<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1999.
Registration No. 333-78193
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERNET CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
----------------
435 Devon Park Drive
Building 800
Wayne, Pennsylvania 19087
(610) 989-0111
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
----------------
Walter W. Buckley, III
President and Chief Executive Officer
Internet Capital Group, Inc.
435 Devon Park Drive
Building 800
Wayne, Pennsylvania 19087
(610) 989-0111
(Name, address including zip code, and telephone number, including area code,
of agent for service)
----------------
With copies to:
Christopher G. Karras, Esq. Bruce K. Dallas, Esq.
Dechert Price & Rhoads Davis Polk & Wardwell
4000 Bell Atlantic Tower 450 Lexington Avenue
1717 Arch Street New York, New York 10017
Philadelphia, Pennsylvania 19103 (212) 450-4000
(215) 994-4000
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Maximum
Proposed Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Price Registration
Securities to be Registered Registered (1) Per Share (2) Fee (3)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share.......................... 18,500,000 $10.00 $185,000,000 $51,430
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 2,250,000 shares that the underwriters have the option to purchase
solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) The Registrant paid $73,531 in connection with its initial filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Explanatory Note
This Registration Statement contains three forms of prospectus. One will
be used in connection with an offering of the registrant's common stock in the
United States and Canada, one will be used in connection with an offering of
the registrants common stock outside the United States and Canada, and the last
will be used in the Directed Share Subscription Program offering of the
registrant's common stock to some shareholders of Safeguard Scientifics, Inc.
and to a unit investment trust in which some shareholders of Safeguard
Scientifics, Inc. may invest. The U.S. prospectus and non-U.S. prospectus will
be identical except for the cover page and the underwriting section. The U.S.
prospectus and the Directed Share Subscription prospectus will be identical
except that a letter to shareholders of Safeguard Scientifics, Inc. detailing
the procedures for the Directed Share Subscription Program will be bound to the
cover of the prospectus to be used in that program. The letter to shareholders
of Safeguard Scientifics, Inc. is filed as Exhibit 99.1 to this Registration
Statement.
<PAGE>
[Logo depicting Internet Capital Group's structure and strategy]
Text of Artwork:
. MARKET MAKERS bring buyers and sellers together by creating Internet-based
markets for the exchange of goods, services and information. 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.
. INTERNET CAPITAL GROUP leverages the collective knowledge and resources of
our partner companies, strategic investors and Advisory Board to actively
develop the business strategies, operations and management teams of our
partner companies. With the goal of holding our partner company interests
for the long-term, we use our experience, industry relationships and
specific expertise to provide our network of partner companies with
strategic guidance, sales and marketing, executive recruiting and human
resources, information technology, finance and business development support.
. 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 business-to-business e-
commerce.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated June 22, 1999
PROSPECTUS
16,250,000 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 16,250,000 shares being offered, we are offering
15,000,000 shares to the public generally and to shareholders of one of our
shareholders, Safeguard Scientifics, Inc., and Safeguard Scientifics, Inc. is
offering up to 1,250,000 shares to its shareholders. We will not receive any
proceeds from the shares being offered by Safeguard Scientifics, Inc.
We expect the public offering price to be between $8.00 and $10.00 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 7 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount................................... $ $
Proceeds, before expenses, to Internet Capital Group,
Inc. .................................................. $ $
Proceeds, before expenses, to Safeguard Scientifics,
Inc.................................................... $ $
</TABLE>
The underwriters may also purchase from us up to an additional 2,250,000
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 & Co.
BancBoston Robertson Stephens
Banc of America Securities LLC
Deutsche Banc Alex. Brown
Wit Capital Corporation
-----------
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 18
Use Of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
The Reorganization....................................................... 20
Directed Share Subscription Program...................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 24
Our Business............................................................. 36
Management............................................................... 55
Certain Transactions..................................................... 70
Principal and Selling Shareholders....................................... 74
Description Of Capital Stock............................................. 76
Shares Eligible For Future Sale.......................................... 80
Certain United States Tax Consequences to Non-U.S. Holders............... 81
Underwriting............................................................. 84
Legal Matters............................................................ 89
Experts.................................................................. 89
Where You Can Find More Information...................................... 89
Index to Consolidated Financial Statements............................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
The terms "Internet Capital Group," "our" and "we," as used in this
prospectus, refer to Internet Capital Group, L.L.C. and its wholly-owned
subsidiary, Internet Capital Group Operations, Inc. (formerly known as Internet
Capital Group, Inc.), for periods before the reorganization of Internet Capital
Group, L.L.C. into Internet Capital Group, Inc. and refer to Internet Capital
Group, Inc. and this subsidiary for periods after the reorganization, except
where it is clear that the term refers only to Internet Capital Group, Inc.
In this prospectus, when we refer to "this offering" or "the offering,"
those terms include the shares being offered by us to the public as well as the
shares being offered by us and by Safeguard Scientifics, Inc. to shareholders
of Safeguard Scientifics, Inc. and to a unit investment trust. See "Certain
Offerings."
Although we refer to the companies in which we have acquired an equity
interest as our "partner companies" and that we have a "partnership" with these
companies, we do not act as an agent or legal representative for any of our
partner companies, we do not have the power or authority to legally bind any of
our partner companies and we do not have the types of liabilities in relation
to our partner companies that a general partner of a partnership would have.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
We intend to furnish our shareholders with annual reports containing
consolidated financial statements audited by an independent accounting firm.
<PAGE>
SUMMARY
This summary is not complete and may not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision. Unless otherwise specifically stated, the information in this
prospectus has been adjusted to reflect the automatic conversion of all
outstanding convertible notes into shares of common stock, but does not take
into account the possible sale of additional shares of common stock to the
underwriters by us under the underwriters' right to purchase additional shares
to cover over-allotments and assumes that Safeguard Scientifics, Inc. sells all
1,250,000 shares offered by it in this offering. In addition, unless otherwise
indicated, all information in this prospectus gives effect to the
reorganization described in "The Reorganization" that was effected before this
offering.
Internet Capital Group, Inc.
Internet Capital Group is an Internet holding company actively engaged in
business-to-business, or B2B, e-commerce through a network of partner
companies. 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 15, 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. Currently, our Advisory
Board consists of individuals with executive-level experience in general
management, sales and marketing and information technology at such leading
companies as Cisco Systems, Coca-Cola Company, Exodus Communications, IBM,
MasterCard, Merrill Lynch and Microsoft. We believe that building successful
B2B e-commerce companies enhances the ability of our collaborative network to
facilitate innovation and growth among our partner companies.
The substantial growth in B2B e-commerce creates tremendous market
opportunities for new emerging companies. Forrester Research estimates that the
B2B e-commerce market, defined as the intercompany trade of hard goods over the
Internet, will grow from $35 billion in 1998 to more than $1.3 trillion by
2003. We focus on two types of B2B e-commerce companies, which we call market
makers and infrastructure service providers.
. Market makers bring buyers and sellers together by creating Internet-
based markets for the exchange of goods, services and information.
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. Our partner company network currently
includes significant interests in 18 market makers: Arbinet
Communications, BidCom, Collabria, CommerX, ComputerJobs.com, Deja.com,
e-Chemicals, eMarketWorld, Internet Commerce Systems, iParts, ONVIA.com,
PaperExchange, PlanSponsor Exchange, PointMent, RapidAutoNet, Star-
Cite!, Universal Access and VerticalNet.
. 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. Our
3
<PAGE>
partner company network currently includes significant interests in 17
infrastructure service providers: Benchmarking Partners, Blackboard,
Breakaway Solutions, ClearCommerce, Context Integration, Entegrity
Solutions, LinkShare, MessageQuest, PrivaSeek, SageMaker, ServiceSoft,
Sky Alland Marketing, Syncra Software, Tradex Technologies, United
Messaging, US Interactive and Vivant!.
We have grown rapidly since our inception in 1996. In 1998, we added 12
B2B e-commerce companies to our network and from the beginning of 1999 to June
15, 1999, we added 15 B2B e-commerce companies to our network.
Our principal executive office is located at 435 Devon Park Drive,
Building 800, Wayne, Pennsylvania 19087 and our telephone number is (610) 989-
0111. We also maintain offices in San Francisco, California, and Boston,
Massachusetts. We maintain a site on the World Wide Web at www.icge.com. The
information on our Web site is not part of this prospectus.
4
<PAGE>
This Offering
The offering information provided below assumes that the $90 million
principal amount of our convertible notes have been converted into $10 million
shares of our common stock based on an assumed initial public offering price of
$9.00 per share and that the underwriters' over-allotment option is not
exercised and excludes:
. shares of common stock reserved for issuance under our 1999 Equity
Compensation Plan, under which options to purchase 5,058,500 shares
were outstanding as of June 15, 1999 at a weighted average exercise
price of $6.38 per share and 3,720,750 shares were available for grant
as of June 15, 1999;
. warrants outstanding to purchase 2,000,000 shares at an exercise price
of $9.00 per share; and
. warrants outstanding to purchase 200,000 shares at an exercise price
of $10.00 per share.
<TABLE>
<C> <S>
Common stock offered:
U.S. offering............................................... 13,250,000 shares
International offering...................................... 3,000,000 shares
------------------
Total................................................... 16,250,000 shares
Shares outstanding after the U.S. and international offerings.. 119,226,304 shares
Over-allotment option.......................................... 2,250,000 shares
Use of proceeds................................................ We estimate that the net
proceeds to us from this
offering without
exercise of the
over-allotment option
will be approximately
$124.6 million, assuming
an offering price of
$9.00 per share based on
the mid-point of the
range on the cover of
this prospectus. We
intend to use these net
proceeds for repayment
of outstanding debt,
acquisitions and working
capital.
Risk factors................................................... See "Risk Factors" and
the other information
included in this
prospectus for a
discussion of factors
you should carefully
consider before deciding
to invest in shares of
our common stock.
Nasdaq National Market symbol.................................. "ICGE"
</TABLE>
Directed Share Subscription Program
Concurrently with our offering to the public and as part of this
offering, we and Safeguard Scientifics, Inc. are offering approximately 3.5
million shares of our common stock to certain shareholders of Safeguard
Scientifics, Inc. in a directed share subscription program. Certain
shareholders of Safeguard Scientifics, Inc. will be ineligible to purchase
shares directly in the directed share subscription program, but may instead be
eligible to purchase interests in a unit investment trust that will invest its
assets solely in our common stock. The shares offered to the unit investment
trust are included in the 3.5 million shares. Immediately prior to the
completion of this offering, Safeguard Scientifics, Inc. will beneficially own
18.3% of our common stock. The directed share subscription program is described
in greater detail below under the heading "Directed Share Subscription
Program."
5
<PAGE>
Summary Consolidated Financial Data
The following summary historical and pro forma consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus. The summary pro forma data does not purport to represent what our
results would have been if the events described below had occurred at the dates
indicated. The pro forma consolidated statements of operations data for the
year ended December 31, 1998 and the three months ended March 31, 1999 reflects
our taxation as a corporation since January 1, 1998 and 1999, respectively,
although we have been taxed as a corporation since February 2, 1999. The pro
forma consolidated balance sheet data reflects the issuance of $90 million
principal amount of our convertible notes in May 1999. The pro forma as
adjusted consolidated balance sheet data reflects the automatic conversion of
our convertible notes into 10,000,000 shares of our common stock upon
completion of this offering and the sale of shares of our common stock in this
offering at an assumed initial public offering price of $9.00 per share and
after deduction of estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Three Months Ended
(Inception) to Year Ended December 31, March 31,
December 31, --------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue
Partner Company
Operations............ $ 285,140 $ 791,822 $ 3,134,769 $ 377,371 $ 3,111,035
General ICG
Operations............ -- -- -- -- --
------------ ------------ ------------- ------------ ------------
$ 285,140 $ 791,822 $ 3,134,769 $ 377,371 $ 3,111,035
============ ============ ============= ============ ============
Operating Loss
Partner Company
Operations............ $ (789,762) $ (4,663,796) $ (13,996,251) $ (2,298,782) $ (7,840,725)
General ICG
Operations............ (1,360,821) (2,054,118) (3,512,586) (700,719) (1,822,634)
------------ ------------ ------------- ------------ ------------
$ (2,150,583) $ (6,717,914) $ (17,508,837) $ (2,999,501) $ (9,663,359)
============ ============ ============= ============ ============
Net Income (Loss)
Partner Company
Operations............ $ (796,202) $ (4,778,902) $ (14,081,522) $ (2,374,716) $ (7,802,449)
General ICG
Operations............ (1,266,283) (1,800,726) 27,980,450 11,643,757 27,140,040
Income tax benefit..... -- -- -- -- 663,206
------------ ------------ ------------- ------------ ------------
$ (2,062,485) $ (6,579,628) $ 13,898,928 $ 9,269,041 $ 20,000,797
============ ============ ============= ============ ============
Net income (loss) per
share--diluted......... $ (0.10) $ (0.19) $ 0.25 $ 0.20 $ 0.27
Weighted average shares
outstanding--diluted... 20,395,774 34,098,844 56,149,289 46,783,625 73,699,973
Pro forma net income
(unaudited)............ $ 8,756,325 $ 12,182,682
Pro forma net income per
share--diluted
(unaudited)............ $ 0.16 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------- -------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 19,236,061 $ 109,236,061 $ 233,848,561
Working capital....................... 18,033,259 108,033,259 232,645,759
Total assets.......................... 130,128,664 220,128,664 344,741,164
Long-term debt........................ 121,665 121,665 121,665
Convertible subordinated notes........ -- 90,000,000 --
Total shareholders' equity............ 123,245,799 123,245,799 337,858,299
</TABLE>
6
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Internet Capital Group. As one of our shareholders, your investment
will be subject to risks inherent in our business. The price of our common
stock may decline. You should carefully consider the following factors as well
as other information contained in this prospectus before deciding to invest in
shares of our common stock.
RISKS PARTICULAR TO INTERNET CAPITAL GROUP
We have a limited operating history upon which you may evaluate us
We were formed in March 1996. Although we have grown significantly since
then, we have a limited operating history upon which you may evaluate our
business and prospects. We and our partner companies are among the many
companies that have entered into the emerging B2B e-commerce market. Many of
our partner companies are in the early stages of their development. Our
business and prospects must be considered in light of the risk, expense and
difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such as
B2B e-commerce. If we are unable to effectively allocate our resources and help
grow existing partner companies, our stock price may be adversely affected and
we may be unable to execute our strategy of developing a collaborative network
of partner companies.
Our business depends upon the performance of our partner companies, which is
uncertain
Economic, governmental, industry and internal company factors outside our
control affect each of our partner companies. If our partner companies do not
succeed, the value of our assets will decline. The material risks relating to
our partner companies include:
. fluctuations in the market price of the common stock of VerticalNet
and other future publicly traded partner companies, which are likely
to affect the price of our common stock;
. lack of the widespread commercial use of the Internet, which may
prevent our partner companies from succeeding; and
. intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our
partner companies.
Of our carrying value of $130 million in total assets as of March 31,
1999, $96 million, or 74%, consisted of ownership interests in our partner
companies. However, we believe that comparisons of the value of our holdings in
VerticalNet's common stock to the value of our total assets are not meaningful
because neither are marked to market. On June 18, 1999, our holdings in
VerticalNet had a market value of approximately $480 million.
The other material risks relating to our partner companies are more fully
described below under "Risks Particular to Our Partner Companies."
Our business model is unproven
Our strategy is based on an unproven business model. Our business model
depends on the willingness of companies to join our collaborative network and
the ability of the collaborative network to assist our partner companies. Our
business model depends on our ability to share information within our network
of partner companies. If competition develops among our partner companies, we
may be unable to fully benefit from the sharing of information within our
network of partner companies. If we cannot convince companies of the value of
our business model, our ability to attract new companies will be adversely
affected and our strategy of building a collaborative network may not succeed.
7
<PAGE>
We may have to take certain actions to avoid registration under the Investment
Company Act of 1940
We believe that we are actively engaged in the business of B2B e-commerce
through our network of partner companies. However, because many of our partner
companies are not majority-owned subsidiaries, changes in the value of our
interests in our partner companies and the income/loss and revenue attributable
to our partner companies could require us to register as an investment company
under the Investment Company Act unless we take action to avoid being required
to register. For example, we may be unable to sell minority interests we would
otherwise want to sell and may need to sell some assets which are not
considered to be investment securities, including interests in partner
companies. We may also have to ensure that we retain at least a 25% ownership
interest in our partner companies after their initial public offerings. In
addition, we may have to acquire additional income or loss generating assets
that we might not otherwise have acquired or may have to forgo opportunities to
acquire interests in companies that we would otherwise want to acquire would be
important to our strategy. It is not feasible for us to register as an
investment company because the Investment Company Act regulations are
inconsistent with our strategy of actively managing, operating and promoting
collaboration among our network of partner companies.
Fluctuations in our quarterly results may adversely affect our stock price
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
. the operating results of our partner companies;
. changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in partner
companies;
. changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership percentages
of our partner companies;
. sales of equity securities by our partner companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
. the pace of development or a decline in growth of the B2B e-commerce
market;
. intense competition from other potential acquirors of B2B e-commerce
companies, which could increase our cost of acquiring interests in
additional companies, and competition for the goods and services
offered by our partner companies; and
. our ability to effectively manage our growth and the growth of our
partner companies during the anticipated rapid growth of the B2B e-
commerce market.
We believe that period-to-period comparisons of our operating results are not
meaningful. Additionally, if our operating results in one or more quarters do
not meet securities analysts' or your expectations, the price of our common
stock could decrease.
Our success is dependent on our key personnel and the key personnel of our
partner companies
We believe that our success will depend on continued employment by us and
our partner companies of senior management and key technical personnel. Our
success also depends on the continued assistance of our Advisory Board members,
some of whom may from time to time leave our Advisory Board. If one or more
members of our senior management, our partner companies' senior management or
our Advisory Board were unable or unwilling to continue in their present
positions, our business and operations could be disrupted.
8
<PAGE>
As of June 15, 1999, eleven of our management personnel have worked for
us for less than one year. Of these eleven management personnel, nine are
executive officers. Our efficiency may be limited while these employees and
future employees are being integrated into our operations. In addition, we may
be unable to find and hire additional qualified management and professional
personnel to help lead us and our partner companies.
The success of some of our partner companies also depends on their having
highly trained technical and marketing personnel. Our partner companies will
need to continue to hire additional personnel as their businesses grow. A
shortage in the number of trained technical and marketing personnel could limit
the ability of our partner companies to increase sales of their existing
products and services and launch new product offerings.
We have had a history of operating losses and expect continued operating losses
in the foreseeable future
For the three month period ended March 31, 1999, we realized net income
of $20.0 million primarily from gains related to the VerticalNet initial public
offering. During the same period, operating losses totaled $9.7 million. For
the year ended December 31, 1998, we realized net income of $13.9 million
primarily due to $34.4 million of non-operating income from the sale of certain
minority interests. During that same year, operating losses totaled $17.5
million. In addition, we incurred operating losses of $6.7 million in 1997 and
$2.2 million in 1996. After giving effect to our acquisitions during 1998 and
1999 as if they had occurred at the beginning of the periods presented, pro
forma operating losses for the year ended December 31, 1998 and the three
months ended March 31, 1999 would have been $46.8 million and $14.8 million,
respectively. See "Internet Capital Group, Inc. Unaudited Pro Forma
Information." We expect to continue to incur operating losses for the
foreseeable future and, if we ever have operating profits, we may not be able
to sustain them.
Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
.broaden our partner company support capabilities;
.explore acquisition opportunities and alliances with other companies;
and
.facilitate business arrangements among our partner companies.
Expenses may also increase due to the potential effect of goodwill amortization
and other charges resulting from completed and future acquisitions. If any of
these and other expenses are not accompanied by increased revenue, our
operating losses will be greater than we anticipate.
Our partner companies are growing rapidly and we may have difficulty assisting
them in managing their growth
Our partner companies have grown, and we expect them to continue to grow,
rapidly by adding new products and services and hiring new employees. This
growth is likely to place significant strain on their resources and on the
resources we allocate to assist our partner companies. In addition, our
management may be unable to convince our partner companies to adopt our ideas
for effectively and successfully managing their growth.
We may compete with some of our shareholders and partner companies, and our
partner companies may compete with each other
We may compete with some of our shareholders and partner companies for
Internet-related opportunities. After this offering, Comcast Corporation,
Compaq Computer Corporation, General Electric Capital Corporation and Safeguard
Scientifics, Inc. will beneficially own approximately 10.5%, 4.2%, 3.0% and
14.9% of our common stock, respectively. These shareholders may compete with us
to acquire interests in B2B e-commerce companies. Comcast Corporation, General
Electric Capital Corporation and Safeguard Scientifics, Inc. currently each
have a designee as a member of our Board of Directors, which may give these
companies
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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.
We face competition from other potential acquirors of B2B e-commerce 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.
Our success could be impaired by valuations placed on Internet-related
companies by the financial marketplace
Our strategy involves creating value for our shareholders and the
employees of our partner companies by helping our partner companies grow and
access the capital markets. We are therefore dependent on the market for
Internet-related companies in general and for initial public offerings of those
companies in particular. To date, there have been a substantial number of
Internet-related initial public offerings and additional offerings are expected
to be made in the future. If the market for Internet-related companies and
initial public offerings were to weaken for an extended period of time, the
ability of our partner companies to grow and access the capital markets will be
impaired, and we may need to provide additional capital to our partner
companies.
We may be unable to obtain maximum value for our partner company interests
We have significant positions in our partner companies. While we
generally do not anticipate selling our interests in our partner companies, if
we were to divest all or part of them, we may not receive maximum value for
these positions. For partner companies with publicly-traded stock, we may be
unable to sell our interest at then-quoted market prices. Furthermore, for
those partner companies that do not have publicly-traded stock, the realizable
value of our interests may ultimately prove to be lower than the carrying value
currently reflected in our consolidated financial statements.
We may not have opportunities to acquire interests in additional companies
We may be unable to identify companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable
to acquire an interest in the company for many reasons, including:
. a failure to agree on the terms of the acquisition, such as the
amount or price of our acquired interest;
. incompatibility between us and management of the company;
. competition from other acquirors of B2B e-commerce companies;
. a lack of capital to acquire an interest in the company; and
. the unwillingness of the company to partner with us.
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If we cannot acquire interests in attractive companies, our strategy to build
a collaborative network of partner companies may not succeed.
Our resources and our ability to manage newly acquired partner companies may
be strained as we acquire more and larger interests in B2B e-commerce
companies
We have acquired, and plan to continue to acquire, significant interests
in B2B e-commerce companies that complement our business strategy. In the
future, we may acquire larger percentages or larger interests in companies
than we have in the past, or we may seek to acquire 100% ownership of
companies. These larger acquisitions may place significantly greater strain on
our resources, ability to manage such companies and ability to integrate them
into our collaborative network. Future acquisitions are subject to the
following risks:
. Our acquisitions may cause a disruption in our ongoing support of our
partner companies, distract our management and other resources and
make it difficult to maintain our standards, controls and procedures.
. We may acquire interests in companies in B2B e-commerce markets in
which we have little experience.
. We may not be able to facilitate collaboration between our partner
companies and new companies that we acquire.
. To fund future acquisitions we may be required to incur debt or issue
equity securities, which may be dilutive to existing shareholders.
Our systems and those of our partner companies and third parties may not be
Year 2000 compliant, which could disrupt our operations and the operations of
our partner companies
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 may realize exposure and risk if our systems and the systems on
which our partner companies are dependent to conduct their operations are not
Year 2000 compliant. Our potential areas of exposure include products
purchased from third parties, computers, software, telephone systems and other
equipment used internally. If our present efforts and the efforts of our
partner companies to address the Year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with which
we and our partner companies conduct business do not successfully address such
issues, our business and the businesses of our partner companies may not be
operational for a period of time. If the Web-hosting facilities of our partner
companies are not Year 2000 compliant, their production Web sites would be
unavailable and they would not be able to deliver services to their users.
RISKS PARTICULAR TO OUR PARTNER COMPANIES
Fluctuation in the market price of VerticalNet's common stock may affect the
market price of our common stock
VerticalNet is currently our only partner company with publicly-traded
common stock. The market price of VerticalNet's common stock has been highly
volatile. On February 16, 1999, VerticalNet completed its initial public
offering at a price of $16.00 per share and its common stock has since traded
as high as $149.00 per share. The market value of our holdings in VerticalNet
changes with these fluctuations. Based on the closing price of VerticalNet's
common stock on June 18, 1999 of $76.81, our holdings in VerticalNet had a
market value of approximately $480 million. As of March 31, 1999, the total
carrying value of our assets as reflected in our balance sheet was
approximately $130 million. We believe comparisons of the value of our
holdings in VerticalNet's common stock to the value of our total assets are
not meaningful because neither are
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marked to market. As of March 31, 1999, our historical cost basis in our
holdings in VerticalNet's common stock is $21.1 million. Nevertheless,
fluctuations in the market price of VerticalNet's common stock are likely to
affect the market price of our common stock.
VerticalNet's results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. lack of acceptance of the Internet as an advertising medium;
. inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
. lower advertising rates;
. slow development of the e-commerce market;
. lack of acceptance of its Internet content;
. loss of key content providers;
. intense competition;
. loss of key personnel; and
. inability to manage growth.
The success of our partner companies depends on the development of the B2B e-
commerce market, which is uncertain
All of our partner companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective medium for the provision of
products and services, our partner companies may not succeed.
Our long-term success depends on widespread market-acceptance of B2B e-
commerce. A number of factors could prevent such acceptance, including the
following:
. the unwillingness of businesses to shift from traditional processes
to B2B e-commerce processes;
. the necessary network infrastructure for substantial growth in usage
of B2B e-commerce may not be adequately developed;
. increased government regulation or taxation may adversely affect the
viability of B2B e-commerce;
. insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times for
the users of B2B e-commerce; and
. concern and adverse publicity about the security of B2B e-commerce
transactions.
Our partner companies may fail if their competitors provide superior Internet-
related offerings or continue to have greater resources than our partner
companies have
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:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
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. dollars spent on consulting services with many established
information systems and management consulting firms; and
. 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.
Some of our partner companies may be unable to protect their proprietary rights
and may infringe on the proprietary rights of others
Proprietary rights, particularly in the form of copyrights, are important
to the success and competitive position of many of our partner companies.
Although our partner companies seek to protect their proprietary rights, their
actions may be inadequate to protect any trademarks, copyrights and other
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain countries, and the global nature of
the Internet makes it impossible for some of our partner companies to control
the dissemination of their work and use of their services. Some of our partner
companies also license content from third parties and it is possible that they
could become subject to infringement actions based upon the content licensed
from those third parties. Our partner companies generally obtain
representations as to the origin and ownership of such licensed content;
however, this may not adequately protect them. Any of these claims, with or
without merit, could subject our partner companies to costly litigation and the
diversion of their technical and management personnel. If our partner companies
incur costly litigation and their personnel are not effectively deployed, the
expenses and losses incurred by our partner companies will increase and their
profits, if any, will decrease.
Our partner companies that publish or distribute content over the Internet may
be subject to legal liability
Some of our partner companies may be subject to legal claims relating to
the content on their Web sites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of
material. In addition, some of the content provided by our partner companies on
their Web sites is drawn from data compiled by other parties, including
governmental and commercial sources, and our partner companies re-enter the
data. This data may have errors. If any of our partner companies' Web site
content is improperly used or if any of our partner companies supply incorrect
information, it could result in unexpected liability. Any of our partner
companies that incur this type of unexpected liability may not have insurance
to cover the claim or its insurance may not provide sufficient coverage. If our
partner companies incur substantial cost because of this type of unexpected
liability, the expenses incurred by our partner companies will increase and
their profits, if any, will decrease.
Our partner companies' computer and communications systems may fail, which may
discourage content providers from using our partner companies' systems
Some of our partner companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Any system interruptions that cause our partner companies'
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Web sites to be unavailable to Web browsers may reduce the attractiveness of
our partner companies' Web sites to third party content providers. If third
party content providers are unwilling to use our partner companies' Web sites,
our business, financial condition and operating results could be adversely
affected. Interruptions could result from natural disasters as well as power
loss, telecommunications failure and similar events.
Our partner companies' businesses may be disrupted if they are unable to
upgrade their systems to meet increased demand
Capacity limits on some of our partner companies' technology, transaction
processing systems and network hardware and software may be difficult to
project and they may not be able to expand and upgrade their systems to meet
increased use.
As traffic on our partner companies' Web sites continues to increase,
they must expand and upgrade their technology, transaction processing systems
and network hardware and software. Our partner companies may be unable to
accurately project the rate of increase in use of their Web sites. In addition,
our partner companies may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of
their Web sites. If our partner companies are unable to appropriately upgrade
their systems and network hardware and software, the operations and processes
of our partner companies may be disrupted.
Our partner companies may not be able to attract a loyal base of users to their
Web sites
While content is important to all our partner companies' Web sites, our
18 market maker partner companies are particularly dependent on content to
attract business. Our success depends upon the ability of these partner
companies to deliver compelling Internet content to their targeted users. If
our partner companies are unable to develop Internet content that attracts a
loyal user base, the revenues and profitability of our partner companies could
be impaired. Internet users can freely navigate and instantly switch among a
large number of Web sites. Many of these Web sites offer original content.
Thus, our partner companies may have difficulty distinguishing the content on
their Web sites to attract a loyal base of users.
Our partner companies may be unable to acquire or maintain easily identifiable
Web site addresses or prevent third parties from acquiring Web site addresses
similar to theirs
Some of our partner companies hold various Web site addresses relating to
their brands. These partner companies may not be able to prevent third parties
from acquiring Web site addresses that are similar to their addresses, which
could adversely affect the use by businesses of our partner companies' Web
sites. In these instances, our partner companies may not grow as we expect. The
acquisition and maintenance of Web site addresses generally is regulated by
governmental agencies and their designees. The regulation of Web site addresses
in the United States and in foreign countries is subject to change. As a
result, our partner companies may not be able to acquire or maintain relevant
Web site addresses in all countries where they conduct business. Furthermore,
the relationship between regulations governing such addresses and laws
protecting trademarks is unclear.
Some of our partner companies are dependent on barter transactions that do not
generate cash revenue
Our partner companies often enter into barter transactions in which they
provide advertising for other internet companies in exchange for advertising
for the partner company. In a barter transaction the partner company will
reflect the sales of the advertising received as an expense and the value of
the advertising provided, in an equal amount, as revenue. However, barter
transactions also do not generate cash revenue, which may adversely affect the
cash flows of some of our partner companies. Limited cash flows may adversely
affect a partner company's abilities to expand its operations and satisfy its
liabilities. During 1998 and the three month period ended 1999, revenue from
barter transactions constituted a significant portion of some of our partner
companies' revenue. Barter revenue may continue to represent a significant
portion of their revenue in future periods. For example, for the three-month
period ending March 31, 1999, approximately $.6 million of VerticalNet's
$1.9 million in revenue was attributable to barter transactions.
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RISKS RELATING TO THE INTERNET INDUSTRY
Concerns regarding security of transactions and transmitting confidential
information over the Internet may have an adverse impact on our business
We believe that concern regarding the security of confidential
information transmitted over the Internet prevents many potential customers
from engaging in online transactions. If our partner companies that depend on
such transactions do not add sufficient security features to their future
product releases, our partner companies' products may not gain market
acceptance or there may be additional legal exposure to them.
Despite the measures some of our partner companies have taken, the
infrastructure of each of them is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents the
security measures imposed by any one of our partner companies, he or she could
misappropriate proprietary information or cause interruption in operations of
the partner company. Security breaches that result in access to confidential
information could damage the reputation of any one of our partner companies and
expose the partner company affected to a risk of loss or liability. Some of our
partner companies may be required to make significant investments and efforts
to protect against or remedy security breaches. Additionally, as e-commerce
becomes more widespread, our partner companies' customers will become more
concerned about security. If our partner companies are unable to adequately
address these concerns, they may be unable to sell their goods and services.
Rapid technological changes may prevent our partner companies from remaining
current with their technical resources and maintaining competitive product and
service offerings
The markets in which our partner companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our partner companies are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
condition and operating results will be adversely affected. To be successful,
our partner companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Our success will depend, in part, on our partner companies' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our partner companies will also need to
respond to technological advances and emerging industry standards in a cost-
effective and timely manner.
Government regulations and legal uncertainties may place financial burdens on
our business and the businesses of our partner companies
As of June 15, 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 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 our business and the businesses of our partner
companies.
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.
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RISKS RELATING TO THE OFFERING
Shares eligible for future sale by our current shareholders may decrease the
price of our common stock
If our shareholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the public
market following the offering, then the market price of our common stock could
fall. Restrictions under the securities laws and certain lock-up agreements
limit the number of shares of common stock available for sale in the public
market. The holders of 52,456,523 shares of common stock, options exercisable
into an aggregate of 2,950,000 shares of common stock, and warrants exercisable
into an aggregate of 505,451 shares of common stock have agreed not to sell any
of these securities for 180 days after the offering without the prior written
consent of Merrill Lynch. In addition, the holders of convertible notes that
will automatically convert into 2,527,409 shares of common stock upon the
closing of this offering have also agreed to such restrictions. However,
Merrill Lynch may, in its sole discretion, release all or any portion of the
securities subject to the lock-up agreements.
The holders of 67,705,401 shares of common stock, the holders of warrants
to purchase 2,000,000 shares of common stock and the holders of convertible
notes that will automatically convert into 10,000,000 shares of common stock
upon the closing of this offering have demand or piggy-back registration
rights. However, the holders of these securities that have demand registration
rights have agreed not to demand that their securities be registered for 180
days after the offering without the prior written consent of Merrill Lynch. We
also may shortly file a registration statement to register all shares of common
stock under our stock option plans. After that registration statement is
effective, common stock issued upon exercise of stock options under our benefit
plans will be eligible for resale in the public market without restriction.
The interests of certain of our significant shareholders may conflict with our
interests and the interests of our other shareholders
As a result of its ownership of our common stock, Safeguard Scientifics,
Inc. will be in a position to affect significantly our corporate actions such
as mergers or takeover attempts in a manner that could conflict with the
interests of our public shareholders. After the offering, Safeguard
Scientifics, Inc. will beneficially own 14.9% of our common stock. See
"Directed Share Subscription Program."
Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult
Our certificate of incorporation provides that our Board of Directors may
issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a three-year
term. The issuance of preferred stock and the existence of a classified board
could make it more difficult for a third-party to acquire us without the
approval of our board.
Our common stock has never been publicly traded so we cannot predict the extent
to which a trading market will develop for our common stock
There has not been a public market for our common stock. We cannot
predict the extent to which a trading market will develop or how liquid that
market might become. The initial public offering price will be determined by
negotiations between representatives of the underwriters and us, and may not be
indicative of prices that will prevail in the trading market.
Our common stock price is likely to be highly volatile
The market price for our common stock is likely to be highly volatile as
the stock market in general and the market for Internet-related stocks and the
stock of VerticalNet in particular, has been highly volatile. The trading
prices of many technology and Internet-related company stocks have reached
historical highs
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within the last year and have reflected relative valuations substantially above
historical levels. During the same period, the stocks of these companies have
also been highly volatile and have recorded lows well below such historical
highs. We cannot assure you that our common stock will trade at the same levels
of other Internet stocks or that Internet stocks in general will sustain their
current market prices.
The following factors will add to our common stock price's volatility:
. actual or anticipated variations in our quarterly operating results
and those of our partner companies;
. new sales formats or new products or services offered by us, our
partner companies and their competitors;
. changes in our financial estimates and those of our partner companies
by securities analysts;
. conditions or trends in the Internet industry in general and the B2B
e-commerce industry in particular;
. announcements by our partner companies and their competitors of
technological innovations;
. announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
. changes in the market valuations of our partner companies and other
Internet companies;
. our capital commitments;
. additions or departures of our key personnel and key personnel of our
partner companies; and
. sales of our common stock.
Many of these factors are beyond our control. These factors may decrease the
market price of our common stock, regardless of our operating performance.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and our partner companies, including,
among other things:
. development of an e-commerce market;
. our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the
changing needs of these markets;
. our ability to successfully execute our business model;
. our partner companies' ability to compete successfully against direct
and indirect competitors;
. our ability to acquire interests in additional companies;
. growth in demand for Internet products and services; and
. adoption of the Internet as an advertising medium.
We undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this prospectus might not occur.
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USE OF PROCEEDS
Based on an assumed initial public offering price of $9.00 per share, our
net proceeds from the sale of the 15,000,000 shares of our common stock offered
by us will be approximately $124.6 million ($143.5 million if the underwriters'
over-allotment option is exercised in full), after deduction of underwriting
discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our working
capital, to create a public market for our common stock, to facilitate our
future access to public equity markets and to provide us with increased
visibility and credibility. We intend to use the net proceeds from the offering
to repay any balance outstanding on our revolving bank credit facility, to
acquire interests in additional B2B e-commerce companies, to increase the
amount of our interests in our existing partner companies and for general
corporate purposes, including working capital. We are in discussions to utilize
approximately $34 million to acquire ownership interests in, or make advances
to, five new or existing partner companies, although we have no binding
obligations to complete these acquisitions. We have committed an additional $1
million to existing partner companies. Our bank credit facility matures in
April 2000 and bears interest, at our option, at prime and/or LIBOR plus 2.5%.
At June 15, 1999, there was no outstanding balance under the bank credit
facility. We use monies borrowed under the bank credit facility primarily to
acquire interests in new or existing partner companies. Pending use of the net
proceeds for the above purposes, we intend to invest the funds in interest-
bearing, investment-grade securities, certificates of deposit, or direct or
guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock, and we do
not intend to pay dividends in the foreseeable future. We plan to retain any
earnings for use in the operation of our business and to fund future growth.
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THE REORGANIZATION
Internet Capital Group, Inc. is a successor to a business originally
founded in March 1996 as a Delaware limited liability company under the name
Internet Capital Group, L.L.C. As a limited liability company, Internet Capital
Group, L.L.C. was treated for income tax purposes as a partnership with taxes
on the income generated by Internet Capital Group, L.L.C. paid by its members.
Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on
February 2, 1999, with Internet Capital Group, Inc. surviving (the
"Reorganization"). In connection with the Reorganization and as required by its
limited liability company agreement to satisfy the members' tax liabilities,
Internet Capital Group, L.L.C. declared a $10.7 million distribution to its
members. Internet Capital Group, Inc. has assumed all liabilities of Internet
Capital Group, L.L.C., including the distribution to members of Internet
Capital Group, L.L.C. The distributions made to some of the members of Internet
Capital Group, L.L.C. are described in detail below under the heading "Certain
Transactions." Also as part of the Reorganization, Internet Capital Group, Inc.
issued 82,005,549 shares of common stock to the members of Internet Capital
Group, L.L.C. The separate existence of Internet Capital Group, L.L.C. ceased
in connection with the Reorganization.
DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we and Safeguard Scientifics, Inc. are offering
approximately 3.5 million shares of our common stock in a directed share
subscription program to shareholders of Safeguard Scientifics, Inc., one of our
principal and founding shareholders. Of these shares, we are offering 2,250,000
shares and Safeguard Scientifics, Inc. is offering 1,250,000 shares. Safeguard
Scientifics, Inc.'s shareholders may subscribe for one share of our common
stock for every ten shares of Safeguard Scientifics, Inc. 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 491 shares
of Safeguard Scientifics, Inc.'s common stock as of June 14, 1999 are eligible
to purchase shares directly from us or Safeguard Scientifics, Inc. under the
program. Shareholders of Safeguard Scientifics, Inc. who own between 100 and
490 shares of Safeguard Scientifics, Inc. common stock will be eligible to
purchase interests in a unit investment trust that will invest its assets
solely in our common stock. The shares offered to the unit investment trust are
included in the 3.5 million shares. Shareholders who own less than 100 shares
of Safeguard Scientifics, Inc. common stock will be ineligible to participate
in the directed share subscription program. If any of the shares offered by us
under the program are not purchased by the shareholders of Safeguard
Scientifics, Inc., then Safeguard Scientifics, Inc. or one or more of its
designees will purchase these shares from us. Subscription orders will be
satisfied first from the shares being sold by us, and then from the shares
offered by Safeguard. Prior to this offering, Safeguard Scientifics, Inc.
beneficially owned 18.3% of our common stock. After this offering, Safeguard
Scientifics, Inc. will beneficially own approximately 17,805,401 shares, or
14.9%, of our common stock, assuming that all 3.5 million shares are purchased
by shareholders of Safeguard Scientifics, Inc. and the unit investment trust
and will beneficially own approximately 21,305,401 shares, or 17.9%, of our
common stock assuming that none of the 3.5 million shares are purchased by the
shareholders of Safeguard Scientifics, Inc. or the unit investment trust. The
purchase price under the program, whether paid by Safeguard Scientifics, Inc.,
its shareholders or the unit investment trust, will be the same price per share
as set forth on the cover page of this prospectus. For purposes of this
prospectus, when we present financial data that reflects this offering, we have
assumed that all 3.5 million shares offered under the directed share
subscription program are sold.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on
an actual basis, on a pro forma basis to reflect the issuance of $90 million
principal amount of our convertible notes in May 1999, and on a pro forma
basis, as adjusted to reflect the automatic conversion of our convertible notes
into 10,000,000 shares of our common stock upon completion of this offering and
the issuance and sale of 15,000,000 shares of our common stock by us in this
offering at an assumed initial public offering price of $9.00 per share and
after deduction of estimated underwriting discounts and commissions and
estimated offering expenses.
The calculation of shareholders' equity reflects our Reorganization on
February 2, 1999. Common stock data also assumes that the underwriters' over-
allotment option is not exercised and excludes shares of common stock reserved
for issuance under our 1999 Equity Compensation Plan, under which options to
purchase 5,058,500 shares were outstanding as of June 15, 1999 at a weighted
average exercise price of $6.38 per share, and assuming an initial public
offering price of $9.00 per share, warrants outstanding to purchase 2,200,000
shares at a weighted average exercise price of $9.09 per share. The calculation
of shareholders' equity does not reflect the waiving of interest that would
result upon the conversion of the convertible notes nor the value attributed to
the warrants issued together with the convertible notes and our credit
facility.
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Long-term debt.................... $ 121,665 $ 121,665 $ 121,665
Convertible subordinated notes.... -- 90,000,000 --
Shareholders' equity:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
none issued and outstanding-
actual, pro forma and pro forma
as adjusted...................... -- -- --
Common stock, $.001 par value;
300,000,000 shares authorized;
82,005,549 shares issued and
outstanding-actual; 82,005,549
shares issued and outstanding-pro
forma; 107,005,549 shares issued
and outstanding-pro forma as
adjusted......................... 82,006 82,006 107,006
Additional paid-in capital........ 100,804,003 100,804,003 315,391,503
Retained earnings................. 23,239,737 23,239,737 23,239,737
Unamortized deferred
compensation..................... (3,618,126) (3,618,126) (3,618,126)
Accumulated other comprehensive
income........................... 2,738,179 2,738,179 2,738,179
------------- ------------- -------------
Total shareholders' equity........ 123,245,799 123,245,799 337,858,299
------------- ------------- -------------
Total capitalization............ $ 123,367,464 $ 213,367,464 $ 337,979,964
============= ============= =============
</TABLE>
21
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 1999, after giving
effect to the conversion of all outstanding convertible notes into shares of
common stock upon completion of this offering, was approximately $207,930,735,
or $2.29 per share. Pro forma net tangible book value per share is equal to our
total tangible assets less our total liabilities, divided by the total number
of shares of our common stock outstanding. After giving effect to the issuance
and sale of 15,000,000 shares of our common stock by us hereby at an assumed
initial public offering price of $9.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma as adjusted net tangible book value at March 31, 1999
would have been approximately $332,543,235, or $3.11 per share. This represents
an immediate increase in net tangible book value of $0.82 per share to existing
shareholders and an immediate dilution of $5.89 per share to new investors
purchasing shares of our common stock in this offering. The following table
illustrates the per share dilution to the new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $9.00
Pro forma net tangible book value per share at March 31, 1999.... $2.29
Increase per share attributable to this offering................. 0.82
Pro forma as adjusted net tangible book value per share after this
offering......................................................... 3.11
-----
Dilution per share to new investors in this offering.............. $5.89
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31,
1999, the total number of shares of our common stock purchased from us, the
total cash consideration paid and the average price per share paid by the
existing shareholders and by the new investors in this offering at an assumed
initial public offering price of $9.00 per share and before deducting estimated
underwriting discounts and commissions and our estimated offering expenses:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
------------------- -------------------- Price Per
Number Percent Amount Percent Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 92,005,549 86% $200,500,000 60% $2.18
New investors (1)...... 15,000,000 14% 135,000,000 40% 9.00
----------- --- ------------ ---
Total............... 107,005,549 100% $335,500,000 100%
=========== === ============ ===
</TABLE>
The table above assumes that the underwriters' over-allotment option is
not exercised. If the over-allotment option is exercised in full, we will issue
and sell an additional 2,250,000 shares.
The foregoing discussion and tables assume no exercise of any stock
options outstanding as of March 31, 1999. As of June 15, 1999, there were
options outstanding to purchase a total of 5,058,500 shares of our common stock
at a weighted average exercise price of $6.38 per share and 3,720,750 shares
reserved for future grant under our 1999 Equity Compensation Plan. To the
extent that any of these shares are issued, there will be further dilution to
new investors. See "Capitalization," "Management--Employee Benefit Plans" and
Note 8 to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our Consolidated Financial Statements, including the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statements of operations data from March 4, 1996, the date of our inception,
through December 31, 1996 and for the years ended December 31, 1997 and 1998,
and consolidated balance sheet data at December 31, 1997 and 1998 have been
derived from the consolidated financial statements, that have been audited by
KPMG LLP, independent auditors, included elsewhere in this prospectus. The
consolidated balance sheet data at December 31, 1996 has been derived from the
consolidated financial statements that have been audited by KPMG LLP,
independent auditors, which are not included in this prospectus. The
consolidated statements of operations data for the three months ended March 31,
1998 and 1999 and the consolidated balance sheet data at March 31, 1999 has
been derived from the unaudited consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Three Months Ended
(Inception) to Year Ended December 31, March 31,
December 31, ------------------------- ------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
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 70,434
General and
administrative........ 1,652,481 3,442,241 7,619,169 1,523,878 3,872,350
Minority interest...... (427,185) 106,411 (5,381,640) -- (134,321)
Equity (income) loss... 514,540 (106,298) 5,868,887 289,847 7,412,602
------------ ----------- ------------ ----------- -----------
Total operating
expenses.............. 2,435,723 7,509,736 20,643,606 3,376,872 12,774,394
------------ ----------- ------------ ----------- -----------
Operating Loss.......... (2,150,583) (6,717,914) (17,508,837) (2,999,501) (9,663,359)
Other income, net....... -- -- 30,483,177 12,322,162 28,704,971
Interest income
(expense), net......... 88,098 138,286 924,588 (53,620) 295,979
------------ ----------- ------------ ----------- -----------
Pretax Income (Loss).... (2,062,485) (6,579,628) 13,898,928 9,269,041 19,337,591
Income tax benefit...... -- -- -- -- 663,206
------------ ----------- ------------ ----------- -----------
Net Income (Loss)....... $ (2,062,485) $(6,579,628) $ 13,898,928 $ 9,269,041 $20,000,797
============ =========== ============ =========== ===========
Net Income (loss) per
share--diluted......... $ (0.10) $ (0.19) $ 0.25 $ 0.20 $ 0.27
Weighted average shares
outstanding--diluted... 20,395,774 34,098,844 56,102,289 46,783,625 73,699,973
Pro forma net income
(unaudited)............ $ 8,756,325 $12,182,682
Pro forma net income per
share--diluted
(unaudited)............ $ 0.16 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------- (Unaudited)
1996 1997 1998 March 31,1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 3,215,256 $ 5,967,461 $26,840,904 $ 19,236,061
Working capital............. 4,883,129 2,390,762 20,452,438 18,033,259
Total assets................ 13,629,407 31,481,016 96,785,975 130,128,664
Long-term debt.............. 167,067 399,948 351,924 121,665
Total shareholders' equity.. 12,858,856 26,634,675 80,724,378 123,245,799
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
audited Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
General
Internet Capital Group is an Internet holding company actively engaged in
B2B e-commerce through a network of partner companies. As of June 15, 1999 we
owned interests in 35 B2B e-commerce companies which we refer to as our partner
companies. We focus on two types of B2B e-commerce companies, which we call
market makers and infrastructure service providers.
Because we acquire significant interests in B2B e-commerce companies,
many of which generate operating losses, we have experienced, and expect to
continue to experience, significant volatility in our quarterly results. We do
not know if we will report net income in any period, and we expect that we will
report operating losses in many quarters for the foreseeable future. While our
partner companies have consistently reported operating losses, we have recorded
net income in certain periods and experienced significant volatility from
period to period due to one-time transactions and other events incidental to
our ownership interests in and advances to partner companies. These
transactions and events are described in more detail under "Other Income" and
include dispositions of, and changes to, our partner company ownership
interests, dispositions of our holdings of available-for-sale securities, and
impairment charges. On a continuous basis, but no less frequently than at the
end of each reporting period, we evaluate the carrying value of our ownership
interests in and advances to each of our partner companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest and advance in the partner company relative to
carrying value, the financial condition and prospects of the partner company,
and other relevant factors.
Because many of our partners companies are not majority-owned
subsidiaries, changes in the value of our interests in our partner companies
and the income/loss and revenue attributable to them could require us to
register as an investment company unless we take action to avoid being required
to register. However, we believe that we can take steps to avoid being required
to register under the Investment Company Act which would not adversely affect
our operations or shareholder value.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
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 our Consolidated
Statements of Operations. Participation of other partner company shareholders
in the earnings or losses of a consolidated partner company is reflected in the
caption "Minority interest" in our Consolidated Statements of Operations.
Minority interest adjusts our consolidated results of operations to reflect
only our share of the earnings or losses of the consolidated partner company.
VerticalNet was our only consolidated partner company through December 31,
1998. However, due to VerticalNet's initial public offering in February 1999,
our ownership interest in VerticalNet decreased to 37%. Therefore, we apply the
equity method of accounting beginning in the three months ended March 31, 1999.
In January 1999, we acquired a controlling majority interest in Breakaway
24
<PAGE>
Solutions which we have consolidated from the date of acquisition. For the
three months ended March 31, 1999, Breakaway Solutions was our only
consolidated partner company.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are accounted for under the equity
method of accounting. Whether or not we exercise 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 our 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 our Consolidated Statements of
Operations; however, our share of the earnings or losses of the partner company
is reflected in the caption "Equity (income) loss" in the Consolidated
Statements of Operations. As of December 31, 1998, we accounted for eight of
our partner companies under the equity method of accounting. As of March 31,
1999, we accounted for 13 of our partner companies under this method.
The net effect of a partner company's results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, as under each of these
methods only our share of the earnings or losses of a partner company is
reflected in our net results of operations in the Consolidated Statements of
Operations.
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, since our inception
we consolidated VerticalNet's financial statements with our own. However, due
to VerticalNet's initial public offering in February 1999, our ownership
interest in VerticalNet decreased to 37%. Therefore, we apply the equity method
of accounting beginning in the three months ended March 31, 1999. In January
1999, we acquired a controlling majority interest in Breakaway Solutions which
we have consolidated from the date of acquisition. The presentation of our
financial statements look substantially different as a result of consolidating
Breakaway Solutions and no longer consolidating VerticalNet in our financial
statements for the three-month period ended March 31, 1999.
To understand our results of operations and financial position without
the effect of consolidating VerticalNet and Breakaway Solutions, Note 12 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets for the same periods presented in the
Consolidated Financial Statements. These statements differ from the
Consolidated Financial Statements by treating VerticalNet and Breakaway
Solutions as if they were accounted for under the equity method of accounting
for all periods presented. Our share of VerticalNet's and Breakaway Solutions'
losses is included in "Equity (income) loss" in the Parent Company Statements
of Operations. 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.
Results of Operations
Our consolidated results of operations are composed of Partner Company
Operations and General ICG Operations. Partner Company Operations includes the
effect of consolidating VerticalNet for the period from our inception on March
4, 1996 through December 31, 1998 and Breakaway Solutions for the three month
period ended March 31, 1999 and recording our share of earnings or losses of
partner companies accounted for
25
<PAGE>
under the equity method of accounting. General ICG Operations represents the
expenses of providing strategic and operational support to our partner
companies, as well as the related administrative costs related to these
expenses. General ICG Operations also includes the effect of transactions and
other events incidental to our ownership interests in our partner companies and
our operations in general.
VerticalNet was our only consolidated partner company through December
31, 1998. All of our consolidated revenue and a significant portion of our
consolidated operating expenses from our inception on March 4, 1996 through
December 31, 1998 were attributable to VerticalNet. For the three months ended
March 31, 1999, Breakaway Solutions was our only consolidated partner company
and accounted for all of our consolidated revenue and a significant portion of
our consolidated expenses.
During the periods ending December 31, 1996, 1997 and 1998 we acquired
equity ownership interests in VerticalNet for $1.0 million, $2.0 million and
$4.0 million, respectively. In 1998, we made advances in the form of
convertible notes to VerticalNet of $5.0 million, of which $.8 million was
repaid by VerticalNet, $2.1 million was purchased from us by one of our
shareholders, and $2.1 million was converted into common stock during the three
months ended March 31, 1999.
As of June 15, 1999, VerticalNet owned and operated 38 industry-specific
trade communities. Advertising revenue and Web site development fees
represented all of VerticalNet's revenue in 1996 and 1997. In 1998, most of
VerticalNet's revenue was generated from selling advertisements to industry
suppliers in its trade communities.
VerticalNet sells storefront and banner advertising and event
sponsorships in its trade communities. The duration of a storefront
advertisement is typically for a period of one year, while banner
advertisements are typically for a period of three months. All advertising
revenue is recognized ratably in the period in which the advertisement is
displayed, provided that the collection is reasonably assured. VerticalNet also
generates revenue from career services, education, and e-commerce, specifically
the sale of books and third party software for which they receive a transaction
fee, and from barter transactions.
Breakaway Solutions markets and supports customer relationship management
systems, custom developed applications integrated with the Internet, and remote
hosting of customer applications in Breakaway Solutions' sites, enabling
Breakaway Solutions to be a full application solutions provider. From January
1996 through December 31, 1998, Breakaway Solutions' operating activities
consisted primarily of implementation of customer relationship management
systems and custom integration to other related applications. Breakaway
Solutions generated $3.5 million, $6.1 million and $10.0 million of revenue in
1996, 1997 and 1998, respectively. In 1999, Breakaway Solutions is expanding to
provide service offerings in custom Web development and application hosting
both through internal expansion and acquisitions.
A significant portion of our operations are conducted through
corporations in which we hold a significant minority ownership interest
accounted for under the equity method of accounting. As of December 31, 1998,
we accounted for eight of our partner companies under the equity method of
accounting. As of March 31, 1999, we accounted for 13 of our partner companies
under this method. Under this method, the results of operations of these
entities are not reflected within our Consolidated Statements of Operations;
however, our share of these companies' earnings or losses is reflected in the
caption "Equity (income) loss" in the Consolidated Statements of Operations.
26
<PAGE>
<TABLE>
<CAPTION>
March 4, 1996 Three Months Ended
(Inception) to Year Ended December 31, March 31,
December 31, --------------------------- ------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Summary of Consolidated
Net Income (Loss)
Partner Company
Operations............. $ (796,202) $ (4,778,902) $ (14,081,522) $(2,374,716) $(7,494,927)
General ICG Operations.. (1,266,283) (1,800,726) 27,980,450 11,643,757 26,832,518
Income tax benefit
(provision) -- -- -- -- 663,206
----------- ------------ ------------- ----------- -----------
Net income (loss) --
Consolidated Total.... $(2,062,485) $ (6,579,628) $ 13,898,928 $ 9,269,041 $20,000,797
=========== ============ ============= =========== ===========
Partner Company
Operations
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 70,434
General and
administrative........ 291,660 1,388,123 4,106,583 823,159 1,714,694
----------- ------------ ------------- ----------- -----------
Operating loss --
Partner Company
Operations before
minority interest and
equity income (loss).. (702,407) (4,663,683) (13,509,004) (2,008,935) (562,444)
Minority interest...... 427,185 (106,411) 5,381,640 -- 134,321
Equity income (loss)... (514,540) 106,298 (5,868,887) (289,847) (7,412,602)
----------- ------------ ------------- ----------- -----------
Operating loss --
Partner Company
Operations............ (789,762) (4,663,796) (13,996,251) (2,298,782) (7,840,725)
Other income, net...... -- -- -- -- 20,506
Interest income........ 7,491 10,999 212,130 3,937 31,526
Interest expense....... (13,931) (126,105) (297,401) (79,871) (13,756)
----------- ------------ ------------- ----------- -----------
Pretax loss -- Partner
Company Operations.... $ (796,202) $ (4,778,902) $ (14,081,522) $(2,374,716) $(7,802,449)
=========== ============ ============= =========== ===========
General ICG Operations
General and
administrative........ $ 1,360,821 $ 2,054,118 $ 3,512,586 $ 700,719 $ 2,157,656
----------- ------------ ------------- ----------- -----------
Operating loss --
General ICG
Operations............ (1,360,821) (2,054,118) (3,512,586) (700,719) (2,157,656)
Other income, net...... -- -- 30,483,177 12,322,162 28,684,465
Interest income........ 94,538 253,392 1,093,657 52,463 278,209
Interest expense....... -- -- (83,798) (30,149) --
----------- ------------ ------------- ----------- -----------
Pretax income (loss) --
General ICG
Operations............ $(1,266,283) $ (1,800,726) $ 27,980,500 $11,643,757 $27,140,040
=========== ============ ============= =========== ===========
Consolidated Total
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 70,434
General and
administrative........ 1,652,481 3,442,241 7,619,169 1,523,878 3,872,350
Minority interest...... (427,185) 106,411 (5,381,640) -- (134,321)
Equity (income) loss... 514,540 (106,298) 5,868,887 289,847 7,412,602
----------- ------------ ------------- ----------- -----------
Operating loss......... (2,150,583) (6,717,914) (17,508,837) (2,999,501) (9,663,359)
Other income, net...... -- -- 30,483,177 12,322,162 28,704,971
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)
----------- ------------ ------------- ----------- -----------
Pretax income (loss)... (2,062,485) (6,579,628) 13,898,928 9,269,041 19,337,591
Income tax benefit
(provision)........... -- -- -- -- 663,206
----------- ------------ ------------- ----------- -----------
Net income (loss) --
Consolidated Total... $(2,062,485) $ (6,579,628) $ 13,898,928 $ 9,269,041 $20,000,797
=========== ============ ============= =========== ===========
Pretax income as
reported.............. $ 13,898,928 $19,337,591
Pro forma income tax
provision............. (5,142,603) (7,154,909)
------------- -----------
Pro forma net income... $ 8,756,325 $12,182,682
============= ===========
</TABLE>
27
<PAGE>
Results of Operations-Partner Company Operations
Breakaway Solutions-Analysis of Three Month Period Ended March 31, 1999
For the three month period ended March 31, 1999, Breakaway Solutions was
our only consolidated partner company. The following is a discussion of
Breakaway Solutions' results of operations for the three months ended March 31,
1999. Breakaway Solutions' comparative results of operations for the 3 months
ended March 31, 1998 are not meaningful.
Revenue. Breakaway Solutions' revenue of $3.1 million for the three month
period ended March 31, 1999 was derived primarily from implementation of
customer relationship management systems and custom integration to other
related applications. Through organic growth and acquisitions, Breakaway
Solutions is expanding in 1999 into custom Web development and application
hosting.
Cost of Revenue. Cost of revenue of $1.6 million for the three months
ended March 31, 1999 consists primarily of Breakaway Solutions' personnel-
related costs of providing its services. As Breakaway Solutions expands into
custom Web development and application hosting subsequent to March 31, 1999 it
will incur the direct costs of these operations.
Sales and Marketing Expenses. Sales and marketing expenses were $.1
million for the three months ended March 31, 1999 and consist primarily of
personnel costs, sales commissions, consulting fees, trade show expenses,
advertising and cost of marketing literature. Breakaway Solutions expects sales
and marketing expenses to increase significantly in future periods as it
expands into custom Web development and application hosting.
General and Administrative Expenses. General and administrative expenses
of $1.7 million for the three months ended March 31, 1999 were directly
attributable Breakaway Solutions and consist of personnel costs, facility
costs, professional fees and general costs to support operations. Breakaway
Solutions expects general and administrative expenses to increase significantly
in future periods due to the expected growth in its infrastructure and the
expected significant goodwill amortization that will result from its completed
and planned acquisitions. Also included in general and administrative expenses
for the three-months ended March 31, 1999 was $.3 million of goodwill
amortization related to the acquisition of our ownership interest in Breakaway
Solutions.
VerticalNet-Analysis of Three Year Period Ended December 31, 1998
For the periods ended December 31, 1996, December 31, 1997 and December
31, 1998, VerticalNet was our only consolidated Partner Company. The following
is a discussion of VerticalNet's results of operations for the three year
period ended December 31, 1998:
Revenue. Revenue was $.3 million for the year ended December 31, 1996,
$.8 million for the year ended December 31, 1997 and $3.1 million for the year
ended December 31, 1998. The increase in revenue was due primarily to an
increase in the number of advertisers as a result of VerticalNet's marketing
efforts and the increase in the number of industry-specific trade communities
from 16 as of December 31, 1997 to 33 as of December 31, 1998.
Cost of Revenue. Cost of revenue was $.4 million in 1996, $1.8 million in
1997 and $4.6 million in 1998. Cost of revenue consists of editorial,
operational and product development expenses. The increase in cost of revenue
was due to increased staffing and the costs of enhancing the features, content
and services of VerticalNet's industry-specific trade communities, as well as
increasing the overall number of trade communities.
Sales and Marketing Expenses. Sales and marketing expenses were $.3
million for the year ended December 31, 1996, $2.3 million for the year ended
December 31, 1997 and $7.9 million for the year ended December 31, 1998. The
increase in sales and marketing expenses was primarily due to the increased
number of sales and marketing personnel, increased sales commissions and
increased expenses related to promoting VerticalNet's industry-specific trade
communities.
28
<PAGE>
General and Administrative Expenses. General and administrative expenses
were $.3 million for the year ended December 31, 1996, $1.4 million for the
year ended December 31, 1997 and $4.1 million for the year ended December 31,
1998. The increase in general and administrative expenses was due primarily to
increased staffing levels, higher facility costs, professional fees to support
the growth of VerticalNet's infrastructure and goodwill amortization related to
VerticalNet's 1998 acquisitions.
Equity (Income) Loss
A significant portion of our operations are conducted through 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 ownership percentage in these companies, and the results of operations of
these companies. In the periods ended December 31, 1996 and 1997, only Sky
Alland was accounted for under the equity method. Sky Alland's 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 results of operations at Sky Alland and the effect of 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 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 at 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 operating 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 significant 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 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.
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Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. We commenced operations in March 1996 with offices in
Wayne, Pennsylvania and San Francisco, California. As the number of our
employees grew to support our operations and those of our partner companies,
our general and administrative costs increased. In late 1998, we opened an
office in Boston, Massachusetts, and in early 1999, we significantly increased
the number of our employees. As a result of these initiatives, our general and
administrative costs increased 160% for the three months ended March 31, 1999
compared to the same period in 1998. We plan to continue to hire new employees,
open new offices, and build our overall infrastructure. While general and
administrative costs increased 71% from 1997 to 1998, we expect these costs
will more than double from 1998 to 1999.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the sales of stock by our publicly traded partner companies to reflect the
change in our share of the net equity of these companies, and impairment
charges related to our ownership interests in partner companies.
General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Year Ended ------------------------
December 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
Sale of Matchlogic to Excite... $12,822,162 $12,822,162 $ --
Sales of Excite holdings....... 16,813,844 -- 2,050,837
Sale of WiseWire to Lycos...... 3,324,238 -- --
Sales of Lycos holdings........ 1,471,907 -- --
Sale of stock by VerticalNet... -- -- 28,253,956
Partner company impairment
charges....................... (3,948,974) -- (1,620,328)
Other.......................... -- (500,000) --
----------- ----------- -----------
$30,483,177 $12,322,162 $28,684,465
=========== =========== ===========
</TABLE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc.
for 763,820 shares of Excite, Inc. The $14.3 million market value of the Excite
shares received on the date of exchange was used to determine the gain of $12.8
million. Throughout the remainder of 1998, we sold 716,082 shares of Excite
which resulted in $30.2 million of proceeds and $16.8 million of gains. During
the three month period ended March 31, 1999, we sold 23,738 shares of Excite
which resulted in $2.5 million of proceeds and $2.1 million of gains.
In April 1998, we exchanged all of our holdings of WiseWire for 191,922
shares of Lycos, Inc. The $5.3 million market value of the Lycos shares
received on the date of exchange was used to determine the gain of $3.3
million. Throughout the remainder of 1998, we sold 169,548 shares of Lycos
which resulted in $6.2 million of proceeds and $1.5 million of gains.
Our remaining holdings of Excite and Lycos at December 31, 1998 and March
31, 1999 are marked to market at each date, with the difference between
carrying value and market value recorded in "Accumulated other comprehensive
income" in the shareholders' equity section of our Consolidated Balance Sheets
in accordance with Statement of Financial Accounting Standards No. 115.
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As a result of VerticalNet completing its initial public offering in
February 1999, our share of VerticalNet's net equity increased by $28.3
million. This increase adjusts our carrying value in VerticalNet and results in
a non-operating gain of $28.3 million, before deferred taxes of $10.5 million,
in the three month period ended March 31, 1999. This gain was recorded in
accordance with SEC Staff Accounting Bulletin No. 84 and our accounting policy
with respect to such transactions. We believe there is a high likelihood that
transactions similar to VerticalNet's initial public offering, in which a
partner company issues shares of its common stock, will occur in the future and
we expect to record gains or losses related to such transactions provided they
meet the requirements of SEC Staff Accounting Bulletin No. 84 and our
accounting policy. In some cases, as described in SEC Staff Accounting Bulletin
No. 84, the occurrence of similar transactions may not result in a non-
operating gain or loss but would result in a direct increase or decrease in our
shareholders' equity.
In 1998 we recorded an impairment charge of $1.9 million for the decrease
in value of one of our partner companies accounted under the cost method as a
result of agreeing to sell the partner company interest below our carrying
value. The impairment charge was determined by calculating the difference
between the expected proceeds of the sale and our carrying value. 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, related to
advances to a cost method partner company. The impairment charges were
determined by the decrease in net book value of the partner company caused by
its operating losses.
Interest Income
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.
Income Taxes
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
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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.
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 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 15, 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, 2,000,000 shares of our common stock. The warrants expire in
May 2002.
Proceeds from our initial public offering, proceeds from the issuance of
our convertible notes, availability under our revolving bank credit facility,
proceeds from the sales from time to time 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 June 2000, including commitments to new
or existing partner companies and general operations requirements. We are
contingently obligated for approximately $3.2 million of guarantee commitments.
Beyond June 2000, 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. VerticalNet
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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 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 $1.3 million for the three
months ended March 31, 1999. Breakaway Solutions is expanding through organic
growth and acquisitions. To fund this growth, we provided $4.0 million of
advances in May 1999 which are expected to be converted into equity in
Breakaway Solutions' next private placement of equity securities. We have
committed an additional $1.0 million to Breakaway Solutions as part of its
private placement of equity securities, with the additional funds to be
provided by outside investors. Breakaway Solutions expects these funds,
together with its existing cash resources, to be sufficient to fund its
operations through June 2000. We have no obligation to provide additional
funding to Breakaway Solutions other than as described above, 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 $18.0 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 or existing partner companies,
offset in 1998 and the three months ended March 31, 1999 by the proceeds of
$36.4 million and $2.5 million, respectively, from the sales of a portion of
our available-for-sale securities, Excite and Lycos.
We utilized $56.6 million, including $9 million contributed to
VerticalNet, to acquire interests in new or 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, CommerX,
ComputerJobs.com, Context Integration, Deja.com, e-Chemicals, Entegrity
Solutions, LinkShare, MessageQuest, 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 or
existing partner companies during the three months ended March 31, 1999. These
companies included: BidCom, ClearCommerce, Collabria, Entegrity, Internet
Commerce Systems, ONVIA.com PlanSponsor Exchange, SageMaker, SMART Technologies
and Universal Access.
We utilized $67.6 million, including $4.0 million contributed directly to
Breakaway Solutions and an additional $4.0 million used to purchase Breakaway
Solutions shares from Breakaway Solutions shareholders, to acquire interests in
or make advances to new and existing partner companies during the period from
April 1, 1999 through June 15, 1999. These companies included: Arbinet
Communications, Blackboard, ClearCommerce, CommerX, Deja.com, e-Chemicals, e-
MarketWorld, iParts, MessageQuest, PlanSponsor Exchange, Pointment, PrivaSeek,
SageMaker, ServiceSoft, Star-Cite!, Syncra Software, Tradex Technologies,
United Messaging and Universal Access.
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<PAGE>
During the period from April 1, 1999 to June 15, 1999 we 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 approximately $8.0 million which will be amortized over three years. We
purchased our ownership interest from shareholders of the partner company.
These shareholders have the option, exercisable at any time through June 2000,
of electing to receive from us cash of $11.3 million or a number of shares of
our common stock determined by dividing $11.3 million by the product that
results from multiplying the initial public offering price of our common stock
by .90.
During the period from April 1, 1999 to June 15, 1999, we agreed to
divest our interest in SMART Technologies, Inc.
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 May 31, 1999.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting
pronouncements to have a significant impact on our 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
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
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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.
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OUR BUSINESS
Industry Overview
Growth of the Internet
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.
Growth of B2B E-Commerce
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 $35 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:
. 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.
. 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.
Market Opportunities for Emerging B2B E-Commerce Companies
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. 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.
. 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.
. 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.
. 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.
. 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:
. 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.
. Software Providers. 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.
. 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:
. 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
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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.
. 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.
. 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 15, 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:
. create or identify companies with the potential to become industry
leaders;
. acquire significant interests in partner companies and incorporate
them into our collaborative network;
. provide strategic guidance and operational support to our partner
companies; and
. 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.
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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:
. Industry Criteria
. 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.
. Competition. We evaluate the amount of competition that a
potential partner company faces from e-commerce and traditional
businesses.
. 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.
. 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.
. 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.
. Partner Company Criteria
. 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.
. Management Quality. We assess the overall quality and industry
expertise of a potential partner company's management.
. Significant Ownership. We consider whether we will be able to
obtain a significant position in the company and exert influence
over the company.
. 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
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<PAGE>
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:
. 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.
. 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:
. 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 Senior Partners, 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.
. 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.
. 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 Solvik, the Chief Information
Officer of Cisco Systems, Inc.
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. 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.
. 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:
. 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.
. 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 Maker Categories
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.
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. 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.
. 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.
. 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 15,
1999, VerticalNet owned and operated 38 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.
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Market Maker Profiles
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 15, 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.
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
---------------------- --------------------- ------------------------ ---------- -------
<C> <C> <S> <C> <C>
Distributor:
CommerX Inc. Plastics Provides Internet-based 34% 1998
www.commerx.com procurement and sales of
raw materials, tools and
maintenance and repair
products for the
plastics industry.
e-Chemicals, Inc. Chemicals Provides Internet-based 36% 1998
www.e-chemicals.com sales and distribution
of industrial chemicals.
iParts Electronic Components Provides Internet-based 85% 1999
www.ipartsupply.com sales and distribution
of electronic
components.
ONVIA.com, Inc. Small Business Provides small 20% 1999
www.onvia.com Services businesses with a wide
breadth of tailored
products and services
over the Internet.
PaperExchange Paper Provides Internet-based 27% 1999
www.paperexchange.com sales and distribution
of all grades of pulp
and paper.
Universal Access, Inc. Telecommunications Provides Internet-based 13% 1999
www.universal ordering for
accessinc.com provisioning and access
and transportation
exchange services for
network service
providers focused on
business customers.
Network:
Arbinet Telecommunications Provides an Internet- 16% 1999
Communications, Inc. based trading floor and
www.arbinet.com clearinghouse for
telecommunications
carriers to purchase
bandwidth.
BidCom, Inc. Construction Provides Internet-based 25% 1999
www.bidcom.com project planning and
management services for
the construction
industry.
Collabria Inc. Printing Provides Internet-based 10% 1999
www.collabria.com procurement and
production services for
the commercial printing
industry.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
--------------------- ---------------------- ------------------------ ---------- -------
<C> <C> <S> <C> <C>
ComputerJobs.com, Technology Provides Internet-based 33% 1998
Inc. Employment job screening and resume
www.computerjobs.com posting for information
technology
professionals,
corporations and
staffing firms.
Internet Commerce Food Provides Internet-based 43% 1999
Systems, Inc. product introduction and
www.icsfoodone.com promotion services to
wholesale and retail
food distributors.
PointMent, Inc. Healthcare Provides Internet-based 50% 1999
www.pointment.com solutions for employee
health benefits
management across the
health care industry.
RapidAutoNet Auto Parts Provides Internet-based 15% 1998
Corporation auto parts procurement
www.rapidautonet.com for professional
automotive and truck
repair shops.
Star-Cite! Travel Provide Internet-based 43% 1999
www.starcite.com services for planning
and managing corporate
meetings for event
planners.
Community:
Deja.com, Inc. Media Provides a Web-based 32% 1997
www.deja.com community for potential
purchasers to access
user comments on a
variety of products and
services.
eMarketWorld, Inc. Special Event Services Provides industry 42% 1999
www.emarketworld.com specific Web-based
conferences and
expositions that help
businesses understand
the Internet.
PlanSponsor Exchange Asset Management Provides a Web-based 24% 1999
www.plansponsor community for asset
exchange.com managers to reach fund
sponsors.
VerticalNet, Inc. Industrial Services Provides industry- 37% 1996
www.verticalnet.com specific Web-based trade
communities for
businesses and
professionals.
</TABLE>
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
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<PAGE>
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
45,000 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.
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<PAGE>
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 with
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 38 industry-specific Web sites as of June 15,
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.
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<PAGE>
VerticalNet's 38 vertical trade communities are:
Process Group
. Adhesives and Sealants Online
(adhesivesandsealants.com)
Manufacturing and Production of
Adhesive, Sealant, and Grout
Materials
. Chemical Online
(chemicalonline.com)
Manufacturing and Processing
Chemicals
. Hydrocarbon Online
(hydrocarbononline.com)
Hydrocarbons and Petrochemicals
Processing
. Oil and Gas Online
(oilandgasonline.com) Production
and Exploration of Oil and Gas
. Paint and Coatings Online
(paintandcoatingsonline.com)
Manufacturing and Production of
Paint Coatings, Inks and Thick Film
Printable Conductors
. Pharmaceutical Online
(pharmaceuticalonline.com)
Development, Design and
Manufacturing of Pharmaceuticals
. Pulp and Paper Online
(pulpandpaperonline.com)
Manufacturing and Production of
Pulp and Paper Products
. Semiconductor Online
(Semiconductoronline.com)
Manufacturing of Semiconductors,
Photovoltaics and Magnetic Data
Storage
Communication Group
. Fiber Optics Online
(fiberopticsonline.com) Design
and Production of Fiber Optic
Networks and Network Components
. Photonics Online
(photonicsonline.com) Design and
Manufacturing of Lasers, Optics,
Optoelectronics, Fiber Optics
and Imaging Devices
. Premises Networks.com
(premisesnetworks.com)
Facilities and Network
Infrastructure Design and
Administration
. RF Globalnet (rfglobalnet.com)
Information, Bookstore and
Educational Center for Radio
Frequency, Wireless and
Microwave Engineers
. Wireless Design Online
(wirelessdesignonline.com)
Design and Development of
Wireless Communications Systems
and Equipment
Environmental Group
. Pollution Online
(pollutiononline.com) Industrial
Pollution Control
. Power Online
(poweronline.com) Power
Generation, Electric Utility
Deregulation, Emissions Control,
Alternative Fuels, Power
Industry
. Public Works Online
(publicworks.com) Public Works
and Municipal Maintenance
. Solid Waste Online
(solidwaste.com) Solid Waste
Disposal
. Water Online (wateronline.com)
Municipal Water Supply and
Municipal Wastewater Treatment
Food & Packaging Group
. Bakery Online (bakeryonline.com)
Production and Procurement of
Baking Ingredients
. Beverage Online
(beverageonline.com) Production
and Procurement of Equipment
used in the Production of
Beverages
. Dairy Network.com
(dairynetwork.com) Production,
Procurement and Distribution of
Dairy Products
. Food Ingredients Online
(foodingredientsonline.com)
Manufacturing and Processing of
Food Ingredients
. Food Online (foodonline.com)
Manufacturing and Processing of
Food Products
. Meat and Poultry Online
(meatandpoultryonline.com)
Production, Procurement and
Distribution of Meat and Poultry
Products
. Packaging Network.com
(packagingnetwork.com)
Production, Purchase, Design and
Marketing of Packaging for All
Consumer and Industrial Products
Healthcare Group
. Hospital Network.com
(hospitalnetwork.com)
Information for Hospital
Purchasing Decision-Makers
. Nurses.com (nurses.com)
Clinical, Professional and Other
Information for Nurses
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Advanced Technologies Group
. Aerospace Online
(aerospaceonline.com) Design and
Manufacturing of Products and
Services Relating to the
Aerospace Industry
. Computer OEM Online
(computeroemonline.com) Design
and Manufacturing of Computers
and Computerized Electronics
Devices
. Embedded Technology Online
(embeddedtechnology.com) Design
and Manufacturing of Embedded
Systems, Computers, Software and
Devices
. Medical Design Online
(medicaldesignonline.com)
Design, Manufacturing and
Procurement of Medical Devices
. Plant Automation.com
(plantautomation.com) Hardware
and Software Used in Industrial
Manufacturing Including Robotics
and Automated Control Systems
. Test and Measurement
(testandmeasurement.com) Design,
Manufacturing and Procurement of
Test, Measurement, Data
Acquisition, Data Analysis and
Instrumentation Equipment
Sciences Group
. Bioresearch Online
(bioresearchonline.com) Covers
all Aspects of Experimental and
Applied Biology Including
Biotechnology, Genomics and
Genetics
. Drug Discovery Online
(drugdiscoveryonline.com) Early-
Stage Pharmaceutical Discovery
and Development
. Laboratory Network.com
(laboratorynetwork.com) Covers
all Aspects of the Research
Industry Focusing on Analytical
Instrumentation and Materials
Science
Services Group
. Property and Casualty.com
(propertyandcasualty.com)
Property and Casualty Insurance
. Safety Online (safetyonline.com)
Industrial and Environmental
Safety
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:
. offer consistent content and services in its current vertical trade
communities and replicate these offerings as it launches new
communities;
. realize cost savings and operating efficiencies in its technology,
marketing, infrastructure and management resources; and
. 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.
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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:
. 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.
. 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.
. 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 15, 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.
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
--------------------------- ----------------------------- ---------- -------
<C> <S> <C> <C>
Strategic Consulting and
Systems Integration:
Benchmarking Partners, Inc. Provides e-commerce best 12% 1996
www.benchmarking.com practices research and
consulting services to
optimize supply and
distribution network
management.
Context Integration, Inc. Provides systems integration 18% 1997
www.context.com services focused on customer
support, data access and e-
commerce.
US Interactive, Inc. Provides a range of 3% 1996
www.usinteractive.com consulting and technical
services relating to Internet
marketing solutions.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
------------------------------ -------------------------- ---------- -------
<C> <S> <C> <C>
Software Providers:
Blackboard, Inc. Provides universities and 31% 1998
www.blackboard.com corporations with
applications that enable
them to host classes and
training on the Internet.
ClearCommerce Corp. Provides comprehensive e- 15% 1997
www.clearcommerce.com commerce solutions
including transaction and
payment processing, credit
card authorization, fraud
tracking and reporting
functions.
Entegrity Solutions Provides encryption 12% 1996
www.entegrity.com software to secure
transactions and
communications between
business applications.
ServiceSoft Technologies, Inc. Provides tools and 6% 1998
www.servicesoft.com services used by its
customers to create
Internet customer service
applications consisting of
self-service, e-mail
response and live
interaction products.
Syncra Software, Inc. Provides software that 34% 1998
www.syncra.com improves supply chain
efficiency through
collaboration of trading
partners over the
Internet.
Tradex Technologies, Inc. Provides e-commerce 13% 1999
www.tradex.com application software that
enables enterprises to
create on-line
marketplaces and
exchanges.
Outsourced Service Providers:
Breakaway Solutions, Inc. Provides application 57% 1999
www.breakaway.com service hosting, e-
commerce consulting and
systems integration
services to middle-market
companies.
The LinkShare Corporation Establishes affiliate 34% 1998
www.linkshare.com relationships for online
merchants with other Web
sites to facilitate e-
commerce.
MessageQuest, Inc. Provides a messaging 27% 1998
www.messagequest.com 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.
PrivaSeek, Inc. Provides consumers with 16% 1998
www.privaseek.com control of their Web-based
personal profiles,
allowing merchants to
offer consumers incentives
for selective disclosure.
SageMaker, Inc. Provides services that 27% 1998
www.sagemaker.com combine an enterprise's
external and internal
information assets into a
single, Web-based
knowledge management
platform.
Sky Alland Marketing, Inc. Provides services to 31% 1996
www.skyalland.com improve customer
communications and
relationships.
United Messaging, Inc. Provides high performance 41% 1999
www.unitedmessaging.com electronic messaging
services for organizations
with mission critical
e-mail networks.
Vivant! Corporation Management Provides process 23% 1998
www.vivantcorp.com automation and decision
support services that
enable companies to
strategically manage
contractors, consultants
and temporary employees.
</TABLE>
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<PAGE>
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:
. Integration. Coordinating diverse business functions such as
manufacturing, logistics, sales and marketing to maximize efficiency.
. Optimization. Developing strategies that increase the efficiency of
supply networks.
. 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.
MessageQuest, Inc. MessageQuest 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,
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the recent growth of the Internet and the use of intranets has increased the
complexity of data sharing among heterogeneous business applications.
MessageQuest currently employs 200 professionals dedicated to providing
software and system integration services around IBM's MQ series, a messaging-
based middleware software solution that facilitates data sharing among an
enterprise's disparate applications, databases and operating systems.
MessageQuest'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, MessageQuest provides its customers with low cost, rapidly-
implemented messaging services. We believe that the services and software
provided by MessageQuest can be used throughout our partner company network,
including our market makers interested in tighter integration with their
suppliers and customers. We have assisted MessageQuest 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, MessageQuest 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 15, 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:
. 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.
. 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.
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<PAGE>
. 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.
. 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, Comcast Corporation, Compaq
Computer Corporation, General Electric Capital Corporation and Safeguard
Scientifics, Inc. will beneficially own 10.5%, 4.2%, 3.0% and 14.9% of our
common stock, respectively. These shareholders may compete with us to acquire
interests in B2B e-commerce companies. Comcast Corporation, General Electric
Capital Corporation and Safeguard Scientifics, Inc. currently each have a
designee as a member of our Board of Directors, which may give such companies
access to our business plan and 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.
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<PAGE>
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:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. 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.
Employees
As of June 15, 1999, excluding our partner companies, we had 33
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 Proceedings
We are not a party to any material legal proceedings.
54
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers, key employees and directors, their ages and their
positions as of June 15, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
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
Rick Devine 41 Managing Director, Executive Recruiting
Kenneth A. Fox 28 Managing Director and Director
David D. Gathman 51 Chief Financial Officer and Treasurer
Gregory W. Haskell 42 Managing Director, Operations
Victor Hwang 30 Managing Director, Acquisitions
Mark J. Lotke 31 Managing Director, Acquisitions
Henry N. Nassau 44 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
Christopher H. Greendale 47 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
</TABLE>
- --------
(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
Reuter's 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 StarCite.
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
55
<PAGE>
and Chief Executive Officer of Reality Online, Mr. Bunker built the company
into a leading builder and host 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 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 the 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, SMART
Technologies, Inc. and Vivant! Corporation.
David D. Gathman has served as our Chief Financial Officer, Secretary 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.
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.
Victor 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.
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. 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 Gatrade, Priceline.com,
Inc., LHS Group, Inc., Envoy Communications Group, Inc., NewSub Services, Inc.,
and Proactive 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
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<PAGE>
from the Graduate Business School at 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 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
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.
Christopher H. Greendale has served as one of our Senior Partners of
Operations since January 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.
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
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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 General Electric 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.
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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 this position, Mr. Hovsepian was General Manager
of IBM's Global Retail and Distribution Industry Solution Organization, and had
global responsibility for IBM's retail store system and the consumer driven
supply chain solution units. Mr. Hovsepian joined IBM 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.
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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, SMART
Technologies, Inc., 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 finding 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
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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:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ---------------------------------
<C> <C> <S>
Class I 2000 Messrs. Brodsky and Gould
Class II 2001 Messrs. Keith, Forgash and Solvik
Class III 2002 Messrs. Buckley, Fox and Gerrity
</TABLE>
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 "--
Stock Option Plans."
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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 in the past served, on the
compensation committee of any other company the directors or executive officers
of which 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 nine additional executive officers--Messrs.
Bunker, Devine, Gathman, Haskell, Hwang, Lotke, Nassau, Nickolas and Ms. Wolf--
each of whom are expected to receive more than $100,000 in compensation in
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- ------------
Shares
Other Underlying
Name and Principal Position Salary Bonus Compensation (1) Options
--------------------------- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C>
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......... $133,808 $ 50,000 -- 1,250,000
</TABLE>
- --------
(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.
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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
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term (3)
Options Employees in Price per Expiration -----------------------
Name Granted (1) 1998 Share (2) Date 5% 10%
---- ----------- ------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. 1,300,000 21% $2.00 Dec. 18, 2008 $14,827,895 $23,618,470
Douglas A. Alexander.... 1,250,000 20% 2.00 Dec. 18, 2008 14,257,592 22,710,067
Kenneth A. Fox.......... 1,250,000 20% 2.00 Dec. 18, 2008 14,257,592 22,710,067
Robert A. Pollan........ 1,250,000 20% 2.00 Dec. 18, 2008 14,257,592 22,710,067
</TABLE>
- -------
(1) All options granted to employees are immediately exercisable and 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.
(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.
(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 $9.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
The following table sets forth certain information concerning option
exercises by our Named Officers.
Year-End December 31, 1998 Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying in-the-Money
Unexercised Options at Fiscal Options at Fiscal
Shares Year-End Year-End (1)
Acquired on Value ------------------------------------ -------------------------
Name Exercise (#) Realized ($) Exercisable (2) Unexercisable Exercisable Unexercisable
---- ------------ ------------ ------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. -- -- 1,300,000 -- $9,100,000 --
Douglas A. Alexander.... -- -- 1,250,000 -- 8,750,000 --
Kenneth A. Fox.......... -- -- 1,250,000 -- 8,750,000 --
Robert A. Pollan........ -- -- 1,250,000 -- 8,750,000 --
</TABLE>
- -------
(1) Based on an assumed initial public offering price of $9.00 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.
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Employee Benefit Plans
Membership Profit Interest Plan
In 1996, the board of managers of Internet Capital Group, L.L.C. approved
the Membership Profit Interests 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 interests 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 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 Plan are summarized below. This summary, however, does
not purport to be a complete description of the 1999 Plan and is qualified in
its entirety by the terms of the 1999 Plan.
Purpose. The purpose of the 1999 Plan is to provide:
. designated employees of Internet Capital Group and its subsidiaries;
. certain advisors who perform services for Internet Capital Group or
its subsidiaries; and
. non-employee members of our Board of Directors,
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
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
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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 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 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 Plan and to make rules, regulations, agreements and
instruments for implementing the plan. The committee's determinations made
under the 1999 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 June 15,
1999, 5,058,500 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 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 Plan provides that each of
our non-employee directors, other than:
. 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;
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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
. non-employee directors who are granted options under the general
option provisions of the 1999 Plan, is entitled to receive an option
to purchase 47,000 shares of our common stock, vesting in equal
installments over four years, upon his 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 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 Plan. Such awards shall be in such amounts and subject
to such performance goals and other terms and conditions as the compensation
committee determines.
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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 Plan may be granted, the number of shares
covered by outstanding grants, the kind of shares issued under the 1999 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 Plan.
Change of Control and Reorganization. Upon a Change of Control, as
defined in the 1999 Plan, the compensation committee may:
. determine that the outstanding grants, whether in the form of options
and stock appreciation rights shall immediately vest and become
exercisable;
. determine that the restrictions and conditions on all outstanding
restricted stock or performance share awards shall immediately lapse;
. 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
. 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 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:
. 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
. 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.
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<PAGE>
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:
. 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
. the exercise price paid for the stock.
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
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<PAGE>
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. We intend to present
the 1999 Plan to the shareholders for their approval before completing this
offering. The 1999 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.
Internet Capital Group, Inc. Equity Compensation Loan Program
In accordance with the 1998 Plan, the 1999 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 each employee who has been awarded a non-qualified stock
option under the 1999 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 such employee 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 May 5, 1999. The loans will be full recourse, will bear
an interest rate of 5.22%, 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 the Company is terminated for
any reason, such eligible employee must repay the full outstanding loan balance
to the Company within 90 days of such termination. Also, if the Company
determines that a grantee breaches any of the terms of the restrictive
covenants, such eligible employee must immediately repay any outstanding loan
balance to the Company.
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 15, 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(a) 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.
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<PAGE>
CERTAIN TRANSACTIONS
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 2,567,999 shares of common
stock to Mr. Buckley in March 1996 and 1,286,549 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.
<TABLE>
<CAPTION>
Amount Received
Shares of Common Date of by Internet
Name Stock Purchased Purchase Capital Group
---- ---------------- ------------- ---------------
<S> <C> <C> <C>
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
</TABLE>
During 1998 and 1999, we leased our corporate offices in Wayne,
Pennsylvania from Safeguard Scientifics, Inc. From January 31, 1998 to May 31,
1999, our monthly lease payments to Safeguard Scientifics, Inc. totaled
approximately $43,000. Prior to this offering, Safeguard Scientifics, Inc.,
beneficially owned 18.3% 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 May 31, 1999, our payments to Safeguard Scientifics
totaled approximately $175,000 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.
In March 1999, we leased office space in Boston, Massachusetts from
Safeguard Scientifics, Inc. We pay Safeguard Scientifics, Inc. $4,636 each
month under the lease. We believe that our lease in Boston 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.
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<PAGE>
After 180 days from the date of this prospectus, each of Comcast ICG,
Inc., CPQ Holdings, Inc., Internet Assets, Inc., Safeguard Scientifics, Inc.,
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 prior to this offering and all shares of our
common stock held by them after exercise of any warrants issued to these
shareholders prior to this offering. Prior to this offering, these
shareholders, together, are the holders of 45,213,733 shares of our common
stock and warrants to purchase 311,665 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 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 $9.00 per share,
the notes will automatically convert into 10,000,000 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 $9.00 per share, 2,000,000 shares of our common stock. The
warrants expire in May 2002.
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<PAGE>
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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Holder Internet Capital Group Convertible Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
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 director 36,000
Robert A. Pollan........... executive officer 31,000
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
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.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
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
Victor 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 2,650,000
Thomas P. Gerrity.......... director 400,000
In June 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
$14,783,222.50. The promissory notes bear interest at the rate of 5.22%, mature
on 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.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
William Haskell............ executive officer $ 6,311,000
Richard Devine............. executive officer 7,114,223
Richard G. Bunker.......... executive officer 1,358,000
</TABLE>
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<PAGE>
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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- -------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III.......... executive officer and director $ 1,207,400
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
Victor 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.
<CAPTION>
Relationship to Amount Paid
Name of Recipient Internet Capital Group to Recipient
- -------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III.......... executive officer and director $ 685,092
Douglas A. Alexander............ executive officer 20,018
Kenneth A. Fox.................. executive officer and director 514,597
Thomas P. Gerrity............... director 6,100
Henry N. Nassau................. executive officer 305
Robert A. Pollan................ executive officer 2,440
Comcast ICG, Inc................ principal shareholder 1,401,198
CPQ Holdings, Inc............... principal shareholder 1,000,932
Internet Assets, Inc............ principal shareholder 122,007
Safeguard Scientifics, Inc...... principal shareholder 2,602,424
Safeguard Capital 98 LP......... principal shareholder 198,262
</TABLE>
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 15, 1999, and as adjusted to reflect
the sale of shares offered hereby, by:
. 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;
. each of our directors and our executive officers named in the summary
compensation table; and
. 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 shares of
Common Stock issuable upon the exercise of options or warrants exercisable
within 60 days of June 15, 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. Figures also include $90 million principal amount of
convertible notes which automatically convert to 10,000,000 shares of our
common stock upon completion of this offering. See "Certain Transactions" for a
description of the convertible notes.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Percent of Shares Outstanding
Options and Warrants Including Options and --------------------------------------
5% Beneficial Owners, Directors, Exercisable Warrants Exercisable
Named Officers Within 60 Days Within 60 Days Before the Offering After the Offering
- -------------------------------- -------------------- --------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Comcast ICG, Inc. (1)............. 356,832 12,623,497 12.1% 10.5%
c/o Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Internet Assets, Inc.............. 33,888 5,203,332 5.0 4.4
Sahab Tower
Fahad Alsalim Street, 10th Floor
P.O. Box 3216
Safat, 13033, Kuwait
Safeguard Scientifics, Inc........ -- 19,055,401 18.3 14.9
435 Devon Park Drive
Wayne, Pennsylvania 19087
Douglas Alexander (2)............. -- 2,566,374 2.5 2.2
Julian A. Brodsky (3)............. -- -- -- --
Walter W. Buckley, III (4)........ 13,333 4,947,998 4.8 4.2
E. Michael Forgash (5)............ 2,222 13,333 * *
Kenneth A. Fox (6)................ 22,222 4,669,882 4.5 4.0
Dr. Thomas P. Gerrity (7)......... 1,711 460,266 * *
Scott E. Gould.................... -- -- -- --
Robert E. Keith, Jr............... 1,022 156,133 * *
Robert Pollan (8)................. 688 1,429,132 1.4 1.2
Peter A. Solvik................... 23,733 362,434 * *
All executive officers and
directors as a group (19 persons)
(2) (3) (4) (5) (6) (7) (8)...... 66,685 20,508,313 19.5 17.1
</TABLE>
- --------
* Less than 1%
74
<PAGE>
(1) Includes convertible notes that convert to 277,777 shares and warrants to
purchase 55,555 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 "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.
(5) E. Michael Forgash is Vice President-Operations of Safeguard Scientifics,
Inc. Mr. Forgash disclaims beneficial ownership of shares beneficially
owned by Safeguard Scientifics, Inc. and Safeguard Scientifies, Inc.
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, Inc. may sell up to 1,250,000 shares of our common
stock to its shareholders and the unit investment trust in connection with the
directed share subscription program. Assuming that Safeguard Scientifics, Inc.
sells all the shares that it is offering, Safeguard Scientifics, Inc. will own
17,805,401 shares of our common stock, or 14.9% of the outstanding shares,
after completion of this offering.
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<PAGE>
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.
Upon completion of this offering, we will have approximately 119,226,304 shares
(121,476,304 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 June 15, 1999, there were 94,226,304 shares of our common stock
outstanding. As of June 15, 1999, 3,720,750 shares of our common stock were
reserved for issuance under our 1999 Equity Compensation Plan. Upon completion
of the offering, there will be 119,226,304 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.
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Registration Rights
After this offering, the holders of 43,963,733 shares of our common stock
and warrants exercisable for 311,665 shares of our common stock are entitled to
demand registration of their shares under the Securities Act. These holders of
22,158,332 shares of our common stock and warrants exercisable for 311,665
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 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.
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
which 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
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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.
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.
Number of Directors; Removal; Filling Vacancies
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.
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Indemnification
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, alternation,
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.
Bylaws
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 119,226,304 shares of our
common stock outstanding (assuming conversion of all of our outstanding
convertible notes, no exercise of the underwriters' over-allotment option and
no 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, 102,976,304 "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:
. 1% of the then outstanding shares of our common stock (approximately
shares immediately after the offering) or;
. 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.
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 22,158,332 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 such period, if such holders cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the common stock.
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CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion summarizes certain 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:
. a non-resident alien individual,
. a foreign corporation,
. a foreign partnership or
. 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.
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.
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.
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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:
. 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;
. 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
. 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.
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:
. subject to the 30% withholding tax discussed above, or
. not subject to the 30% withholding tax because an applicable tax
treaty reduces or eliminates such withholding tax,
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.
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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:
. is a U.S. person;
. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S.;
. is a "controlled foreign corporation" as to the U.S.; or
. with respect to payments made after December 31, 2000, is a foreign
partnership with certain connections to the U.S.
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.
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UNDERWRITING
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,
BancBoston Robertson Stephens Inc., Deutsche Bank Securities Inc., Banc of
America Securities LLC 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 3,000,000 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 9,750,000 shares of common stock being purchased
by the U.S. underwriters does not include the 3,500,000 shares of common stock
being sold through the Directed Share Subscription Program.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
BancBoston Robertson Stephens Inc. ..................................
Banc of America Securities LLC.......................................
Deutsche Bank Securities Inc.........................................
Wit Capital Corporation..............................................
----------
Total........................................................... 13,250,000
==========
</TABLE>
We have also agreed with certain international managers outside the
United States and Canada, for whom Merrill Lynch International, BancBoston
Robertson Stephens International Limited, and Banc of America Securities LLC
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 9,750,000 shares of 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 3,000,000 shares of common stock. The public offering price per share and
the total underwriting discount per share of common stock are identical for the
U.S. shares and the international shares.
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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.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to Internet Capital
Group, Inc. ................................... $ $ $
Proceeds, before expenses, to Safeguard
Scientifics, Inc. ............................ $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1,275,000 and are payable by us.
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.
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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
1,800,000 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 450,000 additional shares of common stock to cover over-allotments, if any,
on terms similar to those granted to the U.S. underwriters.
Directed Shares
At our request, the underwriters have reserved approximately 1.5 million
shares of our common stock for sale at the initial public offering price to our
employees, directors and certain other persons with relationships to Internet
Capital Group. 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.
Directed Shares Subscription Program
As part of this offering, we and Safeguard Scientifics, Inc. are offering
approximately 3.5 million shares of our common stock in a directed share
subscription program to shareholders of Safeguard Scientifics, Inc., one of our
principal and founding shareholders. Of these shares, we are offering 2,250,000
shares and Safeguard Scientifics, Inc. is offering 1,250,000 shares. Safeguard
Scientifics, Inc.'s shareholders may subscribe for one share of our common
stock for every ten shares of Safeguard Scientifics, Inc. 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 491 shares
of Safeguard Scientifics, Inc.'s common stock as of June 14, 1999 are eligible
to purchase shares directly from us or Safeguard Scientifics, Inc. under the
program. Shareholders of Safeguard Scientifics, Inc. who own between 100 and
490 shares of Safeguard Scientifics, Inc. common stock will be eligible to
purchase interests in a unit investment trust that will invest its assets
solely in our common stock. The shares offered to the unit investment trust are
included in the 3.5 million shares. Shareholders who own less than 100 shares
of Safeguard Scientifics, Inc. common stock will be ineligible to participate
in the directed share subscription program. If any of the shares offered by us
under the program are not purchased by the shareholders of Safeguard
Scientifics, Inc., then Safeguard Scientifics, Inc. or one or more of its
designees will purchase these shares from us. Subscription orders will be
satisfied first from the shares being sold by us, and then from the shares
offered by Safeguard. Prior to this offering, Safeguard Scientifics, Inc.
beneficially owned 18.3% of our common stock. After this offering, Safeguard
Scientifics, Inc. will beneficially own approximately 17,805,401 shares, or
14.9%, of our common stock, assuming that all 3.5 million shares are purchased
by shareholders of Safeguard Scientifics, Inc. and the unit investment trust,
and will beneficially own approximately 21,305,401 shares, or 17.9%, of our
common stock assuming that none of the 3.5 million shares are purchased by the
shareholders of Safeguard Scientifics, Inc. or the unit investment trust. The
purchase price under the program, whether paid by Safeguard Scientifics, Inc.,
its shareholders or the unit investment trust, will be the same price per share
as set forth on the cover page of this prospectus. For purposes of this
prospectus, when we present financial data that reflects this offering, we have
assumed that all 3.5 million shares offered under the directed share
subscription program are sold. Merrill Lynch will receive a financial advisory
fee of $ or equal to 3% of the aggregate initial offering price of the 3.5
million shares being sold through the directed share subscription program.
86
<PAGE>
No Sales of Similar Securities
We, our executive officers and directors, Safeguard Scientifics
(Delaware), Inc., Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ Holdings,
Inc., 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:
. 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
. 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:
. the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
. certain of our financial information;
. the history of, and the prospects for, our company and the industry in
which we compete;
. an assessment of our management;
. our past and present operations;
. the prospects for, and timing of, our future revenue;
. the present state of our development;
. the percentage interest of Internet Capital Group being sold as
compared to the valuation for the entire company; and
. 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
87
<PAGE>
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(TM) or selected dealer in more than 95 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(TM) 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.
88
<PAGE>
LEGAL MATTERS
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 27,777 shares of our
common stock upon completion of this offering based on an assumed initial
public offering price of $9.00 per share, and warrants exercisable at the
initial public offering price per share to purchase 5,555 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
3,703 shares of our common stock upon completion of this offering based on an
assumed initial public offering price of $9.00 per share, and warrants
exercisable at the initial public offering price per share to purchase 740
shares of our common stock based on an assumed initial public offering price of
$9.00 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 16,666 shares of our common stock upon
completion of this offering based on an assumed initial public offering price
of $9.00 per share, and warrants exercisable at the initial public offering
price per share to purchase an aggregate of 3,333 shares of our common stock
based on an assumed initial public offering price of $9.00 per share.
EXPERTS
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 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 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.
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
89
<PAGE>
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.
90
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Shareholders' Equity.......................... F-5
Consolidated Statements of Comprehensive Income (Loss)................... F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
COMPUTERJOBS.COM, INC.
Report of Independent Auditors........................................... F-34
Balance Sheets........................................................... F-35
Statements of Income..................................................... F-36
Statements of Changes in Stockholders' Equity (Deficit).................. F-37
Statements of Cash Flows................................................. F-38
Notes to Financial Statements............................................ F-39
SYNCRA SOFTWARE, INC.
Report of Independent Accountants........................................ F-45
Balance Sheet............................................................ F-46
Statement of Operations.................................................. F-47
Statement of Changes in Redeemable Preferred Stock and Stockholders'
Deficit................................................................. F-48
Statement of Cash Flows.................................................. F-49
Notes to Financial Statements............................................ F-50
INTERNET CAPITAL GROUP, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Financial Information Basis of Presentation.......... F-52
Unaudited Pro Forma Condensed Combined Statements of Operations.......... F-53
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..... F-54
</TABLE>
F-1
<PAGE>
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.
KPMG LLP
Philadelphia, Pennsylvania
May 7, 1999
F-2
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
------------------------ ------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents............ $ 5,967,461 $26,840,904 $ 19,236,061
Accounts receivable, less allowances
for doubtful accounts ($30,000-1997;
$61,037-1998; $131,000-1999)........ 721,381 1,842,137 2,757,504
Prepaid expenses and other current
assets.............................. 148,313 1,119,062 295,151
----------- ----------- ------------
Total current assets................. 6,837,155 29,802,103 22,288,716
Fixed assets, net.................... 544,443 1,151,268 773,358
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 5,315,064
Other................................ 20,143 613,393 85,637
----------- ----------- ------------
Total Assets........................... $31,481,016 $96,785,975 $130,128,664
=========== =========== ============
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term
debt................................ $ 150,856 $ 288,016 $ 1,136,290
Line of credit....................... 2,500,000 2,000,000 --
Accounts payable..................... 696,619 1,348,293 358,385
Accrued expenses..................... 388,525 1,823,407 1,376,697
Note payable to Partner Company...... -- 1,713,364 1,285,223
Deferred revenue..................... 710,393 2,176,585 99,062
----------- ----------- ------------
Total current liabilities............ 4,446,393 9,349,665 4,255,457
Long-term debt....................... 399,948 351,924 121,665
Minority interest.................... -- 6,360,008 1,945,027
Deferred taxes....................... -- -- 560,716
Commitments and contingencies (Note
16)
Shareholders' Equity
Preferred stock, $.001 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 74,935,262 100,804,003
Retained earnings (accumulated
deficit)............................ (8,642,113) 5,256,815 23,239,737
Unamortized deferred compensation.... (914,810) (1,266,814) (3,618,126)
Accumulated other comprehensive
income.............................. -- 1,733,071 2,738,179
----------- ----------- ------------
Total shareholders' equity........... 26,634,675 80,724,378 123,245,799
----------- ----------- ------------
Total Liabilities and Shareholders'
Equity................................ $31,481,016 $96,785,975 $130,128,664
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
March 4, 1996 Year Ended (Unaudited)
(Inception) to December 31, Three Months Ended March 31,
December 31, ------------------------ -------------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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 70,434
General and
administrative....... 1,652,481 3,442,241 7,619,169 1,523,878 3,872,350
Minority interest..... (427,185) 106,411 (5,381,640) -- (134,321)
Equity (income) loss.. 514,540 (106,298) 5,868,887 289,847 7,412,602
----------- ----------- ----------- -------------- ---------------
Total operating
expenses........... 2,435,723 7,509,736 20,643,606 3,376,872 12,774,394
----------- ----------- ----------- -------------- ---------------
Operating Loss.......... (2,150,583) (6,717,914) (17,508,837) (2,999,501) (9,663,359)
Other income, net
(Note 15)............ -- -- 30,483,177 12,322,162 28,704,971
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)
----------- ----------- ----------- -------------- ---------------
Pretax Income (Loss).... (2,062,485) (6,579,628) 13,898,928 9,269,041 19,337,591
Income tax benefit.... -- -- -- -- 663,206
----------- ----------- ----------- -------------- ---------------
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $9,269,041 $20,000,797
=========== =========== =========== ============== ===============
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 as
reported............. $13,898,928 $ 19,337,591
Pro forma income tax
provision............ (5,142,603) (7,154,909)
----------- ---------------
Pro forma net income.. $ 8,756,325 $ 12,182,682
=========== ===============
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
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
-------------------
Retained Accumulated
Additional Earnings Unamortized Other
Paid-In (Accumulated Deferred Comprehensive
Shares Amount Capital Deficit) Compensation Income Total
---------- ------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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.............. -- -- 605,089 -- (605,089) -- --
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 $ 74,935,262 $ 5,256,815 $(1,266,814) $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.............. -- -- 270,892 -- (270,892) -- --
Issuance of stock
options to employees
below fair market
value.................. -- -- 2,296,800 -- (2,296,800) -- --
Forfeitures of
restricted stock....... (28,076) (28) (5,025) -- 5,053 -- --
Net unrealized
appreciation in
available for sale
securities............. -- -- -- -- -- 1,005,108 1,005,108
Amortization of deferred
compensation........... -- -- -- -- 211,327 -- 211,327
Distribution to former
LLC members............ -- -- -- (10,675,811) -- -- (10,675,811)
LLC termination (Note
3)..................... -- -- (8,657,936) 8,657,936 -- -- --
Net income.............. -- -- -- 20,000,797 -- -- 20,000,797
---------- ------- ------------ ------------ ----------- ---------- ------------
Balance as of March 31,
1999 (unaudited)....... 82,005,549 $82,006 $100,804,003 $ 23,239,737 $(3,618,126) $2,738,179 $123,245,799
========== ======= ============ ============ =========== ========== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Internet Capital Group, Inc.
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31, Three Months Ended March 31,
------------------------ ----------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $ 9,269,041 $ 20,000,797
----------- ----------- ----------- -------------- --------------
Other Comprehensive
Income (Loss) Before
Tax
Unrealized holding
gains on available-
for-sale securities... -- -- 1,733,071 5,131,916 4,530,350
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 1,005,108
----------- ----------- ----------- -------------- --------------
Comprehensive Income
(Loss)................. $(2,062,485) $(6,579,628) $15,631,999 $ 14,400,957 $21,005,905
=========== =========== =========== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year Ended Three Months
December 31, Ended March 31,
------------------------- --------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $(2,062,485) $(6,579,628) $ 13,898,928 $ 9,269,041 $ 20,000,797
Adjustments to
reconcile to net cash
used in operating
activities:
Other income.......... -- -- (30,483,177) (12,322,162) (28,704,971)
Depreciation and
amortization......... 481,796 446,289 1,135,269 146,189 636,743
Equity (income)
loss................. 514,540 (106,298) 5,868,887 289,847 7,412,602
Minority interest..... (427,185) 106,411 (5,381,640) -- (134,321)
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 (685,901)
Prepaid expenses and
other assets......... (69,558) (142,384) (1,346,515) (196,533) 66,463
Accounts payable...... 43,727 565,672 620,127 271,306 329,253
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 64,971
----------- ----------- ------------ ------------ ------------
Net cash used in
operating
activities......... (3,402,957) (3,436,959) (14,206,592) (885,795) (2,025,216)
Investing Activities
Capital
expenditures......... (100,480) (272,488) (545,432) (97,005) (255,967)
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) (22,479,967)
Other acquisitions
(Note 5)............. -- -- (1,858,389) -- --
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) (23,131,722)
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) 40,533
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) -- -- -- (4,468,875)
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) 17,552,095
----------- ----------- ------------ ------------ ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents........... 3,215,256 2,752,205 20,873,443 (4,073,915) (7,604,843)
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 $ 19,236,061
=========== =========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
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.
Basis of Presentation
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. 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.
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
F-8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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 continually evaluates the carrying value of its ownership
interests in 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.
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.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
Financial Instruments
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.
F-9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Intangibles
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
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.
Revenue Recognition
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.
F-10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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.
Deferred Offering Costs
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.
Stock Based Compensation
"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).
Comprehensive Income
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.
Segment Information
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).
Income Taxes
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.
F-11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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
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 their 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 Statement of Operations for 1998 includes 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.
Pro Forma Income Taxes
The Company's 1998 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.
F-12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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
$12,182,682 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. The Company's consolidated goodwill at March 31, 1999 of $5.3
million, net of $.3 million of accumulated amortization, was attributable to
Breakaway Solutions. Breakaway Solutions had revenue of $2.0 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 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 $20,000,797 and basic and diluted weighted
F-13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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 (1%) 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 $7.1 million, representing 37% of pretax income for that period, including
$10.5 million of tax expense related to the $28.5 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 net loss before tax 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 $7,494,927, respectively. The
Company's net income before tax from the General ICG Operations segment for the
three months ended March 31, 1998 and 1999 was $11,643,757 and $26,832,518,
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.
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 15, 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) for $2.0 million of Breakaway Solutions common
stock and cash. Subsequent to March 31, 1999, Breakaway Solutions acquired all
of the outstanding stock of WPL Laboratories, Inc. (WPL) for $9.2 million of
Breakaway Solutions common stock and cash and WebYes, Inc. (WebYes) for $4.0
million of Breakaway Solutions stock and cash. These acquisitions were
accounted for under the purchase method of accounting. The Applica, WPL and
WebYes acquisitions resulted in intangible assets of $1.8 million, $7.8 million
and $3.9 million, all of which will be amortized over five years.
During the three months ended March 31, 1999, the Company utilized $30.8
million 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
F-14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
for under the equity method of accounting during the three months ended March
31, 1999 resulted in goodwill of $5.6 million and $11.3 million, respectively,
all of which will be amortized over three years.
For the period from April 1, 1999 through June 15, 1999 the Company
utilized $67.6 million 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 $46.9
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 15, 1999 resulted in goodwill of $5.6 million
and $46.2 million, respectively, all of which will be amortized over three
years.
During the period from April 1, 1999 to June 15, 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 $8.0 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 June
2000, to receive cash of $11.3 million or 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.
Subsequent to March 31, 1999, the Company accepted full recourse
promissory notes totaling $39.3 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 $8.0 million to pay the income taxes that became due in
connection with the option exercises (Note 17). The promissory notes bear
interest at 5.22% and mature in 2004.
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.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------------- --------------------------
Carrying Value Cost Basis Carrying Value Cost Basis
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
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
=========== ===========
</TABLE>
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 loss (income)" 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%.
F-15
<PAGE>
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
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets......................................... $ 7,042,767 $34,239,732
Non-current assets..................................... 3,876,167 8,003,286
----------- -----------
Total assets....................................... 10,918,934 42,243,018
----------- -----------
Current liabilities.................................... 5,406,510 12,159,173
Non-current liabilities................................ 1,203,524 758,840
Shareholders' equity................................... 4,308,900 29,325,005
----------- -----------
Total liabilities and shareholders' equity......... $10,918,934 $42,243,018
=========== ===========
</TABLE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Revenue................................ $ 9,365,872 $18,911,691 $ 21,495,832
Net income (loss)...................... $(1,369,774) $ 255,280 $(17,038,167)
</TABLE>
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.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
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
</TABLE>
F-16
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
6. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
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.
F-17
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Long-Term Debt
All of the Company's long-term debt is attributable to VerticalNet and
consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
1999............................................................. $288,016
2000............................................................. 230,338
2001............................................................. 95,718
2002............................................................. 19,810
2003............................................................. 6,058
--------
Total............................................................ $639,940
========
</TABLE>
8. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Accrued compensation and benefits.......................... $ 90,833 $ 454,230
Accrued marketing costs.................................... -- 446,334
Other...................................................... 297,692 922,843
-------- ----------
$388,525 $1,823,407
======== ==========
</TABLE>
F-18
<PAGE>
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.
Restricted Stock
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.
Stock Option Plans
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.
F-19
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following table summarizes the activity of the Company's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
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....................................... 6,650,000 2.00
Options canceled/forfeited............................ (47,000) (1.00)
---------
Outstanding at December 31, 1998...................... 6,697,000 $1.99
=========
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted Average
Number Outstanding at Remaining Contractual
Exercise Price December 31, 1998 Life (in Years)
-------------- --------------------- ---------------------
<S> <C> <C>
$1.00......................... 47,000 7
$2.00......................... 6,650,000 10
</TABLE>
Included in the 1998 option grants are 450,000 stock options to non-
employees. The fair value of these options of $.6 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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
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
</TABLE>
The per share weighted-average fair value of options issued to employees
by the Company during 1997 and 1998 was approximately $0.22 and $0.45,
respectively.
F-20
<PAGE>
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:
<TABLE>
<S> <C>
Dividend yield................................................... 0%
Average expected option life..................................... 5 years
Risk-free interest rate.......................................... 5.2%
</TABLE>
In 1999, the Company granted 2,934,500 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.
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.
F-21
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
11. Operating Segments
In 1998, the Company adopted SFAS 131, which requires the reporting of
operating segments 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 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
March 4, 1996
(Inception)
Through
December 31,
1996 1997 1998
------------- ----------- ------------
<S> <C> <C> <C>
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
----------- ----------- ------------
Operating loss -- Partner Company
Operations before minority interest
and equity income (loss)........... (702,407) (4,663,683) (13,509,004)
Minority interest................... 427,185 (106,411) 5,381,640
Equity income (loss)................ (514,540) 106,298 (5,868,887)
----------- ----------- ------------
Operating loss -- Partner Company
Operations......................... (789,762) (4,663,796) (13,996,251)
Other income, net................... -- -- --
Interest expense, net............... (6,440) (115,106) (85,271)
----------- ----------- ------------
Net loss -- 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
----------- ----------- ------------
Operating loss -- General ICG
Operations......................... (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
----------- ----------- ------------
Net income (loss) -- General ICG
Operations......................... $(1,266,283) $(1,800,726) $ 27,980,450
=========== =========== ============
</TABLE>
F-22
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
December 31,
----------------------- (Unaudited)
March 31,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Current assets.......................... $ 5,245,064 $21,596,575 $ 16,437,857
Ownership interests in and advances to
Partner Companies...................... 24,045,080 59,491,940 104,710,489
Other................................... 86,785 3,354,485 5,525,104
----------- ----------- ------------
Total assets.......................... 29,376,929 84,443,000 126,673,450
Liabilities and shareholders' equity
Current liabilities..................... 318,729 2,082,463 2,866,934
Non-current liabilities................. 2,423,525 1,636,159 560,716
Shareholders' equity.................... 26,634,675 80,724,378 123,245,800
----------- ----------- ------------
Total liabilities and shareholders'
equity............................... $29,376,929 $84,443,000 $126,673,450
=========== =========== ============
</TABLE>
F-23
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Parent Company Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
Year Ended December 31, March 31,
------------------------- ------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ -- $ --
----------- ----------- ------------ ----------- -----------
Operating expenses
General and
administrative....... 1,360,821 2,054,118 3,512,586 730,868 1,822,634
Equity (income) loss.. 796,202 4,778,902 14,081,522 2,374,716 7,802,449
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 2,157,023 6,833,020 17,594,108 3,105,584 9,625,083
----------- ----------- ------------ ----------- -----------
Operating loss.......... (2,157,023) (6,833,020) (17,594,108) (3,105,584) (9,625,083)
Other income, net....... -- -- 30,483,177 12,322,162 28,684,465
Interest income, net.... 94,538 253,392 1,009,859 52,463 278,209
----------- ----------- ------------ ----------- -----------
Pretax income (loss).... (2,062,485) (6,579,628) 13,898,928 9,269,041 19,337,591
Income tax benefit...... -- -- -- -- 663,206
----------- ----------- ------------ ----------- -----------
Net income (loss)....... $ 2,062,485 $ 6,579,628 $ 13,898,928 $ 9,269,041 $20,000,797
=========== =========== ============ =========== ===========
</TABLE>
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 share 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.
F-24
<PAGE>
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
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 1998, the Company recorded impairment charges totaling $3.9 million
for the decrease in value of two cost method Partner Companies.
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.
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:
<TABLE>
<S> <C>
1999............................................................. $385,316
2000............................................................. 402,565
2001............................................................. 266,970
2002............................................................. 239,984
2003............................................................. 246,274
Thereafter....................................................... 103,385
</TABLE>
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 our 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.
F-25
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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:
<TABLE>
<S> <C>
1999........................................................... $1,488,734
2000........................................................... 65,500
</TABLE>
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.
17. Subsequent Events
Issuance of Common Stock
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.
F-26
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Tax Distribution
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 converted by
the price per share at which the notes are converted. The warrants expire in
May 2002.
Initial Public Offering
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.
F-27
<PAGE>
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.
ERNST & YOUNG LLP
Atlanta, Georgia
March 11, 1999, except Note 1 as to which the date
is April 1, 1999
F-28
<PAGE>
COMPUTERJOBS.COM, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
-------- -----------
<S> <C> <C>
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
======== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Income
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year Ended December 31,
December 31, ------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes.
F-30
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Retained Total
Class 1 Common Class 2 Common Earnings Shareholders'
Stock Stock (deficit) Equity (deficit)
-------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
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)
======= === =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 16, Year Ended December
1996 through 31,
December 31, ----------------------
1996 1997 1998
------------ --------- -----------
<S> <C> <C> <C>
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
======== ========= ===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
COMPUTERJOBS.COM, INC.
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.
Accounts Receivable
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
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.
Revenue Recognition
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.
F-33
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
Advertising Costs
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.
Income Taxes
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.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Flow Information
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.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current presentation.
F-34
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
3. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------- ------
<S> <C> <C>
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 $ --
======= =====
</TABLE>
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:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal............................................ $(7,267) $86,665 $79,398
State.............................................. (481) 10,344 9,863
------- ------- -------
$(7,748) $97,009 $89,261
======= ======= =======
</TABLE>
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):
<TABLE>
<S> <C>
Property and equipment.......................................... $ 17,420
Net operating loss carryforwards................................ 7,748
Accrual to cash adjustment...................................... (114,429)
--------
Net deferred income taxes....................................... $(89,261)
========
</TABLE>
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.
F-35
<PAGE>
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:
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year ended December 31,
December 31, -----------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
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
======= =========== ===========
</TABLE>
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.
Preferred Stock
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.
F-36
<PAGE>
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.
Warrants
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:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
F-37
<PAGE>
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.
F-38
<PAGE>
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
F-39
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Balance Sheet
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents....................................... $ 1,700,370
Prepaid expenses................................................ 185,506
Other current assets............................................ 22,704
-----------
Total current assets............................................ 1,908,580
Fixed assets, net................................................. 351,752
Deposits.......................................................... 136,998
-----------
$ 2,397,330
===========
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Current Liabilities:
Accounts payable................................................ $ 233,281
Accrued expenses................................................ 316,918
Notes payable to stockholders................................... 3,926,370
-----------
Total current liabilities....................................... 4,476,569
-----------
Redeemable Preferred Stock:
Series A redeemable convertible preferred stock, $0.001 par
value; authorized: 2,941,031 shares; issued and outstanding:
2,586,207 shares plus accrued dividends of $334,652
(liquidation value of $6,334,651).............................. 6,334,651
Preferred stock warrants........................................ 120,000
Redeemable non-voting, non-convertible preferred stock, $0.001
par value; authorized: 150,000 shares; issued and outstanding
130,000 shares plus accrued dividends of $94,135 (liquidation
value of $1,389,468)........................................... 1,389,468
-----------
Total redeemable preferred stock................................ 7,844,119
-----------
Stockholders' Deficit:
Common stock, $0.001 par value; 10,000,000 shares authorized;
396,000 shares issued and outstanding at December 31, 1998..... 396
Deficit accumulated during the development stage................ (9,923,754)
-----------
Total stockholders' deficit..................................... (9,923,358)
-----------
Commitments and contingencies (Note 14)...........................
-----------
$ 2,397,330
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-40
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Operations
<TABLE>
<CAPTION>
For the period
from inception
(February 11,
1998) through
December 31, 1998
-----------------
<S> <C>
Costs and Expenses:
Research and development.................................... $ 1,501,267
Selling and marketing....................................... 2,425,532
General and administrative.................................. 1,950,153
Impairment charge for intangible goods...................... 1,312,500
Settlement charge........................................... 1,795,333
-----------
Loss from operations.......................................... (8,984,785)
Interest expense, net......................................... 90,430
-----------
Net loss...................................................... $(9,075,215)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-41
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Changes in Redeemable Preferred Stock and Stockholders' Deficit
For the period from inception (February 11, 1998) through December 31, 1998
<TABLE>
<CAPTION>
Series A Redeemable non-
Redeemable voting
Series A Redeemable Preferred non-convertible
Preferred Stock Stock Warrants preferred stock Common stock
-------------------- -------------- ------------------- ---------------------
Carrying Carrying Carrying
Shares Value Value Shares Value Shares Par Value
--------- ---------- -------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders....... 1,396,000 $1,396
Issuance of
Series A
redeemable
convertible
preferred
stock, issuance
costs of
$170,752....... 2,586,207 $5,999,999
Issuance of
redeemable non-
voting, non-
convertible
preferred
stock.......... 150,000 $1,500,000
Repurchase and
retirement of
common stock... (1,000,000) (1,000)
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
Net loss........
--------- ---------- -------- ------- ---------- ---------- ------
Balance at
December 31,
1998........... 2,586,207 $6,334,651 $120,000 130,000 $1,389,468 396,000 $ 396
- --------------------------------------------------
========= ========== ======== ======= ========== ========== ======
<CAPTION>
Deficit
during
development
stage Total
------------ ------------
<S> <C> <C>
Issuance of
common stock to
founders....... $ 1,396
Issuance of
Series A
redeemable
convertible
preferred
stock, issuance
costs of
$170,752....... $ (170,752) (170,752)
Issuance of
redeemable non-
voting, non-
convertible
preferred
stock..........
Repurchase and
retirement of
common stock... (249,000) (250,000)
Redemption of
redeemable non-
voting, non-
convertible
preferred
stock..........
Series A
redeemable
convertible
preferred stock
warrants.......
Accrual of
cumulative
dividends on
redeemable
preferred
stock.......... (428,787) (428,787)
Net loss........ (9,075,215) (9,075,215)
------------ ------------
Balance at
December 31,
1998........... $(9,923,754) $(9,923,358)
- --------------------------------------------------
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the period
from inception
(February 11,
1998) through
December 31, 1998
-----------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................... $(9,075,215)
Adjustments to reconcile net loss to net cash used for
operating activities:......................................
Depreciation.............................................. 58,537
Amortization and impairment of intangible assets.......... 1,500,000
Amortization of discounts on notes payable................ 46,370
Changes in assets and liabilities:
Prepaid expenses........................................ (185,506)
Other current assets.................................... (22,704)
Accounts payable........................................ 233,281
Accrued expenses........................................ 316,918
-----------
Net cash used for operating activities.................. (7,128,319)
-----------
Cash flows from investing activities:
Purchases of fixed assets................................... (410,289)
Increase in deposits........................................ (136,998)
-----------
Net cash used for investing activities.................. (547,287)
-----------
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
Proceeds from issuance of common stock...................... 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
-----------
Net increase in cash and cash equivalents................... 1,700,370
Cash and cash equivalents, beginning of period.............. --
-----------
Cash and cash equivalents, end of period.................... $ 1,700,370
===========
Non-cash investing and financing activities:
Software acquired in exchange for 150,000 shares of non-
voting, non-convertible redeemable preferred............... $ 1,500,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-43
<PAGE>
SYNCRA SOFTWARE, INC.
(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 Enterprise".
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.
Financial Instruments
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
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" ("SFAS No. 121"), 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.
F-44
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Stock-Based Compensation
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.
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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. Prepaid Expenses
Prepaid expenses consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Trade shows and other marketing prepayments...................... $135,774
Others........................................................... 49,732
--------
$185,506
========
</TABLE>
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful life December 31,
(years) 1998
----------- ------------
<S> <C> <C>
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
========
</TABLE>
F-45
<PAGE>
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) with an aggregate value of $1.5 million. Since Benchmarking did
not have a controlling financial interest in Syncra or intend to be involved in
the operations of Syncra, Syncra recorded the technology at the fair value of
the Redeemable Preferred Stock issued in exchange for the technology. 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 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 warrants to purchase preferred stock ("the
Preferred Stock Warrants"). The aggregate value of the 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. The Preferred Stock Warrants have a term of ten years.
Each Note holder is entitled to a number of the securities to be issued in the
Company's next financing equal to 20% of the face value of the Note held by
such holder divided by the price per share of such securities. As a result of
the Series B financing in 1999 (Note 16), the warrant holders are now entitled
to purchase 200,000 shares of Series B Preferred Stock at $4.00 per share.
7. Redeemable Convertible Series A Preferred Stock
At December 31, 1998, the Company has 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").
The Series A Preferred Stock has the following characteristics:
Voting
Holders of Series A 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
Preferred Stock are then convertible.
Dividends
Holders of Series A 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 when, as, and if declared by the Board of
Directors. The Base Amount of each share is equal to the price paid for each
share of Series A Preferred Stock ($2.32) plus unpaid dividends which accrue
commencing on the date of original issuance of the Series A 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.
F-46
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs
of the Company, the holders of Series A 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 per share plus all unpaid
cumulative dividends. 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 (see Note 8), holders of Series A Preferred Stock were, as of
December 31, 1998, entitled to share ratably in the remaining proceeds of the
Company, if any, on an as-converted basis.
Conversion
Each share of Series A 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
Preferred Stock.
The Series A Preferred Stock will automatically convert into shares of
common stock upon (i) a public offering which results in net proceeds to Syncra
of at least $10,000,000, at a price per share of the Common Stock of at least
$9.28 or (ii) upon approval of the two-thirds of the outstanding Series A
preferred stockholders to convert all outstanding shares of Series A Preferred
Stock to Common Stock.
Redemption
Any time after the fifth anniversary of the original issuance of the
Series A Preferred Stock, at the option of the holder thereof, Syncra shall
redeem all, but not less than all of such holder's shares of Series A Preferred
Stock, at a redemption price equal to the original purchase price of $2.32 per
share plus all unpaid dividends thereon which have accrued through and
including the redemption date.
Accretion
The issuance cost incurred by the Company was accreted in full in 1998 as
an adjustment to the carrying value of redeemable convertible Series A
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:
Voting
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.
F-47
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Dividends
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 when, as and if declared by the Board of
Directors. 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 dividend.
Liquidation
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
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.
Redemption
At any time after the fifth anniversary of the original issuance of the
Redeemable Preferred Stock, 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.
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 with a per share price of at
least $7.86; 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 Preferred Stock receive at
least $7.86 per share.
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
Preferred Stock and the Redeemable Preferred Stock.
Restricted Stock Agreements
Syncra has entered into agreements with certain of its 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
F-48
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
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.
At December 31, 1998, all of the outstanding capital stock (including the
Common Stock, Series A Preferred Stock and Redeemable Preferred Stock) of the
Company is subject to certain restrictions as to sale or transfer of such
shares. The Company and its non-founder stockholders also maintain a right 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.
Reserved Shares
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).
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.
No compensation expense has been recognized for employee stock-based
compensation in 1998 because the fair value of the options did not exceed the
exercise price. Further, options vest over several years
F-49
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
and additional option grants are expected to be made in future years. Had
compensation expense been determined based on the fair value of the of the
options granted to employees at the grant date consistent with the provision of
SFAS 123, the Company's net loss would have been the same.
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.
During the period, 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 but 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 is 9.5 years. Further, since the exercise price
of the options is more than the fair market value of the common stock, the
weighted average fair value per share of the options granted during the year
using the Black-Scholes option-pricing model is zero at December 31, 1998.
12. Income Taxes
Deferred tax assets consist of the following at December 31, 1998:
<TABLE>
<S> <C>
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
----------
$ --
==========
</TABLE>
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.
F-50
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
14. Commitments and Contingencies
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:
<TABLE>
<CAPTION>
Operating leases
Year ending December 31, ----------------
<S> <C>
1999......................................................... $ 272,328
2000......................................................... 254,728
2001......................................................... 254,728
2002......................................................... 254,728
Thereafter................................................... 127,364
----------
$1,163,876
==========
</TABLE>
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 March and April 1999, 3,737,602 shares of convertible Series B
Preferred Stock were authorized. Syncra issued 3,537,602 shares of Series B
Preferred Stock in exchange for net cash proceeds of $10.0 million plus the
conversion of all principal and accrued interest due on the Notes (Note 6)
("the Series B Financing"). The terms of the Series B Preferred Stock are
substantially similar to Series A Preferred Stock, except that the Base Amount
of the Series B Preferred Stock and its purchase price are $4.00 per share.
Further, certain terms of both the Series A Preferred Stock (including
conversion rights associated therewith and participating rights upon
liquidation) and the Redeemable Preferred Stock (including redemption rights
associated therewith) were amended in connection with the Series B Financing.
F-51
<PAGE>
INTERNET CAPITAL GROUP, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
During 1998 and 1999, the Company acquired significant minority ownership
interests in 18 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 18 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 11 equity method Partner Companies as if they had occurred on January 1,
1999.
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 $11.7 million and "Ownership interests in and advances
to Partner Companies" by $46.9 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 18 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.
F-52
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Statements of Operations for the Year
Ended December 31, 1998
<TABLE>
<CAPTION>
Applica,
WPL and
Internet Capital Breakaway WebYes VerticalNet Pro Forma Pro Forma
Group, Inc. Acquisition Acquisitions Deconsolidation Adjustments Combined
---------------- ----------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 3,134,769 $10,017,947 $3,090,508 $ (3,134,769) $ -- $ 13,108,455
------------ ----------- ---------- ------------ ------------ ------------
Operating Expenses
Cost of revenue 4,642,528 5,903,843 1,871,245 (4,642,528) -- 7,775,088
Sales and marketing 7,894,662 37,092 (7,894,662) -- 37,092
General and
administrative 7,619,169 4,814,288 800,231 (3,823,593) 4,742,628 a 14,152,723
Minority interest (5,381,640) (247,325) 160,744 5,381,640 -- (86,581)
Equity (income) loss 5,868,887 -- -- -- 32,139,103 38,007,990
------------ ----------- ---------- ------------ ------------ ------------
Total operating
expenses 20,643,606 10,470,806 2,869,312 (10,979,143) 33,881,730 59,886,311
------------ ----------- ---------- ------------ ------------ ------------
Operating Income (Loss) (17,508,837) (452,859) 221,196 7,844,374 (36,881,730) (46,777,856)
Other income 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)
------------ ----------- ---------- ------------ ------------ ------------
Pretax Income (Loss) 13,898,928 (327,850) 213,079 7,929,645 (36,881,730) (15,167,928)
Income tax benefit -- -- -- -- -- --
------------ ----------- ---------- ------------ ------------ ------------
Net Income (Loss) $ 13,898,928 $ (327,850) $ 213,079 $ 7,929,645 $(36,881,730) $(15,167,928)
============ =========== ========== ============ ============ ============
Net Income (Loss) Per
Share
Basic $ 0.25 $ (0.27)
Diluted $ 0.25 $ (0.27)
Weighted Average Shares
Outstanding
Basic 56,102,289 56,102,289
Diluted 56,149,289 56,102,289
</TABLE>
Unaudited Pro Forma Condensed Combined Statements of Operations for the Three
Months Ended March 31, 1999
<TABLE>
<CAPTION>
Applica,
WPL and
Internet Capital WebYes Pro Forma Pro Forma
Group, Inc. Acquisitions Adjustments Combined
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 3,111,035 $1,279,143 $ -- $ 4,390,178
----------- ---------- ----------- -----------
Operating Expenses
Cost of revenue 1,553,329 601,391 -- 2,154,720
Sales and marketing 70,434 10,767 -- 81,201
General and
administrative 3,872,350 234,650 900,000 a 5,007,000
Minority interest (134,321) 181,417 -- 47,096
Equity (income) loss 7,412,602 -- 4,444,533 b 11,857,135
----------- ---------- ----------- -----------
Total operating
expenses 12,774,394 1,028,225 5,344,533 19,147,152
----------- ---------- ----------- -----------
Operating Income (Loss) (9,663,359) 250,918 (5,344,533) 14,756,974
Other income 28,704,971 -- -- 28,704,971
Interest income 309,735 -- -- 309,735
Interest expense (13,756) (6,937) -- (20,693)
----------- ---------- ----------- -----------
Pretax Income (Loss) 19,337,591 243,981 (5,344,533) 14,237,039
Income tax benefit 663,206 -- 1,977,477 d 2,640,683
----------- ---------- ----------- -----------
Net Income (Loss) $20,000,797 $ 243,981 $(3,367,056) $16,877,722
=========== ========== =========== ===========
Net Income Per Share
Basic $ 0.28 $ 0.23
Diluted $ 0.27 $ 0.23
Weighted Average Shares
Outstanding
Basic 72,646,022 72,646,022
Diluted 73,699,973 73,699,973
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-53
<PAGE>
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 of Breakaway
Solutions, Applica, WPL Laboratories and WebYes, the deconsolidation of
VerticalNet and the acquisitions of significant minority ownership
interests in 18 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, 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
11 equity method Partner Companies as if they had occurred on January 1,
1999.
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. 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 goodwill 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.
(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.
F-54
<PAGE>
[Partner Company Logos Will Be Placed Here]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
16,250,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
BancBoston Robertson Stephens
Banc of America Securities LLC
Deutsche Banc Alex. Brown
Wit Capital Corporation
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Alternate International Page
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated June 22, 1999
PROSPECTUS
16,250,000 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 16,250,000 shares being offered, we are offering
16,000,000 shares to the public generally and to shareholders of one of our
shareholders, Safeguard Scientifics, Inc., and Safeguard Scientifics, Inc. is
offering up to 1,250,000 shares to its shareholders. We will not receive any
proceeds from the shares being offered by Safeguard Scientifics, Inc.
We expect the public offering price to be between $8.00 and $10.00 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 7 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount................................... $ $
Proceeds, before expenses, to Internet Capital Group,
Inc. .................................................. $ $
Proceeds, before expenses, to Safeguard Scientifics,
Inc.................................................... $ $
</TABLE>
The underwriters may also purchase from us up to an additional 2,250,000
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
BancBoston Robertson Stephens
International Limited
Banc of America Securities LLC
Deutsche Bank
-----------
The date of this prospectus is , 1999.
<PAGE>
UNDERWRITING Alternate International Page
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,
BancBoston Robertson Stephens International Limited, Banc of America Securities
LLC 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 9,750,000 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. The 9,750,000 shares of common stock being purchased by the
U.S. underwriters does not include the 3,500,000 shares of common stock being
sold through the Directed Share Subscription Program.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch International ..........................................
BancBoston Robertson International Limited............................
Banc of America Securities LLC........................................
Deutsche Bank AG London...............................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
We have also agreed with certain U.S. underwriters in the United States
and Canada, for whom Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
BancBoston Robertson Stephens Inc., Banc of America Securities LLC, 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 3,000,000 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 9,750,000 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
1
<PAGE>
Alternate International Page
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.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to Internet Capital
Group, Inc. ................................... $ $ $
Proceeds, before expenses, to Safeguard
Scientifics, Inc. ............................ $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1,275,000 and are payable by us.
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.
2
<PAGE>
Alternate International Page
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
450,000 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
1,800,000 additional shares of common stock to cover over-allotments, if any,
on terms similar to those granted to the U.S. underwriters.
Directed Shares
At our request, the international managers and U.S. underwriters have
reserved approximately 1.5 million shares of our common stock for sale at the
initial public offering price to our employees, directors and certain other
persons with relationships to Internet Capital Group. 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.
Directed Share Subscription Program
As part of this offering, we and Safeguard Scientifics, Inc. are offering
approximately 3.5 million shares of our common stock in a directed share
subscription program to shareholders of Safeguard Scientifics, Inc., one of our
principal and founding shareholders. Of these shares, we are offering 2,250,000
shares and Safeguard Scientifics, Inc. is offering 1,250,000 shares. Safeguard
Scientifics, Inc.'s shareholders may subscribe for one share of our common
stock for every ten shares of Safeguard Scientifics, Inc. 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 491 shares
of Safeguard Scientifics, Inc.'s common stock as of June 14, 1999 are eligible
to purchase shares directly from us or Safeguard Scientifics, Inc. under the
program. Shareholders of Safeguard Scientifics, Inc. who own between 100 and
490 shares of Safeguard Scientifics, Inc. common stock will be eligible to
purchase interests in a unit investment trust that will invest its assets
solely in our common stock. The shares offered to the unit investment trust are
included in the 3.5 million shares. Shareholders who own less than 100 shares
of Safeguard Scientifics, Inc. common stock will be ineligible to participate
in the directed share subscription program. If any of the shares offered by us
under the program are not purchased by the shareholders of Safeguard
Scientifics, Inc., then Safeguard Scientifics, Inc. or one or more of its
designees will purchase these shares from us. Subscription orders will be
satisfied first from the shares being sold by us, and then from the shares
offered by Safeguard. Prior to this offering, Safeguard Scientifics, Inc.
beneficially owned 18.3% of our common stock. After this offering, Safeguard
Scientifics, Inc. will beneficially own approximately 17,805,401 shares, or
14.9%, of our common stock, assuming that all 3.5 million shares are purchased
by shareholders of Safeguard Scientifics, Inc. and the unit investment trust
and will beneficially own approximately 21,305,401 shares, or 17.9%, of our
common stock, assuming that none of the 3.5 million shares are purchased by the
shareholders of Safeguard Scientifics, Inc. or the unit investment trust. The
purchase price under the program, whether paid by Safeguard Scientifics, Inc.,
its shareholders or the unit investment trust will be the same price per share
as set forth on the cover page of this prospectus. For purposes of this
prospectus, when we present financial data that reflects this offering, we have
assumed that all 3.5 million shares offered under the directed share
subscription program are sold. Merrill Lynch will receive a financial advisory
fee of $ or equal to 3% of the aggregate initial offering price of the 3.5
million shares being sold through the directed share subscription program.
3
<PAGE>
Alternate International Page
No Sales of Similar Securities
We, our executive officers and directors, Safeguard Scientifics
(Delaware), Inc., Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ Holdings,
Inc., 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:
. 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
. 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:
. the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
. certain of our financial information;
. the history of, and the prospects for, our company and the industry in
which we compete;
. an assessment of our management;
. our past and present operations;
. the prospects for, and timing of, our future revenue;
. the present state of our development;
. the percentage interest of Internet Capital Group being sold as
compared to the valuation for the entire company; and
. 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.
4
<PAGE>
Alternate International Page
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.
5
<PAGE>
Alternate International Page
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
16,250,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch International
BancBoston Robertson Stephens International Limited
Banc of America Securities LLC
Deutsche Bank
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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:
<TABLE>
<CAPTION>
Amount (1)
----------
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 73,531
NASD Filing Fee............................................... 26,950
Nasdaq National Market Listing Fee............................ 95,000
Accounting Fees and Expenses.................................. 250,000
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..................................................... $1,275,000
==========
</TABLE>
- --------
(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.
Prior to the effective date of the Registration Statement, Internet
Capital Group will have entered into agreements with its directors and certain
of its executive officers that require Internet Capital Group to
II-1
<PAGE>
indemnify such persons against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred (including expenses of a
derivative action) in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or officer of Internet Capital Group or
any of its affiliated enterprises, provided such person acted in good faith and
in a manner such person reasonably believed to be in or not opposed to the best
interests of Internet Capital Group and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The indemnification agreements also set forth certain procedures that will
apply in the event of a claim for indemnification thereunder.
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 Agreement filed as Exhibit 1.1 to this Registration
Statement provides 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.
Shares of Common Stock
(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
$550,000.
(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.
II-2
<PAGE>
(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.
II-3
<PAGE>
(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.
II-4
<PAGE>
(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 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:
<TABLE>
<CAPTION>
No. of Weighted Averge
Shares Exercise Prices
---------- ---------------
<S> <C> <C>
1996................................................. -- N/A
1997................................................. 94,000 $ 1.00
1998................................................. 6,697,000 $ 2.00
1999................................................. 10,536,750 $ 5.88
</TABLE>
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 or Regulation D promulgated thereunder 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.
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.
II-5
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1* Form of Underwriting Agreement
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* 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
10.2** 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))
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)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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)
10.21** Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the Convertible Note
10.22** Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999
10.23* Stock Purchase Agreement between Internet Capital Group and Safeguard
Scientifics, Inc.
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, Inc.
and Safeguard Scientifics, Inc. 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.
10.30** 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
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 and June 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
23.2* Consent of Dechert Price & Rhoads, included in Exhibit 5.1
23.3 Consent of Ernst & Young LLP
23.4 Consent of PricewaterhouseCoopers LLP
24.1** Power of Attorney, included on the signature page hereof
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
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
(b) Financial Statement Schedules
None.
Schedules other than those listed above 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. Columns omitted from schedules filed
have been omitted since the information is not applicable.
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.
II-8
<PAGE>
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 22nd day of June, 1999.
INTERNET CAPITAL GROUP, INC.
Walter W. Buckley, III
By: _________________________________
Walter W. Buckley, III
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Walter W. Buckley, III President, Chief Executive June 22, 1999
______________________________________ Officer and Director
Walter W. Buckley, III (principal executive
officer)
David D. Gathman Chief Financial Officer June 22, 1999
______________________________________ and Treasurer (principal
David D. Gathman financial and accounting
officer)
* Director June 22, 1999
______________________________________
Julian A. Brodsky
* Director June 22, 1999
______________________________________
E. Michael Forgash
* Director June 22, 1999
______________________________________
Kenneth A. Fox
* Director June 22, 1999
______________________________________
Dr. Thomas P. Gerrity
* Director June 22, 1999
______________________________________
Scott Gould
* Director June 22, 1999
______________________________________
Robert E. Keith, Jr.
Director June 22, 1999
______________________________________
Peter A. Solvik
</TABLE>
Walter W. Buckley, III
* By: __________________________
Walter W. Buckley, III
Attorney-in-Fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1* Form of Underwriting Agreement
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* 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
10.2** 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))
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)
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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)
10.21** 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* Stock Purchase Agreement between Internet Capital Group and Safeguard
Scientifics, Inc.
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
Safeguard Scientifics, Inc. 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.
10.30** 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
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 and June 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
23.2* Consent of Dechert Price & Rhoads, included in Exhibit 5.1
23.3 Consent of Ernst & Young LLP
23.4 Consent of PricewaterhouseCoopers LLP
24.1** Power of Attorney, included on the signature page hereof
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
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
II-12
<PAGE>
EXHIBIT 10.24
[Logo] Safeguard Scientifics, Inc.
April 6, 1999
Donna M. Lightner
Office Manager
Internet Capital Group, L.L.C.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pa 19087
Dear Donna:
As discussed, effective March 1, 1999, the charge for your space in the 800
Building will be increased to $5,745 per month. The rent is based on
approximately 3,650 square feet of space (including an allocation of common area
space) at a rental rate of approximately $19.00 per square foot.
This notice letter constitutes the sole written document with respect to
the lease of office space from Safeguard Scientifics, Inc. to Internet Capital
Group, Inc. There is no formal written lease agreement between Safeguard and
Internet Capital; instead, Internet Capital continues to lease office space from
Safeguard subject to a verbal understanding.
Should you have any questions, please feel free to call me.
Sincerely,
/s/ Tonya Kreeger
-----------------
Tonya Kreeger
Corporate Controller
cc: Vera Dolenti
<PAGE>
EXHIBIT 10.26
Safeguard Boston
April 6, 1999
Jean C. Tempel
Technology Equity Partners
Ten Post Office Square, Suite 1325
Boston, MA 02109
Ms. Donna Lightner
Internet Capital Group
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Dear Donna,
This Letter verifies that as of January 1, 1999 Internet Capital Group has
assumed the responsibility for the payment of lease and general office operating
expenses at the offices at Ten Post Office Square, Suite 1325, Boston. The
lease is in my name and due to the fact that the lease is up in July and
Internet Capital Group will be moving to a new space, we did not feel it was
necessary to sign a sublease agreement.
If there is anything else that you need, please do not hesitate to call.
Regards,
/s/ Jean C. Tempel
------------------
Jean C. Tempel
<PAGE>
EXHIBIT 10.27
OFFICE LEASE
between
OTR, an Ohio general partnership, as Nominee of
The State Teachers Retirement Board of Ohio, a statutory
organization created by the laws of Ohio
(Landlord)
and
INTERNET CAPITAL GROUP OPERATIONS, INC.
a Delaware corporation
(Tenant)
for Premises
44 Montgomery Street
San Francisco, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - SUMMARY AND CERTAIN DEFINITIONS.......................... 1
1.1 Building..................................................... 1
1.2 Premises..................................................... 1
1.3 Rentable Area of the Premises................................ 1
1.4 Lease Year................................................... 1
1.5 Lease Term................................................... 1
1.6 Commencement Date............................................ 1
1.7 Expiration Date.............................................. 1
1.8 Base Rent.................................................... 1
1.9 Tenant's Percentage Share.................................... 2
1.10 Security Deposit............................................. 2
1.11 Tenant's Permitted Use....................................... 2
1.12 Business Hours............................................... 2
1.13 Landlord's Address For Notices............................... 2
1.14 Tenant's Address For Notices................................. 2
1.15 Brokers...................................................... 2
1.16 Guarantors................................................... 2
ARTICLE II - PREMISES.................................................. 3
2.1 Lease of Premises............................................. 3
2.2 Acceptance of Premises........................................ 3
ARTICLE III - TERM..................................................... 3
3.1 Term.......................................................... 3
ARTICLE IV - RENTAL.................................................... 3
4.1 Definitions................................................... 3
4.2 Base Rent..................................................... 6
4.3 Adjustment Procedure; Estimates............................... 7
4.4 Review of Landlord's Statement................................ 7
4.5 Payment....................................................... 8
4.6 Late Charge; Interest......................................... 9
4.7 Additional Rent............................................... 9
4.8 Additional Taxes.............................................. 9
ARTICLE V - SECURITY DEPOSIT........................................... 9
ARTICLE VI - USE OF PREMISES........................................... 10
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
6.1 Tenant's Permitted Use......................................... 10
6.2 Compliance With Laws and Other Requirements.................... 10
6.3 Hazardous Materials............................................ 10
ARTICLE VII- UTILITIES AND SERVICES..................................... 12
7.1 Building Services.............................................. 12
7.2 Interruption of Service........................................ 13
ARTICLE VIII - MAINTENANCE AND REPAIRS.................................. 14
8.1 Landlord's Obligations......................................... 14
8.2 Tenant's Obligations........................................... 14
8.3 Landlord's Rights.............................................. 14
ARTICLE IX - ALTERATIONS, ADDITIONS AND IMPROVEMENTS.................... 14
9.1 Landlord's Consent; Conditions................................. 14
9.2 Performance of Alterations Work................................ 15
9.3 Liens.......................................................... 15
9.4 Lease Termination.............................................. 16
ARTICLE X - INDEMNIFICATION AND INSURANCE............................... 16
10.1 Indemnification............................................... 16
10.2 Property Insurance............................................ 17
10.3 Liability Insurance........................................... 18
10.4 Workers' Compensation Insurance............................... 18
10.5 Policy Requirements........................................... 19
10.6 Waiver of Subrogation......................................... 19
10.7 Failure to Insure............................................. 19
ARTICLE XI - DAMAGE OR DESTRUCTION...................................... 19
11.1 Total Destruction............................................. 19
11.2 Partial Destruction of Premises............................... 19
11.3 Exceptions to Landlord's Obligations.......................... 20
11.4 Waiver........................................................ 20
ARTICLE XII - CONDEMNATION.............................................. 20
12.1 Taking........................................................ 20
12.2 Award......................................................... 20
12.3 Temporary Taking.............................................. 20
ARTICLE XIII - RELOCATION............................................... 20
ARTICLE XIV - ASSIGNMENT AND SUBLETTING................................. 21
14.1 Restriction................................................... 21
14.2 Notice to Landlord............................................ 21
14.3 Landlord's Recapture Rights................................... 22
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
14.4 Landlord's Consent; Standards................................. 22
14.5 Additional Rent............................................... 22
14.6 Landlord's Costs.............................................. 23
14.7 Continuing Liability of Tenant................................ 23
14.8 Non-Waiver.................................................... 23
ARTICLE XV - DEFAULT AND REMEDIES....................................... 23
15.1 Events of Default Jay Tenant.................................. 23
15.2 Landlord's Right To Terminate Upon Tenant Default............. 24
15.3 Mitigation of Damages......................................... 24
15.4 Landlord's Right to Continue-Lease Upon Tenant Default........ 25
15.5 Right of Landlord to Perform.................................. 25
15.6 Default Under Other Leases.................................... 26
15.7 Non-Waiver.................................................... 26
15.8 Cumulative Remedies........................................... 26
15.9 Default by Landlord........................................... 26
ARTICLE XVI ATTORNEYS' FEES; INDEMNIFICATION............................ 26
16.1 Attorneys' Fees............................................... 27
16.2 Indemnification............................................... 27
ARTICLE XVII SUBORDINATION AND ATTORNMENT............................... 27
17.1 Subordination................................................. 27
17.2 Attornment.................................................... 28
17.3 Mortgagee Protection.......................................... 28
ARTICLE XVIII MISCELLANEOUS............................................. 29
18.1 Quiet Enjoyment.............................................. 29
18.2 Rules and Regulations........................................ 29
18.3 Estoppel Certificates........................................ 29
18.4 Entry by Landlord............................................ 30
18.5 Landlord's Lease Undertakings................................ 30
18.6 Transfer of Landlord's Interest.............................. 30
18.7 Holdover..................................................... 31
18.8 Notices...................................................... 31
18.9 Brokers...................................................... 31
18.10 Communications and Computer Lines............................ 31
18.11 Entire Agreement............................................. 32
18.12 Amendments................................................... 32
18.13 Successors................................................... 32
18.14 Force Majeure................................................ 32
18.15 Survival of Obligations...................................... 33
18.16 Light and Air................................................ 33
18.17 Governing Law................................................ 33
18.18 Severability................................................. 33
18.19 Captions..................................................... 33
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
18.20 Interpretation.............................................. 33
18.21 Independent Covenants....................................... 33
18.22 Number and Gender........................................... 33
18.23 Time is of the Essence...................................... 34
18.24 Joint and Several Liability................................. 34
18.25 Exhibits.................................................... 34
18.26 Offer to Lease.............................................. 34
18.27 No Counterclaim; Choice of Laws............................. 34
18.28 Rights Reserved by Landlord................................. 34
18.29 Asbestos.................................................... 35
18.30 ADR Process................................................. 35
</TABLE>
EXHIBITS
- --------
Rider to Lease
Exhibit A Floor Plan of Premises
Exhibit B Work Letter Agreement
Exhibit C Rules and Regulations
Exhibit D None
Exhibit E Acceptance Letter
Addendum to Lease
-iv-
<PAGE>
OFFICE LEASE
------------
THIS OFFICE LEASE ("Lease"), dated February 25, 1999, is made and
entered into by and between OTR, an Ohio general partnership, as Nominee of The
State Teachers Retirement Board of Ohio, a statutory organization by the laws of
Ohio ("Landlord") and INTERNET CAPITAL GROUP OPERATIONS, INC., a Delaware
corporation ("Tenant") upon the following terms and conditions:
ARTICLE I - SUMMARY AND CERTAIN DEFINITIONS
-------------------------------------------
Unless the context otherwise specifies or requires, the following terms
shall have the meanings specified herein:
1.1. Building. The term "Building" shall mean that certain office building
--------
located at 44 Montgomery Street in San Francisco, California, commonly known as
44 MONTGOMERY STREET together with any related land, improvements, common areas,
driveways, sidewalks and landscaping.
1.2. Premises. The term "Premises" shall mean Suite 3700 in the Building,
--------
as more particularly outlined on the "Floor Plan" attached hereto as Exhibit "A"
and incorporated herein by reference. As used herein, "Premises" shall not
include any storage area in the Building or rooftop area on the Building, which
areas shall (if applicable) be leased or rented pursuant to separate written
agreements.
1.3. Rentable Area of the Premises. The term "Rentable Area of the
-----------------------------
Premises" shall mean 4,442 rentable square feet, which Landlord and Tenant have
stipulated as the Rentable Area of the Premises.
1.4. Lease Year. The term "Lease Year" shall mean such consecutive twelve
----------
(12) month period following the Commencement Date.
1.5. Lease Term. The term of this Lease ("Lease Term") shall be for a
----------
period of five (5) consecutive Lease Years following the Commencement Date,
unless sooner terminated as otherwise provided in this Lease.
1.6. Commencement Date. Subject to adjustment as provided in Section 3.1,
-----------------
the term "Commencement Date" shall mean June 1, 1999.
1.7. Expiration Date. Subject to adjustment as provided in Section 3.1,
---------------
the term "Expiration Date" shall mean May 31, 2004.
1.8. Base Rent. Subject to adjustment as provided in Article 4, the term
---------
"Base Rent" shall mean the following amounts for the following periods:
<PAGE>
<TABLE>
<CAPTION>
Period Monthly Base Rent Annual Rate/RSF Annual Base Rent
- ------ ----------------- --------------- ----------------
<S> <C> <C> <C>
06/01/99-05/31/00 $17,716.18 $47.86 $212,594.12
06/01/00-05/31/01 $19,196.84 $51.86 $230,362.12
06/01/01-05/31/02 $19,567.01 $52.86 $234,804.12
06/01/02-05/31/03 $20,307.34 $54.86 $243,688.12
06/01/03-05/31/04 $20,677.51 $55.86 $248,130.12
</TABLE>
1.99 Tenant's Percentage Share. Subject to adjustment by Acceptance
-------------------------
letter, the term "Tenant's Percentage Share" shall mean percent 0.71% with
respect to increases in Property Taxes and Operating Expenses (as such terms are
hereinafter defined). Landlord may reasonably recompute Tenant"s Percentage
Share from time to time to reflect reconfigurations, additions or modifications
to the Premises or Building.
1.10. Security Deposit. The term "Security Deposit" shall mean
----------------
$39,238.00 delivered by Tenant to Landlord to secure Tenant's performance of its
obligations hereunder.
1.11. Tenant's Permitted Use. The term "Tenant's Permitted Use" shall
----------------------
mean general and administrative office use, and no other use.
1.12. Business Hours. The term "Business Hours" shall mean the hours of
--------------
8:00 A.M. to 6:00 P.M., Monday through Friday, and 9:00 A.M. to 1:00 P.M.,
Saturday (federal and state holidays excepted). "Holidays" are defined to be the
following days: New Years Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and to the extent of utilities or services
provided by union members engaged at the Building, such other holidays observed
by such unions.
1.13. Landlord's Address For Notices. The term "Landlord's Address for
------------------------------
Notices" shall mean OTR c/o Seagate Properties, Inc., 44 Montgomery Street,
Suite 1710, San Francisco, California 94104, Attn: Property Manager, with a
copy (but which copy shall not constitute notice) to OTR, 275 Broad Street,
Columbus, Ohio, Attn: Director, Real Estate.
1.14. Tenant's Address For Notices. The term "Tenant's Address For
----------------------------
Notices" shall mean 44 Montgomery Street, Suite 3700, San Francisco, CA 94104,
Attn: Ken Fox (after the Commencement Date) and 44 Montgomery Street, Suite
3705, San Francisco, CA 94104, Attn: Ken Fox (before the Commencement Date).
1.15. Brokers. The term "Brokers" shall mean Seagate Properties, Inc.
-------
1.16. Guarantors. The term "Guarantors" shall mean none.
----------
-2-
<PAGE>
ARTICLE II - PREMISES
---------------------
2.1. Lease of Premises. Commencing on the Commencement Date, Landlord
-----------------
agrees to and shall lease the Premises to Tenant, and Tenant agrees to and shall
lease and hire the Premises from Landlord, upon all of the terms, covenants and
conditions contained in this Lease.
2.2. Acceptance of Premises. Unless otherwise specifically set forth in
----------------------
the Lease, Tenant acknowledges that Landlord has not made any representation or
warranty with respect to the condition of the Premises or the Building or with
respect to the suitability or fitness of either for the conduct of Tenant's
Permitted Use or for any other purpose. Prior to Tenant's taking possession of
the Premises, Landlord or its designee and Tenant will walk the Premises for the
purpose of reviewing the condition of the Premises. Within ten (10) business
days after such review, Landlord and Tenant shall execute and deliver to each
other duplicate original counterparts of the Acceptance Letter. Except as is
expressly set forth in this Lease or Work Letter Agreement, or as may be
expressly set forth in the Acceptance Letter, Tenant agrees to accept the
Premises in its "as is" physical condition without any agreements,
representations, understandings or obligations on the part of Landlord to
perform any alterations, repairs or improvements (or to provide any allowance
for same).
ARTICLE III - TERM
------------------
3.1. Term. Except as otherwise provided in this Lease, the Lease Term
----
shall be for the period described in Section 1.5 of this Lease, commencing on
the Commencement Date described in Section 1.6 of this Lease and ending on the
Expiration Date described in Section 1.7 of this Lease; provided, however, that,
for any reason, Landlord is unable to deliver possession of the Premises on the
date described in Section 1.6 of this Lease, Landlord shall not be liable for
any damage caused thereby, nor shall the Lease be void or voidable, but, rather,
the Lease Term shall commence upon, and the Commencement Date shall be the date
that possession of the Premises is so tendered to Tenant (except for Tenant-
caused delays which shall not be deemed to delay commencement of the Lease
Term), and, the Expiration Date described in Section 1.7 of this Lease and the
rent periods described in Section 1.8 shall be extended by an equal number of
days. See First Addendum to Lease Section 3.1.
ARTICLE IV - RENTAL
-------------------
4.1. Definitions. Unless the context otherwise specifies or requires, the
-----------
following terms shall have the meanings specified herein:
4.1.1. Base Year. The term "Base Year" shall mean calendar year
---------
1999.
4.1.2. Property Taxes. The term "Property Taxes" shall mean the
--------------
aggregate amount of all real estate taxes, assessments (whether they be general
or special), sewer rents and charges, transit taxes, taxes based upon the
receipt of rent and any other federal, state or local government charge,
general, special, ordinary or extraordinary (but not including income or
franchise taxes, capital stock, inheritance, estate, gift, or any other taxes
imposed upon or measured by Landlord's gross income or profits, unless the same
shall be imposed in lieu of real
-3-
<PAGE>
estate taxes or other ad valorem taxes), which Landlord shall pay or become
obligated to pay in connection with the Building, or any part thereof, Property
Taxes shall also include all fees and costs, including attorneys' fees,
appraisals and consultants" fees, incurred by Landlord in seeking to obtain a
reassessment, reduction of, or a limit on the increase in, any Property Taxes,
but the total of said fees and costs shall not exceed the amount of any
reduction in Property Taxes actually granted. If due to Landlord's negligence it
fails to timely pay any installment of Property Taxes, and as a direct
consequence thereof the taxing authority assesses a late fee or penalty, said
late fee or penalty shall not be included in Property Taxes. Property Taxes for
any calendar year shall be Property Taxes which are due for payment or paid in
such year, rather than Property Taxes which are assessed or become a lien during
such year. Property Taxes shall include any tax, assessment, levy, imposition or
charge imposed upon Landlord and measured by or based in whole or in part upon
the Building or the rents or other income from the Building, to the extent that
such items would be payable if the Building was the only property of Landlord
subject to same and the income received by Landlord from the Building was the
only income of Landlord. Property Taxes shall also include any personal property
taxes imposed upon the furniture, fixtures, machinery, equipment, apparatus,
systems and appurtenances of Landlord used in connection with the Building. See
First Addendum to Lease Section 4.1.2.
4.1.3. Operating Expenses. The term "Operating Expenses" shall mean
------------------
all costs, fees, disbursements and expenses paid or incurred by or on behalf of
Landlord in the operation, ownership, maintenance, insurance, management,
replacement and repair of the Building (excluding Property Taxes) including
without limitation:
(i) Premiums for property, casualty, liability, earthquake,
Rent interruption or other types of insurance carried by Landlord to the extent
carried by other institutional owners and operators of first class office.
(ii) Salaries, wages, and other amounts paid or payable for
personnel including the Building manager, superintendent, operation and
maintenance staff, and other employees of Landlord involved in the maintenance
and operation of the Building, including contributions and premiums towards
fringe benefits, unemployment, disability and worker's compensation insurance,
pension plan contributions and similar premiums and contributions and the total
charges of any independent contractors or property managers engaged in the
operating, repair, care, maintenance and cleaning of any portion of the
Building.
(iii) Cleaning expenses, including without limitation,
janitorial services, window cleaning, and garbage and refuse plants.
(iv) Landscape expenses, including without limitation,
irrigation, trimming, mowing, fertilizing, seeding and replacing plants.
(v) Heating, ventilating, air conditioning and
steam/utilities expenses, including fuel, gas, electricity, water, sewer,
telephone and other services.
(vi) Maintaining operating, repairing and replacing
components of equipment or machinery, including without limitation, heating,
refrigeration, ventilation, electrical,
-4-
<PAGE>
plumbing, mechanical, elevator, escalator, sprinklers, fire/life safety,
security and energy management system, including service contracts, maintenance
contracts, supplies and parts.
(vii) Other items of repair or maintenance of elements of the
Building.
(viii) The costs of policing, security and supervision of the
Building.
(ix) Fair market rental and other costs with respect to the
management office for the Building.
(x) The cost of the rental of any machinery or equipment and
the cost of supplies used in the maintenance and operation of the Building.
(xi) Audit fees and the cost of accounting services incurred
in the preparation of statements referred to in this Lease and financial
statements, and in the computation of the rents and charges payable by tenants
of the Building.
(xii) Capital expenditures (a) made primarily to reduce
Operating Expenses or to comply with any laws or other governmental requirements
applicable to the Building, or (b) for replacements (as opposed to additions or
new improvements) of items located in the common areas of the Building, required
to keep such areas in good condition; provided all such permitted capital
expenditures (together with reasonable financing charges) shall be amortized for
purposes of this Lease over the shorter of (x) their useful lives, (y) the
period during which the reasonably estimated savings in Operating Expenses
equals the expenditures.
(xiii) Legal fees and expenses.
(xiv) Payments under the easement, operating agreement,
declaration, restrictive covenant, or instrument pertaining to the sharing of
costs in any planned development.
(xv) A fee for the administration and management of the
Building as reasonably determined by Landlord from time to time. See First
Addendum to Lease Section 4.1.4.
4.1.4. Exclusions from Operating Expenses. Operating Expenses shall
----------------------------------
not include costs of alteration of the premises of tenants of the Building,
depreciation charges, interest and principal payments on mortgages, ground
rental payments, real estate brokerage and leasing commissions, expenses
incurred in enforcing obligations of tenants of the Building, salaries and other
compensation of executive officers of the managing agent of the Building senior
to the Building manager, costs of any special service provided to any one tenant
of the Building but not to tenants of the Building generally, and costs of
marketing or advertising the Building.
4.1.5. Adjustment. If the Building does not have one hundred percent
----------
(100%) occupancy during an entire calendar year, including the Base Year, then
the variable cost component of "Property Tax" and "Operating Expenses" shall be
equitably adjusted so that the
-5-
<PAGE>
total amount of Property Tax and Operating Expenses equals the total amount
which would have been paid or incurred by Landlord had the Building been one
hundred percent (100%) occupied for the entire calendar year. In no event shall
Landlord be entitled to receive from Tenant and any other tenants in the
Building an aggregate amount in excess of actual Operating Expenses as a result
of the foregoing provision.
4.2. Base Rent.
---------
4.2.1. Rent Adjustment. During the Lease Term, Tenant shall pay to
---------------
Landlord as rental for the Premises the Base Rent described in Section 1.8
above, subject to adjustment (herein called the "Rent Adjustment") as follows:
per the Base Rent schedule in Section 1.8 above.
4.2.2. Tax and Operating Expense Adjustment. In addition to the Rent
------------------------------------
Adjustment, during each calendar year subsequent to the Base Year, the Base Rent
shall be increased by (collectively, the "Tax and Operating Expense
Adjustment"): (i) Tenant's Percentage Share of the total dollar increase, if
any, in Property Taxes for such year over Property Taxes for the Base Year; and
(ii) Tenant's Percentage Share of the total dollar increase, if any, in
Operating Expenses paid or incurred by Landlord during such year over Operating
Expenses paid or incurred by Landlord during the Base Year. A decrease in
Property Taxes or Operating Expenses below the Base Year amounts shall not
decrease the amount of the Base Rent due hereunder or give rise to a credit in
favor or Tenant.
4.2.3. Tax Exempt Tenant. If Tenant's Additional Rent as finally
-----------------
determined for any calendar year exceeds the total payments made by Tenant on
account thereof, Tenant shall pay Landlord the deficiency within thirty (30)
days of Tenant's receipt of Landlord"s statement. If the total payments made by
Tenant on account thereof exceed Tenant's Additional Rent as finally determined
for such year, Tenant's excess payment shall be credited toward the rent next
due from Tenant under this Lease. For any partial calendar year at the beginning
or end of the Term, Additional Rent shall be prorated on the basis of a 365-day
year by computing Tenant's Share of the increases in Operating Costs and Taxes
for the entire year and then prorating such amount for the number of days during
such year included in the Term. Notwithstanding the termination of this Lease,
Landlord shall pay to Tenant or Tenant shall pay to Landlord, as the case may
be, within thirty (30) days after Tenant's receipt of Landlord's final statement
for the calendar year in which this Lease terminates, the difference between
Tenant's Additional Rent for that year, as finally determined by Landlord, and
the total amount previously paid by Tenant on account thereof.
If for any reason Base Taxes or Taxes for any year during the Term are
reduced, refunded or otherwise changed, Tenant's Additional Rent shall be
reduced, refunded or adjusted accordingly. If Taxes are temporarily reduced as a
result of space in the Building being leased to a tenant that is entitled to an
exemption from property taxes or other taxes, then for purposes of determining
Additional Rent for each year in which Taxes are reduced by any such exemption,
Taxes for such year shall be calculated on the basis of the amount the Taxes for
the year would have been in the absence of the exemption. The obligations of
Landlord to refund any overpayment of Additional Rent and of Tenant to pay any
Additional Rent not previously paid
-6-
<PAGE>
shall survive the expiration of the Term. Notwithstanding anything to the
contrary in this Lease, if there is at any time a decrease in Taxes below the
amount of the Taxes for the Base Year, then for purposes of calculating
Additional Rent for the year in which such decrease occurs and all subsequent
periods, Base Taxes shall be reduced to equal the Taxes for the year in which
the decrease occurs.
4.3. Adjustment Procedure; Estimates. The Tax and Operating Expense
-------------------------------
Adjustment shall be determined and paid as follows:
4.3.1. Estimates. During each calendar year subsequent to the Base
---------
Year, Landlord shall give Tenant written notice of its estimate of any increased
amounts payable under Section 4.2.2 for that calendar year. On or before the
first day of each calendar month during the calendar year, Tenant shall pay to
Landlord one-twelfth (1/12/th/) of such estimated amounts; provided, however,
that not more often than quarterly, Landlord may, by written notice to Tenant,
revise its estimate for such year, and subsequent payments by Tenant for such
year shall be based upon such revised estimate.
4.3.2. Landlord's Statement. Within one hundred twenty (120) days
--------------------
after the close of each calendar year or as soon thereafter as is practicable,
Landlord shall deliver to Tenant a statement of that year"s Property Taxes and
Operating Expenses, and the actual Tax and Operating Expense Adjustment to be
made pursuant to Section 4.2.2 for such calendar year, as determined by Landlord
(the "Landlord's Statement"). Such Landlord's Statement shall be binding upon
Tenant, except as specifically provided in Section 4.4 below. If the amount of
the actual Tax and Operating Expense Adjustment is more than the estimated
payments for such calendar year made by Tenant, Tenant shall pay the deficiency
to Landlord within thirty (30) days of receipt of Landlord's Statement. If the
amount of the actual Tax and Operating Expense Adjustment is less than the
estimated payments for such calendar year made by Tenant, any excess shall be
credited against Rent (as hereinafter defined) next payable by Tenant under this
Lease or, if the Lease Term has expired, any excess shall be paid to Tenant. No
delay in providing the Statement shall act as a waiver of Landlord's right to
increase in payment pursuant to the Tax and Operating Expense Adjustment.
4.3.3. Termination. If this Lease shall terminate on a day other
-----------
than the end of a calendar year, the amount of the Tax and Operating Expense
Adjustment to be paid that is applicable to the calendar year in which such
termination occurs shall be prorated on the basis of the number of days from
January 1 of the calendar year to the termination date bears to 365. The
termination of this Lease shall not affect the obligations of Landlord and
Tenant pursuant to Section 4.3.2 to be performed after such termination.
4.4. Review of Landlord's Statement. Provided that Tenant is not then in
------------------------------
default beyond any applicable cure period of its obligations to pay Base Rent,
additional rent described in Section 4.2.2 or any other payments required to be
made by it under this Lease, and provided further that Tenant strictly complies
with the provisions of this Section 4.4, Tenant shall have the right, once each
calendar year to reasonably review supporting data for any portion of a
Landlord's Statement (provided, however, Tenant may not have an audit or review
right to all documentation relating to Building operations as this would far
exceed the relevant information
-7-
<PAGE>
necessary to property document a pass-through billing statement, but real estate
tax statements, and information on utilities, repairs, maintenance and insurance
will be available), in accordance with the following procedure:
4.4.1. Notice. Tenant shall, within twenty five (25) business days
------
after any such Landlord's Statement is delivered, deliver a written notice to
Landlord specifying the portions of the Landlord's Statement that are claimed to
be incorrect, and Tenant shall pay to Landlord when due all amounts due from
Tenant to Landlord as specified in the Landlord's Statement. Except as expressly
set forth below, in no event shall Tenant be entitled to withhold, deduct, or
offset any monetary obligation of Tenant to Landlord under the Lease (including,
without limitation, Tenant's obligation to make all payments of Base Rent and
all payments of Tenant"s Tax and Operating Expense Adjustment) pending the
completion of and regardless of the results of any review of records under this
Section 4.4. The right of Tenant under this Section 4.4 may only be exercised
once for any Landlord's Statement, and if Tenant fails to meet any of the above
conditions as a prerequisite to the exercise of such right, the right of Tenant
under this Section 4.4 for a particular Landlord"s Statement shall be deemed
waived.
4.4.2. Records. Tenant acknowledges that Landlord maintains its
-------
records for the Building at Landlord's manager's corporate offices presently
located at the address set forth in Section 1.12 and Tenant agrees that any
review of records under this Section 4.4 shall be at the sole expense of Tenant
and shall be conducted by an independent firm of certified public accountants of
national standing. Tenant acknowledges and agrees that any records reviewed
under this Section 4.4 constitute confidential information of Landlord, which
shall not be disclosed to anyone other than the accountants performing the
review and the principals of Tenant who receive the results of the review. The
disclosure of such information to any other person, whether or not caused by the
conduct of Tenant, shall constitute a material breach of this Lease.
4.4.3. Landlord's Review; Reconciliation. Any errors disclosed by
---------------------------------
the review shall be promptly corrected by Landlord, provided, however, that if
Landlord disagrees with any such claimed errors, Landlord shall have the right
to cause another review to be made by an independent firm of certified public
accountants of national standing. In the event of a disagreement between the two
accounting firms, the review that discloses the least amount of deviation from
the Landlord's Statement shall be deemed to be correct. In the event that the
results of the review of records (taking into account, if applicable, the
results of any additional review caused by Landlord) reveal that Tenant has
overpaid obligations for a preceding period, the amount of such overpayment
shall be credited against Tenant's subsequent installment obligations to pay the
estimated Tax and Operating Expense Adjustment. In the event that such results
show that Tenant has underpaid its obligations for a preceding period, Tenant
shall be liable for Landlord's actual accounting fees, and the amount of such
underpayment shall be paid by Tenant to Landlord with the next succeeding
installment obligation of estimated Tax and Operating Expense Adjustment.
4.5. Payment. Concurrently with the execution hereof, Tenant shall pay
-------
Landlord Base Rent for the first calendar month of the Lease Term. Thereafter
the Base Rent described in Section 1.8, as adjusted in accordance with Section
4.2, shall be payable in advance on the first day of each calendar month. If
the Commencement Date is other than the first day of a calendar
-8-
<PAGE>
month, the prepaid Base Rent for such partial month shall be prorated in the
proportion that the number of days this Lease is in effect during such partial
month bears to the total number of days in the calendar month. All Rent, and all
other amounts payable to Landlord by Tenant pursuant to the provisions of this
Lease, shall be paid to Landlord, without notice, demand, abatement, deduction
or offset, in lawful money of the United States at Landlord's office in the
Building or to such other person or at such other place as Landlord may
designate from time to time by written notice given to Tenant. No payment by
Tenant or receipt by Landlord of a lesser amount than the correct Rent due
hereunder shall be deemed to be other than a payment on account; nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed to effect or evidence an accord and satisfaction; and Landlord
may accept such check or payment without prejudice to Landlord's right to
recover the balance or pursue any other remedy in this Lease or at law or in
equity provided.
4.6. Late Charge; Interest. Tenant acknowledges that the late payment of
---------------------
Base Rent or any other amounts payable by Tenant to Landlord hereunder (all of
which shall constitute additional rental to the same extent as Base Rent) will
cause Landlord to incur administrative costs and other damages, the exact amount
of which would be impracticable or extremely difficult to ascertain. Landlord
and Tenant agree that if Landlord does not receive any such payment on or before
five (5) days after the date the payment is due, Tenant shall pay to Landlord,
as additional rent, (a) a late charge equal to five percent (5%) of the overdue
amount to cover such additional administrative costs; and (b) interest on the
delinquent amounts at the lesser of the maximum rate permitted by law (if any)
or twelve percent (12%) per annum from the date due to the date paid.
4.7. Additional Rent. For purposes of this Lease, all amounts payable by
---------------
Tenant to Landlord pursuant to this Lease, whether or not denominated as such,
shall constitute additional rental hereunder. Such additional rental, together
with the Base Rent, Rent Adjustment, and Tax and Operating Expense Adjustment,
shall sometimes be referred to in this Lease as "Rent".
4.8. Additional Taxes. Notwithstanding anything in Section 4.1.2 to the
----------------
contrary, Tenant shall reimburse Landlord upon demand for any and all taxes
payable by or imposed upon Landlord upon or with respect to: any fixtures or
personal property located in the Premises; any leasehold improvements made in or
to the Premises by or for Tenant; the Rent payable hereunder, including, without
limitation, any gross receipts tax, license fee or excise tax levied by any
governmental authority; the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy of any portion of the Premises
(including without limitation any applicable possessory interest taxes); or this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises.
ARTICLE V - SECURITY DEPOSIT
----------------------------
Upon the execution of this Lease, Tenant shall deposit with Landlord the
Security Deposit described in Section 1.10 above. The Security Deposit is made
by Tenant to secure the faithful performance of all the terms, covenants and
conditions of this Lease to be performed by Tenant. If Tenant shall default with
respect to any covenant or provision hereof beyond the applicable cure period,
Landlord may use, apply or retain all or any portion of the Security Deposit to
cure such default or to compensate Landlord for any loss or damage which
Landlord may suffer
-9-
<PAGE>
thereby. If Landlord so uses or applies all or any portion of the Security
Deposit, Tenant shall immediately upon written demand deposit cash with Landlord
in an amount sufficient to restore the Security Deposit to the full amount
hereinabove stated. Landlord shall not be required to keep the Security Deposit
separate from its general accounts and Tenant shall be entitled to interest on
the Security Deposit. Landlord agrees to invest the Security Deposit in
certificates of deposit, treasury bills or other investments as determined by
Landlord; provided, however, that Landlord shall not be required to invest the
Security Deposit in an investment yielding the highest possible rate of
interest, and Landlord does not guarantee to Tenant any minimum rate of interest
on the investment of the Security Deposit. All interest accruing on such
investment shall be paid to Tenant annually during the Term, provided that
Tenant is not in default under this Lease beyond any applicable cure period.
Within thirty (30) days after the expiration of the Lease Term and the vacation
of the Premises by Tenant, the Security Deposit, or such part as has not been
applied to cure any default of Tenant, shall be returned to Tenant.
ARTICLE VI - USE OF PREMISES
----------------------------
6.1. Tenant's Permitted Use. Tenant shall use the Premises only for
----------------------
Tenant's Permitted Use as set forth in Section 1. II above and shall not use or
permit the Premises to be used for any other purpose without Landlord's prior
written consent. Tenant shall, at its sole cost and expense, obtain all
governmental licenses and permits required to allow Tenant to conduct Tenant's
Permitted Use. Landlord disclaims any warranty that the Premises are suitable
for Tenant's use and Tenant acknowledges that it has had a full opportunity to
make its own determination in this regard.
6.2. Compliance With Laws and Other Requirements.
-------------------------------------------
6.2.1. Applicable Law. Tenant shall cause the Premises to comply in
--------------
all material respects with all laws, ordinances, regulations and directives of
any governmental authority having jurisdiction including, without limitation,
any certificate of occupancy and any law, ordinance, regulation, covenant,
condition or restriction affecting the Building or the Premises which in the
future may become applicable to the Premises (collectively "Applicable Law").
6.2.2. No Violation. Tenant shall not use the Premises, or permit
------------
the Premises to be used, in any manner which: (a) violates any Applicable Law;
(b) causes or is reasonably likely to cause damage to the Building or the
Premises; (c) violates a requirement or condition of any fire and extended
insurance policy covering the Building and/or the Premises, or increases the
cost of such policy; (d) constitutes or is reasonably likely to constitute a
nuisance, annoyance or inconvenience to other tenants or occupants of the
Building or its equipment, facilities or systems; (e) interferes with, or is
reasonably likely to interfere with, the transmission or reception of microwave,
television, radio, telephone or other communication signals by antennae or other
facilities located in the Building; or (f) violates the Rules and Regulations
described in Article XVIII.
6.3. Hazardous Materials.
-------------------
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<PAGE>
6.3.1. Prohibition. No Hazardous Materials (as defined herein),
-----------
shall be Handled (as also defined herein), upon, about, above or beneath the
Premises or any portion of the Building by or on behalf of Tenant, its
subtenants or its assignees, or their respective contractors, clients, officers,
directors, employees, agents, or invitees. Any such Hazardous Materials so
Handled shall be known as Tenant's Hazardous Materials. Notwithstanding the
foregoing, normal quantities of Tenant's Hazardous Materials customarily used in
the conduct of general administrative and executive office activities (e.g.,
copier fluids and cleaning supplies) may be Handled at the Premises without
Landlord's prior written consent. Tenant's Hazardous Materials shall be Handled
at all times in compliance with the manufacturer's instructions therefor and all
applicable Environmental Law (as defined herein). See First Addendum to Lease
Section 6.3.1.
6.3.2. Remediation. Notwithstanding the obligation of Tenant to
-----------
indemnify Landlord pursuant to this Lease, Tenant shall, at its sole cost and
expense, promptly take all actions required by any Regulatory Authority (as
defined herein), or necessary for Landlord to make full economic use of the
Premises or any portion of the Building, which requirements or necessity arises
from the Handling of Tenant's Hazardous Materials upon, about, above or beneath
the Premises or any portion of the Building. Such actions shall include, but
not be limited to, the investigation of the environmental condition of the
Premises or any portion of the Building, the preparation of any feasibility
studies or reports and the performance of any cleanup, remedial, removal or
restoration work. Tenant shall take all actions necessary to restore the
Premises or any portion of the Building to the condition existing prior to the
introduction of Tenant's Hazardous Materials, notwithstanding any less stringent
standards or remediation allowable under applicable Environmental Laws. Tenant
shall nevertheless obtain Landlord's written approval prior to undertaking any
actions required by this Section, which approval shall not be unreasonably
withheld so long as such actions would not potentially have a material adverse
long-term or short-term effect on the Premises or any portion of the Building.
6.3.3. Additional Documents. Tenant agrees to execute affidavits,
--------------------
representations, and the like from time to time at Landlord's request stating
Tenant's best knowledge and belief regarding the presence of Hazardous Materials
on the Premises.
6.3.4. Environmental Laws. As used herein, "Environmental Laws"
------------------
means and includes all now and hereafter existing statutes, laws, ordinances,
codes, regulations, rules, rulings, orders, decrees, directives, policies and
requirements by any Regulatory Authority regulating, relating to, or imposing
liability or standards of conduct concerning public health and safety or the
environment.
6.3.5. Hazardous Materials. As used herein, "Hazardous Materials"
-------------------
means: (a) any material or substance: (i) which is defined or becomes defined as
a "hazardous substance", "hazardous waste," "infectious waste," "chemical
mixture or substance," or "air pollutant" under Environmental Laws; (ii)
containing petroleum, crude oil or any fraction thereof; (iii) containing
polychlorinated biphenyls (PCB's); (iv) containing asbestos; (v) which is
radioactive; or (vi) which is infectious; or (b) any other material or substance
displaying toxic, reactive, ignitable or corrosive characteristics, as all such
terms are used in their broadest sense, and are defined, or become defined by
environmental laws; or (c) materials which cause a nuisance upon or waste to the
Premises or any portion of the Building.
-11-
<PAGE>
6.3.6. Handle. As used herein, "Handle," "handle," "Handled,"
------
"handled," "Handling," or "handling" shall mean any installation, handling,
generation, storage, treatment, use, disposal, discharge, release, manufacture,
refinement, presence, migration, emission, abatement, removal, transportation,
or any other activity of any type in connection with or involving Hazardous
Materials.
6.3.7. Regulatory Authority. As used herein, "Regulatory Authority"
--------------------
shall mean any federal, state or local governmental agency, commission, board or
political subdivision.
ARTICLE VII- UTILITIES AND SERVICES
-----------------------------------
7.1. Building Services. Landlord agrees to furnish or cause to be
-----------------
furnished to the Premises the following utilities and services, subject to the
conditions and standards set forth herein:
7.1.1. Elevator Service. Non-attended automatic elevator service (if
----------------
the Building has such equipment serving the Premises), in common with Landlord
and other tenants and occupants and their agents and invitees.
7.1.2. HVAC. During Business Hours, such air conditioning, heating
----
and ventilation as, in Landlord's reasonable judgment, are required for the
comfortable use and occupancy of the Premises; provided, however, that if Tenant
shall require heating, ventilation or air conditioning in excess of that which
Landlord shall be required to provide hereunder, Landlord shall provide such
additional heating, ventilation or air conditioning at such rates and upon such
additional conditions as shall be determined by Landlord from time to time.
7.1.3. Water. Water for drinking and if rest rooms are within the
-----
Premises, rest room purposes.
7.1.4. Janitorial and Cleaning. Reasonable janitorial and cleaning
-----------------------
services, provided that the Premises are used exclusively for office purposes
and are kept reasonably in order by Tenant. If the Premises are not used
exclusively as offices, Landlord, at Landlord's sole discretion, may require
that the Premises be kept clean and in order by Tenant, at Tenant's expense, to
the satisfaction of Landlord and by persons approved by Landlord; and, in all
events, Tenant shall pay to Landlord the cost of removal of Tenant's refuse and
rubbish, to the extent that the same exceeds the refuse and rubbish attendant to
normal office usage.
7.1.5. Electricity. At all reasonable times, electric current as
-----------
required for building standard lighting and standard office equipment based on
executive and administrative use; provided, however, that: (i) without
Landlord's consent, Tenant shall not install, or permit the installation, in the
Premises of any computers, word processors, electronic data processing equipment
or other type of equipment or machines which will increase Tenant's use of
electric current in excess of that which Landlord is obligated to provide
hereunder (provided, however, that the foregoing shall not preclude the use of
personal computers or similar office equipment); (ii) if Tenant shall require
electric current which may disrupt the provision of electrical service to other
tenants, Landlord may refuse to grant its consent or may condition its consent
upon
-12-
<PAGE>
Tenant's payment of the cost of installing and providing any additional
facilities required to furnish such excess power to the Premises and upon the
installation in the Premises of electric current meters to measure the amount of
electric current consumed, in which latter event Tenant shall pay for the cost
of such meter(s) and the cost of installation, and repair thereof, as well as
for all excess electric current consumed at the rates charged by the applicable
local public utility, plus a reasonable amount to cover the additional expenses
incurred by Landlord in keeping account of the electric current so consumed; and
(iii) if Tenant's increased electrical requirements will materially affect the
temperature level in the Premises or the Building, Landlord's consent may be
conditioned upon Tenant's requirement to pay such amounts as will be incurred by
Landlord to install and operate any machinery or equipment necessary to restore
the temperature level to that otherwise required to be provided by Landlord,
including but not limited to the cost of modifications to the air conditioning
system. Landlord shall not, in any way, be liable or responsible to Tenant for
any loss or damage or expense which Tenant may incur or sustain if, for any
reasons beyond Landlord's reasonable control, either the quantity or character
of electric service is changed or is no longer available or suitable for
Tenant's requirements. Tenant covenants that at all times its use of electric
current shall never exceed the capacity of the feeders, risers or electrical
installations of the Building. If submetering of electricity in the Building
will not be permitted under future laws or regulations, the Rent will then be
equitably and periodically adjusted to include an additional payment to Landlord
reflecting the cost to Landlord for furnishing electricity to Tenant in the
Premises.
7.1.6. Payments. Any amounts which Tenant is required to pay to
--------
Landlord pursuant to this Section 7.1 shall be payable upon demand by Landlord
and shall constitute additional rent.
7.2. Interruption of Service. Landlord shall not be liable for any failure
-----------------------
to furnish, stoppage of, or interruption in furnishing any of the services or
utilities described in Section 7. 1, when such failure is caused by accident,
breakage, repairs, strikes, lockouts, labor disputes, labor disturbances,
governmental regulation, civil disturbances, acts of war, moratorium or other
governmental action, or any other cause beyond Landlord's reasonable control,
and, in such event, Tenant shall not be entitled to any damages nor shall any
failure or interruption abate or suspend Tenant's obligation to pay Rent, Base
Rent and additional rent required under this Lease or constitute or be construed
as a constructive or other eviction of Tenant. Further, in the event any
governmental authority or public utility promulgates or revises any law,
ordinance, rule or regulation, or issues mandatory controls or voluntary
controls relating to the use or conservation of energy, water, gas, light or
electricity, the reduction of automobile or other emissions, or the provision of
any other utility or service, Landlord may take any reasonably appropriate
action to comply with such law, ordinance, rule, regulation, mandatory control
or voluntary guideline and Tenant's obligations hereunder shall not be affected
by any such action of Landlord. The parties acknowledge that safety and
security devices, services and programs provided by Landlord, if any, while
intended to deter crime and ensure safety, may not in given instances prevent
theft or other criminal acts, or ensure safety of persons or property. The risk
that any safety or security device, service or program may not be effective, or
may malfunction, or be circumvented by a criminal, is assumed by Tenant with
respect to Tenant's property and interests, and Tenant shall obtain insurance
coverage to the extent Tenant desires protection against such criminal acts and
other
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<PAGE>
losses, as further described in this Lease. Tenant agrees to cooperate in any
reasonable safety or security program developed by Landlord or required by Law.
ARTICLE VIII - MAINTENANCE AND REPAIRS
--------------------------------------
8.1. Landlord's Obligations. Except as expressly provided in Sections 8.2
----------------------
and 8.3 below, Landlord shall maintain the Building in reasonable order and
repair throughout the Lease Term; provided, however, that Landlord shall not be
liable for any failure to make any repairs or to perform any maintenance unless
such failure shall persist for an unreasonable time after written notice of the
need for such repairs or maintenance is given to Landlord by Tenant. Except as
provided in Article XI, there shall be no abatement of Rent, nor shall there be
any liability of Landlord, by reason of any injury or inconvenience to, or
interference with, Tenant's business or operations arising from the making of,
or failure to make, any maintenance or repairs in or to any portion of the
Building.
8.2. Tenant's Obligations. During the Lease Term, Tenant shall, at its
--------------------
sole cost and expense, maintain the Premises in good order and repair
(including, without limitation, the carpet, wall-covering, doors, plumbing and
other fixtures, equipment, alterations and improvements, whether installed by
Landlord or Tenant). Further, Tenant shall be responsible for, and upon demand
by Landlord shall promptly reimburse Landlord for, any damage to any portion of
the Building or the Premises caused by (a) Tenant's activities in the Building
or the Premises; (b) the performance or existence of any alterations, additions
or improvements made by Tenant in or to the Premises; (c) the installation, use,
operation or movement of Tenant's property in or about the Building or the
Premises; or (d) any act or omission by Tenant or its officers, partners,
employees, agents, contractors or invitees.
8.3. Landlord's Rights. Landlord and its contractors shall have the right,
-----------------
at all reasonable times and upon prior written, oral or telephonic notice to
Tenant at the Premises, other than in the case of any emergency in which case no
notice shall be required, to enter upon the Premises to make any repairs to the
Premises or the Building reasonably or deemed reasonably necessary by Landlord
and to erect such equipment, including scaffolding, as is reasonably necessary
to effect such repairs.
ARTICLE IX - ALTERATIONS, ADDITIONS AND IMPROVEMENTS
----------------------------------------------------
9.1. Landlord's Consent; Conditions. Tenant shall not make or permit to be
------------------------------
made any alterations, additions, or improvements in or to the Premises
("Alterations") without the prior written consent of Landlord, which consent,
with respect to non-structural alterations, shall not be unreasonably withheld,
and which consent with respect to any alterations which may affect the
structural or safety components of the Building, may be given or withheld in
Landlord's sole and absolute discretion. Landlord may impose as a condition to
making any Alterations such requirements as Landlord in its reasonable
discretion deems necessary or desirable including without limitation: Tenant's
submission to Landlord, for Landlord's prior written approval, of all plans and
specifications relating to the Alterations; Landlord's prior written approval of
the time or times when the Alterations are to be performed; Landlord's prior
written approval of the contractors and subcontractors performing Work in
connection with the Alterations; employment
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<PAGE>
of union contractors and subcontractors who shall not cause labor disharmony;
Tenant's receipt of all necessary permits and approvals from all governmental
authorities having jurisdiction over the Premises prior to the construction of
the Alterations; Tenant's delivery to Landlord of such bonds and insurance as
Landlord shall reasonably require; and Tenant's payment to Landlord of all costs
and expenses incurred by Landlord because of Tenant's Alterations, including but
not limited to costs incurred in reviewing the plans and specifications for, and
the progress of, the Alterations. Tenant is required to provide Landlord written
notice of whether the Alterations include the Handling of any Hazardous
Materials and whether these materials are of a customary and typical nature for
industry practices. Upon completion of the Alterations, Tenant shall provide
Landlord with copies of as-built plans. Neither the approval by Landlord of
plans and specifications relating to any Alterations nor Landlord's supervision
or monitoring of any Alterations shall constitute any warranty by Landlord to
Tenant of the adequacy of the design for Tenant's intended use or the proper
performance of the Alterations.
9.2. Performance of Alterations Work. All work relating to the Alterations
-------------------------------
shall be performed in compliance with the plans and specifications approved by
Landlord, all applicable laws, ordinances, rules, regulations and directives of
all governmental authorities having jurisdiction (including without limitation
Title 24 of the California Administrative Code) and the requirements of all
carriers of insurance on the Premises and the Building, the Board of
Underwriters, Fire Rating Bureau, or similar organization. All work shall be
performed in a diligent, first class manner and so as not to unreasonably
interfere with any other tenants or occupants of the Building. All costs
incurred by Landlord relating to the Alterations shall be payable to Landlord by
Tenant as additional rent upon demand. No asbestos-containing materials shall
be used or incorporated in the Alterations. No lead-containing surfacing
material, solder, or other construction materials or fixtures where the presence
of lead might create a condition of exposure not in compliance with
Environmental Laws shall be incorporated in the Alterations.
9.3. Liens. Tenant shall pay when due all costs for work performed and
-----
materials supplied to the Premises. Tenant shall keep Landlord, the Premises
and the Building free from all liens, stop notices and violation notices
relating to the Alterations or any other work performed for, materials furnished
to or obligations incurred by or for Tenant and Tenant shall protect, indemnify,
hold harmless and defend Landlord, the Premises and the Building of and from any
and all loss, cost, damage, liability and expense, including attorneys' fees,
arising out of or related to any such liens or notices. Further, Tenant shall
give Landlord not less than seven (7) business days prior written notice before
commencing any Alterations in or about the Premises to permit Landlord to post
appropriate notices of non-responsibility. Tenant shall also secure, prior to
commencing any Alterations, at Tenant's sole expense upon Landlord's reasonable
request, a completion and lien indemnity bond satisfactory to Landlord for such
work. During the progress of such work, Tenant shall, upon Landlord's request,
furnish Landlord with sworn contractor's statements and lien %waivers covering
all work theretofore performed. Tenant shall satisfy or otherwise discharge all
liens, stop notices or other claims or encumbrances within ten (10) days after
Landlord notifies Tenant in writing that any such lien, stop notice, claim or
encumbrance has been filed. If Tenant fails to pay and remove such lien, claim
or encumbrance within such ten (10) days, Landlord, at its election, may pay and
satisfy the same and in such event the sums so paid by Landlord, with interest
from the date of payment at the rate set forth in this Lease for amounts
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<PAGE>
owed Landlord by Tenant shall be deemed to be additional rent due and payable by
Tenant at once without notice or demand.
9.4. Lease Termination. Except as provided herein, upon expiration or
-----------------
earlier termination of this Lease Tenant shall surrender the Premises to
Landlord in the same condition as existed on the date Tenant first occupied the
Premises (whether pursuant to this Lease or an earlier lease), subject to
reasonable wear and tear and Article XI and XII hereof regarding casualty and
condemnation. All Alterations shall become a part of the Premises and shall
become the property of Landlord upon the expiration or earlier termination of
this Lease, unless Landlord shall, by written notice given to Tenant, require
Tenant to remove some or all of Tenant's Alterations, in which event Tenant
shall promptly remove the designated Alterations and shall promptly repair any
resulting damage, all at Tenant's sole expense. All business and trade
fixtures, machinery and equipment, furniture, movable partitions and items of
personal property owned by Tenant or installed by Tenant at its expense in the
Premises shall be and remain the property of Tenant; upon the expiration or
earlier termination of this Lease, Tenant shall, at its sole expense, remove all
such items and repair any damage to the Premises or the Building caused by such
removal. If Tenant fails to remove any such items or repair such damage
promptly after the expiration or earlier termination of the Lease, Landlord may,
but need not, do so with no liability to Tenant, and Tenant shall pay Landlord
the cost thereof upon demand. Notwithstanding the foregoing to the contrary, in
the event that Landlord gives its consent, pursuant to the provisions of this
Article IX, to allow Tenant to make an Alteration in the Premises, Landlord
agrees, upon Tenant's written request, to notify Tenant in writing at the time
of the giving of such consent whether Landlord will require Tenant, at Tenant's
cost, to remove such Alteration at the end of the Lease Term.
ARTICLE X - INDEMNIFICATION AND INSURANCE
-----------------------------------------
10.1. Indemnification.
---------------
10.1.1. Tenant. Tenant agrees to protect, indemnify, hold harmless
and defend Landlord and any Mortgagee, as defined herein, and each of their
respective partners, directors, officers, agents and employees, successors and
assigns (except to the extent the losses described below are caused by the gross
negligence or intentional misconduct of Landlord, its agents and employees),
from and against:
(i) any and all loss, cost, damage, liability or expense
as incurred (including but not limited to reasonable attorneys' fees and legal
costs) arising out of or related to any claim, suit or judgment brought by or in
favor of any person or persons for damage, loss or expense due to, but not
limited to, bodily injury, including death or property damage sustained by such
person or persons which arises out of, is occupied by or is in any way
attributable to the use or occupancy of the Premises or any portion of the
Building by Tenant or the acts or omissions of Tenant or its agents, employees,
contractors, clients, invitees or subtenants except that caused by the sole
active negligence or willful misconduct of Landlord or its agents or employees.
Such loss or damage shall include, but not be limited to, any injury or damage
to, or death of, Landlord's employees or agents or damage to the Premises or any
portion of the Building.
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(ii) any and all environmental damages which arise from:
(a) the Handling of any Tenants Hazardous Materials, as defined in Section 6.3
or (b) the breach of any of the provisions of this Lease. For the purpose of
this Lease, "environmental damages" shall mean (x) all claims, judgments,
damages, penalties, fines, costs, liabilities, and losses (including without
limitation, diminution in the value of the Premises or any portion of the
Building, damages for the loss of or restriction on use of rentable or usable
space or of any amenity of the Premises or any portion of the Building, and from
any adverse impact of Landlord's marketing of space); (y) all reasonable sums
paid for settlement of claims, attorneys' fees, consultants' fees and experts'
fees; and (z) all costs incurred by Landlord in connection with investigation or
remediation relating to the Handling of Tenant's Hazardous Materials, whether or
not required by Environmental Laws, necessary for Landlord to make full economic
use of the Premises or any portion of the Building, or otherwise required under
this Lease. To the extent that Landlord is held strictly liable by a court or
other governmental agency of competent jurisdiction under any Environmental
Laws, Tenant's obligation to Landlord and the other indemnities under the
foregoing indemnification shall likewise be without regard to fault on Tenant's
part with respect to the violation of any Environmental Law which results in
liability to the indemnitee. Tenant's obligations and liabilities pursuant to
this Section 10.1 shall survive the expiration or earlier termination of this
Lease.
10.1.2. Landlord. Landlord agrees to protect, indemnify, hold
--------
harmless and defend Tenant from and against any and all loss, cost, damage,
liability or expense, including reasonable attorneys' fees, with respect to any
claim of damage or injury to persons or property at the Premises, caused by the
gross negligence or intentional misconduct of Landlord or its authorized agents
or employees.
10.1.3. No Limitation. Notwithstanding anything to the contrary
-------------
contained herein, nothing shall be interpreted or used to (a) in any way affect,
limit, reduce or abrogate any insurance coverage provided by any insurers to
either Tenant or Landlord, or (b) infer or imply that Tenant is a partner, joint
venturer, agent, employee, or otherwise acting by or at the direction of
Landlord.
10.2. Property Insurance.
------------------
10.2.1. Tenant All-Risk. At all times during the Lease Term, Tenant
---------------
shall procure and maintain, at its sole expense, "all-risk" property insurance,
for damage or other loss caused by fire or other casualty or cause including,
but not limited to, vandalism and malicious mischief, theft, water damage of any
type, including sprinkler leakage, bursting of pipes, and explosion, in an
amount not less than one hundred percent (100%) of the replacement cost covering
(a) all Alterations made by or for Tenant in the Premises; and (b) Tenant's
trade fixtures, equipment and other personal property from time to time situated
in the Premises. The proceeds of such insurance shall be used for the repair or
replacement of the property so insured, except that if not so applied or if this
Lease is terminated following a casualty, the proceeds applicable to the
leasehold improvements shall be paid to Landlord and the proceeds applicable to
Tenant's personal property shall be paid to Tenant.
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10.2.2. Tenant Business Interruption. At all times during the
----------------------------
Lease Term, Tenant shall procure and maintain business interruption insurance in
such amount as will reimburse Tenant for direct or indirect loss of earnings
attributable to all perils insured against in Section 10.2. 1.
10.2.3. Landlord All-Risk. Landlord shall, at all times during the
-----------------
Lease Term, procure and maintain "all-risk" property insurance in the amount not
less than ninety percent (90%) of the insurable replacement cost covering the
Building in which the Premises are located and such other insurance as may be
required by a Mortgagee or otherwise desired by Landlord.
10.3. Liability Insurance.
10.3.1. Tenant. At all times during the Lease Term, Tenant shall
------
procure and maintain, at its sole expense, commercial general liability
insurance applying to the use and occupancy of the Premises and the business
operated by Tenant. Such insurance shall have a minimum combined single limit
of liability of at least Two Million Dollars ($2,000,000) per occurrence and a
general aggregate limit of at least Two Million Dollars ($2,000,000). All such
policies shall be written to apply to all bodily injury, property damage, and
personal injury losses, and shall be endorsed to include Landlord and its
agents, beneficiaries, partners, employees, and any deed of trust holder or
mortgagee of Landlord or any ground lessor as additional insureds. Such
liability insurance shall be written as primary policies, not excess or
contributing with or secondary to any other insurance as may be available to the
additional insureds.
10.3.2. Alcohol. Prior to the sale, storage, use or giving away of
-------
alcoholic beverages on or from the Premises by Tenant or another person, Tenant,
at its own expense, shall obtain a policy or policies of insurance issued by a
responsible insurance company and in a form acceptable to Landlord saving
harmless and protecting Landlord and the Premises against any and all damages,
claims, liens, judgments, expenses and costs, including actual attorneys' fees,
arising under any present or future law, statute, or ordinance of the State of
California or other governmental authority having jurisdiction of the Premises,
by reason of any storage, sale, use or giving away of alcoholic beverages on or
from the Premises. Such policy or policies of insurance shall have a minimum
combined single limit of One Million Dollars ($1,000,000) per occurrence and
shall apply to bodily injury, fatal or nonfatal; injury to means of support; and
injury to property of any person. Such policy or policies of insurance shall
name Landlord and its agents, beneficiaries, partners, employees and any
mortgagee of Landlord or any ground lessor of Landlord as additional insureds.
10.3.3. Landlord. Landlord shall, at all during the Lease Term,
--------
procure and maintain commercial general liability insurance for the Building in
which the Premises are located. Such insurance shall have minimum combined
single limit of liability of at least Two Million Dollars ($2,000,000) per
occurrence, and a general aggregate limit of at least Two Million Dollars
($2,000,000).
10.4. Workers' Compensation Insurance. At all times during the Lease
-------------------------------
Term, Tenant shall procure and maintain Workers' Compensation Insurance in
accordance with the laws of the State of California, and Employer's Liability
insurance with a limit not less than One Million
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Dollars ($1,000,000) Bodily Injury Each Accident; One Million Dollars
($1,000,000) Bodily Injury By Disease - Each Person; and One Million Dollars
($1,000,000) Bodily Injury to Disease - Policy Limit.
10.5. Policy Requirements. All insurance required to be maintained by
-------------------
Tenant shall be issued by insurance companies authorized to do insurance
business in the State of California and rated not less than A-VIII in Best's
Insurance Guide. A certificate of insurance (or, at Landlord's option,- copies
of the applicable policies) evidencing the insurance required under this Article
X shall be delivered to Landlord reduction or material prior to the Commencement
Date. No such policy shall be subject to cancellation reduction or material
modification without thirty (30) days prior written notice to Landlord and to
any deed of trust holder, mortgagee or ground lessor designated by Landlord to
Tenant. Tenant shall furnish Landlord with a replacement certificate with
respect to any insurance not less than thirty (30) days prior to the expiration
of the. current policy. Tenant shall have the right to provide the insurance
required by this Article X pursuant to blanket policies, but only if such
blanket policies expressly provide coverage to the Premises and Landlord as
required by this Lease pursuant to a per-location endorsement.
10.6. Waiver of Subrogation. Each party hereby waives any right of
---------------------
recovery against the other for injury or loss due to hazards covered by
insurance or required to be covered, to the extent of the injury or loss covered
thereby. Any policy of insurance to be provided by Tenant or Landlord pursuant
to this Article X shall contain a clause denying the applicable insurer any
right of subrogation against the other party.
10.7. Failure to Insure. If Tenant fails to maintain any insurance which
-----------------
Tenant is required to maintain pursuant to this Article X, Tenant shall be
liable to Landlord for any loss or cost resulting from such failure to maintain.
Tenant may not self-insure against any risks required to be covered by insurance
without Landlord's prior written consent, which consent may be given or withheld
in Landlord's sole and absolute discretion.
ARTICLE XI - DAMAGE OR DESTRUCTION
----------------------------------
11.1. Total Destruction. Except as provided in Section 1 1.3 below, this
-----------------
Lease shall, at Landlord's election, terminate if the Building is totally
destroyed.
11.2. Partial Destruction of Premises. If the Premises are damaged by any
-------------------------------
casualty and, in Landlord's opinion, the Premises (exclusive of any Alterations
made to the Premises by Tenant) can be restored to its pre-existing condition
within two hundred seventy (270) days after the date of the damage or
destruction, Landlord shall, upon written notice from Tenant to Landlord of such
damage, except as provided in Section 11.3, promptly and with due diligence
repair any damage to the Premises (exclusive of any Alterations to the Premises
made by Tenant, which shall be promptly repaired by Tenant at its sole expense)
and, until such repairs are completed, the Rent shall be abated from the date of
damage or destruction in the same proportion that the rentable area of the
portion of the Premises which is unusable by Tenant in the conduct of its
business bears to the total rentable area of the Premises. If such repairs
cannot, in Landlord's opinion, be made within said two hundred seventy (270) day
period, then Landlord may, at its option, exercisable by written notice given to
Tenant within thirty (30) days after the
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date of the damage or destruction, elect to make the repairs within a reasonable
time after the damage or destruction, in which event this Lease shall remain in
full force and effect but the Rent shall be abated as provided in the preceding
sentence; if Landlord does not so elect to make the repairs, then either
Landlord or Tenant shall have the right, by written notice given to the other
within sixty (60) days after the date of the damage or destruction, to terminate
this Lease as of the date of the damage or destruction.
11.3. Exceptions to Landlord's Obligations. Notwithstanding anything to
------------------------------------
the contrary contained in this Article XI, Landlord shall have no obligation to
repair the Premises if either: (a) the Building in which the Premises are
located is so damaged as to require repairs to the Building exceeding thirty
five percent (35%) of the full insurable value of the Building; or (b) Landlord
elects to demolish the Building in which the Premises are located; or (c) the
damage or destruction occurs less than nine (9) months prior to the Expiration
Date, exclusive of option periods. Further, Tenant's Rent shall not be abated
if either (i) the damage or destruction is repaired within five (5) business
days after Landlord receives written notice from Tenant of the casualty, or (ii)
Tenant, or any officers, partners, employees, agents or invitees of Tenant, or
any assignee or subtenant of Tenant, is, in whole or in part, responsible for
the damage or destruction.
11.4. Waiver. The provisions contained in this Lease shall supersede any
------
laws (whether statutory, common law or otherwise) now or hereafter in effect
relating to damage, destruction, self-help or termination, including California
Civil Code Sections 1932 and 1933.
ARTICLE XII - CONDEMNATION
--------------------------
12.1. Taking. If the entire Premises or so much of the Premises as to
------
render the balance unusable by Tenant shall be taken by condemnation, sale in
lieu of condemnation or in any other manner for any public or quasi-public
purpose (collectively "Condemnation"), and if Landlord, at its option, is unable
or unwilling to provide substitute premises containing at least as much rentable
area as described in Section 1.2 above and otherwise reasonably acceptable to
Tenant, then this Lease shall terminate on the date that title or possession to
the Premises is taken by the condemning authority, whichever is earlier.
12.2. Award. In the event of any Condemnation, the entire award for such
-----
taking shall belong to Landlord. Tenant shall have no claim against Landlord or
the award for the value of any unexpired term of this Lease or otherwise.
Tenant shall be entitled to independently pursue a separate award in a separate
proceeding for Tenant's relocation costs directly associated with the taking.
See First Addendum to Lease Section 12.2.
12.3. Temporary Taking. No temporary taking of the Premises shall
----------------
terminate this Lease or entitle Tenant to any abatement of the Rent payable to
Landlord under this Lease; provided, further, that any award for such temporary
taking shall belong to Tenant to the extent that the award applies to any time
period during the Lease Term and to Landlord to the extent that the award
applies to any time period outside the Lease Term.
ARTICLE XIII - RELOCATION
-------------------------
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Landlord shall have the one-time right during the Term of this Lease, at
its option upon not less than thirty (30) days prior written notice to Tenant,
to relocate Tenant and to substitute for the Premises described above other
space in the Building not below the 33/rd/ floor containing at least as much
rentable area as the Premises described in Section 1.2 above. If Tenant is
already in occupancy of the Premises, then Landlord shall approve in advance the
relocation expenses for purposes of reimbursement for Tenant's reasonable moving
and telephone relocation expenses and for reasonable quantities of new
stationery upon submission to Landlord of receipts for such expenditures
incurred by Tenant. See First Addendum to Lease Section 13.
ARTICLE XIV - ASSIGNMENT AND SUBLETTING
---------------------------------------
14.1. Restriction. Without the prior written consent of Landlord, Tenant
-----------
shall not, either voluntarily or by operation of law, assign, encumber, or
otherwise transfer this Lease or any interest herein, or sublet the Premises or
any part thereof, or permit the Premises to be occupied by anyone other than
Tenant or Tenant's employees (any such assignment, encumbrance, subletting,
occupation or transfer is hereinafter referred to as a "Transfer"). For
purposes of this Lease the term "Transfer" shall. also include (a) if Tenant is
a partnership the withdrawal or change, voluntary, involuntary or by operation
of law, of a majority of the partners, or a transfer of a majority of
partnership interests, within a twelve month period, or the dissolution of the
partnership. A Transfer in violation of the foregoing shall be void and, at
Landlord's option, shall constitute a material breach of this Lease.
Notwithstanding anything contained in this Article XIV to the contrary, Tenant
shall have the right to assign the Lease or sublease the Premises, or any part
thereof, to an "Affiliate" without the prior written consent of Landlord, but
upon at least twenty (20) days' prior written notice to Landlord, provided that
said Affiliate is not in default under any other lease for space in a property
that is owned by Landlord or managed by Seagate or any of its affiliates. For
purposes of this provision, the term "Affiliate" shall mean any corporation or
other entity controlling, controlled by, or under common control with (directly
or indirectly) Tenant, including, without limitation, any parent corporation
controlling Tenant or any subsidiary that Tenant controls. The term "control,"
as used herein, shall mean the power to direct or cause the direction of the
management and policies of the controlled entity. Notwithstanding anything
contained in this Article XIV to the contrary, Tenant expressly covenants and
agrees not to enter into any lease, sublease, license, concession or other
agreement for use, occupancy or utilization of the Premises which provides for
rental or other payment for such use, occupancy or utilization based in whole or
in part on the net income or profits derived by any person from the property
leased, used, occupied or utilized (other than an amount based on a fixed
percentage or percentages of receipts or sales), and that any such purported
lease, sublease, license, concession or other agreement shall be absolutely void
and ineffective as a conveyance of any right or interest in the possession, use,
occupancy or utilization of any part of the Premises. See Addendum to Lease
Section 14.1.
14.2. Notice to Landlord. If Tenant desires to assign this Lease or any
------------------
interest herein, or to sublet all or any part of the Premises, then at least
thirty (30) days but not more than one hundred eighty (180) days prior to the
effective date of the proposed assignment or subletting, Tenant shall submit to
Landlord in connection with Tenant's request for Landlord's consent:
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14.2.1. Statement. A statement containing (a) the name and address
---------
of the proposed assignee or subtenant; (b) such financial information with
respect to the proposed assignee or subtenant as Landlord shall reasonably
require; (c) the type of use proposed for the Premises; and (d) all of the
principal terms of the proposed assignment or subletting; and
14.2.2. Original Documents. Four (4) originals of the assignment
------------------
or sublease on a form approved by Landlord and four (4) originals of the
Landlord's Consent to Sublease or Assignment and Assumption of Lease and
Consent.
14.3. Landlord's Recapture Rights. Upon Tenant's proposed assignment or
---------------------------
subletting of 75% or more of the Premises, at any time within twenty (20)
business days after Landlord's receipt of all (but not less than all) of the
information and documents described in Section 14.02 above, Landlord may, at its
option by written notice to Tenant, elect to: (a) sublease the Premises or the
portion thereof proposed to be sublet by Tenant upon the same terms as those
offered to the proposed subtenant; (b) take an assignment of the Lease upon the
same terms as those offered to the proposed assignee; or (c) terminate the Lease
as- to the portion of the Premises proposed to be assigned or sublet, with a
proportionate adjustment in the Rent payable hereunder if the Lease is
terminated as to less than all of the Premises. If Landlord does not exercise
any of the options described in the preceding sentence, then, during the above-
described twenty (20) business day period, Landlord shall either consent or deny
its consent to the proposed assignment or subletting.
14.4. Landlord's Consent; Standards. Landlord's consent to a proposed
-----------------------------
assignment or subletting shall not be unreasonably withheld; but, in addition to
any other grounds for denial, Landlord's consent shall be deemed reasonably
withheld if, in Landlord's good faith judgment: (a) the proposed assignee or
subtenant does not have the financial strength to perform its obligations under
this Lease or any proposed sublease; (b) the business and operations of the
proposed assignee or subtenant are not of comparable quality to the business and
operations being conducted by other tenants in the Building; (c) the proposed
assignee or subtenant intends to use any part of the Premises for a purpose not
permitted under this Lease; (d) either the proposed assignee or subtenant, or
any person which directly or indirectly controls, is controlled by, or is under
common control with the proposed assignee or subtenant occupies space in the
Building, or is negotiating with Landlord to lease space in the Building; (e)
the proposed assignee or subtenant is disreputable; or (f) the use of the
Premises or the Building by the proposed assignee or subtenant would, in
Landlord's reasonable judgment, impact the Building in a negative manner,
including but not limited to significantly increasing the pedestrian traffic in
and out of the Building or requiring any alterations to the Building to comply
with applicable laws; (g) the subject space is not regular in shape with
appropriate means of ingress and egress suitable for normal renting purposes;
(h) the transferee is a government (or agency or instrumentality thereof), or
(i) Tenant has failed to cure a default at the time Tenant requests consent to
the proposed Transfer.
14.5. Additional Rent. If Landlord consents to any such assignment or
---------------
subletting, sixty percent (60%) of the amount by which all sums or other
economic consideration received by Tenant in connection with such assignment or
subletting, whether denominated as rental or otherwise (after first deducting
therefrom Tenant's reasonable costs to effect such Transfer, which costs shall
be consistent with comparable costs in the market place), exceeds, in the
aggregate, the
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total sum which Tenant is obligated to pay Landlord under this Lease (prorated
to reflect obligations allocable to less than all of the Premises under a
sublease) shall be paid to Landlord promptly after receipt as additional Rent
under the Lease without affecting or reducing any other obligation of Tenant
hereunder.
14.6. Landlord's Costs. If Tenant shall Transfer this Lease or all or any
----------------
part of the Premises or shall request the consent of Landlord to any Transfer,
Tenant shall pay to Landlord as additional rent Landlord's costs related
thereto, including Landlord's reasonable attorneys' fees and a minimum fee to
Landlord of Five Hundred Dollars ($500.00).
14.7. Continuing Liability of Tenant. Notwithstanding any Transfer,
------------------------------
Tenant shall remain as fully and primarily liable for the payment of Rent and
for the performance of all other obligations of Tenant contained in this Lease
to the same extent as if the Transfer had not occurred; provided, however, that
any act or omission of any transferee, other than Landlord, that violates the
terms of this Lease shall be deemed a violation of this Lease by Tenant.
14.8. Non-Waiver. The consent by Landlord to any Transfer shall not
----------
relieve Tenant, or any person claiming through or by Tenant, terms, of the
obligation to obtain the consent of Landlord, pursuant to this Article XIV, to
any further Transfer. In the event of an assignment or subletting, Landlord may
collect rent from the assignee or the subtenant without waiving any rights
hereunder and collection of the rent from a person other than Tenant shall not
be a waiver of any of Landlord's rights under this Article XIV, an acceptance of
assignee or subtenant as Tenant, or a release of Tenant from the performance of
Tenant's obligations under this Lease. If Tenant shall default under this Lease
and fail to cure within the time permitted, Landlord is irrevocably authorized,
as Tenant's agent and attorney-in-fact, to direct any transferee to make all
payments under or in connection with the Transfer directly to Landlord (which
Landlord shall apply towards Tenant"s obligations under this Lease) until such
default is cured.
ARTICLE XV - DEFAULT AND REMEDIES
---------------------------------
15.1. Events of Default By Tenant. The occurrence of any of the
----------------------------
following shall constitute a material default and breach of this Lease by
Tenant:
15.1.1. Failure to Pay Rent. The failure by Tenant to pay Base
-------------------
Rent or make any other payment required to be made by Tenant hereunder for three
(3) days after written notice thereof by Landlord to Tenant.
15.1.2. Abandonment. The abandonment of the Premises by Tenant or
-----------
the vacation of the Premises by Tenant for fourteen (14) consecutive days
(without the payment of Rent).
15.1.3. Failure to Perform. The failure by Tenant to observe or
------------------
perform any other provision of this Lease to be observed or performed by Tenant,
other than those described in Sections 15.1.1 and 15.1.2 above, if such failure
continues for ten (10) days after written notice thereof by Landlord to Tenant;
provided, however, that if the nature of the default is such that it cannot be
cured within the ten (10) day period, no default shall exist if Tenant commences
the
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curing of the default within the ten (10) day period and thereafter diligently
prosecutes the same to completion. The ten (10) day notice described herein
shall be in addition to, any notice required under Section 1161 of the
California Code of Civil Procedure or any other law now or hereafter in effect
requiring that notice of default be given prior to the commencement of an
unlawful detainer or other legal proceeding.
15.1.4. Bankruptcy. The making by Tenant or its Guarantor of any
----------
general assignment for the benefit of creditors, the filing by or against Tenant
or its Guarantor of a petition under any federal or state bankruptcy or
insolvency laws (unless, in the case of a petition filed against Tenant or its
Guarantor the same is dismissed within thirty (30) days after filing); the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets at the Premises or Tenant's interest in this Lease or the
Premises, when possession is not restored to Tenant within thirty (30) days; or
the attachment, execution or other seizure of substantially all of Tenant's
assets located at the Premises or Tenant's interest in this Lease or the
Premises, if such seizure is not discharged within thirty (30) days.
15.1.5. Misstatement. Any material misrepresentation herein, or
------------
willful material misrepresentation or omission in any financial statements or
other materials provided by Tenant or any Guarantor in connection with
negotiating or entering into this Lease or in connection with any Transfer under
Section 14.1.
15.2. Landlord's Right To Terminate Upon Tenant Default. In the event of
-------------------------------------------------
any default by Tenant as provided in Section 15.1 above, Landlord shall have the
right to terminate this Lease and recover possession of the Premises by giving
written notice to Tenant of Landlord's election to terminate this Lease, in
which event Landlord shall be entitled to receive from Tenant: (a) the worth at
the time of award of any unpaid Rent which had been earned at the time of such
on award; plus (b) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus (c) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; plus (d) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom; and (e) at Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable law. As used in subsections (a) and (b) above, "worth at the time of
award" shall be computed by allowing interest on such amounts at the then
highest lawful rate of interest, but in no event to exceed one percent (1%) per
annum plus the rate established by the Federal Reserve Bank of San Francisco on
advances made to banks under Sections 13 and 13a of the Reserve Act ("discount
rate") prevailing at the time of award. As used in subsection (c) above, "worth
at the time of award" shall be computed by discounting such amount by (x) the
discount rate of the Federal Reserve Bank of San Francisco prevailing at the
time of award plus (y) one percent (1%).
15.3. Mitigation of Damages. If Landlord terminates this Lease or
---------------------
Tenant's right to possession of the Premises, Landlord shall have no obligation
to mitigate Landlord's damages except to the extent required by applicable law.
If Landlord has not terminated this Lease or
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Tenant's right to possession of the Premises, Landlord shall have no obligation
to mitigate under any circumstances and may permit the Premises to remain vacant
or abandoned. If Landlord is required to mitigate damages as provided herein:
(a) Landlord shall be required only to use reasonable efforts to mitigate, which
shall not exceed such efforts as Landlord generally uses to lease other space in
the Building, (b) Landlord will not be deemed to have failed to mitigate if
Landlord or its affiliates lease any other portions of the Building or other
projects owned by Landlord or its affiliates in the same geographic area, before
reletting the Premises or any portion of the Premises, and (c) any failure to
mitigate as described herein with respect to any period of time shall only
reduce the Rent and other amounts to which Landlord is entitled hereunder by the
reasonable rental value of the Premises during such period. In recognition that
the value of the Building is dependent on the rental rates and terms of leases
therein, Landlord's rejection of a prospective replacement tenant based on an
offer of rentals below Landlord's published rates for new leases of comparable
space at the Building at the time in question, or at Landlord's option, below
the rates provided in this Lease, or containing terms less favorable than those
contained herein, shall not give rise to a claim by Tenant that Landlord failed
to mitigate Landlord's damages.
15.4. Landlord's Right to Continue-Lease Upon Tenant Default. In the
------------------------------------------------------
event of a default of this Lease by Tenant, and if Landlord does not elect to
terminate this Lease as provided in Section 15.2 above, Landlord may, from time
to time, without terminating this Lease, enforce all of its rights and remedies
under this Lease or at law or in equity. Without limiting the foregoing,
Landlord has the remedy described in California Civil Code Section 1951.4
(Landlord may continue this Lease in effect after Tenant's default and recover
Rent as it becomes due, if Tenant has the right to Transfer, subject only to
reasonable limitations). In the event Landlord re-lets the Premises, to the
fullest extent permitted by law, the proceeds of any reletting shall be applied
first to pay to Landlord all costs and expenses of such reletting (including
without limitation, costs and expenses of retaking or repossessing the Premises,
removing persons and property therefrom, securing new tenants, including
expenses for redecoration, alterations and other costs in connection with
preparing the Premises for the new tenant, and if Landlord shall maintain and
operate the Premises, the costs thereof) and receivers' fees incurred in
connection with the appointment of and performance by a receiver to protect the
Premises and Landlord's interest under this Lease and any necessary or
reasonable alterations; second, to the payment of any indebtedness of Tenant to
Landlord other than Rent due and unpaid hereunder; third, to the payment of Rent
due and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of other or future obligations of Tenant to Landlord as the
same may become due and payable, and Tenant shall not be entitled to receive any
portion of such revenue.
15.5. Right of Landlord to Perform. All covenants and agreements to be
----------------------------
performed by Tenant under this Lease shall be performed by Tenant at Tenant's
sole cost and expense. If Tenant shall fail to pay any sum of money, other than
Rent, required to be paid by it hereunder or shall fail to perform any other act
on its part to be performed hereunder, Landlord may, but shall not be obligated
to, make any payment or perform any such other act on Tenant's part to be made
or performed, without waiving or releasing Tenant of its obligations under this
Lease. Any sums so paid by Landlord and all necessary incidental costs,
together with interest thereon at the lesser of the maximum rate permitted by
law if any or twelve percent (12%) per annum from the date of such payment,
shall be payable to Landlord as additional rent on demand and Landlord shall
have
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the same rights and remedies in the event of nonpayment as in the case of
default by Tenant in the payment of Rent.
15.6. Default Under Other Leases. If the term of any lease, other than
--------------------------
this Lease, heretofore or hereafter made by Tenant for any office space in the
Building shall be terminated or terminable after the making of this Lease
because of any default by Tenant under such other lease, such fact shall empower
Landlord, at Landlord's sole option, to terminate this Lease by notice to Tenant
or to exercise any of the rights or remedies set forth in Section 15.2.
15.7. Non-Waiver. Nothing in this Article shall be deemed to affect
----------
Landlord's rights to indemnification for liability or liabilities arising prior
to termination of this Lease or Tenant's right to possession for personal injury
or property damages under the indemnification clause or clauses contained in
this Lease. No acceptance by Landlord of a lesser sum than the Rent then due
shall be deemed to be other than on account of the earliest installment of such
rent due, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as rent be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such installment or pursue any other remedy in
the Lease provided. The delivery of keys to any employee of Landlord or to
Landlord's agent or any employee thereof shall not operate as a termination of
this Lease or a surrender of the Premises.
15.8. Cumulative Remedies. The specific remedies to which Landlord may
-------------------
resort under the terms of the Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which it may be lawfully
entitled in case of any breach or threatened breach by Tenant of any provisions
of the Lease. In addition to the other remedies provided in the Lease, Landlord
shall be entitled to a restraint by injunction of the violation or attempted or
threatened violation of any of the covenants, conditions or provisions of the
Lease or to a decree compelling specific performance of any such covenants,
conditions or provisions.
15.9. Default by Landlord. Landlord's failure to perform or observe any
-------------------
of its obligations under this Lease shall constitute a default by Landlord under
this Lease only if such failure shall continue for a period of thirty (30) days
(or the additional time, if any, which is reasonably necessary to promptly and
diligently cure the failure) after Landlord receives written notice from Tenant
specifying the default. The notice shall give in reasonable detail the nature
and extent of the failure and shall identify the Lease provision(s) containing
the obligation(s). If Landlord shall default in the performance of any of its
obligations under this Lease (after notice and opportunity to cure as provided
herein), Tenant may pursue any remedies available to it under the law and this
Lease, except that in no event shall Landlord be liable for punitive damages,
lost profits, business interruption. In recognition that Landlord must receive
timely payments of Rent and operate the Building, Tenant shall have no right of
self-help to perform repairs or any other obligation of Landlord, and shall have
no right to withhold, set-off, or abate Rent, except as specifically set forth
in this Lease.
ARTICLE XVI - ATTORNEYS' FEES; INDEMNIFICATION
----------------------------------------------
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16.1. Attorneys' Fees. If either Landlord or Tenant shall commence any
---------------
action or other proceeding against the other arising out of, or relating to,
this Lease or the Premises, the prevailing party shall be entitled to recover
from the losing party, in addition to any other relief, its actual attorneys'
fees irrespective of whether or not the action or other proceeding is prosecuted
to judgment and irrespective of any court schedule of reasonable attorneys'
fees. In addition, Tenant shall reimburse Landlord, upon demand, for all
reasonable attorneys' fees. In addition, Tenant shall reimburse Landlord, upon
demand, for all reasonable attorneys' fees incurred in collecting Rent or
otherwise seeking interpretation of this Lease or enforcement against Tenant,
its sublessees and assigns, of Tenant's obligations under this Lease.
16.2. Indemnification. Should Landlord be made a party to any litigation
---------------
instituted by Tenant against a party other than Landlord, or by a third party
against Tenant, Tenant shall indemnify, hold harmless and defend Landlord from
any and all loss, cost, liability, damage or expense incurred by Landlord,
including attorneys" fees, in connection with the litigation.
ARTICLE XVII - SUBORDINATION AND ATTORNMENT
-------------------------------------------
17.1. Subordination. This Lease, and the rights of Tenant hereunder, are
-------------
and shall be subject and subordinate to the interests of (i) all present and
future ground leases and master leases of all or any part of the Building; (ii)
present and future mortgages and deeds of trust encumbering all or any part of
the Building; (iii) all past and future advances made under any such mortgages
or deeds of trust; and (iv) all renewals, modifications, replacements and
extensions of any such ground leases, master leases, mortgages and deeds of
trust; provided, however, that any lessor under any such ground lease or master
lease or any mortgagee or beneficiary under any such mortgage or deed of trust
(any such lessor, mortgagee or beneficiary is hereinafter referred to as a
"Mortgagee") shall have the right to elect, by written notice given to Tenant,
to have this Lease made superior in whole or in part to any such ground lease,
master lease, mortgage or deed of trust (or subject and subordinate to such
ground lease, master lease, mortgage or deed of trust but superior to any junior
mortgage or junior deed of trust). Upon demand, Tenant shall execute,
acknowledge and deliver any instruments reasonably requested by Landlord or any
such Mortgagee to effect the purposes of this Section 17. 1. Such instruments
may contain, among other things, provisions to the effect that such Mortgagee
(hereafter, for the purposes of this Section 17.1, a "Successor Landlord") shall
(a) not be liable for any act or omission of Landlord or its predecessors, if
any, prior to the date of such Successor Landlord's succession to Landlord's
interest under this Lease (except continuing defaults); (b) not be subject to
any offsets which Tenant might have been able to assert against Landlord or its
predecessors, if any, prior to the date of such Successor Landlord"s succession
to Landlord's interest under this Lease; (c) not be liable for the return of any
security deposit under the Lease unless the same shall have actually been
deposited with such Successor Landlord; (d) be entitled to receive notice of any
Landlord default under this Lease plus a reasonable opportunity to cure such
default prior to Tenant having any right or ability to terminate this Lease as a
result of such Landlord default; (e) not be bound by any rent or additional rent
which Tenant might have paid for more than the current month to Landlord; (f)
not be bound by any amendment or modification of the Lease or any cancellation
of the same made without Successor Landlord"s prior written consent; (g) not be
bound by any obligation to make any payment to Tenant which was required to be
made prior to the time such Successor Landlord succeeded to Landlord's interest,
and (h) not be bound by any obligation
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under the Lease to make any improvements to the demised Premises. Any
obligations of any Successor Landlord under its respective lease shall be non-
recourse as to any assets of such Successor Landlord other than its interest in
the Building and its related improvements. Not withstanding the foregoing,
Tenant's Subordination shall only be effective as to the extent that the future
Mortgagee agrees that this Lease shall survive the termination of the
Mortgagee"s interest by lapse of time, foreclosure or otherwise so long as
Tenant is not in default under this Lease.
17.2. Attornment. If the interests of Landlord under the Lease shall be
----------
transferred to any superior Mortgagee or Successor Landlord or other purchaser
or person taking title to the Building by reason of the termination of any
superior lease or the foreclosure of any superior mortgage or deed of trust,
Tenant-shall be bound to such Successor Landlord under all of the terms,
covenants and conditions of the Lease for the balance of the term thereof
remaining and any extensions or renewals thereof which may be effected in
accordance with any option therefor in the Lease, with the same force and effect
as if Successor Landlord were the landlord under the Lease, and Tenant shall
attorn to and recognize as Tenant's landlord under this Lease such Successor
Landlord, as its landlord, said attornment to be effective and self-operative
without the execution of any further instruments upon Successor Landlord's
succeeding to the interest of Landlord under the Lease. Tenant acknowledges
that Landlord is (a) the assignee of the lessor"s interest in that certain
Ground Lease dated June 11, 1963 ("Existing Ground Lease") for the land
underlying the Building, and (b) the assignee of the lessee's interest in the
Ground Lease. Upon expiration or termination of the Existing Ground Lease,
Tenant will attorn to and continue to recognize Landlord as the landlord under
this Lease. Tenant shall, upon demand, execute any documents reasonably
requested by any such person to evidence the attornment described in this
Section 17.2. Concurrently, upon written request from Tenant, and provided
Tenant is not in default under this Lease, Landlord agrees to use diligent,
commercially reasonable efforts to obtain a Non-Disturbance Agreement from the
Successor Landlord. Such Non-Disturbance Agreement may be embodied in the
Mortgagee"s customary form of Subordination and Non-Disturbance Agreement. If,
after exerting diligent, commercially reasonable efforts, Landlord is unable to
obtain a Non-Disturbance Agreement from any such Mortgagee, Landlord shall have
no further obligation to Tenant with respect thereto.
17.3. Mortgagee Protection. Tenant agrees to give any Mortgagee, by
--------------------
registered or certified mail, a copy of any notice of default served upon
Landlord by Tenant, provided that prior to such notice Tenant has been notified
in writing (by way of service on Tenant of a copy of Assignment of Rents and
Leases, or otherwise) of the address of such Mortgagee (hereafter the "Notified
Party"). Tenant further agrees that if Landlord shall have failed to cure such
default within twenty (20) days after such notice to Landlord (or if such
default cannot be cured or corrected within that time, then such additional time
as may be necessary if Landlord has commenced within such twenty (20) days and
is diligently pursuing the remedies or steps necessary to cure or correct such
default), then the Notified Party shall have an additional thirty (30) days
within which to cure or correct such default (or if such default cannot be cured
or corrected within that time, then such additional time as may be necessary if
the Notified Party has commenced within such thirty (30) days and is diligently
pursuing the remedies or steps necessary to cure or correct such default).
Until the time allowed, as aforesaid, for the Notified Party to cure such
default has expired without cure, Tenant shall have no right to, and shall not,
terminate this Lease on account of Landlord's default.
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ARTICLE XVIII - MISCELLANEOUS
-----------------------------
18.1. Quiet Enjoyment. Provided that Tenant performs all of its
---------------
obligations hereunder, Tenant shall have and peaceably enjoy the Premises during
the Lease Term free of claims by or through Landlord, subject to all of the
terms and conditions contained in this Lease.
18.2. Rules and Regulations. The Rules and Regulations attached hereto as
---------------------
Exhibit C are hereby incorporated by reference herein and made a part hereof
Tenant shall abide by, and faithfully observe and comply with the Rules and
Regulations and any reasonable and non-discriminatory amendments, modifications
and/or additions thereto as may hereafter be adopted and published by written
notice to tenants by Landlord for the safety, care, security, good order and/or
cleanliness of the Premises and/or the Building. Landlord shall not be liable
to Tenant for any violation of such rules and regulations by any other tenant or
occupant of the Building.
18.3. Estoppel Certificates. Tenant agrees at any time and from time to
---------------------
time, upon not less than ten (10) days' prior written notice from Landlord, to
execute, acknowledge and deliver to Landlord a statement in writing addressed
and certifying to Landlord, to any current or prospective Mortgagee or any
assignee thereof, to any prospective purchaser of the land, improvements or both
comprising the Building, and to any other party designated by Landlord, that
this Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications); that Tenant has accepted possession of the Premises, which
are acceptable in all respects, and that any improvements required by the terms
of this Lease to be made by Landlord have been completed to the satisfaction of
Tenant; that Tenant is in full occupancy of the Premises; that no rent has been
paid more than thirty (30) days in advance; that the first month's Base Rent has
been paid; that Tenant is entitled to no free rent or other concessions except
as stated in this Lease; that Tenant has not been notified of any previous
assignment of Landlord's or any predecessor landlord's interest under this
Lease; the dates to which Base Rent, additional rental and other charges have
been paid; that Tenant, as of the date of such certificate, has no charge, lien
or claim of setoff under this Lease or otherwise against Base Rent, additional
rental or other charges due or to become due under this Lease; that Landlord is
not in default in performance of any covenant, agreement or condition contained
in this Lease; or any other matter relating to this Lease or the Premises or, if
so, specifying each such default. If there is a Guaranty under this Lease, said
Guarantor shall confirm the validity of the Guaranty by joining in the execution
of the Estoppel Certificate or other documents so requested by Landlord or
Mortgagee. In addition, in the event that such certificate is being given to
any Mortgagee, such statement may contain any other provisions reasonably and
customarily required by such Mortgagee including, without limitations an
agreement on the part of Tenant to furnish to such Mortgagee, written notice of
any Landlord default and a reasonable opportunity for such Mortgagee to cure
such default prior to Tenant being able to terminate this Lease. Any such
statement delivered pursuant to this Section may be relied upon by Landlord or
any Mortgagee, or prospective purchaser to whom it is addressed and such
statement, if required by its addressee, may so specifically state.
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<PAGE>
18.4. Entry by Landlord. Landlord may enter the Premises at all
-----------------
reasonable times to: inspect the same; exhibit the same to prospective
purchasers, Mortgagees or (in the last twelve (12) months of the Term) tenants;
determine whether Tenant is complying with all of its obligations under this
Lease; supply janitorial and other services to be provided by Landlord to Tenant
under this Lease; post notices of non-responsibility; and make repairs or
improvements in or to the Building or the Premises; provided, however, that all
such work shall be done as promptly as reasonably possible and so as to cause as
little interference to Tenant as reasonably possible. Tenant hereby waives any
claim for damages for any injury or inconvenience to, or interference with,
Tenant"s business, any loss of occupancy or quiet enjoyment of the Premises or
any other loss occasioned by such entry. Landlord at all times shall have and
retain a key with which to unlock all of the doors in, on or about the Premises
(excluding Tenant"s vaults, safes and similar areas designated by Tenant in
writing in advance), and Landlord shall have the right to use any and all means
by which Landlord may deem proper to open such doors to obtain entry to the
Premises, and any entry to the Premises obtained by Landlord by any such means,
or otherwise, shall not under any circumstances be or construed to be a forcible
or unlawful entry into or a detained of the Premises or an eviction, actual or
constructive, of Tenant from any part of the Premises. Such entry by Landlord
shall not act as a termination of Tenant"s duties under this Lease. If Landlord
shall be required to obtain entry by means other than a key provided by Tenant,
the cost of such entry shall be payable by Tenant to Landlord as additional
rent.
18.5. Landlord's Lease Undertakings. Notwithstanding anything to the
-----------------------------
contrary contained in this Lease or in any exhibits, Riders or addenda hereto
attached (collectively the "Lease Documents"), it is expressly understood and
agreed by and between the parties hereto that: (a) the recourse of Tenant or its
successors or assigns against Landlord with respect to the alleged breach by or
on the part of Landlord of any representation, warranty, covenant, undertaking
or agreement contained in any of the Lease Documents or otherwise arising out of
Tenant"s use of the Premises or the Building (collectively, "Landlord"s Lease
Undertaking") shall extend only to Landlord"s interest in the real estate of
which the Premises demised under the Lease Documents are a part ("Landlord"s
Real Estate") and not to any other assets of Landlord or its beneficiaries; and
(b) no personal liability or personal responsibility of any sort with respect to
any of Landlord"s Lease Undertakings or any alleged breach thereof is assumed
by, or shall at any time be asserted or enforceable against, Landlord, OTR, an
Ohio general partnership, Seagate Properties, Inc., Seagate Realty Advisors, or
against any of their respective directors, officers, employees, agents,
constituent partners, beneficiaries, trustees or representatives. Tenant
acknowledges that this Lease is executed by certain general partners of OTR
and/or Seagate Realty Advisors, not individually but solely on behalf of, and as
the authorized nominee and agent for, the State Teachers Retirement Board of
Ohio, and Tenant and all persons dealing with Landlord waive any right to bring
a cause of action against the individuals executing this Lease on behalf of
Landlord and must look solely to the assets of State Teachers Retirement Board
of Ohio for the enforcement of any claim against Landlord.
18.6. Transfer of Landlord's Interest. In the event of any transfer of
-------------------------------
Landlord's interest in the Building, Landlord shall be automatically freed and
relieved from all applicable liability with respect to performance of any
covenant or obligation on the part of Landlord under this Lease occurring after
the date of such transfer, provided any deposits or advance rents held by
Landlord are turned over to the grantee and said grantee expressly assumes,
subject to the
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limitations of this Lease, all the terms, covenants and conditions of this
Lease to be performed on the part of Landlord, it being intended hereby that the
covenants and obligations contained in this Lease on the part of Landlord shall,
subject to all the provisions of this Lease, be binding on Landlord, its
successors and assigns, only during their respective periods of ownership.
18.7. Holdover. If Tenant holds possession of the Premises after the
--------
expiration or termination of the Lease Term, by lapse of time or otherwise,
Tenant shall become a tenant at sufferance upon all of the terms contained
herein, except as to Lease Term and Rent. During such holdover period, Tenant
shall pay to Landlord a monthly rental equivalent to (a) for the first month,
one hundred fifty percent (150%) of the rent payable by Tenant to Landlord with
respect to the last month of the Lease Term, and (b) thereafter two hundred
percent (200%) of the Rent payable by Tenant to Landlord with respect to the
last month of the Lease Term. The monthly rent payable for such holdover period
shall in no event be construed as a penalty or as liquidated damages for such
retention of possession. Without limiting the foregoing, Tenant hereby agrees to
indemnify, defend and hold harmless Landlord, its beneficiary, and their
respective agents, contractors and employees, from and against any and all
claims, liabilities, actions, losses, damages (including without limitation,
direct, indirect, incidental and consequential) and expenses (including, without
limitation, court costs and reasonable attorneys" fees) asserted against or
sustained by any such party and arising from or by reason of such retention of
possession, which obligations shall survive the expiration or termination of the
Lease Term.
18.8. Notices. All notices which Landlord or Tenant may be required, or
-------
may desire, to serve on the other may be served, as an alternative to personal
service, by mailing the same by registered or certified mail, postage prepaid,
addressed to Landlord at the address for Landlord get forth in Section 1.13
above and to Tenant at the address for Tenant set forth in Section 1.14 above,
or, from and after the Commencement Date, to Tenant at the Premises whether or
not Tenant has departed from, abandoned or vacated the Premises, or addressed to
such other address or addresses as either Landlord or Tenant may from time to
time designate to the other in writing. Any notice shall be deemed to have been
served three (3) business days after posting.
18.9. Brokers. The parties recognize as the broker(s) who procured this
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Lease the firm(s) specified in Section 1.15 and agree that Landlord shall be
solely responsible for the payment of any brokerage commissions to said
broker(s), and that Tenant shall have no responsibility therefor unless written
provision to the contrary has been made a part of this Lease. If Tenant has
dealt with any other person or real estate broker in respect to leasing,
subleasing or renting space in the Building, Tenant shall be solely responsible
for the payment of any fee due said person or firm and Tenant shall protect,
indemnify, hold harmless and defend Landlord from any liability in respect
thereto.
18.10. Communications and Computer Lines. Tenant may, in a manner
---------------------------------
consistent with the provisions and requirements of this Lease, install,
maintain, replace, remove or use any communications or computer wires, cables
and related devices (collectively the "Lines") at the Building in or serving the
Premises, provided: (a) Tenant shall obtain Landlord"s prior written consent,
which consent may be conditioned as reasonably required by Landlord, (b) if
Tenant at any time uses any equipment that may create an electromagnetic field
exceeding the normal insulation ratings of ordinary twisted pair riser cable or
cause radiation higher than normal
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background radiation, the Lines therefor (including riser cables) shall be
appropriately insulated to prevent such excessive electromagnetic fields or
radiation, and (c) Tenant shall pay all costs in connection therewith. Landlord
reserves the right to require that Tenant remove any Lines which are installed
in violation of these provisions.
18.10.1. New Lines. Landlord may (but shall not have the obligation
---------
to): (a) install new Lines at the Property, and (b) create additional space for
Lines at the Property, and adopt reasonable and uniform rules and regulations
with respect to the Lines.
18.10.2. Line Problems. Notwithstanding anything to the contrary
-------------
contained in this Lease in the event Tenant"s lines unreasonably interfere with
another tenant"s lines or Landlord"s operation of the Building, and such
interference cannot reasonably be remedied without removing such lines, Landlord
reserves the right to require that Tenant remove any or all Lines installed by
or for Tenant within or serving the Premises. Tenant shall not, without the
prior written consent of Landlord in each instance, grant to any third party a
security interest or lien in or on the Lines, and any such security interest or
lien granted without Landlord"s written consent shall be null and void. Except
to the extent arising from the intentional or negligent acts of Landlord or
Landlord"s agents or employees, Landlord shall have no liability for damages
arising from, and Landlord does not warrant that Tenant"s use of any Lines will
be free from the following, (collectively called "Line Problems"): (a) any
eavesdropping or wire-tapping by unauthorized parties, (b) any failure of any
Lines to satisfy Tenant"s requirements, or (c) any shortages, failures,
variations, interruptions, disconnections, loss or damage caused by tile
installation, maintenance, replacement, use or removal of Lines by or for other
tenants or occupants at the Property. Under no circumstances shall any Line
Problems be deemed an actual or constructive eviction of Tenant, render Landlord
liable to Tenant for abatement of Rent, or relieve Tenant from performance of
Tenant"s obligations under this Lease. Landlord in no event shall be liable for
damages by reason of loss of profits, business interruption or other
consequential damage arising from any Line Problems.
18.11. Entire Agreement. This Lease contains all of the agreements and
----------------
understandings relating to the leasing of the Premises and the obligations of
Landlord and Tenant in connection with such leasing. Landlord has not made, and
Tenant is not relying upon, any warranties, or representations, promises or
statements made by Landlord or any agent of Landlord, except as expressly set
forth herein. This Lease supersedes any and all prior agreements and
understandings between Landlord and Tenant and alone expresses the agreement of
the parties.
18.12. Amendments. This Lease shall not be amended, changed or modified
----------
in any way unless in writing executed by Landlord and Tenant. Landlord shall
not have waived or released any of its rights hereunder unless in writing and
executed by Landlord.
18.13. Successors. Subject to the limitations expressly provided herein,
----------
this Lease and the obligations of Landlord and Tenant contained herein shall
bind and benefit the successors and assigns of the parties hereto.
18.14. Force Majeure. Landlord shall incur no liability to Tenant with
-------------
respect to, and shall not be responsible for any failure to perform, any of
Landlord's obligations hereunder if such
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failure is caused by any reason beyond the control of Landlord including, but
not limited to, strike, labor trouble, governmental rule, regulations,
ordinance, statute or interpretation, or by fire, earthquake, civil commotion,
or failure or disruption of utility services. The amount of time for Landlord to
perform any of Landlord"s obligations shall be extended by the amount of time
Landlord is delayed in performing such obligation by reason of any force Majeure
occurrence whether similar to or different from the foregoing types of
occurrences. The provisions of this Section 18.14 shall be mutual but shall not
affect the time periods with respect to abatement or termination rights, nor
shall Tenant claim Force Majeure for failure to pay Rent.
18.15. Survival of Obligations. Any obligations of Tenant accruing prior
-----------------------
to the expiration of the Lease shall survive the expiration or earlier
termination of the Lease, and Tenant shall promptly perform all such obligations
whether or not this Lease has expired or been terminated.
18.16. Light and Air. No diminution or shutting off of any light, air or
-------------
view by any structure now or hereafter erected shall in any manner affect this
Lease or the obligations of Tenant hereunder, or increase any of the obligations
of Landlord hereunder.
18.17. Governing Law. This Lease shall be governed by, and construed in
-------------
accordance with, the laws of the State of California.
18.18. Severability. In the event any provision of this Lease is found to
------------
be unenforceable, the remainder of this Lease shall not be affected, and any
provision found to be invalid shall be enforceable to the extent permitted by
law. The parties agree that in the event two different interpretations may be
given to any provision hereunder, one of which will render the provision
unenforceable, and one of which will render the provision enforceable, the
interpretation rendering the provision enforceable shall be adopted.
18.19. Captions. All captions, headings, titles, numerical references and
--------
computer highlighting are for convenience only and shall have no effect on the
interpretation of this Lease.
18.20. Interpretation. Tenant acknowledges that it has read and reviewed
--------------
this Lease and that it has had the opportunity to confer with counsel in the
negotiation of this Lease. Accordingly, this Lease shall be construed neither
for nor against Landlord or Tenant, but shall be given a fair and reasonable
interpretation in accordance with the plain meaning of its terms and the intent
of the parties.
18.21. Independent Covenants. Each covenant, agreement, obligation or
---------------------
other provision of this Lease to be performed by Tenant are separate and
independent covenants of Tenant, and not dependent on any other provision of the
Lease.
18.22. Number and Gender. All terms and words used in this Lease,
-----------------
regardless of the number or gender in which they are used, shall be deemed to
include the appropriate number and gender, as the context may require.
-33-
<PAGE>
18.23. Time is of the Essence. Time is of the essence of this Lease and
----------------------
the performance of all obligations hereunder.
18.24. Joint and Several Liability. If Tenant comprises more than one
---------------------------
person or entity, or if this Lease is guaranteed by any party, all such persons
shall be jointly and severally liable for payment of rents and the performance
of Tenant"s obligations hereunder.
18.25. Exhibits. Rider to Lease, Exhibits A (Floor Plan), B (Work Letter
--------
Agreement), C (Rules and Regulations), and E (Acceptance Letter), and First
Addendum to Lease are incorporated into this Lease by reference and made a part
hereof.
18.26. Offer to Lease. The submission of this Lease to Tenant or its
--------------
broker or other agent, does not constitute an offer to Tenant to lease the
Premises. This Lease shall have no force and effect until (a) it is executed and
delivered by Tenant to Landlord, and (b) it is fully reviewed, executed and
delivered by Landlord to Tenant; provided, however, that upon execution of this
Lease by Tenant and delivery to Landlord, such execution and delivery by Tenant
shall, in consideration of the time and expense incurred by Landlord in
reviewing the Lease and Tenant"s credit, constitute an offer by Tenant to Lease
the Premises upon the terms and conditions set forth herein (which offer to
Lease shall be irrevocable for twenty (20) business days following the date of
delivery).
18.27. No Counterclaim; Choice of Laws. In addition, Tenant hereby
-------------------------------
submits to local jurisdiction in the State of California and agrees that any
action by Tenant against Landlord shall be instituted in the State of California
and that Landlord shall have personal jurisdiction over Tenant for any action
brought by Landlord against Tenant in the State of California.
18.28. Rights Reserved by Landlord. Landlord reserves the following
---------------------------
rights exercisable without notice (except as otherwise expressly provided to the
contrary in this Lease) and without being deemed an eviction or disturbance of
Tenant"s use or possession of the Premises or giving rise to any claim for set-
off or abatement of Rent: (a) to change the name or street address of the
Building; (b) to install, affix and maintain all signs on the exterior and/or
interior of the Building; (c) to designate and/or approve prior to installation,
all types of signs, window shades, blinds, drapes, awnings or other similar
items, and all internal lighting that may be visible from the exterior of the
Premises and, notwithstanding the provisions of Article IX, the design,
arrangement, style, color and general appearance of the portion of the Premises
visible from the exterior, and contents thereof, including, without limitation,
furniture, fixtures, equipment, art work, wall coverings, carpet and
decorations, and all changes, additions and removals thereto, shall, at all
times have the appearance of premises having the same type of exposure and used
for substantially the same purposes that are generally prevailing in comparable
office buildings in tile area; (d) to change the arrangement of entrances,
doors, corridors, elevators and/or stairs in the Building, provided no such
change shall materially adversely affect access to the Premises; (e) to grant
any party the exclusive right to conduct any business or render any service in
the Building, provided such exclusive right shall not operate to prohibit Tenant
from using the Premises for the purposes permitted under this Lease; (f) to
prohibit the placement of vending or dispensing machines of any kind in or about
the Premises other than for use by Tenant"s employees; (g) to prohibit the
placement of video or other electronic games in the
-34-
<PAGE>
Premises; (h) to have access for Landlord and other tenants of the Building to
any mail chutes and boxes located in or on the Premises according to the rules
of the United States Post Office and to discontinue any mail chute business in
the Building; (i) to close the Building after normal business hours, except that
Tenant and its employees and invitees shall be entitled to admission at all
times under such rules and regulations as Landlord prescribes for security
purposes; (j) to install, operate and maintain security systems which monitor,
by close circuit television or otherwise, all persons entering or exiting the
Building; (k) to install and maintain pipes, ducts, conduits, wires and
structural elements located in the Premises which serve other parts or other
tenants of the Building; and (1) to retain at all times master keys or pass keys
to the Premises. Any violation of this provision shall be deemed a material
breach of this Lease.
18.29. Asbestos. Tenant acknowledges that it has been expressly disclosed
--------
to Tenant by Landlord"s Managing Agent that the Building and the Premises
contain asbestos containing materials ("ACM"). The acknowledgment by Tenant of
the ACM does not in any manner impose any liability or responsibility on Tenant
for removal, treatment, or abatement of such ACM or any responsibility
whatsoever regarding such ACM provided, however, that Tenant shall comply with
all applicable laws and regulations in connection with any work in the Premises
including, but not limited to, work which requires entry into the ceiling.
18.30. ADR Process. If Landlord and Tenant are unable for any reason to
-----------
timely agree on (i) the Prevailing Rental Rate referenced in Section 3.2. 1, if
applicable, or (ii) the correction of alleged errors in Landlord"s Statement as
provided in Section 4.4. or (iii) the amount of Base Rent to be abated if an
interruption of services or utilities occurs as described in Section 7.2 or an
impairment to the Premises occurs due to Landlord"s failure to maintain or
repair as described in Section 8.2 or (iv) any other reference to "market" or
"comparable" contained in this Lease for the determination of economic
evaluation (collectively, "Specified Disputes"), then Landlord and Tenant agree
that all Specified Disputes shall be resolved pursuant to the neutral binding
alternative dispute resolution process ("ADR Process") described below. Landlord
and Tenant (acting together or individually) shall submit a notice of a
Specified Dispute ("Notice of Dispute") to JAMS (defined below) which Notice
sets forth the details of the dispute and requests JAMS to implement the ADR
Process set forth below.
A. ADR Process. The Notice of Dispute shall be delivered to the San
-----------
Francisco office of Judicial Arbitration and Mediation Service ("JAMS") for
binding resolution pursuant to the ADR Process. The ADR Process shall be
conducted according to the following procedure:
(i) The ADR Process shall be conducted in San Francisco,
California.
(ii) JAMS shall promptly select a single retired California
Superior Court Judge to be the hearing officer ("Hearing Officer"). The Hearing
Officer shall not have any actual or perceived conflict of interest with
Landlord or Tenant, any affiliate or subsidiary of their respective counsel and
absent any conflict, neither Landlord or Tenant shall have the right to object
to the Hearing Officer. The Hearing Officer shall have extensive and recent
civil trial experience and shall not have been primarily a criminal courts judge
during his/her career. The first hearing day shall be scheduled not later than
thirty (30) calendar days following appointment
-35-
<PAGE>
of the Hearing Officer and the hearing process shall be concluded within thirty
(30) calendar days from commencement.
(iii) The Hearing Officer shall preside over the ADR Process, shall
accept relevant evidence, and may (in her/her discretion) hear live testimony of
the parties and their expert and other witnesses, examine and cross-examine the
parties and their witnesses, allow counsel to examine and cross-examine
witnesses, hear arguments 6f counsel, and otherwise conduct and control a
hearing as if he/she were sitting as a California Superior Court Judge without a
jury. At the conclusion of the hearing, the Hearing Officer shall orally
announce a tentative decision as to the disagreement(s) which form the basis of
the Specified Dispute(s). In announcing the tentative decision and in rendering
the Final Award (defined below), the Hearing Officer shall be required to follow
California law in the interpretation of any document or agreement (including
this Lease), in admitting evidence and in fashioning a remedy. The Hearing
Officer shall not have the power or authority to award any amount in the nature
or character of punitive or exemplary damages, but shall have the power to issue
an award for compensatory damages based on breach or default of the Lease, shall
have the power to issue injunctive or other equitable relief where appropriate,
shall have the power to issue a judgment for unlawful detained of the Premises,
and shall have the power to issue an award for attorneys" fees and costs as
allowed by this Lease.
(iv) Within ten (10) calendar days following conclusion of the oral
hearing, the Hearing Officer shall prepare and deliver to each of the parties a
written decision, accompanied by a statement of facts, law, underlying reasons
and conclusions necessary to fully explain his/her decision ("Final Award"). If
the Final Award requires payment by one party of any amount of money to the
other party, the Hearing Officer shall require that payment be made within
thirty (30) calendar days following issuance of the Final Award, and, if payment
is not timely made, the Final Award shall provide the party to whom payment is
due with the right but not the obligation to seek immediate enforcement of the
Final Award by a court of competent jurisdiction.
(v) The Final Award shall be binding on each party to the dispute,
shall be admissible in any court of law for any purpose reasonably related
thereto (including, but not limited to, for the purpose of determining whether
or not a breach or default under the Lease has occurred), and either party may
petition the California Superior Court to enter the Final Award as the final
judgment and award of the court and/or to enforce enforcement of a Final Award.
(vi) Each party shall pay one-half of the fees and costs for JAMS
and the Hearing Officer. If advance payment or deposit is required prior to
commencement of the ADR Process, each party to the dispute hereby represents and
warrants that it will timely pay and deposit said amount. The failure to timely
pay any amounts requested by the Hearing Officer or JAMS shall constitute an
immediate and material event of default and if said amounts are not timely paid
following receipt of a five (5) business day notice and demand to pay, the
Hearing Officer shall be required (without the taking of any evidence or
testimony) to issue a Final Award in favor of the party to the dispute timely
paying its fees, on the terms and conditions requested by said party, which
shall be final and binding. See Addendum Section 18.31.
-36-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this lease as of the
date first above written.
<TABLE>
<CAPTION>
<S> <C>
LANDLORD: TENANT:
OTR, an Ohio general partnership, as Nominee INTERNET CAPITAL GROUP
of The State Teachers Retirement Board of OPERATIONS, INC., a Delaware corporation
Ohio, a statutory organization created by
the laws of Ohio
</TABLE>
By: /s/ Kenneth A. Fox
----------------------
By: SEAGATE REALTY Its: Managing Director
--------------------
ADVISORS, a California general Date: 4/7/99
-------------------
partnership, its duly authorized agent.
By: /s/ J.R.C.
---------------------------
Its: Agent
--------------------------
Date: 4/7/99
-------------------------
-37-
<PAGE>
FIRST ADDENDUM TO LEASE
-----------------------
THIS FIRST ADDENDUM TO LEASE (this "Addendum") is made by and between OTR, as
Nominee of the State Teachers Retirement Board of Ohio ("Landlord"), and
Internet Capital Group Operations, Inc. ("Tenant"), to be a part of that certain
Office Lease of even date herewith between Landlord and Tenant (the "Lease")
concerning approximately 4,442 square feet of space (tile "Premises"), known as
Suite 3700, 44 Montgomery Street, San Francisco, California. Landlord and Tenant
agree that, notwithstanding anything to the contrary in the Lease, the Lease is
hereby modified and supplemented as set forth below.
3.1 Term. Provided that Landlord is in receipt of the Lease, executed by
----
Tenant no later than April 2, 1999, Landlord shall use commercially reasonable
efforts without incurring extra costs to cause the Commencement Date to occur on
June 1, 1999. If the Commencement Date has not occurred for any reason
whatsoever (except Tenant Delays) on or before August 30, 1999, then, in
addition to Tenant's other rights or remedies, Tenant may terminate the Lease by
written notice to Landlord, which notice must be received by Landlord on or
before September 15, 1999, whereupon any monies previously paid to Landlord for
Rent or Security Deposit shall be reimbursed to Tenant, or, at Tenant's
election, the date Tenant is otherwise obliged to commence payment of rent shall
be delayed by one day for each day that the Commencement Date is delayed beyond
such date.
4.1.2 Property Taxes. "Property Taxes" shall not include and Tenant shall not
--------------
be required to pay any portion of any tax or assessment expense or any increase
therein (a) levied on Landlord's rental income, unless such tax or assessment
expense is imposed in lieu of real property taxes or (b) in excess of the amount
which would be payable if such tax or assessment expense were paid in
installments over the longest permitted term. (See Section 4.8)
4.1.4 Operating Expenses. "Operating Expenses" shall not include and Tenant
------------------
shall in no event have any obligation to perform or to pay directly, or to
reimburse Landlord for any of the following: (a) costs occasioned by casualties
or by the exercise of the power of eminent domain; (b) insurance deductibles,
and co-insurance payments; (c) costs incurred in connection with the presence of
any Hazardous Material, except to the extent caused by the release of emission
of the Hazardous Material in question by Tenant; and (d) costs which could
properly be capitalized under generally accepted accounting principles, except
to the extent provided under Section 4.1.3(xii).
6.2.1 Applicable Law. Tenant shall not be required to cause the Premises to
--------------
comply with any Applicable Law that would require a capital expenditure unless
such compliance is necessitated solely due to Tenant's particular use of the
Premises or is triggered by Tenant's modifications or alterations which would
require a building permit.
6.3.1 Hazardous Materials. To the knowledge of Landlord, (a) except as set
-------------------
forth in Section 18.29 of the Lease, no known Hazardous Material is present in
the Building or the soil, surface water or groundwater thereof, (b) no
underground storage tanks are present around the Building, and (c) no action,
proceeding or claim is pending or threatened regarding the Building concerning
<PAGE>
any Hazardous Material or pursuant to any Environmental Law.
8.1 Landlord's Obligations. Landlord shall perform and construct, and Tenant
----------------------
shall have no responsibility to perform or construct, any repair, maintenance or
improvements (a) necessitated by the acts or omissions of Landlord or any other
occupant of the Building, or their respective agents, employees or contractors,
(b) occasioned by casualty, (c) which could be treated as a "capital
expenditure" under generally accepted accounting principles and (d) to the
heating, ventilating, air conditioning, electrical, water and plumbing systems
serving the Premises. Notwithstanding the foregoing, Tenant shall pay for its
share of the repairs described in (c) and (d) to the extent such costs are
properly included in Operating Expenses.
11.2 Partial Destruction of Premises. Tenant shall have the option to
-------------------------------
terminate the Lease following a casualty if the Premises cannot be, or are not
in fact, fully restored by Landlord to their prior condition within one hundred
eighty (180) days after the casualty.
12.2 Condemnation. In connection with any Condemnation, Tenant shall be
------------
entitled to a portion of the proceeds based upon the unamortized value,
allocable to the remainder of the term, of any Building Standard improvements
installed at Tenant's expense. Any improvements which are above-standard shall
be excluded from the calculation.
13 Relocation. Any relocated space shall be in the same location within the
----------
Building as the Premises and be substantially the same in dimensions,
configuration, decor, interior improvements and nature as that of the Premises
and shall be placed in that condition by Landlord, at Landlord's sole cost and
expense. The physical relocation of the Premises shall take place on a weekend
and shall be completely accomplished before the Monday following the weekend in
which the relocation takes place. If the relocated space is larger than the
Premises, Rent shall remain in the same amount as for the Premises for the
balance of the Term. Landlord shall be responsible for all reasonable costs in
connection with the relocation, including, without limitation, moving costs,
costs for recabling and rewiring of Tenant's data and telecommunications
systems, costs of reconfiguring furniture and work stations to the relocated
space costs to otherwise improve the relocated space to comparable condition as
the Premises, costs for stationery and all labor and product costs associated
therewith.
14.1 Assignment and Subletting. Tenant may, without Landlord's prior written
-------------------------
consent, Transfer the Lease to a successor entity of equal or greater financial
capacity (based on Tenant's financial position at the date of Tenant's execution
of this Lease) related to Tenant by merger, consolidation, nonbankruptcy
reorganization or government action. A sale or transfer of Tenant's ownership
interests shall not be deemed a Transfer of the Lease.
18.4 Landlord's Entry. Landlord and Landlord's agents, except in the case of
----------------
emergency, shall provide Tenant with reasonable notice prior to entry of the
Premises. Any such entry shall comply with Tenant's reasonable security
measures. (See also Section 8.3)
18.31 Approvals; Expenditures. Whenever the Lease requires an approval,
-----------------------
consent, determination or judgment by either Landlord or Tenant, unless another
standard is expressly set
-2-
<PAGE>
forth, such approval, consent, determination or judgment and any conditions
imposed thereby shall be reasonable and shall not be unreasonably withheld or
delayed. Any expenditure under the Lease for which a party demands reimbursement
shall be limited to the fair market value of the goods and services involved,
shall be reasonably incurred, and shall be substantiated by documentary evidence
available for inspection and review by the other party.
B.6 Substantial Completion. Effective upon delivery of the Premises to Tenant,
----------------------
Landlord does hereby warrant that (a) the construction of the Work was performed
in accordance with the Working Drawings, and in a good and workman-like manner,
(b) all material and equipment installed therein conformed to the Working
Drawings and was new and otherwise of good quality, (c) the electrical,
plumbing, and mechanical systems servicing the Premises are in working order and
in good condition, and (d) the roof is in good condition and water tight.
LANDLORD: TENANT:
- --------
OTR, an Ohio general partnership, INTERNET CAPITAL GROUP
as Nominee of the State Teachers OPERATIONS, INC., a Delaware
Retirement System of Ohio, a corporation
statutory organization created by
the laws of Ohio
By: SEAGATE REALTY ADVISORS,
a California general partnership, By:________________________________
its duly authorized agent: Its:_______________________________
Date:______________________________
By:________________________________
Its:_______________________________
Date:______________________________
-3-
<PAGE>
RIDER TO LEASE DATED AS OF FEBRUARY 25,1999,
BY AND BETWEEN
OTR, AN OHIO GENERAL PARTNERSHIP, AS NOMINEE OF THE STATE
TEACHERS RETIREMENT BOARD OF OHIO, A STATUTORY ORGANIZATION
CREATED BY THE LAWS OF OHIO, ("LANDLORD"),
AND
INTERNET CAPITAL GROUP OPERATIONS, INC., ("TENANT")
a Delaware Corporation
This Rider and the Lease shall, for any and all purposes, be deemed to be
one instrument. In the event of any conflict or inconsistency between the terms
and provisions of the Lease and the terms and provisions of this Rider, the
terms and provisions of this Rider shall, in all instances, control and prevail.
Except as expressly defined or modified in this Rider, all words and phrases
which are defined in the Lease shall have the same meaning in this Rider as is
ascribed to such words and phrases in the Lease.
7.03 Utility Deregulation.
--------------------
(A) Landlord Controls Selection. Landlord has advised Tenant that
---------------------------
presently Pacific Gas & Electric ("Electric Service Provider") is the utility
company selected by Landlord to provide electricity service for 44 Montgomery
Street. Notwithstanding the foregoing, if permitted by law, Landlord shall have
the right at any time and from time to time during the Lease Term to either
contract for service from a different company or companies providing electricity
service (each such company shall hereinafter be referred to as an "Alternate
Service Provider") or continue to contract for service from the Electric Service
Provider.
(B) Tenant Shall Give Landlord Access. Tenant shall cooperate with
---------------------------------
Landlord, the Electric Service Provider, and any Alternate Service Provider at
all times and, as reasonably necessary, shall allow Landlord, Electric Service
Provider, and any Alternate Service Provider reasonable access to 44 Montgomery
Street's electric lines, feeders, risers, wiring and any other machinery within
the Premises.
18.31 Miscellaneous: Signage. Upon move-in, Tenant shall receive from Landlord
-----------------------
at Landlord's cost:
1) One suite sign insert which includes insert and one line of verbiage.
2) One elevator lobby strip
3) One main lobby strip for each 750 square feet leased
4) Two suite keys and two restroom guest keys
RIDER
-----
<PAGE>
Additional signage and keys may be purchased through Seagate Properties, Inc.
LANDLORD: TENANT:
- -------- ------
OTR, an Ohio general partnership, INTERNET CAPITAL GROUP
as Nominee of The State Teachers OPERATIONS, INC., a Delaware
Retirement System of Ohio, a corporation
statutory organization created by
the laws of Ohio
By: SEAGATE REALTY ADVISORS,
a California general partnership, By:________________________________
its duly authorized agent: Its:_______________________________
Date:______________________________
By:________________________________
Its:_______________________________
Date:______________________________
RIDER
-----
<PAGE>
EXHIBIT A
FLOOR PLAN OF PREMISES
----------------------
This Exhibit A is attached to and made a part of that certain Lease dated
February 25, 1999, by and between OTR, an Ohio general partnership, as Nominee
for the State Teacher's Retirement Board of Ohio, a statutory organization
created by the laws of Ohio, as Landlord, and Internet Capital Group Operations,
Inc., a Delaware Corporation as Tenant, in the Building commonly referred to as
44 Montgomery Street.
GRAPHICS
EXHIBIT A
---------
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
---------------------
This Work Letter Agreement ("Work Letter") is executed simultaneously with
that certain Office Lease (the "Lease") between INTERNET CAPITAL GROUP
OPERATIONS, INC., a Delaware Corporation as "Tenant", and OTR, an Ohio general
partnership, as Nominee of The State Teachers Retirement Board of Ohio, a
statutory organization created by the laws of Ohio, as "Landlord", relating to
demised premises ("Premises") at the building commonly known as 44 MONTGOMERY
STREET (the "Building"), which Premises are more fully identified in the Lease.
Capitalized terms used herein, unless otherwise defined in this Work Letter,
shall have the respective meanings ascribed to them in the Lease.
For and in consideration of the agreement to lease the Premises and the
mutual covenants contained herein and in the Lease, Landlord and Tenant hereby
agree as follows:
1. Tenant's Initial Plans; the Work. Tenant desires Landlord to perform
--------------------------------
certain leasehold improvement work in the Premises in substantial accordance
with the plan or plans (collectively, the "Initial Plan") which if not attached
hereto as Schedule 1, both Landlord and Tenant shall make a good faith effort to
have a mutually acceptable Initial Plan drawn within fifteen (15) days hereof,
and will then be made an attachment to the Lease. Such work, as shown in the
Initial Plan and as more fully detailed in the Working Drawings (as defined and
described in Paragraph 2 below), shall be hereinafter referred to as the "Work".
Tenant has furnished to Landlord such additional plans, drawings, specifications
and finish details as Landlord may reasonably request to enable Landlord's
architects and engineers to prepare mechanical, electrical and plumbing plans
and to prepare the Working Drawings, including a final telephone layout and
special electrical connection requirements, if any. All plans, drawings,
specifications and other details describing the Work which have been or are
hereafter furnished by or on behalf of Tenant shall be subject to Landlord's
approval, which Landlord agrees shall not be unreasonably withheld. Landlord
shall not be deemed to have acted unreasonably if it withholds its approval of
any plans, specifications, drawings or other details or of any Additional Work
(as defined in Paragraph 7 below) because, in Landlord's reasonable opinion, the
work, as described in any such item, or the Additional Work, as the case may be:
(a) is likely to adversely affect Building systems, the structure of the
Building or the safety of the Building and/or its occupants; (b) might impair
Landlord's ability to furnish services to Tenant or other tenants in the
Building; (c) would increase the cost of operating the Building; (d) would
violate any governmental laws, rules or ordinances (or interpretations thereof);
(e) contains or uses hazardous or toxic materials or substances; (f) would
adversely affect the appearance of the Building; (g) might adversely affect
another tenant's premises; (h) is prohibited by any ground lease affecting the
Building or any mortgage, trust deed or other instrument encumbering the
Building; or (i) is likely to be substantially delayed because of unavailability
or shortage of labor or materials necessary to perform such work or the
difficulties or unusual nature of such work. The foregoing reasons, however,
shall not be the only reasons for which Landlord may withhold its approval,
whether or not such other reasons are similar or dissimilar to the foregoing.
Neither the approval by
EXHIBIT B
---------
<PAGE>
Landlord of the Work or the Initial Plan or any other plans, drawings,
specifications or other items associated with the Work nor Landlord's
performance, supervision or monitoring of the Work shall constitute any warranty
by Landlord to Tenant of the adequacy of the design for Tenant's intended use of
the Premises.
2. Working Drawings. If necessary for the performance of the Work and not
----------------
included as part of the Initial Plan attached hereto, Landlord shall prepare or
cause to be prepared final working drawings and specifications for the Work (the
"Working Drawings") based on and consistent with the Initial Plan and the other
plans, drawings, specifications, finish details and other information furnished
by Tenant to Landlord and approved by Landlord pursuant to Paragraph 1 above.
The parties acknowledge that the Working Drawings, in such form that both
parties are in agreement contain the finish detail required for accurate
pricing, have been approved and are attached hereto as Schedule 2.
3. Performance of the Work: Allowance. Except as hereinafter provided to
----------------------------------
the contrary, Landlord shall cause the performance of the Work (except as may be
stated or shown otherwise in the Working Drawings) building standard materials,
quantities and procedures then in use by Landlord ("Building Standards").
Landlord shall pay for a portion of the "Cost of the Work" (as defined below) in
an amount not to exceed $193,600 (the "Allowance") and Tenant shall pay for the
entire Cost of the Work in excess of the Allowance relative to permit cost in
excess of $4,500.00, specialty hardware costs, which specifications have not
been provided as of the Lease signing and Life/Safety costs within the Premises
that exceed $9,100.00. Tenant shall not be entitled to any credit, abatement or
payment from Landlord in the event that the amount of the Allowance specified
above exceeds the Cost of the Work. For purposes of this Agreement, the term
"Cost of the Work" shall mean and include any and all costs expenses of the
Work, including, without limitation, the cost of the Initial Plans and Working
Drawings as provided by the Landlord's architect, Landlord's Supervision Fees
and of all labor (including overtime) and materials constituting the Work. In
the event that the Work triggers the Landlord to perform certain base building
work to areas outside of Tenant's Premises, Landlord shall perform such work at
its expense.
Tenant's monthly Base Rent shall include the amortization of $49,200 in excess
costs. This amortization is reflected in Section 1.8 of the Lease. Additionally,
Tenant will remit to Landlord within thirty (30) days from invoicing, a check in
the amount of $20,000, which amount shall be applied toward the estimated Tenant
Improvement cost of $193,600.
4. Payment. Prior to commencing the Work, Landlord shall submit to Tenant
-------
a written statement of the total Cost of the Work (which shall include the
amount of any overtime projected as necessary to substantially complete the Work
by the Commencement Date specified in the Lease) as then known by Landlord.. In
the event, and each time, that any change order by Tenant, delay caused by acts
beyond Landlord's control or cost increase described in the second sentence of
Section 3 causes the Cost of the Work to be increased after the time that
Landlord delivers to Tenant the aforesaid initial statement of the Cost of the
Work, Landlord shall deliver to Tenant a revised statement of the total Cost of
the Work, indicating the costs attributable to such change order (the "Excess
Costs"), if any. Within three (3) days after submission to Tenant of
EXHIBIT B
---------
<PAGE>
any such revised statement, Tenant shall pay to Landlord an amount equal to the
Excess Costs, as shown in such revised statement, less the amounts previously
paid by Tenant to Landlord on account of the Excess Costs, and Landlord shall
not be required to proceed further with the Work until Tenant has paid such
amount. Delays in the performance of the Work resulting from the failure of
Tenant to comply with the provisions of this Paragraph 4 shall be deemed to be
delays caused by Tenant.
5. Amortization of Excess Costs. Tenant may elect to amortize the Excess
----------------------------
Costs over the initial 60 month term at an annual percentage rate of 11%, which
costs shall then be added to Tenant's monthly Base Rent and referred to as
Additional Rent. Upon Tenant's approval of Excess Costs, Tenant shall notify
Landlord of its method of payment: either 1) Amortization of Excess Costs or 2)
Lump Sum Payment of Excess Costs.
6. Substantial Completion. Landlord shall cause the Work to be
----------------------
"substantially completed" on or before the scheduled date of commencement of the
term of the Lease as specified in Section 1.6 of the Lease, subject to delays
caused by strikes, lockouts, boycotts or other labor problems, casualties,
discontinuance of any utility or other service required for performance of the
Work, unavailability or shortages of materials or other problems in obtaining
materials necessary for performance of the Work or any other matter beyond the
control of Landlord (or beyond the control of Landlord's contractors or
subcontractors performing the Work) and also subject to "Tenant Delays" (as
defined and described in Paragraph 6 of this Work Letter). The Work shall be
deemed to be "substantially completed' for all purposes under this Work Letter
and the Lease if and when Landlord's architect issues a written certificate to
Landlord and Tenant, certifying that the Work has been substantially completed
(i.e., completed except for "punchlist" items listed in such architect's
certificate) in substantial compliance with the Working Drawings, or when Tenant
first takes occupancy of the Premises, whichever first occurs. If the Work is
not deemed to be substantially completed on or before the scheduled date of the
commencement of the term of the Lease as specified in Section 1.6 of the Lease,
(a) Landlord agrees to use reasonable efforts to complete the Work as soon as
practicable thereafter, (b) the Lease shall remain in full force and effect, (c)
Landlord shall not be deemed to be in breach or default or the Lease or this
Work Letter as a result thereof and Landlord shall have no liability to Tenant
as a result of any delay in occupancy (whether for damages, abatement of Rent or
otherwise), and (d) except in the event of Tenant Delays, and notwithstanding
anything contained in the Lease to the contrary, the Commencement Date of the
Lease Term as specified in Section 1.6 of the Lease shall be extended to the
date on which the Work is deemed to be substantially completed and the
Expiration Date of the Lease Term as specified in Section 1.7 of the Lease shall
be extended by an equal number of days. At the request of either Landlord or
Tenant in the event of such extensions in the commencement and expiration dates
of the term of the Lease, Tenant and Landlord shall execute and deliver an
amendment to the Lease reflecting such extensions. Landlord agrees to use
reasonable diligence to complete all punchlist work listed in the aforesaid
architect's certificate promptly after substantial completion. See Addendum to
Lease Section B6.
7. Tenant Delays. If the Work has not been substantially completed on
-------------
said scheduled commencement date by reason of any delay attributable to Tenant
("Tenant Delays"),
EXHIBIT B
---------
<PAGE>
including without limitation:
(i) the failure of Tenant to furnish all or any plans, drawings,
specifications, finish details or the other information required under Paragraph
1 above on or before the date stated in Paragraph 1;
(ii) the failure of Tenant to grant approval of the Working Drawings
within the time required under Paragraph 2 above;
(iii) the failure of Tenant to comply with the requirements of
Paragraph 4 above;
(iv) Tenant's requirements in a TEO for special work or materials,
finishes, or installations other than the Building Standards or Tenant's
requirement for special construction staging or phasing;
(v) the performance of any Additional Work (as defined in Paragraph
7 below) requested by Tenant or the performance of any work in the Premises by
any person, firm or corporation employed by or on behalf of Tenant, or any
failure to complete or delay in completion of such work; or
(vi) any other act or omission of Tenant that causes a delay, then
Tenant's obligation to pay rent shall commence on the date that the work would
have been substantially complete but for the Tenant Delays.
8. Additional Work. Upon Tenant's request and submission by Tenant (at
---------------
Tenant's sole cost and expense) of the necessary information and/or plans and
specifications for work other than the Work described in the Working Drawings
("Additional Work") and the approval by Landlord of such Additional Work, which
approval Landlord agrees shall not be unreasonably withheld, Landlord shall
perform such Additional Work, at Tenant's sole cost and expense (to the extent
the cost thereof exceeds the Allowance), subject, however, to the following
provisions of this Paragraph 7. Prior to commencing any Additional Work
requested by Tenant, Landlord shall submit to Tenant a written statement of the
cost of such Additional Work, which cost shall include a fee payable to Landlord
in the amount of 9% of the total cost of such Additional Work as compensation to
Landlord for monitoring the Additional Work and for administration, overhead and
field supervision associated with the Additional Work. (such fee being
hereinafter referred to as "Landlord's Additional Compensation"), and,
concurrently with such statement of cost, Landlord shall also submit to Tenant a
proposed tenant extra order (the "TEO") for the Additional Work in the standard
form then in use by Landlord. Tenant shall execute and deliver to Landlord such
TEO and shall pay to Landlord the entire cost of the Additional Work, including
Landlord's Additional Compensation (as reflected in Landlord's statement of such
cost), within five (5) days after Landlord's submission of such statement and
TEO to Tenant. If Tenant fails to execute or deliver such TEO or pay the entire
cost of such Additional Work within such 5-day period, then Landlord shall not
be obligated to do any of the Additional Work and may proceed to do only the
Work, as specified in the Working Drawings.
EXHIBIT B
---------
<PAGE>
9. Charges and Fees. Included in the Cost of the Work set forth in
----------------
Section 3 of this Exhibit B is the management/supervision fee which Landlord
will earn and is equal to six percent (6%) of the direct cost of the materials
and labor for the Work (and all change orders with respect thereto) to defray
Landlord's administrative and overhead expenses incurred to review the Plans and
coordinate with architects, engineers, general contractors and, if necessary,
the Tenant's on-site project manager regarding the staging and progression of
the Work.
10. Tenant Access. Landlord, in Landlord's reasonable discretion and upon
-------------
request by Tenant, shall grant to Tenant a license to have access to the
Premises prior to the date designated in the Lease for the commencement of the
term of the Lease to allow Tenant to do other work required by Tenant to make
the Premises ready for Tenant's use and occupancy (the "Tenant's Pre-Occupancy
Work"). It shall be a condition to the grant by Landlord and continued
effectiveness of such license that:
(i) Tenant shall give to Landlord a written request to have such
access to the Premises not less than three (3) business days prior to the date
on which such access will commence, which written request shall contain or shall
be accompanied by each of the following items, all in form and substance
reasonably acceptable to Landlord: (a) a detailed description of and schedule
for Tenant's Pre-Occupancy Work; (b) the names and addresses of all contractors,
subcontractors and material suppliers and all other representatives of Tenant
who or which will be entering the Premises on behalf of Tenant to perform
Tenant's Pre-Occupancy Work or will be supplying materials for such work, and
the approximate number of individuals, itemized by trade, who will be present in
the Premises; (c) copies of all contracts, subcontracts and material purchase
orders pertaining to Tenant's Pre-Occupancy Work; (d) copies of all plans and
specifications pertaining to Tenant's Pre-Occupancy Work; (e) copies of all
licenses and permits in connection with the performance of Tenant's Pre-
Occupancy Work; (f) certificates of insurance (in amounts satisfactory to
Landlord and with the parties identified in, or required by, the Lease named as
additional insureds ) and instruments of indemnification against all claims,
costs, expenses, damages and liabilities which may arise in connection with
Tenant's Pre-Occupancy Work; and (g) assurances of the ability of Tenant to pay
for all of Tenant's Pre-Occupancy Work; and/or a letter of credit or other
security deemed appropriate by Landlord securing Tenant's lien-free completion
of Tenant's Pre-Occupancy Work.
(ii) Such pre-term access by Tenant and its representatives shall be
subject to scheduling by Landlord.
(iii) Tenant's employees, agents, contractors, workmen, mechanics,
suppliers and invitees shall work in harmony and not interfere with Landlord or
Landlord's agents in performing the Work and any Additional Work in the
Premises, Landlord's work in other premises and in common areas of the Building,
or the general operation of the Building. If at any time any such person
representing Tenant shall cause or threaten to cause such disharmony or
interference, including labor disharmony, and Tenant fails to immediately
institute and maintain such corrective actions as directed by Landlord, then
Landlord may withdraw such license upon twenty-four (24) hours' prior written
notice to Tenant.
EXHIBIT B
---------
<PAGE>
(a) Any such entry into and occupancy of the Premises by
Tenant or any person or entity working for or on behalf of Tenant shall be
deemed to be subject to all of the terms, covenants, conditions and provisions
of the Lease, specifically including the provisions of Section IX thereof
(regarding Tenant's improvements and alterations to the Premises), and excluding
only the covenant to pay Rent. Landlord shall not be liable for any injury, loss
or damage which may occur to any of Tenant's Pre-Occupancy Work made in or about
the Premises or to property placed therein prior to the commencement of the term
of the Lease, the same being at Tenant's sole risk and liability. Tenant shall
be liable to Landlord for any damage to the Premises or to any portion of the
Work or Additional Work caused by Tenant or any of Tenant's employees, agents,
contractors, workmen or suppliers. In the event that the performance of Tenant's
Pre-Occupancy Work causes extra costs to Landlord or requires the use of
elevators during hours other than 7:00 a.m. to 6:00 p.m. on Monday through
Friday (excluding holidays) or of other Building services, Tenant shall
reimburse Landlord for such extra cost and/or shall pay Landlord for such
elevator service or other Building services at Landlord's standard rates then in
effect.
11. Lease Provisions. The terms and provisions of the Lease, insofar as
----------------
they are applicable to this Work Letter, are hereby incorporated herein by
reference. All amounts payable by Tenant to Landlord hereunder shall be deemed
to be additional Rent under the Lease and, upon any default in the payment of
same, Landlord shall have all of the rights and remedies provided for in the
Lease.
12. Miscellaneous.
-------------
(i) This Work Letter shall be governed by the laws of the state of
California.
(ii) This Work Letter may not be amended except by a written
instrument signed by the party or parties to be bound thereby.
(iii) Any person signing this Work Letter on behalf of Tenant
warrants and represents he/she has authority to sign and deliver this Work
Letter and bind Tenant.
(iv) Notices under this Work Letter shall be given in the same
manner as under the Lease.
(v) The headings set forth herein are for convenience only.
(vi) This Work Letter sets forth the entire agreement of Tenant and
Landlord regarding the Work.
(vii) In the event that the final working drawings and
specifications are included as part of the Initial Plan attached hereto, or in
the event Landlord performs the Work without the necessity of preparing working
drawings and specifications, then whenever the term "Working Drawings" is used
in this Agreement, such term shall be deemed to refer to the Initial Plan and
all supplemental plans and specifications approved by Landlord.
(viii) Landlord recommends that the Premises' HVAC systems and
distribution be re-
EXHIBIT B
---------
<PAGE>
engineered and rebalanced anytime modifications are made to Tenant's Premises.
In the event Tenant elects not to re-engineer and/or rebalance the HVAC systems,
then should it be deemed necessary, at anytime during the Term, to modify the
distribution of the HVAC to the Premises, all costs associated shall be at
Tenant's sole cost and expense.
13. Exculpation of Landlord and Seagate. Notwithstanding anything to the
-----------------------------------
contrary contained in this Lease or in any exhibits, Riders or addenda hereto
attached (collectively the "Lease Documents"), it is expressly understood and
agreed by and between the parties hereto that: (a) the recourse of Tenant or its
successors or assigns against Landlord with respect to the alleged breach by or
on the part of Landlord of any representation, warranty, covenant, undertaking
or agreement contained in any of the Lease Documents or otherwise arising out of
Tenant's use of the Premises or the Building (collectively, "Landlord's Lease
Undertaking") shall extend only to Landlord's interest in the real estate of
which the Premises demised under the Lease Documents are a part ("Landlord's
Real Estate") and not to any other assets of Landlord or its beneficiaries; and
(b) no personal liability or personal responsibility of any sort with respect to
any of Landlord's Lease Undertakings or any alleged breach thereof is assumed
by, or shall at any time be asserted or enforceable against, Landlord, OTR, an
Ohio general partnership, Seagate Properties, Inc., Seagate Realty Advisors, or
against any of their respective directors, officers, employees, agents,
constituent partners, beneficiaries, trustees or representatives. Tenant
acknowledges that this Lease is executed by certain general partners of OTR
and/or Seagate Realty Advisors, not individually but solely on behalf of, and as
the authorized nominee and agent for, the State Teachers Retirement Board of
Ohio, and Tenant and all persons dealing with Landlord waive any right to bring
a cause of action against the individuals executing this Lease on behalf of
Landlord and must look solely to the assets of State Teachers Retirement Board
of Ohio for the enforcement of any claim against Landlord.
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the
________ day of April, 1999.
LANDLORD: TENANT:
- -------- ------
OTR, an Ohio general partnership, INTERNET CAPITAL GROUP
as Nominee of the State Teachers OPERATIONS, INC. a Delaware
Retirement System of Ohio, a corporation
statutory organization created by
the laws of Ohio
By:________________________________
By: SEAGATE REALTY ADVISORS,
a California general partnership, Its:_______________________________
its duly authorized agent
Date:______________________________
By:______________________________
Its:_____________________________
Date:____________________________
EXHIBIT B
---------
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
---------------------
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or used for any purpose
other than ingress and egress. The halls, passages, entrances, elevators,
stairways, balconies and roof are not for the use of the general public, and
Landlord shall in all cases retain the right to control or prevent access
thereto by all persons whose presence in the judgment of Landlord shall be
prejudicial to the safety, character, reputation or interests of Landlord and
its tenants, provided that nothing herein contained shall be to prevent such use
by persons with whom the tenant normally deals in the ordinary course of its
business unless such persons are engaged in illegal activities. No tenant and no
employees of any tenant shall go upon the roof of the Building without the
written consent of Landlord.
2. No awnings or other projections shall be attached to the outside walls
or surfaces of the Building nor shall the interior or exterior of any windows be
coated without the prior written consent of Landlord. Except as otherwise
specifically approved by Landlord, all electrical ceiling fixtures hung in
offices or spaces within the Building must be fluorescent and of quality, type,
design and bulb color approved by Landlord. Tenant shall not place anything or
allow anything to be placed near the glass of any window, door, partition or
wall which may appear unsightly from outside the Premises.
3. No sign, picture, plaque, advertisement, notice or other material
shall be exhibited, painted, inscribed or affixed by any tenant or any part of,
or so as to be seen from the outside of, the Premises or the Building without
the prior written consent of Landlord. In the event of the violation of the
foregoing by any tenant, Landlord may remove the same without any liability, and
may charge the expense incurred in such removal to the tenant violating this
rule. Interior signs on doors and the directory tablet shall be inscribed,
painted or affixed for each tenant by Landlord at the expense of such tenant,
and shall be of a size, color and style acceptable to Landlord.
4. The toilets and wash basins and other plumbing fixtures shall not be
used for any purpose other than those for which they were constructed, and no
sweepings, rubbish, rags or other substances shall be thrown therein. All damage
resulting from any misuse of the fixtures shall be borne by the tenant who, or
whose servants, employees, agents, visitors or licensees, shall have caused the
same.
5. No tenant or its officers, agents, employees or invitees shall mark,
paint, drill into, or in any way deface any part of the Premises or the
Building. No boring, cutting or stringing of wires or laying of linoleum or
other similar floor coverings shall be permitted except with the prior written
consent of Landlord and as Landlord may direct.
EXHIBIT C
---------
<PAGE>
6. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the Premises and no cooking shall be done or permitted by any
tenant on the Premises except that microwave cooking in a UL-approved microwave
oven and the preparation of coffee, tea, hot chocolate and similar items for the
tenant and its employees and business visitors shall be permitted. Tenant shall
not cause or permit any unusual or objectionable odors to escape from the
Premises.
7. The Premises shall not be used for manufacturing or for the storage of
merchandise except as such storage may be incidental to the use of the Premises
for general office purposes. No tenant shall engage or pay any employee on the
Premises except those actually working for such tenant on the Premises nor
advertise for laborers giving an address at the Premises. The Premises shall not
be used for lodging or sleeping or for any immoral or illegal Purposes.
8. No tenant or its officers, agents, employees or invitees shall make,
or permit to be made any unseemly or disturbing noises, sounds or vibrations or
disturb or interfere with occupants of this or neighboring buildings or Premises
or those having business with them whether by the use of any musical instrument,
radio, phonograph, unusual noise, or in any other way.
9. No tenant or its officers, agents, employees or invitees shall throw
anything out of doors, balconies or down the passageways.
10. Tenant shall not maintain armed security in or about the Premises nor
possess any weapons, explosives, combustibles or other hazardous devices in or
about the Building and/or Premises.
11. No tenant or its officers, agents, employees or invitees shall at any
time use, bring or keep upon the Premises any flammable, combustible, explosive,
foul or noxious fluid, chemical or substance, or do or permit anything to be
done in the leased Premises, or bring or keep anything therein, which shall in
any way increase the rate of fire insurance on the Building, or on the property
kept therein, or obstruct or interfere with the rights of other tenants, or in
any way injure or annoy them, or conflict with the regulations of the Fire
Department or the fire laws, or with any insurance policy upon the Building, or
any part thereof, or with any rules and ordinances established by the Board of
Health or other governmental authority.
12. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanism thereof. Each tenant must, upon the termination of this
tenancy, restore to Landlord all keys of stores, offices, and toilet rooms,
either furnished to, or otherwise procured by, such tenant, and in the event of
the loss of any keys so furnished, such tenant shall pay to Landlord the cost of
replacing the same or of changing the lock or locks opened by such lost key if
Landlord shall deem it necessary to make such change.
EXHIBIT C
---------
<PAGE>
13. All removals, or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the hours
which Landlord may determine from time to time. The moving of safes or other or
bulky matter of any kind must be made upon previous notice to the manager of the
Building and under his or her supervision, and the persons employed by any
tenant for such work must be acceptable to Landlord. Landlord reserves the right
to inspect all safes, freight or other bulky articles to be brought into the
Building and to exclude from the Building all safes, freight or other bulky
articles which violate any of these Rules and Regulations or the Lease of which
these Rules and Regulations are a part. Landlord reserves the right to prohibit
or impose conditions upon the installation on the Premises of heavy objects
which might overload the building floors. Landlord will not be responsible for
loss of or damage to any safes, freight, bulky articles or other property from
any cause, and all damage done to the Building by moving or maintaining any such
safe or other property shall be repaired at the expense of the tenant.
14. No tenant shall purchase or otherwise obtain for use in the Premises
water, ice, towel, vending machine, janitorial, maintenance or other like
services, or accept barbering or bootblacking services, except from persons
authorized by Landlord, and at hours and under regulations fixed by Landlord.
15. Landlord shall have the right to prohibit any advertising by any
tenant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as an office building and upon written notice from
Landlord any tenant shall refrain from or discontinue such advertising.
16. Landlord reserves the right to exclude from the Building between the
hours of 10:00 p.m. and 7:00 a.m. and at all hours of Saturdays, Sundays and
legal holidays all persons who do not present a pass signed by Landlord.
Landlord shall furnish passes to persons for whom any tenant requests in
writing. Each tenant shall be responsible for all persons for whom he requests
passes and shall be liable to Landlord for all acts of such persons. Landlord
shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In the case of
invasion, mob, riot, public excitement or other commotion, Landlord reserves the
right to prevent access to the Building during the continuance of the same, by
the closing of the gates and doors or otherwise, for the safety of the tenants
and others and the protection of the Building and the property therein.
17. Any outside contractor employed by any tenant shall, while in the
Building, be subject to the prior written approval of Landlord and subject to
the Rules and Regulations of the Building. Tenant shall be responsible for all
acts of such persons and Landlord shall not be responsible for any loss or
damage to property in the Premises, however occurring.
18. All doors opening onto public corridors shall be kept closed, except
when in use for ingress and egress, and left locked when not in use.
EXHIBIT C
---------
<PAGE>
19. The requirements of tenants will be attended to only upon application
to the Office of the Building.
20. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant shall cooperate to prevent the same.
21. All office equipment of any electrical or mechanical nature shall be
placed by tenants in the Premises in settings approved by Landlord, to absorb or
prevent any vibration, noise or annoyance.
22. No air conditioning unit or other similar apparatus shall be installed
or used by any tenant without the written consent of Landlord.
23. There shall not be used in any space, or in the public halls of the
Building either by any tenant or others, any hand trucks except those equipped
with rubber tires and side guards.
24. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires or
stringing of wires will be allowed without written consent of Landlord. The
location of telephones, call boxes and other office equipment affixed to the
Premises shall be subject to the approval of Landlord. All such work shall be
effected pursuant to permits issued by all applicable governmental authorities
having jurisdiction.
25. No vendor with the intent of selling such goods shall be allowed to
transport or carry beverages, food, food containers, etc., on any passenger
elevators. The transportation of such items shall be via the service elevators
in such manner as prescribed by Landlord.
26. Tenants shall cooperate with Landlord in the conservation of energy
used in or about the Building, including without rotation, cooperating with
Landlord in obtaining maximum effectiveness of the cooling system by closing
drapes or other window coverings when the sun's rays fall directly on windows of
the Premises, and closing windows and doors to prevent heat loss. Tenant shall
not obstruct, alter, or in any way impair the efficient operation of Landlord's
heating, lighting, ventilating and air conditioning system and shall not place
bottles, machines, parcels, or any other articles on the induction unit
enclosure so as to interfere with air flow. In addition, Tenant shall not
obstruct, alter, or in any way impair the proper circulation and regular
maintenance and repair of the induction unit by placing furniture less than 18
inches from the induction unit. Tenant shall not tamper with or change the
setting of any thermostats or temperature control valves, and shall in general
use heat, gas, electricity, air conditioning equipment and heating equipment in
a manner compatible with sound energy conservation practices and standards.
27. All parking ramps and areas, pedestrian walkways, plazas, and other
public areas
EXHIBIT C
---------
<PAGE>
forming a part of the Building shall be under the sole and absolute control of
Landlord with the exclusive right to regulate and control these areas. Tenant
agrees to conform to the rules and regulations that may be established by
Landlord for these areas from time to time.
28. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the Building.
29. Tenant and its employees, agents, subtenants, contractors and invitees
shall comply with all applicable "nonsmoking" ordinances and, irrespective of
such ordinances, shall not smoke or permit smoking of cigarettes, cigars or
pipes outside of Tenant's Premises (including plaza areas) in any portions of
the Building except areas specifically designated as smoking areas by Landlord.
If required by applicable ordinance, Tenant shall provide smoking areas within
Tenant's Premises.
EXHIBIT C
---------
<PAGE>
EXHIBIT E
TENANT ACCEPTANCE LETTER
------------------------
February 25, 1999
Mr. Ken Fox
INTERNET CAPITAL GROUP OPERATIONS, INC.
44 Montgomery Street, Suite 3700
San Francisco, CA 94104
Re: 44 Montgomery Street, Suite 3700
Dear Mr. Fox:
Please sign below to confirm that you accept the Premises as complete under that
certain Lease Agreement dated February 25, 1999, by and between OTR, an Ohio
general partnership, as Nominee for the State Teachers Retirement Board of Ohio,
a statutory organization created by the laws of Ohio, and, Internet Capital
Group Operations, Inc. and that the Commencement Date is June 1, 1999 and the
expiration date is May 31, 2004.
Sincerely,
SEAGATE PROPERTIES, INC.
Managing Agent
By:___________________________
Acknowledged and Agreed:
Its:__________________________
Date:_________________________
Tenant: Internet Capital Group
Operations, Inc., a Delaware
Corporation
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
EXHIBIT E
---------
<PAGE>
SCHEDULE I
- ----------
COPIES OF INITIAL PLAN
- ----------------------
The Premises is located in the north section of the Building, Please see floor
plan below:
[GRAPH]
SCHEDULE 1
----------
<PAGE>
EXHIBIT 10.31
INTERNET CAPITAL GROUP [LOGO]
July 18, 1997
Mr. Douglas Alexander
Reality OnLine
1000 Madison Avenue
Norristown, PA 19403-2342
Dear Doug:
Upon further thought, additional conversations with you and recent
developments at VerticalNet we think that it makes sense to revise our original
offer extended to you on July 3, 1997.
What follows is a summary of what would be expected of you as Managing
Director of Internet Capital Group as well as your compensation. We believe
this is an extraordinary opportunity for us to build our core management team
and hope that you share our enthusiasm for the opportunities we are trying to
capitalize on.
It is expected that your day to day responsibilities with Internet Capital
Group ("ICG") will be focused on working with and mentoring the management teams
of ICG portfolio companies. In addition, as a Managing Director, your input and
help will also play a critical role in the new investment process. It should be
understood that like the companies we invest in, ICG is a very entrepreneurial
and flat organization. As a result, you will find that your day to day tasks
will vary greatly, and include far more than is outlined above.
A good example of the type of projects which will occur from time to time
currently exists at VerticalNet. Upon the acceptance of this offer, we would
like you to be the Chairman and acting CEO of VerticalNet. Your preliminary
responsibilities as acting CEO will be to aide the entrepreneurs in the tactical
and strategic execution of the VerticalNet business model and to take the lead
role in recruiting a full time CEO. At the conclusion of a successful CEO
search you would remain Chairman and the ICG partner responsible for
VerticalNet.
Salary:
------
. Internet Capital Group will pay you a base salary of $225,000 and a
potential bonus of $100,000 a year. The parameters for the bonus will
be outlined in ICG's 1998 plan. For 1997, Internet Capital Group will
guarantee your bonus pro-rated for the actual number of months of your
employment. For example, if your employment begins August 1st, your
bonus will be 5/12 of $100,000 or $41,667.
<PAGE>
Mr. Douglas Alexander
July 18, 1997
Page 2 of 2
Equity:
------
. Internet Capital Group will grant you founders stock in the amount of
two and half percent of the Company. These shares are priced at one
penny and will vest over a five-year period unless an IPO occurs at
which time it is likely they will fully vest.
. VerticalNet: In addition to the options for one third percent of
VerticalNet which have already been issued, you will receive
additional options which will vest monthly over the first twelve
months of your employment with Internet Capital Group bringing your
total option package in VerticalNet to two percent of the company.
Finally, if there is an ICG investment where we have the opportunity to
personally invest, you will have the opportunity (on a pro-rata basis) to co-
invest as well. We are proud to extend you this offer and look forward to
working with you to capitalize on the unique opportunity that entrepreneurship
and the Internet create.
Best personal regards,
/s/ Walter W. Buckley /s/ Kenneth A. Fox
- --------------------- ------------------
Walter W. Buckley Kenneth A. Fox
<PAGE>
EXHIBIT 10.32
INTERNET CAPITAL GROUP [LOGO]
April 27, 1998
Mr. Robert Pollan
346 Castlewood Drive
Devon, PA 19333
Dear Bob:
We are proud to extend you an offer to join Internet Capital Group as a Managing
Director. We have enjoyed the opportunity to get to know you over the past year
and are excited at the prospect of having you join our team.
What follows is a summary of what would be expected of you as a Managing
Director of Internet Capital Group as well as your compensation. We believe
this is an extraordinary opportunity for us to build our core management team
and hope that you share our enthusiasm for the Company and the opportunities we
are trying to capitalize on. It is expected that your day to day
responsibilities with Internet Capital Group ("ICG") will be focused on working
with and mentoring the management teams of the ICG portfolio companies in the
value/supply chain markets. In addition, as a Managing Director, your input and
help will also play a critical role in ICG's strategy and investment process.
It should be understood that like the companies we invest in, ICG is a very
entrepreneurial and flat organization. As a result, you will find that your day
to day tasks will vary greatly, and include far more than is outlined above.
Salary:
- ------
. Internet Capital Group will pay you a base salary of $245,000 and a
potential bonus of $100,000 a year. The parameters for the bonus will be
outlined in ICG's 1999 plan. For 1998, Internet Capital Group will
guarantee your bonus pro-rated for the actual number of months of your
employment. For example, if your employment begins July 1st, your bonus
will be 6/12 of $100,000 or $50,000.
Equity
- ------
. Internet Capital Group will grant you non-qualified stock option stock in
the amount of one and 3/4 percent of the Company. These shares are priced
at two dollars and will vest over a five-year period. In addition, if
founding MPI shares become available, ICG will demonstrate a best efforts
to transfer these shares to you, understanding there are significant tax
issues to be resolved.
<PAGE>
Mr. Robert Pollen
April 27, 1998
Page 2
Finally, if there is an ICG investment where we have the opportunity to
personally invest, you will have the opportunity (on a pro-rata basis) to co-
invest as well. We are proud to extend you this offer and look forward to
working with you to capitalize on the unique opportunity that entrepreneurship
and the Internet create.
Best personal regards,
/s/ Walter W. Buckley
- ----------------------
Walter W. Buckley
<PAGE>
EXHIBIT 10.33
PROMISSORY NOTE
---------------
$ ___________ May 5, 1999
FOR VALUE RECEIVED, ____________, ("Borrower"), hereby promises to pay
to the order of INTERNET CAPITAL GROUP, INC., a Delaware corporation ("Holder"),
the principal sum _________________________________($___________) (the
"Principal Amount" as adjusted from time to time in accordance with the terms
hereof), on May , 2004, together with interest accrued thereon through the
date of payment; provided, however, (i) upon the sale, by the undersigned, of
-------- -------
less than all the shares of Common Stock, par value $0.001 per share, of Holder
(the "Common Stock") purchased by the undersigned on the date hereof, the
undersigned shall be required to make a principal payment, together with
interest accrued thereon, equal to (x) multiplied by (y) where (x) is the
Principal Amount and (y) is (A) the number of shares of Common Stock sold by the
undersigned divided by (B) the total number of shares of Common Stock which are
purchased by the undersigned on the date hereof, (ii) upon the sale, by the
undersigned, of all the shares of Common Stock which are purchased by the
undersigned on the date hereof, the Principal Amount, together with interest
accrued thereon, shall become due and payable, and the undersigned shall pay
such Principal Amount, together with interest accrued thereon, to the Holder,
(iii) 90 days after termination of the Borrower's employment with the Holder or
its affiliates, for any reason, or (iv) upon a good faith determination by the
Board of Directors of the Holder that the Borrower has violated one or more of
the terms or conditions of the Restrictive Covenant Agreement between the Holder
and the Borrower, a copy of which is attached hereto as Exhibit A, the Principal
Amount, together with interest accrued thereon, shall become due and payable,
and the undersigned shall pay such Principal Amount, together with interest
accrued thereon, to the Holder.
The Borrower shall pay to the Holder hereof interest from 30 days
after the date hereof on the outstanding principal balance hereunder at the rate
of 5.22 percent (5.22%) per annum. Interest shall be calculated on the basis of
a 365-day year for the actual number of days elapsed and shall be payable on the
last day of each Yearly Period (as hereinafter defined) during the term hereof.
To the extent that interest for any Yearly Period or portion thereof is not paid
on the last day of such Yearly Period, such interest shall become part of the
Principal Amount effective such last day of such Yearly Period. As used herein,
the term "Yearly Period" means each successive twelve-month period, beginning on
the date hereof and ending on the first anniversary of the date hereof and
continuing to each successive anniversary thereafter, during which the Principal
Amount remains outstanding.
Payment shall be made at such place as the Holder may designate. All
payments hereunder shall be made in immediately available funds in lawful money
of the United States of America.
-1-
<PAGE>
This Promissory Note represents a full recourse obligation of the
Borrower. If for any reason the Borrower fails to pay the full amount due
hereunder, the Borrower's maximum personal liability shall be an amount equal to
100% of the Principal Amount.
Without limiting the generality of the foregoing, the Borrower hereby
pledges to the Holder __________ shares of Common Stock of the Company acquired
by the Borrower pursuant to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan on the date hereof to secure the satisfaction by Borrower of
all its obligations to the Holder under this Promissory Note. All applicable
provisions of the Uniform Commercial Code shall apply to and be deemed to govern
this pledge. Concurrently with the delivery of this Promissory Note to the
Holder, the Borrower has delivered to the Holder the certificates representing
the shares of Common Stock pledged hereby, together with a stock power therefor
duly executed by the Borrower in blank.
All or any portion of the Principal Amount evidenced by this
Promissory Note may be prepaid at any time without premium or penalty.
Except as set forth in the next sentence, the obligations of the
Borrower and the rights of the Holder under this Promissory Note shall be
absolute and shall not be subject to any counterclaim, set-off, deduction or
defense. Notwithstanding anything to the contrary contained herein, Holder
shall be entitled to apply one hundred percent (100%), or such lower percentage
as determined by the Holder, of the amount of any and all bonus payments, net of
applicable taxes and withholdings in accordance with Borrower's applicable
employee benefit plans, awarded by the Holder or its affiliates to the Borrower,
to reduce the aggregate amount of the outstanding principal and accrued and
unpaid interest thereon due under this Promissory Note.
The Borrower hereby acknowledges that, as a condition of receipt of
the value provided by the Holder referenced above and in partial consideration
therefore, the Holder has on the date hereof, executed a Restrictive Covenant
Agreement between the Holder and the Borrower, a copy of which is attached
hereto as Exhibit A.
The Borrower hereby waives presentment, notice of dishonor and protest
in respect hereof.
In the event of default under this Promissory Note, the Holder shall
have all rights and remedies provided at law and in equity. All costs and
expenses of collection, including attorneys' fees, shall be added to and become
part of the Principal Amount of this Promissory Note and shall be collectible as
part of such Principal Amount.
No interest or other amount shall be payable in excess of the maximum
permissible rate under applicable law and any interest or other amount which is
paid in excess of such maximum rate shall be deemed to be a payment of principal
hereunder.
This Promissory Note may not be changed, modified or terminated
orally, but only by an agreement in writing signed by the party sought to be
charged.
-2-
<PAGE>
This Promissory Note shall be governed by, and construed in accordance
with, the laws of the State of Delaware, without giving effect to the principles
of conflict of laws thereof. If any term or provision of the Promissory Note
shall be held invalid, illegal or unenforceable, the validity of all other terms
and provisions hereof shall in no way be affected thereby.
This Promissory Note shall be binding upon the successors and assigns
of the Borrower and shall inure to the benefit of the Holder and its successors
and assigns.
_______________________________
[Name]
-3-
<PAGE>
EXHIBIT 10.34
Internet Capital Group, Inc.
Restrictive Covenant Agreement
In consideration of my eligibility for and receipt of a loan from
Internet Capital Group, Inc. (the "Company") to exercise my grant under the
Internet Capital Group, Inc. 1999 Equity Compensation Plan (the "Plan") and to
pay certain income taxes associated with the exercise of that grant, I hereby
agree as follows:
1. Proprietary Information. At all times, I will hold in strictest confidence
and will not disclose, use, lecture upon or publish any of the Company's
Proprietary Information (defined below), except as such disclosure, use or
publication may be required in connection with my work for the Company, or
unless the Company expressly authorizes such disclosure in writing. "Proprietary
Information" shall mean any and all confidential and/or proprietary knowledge,
data or information of the Company, its affiliated entities, any of its
portfolio companies, investors, and partners, including but not limited to
information relating to financial matters, investments, budgets, business plans,
marketing plans, personnel matters, business contacts, products, processes,
know-how, designs, methods, improvements, discoveries, inventions, ideas, data,
programs, and other works of authorship. I will not, at any time, improperly use
or disclose any confidential information or trade secrets, if any, of any former
employer or any other person to whom I have an obligation of confidentiality,
and I will not bring into the premises of the Company any unpublished documents
or any property belonging to any former employer or any other person to whom I
have an obligation of confidentiality unless consented to in writing by that
former employer or person.
2. Assignment of Inventions.
2.1. Proprietary Rights and Inventions. The term "Proprietary Rights"
shall mean all trade secrets, know-how, patents, copyrights and other
intellectual property rights throughout the world. The term "Inventions" shall
mean all trade secrets, inventions, ideas, processes, data, programs, other
works of authorship, know-how, improvements, discoveries, developments, designs
and techniques.
2.2. Prior Inventions. I have set forth on the attached Prior Inventions
Schedule a complete list of all Inventions that I have, along or jointly with
others, made prior to the commencement of my employment with the Company that I
consider to be my property or the property of third parties and that I wish to
have excluded from the scope of this Restrictive Covenant Agreement
(collectively referred to as "Prior Inventions"). If no such disclosure is
attached, I represent that there are no prior Inventions. If, in the course of
my employment with the Company, I incorporate a Prior Invention into a Company
product, process or machine, the Company is hereby granted and shall have a
nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with
rights to sublicense through multiple tiers of sublicensees) to make, have made,
modify, use and sell such Prior Invention. Notwithstanding the foregoing, I
agree that I will not incorporate, or permit to be incorporated, Prior
Inventions in any Company Inventions without the Company's prior written
consent.
2.3. Assignment of Inventions. I hereby assign and agree to assign in the
future (when any such inventions or Proprietary Rights are first reduced to
practice or first fixed in a tangible medium, as applicable) to the Company all
of my right, title and interest in and to any and all Inventions (and all
Proprietary Rights with respect thereto) which are created, made conceived or
reduced to practice by me or under my direction or jointly with others during my
employment by the Company, whether or not during normal working hours or on the
premises of the Company (the "Company Inventions"). I will, at the Company's
requests, promptly execute a written assignment to the Company of any such
Company Invention, and I will preserve any such Company Invention as part of the
Proprietary Information of the Company.
2.4. Obligation to Keep Company Informed. I will promptly and fully
disclose in writing to the Company all Company Inventions. I agree to assist in
every proper way and to execute those documents and take such acts as are
reasonably requested by the Company to obtain, sustain and from time to time
enforce Proprietary Rights relating to Company Inventions in the United States
or any other country.
3. No Conflicting Obligation. I represent that my performance of all the terms
of this Restrictive Covenant Agreement as an employee of the Company does not
and will not breach any Restrictive Covenant Agreement to keep in confidence
information acquired by me in confidence or in trust prior to my employment by
the Company. I have not entered into, and I agree not to enter into, any
Restrictive Covenant Agreement whether written or oral in conflict herewith.
Page 1 of 3
<PAGE>
4. Additional Activities.
4.1. Non-Competition. During the term of my employment with the Company
and for the one (1) year period beginning on the date that my employment with
the Company terminates (other than due to a termination by the Company without
Cause), I will not, without the Company's express written consent, engage in any
employment or business activity whose primary business involves or is related to
business-to-business commerce using the internet or would otherwise conflict
with my employment by the Company. If the Company terminates my employment
without Cause, as defined in the Plan, I will not engage in any employment or
business activity whose primary business involves or is related to business-to-
business commerce using the internet for the six (6) month period beginning on
the date that my employment with the Company terminates only if the Company has
notified me within twenty (20) days of the date that my employment with the
Company terminates that the Company has agreed to continue my then current
salary during that six (6) month period.
4.2. Non-Solicitation and Non-Hire. During the term of my employment by
the Company and the one (1) year period beginning on the date that my employment
with the Company terminates for any reason, I will not either directly or
through others, solicit, hire or attempt to solicit or hire any employee,
consultant, independent contractor or customer of the Company to change or
terminate his or her relationship with the Company or otherwise to become an
employee, consultant, independent contractor or customer to, for or of any other
person or business entity. Notwithstanding the foregoing, general solicitations
of employment published in a journal, newspaper or other publication of general
circulation and not specifically directed towards such employees, consultants or
independent contractors shall not be deemed to constitute solicitation for
purposes of this Section 4.2. You shall not be prohibited from employing or
maintaining as a customer any such person or business that contacts you on his
or her or its own initiative and without any solicitation on your part.
5. Return of Company Documents. Upon termination of my employment with the
Company for any reason whatsoever, voluntarily or involuntarily, and at any
earlier time the Company requests, I will deliver to the person designated by
the Company all originals and copies of all documents and other property of the
Company in my possession, under my control or to which I may have access. I will
not reproduce or appropriate for my own use, or for the use of others, any
property, Proprietary Information or Company Inventions.
6. Legal and Equitable Remedies. Because my services are personal and unique
because I have had and will continue to have access to and have become and will
continue to become acquainted with the Proprietary Information of the Company
and because any breach by me of any of the restrictive covenants contained in
this Restrictive Covenant Agreement would result in irreparable injury and
damage for which money damages would not provide an adequate remedy, the Company
shall have the right to enforce this Restrictive Covenant Agreement and any of
its provisions by injunction, specific performance or other equitable relief,
without bond and without prejudice to any other rights and remedies that the
Company may have for a breach, or threatened breach, of this Restrictive
Covenant Agreement. You agree that in any action in which the Company seeks
injunction, specific performance or other equitable relief, you will not assert
or contend that any of the provisions of this Restrictive Covenant Agreement are
unreasonable or otherwise unenforceable.
7. Notices. Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party shall specify in writing. Such notices shall be deemed given upon personal
delivery to the appropriate address or if sent by certified or registered mail,
three (3) days after the date of mailing, or if sent by overnight courier upon
written verification of receipt.
8. Employment. I agree and understand that nothing in this Restrictive
Covenant Agreement shall confer any right with respect to continuation of
employment by the Company, nor shall it interfere in any way with my right or
the Company's right to terminate my employment at any time, for any reason.
9. General Provision. This Restrictive Covenant Agreement will be governed by
and construed according to the laws of the State of Delaware, as such laws are
applied to Restrictive Covenant Agreements. You acknowledge and agree that you
have had an opportunity to seek advice of counsel in connection with this
Restrictive Covenant Agreement and that the covenants contained herein are
reasonable in geographical and temporal scope and in all other respects. If any
court or other decision-maker of competent jurisdiction determines that any of
your covenants contained in this Restrictive Covenant Agreement, or any part
thereof, is unenforceable because of the duration or geographical scope of such
provision, then, the duration or scope of such provision, as the case may be,
shall be reduced so that such provision becomes enforceable and, in its reduced
form, such provision shall then be enforceable and shall be enforced. In case
any one or more of the provisions contained in this Restrictive Covenant
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the other provisions of this Restrictive Covenant Agreement, and this
Restrictive Covenant Agreement
Page 2 of 3
<PAGE>
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. This Restrictive Covenant Agreement will be binding
upon my heirs, executors, administrators and other legal representatives and
will be for the benefit of the Company, it successors, and its assigns. The
provisions of this Restrictive Covenant Agreement shall survive the termination
of employment and the assignment of this Restrictive Covenant Agreement by the
Company to any successor in interest or other assignee. No waiver by the Company
of any breach of this Restrictive Covenant Agreement shall be a waiver of any
preceding or succeeding breach. No waiver by the Company of any right under this
Restrictive Covenant Agreement shall be construed as a waiver of any other
right. The obligations pursuant to Sections 1 and 2 of this Restrictive Covenant
Agreement shall apply to any time during which I was previously employed, or am
in the future employed, by the Company as a consultant if no other Restrictive
Covenant Agreement governs nondisclosure and assignment of inventions during
such period. This Restrictive Covenant Agreement is the final, complete and
exclusive Restrictive Covenant Agreement of the parties with respect to the
subject matter hereof and supersedes and merges all prior discussions between
us. No modification of or amendment to this Restrictive Covenant Agreement, nor
any waiver of any rights under this Restrictive Covenant Agreement, will be
effective unless in writing and signed by the party to be charged. Any
subsequent change or changes in my duties, salary or compensation will not
affect the validity or scope of this Restrictive Covenant Agreement.
*****
This Restrictive Covenant Agreement shall be effective as of the date set
forth below.
Dated: ____________, 1999
I have read this Agreement carefully and understand its terms. I have
completely filled out the Prior Inventions Schedule to this Agreement.
_________________________________
By:
Address:
_________________________________
_________________________________
_________________________________
Accepted and Agreed to:
INTERNET CAPITAL GROUP, INC.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
_________________________________
Walter W. Buckley, III
President and Chief Executive Officer
Date: _____________, 1999
Page 3 of 3
<PAGE>
Prior Inventions Schedule
FROM:
DATE: _____________, 1999
SUBJECT: Prior Inventions
1. Except as listed in Section 2 below, the following is a complete list
of all inventions or improvements relevant to the subject matter of my
employment by Internet Capital Group, Inc. and any of its subsidiaries or
affiliates (the "Company") that have been made or conceived or first reduced to
practice by me alone or jointly with others prior to my engagement by the
Company:
[_] No inventions or improvements.
[_] See below:
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
[_] Additional sheets attached.
2. Due to a prior confidentiality agreement, I cannot complete the
disclosure under Section 1 above with respect to inventions or improvements
generally listed below, the proprietary rights and duty of confidentiality with
respect to which I owe to the following party(ies):
Invention or Improvement Party(ies) Relationship
1. __________________________ ___________________ _________________________
2. __________________________ ___________________ _________________________
3. __________________________ ___________________ _________________________
[_] Additional sheets attached.
<PAGE>
EXHIBIT 21.1
Subsidiaries of Internet Capital Group, Inc.
--------------------------------------------
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- ------------------------------
<S> <C>
Internet Capital Group Operations, Inc. Delaware
Arbinet Communications, Inc. Delaware
Benchmarking Partners, Inc. Massachusetts
BidCom, Inc. California
Blackboard, Inc. Delaware
Breakaway Solutions, Inc. Delaware
ClearCommerce Corporation Delaware
Collabria, Inc. Delaware
CommerX Inc. Delaware
ComputerJobs.com, Inc. Georgia
Context Integration, Inc. Delaware
Deja.com, Inc. Texas
e-Chemicals, Inc. Delaware
eMarketWorld, Inc. Delaware
Entegrity Solutions California
Internet Commerce Systems, Inc. Delaware
iParts Delaware
The Linkshare Corporation Delaware
MessageQuest, Inc. Florida
Paper Exchange.com L.L.C. Delaware
ONVIA.com, Inc. Washington
PrivaSeek, Inc. Delaware
Plansponsor Exchange Delaware
Pointment, Inc. California
RapidAutoNet Corporation Delaware
SageMaker, Inc. Delaware
ServiceSoft Technologies, Inc. Delaware
Sky Alland Marketing, Inc. Maryland
Star-Cite! Solutions, Inc. Delaware
Syncra Software, Inc. Delaware
Tradex Technologies, Inc. Delaware
United Messaging, Inc. Delaware
Universal Access, Inc. Illinois
US Interactive, Inc. Delaware
VerticalNet, Inc. Pennsylvania
Vivant! Corporation Delaware
</TABLE>
<PAGE>
Exhibit 23.1
The Board of Directors
Internet Capital Group, Inc.
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
KPMG LLP
Philadelphia, Pennsylvania
June 21, 1999
<PAGE>
Exhibit 23.3
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 11, 1999, except Note 1 as to which the date is
April 1, 1999, with respect to the financial statements of ComputerJobs.com,
Inc. included in the Registration Statement (Form S-1) and related Prospectus of
Internet Capital Group, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
Atlanta, Georgia
June 21, 1999
<PAGE>
Exhibit 23.4
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Consent of Independent Accountants
We hereby consent to the use in the Registration Statement on Form S-1 of
Internet Capital Group, Inc. of our report dated April 29, 1999, relating to the
financial statements of Syncra Software, Inc., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 19,236,061
<SECURITIES> 0
<RECEIVABLES> 2,888,504
<ALLOWANCES> (131,000)
<INVENTORY> 0
<CURRENT-ASSETS> 22,288,716
<PP&E> 839,428
<DEPRECIATION> (66,070)
<TOTAL-ASSETS> 130,128,664
<CURRENT-LIABILITIES> 4,255,457
<BONDS> 121,665
0
0
<COMMON> 82,006
<OTHER-SE> 123,163,793
<TOTAL-LIABILITY-AND-EQUITY> 130,128,664
<SALES> 0
<TOTAL-REVENUES> 3,111,035
<CGS> 0
<TOTAL-COSTS> 1,553,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 131,000
<INTEREST-EXPENSE> (295,979)
<INCOME-PRETAX> 26,615,872
<INCOME-TAX> (663,206)
<INCOME-CONTINUING> 20,000,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,000,797
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
<PAGE>
Exhibit 99.1
SAFEGUARD SCIENTIFICS, INC.
--------------------------
DIRECTED SHARE SUBSCRIPTION PROGRAM FOR
---------------------------------------
INTERNET CAPITAL GROUP, INC.
----------------------------
FOR HOLDERS OF
--------------
GREATER THAN 490 SHARES OF
--------------------------
SAFEGUARD SCIENTIFICS, INC.
---------------------------
COMMON STOCK
------------
ON JUNE 14, 1999
----------------
<PAGE>
If you have any questions regarding the Directed Share Subscription
Program, please contact Safeguard's automated investor relations line at (888)
SFE-1200 or the information agent at (877) 460-4356.
Please do not call Internet Capital Group with any questions regarding this
program. Only Safeguard's automated investor relations line or the information
agent will be able to answer your questions.
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of Internet Capital Group. We are permitting Safeguard Scientifics
to use its Directed Share Subscription Program to offer you the opportunity to
buy our common stock at our initial public offering price. We are offering a
total of shares of our common stock to Safeguard stockholders
under the program.
Safeguard has previously sent you materials describing in general terms how
the program works. Set forth below is a detailed description of how the program
will work in connection with our offering. Please review this description and
the attached prospectus carefully in deciding whether or not you wish to invest.
Who can subscribe
Only holders of greater than 490 shares of Safeguard common stock as of
June 14, 1999 are eligible to directly purchase shares of our common stock in
the program. Holders of 100 to 490 shares fo Safeguard common stock as of June
14, 1999 will receive a separate offer to acquire units in a unit investment
trust that will represent the economic equivalent of shares of our common stock.
Holders of fewer than 100 Safeguard shares will not be eligible to participate
in the program.
You may not transfer your subscription offer
The offer to purchase shares in this program may not be transferred except
by involuntary operation of law such as death or certain dissolutions.
Number of shares for which you may subscribe
To determine how many shares of our common stock you are eligible to
purchase, divide the number of shares of Safeguard common stock that you owned
as of June 14, 1999 by 10 and round up to the nearest whole number. For example,
if you held between 491 and 500 shares of Safeguard common stock as of this
date, you may subscribe for up to 50 shares of our common stock. You would have
to have had at least 501 shares of Safeguard common stock to be eligible to
subscribe for 51 shares of our common stock. You may not subscribe for a
fractional share of our common stock.
Minimum Subscription Size
The minimum subscription that we will accept for any account is for 50
shares of our common stock. Therefore, holders of fewer than 491 shares of
Safeguard common stock as of June 14, 1999 will not be able to purchase our
shares under the program. This limit applies to each of your accounts, not the
aggregate of all of your accounts. If as of June 14, 1999 you held 300 shares of
Safeguard common stock in one account and another 200 shares in a different
account, we will not consider you to be the owner of 500 shares of Safeguard
common stock. Since none of your accounts contained at least 491 shares of
Safeguard common stock, you would not be eligible to subscribe.
<PAGE>
You are under no obligation to subscribe, but if you subscribe for any
shares it must be for at least 50 shares in each account. For example, if you
held 750 shares of Safeguard common stock in a single account as of June 14 ,
1999 and you choose to purchase our shares under the program, you may purchase
between 50 and 75 shares.
Subscription Price
The price per share under the program will be the same price that all
investors will pay in our initial public offering. The price per share in the
initial public offering will be determined by negotiations between us and the
underwriters of our offering. The factors that we expect to consider in these
negotiations are described in the attached prospectus under the heading
"Underwriting." We currently anticipate that the offering price will be between
$ and $ per share. We will inform you of the initial public offering
price as described below under "How to Subscribe."
Stock Purchase Agreement with Safeguard Scientifics
We intend to enter into a Stock Purchase Agreement with Safeguard. This
agreement will provide that if all of our shares offered under
the program are not purchased by Safeguard stockholders, then Safeguard will
purchase the remaining shares at our initial public offering price. Safeguard
will be able to transfer all or part of its obligation to purchase these
remaining shares to third parties.
How to Subscribe
Enclosed with this letter and the attached copy of our preliminary
prospectus is a subscription form. The subscription form specifies the number of
our shares of common stock you may purchase in the program after we determine
the initial offering price. We expect to determine the initial public offering
price in late July to early August 1999, but various factors could hasten or
delay us. We will close the initial public offering and stop accepting
subscription forms four business days after we determine the initial public
offering price.
TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE FOLLOWING
PROCEDURES:
. Subscription forms and payments will not be accepted until after we have
determined our initial public offering price. Any subscription forms or
payments received before then will be returned to you.
. Time will not permit us to notify you directly of our initial public offering
price and closing date. Instead, Safeguard will take the following actions:
. publicize the offering price and the closing date on Safeguard's Web site
(www.safeguard.com) and through a press release;
. make every effort to notify each broker, dealer, bank, trust company or
other nominee that holds shares on behalf of Safeguard stockholders of the
offering price and closing date;
. make available an automated investor relations line (888-SFE-1200) on a 24
hour basis;
. make available an information agent (1-877-460-4356); and
. through the Safeguard Web site, provide you with an opportunity to request
e-mail notification (either directly to you or your designated
representative).
You will have to monitor these media to know when to place your order and
deliver payment. Also, if you do not hold your Safeguard shares directly,
you will need to keep in close contact with your broker, bank or other
nominee that holds your Safeguard shares on your behalf since they will need
to process the subscription for our shares and payment on your behalf.
. We will stop accepting orders under the program at 5:00 p.m. New York City
time on the fourth business day after we determine the initial public
offering price. Subscriptions forms and payments
2
<PAGE>
that have not been received by ChaseMellon Shareholder Services, L.L.C. by
this deadline will not be honored. For example, if we determine the initial
public offering price on a Thursday, ChaseMellon must receive all orders and
payments by 5:00 p.m. New York City time on the following Wednesday. This
deadline would be extended to the following Thursday if there were any
intervening holidays on which the Nasdaq National Market was closed.
. To place an order for our shares under this program, you will have to take
the following actions:
. If you hold your Safeguard shares in your own name, you must complete
and sign the subscription form and return it with full payment to
ChaseMellon. Your subscription form and payment must be received by
ChaseMellon before 5:00 p.m. New York City time on the fourth business
day after we determine the initial public offering price. We will not
honor any subscription form received by ChaseMellon after that date.
We suggest, for your protection, that you deliver your subscription form
and payment to ChaseMellon by overnight or express mail courier (or by
facsimile transmission if you intend to wire funds) as follows:
By Hand Delivery:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
By Overnight or Express Mail Courier:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
85 Challenger Road
Mail Drop Reorg
Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
ChaseMellon Shareholder Services, L.L.C.
Facsimile Transmission: (201) 296-4293
To confirm fax, call: (201) 296-4860
Wire instructions: Wire to: The Chase Manhattan Bank, New York, NY
ABA #021000021
Attention: Chase Mellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./Internet Capital
Group
Reference: Subscription Number
. If you hold your Safeguard shares through a broker, bank, trust company
or other nominee, then after we determine the initial public offering
price, you will have to contact the nominee that holds your Safeguard
shares if you wish to place an order and arrange for payment. WE CAUTION
YOU THAT BROKERS AND OTHER NOMINEES WILL REQUIRE SOME TIME TO PROCESS
SUBSCRIPTION FORMS FROM SAFEGUARD STOCKHOLDERS. THEREFORE, THEY MOST
LIKELY WILL STOP ACCEPTING SUBSCRIPTION FORMS EARLIER THAN THE FOURTH
BUSINESS DAY AFTER WE DETERMINE THE INITIAL PUBLIC OFFERING PRICE.
3
<PAGE>
. You must pay the subscription price by check or money order in U.S.
dollars representing good funds payable to "ChaseMellon Shareholder
Services, L.L.C." or by wire tranfer. Until this offering has
closed, your payment will be held in escrow by ChaseMellon
Shareholder Services, L.L.C.
. We will provide to each broker, dealer, bank, trust company, clearing
corporation and other nominee who holds Safeguard shares for the account
of others copies of the preliminary and final prospectus to provide to
the beneficial owners. Each of those entities will be responsible for
providing you with a copy of the preliminary and final prospectus.
ChaseMellon Shareholder Services will mail copies of the premilinary and
final prospectus to all record holders of Safeguard common stock as of
June 14, 1999.
. Safeguard will decide all questions as to the validity, form and
eligibility of subscriptions (including times of receipt, beneficial
ownership and compliance with minimum exercise provisions). The
acceptance of subscriptions and the subscription price also will be
determined by Safeguard. Alternative, conditional or contingent
subscriptions will not be accepted. Safeguard reserves the absolute
right to reject any subscriptions not properly submitted. In addition,
Safeguard may reject any subscription if the acceptance of the
subscription would be unlawful. Safeguard also may waive any
irregularities or conditions in the subscription for our shares, and
Safeguard's interpretation of the terms and conditions of the program
will be final and binding.
. We are not obligated to give you notification of defects in your
subscription. We will not consider a subscription to be made until all
defects have been cured or waived. If your subscription is rejected,
your payment of the exercise price will be promptly returned by
ChaseMellon.
Cancellation of Initial Public Offering
We may cancel our initial public offering at any time up until the closing.
If the initial public offering is canceled, Safeguard will publicize the
cancellation on its Web site and through a press release. The program gives you
no rights to purchase shares of our common stock if we cancel our initial public
offering and any funds previously submitted by you will be returned promptly.
Federal Tax Consequences
We believe that you will not be considered to have received a taxable
distribution of property as a result of your having the opportunity to
participate in this offering. Furthermore, we believe that, if the opportunity
were considered to be a property right, its value would be minimal, because your
opportunity is nontransferable, is of short duration and gives you only the
ability to purchase our common stock under the program at the same price as
other purchasers in our initial public offering. However, the Internal Revenue
Service is not bound by this position, and you are encouraged to consult with
your tax advisors about the federal, state and other tax consequences of the
program.
Stabilization
The underwriters of our initial public offering may engage in certain
transactions that stabilize the price of our common stock. We make no
representation as to the direction or magnitude of any effect that such
transactions may have on the price of our common stock.
Risk Factors
Investing in our common stock involves certain risks which are disclosed on
page of the attached preliminary prospectus.
Certain Restrictions
In managing the program, we and Safeguard will take reasonable steps to
comply with the laws of the different countries in which Safeguard stockholders
live. If compliance is too burdensome in one or more countries,
4
<PAGE>
Exhibit 99.3
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Dear Broker:
As you may know, we are undertaking an initial public offering of our shares of
common stock. We are permitting Safeguard Scientifics, Inc. to use its Directed
Share Subscription Program to offer Safeguard stockholders the opportunity to
buy shares of our common stock at the initial public offering price. The price
per share under this program will be the same price that all investors will pay
in our initial public offering.
The enclosed questions and answers will provide you with the key terms of the
Directed Share Subscription Program.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's investor relations line at (888) SFE-1200 or Corporate
Investor Communications, the information agent for this offer, at (877) 460-
4356. Please do not call Internet Capital Group regarding this program.
----------------------------------------------------------------
<PAGE>
Preliminary prospectuses for distribution to Safeguard stockholders are being
distributed through Corporate Investor Communications, Attention: Processing
Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201)
896-1900. Please call Corporate Investor Communications if you do not receive a
sufficient number of prospectuses for distrubution to Safeguard stockholders.
You should provide a copy of the preliminary prospectus to each Safeguard
stockholder on whose behalf you hold shares.
Sincerely,
Walter W. Buckley
President and
Chief Executive Officer
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
---------------------------
DIRECTED SHARE SUBSCRIPTION PROGRAM
-----------------------------------
FOR INTERNET CAPITAL GROUP
--------------------------
Q: Who is eligible to participate in the directed share subscription program
- ------------------------------------------------------------------------------
for Internet Capital Group?
---------------------------
A: Only record holders of at least 100 shares of Safeguard stock on June 14,
- ------------------------------------------------------------------------------
1999.
-----
Q: How was the opportunity to purchase IPO shares allocated to Safeguard
- --------------------------------------------------------------------------
stockholders?
-------------
A: Safeguard stockholders received a subscription offer to purchase 1 share of
- --------------------------------------------------------------------------------
Internet Capital Group for each 10 shares of Safeguard owned on June 14,
------------------------------------------------------------------------
1999, subject to the minimum purchase requirement.
--------------------------------------------------
If a Safeguard stockholder owned at least 100 shares of Safeguard common
------------------------------------------------------------------------
stock but the number of shares was not evenly divisible by 10, Safeguard
------------------------------------------------------------------------
will round up the subscription offer to the next whole number. The
------------------------------------------------------------------
Depository Trust Company will notify its participants of the date by which
--------------------------------------------------------------------------
the roundup requests must be submitted.
---------------------------------------
The offer to purchase shares under the directed share subscription program
--------------------------------------------------------------------------
is nontransferable and cannot be combined among multiple accounts.
------------------------------------------------------------------
There will not be an oversubscription privilege under this program.
-------------------------------------------------------------------
Q: What will a Safeguard stockholder be able to purchase?
- -----------------------------------------------------------
A: A holder of at least 491 shares of Safeguard on the record date will be
- ----------------------------------------------------------------------------
able to purchase shares of Internet Capital Group directly. The minimum
-----------------------------------------------------------------------
direct purchase is 50 shares.
----------------------------
A holder of at least 100 shares but less than 491 shares of Safeguard on
------------------------------------------------------------------------
the record date will be able to purchase units in the Safeguard Scientifics
---------------------------------------------------------------------------
ICG Trust. The minimum purchase of trust units is 10 units and the maximum
--------------------------------------------------------------------------
purchase of trust units is 49 units.
------------------------------------
A holder of less than 100 Safeguard shares will be unable to participate in
---------------------------------------------------------------------------
the directed share subscription program for Internet Capital Group.
-------------------------------------------------------------------
Q: What is the Safeguard Scientifics ICG Trust?
- -------------------------------------------------
A: The Safeguard Scientifics ICG Trust was set up to purchase shares of
- -------------------------------------------------------------------------
Internet Capital Group, at the IPO price, and to offer units in the trust
-------------------------------------------------------------------------
to eligible Safeguard stockholders who do not meet the minimum purchase
-----------------------------------------------------------------------
requirement. Each unit in the trust will represent the economic equivalent
--------------------------------------------------------------------------
of one share of Internet Capital Group. Units will be sold to eligible
----------------------------------------------------------------------
Safeguard stockholders at the same price as the trust pays for the Internet
---------------------------------------------------------------------------
Capital Group shares, which will be the offering price.
-------------------------------------------------------
The units will be uncertificated and may be held in street name at the
----------------------------------------------------------------------
Depository Trust Company. The units will be transferable. Holders of trust
--------------------------------------------------------------------------
<PAGE>
units will be able to sell the units at any time at the closing price of
-----------------------------------------------------------------------
the IPO shares on the date of redemption, less the brokerage costs
------------------------------------------------------------------
associated with selling the underlying shares to meet the redemption.
---------------------------------------------------------------------
Q: How will I know when the offering prices and what the expiration date for
- ------------------------------------------------------------------------------
the offering will be?
---------------------
A: When the offering is declared effective by the SEC and the offering price
- ------------------------------------------------------------------------------
is set, Safeguard will
----------------------
. issue a press release to the wire services
-----------------------------------------------
. update its automated investor relations line (1-888-SFE-1200) through
--------------------------------------------------------------------------
which you will be able to listen to the text of the press release
---------------------------------------------------------------------
announcing the price and the expiration date or request a faxed copy
--------------------------------------------------------------------
of the release
--------------
. update the information available through its information agent, who
------------------------------------------------------------------------
can be reached at 1-877-460-4356
--------------------------------
. post this information on its web page at www.safeguard.com
---------------------------------------------------------------
. notify the New York Stock Exchange, which will notify all of its
---------------------------------------------------------------------
members
-------
. notify the Depository Trust Company, which will electronically notify
--------------------------------------------------------------------------
all of its participants
-----------------------
. send you an e-mail alert if you signed up for this on Safeguard's web
--------------------------------------------------------------------------
page.
-----
Q: When can subscriptions and payment be submitted?
- -----------------------------------------------------
A: No subscriptions or payment can be accepted by the offering agent prior to
- -------------------------------------------------------------------------------
the date the offering is declared effective and the IPO price is set.
---------------------------------------------------------------------
ChaseMellon Shareholder Services, L.L.C. is the offering agent.
---------------------------------------------------------------
Once the IPO price has been set, the offering agent will begin accepting
- -----------------------------------------------------------------------------
subscriptions and payment. The offering agent will stop accepting
-----------------------------------------------------------------
subscriptions and payments at 5:00 p.m. New York City time on the fourth
------------------------------------------------------------------------
business day after the IPO price has been set.
----------------------------------------------
DTC will handle subscriptions on behalf of its participants. When you
- --------------------------------------------------------------------------
subscribe for shares of Internet Capital Group through DTC's automated
----------------------------------------------------------------------
subscription system, you will be required to confirm.
-----------------------------------------------------
. for a direct purchase of shares, that you are subscribing only on
----------------------------------------------------------------------
behalf of holders that meet the minimum per account purchase
-------------------------------------------------------------
requirement of 50 shares and
----------------------------
. for a purchase of units in the Safeguard Scientifics ICG Trust, that
-------------------------------------------------------------------------
you are subscribing only on behalf of holders that meet the minimum
-------------------------------------------------------------------
and maximum purchase requirements of between 10 units and 49 units.
-------------------------------------------------------------------
<PAGE>
Exhibit 99.4
- --------------------------- -------------------------------------
Subscription Number Share Subscription Offer
- ------------------------------------------------------
Shares of Internet Capital Group Eligible to Subscribe
- ------------------------------------------------------
Record Date Shares
SAFEGUARD SCIENTIFICS, INC.
DIRECTED SHARE SUBSCRIPTION PROGRAM
- --------------------------------------------------------------------------------
INTERNET CAPITAL GROUP, INC.
SUBSCRIPTION FORM
The shareholder named above has the right to purchase, pursuant to the terms and
conditions of the Safeguard Scientifics, Inc. Directed Share Subscription
Program, the number of fully paid and non-assessable shares of common stock,
$.001 par value, of Internet Capital Group, Inc. indicated above at a
subscription price that will be determined as outlined below. THE DIRECTED SHARE
SUBSCRIPTION PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH
BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. As described
in the preliminary prospectus accompanying this Subscription Form, each holder
of at least 100 shares of Safeguard Scientifics, Inc. Common Stock may subscribe
for one share of Internet Capital Group common stock for every ten shares of
Safeguard Scientifics common stock held as of June 14, 1999 in any account,
rounded upward. The minimum subscription that we will accept is for 50 shares of
Internet Capital Group per any individual account. Therefore, holders will not
be able to subscribe with respect to accounts containing fewer than 491 shares
of Safeguard common stock as of June 14, 1999. The right to participate in this
program and purchase shares of Internet Capital Group is nontransferable except
involuntarily by operation of law (e.g. death or certain dissolutions). Should
an involuntary transfer occur by operation of law, please contact ChaseMellon
Shareholder Services, L.L.C., the agent for the program, by telephone at
800-777-3674 for appropriate instructions.
The subscription price per share under the program will be the same price that
all investors will pay in Internet Capital Group's initial public offering. The
price per share will be determined by negotiations between Internet Capital
Group and the underwriters of the offering. The factors to be considered in
these negotiations are described in the preliminary prospectus accompanying this
Subscription Form. Internet Capital Group currently anticipates that its
initial public offering price will be determined in late July to early August
1999 but various factors could hasten or delay this determination. Time will
not permit Internet Capital Group to notify you directly of the subscription
price and the expiration date for this offering, but Safeguard Scientifics will
take the actions described in the accompanying preliminary prospectus to
publicize this information.
No offer to buy securities can be accepted, and no part of the subscription
price can be received, until the initial public offering price has been
determined and the registration statement, of which the preliminary prospectus
accompanying this Subscription Form is a part, has been declared effective. Any
Subscription Forms or payments received before then will be returned to you.
All persons electing to subscribe for shares of Internet Capital Group, Inc.
must complete the Election to Purchase on the reverse side of this Subscription
Form and return the Subscription Form, together with full payment of the
subscription price, to ChaseMellon at the addresses on the back of this
Subscription Form. If you do not properly complete and sign this Subscription
Form, it may be rejected. The Subscription Form and full payment of the
subscription price must be received by ChaseMellon no later than 5:00 p.m. New
York City time on the fourth business day after the initial public offering
price is determined. ChaseMellon will not honor any subscriptions received
after that time and date. If you do not wish to subscribe for shares, you do
not need to return this Subscription Form. Before completing and returning this
Subscription Form, you are urged to read carefully the preliminary prospectus
mailed to you with this Subscription Form for a more complete explanation of the
offering and for information about Internet Capital Group. If Internet Capital
Group cancels the initial public offering, you will have no rights to purchase
shares of Internet Capital Group and any funds previously submitted by you will
be returned.
<PAGE>
You should not return this Subscription Form or deliver any payment until after
Internet Capital Group has determined its initial public offering price. Any
subscription forms or payment received before then will be returned to you. Once
the initial public offering price has been determined, Safeguard Scientifics
will take the actions described in the preliminary prospectus to publicize the
subscription price and the date by which you must respond to the offer that has
been made to you under this program. If you wish to subscribe for shares at that
time, you should complete this Subscription Form and deliver payment of the
subscription price to ChaseMellon. ChaseMellon must receive the properly
completed and signed Subscription Form and full payment of the subscription
price by 5:00 p.m. New York City Time, on the fourth business day after Internet
Capital Group determines its initial public offering price. ChaseMellon will
stop accepting Subscription Forms after that time and date.
We suggest, for your protection, that you deliver the completed Subscription
Form and payment of the subscription price to ChaseMellon Shareholder Services,
L.L.C. by overnight or express mail courier; or by facsimile transmission and
wire transfer. The addresses for ChaseMellon are as follows:
By Hand Delivery: By Overnight Delivery/Express Mail Courier
- ----------------- ------------------------------------------
ChaseMellon Shareholder Services, ChaseMellon Shareholder Services
L.L.C. L.L.C.
Attn: Reorganization Dept. Attn: Reorganization Dept.
120 Broadway, 13th Floor 85 Challenger Road, Mail Drop--Reorg
New York, NY 10271 Ridgefield Park, NJ 07660
By Facsimile Transmisssion and Wire Transfer:
- ---------------------------------------------
ChaseMellon Shareholder Services, Wire to: The Chase Manhattan Bank,
L.L.C New York, NY
Facsimile Transmission: (201)296-4293 ABA# 021000021
To Confirm fax, call: (201) 296-4860 Attention: ChaseMellon Shareholder
Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics,
Inc./Internet Capital Group
Reference: Subscription Number
- --------------------------------------------------------------------------------
SUBSCRIPTION FORM--ELECTION TO PURCHASE
Subject to the terms and conditions of the Directed Share Subscription Program
described in the preliminary prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to purchase shares of common stock
of Internet Capital Group, Inc. as indicated below.
<TABLE>
<CAPTION>
<S> <C>
Number of shares purchased/1/ ____________________(NOTE: 50 share minimum required
in each account)/2/
Per share subscription price $___________________
Payment enclosed/3/ $___________________
</TABLE>
/1/ If the amount enclosed is not sufficient to pay the subscription price for
all shares that are stated to be purchased, or if the number of shares
being purchased is not specified, the number of shares purchased will be
assumed to be the maximum number that could be purchased upon payment of
such amount. Any amount remaining after such division shall be returned to
the purchaser.
/2/ Any order for less than the minimum purchase requirement will be rejected.
/3/ The subscription price must be paid by check or money order in U.S. dollars
representing "good funds" payable to ChaseMellon Shareholder Services,
L.L.C. or by wire transfer as described above. The payment enclosed should
equal the total shares purchased multiplied by the per share subscription
price.
Shares of common stock of Internet Capital Group, Inc. will be issued promptly
following the closing of the offering. The shares will be registered in the same
manner set forth on the face of this Subscription Form. If your shares are held
in joint ownership, all joint owners must sign this election to purchase. When
signing as attorney, executor, administrator, trustee or guardian, please give
your full title as such. If signing for a corporation, an authorized officer
must sign and provide title. If signing for a partnership, an authorized partner
must sign and indicate title.
Please provide a telephone number at which you can be reached in the event that
we have questions regarding the information that you have supplied.
Daytime Telephone Number ( ) ____________________________________
Evening Telephone Number ( ) ____________________________________
(IF JOINTLY OWNED, BOTH MUST SIGN)
SIGNATURE(S): ________________________________________
Dated:___________________________, 1999
________________________________________
NOTE: The above signature(s) must correspond with the
name(s) as written upon the face of this
Subscription Form in every particular without
alteration.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE--
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
Failure to complete this form may subject you to 31%
federal income tax withholding.
Part 1: PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE SPACE
PROVIDED AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW
TIN__________________________________________________
Social Security or Employer Identification Number
Part 2: Check the box if you are awaiting a TIN [_]
Part 3: CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the
number shown on this form is my correct taxpayer identification number (or a TIN
has not issued to me but I have mailed or delivered an application to receive a
TIN or intend to do so in the near future), (2) I am not subject to backup
withholding either because I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends or the IRS has notified me that I am
no longer subject to backup withholding, and (3) all other information provided
on this form is true, correct and complete.
Dated:___________________, 1999 SIGNATURE:___________________________________
You must cross out item (2) above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding, you received another notification
from the IRS that you are no longer subject to backup withholding, do not cross
out item (2).
