerticalNet’s Chairman
of the Board of Directors and Walter W. Buckley, our President and
Chief Executive Officer, is a member of VerticalNet’s Board of
Directors. This year VerticalNet became a public company, trading
on the Nasdaq National Market under the symbol “VERT.”
VerticalNet has formed a strategic alliance with e-Chemicals to
provide customer leads for e-Chemicals and to expand VerticalNet
’s services to its chemical business customers. For 1998,
VerticalNet had revenue of $3.1 million, and for the quarter ended
March 31, 1999, revenue of $1.9 million.
|
Infrastructure Service Provider Categories
|
Infrastructure service providers assist traditional businesses in
the following ways:
|
Ÿ
|
Strategic Consulting and Systems Integration.
Strategic consultants assist traditional businesses in developing
their e-commerce strategies. Systems integrators develop and
implement technological infrastructure that enables e-commerce.
Systems integrators also integrate e-commerce applications with
existing enterprise applications. Strategic consultants and
systems integrators typically bill their clients on a
project-by-project basis.
|
|
Ÿ
|
Software Providers.
Software providers design and sell software applications that
support e-commerce and integrate business functions. Software
providers may sell or license their products.
|
|
Ÿ
|
Outsourced Service Providers.
Outsourced service providers offer software applications,
infrastructure and related services designed to help traditional
businesses reduce cost, improve operational efficiency and
decrease time to market. Outsourced service providers may charge
fees on a per-use or periodic basis.
|
|
Infrastructure Service Provider Profiles
|
Table of Infrastructure Service Providers.
The
partner companies listed below are important to our strategy
because the growth of our partner companies increases the value of
our collaborative network. We believe that infrastructure service
providers will facilitate innovation and growth of our market maker
companies by providing them with critical services. The table shows
certain information regarding our infrastructure service provider
partner companies by category as of June 30, 1999. Our ownership
positions have been calculated based on the issued and outstanding
common stock of each partner company, assuming
the issuance of common stock on the conversion or exercise of
preferred stock and convertible notes, but excluding the effect of
options and warrants.
Category and
Name
|
|
Description of
Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
Strategic
Consulting and
Systems Integration:
|
Benchmarking Partners, Inc.
www.benchmarking.com
|
|
Provides e-commerce best
practices research and
consulting services to optimize supply and distribution
network management.
|
|
12
|
%
|
|
1996
|
|
|
|
Context Integration, Inc.
www.context.com
|
|
Provides systems integration
services focused on
customer support, data access and e-commerce.
|
|
18
|
%
|
|
1997
|
|
|
|
US Interactive, Inc.
www.usinteractive.com
|
|
Provides a range of consulting
and technical services
relating to Internet marketing solutions.
|
|
3
|
%
|
|
1996
|
|
|
|
| Software
Providers:
|
Blackboard, Inc.
www.blackboard.com
|
|
Provides universities and
corporations with applications
that enable them to host classes and training on the
Internet.
|
|
30
|
%
|
|
1998
|
|
|
|
ClearCommerce Corp.
www.clearcommerce.com
|
|
Provides comprehensive e-commerce
solutions including
transaction and payment processing, credit card
authorization, fraud tracking and reporting functions.
|
|
15
|
%
|
|
1997
|
|
|
|
Entegrity Solutions
www.entegrity.com
|
|
Provides encryption software to
secure transactions and
communications between business applications.
|
|
12
|
%
|
|
1996
|
|
|
|
ServiceSoft Technologies, Inc.
www.servicesoft.com
|
|
Provides tools and services used
by its customers to
create Internet customer service applications consisting
of self-service, e-mail response and live interaction
products.
|
|
6
|
%
|
|
1998
|
|
|
|
Syncra Software, Inc.
www.syncra.com
|
|
Provides software that improves
supply chain
efficiency through collaboration of trading partners
over the Internet.
|
|
35
|
%
|
|
1998
|
|
|
|
Tradex Technologies, Inc.
www.tradex.com
|
|
Provides e-commerce application
software that enables
enterprises to create on-line marketplaces and
exchanges.
|
|
13
|
%
|
|
1999
|
|
|
|
| Outsourced Service Providers:
|
Breakaway Solutions, Inc.
www.breakaway.com
|
|
Provides application service
hosting, e-commerce
consulting and systems integration services to growing
companies.
|
|
53
|
%
|
|
1999
|
|
|
|
CommerceQuest, Inc.
www.commercequest.com
|
|
Provides a messaging service for
data sharing across
separate enterprises. Also provides software, systems
integration services and managed network services for
application integration within enterprises or with
external trading partners and customers.
|
|
29
|
%
|
|
1998
|
|
|
Category and
Name
|
|
Description of
Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
LinkShare Corporation
www.linkshare.com
|
|
Establishes affiliate
relationships for online merchants
with other Web sites to facilitate e-commerce.
|
|
34
|
%
|
|
1998
|
|
|
|
PrivaSeek, Inc.
www.privaseek.com
|
|
Provides consumers with control
of their Web-based
personal profiles, allowing merchants to offer
consumers incentives for selective disclosure.
|
|
16
|
%
|
|
1998
|
|
|
|
SageMaker, Inc.
www.sagemaker.com
|
|
Provides services that combine an
enterprise’s
external and internal information assets into a single,
Web-based knowledge management platform.
|
|
27
|
%
|
|
1998
|
|
|
|
Sky Alland Marketing, Inc.
www.skyalland.com
|
|
Provides services to improve
customer
communications and relationships.
|
|
31
|
%
|
|
1996
|
|
|
|
United Messaging, Inc.
www.unitedmessaging.com
|
|
Provides high performance
electronic messaging
services for organizations with mission critical e-mail
networks.
|
|
41
|
%
|
|
1999
|
|
|
|
Vivant! Corporation Management
www.vivantcorp.com
|
|
Provides process automation and
decision support
services that enable companies to strategically manage
contractors, consultants and temporary employees.
|
|
23
|
%
|
|
1998
|
Set
forth below is a more detailed summary of some of our
infrastructure service provider partner companies.
Benchmarking Partners, Inc.
Benchmarking Partners is a strategic consulting and systems
integration infrastructure service company that provides e-commerce
best practices research and consulting services to optimize supply
and distribution network management. The use of best business
practices enabled by information technology established by
Benchmarking Partners allows companies to efficiently manage their
supply and distribution networks. Benchmarking Partners improves
supply and distribution networks in the following ways:
|
Ÿ
|
Integration.
Coordinating diverse business functions such as manufacturing,
logistics, sales and marketing to maximize efficiency.
|
|
Ÿ
|
Optimization.
Developing strategies that increase the efficiency of supply
networks.
|
|
Ÿ
|
Collaboration.
Creating collaborative solutions that incorporate key trading
partners.
|
Benchmarking Partners’ clients include: companies undergoing
business process and information technology transformation;
technology solution providers hoping to gain a better understanding
of the market requirements for their products; and management
consultants and systems integrators seeking to refine their ability
to effectively support their clients.
We were
introduced to Benchmarking Partners through a member of our Board
of Directors. We have helped Benchmarking Partners recruit key
managers and are currently helping it build and position its best
practice e-commerce Web site. Benchmarking Partners assisted us in
assessing enterprise software markets and provides information
technology advice to other partner companies. Benchmarking Partners
is also working with Sky Alland Marketing and US Interactive to
develop Internet business application opportunities. For 1998,
Benchmarking Partners had revenue of $15.0 million, and for the
quarter ended March 31, 1999, revenue of $5.0 million.
Breakaway Solutions, Inc.
Breakaway Solutions is an outsourced service provider
infrastructure service company that is an application service
provider and e-commerce consulting and systems integration services
provider to middle-market companies. Through its application
service hosting solutions, Breakaway Solutions implements, operates
and supports software applications that can be accessed and used
over the Internet. Breakaway Solutions also offers custom
developed, e-commerce related B2B interactive marketing and other
solutions. By focusing on Internet-based solutions, Breakaway
Solutions has created a library of components that can be
redeployed by multiple clients. This allows Breakaway Solutions to
provide rapid, cost-effective service to clients.
We
first met Breakaway Solutions through one of our shareholders and
Advisory Board members. We helped Breakaway Solutions to complete
its management team and merge with one of our other partner
companies. In addition, Breakaway Solutions is a strategic partner
for installing ClearCommerce’s Web-based transaction and order
processing solutions. Breakaway Solutions is also in discussions to
provide its services to ONVIA.com. Including the effect of options
and warrants, our ownership percentage in Breakaway Solutions is
32%. For 1998, Breakaway Solutions had revenue of $10.0 million,
and for the quarter ended March 31, 1999, revenue of $3.1 million.
CommerceQuest, Inc.
CommerceQuest is an outsourced service provider infrastructure
service company that delivers systems integration services,
software, and managed networked services to enterprises seeking to
enable mission-critical business processes within their enterprise
or with their external trading partners and customers. The range of
computing environments and software applications utilized across a
typical Fortune 500 enterprise is vast and growing, often involving
multiple legacy and client/server environments, characterized by
heterogeneous computer platforms and various proprietary
information formats. Additionally, the recent growth of the
Internet and the use of intranets has increased the complexity of
data sharing among heterogeneous business applications.
CommerceQuest currently employs 200 professionals dedicated to
providing software and system integration services around IBM
Corporation’s MQ series, a messaging-based middleware software
solution that facilitates data sharing among an enterprise’s
disparate applications, databases and operating systems.
CommerceQuest’s recently launched managed network service
leverages its extensive domain expertise in providing middleware
solutions that facilitate data sharing to provide a highly secure,
assured information delivery system between corporations for use
over any network, including the Internet. This managed network
service provides an open platform that seamlessly bridges legacy
e-commerce services, such as electronic data interchange and
proprietary value-added networks, with today’s best-of-breed
Internet technologies. By offering multi-platform and multi-network
interoperability and extensive customer support, CommerceQuest
provides its customers with low cost, rapidly-implemented messaging
services. We believe that the services and software provided by
CommerceQuest can be used throughout our partner company network,
including our market makers interested in tighter integration with
their suppliers and customers. We have assisted CommerceQuest in
recruiting senior management and repositioning it to offer managed
network services. To support the introduction of managed network
services, we provided the company with strategic planning, sales
and marketing support and introductions to potential business
partners. For 1998, CommerceQuest had revenue of $31.9 million, and
for the quarter ended March 31, 1999 had revenue of $4.7 million.
Government Regulations and Legal Uncertainties
As of
June 30, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet’s
popularity and increasing use, new laws and regulations may be
adopted. These laws and regulations may cover issues such as the
collection and use of data from Web site visitors and related
privacy issues, pricing, content, copyrights, online gambling,
distribution and the quality of goods and services. The enactment
of any additional laws or regulations may impede the growth of the
Internet and B2B e-commerce, which could decrease the revenue of
our partner companies and place additional financial burdens on
them.
Laws
and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress
recently enacted laws regarding online copyright infringement and
the protection of information collected online from children.
Although these laws may not have a direct adverse effect on our
business or those of our partner companies, they add to the legal
and regulatory burden faced by B2B e-commerce companies. Other
specific areas of legislative activity are:
|
Ÿ
|
Taxes.
Congress recently enacted a three-year moratorium, ending on
October 21, 2001, on the application of “discriminatory”
or “special” taxes by the states on Internet access or
on products and services delivered over the Internet. Congress
further declared that there will be no federal taxes on
e-commerce until the end of the moratorium. However, this
moratorium does not prevent states from taxing activities or
goods and services that the states would otherwise have the power
to tax. Furthermore, the moratorium does not apply to certain
state taxes that were in place before the moratorium was enacted.
|
|
Ÿ
|
Online Privacy.
Both
Congress and the Federal Trade Commission are considering
regulating the extent to which companies should be able to use
and disclose information they obtain online from consumers. If
any regulations are enacted, B2B e-commerce companies may find
certain marketing activities restricted. Also, the European Union
has directed its member nations to enact much more stringent
privacy protection laws than are generally found in the United
States, and has threatened to prohibit the export of certain
personal data to United States companies if similar measures are
not adopted. Such a prohibition could limit the growth of foreign
markets for United States B2B e-commerce companies. The
Department of Commerce is negotiating with the Federal Trade
Commission to provide exemptions from the European Union
regulations, but the outcome of these negotiations is uncertain.
|
|
Ÿ
|
Regulation of Communications Facilities.
To
some extent, the rapid growth of the Internet in the United
States has been due to the relative lack of government
intervention in the marketplace for Internet access. Lack of
intervention may not continue in the future. For example, 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 in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much
the same manner as telephone services, which could slow the
deployment of broadband Internet access services. Because of
these proceedings or others, new laws or regulations could be
enacted which could burden the companies that provide the
infrastructure on which the Internet is based, thereby slowing
the rapid expansion of the medium and its availability to new
users.
|
|
Ÿ
|
Other Regulations.
The
growth of the Internet and e-commerce may lead to the enactment
of more stringent consumer protection laws. The Federal Trade
Commission may use its existing jurisdiction to police e-commerce
activities, and it is possible that the Federal Trade Commission
will seek authority from Congress to regulate certain online
activities. The Federal Trade Commission has already issued for
public comment proposed regulations governing the collection of
information online from children.
|
Generally applicable laws may affect us and our partner companies.
The exact applicability of many of these laws to B2B e-commerce,
however, is uncertain.
Proprietary Rights
Our
partner companies have copyrights with respect to software
applications, Web sites and other materials. These materials may
constitute an important part of our partner companies’ assets
and competitive strengths. Federal law generally protects such
copyrights for 90 years from the creation of the underlying
material.
Competition
|
Competition
From our Shareholders and Within our Network
|
We may
compete with our shareholders and partner companies for
Internet-related opportunities. After this offering and the
concurrent offering, Comcast Corporation, Compaq Computer
Corporation, IBM Corporation and Safeguard Scientifics will
beneficially own 9.9%, 4.0%, 3.3% and 14.4% of our common stock,
respectively. If the shareholders of Safeguard Scientifics do not
purchase any of the shares offered in the directed share
subscription program, Safeguard Scientifics will beneficially own
approximately 17.2% of our common stock after this offering and the
concurrent offering. Excluding any shares potentially purchased by
General Electric Capital Corporation in this offering, General
Electric Capital Corporation will own approximately 2.9% of our
common stock after this offering and the concurrent offering. These
shareholders may compete with us to acquire interests in B2B
e-commerce companies. Comcast Corporation, General Electric Capital
Corporation and Safeguard Scientifics currently each have a
designee as a member of our board of directors and IBM Corporation
has a right to designate a board observer, which may give these
companies access to our business plan and knowledge about potential
acquisitions. In addition, we may compete with our partner
companies to acquire interests in B2B e-commerce companies, and our
partner companies may compete with each other for acquisitions or
other B2B e-commerce opportunities. In particular, VerticalNet
seeks to expand, in part through acquisition, its number of B2B
communities. VerticalNet, therefore, may seek to acquire companies
that we would find attractive. While we may partner with
VerticalNet on future acquisitions, we have no current contractual
obligations to do so. We do not have any contracts or other
understandings with our shareholders or partner companies that
would govern the resolution of these potential conflicts. Such
competition, and the complications posed by the designated
directors, may deter companies from partnering with us and may
limit our business opportunities.
|
Competition
Facing our Partner Companies
|
Competition for Internet products and services is intense. As the
market for B2B e-commerce grows, we expect that competition will
intensify. Barriers to entry are minimal, and competitors can offer
products and services at a relatively low cost. Our partner
companies compete for a share of a customer’s:
|
Ÿ
|
purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
|
|
Ÿ
|
dollars spent on consulting services with many established
information systems and management consulting firms; and
|
|
Ÿ
|
advertising budget with online services and traditional off-line
media, such as print and trade associations.
|
In addition, some of our partner companies compete
to attract and retain a critical mass of buyers and sellers.
Several companies offer competitive solutions that compete with one
or more of our partner companies. We expect that additional
companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies
’ competitors may develop Internet products or services that
are superior to, or have greater market acceptance than, the
solutions offered by our partner companies. If our partner
companies are unable to compete successfully against their
competitors, our partner companies may fail.
Many
of our partner companies’ competitors have greater brand
recognition and greater financial, marketing and other resources
than our partner companies. This may place our partner companies at
a disadvantage in responding to their competitors’ pricing
strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
|
Competition
for Partner Companies
|
We face
competition from other capital providers including publicly-traded
Internet companies, venture capital companies and large
corporations. Many of these competitors have greater financial
resources and brand name recognition than we do. These competitors
may limit our opportunity to acquire interests in new partner
companies. If we cannot acquire interests in attractive companies,
our strategy to build a collaborative network of partner companies
may not succeed.
Facilities
Our
corporate headquarters are located at 435 Devon Park Drive,
Building 800 in an office facility located in Wayne, Pennsylvania,
where we lease approximately 3,650 square feet. We plan to move
into a larger corporate headquarters in Wayne, Pennsylvania during
the second half of 1999. We also maintain offices in Boston,
Massachusetts and San Francisco, California and intend to open an
office in Seattle, Washington.
Employees
As of
June 30, 1999, excluding our partner companies, we had 35
employees, all of whom work with us on a full-time basis. We
consider our relationships with our employees to be good. None of
our employees are covered by collective bargaining agreements.
Legal Matters
We are
not a party to any material legal proceedings.
Executive Officers and Directors
Our
executive officers, key employees and directors, their ages and
their positions are as follows:
Name
|
|
Age
|
|
Position
|
| Walter W.
Buckley, III
|
|
39
|
|
President, Chief
Executive Officer and Director
|
| Douglas A.
Alexander
|
|
38
|
|
Managing Director
|
| Richard G. Bunker
|
|
37
|
|
Managing Director
and Chief Technology Officer
|
| Richard S. Devine
|
|
41
|
|
Managing
Director, Executive Recruiting
|
| Kenneth A. Fox
|
|
28
|
|
Managing Director
and Director
|
| David D. Gathman
|
|
51
|
|
Chief Financial
Officer and Treasurer
|
| Christopher H.
Greendale
|
|
47
|
|
Managing
Director, Operations
|
| Gregory W. Haskell
|
|
42
|
|
Managing
Director, Operations
|
| Todd G. Hewlin
|
|
32
|
|
Managing
Director, Corporate Strategy and Research
|
| Victor S. Hwang
|
|
30
|
|
Managing
Director, Acquisitions
|
| Sam Jadallah
|
|
35
|
|
Managing
Director, Operations
|
| Mark J. Lotke
|
|
31
|
|
Managing
Director, Acquisitions
|
| Henry N. Nassau
|
|
45
|
|
Managing
Director, General Counsel and Secretary
|
| John N. Nickolas
|
|
32
|
|
Managing
Director, Finance and Assistant Treasurer
|
| Robert A. Pollan
|
|
38
|
|
Managing
Director, Operations
|
| Sherri L. Wolf
|
|
31
|
|
Managing
Director, Investor Relations
|
| Michael H. Forster
|
|
56
|
|
Senior Partner,
Operations
|
| Robert E. Keith,
Jr. (1)
|
|
58
|
|
Chairman and
Director
|
| Julian A. Brodsky
(2)
|
|
65
|
|
Director
|
| E. Michael
Forgash (2)
|
|
41
|
|
Director
|
| Thomas P. Gerrity
(1)
|
|
57
|
|
Director
|
| Scott E. Gould
|
|
34
|
|
Director
|
| Peter A. Solvik(1)
|
|
40
|
|
Director
|
(1)
|
Member of the compensation committee
|
(2)
|
Member of the audit committee
|
Walter W. Buckley, III,
is a
co-founder and has served as our President and Chief Executive
Officer and as one of our directors since March 1996. Prior to
co-founding us, Mr. Buckley worked for Safeguard Scientifics, Inc.
as Vice President of Acquisitions from 1991 to February 1996. Mr.
Buckley directed many of Safeguard Scientifics’ investments
and was responsible for developing and executing Safeguard
Scientifics’ multimedia and Internet investment strategies.
Mr. Buckley serves as a director of VerticalNet, Inc., Sky Alland
Marketing, Who?Vision Systems, Inc., Syncra Software, Inc.,
PrivaSeek, Inc., Breakaway Solutions, Inc. and e-Chemicals, Inc.
Douglas A. Alexander
has
served as one of our Managing Directors since September 1997. Prior
to joining us, Mr. Alexander co-founded Reality Online, Inc. in
1986 and sold it to Reuters Group in 1994. Mr. Alexander continued
to serve as President and Chief Executive Officer of Reality Online
after its acquisition by Reuters Group until September 1997 and was
a key contributor to Reuters’ Internet initiatives. Mr.
Alexander is Chairman of the Board of VerticalNet, Inc. and serves
as a director of Arbinet Communications, Inc., Blackboard, Inc.,
ComputerJobs.com, Inc., Deja.com, Inc., eMerge Systems, LinkShare
Corporation, SageMaker, Inc. and Star-Cite!.
Richard G. Bunker
has
served as one of our Managing Directors and has been our Chief
Technology Officer since April 1999. Prior to joining us, Mr.
Bunker was President and Chief Executive Officer of Reality Online,
a Reuters company, from September 1997 to April 1999. Before
becoming President and Chief
Executive Officer, Mr. Bunker served in various senior management
positions at Reality Online. While President and Chief Executive
Officer of Reality Online, Mr. Bunker built the firm into a leading
online securities trading company. He also served as Senior Vice
President and Chief Information Officer of SEI Investments from
January 1994 to March 1996, and Vice President of the investment
management and trading technology group at State Street Global
Advisors from October 1992 to January 1994.
Richard S. Devine
has
served as our Managing Director of Executive Recruiting since June
1999. Prior to joining us, Mr. Devine was a Partner at Heidrick
& Struggles, and a member of its International Technology
Practice from October 1997 to June 1999. In this capacity, Mr.
Devine led the search for many high profile executive positions
including the Chief Executive Officer of Global Crossing, President
of Transport, a joint venture between Microsoft Corporation and
First Data Corporation, Senior Vice President of Worldwide
Operations at Apple Computer Corporation, Vice President of
Customer Service at Amazon.com, Chief Financial Officer and Chief
Information Officer at Remedy Corporation and General Manager of
the Americas, General Manager of Services and Vice President of
International at Siebel Systems. Mr. Devine also served as
President and Chief Executive Officer of KidSoft LLC from March
1992 to February 1997.
Kenneth A. Fox
is a
co-founder and has served as one of our Managing Directors since
our inception in March 1996. Mr. Fox has also served as one of our
directors since February 1999. Prior to co-founding us, Mr. Fox
served as Director of West Coast Operations for Safeguard
Scientifics, Inc. and Technology Leaders II, L.P., a venture
capital partnership, from 1994 to 1996. In this capacity, Mr. Fox
led the development of and managed the West coast operations for
these companies. Mr. Fox serves as a director of BidCom,
ClearCommerce Corporation, CommerX, Inc., Context Integration,
Inc., Deja.com, Inc., Entegrity Solutions Corporation, ONVIA.com,
Inc., RapidAutoNet and Vivant! Corporation.
David D. Gathman
has
served as our Chief Financial Officer and Treasurer since January
1999. Prior to joining us, Mr. Gathman was Chief Financial Officer
and Executive Vice President, Finance and Administration of
Integrated Systems Consulting Group, Inc. from January 1997 through
its merger with First Consulting Group, Inc. in December 1998. He
also served as Chief Operating Officer, Vice President, Secretary
and Assistant Treasurer of Integrated Systems Consulting Group,
Inc. from April 1994 to December 1998 and as a director of the
company. Mr. Gathman brings to us over 30 years of finance-related
experience, the last 16 of which were focused in the information
technology industry.
Christopher H. Greendale
has
served as one of our Managing Directors since July 1999 and was one
of our Senior Partners of Operations from January 1999 to July
1999. Prior to joining us, Mr. Greendale served as an independent
management consultant from January 1998 to December 1998. Prior to
becoming a consultant, Mr. Greendale served as Executive Vice
President of Cambridge Technology Partners, a company he co-founded
in 1991. Cambridge Technology Partners is a systems integrator that
initiated fixed price, fixed time, rapid systems development. Mr.
Greendale has extensive experience in sales and marketing, and
general management in the information technology industry.
Gregory W. Haskell
has
served as one of our Managing Directors of Operations since June
1999. Prior to joining us, Mr. Haskell served from January 1994 to
June 1999 as President and Chief Operating Officer of XL Vision,
Inc., a business and technology incubator that builds companies and
spins them out into stand alone public companies. During his tenure
at XL Vision, Mr. Haskell co-founded four technology-based spinout
companies. Mr. Haskell serves as a director of Axcess, Inc.,
ComputerJobs.com, e-Chemicals, Integrated Visions, Inc.,
PaperExchange and XL Vision, Inc.
Todd
G. Hewlin
has
served as our Managing Director of Corporate Strategy and Research
since July 1999. Prior to joining us, Mr. Hewlin served as a
Partner with McKinsey & Company, a global management
consultancy, and has held various positions with McKinsey &
Company from September 1993 to June 1999. During that time, Mr.
Hewlin led technology-intensive strategy projects for leading
organizations in North America and Europe. Mr. Hewlin’s
clients have included world-class technology companies, an Internet
bank, a
global satellite telephony startup, and a range of
traditional companies assessing the impact of the Internet. From
December 1998 to June 1999, Mr. Hewlin co-led McKinsey’s
Global Electronic Commerce practice.
Victor S. Hwang has served as one of our Managing Directors of
Acquisitions since March 1999. Prior to joining us, Mr. Hwang
served from January 1999 to March 1999 as a General Partner of
Softbank Holdings, responsible for developing an investment fund
targeting late-stage private Internet companies. From August 1995
to January 1999, Mr. Hwang also served as an investment banker at
Goldman, Sachs & Co., where he was involved in
numerous financing and merger transactions for a broad range of
Internet, software, semiconductor, communications and hardware
companies. While at Goldman, Sachs & Co., Mr. Hwang’s
clients included eBay, GeoCities and Yahoo!. Mr. Hwang obtained a
Masters of Business Administration from the Graduate Business
School of Stanford University where he was in attendance from
September 1993 to June 1995.
Sam
Jadallah has served as one of our Managing Directors of
Operations since July 1999. Prior to joining us, Mr. Jadallah
served as a Microsoft Vice President of Worldwide Enterprise Sales
from June 1996 to July 1999 where he was responsible for leading
sales efforts to business and academic customers. Prior to holding
this position, Mr. Jadallah served as Manager of Worldwide Business
Strategy reporting to Steve Ballmer, President of Microsoft. Mr.
Jadallah also served as General Manager of Corporate and Developer
Support and served as District Manager leading Microsoft sales to
the US Department of Defense from 1990 to 1992. Mr. Jadallah held
various other sales, management and technical positions since
joining Microsoft in 1987.
Mark
J. Lotke has served as one of our Managing Directors of
Acquisitions since June 1999. Prior to joining us, Mr. Lotke served
from August 1997 to May 1999 as an Associate and from July 1993 to
August 1997 as a Junior Associate at General Atlantic Partners, a
private equity firm focused on investing in global information
technology companies. While at General Atlantic Partners, Mr. Lotke
was involved in numerous private equity transactions across a wide
range of Internet, software, and services companies, including
E*trade, Priceline.com, Inc., LHS Group, Inc., Envoy Corporation,
NewSub Services, Inc., and Predictive Systems. Prior to joining
General Atlantic Partners, Mr. Lotke served as a strategy
consultant at Corporate Decisions, Inc. Mr. Lotke obtained a
Masters of Business Administration from the Graduate Business
School of Stanford University where he was in attendance from
September 1995 to June 1997.
Henry N. Nassau has served as one of our Managing Directors and
as our General Counsel and Secretary since May 1999. Mr. Nassau was
a partner in the law firm of Dechert Price & Rhoads from
September 1987 to May 1999 and was Chair of the Business Department
from January 1998 to May 1999. At Dechert Price & Rhoads, Mr.
Nassau engaged in the practice of corporate law, concentrating on
mergers and acquisitions.
John
N. Nickolas has served as our Managing Director of Finance and
has been our Assistant Treasurer since January 1999. Prior to
joining us, Mr. Nickolas served from October 1994 to December 1998
in various finance and accounting positions for Safeguard
Scientifics, Inc., most recently serving as Corporate Controller
from December 1997 to December 1998. Mr. Nickolas brings to us
extensive financial experience including corporate finance,
financial reporting, accounting and treasury operations. Before
joining Safeguard Scientifics, Inc., Mr. Nickolas was Audit Manager
and held various other positions at KPMG LLP from July 1990 to
October 1994.
Robert A. Pollan has served as one of our Managing Directors of
Operations since June 1998. Prior to joining us, Mr. Pollan served
as a Chief Technology Officer and Vice President of Business
Development at General Electric Capital Corporation from August
1995 to June 1998. During his tenure at General Electric Capital
Corporation, Mr. Pollan co-founded and served as President of two
supply chain ventures focused on remote telemetry and third-party
logistics, returnable packaging leasing and logistics. He led
several acquisitions in Europe, Asia and the United States. Mr.
Pollan was co-founder and, from September 1991 to
July 1995, Managing Director of OFR, Ltd., an
advisory firm focused on the organizational and financial
restructuring of industrial enterprises in Central Europe. While in
Central Europe, Mr. Pollan founded the first
Polish industrial group and advised the World Bank and a number of
Eastern European governments. Mr. Pollan serves as a director of
CommerceQuest, Inc., CommerX, Inc., Internet Commerce Systems,
Inc., iParts, PointMent, and United Messaging and Universal Access,
Inc.
Sherri L. Wolf
has
served as our Managing Director of Investor Relations since May
1999. Prior to joining us, Ms. Wolf served as a Vice President in
equity research at Adams, Harkness & Hill, an investment
banking firm, from September 1994 to May 1999. While with Adams,
Harkness & Hill, Ms. Wolf focused on the Internet and the
information technology services sectors and covered such companies
as CMG Information Services, Inc., Safeguard Scientifics, Inc.,
Lycos and Forrester Research. Ms. Wolf obtained a Masters of
Science from the Massachusetts Institute of Technology’s Sloan
School of Management where she was in attendance from September
1992 to June 1994.
Michael H. Forster
has
served as one of our Senior Partners of Operations since June,
1998. Before joining us, Mr. Forster served as Senior Vice
President of Worldwide Field Operations for Sybase, Inc. from April
1996 to March 1999. Prior to this position with the company, Mr.
Forster was Sybase’s Senior Vice President and President of
the company’s Information Connection Division from April 1994
to March 1996. Mr. Forster has over 30 years of sales, marketing
and general management experience in the information technology
industry. Mr. Forster serves as a director of Tangram Enterprise
Solutions, SageMaker, Inc. and Syncra Software, Inc.
Robert E. Keith, Jr.
has
served as the Chairman of our Board of Directors since our
inception in March 1996. Mr. Keith is also Managing General Partner
of Technology Leaders II, L.P. and has had principal operating
responsibility for Technology Leaders II, L.P. since 1988. Mr.
Keith also serves as a director of American Education Centers,
Inc., Cambridge Technology Partners (Massachusetts), Inc., Diablo
Research Corporation, LLC, Interactive Media Systems, Inc.,
Masterpack International, Inc., MultiGen-Paradigm, Inc., National
Media Corporation, Naviant Technology Solutions, Inc., Sansource,
Inc., US Interactive, Inc., and Whisper Communications, Inc. and is
Vice Chairman of the Board of Safeguard Scientifics, Inc.
Julian A. Brodsky
has
served as one of our directors since May 1996. Mr. Brodsky is a
founder of Comcast Corporation, a developer of broadband cable
networks, cellular and personal communications systems and has
served as a director of Comcast since 1969 and Vice Chairman since
1988. He serves as Vice President and a director of Sural
Corporation. Mr. Brodsky serves as a director of Comcast Cable
Communications, Inc., Comcast Cellular Corporation, the RBB Fund,
Inc. and Chairman of Comcast Interactive Capital Group, Inc.
E.
Michael Forgash
has
served as one of our directors since May 1998. Mr. Forgash has been
Vice President, Operations of Safeguard Scientifics, Inc. since
January, 1998. Prior to joining Safeguard Scientifics, Mr. Forgash
was President and Chief Executive Officer of Creative Multimedia
from August 1996 to October 1997. Prior to that, Mr. Forgash was
President at Continental HealthCare Systems from November 1994 to
July 1996. Mr. Forgash also serves as a director of US Interactive,
Inc., 4anything.com, Inc., eMerge Vision, Who? Vision Systems, Inc.
and Integrated Visions, Inc.
Dr.
Thomas P. Gerrity
has
served as one of our directors since December 1998. Dr. Gerrity has
also served as Dean of The Wharton School of the University of
Pennsylvania since July 1990. Dr. Gerrity is also a member of the
Board of Directors of Fiserv, Inc., Fannie Mae, CVS Corporation,
Sunoco, Inc., Reliance Group Holdings, Inc., Knight-Ridder, Inc.
and Ikon Office Solutions, Inc. and a trustee of MAS Funds.
Scott E. Gould
has
served as one of our directors since December 1998. Mr. Gould is
Vice President of G.E. Capital Equity Capital Group, Inc., a
wholly-owned subsidiary of General Electric Corporation, in charge
of Supply Chain Technology, Logistics and Transportation Investing
since August, 1997. Prior to joining G.E. Capital Equity Capital
Group, Mr. Gould was Director of Strategic Planning &
Information from January 1996 to August 1997 and Director of
Finance from February 1994 to January 1996 for DSC Logistics, a
logistics outsourcer and software company. Mr. Gould also works
with the boards of McHugh Software International and IFCO
Returnable Packaging Systems.
Peter A. Solvik
has
served as one of our directors since May 1999. Mr. Solvik has
served as Senior Vice President and Chief Information Officer of
Cisco Systems, Inc. since January 1999, as Vice President and CIO
from 1995 to 1999, and as Director of Information Systems and CIO
from 1995 to 1995. Under Mr. Solvik’s leadership, Cisco
Systems has been recognized as one of the most innovative and
successful large corporations in the use of the Internet. Mr.
Solvik is also a member of the board of directors of Context
Integration, Inc., Cohera Corp. and Asera Inc.
Advisory Board
Our Advisory Board members provide our partner companies with
strategic guidance in general management, sales and marketing, and
information technology management. Our Advisory Board members and
their backgrounds are:
|
General
Management Guidance
|
Jeff
Ballowe
has
served on our Advisory Board since February 1998. Mr. Ballowe
served as President, Interactive Media and Development Group, of
Ziff-Davis, Inc.’s Internet publications until the end of
1997. Mr. Ballowe was instrumental in transforming Ziff-Davis from
a national magazine publisher to an international integrated media
company. Prior to joining Ziff-Davis, Mr. Ballowe worked as a
marketing executive at various technology and marketing services
companies. Mr. Ballowe serves as Chairman of the Board of Directors
of Deja.com, Inc. and as director of drkoop.com, Inc., Xoom.com,
Inc., Ziff-Davis TV Inc. and VerticalNet, Inc.
Alex W. “Pete” Hart
has
served on our Advisory Board since March 1998. Mr. Hart is a
consultant in consumer financial services specializing in emerging
payment and distribution systems. Mr. Hart has served in numerous
positions, including Chief Executive Officer, of Advanta
Corporation from March 1994 to October 1997. Prior to joining
Advanta Corporation, Mr. Hart served as President and Chief
Executive Officer of MasterCard International. Mr. Hart serves as a
director of Sanchez Computer Associates, Who?Vision Systems,
4anything.com, HNC Software, Integrated Vision and Destiny Systems
and on the advisory board of ONVIA.com and Qpass.
Ron
Hovsepian
has
served on our Advisory Board since October 1998. Mr. Hovsepian is
the Vice President, Business Development, Distribution Industry,
for IBM Corporation. Prior to holding this position, Mr. Hovsepian
was General Manager of IBM Corporation’s Global Retail and
Distribution Industry Solution Organization, and had global
responsibility for IBM Corporation’s retail store system and
the consumer driven supply chain solution units. Mr. Hovsepian
joined IBM Corporation as a Marketing Representative in 1983.
Martha Rogers, Ph.D.,
has
served on our Advisory Board since 1996. Dr. Rogers is a Professor
at the Duke University Fuqua School of Business. Dr. Rogers has
served as Founding Partner of Marketing 1 to 1/Peppers and Rogers
Group since 1994. Marketing 1 to 1/Peppers and Rogers Group is a
management consulting firm that focuses on thought leadership and
strategy in the growing fields of interactivity, marketing,
technology, relationship management and business development. Dr.
Rogers frequently appears on a variety of radio and television
programs, including C-SPAN’s “American Perspectives”
covering business trends and features.
Yossi Sheffi
has
served on our Advisory Board since July 1998. Dr. Sheffi is a
Professor at Massachusetts Institute of Technology where he serves
as Director of the Center for Transportation Studies. Dr. Sheffi
’s teaching and research areas include logistics,
optimization, supply chain management and e-commerce. Dr. Sheffi is
the author of a textbook and over fifty technical publications. In
1997, Dr. Sheffi co-founded Syncra Software, Inc. and in 1998, he
co-founded e-Chemicals, Inc. Dr. Sheffi is Chairman of the Boards
of Directors of Syncra Software, Inc. and e-Chemicals, Inc.
David Stamm
has
served on our Advisory Board since June 1999. Mr. Stamm founded
Clarify, Inc. in August 1990 and served as President, Chief
Executive Officer and Director from its inception until March
1998. In March 1998, Mr. Stamm was appointed Chairman of the Board of
Directors of Clarify. From 1980 to 1989, Mr. Stamm served as
Executive Vice President and a director of Daisy Systems
Corporation, a computer-aided engineering hardware and software
company which he co-founded in August 1980. Mr. Stamm also serves
as a director of TimeDance, Inc., a privately-held internet
start-up specializing in meeting scheduling systems and Full Circle
Software, a privately-held start-up focusing on web-based technical
support for personal computer hardware and software.
Gary C. Wendt
has
served on our Advisory Board since May 1999. Mr. Wendt served as
President, Chairman and Chief Executive Officer of General Electric
Capital Services, Inc. from 1986 to 1998. During Mr. Wendt’s
tenure as leader of General Electric Capital Services, the company
became General Electric Corporation’s largest business sector.
Mr. Wendt serves as a director of iXL Enterprises, Inc., Sanchez
Computer Associates, Inc. and LAPA Lineas Aereas Privadas
Argentinas S.A.
|
Sales and
Marketing Guidance
|
Rowland Hanson
has
served on our Advisory Board September 1996. Mr. Hanson is founder
and President of C. Rowland Hanson & Associates which provides
strategic planning, marketing and communications to a variety of
software companies. Mr. Hanson has also been involved in the
founding, development and sale or merger of several software
companies. Prior to founding C. Rowland Hanson & Associates,
Mr. Hanson served as Vice President of Corporate Communications at
Microsoft Corporation, where he is credited with developing and
executing the company’s original branding strategy. Mr. Hanson
serves as a director of Webforia and Sequel Technology.
Tom
Kippola
has
served on our Advisory Board since February 1997. Mr. Kippola is
the Managing Partner of The Chasm Group, which provides market
strategy consulting and training and speaking services for
start-up, growing and established information technology companies.
Prior to his consulting career, Mr. Kippola was director of
marketing for a service automation software vendor. Mr. Kippola has
co-authored a book entitled “The Gorilla Game: An Investor
’s Guide to Picking Winners in High Technology.” Mr.
Kippola serves as a director of Whisper Communications, Inc. and
Thru-Put Technologies. In addition, Mr. Kippola is an advisory
board member of Rubric, RTMS, Inc. and Voyager Capital.
Geoffrey A. Moore
has
served on our Advisory Board since February 1997. Mr. Moore is
Chairman of the Board and founder of The Chasm Group, where he
continues to provide market development and business strategy
services to many leading high-technology companies. He is also a
venture partner with Mohr Davidow Ventures where he provides market
strategy advice to the high-tech portfolio companies. Prior to
founding The Chasm Group, Mr. Moore was a principal and partner at
Regis McKenna, Inc., a leading high-tech marketing strategy and
communications company. Mr. Moore serves as a director of many
companies, including Documentation Inc. and Objectivity, Inc.
John A. Miller, Jr.
has
served on our Advisory Board since July 1996. Mr. Miller has served
as President and Chief Executive Officer of Miller Consulting Group
since founding the company in 1996. Miller Consulting Group is a
strategy-driven public relations firm that integrates market
positioning with tactical public relations for emerging information
technology companies. Prior to founding the Miller Consulting
Group, Mr. Miller founded Miller Communications, which advised
Compaq Computer Corporation, Lotus Corporation and more than 75
other emerging information technology firms throughout the 1980s.
Don
Peppers
has
served on our Advisory Board since August 1996. Mr. Peppers is a
partner at Marketing 1 to 1/Pepper and Rogers Group, a management
consulting firm. Mr. Peppers is a co-author with Dr. Martha Rogers,
of several books on customer relationship management and one-on-one
marketing. Mr. Peppers serves as a director of DoubleClick, a
network of Web advertising sites and ad serving services, and Modem
Media.Poppe Tyson, an interactive marketing and advertising agency.
Charles W. Stryker, Ph.D.,
has
served on our Advisory Board since September 1997. Dr. Stryker has
served as President, Marketing Information Solutions for
IntelliQuest, Inc. Dr. Stryker is a recognized leader in
the information solutions industry with his record as founder of
Trinet, Inc., MkIS User Forum, Information Technology Forum, and
President of National Accounts Division of American Business
Information.
Sergio Zyman
has
served on our Advisory Board since February 1999. Mr. Zyman is
founder of The Z Group, a broad consulting and venture firm. Prior
to his consulting career, Mr. Zyman served as Vice President and
Chief Marketing Officer of the Coca-Cola Company. During Mr. Zyman
’s tenure with Coca-Cola, he had responsibility for the
introduction of Cherry Coke®, Diet Coke®, Fruitopia®
and the New Coke initiative. Since leaving Coca-Cola, Mr. Zyman has
also authored a book entitled “The End of Marketing As We Know
It.” Mr. Zyman serves as a director of Gap, Inc., Netcentives,
Inc. and VC Television Network Corp.
|
Information
Technology Management Guidance
|
K.B. Chandrasekhar
has
served on our Advisory Board since April 1999. Mr. Chandrasekhar is
Chairman of the Board of Exodus Communications, a company he
co-founded in 1994. Exodus Communications is a leading server
hosting company for Internet sites. Since establishing its first
Internet data center in 1996, Exodus Communications has expanded to
nine cities with more than 1,000 employees and 1,000 customers.
Prior to co-founding Exodus Communications, Mr. Chandrasekhar
founded Fouress, Inc., a network software design and development
firm.
Esther Dyson
has
served on our Advisory Board since May 1996. Ms. Dyson is Chief
Executive Officer of EDventure Holdings, Inc. EDventure Holdings is
a company focused on emerging information technology worldwide, and
on the emerging computer markets of Central and Eastern Europe.
EDventure publishes Release 1.0, a monthly newsletter and sponsors
two annual technology forums. Ms. Dyson serves as a director of
Scala Business Solutions N.V., Poland Online, New World Publishing,
Global Business Network, Graphisoft, PRT Group, Inc., Accent,
Medscape Inc. and Cygnus Solutions. Ms. Dyson also serves on the
advisory board of Perot Systems Corporation.
John McKinley
has
served on our Advisory Board since July 1998. Mr. McKinley is Chief
Technology Officer of Merrill Lynch & Co. With Merrill Lynch,
Mr. McKinley has responsibility for 8,200 information technology
professionals and is responsible for driving e-commerce initiatives
throughout the company. Prior to joining Merrill Lynch, Mr.
McKinley served as Chief Technology and Information Officer for
General Electric Capital Corporation. Mr. McKinley serves as a
director of Proxicom Inc., a leading Internet-focused systems
integration firm. Mr. McKinley also serves on the Executive Client
Advisory Board of AT&T Corporation.
William Powar
has
served on our Advisory Board since June 1998. Mr. Powar is a
principal of Venture Architects, a company he founded in January
1997. Venture Architects is a consulting firm that provides
strategic guidance and business development expertise to companies
in the e-commerce industry. Prior to founding Venture Architects,
Mr. Powar served 22 years with Visa USA and Visa International
developing new markets and businesses. From 1994 through 1996, Mr.
Powar directed Visa’s venture investments and strategic
alliances. Mr. Powar serves as a director of MobiNetix Systems, Inc.
We
expect to change the composition of our Advisory Board from time to
time to better match the evolving needs of our partner companies.
Classes of the Board
Our
Board of Directors is divided into three classes that serve
staggered three-year terms as follows:
Class
|
|
Expiration
|
|
Member
|
| Class I
|
|
2000
|
|
Messrs. Brodsky
and Gould
|
|
|
|
| Class II
|
|
2001
|
|
Messrs. Keith,
Forgash and Solvik
|
|
|
|
| Class III
|
|
2002
|
|
Messrs. Buckley,
Fox and Gerrity
|
Board Committees
The
compensation committee reviews and makes recommendations to the
Board regarding the compensation to be provided to our Chief
Executive Officer and our directors. In addition, the compensation
committee reviews compensation arrangements for our other executive
officers. The compensation committee also administers our equity
compensation plans. The current members of the compensation
committee are Messrs. Gerrity, Keith and Solvik.
The
audit committee reviews and monitors our corporate financial
reporting, external audits, internal control functions and
compliance with laws and regulations that could have a significant
effect on our financial condition or results of operations. In
addition, the audit committee has the responsibility to consider
and recommend the appointment of, and to review fee arrangements
with, our independent auditors. The current members of the audit
committee are Messrs. Brodsky and Forgash.
Director Compensation and Other Arrangements
We do
not pay cash compensation to our directors; 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 1999
Equity Compensation Plan. See “Employee Benefit Plans—
Internet Capital Group, Inc. 1999 Equity Compensation Plan—
Non-Employee Director Option Grants,” below.
Compensation Committee Interlocks and Insider
Participation
Upon
completion of this offering, our compensation committee will make
all compensation decisions. Messrs. Gerrity, Keith and Solvik serve
as the members of the compensation committee. Mr. Buckley
previously served on the compensation committee. Messrs. Alexander
and Buckley serve on the compensation committee of VerticalNet.
None of our other executive officers, directors or compensation
committee members currently serve, or have in the past served, on
the compensation committee of any other company whose directors or
executive officers have served on our compensation committee.
Executive Compensation
The
following table provides certain summary information concerning the
compensation earned by our chief executive officer and the other
executive officers employed by us during the fiscal year ended
December 31, 1998. Since January 1, 1999, we have employed twelve
additional executive officers—Messrs. Bunker, Devine, Gathman,
Greendale, Haskell, Hewlin, Hwang, Jadallah, Lotke, Nassau,
Nickolas and Ms. Wolf—each of whom are expected to receive
more than $100,000 in compensation in 1999.
Summary Compensation Table
| |
|
Annual
Compensation
|
|
Long-Term
Compensation
Awards
|
Name and
Principal Position
|
|
Salary
|
|
Bonus
|
|
Other
Compensation (1)
|
|
Shares
Underlying
Options
|
| Walter W.
Buckley, III
|
| President and
Chief Executive Officer
|
|
$159,769
|
|
$96,000
|
|
—
|
|
1,300,000
|
|
|
| Douglas A.
Alexander
|
| Managing Director
|
|
225,000
|
|
100,000
|
|
—
|
|
1,250,000
|
|
|
| Kenneth A. Fox
|
| Managing Director
|
|
119,538
|
|
75,000
|
|
—
|
|
1,250,000
|
|
|
| Robert A. Pollan
|
| Managing
Director, Operations
|
|
133,808
|
|
50,000
|
|
—
|
|
1,250,000
|
(1)
|
The
value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for
any officer in the table above the lesser of either $50,000 or
10% of the total annual salary and bonus reported for such
officer.
|
The
following tables set forth certain information concerning grants to
purchase shares of our common stock of each of the officers named
in the summary compensation table above during the year ended
December 31, 1998.
Option Grants During the Year Ended December 31,
1998
| |
|
Number of
Securities
Underlying
Options
Granted (1)
|
|
Percentage of
Total Options
Granted to
Employees in
1998
|
|
Exercise
Price per
Share (2)
|
|
Expiration
Date
|
|
Potential
Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation for
Option Term (3)
|
Name
|
|
|
|
|
|
5%
|
|
10%
|
| Walter W.
Buckley, III
|
|
1,300,000
|
|
22%
|
|
$2.00
|
|
Dec. 18, 2008
|
|
$20,693,192
|
|
$34,490,521
|
| Douglas A.
Alexander
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
| Kenneth A. Fox
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
| Robert A. Pollan
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
(1)
|
All
options granted to employees are immediately exercisable, are
nonqualified stock options and generally vest over five years at
the rate of 20% of the shares subject to the option per year.
Unvested shares are subject to a right of repurchase upon
termination of employment. Options expire ten years from the date
of grant.
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(2)
|
We
granted options at an exercise price equal to the fair market
value of our common stock on the date of grant, as determined by
our Board of Directors.
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(3)
|
These amounts represent hypothetical gains that could be achieved
for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration dates, based
upon an assumed initial public offering price of $11.00 per
share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income
tax consequences of option exercises or sales of appreciated
stock.
|
The
following table sets forth certain information concerning option
exercises by each of the officers named in the above summary
compensation table.
Year-End December 31, 1998 Option Values
| |
|
Shares
Acquired on
Exercise (#)
|
|
Value
Realized ($)
|
|
Number of
Securities Underlying
Unexercised Options at Fiscal
Year-End
|
|
Value of
Unexercised
in-the-Money
Options at Fiscal
Year-End (1)
|
Name
|
|
|
|
Exercisable
(2)
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
| Walter W.
Buckley, III
|
|
—
|
|
—
|
|
1,300,000
|
|
—
|
|
$11,700,000
|
|
—
|
| Douglas A.
Alexander
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
| Kenneth A. Fox
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
| Robert A. Pollan
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
(1)
|
Based on an assumed initial public offering price of $11.00 per
share, less the exercise price, multiplied by the number of
shares underlying the option.
|
(2)
|
All
the options listed below were exercised in May 1999.
|
Employee Benefit Plans
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Membership
Profit Interest Plan
|
In
1996, the board of managers of Internet Capital Group, L.L.C.
approved the Membership Profit Interest Plan, which we refer to as
our restricted stock issuances after the Reorganization. Under the
terms of the Membership Profit Interest Plan, certain employees,
consultants and advisors who are designated by Messrs. Buckley and
Fox received grants of units of membership interest in Internet
Capital Group, L.L.C. These units of membership interest cannot be
transferred until the rights of the holder in the units vest.
Twenty percent of each of these holder’s units of membership
interest vest each year over a five year period beginning on the
vesting date established by our board. If any holder’s
relationship with us is terminated, his or her units of membership
interest that have not vested are forfeited to us.
Following the Reorganization, all outstanding grants became grants
under our new Membership Profit Interest Plan. As of December 31,
1998 a total of 6,783,625 shares of common stock have been issued
under the Membership Profit Interest Plan, all of which were
outstanding, leaving no shares available for grant at a later date.
Our Board of Directors has the power, subject to the limitations
contained in the Membership Profit Interest Plan, to prescribe the
terms and conditions of any award granted under the Membership
Profit Interest Plan, including the total number of shares awarded
to each grantee and any applicable vesting schedule.
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan
|
Our
1998 Equity Compensation Plan and our Managers’ Option Plan
were approved by the board of managers of Internet Capital Group,
L.L.C. on October 13, 1998. After the Reorganization, we converted
the 1998 Equity Compensation Plan and the Managers’ Option
Plan into our 1999 Equity Compensation Plan, which combines the
Equity Compensation Plan and the Managers’ Option Plan into a
single plan. The 1998 Equity Compensation Plan and Managers’
Option Plan provided for the grant of non-qualified options for
membership interests in Internet Capital Group, L.L.C., restricted
stock, stock appreciation rights (“SARs”), and
performance awards. Our 1999 Equity Compensation Plan provides that
options outstanding under the 1998 Equity Compensation Plan and
Managers’ Option Plan will be considered options issued under
the 1999 Equity Compensation Plan.
We have
adopted the Internet Capital Group, Inc. 1999 Equity Compensation
Plan, as amended and restated, effective as of February 2, 1999.
The terms and provisions of the 1999 Equity Compensation Plan are
summarized below. This summary, however, does not purport to be a
complete description of the Equity Compensation and is qualified in
its entirety by the terms of the 1999 Equity Compensation Plan.
Purpose. The purpose of the 1999 Equity Compensation Plan is to
provide:
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designated employees of Internet Capital Group and its
subsidiaries;
|
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certain advisors who perform services for Internet Capital Group
or its subsidiaries; and
|
|
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non-employee members of our Board of Directors,
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with the opportunity to receive grants of incentive
stock options, non-qualified options, share appreciation rights,
restricted shares, performance shares, dividend equivalent rights
and cash awards. We believe that the 1999 Equity Compensation Plan
will encourage the participants to contribute materially to our
growth and will align the economic interests of the participants
with those of our shareholders.
General. Subject to adjustment as described below, the plan
authorizes awards to participants of up to 21,000,000 shares of our
common stock. No more than 3,000,000 shares in the aggregate may be
granted to any individual in any calendar year. Such shares may be
authorized but unissued shares of our common stock or may be shares
that we have reacquired, including shares we purchase on the open
market. If any options or stock appreciation rights granted under
the plan expire or are terminated for any reason without being
exercised, or restricted shares or performance shares are
forfeited, the shares of common stock underlying that award will
again be available for grant under the plan.
Administration of the Plan. A committee appointed by our Board
of Directors administers the 1999 Equity Compensation Plan. The
committee has the sole authority to designate participants, grant
awards and determine the terms of all grants, subject to the terms
of the 1999 Equity Compensation Plan. As a result of our becoming a
publicly-traded company, the compensation committee of the Board of
Directors will become responsible for administering and
interpreting the plan. Prior to that time, the Board of Directors
has fulfilled those roles. The compensation committee will consist
of two or more persons appointed by the Board of Directors from
among its members, each of whom will be a “non-employee
director” as defined by Rule 16b-3 under the Securities
Exchange Act of 1934, and an “outside director” as
defined by Section 162(m) of the Internal Revenue Code and related
Treasury regulations. The committee has the full authority to
interpret the 1999 Equity Compensation Plan and to make rules,
regulations, agreements and instruments for implementing the plan.
The committee’s determinations made under the 1999 Equity
Compensation Plan are to be conclusive and binding on all persons
having any interest in the plan or any awards granted under the
plan.
Eligibility. Grants may be made to any employee of Internet
Capital Group, Inc. or any of its subsidiaries and to any
non-employee member of the Board of Directors. Key advisors who
perform services for us or any of our subsidiaries are eligible if
they render bona fide services, not as part of the offer or sale of
securities in a capital-raising transaction. As of July 12, 1999,
1,598,500 options were outstanding under the plan.
Options.
Incentive stock options may be granted only to employees. The
maximum number of shares that may be subject to incentive stock
options over the life of the 1999 Equity Compensation Plan is
3,000,000. Non-qualified stock options may be granted to employees,
key advisors and non-employee directors. The exercise price of
common stock underlying an option shall be determined by the
compensation committee at the time the option is granted, and may
be equal to, greater than, or less than the fair market value of
such stock on the date the option is granted; provided that the
exercise price of an incentive stock option shall be equal to or
greater than the fair market value of a share of common stock on
the date such incentive stock option is granted, and the exercise
price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of such
fair market value.
Unless
the applicable option agreement provides otherwise, a participant
can exercise an option award at any time, before or after the
option has fully vested, by paying the applicable exercise price in
cash, or, with the approval of the compensation 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 of the grants, or by such other method as the compensation
committee shall approve, including payment through a broker in
accordance with procedures permitted by Regulation T of the Federal
Reserve Board. In addition, the plan provides that we may make
loans to participants or guarantee loans made by third parties to
the participant for the purpose of assisting participants to
exercise their options. The compensation committee has the
authority to set the terms and conditions that will apply to any
loan or guarantee.
Options
vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument. In
general, the options that have already been granted under the plan
are subject to a five year vesting schedule with twenty percent of
each grant vesting on each anniversary of the grant date. The
compensation committee will determine the term of each option up to
a maximum of ten years from the date of grant except that the term
of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the
date of grant. The compensation committee may accelerate the
exercisability of any or all outstanding options at any time for
any reason.
Non-Employee Director Option Grants.
The
1999 Equity Compensation Plan provides that each of our
non-employee directors, other than:
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Ÿ
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non-employee directors who at any time during their membership on
our board of directors are employees of Safeguard Scientifics,
Inc. or any of its subsidiaries or affiliates;
|
|
Ÿ
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non-employee directors who at any time during their membership on
our board of directors are employees of TL Ventures, Inc. or any
of its subsidiaries or affiliates; or
|
|
Ÿ
|
non-employee directors who are granted options under the general
option provisions of the 1999 Equity Compensation Plan are each
entitled to receive an option to purchase 47,000 shares of our
common stock, vesting in equal installments over four years, upon
their initial election to our board of directors, and a service
grant to purchase 20,000 shares every two years, vesting in equal
installments over two years. The plan also allows our board of
directors to grant an option to any of the eligible non-employee
directors who were members of the Board of Directors immediately
following the execution of the Reorganization to compensate any
of those non-employee directors for the cancellation of
outstanding options held immediately prior to the Reorganization.
No non-employee director may be granted more than 107,000 shares
of our common stock under the automatic and conversion grants
described above. Such automatic and conversion grants will
otherwise be generally subject to the terms provided for options
under the 1999 Equity Compensation Plan.
|
Restricted Stock.
The
compensation committee shall determine the number of restricted
shares granted to a participant, subject to the maximum plan limit
described above. Grants of restricted shares will be conditioned on
such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the
compensation committee may determine in its sole discretion. The
restrictions shall remain in
force during a restriction period set by the compensation committee.
If the grantee is no longer employed by us during the restriction
period or if any other conditions are not met, the restricted
shares grant will terminate as to all shares covered by the grant
for which the restrictions are still applicable, and those shares
must be immediately returned to us.
Stock Appreciation Rights.
The
compensation committee may grant stock appreciation rights (SARs)
to any participant, subject to the maximum plan limit described
above. At any time, the compensation committee may grant an SAR
award, either separately or in connection with any option;
provided, that if an SAR is granted in connection with an incentive
stock option, it must be granted at the same time that the
underlying option is granted. The compensation committee will
determine the base amount of the SAR at the time that it is granted
and will establish any applicable vesting provisions, transfer
restrictions or other restrictions as it may determine is
appropriate in its sole discretion. When a participant exercises an
SAR, he or she will receive the amount by which the value of the
stock has appreciated since the SAR was granted, which may be
payable to the participant in cash, shares, or a combination of
cash and shares, as determined by the compensation committee.
Performance Share Awards.
The
compensation committee may grant performance share awards to any
employee or key advisor. A performance share award represents the
right to receive an amount based on the value of our stock, but may
be payable only if certain performance goals that are established
by the compensation committee are met. If the compensation
committee determines that the applicable performance goals have
been met, a performance share award will be payable to the
participant in cash, shares or a combination of cash and shares, as
determined by the compensation committee.
Dividend Equivalent Rights.
The
compensation committee may grant dividend equivalent rights to any
participant. A dividend equivalent right is a right to receive
payments in amounts equal to dividends declared on shares of our
common stock with respect to the number of shares and payable on
such dates as determined by the compensation committee. The
compensation committee shall determine all other terms applicable
to dividend equivalent rights.
Cash
Awards.
The
compensation committee may grant cash awards to employees under the
1999 Equity Compensation Plan. Such awards shall be in such amounts
and subject to such performance goals and other terms and
conditions as the compensation committee determines.
Amendment and Termination of the Plan.
The
compensation committee may amend or terminate the plan at any time.
The plan will terminate on the tenth anniversary of its effective
date, unless the compensation committee terminates it earlier or
extends it with the approval of the shareholders.
Adjustment Provisions.
In the
event that certain reorganizations of Internet Capital Group or
similar transactions or events occur, the maximum number of shares
of stock available for grant, the maximum number of shares that any
participant in the 1999 Equity Compensation Plan may be granted,
the number of shares covered by outstanding grants, the kind of
shares issued under the 1999 Equity Compensation Plan and the price
per share or the applicable market value of such grants shall be
adjusted by the committee to reflect changes to our common stock as
a result of such occurrence to prevent the dilution or enlargement
of rights of any individual under the 1999 Equity Compensation Plan.
Change of Control and Reorganization.
Upon a
Change of Control, as defined in the 1999 Equity Compensation Plan,
the compensation committee may:
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Ÿ
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determine that the outstanding grants, whether in the form of
options and stock appreciation rights shall immediately vest and
become exercisable;
|
|
Ÿ
|
determine that the restrictions and conditions on all outstanding
restricted stock or performance share awards shall immediately
lapse;
|
|
Ÿ
|
require that grantees surrender their outstanding options and
stock appreciation rights in exchange for payment by us, in cash
or common stock, in 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 or stock appreciation
rights exceeds the exercise price of those options; and/or
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Ÿ
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after giving grantees an opportunity to exercise their
outstanding options and stock appreciation rights, terminate any
or all unexercised options and stock appreciation rights.
|
Upon a
Reorganization, as defined in the 1999 Equity Compensation Plan,
where we are not the surviving entity or where we survive only as a
subsidiary of another entity, unless the compensation committee
determines otherwise, all outstanding option or SAR grants shall be
assumed by or replaced with comparable options or rights by the
surviving corporation. In addition, the compensation committee may:
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Ÿ
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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
|
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after accelerating all vesting and giving grantees an opportunity
to exercise their outstanding options or SARs, terminate any or
all unexercised options and SARs.
|
Federal Tax Consequences of Stock Options.
In
general, neither the grant nor the exercise of an incentive stock
option will result in taxable income to an option holder or a
deduction to Internet Capital Group. To receive special tax
treatment as an incentive stock option under the Internal Revenue
Code as to shares acquired upon exercise of an incentive stock
option, an option holder must neither dispose of such shares within
two years after the incentive stock option is granted nor within
one year after the exercise of the option. In addition, the option
holder must be an employee of Internet Capital Group or one of its
subsidiaries at all times between the date of grant and the date
three months, or one year in the case of disability, before the
exercise of the option. Special rules apply in the case of the
death of the option holder. Incentive stock option treatment under
the Internal Revenue Code generally allows the sale of our common
stock received upon the exercise of an incentive stock option to
result in any gain being treated as a capital gain to the option
holder, but we will not be entitled to a tax deduction. However,
the exercise of an incentive stock option, if the holding period
rules described above are satisfied, will give rise to income
includable by the option holder in his or her alternative minimum
tax in an amount equal to the excess of the fair market value of
the stock acquired on the date of the exercise of the option over
the exercise price.
If the
holding rules described above are not satisfied, gain recognized on
the disposition of the shares acquired upon the exercise of an
incentive stock option will be characterized as ordinary income.
Such gain will be equal to the difference between the exercise
price and the fair market value of the shares at the time of
exercise. Special rules may apply to disqualifying dispositions
where the amount realized is less than the value at exercise. We
will generally be entitled to a deduction equal to the amount of
such gain included by an option holder as ordinary income. Any
excess of the amount realized upon such disposition over the fair
market value at exercise will generally be long-term or short-term
capital gain depending on the holding period involved.
Notwithstanding the foregoing, in the event that the exercise of
the option is permitted other than by cash payment of the exercise
price, various special tax rules may apply.
No
income will be recognized by an option holder at the time a
non-qualified stock option is granted. Generally, ordinary income
will, however, be recognized by an option holder at the time a
vested non-qualified stock option is exercised in an amount equal
to the excess of the fair market value of the underlying common
stock on the exercise date over the exercise price. We will
generally be entitled to a deduction for federal income tax
purposes in the same amount as the amount included in ordinary
income by the option holder with respect to his or her
non-qualified stock option. Gain or loss on a subsequent sale or
other disposition of the shares acquired upon the exercise of a
vested non-qualified stock option will be measured by the
difference between the amount realized on the disposition and the
tax basis of such shares, and will generally be long-
term capital gain depending on the holding period involved. The tax
basis of the shares acquired upon the exercise of any non-qualified
stock option will be equal to the sum of the exercise price of such
non-qualified stock option and the amount included in income with
respect to such option. Notwithstanding the foregoing, in the event
that exercise of the option is permitted other than by cash payment
of the exercise price, various special tax rules apply.
Unless
the holder of an unvested non-qualified stock option makes an 83(b)
election as described below, there generally will be no tax
consequences as a result of the exercise of an unvested option
until the stock received upon such exercise is no longer subject to
a substantial risk of forfeiture or is transferable. Generally,
when the shares have vested, the holder will recognize ordinary
income, and we will be entitled to a deduction, equal to the
difference between the fair market value of the stock at such time
and the exercise price paid by the holder for the stock.
Subsequently realized changes in the value of the stock generally
would be treated as long-term or short-term capital gain or loss,
depending on the length of time the shares were held prior to
disposition of such shares. In general terms, if a holder were to
make an 83(b) election under Section 83(b) of the Internal Revenue
Code upon the exercise of the unvested option, the holder would
recognize ordinary income on the date of the exercise of such
option, and we would be entitled to a deduction, equal to:
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the
fair market value of the stock received pursuant to such exercise
as though the stock were not subject to a substantial risk of
forfeiture or transferable, minus
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the
exercise price paid for the stock.
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If an 83(b) election were made, there would
generally be no tax consequences to the holder upon the vesting of
the stock, and all subsequent appreciation in the stock would
generally be eligible for capital gains treatment.
Additional special tax rules may apply to those option holders who
are subject to the rules set forth in Section 16 of the Securities
Exchange Act of 1934. The foregoing tax discussion is a general
description of certain expected federal income tax results under
current law, and all affected individuals should consult their own
advisors if they wish any further details or have special questions.
Section 162(m). Section 162(m) of the Internal Revenue Code may
preclude us from claiming a federal income tax deduction if we pay
total remuneration in excess of $1.0 million to the chief executive
officer or to any of the other four most highly compensated
officers in any one year. Total remuneration would generally
include amounts received upon the exercise of stock options granted
under the plan and the value of shares received when restricted
shares become transferable or such other time when income is
recognized. An exception does exist, however, for performance-based
compensation which includes amounts received upon the exercise of
stock options pursuant to a plan approved by shareholders that
meets certain requirements. The 1999 Equity Compensation Plan is
intended to make grants of stock options and stock appreciation
rights that meet the requirements of performance-based
compensation. Other awards have been structured with the intent
that such awards may qualify as such performance based compensation
if so determined by the compensation committee.
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Internet
Capital Group, Inc. Equity Compensation Loan Program
|
In
accordance with the 1998 Equity Compensation Plan, the 1999 Equity
Compensation Plan and the applicable employee option agreements,
and in consideration of certain restrictive covenants regarding the
use of confidential information and non-competition, we have
offered to loan some employees who have been awarded non-qualified
stock options under the 1999 Equity Compensation Plan an amount
necessary to pay the exercise price of their outstanding options
and an amount to pay some portion of the income tax that these
employees will owe upon the exercise of such options. These loans
will generally be available to those eligible employees who elect
to exercise their options on or prior to a date to be determined by
us. The loans will be full recourse, will bear interest at the
Applicable Federal Rate, and will be for five-year terms. In
addition, each eligible employee will pledge the number of shares
acquired pursuant to the exercise of the applicable option as
collateral for the loan. If an eligible employee sells any shares
acquired pursuant to the option exercise, such eligible employee is
obligated under the terms of the loan to use the proceeds of such
sale to repay that percentage of the original balance of the loan
which is equal to the percentage determined by dividing the number
of shares sold by the number of shares acquired pursuant to the
exercise of the applicable option. If the eligible employee’s
employment by us is terminated for any reason, such eligible
employee must repay the full outstanding loan balance to us within
90 days of such termination. Also, if we determine that a grantee
breaches any of the terms of the restrictive covenants, such
eligible employee must immediately repay any outstanding loan
balance to us.
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Internet
Capital Group, Inc. Long-Term Incentive Plan
|
Our
long-term incentive plan supports our growth strategy since the
plan permits participants to share directly in the growth of our
partner companies. Each year, we will allocate up to 12% of each
acquisition made during the year for the benefit of the
participants in the long-term incentive plan. The plan permits the
compensation committee to award grants in the form of interests in
limited partnerships established by us to hold the interests
acquired by us in a given year, restricted stock in a partner
company, or share units which entitle a participant to share in the
appreciation of the value of the stock of a partner company above
established threshold levels. Grants may be made to any of our
employees. As of June 30, 1999, no grants have been made under the
plan. We intend primarily to grant limited partnership interests to
plan participants to more closely align the participants’
interests with our interests.
All
grants are subject to vesting over a period of years and the
attainment of specified threshold levels. Partnership interests are
generally paid out in stock of a partner company after a fixed
period of years. The compensation committee can accelerate vesting
and payout upon the attainment of the threshold value. Restricted
stock awards are subject to certain restrictions and are held in
escrow until the attainment of the established threshold levels.
Share units are payable in cash or in stock of a partner company
after a fixed period of years, subject to acceleration by the
compensation committee if the threshold levels are achieved.
|
Internet
Capital Group, Inc. 401(k) Plan
|
We
sponsor the Internet Capital Group, Inc. 401(k) Plan, a defined
contribution plan that is intended to qualify under Section 401(k)
of the Code. All employees who are at least 21 years old and have
been employed by us for one month are eligible to participate in
our 401(k) Plan. An eligible employee of the Company may begin to
participate in our 401(k) Plan on the first day of the plan quarter
after satisfying our 401(k) Plan’s eligibility requirements. A
participating employee may make pre-tax contributions of a
percentage (not less than 1% and not more than 15%) of his or her
eligible compensation, subject to the limitations under the federal
tax laws. Employee contributions and the investment earnings
thereon are fully vested at all times. We may make discretionary
contributions to the 401(k) Plan but we have never done so.
Walter
W. Buckley, III and Kenneth A. Fox, two of our executive officers,
and Safeguard Scientifics, Inc., one of our principal stockholders,
were all involved in our founding and organization and may be
considered our promoters. Under our Membership Profit Interest
Plan, we issued 2,568,000 shares of common stock to Mr. Buckley in
March 1996 and 1,286,550 shares of common stock to Mr. Fox in
September 1996. In December 1998, each of Mr. Buckley and Mr. Fox
received an incentive stock option grant under our 1998 Equity
Compensation Plan to purchase 1,300,000 and 1,250,000 shares of
common stock, respectively. In May 1999, each of Mr. Buckley and
Mr. Fox received an incentive stock option grant under our 1999
Equity Compensation Plan to purchase 1,000,000 and 900,000 shares
of common stock, respectively. In addition, Safeguard Scientifics,
Inc., through its affiliates Safeguard Scientifics (Delaware), Inc.
and Safeguard 98 Capital L.P., and Mr. Buckley and Mr. Fox, have
purchased common stock from us. The following table sets forth the
number of shares of our common stock purchased by Mr. Buckley, Mr.
Fox and Safeguard Scientifics, Inc. through Safeguard Scientifics
(Delaware), Inc. and Safeguard 98 Capital L.P., the date of each
purchase and the amounts received by us from each of these
purchasers of our common stock.
Name
|
|
Shares of
Common
Stock Purchased
|
|
Date of
Purchase
|
|
Amount
Received
by Internet
Capital Group
|
| Walter W.
Buckley, III
|
|
250,000
|
|
April
1996
|
|
$250,000
|
| |
|
250,000
|
|
November
1996
|
|
250,000
|
| |
|
250,000
|
|
April
1997
|
|
250,000
|
| |
|
250,000
|
|
November
1997
|
|
250,000
|
|
| Kenneth A. Fox
|
|
250,000
|
|
May 1996
|
|
$250,000
|
| |
|
250,000
|
|
November
1996
|
|
250,000
|
| |
|
250,000
|
|
June 1997
|
|
250,000
|
| |
|
250,000
|
|
December
1997
|
|
250,000
|
|
| Safeguard
Scientifics (Delaware), Inc.
|
|
6,139,074
|
|
May 1996
|
|
$6,139,074
|
| |
|
360,926
|
|
November
1996
|
|
360,926
|
| |
|
3,250,000
|
|
April
1997
|
|
3,250,000
|
| |
|
3,250,000
|
|
November
1997
|
|
3,250,000
|
|
| Safeguard 98
Capital L.P.
|
|
4,062,500
|
|
June 1998
|
|
$8,125,000
|
| |
|
4,062,500
|
|
February
1999
|
|
8,125,000
|
During
1998 and 1999, we leased our corporate offices in Wayne,
Pennsylvania from Safeguard Scientifics, Inc. From January 31, 1998
to June 30, 1999, our monthly lease payments to Safeguard
Scientifics, Inc. totaled approximately $58,000. Prior to this
offering and the concurrent offering, Safeguard Scientifics, Inc.,
beneficially owned about 17.7% of our common stock. We believe that
our lease in Wayne with Safeguard Scientifics, Inc. is on terms no
less favorable to us than those that would be available to us in an
arm’s-length transaction with a third party.
In the
second half of 1999, we intend to lease new corporate office space
in Wayne, Pennsylvania from Safeguard Scientifics, Inc. We expect
that our new lease with Safeguard Scientifics, Inc. will be on
terms no less favorable to us than those terms that would be
available to us in an arm’s-length transaction with a third
party.
During
1998 and 1999, we paid Safeguard Scientifics for telephone and
accounting services, health and general insurance coverage, and
other services. From January 31, 1998 to June 30, 1999, our
payments to Safeguard Scientifics totaled approximately $220,000
for these services. We believe that the services provided to us are
on terms no less favorable to us than those that would be available
to us in an arm’s-length transaction with a third party.
After
180 days from the date of this prospectus, each of Comcast ICG,
Inc., CPQ Holdings, Inc., General Electric Capital Corporation, IBM
Corporation, Internet Assets, Inc., Safeguard Scientifics,,
Technology Leaders II L.P. and Technology Leaders II Offshore C.V.
will have the right to demand on no more than two occasions that we
register the shares of our common stock held by them at the time of
this offering and all shares of our common stock held by them after
exercise of any warrants issued to these shareholders at the time
of this offering. After this offering, these shareholders,
together, will be holders of 51,602,064 shares of our common stock
and warrants to purchase 319,871 shares of our common stock.
In
January 1998, we loaned Douglas A. Alexander, one of our Managing
Directors, $117,669. Mr. Alexander used the proceeds from the loan
to purchase a portion of our interest in VerticalNet at our cost.
Mr. Alexander agreed to pay the principal amount of the loan with
interest at an annual rate equal to the prime rate plus 1% within
30 days of the date we request payment. On January 5, 1999, Mr.
Alexander paid us $128,820, representing the outstanding principal
amount of the loan plus accrued interest.
In
January 1997, we granted Christopher H. Greendale, currently one of
our Managing Directors, a ten year option to purchase shares of
Series A Preferred Stock convertible into 58,500 shares of common
stock of Benchmarking Partners, Inc., which we currently own. The
option is exercisable at a purchase price of $2.85 per share and
vests in four annual installments of 14,625 shares beginning one
year after the date of grant. Vesting is contingent upon Mr.
Greendale’s continued service to us.
In
October 1998, we sold our 100,000 shares of Series B Preferred
Stock of Who?Vision Systems, Inc. for $300,000 to Comcast.
In
January 1999, we sold our convertible notes of VerticalNet for
$2,083,221 to Comcast Corporation. At the time of this sale to
Comcast, the outstanding principal amount of these convertible
notes was $2,083,221.
In
March 1999, we sold our convertible notes of PrivaSeek for $571,659
to Comcast and the assumption by Comcast of one of our notes
payable in the outstanding principal amount of $428,341. At the
time of this sale to Comcast, the outstanding principal amount of
these convertible notes was $1 million.
In
April 1999, in connection with our obtaining a bank credit
facility, Safeguard Scientifics, Inc. delivered a letter to the
agent for the banks stating that it intends to take any action that
may in the future be necessary to promptly cure certain defaults
that could occur under our bank credit facility.
In May
1999, we issued $90 million principal amount of three-year
convertible notes to our largest shareholders, directors, executive
officers, certain members of the immediate families of our
executive officers and others in a round of financing led by
Comcast ICG. The notes bear interest at an annual rate of 4.99%
during the first year and at the prime rate for the remaining two
years. The notes mature on May 10, 2002. Upon completion of this
offering, based on an assumed initial public offering price of
$11.00 per share, the notes will automatically convert into
8,181,682 shares of our common stock, and all accrued interest will
be waived. We issued warrants to the holders of these notes to
purchase shares of our common stock. The warrant holders will be
entitled to purchase, based on an assumed initial public offering
price of $11.00 per share, 1,636,225 shares of our common stock.
The warrants expire in May 2002.
The
following table sets forth the names of the holders of certain
convertible notes and warrants, their relationship to us and the
amounts of each of their convertible notes.
Name of Holder
|
|
Relationship to
Internet Capital Group
|
|
Amount of
Convertible Note
|
| Ann B. Alexander
|
|
family member of
executive officer
|
|
$ 63,000
|
| Bradley Alexander
|
|
family member of
executive officer
|
|
155,000
|
| Douglas E.
Alexander
|
|
family member of
executive officer
|
|
160,000
|
| Susan R. Buckley
|
|
family member of
executive officer
|
|
55,000
|
| Walter W.
Buckley, Jr.
|
|
family member of
executive officer
|
|
200,000
|
| Walter W.
Buckley, III
|
|
executive officer
and director
|
|
600,000
|
| Comcast ICG, Inc.
|
|
principal
shareholder
|
|
15,000,000
|
| E. Michael
Forgash
|
|
director
|
|
100,000
|
| Kenneth A. Fox
|
|
executive officer
and director
|
|
1,000,000
|
| David D. Gathman
|
|
executive officer
|
|
25,000
|
| Thomas P. Gerrity
|
|
director
|
|
77,000
|
| Internet Assets,
Inc.
|
|
principal
shareholder
|
|
1,525,000
|
| Robert E. Keith,
Jr.
|
|
director
|
|
46,000
|
| Henry N. Nassau
|
|
executive officer
|
|
36,000
|
| Robert A. Pollan
|
|
executive officer
|
|
31,000
|
| Peter A. Solvik
|
|
director
|
|
1,068,000
|
|
| In May 1999, some of our officers
and directors exercised options to purchase our common stock.
Instead of paying us in cash, the officers and directors
delivered promissory notes to us in the aggregate amount of
$21,765,000. The promissory notes bear interest at the rate of
5.22%, mature on or about May 5, 2004 and are secured by
8,910,000 shares of our common stock. The following table sets
forth the names of the makers of the promissory notes, their
relationship to us and the amounts owed to us by each of these
makers.
|
|
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
$ 2,600,000
|
| Douglas A.
Alexander
|
|
executive officer
|
|
2,500,000
|
| Richard G.
Bunker
|
|
executive officer
|
|
1,350,000
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
2,500,000
|
| David D. Gathman
|
|
executive officer
|
|
1,300,000
|
| Christopher H.
Greendale
|
|
executive officer
|
|
300,000
|
| Victor S. Hwang
|
|
executive officer
|
|
4,005,000
|
| Henry N. Nassau
|
|
executive officer
|
|
3,660,000
|
| John N. Nickolas
|
|
executive officer
|
|
800,000
|
| Robert A. Pollan
|
|
executive officer
|
|
2,866,000
|
| Thomas P.
Gerrity
|
|
director
|
|
400,000
|
|
| In June 1999, some of our
executive officers exercised options to purchase our common
stock. Instead of paying us cash, the officers and directors
delivered promissory notes to us in the aggregate amount of
$14,783,223. The promissory notes bear interest at the rate of
5.37%, mature on or about June 4, 2004 and are secured by
2,247,750 shares of our common stock. The following table sets
forth the names of the makers of the promissory notes, their
relationship to us and the amounts owed to us by each of these
makers.
|
|
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Gregory W.
Haskell
|
|
executive
officer
|
|
$
6,311,000
|
| Richard S.
Devine
|
|
executive
officer
|
|
7,114,223
|
| Richard G.
Bunker
|
|
executive
officer
|
|
1,358,000
|
In
July 1999, some of our officers and directors exercised options
to purchase our common stock. Instead of paying us cash, the
officers and directors delivered promissory notes to us in the
aggregate amount of $39,304,000. The promissory notes bear
interest at the rate of 5.82%, mature on or about July 7, 2004
and are secured by 5,475,000 shares of our common stock. The
following table sets forth the names of the makers of the
promissory notes, their relationship to us and the amounts owed
to us by each of these makers.
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Douglas A.
Alexander
|
|
executive
officer
|
|
$3,395,000
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
6,790,000
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
6,111,000
|
| Robert A.
Pollan
|
|
executive
officer
|
|
3,395,000
|
| Todd G. Hewlin
|
|
executive
officer
|
|
2,430,000
|
| Mark J. Lotke
|
|
executive
officer
|
|
7,058,000
|
| Sam Jadallah
|
|
executive
officer
|
|
10,125,000
|
|
| In May 1999, some of our
officers and directors incurred tax liabilities as a result of
exercising their options to purchase our common stock. These
directors and officers borrowed money from us to pay these tax
liabilities. The loans are evidenced by promissory notes
delivered by these officers and directors to us in the
aggregate principal amount of $7,463,307. The promissory notes
bear interest at a rate of 5.22% and mature on May 5, 2004. The
following table sets forth the names of the makers of the
promissory notes, their relationship to us and the amounts owed
to us by each of these makers.
|
|
Name of
Maker
|
|
Relationship to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
$
1,207,440
|
| Douglas A.
Alexander
|
|
executive
officer
|
|
1,161,000
|
| Richard G.
Bunker
|
|
executive
officer
|
|
272,835
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
1,395,000
|
| David D.
Gathman
|
|
executive
officer
|
|
603,720
|
| Christopher H.
Greendale
|
|
executive
officer
|
|
66,552
|
| Victor S.
Hwang
|
|
executive
officer
|
|
973,092
|
| John N.
Nickolas
|
|
executive
officer
|
|
371,520
|
| Robert A.
Pollan
|
|
executive
officer
|
|
1,478,700
|
|
| In January 1999, while a
limited liability company, we paid a distribution to some of
our officers, directors and principal stockholders who were
members of Internet Capital Group, L.L.C. The following table
sets forth the names of the recipients of the distribution,
their relationships to us and the amount paid by us to the
recipient.
|
|
Name of
Recipient
|
|
Relationship to
Internet Capital Group
|
|
Amount Paid
to Recipient
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
$ 685,092
|
| Douglas A.
Alexander
|
|
executive
officer
|
|
249,702
|
| Kenneth A.
Fox
|
|
executive
officer and director
|
|
514,597
|
| Thomas P.
Gerrity
|
|
director
|
|
6,100
|
| Christopher
H. Greendale
|
|
executive
officer
|
|
37,307
|
| Henry N.
Nassau
|
|
executive
officer
|
|
305
|
| Robert A.
Pollan
|
|
executive
officer
|
|
2,440
|
| Peter A.
Solvik
|
|
director
|
|
29,216
|
| Comcast ICG,
Inc.
|
|
principal
shareholder
|
|
1,401,198
|
| Internet
Assets, Inc.
|
|
principal
shareholder
|
|
122,007
|
| Safeguard
Scientifics (Delaware), Inc.
|
|
principal
shareholder
|
|
2,602,424
|
| Safeguard
Capital 98 LP
|
|
principal
shareholder
|
|
198,262
|
PRINCIPAL AND SELLING SHAREHOLDERS
The
following table sets forth certain information regarding
beneficial ownership of our common stock as of July 12, 1999,
and as adjusted to reflect the sale of shares offered hereby,
by:
|
Ÿ
|
each person (or group of affiliated persons) who is known by
us to own more than five percent of the outstanding shares of
our common stock;
|
|
Ÿ
|
each of our directors and our executive officers named in the
summary compensation table; and
|
|
Ÿ
|
all of our executive officers and directors as a group.
|
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities.
Unless otherwise noted, we believe that all persons named in
the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures
include $90 million principal amount of convertible notes which
automatically convert to 8,181,682 shares of our common stock
upon completion of this offering assuming an $11.00 per share
initial public offering price, shares issuable upon exercise of
warrants to purchase an additional 1,836,225 shares at the
initial public offering price and shares of common stock
issuable upon the exercise of options or warrants exercisable
within 60 days of July 12, 1999. These options and warrants are
deemed to be outstanding and to be beneficially owned by the
person holding them for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person. See “Certain Transactions” for a description
of the convertible notes.
| |
|
Options and Warrants
Exercisable
Within 60 Days
|
|
Number of Shares
Beneficially Owned
Including Options and
Warrants Exercisable
Within 60 Days
|
|
Percent of Shares Outstanding
|
5%
Beneficial Owners, Directors,
Named Officers
|
|
|
|
Before the Offering
|
|
After the Offering
|
| Comcast ICG,
Inc. (1)
|
|
339,726
|
|
12,303,361
|
|
11.4
|
%
|
|
9.9
|
%
|
|
c/o Comcast
Corporation
|
|
1500 Market
Street
|
|
Philadelphia,
Pennsylvania 19102
|
| Internet
Assets, Inc.
|
|
27,727
|
|
5,166,363
|
|
4.8
|
|
|
4.2
|
|
|
Sahab Tower
|
|
Fahad Alsalim
Street, 10th Floor
|
|
P.O. Box 3216
|
|
Safat, 13033,
Kuwait
|
| Safeguard
Scientifics, Inc.
|
|
—
|
|
19,061,794
|
|
17.7
|
|
|
14.4
|
|
|
435 Devon
Park Drive
|
|
Wayne,
Pennsylvania 19087
|
| Douglas
Alexander (2)
|
|
—
|
|
3,066,374
|
|
2.9
|
|
|
2.5
|
|
| Julian A.
Brodsky (3)
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Walter W.
Buckley, III (4)
|
|
11,909
|
|
6,081,954
|
|
5.7
|
|
|
4.9
|
|
| E. Michael
Forgash (5)
|
|
1,818
|
|
81,533
|
|
*
|
|
|
*
|
|
| Kenneth A.
Fox (6)
|
|
18,181
|
|
5,545,640
|
|
5.2
|
|
|
4.5
|
|
| Dr. Thomas P.
Gerrity (7)
|
|
1,400
|
|
458,400
|
|
*
|
|
|
*
|
|
| Scott E.
Gould
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Robert E.
Keith, Jr.
|
|
836
|
|
155,017
|
|
*
|
|
|
*
|
|
| Robert A.
Pollan (8)
|
|
563
|
|
1,928,381
|
|
1.8
|
|
|
1.6
|
|
| Peter A.
Solvik
|
|
219,418
|
|
536,544
|
|
*
|
|
|
*
|
|
All executive
officers and directors
as a group (22 persons) (2) (3)
(4) (5) (6) (7) (8)
|
|
656,142
|
|
27,226,641
|
|
25.1
|
%
|
|
21.9
|
%
|
* Less than 1%
(1)
|
Includes convertible notes that convert to 227,272 shares and
warrants to purchase 45,454 shares of common stock held by
Comcast Interactive Investments, Inc. as to which Comcast
ICG, Inc. disclaims beneficial ownership.
|
(2)
|
Includes shares of restricted common stock which have not
vested pursuant to the Membership Profit Interest Plan and
the 1999 Equity Compensation Plan. See “Management—
Employee Benefit Plans” for a description of the
Membership Profit Interest Plan and the 1999 Equity
Compensation Plan.
|
(3)
|
Julian A. Brodsky is a Director and Vice-Chairman of Comcast
Corporation. Mr. Brodsky disclaims beneficial ownership of
shares held by Comcast ICG, Inc., a subsidiary of Comcast
Corporation.
|
(4)
|
Includes shares of restricted common stock that have not
vested pursuant to the Membership Profit Interest Plan and
the 1999 Equity Compensation Plan. Also includes 142,500
shares of common stock and convertible notes that convert to
5,000 shares and warrants to purchase 1,000 shares of common
stock held by Susan R. Buckley, wife of Walter W. Buckley,
III.
|
(5)
|
E. Michael Forgash is Vice President-Operations of Safeguard
Scientifics, Inc. Mr. Forgash disclaims beneficial ownership
of shares beneficially owned by Safeguard Scientifics and
Safeguard Scientifics, disclaims beneficial ownership of
shares beneficially owned by Mr. Forgash.
|
(6)
|
Includes shares of restricted common stock that have not
vested pursuant to the Membership Profit Interest Plan and
the 1999 Equity Compensation Plan.
|
(7)
|
Includes shares of restricted common stock that have not
vested pursuant to the 1999 Equity Compensation Plan.
|
(8)
|
Includes shares of restricted common stock which have not
vested pursuant to the Membership Profit Interest Plan and
the 1999 Equity Compensation Plan.
|
Selling Shareholder
Safeguard Scientifics may sell up to 1,300,000 shares of our
common stock to its shareholders in connection with the
directed share subscription program. Assuming that all the
shares offered in the directed share subscription program are
purchased by shareholders of Safeguard Scientifics, Safeguard
Scientifics will own 17,761,794 shares of our common stock, or
approximately 14.4% of the outstanding shares, after completion
of this offering and the concurrent offering. If the
shareholders of Safeguard Scientifics do not purchase any of
the shares offered in the directed share subscription program,
Safeguard Scientifics will beneficially own approximately 17.2%
of our common stock after this offering and the concurrent
offering.
DESCRIPTION OF CAPITAL STOCK
General
Our
authorized capital stock consists of 300,000,000 shares of
common stock, par value $.001 per share, and 10,000,000 shares
of preferred stock, par value $.01 per share. Upon completion
of this offering, we will have approximately 123,765,124 shares
(125,565,124 shares if the underwriters’ over-allotment
option is exercised in full) of common stock issued and
outstanding.
The
following is qualified in its entirety by reference to our
certificate of incorporation and bylaws, copies of which are
filed as exhibits to the Registration Statement of which this
prospectus is a part.
Common Stock
As
of July 12, 1999, there were 99,492,533 shares of our common
stock outstanding. As of July 12, 1999, 1,605,750 shares of our
common stock were reserved for issuance under our 1999 Equity
Compensation Plan. Upon completion of the offering, there will
be 123,765,124 shares of common stock outstanding.
The
holders of our common stock are entitled to dividends as our
board of directors may declare from funds legally available
therefor, subject to the preferential rights of the holders of
our preferred stock, if any. The holders of our common stock
are entitled to one vote per share on any matter to be voted
upon by shareholders. Our certificate of incorporation does not
provide for cumulative voting in connection with the election
of directors, and accordingly, holders of more than 50% of the
shares voting will be able to elect all of the directors. No
holder of our common stock will have any preemptive right to
subscribe for any shares of capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or
winding up of our affairs, the holders of our common stock are
entitled to share ratably in all assets remaining after payment
of creditors and subject to prior distribution rights of our
preferred stock, if any. All of the outstanding shares of
common stock are, and the shares offered by us will be, fully
paid and non-assessable.
Preferred Stock
As
of the closing of this offering, no shares of our preferred
stock will be outstanding. Our certificate of incorporation
provides that our board of directors may by resolution
establish one or more classes or series of preferred stock
having such number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights,
preferences, and limitations as may be fixed by them without
further shareholder approval. The holders of our preferred
stock may be entitled to preferences over common shareholders
with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of
directors resolutions issuing such shares.
The
issuance of our preferred stock may have the effect of
delaying, deferring or preventing a change in control of
Internet Capital Group without further action by the
shareholders and may adversely affect voting and other rights
of holders of our common stock. In addition, issuance of
preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to
acquire a majority of the outstanding shares of voting stock.
At present, we have no plans to issue any shares of preferred
stock.
Registration Rights
After this offering, the holders of 51,602,064 shares of our
common stock and warrants exercisable for 319,871 shares of our
common stock are entitled to demand registration of their
shares under the Securities Act. The holders of 87,080,172
shares of our common stock and warrants exercisable for
1,208,527 shares of our common stock, however, have agreed not
to demand registration of their common stock for 180 days after
the date of this offering. After this 180-day period, any one of
these holders may require us, on not more than two occasions,
to file a registration statement under the Securities Act with
respect to at least twenty-five percent (25%) of his, her or
its shares eligible for demand rights if the gross offering
price would be expected to exceed $5.0 million. We are required
to use our best efforts to effect the registration, subject to
certain conditions and limitations. In addition, if 180 days
after the date of this offering, we prepare to register any of
our securities under the Securities Act, for our own account or
the account of our other holders, we will send notice of this
registration to holders of the shares eligible for demand
rights as well as to holders of all of our convertible notes
and holders who have contributed to us at least $1,000,000 in
capital. Subject to certain conditions and limitations, they
may elect to register their eligible shares. If we are able to
file a registration statement on Form S-3, the holders of
shares eligible for demand rights may register their common
stock along with that registration. The expenses incurred in
connection with such registrations will be borne by us, except
that we will pay expenses of only one registration on Form S-3
at a holder’s request per year.
Section 203 of the Delaware General
Corporation Law; Certain Anti-Takeover, Limited Liability and
Indemnification Provisions
|
Section
203 of the Delaware General Corporation Law
|
The
following is a description of the provisions of the Delaware
General Corporation Law, and our certificate of incorporation
and bylaws that we believe are material to investors. This
summary does not purport to be complete and is qualified in its
entirety by reference to the Delaware General Corporation Law,
and our certificate of incorporation and bylaws.
We
are subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly held
Delaware corporation from engaging in a “business
combination” with an “interested stockholder”
for a period of three years after the date of the transaction
in which the person became an “interested stockholder,
” unless the business combination is approved in a
prescribed manner. A “business combination” includes
certain mergers, asset sales, and other transactions resulting
in a financial benefit to the “interested stockholder.
” Subject to certain exceptions, an “interested
stockholder” is a person who, together with affiliates and
associates, owns, or within the past three years did own, 15%
of the corporation’s voting stock.
Certain provisions of our certificate of incorporation and
bylaws could have anti-takeover effects. These provisions are
intended to enhance the likelihood of continuity and stability
in the composition of our corporate policies formulated by our
Board of Directors. In addition, these provisions also are
intended to ensure that our Board of Directors will have
sufficient time to act in what the board of directors believes
to be in the best interests of us and our shareholders. These
provisions also are designed to reduce our vulnerability to an
unsolicited proposal for our takeover that does not contemplate
the acquisition of all of our outstanding shares or an
unsolicited proposal for the restructuring or sale of all or
part of Internet Capital Group. The provisions are also
intended to discourage certain tactics that may be used in
proxy fights. However, these provisions could delay or
frustrate the removal of incumbent directors or the assumption
of control of us by the holder of a large block of common
stock, and could also discourage or make more difficult a
merger, tender offer, or proxy contest, even if such event
would be favorable to the interest of our shareholders.
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Classified Board of Directors
|
Our
certificate of incorporation provides for our Board of
Directors to be divided into three classes of directors, with
each class as nearly equal in number as possible, serving
staggered three-year terms (other than directors who may be
elected by holders of preferred stock). As a result,
approximately one-third of our Board of Directors will be
elected each year. The classified board provision will help to
assure the continuity and stability of our Board of Directors
and our business strategies and policies as determined by our
Board of Directors. The classified board provision could have
the effect of discouraging a third party from making an
unsolicited tender offer or otherwise attempting to obtain
control of us without the approval of our Board of
Directors. In addition, the classified board provision could
delay shareholders who do not like the policies of our Board of
Directors from electing a majority of our Board of Directors
for two years.
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No
Shareholder Action by Written Consent; Special Meetings
|
Our
certificate of incorporation provides that shareholder action
can only be taken at an annual or special meeting of
shareholders and prohibits shareholder action by written
consent in lieu of a meeting. Our bylaws provide that special
meetings of shareholders may be called only by our Board of
Directors or our Chief Executive Officer. Our shareholders are
not permitted to call a special meeting of shareholders or to
require that our Board of Directors call a special meeting.
|
Advance
Notice Requirements for Shareholder Proposals and Director
Nominees
|
Our
bylaws establish an advance notice procedure for our
shareholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting
of our shareholders (the “Shareholder Notice Procedure
”). The Shareholder Notice Procedure provides that only
persons who are nominated by, or at the direction of, our Board
of Directors or its Chairman, or by a shareholder who has given
timely written notice to our Secretary or any Assistant
Secretary prior to the meeting at which directors are to be
elected, will be eligible for election as our directors. The
Shareholder Notice Procedure also provides that at an annual
meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, our Board of
Directors or its Chairman or by a shareholder who has given
timely written notice to our Secretary of such shareholder’
s intention to bring such business before such meeting. Under
the Shareholder Notice Procedure, if a shareholder desires to
submit a proposal or nominate persons for election as directors
at an annual meeting, the shareholder must submit written
notice to Internet Capital Group not less than 90 days nor more
than 120 days prior to the first anniversary of the previous
year’s annual meeting. In addition, under the Shareholder
Notice Procedure, a shareholder’s notice to Internet
Capital Group proposing to nominate a person for election as a
director or relating to the conduct of business other than the
nomination of directors must contain certain specified
information. If the chairman of a meeting determines that
business was not properly brought before the meeting, in
accordance with the Shareholder Notice Procedure, such business
shall not be discussed or transacted.
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Number
of Directors; Removal; Filling Vacancies
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Our
certificate of incorporation and bylaws provide that our Board
of Directors will consist of not less than 5 nor more than 9
directors (other than directors elected by holders of our
preferred stock), the exact number to be fixed from time to
time by resolution adopted by our directors. Further, subject
to the rights of the holders of any series of our preferred
stock, if any, our certificate of incorporation and bylaws
authorize our Board of Directors to elect additional directors
under specified circumstances and fill any vacancies that occur
in our Board of Directors by reason of death, resignation,
removal, or otherwise. A director so elected by our Board of
Directors to fill a vacancy or a newly created directorship
holds office until the next election of the class for which
such director has been chosen and until his successor is
elected and qualified. Subject to the rights of the holders of
any series of our preferred stock, if any, our certificate of
incorporation and bylaws also provide that directors may be
removed only for cause and only by the affirmative vote of
holders of a majority of the combined voting power of the then
outstanding stock of Internet Capital Group. The effect of
these provisions is to preclude a shareholder from removing
incumbent directors without cause and simultaneously gaining
control of our Board of Directors by filling the vacancies
created by such removal with its own nominees.
We
have included in our certificate of incorporation and bylaws
provisions to eliminate the personal liability of our directors
for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by the Delaware General
Corporation Law, and to indemnify our directors and officers to
the fullest
extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which
indemnification is otherwise discretionary. We believe that
these provisions are necessary to attract and retain qualified
persons as directors and officers.
|
Certificate of Incorporation
|
The
provisions of our certificate of incorporation that could have
anti-takeover effects as described above are subject to
amendment, alteration, repeal, or rescission by the affirmative
vote of the holder of not less than two-thirds (66
2
/
3
%)
of the outstanding shares of voting securities. This
requirement makes it more difficult for shareholders to make
changes to the provisions in our certificate of incorporation
which could have anti-takeover effects by allowing the holders
of a minority of the voting securities to prevent the holders
of a majority of voting securities from amending these
provisions of our certificate of incorporation.
Our
certificate of incorporation provides that our bylaws are
subject to adoption, amendment, alteration, repeal, or
rescission either by our Board of Directors without the assent
or vote of our shareholders, or by the affirmative vote of the
holders of not less than two-thirds (66
2
/
3
%)
of the outstanding shares of voting securities. This provision
makes it more difficult for shareholders to make changes in our
bylaws by allowing the holders of a minority of the voting
securities to prevent the holders of a majority of voting
securities from amending our bylaws.
Transfer Agent and Registrar
The
Transfer Agent and Registrar for our common stock is
ChaseMellon Shareholder Services. The Transfer Agent’s
address is 4 Station Square, Pittsburgh, Pennsylvania, and its
telephone number is (412) 236-8157.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 123,765,124
shares of our common stock outstanding (assuming conversion of
all of our outstanding convertible notes, and no exercise of
the underwriters’ over-allotment option exercise of
outstanding options and warrants). Of these shares, the shares
sold in this offering will be freely transferable without
restriction or further registration under the Securities Act,
except for any shares held by an existing “affiliate”
of Internet Capital Group, as that term is defined by the
Securities Act, which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act.
Upon completion of this offering, 110,465,133 “restricted
shares” as defined in Rule 144 will be outstanding. None
of these shares will be eligible for sale in the public market
as of the effective date of this registration statement.
In
general, under Rule 144 as currently in effect, beginning 90
days after the offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any
affiliate) at least one year previously, including a person who
may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
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1% of the then outstanding shares of our common stock
(approximately 123,765,124 shares immediately after the
offering) or;
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Ÿ
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the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission.
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Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current
public information about us. Any person (or persons whose
shares are aggregated) who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and
who owns shares within the definition of “restricted
securities” under Rule 144 under the Securities Act that
were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice
requirements.
We
have agreed not to offer, sell or otherwise dispose of any
shares of our common stock or any securities convertible into
or exercisable or exchangeable for our common stock or any
rights to acquire our common stock for a period of 180 days
after the date of this prospectus, without the prior written
consent of the representatives of the underwriters, subject to
certain limited exceptions. See “Underwriting.”
The
holders of 87,080,172 shares of our common stock have agreed
not to demand registration of their common stock for 180 days
after the date of this prospectus without the prior written
consent of the underwriters. After this period, if the holders
cause a large number of shares to be registered and sold in the
public market, those sales could have an adverse effect on the
market price for the common stock.
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The
following discussion summarizes principal U.S. federal income
and estate tax consequences of the ownership and disposition of
common stock by “Non-U.S. Holders”. You are a “
non-U.S. holder” for U.S. federal income tax purposes if
you are:
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a non-resident alien individual,
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a foreign partnership or
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an estate or trust that in either case is not subject to U.S.
federal income tax on a net income basis on income or gain
from common stock.
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This discussion does not consider the specific facts and
circumstances that may be relevant to particular holders and
does not address the treatment of holders of common stock under
the laws of any state, local or foreign taxing jurisdiction.
This discussion is based on the tax laws of the U.S., including
the Internal Revenue Code, as amended to the date hereof,
existing and proposed regulations thereunder, and
administrative and judicial interpretation thereof, as
currently in effect. These laws are subject to change, possibly
on a retroactive basis.
|
You
should consult your own tax advisors with regard to the
application of the federal income tax laws to your particular
situation, as well as to the applicability and effect of any
state, local or foreign tax laws to which you may be subject.
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Dividends
If
you are a non-U.S. holder of our common stock, dividends paid
to you are subject to withholding of U.S. federal income tax at
a 30% rate or at a lower rate if so specified in an applicable
income tax treaty. If, however, the dividends are effectively
connected with your conduct of a trade or business within the
U.S., and they are attributable to a permanent establishment
that you maintain in the U.S., if that is required by an
applicable income tax treaty as a condition for subjecting you
to U.S. income tax on a net income basis on such dividends,
then such “effectively connected” dividends generally
are not subject to withholding tax. Instead, such effectively
connected dividends are taxed at rates applicable to U.S.
citizens, resident aliens and domestic U.S. corporations.
Effectively connected dividends received by a non-U.S.
corporation may, under certain circumstances, be subject to an
additional “branch profits tax” at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty.
Under currently effective U.S. Treasury regulations, dividends
paid to an address in a foreign country are presumed to be paid
to a resident of that country, unless the payor has knowledge
to the contrary, for purposes of the 30% withholding tax
discussed above. Under current interpretations of U.S. Treasury
regulations, this presumption that dividends paid to an address
in a foreign country are paid to a resident of that country,
unless the payor has knowledge to the contrary, also applies
for the purposes of determining whether a lower tax treaty rate
applies.
Under U.S. Treasury regulations that will generally apply to
dividends paid after December 31, 2000, the “New
Regulations,” if you claim the benefit of a lower treaty
rate, you must satisfy certain certification requirements. In
addition, in the case of common stock held by a foreign
partnership, the certification requirements generally will
apply to the partners of the partnership and the partnership
must provide certain information, including a U.S. taxpayer
identification number. The final withholding regulations also
provide look-through rules for tiered partnerships.
If you are eligible for a reduced rate of U.S. withholding tax
under a tax treaty, you may obtain a refund of any excess
amounts withheld by filing a refund claim with the IRS.
Gain On Disposition Of Common Stock
If
you are a non-U.S. holder you generally will not be subject to
U.S. federal income tax on gain recognized on a disposition of
common stock unless:
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the gain is effectively connected with your conduct of a
trade or business in the U.S., and the gain is attributable
to a permanent establishment that you maintain in the U.S.,
if that is required by an applicable income tax treaty as a
condition for subjecting you to U.S. taxation on a net income
basis on gain from the sale or other disposition of the
common stock;
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you are an individual, you hold the common stock as a capital
asset and you are present in the U.S. for 183 or more days in
the taxable year of the sale and certain other conditions
exist; or
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we are or have been a “United States real property
holding corporation” for federal income tax purposes and
you held, directly or indirectly, at any time during the
five-year period ending on the date of disposition, more than
5% of our common stock, and you are not eligible for any
treaty exemption.
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Effectively connected gains recognized by a corporate non-U.S.
holder may also, under certain circumstances, be subject to an
additional “branch profits tax” at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty.
We
have not been, are not, and do not anticipate becoming a “
United States real property holding corporation” for
federal income tax purposes.
Federal Estate Taxes
Common stock held by an individual non-U.S. holder at the time
of death will be included in the holder’s gross estate for
U.S. federal estate tax purposes and may be subject to U.S.
federal estate taxes, unless an applicable estate tax treaty
provides otherwise.
Information Reporting And Backup Withholding
In
general, U.S. information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you
are either:
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subject to the 30% withholding tax discussed above, or
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not subject to the 30% withholding tax because an applicable
tax treaty reduces or eliminates such withholding tax,
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although dividend payments to you will be
reported for purposes of the withholding tax. See the
discussion under “Dividends” above for further
discussion of the reporting of dividend payments. If you do not
meet either of these requirements for exemption and you fail to
provide certain information, including your U.S. taxpayer
identification number, or otherwise establish your status as an
“exempt recipient”, you may be subject to backup
withholding of U.S. federal income tax at a rate of 31% on
dividends paid with respect to common stock.
Under current law, the payor may generally treat dividends paid
to a payee with a foreign address as exempt from backup
withholding and information reporting unless the payor has
definite knowledge that the payee is a U.S. person. However,
under the New Regulations, dividend payments generally will be
subject to information reporting and backup withholding unless
certain certification requirements are met. See the
discussion under “Dividends” in this section for the
rules applicable to foreign partnerships under the New
Regulations.
U.S. information reporting and backup withholding requirements
generally will not apply to a payment of the proceeds of a sale
of common stock made outside the U.S. through an office outside
the U.S. of a non-U.S. broker. However, U.S. information
reporting, but not backup withholding, will apply to a payment
made outside the U.S. of the proceeds of a sale of common stock
through an office outside the U.S. of a broker that:
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derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the U.S.;
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is a “controlled foreign corporation” as to the
U.S.; or
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with respect to payments made after December 31, 2000, is a
foreign partnership with certain connections to the U.S.
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in each case, unless the broker has documentary
evidence in its records that the holder or beneficial owner is
a non-U.S. person and has no knowledge to the contrary or the
holder otherwise establishes an exemption.
Payment of the proceeds of a sale of common stock to or through
a U.S. office of a broker is subject to both U.S. backup
withholding and information reporting unless the holder
certifies its non-U.S. status under penalty of perjury or
otherwise establishes an exemption.
Backup withholding is not an additional tax and you may apply
any taxes that are withheld against your tax liability and you
generally may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing a refund claim
with the Internal Revenue Service.
Underwritten Public Offering
Of
the 13,300,000 shares of our common stock offered by this
prospectus, we are offering 9,800,000 shares to the public
generally in an underwritten public offering and 2,200,000
shares to the shareholders of one of our shareholders,
Safeguard Scientifics, and Safeguard Scientifics is offering up
to 1,300,000 shares in a directed share subscription program.
General
We
intend to offer our common stock in the United States and
Canada through a number of U.S. underwriters as well as
elsewhere through international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC, BancBoston Robertson Stephens Inc., Deutsche
Bank Securities Inc. and Wit Capital Corporation are acting as
U.S. representatives of each of the U.S. underwriters. Subject
to the terms and conditions set forth in the purchase agreement
among us and the U.S. underwriters, and concurrently with the
sale of 1,960,000 shares of common stock to the international
managers, we have agreed to sell to each of the U.S.
underwriters, and each of the U.S. underwriters, severally and
not jointly, has agreed to purchase from us the number of
shares of our common stock set forth opposite its name below.
The 7,840,000 shares of common stock being purchased by the
U.S. underwriters does not include the 2,200,000 shares of
common stock being offered by us and the 1,300,000 shares being
offered by Safeguard Scientifics in the directed share
subscription program.
Underwriters
|
|
Number
of
Shares
|
Merrill
Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
| Banc of
America Securities LLC
|
|
|
| BancBoston
Robertson Stephens Inc.
|
|
|
| Deutsche Bank
Securities Inc.
|
|
|
| Wit Capital
Corporation
|
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|
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|
|
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|
|
| |
|
|
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|
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|
|
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|
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|
| |
|
|
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|
| |
|
|
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|
|
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|
|
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|
|
|
| |
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Total
|
|
7,840,000
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|
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We have also agreed with certain international managers outside
the United States and Canada, for whom Merrill Lynch
International, Banc of America Securities LLC, BancBoston
Robertson Stephens International Limited and Deutsche Bank AG
London are acting as managers, that, subject to the terms and
conditions set forth in the purchase agreement, and
concurrently with the sale of 7,840,000 common stock to the
U.S. underwriters pursuant to the purchase agreement, to sell
to the international managers, and the international managers
severally have agreed to purchase from us, an aggregate of
1,960,000 common stock. The public offering price per share and
the total underwriting discount per share of common stock are
identical for the U.S. shares and the international shares.
In
the purchase agreement, the several U.S. underwriters and the
several international managers, respectively, have agreed,
subject to the terms and conditions set forth therein, to
purchase all of the shares of common stock being sold under the
terms of the purchase agreement if any of the shares of common
stock being sold under the purchase agreement are purchased. In
the event of a default by an underwriter, the purchase
agreement provides that, in certain circumstances, the purchase
commitments of the nondefaulting underwriters may be increased
or the purchase agreement may be terminated. The closings with
respect to the sale of shares of common stock to be purchased
by the U.S. underwriters and the international managers are
conditioned upon one another.
We
have agreed to indemnify the U.S. underwriters and the
international managers against some liabilities, including some
liabilities under the Securities Act, or to contribute to
payments the U.S. underwriters and the international managers
may be required to make in respect of those liabilities.
The
shares of common stock are being offered by the several
underwriters, subject to prior sales, when, as and if issued to
and accepted by them, subject to approval of certain legal
matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in
part.
Commissions and Discounts
The
U.S. representatives have advised us that they propose
initially to offer the shares of our common stock to the public
at the initial public offering price set forth on the cover
page of this prospectus, and to certain dealers at such price
less a concession not in excess of $
per share of
common stock. The U.S. underwriters may allow, and such dealers
may reallow, a discount not in excess of $
per
share of common stock on sales to certain other dealers. After
the initial public offering, the public offering price,
concession and discount may be changed.
The
following table shows the per share and total public offering
price, underwriting discount to be paid by us to the U.S.
underwriters and the proceeds before expenses to us. This
information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment options.
| |
|
Per
Share
|
|
Without
Option
|
|
With
Option
|
| Public
offering price
|
|
$
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
|
$
|
The expenses of the offering, exclusive of the underwriting
discount, are estimated at $1,158,272 and are payable by us.
The following table sets forth these expenses. All amounts
shown are estimates.
| |
|
Amount
|
| Securities
and Exchange Commission registration fee
|
|
$54,178
|
| NASD filing
fee
|
|
19,833
|
| Nasdaq
National Market listing fee
|
|
69,911
|
| Accounting
fees and expenses
|
|
368,000
|
| Blue Sky fees
and expenses
|
|
750
|
| Legal fees
and expenses
|
|
330,000
|
| Transfer
Agent and Registrar fees and expenses
|
|
7,000
|
| Printing and
engraving expenses
|
|
145,000
|
| Director and
officer liability insurance
|
|
150,000
|
| Miscellaneous
fees and expenses
|
|
13,600
|
| |
|
|
|
Total
|
|
1,158,272
|
| |
|
|
Intersyndicate Agreement
The
U.S. underwriters and the international managers have entered
into an intersyndicate agreement that provides for the
coordination of their activities. Under the terms of the
intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of common
stock to each other for purposes of resale at the public
offering price, less an amount not greater than the selling
concession. Under the terms of the intersyndicate agreement,
the U.S. underwriters and any dealer to whom they sell shares
of common stock will not offer to sell or sell shares of common
stock to persons who are non-U.S. or non-Canadian persons, or
to persons they believe intend to resell to persons who are
non-U.S. or non-Canadian persons, and the international
managers and any dealer to whom they sell shares of common
stock will not offer to sell or sell shares of common stock to
U.S. persons or to Canadian persons or to persons they believe
intend to resell to U.S. or Canadian persons, except in the
case of the terms of the intersyndicate agreement.
Over-allotment Option
We
have granted an option to the U.S. underwriters, exercisable
for 30 days after the date of this prospectus, to purchase up
to an aggregate of 1,440,000 additional shares of common stock
at the public offering price set forth on the cover page of
this prospectus, less the underwriting discount. The U.S.
underwriters may exercise this option solely to cover
over-allotments, if any, made on the sale of the common stock
offered hereby. To the extent that the U.S. underwriters
exercise this option, each U.S. underwriter will be obligated,
subject to certain conditions, to purchase a number of
additional shares of common stock proportionate to such U.S.
underwriter’s initial amount reflected in the foregoing
table.
We
have also granted an option to the international managers,
exercisable for 30 days after the date of this prospectus, to
purchase up to an aggregate of 360,000 additional shares of
common stock to cover over-allotments, if any, on terms similar
to those granted to the U.S. underwriters.
Reserved Shares
At
our request, the U.S. underwriters have reserved approximately
2,600,000 shares of our common stock for sale at the initial
public offering price to our employees, directors and certain
other persons designated by Internet Capital Group. In
addition, the U.S. underwriters have reserved up to $20 million
of shares of our common stock for sale to General Electric
Capital Corporation. This would represent 1,818,181 shares
based on the midpoint of the offering range. General Electric
Capital Corporation has not committed to purchasing these
shares. The number of shares of our common stock available for
sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares
which are not so
orally confirmed for purchase within one day of the pricing of
the offering will be offered by the underwriters to the general
public on the same basis as the other shares offered by this
prospectus.
No Sales of Similar Securities
We,
our executive officers and directors, Safeguard Scientifics
(Delaware), Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ
Holdings, Inc., IBM Corporation, Internet Assets, Inc.,
Technology Leaders II L.P. and Technology Leaders II Offshore
C.V. have agreed, with certain exceptions, not to directly or
indirectly:
|
Ÿ
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later
acquired by the person executing the agreement or with
respect to which the person executing the agreement has or
later acquires the power of disposition, or file a
registration statement under the Securities Act relating to
any of the foregoing; or
|
|
Ÿ
|
enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of
our common stock,
|
whether any such swap or transaction is to be
settled by delivery of our common stock or other securities, in
cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus. See “Shares Eligible
for Future Sale.”
Quotation on the Nasdaq National Market
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
through negotiations among us and the representatives. Among
the factors considered by us and the representatives in
determining the initial public offering price of our common
stock, in addition to prevailing market conditions, are:
|
Ÿ
|
the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
|
|
Ÿ
|
certain of our financial information;
|
|
Ÿ
|
the history of, and the prospects for, our company and the
industry in which we compete;
|
|
Ÿ
|
an assessment of our management;
|
|
Ÿ
|
our past and present operations;
|
|
Ÿ
|
the prospects for, and timing of, our future revenue;
|
|
Ÿ
|
the present state of our development;
|
|
Ÿ
|
the percentage interest of Internet Capital Group being sold
as compared to the valuation for the entire company; and
|
|
Ÿ
|
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our
common stock will trade in the public market subsequent to
the offering at or above the initial public offering price.
|
We
have applied for a listing of our common stock on the Nasdaq
National Market under the symbol “ICGE.”
The
underwriters have advised us that they do not expect sales to
accounts over which the underwriters exercise discretionary
authority to exceed five percent of the total number of shares
of our common stock offered by them.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our 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 our common stock. As an exception to these
rules, the U.S. representatives are permitted to engage in
certain transactions that stabilize the price of our common
stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our
common stock.
If
the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares
of common stock than are set forth on the cover page of this
prospectus, the U.S. representatives may reduce that short
position by purchasing common stock in the open market. The
U.S. representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option
described above.
The
U.S. representatives may also impose a penalty bid on certain
underwriters and selling group members. This means that if the
U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters’ short position or
to stabilize the price of our 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 short position could cause the
price of the security to be higher than it might be in the
absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to
the extent that it discourages resales of our common stock.
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
our common stock. In addition, neither we nor any of the
underwriters makes any representation that the U.S.
representatives or the lead managers will engage in such
transactions or that such transactions, once commenced, will
not be discontinued without notice.
Electronic Format
Wit
Capital is making a prospectus in electronic format available
on its Internet Web site. All dealers purchasing shares from
Wit Capital in the offering similarly have agreed to make a
prospectus in electronic format available on Web sites
maintained by each of the dealers. The information on these Web
sites relating to the Internet Capital Group offering is filed
as an exhibit to the registration statement. Please see the
exhibit for a more complete description of the information
relating to the offering contained on those Web sites.
Wit
Capital, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the
underwriters. The National Association of Securities Dealers,
Inc. approved the membership of Wit Capital on September 4,
1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager™ or selected dealer in more than 105 public
offerings. Except for its participation in this offering and as
disclosed below, Wit Capital has no relationship with Internet
Capital Group or any of its founders or significant
shareholders.
Robert Lessin, the Chairman, Chief Executive Officer and a
significant shareholder of Wit Capital, owned 154,861 shares of
VerticalNet’s Series C Preferred Stock, which converted
into 154,861 shares of VerticalNet’s common stock prior to
consummation of VerticalNet’s initial public offering.
Except for its participation as e-Manager™ in VerticalNet
’s initial public offering, or as otherwise disclosed in
the underwriting section of VerticalNet’s initial public
offering prospectus, Wit Capital has no relationship with
VerticalNet or any of its founders or significant shareholders.
Walter W. Buckley, President, Chief Executive Officer and a
director of Internet Capital Group, owns 50,000 shares of Wit
Capital Corporation. Kenneth A.
Fox, a Managing Director and director of Internet Capital Group,
owns 50,000 shares of Wit Capital Corporation. An affiliate of
Comcast ICG, Inc., one of our principal stockholders, owns
1,333,333 shares of Wit Capital Corporation. Julian A. Brodsky,
one of our directors, owns 80,000 shares of Wit Capital
Corporation.
Directed Share Subscription Program
As
part of this offering, we are offering 2,200,000 shares and
Safeguard Scientifics is offering up to 1,300,000 shares of our
common stock in a directed share subscription program to
shareholders of Safeguard Scientifics, one of our principal and
founding shareholders. Safeguard Scientifics has agreed to be
designated a statutory underwriter with respect to the shares
of our common stock offered to the shareholders of Safeguard
Scientifics. Safeguard Scientifics is not an underwriter with
respect to the other shares of our common stock offered and is
not included in the term “underwriter” as used
elsewhere in this prospectus.
Safeguard Scientifics’ shareholders may subscribe for one
share of our common stock for every ten shares of Safeguard
Scientifics’ common stock held by them, and may not
transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least
100 shares of Safeguard Scientifics’ common stock as of
June 24, 1999 are eligible to purchase shares directly from us
or Safeguard Scientifics under the program. Shareholders who
own less than 100 shares of Safeguard Scientifics’ common
stock will be ineligible to participate in the directed share
subscription program. Subscription orders will be satisfied
first from the shares being sold by us, and then from the
shares offered by Safeguard Scientifics. If any of the shares
offered by us under the program are not purchased by the
shareholders of Safeguard Scientifics, Safeguard Scientifics
will purchase these shares from us. Safeguard Scientifics may
not transfer its purchase obligation to anyone else and the
only condition to its purchase obligation is the consummation
of the underwritten public offering. Safeguard Scientifics does
not have any registration rights for any shares that it may
purchase in the directed share subscription program.
Accordingly, because these shares were purchased directly from
us without registration, Safeguard Scientifics may only sell
these shares in accordance with Rule 144 restrictions. See
“Shares Eligible For Future Sale.” In addition,
Safeguard Scientifics has agreed not to offer, sell or
otherwise dispose of any shares of our common stock for a
period of 180 days after the date of this prospectus. Sales
under the directed share subscription program will close on the
closing of the sale of the other shares offered to the public.
It is expected that sales under the directed share subscription
program will be reflected in purchasers’ book-entry
accounts at the Depository Trust Company, if any, upon the
closing of these sales. After the closing of these sales, we
will mail stock certificates to all purchasers who do not
maintain book-entry accounts at the Depository Trust Company.
Prior to this offering, Safeguard Scientifics beneficially
owned 17.7% of our common stock. After this offering and the
concurrent offering, Safeguard Scientifics will beneficially
own about 17,761,794 shares, or approximately 14.4%, of our
common stock, assuming that all shares offered in the directed
share subscription program are purchased by shareholders of
Safeguard Scientifics. If the shareholders of Safeguard
Scientifics do not purchase any of the shares offered in the
directed share subscription program, Safeguard Scientifics will
beneficially own approximately 17.2% of our common stock after
this offering and the concurrent offering. The purchase price
under the program, whether paid by Safeguard Scientifics or its
shareholders, will be the same price per share as set forth on
the cover page of this prospectus.
We
have entered into an agreement to pay Merrill Lynch a financial
advisory fee of up to $1,925,000 or an amount equal to 5% of
the aggregate initial public offering price of all the shares
being sold through the directed share subscription program,
including shares that may be sold to Safeguard Scientifics. The
financial advisory fee compensates Merrill Lynch for its
financial advice relating to the directed share subscription
program, including designing the program and coordinating the
offering of our common stock. In addition, Merrill Lynch
provided a cover letter for the preliminary prospectuses sent
to the shareholders of Safeguard Scientifics. Safeguard
Scientifics will not receive any compensation from us or any
other person with respect to this offering, including any
underwriting discounts or commissions.
The following table shows the per share and total offering
price, financial advisory fee to be paid by us to Merrill Lynch
and the proceeds before expenses to us.
| |
|
Per
Share
|
|
Total
|
| Public
offering price
|
|
$
|
|
$
|
| Financial
advisory fee
|
|
$
|
|
$
|
| Proceeds to
Internet Capital Group, Inc.
|
|
$
|
|
$
|
| Maximum
proceeds, before expenses, to Safeguard Securities, Inc.
|
|
$
|
|
$
|
The
expenses of the directed share subscription program, exclusive
of the financial advisory fee to be paid to Merrill Lynch, are
estimated at $366,728 and Safeguard Scientifics will reimburse
us for all expenses incurred by us in connection with the
directed share subscription program, including the financial
advisory fee to Merrill Lynch. The following table sets forth
these expenses other than the financial advisory fees. All
amounts shown are estimates.
| |
|
Amounts
|
| SEC
registration fee
|
|
$19,353
|
| NASD filing
fees
|
|
7,117
|
| Nasdaq
National Market listing fee
|
|
25,089
|
| Accounting
fees and expenses
|
|
132,000
|
| Blue Sky fees
and expenses
|
|
250
|
| Legal fees
and expenses
|
|
120,000
|
| Transfer
Agent and Registrar fees and expenses
|
|
3,000
|
| Printing and
engraving expenses
|
|
55,000
|
| Miscellaneous
fees and expenses
|
|
4,919
|
| |
|
|
|
Total
|
|
$366,728
|
| |
|
|
The
validity of our common stock offered hereby will be passed upon
for us by Dechert Price & Rhoads, Philadelphia,
Pennsylvania. Dechert Price & Rhoads beneficially owns an
aggregate of $250,000 principal amount of convertible notes
that will automatically convert into 22,727 shares of our
common stock upon completion of this offering based on an
assumed initial public offering price of $11.00 per share, and
warrants exercisable at the initial public offering price per
share to purchase 4,545 shares of our common stock. A member of
Dechert Price & Rhoads beneficially owns $33,333.33
principal amount of convertible notes that will automatically
convert into 3,030 shares of our common stock upon completion
of this offering based on an assumed initial public offering
price of $11.00 per share, and warrants exercisable at the
initial public offering price per share to purchase 606 shares
of our common stock based on an assumed initial public offering
price of $11.00 per share.
Certain legal and regulatory matters in connection with the
offering will be passed upon for the underwriters by Davis Polk
& Wardwell, New York, New York. Members of and an attorney
associated with Davis Polk & Wardwell beneficially own an
aggregate of $150,000 principal amount of convertible notes
that will automatically convert into 13,636 shares of our
common stock upon completion of this offering based on an
assumed initial public offering price of $11.00 per share, and
warrants exercisable at the initial public offering price per
share to purchase an aggregate of 2,727 shares of our common
stock based on an assumed initial public offering price of
$11.00 per share.
The
consolidated financial statements of Internet Capital Group,
Inc. as of December 31, 1997 and 1998 and for the period March
4, 1996 (inception) through December 31, 1996, and for the
years ended December 31, 1997 and 1998 have been included
herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
The
financial statements of Applica Corporation as of December 31,
1998, and for the period from September 24, 1998 (inception)
through December 31, 1998 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing
and accounting.
The
financial statements of Breakaway Solutions, Inc. as of
December 31, 1997 and 1998, and for each of the years in the
three year period ended December 31, 1998 have been included
herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
The
financial statements of CommerceQuest, Inc. as of December 31,
1997 and 1998 and for each of the three years in the period
ended December 31, 1998 included in this prospectus, have been
so included in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The
financial statements of ComputerJobs.com, Inc. as of December
31, 1997 and 1998, and for the period from January 16, 1996
(inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth on their report thereon
appearing elsewhere herein, and are included in reliance upon
such report given on the authority of said firm as experts in
auditing and accounting.
The
financial statements of Syncra Software, Inc. as of December
31, 1998 and for the period from February 11, 1998 (inception)
through December 31, 1998 included in this prospectus, have
been so included in
reliance on the report of PricewaterhouseCoopers LLP given on the
authority of said firm as experts in auditing and accounting.
The
financial statements of United Messaging, Inc. as of December
31, 1998 and for the period from August 25, 1998 (date of
inception) to December 31, 1998 have been included herein and
in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The
financial statements of Universal Access, Inc. as of December
31, 1997 and 1998, and for the period from October 2, 1997
(date of inception) to December 31, 1997 and in the year ended
December 31, 1998 included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers
LLP given on the authority of said firm as experts in auditing
and accounting.
The
consolidated financial statements of Web Yes, Inc. and
Subsidiary as of December 31, 1997 and 1998, and for the two
years ended December 31, 1998 have been included herein and in
the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The
financial statements of WPL Laboratories, Inc. as of December
31, 1997 and 1998, and for the years then ended have been
included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We
have filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act
with respect to our common stock offered hereby. This
prospectus does not contain all of the information set forth in
the registration statement and the exhibits to the registration
statement. For further information with respect to Internet
Capital Group and our common stock offered hereby, reference is
made to the Registration Statement and the exhibits filed as a
part of the Registration Statement. Statements contained in
this prospectus concerning the contents of any contract or any
other document are not necessarily complete; reference is made
in each instance to the copy of such contract or any other
document filed as an exhibit to the registration statement.
Each such statement is qualified in all respects by such
reference to such exhibit. The registration statement,
including exhibits thereto, may be inspected without charge at
the Commission’s principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission’s
regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048 after
payment of fees prescribed by the Commission. The Commission
also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other
information regarding registrants that file electronically with
the Commission at the address http://www.sec.gov.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
We have audited the accompanying consolidated
balance sheets of Internet Capital Group, Inc. and subsidiaries
as of December 31, 1997 and 1998, and the related consolidated
statements of operations, shareholders’ equity,
comprehensive income (loss) and cash flows for the period March
4, 1996 (inception) to December 31, 1996 and for the years
ended December 31, 1997 and 1998. 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
did not audit the financial statements of certain nonsubsidiary
investee companies (Computer Jobs.com, Inc. and Syncra
Software, Inc.), which Internet Capital Group, Inc. originally
acquired an interest in during 1998. The Company’s
ownership interests in and advances to these nonsubsidiary
investee companies at December 31, 1998 was $8,392,155, and its
equity in net income (loss) of these nonsubsidiary investee
companies was $3,876,148 for the year ended December 31, 1998.
The financial statements of these nonsubsidiary investee
companies were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to
the amounts included for these nonsubsidiary investee
companies, is based solely on the reports of the other auditors.
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, based on our audits and the
reports of the other auditors, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Internet Capital Group,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period
March 4, 1996 (inception) to December 31, 1996 and for the
years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
Philadelphia, Pennsylvania
May 7, 1999
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December 31,
|
|
March 31,
|
| |
|
1997
|
|
1998
|
|
1999
|
| Assets
|
| Current Assets
|
|
Cash and cash
equivalents
|
|
$
5,967,461
|
|
|
$26,840,904
|
|
|
$19,372,129
|
|
Accounts
receivable, less allowances for doubtful accounts
($30,000-1997; $61,037-1998;
$142,560-1999)
|
|
721,381
|
|
|
1,842,137
|
|
|
2,711,325
|
|
|
Prepaid
expenses and other current assets
|
|
148,313
|
|
|
1,119,062
|
|
|
351,716
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
6,837,155
|
|
|
29,802,103
|
|
|
22,435,170
|
|
| |
|
Fixed assets,
net
|
|
544,443
|
|
|
1,151,268
|
|
|
1,063,766
|
|
|
Ownership
interests in and advances to partner companies
|
|
24,045,080
|
|
|
59,491,940
|
|
|
96,380,245
|
|
|
Available-for-sale securities
|
|
—
|
|
|
3,251,136
|
|
|
5,285,644
|
|
|
Intangible
assets, net
|
|
34,195
|
|
|
2,476,135
|
|
|
6,806,927
|
|
|
Other
|
|
20,143
|
|
|
613,393
|
|
|
92,969
|
|
| |
|
|
|
|
|
|
|
|
|
| Total Assets
|
|
$31,481,016
|
|
|
$96,785,975
|
|
|
$132,064,721
|
|
| |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
| Current
Liabilities
|
|
Current
maturities of long-term debt
|
|
$
150,856
|
|
|
$
288,016
|
|
|
$275,928
|
|
|
Line of
credit
|
|
2,500,000
|
|
|
2,000,000
|
|
|
1,001,991
|
|
|
Accounts
payable
|
|
696,619
|
|
|
1,348,293
|
|
|
759,970
|
|
|
Accrued
expenses
|
|
388,525
|
|
|
1,823,407
|
|
|
1,316,427
|
|
|
Note payable
to partner company
|
|
—
|
|
|
1,713,364
|
|
|
1,285,023
|
|
|
Deferred
revenue
|
|
710,393
|
|
|
2,176,585
|
|
|
99,062
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
4,446,393
|
|
|
9,349,665
|
|
|
4,738,401
|
|
| |
|
Long-term
debt
|
|
399,948
|
|
|
351,924
|
|
|
121,665
|
|
|
Minority
interest
|
|
—
|
|
|
6,360,008
|
|
|
3,408,479
|
|
|
Deferred
taxes
|
|
—
|
|
|
—
|
|
|
560,716
|
|
|
Commitments
and contingencies (Note 16)
|
| |
|
Shareholders’ Equity
|
|
Preferred
stock, $.01 par value; no shares authorized
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock,
$.001 par value; authorized 130,000,000
shares; 46,783,625 (1997),
66,043,625 (1998) and
82,005,549 (1999) issued and
outstanding
|
|
46,784
|
|
|
66,044
|
|
|
82,006
|
|
|
Additional
paid-in capital
|
|
36,144,814
|
|
|
74,998,459
|
|
|
103,758,063
|
|
|
Retained
earnings (accumulated deficit)
|
|
(8,642,113
|
)
|
|
5,256,815
|
|
|
23,318,903
|
|
|
Unamortized
deferred compensation
|
|
(914,810
|
)
|
|
(1,330,011
|
)
|
|
(6,661,692
|
)
|
|
Accumulated
other comprehensive income
|
|
—
|
|
|
1,733,071
|
|
|
2,738,180
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
26,634,675
|
|
|
80,724,378
|
|
|
123,235,460
|
|
| |
|
|
|
|
|
|
|
|
|
| Total
Liabilities and Shareholders’ Equity
|
|
$31,481,016
|
|
|
$96,785,975
|
|
|
$132,064,721
|
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
| |
|
March 4, 1996
(Inception) to
December 31,
|
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenue
|
|
$
285,140
|
|
|
$
791,822
|
|
|
$3,134,769
|
|
|
$377,371
|
|
|
$3,111,035
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
Cost of
revenue
|
|
427,470
|
|
|
1,767,017
|
|
|
4,642,528
|
|
|
628,213
|
|
|
1,553,329
|
|
|
Sales and
marketing
|
|
268,417
|
|
|
2,300,365
|
|
|
7,894,662
|
|
|
934,934
|
|
|
114,415
|
|
|
General and
administrative
|
|
1,652,481
|
|
|
3,442,241
|
|
|
7,619,169
|
|
|
1,523,878
|
|
|
3,733,400
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
2,348,368
|
|
|
7,509,623
|
|
|
20,156,359
|
|
|
3,087,025
|
|
|
5,401,144
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(2,063,228
|
)
|
|
(6,717,801
|
)
|
|
(17,021,590
|
)
|
|
(2,709,654
|
)
|
|
(2,290,109
|
)
|
| Other income,
net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,677,471
|
|
| Interest
income
|
|
102,029
|
|
|
264,391
|
|
|
1,305,787
|
|
|
56,400
|
|
|
309,735
|
|
| Interest
expense
|
|
(13,931
|
)
|
|
(126,105
|
)
|
|
(381,199
|
)
|
|
(110,020
|
)
|
|
(13,756
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes,
Minority Interest and Equity
Income (Loss)
|
|
(1,975,130
|
)
|
|
(6,579,515
|
)
|
|
14,386,175
|
|
|
9,558,888
|
|
|
26,683,341
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| Minority
interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
—
|
|
|
146,018
|
|
| Equity income
(loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
|
(289,847
|
)
|
|
(7,412,602
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$(0.10
|
)
|
|
$(0.19
|
)
|
|
$0.25
|
|
|
$0.20
|
|
|
$0.28
|
|
|
Diluted
|
|
$(0.10
|
)
|
|
$(0.19
|
)
|
|
$0.25
|
|
|
$0.20
|
|
|
$0.27
|
|
|
Weighted
Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
20,395,774
|
|
|
34,098,844
|
|
|
56,102,289
|
|
|
46,783,625
|
|
|
72,646,022
|
|
|
Diluted
|
|
20,395,774
|
|
|
34,098,844
|
|
|
56,149,289
|
|
|
46,783,625
|
|
|
73,699,973
|
|
|
Pro Forma
Information (Unaudited)
(Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma net
income
|
|
Pretax income
|
|
|
|
|
|
|
|
$13,898,928
|
|
|
|
|
|
$19,416,757
|
|
|
Pro forma
income taxes
|
|
|
|
|
|
|
|
(5,142,603
|
)
|
|
|
|
|
(7,184,200
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income
|
|
|
|
|
|
|
|
$
8,756,325
|
|
|
|
|
|
$12,232,557
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma net
income per share
|
|
Basic
|
|
|
|
|
|
|
|
$
0.16
|
|
|
|
|
|
$0.17
|
|
|
Diluted
|
|
|
|
|
|
|
|
$
0.16
|
|
|
|
|
|
$0.17
|
|
Pro forma
weighted average shares
outstanding
|
|
Basic
|
|
|
|
|
|
|
|
56,102,289
|
|
|
|
|
|
72,646,022
|
|
|
Diluted
|
|
|
|
|
|
|
|
56,149,289
|
|
|
|
|
|
73,699,973
|
|
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders
’ Equity
| |
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Unamortized
Deferred
Compensation
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
|
|
Balance as of March 4, 1996
|
|
—
|
|
$
—
|
|
|
$
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
$
—
|
Issuance of common stock,
net
|
|
13,723,426
|
|
13,723
|
|
|
13,672,290
|
|
—
|
|
—
|
|
—
|
|
13,686,013
|
Issuance of common stock
(Note 10)
|
|
6,139,074
|
|
6,139
|
|
|
1,102,313
|
|
—
|
|
—
|
|
—
|
|
1,108,452
|
|
Issuance of restricted stock
|
|
6,027,017
|
|
6,027
|
|
|
1,013,639
|
|
—
|
|
(1,019,666)
|
|
—
|
|
—
|
Amortization of deferred
compensation
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
126,876
|
|
—
|
|
126,876
|
| Net
loss
|
|
—
|
|
—
|
|
|
—
|
|
(2,062,485)
|
|
—
|
|
—
|
|
(2,062,485)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1996
|
|
25,889,517
|
|
25,889
|
|
|
15,788,242
|
|
(2,062,485)
|
|
(892,790)
|
|
—
|
|
12,858,856
|
|
Issuance of common stock
|
|
20,137,500
|
|
20,138
|
|
|
20,117,367
|
|
—
|
|
—
|
|
—
|
|
20,137,505
|
|
Issuance of restricted stock
|
|
1,773,053
|
|
1,773
|
|
|
416,562
|
|
—
|
|
(418,335)
|
|
—
|
|
—
|
|
Forfeitures of restricted stock
|
|
(1,016,445
|
)
|
(1,016
|
)
|
|
(177,357
|
)
|
—
|
|
178,373
|
|
—
|
|
—
|
Amortization of deferred
compensation
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
217,942
|
|
—
|
|
217,942
|
| Net
loss
|
|
—
|
|
—
|
|
|
—
|
|
(6,579,628)
|
|
—
|
|
—
|
|
(6,579,628)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1997
|
|
46,783,625
|
|
46,784
|
|
|
36,144,814
|
|
(8,642,113)
|
|
(914,810)
|
|
—
|
|
26,634,675
|
Issuance of common stock,
net
|
|
19,260,000
|
|
19,260
|
|
|
38,185,359
|
|
—
|
|
—
|
|
—
|
|
38,204,619
|
Issuance of stock options to
non-employees
|
|
—
|
|
—
|
|
|
668,286
|
|
—
|
|
(668,286)
|
|
—
|
|
—
|
Net
unrealized appreciation in
available-for-sale securities
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
1,733,071
|
|
1,733,071
|
Amortization of deferred
compensation
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
253,085
|
|
—
|
|
253,085
|
| Net
income
|
|
—
|
|
—
|
|
|
—
|
|
13,898,928
|
|
—
|
|
—
|
|
13,898,928
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1998
|
|
66,043,625
|
|
$
66,044
|
|
|
$74,998,459
|
|
$5,256,815
|
|
$(1,330,011)
|
|
$1,733,071
|
|
$80,724,378
|
Three months ended
March 31, 1999—
Unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
15,990,000
|
|
15,990
|
|
|
31,964,010
|
|
—
|
|
—
|
|
—
|
|
31,980,000
|
Issuance of stock options to
non-employees
|
|
—
|
|
—
|
|
|
297,141
|
|
—
|
|
(297,141)
|
|
—
|
|
—
|
Issuance of stock options to
employees below fair market
value
|
|
—
|
|
—
|
|
|
5,161,414
|
|
—
|
|
(5,161,414)
|
|
—
|
|
—
|
|
Forfeitures of restricted stock
|
|
(28,076
|
)
|
(28
|
)
|
|
(5,025
|
)
|
—
|
|
5,053
|
|
—
|
|
—
|
Net
unrealized appreciation in
available-for-sale securities
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
1,005,109
|
|
1,005,109
|
Amortization of deferred
compensation
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
121,821
|
|
—
|
|
121,821
|
Distribution to former LLC
members
|
|
—
|
|
—
|
|
|
—
|
|
(10,675,811)
|
|
—
|
|
—
|
|
(10,675,811)
|
| LLC
termination (Note 3)
|
|
—
|
|
—
|
|
|
(8,657,936
|
)
|
8,657,936
|
|
—
|
|
—
|
|
—
|
| Net
income
|
|
—
|
|
—
|
|
|
—
|
|
20,079,963
|
|
—
|
|
—
|
|
20,079,963
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 1999
(Unaudited)
|
|
82,005,549
|
|
$82,006
|
|
|
$103,758,063
|
|
$23,318,903
|
|
$(6,661,692)
|
|
$2,738,180
|
|
$123,235,460
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive
Income (Loss)
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
$9,269,041
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
Comprehensive Income (Loss) Before Tax
|
Unrealized holding gains
on available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
1,733,071
|
|
5,131,916
|
|
4,530,351
|
|
|
Reclassification
adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
(2,050,837
|
)
|
| Tax
Related to Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
on available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
(1,585,623
|
)
|
|
Reclassification
adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
111,218
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
appreciation in available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
1,733,071
|
|
5,131,916
|
|
1,005,109
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$15,631,999
|
|
$14,400,957
|
|
$21,085,072
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
|
|
Year Ended
December 31,
|
|
Three Months
Ended March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
|
| Operating
Activities
|
| Net income
(loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
Adjustments
to reconcile to net cash used in operating
activities:
|
|
Other income
|
|
—
|
|
|
—
|
|
|
(30,483,177
|
)
|
|
(12,322,162
|
)
|
|
(28,684,465
|
)
|
|
Depreciation and
amortization
|
|
481,796
|
|
|
446,289
|
|
|
1,135,269
|
|
|
146,189
|
|
|
551,037
|
|
|
Equity (income) loss
|
|
514,540
|
|
|
(106,298
|
)
|
|
5,868,887
|
|
|
289,847
|
|
|
7,412,602
|
|
|
Minority interest
|
|
(427,185
|
)
|
|
106,411
|
|
|
(5,381,640
|
)
|
|
—
|
|
|
(146,018
|
)
|
|
Deferred taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(913,689
|
)
|
Changes in
assets and liabilities, net of effect of
acquisitions:
|
|
Accounts receivable, net
|
|
(2,176,869
|
)
|
|
1,574,374
|
|
|
(1,183,360
|
)
|
|
34,393
|
|
|
(673,501
|
)
|
|
Prepaid expenses and
other assets
|
|
(69,558
|
)
|
|
(142,384
|
)
|
|
(1,346,515
|
)
|
|
(196,533
|
)
|
|
69,672
|
|
|
Accounts payable
|
|
43,727
|
|
|
565,672
|
|
|
620,127
|
|
|
271,306
|
|
|
(332,937
|
)
|
|
Deferred revenue
|
|
147,100
|
|
|
493,960
|
|
|
1,249,624
|
|
|
200,156
|
|
|
(97,163
|
)
|
|
Accrued expenses
|
|
145,977
|
|
|
204,645
|
|
|
1,415,265
|
|
|
1,421,968
|
|
|
903,002
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
(3,402,957
|
)
|
|
(3,436,959
|
)
|
|
(14,206,592
|
)
|
|
(885,795
|
)
|
|
(1,831,497
|
)
|
| Investing
Activities
|
|
Capital expenditures
|
|
(100,480
|
)
|
|
(272,488
|
)
|
|
(545,432
|
)
|
|
(97,005
|
)
|
|
(156,116
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
36,431,927
|
|
|
—
|
|
|
2,574,371
|
|
Proceeds from sales of
Partner Company ownership
interests in and advances to a shareholder
|
|
—
|
|
|
—
|
|
|
300,000
|
|
|
—
|
|
|
2,654,880
|
|
|
Advances to Partner
Companies
|
|
(60,000)
|
|
|
(2,800,000
|
)
|
|
(12,778,884
|
)
|
|
—
|
|
|
(1,892,502
|
)
|
|
Repayment of advances to
Partner Companies
|
|
—
|
|
|
950,000
|
|
|
677,084
|
|
|
500,000
|
|
|
1,913,358
|
|
Acquisitions of ownership
interests in Partner
Companies, net of cash acquired
|
|
(6,934,129
|
)
|
|
(14,465,874
|
)
|
|
(35,822,393
|
)
|
|
(3,552,712
|
)
|
|
(22,480,597
|
)
|
|
Other acquisitions (Note
5)
|
|
—
|
|
|
—
|
|
|
(1,858,389
|
)
|
|
—
|
|
|
—
|
|
|
Increase in cash
surrender value of life insurance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,441
|
)
|
Reduction in cash due to
deconsolidation of
VerticalNet
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,645,895
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(7,094,609
|
)
|
|
(16,588,362
|
)
|
|
(13,596,087
|
)
|
|
(3,149,717
|
)
|
|
(23,094,942
|
)
|
| Financing
Activities
|
|
Issuance of common stock,
net
|
|
13,686,013
|
|
|
20,137,505
|
|
|
38,204,619
|
|
|
—
|
|
|
31,980,000
|
|
|
Long-term debt and
capital lease repayments
|
|
(30,191
|
)
|
|
(57,979
|
)
|
|
(321,857
|
)
|
|
(38,403
|
)
|
|
(59,316
|
)
|
|
Line of credit borrowings
|
|
1,208,000
|
|
|
2,500,000
|
|
|
2,000,000
|
|
|
—
|
|
|
576,248
|
|
|
Line of credit repayments
|
|
(1,106,000
|
)
|
|
(2,000
|
)
|
|
(2,500,000
|
)
|
|
—
|
|
|
—
|
|
|
Distribution to former
LLC members
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,675,811
|
)
|
|
Treasury stock purchase
by subsidiary
|
|
(60,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,463,457
|
)
|
|
Issuance of stock by
subsidiary
|
|
15,000
|
|
|
200,000
|
|
|
11,293,360
|
|
|
—
|
|
|
100,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing
activities
|
|
13,712,822
|
|
|
22,777,526
|
|
|
48,676,122
|
|
|
(38,403
|
)
|
|
17,457,664
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash
Equivalents
|
|
3,215,256
|
|
|
2,752,205
|
|
|
20,873,443
|
|
|
(4,073,915
|
)
|
|
(7,468,775
|
)
|
| Cash and cash
equivalents at beginning of period
|
|
—
|
|
|
3,215,256
|
|
|
5,967,461
|
|
|
5,967,461
|
|
|
26,840,904
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
Cash Equivalents at End of Period
|
|
$3,215,256
|
|
|
$5,967,461
|
|
|
$26,840,904
|
|
|
$1,893,546
|
|
|
$19,372,129
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Significant
Accounting Policies
|
Description of the Company
|
Internet Capital Group, Inc. (the “Company”) was
formed on March 4, 1996. The Company is an Internet holding
company actively engaged in business-to-business, or B2B,
e-commerce through a network of companies. The Company defines
e-commerce as conducting or facilitating business transactions
over the Internet. As of December 31, 1998, the Company owned
interests in more than 20 companies engaged in e-commerce,
which the Company calls its “Partner Companies”. The
Company’s goal is to become the premier B2B e-commerce
company. The Company’s operating strategy is to integrate
its Partner Companies into a collaborative network that
leverages the collective knowledge and resources of the Company.
On
February 2, 1999, the Company converted from a Limited
Liability Corporation (“LLC”) to a corporation. All
shareholder transactions have been presented as if the
conversion occurred on March 4, 1996 (inception).
|
Principles of Consolidation
|
During the periods ending December 31, 1996, 1997 and 1998 the
Company acquired equity ownership interests in VerticalNet for
$1.0 million, $2.0 million and $4.0 million, respectively. The
excess of cost over net assets acquired related to the 1996 and
1997 acquisitions was $.7 million and $.8 million,
respectively. The Company’s carrying value in VerticalNet,
including the excess of cost over net assets acquired related
to the 1996 and 1997 acquisitions, was reduced to below zero
and became a liability as a result of consolidating VerticalNet
’s losses after amounts attributed to Minority Interest
were exhausted. For the same reason, the 1998 acquisition did
not result in an intangible asset. In 1998, the Company made
advances in the form of convertible notes to VerticalNet of
$5.0 million. Of this amount, $.8 million was repaid by
VerticalNet, $2.1 million was purchased from the Company by one
of its principal shareholders, and $2.1 million was converted
into common stock during the three months ended March 31, 1999
(unaudited). The Company’s direct and indirect voting
interest in VerticalNet at December 31, 1997 and 1998 was 63%
and 52%, respectively.
The
consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group
Operations, Inc. (the “Operations Company”) and its
majority owned subsidiary, VerticalNet, Inc. (“VerticalNet
”). The various interests that the Company acquires in its
Partner Companies are accounted for under three broad methods:
consolidation, equity method and cost method. The applicable
accounting method is generally determined based on the Company
’s voting interest in a Partner Company.
Consolidation.
Partner Companies in which the Company directly or indirectly
owns more than 50% of the outstanding voting securities are
generally accounted for under the consolidation method of
accounting. Under this method, a Partner Company’s results
of operations are reflected within the Company’s
Consolidated Statements of Operations. All significant
intercompany accounts and transactions have been eliminated.
Participation of other Partner Company shareholders in the
earnings or losses of a consolidated Partner Company is
reflected in the caption “Minority interest” in the
Company’s Consolidated Statements of Operations. Minority
interest adjusts the Company’s consolidated results of
operations to reflect only the Company’s share of the
earnings or losses of the consolidated Partner Company.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Equity Method. Partner Companies whose results are not
consolidated, but over whom the Company exercises significant
influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to a Partner Company depends on an
evaluation of several factors including, among others,
representation on the Partner Company’s Board of Directors
and ownership level, which is generally a 20% to 50% interest
in the voting securities of the Partner Company, including
voting rights associated with the Company’s holdings in
common, preferred and other convertible instruments in the
Partner Company. Under the equity method of accounting, a
Partner Company’s results of operations are not reflected
within the Company’s Consolidated Statements of Operations;
however, the Company’s share of the earnings or losses of
the Partner Company is reflected in the caption “Equity
income (loss)” in the Consolidated Statements of
Operations.
The
amount by which the Company’s carrying value exceeds its
share of the underlying net assets of Partner Companies
accounted for under the consolidation or equity method of
accounting is amortized on a straight-line basis over three
years which adjusts the Company’s share of the Partner
Company’s earnings or losses.
Cost Method. Partner Companies not accounted for under the
consolidation or the equity method of accounting are accounted
for under the cost method of accounting. Under this method, the
Company’s share of the earnings or losses of such
companies is not included in the Consolidated Statements of
Operations. However, cost method impairment charges are
recognized in the Consolidated Statement of Operations with the
new cost basis not written-up if circumstances suggest that the
value of the Partner Company has subsequently recovered.
The
Company records its ownership interest in debt securities of
Partner Companies accounted for under the cost method at cost
as it has the ability and intent to hold these securities until
maturity. The Company records its ownership interest in equity
securities of Partner Companies accounted for under the cost
method at cost, unless these securities have readily
determinable fair values based on quoted market prices, in
which case these interests would be classified as
available-for-sale securities or some other classification in
accordance with SFAS No. 115. In addition to the Company’s
investments in voting and non-voting equity and debt
securities, it also periodically makes advances to its Partner
Companies in the form of promissory notes which are accounted
for in accordance with SFAS No. 114.
The
Company continually evaluates the carrying value of its
ownership interests in and advances to each of its Partner
Companies for possible impairment based on achievement of
business plan objectives and milestones, the value of each
ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner
Company, and other relevant factors. The business plan
objectives and milestones the Company considers include, among
others, those related to financial performance such as
achievement of planned financial results or completion of
capital raising activities, and those that are not primarily
financial in nature such as the launching of a web site or the
hiring of key employees. The fair value of the Company’s
ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which
independent third parties have or have committed to invest in
its Partner Companies.
|
Available-for-Sale Securities
|
Available-for-sale securities are reported at fair value, based
on quoted market prices, with the net unrealized gain or loss
reported as a component of accumulated other comprehensive
income in shareholders’ equity.
Unrealized gains or losses related to available-for-sale
securities will be recorded net of deferred taxes subsequent to
February 2, 1999, the date the Company converted from an LLC to
a C Corporation.
The
preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid instruments with an
original maturity of 90 days or less at the time of purchase to
be cash equivalents. Cash and cash equivalents at December 31,
1998 are invested principally in money market accounts.
Cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are carried at cost which
approximates fair value due to the short-term maturity of these
instruments. Long-term debt is carried at cost which
approximates fair value as the debt bears interest at rates
approximating current market rates.
Goodwill, the excess of cost over net assets of businesses
acquired, is amortized on a straight-line basis over three
years. Goodwill at December 31, 1998 of $2.5 million, net of
accumulated amortization of $.3 million, was attributable to
acquisitions by VerticalNet.
Fixed assets are carried at cost less accumulated depreciation,
which is based on the estimated useful lives of the assets
(approximately three to seven years) computed using the
straight-line method.
Equipment acquired under long-term capital lease arrangements
is recorded at amounts equal to the net present value of the
future minimum lease payments using the interest rate implicit
in the lease. Amortization is provided by use of the
straight-line method over the estimated useful lives of the
related assets.
All
of the Company’s revenue from March 4, 1996 (inception)
through December 31, 1998 was attributable to VerticalNet.
VerticalNet’s revenue is derived principally from
advertising contracts which include the initial development of
storefronts. A storefront is a Web page posted on one of
VerticalNet’s trade communities that provides information
on an advertiser’s products, links a visitor to the
advertiser’s Web site and generates sales inquiries from
interested visitors. The advertising contracts generally do not
extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred
revenue of $2.2 million at December 31, 1998 represents the
unearned portion of advertising contracts for which revenue
will be recognized over the remaining period of the advertising
contract.
VerticalNet also generates revenue through providing
educational courses and selling books. Revenue from educational
courses is recognized in the period in which the course is
completed and revenue from the sale of books is recognized in
the period in which the books are shipped.
Barter transactions are recorded at the lower of estimated fair
value of goods or services received or the estimated fair value
of the advertisements given. Barter revenue is recognized when
the VerticalNet advertising impressions (VNAI) are delivered to
the customer and advertising expense is recorded when the
customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to
VerticalNet delivering the VNAI, a liability is recorded, and
if VerticalNet delivers the VNAI to the customer prior to
receiving the CAI, a prepaid expense is recorded. For the
period March 4, 1996 (inception) through December 31, 1997,
VerticalNet barter transactions were immaterial. For the year
ended December 31, 1998, VerticalNet recognized approximately
$.6 million and $.5 million of advertising revenues
and expenses, respectively, from barter transactions. Included in
prepaid expenses and other current assets at December 31, 1998
is approximately $.2 million relating to barter transactions.
|
Concentration of Credit Risk
|
VerticalNet performs ongoing credit evaluations of its customers
’ financial condition and generally does not require
collateral on accounts receivable. VerticalNet maintains
allowances for credit losses and such losses have been within
management’s expectations. No single customer accounted
for greater than 10% of total revenue during the period from
March 4, 1996 (inception) to December 31, 1996 and the years
ended December 31, 1997 and 1998.
|
Accounting for Impairment of Long-Lived Assets
|
In
accordance with Statement of Financial Accounting Standards
Board No. 121, the Company records an impairment loss 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.
As
of December 31, 1998, specific incremental costs directly
attributable to a planned initial public offering (IPO) of
VerticalNet shares have been deferred. These deferred costs,
totaling $.5 million, are included in non-current other assets
on the Consolidated Balance Sheet. These costs were charged
against VerticalNet’s additional paid-in-capital in
connection with the consummation of VerticalNet’s IPO in
February 1999.
The
Company has adopted SFAS No. 123, “Accounting for Stock
Based Compensation.” As permitted by SFAS No. 123. the
Company measures compensation cost in accordance with
Accounting Principles Board Opinion (APB) No. 25, “
Accounting for Stock Issued to Employees” and related
interpretations. Accordingly, no accounting recognition is
given to stock options issued to employees that are granted at
fair market value until they are exercised. Stock options
issued to non-employees are recorded at fair value at the date
of grant. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. Therefore, the adoption of
SFAS No. 123 was not material to the Company’s financial
condition or results of operations; however, the pro forma
impact on income (loss) per share has been disclosed in the
Notes to Consolidated Financial Statements as required by SFAS
No. 123 (Note 9).
In
1998, the Company adopted Statement of Financial Accounting
Standard No. 130, “Reporting Comprehensive Income”
(SFAS 130), which requires companies to report and display
comprehensive income and its components in financial
statements. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Excluding net
income, the Company’s source of comprehensive income is
from net unrealized appreciation on its available-for-sale
securities. Reclassification adjustments result from the
recognition in net income of gains or losses that were included
in comprehensive income in prior periods.
At
December 31, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, “Disclosures about Segments
of an Enterprise and Related Information” (SFAS 131) which
requires companies to present financial and descriptive segment
information (Note 11).
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Income taxes are accounted for under the asset and liability
method whereby deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in
which the 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.
From the Company’s inception in March 1996 to February
1999, the Company was not subject to federal and state income
taxes. The Company has no net operating loss carry forwards at
December 31, 1998 (Note 2).
Net
income per share (EPS) is computed using the weighted average
number of common shares outstanding during each year. Dilutive
EPS includes common stock equivalents (unless anti-dilutive)
which would arise from the exercise of stock options and
conversion of other convertible securities and is adjusted, if
applicable, for the effect on net income (loss) of such
transactions.
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 income 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.
|
Gain or
Loss on Issuances of Stock By Partner Companies
|
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a
Partner Company accounted for under the consolidation or equity
method of accounting sells its common stock at a price
different from the Partner Company’s book value per share,
the Company’s share of the Partner Company’s net
equity changes. If at that time, the Partner Company is not a
newly-formed, non-operating entity, nor a research and
development, start-up or development stage company, nor is
there question as to the Company’s ability to continue in
existence, the Company records the change in its share of the
Partner Company’s net equity as a gain or loss in its
Consolidated Statements of Operations (Note 17).
|
Recent
Accounting Pronouncements
|
The
Company does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or
cash flows.
2. Pro Forma
Information (Unaudited)
On
February 2, 1999, the Company converted from an LLC to a C
corporation. The Company became subject to corporate federal
and state income taxes concurrent with the conversion to a C
corporation. The accompanying Consolidated Statements of
Operations for the year ended December 31, 1998 and three
months ended March 31, 1999 include pro forma information with
respect to income taxes, net income and net income per share
assuming the Company had been taxed as a C Corporation since
January 1, 1998. The unaudited pro forma information provided
does not necessarily reflect the income taxes, net income and
net income per share that would have occurred had the Company
been taxed as a C corporation since January 1, 1998.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
The
Company’s pro forma effective tax rate of 37% differed
from the federal statutory rate of 35% principally due to
non-deductible permanent differences.
Based upon the cumulative temporary differences (primarily
relating to the difference between the book and tax carrying
value of its Partner Companies), the Company would have
recognized a pro forma net deferred federal and state tax asset
of $8.2 million at December 31, 1998. In the opinion of
management, it is more likely than not that such asset would be
realized and accordingly, a valuation allowance was not
considered necessary in calculating this pro forma amount.
Pro
forma basic and diluted net income per share for the year ended
December 31, 1998 of $0.16 was calculated based on pro forma
net income of $8,756,325 and basic and diluted weighted average
shares outstanding of 56,102,289 and 56,149,289, respectively.
The difference between basic and diluted weighted average
shares outstanding of 47,000 was due to the dilutive effect of
stock options.
Pro
forma basic and diluted net income per share for the three
months ended March 31, 1999 of $0.17 was calculated based on
pro forma net income of $12,232,557 and basic and diluted
weighted average shares outstanding of 72,646,022 and
73,699,973, respectively. The difference between basic and
diluted weighted average shares outstanding of 1,053,951 was
due to the dilutive effect of stock options.
3. Interim Financial
Information (Unaudited)
The
interim financial statements of the Company for the three
months ended March 31, 1998 and 1999, 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 the rules
and regulations relating to interim financial statements.
In
the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly
the results of the Company’s operations and its cash flows
for the three months ended March 31, 1998 and 1999. The
accompanying unaudited interim financial statements are not
necessarily indicative of full year results.
The
unaudited interim consolidated financial statements for the
three months ended March 31, 1999 include the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group
Operations, Inc. and its majority owned subsidiary, Breakaway
Solutions, Inc. (“Breakaway Solutions”). In January
1999, the Company acquired a controlling majority interest in
Breakaway Solutions for $8.3 million. Breakaway Solutions’
operating activities have historically consisted primarily of
implementation of customer relational management systems and
custom integration to other related applications. In 1999,
Breakaway Solutions is expanding to provide service offerings
in custom web development and application hosting both through
internal expansion and acquisitions. Breakaway Solutions’
revenue is generally recognized upon performance of services.
In connection with the acquisition of its ownership interest in
Breakaway Solutions, the Company recorded the excess of cost
over net assets acquired of $5.6 million as goodwill which will
be amortized over three years. Of the Company’s
consolidated intangible assets at March 31, 1999 of $6.8
million, net of $.3 million of accumulated amortization, $5.3
million was attributable to the Company’s acquisition of
Breakaway Solutions and $1.5 million was attributable to the
acquisition of Applica Corporation by Breakaway Solutions.
Breakaway Solutions had revenue of $2.1 million and $3.1
million for the three months ended March 31, 1998 and 1999,
respectively.
The
consolidated financial statements through December 31, 1998,
including the unaudited interim consolidated financial
statements for the three months ended March 31, 1998, reflect
VerticalNet accounted for
on the consolidation method of accounting. The unaudited interim
consolidated financial statements for the three months ended
March 31, 1999, reflect VerticalNet accounted for on the equity
method of accounting due to the decrease in the Company’s
ownership interest to 37%.
The
Company’s carrying value and cost basis of Partner
Companies accounted for under the equity method of accounting
at March 31, 1999 was $55.8 million and $69.5 million,
respectively. The Company’s carrying value and cost basis
of Partner Companies accounted for under the cost method of
accounting at March 31, 1999 was $40.6 million and $44.2
million, respectively.
At
March 31, 1999, the Company’s carrying value in its
Partner Companies accounted for under the equity method of
accounting exceeded its share of the underlying equity in the
net assets of such companies by $23.2 million, net of
accumulated amortization of $2.1 million.
The
Company’s Partner Companies accounted for under the equity
method of accounting had total revenues of $4.7 million and
$11.4 million and total net loss of $0.5 million and $17.1
million during the three months ended March 31, 1998 and 1999,
respectively.
Basic and diluted net income per share for the three months
ended March 31, 1999 of $0.28 and $0.27, respectively, were
calculated based on net income of $20,079,963 and basic and
diluted weighted average shares outstanding of 72,646,022 and
73,699,973, respectively. The difference between basic and
diluted weighted average shares outstanding of 1,053,951 was
due to the dilutive effect of stock options. Basic and diluted
net income per share for the three months ended March 31, 1998
were the same as there were no outstanding dilutive securities
during the period.
On
February 2, 1999, the Company converted from an LLC to a
corporation. The Company’s accumulated deficit of
$8,657,936 at that date was reclassed to additional paid-in
capital.
The
Company’s effective tax rate for the three months ended
March 31, 1999 of (3%) differed from the federal statutory rate
of 35% principally due to the impact of changing its tax status
from an LLC to a corporation on February 2, 1999 and
non-deductible permanent differences. On February 2, 1999, the
Company recorded a deferred tax benefit and related deferred
tax asset of $7.7 million which primarily represented the
excess of tax basis over book basis of its ownership interests
in and advances to Partner Companies. For the period from
February 2, 1999 through March 31, 1999 the Company recorded
tax expense of $7.0 million, representing 37% of pretax income
for that period, including $10.5 million of tax expense related
to the $28.3 million non-operating gain related to VerticalNet
’s initial public offering.
The
Company’s net deferred tax liability of $560,716 at March
31, 1999 consists of a deferred tax asset of $913,689 relating
to the difference between the book and tax carrying values of
its Partner Companies and a deferred tax liability of
$1,474,405 relating to the tax effect of net unrealized
appreciation in available-for-sale securities.
The
Company’s revenue and loss from the Partner Company
Operations segment for the three months ended March 31, 1998
and 1999 was $377,371 and $2,374,716 and $3,111,035 and
$7,812,789, respectively. The Company’s income before tax
from the General ICG Operations segment for the three months
ended March 31, 1998 and 1999 was $11,643,757 and $27,229,546,
respectively, primarily due to other income of $12,322,162 and
$28,684,465, respectively.
Partner Company Operations’ assets were $67.5 million at
March 31, 1999, including $55.8 million of carrying value of
Partner Companies accounted for under the equity method of
accounting. General ICG Operations’ assets were $62.6
million at March 31, 1999, including $16.2 million, $40.6
million and $5.8 million of cash and cash equivalents, carrying
value of Partner Companies accounted for under the cost method,
and other, respectively.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
In April 1999, the Company entered into a $50 million revolving
bank credit facility (Note 7). The Company borrowed up to $25
million under the facility during May 1999 which was repaid
with the proceeds from the issuance of its convertible notes
(Note 17). As of June 30, 1999, borrowing availability under
the facility was $50 million, of which none was outstanding.
In
March 1999, Breakaway Solutions acquired all of the outstanding
stock of Applica Corporation (Applica). Subsequent to March 31,
1999, Breakaway Solutions acquired all of the outstanding stock
of WPL Laboratories, Inc. (WPL) and WebYes, Inc. (WebYes).
These acquisitions were accounted for under the purchase method
of accounting. The Applica, WPL and WebYes acquisitions had a
total purchase price of $15.2 million and resulted in total
intangible assets of $13.5 million which will be amortized over
five years.
During the three months ended March 31, 1999, the Company
utilized $32.7 million in cash to acquire interests in and make
advances to new and existing Partner Companies, including $8.3
million contributed to Breakaway Solutions and $18.3 million
utilized to acquire interests in Partner Companies accounted
for under the equity method of accounting. The acquisition of
Breakaway Solutions and the Partner Companies accounted for
under the equity method of accounting during the three months
ended March 31, 1999 resulted in goodwill of $5.5 million and
$12.6 million, respectively, all of which will be amortized
over three years.
For
the period from April 1, 1999 through June 30, 1999 the Company
utilized $84.3 million in cash to acquire interests in and make
advances to new and existing Partner Companies, including $4.0
million contributed directly to Breakaway Solutions, and an
additional $4.0 million used to purchase Breakaway Solutions
shares directly from Breakaway Solutions shareholders and $55.3
million utilized to acquire interests in Partner Companies
accounted for under the equity method of accounting. The
acquisition of Breakaway and the Partner Companies accounted
for under the equity method of accounting during the period
from April 1, 1999 through June 30, 1999 resulted in goodwill
of $5.6 million and $36.2 million, respectively, all of which
will be amortized over three years.
During the period from April 1, 1999 to June 30, 1999 the
Company acquired an interest in a new Partner Company to be
accounted for under the equity method of accounting for initial
consideration of $11.3 million, resulting in goodwill of $8.2
million which will be amortized over three years. This
ownership interest was purchased directly from shareholders of
the Partner Company. These sellers have the option, exercisable
at any time through August 2000, of electing to receive cash of
$11.3 million or a number of shares of the Company’s
common stock determined by dividing $11.3 million by the
product of multiplying the Company’s initial public
offering price by .90.
During the year ended December 31, 1998, the three months ended
March 31, 1999, the three months ended June 30, 1999, and the
period from July 1, 1999 through July 12, 1999, the Company
recorded aggregate unearned compensation in the amount of $.7
million, $5.5 million, $9.6 million and $1.4 million,
respectively, in connection with the grant of stock options to
non-employees and the grant of employee stock options with
exercise prices less than the deemed fair value on the
respective dates of grant. General and administrative costs for
the three months ended March 31, 1999 include $.1 million of
amortization expense related to stock option grants.
Amortization of deferred compensation expense for the year
ended December 31, 1999 will be about $2.4 million. The Company
expects to recognize amortization of deferred compensation
expense for each of the years from 2000 to 2003 of about $3.4
million and of about $1.2 million for 2004.
Subsequent to March 31, 1999, the Company accepted full
recourse promissory notes totaling $80.0 million from certain
of its employees and a director for the purchase of all or a
portion of their vested and unvested stock options and $8.5
million to pay the income taxes that became due in connection
with the option exercises (Note 17). The promissory notes bear
interest at rates ranging from 5.22% to 5.82% and mature in
2004.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Subsequent to March 31, 1999 the Company determined it would
divest its ownership interest in SMART Technologies, Inc. due
to the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger, the Company
’s ownership interest in and advances to SMART
Technologies, Inc. will be converted into cash, common stock
and warrants to purchase common stock of i2 Technologies, Inc.
The transaction had not been completed as of June 30, 1999. The
Company’s estimated non-operating gain before taxes from
this transaction will be approximately $2 million and its
holdings in i2 Technologies, Inc. will be accounted for as
available-for-sale securities.
In
May 1999, @Home Corporation exchanged its shares for all of the
outstanding stock of Excite. As part of this merger, the
Company will receive shares of @Home Corporation in exchange
for its shares in Excite. The Company’s estimated
non-operating gain before taxes from this transaction will be
approximately $2.7 million and its holdings in @Home
Corporation will be accounted for as available-for-sale
securities.
In
May 1999, VerticalNet announced it had signed a definitive
agreement to acquire all of the outstanding stock of Isadra,
Inc. in exchange for 500,000 shares of VerticalNet common stock
and $3 million in
cash. Consummation of the merger is subject to shareholder and
regulatory approvals as well as customary closing conditions.
The transaction had not been completed as of June 30, 1999.
Upon completion of the transaction, the Company’s voting
ownership will decrease from 36% to 35%. In addition, the
Company expects to record a non-operating gain due to the
increase in its share of VerticalNet’s net equity as a
result of their issuance of shares.
4. Ownership Interests
in and Advances to Partner Companies
The
following summarizes the Company’s ownership interests in
and advances to Partner Companies accounted for under the
equity method or cost method of accounting. The ownership
interests are classified according to applicable accounting
methods at December 31, 1997 and 1998. Cost basis represents
the Company’s original acquisition cost less any
impairment charges in such companies.
| |
|
December 31, 1997
|
|
December 31, 1998
|
| |
|
Carrying
Value
|
|
Cost
Basis
|
|
Carrying
Value
|
|
Cost
Basis
|
| Equity Method
|
|
$
1,200,210
|
|
$
1,608,452
|
|
$21,311,324
|
|
$27,588,451
|
| Cost Method
|
|
22,844,870
|
|
22,844,870
|
|
38,180,616
|
|
38,180,616
|
| |
|
|
|
|
|
|
|
|
| |
|
$24,045,080
|
|
|
|
$59,491,940
|
|
|
| |
|
|
|
|
|
|
|
|
At
December 31, 1998 the Company’s carrying value in its
Partner Companies accounted for under the equity method
exceeded its share of the underlying equity in the net assets
of such companies by $12.7 million. This excess relates to
ownership interests acquired in 1998 and is being amortized
over a three year period. Amortization expense of $.4 million
is included in “Equity income (loss)” in the
accompanying Consolidated Statements of Operations for the year
ended December 31, 1998.
Of
the $5.9 million of equity loss recorded by the Company in
1998, approximately $4.3 million was attributable to Syncra
Software, Inc.
As
of December 31, 1998, the Company had $5.2 million in advances
to Partner Companies which mature on various dates through
November 25, 1999 and bear interest at fixed rates between 7%
and 10%.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
The following summarized financial information for Partner
Companies accounted for under the equity method of accounting
at December 31, 1997 and 1998 has been compiled from the
financial statements of the respective Partner Companies:
Balance Sheets
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Current
assets
|
|
$
7,042,767
|
|
$33,645,121
|
| Non-current
assets
|
|
3,876,167
|
|
7,147,665
|
| |
|
|
|
|
|
Total assets
|
|
10,918,934
|
|
40,792,786
|
| |
|
|
|
|
| Current
liabilities
|
|
5,406,510
|
|
11,712,289
|
| Non-current
liabilities
|
|
1,203,524
|
|
758,840
|
| Shareholders
’ equity
|
|
4,308,900
|
|
28,321,657
|
| |
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$10,918,934
|
|
$40,792,786
|
| |
|
|
|
|
Results of Operations
| |
|
|
|
Year Ended December 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
| Revenue
|
|
$9,365,872
|
|
|
$18,911,691
|
|
$21,495,832
|
|
| Net income
(loss)
|
|
$(1,369,774
|
)
|
|
$
255,280
|
|
$(14,969,192
|
)
|
5. Other Acquisitions
In
1998, VerticalNet acquired all of the outstanding capital stock
of Boulder Interactive Technology Services Company (BITC) for
$1.9 million in cash and all of the outstanding capital stock
of Informatrix Worldwide, Inc. (Informatrix) for 49,892 shares
of VerticalNet’s common stock valued at $.2 million. These
acquisitions were accounted for using the purchase method of
accounting. The excess of the purchase price over the fair
value of the net assets acquired of approximately $2.8 million
was recorded as goodwill and is being amortized over three
years. Accumulated amortization relating to this goodwill
totaled $.3 million at December 31, 1998.
The
following unaudited pro forma financial information presents
the combined results of operations as if VerticalNet had owned
BITC and Informatrix since January 1, 1997 and October 15, 1997
(inception), respectively, after giving effect to certain
adjustments including goodwill and income taxes. The unaudited
pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the
Company, VerticalNet, BITC and Informatrix constituted a single
entity during such periods.
| |
|
(Unaudited)
Year Ended December 31,
|
| |
|
1997
|
|
1998
|
| Revenue
|
|
$1,118,030
|
|
|
$3,606,027
|
| Pro forma net
income (loss)
|
|
$(7,590,016
|
)
|
|
$13,166,449
|
| Pro forma net
income (loss) per share
|
|
$(.22
|
)
|
|
$.23
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
6. Fixed Assets
Fixed assets consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Computer
equipment and software
|
|
$681,656
|
|
|
$1,564,297
|
|
| Office
equipment and furniture
|
|
148,430
|
|
|
271,809
|
|
| Trade show
equipment
|
|
34,079
|
|
|
40,587
|
|
| Leasehold
improvements
|
|
29,402
|
|
|
45,864
|
|
| |
|
|
|
|
|
|
| |
|
893,567
|
|
|
1,922,557
|
|
| Less:
accumulated depreciation and amortization
|
|
(349,124
|
)
|
|
(771,289
|
)
|
| |
|
|
|
|
|
|
| |
|
$
544,443
|
|
|
$1,151,268
|
|
| |
|
|
|
|
|
|
7. Debt
|
Revolving Credit Facilities
|
In
March 1998, the Company entered into an unsecured $3 million
revolving credit facility. Borrowings under this facility
accrued interest at a premium to prime ranging from .75% to
1.5%. The Company borrowed up to $2 million under this facility
during 1998. No amounts were outstanding at December 31, 1998
and the facility expired in March 1999.
In
April 1999, the Company entered into a $50 million revolving
bank credit facility. In connection with the facility, the
Company issued 200,000 warrants exercisable for seven years at
$10 per share. The facility matures in April 2000, is subject
to a .25% unused commitment fee, bears interest, at the Company
’s option, at prime and/or LIBOR plus 2.5%, and is secured
by substantially all of the Company’s assets (including
the Company’s holdings in VerticalNet). Borrowing
availability under the facility is based on the fair market
value of the Company’s holdings of publicly traded Partner
Companies (currently only VerticalNet) and the value, as
defined in the facility, of the Company’s private Partner
Companies. Based on the provisions of the borrowing base,
borrowing availability at April 30, 1999 was $32.6 million, of
which none was outstanding. As of May 7, 1999, the Company had
borrowed $13 million under the facility.
VerticalNet had a line of credit with a bank in the amount of
$2.5 million at December 31, 1997. Borrowings under the
facility were collateralized by a security interest in all
assets of VerticalNet and required VerticalNet to meet
specified financial ratios. As of December 31, 1997,
VerticalNet was in technical default, as it did not meet the
specified financial ratios, but the bank waived these
violations. The facility accrued 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.
As
of June 1998, VerticalNet modified the agreement, reducing its
line of credit with the bank to $.5 million. On November 25,
1998, the agreement was additionally amended allowing the
Company to execute a $2.0 million note with the bank. The note
accrues interest at prime plus 1.5% and matures at the earlier
of March 31, 1999 or the completion of VerticalNet’s next
financing. In connection with the loan, VerticalNet issued
warrants to purchase 20,513 shares of VerticalNet’s common
stock at an exercise price of $16 per share with an estimated
fair value of $.1 million. As of December 31, 1998, the
outstanding balance for borrowings under this facility was $2
million and the weighted average interest rate for the year
ended December 31, 1998 was 10%. Upon the completion of
VerticalNet’s IPO in February 1999, VerticalNet repaid $2
million and the line of credit with the bank was reduced to $.5
million.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
All
of the Company’s long-term debt is attributable to
VerticalNet and consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Term notes
with related parties
|
|
$100,000
|
|
|
$
—
|
|
| Term bank
notes
|
|
32,852
|
|
|
—
|
|
| Capital
leases
|
|
417,952
|
|
|
639,940
|
|
| |
|
|
|
|
|
|
| |
|
550,804
|
|
|
639,940
|
|
| Less: current
portion
|
|
(150,856
|
)
|
|
(288,016
|
)
|
| |
|
|
|
|
|
|
| Long-term
debt
|
|
$399,948
|
|
|
$351,924
|
|
| |
|
|
|
|
|
|
VerticalNet 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 the Company. These notes were repaid in May 1998.
VerticalNet 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.
VerticalNet 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,
1997 and 1998, the book value of assets held under capital
leases was approximately $.3 million and $.5 million,
respectively, and the aggregate remaining minimum lease
payments at December 31, 1998 were approximately $.7 million
including interest of approximately $.1 million.
At
December 31, 1998, long-term debt is scheduled to mature as
follows:
| 1999
|
|
$288,016
|
| 2000
|
|
230,338
|
| 2001
|
|
95,718
|
| 2002
|
|
19,810
|
| 2003
|
|
6,058
|
| |
|
|
| Total
|
|
$639,940
|
| |
|
|
8. Accrued Expenses
Accrued expenses consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Accrued
compensation and benefits
|
|
$90,833
|
|
$
454,230
|
| Accrued
marketing costs
|
|
—
|
|
446,334
|
| Other
|
|
297,692
|
|
922,843
|
| |
|
|
|
|
| |
|
$
388,525
|
|
$1,823,407
|
| |
|
|
|
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
9. Shareholders’
Equity
The
Company’s authorized capital stock consists of 130,000,000
shares of common stock, par value $.001 per share. The holders
of common stock are entitled to one vote per share and are
entitled to dividends as declared.
Dividends may be restricted by the inability to liquidate
ownership interests in Partner Companies to fund cash dividends
and may be subject to the preferential rights of the holders of
the Company’s preferred stock, if any.
The
Company may establish one or more classes or series of
preferred stock. The holders of the preferred stock may be
entitled to preferences over common stock or shareholders with
respect to dividends, liquidation, dissolution, or winding up
of the Company, as established by the Company’s Board of
Directors. No preferred stock is authorized at December 31,
1998.
Certain shareholders were granted registration rights which
become effective after completion of a public offering.
Shareholders’ equity contributions are recorded when
received. The Company issued 15,990,000 shares of common stock
for net proceeds of $32 million in 1999. These shares had been
subscribed for at December 31, 1998.
During 1996 and 1997, 6,027,017 and 756,608 shares of
restricted common stock (“restricted stock”) were
granted, net of forfeitures, to employees, consultants and
advisors at no cost as performance incentives. The restricted
stock vests in equal annual installments over a five year
period.
At
December 31, 1997 and 1998, the 6,783,625 shares of restricted
stock had been granted at a weighted average fair value of
$0.19 per share or an aggregate of $1.3 million based on
independent valuations of the shares. These independent
valuations took into account certain factors, primarily the
restrictions on the ability of restricted shareholders to
receive distributions of dividends or profits and the
uncertainty of realization of any return from these shares. The
$1.3 million of deferred compensation is classified as a
reduction of shareholders’ equity and is being amortized
over the five-year vesting period. Compensation expense related
to the restricted stock totaling $.1 million, $.2 million and
$.3 million was recorded in 1996, 1997 and 1998, respectively.
Incentive or non-qualified stock options may be granted to
Company employees, directors and consultants under several
stock option plans (“Plans”). Generally, the options
vest over a four to five year period and expire eight to ten
years after the date of grant. At December 31, 1998, the
Company reserved 10,470,000 shares of common stock for possible
future issuance under the Plans. VerticalNet and most Partner
Companies also maintain their own stock option plans.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
The following table summarizes the activity of the Company’
s stock option plans:
| |
|
Shares
|
|
Weighted
Average
Exercise Price
|
| Outstanding
at January 1, 1997
|
|
—
|
|
|
$
—
|
|
| Options
granted
|
|
94,000
|
|
|
1.00
|
|
| Options
canceled/forfeited
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
| Outstanding
at December 31, 1997
|
|
94,000
|
|
|
1.00
|
|
| Options
granted
|
|
6,047,000
|
|
|
2.00
|
|
| Options
canceled/forfeited
|
|
(47,000
|
)
|
|
(1.00
|
)
|
| |
|
|
|
|
|
|
| Outstanding
at December 31, 1998
|
|
6,094,000
|
|
|
$1.99
|
|
| |
|
|
|
|
|
|
No
options were issued by the Company in 1996. At December 31,
1997 there were no options exercisable under the Plans. At
December 31, 1998 there were 11,750 options exercisable at
$1.00 per share under the Plans.
The
following table summarizes information about stock options
outstanding:
Exercise
Price
|
|
Number
Outstanding at
December 31, 1998
|
|
Weighted
Average
Remaining Contractual
Life (in Years)
|
| $1.00
|
|
47,000
|
|
7
|
| $2.00
|
|
6,047,000
|
|
10
|
Included in the 1998 option grants are 497,000 stock options to
non-employees. The fair value of these options of $.7 million
was recorded as deferred compensation in 1998 and is being
amortized over the five year vesting period. The fair value of
these options was determined using the Black-Scholes method
assuming a volatility of 80%, a dividend yield of 0%, an
average expected option life of 5 years, and a risk-free
interest rate of 5.2%.
The
Company applies APB 25 and related interpretations in
accounting for its stock option plans. Had compensation cost
been recognized pursuant to SFAS 123, the Company’s net
income (loss) would have been as follows:
| |
|
Year Ended December 31,
|
| |
|
1997
|
|
1998
|
| Net income
(loss)
|
|
As reported
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
SFAS 123 pro
forma
|
|
$(6,648,952
|
)
|
|
$13,436,582
|
| Net income
(loss) per share
|
|
As reported
|
|
$(.19
|
)
|
|
$.25
|
|
SFAS 123 pro
forma
|
|
$(.19
|
)
|
|
$.24
|
The
per share weighted-average fair value of options issued by the
Company during 1997 and 1998 was approximately $0.22 and $0.45,
respectively.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
The following assumptions were used to determine the fair value
of stock options granted to employees by the Company, its
subsidiaries, and Partner Companies accounted for under the
equity method using the minimum value option-price model:
| Dividend
yield
|
|
0
|
%
|
| Average
expected option life
|
|
5 years
|
|
| Risk-free
interest rate
|
|
5.2
|
%
|
In
1999 through May 7, 1999, the Company granted 3,584,500 options
to employees and non-employees at exercise prices ranging from
$2.00 to $4.88.
10. Related Parties
The
Company provides strategic and operational support to its
Partner Companies in the normal course of its business. These
services are generally provided by the Company’s
employees, members of its Advisory Board and Board of Directors
and outside consultants. The costs related to employees are
paid by the Company and are reflected by the Company in general
and administrative expenses of the General ICG Operations
segment. Members of the Company’s Advisory Board and Board
of Directors are generally compensated with stock options in
the Company which are accounted for in accordance with
Statement of Financial Accounting Standards No. 123 with any
expense related to these options included in general and
administrative expenses of the General ICG Operations segment.
The costs of outside consultants are generally paid directly by
the Partner Company.
A
principal shareholder satisfied a portion of its initial 1996
funding commitment by contributing its interests valued at $6.1
million in the securities of a Partner Company. As this
shareholder controlled the Company at the time of the transfer,
the shareholder’s cost basis in the shares of the Partner
Company ($1.1 million), together with a $.5 million equity
contribution made by the Company, comprise the Company’s
cost basis in the Partner Company.
The
Company entered into various cost sharing arrangements with the
same principal shareholder during 1996, 1997, and 1998, whereby
the Company reimbursed, under fair market terms, this
shareholder for certain operational expenses. The amounts
incurred for such items were $.1 million, $.1 million and $.2
million in 1996, 1997, and 1998, respectively.
The
Company loaned an officer $.1 million during 1998, evidenced by
a term note with an interest rate of prime plus 1% (8.75% at
December 31, 1998) to purchase a portion of the Company’s
interest in a Partner Company at the Company’s cost. This
note was repaid in January 1999 and is included in other
current assets in the December 31, 1998 Consolidated Balance
Sheets.
In
September 1998 the Company entered into a $.2 million one-year
consulting contract with a Partner Company.
The
Company shares certain acquisition rights with certain of its
principal shareholders whereby these shareholders have the
ability to purchase a portion of the Company’s interest in
certain Partner Companies. During 1998 and 1999, one
shareholder exercised this right and acquired a portion of the
Company’s interest in or advances to three Partner
Companies for cash of $3.0 million and assumption of $.4
million of a payable to a Partner Company. At the time of the
transactions, there was no difference between the consideration
received and the Company’s cost basis of the ownership
interest or advance sold. The agreement under which these
rights are exercisable will terminate automatically upon an
initial public offering.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Certain executives of the Company and its Partner Companies
have the option to purchase a portion of the Company’s
ownership interest in various Partner Companies at the Company
’s cost.
11. Segment Information
In
1998, the Company adopted SFAS 131, which requires the
reporting of segment information using the “management
approach” versus the “industry approach”
previously required. The Company’s reportable segments
consist of Partner Company Operations and General ICG
Operations. Partner Company Operations includes the effect of
consolidating VerticalNet and recording the Company’s
share of earnings and losses of Partner Companies accounted for
under the equity method. VerticalNet operations include
creating and operating industry-specific trade communities on
the Internet. Partner Companies accounted for under the equity
method of accounting operate in various Internet-related
businesses. General ICG Operations represents the expenses of
providing strategic and operational support to the
Internet-related Partner Companies, as well as the related
administrative costs related to such expenses. General ICG
Operations also includes the effect of transactions and other
events incidental to the Company’s general operations and
the Company’s ownership interests in and advances to
Partner Companies. The Company’s and Partner Companies
’ operations were principally in the United States of
America during 1996, 1997 and 1998.
The
following summarizes information related to the Company’s
segments. All significant intersegment activity has been
eliminated. Assets are owned or allocated assets used by each
operating segment.
| |
|
|
|
Year Ended December 31,
|
| |
|
March 4, 1996
(Inception)
Through
December 31,
1996
|
|
1997
|
|
1998
|
| Partner
Company Operations
|
|
Revenue
|
|
$
285,140
|
|
|
$
791,822
|
|
|
$3,134,769
|
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
Cost of
revenue
|
|
427,470
|
|
|
1,767,017
|
|
|
4,642,528
|
|
|
Sales and
marketing
|
|
268,417
|
|
|
2,300,365
|
|
|
7,894,662
|
|
|
General and
administrative
|
|
291,660
|
|
|
1,388,123
|
|
|
4,106,583
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
987,547
|
|
|
5,455,505
|
|
|
16,643,773
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(702,407
|
)
|
|
(4,663,683
|
)
|
|
(13,509,004
|
)
|
|
Interest income
|
|
7,491
|
|
|
10,999
|
|
|
212,130
|
|
|
Interest expense
|
|
(13,931
|
)
|
|
(126,105
|
)
|
|
(297,401
|
)
|
| |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority
interest and equity
income (loss)
|
|
(708,847
|
)
|
|
(4,778,789
|
)
|
|
(13,594,275
|
)
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Minority interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
Equity income (loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from Partner Company Operations
|
|
$(796,202
|
)
|
|
$(4,778,902
|
)
|
|
$(14,081,522
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| General
ICG Operations
|
|
General and administrative
|
|
$1,360,821
|
|
|
$2,054,118
|
|
|
$3,512,586
|
|
| |
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
Interest income, net
|
|
94,538
|
|
|
253,392
|
|
|
1,009,859
|
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from General ICG Operations
|
|
$(1,266,283
|
)
|
|
$(1,800,726
|
)
|
|
$27,980,450
|
|
| |
|
|
|
|
|
|
|
|
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Assets
|
|
| Partner
Company Operations
|
|
Carrying
value of equity method Partner Companies
|
|
$1,200,210
|
|
$21,311,324
|
|
Other
|
|
2,104,087
|
|
12,342,975
|
| |
|
|
|
|
| |
|
3,304,297
|
|
33,654,299
|
| General
ICG Operations
|
|
|
|
|
|
Cash and cash
equivalents
|
|
5,212,745
|
|
21,178,055
|
|
Carrying
value of cost method Partner Companies
|
|
22,844,870
|
|
38,180,616
|
|
Other
|
|
119,104
|
|
3,773,005
|
| |
|
|
|
|
| |
|
28,176,719
|
|
63,131,676
|
| |
|
|
|
|
| |
|
$31,481,016
|
|
$96,785,975
|
| |
|
|
|
|
12. Parent Company
Financial Information
The
Company’s consolidated financial statements reflect
VerticalNet accounted for under the consolidation method of
accounting from the Company’s inception in March 1996
through December 31, 1998 (audited) and under the equity method
of accounting for the three months ended March 31, 1999
(unaudited). The Company’s consolidated financial
statements for the three months ended March 31, 1999 reflect
Breakaway Solutions accounted for under the consolidation
method of accounting (unaudited).
Parent company financial information is provided to present the
financial position and results of operations of the Company as
if VerticalNet and Breakaway Solutions were accounted for under
the equity method of accounting for all periods presented. The
Company’s share of VerticalNet’s and Breakaway
Solutions’ losses is included in “Equity income (loss)
” in the Parent Company Statements of Operations for all
periods presented based on the Company’s ownership
percentage in each period. The losses recorded in excess of
carrying value of VerticalNet at December 31, 1997 and 1998 are
included in “Non-current liabilities” and the
carrying value of VerticalNet and Breakaway Solutions as of
March 31, 1999 are included in “Ownership interests in and
advances to Partner Companies” in the Parent Company
Balance Sheets. The March 31, 1999 Parent Company Balance Sheet
and the Parent Company Statements of Operations for the three
months ended March 31, 1998 and 1999 are unaudited.
Parent Company Balance Sheets
| |
|
December 31,
|
|
(Unaudited)
|
| |
|
1997
|
|
1998
|
|
March 31,
1999
|
| Assets
|
|
Current
assets
|
|
$
5,245,064
|
|
$21,596,575
|
|
$16,437,857
|
|
Ownership
interests in and advances to Partner Companies
|
|
24,045,080
|
|
59,491,940
|
|
104,271,808
|
|
Other
|
|
86,785
|
|
3,354,485
|
|
5,525,104
|
| |
|
|
|
|
|
|
|
Total assets
|
|
29,376,929
|
|
84,443,000
|
|
126,234,769
|
| Liabilities
and shareholders’ equity
|
|
Current
liabilities
|
|
318,729
|
|
2,082,463
|
|
2,438,593
|
|
Non-current
liabilities
|
|
2,423,525
|
|
1,636,159
|
|
560,716
|
|
Shareholders
’ equity
|
|
26,634,675
|
|
80,724,378
|
|
123,235,460
|
| |
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$29,376,929
|
|
$84,443,000
|
|
$126,234,769
|
| |
|
|
|
|
|
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Parent Company Statements of Operations
| |
|
|
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenue
|
|
$
—
|
|
|
$
—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses
|
|
General and
administrative
|
|
1,360,821
|
|
|
2,054,118
|
|
|
3,512,586
|
|
|
700,719
|
|
|
1,733,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
1,360,821
|
|
|
2,054,118
|
|
|
3,512,586
|
|
|
700,719
|
|
|
1,733,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,360,821
|
)
|
|
(2,054,118
|
)
|
|
(3,512,586
|
)
|
|
(700,719
|
)
|
|
(1,733,128
|
)
|
| Other income,
net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,684,465
|
|
| Interest
income, net
|
|
94,538
|
|
|
253,392
|
|
|
1,009,859
|
|
|
22,314
|
|
|
278,209
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
and equity income (loss)
|
|
1,266,283
|
|
|
(1,800,726
|
)
|
|
27,980,450
|
|
|
11,643,757
|
|
|
27,229,546
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| Equity income
(loss)
|
|
(796,202
|
)
|
|
(4,778,902
|
)
|
|
(14,081,522
|
)
|
|
(2,374,716
|
)
|
|
(7,812,789
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Supplemental
non-cash financing and investing activities
During the years ended December 31, 1997 and 1998 and the three
months ended March 31, 1999 (unaudited), the Company converted
$1.4 million, $1.8 million and $3.4 million, respectively, of
advances to Partner Companies into ownership interests in
Partner Companies.
During the year ended December 31, 1998, the Company exchanged
all of its holdings in Matchlogic and Wisewire for shares of
Excite and Lycos, respectively (Note 15).
Interest paid in the periods ended December 31, 1997 and 1998
was $.l million and $.2 million, respectively.
The
Company paid no income taxes in 1996, 1997 and 1998 due to its
tax status as an LLC.
In
1998, the Company acquired an ownership interest in a Partner
Company in exchange for a $1.7 million note payable. The note
is payable in two equal installments through June 1999, does
not bear interest and is secured with the acquired stock of the
Partner Company. In March 1999, a shareholder of the Company
assumed $.4 million of this note.
14. Defined
Contribution Plan
In
1997, the Company established a defined contribution plan that
covers all of its employees. Participants may contribute 1% to
15% of pre-tax compensation, as defined. The Company may make
discretionary contributions to the plan but has never done so.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
15. Other Income
Other income consists of the following for the year ended
December 31, 1998:
| Sale of
Matchlogic to Excite
|
|
$12,822,162
|
|
| Sale of
Excite holdings
|
|
16,813,844
|
|
| Sale of
WiseWire to Lycos
|
|
3,324,238
|
|
| Sale of Lycos
holdings
|
|
1,471,907
|
|
| Partner
Company impairment charges
|
|
(3,948,974
|
)
|
| |
|
|
|
| |
|
$30,483,177
|
|
| |
|
|
|
Gains on sales of Partner Companies and available-for-sale
securities are determined using average cost.
In
February 1998, the Company exchanged all of its holdings in
MatchLogic for 763,820 shares of Excite. The fair market value
of the Excite shares received of $14.3 million on the date of
exchange was used to determine the gain of $12.8 million.
Throughout the remainder of 1998, the Company sold 716,082
shares of Excite which resulted in $30.2 million of proceeds
and $16.8 million of gains.
In
April 1998, the Company exchanged all of its holdings in
WiseWire for 191,922 shares of Lycos, Inc. The fair market
value of the Lycos shares received of $5.3 million on the date
of exchange was used to determine the gain of $3.3 million.
Throughout the remainder of 1998, the Company sold 169,548
shares of Lycos which resulted in $6.2 million of proceeds and
$1.5 million of gains.
In
December 1998 the Company recorded an impairment charge of $1.9
million for the decrease in value of one of its Partner
Companies accounted for under the cost method of accounting as
a result of selling the Partner Company interest below its
carrying value. The Company had acquired its ownership interest
in the Partner Company during 1996 and 1997. In December 1998,
the Partner Company agreed to be acquired by an independent
third party. The transaction was completed in January 1999. The
impairment charge the Company recorded was determined by
calculating the difference between the proceeds it received
from the sale and its carrying value.
For
the year ended December 31, 1998 and the three months ended
March 31, 1999, the Company recorded impairment charges of $2.0
million and $1.6 million, respectively, for the other than
temporary decline in the fair value of a cost method Partner
Company. From the date of its initial acquisition of an
ownership interest in this Partner Company through December 31,
1998, the Company’s funding to this Partner Company
represented all of the outside capital the company had
available to fund its net losses and capital asset
requirements. During the three months ended March 31, 1999 the
Company fully guaranteed the Partner Company’s new bank
loan and agreed to provide additional funding. The Company
acquired an additional ownership interest in this Partner
Company for $5.0 million in April 1999. The impairment charges
the Company recorded were determined by the decrease in net
book value of the Partner Company caused by its net losses
which were funded entirely based on the Company’s funding
and bank guarantee. Given its continuing losses, the Company
will continue to determine and record impairment charges in a
similar manner for this Partner Company until the status of its
financial position improves.
16. Commitments and
Contingencies
The
Company and its subsidiaries are involved in various claims and
legal actions arising 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 and its subsidiaries.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
In connection with its ownership interests in certain Partner
Companies, the Company guaranteed $3.2 million of bank loan and
other commitments and has committed capital of $2 million to an
existing Partner Company to be funded in 1999.
The
Company and VerticalNet lease their facilities under operating
lease agreements expiring through 2004. Future minimum lease
payments as of December 31, 1998 under the leases are as
follows:
| 1999
|
|
$385,316
|
| 2000
|
|
402,565
|
| 2001
|
|
266,970
|
| 2002
|
|
239,984
|
| 2003
|
|
246,274
|
| Thereafter
|
|
103,385
|
Rent expense under the noncancelable operating leases was
approximately $.1 million and $.3 million for the years ended
December 31, 1997 and 1998, respectively.
Because many of its Partner Companies are not majority-owned
subsidiaries, changes in the value of the Company’s
interests in Partner Companies and the income or loss and
revenue attributable to them could require the Company to
register under the Investment Company Act unless it takes
action to avoid being required to register. However, the
Company believes it can take steps to avoid being required to
register under the Investment Company Act which would not
adversely affect its operations or shareholder value.
On
June 30, 1998, VerticalNet entered into a three year
Sponsorship Agreement with Excite, Inc. (Excite). The
Sponsorship Agreement provides for VerticalNet 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 VerticalNet 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 $.2 million in barter advertising during the term of the
Sponsorship Agreement. As of December 31, 1998, each company
has satisfied the barter provisions under the Sponsorship
Agreement.
On
January 19, 1999, VerticalNet entered into a one-year agreement
with Compaq Computer Corporation (Compaq) and its Internet Web
site known as AltaVista. The agreement provides for VerticalNet
and AltaVista to sponsor and promote thirty-one co-branded Web
pages. The agreement requires VerticalNet to pay Compaq $1.0
million over the term of the agreement based on the number of
advertising impressions delivered. Such amount will be charged
to expense as the advertising impressions are provided by
AltaVista. In addition, each company will provide the other
with $.3 million in barter advertising during the term of the
agreement.
VerticalNet has entered into non-cancelable obligations with
several content service providers and Internet search engines.
Under these agreements, exclusive of the Excite and AltaVista
agreements discussed above, VerticalNet’s obligations are
as follows:
| 1999
|
|
$1,488,734
|
| 2000
|
|
65,500
|
VerticalNet has entered into employment agreements with several
employees. The agreements are cancelable, but require severance
upon termination. As of December 31, 1998, VerticalNet would be
required to pay approximately $1 million in severance in the
event that these employment agreements are canceled.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
17. Subsequent Events
The
Company issued 15,990,000 shares of common stock for net
proceeds of $32 million from January through March, 1999 (Note
9).
In
April 1999 the Company’s Board of Directors authorized the
acceptance of full recourse promissory notes from its employees
and a director as consideration for exercising all or a portion
of their vested and unvested stock options. The Company has the
right, but not the obligation, to repurchase unvested shares
under certain circumstances. The exercise of unvested options
by the employees and director and the acceptance of promissory
notes by the Company are in accordance with the terms of the
Company’s equity compensation plans and related option
agreements. The Company’s Board of Directors also approved
loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in
connection with the option exercises.
|
VerticalNet Initial Public Offering
|
In
February 1999, VerticalNet completed its initial public
offering (IPO) of 4,025,000 shares of its common stock at
$16.00 per share. Net proceeds to VerticalNet were
approximately $58.3 million. As a result of the VerticalNet
IPO, the Company recorded a gain in 1999 of approximately $28
million relating to the increase in the Company’s share of
VerticalNet’s net equity.
In
March 1999 the Company made a distribution of $10.7 million to
former LLC members in accordance with the LLC agreements to
satisfy the members’ tax liabilities.
|
Ownership Interests in and Advances to Partner Companies
|
Through May 7, 1999, the Company expended approximately $60
million to acquire interests in or make advances to new and
existing Partner Companies.
|
Revolving Bank Credit Facility
|
In
April 1999, the Company entered into a $50 million revolving
bank credit facility (Note 7).
|
Convertible Subordinated Notes
|
On
May 5, 1999, the Company’s Board of Directors authorized
the issuance of up to $90 million of convertible subordinated
notes. The notes bear interest at an annual rate of 4.99%
during the first year and at the prime rate for the remaining
two years. Prior to May 2000, the notes will automatically
convert into shares of the Company’s common stock at the
initial public offering price upon consummation of an initial
public offering or at the per share value of a private round of
equity financing of at least $50 million. If the notes are
converted, all accrued interest is waived. The Company’s
Board of Directors also approved the issuance of warrants to
the holders of these convertible notes to purchase shares of
the Company’s common stock. The warrant holders will be
entitled to purchase the number of shares of the Company’s
common stock determined by dividing 20% of the principal amount
of the notes by the price per share at which the notes are
convertible. The warrants expire in May 2002.
On
May 7, 1999 the Company’s Board of Directors authorized
the filing of a registration statement on Form S-1 in
connection with the Company’s initial public offering.
INTERNET CAPITAL GROUP, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
During 1998 and 1999, the Company acquired significant minority
ownership interests in 19 Partner Companies accounted for under
the equity method of accounting. In January 1999, the Company
acquired a controlling majority interest in Breakaway
Solutions, Inc. In March 1999, Breakaway Solutions acquired all
of the outstanding stock of Applica Corporation. Subsequent to
March 31, 1999, Breakaway Solutions acquired all of the
outstanding stock of WPL Laboratories, Inc. and WebYes, Inc.
All acquisitions have been accounted for by the purchase method
of accounting. In addition, the Company deconsolidated
VerticalNet subsequent to December 31, 1998 due to the decrease
in the Company’s ownership percentage from above to below
50%.
The
unaudited pro forma condensed combined statement of operations
for the year ended December 31, 1998 reflects the acquisitions
in 1999 of Breakaway Solutions, Applica, WPL Laboratories, and
WebYes, the deconsolidation of VerticalNet and the 1998 and
1999 acquisitions of significant minority ownership interests
in 19 equity method Partner Companies as if they had occurred
on January 1, 1998.
The
unaudited pro forma condensed combined statement of operations
for the three months ended March 31, 1999 reflects the
acquisitions in 1999 of Applica, WPL Laboratories WebYes and
significant minority ownership interests in 12 equity method
Partner Companies as if they had occurred on January 1, 1998.
An
unaudited condensed pro forma balance sheet at March 31, 1999,
has not been presented since Breakaway Solutions is reflected
in the historical financial statements and the acquisitions of
WPL Laboratories, WebYes and equity method Partner Companies
subsequent to March 31, 1999 would not have had a material
effect on the consolidated balance sheet except for the
intangible and other long-term assets recorded in connection
with the acquisitions. The pro forma effect of WPL
Laboratories, WebYes and equity method Partner Companies
acquired subsequent to March 31, 1999, would have been to
increase “Intangible assets” by $12.0 million, “
Ownership interests in and advances to Partner Companies”
by $66.6 million, other assets by $1.8 million, other
liabilities by $11.6 million, “minority interest” by
$8.5 million, “convertible notes” by $40.9 million
and decrease “cash and cash equivalents” by $19.4
million assuming such acquisitions had occurred on March 31,
1999.
Since the pro forma financial information is based upon the
financial condition and operating results of Breakaway
Solutions, Applica, WPL Laboratories, WebYes and the 19 equity
method Partner Companies acquired during periods when they were
not under the control, influence or management of the Company,
the information presented may not be indicative of the results
which would have actually been obtained had the acquisitions
been completed as of the respective periods presented, 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 the
Company with Breakaway Solutions, Applica, WPL Laboratories,
WebYes and the equity method Partner Companies. The unaudited
pro forma condensed combined financial statements should be
read in conjunction with the historical audited financial
statements of the Company and the notes thereto as well as the
audited historical financial statements of Breakaway Solutions,
Applica, WPL Laboratories, WebYes, and certain equity method
Partner Companies and the notes thereto included elsewhere in
this prospectus.
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined
Statements of Operations for the Year Ended December 31, 1998
| |
|
Internet Capital
Group, Inc.
|
|
Breakaway
Acquisition
|
|
Applica,
WPL and
WebYes
Acquisitions
|
|
VerticalNet
Deconsolidation
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
| Revenue
|
|
$3,134,769
|
|
|
$10,017,947
|
|
|
$2,938,927
|
|
|
$(3,134,769)
|
|
$—
|
|
|
$12,956,874
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
4,642,528
|
|
|
5,903,843
|
|
|
1,870,064
|
|
|
(4,642,528)
|
|
—
|
|
|
7,773,907
|
|
|
Sales and marketing
|
|
7,894,662
|
|
|
—
|
|
|
37,092
|
|
|
(7,894,662)
|
|
—
|
|
|
37,092
|
|
|
General and administrative
|
|
7,619,169
|
|
|
4,814,288
|
|
|
691, 810
|
|
|
(3,823,593)
|
|
6,306,923
|
a
|
|
15,608,597
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
20,156,359
|
|
|
10,718,131
|
|
|
2,598,966
|
|
|
(16,360,783)
|
|
6,306,923
|
|
|
23,419,596
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,021,590
|
)
|
|
(700,184
|
)
|
|
339,961
|
|
|
13,226,014
|
|
(6,306,923
|
)
|
|
(10,462,722
|
)
|
| Other income,
net
|
|
30,483,177
|
|
|
156,945
|
|
|
—
|
|
|
|
|
|
|
|
30,640,122
|
|
| Interest
income
|
|
1,305,787
|
|
|
11,191
|
|
|
—
|
|
|
(212,130)
|
|
—
|
|
|
1,104,848
|
|
| Interest
expense
|
|
(381,199
|
)
|
|
(43,127
|
)
|
|
(8,117
|
)
|
|
297,401
|
|
—
|
|
|
(135,042
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes,
Minority Interest and Equity
Income (Loss)
|
|
14,386,175
|
|
|
(575,175
|
)
|
|
331,844
|
|
|
13,311,285
|
|
(6,306,923
|
)
|
|
21,147,206
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
c
|
|
—
|
|
| Minority
interest
|
|
5,381,640
|
|
|
247,325
|
|
|
(142,693
|
)
|
|
(5,381,640)
|
|
1,159,980
|
e
|
|
1,264,612
|
|
| Equity income
(loss)
|
|
(5,868,887
|
)
|
|
|
|
|
|
|
|
|
|
(32,309,632
|
)b
|
|
(38,178,519
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$13,898,928
|
|
|
$(327,850
|
)
|
|
$189,151
|
|
|
$7,929,645
|
|
$(37,456,575
|
)
|
|
$(15,766,701
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(0.28)
|
|
|
Diluted
|
|
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(0.28)
|
|
Weighted
Average Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
56,102,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,102,289
|
|
|
Diluted
|
|
56,149,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,102,289
|
|
Unaudited Pro Forma Condensed Combined
Statements of Operations for the Three Months Ended March 31,
1999
| |
|
Internet Capital
Group, Inc.
|
|
Applica,
WPL and
WebYes
Acquisitions
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
| Revenue
|
|
$3,111,035
|
|
|
$1,229,506
|
|
|
$—
|
|
|
$4,340,541
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
1,553,329
|
|
|
498,227
|
|
|
—
|
|
|
2,051,556
|
|
Sales and marketing
|
|
114,415
|
|
|
68,721
|
|
|
—
|
|
|
183,136
|
|
General and administrative
|
|
3,733,400
|
|
|
412,068
|
|
|
1,291,074
|
a
|
|
5,436,542
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
5,401,144
|
|
|
979,016
|
|
|
1,291,074
|
|
|
7,671,234
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,290,109
|
)
|
|
250,490
|
|
|
(1,291,074
|
)
|
|
(3,330,693)
|
| Other income,
net
|
|
28,677,471
|
|
|
—
|
|
|
—
|
|
|
28,677,471
|
| Interest
income
|
|
309,735
|
|
|
—
|
|
|
—
|
|
|
309,735
|
| Interest
expense
|
|
(13,756
|
)
|
|
(6,011
|
)
|
|
—
|
|
|
(19,767)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes, Minority
Interest and Equity Income (Loss)
|
|
26,683,341
|
|
|
244,479
|
|
|
(1,291,074
|
)
|
|
25,636,746
|
| Income taxes
|
|
663,206
|
|
|
—
|
|
|
2,575,678
|
d
|
|
3,238,884
|
| Minority
interest
|
|
146,018
|
|
|
(105,126
|
)
|
|
289,995
|
e
|
|
330,887
|
| Equity income
(loss)
|
|
(7,412,602
|
)
|
|
—
|
|
|
(5,960,214
|
)b
|
|
(13,372,816)
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$20,079,963
|
|
|
$139,353
|
|
|
$(4,385,615
|
)
|
|
$15,833,701
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net Income
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$0.28
|
|
|
|
|
|
|
|
|
$0.22
|
|
Diluted
|
|
$0.27
|
|
|
|
|
|
|
|
|
$0.21
|
| Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
72,646,022
|
|
|
|
|
|
|
|
|
72,646,022
|
|
Diluted
|
|
73,699,973
|
|
|
|
|
|
|
|
|
73,699,973
|
See notes to unaudited pro forma
condensed combined financial statements.
Internet Capital Group, Inc.
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
1. Basis of Presentation
|
The unaudited
pro forma condensed combined statement of operations for the
year ended December 31, 1998, gives effect to the acquisition
(purchase price and goodwill/intangibles in parenthesis) of
Breakaway Solutions ($16.3 and $10.8 million), Applica ($1.6
and $1.4 million), WPL Laboratories ($9.9 and $8.5 million)
and WebYes ($3.7 and $3.6 million), the deconsolidation of
VerticalNet and the acquisitions of significant minority
ownership interests in 19 equity method Partner Companies
($110.9 and $71.1 million) as if they had occurred on January
1, 1998.
|
|
The unaudited
pro forma condensed combined statement of operations for the
three months ended March 31, 1999, gives effect to the
acquisition by Breakaway Solutions of Applica, WPL
Laboratories and WebYes and the acquisition by the Company of
significant minority ownership interests in 12 equity method
Partner Companies ($84.9 and $56.9 million) as if they had
occurred on January 1, 1998.
|
|
The effects
of the acquisitions have been presented using the purchase
method of accounting and accordingly, the purchase price was
allocated to the assets and liabilities assumed based upon
management’s best preliminary estimate of fair value
with any excess purchase price being allocated to goodwill or
other identifiable intangibles. The preliminary allocation of
the purchase price will be subject to further adjustments,
which are not anticipated to be material, as the Company and
Breakaway finalize their allocations of purchase price in
accordance with generally accepted accounting principles. The
pro forma adjustments related to the purchase price
allocation of the acquisitions represent management’s
best estimate of the effects of the acquisitions.
|
2. Pro Forma Statement of Operations
Adjustments
|
The pro forma
statement of operations adjustments for the year ended
December 31, 1998, and the three months ended March 31, 1999,
consist of:
|
|
(a)
|
General and administrative expense has been adjusted to
reflect the amortization of intangible assets associated with
the acquisitions of Breakaway Solutions, Applica, WPL
Laboratories and WebYes over an estimated useful life of
three to five years.
|
|
(b)
|
Equity (income) loss has been adjusted to reflect the Company
’s ownership interest in the (income) loss of the equity
method Partner Companies and the amortization of the
difference in the Company’s carrying value in the
Partner Company and the Company’s ownership interest in
the underlying net equity of the Partner Company over an
estimated useful life of three years. For the year ended
December 31, 1998 and the three months ended March 31, 1999,
equity (income) loss includes $9.0 and $1.6 million,
respectively, of equity (income) loss and $23.3 and $4.4
million, respectively, in amortization of the difference
between cost and equity in net assets.
|
|
(c) No income
tax provision is required due to the Company’s tax
status as an LLC.
|
|
(d) Income
tax benefit has been adjusted to reflect the tax effect of
the pro forma adjustments.
|
|
(e)
|
Minority interest has been adjusted to reflect minority
interest in amortization of goodwill associated with the
acquisitions of Applica, WPL Laboratories and WebYes.
|
Independent Auditors’ Report
The Board of Directors
Applica Corporation:
We have audited the accompanying balance sheet
of Applica Corporation (the “Company”), a
development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders’ equity,
and cash flows from September 24, 1998 (inception) through
December 31, 1998. 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 Applica Corporation at December 31, 1998
and the results of its operations and its cash flows from
September 24, 1998 (inception) through December 31, 1998, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
June 30, 1999
(A Development-Stage Company)
Balance Sheet
December 31, 1998
| Assets
|
|
|
| Current
assets:
|
|
Cash
|
|
$474,205
|
|
|
Subscriptions
receivable
|
|
3,000
|
|
| |
|
|
|
|
Total current
assets
|
|
477,205
|
|
| |
|
|
|
| Property and
equipment, net
|
|
43,259
|
|
| Deposits
|
|
7,332
|
|
| |
|
|
|
|
Total assets
|
|
$527,796
|
|
| |
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
| Accounts
payable
|
|
$61,775
|
|
| |
|
|
|
|
Total
liabilities
|
|
61,775
|
|
| |
|
|
|
| Commitments
and contingencies
|
| |
| Stockholders
’ equity:
|
Preferred
stock $.001 par value, 5,000,000 shares authorized, 500,000
shares issued and
outstanding (liquidation
preference of $500,000)
|
|
500,000
|
|
Common stock
$.001 par value, 10,000,000 shares authorized, 3,000,000
shares issued and
outstanding
|
|
3,000
|
|
|
Deficit
accumulated during development stage
|
|
(36,979
|
)
|
| |
|
|
|
|
Total
stockholders’ equity
|
|
466,021
|
|
| |
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$527,796
|
|
| |
|
|
|
See accompanying notes to financial
statements.
(A Development-Stage Company)
Statement of Operations
From September 24, 1998 (inception)
through December 31, 1998
| Operating
expenses:
|
|
Organization
costs
|
|
$25,911
|
|
|
Occupancy
|
|
7,331
|
|
|
Depreciation
|
|
1,483
|
|
|
Other
|
|
2,254
|
|
| |
|
|
|
|
Total
operating expenses
|
|
36,979
|
|
| |
|
|
|
|
Net loss
|
|
$(36,979
|
)
|
| |
|
|
|
| Net loss per
share—basic and diluted
|
|
$(0.01
|
)
|
| |
|
|
|
| Weighted
average shares outstanding
|
|
3,000,000
|
|
| |
|
|
|
See accompanying notes to financial
statements.
(A Development-Stage Company)
Statement of Stockholders’ Equity
| |
|
Preferred Stock
|
|
Common Stock
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Total
Stockholders’
Equity
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
| Balance,
September 24, 1998
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Subscription
of common stock
|
|
—
|
|
$
—
|
|
3,000,000
|
|
$3,000
|
|
$
—
|
|
|
$3,000
|
|
| Issuance of
preferred stock
|
|
500,000
|
|
500,000
|
|
—
|
|
—
|
|
—
|
|
|
500,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(36,979
|
)
|
|
(36,979
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
500,000
|
|
$500,000
|
|
3,000,000
|
|
$3,000
|
|
$(36,979
|
)
|
|
$466,021
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
(A Development-Stage Company)
Statement of Cash Flows
From September 24, 1998 (inception)
through December 31, 1998
| Cash flows
from operating activities:
|
|
|
| Net loss
|
|
$(36,979
|
)
|
| Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
|
|
1,483
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
Accounts
payable
|
|
61,775
|
|
|
Deposits
|
|
(7,332
|
)
|
| |
|
|
|
|
Net cash
provided by operating activities
|
|
18,947
|
|
| |
|
|
|
| Cash flows
from investing activities:
|
|
|
|
| Additions to
property and equipment
|
|
(44,742
|
)
|
| |
|
|
|
|
Net cash used
in investing activities
|
|
(44,742
|
)
|
| |
|
|
|
| Cash flows
from financing activities:
|
|
|
|
| Issuance of
preferred stock
|
|
500,000
|
|
| |
|
|
|
|
Net cash
provided by financing activities
|
|
500,000
|
|
| |
|
|
|
| Net increase
in cash
|
|
474,205
|
|
| Cash at
beginning of period
|
|
—
|
|
| |
|
|
|
| Cash at end
of period
|
|
$474,205
|
|
| |
|
|
|
See accompanying notes to financial
statements.
(A Development-Stage Company)
Notes to Financial Statements
December 31, 1998
(1) The Company
Applica Corporation (the “Company”) was founded in
September 1998 and provides application hosting services. The
Company has experienced losses since inception and is subject
to those risks associated with development-stage companies.
Activities since inception have consisted of development of a
business plan. Since inception and through December 31, 1998,
the Company operated with no salaried employees. Therefore,
recurring operating expenses, such as salaries and fringe
benefits, are not reflected in the accompanying financial
statements. Financial statements in subsequent periods will
reflect salaries and fringe benefits.
On
March 25, 1999, the Company was acquired by Breakaway
Solutions, Inc. (see note 7b).
(2) Summary of
Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates.
(b) 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.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated
using the straight-line method over the estimated useful lives
of the related assets, which range from five to seven years.
Equipment under capital leases is stated at the net present
value of minimum lease payments. Equipment held under capital
leases and leasehold improvements are amortized straight-line
over the shorter of the lease term or estimated useful life of
the asset.
(d) Income Taxes
Income taxes are accounted for under 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 operating loss
and tax credit 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.
(e) Loss Per Share
In
1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 (“SFAS 128”),
Earnings per Share
.
SFAS 128 requires the presentation of basic and diluted net
loss per share
for all periods presented. Basic net loss per share is based on
the weighted average number of shares outstanding during the
period. Diluted net loss per share reflects the per share
effect of dilutive stock options and other dilutive common
stock equivalents. As the Company is in a net loss position for
the period ended December 31, 1998, common stock equivalents of
500,000 for the period ended December 31, 1998 were excluded
from the diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same
as basic loss per share, and has not been presented separately.
(f) Reporting Comprehensive Income
In
1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (“SFAS 130”), Reporting
Comprehensive Income. This statement requires that all
components of comprehensive income (loss) be reported in the
financial statements in the period in which they are
recognized. For the period presented, comprehensive loss under
SFAS 130 was equivalent to the Company’s net loss reported
in the accompanying statement of operations.
(g) Recent Accounting Pronouncements
The
Company does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or
cash flows.
(3) Property and
Equipment
At
December 31, 1998, property and equipment consists of the
following:
| Office
equipment
|
|
$41,683
|
|
| Computer
equipment
|
|
3,059
|
|
| |
|
|
|
|
|
|
44,742
|
|
| Less:
accumulated depreciation
|
|
(1,483
|
)
|
| |
|
|
|
|
Property and
equipment, net
|
|
$43,259
|
|
| |
|
|
|
(4) Preferred Stock
The
Company’s stockholders have authorized 5,000,000 shares of
Series A preferred stock. The Series A preferred stock is
entitled to receive dividends at a rate of $.05 per share per
annum. The Series A preferred stock is voting and is
convertible into shares of common stock on a share-for-share
basis, subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the
Series A preferred stock has a liquidation preference of $1.00
per share. The Series A preferred stock is convertible into
common stock immediately at the option of the holder, and
automatically converts into common stock upon the completion of
a qualified public offering.
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements—
(Continued)
(5) Income Taxes
The
tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at December 31,
1998, are as follows:
| Deferred tax
assets:
|
|
Intangible
assets, principally due to differences in amortization
|
|
$5,372
|
|
|
Net operating
loss carryforward
|
|
195
|
|
| |
|
|
|
|
Total gross
deferred tax assets
|
|
5,567
|
|
| |
|
|
|
| Valuation
allowance
|
|
(5,567
|
)
|
| |
|
|
|
|
Net deferred
tax assets
|
|
$
—
|
|
| |
|
|
|
The
Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after
considering all the available objective evidence, it is more
likely than not that these assets will not be realized.
(6) Commitments and
Contingencies
The
Company has entered into an operating lease for its office
space which expires in August 1999. Future minimum rental
commitments under the lease in 1999 are $36,000. The Company is
currently exploring alternatives for new space.
(7) Subsequent Events
(a) Loan Agreement
On
March 15, 1999, the Company entered into a Loan and Security
Agreement with a Bank for a $150,000 equipment credit line
which expires on June 15, 2002. This agreement terminated upon
the purchase of the Company (see note 7b).
(b) Agreement and Plan of Reorganization
On
March 25, 1999, the Company entered into an Agreement and Plan
of Reorganization with Breakaway Solutions, Inc. (“
Breakaway”), a provider of information technology
consulting services. Under the agreement, Breakaway acquired
all of the outstanding stock of the Company in a transaction
accounted for under the purchase method of accounting. The
purchase price was comprised of 904,624 shares of Breakaway
common stock.
Independent Auditors’ Report
The Board of Directors
Breakaway Solutions, Inc.:
We have audited the accompanying balance sheets
of Breakaway Solutions, Inc. as of December 31, 1997 and 1998,
and the related statements of operations, stockholders’
equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 Breakaway Solutions, Inc. as of December
31, 1997 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
June 30, 1999, except for note 11
which is as of July 12, 1999
BREAKAWAY SOLUTIONS, INC.
BALANCE SHEETS
| |
|
December 31,
|
|
March 31,
1999
|
| |
|
1997
|
|
1998
|
| |
|
|
|
|
|
(Unaudited)
|
| Assets
|
|
|
|
|
|
|
|
|
|
| Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
879,136
|
|
|
$
16,954
|
|
|
$3,205,752
|
|
Accounts
receivable, net of allowance for doubtful accounts of $65,000,
$131,000 and $142,560 in 1997,
1998 and 1999, respectively
|
|
960,830
|
|
|
1,445,994
|
|
|
1,911,534
|
|
|
Unbilled
revenues on contracts
|
|
232,258
|
|
|
625,609
|
|
|
799,791
|
|
|
Prepaid
expenses
|
|
27,858
|
|
|
46,211
|
|
|
72,381
|
|
|
Advances to
employees
|
|
—
|
|
|
13,273
|
|
|
7,855
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
2,100,082
|
|
|
2,148,041
|
|
|
5,997,313
|
|
|
Property and
equipment, net
|
|
397,102
|
|
|
553,566
|
|
|
911,487
|
|
|
Intangible
assets, net
|
|
—
|
|
|
—
|
|
|
1,437,974
|
|
|
Cash
surrender value of life insurance
|
|
—
|
|
|
—
|
|
|
62,441
|
|
|
Deposits
|
|
35,726
|
|
|
40,877
|
|
|
30,528
|
|
| |
|
|
|
|
|
|
|
|
|
| Total assets
|
|
$2,532,910
|
|
|
$2,742,484
|
|
|
$8,439,743
|
|
| |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
| Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Line of
credit
|
|
$
—
|
|
|
$
425,743
|
|
|
$1,001,991
|
|
|
Notes payable
|
|
—
|
|
|
—
|
|
|
141,629
|
|
|
Long-term debt
—current portion
|
|
10,417
|
|
|
—
|
|
|
—
|
|
|
Capital lease
obligation—current portion
|
|
181,042
|
|
|
148,391
|
|
|
134,299
|
|
|
Accounts
payable
|
|
246,060
|
|
|
814,074
|
|
|
298,347
|
|
|
Accrued
compensation and related benefits
|
|
84,349
|
|
|
178,191
|
|
|
397,210
|
|
|
Accrued
expenses
|
|
—
|
|
|
—
|
|
|
68,111
|
|
|
Accrued
acquisition costs
|
|
—
|
|
|
—
|
|
|
159,159
|
|
|
Deferred
revenue on contracts
|
|
—
|
|
|
196,225
|
|
|
99,062
|
|
|
Stockholder
distributions payable
|
|
434,843
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
956,711
|
|
|
1,762,624
|
|
|
2,299,808
|
|
| |
|
|
|
|
|
|
|
|
|
|
Capital lease
obligation—long-term portion
|
|
84,368
|
|
|
67,040
|
|
|
121,665
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
84,368
|
|
|
67,040
|
|
|
121,665
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
1,041,079
|
|
|
1,829,664
|
|
|
2,421,473
|
|
| |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
| |
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Series A
preferred stock $.0001 par value, 5,853,000 shares authorized
at
December 31, 1998 and March 31,
1999, none issued and outstanding
in 1997 and 1998, 5,853,000
shares issued and outstanding in 1999
(liquidation preference of
$8,291,945)
|
|
—
|
|
|
—
|
|
|
585
|
|
Common stock
$.0001 par value, 22,100,000 shares authorized,
9,600,000 shares issued in 1997
and 1998 and 7,420,711 shares
issued in 1999, 8,016,000,
7,656,000 and 5,476,711 shares
outstanding in 1997, 1998 and
1999, respectively
|
|
960
|
|
|
960
|
|
|
742
|
|
|
Additional
paid-in capital
|
|
—
|
|
|
—
|
|
|
6,252,488
|
|
|
Less:
Treasury stock, at cost
|
|
(26
|
)
|
|
(32
|
)
|
|
(32
|
)
|
|
Retained
earnings (deficit)
|
|
1,490,897
|
|
|
911,892
|
|
|
(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,491,831
|
|
|
912,820
|
|
|
6,018,270
|
|
| |
|
|
|
|
|
|
|
|
|
| Total
liabilities and stockholders’ equity
|
|
$2,532,910
|
|
|
$2,742,484
|
|
|
$8,439,743
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
BREAKAWAY SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
| |
|
Years Ended December 31,
|
|
(Unaudited)
Three Months
Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues
|
|
$3,462,134
|
|
|
$6,118,058
|
|
|
$10,017,947
|
|
|
$2,124,132
|
|
|
$3,111,035
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
personnel costs
|
|
1,429,952
|
|
|
2,543,147
|
|
|
5,903,843
|
|
|
1,300,419
|
|
|
1,553,329
|
|
|
Sales and
marketing costs
|
|
3,225
|
|
|
13,748
|
|
|
50,631
|
|
|
9,665
|
|
|
114,415
|
|
|
General and
administrative expenses
|
|
1,364,895
|
|
|
2,545,580
|
|
|
4,763,657
|
|
|
780,620
|
|
|
1,689,580
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
2,798,072
|
|
|
5,102,475
|
|
|
10,718,131
|
|
|
1,970,704
|
|
|
3,357,324
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
664,062
|
|
|
1,015,583
|
|
|
(700,184
|
)
|
|
153,428
|
|
|
(246,289
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
—
|
|
|
—
|
|
|
160,000
|
|
|
(3,021
|
)
|
|
(6,994
|
)
|
|
Interest
income
|
|
3,684
|
|
|
92,823
|
|
|
11,191
|
|
|
7,711
|
|
|
31,526
|
|
|
Interest
expense
|
|
(28,557
|
)
|
|
(32,725
|
)
|
|
(43,127
|
)
|
|
(1,348
|
)
|
|
(13,756
|
)
|
|
Loss on
disposal of equipment
|
|
(20,780
|
)
|
|
(2,030
|
)
|
|
(3,055
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
income (expense)
|
|
(45,653
|
)
|
|
58,068
|
|
|
125,009
|
|
|
3,342
|
|
|
10,776
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss)
before income taxes
|
|
618,409
|
|
|
1,073,651
|
|
|
(575,175
|
)
|
|
156,770
|
|
|
(235,513
|
)
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$
618,409
|
|
|
$1,073,651
|
|
|
$(575,175
|
)
|
|
$156,770
|
|
|
$(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$0.07
|
|
|
$0.13
|
|
|
$(0.07
|
)
|
|
$0.02
|
|
|
$(0.05
|
)
|
| Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
8,301,633
|
|
|
8,016,000
|
|
|
8,000,877
|
|
|
8,016,000
|
|
|
4,698,186
|
|
| |
|
|
|
Pro forma
information (Unaudited)
(note 9):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes, as
reported
|
|
$
618,409
|
|
|
$1,073,651
|
|
|
$(575,175
|
)
|
|
$156,770
|
|
|
$ (235,513
|
)
|
|
Pro forma
income taxes (benefit)
|
|
247,364
|
|
|
429,460
|
|
|
(195,560
|
)
|
|
62,708
|
|
|
(80,074
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss)
|
|
$
371,045
|
|
|
$
644,191
|
|
|
$(379,615
|
)
|
|
$94,062
|
|
|
$ (155,439
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per share—
basic and diluted
|
|
$
0.04
|
|
|
$
0.08
|
|
|
$
(0.05
|
)
|
|
$
0.01
|
|
|
$ (0.03
|
)
|
Pro forma
weighted average shares
outstanding
|
|
8,301,633
|
|
|
8,016,000
|
|
|
8,000,877
|
|
|
8,016,000
|
|
|
4,698,186
|
|
See accompanying notes to financial
statements.
BREAKAWAY SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
| |
|
Series A
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
(Deficit)
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
Total
Stockholders’
Equity
|
|
| Balance,
January 1, 1996
|
|
—
|
|
$
—
|
|
9,600,000
|
|
|
$960
|
|
|
$—
|
|
|
—
|
|
|
$ —
|
|
|
$330,815
|
|
|
$
331,775
|
|
| Purchase of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
—
|
|
|
(26
|
)
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,841
|
)
|
|
(1,841
|
)
|
| Net income
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
618,409
|
|
|
618,409
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1996
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
947,383
|
|
|
948,317
|
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(530,137
|
)
|
|
(530,137
|
)
|
| Net income
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,073,651
|
|
|
1,073,651
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
1,490,897
|
|
|
1,491,831
|
|
| Purchase of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(360,000
|
)
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,830
|
)
|
|
(3,830
|
)
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(575,175
|
)
|
|
(575,175
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,944,000
|
)
|
|
(32
|
)
|
|
911,892
|
|
|
912,820
|
|
| S Corporation
termination
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
911,892
|
|
|
—
|
|
|
—
|
|
|
(911,892
|
)
|
|
—
|
|
| Issuance of
preferred stock
|
|
5,853,000
|
|
585
|
|
—
|
|
|
—
|
|
|
8,291,360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,291,945
|
|
| Repurchase
and retirement of common stock
|
|
—
|
|
—
|
|
(3,154,500
|
)
|
|
(315
|
)
|
|
(4,468,665
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,468,980
|
)
|
Issuance of
common stock for acquired
business
|
|
—
|
|
—
|
|
904,624
|
|
|
90
|
|
|
1,417,908
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,417,998
|
|
| Exercise of
stock options
|
|
—
|
|
—
|
|
70,587
|
|
|
7
|
|
|
99,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(235,513
|
)
|
|
(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
March 31, 1999 (Unaudited)
|
|
5,853,000
|
|
$585
|
|
7,420,711
|
|
|
$742
|
|
|
$6,252,488
|
|
|
(1,944,000
|
)
|
|
$
(32
|
)
|
|
$(235,513
|
)
|
|
$6,018,270
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
BREAKAWAY SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Net income
(loss)
|
|
$618,409
|
|
|
1,073,651
|
|
|
(575,175
|
)
|
|
156,770
|
|
|
(235,513
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
46,484
|
|
|
254,217
|
|
|
332,994
|
|
|
56,609
|
|
|
104,780
|
|
|
Loss on disposal of fixed assets
|
|
20,780
|
|
|
2,030
|
|
|
3,055
|
|
|
—
|
|
|
—
|
|
Changes in
operating assets and liabilities, net of impact of
acquisition of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(361,107
|
)
|
|
(471,676
|
)
|
|
(485,164
|
)
|
|
(726,282
|
)
|
|
(499,219
|
)
|
|
Unbilled revenues on contracts
|
|
—
|
|
|
—
|
|
|
(393,351
|
)
|
|
—
|
|
|
(174,182
|
)
|
|
Inventory
|
|
12,831
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Prepaid and other assets
|
|
(47,046
|
)
|
|
69,096
|
|
|
(18,353
|
)
|
|
(43,679
|
)
|
|
(5,741
|
)
|
|
Accounts payable
|
|
(39,707
|
)
|
|
222,239
|
|
|
568,014
|
|
|
84,707
|
|
|
(666,829
|
)
|
|
Accrued compensation and related benefits
|
|
—
|
|
|
63,387
|
|
|
93,842
|
|
|
(83,478
|
)
|
|
366,441
|
|
|
Accrued expenses
|
|
1,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,111
|
|
|
Deferred revenue on contracts
|
|
(77,070
|
)
|
|
—
|
|
|
196,225
|
|
|
—
|
|
|
(97,163
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
(used in) operating activities
|
|
175,074
|
|
|
1,212,944
|
|
|
(277,913
|
)
|
|
(555,353
|
)
|
|
(1,139,315
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(18,950
|
)
|
|
(132,937
|
)
|
|
(502,461
|
)
|
|
(97,100
|
)
|
|
(72,442
|
)
|
|
Proceeds from disposal of fixed assets
|
|
—
|
|
|
13,200
|
|
|
9,948
|
|
|
—
|
|
|
—
|
|
|
Increase in cash surrender value of life
insurance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,441
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
(18,950
|
)
|
|
(119,737
|
)
|
|
(492,513
|
)
|
|
(97,100
|
)
|
|
(134,883
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,291,945
|
|
|
Proceeds from exercise of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
|
Repurchase and retirement of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,468,980
|
)
|
|
Advances to employees
|
|
—
|
|
|
—
|
|
|
(13,273
|
)
|
|
—
|
|
|
—
|
|
|
Repayments of advances to employees
|
|
163
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,418
|
|
|
Payments on current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
(10,417
|
)
|
|
(3,125
|
)
|
|
—
|
|
|
Proceeds from (repayments of) credit line
|
|
(125,000
|
)
|
|
—
|
|
|
425,743
|
|
|
—
|
|
|
576,248
|
|
|
(Increase) decrease in deposits
|
|
(216
|
)
|
|
(18,211
|
)
|
|
(5,151
|
)
|
|
(3,102
|
)
|
|
17,681
|
|
|
Distributions to stockholders
|
|
(1,841
|
)
|
|
(95,750
|
)
|
|
(438,673
|
)
|
|
—
|
|
|
—
|
|
|
Repurchase of treasury stock
|
|
(26
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
Payments of capital lease obligations
|
|
(38,813
|
)
|
|
(184,224
|
)
|
|
(49,979
|
)
|
|
(6,522
|
)
|
|
(59,316
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
(used in) financing activities
|
|
(165,733
|
)
|
|
(298,185
|
)
|
|
(91,756
|
)
|
|
(12,749
|
)
|
|
4,462,996
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase (decrease) in cash and cash equivalents
|
|
(9,609
|
)
|
|
795,022
|
|
|
(862,182
|
)
|
|
(665,202
|
)
|
|
3,188,798
|
|
| Cash and cash
equivalents at beginning of period
|
|
93,723
|
|
|
84,114
|
|
|
879,136
|
|
|
879,136
|
|
|
16,954
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents at end of period
|
|
$84,114
|
|
|
879,136
|
|
|
16,954
|
|
|
213,934
|
|
|
3,205,752
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$28,557
|
|
|
32,725
|
|
|
43,127
|
|
|
1,348
|
|
|
13,756
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$42,742
|
|
|
331,511
|
|
|
13,720
|
|
|
—
|
|
|
99,849
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions payable to stockholders
|
|
$
—
|
|
|
434,843
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with
acquisition of business
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,417,998
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,903,567
|
|
|
Liabilities assumed and issued
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(485,569
|
)
|
|
Common stock issued
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,417,998
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for
acquisition of business
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
BREAKAWAY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
and March 31, 1999 (unaudited)
(1) The Company
Breakaway Solutions, Inc. (the “Company”), formerly
The Counsell Group, Inc., was established in 1992 to provide
information technology consulting services to businesses. The
Company specializes in designing, developing and implementing
applications and business solutions for growing enterprises
throughout the United States.
(2) Summary of
Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates.
(b) Cash and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
(c) Financial Instruments and Concentration of
Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash
equivalents, accounts receivable and debt instruments.
The
Company performs ongoing credit evaluations of its customers
and generally does not require collateral on accounts
receivable. The Company maintains allowances for potential
credit losses and such losses have been within management’
s expectations. Write-offs of accounts receivable have not been
material for any of the periods presented. The Company’s
customers are headquartered primarily in North America. At
December 31, 1997 and 1998, amounts due from three customers
represented $503,750 or 40% and $683,149 or 33%, respectively,
of total accounts receivable.
The
fair market values of cash and cash equivalents, accounts
receivable and debt instruments at both December 31, 1997 and
1998 approximate their carrying amounts.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation is
recorded on the straight-line basis over the estimated useful
life of the related assets which range from three to six years.
Equipment held under capital leases is stated at the present
value of minimum lease payments at the inception of the lease
and amortized using the straight-line method over the lease
term. Maintenance and repairs are charged to operations when
incurred.
(e) Intangible assets
Intangible assets relate to the Company’s purchase of its
wholly owned subsidiary, Applica Corporation, on March 25, 1999
(see note 11c). Such costs are being amortized on a
straight-line basis over five years, the period expected to be
benefited. Intangible assets consisted of the following at
March 31, 1999:
| Assembled
workforce
|
|
$
201,000
|
| Goodwill
|
|
1,236,974
|
| |
|
|
| |
|
1,437,974
|
| Less:
accumulated amortization
|
|
—
|
| |
|
|
| |
|
$1,437,974
|
| |
|
|
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements—
(Continued)
(f) 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.
(g) Revenue Recognition
Revenues pursuant to fixed-fee contracts are recognized as
services are rendered on the percentage-of-completion method of
accounting (based on the ratio of costs incurred to total
estimated costs). Revenues pursuant to time and material
contracts are recognized as services are provided. Unbilled
revenues on contracts are comprised of costs plus earnings.
Billings in excess of costs plus earnings are classified as
deferred revenues.
Provisions for estimated losses on uncompleted contracts are
made on a contract-by-contract basis and are recognized in the
period in which such losses are determined.
(h) Project Personnel Costs
Project personnel costs consist of payroll and payroll-related
expenses for personnel dedicated to client assignments.
(i) Income Taxes
The
Company was taxed under the provisions of Subchapter S of the
Internal Revenue Code, whereby the corporate income is taxed to
the individual shareholders based on their proportionate share
of the Company’s taxable income. Massachusetts taxes
profits on S Corporations with receipts exceeding $6,000,000.
Effective January 1, 1999, the Company terminated its S
Corporation election and is subject to corporate-level federal
and certain additional state income taxes. Accordingly, the
accompanying consolidated statements of operations include a
pro forma income tax adjustment (see note 9) for the income
taxes that would have been recorded if the Company had been a C
Corporation for all periods presented.
(j) Stock-Based Compensation
The
Company has adopted Statement of Financial Accounting Standards
No. 123 (“SFAS 123”), Accounting for Stock-Based
Compensation. As permitted by SFAS 123, the Company
measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 (“APB No. 25”),
Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no accounting recognition is
given to stock options issued to employees that are granted at
fair market value until they are exercised. Stock options
issued to non-employees are recorded at fair value at the date
of grant. Upon exercise, net proceeds, including income tax
benefits realized, are credited to equity. Therefore, the
adoption of SFAS 123 was not material to the Company’s
financial condition or results of operations; however, the pro
forma impact on income (loss) per share has been disclosed in
the notes to the financial statements as required by SFAS 123
(see note 4c).
(k) Net Income (Loss) Per Share
In
1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 (“SFAS 128”),
Earnings per Share. SFAS 128 requires the presentation
of basic and diluted income (loss) per
share for all periods presented. As the Company has been in a net
loss position for the year ended December 31, 1998 and the
three months ended March 31, 1999, common stock equivalents of
674,474 for the year ended December 31, 1998 and 5,084,692 for
the three months ended March 31, 1999 were excluded from the
diluted loss per share calculation as they would be
antidilutive. There were no common stock equivalents
outstanding in 1996 and 1997. As a result, diluted loss per
share is the same as basic loss per share, and has not been
presented separately.
(l) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 130 (“SFAS 130”),
Reporting Comprehensive Income
.
This statement requires that all components of comprehensive
income be reported in the financial statements in the period in
which they are recognized. For each year reported,
comprehensive income (loss) under SFAS 130 was equivalent to
the Company’s net income (loss) reported in the
accompanying consolidated statements of operations.
(m) Unaudited Interim Financial Information
The
financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited; however, in
the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation
of the financial statements for the interim periods have been
included. Results of operations for the interim periods
presented are not necessarily indicative of the results that
may be expected for the full fiscal year or any future periods.
(n) Recent Accounting Pronouncements
The
Company does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or
cash flows.
(3) Property and
Equipment
Property and equipment consisted of the following at December
31:
| |
|
1997
|
|
1998
|
| Computer
equipment
|
|
$578,724
|
|
|
$1,116,829
|
|
| Office
equipment
|
|
—
|
|
|
11,756
|
|
| Furniture and
fixtures
|
|
134,490
|
|
|
70,481
|
|
| |
|
|
|
|
|
|
|
|
|
713,214
|
|
|
1,199,066
|
|
| Less:
accumulated depreciation and amortization
|
|
(316,112
|
)
|
|
(645,500
|
)
|
| |
|
|
|
|
|
|
|
|
|
$397,102
|
|
|
$
553,566
|
|
| |
|
|
|
|
|
|
The
cost and related accumulated amortization of property and
equipment held under capital leases is as follows at December
31:
| |
|
1997
|
|
1998
|
| Cost
|
|
$400,297
|
|
|
$394,637
|
|
| Less:
Accumulated amortization
|
|
(157,593
|
)
|
|
(332,053
|
)
|
| |
|
|
|
|
|
|
| |
|
$242,704
|
|
|
$62,584
|
|
| |
|
|
|
|
|
|
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements—
(Continued)
(4) Capital Stock
(a) Preferred Stock
In
October 1998, the Company’s stockholders authorized
5,853,000 shares of Series A Convertible Preferred Stock. The
Series A Convertible Preferred Stock is entitled to receive
dividends at a rate of $.1136 per share, as and if declared.
The Series A Convertible Preferred Stock is voting and is
convertible into shares of common stock on a share-for-share
basis, subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the
Series A Convertible Preferred Stock has a liquidation
preference of $1.41667 per share. The Series A Convertible
Preferred Stock is convertible into common stock immediately at
the option of the holder, and automatically converts into
common stock upon the completion of a qualifying initial public
offering (see note 11a).
(b) Stock Splits
In
February and December 1998, the Board of Directors approved a
2-for-1 and 3-for-1 stock split of the Company’s common
stock, respectively. All prior periods have been restated to
reflect these stock splits effected as a recapitalization.
(c) Stock Plan
The
Company’s 1998 Stock Plan (the “Stock Plan”)
authorizes the Company to grant options to purchase common
stock, to make awards of restricted common stock, and to issue
certain other equity-related awards to employees and directors
of, and consultants to, the Company. The total number of shares
of common stock which may be issued under the Stock Plan is
9,000,000 shares. The Stock Plan is administered by the Board
of Directors, which selects the persons to whom stock options
and other awards are granted and determines the number of
shares, the exercise or purchase prices, the vesting terms and
the expiration date. Non-qualified stock options may be granted
at exercise prices which are above, equal to, or below the
grant date fair market value of the common stock. The exercise
price of options qualifying as incentive stock options may not
be less than the grant date fair market value of the common
stock.
Stock options granted under the Stock Plan are nontransferable,
generally become exercisable over a four-year period, and
expire ten years after the date of grant (subject to earlier
termination in the event of the termination of the optionee
’s employment or other relationship with the Company).
A
summary of the status of the Company’s Stock Plan is
presented below:
| |
|
Year Ended
December 31, 1998
|
|
(Unaudited)
Three Months Ended
March 31, 1999
|
Fixed
options
|
|
Shares
|
|
Weighted
average
exercise price
|
|
Shares
|
|
Weighted
average
exercise price
|
| Outstanding
at beginning of period
|
|
—
|
|
|
$
—
|
|
5,992,794
|
|
|
$1.00
|
|
Granted
|
|
6,120,879
|
|
|
.99
|
|
3,168,042
|
|
|
1.48
|
|
Exercised
|
|
—
|
|
|
—
|
|
(70,587
|
)
|
|
1.42
|
|
Forfeited
|
|
(128,085
|
)
|
|
.61
|
|
(83,283
|
)
|
|
.54
|
| |
|
|
|
|
|
|
|
|
|
|
| Outstanding
at end of period
|
|
5,992,794
|
|
|
1.00
|
|
9,006,966
|
|
|
1.17
|
| |
|
|
|
|
|
|
|
|
|
|
| Options
exercisable at end of period
|
|
2,610,630
|
|
|
|
|
3,064,927
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements—
(Continued)
The following table summarizes information about the Company
’s stock options outstanding at December 31, 1998:
| |
|
Options outstanding
|
|
Options exercisable
|
Exercise
prices
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual life
|
|
Number
exercisable
|
|
Weighted
average
exercise price
|
|
$.54
|
|
2,776,494
|
|
9.5 years
|
|
1,825,005
|
|
$.54
|
|
.81
|
|
129,900
|
|
9.75 years
|
|
21,000
|
|
.81
|
|
1.42
|
|
3,086,400
|
|
10 years
|
|
764,625
|
|
1.42
|
| |
|
|
|
|
|
|
|
|
| |
|
5,992,794
|
|
9.76 years
|
|
2,610,630
|
|
.80
|
| |
|
|
|
|
|
|
|
|
The
Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees
,
in accounting for its Stock Plan, and, accordingly,
compensation cost is recognized in the consolidated financial
statements for stock options granted to employees only when the
fair value on the grant date exceeds the exercise price. The
Company granted no stock options during 1996 and 1997. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123 for
1998 and 1999 grants, its net loss would have been increased to
the pro forma amounts indicated below:
| |
|
Year Ended
December 31, 1998
|
|
(Unaudited)
Three Months
Ended
March 31, 1999
|
| Net loss:
|
|
|
|
|
|
|
|
As reported
|
|
$(575,175
|
)
|
|
$(235,513
|
)
|
| |
|
|
|
|
|
|
|
Pro forma
|
|
$(686,864
|
)
|
|
$(361,257
|
)
|
| |
|
|
|
|
|
|
| Loss per
share:
|
|
|
|
|
|
|
|
As reported
|
|
$(0.07
|
)
|
|
$(0.05
|
)
|
| |
|
|
|
|
|
|
|
Pro forma
|
|
$(0.09
|
)
|
|
$(0.08
|
)
|
| |
|
|
|
|
|
|
The
per share weighted average fair value of stock options granted
during 1998 and 1999 was $0.50 and $0.75, respectively, on the
date of grant, using the minimum value option-pricing model
with the following weighted average assumptions used: no
expected dividend yield, risk free interest rate of 7%, and
expected life of ten years.
(5) Commitments and
Contingencies
(a) Operating Leases
The
Company leases its facilities under various operating leases
expiring in 2002. Such leases include provisions that may
require the Company to pay its proportionate share of operating
costs, which exceed specific thresholds. Rent expense for the
years ended December 31, 1996, 1997 and 1998 was $144,499,
$203,511 and $576,509, respectively and $62,758 and $139,981
for the three-months ended March 31, 1998 and 1999,
respectively. Other income in 1998 consists primarily of a
payment received by the Company in connection with the early
termination of its existing office lease.
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements—
(Continued)
(b) Capital Leases
The
Company leases certain of its computer and office equipment
under capital leases. Substantially all of such leases are for
two years, with annual interest at rates ranging from 5.4% to
15.68%. The leased equipment secures all leases.
The
following is a schedule of future minimum rental payments
required under the above leases as of December 31, 1998:
| |
|
Operating
leases
|
|
Capital
leases
|
| 1999
|
|
$
770,762
|
|
$168,253
|
|
| 2000
|
|
702,665
|
|
72,118
|
|
| 2001
|
|
720,518
|
|
—
|
|
| 2002
|
|
488,280
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
$2,682,225
|
|
240,371
|
|
| |
|
|
| Less: amount
representing interest
|
|
|
|
(24,940
|
)
|
|
|
|
|
|
Net present
value of minimum lease payments
|
|
|
|
215,431
|
|
| Less: current
portion of capital lease obligations
|
|
|
|
(148,391
|
)
|
|
|
|
|
|
Capital lease
obligations, net of current portion
|
|
|
|
$
67,040
|
|
|
|
|
|
(6) Line of Credit
The
Company had a $750,000 bank revolving line of credit (increased
to $1,300,000 in February 1999) at prime plus
1
/
2
%
(8.25% at December 31, 1998) which terminated in 1999. At
December 31, 1997 and 1998, the Company borrowed $0 and
$425,743, respectively under this line of credit.
(7) Significant
Customers
The
following table summarizes revenues from major customers
(revenues in excess of 10% for the year) as a percentage of
total revenues:
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
Years Ended December 31,
|
|
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
—
|
|
|
19
|
%
|
|
27
|
%
|
|
30
|
%
|
|
26
|
%
|
| Customer B
|
|
13
|
%
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer C
|
|
18
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer D
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
| Customer G
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
(8) Deferred
Compensation Plan
The
Company sponsors a qualified 401(k) deferred compensation plan
(the “Plan”), which covers substantially all of its
employees. Participants are permitted, in accordance with the
provisions of Section
401(k) of the Internal Revenue Code, to contribute up to 15% of
their earnings into the Plan. The Company may make matching
contributions at its discretion. The Company elected not to
contribute to the Plan for the years ended December 31, 1996,
1997 and 1998.
(9) Taxes (Unaudited)
As
discussed in note 2, effective January 1, 1999, the Company
terminated its S Corporation election and will be subject to
corporate-level federal and certain state income taxes. Upon
termination of the S Corporation status, deferred income taxes
are recorded for the tax effect of cumulative temporary
differences between the financial reporting and tax bases of
certain assets and liabilities, primarily deferred revenue that
must be recognized currently for tax purposes, accrued expenses
that are not currently deductible, cumulative differences
between tax depreciation and financial reporting allowances,
and the impact of the conversion from the cash method to the
accrual method of reporting for tax purposes.
Pro
forma income tax expense (benefit), assuming the Company had
been a C Corporation and applying the tax laws in effect during
the periods presented, for each of the three years in the
period ended December 31, 1998 would have been as follows:
| |
|
Years Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Federal tax
|
|
$210,259
|
|
$365,042
|
|
$(195,560
|
)
|
|
$25,629
|
|
$(80,074
|
)
|
| State taxes,
net of federal
|
|
37,105
|
|
64,418
|
|
—
|
|
|
4,523
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$247,364
|
|
$429,460
|
|
$(195,560
|
)
|
|
$30,152
|
|
$(80,074
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after
considering all the available objective evidence, it is more
likely than not that these assets will not be realized.
(10) Operating Segments
Historically, the Company has operated in a single segment.
With the acquisition of Applica Corporation, the Company
expanded its operations to include a second segment,
application hosting. To date, Applica Corporation, a
development-stage company, has generated no revenues. Total
assets relating to the application hosting business of Applica
Corporation are $1,903,567 as of March 31, 1999.
(11) Subsequent Events
(a) Series A Convertible Preferred Stock Financing
In
January 1999, the Company issued 5,853,000 shares of Series A
Convertible Preferred Stock, $.0001 par value, for $1.41667 per
share (see note 4a).
(b) Litigation
On
March 2, 1999 the Company and its Chief Executive Officer (
“CEO”) became parties to a civil action filed by
Cambridge Technology Partners, Inc. (“CTP”). The suit
alleges violation of employment and severance agreements by the
CEO who is a former CTP employee. CTP is seeking monetary
damages against the Company for interference with the former
employee’s contractual relations with CTP. Management of
the Company believes that the suit is without merit and intends
to vigorously defend against the action. In the
opinion of management, the amount of ultimate liability with
respect to this action will not materially affect the financial
position or results of operations of the Company.
(c) Acquisitions
Subsequent to December 31, 1998, the Company entered into the
following acquisitions, which will be accounted for under the
purchase method of accounting:
|
On March 25,
1999, the Company entered into an agreement to acquire all
the outstanding stock of Applica Corporation, a provider of
application hosting services. The purchase price was
comprised of 904,624 shares of Common Stock.
|
|
On May 17,
1999, the Company entered into an agreement to acquire all
the outstanding stock of WPL Laboratories, Inc., a provider
of advanced software development services. The purchase price
was comprised of: $5 million in cash, 1,705,175 shares of
common stock and the assumption of all outstanding WPL stock
options, which became exercisable for 393,506 shares of the
Company’s common stock at a an exercise price of $2.38
per share with a four-year vesting period. The WPL
stockholders received one half of their cash consideration at
closing and will receive the remainder incrementally over a
four-year period so long as the stockholder does not
voluntarily terminate his employment and is not terminated
for cause. Of the shares of common stock issued to the former
WPL stockholders, approximately fifty-percent are subject to
the Company’s right, which lapses incrementally over a
four-year period, to repurchase the shares of a particular
stockholder, at their value at the time of the acquisition,
upon the stockholder’s resignation or the Company’s
termination of the stockholder for cause. In connection with
the stock issuance, the Company provided approximately
$1,200,000 in loans to stockholders. The loans which bear
interest at prime plus 1% are due at the earlier of the sale
of stock or four years.
|
|
On June 10,
1999, the Company entered into an agreement to acquire all
the outstanding stock of Web Yes, Inc., a provider of web
hosting services. The purchase price was comprised of 571,135
shares of common stock. Of the shares of common stock issued
to the former Web Yes stockholders, 428,351 are subject to
the Company’s right, which lapses incrementally over a
four-year period, to repurchase the shares of the particular
stockholder upon the termination of his employment with
Breakaway. The repurchase price shall be either at the share
value at the time of the acquisition if the stockholder
terminates employment or is terminated for cause, or at the
fair market value if the stockholder’s employment is
terminated without cause.
|
Related Party Advances
In
May 1999, Internet Capital Group, holder of the Company’s
Series A Convertible Preferred Stock, provided $4,000,000 in
advances which were converted into equity in July, 1999. In
connection with this transaction, the Company issued Internet
Capital Group a warrant to purchase 92,341 shares of common
stock at an exercise price of $6.50 per share.
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements—
(Continued)
Series B Convertible
Preferred Stock
In
July 1999, the Company issued 2,931,849 shares of Series B
Convertible Preferred Stock, $.0001 par value, for $6.50 per
share. The Series B Convertible Preferred Stock is entitled to
receive dividends at a rate of $.1136 per share as and if
declared. The Series B Convertible Preferred Stock is voting
and is convertible into shares of common stock on a
share-per-share basis, subject to certain adjustments. In the
event of any liquidation, dissolution or winding up of the
Company, the Series B Convertible Preferred Stock has a
liquidation preference of $6.50 per share. The Series B
Convertible Preferred Stock is convertible into common stock
immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualifying
initial public offering.
1999 Stock Incentive
Plan
The
1999 Stock Incentive Plan was adopted in July 1999. The 1999
plan is intended to replace the 1998 plan. Up to 6,000,000
shares of common stock (subject to adjustment in the event of
stock splits and other similar events) may be issued pursuant
to awards granted under the 1999 plan.
The
1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other
stock-based awards.
1999 Employee Stock
Purchase Plan
The
1999 Employee Stock Purchase Plan was adopted in July 1999. The
purchase plan authorizes the issuance of up to a total of
500,000 shares of common stock to participating employees.
The
following employees, including directors who are employees and
employees of any participating subsidiaries, are eligible to
participate in the purchase plan:
|
Ÿ
|
Employees who are customarily employed for more than 20 hours
per week and for more than five months per year; and
|
|
Ÿ
|
Employees employed for at least three months prior to
enrolling in the purchase plan.
|
Employees who would immediately after the grant own 5% or more
of the total combined voting power or value of the Company’
s stock or any subsidiary are not eligible to participate.
Report of Independent Accountants
To the Board of Directors and Stockholders of
CommerceQuest, Inc. (formerly MessageQuest, Inc.)
In
our opinion, the accompanying balance sheets and the related
statements of income, of changes in stockholders’
(deficit) equity and of cash flows present fairly, in all
material respects, the financial position of CommerceQuest,
Inc. at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company’s
management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally
accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
February 26, 1999,
except as to the stock split described in Note
11 and the information included in Note 13,
for which the dates are March 10, 1999 and June
1, 1999, respectively
Balance Sheets
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December
31,
1997
|
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
| Current
assets:
|
|
Cash and cash
equivalents
|
|
$709,803
|
|
$1,807,369
|
|
|
$2,234,279
|
|
Accounts
receivable, net of allowance of $48,000 at December
31, 1997 and 1998 and March 31,
1999
|
|
3,639,098
|
|
3,678,627
|
|
|
2,480,205
|
|
|
Unbilled
accounts receivable
|
|
647,206
|
|
2,465,292
|
|
|
864,375
|
|
|
Other current
assets
|
|
48,744
|
|
234,505
|
|
|
279,058
|
|
| |
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
5,044,851
|
|
8,185,793
|
|
|
5,857,917
|
|
| Property and
equipment, net
|
|
781,318
|
|
3,725,818
|
|
|
3,797,876
|
|
| Other assets
|
|
15,780
|
|
363,846
|
|
|
436,511
|
|
| |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$5,841,949
|
|
$12,275,457
|
|
|
$10,092,304
|
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ (Deficit) Equity
|
| Current
liabilities:
|
|
Accounts
payable and accrued expenses
|
|
$2,927,494
|
|
$5,102,468
|
|
|
$2,169,170
|
|
|
Deferred
revenue
|
|
493,674
|
|
1,013,760
|
|
|
3,017,127
|
|
|
Current
portion of long-term debt
|
|
123,379
|
|
169,402
|
|
|
173,652
|
|
| |
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
3,544,547
|
|
6,285,630
|
|
|
5,359,949
|
|
|
Other
liabilities
|
|
—
|
|
231,518
|
|
|
417,929
|
|
|
Revolving
lines of credit
|
|
—
|
|
233,744
|
|
|
932
|
|
|
Long-term
debt
|
|
386,578
|
|
157,771
|
|
|
112,732
|
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
3,931,125
|
|
6,908,663
|
|
|
5,891,542
|
|
| |
|
|
|
|
|
|
|
|
|
Convertible
subordinated debentures
|
|
—
|
|
10,800,000
|
|
|
10,800,000
|
|
| |
|
|
|
|
|
|
|
|
| |
| |
| Commitments
and contingencies (Note 10)
|
| |
|
Stockholders’ (deficit) equity:
|
Common stock;
$.002 par value, 40,000,000 shares authorized,
25,000,000 shares issued
|
|
50,000
|
|
50,000
|
|
|
50,000
|
|
|
Additional
paid-in capital
|
|
431,700
|
|
431,700
|
|
|
431,700
|
|
|
Retained
earnings
|
|
1,429,124
|
|
1,385,059
|
|
|
219,027
|
|
| |
|
|
|
|
|
|
|
|
| |
|
1,910,824
|
|
1,866,759
|
|
|
700,727
|
|
|
Less treasury
stock of 12,725,420 shares, at cost
|
|
0
|
|
(7,299,965
|
)
|
|
(7,299,965
|
)
|
| |
|
|
|
|
|
|
|
|
|
Total
stockholders’ (deficit) equity
|
|
1,910,824
|
|
(5,433,206
|
)
|
|
(6,599,238
|
)
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$5,841,949
|
|
$12,275,457
|
|
|
$10,092,304
|
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Statements of Income
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues:
|
|
Licensed
products
|
|
$4,226,208
|
|
|
$5,000,698
|
|
|
$
4,507,934
|
|
|
$527,078
|
|
|
$
682,498
|
|
|
Professional
services
|
|
5,042,263
|
|
|
5,529,498
|
|
|
12,561,392
|
|
|
2,413,154
|
|
|
3,234,971
|
|
|
Reselling
|
|
9,184,437
|
|
|
13,680,505
|
|
|
14,029,063
|
|
|
1,785,145
|
|
|
770,624
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
18,452,908
|
|
|
24,210,701
|
|
|
31,098,389
|
|
|
4,725,377
|
|
|
4,688,093
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
revenues:
|
|
Technical
support
|
|
—
|
|
|
150,954
|
|
|
500,653
|
|
|
60,702
|
|
|
96,733
|
|
|
Services
|
|
3,191,054
|
|
|
3,817,452
|
|
|
8,094,721
|
|
|
1,561,174
|
|
|
2,048,659
|
|
|
Reselling
|
|
7,957,255
|
|
|
11,385,342
|
|
|
11,184,289
|
|
|
1,438,925
|
|
|
562,097
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
11,148,309
|
|
|
15,353,748
|
|
|
19,779,663
|
|
|
3,060,801
|
|
|
2,707,489
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
margin
|
|
7,304,599
|
|
|
8,856,953
|
|
|
11,318,726
|
|
|
1,664,576
|
|
|
1,980,604
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Sales and
marketing
|
|
848,681
|
|
|
1,388,530
|
|
|
2,802,482
|
|
|
322,312
|
|
|
1,329,696
|
|
|
Product
development
|
|
1,542,867
|
|
|
2,540,529
|
|
|
2,146,653
|
|
|
354,620
|
|
|
462,488
|
|
|
General and
administrative
|
|
2,932,577
|
|
|
3,003,253
|
|
|
3,964,803
|
|
|
743,730
|
|
|
1,172,845
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
5,324,125
|
|
|
6,932,312
|
|
|
8,913,938
|
|
|
1,420,662
|
|
|
2,965,029
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income
(loss) from operations
|
|
1,980,474
|
|
|
1,924,641
|
|
|
2,404,788
|
|
|
243,914
|
|
|
(984,425
|
)
|
| Other income
(expense):
|
|
Interest
expense
|
|
(26,506
|
)
|
|
(14,513
|
)
|
|
(362,040
|
)
|
|
(8,984
|
)
|
|
(206,194
|
)
|
|
Other income
|
|
11,155
|
|
|
190,283
|
|
|
83,187
|
|
|
4,929
|
|
|
24,587
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$1,965,123
|
|
|
$2,100,411
|
|
|
$
2,125,935
|
|
|
$239,859
|
|
|
$(1,166,032
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Statements of Changes in Stockholders
’ (Deficit) Equity
For the Years Ended December 31, 1996,
1997 and 1998
and the Three Months Ended March 31, 1999
(Unaudited)
| |
|
Common Stock
|
|
|
|
Treasury Stock
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Shares
|
|
Amount
|
|
Retained
Earnings
(Deficit)
|
|
Total
|
| Balance,
January 1, 1996
|
|
20,000
|
|
|
$20,000
|
|
|
$1,700
|
|
—
|
|
$—
|
|
|
$(775,810
|
)
|
|
$(754,110
|
)
|
| Stock
canceled
|
|
(20,000
|
)
|
|
(20,000
|
)
|
|
20,000
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
| Stock issued
|
|
25,000,000
|
|
|
50,000
|
|
|
410,000
|
|
—
|
|
—
|
|
|
—
|
|
|
460,000
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
1,965,123
|
|
|
1,965,123
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(985,600
|
)
|
|
(985,600
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1996
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
—
|
|
—
|
|
|
203,713
|
|
|
685,413
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
2,100,411
|
|
|
2,100,411
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(875,000
|
)
|
|
(875,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
—
|
|
—
|
|
|
1,429,124
|
|
|
1,910,824
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
2,125,935
|
|
|
2,125,935
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(2,170,000
|
)
|
|
(2,170,000
|
)
|
| Purchase of
treasury shares
|
|
—
|
|
|
—
|
|
|
—
|
|
12,725,420
|
|
(7,299,965
|
)
|
|
—
|
|
|
(7,299,965
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
12,725,420
|
|
(7,299,965
|
)
|
|
1,385,059
|
|
|
(5,433,206
|
)
|
| Net loss
(Unaudited)
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(1,166,032
|
)
|
|
(1,166,032
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
March 31, 1999 (Unaudited)
|
|
25,000,000
|
|
|
$ 50,000
|
|
|
$431,700
|
|
12,725,420
|
|
$(7,299,965
|
)
|
|
$219,027
|
|
|
$(6,599,238
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Statements of Cash Flows
| |
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
Net income (loss)
|
|
$1,965,123
|
|
|
$2,100,411
|
|
|
$2,125,935
|
|
|
$239,859
|
|
|
($1,166,032
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided
by operating
activities:
|
|
Non-cash compensation
expense
|
|
460,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Depreciation and
amortization
|
|
144,411
|
|
|
323,894
|
|
|
536,454
|
|
|
92,804
|
|
|
177,370
|
|
|
Changes in operating
assets and liabilities:
|
|
Accounts receivable
|
|
(5,475,784
|
)
|
|
2,409,399
|
|
|
(39,529
|
)
|
|
360,672
|
|
|
1,198,422
|
|
|
Unbilled accounts receivable
|
|
—
|
|
|
(623,580
|
)
|
|
(1,818,086
|
)
|
|
(217,862
|
)
|
|
1,600,917
|
|
|
Other receivables
|
|
7,343
|
|
|
3,642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
|
(29,072
|
)
|
|
(30,740
|
)
|
|
(456,083
|
)
|
|
370,230
|
|
|
(117,290
|
)
|
|
Stockholder receivables
|
|
(139,347
|
)
|
|
3,877
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Accounts payable and accrued expenses
|
|
4,754,771
|
|
|
(2,027,734
|
)
|
|
1,902,920
|
|
|
(482,590
|
)
|
|
(2,661,244
|
)
|
|
Deferred revenue
|
|
—
|
|
|
493,674
|
|
|
520,086
|
|
|
71,101
|
|
|
2,003,367
|
|
|
Other liabilities
|
|
—
|
|
|
—
|
|
|
231,518
|
|
|
—
|
|
|
186,411
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
1,687,445
|
|
|
2,652,843
|
|
|
3,003,215
|
|
|
434,214
|
|
|
1,221,921
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
Purchase of property and equipment
|
|
(453,591
|
)
|
|
(641,160
|
)
|
|
(3,208,611
|
)
|
|
(147,972
|
)
|
|
(521,410
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(453,591
|
)
|
|
(641,160
|
)
|
|
(3,208,611
|
)
|
|
(147,972
|
)
|
|
(521,410
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
Proceeds under convertible subordinated debenture
|
|
—
|
|
|
—
|
|
|
5,821,967
|
|
|
—
|
|
|
—
|
|
|
Borrowings under note payable agreements
|
|
138,000
|
|
|
400,000
|
|
|
102,343
|
|
|
—
|
|
|
—
|
|
|
Principal payments on notes payable
|
|
(248,939
|
)
|
|
(28,982
|
)
|
|
(146,188
|
)
|
|
(29,708
|
)
|
|
(40,789
|
)
|
|
Stockholder loans
|
|
531,020
|
|
|
—
|
|
|
729,003
|
|
|
—
|
|
|
—
|
|
|
Payments on stockholder loans
|
|
(1,266,703
|
)
|
|
(85,000
|
)
|
|
(867,942
|
)
|
|
—
|
|
|
—
|
|
|
Borrowings under line of credit
|
|
1,854,000
|
|
|
2,104,000
|
|
|
1,661,126
|
|
|
200,304
|
|
|
903,290
|
|
|
Payments on line of credit
|
|
(2,104,000
|
)
|
|
(2,104,000
|
)
|
|
(1,427,382
|
)
|
|
(200,304
|
)
|
|
(1,136,102
|
)
|
|
Dividends paid
|
|
—
|
|
|
(1,725,130
|
)
|
|
(2,170,000
|
)
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock, at cost
|
|
—
|
|
|
—
|
|
|
(2,399,965
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities
|
|
(1,096,622
|
)
|
|
(1,439,112
|
)
|
|
1,302,962
|
|
|
(29,708
|
)
|
|
(273,601
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase in cash
|
|
137,232
|
|
|
572,571
|
|
|
1,097,566
|
|
|
256,534
|
|
|
426,910
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
137,232
|
|
|
709,803
|
|
|
709,803
|
|
|
1,807,369
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents, end of period
|
|
$137,232
|
|
|
$709,803
|
|
|
$1,807,369
|
|
|
$966,337
|
|
|
$2,234,279
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
Interest paid during the period
|
|
$26,506
|
|
|
$14,513
|
|
|
$130,522
|
|
|
$8,984
|
|
|
$ 19,783
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
See notes 2 and 6
|
The accompanying notes are an integral
part of these financial statements.
Notes to Financial Statements
1. Organization and
Operations:
CommerceQuest, Inc. (the “Company,” formerly
MessageQuest) is a solutions provider in the Enterprise
Application Integration and Internet Application Integration
segments of the computer industry. The Company develops
software tools and provides consulting and managed network
services based upon its domain expertise in message oriented
middleware. The Company’s solutions enable its customers
to integrate business information over dissimilar computing
platforms and communication networks. In addition, the Company
is a value-added re-marketer of hardware and software products
manufactured by industry leaders such as IBM, Sun Microsystems
and BMC Software.
2. Summary of
Significant Accounting Policies:
Revenue Recognition—The Company licenses its software
products to end users pursuant to perpetual license agreements.
Amounts billed in advance of installation and pending
completion of remaining significant obligations are deferred.
Revenue from software licenses is recognized upon sale and
shipment. Royalty revenue from licensing agreements with third
party distributors is recognized when earned. For the years
ended December 31, 1996 and 1997, revenue from the sale of
software was recognized in accordance with Statement of
Position (“SOP”) 91-1, Software Revenue Recognition
. Beginning January 1, 1998, revenue from the sale of
software is recognized in accordance with SOP 97-2, Software
Revenue Recognition. SOP 97-2 requires the total contract
revenue to be allocated to the various elements of the contract
based upon objective evidence of the fair values of such
elements and allows for only allocated revenue to be recognized
upon completion of those elements. The effect of the adoption
of SOP 97-2 was not significant to the Company’s results
of operations for the year ended December 31, 1998. Amounts
billed in advance of recognized revenue are deferred. For
contracts for professional services, revenue is recognized as
the services are performed. Revenue from support/maintenance
contracts is recognized ratably over the contract period as the
services are performed.
Unbilled accounts receivable represent revenue on contracts to
be billed in subsequent periods in accordance with the terms of
such contracts, as well as revenue from reselling transactions
for which the customer has yet to be billed.
During 1996, the Company entered into a contract for the sale
of a license for certain message-oriented middleware and
database products to BMC Software, Inc. for $5,450,000. The
Company recognized revenues under this contract of
approximately $3,800,000 during 1996. The remaining revenues of
approximately $1,650,000 were recognized during 1997.
Cash and Cash Equivalents—The Company considers all
short-term, highly liquid investments with original maturities
of three months or less to be cash equivalents.
Product Development Expenses—Certain costs have been
incurred internally in the development of certain software
products. To date, the period between achieving technological
feasibility and the general availability of such software has
been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, such
amounts to date have been expensed as incurred.
Property and Equipment—Property and equipment are
stated at cost. Additions and major renewals are capitalized.
Repairs and maintenance are charged to expense as incurred.
Upon disposal, the related cost and accumulated depreciation
are removed from the accounts, with the resulting gain or loss
included in income. Depreciation is provided on an accelerated
method over the estimated useful lives of the related assets.
Statement of Cash Flows—During the year ended December
31, 1997, the Company was repaid certain receivables from
stockholders in the amount of $135,470 through a reduction in
dividend payments.
Acquisitions of capital assets of $272,054 were included in
accounts payable and accrued expenses as of December 31, 1998.
Accordingly, these noncash transactions have been excluded from
the accompanying statements of cash flows.
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. Estimates also affect
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Comprehensive Income—SFAS No. 130, “Reporting
Comprehensive Income,” requires that the Company report
comprehensive income, which includes net income as well as
certain other changes in assets and liabilities recorded in
stockholders’ (deficit) equity in the financial
statements. There were no components of comprehensive income
other than net income for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited).
Unaudited Financial Statements—The financial
statements as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 are unaudited; however, in the opinion
of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the
financial statements for these interim periods have been
included. The results for the three months ended March 31, 1999
are not necessarily indicative of the results to be obtained
for the full fiscal year ending December 31, 1999.
Segment Reporting—In 1998, the Company adopted SFAS
131, “Disclosures about Segments of an Enterprise and
Related Information.” SFAS 131 supersedes SFAS 14, “
Financial Reporting for Segments of a Business Enterprise,”
replacing the “industry segment” approach with the
“management” approach. The management approach
designates the internal organization that is used by management
for making operating decisions and assessing performance as the
source of the Company’s reportable segments. SFAS 131 also
requires disclosures about products and services, geographic
areas, and major customers. Currently, there is no additional
segment information required to be disclosed.
New Accounting Pronouncements—In 1998, the Financial
Accounting Standards Board issued FAS 133, “Accounting for
Derivative Instruments and Hedging,” effective for fiscal
years beginning after June 15, 1999. The new standard requires
that an entity recognize derivatives as either assets or
liabilities in the financial statements, to measure those
instruments at fair value and to reflect the changes in fair
value of those instruments as either components of
comprehensive income or net income, depending on the types of
those instruments. The Company does not use derivatives or
other financial products for speculative purposes. The Company
has not yet determined to what extent the standard will impact
its financial statements.
Reclassifications—Certain items in the 1996 and 1997
financial statements have been reclassified to conform to the
1998 presentation. Such reclassifications had no impact on
total assets, net income, or total cash flows previously
reported.
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
3. Concentrations of
Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents and trade receivables. The Company maintains
substantially all of its cash investments with what it believes
to be high credit quality financial institutions. Sales and
accounts receivable to customers that exceeded 10% of total
revenues and total accounts receivable are as follows:
| |
|
Sales
|
|
Accounts Receivable
|
| |
|
|
|
(Unaudited)
|
| |
|
Year Ended
December 31,
|
|
Three Months
Ended
March 31,
|
|
December 31,
|
|
(Unaudited)
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
1997
|
|
1998
|
|
1999
|
| Customer A
|
|
22
|
%
|
|
17
|
%
|
|
—
|
|
|
11
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer B
|
|
32
|
|
|
15
|
|
|
23
|
%
|
|
19
|
|
|
—
|
|
|
26
|
%
|
|
33
|
%
|
|
—
|
|
| Customer C
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer D
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
20
|
%
|
|
—
|
|
|
24
|
|
|
19
|
%
|
| Customer G
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
| Customer H
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
| Customer I
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer J
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer K
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
4. Property and
Equipment:
Property and equipment consists of the following:
| |
|
Useful
Lives
|
|
December 31,
|
|
(Unaudited)
March 31,
|
| |
|
|
|
1997
|
|
1998
|
|
1999
|
| Buildings
|
|
39 years
|
|
$—
|
|
|
$2,290,956
|
|
|
$2,466,165
|
|
| Furniture and
equipment
|
|
7 years
|
|
331,902
|
|
|
552,889
|
|
|
578,114
|
|
| Computers
|
|
5 years
|
|
998,424
|
|
|
1,960,863
|
|
|
2,009,785
|
|
| Leasehold
improvements
|
|
7 years
|
|
7,059
|
|
|
13,342
|
|
|
13,342
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337,385
|
|
|
4,818,050
|
|
|
5,067,406
|
|
| Less
accumulated depreciation and amortization
|
|
|
|
(556,067
|
)
|
|
(1,092,232
|
)
|
|
(1,269,530
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$781,318
|
|
|
$3,725,818
|
|
|
$3,797,876
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited) approximated $144,000, $324,000, $536,000,
$93,000 and $177,000, respectively.
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
5. Long-Term Debt:
Long-term debt consists of the following:
| |
|
December 31,
|
|
(Unaudited)
March 31,
1999
|
| |
|
1997
|
|
1998
|
Notes
payable, bearing interest at 9.95%, principal and interest
due in monthly installments;
collateralized by certain fixed
assets
|
|
$371,018
|
|
|
$327,173
|
|
|
$286,384
|
|
Note payable
to stockholder, non-interest bearing, principal
payable in January 1999. Paid in
full during 1998
|
|
138,939
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
509,957
|
|
|
327,173
|
|
|
286,384
|
|
| Less current
portion
|
|
(123,379
|
)
|
|
(169,402
|
)
|
|
(173,652
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$386,578
|
|
|
$157,771
|
|
|
$112,732
|
|
| |
|
|
|
|
|
|
|
|
|
Maturities of notes payable for the years subsequent to March
31, 1999 (unaudited) are as follows:
| 1999
|
|
$173,652
|
| 2000
|
|
112,732
|
6. Convertible
Subordinated Debentures:
In
September and October 1998, the Company issued a total of
$10,800,000 of 7.00% convertible subordinated debentures
maturing through October 2003. The convertible subordinated
debentures are exchangeable at any time into common stock of
the Company at an exchange price of $2.52 per share, subject to
adjustment. Provisions of the debenture agreements contain
certain covenants, the most restrictive of which limits the
payment of dividends and the creation of additional
indebtedness.
In
connection with the transaction, $5,300,000 of the proceeds was
used to repurchase shares of stock from certain shareholders.
The lender agreed to pay $4,900,000 of this amount;
accordingly, this amount has been reflected as a non-cash
transaction and excluded from the statement of cash flows for
the year ended December 31, 1998. Approximately $78,000 of the
subordinated debenture issue costs were withheld from the
proceeds and have been included in other assets in the
financial statements as of December 31, 1998. Accordingly, this
amount has been reflected as a non-cash transaction and
excluded from the statement of cash flows for the year ended
December 31, 1998.
7. Lines of Credit:
During 1998, the Company entered into a line of credit facility
with a financial institution in the amount of $1,000,000 to
finance working capital needs. There were no borrowings under
this credit facility at December 31, 1998 and March 31, 1999.
Additionally, during 1998, the Company entered into a reducing
line of credit facility, as defined in the credit agreement,
with an initial available balance of $1,300,000 to finance the
acquisition of the Company’s headquarters and to provide
additional funds for property improvements. At December 31,
1998 and March 31, 1999 (unaudited) there were $226,850 and
$890, respectively, of borrowings under this credit facility.
The credit facilities mature in ten years and are
collateralized by the Company’s property and equipment.
During 1998, the Company also entered into a reducing line of
credit facility, as defined in the credit agreement, with an
initial available balance of $400,000 to provide financing for
property
improvements on the Company’s headquarters. The facility is
for seven years and is collateralized by all the assets of the
Company. Interest on the credit lines is payable monthly at a
rate of 2.75% in excess of the 30-day commercial paper rate,
based upon the actual days elapsed over a 360-day year (7.85%
and 7.62% borrowing rates at December 31, 1998 and March 31,
1999 (unaudited), respectively). At December 31, 1998 and March
31, 1999 (unaudited), there were $6,894 and $42, respectively,
of borrowings under this credit facility. There was $2,196,086
and $2,534,525 available under the three facilities at December
31, 1998 and March 31, 1999 (unaudited), respectively. The
weighted-average interest rates under these facilities for the
year ended December 31, 1998 and the three months ended March
31, 1999 (unaudited), were 8.03% and 7.59%, respectively.
At
December 31, 1997 the Company had a line of credit agreement
with a financial institution for an amount of $250,000
collateralized by accounts receivable and inventory. At
December 31, 1997, the balance outstanding was $0. During
February 1998, the Company renegotiated the line of credit,
increasing the available credit facility to $500,000. Amounts
drawn under the line of credit bore interest at 1.5 percentage
points above the Bank’s base rate (8.25% borrowing rate at
December 31, 1997). Under the terms of the agreement, the line
of credit was due on demand. This line of credit was terminated
by the Company during 1998.
8. Fair Value of
Financial Instruments:
The
fair value of short-term financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable
and certain accrued expenses approximates their carrying
amounts in the financial statements due to the short maturity
of such instruments.
The
carrying amount of the lines of credit issued pursuant to the
Company’s bank credit agreement approximates fair value
because the interest rates change with market interest rates.
The
fair value of the Company’s long-term debt approximates
carrying value based on the quoted market prices for the same
or similar issues or on the current rates offered to the
Company for debt of the same maturities.
The
Company believes that it is not practical to estimate the fair
value of the convertible subordinate debentures with a carrying
value of $10,800,000, as these debentures have numerous unique
features.
9. Income Taxes:
The
stockholders have elected under the provisions of Subchapter S
of the Internal Revenue Code and similar provisions under state
law, to have the Company’s income treated substantially as
if the Company were a partnership, allowing the stockholders to
report the Company’s income on their individual tax
returns. Accordingly, the financial statements reflect no
provision or benefit for federal and state income taxes.
10. Commitments and
Contingencies:
Operating Leases—The Company leases office space under
operating leases expiring through August 2001. Rent expense
under these leases for the years ended December 31, 1996, 1997
and 1998 and for the three months ended March 31, 1998 and 1999
(unaudited) approximated $115,000, $239,000, $357,000, $68,000
and $40,000, respectively.
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
Future basic rental commitments under noncancelable operating
leases at March 31, 1999 (unaudited) are approximately as
follows:
| Twelve months
ending March 31:
|
|
|
|
2000
|
|
$121,000
|
|
2001
|
|
75,000
|
|
2002
|
|
15,000
|
| |
|
|
|
Total minimum
payments
|
|
$211,000
|
| |
|
|
11. Equity:
Stock Compensation—During 1996, the Company issued
common stock as compensation to employees who were previously
covered by a phantom stock agreement. In exchange for the newly
issued shares, the recipients waived all rights and shares
granted them under the phantom stock agreement. The aggregate
compensation earned under the phantom stock plan during 1996
totaled $460,000.
Stock Split—During January 1997, October 1998 and on
March 10, 1999, the Board of Directors approved that the Company
’s issued and outstanding common stock, be split on a
5-for-1, 5-for-1, and 2-for-1 basis, respectively. All share
amounts have been retroactively adjusted in the accompanying
financial statements to reflect these stock splits.
Stock Option Plan—Effective January 1, 1997, the Board
of Directors approved the adoption of a stock option plan under
which qualified and non-qualified stock options may be granted
to employees, directors, and consultants to the Company. The
Board of Directors also authorized 4,138,750 shares to be
reserved for issuance pursuant to the terms of the plan. The
Company has granted qualified and non-qualified stock options
to certain employees with vesting periods of up to 4 years.
These options give the employee the right to purchase common
stock at an exercise price estimated by management to be at
least equal to the fair value of the stock at the date of the
option’s grant. For all options granted, the term during
which employees may exercise the option was initially 10 years.
The
Company applies APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related Interpretations in
accounting for stock options. Accordingly, no compensation cost
has been recognized in connection with the issuance of these
options. Had compensation cost for the Company’s stock
option plan been determined based on the fair value at the
grant dates for the awards under the plan consistent with the
method of SFAS Statement 123, “Accounting for Stock Based
Compensation,” the Company’s net income would have
been reduced to the adjusted amounts indicated below:
| |
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Pro forma net
income:
|
|
As reported
|
|
$1,965,123
|
|
$2,100,411
|
|
$2,125,935
|
|
$239,859
|
|
$(1,166,032)
|
|
As adjusted
|
|
1,965,123
|
|
1,152,116
|
|
1,356,486
|
|
133,478
|
|
(1,166,032)
|
The
estimated per share fair value of options granted for the years
ending December 31, 1997 and 1998 and the three months ended
March 31, 1998 (unaudited) was $0.46, $0.39 and $0.45
respectively. There were no options granted during the three
months ended March 31, 1999. The fair value of each option
granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions for grants in the years ended December 31,
1997 and 1998 and the three months ended March 31, 1998
(unaudited), respectively: no dividend yield for each year
presented; risk-free interest rates of 5.74%, 4.65% and 5.65%,
respectively; expected lives of the options prior to exercise
of 8.5 years for each year presented, and volatility of the
stock price was omitted from the pricing model as permitted by
SFAS No. 123. A summary of the status of the Company’s
stock option plan and changes during the years and periods
ended on those dates, is presented below:
| |
|
|
|
(Unaudited)
|
| |
|
Year Ended December 31,
|
|
Three Months Ended
March 31, 1999
|
| |
|
1997
|
|
1998
|
Fixed
Options
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
Outstanding
at beginning of
period
|
|
—
|
|
$0.00
|
|
1,957,000
|
|
$1.20
|
|
3,530,000
|
|
$1.21
|
|
Granted
|
|
2,069,500
|
|
$1.20
|
|
1,982,500
|
|
$1.22
|
|
—
|
|
$0.00
|
|
Exercised
|
|
—
|
|
$0.00
|
|
—
|
|
$0.00
|
|
—
|
|
$0.00
|
|
Canceled
|
|
(112,500)
|
|
$1.20
|
|
(409,500)
|
|
$1.20
|
|
—
|
|
$0.00
|
| |
|
|
|
|
|
|
|
|
|
|
| Outstanding
at end of period
|
|
1,957,000
|
|
|
|
3,530,000
|
|
|
|
3,530,000
|
|
|
Options
exercisable at end of
period
|
|
—
|
|
|
|
551,750
|
|
|
|
1,262,750
|
|
|
The
following table summarizes certain information about stock
options at March 31, 1999 (unaudited):
Options Outstanding
|
|
Options Exercisable
|
Number
Outstanding
at 3/31/99
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Exercise
Prices
|
|
Number
Exercisable
at 3/31/99
|
|
Exercise
Prices
|
| 3,480,000
|
|
8.55 years
|
|
$1.20
|
|
1,262,750
|
|
$1.20
|
| 50,000
|
|
9.44 years
|
|
$
1.80
|
|
—
|
|
$
0.00
|
As
of March 31, 1999 (unaudited), options to purchase 608,750
shares of common stock were available for future grants.
12. Employee Benefit
and Incentive Plans:
The
Company sponsors a tax deferred 401(k) defined contribution
savings and profit sharing plan which covers substantially all
employees who meet minimum service requirements. Employees may
defer up to 15% of their annual compensation, which the Company
will match at a rate of 20% of the employee’s contribution
on the first 6% of his or her annual salary. In addition, the
plan allows for annual profit sharing contributions at the
discretion of the Board of Directors.
Company matching contributions to the 401(k) plan for the years
ended December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999 (unaudited) totaled approximately
$15,000, $28,000, $52,000, $11,000 and $23,000, respectively.
To date, the Company has not made any discretionary profit
sharing contributions to the 401(k) plan.
13. Subsequent Event:
On
June 1, 1999, the Company changed its name to CommerceQuest,
Inc. and amended and restated its certificate of incorporation
to increase the number of authorized shares of common stock to
40,000,000.
Report of Independent Auditors
Board of Directors and Stockholders of
ComputerJobs.com, Inc.
We
have audited the accompanying balance sheets of
ComputerJobs.com, Inc. (formerly ComputerJobs Store, Inc.) as
of December 31, 1997 and 1998, and the related statements of
income, changes in stockholders’ equity (deficit), and
cash flows for the period from January 16, 1996 (inception)
through December 31, 1996 and for the years ended December 31,
1997 and 1998. 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
ComputerJobs.com, Inc. at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the period
from January 16, 1996 (inception) through December 31, 1996 and
for the years ended December 31, 1997 and 1998 in conformity
with generally accepted accounting principles.
Atlanta, Georgia
March 11, 1999, except Note 1 as to which the
date
is April 1, 1999
Balance Sheets
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Assets
|
|
|
|
|
|
|
| Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
315,213
|
|
|
$
9,385,180
|
|
Trade accounts receivable, net of allowance
for doubtful accounts of $4,000
and
$20,000 at December 31, 1997 and 1998, respectively
|
|
136,528
|
|
|
315,081
|
|
|
Unbilled trade accounts receivable
|
|
17,000
|
|
|
62,990
|
|
|
Prepaid expenses
|
|
—
|
|
|
1,197
|
|
| Loan
receivable from stockholder
|
|
1,086
|
|
|
—
|
|
| |
|
|
|
|
|
|
| Total current
assets
|
|
469,827
|
|
|
9,764,448
|
|
| Property and
equipment:
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
15,291
|
|
|
35,728
|
|
|
Computer and office equipment
|
|
73,721
|
|
|
189,288
|
|
|
Accumulated depreciation
|
|
(21,159
|
)
|
|
(64,249
|
)
|
| |
|
|
|
|
|
|
| Net property
and equipment
|
|
67,853
|
|
|
160,767
|
|
| Other assets
|
|
2,000
|
|
|
99,721
|
|
| |
|
|
|
|
|
|
| Total assets
|
|
$539,680
|
|
|
$10,024,936
|
|
| |
|
|
|
|
|
|
| |
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
| Current
liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$47,323
|
|
|
$136,209
|
|
|
Deferred income taxes payable
|
|
—
|
|
|
89,261
|
|
|
Note payable to stockholders
|
|
—
|
|
|
1,000,000
|
|
|
Distribution payable to stockholders
|
|
—
|
|
|
346,817
|
|
|
Current portion of notes payable
|
|
6,279
|
|
|
—
|
|
|
Deferred revenue
|
|
16,271
|
|
|
27,996
|
|
| |
|
|
|
|
|
|
| Total current
liabilities
|
|
69,873
|
|
|
1,600,283
|
|
| Notes
payable, less current portion
|
|
6,354
|
|
|
—
|
|
Series A
Preferred Stock, no par value — ($2 per share redemption
value;
minimum liquidation value of
$10,000,000 plus accrued and unpaid dividends
plus a portion of remaining
assets, as defined), convertible to Class 2
common stock, 5,000,000 shares
authorized, issued and outstanding
|
|
—
|
|
|
9,986,126
|
|
| Stockholders
’ equity:
|
|
|
|
|
|
|
Class 1 common stock, no par value
— 5,500,000 shares authorized,
5,500,000 shares issued and outstanding
|
|
10,510
|
|
|
10,510
|
|
Class 2 common stock, no par value
— 14,000,000 shares authorized, no
shares issued or outstanding
|
|
—
|
|
|
—
|
|
|
Retained earnings (deficit)
|
|
452,943
|
|
|
(1,571,983
|
)
|
| |
|
|
|
|
|
|
| Total
stockholders’ equity (deficit)
|
|
463,453
|
|
|
(1,561,473
|
)
|
| |
|
|
|
|
|
|
| Total
liabilities and stockholders’ equity (deficit)
|
|
$539,680
|
|
|
$10,024,936
|
|
| |
|
|
|
|
|
|
See accompanying notes.
Statements of Income
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year Ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Revenue
|
|
$377,163
|
|
|
$1,504,742
|
|
|
$4,431,060
|
|
| Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
38,477
|
|
|
65,178
|
|
|
469,519
|
|
|
Sales and marketing
|
|
38,509
|
|
|
198,586
|
|
|
1,893,589
|
|
|
General and administrative
|
|
189,126
|
|
|
776,572
|
|
|
1,121,918
|
|
|
Depreciation
|
|
3,617
|
|
|
17,542
|
|
|
45,383
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
269,729
|
|
|
1,057,878
|
|
|
3,530,409
|
|
| Operating
income
|
|
107,434
|
|
|
446,864
|
|
|
900,651
|
|
| Other income
(deductions):
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(982
|
)
|
|
(1,646
|
)
|
|
(12,537
|
)
|
|
Interest income
|
|
401
|
|
|
8,258
|
|
|
53,610
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(581
|
)
|
|
6,612
|
|
|
41,073
|
|
| |
|
|
|
|
|
|
|
|
|
| Income before
income taxes
|
|
106,853
|
|
|
453,476
|
|
|
941,724
|
|
| Income tax
expense
|
|
—
|
|
|
—
|
|
|
89,261
|
|
| |
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
852,463
|
|
| |
|
|
|
|
|
|
|
|
|
| Supplemental
unaudited pro forma information:
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, as above
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
941,724
|
|
|
Pro forma provision for income taxes
|
|
(40,604
|
)
|
|
(172,320
|
)
|
|
(357,853
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
66,249
|
|
|
$
281,156
|
|
|
$
583,871
|
|
| |
|
|
|
|
|
|
|
|
|
|
Basic pro forma earnings per common share
|
|
$0.01
|
|
|
$0.05
|
|
|
$0.09
|
|
|
Average outstanding common shares
|
|
5,500,000
|
|
|
5,500,000
|
|
|
5,500,000
|
|
See accompanying notes.
Statements of Changes in Stockholders
’ Equity (Deficit)
| |
|
Class
1 Common
Stock
|
|
Class
2 Common
Stock
|
|
Retained
Earnings
(deficit)
|
|
Total
Shareholders’
Equity (deficit)
|
| Balance at
January 16, 1996 (inception)
|
|
$10,510
|
|
—
|
|
$
—
|
|
|
$
10,510
|
|
|
Net income
|
|
—
|
|
—
|
|
106,853
|
|
|
106,853
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(33,879
|
)
|
|
(33,879
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1996
|
|
10,510
|
|
—
|
|
72,974
|
|
|
83,484
|
|
|
Net income
|
|
—
|
|
—
|
|
453,476
|
|
|
453,476
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(73,507
|
)
|
|
(73,507
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1997
|
|
10,510
|
|
—
|
|
452,943
|
|
|
463,453
|
|
|
Net income
|
|
—
|
|
—
|
|
852,463
|
|
|
852,463
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(2,796,817
|
)
|
|
(2,796,817
|
)
|
Accretion and
dividends on Series A
Preferred Stock
|
|
—
|
|
—
|
|
(80,572
|
)
|
|
(80,572
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December, 31 1998
|
|
$
10,510
|
|
—
|
|
$(1,571,983
|
)
|
|
$(1,561,473
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Statements of Cash Flows
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year Ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Operating
activities
|
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
852,463
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
3,617
|
|
|
17,542
|
|
|
45,383
|
|
|
Provision for
deferred taxes
|
|
—
|
|
|
—
|
|
|
89,261
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
(30,880
|
)
|
|
(105,648
|
)
|
|
(178,553
|
)
|
|
Unbilled trade accounts receivable
|
|
—
|
|
|
(17,000
|
)
|
|
(45,990
|
)
|
|
Loan receivable from stockholder
|
|
—
|
|
|
(1,086
|
)
|
|
1,086
|
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
(2,000
|
)
|
|
(98,918
|
)
|
|
Accounts payable and accrued expenses
|
|
12,394
|
|
|
34,930
|
|
|
88,886
|
|
|
Deferred revenue
|
|
21,903
|
|
|
(5,632
|
)
|
|
11,725
|
|
| |
|
|
|
|
|
|
|
|
|
| Net cash
provided by operating activities
|
|
113,887
|
|
|
374,582
|
|
|
765,343
|
|
|
|
|
| Investing
Activities
|
|
|
|
|
|
|
|
|
|
| Purchase of
property and equipment
|
|
(23,980
|
)
|
|
(65,033
|
)
|
|
(138,297
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Net cash used
in investing activities
|
|
(23,980
|
)
|
|
(65,033
|
)
|
|
(138,297
|
)
|
|
|
|
| Financing
Activities
|
|
|
|
|
|
|
|
|
|
| Sale of
Series A Preferred Stock, less expenses
|
|
—
|
|
|
—
|
|
|
9,905,554
|
|
| Distributions
to stockholders
|
|
(33,879
|
)
|
|
(73,507
|
)
|
|
(1,450,000
|
)
|
| Proceeds from
notes payable
|
|
21,100
|
|
|
—
|
|
|
—
|
|
| Repayment of
notes payable
|
|
(2,817
|
)
|
|
(5,650
|
)
|
|
(12,633
|
)
|
| Sales of
common stock
|
|
10,510
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Net cash
provided (used) by financing activities
|
|
(5,086
|
)
|
|
(79,157
|
)
|
|
8,442,921
|
|
| |
|
|
|
|
|
|
|
|
|
| Net increase
in cash and cash equivalents
|
|
84,821
|
|
|
230,392
|
|
|
9,069,967
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
84,821
|
|
|
315,213
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, end of year
|
|
$
84,821
|
|
|
$
315,213
|
|
|
$9,385,180
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
Notes to Financial Statements
December 31, 1998
1. Description of the
Business
The
Company is an Internet-based interactive technology company
that provides an employment Web site for information technology
(IT) professionals. The Company’s web site enables
recruiters and employers to post job opportunities and search
for employment opportunities based on an array of search
criteria. The Company also offers banner advertising and job
reposting services for companies wanting access to IT
professionals. The Company operates primarily on a regional
basis and at December 31, 1998, served five regions in the
United States: Atlanta, the Carolinas, Chicago, Florida, and
Texas.
On
April 1, 1999 the Company changed its name from ComputerJobs
Store, Inc. to ComputerJobs.com, Inc.
2. Summary of
Significant Accounting Policies
|
Cash
and Cash Equivalents
|
The
Company considers short-term investments with original maturity
dates of 90 days or less at the date of purchase to be cash
equivalents.
|
Concentration of Credit Risk
|
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
equivalents and accounts receivable. Cash equivalents are held
primarily with one financial institution. The Company performs
periodic evaluations of the relative credit standing of this
financial institution. Accounts receivable are unsecured and
the Company is at risk to the extent such amounts become
uncollectible.
The
Company performs periodic credit evaluations of its customers
’ financial condition and generally does not require
collateral. Receivables are generally due within 30 days.
Credit losses have been within management’s expectations.
Property and equipment are stated at cost. The Company provides
for depreciation computed on a straight-line basis over the
estimated useful lives of the related assets which range from 3
to 5 years.
If
facts and circumstances indicate that the property and
equipment or other assets may be impaired, an evaluation of
continuing value would be performed. If an evaluation is
required, the estimated future undiscounted cash flows
associated with these assets would be compared to their
carrying amount to determine if a write down to fair market
value or discounted cash flow value is required.
The
Company recognizes advertising and service revenue as earned
over the service period. Unbilled trade accounts receivables
are recorded for advertising revenue which is not billed to the
customer until the month following the month in which it is
earned. Advance payments received by the Company are deferred
and credited to operations on the straight-line basis over the
life of the agreement.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
Advertising costs are expensed in the period in which they are
incurred. The Company incurred $11,583, $178,870 and $1,528,590
in advertising costs for the period from January 16, 1996
(inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998, respectively.
The
Company elected to be taxed under the provision of Subchapter S
of the Internal Revenue Code for the period from January 16,
1996 (inception) through November 25, 1998. Under these
provisions, the income of the Company was reported by the stock
or shareholders on their individual income tax returns. As
such, the accompanying financial statements do not include a
provision for income taxes for the period from January 16, 1996
(inception) to November 25, 1998.
In
connection with the Company’s amended and restated
articles of incorporation, the Company terminated its tax
status as a Subchapter S corporation. Effective November 25,
1998, the Company is taxed as a subchapter C corporation. The
deferred tax effects of the change in tax status of
approximately $54,000 are included in income at the date the
change in tax status occurred. Supplemental unaudited pro forma
information related to net income and earnings per share is
presented as if the Company had been taxed as a subchapter C
corporation for all periods presented.
Income taxes for the period November 25, 1998 through December
31, 1998 have been provided using the liability method in
accordance with FASB Statement 109, Accounting for Income
Taxes. Under the liability method, the Company recognizes
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Using the enacted tax rates in
effect for the year in which the differences are expected to
reverse, deferred tax liabilities and assets are determined
based on the differences between the book basis for financial
reporting and the tax basis of an asset or liability.
The
preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
During 1998, the Company recorded a distribution payable to the
stockholders of $346,817, a note payable to stockholders for
$1,000,000 and accrued dividends of $79,000 on the Series A
Preferred Stock which are non-cash financing activities.
Certain prior year balances have been reclassified to conform
with the current presentation.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
3. Notes Payable
Notes payable consist of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Note payable;
interest at prime rate plus 2.0% (10.5% at December 31, 1997)
|
|
$5,052
|
|
$
—
|
| Note payable;
interest at prime rate plus 2.0% (10.25% at December 31,
1997)
|
|
7,581
|
|
—
|
| |
|
|
|
|
|
|
|
12,633
|
|
—
|
| Less amounts
due within one year
|
|
6,279
|
|
—
|
| |
|
|
|
|
|
|
|
$6,354
|
|
$
—
|
| |
|
|
|
|
The
notes payables were secured by the property and equipment of
the Company and guaranteed by stockholders of the Company.
Interest paid for the period from January 16, 1996 (inception)
through December 31, 1996 and during the years ended December
31, 1997 and 1998 totaled $982, $1,646 and $1,030, respectively.
At
December 31, 1996 and 1997, the Company had an unused line of
credit of $50,000, for general working capital purposes. The
line of credit expired on April 5, 1998 and was not renewed.
4. Income Taxes
Income tax expense (benefit) consists of the following for the
period from November 25, 1998 through December 31, 1998:
| |
|
Current
|
|
Deferred
|
|
Total
|
| Federal
|
|
$(7,267
|
)
|
|
$86,665
|
|
$79,398
|
| State
|
|
(481
|
)
|
|
10,344
|
|
9,863
|
| |
|
|
|
|
|
|
|
|
|
|
$(7,748
|
)
|
|
$97,009
|
|
$89,261
|
| |
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company’s deferred tax
assets and liabilities as of December 31, 1998 are as follows:
Deferred income tax assets (liabilities):
| Property and
equipment
|
|
$17,420
|
|
| Net operating
loss carryforwards
|
|
7,748
|
|
| Accrual to
cash adjustment
|
|
(114,429
|
)
|
| |
|
|
|
| Net deferred
income taxes
|
|
$(89,261
|
)
|
| |
|
|
|
The
Company uses the cash basis for its calculation of income tax
expense in accordance with internal revenue code 448(b)(3). For
income tax purposes, income is generally reported in the period
that cash is actually received and expenses are generally
reported in the period the payment is actually made.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
Pro forma income tax expense differed from the amounts computed
by applying the statutory federal rate of 34% as a result of
the following:
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Computed
using a 34% tax rate
|
|
$36,330
|
|
$154,182
|
|
$320,186
|
| State income
taxes, net of federal tax
|
|
4,274
|
|
18,138
|
|
37,667
|
| |
|
|
|
|
|
|
|
|
|
$40,604
|
|
$172,320
|
|
$357,853
|
| |
|
|
|
|
|
|
5. Stockholders’
Equity
On
November 25, 1998, the Company amended and restated its
articles of incorporation. Pursuant to this amendment and
restatement, the Company converted its original 1,000 shares of
issued common stock into 5,500,000 shares of Class 1 common
stock. The common stock authorized, outstanding and issued, as
of December 31, 1996 and 1997, has been adjusted to reflect
this recapitalization. The Company also authorized 14,000,000
shares of Class 2 common stock and 5,000,000 shares of Series A
Preferred Stock. The Company has reserved 2,000,000 shares of
Class 2 common stock for issuance in connection with its stock
option plan.
Each share of Class 1 common stock is convertible to one share
of Class 2 common stock at the option of the holder. Class 1
common stock automatically converts to Class 2 common stock
upon a qualifying initial public offering (IPO) of the Company.
The
rights and privileges of Class 1 and Class 2 stockholders are
equal except that Class 1 stockholders are entitled to receive
certain preferences over Class 2 stockholders in the event of
the Company’s liquidation, dissolution or sale or merger.
In
November 1998, the Company sold 5,000,000 shares of Series A
Preferred Stock for an aggregate sales price of $10,000,000.
The Series A Preferred Stock is cumulative and accrues
dividends at 8%. Each share of preferred stock is currently
convertible into one share of Class 2 common stock at the
option of the holder. Each holder of Series A Preferred Stock
is entitled to certain protections against sales of common
stock at less than the original Series A purchase price, which
may result in the right of such holder to convert each share of
Series A into more than one share of Class 2 common stock. The
Series A preferred stock automatically converts into Class 2
common stock upon a qualifying IPO of the Company. The Company
has reserved 5,000,000 shares of Class 2 common stock for the
conversion of Series A Preferred Stock.
The
voting rights of the Series A Preferred Stock are equal to the
voting rights of the Class 2 common stock. Dividends are
payable in cash or stock on the sale, liquidation, or merger of
the Company or redemption of such preferred stock. To the
extent the holders have not converted the Series A Preferred
Stock into Class 2 common stock, the holders of least 75% of
the preferred stock may cause the Company to redeem all such
preferred stock at any time after November 25, 2003 at the
greater of the purchase price plus accrued dividends or the
appraised value, as defined.
In
the event of the Company’s liquidation, dissolution or
sale or merger, the holders of Series A Preferred Stock are
entitled to $10,000,000 plus all accrued dividends on the
Series A Preferred Stock before any amounts may be distributed
to the holders of Class 1 or Class 2 common stock.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
No dividends may be paid to the holders of Class 1 and Class 2
common stock until all outstanding dividends are paid on the
Series A Preferred Stock. In the event that the holders of the
Series A Preferred Stock elect to convert their shares into
Class 2 common stock, the Company is not required to distribute
the accrued dividends on the Series A Preferred Stock.
At
December 31, 1998, the Series A Preferred Stock was increased
by $79,000 representing dividends not currently declared or
paid. The cost of issuance of the Series A Preferred Stock of
$94,446 is being accreted over a five year period. Such
accretion amounted to $1,572 in the year ended December 31,
1998.
In
connection with the sale of Series A Preferred Stock, the
Company issued warrants for the purchase of 1,250,000 shares of
Class 2 common stock at $5.00 per share. The Company has not
assigned a value to the warrants as management believes the
warrants are of minimal value. The Company has reserved
1,250,000 shares of Class 2 common stock for the exercise of
these warrants. The warrants expire on the earlier of 1) three
years after an IPO by the Company, 2) the closing date of the
sale or merger of the Company, or 3) December 31, 2003.
6. Earnings Per Share
The
following table sets forth the computation of the unaudited pro
forma earnings per common share:
| |
|
1996
|
|
1997
|
|
1998
|
| Numerator:
|
|
|
|
|
|
|
|
|
Pro forma net
income
|
|
$
66,249
|
|
$281,156
|
|
$583,871
|
|
Accretion and
dividends on Series A Preferred
Stock
|
|
—
|
|
—
|
|
(80,572
|
)
|
| |
|
|
|
|
|
|
|
Numerator for
basic pro forma earnings per common
share—income available to
common
stockholders
|
|
$
66,249
|
|
$281,156
|
|
$503,299
|
|
| |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic pro forma earning per
common share—weighted
average shares
|
|
5,500,000
|
|
5,500,000
|
|
5,500,000
|
|
| |
|
|
|
|
|
|
|
| Basic pro
forma earnings per common share
|
|
$
0.01
|
|
$
0.05
|
|
$
0.09
|
|
| |
|
|
|
|
|
|
|
Series A Preferred Stock, which is convertible into Class 2
common stock and was outstanding during 1998 (issued on
November 25, 1998), and common shares issuable upon the
exercise of warrants were not included in the computation of
pro forma earnings per share because their effect would be
anti-dilutive.
7. Employee Benefits
On
January 1, 1998, the Company established a 401(k) plan that
covers substantially all employees. The Company contributed
$26,965 to the 401(k) plan in 1998.
In
1997, the Company sponsored a simplified employee pension plan
under section 408(k) of the Internal Revenue Code. The plan
provides discretionary contributions in each calendar year to
the individual retirement accounts of all eligible employees.
Full time employees with more than a year of service are
eligible to participate. Total contributions by the Company
totaled $42,119 for the year ended December 31, 1997. The
408(k) Plan was terminated upon the establishment of the 401(k)
Plan.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
8. Lease Commitments
During December 1998, the Company entered into a five year
operating lease for office space. This lease agreement provides
for rent escalation clauses to cover increases in certain of
the lessors’ operating costs. Rental expense totaled
$11,630, $30,646 and $92,217 for the period from January 16,
1996 through December 31, 1996 and for the years ended December
31, 1997 and 1998, respectively. Future minimum rental payments
(excluding any estimate of operating costs) under noncancelable
operating leases with terms of one year or more at December 31,
1998 are $360,679 in 1999, $327,043 in 2000, $320,254 in 2001,
$320,254 in 2002 and $320,254 in 2003.
9. Related Party
Transactions
On
November 2, 1998, the Company declared a $2,000,000
distribution payable to the stockholders. During 1998,
$1,000,000 of the distributions were paid. The Company issued
notes to the stockholders for the remaining $1,000,000. These
notes accrue interest at the federal funds interest rate and
are payable in February 1999.
10. Fair Value of
Financial Instruments
The
carrying amounts reported in the accompanying balance sheets
for cash and cash equivalents, accounts receivable, accounts
payable and notes payable approximates their fair value.
11. Year 2000 Issue
(Unaudited)
Year 2000 issues may arise if computer programs have been
written using two digits rather than four digits to define the
applicable year. In such cases, programs that have time
sensitive logic may recognize a date using “00” as
the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The
Company has determined that it will not need to modify or
replace significant portions of its software so that its
computer systems will function properly with respect to dates
in the year 2000 and beyond. The Company anticipates that any
remaining costs to ensure year 2000 compliance will not be
significant.
Although no formal assessment of the information and
operational systems of its major clients and vendors has been
made, the Company is not aware of any significant problems as a
result of the year 2000. However, if the customers and clients
encounter operational problems related to year 2000 and are
unable to resolve such problems in a timely manner, it could
result in a material financial risk to the Company.
Report of Independent Accountants
To the Board of Directors and Stockholders of
Syncra Software, Inc.
In
our opinion, the accompanying balance sheet and the related
statements of operations, of changes in redeemable preferred
stock and stockholders’ deficit and of cash flows present
fairly, in all material respects, the financial position of
Syncra Software, Inc. (a development stage enterprise) at
December 31, 1998 and the results of its operations and its
cash flows for the period from inception (February 11, 1998)
through December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
(a development stage enterprise)
Balance Sheet
| |
|
|
|
(Unaudited)
|
| |
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
|
|
|
| Current
Assets:
|
|
|
|
|
Cash and cash
equivalents
|
|
$1,700,370
|
|
|
$176,953
|
|
|
Prepaid
expenses
|
|
185,506
|
|
|
149,366
|
|
|
Other current
assets
|
|
22,704
|
|
|
19,991
|
|
| |
|
|
|
|
|
|
|
Total current
assets
|
|
1,908,580
|
|
|
346,310
|
|
| Fixed assets,
net
|
|
351,752
|
|
|
342,690
|
|
| Deposits
|
|
136,998
|
|
|
136,998
|
|
| |
|
|
|
|
|
|
|
|
|
$2,397,330
|
|
|
$825,998
|
|
| |
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock and Stockholders’
Deficit
|
|
|
|
| Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
233,281
|
|
|
$226,688
|
|
|
Accrued
expenses
|
|
316,918
|
|
|
347,771
|
|
|
Notes payable
to stockholders
|
|
3,926,370
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
Total current
liabilities
|
|
4,476,569
|
|
|
574,459
|
|
| |
|
|
|
|
|
|
|
|
|
| Redeemable
Preferred Stock:
|
|
|
|
|
|
|
Series A
redeemable convertible preferred stock, $0.001 par value
Authorized: 2,941,031 and
2,586,207 shares at December 31, 1998 and
March 31, 1999 (unaudited),
respectively; issued and outstanding:
2,586,207 shares at December
31, 1998 and March 31, 1999 (unaudited)
plus accrued dividends of
$334,652 and $454,513 at December 31, 1998
and March 31, 1999 (unaudited),
respectively; liquidation value of
$6,334,651 and $6,454,512 at
December 31, 1998 and March 31, 1999
(unaudited), respectively
|
|
6,334,651
|
|
|
6,454,512
|
|
Series B
redeemable convertible preferred stock, $0.001 par value
Authorized: 3,737,602 shares;
subscribed and issued and outstanding:
3,287,602 shares at March 31,
1999 (unaudited); liquidation value of
$13,150,408 at March 31, 1999
(unaudited)
|
|
—
|
|
|
13,150,408
|
|
|
Subscriptions
receivable (unaudited)
|
|
—
|
|
|
(9,000,000
|
)
|
|
Preferred
stock warrants
|
|
120,000
|
|
|
120,000
|
|
Redeemable
non-voting, non-convertible preferred stock, $0.001 par value
Authorized: 150,000 and 130,000
shares at December 31, 1998 and March 31,
1999 (unaudited), respectively;
issued and outstanding: 130,000 shares at
December 31, 1998 and March 31,
1999 (unaudited) plus accrued dividends
of $89,468 and $116,001 at
December 31, 1998 and March 31, 1999
(unaudited), respectively;
liquidation value of $1,389,468 and $1,416,001 at
December 31, 1998 and March 31,
1999 (unaudited), respectively
|
|
1,389,468
|
|
|
1,416,001
|
|
| |
|
|
|
|
|
|
|
Total
redeemable preferred stock
|
|
7,844,119
|
|
|
12,140,921
|
|
| |
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
Common stock,
$0.001 par value; 10,000,000 shares authorized;
396,000 shares issued and
outstanding at December 31, 1998 and March
31, 1999 (unaudited)
|
|
396
|
|
|
396
|
|
|
Deficit
accumulated during the development stage
|
|
(9,923,754
|
)
|
|
(11,889,778
|
)
|
| |
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(9,923,358
|
)
|
|
(11,889,382
|
)
|
| |
|
|
|
|
|
|
| Commitments
(Note 14)
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$2,397,330
|
|
|
$825,998
|
|
| |
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Operations
| |
|
For the Period
from Inception
(February 11,
1998) through
December 31, 1998
|
|
(Unaudited)
For the Three Months Ended
March 31,
|
| |
|
|
1998
|
|
1999
|
| Costs and
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
$1,501,267
|
|
|
$235,127
|
|
|
$480,701
|
|
|
Selling and
marketing
|
|
2,425,532
|
|
|
271,723
|
|
|
767,148
|
|
|
General and
administrative
|
|
1,950,153
|
|
|
685,788
|
|
|
355,164
|
|
|
Impairment
charge for intangible assets
|
|
1,312,500
|
|
|
—
|
|
|
—
|
|
|
Settlement
charge
|
|
1,795,333
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Loss from
operations
|
|
(8,984,785
|
)
|
|
(1,192,638
|
)
|
|
(1,603,013
|
)
|
| Interest
expense, net
|
|
(90,430
|
)
|
|
(2,565
|
)
|
|
(156,617
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(9,075,215
|
)
|
|
$(1,195,203
|
)
|
|
$(1,759,630
|
)
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Changes in Redeemable Preferred
Stock and Stockholders’ Deficit
| |
|
Series A Redeemable
Preferred Stock
|
|
Series B Redeemable
Preferred Stock
|
|
Subscriptions
Receivable
|
|
Preferred
Stock Warrants
|
|
Redeemable Non-
voting
Non-convertible
Preferred Stock
|
|
Common stock
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Total
|
| |
|
Shares
|
|
Carrying
Value
|
|
Shares
|
|
Carrying
Value
|
|
|
Carrying
Value
|
|
Shares
|
|
Carrying
Value
|
|
Shares
|
|
Par Value
|
Issuance of
common
stock to founders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,396,000
|
|
|
$1,396
|
|
|
|
|
|
$
1,396
|
|
Issuance of
redeemable
non-voting, non-
convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
$1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Series A
redeemable
convertible
preferred stock,
issuance costs of
$170,752:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial closing
|
|
948,276
|
|
$2,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second closing
|
|
646,551
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third closing
|
|
991,380
|
|
2,299,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(170,752
|
)
|
|
(170,752
|
)
|
Repurchase and
retirement of
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
(1,000
|
)
|
|
(249,000
|
)
|
|
(250,000
|
)
|
Redemption of
redeemable non-
voting, non-
convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
(204,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
redeemable
convertible
preferred stock
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
$120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of
cumulative
dividends on
redeemable
preferred stock
|
|
|
|
334,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,135
|
|
|
|
|
|
|
|
|
(428,787
|
)
|
|
(428,787
|
)
|
| Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,075,215
|
)
|
|
(9,075,215
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December
31, 1998
|
|
2,586,207
|
|
6,334,651
|
|
|
|
|
|
|
|
|
120,000
|
|
130,000
|
|
|
1,389,468
|
|
|
396,000
|
|
|
396
|
|
|
(9,923,754
|
)
|
|
(9,923,358
|
)
|
Issuance of
Series B
redeemable
convertible
preferred stock,
issuance costs of
$60,000
(Unaudited)
|
|
|
|
|
|
3,287,602
|
|
$13,150,408
|
|
$(9,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000
|
)
|
|
(60,000
|
)
|
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited)
|
|
|
|
119,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,533
|
|
|
|
|
|
|
|
|
(146,394
|
)
|
|
(146,394
|
)
|
| Net loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,759,630
|
)
|
|
(1,759,630
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31,
1999 (Unaudited)
|
|
2,586,207
|
|
$ 6,454,512
|
|
3,287,602
|
|
$13,150,408
|
|
$(9,000,000
|
)
|
|
$120,000
|
|
130,000
|
|
|
$1,416,001
|
|
|
396,000
|
|
|
$396
|
|
|
$(11,889,778
|
)
|
|
$(11,889,382
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Cash Flows
| |
|
For the Period
From Inception
(February 11,
1998) Through
December 31, 1998
|
|
(Unaudited)
For the Three Months Ended
March 31,
|
| |
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(9,075,215
|
)
|
|
$(1,195,203
|
)
|
|
$(1,759,630
|
)
|
Adjustments
to reconcile net loss to net cash used for
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
58,537
|
|
|
506
|
|
|
28,522
|
|
|
Amortization
and impairment of intangible assets
|
|
1,500,000
|
|
|
125,000
|
|
|
—
|
|
|
Amortization
of discounts on notes payable
|
|
46,370
|
|
|
—
|
|
|
73,630
|
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
(185,506
|
)
|
|
—
|
|
|
36,140
|
|
|
Other current
assets
|
|
(22,704
|
)
|
|
(54,333
|
)
|
|
2,713
|
|
|
Accounts
payable
|
|
233,281
|
|
|
1,691
|
|
|
(6,593
|
)
|
|
Accrued
expenses
|
|
316,918
|
|
|
126,233
|
|
|
121,261
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
for operating activities
|
|
(7,128,319
|
)
|
|
(996,106
|
)
|
|
(1,503,957
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
| Purchases of
fixed assets
|
|
(410,289
|
)
|
|
(28,543
|
)
|
|
(19,460
|
)
|
| Increase in
deposits
|
|
(136,998
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
for investing activities
|
|
(547,287
|
)
|
|
(28,543
|
)
|
|
(19,460
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
| Proceeds from
issuance of notes payable to stockholders
|
|
4,000,000
|
|
|
—
|
|
|
—
|
|
Proceeds from
Series A redeemable convertible preferred
stock, net of issuance costs
|
|
5,829,247
|
|
|
1,829,248
|
|
|
—
|
|
| Proceeds from
issuance of common stock
|
|
1,396
|
|
|
1,396
|
|
|
—
|
|
Redemption of
non-voting, non-convertible redeemable
preferred stock and related
dividends
|
|
(204,667
|
)
|
|
—
|
|
|
—
|
|
| Repurchase of
common stock
|
|
(250,000
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
9,375,976
|
|
|
1,830,644
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Net increase
(decrease) in cash and cash equivalents
|
|
1,700,370
|
|
|
805,995
|
|
|
(1,523,417
|
)
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
—
|
|
|
1,700,370
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, end of period
|
|
$1,700,370
|
|
|
$805,995
|
|
|
$176,953
|
|
| |
|
|
|
|
|
|
|
|
|
| Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Software
acquired in exchange for 150,000 shares of
non-voting, non-convertible
redeemable preferred
stock
|
|
$1,500,000
|
|
|
$1,500,000
|
|
|
$—
|
|
| |
|
|
|
|
|
|
|
|
|
Conversion of
notes payable to stockholders plus accrued
interest of $150,408 into
1,037,602 shares of Series B
Preferred Stock
|
|
$—
|
|
|
$—
|
|
|
$4,150,408
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Notes to Financial Statements
1. Nature of the
Business
Syncra Software, Inc. (“Syncra” or the “Company
”) was incorporated in Delaware on February 11, 1998.
Syncra was formed to design, develop, produce and market supply
chain collaboration software and solutions. Since its
inception, Syncra has devoted substantially all of its efforts
to business planning, research and development, recruiting
management and technical staff, acquiring operating assets,
raising capital, marketing and business development.
Accordingly, Syncra is considered to be in the development
stage as defined in Statement of Financial Accounting Standards
(“SFAS”) No. 7, “Accounting and Reporting by
Development Stage Enterprises”.
Syncra is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological
changes, growth and commercial acceptances of the Internet,
dependence on principal products and third party technology,
new product development and performance, new product
introductions and other activities of competitors, dependence
on key personnel, development of a distribution channel,
international expansion, lengthy sales cycles and limited
operating history.
2. Summary of
Significant Accounting Policies
|
Cash
and Cash Equivalents
|
Syncra considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be
cash equivalents. Included in cash and cash equivalents at
December 31, 1998 is approximately $1.6 million in money market
accounts.
The
carrying amount of Syncra’s financial instruments,
principally cash, notes payable, and redeemable preferred
stock, approximates their fair values at December 31, 1998.
Fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Repairs
and maintenance costs are expensed as incurred.
|
Research and Development and Software Development Costs
|
Costs incurred in the research and development of Syncra’s
products are expensed as incurred, except for certain research
and development costs. Costs associated with the development of
computer software are expensed prior to the establishment of
technological feasibility, as defined by SFAS No. 86, “
Accounting for the Cost of Computer Software to be Sold, Leased
or Otherwise Marketed.” Costs incurred subsequent to the
establishment of technological feasibility and prior to the
general release of the products are capitalized. During the
period ended December 31, 1998, costs eligible for
capitalization were immaterial.
|
Accounting for Impairment of Long Lived Assets
|
In
accordance with SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of”, the Company records impairment of 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.
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
Syncra accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations.
Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise
prices at least equal to the fair market value of Syncra’s
Common Stock at the date of grant. Syncra has adopted the
provisions of SFAS No. 123, “ Accounting for Stock-Based
Compensation”, through disclosure only (Note 11). All
stock-based awards to non-employees are accounted for at their
fair value in accordance with SFAS No. 123.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
|
Unaudited Interim Financial Statements
|
The
financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited. In the
opinion of Syncra’s management, the March 31, 1998 and
1999 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position and
results of operation for that period. The results of operations
for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations to be expected for the
year ending December 31, 1999.
3. Prepaid Expenses
Prepaid expenses consist of the following at December 31, 1998:
| Trade shows
and other marketing prepayments
|
|
$135,774
|
| Others
|
|
49,732
|
| |
|
|
|
|
|
$185,506
|
| |
|
|
4. Fixed Assets
Fixed assets consist of the following:
| |
|
Estimated
useful life
(years)
|
|
December
31,
1998
|
| Computer
equipment
|
|
3
|
|
$246,631
|
| Office
equipment
|
|
5
|
|
71,783
|
| Furniture and
fixtures
|
|
7
|
|
91,875
|
| |
|
|
|
|
|
|
|
|
|
410,289
|
| Less:
accumulated depreciation
|
|
|
|
58,537
|
| |
|
|
|
|
|
|
|
|
|
$351,752
|
| |
|
|
|
|
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
5. Impairment of
Intangible Assets
In
accordance with SFAS No. 121, Syncra reviews for impairment of
long-lived assets when events or changes in circumstances
indicate that an asset’s carrying value may not be
recoverable. In connection with the organization of Syncra in
February 1998, Syncra purchased the rights to certain software
from Benchmarking Partners, Inc. (“Benchmarking”) in
exchange for the issuance of 150,000 shares of Syncra’s
non-voting, non-convertible Redeemable Preferred Stock (Note
8). Syncra did not obtain an independent valuation of the
technology and the fair value of the Redeemable Preferred Stock
was not objectively determinable. Therefore, Syncra recorded
the technology based upon the amount of the Redeemable
Preferred Stock as determined by Syncra’s Board of
Directors. Syncra expected to use the acquired software as a
core technology in its product development. In May 1998,
management reassessed the status of Syncra’s product
development and the additional features and functionality
planned to be included in Syncra’s products. As a result
of this re-evaluation, management concluded that the core
technology acquired from Benchmarking would not be able to
support Syncra’s planned products. Accordingly, management
decided to restart Syncra’s product development activities
without the use of the acquired software. An impairment charge
of $1,312,500 was recognized in the December 31, 1998 statement
of operations.
6. Notes Payable to
Stockholders
During 1998, the Company received aggregate cash proceeds
totaling $4,000,000 pursuant to the issuance of convertible
promissory notes (the “Notes”) payable to certain of
its stockholders. No repayments of principal or interest (which
accrues at a rate of 9% per annum) were made during the year.
The Note holders were also issued 344,828 warrants to purchase
Series A Preferred Stock (“Preferred Stock Warrants”)
at $2.32 per share in 1998. The aggregate value of the
Preferred Stock Warrants issued to all Note holders was
estimated to be $120,000, which was accounted for as discount
on the Notes and Preferred Stock Warrants. The discount is
being amortized over the term of the Notes. Upon closing of the
Series B Preferred Stock financing, each Note holder is
entitled to a number of warrants equal to 20% of the face value
of the Note held by such holder divided by the price per share
of Series B Preferred Stock. As a result of the Series B
Preferred Stock financing in 1999, the Notes were converted
into shares of Series B Preferred Stock. Additionally, the
Preferred Stock Warrants were converted to the equivalent
number of warrants for Series B Preferred Stock totaling
200,000 shares at $4.00 per share (Note 7). The Preferred Stock
Warrants have a term of ten years.
7. Redeemable
Convertible Preferred Stock
At
December 31, 1998, the Company had authorized preferred stock
of 5,000,000 shares, $.001 par value per share, of which
2,941,031 shares were designated as redeemable convertible
Series A Preferred Stock (“Series A Preferred Stock”)
and 150,000 shares of which were designated as Redeemable
Preferred Stock (the “Redeemable Preferred Stock”).
On
March 31, 1999, the Company’s authorized Preferred Stock
was increased to 6,453,809 shares with a par value of $.001 per
share of which 2,586,207 shares were designated as redeemable
convertible Series A Preferred Stock, 3,737,602 shares as
redeemable convertible Series B Preferred Stock (“Series B
Preferred Stock”) and 130,000 shares as Redeemable
Preferred Stock. Of the designated Series B Preferred Stock,
the Company issued 3,287,602 shares on March 31, 1999 in
exchange for net cash proceeds of $9.0 million received on
April 1, 1999 and the conversion of all principal and accrued
interest due on the Notes (Note 6).
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
The Series A and B Preferred Stock have the following
characteristics:
Holders of Series A and B Preferred Stock are entitled to that
number of votes equal to the number of shares of common stock
into which the shares of Series A and B Preferred Stock are
then convertible.
Holders of Series A and B Preferred Stock are entitled to
receive out of funds legally available, cumulative dividends at
the rate of 8% per share per annum on the Base Amount of each
share. The Base Amount of each share is equal to the price paid
for each share of Series A and B Preferred Stock of $2.32 and
$4.00, respectively, plus unpaid dividends which accrue
commencing on the date of original issuance of the Series A and
B Preferred Stock. In the event that the full amount of
dividends is not paid in any twelve-month period, the Base
Amount will be increased by the amount of the unpaid dividend.
After payment of all dividends owing to the holders of Series A
and B Preferred Stock, such holders will not participate in any
other dividends thereafter paid on Redeemable Preferred Stock
or Common Stock.
In
the event of any liquidation, dissolution or winding-up of the
affairs of the Company, the holders of Series A and B Preferred
Stock are entitled to receive, prior to and in preference to
holders of both Redeemable Preferred Stock and Common Stock, an
amount equal to $2.32 and $4.00 per share, respectively, plus
all unpaid cumulative dividends on each share. After full
payment of (i) the foregoing amounts and (ii) amounts to be
paid to the holders of Redeemable Preferred Stock pursuant to
the terms thereof (Note 8), the remaining assets of the Company
will be distributed ratably among the holders of Common Stock.
Each share of Series A and B Preferred Stock may be converted
at any time, at the option of the stockholder, into one share
of Common Stock, subject to certain anti-dilution adjustments,
as defined in the terms of the Series A and B Preferred Stock.
The
Series A and B Preferred Stock will automatically convert into
shares of Common Stock upon (i) a public offering of Syncra
’s Common Stock which results in gross proceeds to Syncra
of at least $10,000,000, at a price per share of the Common
Stock of at least three times the Series B Preferred Stock
original purchase price per share (as adjusted for stock
splits, stock dividends, combinations, reorganizations,
reclassifications or similar events) or (ii) upon approval of
the two-thirds of the outstanding Series A and B Preferred
Stockholders, voting separately, to convert all outstanding
shares of Series A and B Preferred Stock to Common Stock.
Any
time after March 31, 2004, at the option of the holders of the
Series A and B Preferred Stock, Syncra shall redeem all, but
not less than all of such holder’s shares of Series A and
B Preferred Stock, at a redemption price equal to the original
purchase price of $2.32 and $4.00 per share, respectively, plus
all unpaid dividends thereon which have accrued through and
including the redemption date.
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
The
issuance cost incurred by the Company was accreted in full in
1998 and at March 31, 1999 as an adjustment to the carrying
value of redeemable convertible Series A and B Preferred Stock.
8. Non-voting,
Non-convertible Redeemable Preferred Stock
As
described in Note 5, Syncra’s Redeemable Preferred Stock
was issued in a non-cash exchange with Benchmarking for certain
software. Subsequent to the issuance of the Redeemable
Preferred Stock to Benchmarking, Syncra repurchased 20,000
shares of its Redeemable Preferred Stock from Benchmarking at a
price per share of $10.00 plus accrued dividends of $4,667. In
a separate transaction, Benchmarking transferred the remaining
130,000 shares of the Redeemable Preferred Stock to Internet
Capital Group, Inc. (“ICG”), an existing stockholder
of Syncra in exchange for a $1.3 million note, bearing interest
at 8% per annum. At December 31, 1998, ICG continued to hold
the 130,000 shares of Redeemable Preferred Stock. ICG is also a
stockholder of Benchmarking.
The
Redeemable Preferred Stock has the following characteristics:
Except as required by law, holders of Redeemable Preferred
Stock are not entitled to vote on any matters submitted to a
vote of the stockholders of Syncra, including the election of
directors.
Holders of Redeemable Preferred Stock are entitled to receive
out of funds legally available, cumulative dividends at the
rate of 8% per share per annum on the Base Amount of each
share. The Base Amount of each share is equal to purchase price
paid for such share of Redeemable Preferred Stock ($10.00) plus
unpaid dividends which accrue commencing on the date of
original issuance of the Redeemable Preferred Stock. In the
event that the full amount of dividends is not paid in any
twelve- month period, the Base Amount will be increased by the
amount of the unpaid dividends. After payment of all dividends
owing to the holders of Redeemable Preferred Stock, such
holders will not participate in any other dividends thereafter
paid on the Series A and B Preferred Stock or the Common Stock.
In
the event of any liquidation, dissolution or winding-up of the
affairs of Syncra, the holders of Redeemable Preferred Stock
are entitled to receive, prior to and in preference to any
holders of Common Stock, but after all distribution or payments
required to be made to the holders of Series A and B Preferred
Stock, an amount equal to $10.00 per share plus accrued but
unpaid dividends. After payment in full of the amounts owed to
holders of the Redeemable Preferred Stock, such holders are not
entitled to share in the distribution of the remaining assets
of Syncra.
At
any time after March 31, 2004, each holder may require Syncra
to redeem all or any portion of such holder’s shares at a
redemption price equal to the original issuance price per share
($10.00) plus all unpaid dividends thereon which have accrued
through and including the redemption date.
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
At any time, and from time to time, Syncra may elect to redeem
all, or any portion of the outstanding shares of its Redeemable
Preferred Stock, at a redemption price equal to the original
issuance price per share ($10.00) plus all unpaid dividends
thereon which have accrued through and including the redemption
date.
Redeemable Preferred Stock is also redeemable by Syncra upon
the earlier of (i) a public offering of Syncra’s Common
Stock which results in gross proceeds to Syncra of at least
$10,000,000, at a price per share of the Common Stock of at
least three times the Series B Preferred Stock original
purchase price per share (as adjusted for stock splits, stock
dividends, combinations, reclassifications, reorganizations or
other similar events); or (ii) the consummation of a sale of
all or substantially all of Syncra’s assets or capital
stock, either through a direct sale, merger, reorganization or
other form of business combination in which control of Syncra
is transferred and as a result holders of Series A and B
Preferred Stock receive at least three times the Series B
Preferred Stock original purchase price per share (as adjusted
for stock splits, stock dividends, combination,
reorganizations, reclassifications or other similar events).
9. Common Stock
Each share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of Syncra’s stockholders.
Common stockholders are entitled to receive dividends, if any,
as may be declared by the Board of Directors, subject to the
preferential dividend rights of the holders of the Series A and
B Preferred Stock and the Redeemable Preferred Stock.
|
Restricted Stock Agreements
|
Syncra has entered into agreements with certain of its employee
stockholders providing for restrictions on transfers of the
shares subject to such agreement. Each agreement provides
Syncra with a right to repurchase the shares held by such
individual, in the event that the Company terminates the
employment of the individual. The number of shares which may be
repurchased by the Company and the price at which such shares
may be repurchased differs per individual and is contingent on
whether such individual’s termination is for ‘cause
’ (as defined in the agreement) or other than for ‘
cause’. At December 31, 1998, none of the restricted
shares were subject to repurchase due to the restrictions
contained in these agreements.
Pursuant to a stockholders’ agreement, as amended and
restated on March 31, 1999, all of the outstanding capital
stock (including the Common Stock, Series A and B Preferred
Stock and Redeemable Preferred Stock) of the Company is subject
to certain restrictions as to sale or transfer of such shares
pursuant to a stockholders’ agreement. The Company and its
non-founder stockholders also hold rights of first refusal,
under certain circumstances, on shares offered by a stockholder
for sale to third parties, at the price per share to be paid by
such third party.
At
December 31, 1998, 2,833,857 shares were reserved for issuance
upon conversion of the Series A Preferred Stock and exercise of
outstanding options.
10. Repurchase of
Common Stock and Redemption of Preferred Stock
On
June 5, 1998, the Company repurchased 1,000,000 shares of
Common Stock and redeemed 20,000 shares of its Redeemable
Preferred Stock from Benchmarking, one of the original founders
in exchange for $2,250,000. The transaction was financed
through the sale of additional Series A Preferred Stock to
certain of the existing holders of Series A Preferred Stock. Of
the 150,000 shares of Redeemable Preferred Stock originally
issued to Benchmarking, the remaining 130,000 shares were
transferred by Benchmarking to ICG (see Note 8).
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
In addition to the shares acquired, the withdrawal of
Benchmarking as a stockholder eliminated a potential conflict
of interest for Syncra and its other stockholders with
Benchmarking and its customers. The transaction also settled
potential claims by Benchmarking against Syncra with respect to
the transfer of technical talent from Benchmarking to Syncra
and other potential claims by Benchmarking against the
potential future value of Syncra.
The
difference between the total amount paid to Benchmarking and
the aggregate of the redemption value of the Redeemable
Preferred Stock plus accrued dividends of $204,667 and the fair
value of the Common Stock of $250,000 was treated as settlement
charge in the statement of operations.
11. Stock Option Plan
In
1998, the Company adopted the 1998 Stock Option Plan (the “
1998 Plan”) which provides for the grant of incentive
stock options and non-qualified stock options, stock awards and
stock purchase rights for the purchase of up to 1,000,000
shares of the Company’s Common Stock by officers,
employees, consultants, and directors of the Company. The Board
of Directors is responsible for administration of the 1998
Plan. The Board determines the term of each option, the option
exercise price, the number of shares for which each option is
granted, the rate at which each option is exercisable and the
vesting period (generally ratably over four to five years).
Incentive stock options may be granted to any officer or
employee at an exercise price of not less than the fair value
per common share on the date of the grant (not less than 110%
of the fair value in the case of holders of more than 10% of
the Company’s voting stock) and with a term not to exceed
ten years from the date of the grant (five years for incentive
stock options granted to holders of more than 10% of the Company
’s voting stock). Non-qualified stock options may be
granted to any officer, employee, consultant, or director at an
exercise price per share of not less than the book value per
share.
During the period from inception (February 11, 1998) through
December 31, 1998, Syncra granted options aggregating 803,300
shares with a weighted average exercise price of $0.87 per
share. Of the total options granted, 99,374 shares were
exercisable at December 31, 1998. None of these vested options
were exercised during the period. Options totaling 196,700 were
available for future grant at December 31, 1998. The
weighted-average remaining contractual life of the options
outstanding is 9.5 years. No compensation expense has been
recognized for employee stock-based compensation in 1998.
The
exercise price of the options is more than the fair market
value of the common stock, therefore, the weighted average
grant date fair value per share of the options granted during
the year using the Black-Scholes option-pricing model is zero
at December 31, 1998. As a result, had compensation expense
been determined based on the fair value of the options granted
to employees at the grant date consistent with the provision of
SFAS No. 123, the Company’s pro forma net loss would have
been the same. The impact on the pro forma net loss is not
necessarily indicative of the effects on future results of
operations because the Company expects to grant options in
future years.
For
purposes of pro forma disclosure of net loss, the fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions for grants in 1998; zero dividend yield; zero
volatility; risk-free interest rate of 4.55%, and expected life
of five years.
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
12. Income Taxes
Deferred tax assets consist of the following at December 31,
1998:
| Net operating
loss carryforward
|
|
$2,386,619
|
| Fixed and
intangible assets
|
|
482,690
|
| Research and
development credit carryforwards
|
|
90,891
|
| Accrued
vacation
|
|
35,687
|
| |
|
|
| Net deferred
tax assets
|
|
2,995,887
|
| Deferred tax
asset valuation allowance
|
|
2,995,887
|
| |
|
|
|
|
|
$
—
|
| |
|
|
The
Company has provided a valuation allowance for the full amount
of its net deferred tax assets since realization of any future
benefit from deductible temporary differences and net operating
loss and tax credit carryforwards cannot be sufficiently
assured at December 31, 1998.
At
December 31, 1998, the Company has federal and state net
operating loss carryforwards of approximately $5.9 million
available to reduce future taxable income, which will expire in
2019. The Company also has federal and state research and
development tax credit carryforwards of approximately $72,490
and $27,881, respectively, available to reduce future tax
liabilities.
Under the provisions of the Internal Revenue Code, certain
substantial changes in the Company’s ownership may limit
the amount of net operating loss carryforwards and research and
development credit carryforwards which could be utilized
annually to offset future taxable income and taxes payable.
13. 401(K) Savings Plan
The
Company has established a retirement savings plan under Section
401(k) of the Internal Revenue Code (the “401(k) Plan”
). The 401(k) Plan covers substantially all employees of the
Company who meet minimum age and service requirements, and
allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the
401(k) Plan may be made at the discretion of the Board of
Directors. The Company has not made any contributions to the
401(k) Plan through December 31, 1998.
14. Commitments
The
Company leases its office space and certain office equipment
under noncancelable operating leases. Total rent expense under
these operating leases was approximately $134,000 for the
period ended December 31, 1998.
Future minimum lease commitments at December 31, 1998 are as
follows:
| Year
ending December 31,
|
|
Operating
Leases
|
|
1999
|
|
$
272,328
|
|
2000
|
|
254,728
|
|
2001
|
|
254,728
|
|
2002
|
|
254,728
|
|
Thereafter
|
|
127,364
|
| |
|
|
|
|
|
$1,163,876
|
| |
|
|
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
15. Related Party
Transactions
In
the normal course of business, Syncra had transactions with
Benchmarking during the period from inception until May 1998
for certain operating expenses such as organizational costs,
payroll, marketing, legal and other expenses. The total
expenses reimbursed by Syncra to Benchmarking amounted to
$496,344. Furthermore, Syncra also paid Benchmarking a
management fee totaling $80,000 during the same period.
In
addition to the above transactions, Syncra also reimbursed ICG
$500,000 related to professional services provided by
Benchmarking to Syncra that originally were funded by ICG.
16. Subsequent Events
In
April 1999, Syncra issued 250,000 shares of Series B Preferred
Stock for $1.0 million to a new investor.
Independent Auditors’ Report
The Board of Directors and Stockholders
United Messaging, Inc.:
We
have audited the accompanying balance sheet of United
Messaging, Inc. (a development-stage enterprise) as of December
31, 1998, and the related statements of operations, stockholders
’ deficit and cash flows for the period from August 25,
1998 (inception) to December 31, 1998. 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
United Messaging, Inc. (a development stage enterprise) as of
December 31, 1998, and the results of its operations and its
cash flows for the period August 25, 1998 (inception) to
December 31, 1998, in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania
July 6, 1999
(a development-stage enterprise)
BALANCE SHEETS
December 31, 1998 (Audited) and March 31,
1999 (Unaudited)
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
| Current
assets:
|
|
Cash
|
|
$
613
|
|
|
$
1,909
|
|
|
Prepaid
expenses
|
|
917
|
|
|
641
|
|
|
Due from
employees
|
|
—
|
|
|
27,969
|
|
| |
|
|
|
|
|
|
|
Total current
assets
|
|
1,530
|
|
|
30,519
|
|
Property and
equipment, net of accumulated depreciation of $1,572 and
$2,682,
respectively (note 2)
|
|
19,192
|
|
|
20,241
|
|
| |
|
|
|
|
|
|
| Total assets
|
|
$
20,722
|
|
|
$
50,760
|
|
| |
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
| Current
liabilities:
|
|
Accounts
payable
|
|
$
6,973
|
|
|
$
16,612
|
|
|
Accrued
expenses
|
|
53,669
|
|
|
125,005
|
|
|
Due to
employees
|
|
10,882
|
|
|
23,614
|
|
|
Advances from
stockholder (note 4)
|
|
53,197
|
|
|
84,945
|
|
| |
|
|
|
|
|
|
|
Total
liabilities
|
|
124,721
|
|
|
250,176
|
|
| Stockholders
’ Deficit (note 4):
|
Preferred
stock—Series A non-voting, authorized 250,000, $1 par
value, no
shares issued
|
|
—
|
|
|
—
|
|
Preferred
stock—Series B non-voting, authorized 250,000, $1 par
value, no
shares issued
|
|
—
|
|
|
—
|
|
Common stock,
authorized 9,500,000 shares, $.001 par value, 2,066,677
shares issued and outstanding
at December 31, 1998 and 3,333,350 at
March 31, 1999
|
|
2,067
|
|
|
3,333
|
|
|
Additional
paid-in capital
|
|
—
|
|
|
11,402
|
|
|
Deficit
accumulated during the development stage
|
|
(106,066
|
)
|
|
(214,151
|
)
|
| |
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(103,999
|
)
|
|
(199,416
|
)
|
| |
|
|
|
|
|
|
| Total
liabilities and stockholders’ deficit
|
|
$
20,722
|
|
|
$
50,760
|
|
| |
|
|
|
|
|
|
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Operations
Period from August 25, 1998 (Inception)
through December 31, 1998 (Audited),
the three months ended March 31, 1999
(Unaudited), and
the period from August 25, 1998
(Inception) through March 31, 1999 (Unaudited)
| |
|
(Audited)
|
|
|
|
(Unaudited)
|
| |
|
Period From
August 25, 1998
(Inception) Through
December 31, 1998
|
|
(Unaudited)
Three Months
Ended
March 31, 1999
|
|
Period From
August 25, 1998
(Inception) Through
March 31, 1999
|
| Revenues
|
|
$
—
|
|
|
$
—
|
|
|
$
—
|
|
| |
| Expenses
incurred in the development stage:
|
|
Selling and
marketing
|
|
69,429
|
|
|
51,952
|
|
|
121,381
|
|
|
Operations
|
|
20,940
|
|
|
46,469
|
|
|
67,409
|
|
|
Administration
|
|
14,125
|
|
|
8,554
|
|
|
22,679
|
|
|
Depreciation
|
|
1,572
|
|
|
1,110
|
|
|
2,682
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
106,066
|
|
|
108,085
|
|
|
214,151
|
|
| |
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(106,066
|
)
|
|
$(108,085
|
)
|
|
$(214,151
|
)
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Stockholders’ Deficit
Period from August 25, 1998 (Inception)
through December 31, 1998 (Audited)
and the three months ended March 31, 1999 (Unaudited)
| |
|
Series A
Preferred
Stock
|
|
Series B
Preferred
Stock
|
|
Common
Stock
(Shares)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Deficit
|
Balance,
August 25, 1998
(Inception)
|
|
$—
|
|
$—
|
|
—
|
|
$—
|
|
$—
|
|
$—
|
|
|
$—
|
|
| Issuance of
common stock
|
|
—
|
|
—
|
|
2,066,677
|
|
2,067
|
|
—
|
|
—
|
|
|
2,067
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(106,066
|
)
|
|
(106,066
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
—
|
|
—
|
|
2,066,677
|
|
2,067
|
|
—
|
|
(106,066
|
)
|
|
(103,999
|
)
|
| Issuance of
common stock
|
|
—
|
|
—
|
|
1,266,673
|
|
1,266
|
|
11,402
|
|
—
|
|
|
12,668
|
|
| Net loss
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(108,085
|
)
|
|
(108,085
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 1999
(Unaudited)
|
|
$
—
|
|
$—
|
|
3,333,350
|
|
$3,333
|
|
$11,402
|
|
$(214,151
|
)
|
|
$(199,416
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Cash Flows
Period from August 25, 1998 (Inception)
through December 31, 1998 (Audited),
the three months ended March 31, 1999
(Unaudited), and
the period from August 25, 1998
(Inception) through March 31, 1999 (Unaudited)
| |
|
(Audited)
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
Period From
August 25, 1998
(Inception) Through
December 31,
1998
|
|
Three Months
Ended
March 31,
1999
|
|
Period From
August 25, 1998
(Inception) Through
March 31,
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(106,066
|
)
|
|
$(108,085
|
)
|
|
$(214,151
|
)
|
Adjustments to reconcile net loss to net
cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
1,572
|
|
|
1,110
|
|
|
2,682
|
|
|
Increase
(decrease) in cash due to changes in:
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
(917
|
)
|
|
276
|
|
|
(641
|
)
|
|
Due from employees
|
|
—
|
|
|
(27,969
|
)
|
|
(27,969
|
)
|
|
Accounts payable
|
|
6,973
|
|
|
9,639
|
|
|
16,612
|
|
|
Accrued expenses
|
|
53,669
|
|
|
71,336
|
|
|
125,005
|
|
|
Due to employees
|
|
10,882
|
|
|
12,732
|
|
|
23,614
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
(33,887
|
)
|
|
(40,961
|
)
|
|
(74,848
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(20,764
|
)
|
|
(2,159
|
)
|
|
(22,923
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing activities
|
|
(20,764
|
)
|
|
(2,159
|
)
|
|
(22,923
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
—
|
|
|
14,735
|
|
|
14,735
|
|
|
Advances from stockholder
|
|
55,264
|
|
|
29,681
|
|
|
84,945
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
55,264
|
|
|
44,416
|
|
|
99,680
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase
in cash
|
|
613
|
|
|
1,296
|
|
|
1,909
|
|
| Cash,
beginning of period
|
|
—
|
|
|
613
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash, end of
period
|
|
$
613
|
|
|
$1,909
|
|
|
$1,909
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1998 (Audited) and March 31,
1999 (Unaudited)
(1) Summary of
Significant Accounting Policies
(a) Description of Business
United Messaging, Inc. (the Company) was incorporated in
Delaware on August 25, 1998 (inception), for the purpose of
becoming the premier worldwide provider of electronic messaging
networks.
Since inception, the Company has been engaged principally in
organizational activities, including raising capital,
recruiting a management team and employees, executing
agreements, negotiating strategic relationships, and developing
operational plans and marketing activities. Accordingly, the
Company is in the development stage, as defined by the
Statement of Accounting Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage Enterprises.
(b) Unaudited Interim Financial Information
The
interim financial statements of the Company for the three
months ended March 31, 1999 and the period August 25, 1998
(inception) through March 31, 1999, included herein have been
prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principals 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
adjustments, consisting only of normal, recurring adjustments,
necessary to present fairly the financial position of the
Company at March 31, 1999, and the results of its operations
and its cash flows for the three months ended March 31, 1999
and the period August 25, 1998 (inception) to March 31, 1999.
(c) Financial Instruments
The
Company’s financial instruments principally consist of
cash and accounts payable. Cash and accounts payable are
carried at cost which approximates fair value because of the
short maturity of these instruments.
(d) Property and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation.
Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets as follows:
| Software
|
|
3 years
|
| Computer
equipment
|
|
5 years
|
(e) Long-Lived Assets
In
accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets to be
Disposed Of
,
the Company periodically evaluates the carrying value of
long-lived assets when events and circumstances warrant such
review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized in the amount by
which the carrying value exceeds the fair market value of the
long-lived asset. The Company has identified no such impairment
losses.
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
December 31, 1998 (Audited) and March 31,
1999 (Unaudited)
(f) Income Taxes
The
Company has elected under the
Internal Revenue Code
to
be an S corporation for federal income tax purposes. In lieu of
corporate income taxes, the stockholders of an S corporation
are taxed on their proportionate share of the Company’s
taxable income or are allocated a portion of the Company’s
net operating loss. Therefore, no provision or liability for
federal income taxes has been included in the financial
statements.
The
Company is not an S corporation for state income tax purposes
and, therefore, is responsible for state income taxes and
liabilities. Due to the Company’s net operating losses, no
state income tax has been provided. At December 31, 1998 and
March 31, 1999, management has established a valuation
allowance of approximately $9,000 and $19,000 as of December
31, 1998 (audited) and March 31, 1999 (unaudited) to eliminate
the state deferred tax asset arising from the state net
operating loss carry forward, which total approximately $9,000
and $19,000 as of December 31, 1998 (audited) and March 31,
1999 (unaudited) and expire in 2008.
On
May 21, 1999 in connection with the sale of Series A
convertible preferred stock (note 4) the Company’s S
corporation status for federal income taxes was terminated.
Therefore, subsequent to that date, the Company is responsible
for both federal and state income tax liabilities.
(g) 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.
(2) Property and
Equipment
A
summary of property and equipment is as follows:
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December
31,
1998
|
|
March
31,
1999
|
| Computer
equipment
|
|
$20,764
|
|
$22,923
|
| Less:
accumulated depreciation
|
|
1,572
|
|
2,682
|
| |
|
|
|
|
| Property and
equipment, net
|
|
$19,192
|
|
$20,241
|
| |
|
|
|
|
(3) Accrued Expenses
Accrued expenses consist of the following:
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December
31,
1998
|
|
March
31,
1999
|
| Employee
compensation and related taxes
|
|
$40,739
|
|
$109,781
|
| Other
|
|
12,930
|
|
15,224
|
| |
|
|
|
|
|
|
|
$53,669
|
|
$125,005
|
| |
|
|
|
|
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
December 31, 1998 (Audited) and March 31,
1999 (Unaudited)
(4) Capital Structure
As
of December 31, 1998 and March 31, 1999, the capital structure
of the Company consisted of one class of Common voting stock
and two classes of Preferred stock, series A non-voting stock
and series B non-voting convertible stock.
On
February 1, 1999, the Company issued 1,266,670 shares of common
stock to founding employees of the Company at fair market value
of $.01 per share as determined by the Board, given the
development stage of the Company.
On
May 10, 1999, the Company increased the authorized shares of
common stock from 1,000,000 to 9,500,000, cancelled the 250,000
authorized shares of Preferred A non-voting stock and the
250,000 shares of Preferred B non-voting stock, and authorized
4,500,000 shares of preferred stock with a par value of $.001
per share. Additionally, the Company declared a thousand for
one stock split for all common stock outstanding, and
accordingly the par value changed from $1 per share to $.001
per share. Share information as of and for the period August
25, 1998 through December 31, 1998 and as of and for the three
months ended March 31, 1999, retroactively reflects these
changes.
On
May 21, 1999, the Company sold 4,500,000 shares of Series A
convertible preferred stock at a price of $1.25 per share,
resulting in proceeds to the Company of $5,625,000. Each share
of Series A convertible preferred stock is convertible at the
option of the holder into common stock at $1.25 per share
subject to certain adjustments of the conversion price. The
holders of the Series A convertible preferred stock are
entitled to receive dividends at a rate of $0.08 per share.
Such dividends are payable when declared by the Board of
Directors and are not cumulative.
In
the event of liquidation of the Company, the holders of Series
A convertible preferred stock are also entitled to receive
$1.25 per share (adjusted for stock dividends, combinations, or
splits) for each share of Series A preferred prior to and in
preference to any distribution to holders of common stock.
On
June 30, 1999, the board of directors granted to certain
officers and employees of the Company options to purchase
566,500 shares of common stock at an exercise price of $.125
per share. The options vest over a four year period.
(5) Related-Party
Transactions
A
stockholder has advanced funds and paid expenses on behalf of
the Company which are recorded as an advance from stockholder
in the balance sheet. Such amounts are noninterest bearing and
unsecured.
The
Company’s operating facilities are located in Malvern,
Pennsylvania. During the period from inception through March
31, 1999, the Company occupied an office building partially
owned by the sole stockholder. The Company incurred no rent
expense in 1998.
(6) Subsequent Events
On
April 9, 1999, the Company borrowed $400,000 from an investor
payable May 26, 1999, with interest at 5% thereafter. The
borrowing is in the form of a convertible promissory note,
convertible into Series A preferred stock. The borrowing was
repaid in May 1999 in conjunction with the issuance of Series A
convertible preferred stock (note 4).
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
December 31, 1998 (Audited) and March 31,
1999 (Unaudited)
On April 22, 1999, the Company entered into a lease for a
commercial office building in Pennsylvania, which is partially
owned by a stockholder. The lease is for one year beginning May
1, 1999, with an annual rent of $88,800. Also, in April 1999,
the Company entered into a one-year lease for an office
facility in Virginia beginning May 1, 1999, and a lease for an
operating facility in Pennsylvania beginning June 1, 1999, and
ending December 31, 2002.
Future annual minimum lease payments for noncancellable
operating leases are as follows:
Year Ended
December 31,
|
|
|
| 1999
|
|
$115,788
|
| 2000
|
|
135,206
|
| 2001
|
|
110,834
|
| 2002
|
|
116,922
|
Report of Independent Accountants
To the Board of Directors and
Shareholders of Universal Access, Inc.:
In our opinion, the accompanying balance sheets
and the related statements of operations, of cash flows and of
stockholders’ deficit present fairly, in all material
respects, the financial position of Universal Access, Inc. (the
Company) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from October 2,
1997 (date of inception) to December 31, 1997 and the year
ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company’s management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/S
/ PRICEWATERHOUSE
COOPERS
LLP
Chicago, Illinois
April 6, 1999, except as to Note 2,
which is as of June 23, 1999
Balance Sheets
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December 31,
1997
|
|
December 31,
1998
|
|
March 31,
1999
|
| ASSETS
|
|
|
|
|
|
|
|
|
|
| Current
assets:
|
|
Cash and cash
equivalents
|
|
$
1,000
|
|
|
$
844,000
|
|
|
$5,570,000
|
|
|
Accounts
receivable, net
|
|
44,000
|
|
|
657,000
|
|
|
1,271,000
|
|
|
Prepaid
expenses and other current assets
|
|
—
|
|
|
15,000
|
|
|
217,000
|
|
|
Security
deposits
|
|
54,000
|
|
|
85,000
|
|
|
113,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
99,000
|
|
|
1,601,000
|
|
|
7,171,000
|
|
| Restricted
cash
|
|
—
|
|
|
149,000
|
|
|
134,000
|
|
| Property and
equipment, net
|
|
1,000
|
|
|
219,000
|
|
|
263,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
100,000
|
|
|
$1,969,000
|
|
|
$7,568,000
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
| Current
liabilities:
|
|
Accounts
payable
|
|
$
56,000
|
|
|
$
577,000
|
|
|
$
334,000
|
|
|
Accrued
expenses and other current liabilities
|
|
2,000
|
|
|
75,000
|
|
|
278,000
|
|
|
Unearned
revenue, net
|
|
—
|
|
|
381,000
|
|
|
625,000
|
|
|
Notes payable
—shareholders
|
|
76,000
|
|
|
126,000
|
|
|
100,000
|
|
|
Short-term
borrowings
|
|
—
|
|
|
—
|
|
|
500,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
134,000
|
|
|
1,159,000
|
|
|
1,837,000
|
|
| Note payable
|
|
—
|
|
|
149,000
|
|
|
134,000
|
|
| Commitments
and contingencies (Note 6)
|
Redeemable
cumulative convertible Series A Preferred Stock, no par
value; 1,000,000 shares
authorized at December 31, 1998 and
March 31, 1999; 335,334 and
772,331 shares issued and outstanding
plus accrued dividends of $20,000
and $37,000 (liquidation value of
$903,000 and $2,039,000) at
December 31, 1998 and March 31,
1999, respectively
|
|
—
|
|
|
903,000
|
|
|
2,039,000
|
|
| Redeemable
cumulative convertible Series A Preferred Stock warrants
|
|
—
|
|
|
36,000
|
|
|
83,000
|
|
| Unissued
redeemable cumulative convertible Series A Preferred Stock
|
|
—
|
|
|
1,004,000
|
|
|
—
|
|
Redeemable
cumulative convertible Series B Preferred Stock, no par
value; 2,000,000 shares
authorized, issued and outstanding plus
accrued dividends of $50,000
(liquidation value of $4,613,000) at
March 31, 1999—unaudited
|
|
—
|
|
|
—
|
|
|
4,613,000
|
|
Redeemable
cumulative convertible Series B Preferred Stock
warrants—unaudited
|
|
—
|
|
|
—
|
|
|
1,197,000
|
|
| Stockholders
’ deficit:
|
Common stock,
no par value; 15,000,000, 150,000,000 and
150,000,000 shares authorized
at December 31, 1997,
December 31, 1998 and March 31,
1999, respectively;
11,899,500, 15,150,000 and
15,300,000 shares issued and
outstanding at December 31,
1997, December 31, 1998 and
March 31, 1999, respectively
|
|
136,000
|
|
|
225,000
|
|
|
225,000
|
|
|
Common stock
warrants
|
|
—
|
|
|
—
|
|
|
13,000
|
|
|
Additional
paid-in-capital
|
|
—
|
|
|
487,000
|
|
|
518,000
|
|
|
Deferred
stock option plan compensation
|
|
—
|
|
|
(422,000
|
)
|
|
(394,000
|
)
|
|
Accumulated
deficit
|
|
(170,000
|
)
|
|
(1,572,000
|
)
|
|
(2,697,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(34,000
|
)
|
|
(1,282,000
|
)
|
|
(2,335,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$100,000
|
|
|
$1,969,000
|
|
|
$7,568,000
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Statements of Operations
| |
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
From
Inception to
December 31,
1997
|
|
For the
Year Ended
December 31,
1998
|
|
For the
Three Month
Period Ended
March 31,
1998
|
|
For the
Three Month
Period Ended
March 31,
1999
|
| Revenues:
|
|
Access
|
|
$
77,000
|
|
|
$1,589,000
|
|
|
$168,000
|
|
|
$1,508,000
|
|
|
Co-location
|
|
—
|
|
|
40,000
|
|
|
—
|
|
|
23,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
77,000
|
|
|
$1,629,000
|
|
|
168,000
|
|
|
1,531,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Cost of
revenues
|
|
66,000
|
|
|
1,256,000
|
|
|
125,000
|
|
|
1,286,000
|
|
|
Operations
and administration
|
|
180,000
|
|
|
1,516,000
|
|
|
135,000
|
|
|
1,175,000
|
|
|
Depreciation
|
|
—
|
|
|
47,000
|
|
|
—
|
|
|
24,000
|
|
|
Stock option
plan compensation
|
|
—
|
|
|
65,000
|
|
|
—
|
|
|
28,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
246,000
|
|
|
2,884,000
|
|
|
260,000
|
|
|
2,513,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(169,000
|
)
|
|
(1,255,000
|
)
|
|
(92,000
|
)
|
|
(982,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other income
and expense:
|
|
Interest
expense
|
|
(1,000
|
)
|
|
(27,000
|
)
|
|
(2,000
|
)
|
|
(3,000
|
)
|
|
Interest
income
|
|
—
|
|
|
8,000
|
|
|
—
|
|
|
2,000
|
|
|
Other expense
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
income and expenses
|
|
(1,000
|
)
|
|
(119,000
|
)
|
|
(2,000
|
)
|
|
(1,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
(170,000
|
)
|
|
(1,374,000
|
)
|
|
(94,000
|
)
|
|
(983,000
|
)
|
Accretion and
dividends on redeemable cumulative
convertible preferred stock
|
|
—
|
|
|
(28,000
|
)
|
|
—
|
|
|
(142,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
applicable to common stockholders
|
|
$(170,000
|
)
|
|
$(1,402,000
|
)
|
|
$(94,000
|
)
|
|
$(1,125,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Statements of Cash Flows
| |
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
From
Inception to
December 31,
1997
|
|
For the
Year Ended
December 31,
1998
|
|
For the
Three Month
Period Ended
March 31,
1998
|
|
For the
Three Month
Period Ended
March 31,
1999
|
| Cash flows
from operating activities:
|
|
Net loss
|
|
$(170,000
|
)
|
|
$(1,374,000
|
)
|
|
$(94,000
|
)
|
|
$(983,000
|
)
|
|
Adjustments
to reconcile net loss to net
|
|
cash used for operating activities:
|
|
Depreciation
|
|
—
|
|
|
47,000
|
|
|
—
|
|
|
24,000
|
|
|
Stock option
plan compensation
|
|
—
|
|
|
65,000
|
|
|
—
|
|
|
28,000
|
|
|
Provision for
doubtful accounts
|
|
4,000
|
|
|
42,000
|
|
|
6,000
|
|
|
106,000
|
|
|
Changes in
operating assets and liabilities:
|
|
Accounts receivable
|
|
(48,000
|
)
|
|
(655,000
|
)
|
|
(50,000
|
)
|
|
(720,000
|
)
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
(15,000
|
)
|
|
—
|
|
|
(202,000
|
)
|
|
Security deposits
|
|
(54,000
|
)
|
|
(31,000
|
)
|
|
(10,000
|
)
|
|
(28,000
|
)
|
|
Accounts payable
|
|
56,000
|
|
|
521,000
|
|
|
43,000
|
|
|
(243,000
|
)
|
|
Accrued expenses and other current
liabilities
|
|
2,000
|
|
|
73,000
|
|
|
(1,000
|
)
|
|
203,000
|
|
|
Unearned revenue
|
|
—
|
|
|
381,000
|
|
|
—
|
|
|
244,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
for operating activities
|
|
(210,000
|
)
|
|
(946,000
|
)
|
|
(106,000
|
)
|
|
(1,571,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
Purchase of
property and equipment
|
|
(1,000
|
)
|
|
(265,000
|
)
|
|
(1,000
|
)
|
|
(68,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
Net
borrowings on line of credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
|
Proceeds from
notes payable
|
|
76,000
|
|
|
199,000
|
|
|
51,000
|
|
|
100,000
|
|
|
Payments on
notes payable
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(141,000
|
)
|
Proceeds from
unissued redeemable Series A
preferred stock
|
|
—
|
|
|
1,004,000
|
|
|
—
|
|
|
—
|
|
Proceeds from
redeemable Series A preferred
stock
|
|
—
|
|
|
875,000
|
|
|
—
|
|
|
70,000
|
|
Proceeds from
redeemable Series B preferred
stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,564,000
|
|
|
Proceeds from
common stock
|
|
136,000
|
|
|
89,000
|
|
|
79,000
|
|
|
—
|
|
Proceeds from
redeemable Series A preferred
stock warrants
|
|
—
|
|
|
36,000
|
|
|
—
|
|
|
47,000
|
|
Proceeds from
redeemable Series B preferred
stock warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,197,000
|
|
|
Proceeds from
common stock warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,000
|
|
|
Cash deposit
to collateralize note payable, net
|
|
—
|
|
|
(149,000
|
)
|
|
—
|
|
|
15,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
212,000
|
|
|
2,054,000
|
|
|
130,000
|
|
|
6,365,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase in cash and cash equivalents
|
|
1,000
|
|
|
843,000
|
|
|
23,000
|
|
|
4,726,000
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
1,000
|
|
|
1,000
|
|
|
844,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents, end of period
|
|
$
1,000
|
|
|
$844,000
|
|
|
$
24,000
|
|
|
$5,570,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
No amounts were paid for income taxes or
interest during 1997 and 1998.
The accompanying notes are an integral
part of these financial statements.
Statements of Stockholders’ Deficit
December 31, 1997 and 1998 and March 31,
1999 (Unaudited)
| |
|
Common Stock
|
|
Common
Stock
Warrants
|
|
Additional
Paid-In
Capital
|
|
Deferred
Stock
Option
Plan
Compensation
|
|
Accumulated
Deficit
|
|
Total
|
| |
|
Shares
Issued
|
|
No Par
Value
|
| Balance at
October 2, 1997
|
|
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
|
$
—
|
|
|
$
—
|
|
| Issuance of
common stock
|
|
11,899,500
|
|
136,000
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
136,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(170,000
|
)
|
|
(170,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1997
|
|
11,899,500
|
|
136,000
|
|
—
|
|
—
|
|
—
|
|
|
(170,000
|
)
|
|
(34,000
|
)
|
| Issuance of
common stock
|
|
3,100,500
|
|
89,000
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
89,000
|
|
| Exercise of
stock options
|
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred
stock option plan
compensation
|
|
—
|
|
—
|
|
—
|
|
487,000
|
|
(487,000
|
)
|
|
—
|
|
|
—
|
|
| Stock option
plan compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
65,000
|
|
|
—
|
|
|
65,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(1,374,000
|
)
|
|
(1,374,000
|
)
|
Accretion and
dividends on Series A
Preferred Stock
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(28,000
|
)
|
|
(28,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1998
|
|
15,150,000
|
|
225,000
|
|
—
|
|
487,000
|
|
(422,000
|
)
|
|
(1,572,000
|
)
|
|
(1,282,000
|
)
|
Issuance of
common stock warrants
(Unaudited)
|
|
—
|
|
—
|
|
13,000
|
|
—
|
|
—
|
|
|
—
|
|
|
13,000
|
|
Issuance of
common stock options by
certain shareholders (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
31,000
|
|
—
|
|
|
—
|
|
|
31,000
|
|
| Exercise of
stock options (Unaudited)
|
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock option
plan compensation
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
28,000
|
|
|
—
|
|
|
28,000
|
|
| Net loss
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(983,000
|
)
|
|
(983,000
|
)
|
Accretion and
dividends on Series A
Preferred Stock (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(62,000
|
)
|
|
(62,000
|
)
|
Accretion and
dividends on Series B
Preferred Stock (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(80,000
|
)
|
|
(80,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 1999
(Unaudited)
|
|
15,300,000
|
|
$225,000
|
|
$13,000
|
|
$518,000
|
|
$(394,000
|
)
|
|
$(2,697,000
|
)
|
|
$(2,335,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these financial statements.
Notes to Financial Statements
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 1—Summary of Significant Accounting
Policies
The Company
Universal Access, Inc. (the “Company” or “UAI
”), an Illinois corporation, was organized and commenced
operations on October 2, 1997 for the purpose of providing
provisioning, co-location and high-capacity bandwidth to “
services providers” that include Internet, Applications,
DSL and Telecommunications providers. The Company operated as a
subchapter S-Corporation until September 27, 1998, at which
time it converted to a C-Corporation.
Basis of Presentation
The
accompanying interim financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 and the
related notes have not been audited. However, they have been
prepared in conformity with the accounting principles stated in
the audited financial statements for the period from October 2,
1997 to December 31, 1997 and the year ended December 31, 1998
and include all adjustments, which were of a normal and
recurring nature, which in the opinion of management are
necessary to present fairly the financial position of the
Company and results of operations and cash flows for the
periods presented. The operating results for the interim
periods are not necessarily indicative of results expected for
the full years.
Revenue Recognition
Access and co-location services are billed a month in advance
under long-term contracts ranging from twelve to sixty months.
UAI recognizes revenue in the month the service is provided.
Advance billings are recorded by the Company as unearned
revenue. UAI recognizes revenue from one-time fees for
installation and maintenance when the related services are
performed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market
funds and all investments with an initial maturity of three
months or less. All cash equivalents are recorded at cost.
Accounts Receivable
The
allowance for doubtful accounts was $4,000, $46,000 and
$152,000 at December 31, 1997 and 1998 and March 31, 1999,
respectively.
Financial instruments that could potentially subject UAI to
concentration of credit risk primarily include accounts
receivable. Two customers represented 38% of total accounts
receivable as of December 31, 1998, and 31% of total sales
during 1998. Three customers represented 94% of total accounts
receivable as of December 31, 1997, and 81% of total sales
during 1997. If any of these individually significant customers
are unable to meet their financial obligations, results of
operations of the Company could be adversely affected. UAI
performs ongoing credit evaluations of its customers’
financial condition and to date has not experienced significant
losses with respect to revenues from any of its significant
customers.
Stock-Based Compensation
The
Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option
plan. Accordingly, when options are granted, a non-cash charge
representing the
difference between the exercise price and the fair market value
of the Common Stock underlying the vested options on the date
of grant is recorded as option plan compensation expense with
the balance deferred and amortized over the remaining vesting
period.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided for using the straight-line method.
Leasehold improvements are amortized over the life of the lease.
| Furniture and
fixtures
|
|
3 years
|
| Co-location
equipment
|
|
3 years
|
| Equipment
|
|
3 years
|
Repairs and maintenance, which do not significantly increase
the life of the related assets, are expensed as incurred.
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 at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. The Company estimates the future cash flows
expected to result from operations, and if the sum of the
expected undiscounted future cash flows is less than the
carrying amount of the long-lived asset, the Company recognizes
an impairment loss by reducing the depreciated cost of the
long-lived asset to its estimated fair value. To date the
Company has not recognized impairment on any long-lived assets.
Income Taxes
On
September 27, 1998, UAI changed status from an S-Corporation to
a C-Corporation. As of this date, the Company established a
deferred tax asset which reflects the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts. The deferred
tax asset was recorded net of a valuation allowance to reduce
the deferred tax asset to an amount that is more likely than
not to be realized.
Prior to September 27, 1998, all attributes for federal income
taxes passed through to the stockholders. Accordingly, no
income tax provision or deferred tax amounts were recorded
prior to this date. Had the Company been a C-Corporation from
October 2, 1997 (inception) to December 31, 1998, no income
taxes would have been due since the Company incurred losses
during this time period.
Note 2—Stock Splits
The
Company effected a 500-for-1 common stock split in July 1998, a
2-for-1 common stock split in February 1999 and a 3-for-2
common stock split on June 23, 1999. All share amounts have
been retroactively restated to reflect such splits.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 3—Property and Equipment
Property and equipment consists of the following, stated at
cost:
| |
|
December
31,
1997
|
|
December 31,
1998
|
| Furniture and
fixtures
|
|
$
—
|
|
$119,000
|
|
| Co-location
equipment
|
|
—
|
|
85,000
|
|
| Equipment
|
|
1,000
|
|
62,000
|
|
| |
|
|
|
|
|
| |
|
1,000
|
|
266,000
|
|
| Less:
Accumulated depreciation
|
|
—
|
|
(47,000
|
)
|
| |
|
|
|
|
|
| Property and
equipment, net
|
|
$
1,000
|
|
$219,000
|
|
| |
|
|
|
|
|
Note 4—Notes Payable
Notes payable are summarized as follows:
| |
|
December
31,
1997
|
|
December
31,
1998
|
| Note payable
(interest at 7.5%)
|
|
$
—
|
|
$149,000
|
| Borrowings
under line of credit
|
|
—
|
|
—
|
| Notes payable
to shareholders (weighted average interest at 9.7%)
|
|
76,000
|
|
126,000
|
| |
|
|
|
|
| Notes payable
|
|
$76,000
|
|
$275,000
|
| |
|
|
|
|
In
November of 1997 and March of 1998, the Company entered into
separate note payable agreements with two of its shareholders
in the original principal amounts of $76,000 and $50,000,
respectively. The notes payable bear interest at a rate of
8.25% and 12%, respectively, and are due upon demand. The note
with the original principal amount of $76,000 is collateralized
by a $63,000 security deposit. The $50,000 note payable is
unsecured.
In
November 1998, the Company entered into a 36-month term loan
agreement with a Bank, in the original principal amount of
$149,000, for the purchase of office furniture and equipment.
The note payable is collateralized by the Company’s
property and equipment, and cash deposits and money market
accounts with the Bank. The Company is required to maintain a
balance in their money market account of an amount not less
than the original amount of the note.
In
April 1998, the Company entered into a $500,000 revolving line
of credit agreement with a Bank. Borrowings are at the prime
rate plus 0.5% (8.25% at December 31, 1998) and the agreement
expires in May 1999. Borrowings under the revolving line of
credit are unsecured. As of December 31, 1998, no borrowings
were outstanding under this agreement.
The
Company executed unsecured promissory notes with a shareholder
dated December 29, 1998, in the original aggregate principal
amount of $100,000. The notes bear interest at a rate of 10%
per year and are due upon demand, after March 31, 1999. The
Company did not receive the proceeds of these promissory notes
until after December 31, 1998; as such the notes payable were
offset by the proceeds receivable at that date for presentation
purposes.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 5—Income Taxes
There is no current provision or benefit for income taxes
recorded for the period from September 27, 1998, the date of
C-Corporation conversion, to December 31, 1998, as the Company
has generated net operating losses for income taxes purposes
for which there is no carryback potential. There is no deferred
provision or benefit for income taxes recorded as the Company
is in a net asset position for which a full valuation allowance
has been recorded due to uncertainty of realization.
The
components of the deferred income tax asset at December 31,
1998 are as follows:
| Net operating
loss
|
|
$
93,000
|
|
| Stock option
plan compensation
|
|
18,000
|
|
| Allowance for
doubtful accounts
|
|
19,000
|
|
| Other
|
|
21,000
|
|
| |
|
|
|
|
|
|
151,000
|
|
| Valuation
allowance
|
|
(151,000
|
)
|
| |
|
|
|
|
Total
|
|
$
—
|
|
| |
|
|
|
At
December 31, 1998, the Company had a federal net operating loss
carryforward of $227,000 which will expire in 2018.
Note 6—Commitments and Contingencies
The
Company leases office facilities and certain equipment over
periods ranging from two to three years. Total rent expense for
the years ended December 31, 1997 and 1998 was $0 and $46,000,
respectively. Future rentals for operating leases at December
31, 1998 are as follows:
| 1999
|
|
$74,000
|
| 2000
|
|
78,000
|
| 2001
|
|
34,000
|
| 2002
|
|
—
|
| |
|
|
|
Total minimum
lease payments
|
|
$186,000
|
| |
|
|
In
addition to the above leases, the Company has entered into
leased line agreements with telecommunications vendors for
high-capacity bandwidth. These leases are cancelable at any
time with a maximum 30-day notice. The Company, in turn,
contracts with customers for the use of the leased
high-capacity bandwidth. The customer contracts provide for
cancellation penalties equal to the sum of all payments due
through the remainder of the contract, less 6%.
The
Company entered into an agreement with a telecommunications
vendor, whereby the Company agreed to purchase a minimum of
$250,000 of network services per month, beginning June 29, 1999
and continuing for a period of ten years.
UAI
has standby letters of credit which have been issued on its
behalf totaling $172,000 securing performance of certain
contracts with carriers and landlords. All letters of credit
expire within one year. On February 15, 1999, an outstanding
letter of credit for $100,000 was replaced by a $250,000 letter
of credit in support of certain ongoing contracts.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 7—Related Party Transactions
During 1998, UAI entered into certain transactions with
shareholders and directors for the lease of office space and
pager equipment. Rent expense for these leases approximated
$65,000 in 1998.
Note 8—Employee Benefit Plans and
Employment Agreements
Employee Savings and Benefit Plans
As
of January 1, 1999, UAI implemented a retirement savings plan
pursuant to Section 401(k) of the Internal Revenue Code, which
covers substantially all of the Company’s employees.
Employer contributions to the retirement savings plan are
discretionary.
Employment Agreements
UAI
has entered into employment agreements with several of its key
employees which have initial terms ranging from one to three
years, after which they are renewable for additional one-year
periods. The employment agreements entitle the employee to
receive certain severance payments for termination of
employment without cause, as defined by the agreements.
Employee Stock Option Plan
In
July of 1998, UAI’s Board of Directors adopted the 1998
Employee Stock Option Plan (the “Plan”) for the
Company’s directors, officers, employees and key advisors.
The total number of shares of UAI no par value Common Stock
(the “Common Stock”) reserved for issuance under the
Plan is 4,500,000. Awards granted under the plan are at the
discretion of the Company’s Board of Directors, or a
compensation committee appointed by the Board of Directors, and
may be in the form of either incentive or nonqualified stock
options. At December 31, 1998, 2,448,000 shares of Common Stock
were available for additional awards under the plan.
If
the Company had elected to recognize compensation cost based on
the fair value of the options as prescribed by Statement of
Financial Accounting Standard No. 123, “Accounting for
Stock-Based Compensation”, the following results would
have occurred for the year ended December 31, 1998 using the
Black-Scholes option-pricing model with the listed assumptions:
| Pro forma net
loss
|
|
$1,375,000
|
|
| Volatility
|
|
0
|
%
|
| Dividend
yield
|
|
0
|
%
|
| Risk-free
interest rate
|
|
5
|
%
|
| Expected life
in years
|
|
5
|
|
During 1998, the Company recognized $65,000 of option plan
compensation expense and expects to recognize additional
expense of approximately $422,000 over the next four years as
such options vest.
The
vesting term of options granted under the Plan shall be fixed
by the Board of Directors, or compensation committee elected by
the Board of Directors, but in no case shall be exercisable for
more than 10 years after the date the option is granted.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
The following information relates to stock options with an
exercise price which was less than the fair market value of the
underlying stock on the date of grant:
| |
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
| Balance at
December 31, 1997
|
|
—
|
|
|
—
|
|
Granted
|
|
1,725,000
|
|
|
$
0.0027
|
|
Exercised
|
|
(150,000
|
)
|
|
0.000007
|
|
Forfeited
|
|
—
|
|
|
—
|
| |
|
|
|
|
|
| Balance at
December 31, 1998
|
|
1,575,000
|
|
|
$
0.003
|
| |
|
|
|
|
|
| Weighted
average fair value of options granted during 1998
|
|
$
0.28
|
|
|
|
The
following information relates to stock options with an exercise
price which equaled the fair market value of the underlying
common stock on the date of grant:
| |
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
| Balance at
December 31, 1997
|
|
—
|
|
—
|
|
Granted
|
|
327,000
|
|
$0.18
|
|
Exercised
|
|
—
|
|
—
|
|
Forfeited
|
|
—
|
|
—
|
| |
|
|
|
|
| Balance at
December 31, 1998
|
|
327,000
|
|
$0.18
|
| |
|
|
|
|
| Weighted
average fair value of options granted during 1998
|
|
$
0.04
|
|
|
The
following information relates to stock options as of December
31, 1998:
| |
|
Exercise Prices
|
| |
|
$0.000007
to $0.0033
|
|
$0.133
to $0.22
|
|
$0.5067
to $0.53
|
| Stock Options
Outstanding
|
|
Number
|
|
1,575,000
|
|
291,000
|
|
36,000
|
|
Weighted
average exercise price
|
|
$
0.003
|
|
$
0.14
|
|
$0.5267
|
Weighted
average remaining contractual life
(years)
|
|
4.67
|
|
4.51
|
|
4.91
|
| Stock Options
Exercisable
|
|
Number
|
|
150,000
|
|
—
|
|
—
|
|
Weighted
average exercise price
|
|
$0.000007
|
|
—
|
|
—
|
The
above disclosures include options to purchase 300,000 shares of
common stock issued to non-employees for services rendered
during 1998. These options were issued with an exercise price
of $0.000007 and were immediately exercisable. These
non-employee options comprised $40,000 of the $65,000 stock
option plan compensation expense recognized during 1998. During
1998, options covering 150,000 shares related to these
non-employee options were exercised, and as of December 31,
1998, options covering 150,000 shares related to these
non-employee options were outstanding. All of these remaining
nonemployee options were exercised during the three months
ended March 31, 1999.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 9—Redeemable Cumulative
Convertible Preferred Stock
Series A Redeemable Cumulative Convertible Preferred Stock
During 1998, UAI issued 335,334 shares of Series A Redeemable
Cumulative Convertible Preferred Stock (“Series A
Preferred Stock”) for gross proceeds of $1,006,000.
Additionally, UAI received cash and accepted subscription
documents for 385,830 shares of Series A Redeemable Cumulative
Convertible Preferred Stock (“Unissued Series A Preferred
Stock”) for gross proceeds of $1,157,000. As of December
31, 1998, the Company had authorized 1,000,000 shares of Series
A Preferred Stock. Stock certificates for the Unissued Series A
Preferred Stock were issued as of February 8, 1999.
Holders of the Series A Preferred Stock are entitled to
cumulative dividends at an annual rate of 8%, payable in cash
or stock, at the Company’s discretion. The Series A
Preferred Stock holders have the right to convert their shares
at any time into shares of UAI Common Stock on a 3-for-1 basis.
A qualified initial public offering of at least $3 per share
triggers a mandatory conversion of the Series A Preferred Stock
into Common Stock.
Holders of Series A Preferred Stock have the right to demand
the Company to redeem one-third of the shares originally
purchased on each of the fourth, fifth, and sixth anniversaries
of the closing. UAI has the right to redeem not less than all
of the outstanding Series A Preferred Stock between the third
and sixth anniversaries of the closing. All redemptions are to
be made at amount equal to the sum of the original purchase
price of the Series A Preferred Stock plus accumulated but
unpaid dividends.
Series A Preferred Stock holders vote as a class on all matters
and are entitled to one vote per each Common Stock equivalent
share. Series A Preferred Stock holders, as a class, may elect
one representative to the Board of Directors.
Upon liquidation or dissolution, shareholders of Series A
Preferred Stock will be distributed available assets up to the
sum of the original purchase price plus accumulated but unpaid
dividends. This distribution has preference over any
distribution to common stock holders.
Series A Redeemable Cumulative Convertible Preferred Stock
Warrants
In
connection with the sale of Series A Preferred Stock, UAI
issued warrants (the “Series A Warrants”) to purchase
an additional 33,334 shares of Series A Preferred Stock at
$3.00 per share, exercisable for a period of five years from
September 21, 1998, the issuance date of the warrants.
The
fair market value of the Series A Warrants was established at
the time of issuance to be $36,000, based on the Black-Scholes
valuation model. The Series A Preferred Stock is shown net of
the fair market value of the Series A Warrants.
Note 10—Common Stock
At
December 31, 1998, UAI had authorized 150,000,000 shares of no
par value Common Stock and 15,150,000 shares were issued and
outstanding.
As
of February 8, 1999, the Company ratified changes to the
composition of its Board of Directors (the “New Board of
Directors”). The New Board of Directors is composed of
seven Directors; three Directors elected by the Common Stock
holders, one Director elected by the Series A Preferred Stock
holders, two Directors elected by the Series B Preferred Stock
holders and one Director, who is to be an industry expert,
nominated by the Common Stock holders and approved by all
shareholders jointly.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
The Company has a sufficient number of authorized Common Stock
shares available to issue upon the conversion of the
outstanding preferred stock, warrants and stock options.
As
of December 31, 1998, Common Stock shares reserved for issuance
are as follows:
| Redeemable
Series A Preferred Stock
|
|
2,316,990
|
| Employee
stock options outstanding
|
|
1,752,000
|
| Series A
Warrants
|
|
231,699
|
| |
|
|
| Total
|
|
4,300,689
|
| |
|
|
Note 11—Subsequent Events
On
February 8, 1999, UAI issued 2,000,000 shares of Series B
Redeemable Cumulative Convertible Preferred Stock (“Series
B Preferred Stock”) for gross proceeds of $6,000,000. In
conjunction with the issuance of the Series B Preferred Stock,
the Company issued warrants to purchase an additional 400,000
shares of Series B Preferred Stock (the “Series B Warrants
”) at an exercise price of $0.01 per share and warrants to
purchase 180,000 shares of Common Stock at $1.00 per share, and
caused options to purchase 420,000 shares of Common Stock to be
granted by certain principal shareholders of the Company’s
Common Stock. The 420,000 common stock options granted by the
principal shareholders were valued at $31,000 using the
Black-Scholes valuation model. This amount was recorded as
additional paid-in capital. Series B Preferred Stock is
convertible into Common Stock on a 3-for-1 basis.
Note 12—Subsequent Events (Unaudited)
On
April 30, 1999, UAI issued 666,667 shares of Series C
Convertible Preferred Stock (“Series C Preferred Stock
”) for gross proceeds of $1,950,000. Series C Preferred
Stock is convertible into Common Stock on a 3-for-2 basis.
During June and July 1999, UAI issued 4,705,882 shares of
Series D Cumulative Convertible Preferred Stock (“Series D
Preferred Stock”) for gross proceeds of $20,000,000.
Series D Preferred Stock is convertible into Common Stock on a
3-for-2 basis.
On
May 3, 1999, the Company renegotiated its existing line of
credit to increase the maximum borrowings under the line to
$4,000,000. This new line of credit agreement bears the same
rate of interest as the previous line of credit agreement and
expires on April 10, 2000. Subsequent to March 31, 1999, the
Company entered into additional operating leases with minimum
lease payments totaling approximately $5,000,000 over the next
five years.
During 1999, the Company signed a letter of intent to acquire
Pacific Crest Networks, Inc. The total purchase price is
$1,000,000 with $400,000 payable in cash, $350,000 payable in
Series D preferred stock and $250,000 of debt to be assumed.
Independent Auditors’ Report
The Board of Directors
Web Yes, Inc.:
We
have audited the accompanying consolidated balance sheets of
Web Yes, Inc. and subsidiary as of December 31, 1997 and 1998,
and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years then
ended. 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 consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated 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 Web Yes, Inc. and subsidiary as of December 31,
1997 and 1998, and the results of their operations and their
cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
June 30, 1999
WEB YES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
| |
|
December 31,
|
|
(Unaudited)
|
| |
|
1997
|
|
1998
|
|
March
31,
1999
|
| |
|
|
| Assets:
|
|
|
|
|
|
|
|
| Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
4,729
|
|
|
$10,204
|
|
$
1,480
|
|
Accounts
receivable
|
|
15,415
|
|
|
13,899
|
|
31,764
|
| |
|
|
|
|
|
|
|
|
Total current
assets
|
|
20,144
|
|
|
24,103
|
|
33,244
|
| |
|
|
|
|
|
|
|
| Computer
equipment
|
|
56,509
|
|
|
190,948
|
|
221,142
|
| Less:
Accumulated depreciation and amortization
|
|
6,667
|
|
|
26,095
|
|
37,601
|
| |
|
|
|
|
|
|
|
|
Net computer
equipment
|
|
49,842
|
|
|
164,853
|
|
183,541
|
| |
|
|
|
|
|
|
|
| Deposits
|
|
100
|
|
|
2,281
|
|
2,281
|
| |
|
|
|
|
|
|
|
|
Total assets
|
|
$70,086
|
|
|
$191,237
|
|
$219,066
|
| |
|
|
|
|
|
|
|
| |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
| Current
liabilities:
|
|
|
|
|
|
|
|
| |
|
Current
portion of capital lease obligations
|
|
$
4,782
|
|
|
$18,633
|
|
$19,951
|
|
Loans and
advances payable to stockholders
|
|
45,007
|
|
|
29,251
|
|
42,296
|
|
Accounts
payable
|
|
12,652
|
|
|
49,414
|
|
30,563
|
|
Accrued
expenses
|
|
2,010
|
|
|
14,925
|
|
28,134
|
| |
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
64,451
|
|
|
112,223
|
|
120,944
|
| Capital lease
obligations, net of current portion
|
|
13,652
|
|
|
43,056
|
|
37,344
|
| |
|
|
|
|
|
|
|
|
Total
liabilities
|
|
78,103
|
|
|
155,279
|
|
158,288
|
| |
|
|
|
|
|
|
|
| Commitments
and contingencies
|
|
|
|
|
|
|
|
| |
| Stockholders
’ equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value, 200,000 shares authorized, none issued
and outstanding in 1997, 70,000
shares issued and outstanding in
1998 and 1999 (liquidation
preference of $1 per share)
|
|
—
|
|
|
70,000
|
|
70,000
|
Common stock,
no par value, 1,000,000 shares authorized, 13,395
shares issued and outstanding
in 1997, 691,897 shares issued and
outstanding in 1998 and 1999
|
|
134
|
|
|
6,919
|
|
6,919
|
| Additional
paid-in capital
|
|
—
|
|
|
55,985
|
|
55,985
|
| Accumulated
deficit
|
|
(8,151
|
)
|
|
(90,726)
|
|
(65,906)
|
| Less:
Subscriptions receivable
|
|
—
|
|
|
(6,220)
|
|
(6,220)
|
| |
|
|
|
|
|
|
|
|
Total
stockholders’ equity (deficit)
|
|
(8,017
|
)
|
|
35,958
|
|
60,778
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$70,086
|
|
|
$191,237
|
|
$219,066
|
| |
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months
Ended March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues
|
|
$108,669
|
|
|
$288,512
|
|
|
$54,464
|
|
|
$141,828
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
personnel costs
|
|
—
|
|
|
38,750
|
|
|
—
|
|
|
37,067
|
|
|
Other direct
costs
|
|
39,163
|
|
|
111,650
|
|
|
9,529
|
|
|
15,051
|
|
|
Selling,
general and administrative expenses
|
|
70,894
|
|
|
214,238
|
|
|
23,375
|
|
|
57,953
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
110,057
|
|
|
364,638
|
|
|
32,904
|
|
|
110,071
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
(1,388
|
)
|
|
(76,126
|
)
|
|
21,560
|
|
|
31,757
|
|
|
Interest
expense
|
|
(4,182
|
)
|
|
(6,449
|
)
|
|
(916
|
)
|
|
(6,937
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$(5,570
|
)
|
|
$(82,575
|
)
|
|
$20,644
|
|
|
$24,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share—basic and diluted
|
|
$(.42
|
)
|
|
$(.37
|
)
|
|
$1.52
|
|
|
$
.04
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted
average shares outstanding
|
|
13,395
|
|
|
223,452
|
|
|
13,595
|
|
|
691,897
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders
’ Equity
| |
|
Common Stock
|
|
Preferred Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Subscriptions
Receivable
|
|
Total
Stockholders’
Equity
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
| Balance,
January 1, 1997
|
|
13,395
|
|
$134
|
|
—
|
|
$—
|
|
$—
|
|
$(2,581
|
)
|
|
$—
|
|
|
$(2,447
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,570
|
)
|
|
—
|
|
|
(5,570
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
13,395
|
|
134
|
|
—
|
|
—
|
|
—
|
|
(8,151
|
)
|
|
|
|
|
(8,017
|
)
|
Issuance of common stock to
founders
|
|
621,952
|
|
6,220
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(6,220
|
)
|
|
—
|
|
Issuance of common stock in
exchange for
services
|
|
56,550
|
|
565
|
|
—
|
|
—
|
|
55,985
|
|
—
|
|
|
—
|
|
|
56,550
|
|
|
Issuance of preferred shares
|
|
—
|
|
—
|
|
70,000
|
|
70,000
|
|
—
|
|
—
|
|
|
—
|
|
|
70,000
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(82,575
|
)
|
|
—
|
|
|
(82,575
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
691,897
|
|
6,919
|
|
70,000
|
|
70,000
|
|
55,985
|
|
(90,726
|
)
|
|
(6,220
|
)
|
|
35,958
|
|
|
Net income (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24,820
|
|
|
—
|
|
|
24,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 1999
(Unaudited)
|
|
691,897
|
|
$6,919
|
|
70,000
|
|
$70,000
|
|
$55,985
|
|
$(65,906
|
)
|
|
$(6,220
|
)
|
|
$60,778
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months
Ended March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$(5,570
|
)
|
|
$(82,575
|
)
|
|
$20,644
|
|
|
$24,820
|
|
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
6,018
|
|
|
20,023
|
|
|
3,000
|
|
|
11,507
|
|
|
Common stock
issued to non-employees for services
|
|
—
|
|
|
56,550
|
|
|
—
|
|
|
—
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(14,552
|
)
|
|
1,516
|
|
|
1,634
|
|
|
(17,865
|
)
|
|
Accounts
payable
|
|
11,346
|
|
|
36,762
|
|
|
(9,426
|
)
|
|
(18,851
|
)
|
|
Accrued
expenses
|
|
1,716
|
|
|
12,915
|
|
|
500
|
|
|
13,209
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating
activities
|
|
(1,042
|
)
|
|
45,191
|
|
|
16,352
|
|
|
12,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of computer equipment
|
|
(19,724
|
)
|
|
(78,286
|
)
|
|
(6,147
|
)
|
|
(30,195
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing activity
|
|
(19,724
|
)
|
|
(78,286
|
)
|
|
(6,147
|
)
|
|
(30,195
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of preferred stock
|
|
—
|
|
|
55,000
|
|
|
5,000
|
|
|
—
|
|
|
Increase in
deposits
|
|
(100
|
)
|
|
(2,181
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from
loans and advances payable to stockholders
|
|
37,007
|
|
|
15,033
|
|
|
22,543
|
|
|
8,651
|
|
|
Repayment of
capital lease obligations
|
|
(750
|
)
|
|
(8,967
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds
(repayment) of loans payable
|
|
(11,008
|
)
|
|
(20,315
|
)
|
|
(30,007
|
)
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
25,149
|
|
|
38,570
|
|
|
(2,464
|
)
|
|
8,651
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Increase
(decrease) in cash
|
|
4,383
|
|
|
5,475
|
|
|
7,741
|
|
|
(8,724
|
)
|
| Cash,
beginning of period
|
|
346
|
|
|
4,729
|
|
|
4,729
|
|
|
10,204
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash, end of
period
|
|
$ 4,729
|
|
|
$10,204
|
|
|
$12,470
|
|
|
$ 1,480
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$ 2,466
|
|
|
$ 8,460
|
|
|
$916
|
|
|
$ 1,796
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
preferred stock in exchange for advances from
stockholders
|
|
—
|
|
|
$15,000
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
obligations
|
|
$19,150
|
|
|
$56,748
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
Web
Yes, Inc. (the “Company”), which was incorporated in
July 1996, provides application hosting services. Since
inception and through September 1998 the Company operated with
no salaried employees. Therefore, recurring operating expenses
such as salaries and benefits are not reflected in the
accompanying financial statements. Financial statements for
periods after September 30, 1998 reflect salaries and fringe
benefits.
Web
Developers Network, Inc., a wholly owned subsidiary of the
Company, has been inactive since inception.
(2) Summary of
Significant Accounting Policies
(a) Principles of Consolidation
The
accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Web
Developers Network, Inc. All significant intercompany
transactions have been eliminated in consolidation.
(b) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(c) Computer Equipment
Computer equipment is recorded at cost. Depreciation is
recorded on the straight-line basis over the estimated useful
life of the related assets (three to five years). Equipment
held under capital leases is stated at the net present value of
minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term.
Maintenance and repairs are charged to operations when incurred.
(d) Financial Instruments and Concentration of
Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, accounts
receivable and debt instruments.
The
Company performs ongoing credit evaluations of its customers
and generally does not require collateral on accounts
receivable. The Company maintains allowances for potential
credit losses and such losses have been within management’
s expectations. Write-offs of accounts receivable have not been
material for any of the periods presented. The Company operates
in one industry segment and its customers are headquartered
primarily in North America.
The
fair market values of cash, accounts receivable and debt
instruments at both December 31, 1997 and 1998 approximate
their carrying amounts.
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
—(Continued)
(e) 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) Revenue Recognition
Revenues pursuant to time and materials contracts are
recognized as services are provided. Revenues from application
hosting agreements are recognized ratably over the terms of the
agreements.
(g) Direct Personnel Costs and Other Direct Costs
Direct personnel costs consist of payroll and payroll-related
expenses for personnel dedicated to client assignments. Other
direct costs consist of hardware.
(h) 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 income tax bases, operating
loss and tax credit 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.
(i) Net Income (Loss) Per Share
Basic net income (loss) per share was calculated based on
weighted average common shares outstanding. There were no
common stock equivalents outstanding for any of the periods
presented; accordingly, basic and fully diluted earnings per
share are the same. As the Company has been in a net loss
position for the years ended December 31, 1997 and 1998, common
stock equivalents of zero and 200,000 were excluded from the
diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same
as basic loss per share, and has not been presented separately.
(j) Reporting Comprehensive Income
Effective July 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 130 (“SFAS 130”),
Reporting Comprehensive Income. This statement requires
that all components of comprehensive income (loss) be reported
in the consolidated financial statements in the period in which
they are recognized. For each period presented, comprehensive
income (loss) under SFAS 130 was equivalent to the Company’
s net income (loss) reported in the accompanying consolidated
statements of operations.
(k) Unaudited Interim Financial Information
The
consolidated financial statements as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999 are unaudited;
however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial statements for
the interim periods have been included. Results of operations
for the interim periods presented are not necessarily
indicative of the results that may be expected for the full
fiscal year or any other future periods.
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
—(Continued)
(l) Recent Accounting Pronouncements
The
Company does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or
cash flows.
(3) Loans and Advances
Payable to Stockholders
The
Company has various loans and advances payable to stockholders
for working capital purposes. The loans, which accrue interest
at 8%, have no definitive repayment terms.
(4) Stockholders’
Equity
(a) Common Stock
In
September 1998, the Company amended its articles of
incorporation to adjust the number of authorized shares of
common stock from 20,000 shares to 1,000,000 shares. The
Company then issued 621,952 shares of common stock at $.01 per
share to the founders of the Company in order to adjust the
equity ownership to planned percentages. Subsequent to this
issuance the founders began to draw salaries.
During 1998, the Company issued common stock to employees and
non-employees in exchange for services rendered. The Company
recorded expense of $56,550 for the fair value of the stock
issued.
(b) Preferred Stock
In
September 1998, the Company authorized 200,000 shares of
preferred stock and issued 70,000 shares of preferred stock at
$1.00 per share. The preferred stock is voting and is
convertible into one share of common stock immediately at the
option of the holder, and automatically converts into common
stock upon the completion of a qualifying initial public
offering. The preferred stock has a $1 per share liquidation
preference.
(5) Capital Leases
The
Company leases certain of its computer and office equipment
under capital leases. Substantially all of such leases are for
four years, with interest rates ranging from 12.9% to 21.6%.
The leased equipment secures all leases.
The
following is a schedule by year of future minimum lease
payments due under capital leases, and the net present value of
the minimum lease payments as of December 31, 1998:
| 1999
|
|
$27,184
|
| 2000
|
|
26,228
|
| 2001
|
|
17,146
|
| 2002
|
|
7,459
|
| |
|
|
|
Total minimum
lease payments
|
|
78,017
|
| Less: amount
representing interest
|
|
16,328
|
| |
|
|
|
Net present
value of minimum lease payments
|
|
61,689
|
| Less: current
portion of capital lease obligations
|
|
18,633
|
| |
|
|
|
Capital lease
obligations, net of current portion
|
|
$43,056
|
| |
|
|
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
—(Continued)
(6) Significant
Customers
The
following table summarizes revenues from major customers
(revenues in excess of 10% for the year) as a percentage of
total revenues:
| |
|
Years ended
December 31,
|
|
(Unaudited)
Three months
ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
29
|
%
|
|
24
|
%
|
|
22
|
%
|
|
49
|
%
|
| Customer B
|
|
—
|
|
|
35
|
|
|
10
|
|
|
22
|
|
(7) Income Taxes
The
tax effects of temporary differences that give rise to
significant portions of deferred tax assets at December 31,
1997 and 1998 are as follows:
| |
|
1997
|
|
1998
|
| Deferred tax
assets:
|
|
Accrued
expenses
|
|
$
492
|
|
|
$
978
|
|
|
Net operating
loss carryforward
|
|
714
|
|
|
3,735
|
|
| |
|
|
|
|
|
|
|
Total gross
deferred tax assets
|
|
1,206
|
|
|
4,713
|
|
| Valuation
allowance
|
|
(1,206
|
)
|
|
(4,713
|
)
|
| |
|
|
|
|
|
|
|
Net deferred
tax asset
|
|
$
—
|
|
|
$
—
|
|
| |
|
|
|
|
|
|
The
Company has recorded a full valuation allowance against its
deferred tax assets since management believes that after
considering all the available objective evidence it is more
likely than not that these assets will not be realized.
(8) Subsequent Event
On
June 10, 1999, the Company entered into an Agreement and Plan
of Reorganization with Breakaway Solutions, Inc. (“
Breakaway”), a provider of information technology
consulting services. Under the agreement, Breakaway acquired
all the outstanding capital stock of the Company in a
transaction accounted for under the purchase method of
accounting. The total purchase price was comprised of 571,135
shares of common stock of Breakaway. Of the shares of common
stock issued to the former Web Yes stockholders, 428,351 are
subject to the Company’s right, which lapses incrementally
over a four-year period, to repurchase the shares of the
particular stockholder upon the termination of his employment
with Breakaway. The repurchase price shall be either at the
share value at the time of the acquisition if the stockholder
terminates employment or is terminated for cause, or at their
fair market value if stockholder’s employment is
terminated without cause.
Independent Auditors’ Report
The Board of Directors
WPL Laboratories, Inc.:
We have audited the accompanying balance sheets
of WPL Laboratories, Inc. as of December 31, 1997 and 1998, and
the related statements of income, stockholders’ equity and
cash flows for each of the years then ended. 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 WPL Laboratories, Inc. as of December 31,
1997 and 1998, and the results of its operations and its cash
flows for each of the years then ended, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
June 30, 1999
Balance Sheets
| |
|
December 31,
|
|
(Unaudited)
March 31,
1999
|
| |
|
1997
|
|
1998
|
| Assets
|
| Current
assets:
|
|
Cash
|
|
$81,232
|
|
|
$240,310
|
|
|
$415,368
|
|
|
Accounts
receivable
|
|
371,869
|
|
|
746,982
|
|
|
983,462
|
|
|
Employee
advances
|
|
—
|
|
|
103,300
|
|
|
103,300
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
453,101
|
|
|
1,090,592
|
|
|
1,502,130
|
|
| |
|
|
|
|
|
|
|
|
|
| Property and
equipment
|
|
|
|
|
Office and
computer equipment
|
|
103,703
|
|
|
169,668
|
|
|
203,230
|
|
|
Software
|
|
5,000
|
|
|
9,512
|
|
|
10,334
|
|
|
Automobile
|
|
7,500
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
116,203
|
|
|
179,180
|
|
|
213,564
|
|
|
Less:
Accumulated depreciation and amortization
|
|
(64,556
|
)
|
|
(83,737
|
)
|
|
(94,647
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Net property
and equipment
|
|
51,647
|
|
|
95,443
|
|
|
118,917
|
|
| |
|
|
|
|
|
|
|
|
|
| Other assets
|
|
1,915
|
|
|
103,909
|
|
|
244,503
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$506,663
|
|
|
$1,289,944
|
|
|
$1,865,550
|
|
| |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
| Current
liabilities:
|
|
Related-party
advance and accrued interest
|
|
$23,333
|
|
|
$25,000
|
|
|
$—
|
|
|
Accounts
payable
|
|
10,947
|
|
|
8,278
|
|
|
11,862
|
|
|
Accrued
compensation and related benefits
|
|
68,341
|
|
|
206,192
|
|
|
266,689
|
|
|
Other accrued
expenses
|
|
19,469
|
|
|
23,052
|
|
|
12,500
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
122,090
|
|
|
262,522
|
|
|
291,051
|
|
| |
|
|
|
|
|
|
|
|
|
| Commitments
and contingencies
|
|
|
|
| Stockholders
’ equity:
|
Common stock
$.01 par value, 10,000,000 shares authorized,
1,248,980 shares issued and
outstanding in 1997 and
1,800,000 shares issued and
outstanding in 1998 and 1999
|
|
12,490
|
|
|
18,000
|
|
|
18,000
|
|
|
Additional
paid-in capital
|
|
99
|
|
|
242,589
|
|
|
242,589
|
|
|
Retained
earnings
|
|
371,984
|
|
|
766,833
|
|
|
1,313,910
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
384,573
|
|
|
1,027,422
|
|
|
1,574,499
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$506,663
|
|
|
$1,289,944
|
|
|
$1,865,550
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
Statements of Income
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues
|
|
$1,611,284
|
|
|
$2,650,415
|
|
|
$434,585
|
|
$1,087,678
|
| |
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Project
personnel costs
|
|
1,191,193
|
|
|
1,719,664
|
|
|
193,316
|
|
446,109
|
|
Sales and
marketing
|
|
45,579
|
|
|
37,092
|
|
|
12,271
|
|
10,768
|
|
General and
administrative
|
|
186,461
|
|
|
497,143
|
|
|
52,333
|
|
84,650
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
1,423,233
|
|
|
2,253,899
|
|
|
257,920
|
|
541,527
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
188,051
|
|
|
396,516
|
|
|
176,665
|
|
546,151
|
| |
|
|
|
|
|
|
|
|
|
|
| Other income
(expense):
|
|
Interest
expense
|
|
(2,250
|
)
|
|
(1,667
|
)
|
|
—
|
|
—
|
|
Interest
income
|
|
—
|
|
|
—
|
|
|
—
|
|
926
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total other
income (expense)
|
|
(2,250
|
)
|
|
(1,667
|
)
|
|
—
|
|
926
|
| |
|
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
185,801
|
|
|
$
394,849
|
|
|
$
176,665
|
|
$
547,077
|
| |
|
|
|
|
|
|
|
|
|
|
| |
| Net income
per share—basic
|
|
$0.15
|
|
|
$0.24
|
|
|
$
0.14
|
|
$0.30
|
| |
|
|
|
|
|
|
|
|
|
|
| Net income
per share—diluted
|
|
$0.15
|
|
|
$0.24
|
|
|
$
0.14
|
|
$0.29
|
| |
|
|
|
|
|
|
|
|
|
|
| |
| Weighted
average shares outstanding
|
|
1,248,980
|
|
|
1,664,132
|
|
|
1,248,980
|
|
1,800,000
|
| Weighted
average stock equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
66,415
|
| |
|
|
|
|
|
|
|
|
|
|
| Weighted
average shares outstanding and stock equivalents
|
|
1,248,980
|
|
|
1,664,132
|
|
|
1,248,980
|
|
1,866,415
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
Statements of Stockholders’ Equity
| |
|
Common Stock
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Total
Stockholders’
Equity
|
| Balance,
January 1, 1997
|
|
1,248,980
|
|
$12,490
|
|
$99
|
|
$267,993
|
|
$280,582
|
|
|
Stockholders
’ distributions
|
|
—
|
|
—
|
|
—
|
|
(81,810)
|
|
(81,810)
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
185,801
|
|
185,801
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
1,248,980
|
|
12,490
|
|
99
|
|
371,984
|
|
384,573
|
|
|
|
Common stock
issued to
employees for services
rendered
|
|
551,020
|
|
5,510
|
|
242,490
|
|
—
|
|
248,000
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
394,849
|
|
394,849
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
1,800,000
|
|
18,000
|
|
242,589
|
|
766,833
|
|
1,027,422
|
|
|
|
|
Net income
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
547,077
|
|
547,077
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 1999
(Unaudited)
|
|
1,800,000
|
|
$
18,000
|
|
$242,589
|
|
$1,313,910
|
|
$1,574,499
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
Statements of Cash Flows
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Operating
activities:
|
|
Net income
|
|
$185,801
|
|
|
$394,849
|
|
|
$176,665
|
|
|
$547,077
|
|
Adjustments to reconcile net income to net
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
14,300
|
|
|
26,681
|
|
|
6,671
|
|
|
10,910
|
|
Common stock
issued to employees for services
rendered
|
|
—
|
|
|
248,000
|
|
|
—
|
|
|
—
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(68,745
|
)
|
|
(375,113
|
)
|
|
30,936
|
|
|
(236,480
|
)
|
|
Employee
advances
|
|
—
|
|
|
(103,300
|
)
|
|
—
|
|
|
—
|
|
|
Accounts
payable
|
|
(2,902
|
)
|
|
(2,669
|
)
|
|
868
|
|
|
3,584
|
|
|
Accrued
compensation and related benefits
|
|
59,033
|
|
|
137,851
|
|
|
(87,810
|
)
|
|
60,497
|
|
|
Accrued
expenses
|
|
—
|
|
|
3,583
|
|
|
—
|
|
|
(10,552
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating
activities
|
|
187,487
|
|
|
329,882
|
|
|
127,330
|
|
|
375,036
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(41,106
|
)
|
|
(70,477
|
)
|
|
(1,025
|
)
|
|
(34,384
|
)
|
|
Increase in other assets
|
|
(1,240
|
)
|
|
(101,994
|
)
|
|
(1,119
|
)
|
|
(140,594
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
(42,346
|
)
|
|
(172,471
|
)
|
|
(2,144
|
)
|
|
(174,978
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) related party
advance
|
|
—
|
|
|
1,667
|
|
|
—
|
|
|
(25,000
|
)
|
|
Stockholders’ distribution
|
|
(81,810
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in)
financing activities
|
|
(81,810
|
)
|
|
1,667
|
|
|
—
|
|
|
(25,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
in cash
|
|
63,331
|
|
|
159,078
|
|
|
125,186
|
|
|
175,058
|
|
| Cash at
beginning of period
|
|
17,901
|
|
|
81,232
|
|
|
81,232
|
|
|
240,310
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash at end
of period
|
|
$81,232
|
|
|
$240,310
|
|
|
$206,418
|
|
|
$415,368
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
584
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
Notes to Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
WPL
Laboratories, Inc. (the “Company”) provides advanced
software development services to businesses. The Company’s
projects include sales force automation, distribution,
management, personnel management, e-commerce application
development, product analysis and Internet enabling
applications.
(2) Summary of
Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates.
(b) Financial Instruments and Concentration of
Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts
receivable.
The
Company performs ongoing credit evaluations of its customers
and generally does not require collateral on accounts
receivable. The Company maintains allowances for potential
credit losses and such losses have been within management’
s expectations. Write-offs of accounts receivable have not been
material for any of the periods presented. The Company operates
in one industry segment and its customers are headquartered
primarily in North America.
The
fair market values of cash and accounts receivable at both
December 31, 1997 and 1998 approximate their carrying amounts.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using
the straight-line method over three years for office and
computer equipment and software and five years for the
automobile.
(d) 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.
(e) Stockholders’ Equity
On
April 1, 1998, the Company amended its articles of
incorporation to change the par value of its common stock from
$1.00 to $.01 and adjust the number of authorized shares. In
addition, the Company approved a stock dividend of 1,248,880
shares. All related share information for all periods presented
has been restated to reflect this amendment.
WPL LABORATORIES, INC.
Notes to Financial Statements—
(Continued)
(f) Revenue Recognition
The
Company generally recognizes revenue on projects as work is
performed based on hourly billable rates. In addition, a
limited number of projects are performed under fixed-price
contracts. Revenue from these contracts is recognized on the
percentage of completion method based on the percentage that
incurred costs to date bear to the most recently estimated
total costs. Anticipated losses on uncompleted contracts, if
any, are recognized in full when determined.
(g) Project Personnel Costs
Project personnel costs consists of payroll and payroll-related
expenses for personnel dedicated to client assignments.
(h) Income Taxes
The
Company has elected to be taxed under the provisions of
subchapter S of the Internal Revenue Code, whereby the
corporate income is taxed to the individual shareholders based
on their proportionate share of the Company’s taxable
income.
(i) Stock-Based Compensation
The
Company has adopted Statement of Financial Accounting Standards
No. 123 (“SFAS” 123”), Accounting for
Stock-Based Compensation. As permitted by SFAS 123, the
Company measures compensation costs in accordance with
Accounting Principles Board Opinion No. 25 (“APB No. 25
”), Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted
at fair market value until they are exercised. Stock options
issued to non-employees are recorded at the fair value of the
stock at the date of grant. Upon exercise, net proceeds,
including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the
Company’s financial condition or results of operations.
(j) Net Income Per Share
The
Company adopted the provisions of SFAS No. 128, Earnings Per
Share during 1997. This statement requires the presentation
of basic and diluted net income per share for all periods
presented. Under SFAS 128, the Company presents both basic net
income per share and diluted net income per share. Basic net
income per share is calculated based on weighted average common
shares outstanding. Diluted net income per share reflects the
per share effect of dilutive stock options and other dilutive
common stock equivalents.
(k) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards 130 (“SFAS 130”),
Reporting Comprehensive Income. This statement requires
that all components of comprehensive income be reported in the
financial statements in the period in which they are
recognized. For each year reported, comprehensive income under
SFAS 130 was equivalent to the Company’s net income
reported in the accompanying statements of income.
(l) Unaudited Interim Financial Information
The
financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited; however, in
the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation
of the financial statements for the interim periods have been
included. Results of operations for the interim periods
presented are not necessarily indicative of the results that
may be expected for the full fiscal year or any future periods.
WPL LABORATORIES, INC.
Notes to Financial Statements—
(Continued)
(m) Recent Accounting Pronouncements
The
Company does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or
cash flows.
(3) Related-Party
Advance and Accrued Interest
In
1996, the Company received a working capital advance of
$20,000, with no defined terms, from a relative of its major
stockholder. The advance has been accruing interest at 8.3% per
year. Interest expense on the advance was $2,250, and $1,667
for the years ended December 31, 1997 and 1998, respectively,
and $417 and $0 for the three months ended March 31, 1998 and
1999, respectively.
(4) Common Stock
In
April 1998, the Company awarded 551,020 shares of common stock
to certain employees for services rendered. Accordingly, the
Company recorded compensation expense of $248,000, which
represented the estimated fair value of the common stock
issued. In connection with the award, the Company advanced
$103,300 to the employees to pay certain personal income taxes.
These advances are outstanding as of December 31, 1998.
(5) Employee Benefit
Plan
The
Company maintains a defined contribution plan in accordance
with the provisions of Section 401(k) of the Internal Revenue
Code. The plan covers all full-time employees of the Company.
Participants may contribute up to the greater of 15% of their
total compensation or $10,000 to the plan, with the Company
matching on a discretionary basis. For the years ended December
31, 1997 and 1998, the Company did not contribute to the plan.
(6) Significant
Customers
The
following table summarizes revenues from significant customers
(revenues in excess of 10% for the year) as a percentage of
total revenues:
| |
|
|
|
(Unaudited)
|
| |
|
Years Ended
December 31,
|
|
Three Months
Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
52
|
%
|
|
38
|
%
|
|
53
|
%
|
|
32
|
%
|
| Customer B
|
|
—
|
|
|
18
|
|
|
31
|
|
|
—
|
|
| Customer C
|
|
—
|
|
|
15
|
|
|
—
|
|
|
22
|
|
| Customer D
|
|
25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
(7) Lease Commitments
The
Company has entered into operating leases for its office
facility and equipment that expire through July 2000. Rent
expense for the years ended December 31, 1997 and 1998 was
$43,613, and $43,893, respectively. Future minimum lease
payments under the operating leases as of December 31, 1998 are
$119,054 in 1999, $167,064 in 2000, $164,664 in 2001 and
$41,166 in 2002.
WPL LABORATORIES, INC.
Notes to Financial Statements—
(Continued)
(8) Subsequent Events
(a) Stock Option Plan
On
January 1, 1999, the Company instituted the WPL Laboratories,
Inc. 1999 Stock Option Plan (the “Plan”) which
authorizes the Company to grant options to purchase common
stock, to make awards of restricted common stock, and to issue
certain other equity-related awards to employees and directors
of, and consultants to, the Company. The total number of shares
of common stock which may be issued under the Plan is 200,000
shares. The Plan is administered by the Board of Directors,
which selects the persons to whom stock options and other
awards are granted and determines the number of shares, the
exercise or purchase prices, the vesting terms and the
expiration date. Non-qualified stock options may be granted at
exercise prices which are above, equal to, or below the grant
date fair market value of the common stock. The exercise price
of options qualifying as incentive stock options may not be
less than the grant date fair market value of the common stock.
Stock options granted under the Plan are nontransferable,
generally become exercisable over a four-year period, and
expire ten years after the date of grant (subject to earlier
termination in the event of the termination of the optionee
’s employment or other relationship with the Company).
Subsequent to December 31, 1998 and through May 14, 1999, the
Company granted 186,208 options under the Plan to purchase
common stock at $4.00 per share.
(b) Line of Credit
On
February 22, 1999, the Company entered into a line of credit
agreement with a commercial bank under which it may borrow up
to $750,000 at the bank’s prime rate plus .5%. Borrowings
under the line are secured by substantially all assets of the
Company and are subject to certain financial and nonfinancial
covenants which include, among others, maintenance of a ratio
of debt to cash flow, minimum tangible net worth and a ratio of
current assets to current liabilities. The line of credit
expires on April 15, 2000. This agreement terminated upon the
purchase of the Company (see note 8d).
(c) Consulting Agreement
On
March 17, 1999, the Company signed a consulting agreement with
Plansponsor.com, Inc. (“PlanSponsor”). The agreement
calls for the Company to provide 3,000 hours of services,
including work previously performed for PlanSponsor in exchange
for shares of common stock in PlanSponsor. As of December 31,
1998, the Company had performed $100,875 of services based on
the agreement’s contractual rates. This amount is included
in other assets on the accompanying balance sheet and will
ultimately be settled by issuance of shares of PlanSponsor
common stock. In May 1999, the Company declared a dividend of
the PlanSponsor stock to the stockholders of the Company.
(d) Reorganization Agreement
On
May 17, 1999, the Company entered into a Reorganization
Agreement with Breakaway Solutions, Inc. (“Breakaway”
), a provider of information technology consulting services.
Under the agreement, Breakaway acquired all of the outstanding
stock of the Company in a transaction accounted for under the
purchase method of accounting. The purchase price was comprised
of $5 million in cash, 1,705,175 shares of common stock and the
assumption of all outstanding WPL stock options, which became
exercisable for 393,506 shares of the Company’s common
stock at an exercise price of $2.38 per share with a four-year
vesting period. The WPL stockholders received one half of their
cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the
stockholder does not voluntarily terminate his
employment and is not terminated for cause. Of the shares of
common stock issued to the former WPL stockholders,
approximately fifty-percent are subject to our right, which
lapses incrementally over a four-year period, to repurchase the
shares of a particular stockholder at their value at the time
of the acquisition upon the stockholder’s resignation or
our termination of the stockholder for cause.
Inside back cover of prospectus:
Graphic listing the different categories of “Market Makers
” and “Infrastructure Service Providers” under
which each of the Internet Capital Group partner Companies
logos is presented.
The
categories of Market Makers are: “Distributors,”
“Networks” and “Communities.” Under the
Distributors category, the logos for ONVIA.com, Inc., CommerX,
Inc., PaperExchange, Universal Access, Inc., e-Chemicals, Inc.
and iParts are presented. Under the Networks category, the
logos for Internet Commerce Systems, Inc., BidCom, Inc.,
RapidAutoNet Corporation, Collabria Inc., ComputerJobs.com,
Inc., StarCite!, PointMent, Inc. and Arbinet Communications,
Inc. are presented. Under the Communities category,
VerticalNet, Inc., PlanSponsor Exchange and Universal Access,
Inc.
The
categories of Infrastructure Service Providers are: “
Strategic Consulting and Systems Integration,” “
Software” and “Outsourced Services” providers.
Under the Strategic Consulting and System Integration category,
the logos for Benchmarking Partners, Inc., U.S. Interactive,
Inc. and Context Integration, Inc. are presented. Under the
Software category, the logos for Syncra Software, Inc.,
Entegrity Solutions, Blackboard, Inc., ServiceSoft
Technologies, Inc., Clear Commerce Corp. and Tradex
Technologies, Inc. Under the Outsourced Services category, the
logos for LinkShare Corporation, Vivant! Corporation
Management, PrivaSeek, Inc., United Messaging, Inc., Breakaway
Solutions, Inc., SagaMaker, Inc., Sky Alland Marketing, Inc.
and CommerceQuest, Inc. are presented.
Through and including
, 1999 (the
25th day after the date of this prospectus), all dealers
effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to the unsold allotments or subscriptions.
13,300,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
PROSPECTUS
Merrill Lynch & Co.
Banc of America Securities LLC
BancBoston Robertson Stephens
Deutsche Banc Alex. Brown
Wit Capital Corporation
, 1999
The information in this prospectus is not
complete and may be changed. 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 is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Alternate International Page
Subject to Completion
Preliminary Prospectus dated July 30, 1999
PROSPECTUS
13,300,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
This is Internet Capital Group, Inc.’s initial public
offering of shares of common stock. Of the 13,300,000 shares
being offered, we are offering 9,800,000 shares to the public
generally and 2,200,000 shares to shareholders of one of our
shareholders, Safeguard Scientifics, Inc., and Safeguard
Scientifics, Inc. is offering up to 1,300,000 shares to its
shareholders. We will not receive any proceeds from the shares
being offered by Safeguard Scientifics, Inc. Safeguard
Scientifics has agreed to be designated a statutory underwriter
with respect to the shares of our common stock offered to the
shareholders of Safeguard Scientifics. Safeguard Scientifics is
not an underwriter with respect to the other shares of our
common stock offered and is not included in the term “
underwriter” as used elsewhere in this prospectus.
We
expect the public offering price to be between $10.00 and
$12.00 per share. Currently, no public market exists for the
shares. After pricing of the offering, we expect that the
common stock will trade on the Nasdaq National Market under the
symbol “ICGE.”
Investing in our common stock involves risks which are
described in the “Risk Factors” section beginning on
page 8 of this prospectus.
|
Underwritten Public Offering
|
|
Per Share
|
|
Total
|
|
Public
offering price
|
|
$
|
|
$
|
|
Underwriting
discount
|
|
$
|
|
$
|
|
Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
| |
|
Directed Share Subscription Program
|
|
Per Share
|
|
Total
|
| |
|
|
|
|
|
Public
offering price
|
|
$
|
|
$
|
|
Financial
advisory fee to Merrill Lynch
|
|
$
|
|
$
|
|
Proceeds to
Internet Capital Group, Inc.
|
|
$
|
|
$
|
|
Maximum
proceeds, before expenses, to Safeguard Scientifics, Inc.
|
|
$
|
|
$
|
| |
|
Aggregate Offering Proceeds
|
|
|
|
Total
|
|
|
| |
|
|
|
|
Proceeds to
Internet Capital Group, Inc. from the underwritten public
offering and directed share
subscription program
|
|
|
|
$
|
|
|
The
underwriters may also purchase from us up to an additional
1,800,000 shares at the public offering price, less the
underwriting discount, within 30 days from the date of this
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The
shares of common stock will be ready for delivery in New York,
New York on or about
, 1999.
Merrill Lynch International
|
Banc of
America Securities LLC
|
|
BancBoston
Robertson Stephens
|
Deutsche Bank
The date of this prospectus is
,
1999.
UNDERWRITING
General
We
intend to offer our common stock outside the United States and
Canada through a number of international managers, as well as
in the United States and Canada through a number of U.S.
underwriters. Merrill Lynch International, Banc of America
Securities LLC, BancBoston Robertson Stephens International
Limited and Deutsche Bank AG London are acting as managers of
each of the international managers named below. Subject to the
terms and conditions set forth in the purchase agreement among
us and the international managers, and concurrently with the
sale of 7,840,000 shares of common stock to the U.S.
underwriters, we have agreed to sell to each of the
international managers, and each of the international managers,
severally and not jointly, has agreed to purchase from us the
number of shares of our common stock set forth opposite its
name below.
Underwriters
|
|
Number
of
Shares
|
| Merrill Lynch
International
|
|
|
| Banc of
America Securities LLC
|
|
|
| BancBoston
Robertson International Limited
|
|
|
| Deutsche Bank
AG London
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Total
|
|
1,960,000
|
| |
|
|
We
have also agreed with certain U.S. underwriters in the United
States and Canada, for whom Merrill Lynch, Pierce, Fenner &
Smith, Incorporated, Banc of America Securities LLC, BancBoston
Robertson Stephens Inc., Deutsche Bank Securities Inc. and Wit
Capital Corporation are acting as managers, that, subject to
the terms and conditions set forth in the purchase agreement,
and concurrently with the sale of 1,960,000 shares of common
stock to the international managers pursuant to the purchase
agreement, to sell to the U.S. underwriters, and the U.S.
underwriters severally have agreed to purchase from us, an
aggregate of 7,840,000 shares of common stock. The public
offering price per share and the total underwriting discount
per share of common stock are identical for the international
shares and the U.S. shares.
In
the purchase agreement, the several international managers and
the several U.S. underwriters, respectively, have agreed,
subject to the terms and conditions set forth therein, to
purchase all of the shares of
common stock being sold under the terms of the
purchase agreement if any of the shares of common stock being
sold under the purchase agreement are purchased. In the event
of a default by an underwriter, the purchase agreement provides
that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase
agreement may be terminated. The closings with respect to the
sale of shares of common stock to be purchased by the
international managers and the U.S. underwriters are
conditioned upon one another.
We
have agreed to indemnify the international managers and the
U.S. underwriters against some liabilities, including some
liabilities under the Securities Act, or to contribute to
payments the international managers and the U.S. underwriters
may be required to make in respect of those liabilities.
The
shares of common stock are being offered by the several
underwriters, subject to prior sales, when, as and if issued to
and accepted by them, subject to approval of certain legal
matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in
part.
Commissions and Discounts
The
managers have advised us that they propose initially to offer
the shares of our common stock to the public at the initial
public offering price set forth on the cover page of this
prospectus, and to certain dealers at such price less a
concession not in excess of $
per share of common
stock. The international managers may allow, and such dealers
may reallow, a discount not in excess of $
per
share of common stock on sales to certain other dealers. After
the initial public offering, the public offering price,
concession and discount may be changed.
The
following table shows the per share and total public offering
price, underwriting discount to be paid by us to the
international managers and the U.S. underwriters and the
proceeds before expenses to us. This information is presented
assuming either no exercise or full exercise by the
international managers and the U.S. underwriters of their
over-allotment options.
| |
|
Per
Share
|
|
Without
Option
|
|
With
Option
|
| Public
offering price
|
|
$
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
|
$
|
The
expenses of the offering, exclusive of the underwriting
discount, are estimated at $1,158,272 and are payable by us.
The following table sets forth these expenses. All amounts
shown are estimates.
| |
|
Amount
|
| Securities
and Exchange Commission registration fee
|
|
$54,178
|
| NASD filing
fee
|
|
19,833
|
| Nasdaq
National Market listing fee
|
|
69,911
|
| Accounting
fees and expenses
|
|
368,000
|
| Blue Sky fees
and expenses
|
|
750
|
| Legal fees
and expenses
|
|
330,000
|
| Transfer
Agent and Registrar fees and expenses
|
|
7,000
|
| Printing and
engraving expenses
|
|
145,000
|
| Director and
officer liability insurance
|
|
150,000
|
| Miscellaneous
fees and expenses
|
|
13,600
|
| |
|
|
|
Total
|
|
$1,158,272
|
| |
|
|
Intersyndicate Agreement
The
international managers and the U.S. underwriters have entered
into an intersyndicate agreement that provides for the
coordination of their activities. Under the terms of the
intersyndicate agreement, the international managers and the
U.S. underwriters are permitted to sell shares of common stock
to each other for purposes of resale at the public offering
price, less an amount not greater than the selling concession.
Under the terms of the intersyndicate agreement, the
international managers and any dealer to whom they sell shares
of common stock will not offer to sell or sell shares of common
stock to persons who are U.S. or Canadian persons, or to
persons they believe intend to resell to persons who are U.S.
or Canadian persons, and the U.S. underwriters and any dealer
to whom they sell shares of common stock will not offer to sell
or sell shares of common stock to non-U.S. persons or to
non-Canadian persons or to persons they believe intend to
resell to non-U.S. or non-Canadian persons, except in the case
of the terms of the intersyndicate agreement.
Over-allotment Option
We
have granted an option to the international managers,
exercisable for 30 days after the date of this prospectus, to
purchase up to an aggregate of 360,000 additional shares of
common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount.
The international managers may exercise this option solely to
cover over-allotments, if any, made on the sale of the common
stock offered hereby. To the extent that the international
managers exercise this option, each international manager will
be obligated, subject to certain conditions, to purchase a
number of additional shares of common stock proportionate to
such international manager’s initial amount reflected in
the foregoing table.
We
have also granted an option to the U.S. underwriters,
exercisable for 30 days after the date of this prospectus, to
purchase up to an aggregate of 1,440,000 additional shares of
common stock to cover over-allotments, if any, on terms similar
to those granted to the international managers.
Reserved Shares
At
our request, the U.S. underwriters have reserved approximately
2,600,000 shares of our common stock for sale at the initial
public offering price to our employees and directors and
certain other persons designated by Internet Capital Group. In
addition, the U.S. underwriters have reserved up to $20 million
of shares of our common stock for sale to General Electric
Capital Corporation. This represents 1,818,181 shares based on
the mid-point of the offering range. General Electric Capital
Corporation has not committed to purchasing these shares. The
number of shares of our common stock available for sale to the
general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are
not so orally confirmed for purchase within one day of the
pricing of the offering will be offered by the underwriters to
the general public on the same basis as the other shares
offered by this prospectus.
No Sales of Similar Securities
We,
our executive officers and directors, Safeguard Scientifics
(Delaware), Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ
Holdings, Inc., IBM Corporation, Internet Assets, Inc.,
Technology Leaders II L.P. and Technology Leaders II Offshore
C.V. have agreed, with certain exceptions, not to directly or
indirectly:
|
Ÿ
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later
acquired by the person executing the agreement or with
respect to which the person executing the agreement has or
later acquires the power of disposition, or file a
registration statement under the Securities Act relating to
any of the foregoing; or
|
|
Ÿ
|
enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of
our common stock,
|
whether any such swap or transaction is to be
settled by delivery of our common stock or other securities, in
cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus. See “Shares Eligible
for Future Sale.”
Quotation on the Nasdaq National Market
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
through negotiations among us and the representatives. Among
the factors considered by us and the representatives in
determining the initial public offering price of our common
stock, in addition to prevailing market conditions, are:
|
Ÿ
|
the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
|
|
Ÿ
|
certain of our financial information;
|
|
Ÿ
|
the history of, and the prospects for, our company and the
industry in which we compete;
|
|
Ÿ
|
an assessment of our management;
|
|
Ÿ
|
our past and present operations;
|
|
Ÿ
|
the prospects for, and timing of, our future revenue;
|
|
Ÿ
|
the present state of our development;
|
|
Ÿ
|
the percentage interest of Internet Capital Group being sold
as compared to the valuation for the entire company; and
|
|
Ÿ
|
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our
common stock will trade in the public market subsequent to
the offering at or above the initial public offering price.
|
We
have applied for a listing of our common stock on the Nasdaq
National Market under the symbol “ICGE.”
The
underwriters have advised us that they do not expect sales to
accounts over which the underwriters exercise discretionary
authority to exceed five percent of the total number of shares
of our common stock offered by them.
Price Stabilization, Short Positions and
Penalty Bids
Until the distribution of our 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 our common stock. As an exception to these
rules, the U.S. representatives are permitted to engage in
certain transactions that stabilize the price of our common
stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our
common stock.
If
the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares
of common stock than are set forth on the cover page of this
prospectus, the U.S. representatives may reduce that short
position by purchasing common stock in the open market. The
U.S. representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option
described above.
The
U.S. representatives may also impose a penalty bid on certain
underwriters and selling group members. This means that if the
U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters’ short position or
to stabilize the price of our 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 short position could cause the
price of the security to be higher than it might be in the
absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to
the extent that it discourages resales of our common stock.
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
our common stock. In addition, neither we nor any of the
underwriters makes any representation that the U.S.
representatives or the lead managers will engage in such
transactions or that such transactions, once commenced, will
not be discontinued without notice.
Through and including
, 1999 (the
25th day after the date of this prospectus), all dealers
effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to the unsold allotments or subscriptions.
13,300,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
PROSPECTUS
Merrill Lynch International
Banc of America Securities LLC
BancBoston Robertson Stephens
International Limited
Deutsche Bank
, 1999
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The
expenses to be paid by Internet Capital Group in connection
with the distribution of the securities being registered, other
than underwriting discounts and commissions, are as follows:
| |
|
Amount
(1)
|
| Securities
and Exchange Commission Registration Fee
|
|
$
73,531
|
| NASD Filing
Fee
|
|
26,950
|
| Nasdaq
National Market Listing Fee
|
|
95,000
|
| Accounting
Fees and Expenses
|
|
500,000
|
| Blue Sky Fees
and Expenses
|
|
1,000
|
| Legal Fees
and Expenses
|
|
450,000
|
| Transfer
Agent and Registrar Fees and Expenses
|
|
10,000
|
| Printing and
Engraving Expenses
|
|
200,000
|
| Director and
Officer Liability Insurance (2)
|
|
150,000
|
| Miscellaneous
Fees and Expenses
|
|
18,519
|
| |
|
|
|
Total
|
|
$1,525,000
|
| |
|
|
(1)
|
All amounts are estimates except the SEC filing fee, the NASD
filing fee and the Nasdaq National Market listing fee.
|
(2)
|
Represents premiums paid by Internet Capital Group on
policies that insure Internet Capital Group’s directors
and officers against certain liabilities they may incur in
connection with the registration, offering and sale of the
securities described herein.
|
Item 14. Indemnification of Directors and
Officers
Under Section 145 of the General Corporate Law of the State of
Delaware, Internet Capital Group has broad powers to indemnify
its directors and officers against liabilities they may incur
in such capacities, including liabilities under the Securities
Act of 1933, as amended (the “Securities Act”).
Internet Capital Group’s bylaws (Exhibit 3.2 hereto) also
provide for mandatory indemnification of its directors and
executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under
Delaware law.
Internet Capital Group’s certificate of incorporation
(Exhibit 3.1 hereto) provides that the liability of its
directors for monetary damages shall be eliminated to the
fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for
monetary damages for breach of the directors’ fiduciary
duty of care to Internet Capital Group and its shareholders.
These provisions do not eliminate the directors’ duty of
care and, in appropriate circumstances, equitable remedies such
as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director
’s duty of loyalty to Internet Capital Group, for acts or
omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction
from which the director derived an improper personal benefit,
and for payment of dividends or approval of stock repurchases
or redemptions that are unlawful under Delaware law. The
provision also does not affect a director’s
responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Internet Capital Group intends to obtain in conjunction with
the effectiveness of the Registration Statement a policy of
directors’ and officers’ liability insurance that
insures the Company’s directors and officers against the
cost of defense, settlement or payment of a judgment under
certain circumstances.
The Underwriting Agreements filed as Exhibits 1.1 and 1.2 to
this Registration Statement provide for indemnification by the
underwriters of Internet Capital Group and its officers and
directors for certain liabilities arising under the Securities
Act or otherwise.
Item 15. Recent Sales of Unregistered
Securities
Since its inception in March 1996, Internet Capital Group (or
its predecessor, Internet Capital Group, L.L.C.) has issued and
sold unregistered securities in the transactions described
below.
|
(1)
|
In April 1996, Internet Capital Group, L.L.C. issued 525,000
units of Membership Interests to employees, directors, and
consultants in a subscription offering for an aggregate
purchase price of $525,000.
|
|
(2)
|
On May 9, 1996, Internet Capital Group, L.L.C. issued
6,139,074 units of Membership Interests to Safeguard
Scientifics (Delaware), Inc. for an aggregate purchase price
of $6,139,074 consisting of the assignment of 182,500 shares
of Common Stock, 127,000 shares of Series C Preferred Stock,
855,400 shares of Series D Preferred Stock and 134,375 shares
of Series F Preferred Stock of Sky Alland Marketing, Inc. and
related rights and obligations in respect thereof.
|
|
(3)
|
In May 1996, Internet Capital Group, L.L.C. issued 2,925,000
units of Membership Interests to employees, consultants, and
other purchasers in a subscription offering for an aggregate
purchase price of $2,925,000.
|
|
(4)
|
In June 1996, Internet Capital Group, L.L.C. issued 2,000,000
units of Membership Interests to employees, consultants, and
other purchasers in a subscription offering for an aggregate
purchase price of $2,000,000
|
|
(5)
|
In July 1996, Internet Capital Group, L.L.C. issued an
aggregate of 800,000 units of Membership Interests to
BancBoston Investments, Inc., The HRG Corporation, and Mr.
Robert S. Adelson in a subscription offering for an aggregate
purchase price of $800,000.
|
|
(6)
|
In August 1996, Internet Capital Group, L.L.C. issued 168,750
units of Membership Interests to S.M.M Internet, M. Reid &
Company and Mr. Robert E. Keith, a director of Internet
Capital Group, and Mrs. Margot W. Keith in a subscription
offering for an aggregate purchase price of $168,750.
|
|
(7)
|
In September 1996, Internet Capital Group, L.L.C issued
175,000 units of Membership Interests to Mr. Herbert and Mrs.
Karen Lotman, F.B.A. Trust F/B/O Shelly Lotman Fisher, and
F.E.A. Trust F/B/O Jeffrey Lotman in a subscription offering
for an aggregate purchase price of $175,000.
|
|
(8)
|
On September 30 1996, Internet Capital Group, L.L.C. issued
an aggregate of 4,968,935 units of Membership Profit
Interests to employees, directors and consultants pursuant to
the Membership Profit Interest Plan in consideration for
services rendered to Internet Capital Group, L.L.C.
|
|
(9)
|
In October 1996, Internet Capital Group, L.L.C. issued 25,000
units of Membership Interests to Mrs. Jean C. Tempel in a
subscription offering for a purchase price of $25,000.
|
|
(10)
|
In November 1996, Internet Capital Group, L.L.C. issued
6,754,676 units of Membership Interests to employees,
consultants, directors, and other purchasers in a
subscription offering for an aggregate purchase price of
$6,754,676.
|
|
(11)
|
In December 1996, Internet Capital Group, L.L.C. issued
300,000 units of Membership Interests to Mr. Walter W.
Buckley, III, Chief Executive Officer and a director of
Internet Capital Group, and to Mr. Douglas A. Alexander, a
Managing Director of Internet Capital Group in a subscription
offering for an aggregate purchase price of $300,000.
|
|
(12)
|
In December 1996, Internet Capital Group, L.L.C. issued an
aggregate of 20,000 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(13)
|
In February 1997, Internet Capital Group, L.L.C. issued an
aggregate of 210,070 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(14)
|
On March 31, 1997, Internet Capital Group, L.L.C. issued
87,500 units of Membership Interests to Mr. Douglas A.
Alexander, a Managing Director of Internet Capital Group,
Mrs. Jean C. Tempel, and to Mr. Robert E. Keith, a director
of Internet Capital Group and Mrs. Margot W. Keith in a
subscription offering for an aggregate purchase price of
$87,500.
|
|
(15)
|
On April 11, 1997, Internet Capital Group, L.L.C. issued
46,783 units of Membership Interests to Mr. Lou Ryan pursuant
to the Membership Profit Interest Plan in consideration for
services rendered to Internet Capital Group, L.L.C.
|
|
(16)
|
In April 1997, Internet Capital Group, L.L.C. issued
9,318,750 units of Membership Interests to employees,
consultants, directors, and other purchasers in a
subscription offering for an aggregate purchase price of
$9,318,750.
|
|
(17)
|
In June 1997, Internet Capital Group, L.L.C. issued 550,000
units of Membership Interests to Mr. Walter W. Buckley, III,
Chief Executive Officer and a director of Internet Capital
Group, Mr. Kenneth A. Fox, a Managing Director and a director
of Internet Capital Group, and Mr. John C. Maxwell, III in a
subscription offering for an aggregate purchase price of
$550,000.
|
|
(18)
|
In August 1997, Internet Capital Group, L.L.C. issued 50,000
units of Membership Interests to the Tom Kippola Pension Plan
a subscription offering for a purchase price of $50,000.
|
|
(19)
|
In September 1997, Internet Capital Group, L.L.C. issued an
aggregate of 1,209,519 units of Membership Profit Interests
to employees and consultants to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(20)
|
In November 1997, Internet Capital Group, L.L.C. issued
9,456,250 units of Membership Interests to employees,
consultants, directors, and other purchasers in a
subscription offering for an aggregate purchase price of
$9,456,250.
|
|
(21)
|
In November 1997, Internet Capital Group, L.L.C. issued an
aggregate of 115,175 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(22)
|
In December 1997, Internet Capital Group, L.L.C. issued
725,000 units of Membership Interests to employees,
consultants, directors, and other purchasers in a
subscription offering for an aggregate purchase price of
$725,000.
|
|
(23)
|
In December 1997, Internet Capital Group, L.L.C. issued
185,000 units of Membership Profit Interests to employees and
consultants pursuant to the Membership Profit Interest Plan
in consideration for services rendered to Internet Capital
Group, L.L.C.
|
|
(24)
|
In March 1998, Internet Capital Group, L.L.C. issued 250,000
units of Membership Interests to Mr. Austin Hearst in a
subscription offering for an aggregate purchase price of
$500,000.
|
|
(25)
|
In April 1998, Internet Capital Group, L.L.C. issued an
aggregate of 125,000 units of Membership Interests to Mr.
Britton Murdock, Mr. Robert E. Keith and Mrs. Margot W. Keith
in a subscription offering for an aggregate purchase price of
$250,000.
|
|
(26)
|
In May 1998, Internet Capital Group, L.L.C. issued an
aggregate of 1,912,500 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $3,825,000.
|
|
(27)
|
In June 1998, Internet Capital Group, L.L.C. issued an
aggregate of 11,143,750 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $22,287,500.
|
|
(28)
|
In July 1998, Internet Capital Group, L.L.C. issued an
aggregate of 551,250 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $1,102,500.
|
|
(29)
|
In August 1998, Internet Capital Group, L.L.C. issued an
aggregate of 225,000 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $450,000.
|
|
(30)
|
In September 1998, Internet Capital Group, L.L.C. issued an
aggregate of 1,092,500 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $2,185,000.
|
|
(31)
|
In October 1998, Internet Capital Group, L.L.C. issued an
aggregate of 3,883,750 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $7,767,500.
|
|
(32)
|
In November 1998, Internet Capital Group, L.L.C. issued an
aggregate of 76,250 units of Membership Interests to Mr.
Roger S. Penske, Jr., Mr. Ron Trichon and Mr. T. Richard
Butera in a subscription offering for an aggregate purchase
price of $152,500.
|
|
(33)
|
In January 1999, Internet Capital Group, L.L.C. issued an
aggregate of 158,750 units of Membership Interests to Mr.
Samuel A. Plum, Mrs. Susan R. Buckley and Dr. Thomas P.
Gerrity, a director of Internet Capital Group, in a
subscription offering for an aggregate purchase price of
$317,500.
|
|
(34)
|
On February 2, 1999, each unit of the foregoing Membership
Interests and Membership Profit Interests was converted into
one share of Common Stock of Internet Capital Group as a
result of the merger of Internet Capital Group, L.L.C. into
Internet Capital Group.
|
|
(35)
|
In February 1999, Internet Capital Group issued an aggregate
of 14,706,250 shares of Common Stock to employees, directors,
consultants and other purchasers in a subscription offering
for an aggregate purchase price of $29,412,500.
|
|
(36)
|
In March 1999, Internet Capital Group issued an aggregate of
1,125,000 shares of Common Stock to consultants and other
purchasers in a subscription offering for an aggregate
purchase price of $2,250,000.
|
|
Warrants to Purchase Common Stock
|
On
May 10, 1999, in connection with Internet Capital Group’s
issuance of the convertible notes, Internet Capital Group
granted warrants, exercisable at the initial public offering
price, to the holders of the convertible notes to purchase a
number shares of common stock of Internet Capital Group equal
to $18 million divided by the initial public offering price.
On
April 30, 1999, in connection with the Secured Revolving Credit
Facility dated April 30, 1999, between Internet Capital Group,
Inc. and certain lenders and guarantors, Internet Capital Group
granted to the lenders warrants to purchase an aggregate of
200,000 shares of common stock of Internet Capital Group for a
purchase price of $10 per share.
|
Notes
Convertible to Common Stock
|
On
May 10, 1999, Internet Capital Group issued convertible notes
in an aggregate principal amount of $90 million. Upon
consummation of this offering, the convertible notes
automatically convert into shares of common stock of Internet
Capital Group at the initial public offering price.
|
Options
to Purchase Common Stock
|
Internet Capital Group from time to time has granted stock
options to employees, directors, advisory board members and
certain employees of our partner companies. The following table
sets forth certain information regarding such grants:
| |
|
No. of
Shares
|
|
Weighted
Averge
Exercise Prices
|
| 1996
|
|
—
|
|
N/A
|
| 1997
|
|
94,000
|
|
$1.00
|
| 1998
|
|
6,047,000
|
|
$ 2.00
|
| 1999
|
|
13,301,750
|
|
$ 5.74
|
The
sale and issuance of securities in the transactions described
above were exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering, where the
purchasers were sophisticated investors who represented their
intention to acquire securities for investment only and not
with a view to distribution and received or had access to
adequate information about the Registrant or in reliance on
rule 701 promulgated under the Securities Act.
Appropriate restrictive legends were affixed to the stock
certificates issued in the above transactions. Similar legends
were imposed in connection with any subsequent sales of any
such securities. No underwriters were employed in any of the
above transactions.
Item 16. Exhibits and
Financial Statement Schedules
(a)
Exhibits
Exhibit
Number
|
|
Document
|
| 1.1**
|
|
Form of
Underwriting Agreement for U.S. Offering
|
| 1.2**
|
|
Form of
Underwriting Agreement for International Offering
|
| 2.1**
|
|
Agreement of
Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and
Internet Capital Group, Inc.
|
| 3.1
|
|
Restated
Certificate of Incorporation
|
| 3.2
|
|
Amended and
Restated Bylaws
|
| 4.1
|
|
Specimen
Certificate for Internet Capital Group’s Common Stock
|
| 5.1
|
|
Form of
Opinion of Dechert Price & Rhoads as to the legality of
the shares of Common Stock
being registered
|
| 10.1**
|
|
Internet
Capital Group, L.L.C. 1998 Equity Compensation Plan
|
| 10.1.1**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan
|
| 10.1.2**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1,
1999
|
| 10.1.3**
|
|
Amendment No.
1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as
Amended and Restated May 1, 1999
|
| 10.2**
|
|
Internet
Capital Group, L.L.C. Option Plan for Non-Employee Managers
|
| 10.2.1**
|
|
Internet
Capital Group, Inc. Directors’ Option Plan
|
| 10.3**
|
|
Internet
Capital Group, L.L.C. Membership Profit Interest Plan
|
| 10.4
|
|
Internet
Capital Group, Inc. Long-Term Incentive Plan
|
| 10.5**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated September 30, 1998
|
| 10.5.1**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated January 4, 1999
|
| 10.6**
|
|
Securities
Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and
certain securities holders named therein
|
| 10.7**
|
|
Amended and
Restated 1996 Equity Compensation Plan of VerticalNet, Inc.
(incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the
Registration Statement on Form S-1 filed by
VerticalNet, Inc. on January 22, 1999 (Registration No.
333-68053) (“VerticalNet Amendment
No. 1”))
|
| 10.8**
|
|
Employment
Letter with Mark L. Walsh (incorporated by reference to
Exhibit 10.2 to Amendment
No. 2 to the Registration Statement on Form S-1 filed by
VerticalNet, Inc. on February 8, 1999
(Registration No. 333-68053) (“VerticalNet Amendment No. 2
”))
|
| 10.9**
|
|
Employment
Letter with Bary E. Wynkoop (incorporated by reference to
Exhibit 10.3 to
VerticalNet Amendment No. 2)
|
| 10.10**
|
|
Share
Purchase Agreement dated September 1, 1998, between Boulder
Interactive Technology
Services Co. and VerticalNet, Inc. (incorporated by reference
to Exhibit 10.4 to VerticalNet
Amendment No. 1)
|
| 10.11**
|
|
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. (incorporated by reference to Exhibit 10.5 to VerticalNet
Amendment No. 2)
|
| 10.12**
|
|
Sponsorship
Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.
(incorporated by reference to Exhibit 10.6 to VerticalNet
Amendment No. 1)
|
| 10.13**
|
|
Internet
Services Agreement dated as of January 19, 1999 by and
between Compaq Computer
Corporation and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.7 to Amendment No. 3
to the Registration Statement on Form S-1 filed by VerticalNet,
Inc. on February 10, 1999
(Registration No. 333-68053))
|
Exhibit
Number
|
|
Document
|
| 10.14**
|
|
Asset
Purchase Agreement dated January 13, 1999 by and among
VerticalNet, Inc., Coastal
Video Communications Corp., Paul V. Michels and Phillip P.
Price (incorporated by reference to
Exhibit 10.8 to VerticalNet Amendment No. 1)
|
| 10.15**
|
|
Common Stock
Purchase Warrant to purchase 40,000 or 60,000 shares of
VerticalNet, Inc.
Common Stock dated November 25, 1998 issued to Progress
Capital, Inc. (incorporated by
reference to Exhibit 10.9 to VerticalNet Amendment No. 1)
|
| 10.16**
|
|
Form of
VerticalNet, Inc. Common Stock Purchase Warrant dated
November 25, 1998 issued in
connection with the Convertible Note (incorporated by reference
to Exhibit 10.10 to VerticalNet
Amendment No. 1)
|
| 10.17**
|
|
Form of
VerticalNet, Inc. Convertible Note dated November 25, 1998
(incorporated by reference
to Exhibit 10.11 to VerticalNet Amendment No. 1)
|
| 10.18**
|
|
Series A
Preferred Stock Purchase Agreement dated as of September 12,
1996 between Internet
Capital Group, L.L.C. and Water Online, Inc. (incorporated by
reference to Exhibit 10.12 to
VerticalNet Amendment No. 2)
|
| 10.19**
|
|
Series D
Investor Rights Agreement dated as of May 8, 1998 by and
among VerticalNet, Inc.
and the Investors (incorporated by reference to Exhibit 10.13
to VerticalNet Amendment No. 2)
|
| 10.20**
|
|
Registration
Rights Agreement dated as of November 25, 1998 between
VerticalNet, Inc. and the
Convertible Note Holders (incorporated by reference to Exhibit
10.14 to VerticalNet Amendment
No. 2)
|
| 10.20.1
|
|
Agreement and
Plan of Merger among VerticalNet, Inc., TSX Acquisition
Corp., Techspex, Inc.
and the Stockholders of Techspex, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K
filed by VerticalNet, Inc. on June 25, 1999 (SEC File No.
333-72143))
|
| 10.21**
|
|
Form of
Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May , 1999
issued in connection with the Convertible Note
|
| 10.22**
|
|
Form of
Internet Capital Group, Inc. Convertible Note dated May 10,
1999
|
| 10.23
|
|
Form of Stock
Purchase Agreement between Internet Capital Group and
Safeguard Scientifics,
Inc.
|
| 10.23.1**
|
|
Stock
Purchase Agreement between Internet Capital Group, Inc. and
International Business
Machines Corporation
|
| 10.23.2
|
|
Form of
Placement Agency Agreement between Internet Capital Group,
Inc. and Merrill Lynch
& Co.
|
| 10.23.3
|
|
Form of Fee
Arrangement Letter between Internet Capital Group, Inc. and
Merrill Lynch & Co.
|
| 10.24**
|
|
Letter
describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc.
for premises located in Wayne, Pennsylvania
|
| 10.25**
|
|
Office Lease
dated July 22, 1996 between State Street Bank and Trust,
Internet Capital Group,
The Access Fund, Hamilton Lane Advisors and Martin S. Gans for
office space in San
Francisco, California.
|
| 10.26**
|
|
Letter
describing the oral lease between Internet Capital Group and
Jean C. Tempel for premises
located in Boston, Massachusetts
|
| 10.27**
|
|
Office Lease
dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc.
|
| 10.28**
|
|
Credit
Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC
Bank, N.A.
|
| 10.29**
|
|
Benchmarking
Partners, Inc. Option Agreement dated January 1, 1997 by and
between
Christopher H. Greendale and Internet Capital Group, L.L.C.
|
| 10.29.1
|
|
Amendment to
Benchmarking Partners Option Agreement dated July 19, 1999 by
and between
Christopher H. Greendale and Internet Capital Group, Inc.
|
| 10.30**
|
|
Syncra
Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H.
Forster and Internet Capital Group, L.L.C.
|
| 10.31**
|
|
Letter
Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18,
1997
|
Exhibit
Number
|
|
Document
|
| 10.32**
|
|
Letter
Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998
|
| 10.33**
|
|
Form of
Promissory Note issued in connection with exercise of
Internet Capital Group’s stock
options in May, June and July of 1999
|
| 10.34**
|
|
Form of
Restrictive Covenant Agreement executed in connection with
exercise of Internet Capital
Group’s stock options
|
| 21.1**
|
|
Subsidiaries
of Internet Capital Group
|
| 23.1
|
|
Consent of
KPMG LLP regarding Internet Capital Group
|
| 23.2
|
|
Consent of
Dechert Price & Rhoads, included in Exhibit 5.1
|
| 23.3
|
|
Consent of
KPMG LLP regarding Applica Corporation
|
| 23.4
|
|
Consent of
KPMG LLP regarding Breakaway Solutions, Inc.
|
| 23.5
|
|
Consent of
PricewaterhouseCoopers LLP regarding Commerce Quest, Inc.
|
| 23.6
|
|
Consent of
Ernst & Young LLP regarding ComputerJobs.com, Inc.
|
| 23.7
|
|
Consent of
PricewaterhouseCoopers LLP regarding Syncra Software, Inc.
|
| 23.8
|
|
Consent of
KPMG LLP regarding United Messaging, Inc.
|
| 23.9
|
|
Consent of
PricewaterhouseCoopers LLP regarding Universal Access, Inc.
|
| 23.10
|
|
Consent of
KPMG LLP regarding Web Yes, Inc.
|
| 23.11
|
|
Consent of
KPMG LLP regarding WPL Laboratories
|
| 24.1**
|
|
Power of
Attorney, included on the signature page hereof
|
| 24.2**
|
|
Power of
Attorney for Peter A. Solvik
|
| 27.1
|
|
Financial
Data Schedule
|
| 99.1**
|
|
Form of
Letter from Internet Capital Group, Inc. to Safeguard
Scientifics, Inc.’s shareholders
describing the Directed Share Subscription Program
|
| 99.2**
|
|
Form of
Letter from Merrill Lynch & Co. to Safeguard Scientifics,
Inc.’s shareholders to
accompany the Internet Capital Group, Inc. letter to Safeguard
Scientifics, Inc. shareholders
|
| 99.3**
|
|
Form of
Letter from Internet Capital Group, Inc. to Brokers
describing the Directed Share
Subscription Program
|
| 99.4**
|
|
Form of
Subscription Form for Directed Share Subscription Program
|
| 99.5
|
|
Information
placed by Wit Capital on its Web site regarding Internet
Capital Group, Inc.
|
* To be filed by amendment.
** Previously filed.
(b)
Financial Statement Schedules
Schedules have been omitted since they are not required or are
not applicable or the required information is shown in the
financial statements or related notes.
Item 17. Undertakings
The
undersigned Registrant hereby undertakes to provide the
underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
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 Securities and Exchange 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 purposes 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 therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania on the 30th day of July, 1999.
|
INTERNET
CAPITAL GROUP, INC.
|
|
President
and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the Registration Statement has been signed by
the following persons in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
WALTER
W. BUCKLEY
, III
Walter W. Buckley, III
|
|
President,
Chief Executive
Officer and Director
(principal executive officer)
|
|
July 30, 1999
|
|
|
|
DAVID
D. GATHMAN
David D. Gathman
|
|
Chief
Financial Officer and
Treasurer
(principal financial
and accounting officer)
|
|
July 30, 1999
|
|
|
|
*
Julian A. Brodsky
|
|
Director
|
|
July 30, 1999
|
|
|
|
*
E. Michael Forgash
|
|
Director
|
|
July 30, 1999
|
|
|
|
*
Kenneth A. Fox
|
|
Director
|
|
July 30, 1999
|
|
|
|
*
Dr. Thomas P. Gerrity
|
|
Director
|
|
July 30, 1999
|
|
|
|
*
Scott Gould
|
|
Director
|
|
July 30, 1999
|
|
|
|
*
Robert E. Keith, Jr.
|
|
Director
|
|
July 30, 1999
|
|
*
Peter A. Solvik
|
|
Director
|
|
July 30, 1999
|
* By:
EXHIBIT INDEX
Exhibit
Number
|
|
Document
|
| 1.1**
|
|
Form of
Underwriting Agreement for U.S. Offering
|
| 1.2**
|
|
Form of
Underwriting Agreement for International Offering
|
| 2.1**
|
|
Agreement of
Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and
Internet Capital Group, Inc.
|
| 3.1
|
|
Restated
Certificate of Incorporation
|
| 3.2
|
|
Amended and
Restated Bylaws
|
| 4.1
|
|
Specimen
Certificate for Internet Capital Group’s Common Stock
|
| 5.1
|
|
Form of
Opinion of Dechert Price & Rhoads as to the legality of
the shares of Common Stock
being registered
|
| 10.1**
|
|
Internet
Capital Group, L.L.C. 1998 Equity Compensation Plan
|
| 10.1.1**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan
|
| 10.1.2**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1,
1999
|
| 10.1.3**
|
|
Amendment No.
1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as
Amended and Restated May 1, 1999
|
| 10.2**
|
|
Internet
Capital Group, L.L.C. Option Plan for Non-Employee Managers
|
| 10.2.1**
|
|
Internet
Capital Group, Inc. Directors’ Option Plan
|
| 10.3**
|
|
Internet
Capital Group, L.L.C. Membership Profit Interest Plan
|
| 10.4
|
|
Internet
Capital Group, Inc. Long-Term Incentive Plan
|
| 10.5**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated September 30, 1998
|
| 10.5.1**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated January 4, 1999
|
| 10.6**
|
|
Securities
Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and
certain securities holders named therein
|
| 10.7**
|
|
Amended and
Restated 1996 Equity Compensation Plan of VerticalNet, Inc.
(incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the
Registration Statement on Form S-1 filed by
VerticalNet, Inc. on January 22, 1999 (Registration No.
333-68053) (“VerticalNet Amendment
No. 1”))
|
| 10.8**
|
|
Employment
Letter with Mark L. Walsh (incorporated by reference to
Exhibit 10.2 to Amendment
No. 2 to the Registration Statement on Form S-1 filed by
VerticalNet, Inc. on February 8, 1999
(Registration No. 333-68053) (“VerticalNet Amendment No. 2
”))
|
| 10.9**
|
|
Employment
Letter with Bary E. Wynkoop (incorporated by reference to
Exhibit 10.3 to
VerticalNet Amendment No. 2)
|
| 10.10**
|
|
Share
Purchase Agreement dated September 1, 1998, between Boulder
Interactive Technology
Services Co. and VerticalNet, Inc. (incorporated by reference
to Exhibit 10.4 to VerticalNet
Amendment No. 1)
|
| 10.11**
|
|
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. (incorporated by reference to Exhibit 10.5 to VerticalNet
Amendment No. 2)
|
| 10.12**
|
|
Sponsorship
Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.
(incorporated by reference to Exhibit 10.6 to VerticalNet
Amendment No. 1)
|
| 10.13**
|
|
Internet
Services Agreement dated as of January 19, 1999 by and
between Compaq Computer
Corporation and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.7 to Amendment No. 3
to the Registration Statement on Form S-1 filed by VerticalNet,
Inc. on February 10, 1999
(Registration No. 333-68053))
|
Exhibit
Number
|
|
Document
|
| 10.14**
|
|
Asset
Purchase Agreement dated January 13, 1999 by and among
VerticalNet, Inc., Coastal
Video Communications Corp., Paul V. Michels and Phillip P.
Price (incorporated by reference to
Exhibit 10.8 to VerticalNet Amendment No. 1)
|
| 10.15**
|
|
Common Stock
Purchase Warrant to purchase 40,000 or 60,000 shares of
VerticalNet, Inc.
Common Stock dated November 25, 1998 issued to Progress
Capital, Inc. (incorporated by
reference to Exhibit 10.9 to VerticalNet Amendment No. 1)
|
| 10.16**
|
|
Form of
VerticalNet, Inc. Common Stock Purchase Warrant dated
November 25, 1998 issued in
connection with the Convertible Note (incorporated by reference
to Exhibit 10.10 to VerticalNet
Amendment No. 1)
|
| 10.17**
|
|
Form of
VerticalNet, Inc. Convertible Note dated November 25, 1998
(incorporated by reference
to Exhibit 10.11 to VerticalNet Amendment No. 1)
|
| 10.18**
|
|
Series A
Preferred Stock Purchase Agreement dated as of September 12,
1996 between Internet
Capital Group, L.L.C. and Water Online, Inc. (incorporated by
reference to Exhibit 10.12 to
VerticalNet Amendment No. 2)
|
| 10.19**
|
|
Series D
Investor Rights Agreement dated as of May 8, 1998 by and
among VerticalNet, Inc. and
the Investors (incorporated by reference to Exhibit 10.13 to
VerticalNet Amendment No. 2)
|
| 10.20**
|
|
Registration
Rights Agreement dated as of November 25, 1998 between
VerticalNet, Inc. and the
Convertible Note Holders (incorporated by reference to Exhibit
10.14 to VerticalNet Amendment
No. 2)
|
| 10.20.1**
|
|
Agreement and
Plan of Merger among VerticalNet, Inc., TSX Acquisition
Corp., Techspex, Inc.
and the Stockholders of Techspex, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K
filed by VerticalNet, Inc. on June 25, 1999 (SEC File No.
333-72143))
|
| 10.21**
|
|
Form of
Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May , 1999
issued in connection with the Convertible Note
|
| 10.22**
|
|
Form of
Internet Capital Group, Inc. Convertible Note dated May 10,
1999
|
| 10.23
|
|
Form of Stock
Purchase Agreement between Internet Capital Group and
Safeguard Scientifics,
Inc.
|
| 10.23.1**
|
|
Stock
Purchase Agreement between Internet Capital Group, Inc. and
International Business
Machines Corporation
|
| 10.23.2
|
|
Form of
Placement Agency Agreement between Internet Capital Group,
Inc. and Merrill Lynch
& Co.
|
| 10.23.3
|
|
Form of Fee
Arrangement Letter between Internet Capital Group, Inc. and
Merrill Lynch & Co.
|
| 10.24**
|
|
Letter
describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc.
for premises located in Wayne, Pennsylvania
|
| 10.25**
|
|
Office Lease
dated July 22, 1996 between State Street Bank and Trust,
Internet Capital Group,
The Access Fund, Hamilton Lane Advisors and Martin S. Gans for
office space in San Francisco,
California.
|
| 10.26**
|
|
Letter
describing the oral lease between Internet Capital Group and
Jean C. Tempel for premises
located in Boston, Massachusetts
|
| 10.27**
|
|
Office Lease
dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc.
|
| 10.28**
|
|
Credit
Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC
Bank, N.A.
|
| 10.29**
|
|
Benchmarking
Partners, Inc. Option Agreement dated January 1, 1997 by and
between
Christopher H. Greendale and Internet Capital Group, L.L.C.
|
| 10.29.1
|
|
Amendment to
Benchmarking Partners Option Agreement dated July 19, 1999 by
and between
Christopher H. Greendale and Internet Capital Group, Inc.
|
| 10.30**
|
|
Syncra
Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H.
Forster and Internet Capital Group, L.L.C.
|
| 10.31**
|
|
Letter
Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18,
1997
|
Exhibit
Number
|
|
Document
|
| 10.32**
|
|
Letter
Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998
|
| 10.33**
|
|
Form of
Promissory Note issued in connection with exercise of
Internet Capital Group’s stock
options in May, June and July of 1999
|
| 10.34**
|
|
Form of
Restrictive Covenant Agreement executed in connection with
exercise of Internet Capital
Group’s stock options
|
| 21.1**
|
|
Subsidiaries
of Internet Capital Group
|
| 23.1
|
|
Consent of
KPMG LLP regarding Internet Capital Group
|
| 23.2
|
|
Consent of
Dechert Price & Rhoads, included in Exhibit 5.1
|
| 23.3
|
|
Consent of
KPMG LLP regarding Applica Corporation
|
| 23.4
|
|
Consent of
KPMG LLP regarding Breakaway Solutions, Inc.
|
| 23.5
|
|
Consent of
PricewaterhouseCoopers LLP regarding Commerce Quest, Inc.
|
| 23.6
|
|
Consent of
Ernst & Young LLP regarding ComputerJobs.com, Inc.
|
| 23.7
|
|
Consent of
PricewaterhouseCoopers LLP regarding Syncra Software, Inc.
|
| 23.8
|
|
Consent of
KPMG LLP regarding United Messaging, Inc.
|
| 23.9
|
|
Consent of
PricewaterhouseCoopers LLP regarding Universal Access, Inc.
|
| 23.10
|
|
Consent of
KPMG LLP regarding Web Yes, Inc.
|
| 23.11
|
|
Consent of
KPMG LLP regarding WPL Laboratories
|
| 24.1**
|
|
Power of
Attorney, included on the signature page hereof
|
| 24.2**
|
|
Power of
Attorney for Peter A. Solvik
|
| 27.1
|
|
Financial
Data Schedule
|
| 99.1**
|
|
Form of
Letter from Internet Capital Group, Inc. to Safeguard
Scientifics, Inc.’s shareholders
describing the Directed Share Subscription Program
|
| 99.2**
|
|
Form of
Letter from Merrill Lynch & Co. to Safeguard Scientifics,
Inc.’s shareholders to
accompany the Internet Capital Group, Inc. letter to Safeguard
Scientifics, Inc. shareholders
|
| 99.3**
|
|
Form of
Letter from Internet Capital Group, Inc. to Brokers
describing the Directed Share
Subscription Program
|
| 99.4**
|
|
Form of
Subscription Form for Directed Share Subscription Program
|
| 99.5
|
|
Information
placed by Wit Capital on its Web site regarding Internet
Capital Group, Inc.
|
* To be filed by amendment.
** Previously filed.
