<R>
As filed with the Securities and
Exchange Commission on July 16, 1999.
</R>
Registration No. 333-78193
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
<R>
AMENDMENT NO. 2
</R>
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.
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103
(215) 994-4000
|
|
Bruce K. Dallas, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
|
|
CALCULATION OF REGISTRATION FEE
<R>
Title of Each
Class of
Securities to be Registered
|
|
Amount to be
Registered (1)
|
|
Proposed
Offering
Price Per Share
|
|
Proposed Maximum
Aggregate Offering
Price (2)
|
|
Amount of
Registration Fee (3)
|
|
Common Stock, par
value $.001
per share
|
|
15,050,000
|
|
$12.00
|
|
$180,600,000
|
|
$50,207
|
</R>
<R>
(1)
|
Includes 1,800,000 shares that the underwriters have the option to
purchase solely to cover over-allotments.
|
</R>
(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.
Explanatory Note
<R>
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 registrant’s 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. 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 program 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.
</R>
<R>
</R> <R>
red herring language
</R> <R>
</R> <R>
red herring top
</R>
<R></R>
PROSPECTUS
<R>
13,250,000 Shares
</R>
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
<R>
This is
Internet Capital Group, Inc.’s initial public offering of
shares of common stock. Of the 13,250,000 shares being offered, we
are offering 12,000,000 shares to the public generally and to
shareholders of one of our shareholders, Safeguard Scientifics,
Inc., and Safeguard Scientifics 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. Safeguard Scientifics
may be deemed a statutory underwriter with respect to the shares of
our common stock offered to the shareholders of Safeguard
Scientifics. Safeguard Scientifics is not an underwriter with
respect to the other shares of our common stock offered and is not
included in the term “underwriter” as used elsewhere in
this prospectus.
</R>
<R>
We
expect the public offering price to be between $10.00 and $12.00 per
share. Currently, no public market exists for the shares. After
pricing of the offering, we expect that the common stock will trade
on the Nasdaq National Market under the symbol “ICGE.”
</R>
<R>
International Business Machines Corporation has agreed to purchase
directly from us $45 million of shares of our common stock in a
private placement at a price equal to the initial public offering
price per share. The private placement is concurrent with and
conditioned upon the completion of our initial public offering. At
our request, the underwriters have reserved approximately 2.6
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. In addition, the
underwriters have reserved up to $20 million of shares of our common
stock for sale to General Electric Capital Corporation at the
initial public offering price. This represents 1,818,181 shares
based on the mid-point of the offering range. General Electric
Capital Corporation has not committed to purchasing these shares.
</R>
<R>
Investing in our common stock involves risks which are described in
the “Risk Factors” section beginning on page 8 of this
prospectus.
</R>
<R>
| |
|
Per Share
|
|
Total
|
| Public offering
price
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
| Proceeds, before
expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
| Proceeds, before
expenses, to Safeguard Scientifics, Inc.
|
|
$
|
|
$
|
</R>
<R>
The
underwriters may also purchase from us up to an additional 1,800,000
shares at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover
over-allotments.
</R>
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.
<R>
|
Banc of America
Securities LLC
|
</R>
|
BancBoston
Robertson Stephens
|
<R></R>
|
Deutsche Banc
Alex. Brown
|
Wit Capital Corporation
The date of this prospectus is
, 1999.
<R>
[First Logo and Artwork
depicting Internet Capital Group’s structure and strategy]
</R>
<R>
Text of Artwork:
</R>
<R>
Internet Capital Group is an Internet holding company actively
engaged in business-to-business e-commerce through a network of
partner companies. We provide operational assistance, capital
support, industry expertise, and a strategic network of business
relationships intended to maximize the long-term market potential of
more than 30 business-to-business e-commerce partner companies. We
focus on two types of business-to-business e-commerce companies—
market makers and infrastructure service providers.
</R>
<R>
[ Second Logo and Artwork
depicting Internet Capital Group’s structure and strategy]
</R>
Text of Artwork:
<R>
·
|
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. In
addition, our skilled management team helps guide our partner
companies in areas such as sales and marketing, executive
recruiting, human resources, technology and finance.
|
</R>
<R>
·
|
MARKET MAKERS bring buyers and sellers in a particular
industrial marketplace together to exchange products, services and
information via the Internet. We place market makers into one of
three categories—distributors, networks or communities.
Distributors sell goods and services to buyers over the Internet.
Networks streamline and automate communications and transactions
between buyers and sellers, and own the customer relationship.
Communities utilize content and communications to aggregate buyers
and sellers of common interests in an effort to facilitate
transactions.
|
</R>
<R>
·
|
INFRASTRUCTURE SERVICE PROVIDERS assist traditional
businesses in one of four ways—providing strategic
consulting, systems integration, software or outsourced services.
Strategic consultants assist businesses in developing their
e-commerce strategies. Systems integrators develop and implement
technological infrastructure that enables e-commerce. Software
providers design and sell software applications that support
e-commerce and integrate business functions. Outsourced service
providers offer software applications, infrastructure and related
services designed to help businesses reduce cost, improve
operational efficiency and decrease time to market.
|
</R>
TABLE OF CONTENTS
<R>
</R>
ABOUT THIS PROSPECTUS
<R>
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.
</R>
<R>
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 to shareholders of Safeguard Scientifics. See
“Directed Share Subscription Program.”
</R>
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.
<R>
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 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.
</R>
Internet Capital Group, Inc.
<R>
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 30,
1999, we owned interests in 35 B2B e-commerce companies which we
refer to as our partner companies.
</R>
<R>
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 Coca-Cola
Company, Exodus Communications, IBM Corporation, 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.
</R>
<R>
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
$43 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.
</R>
<R>
|
Ÿ
|
Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information in a particular industrial sector. Market makers
enable more effective and lower cost commerce for traditional
businesses by providing access through the Internet to a broader
range of buyers and sellers. Market makers typically operate in a
specific industry and tailor their business models to match a
target market’s distinct characteristics. 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.
|
</R>
|
Ÿ
|
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
partner company network currently includes significant interests in
17 infrastructure service providers: Benchmarking Partners,
Blackboard, Breakaway Solutions, ClearCommerce, CommerceQuest,
Context Integration, Entegrity Solutions, LinkShare, PrivaSeek,
SageMaker, ServiceSoft, Sky Alland Marketing, Syncra Software,
Tradex Technologies, United Messaging, US Interactive and Vivant!.
|
</R>
<R>
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 30, 1999, we added 15 B2B e-commerce companies to our
network.
</R>
<R>
We are a
Delaware corporation. 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.
</R>
This Offering
<R></R>
<R>
The
offering information provided below assumes an initial public
offering price of $11.00 per share and includes:
</R>
<R>
|
Ÿ
|
the
conversion of $90 million principal amount of our convertible
notes into 8,181,682 shares of common stock; and
|
</R>
<R>
|
Ÿ
|
the
sale and issuance to IBM Corporation upon closing of this offering
of 4,090,909 shares of common stock in a concurrent offering.
|
</R>
<R>
The
information provided below excludes:
</R>
<R>
|
Ÿ
|
1,598,500 shares of common stock issuable upon exercise of stock
options outstanding as of July 12, 1999 at a weighted average
exercise price of $5.27 per share;
|
</R>
<R>
|
Ÿ
|
1,605,750 shares of common stock issuable upon exercise of options
reserved for grant;
|
</R>
<R>
|
Ÿ
|
1,636,225 shares of common stock issuable upon exercise of
warrants with an exercise price of $11.00 per share related to our
outstanding convertible notes;
|
</R>
<R>
|
Ÿ
|
200,000 shares of common stock issuable upon exercise of warrants
with an exercise price of $10.00 per share related to our
revolving credit facility;
|
</R>
<R>
|
Ÿ
|
approximately 1,136,363 shares of our common stock issuable upon
exercise of an option under an agreement related to the
acquisition of a partner company ownership interest; and
|
</R>
<R>
|
Ÿ
|
the
exercise of the underwriters’ over-allotment option.
|
</R>
<R>
| Common stock
offered:
|
|
|
|
U.S. offering
|
|
10,850,000 shares
|
|
International offering
|
|
2,400,000
shares
|
| |
|
|
|
Total
|
|
13,250,000 shares
|
|
| Shares outstanding after the U.S.
and international offerings
|
|
123,765,124 shares
|
|
|
|
| Over-allotment option
|
|
1,800,000 shares
|
|
|
|
| Use of proceeds
|
|
We estimate that the net proceeds
to us from
this offering without exercise of the
over-allotment option will be about
$121.7 million. 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”
|
</R>
<R>
Concurrent Offering
</R>
<R>
Concurrently with our offering to the public, we are offering $45
million of shares of our common stock in a private placement to IBM
Corporation at the initial public offering price per share. This
private placement is described in greater detail below under the
heading “Concurrent Offering.”
</R>
Directed Share Subscription Program
<R>
Concurrently with our offering to the public and as part of this
offering, we and Safeguard Scientifics are offering approximately
3.5 million shares of our common stock to shareholders of Safeguard
Scientifics who owned at least 100 shares of common stock of
Safeguard Scientifics as of June 24, 1999 in a directed share
subscription program. Immediately prior to the completion of this
offering, Safeguard Scientifics will beneficially own 17.7% of our
common stock. The directed share subscription program is described
in greater detail below under the heading “Directed Share
Subscription Program.”
</R>
Summary Consolidated Financial Data
<R>
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 columns included in the
Consolidated Statements of Operations Data for the year ended
December 31, 1998 and the three months ended March 31, 1999, derived
from elsewhere in this prospectus, reflect the effect of our 1998
and 1999 acquisitions as if they had occurred on January 1, 1998.
The Pro Forma Consolidated Statements of Operations Data for the
year ended December 31, 1998 and the three months ended March 31,
1999, included under the actual results for each of those periods,
reflect our taxation as a corporation since January 1, 1998 and
1999, respectively, although we have been taxed as a corporation
only since February 2, 1999. The Pro Forma Consolidated Balance
Sheet Data reflect the issuance of $90 million principal amount of
our convertible notes in May 1999. The Pro Forma As Adjusted
Consolidated Balance Sheet Data reflect the automatic conversion of
our convertible notes into 8,181,682 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 $11.00 per share and after deduction of estimated underwriting
discounts and commissions and estimated offering expenses.
</R>
<R>
| |
|
March
4, 1996
(Inception) to
December 31,
1996
|
|
Year Ended
December 31,
|
|
Three
Months Ended March 31,
|
| |
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
|
1997
Actual
|
|
1998
Actual
|
|
1998
Pro Forma
|
|
1998
Actual
|
|
1999
Actual
|
|
1999
Pro Forma
|
|
|
|
(In Thousands
Except Per Share Data)
|
Consolidated
Statements of Operations
Data:
|
|
|
| Revenue
|
|
$285
|
|
|
$792
|
|
|
$3,135
|
|
|
$12,957
|
|
|
$377
|
|
|
$3,111
|
|
|
$4,340
|
|
| Operating
Expenses
|
|
2,348
|
|
|
7,510
|
|
|
20,156
|
|
|
23,420
|
|
|
3,087
|
|
|
5,401
|
|
|
7,671
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,063
|
)
|
|
(6,718
|
)
|
|
(17,021
|
)
|
|
(10,463
|
)
|
|
(2,710
|
)
|
|
(2,290
|
)
|
|
(3,331
|
)
|
| Other income, net
|
|
—
|
|
|
—
|
|
|
30,483
|
|
|
30,640
|
|
|
12,322
|
|
|
28,677
|
|
|
28,677
|
|
| Interest income
(expense), net
|
|
88
|
|
|
138
|
|
|
924
|
|
|
970
|
|
|
(53
|
)
|
|
296
|
|
|
290
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss)
Before Income Taxes, Minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Equity Income (Loss)
|
|
(1,975
|
)
|
|
(6,580
|
)
|
|
14,386
|
|
|
21,147
|
|
|
9,559
|
|
|
26,683
|
|
|
25,636
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663
|
|
|
3,239
|
|
| Minority interest
|
|
427
|
|
|
(106
|
)
|
|
5,382
|
|
|
1,265
|
|
|
—
|
|
|
146
|
|
|
331
|
|
| Equity income
(loss)
|
|
(514
|
)
|
|
106
|
|
|
(5,869
|
)
|
|
(38,179
|
)
|
|
(290
|
)
|
|
(7,412
|
)
|
|
(13,372
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$(2,062
|
)
|
|
$(6,580
|
)
|
|
$13,899
|
|
|
$(15,767
|
)
|
|
$9,269
|
|
|
$20,080
|
|
|
$15,834
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share—
diluted
|
|
$ (0.10
|
)
|
|
$ (0.19
|
)
|
|
$ 0.25
|
|
|
$(0.28
|
)
|
|
$ 0.20
|
|
|
$ 0.27
|
|
|
$0.21
|
|
Weighted average
shares
outstanding—diluted
|
|
20,396
|
|
|
34,099
|
|
|
56,149
|
|
|
56,102
|
|
|
46,784
|
|
|
73,700
|
|
|
73,700
|
|
| Pro forma net
income (unaudited)
|
|
|
|
|
|
|
|
$8,756
|
|
|
|
|
|
|
|
|
$12,233
|
|
|
|
|
Pro forma net
income per share—
diluted (unaudited)
|
|
|
|
|
|
|
|
$ 0.16
|
|
|
|
|
|
|
|
|
$0.17
|
|
|
|
|
</R>
<R></R>
<R>
| |
|
March 31, 1999
|
| |
|
(Unaudited)
|
| |
|
Actual
|
|
Pro Forma
|
|
Pro Forma
As Adjusted
|
| Consolidated
Balance Sheet Data:
|
|
(In Thousands)
|
| Cash and cash
equivalents
|
|
$19,372
|
|
$ 109,372
|
|
$273,852
|
| Working capital
|
|
17,697
|
|
107,697
|
|
272,177
|
| Total assets
|
|
132,065
|
|
222,065
|
|
386,545
|
| Long-term debt
|
|
122
|
|
122
|
|
122
|
| Convertible
subordinated notes
|
|
—
|
|
90,000
|
|
—
|
| Total shareholders
’ equity
|
|
123,235
|
|
123,235
|
|
377,715
|
</R>
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
<R>
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 early stages 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.
</R>
Our business depends upon the performance of our
partner companies, which is uncertain
<R>
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 and the
price of our common stock could decline. The material risks relating
to our partner companies include:
</R>
|
Ÿ
|
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;
|
|
Ÿ
|
lack
of the widespread commercial use of the Internet, which may
prevent our partner companies from succeeding; and
|
|
Ÿ
|
intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our
partner companies.
|
<R>
Of our
carrying value of $132 million in total assets as of March 31, 1999,
$96 million, or 73%, consisted of ownership interests and advances
to our partner companies. The carrying value of our partner company
ownership interests includes our original acquisition cost, the
effect of accounting for certain of our partner companies under the
equity method of accounting, and the effect of impairment charges
recorded for the decrease in value of certain partner companies. The
carrying value of our partner companies will be impaired and
decrease if one or more of our partner companies do not succeed. The
carrying value of our partner companies is not marked to market;
therefore a decline in the market value of one of our publicly
traded partner companies may impact our financial position by not
more than the carrying value of the partner company. However, such a
decline would likely affect the price of our common stock. For
example, VerticalNet is currently our only publicly traded partner
company and on June 30, 1999 our holdings in VerticalNet had a
market value of approximately $657 million. A decline in the market
value of VerticalNet will likely cause a decline in the price of our
common stock.
</R>
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
<R></R>
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.
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:
|
Ÿ
|
the
operating results of our partner companies;
|
|
Ÿ
|
changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in partner
companies;
|
|
Ÿ
|
changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership
percentages of our partner companies;
|
|
Ÿ
|
sales
of equity securities by our partner companies, which could cause
us to recognize gains or losses under applicable accounting rules;
|
|
Ÿ
|
the
pace of development or a decline in growth of the B2B e-commerce
market;
|
|
Ÿ
|
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
|
|
Ÿ
|
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.
<R>
As of
June 30, 1999, thirteen of our management personnel have worked for
us for less than one year. Of these thirteen management personnel,
twelve 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.
</R>
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.
<R>
We have had a history of losses and expect
continued losses in the foreseeable future
</R>
<R>
For the
three months ended March 31, 1999, we realized net income of $20.1
million primarily from a $28.3 million non-operating gain, before
deferred income taxes of $10.5 million, related to the VerticalNet
initial public offering and a $7.7 million deferred tax benefit
related to our conversion from a limited liability corporation to a
taxable corporation. Without the $25.5 million effect of these items
on our net income, we
would have had a net loss of $5.4 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 gains from the sale of certain
minority interests. In addition, we incurred net losses of $6.6
million in 1997 and $2.1 million in 1996. After giving effect to our
acquisitions during 1998 and 1999 as if they had occurred on January
1, 1998, pro forma net income for the year ended December 31, 1998
and the three months ended March 31, 1999 would have been reduced by
$29.7 million and $4.2 million, respectively. Excluding the effect
of any future non-operating gains, we expect to continue to incur
losses for the foreseeable future and, if we ever have profits, we
may not be able to sustain them.
</R>
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:
Ÿ
broaden our partner company support capabilities;
Ÿ
explore acquisition opportunities and alliances with other companies;
and
Ÿ
facilitate business arrangements among our partner companies.
<R>
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 losses will
be greater than we anticipate.
</R>
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
<R>
We may
compete with some of our shareholders and partner companies for
Internet-related opportunities. After this offering and the
concurrent offering, Comcast Corporation, Compaq Computer
Corporation, IBM Corporation and Safeguard Scientifics will
beneficially own approximately 9.9%, 4.0%, 3.3% and 14.4% of our
common stock, respectively. Excluding any shares potentially
purchased by General Electric Capital Corporation in this offering,
General Electric Capital Corporation will own approximately 2.9% of
our common stock after this offering. These shareholders may compete
with us to acquire interests in B2B e-commerce companies. Comcast
Corporation, General Electric Capital Corporation and Safeguard
Scientifics currently each have a designee as a member of our board
of directors and IBM Corporation has a right to designate a board
observer, which may give these companies access to our business plan
and knowledge about potential acquisitions. In addition, we may
compete with our partner companies to acquire interests in B2B
e-commerce companies, and our partner companies may compete with
each other for acquisitions or other B2B e-commerce opportunities.
In particular, VerticalNet seeks to expand, in part through
acquisition, its number of B2B communities. VerticalNet, therefore,
may seek to acquire companies that we would find attractive. While
we may partner with VerticalNet on future acquisitions, we have no
current contractual obligations to do so. We do not have any
contracts or other understandings with our shareholders or partner
companies that would govern the resolution of these potential
conflicts. This competition, and the complications posed by the
designated directors, may deter companies from partnering with us
and may limit our business opportunities.
</R>
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.
<R>
Our success could be impaired by low
valuations placed on Internet-related companies by the financial
marketplace
</R>
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:
|
ž
|
a
failure to agree on the terms of the acquisition, such as the
amount or price of our acquired interest;
|
|
ž
|
incompatibility between us and management of the company;
|
|
ž
|
competition from other acquirors of B2B e-commerce companies;
|
|
ž
|
a
lack of capital to acquire an interest in the company; and
|
|
ž
|
the
unwillingness of the company to partner with us.
|
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:
|
ž
|
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.
|
|
Ÿ
|
We
may acquire interests in companies in B2B e-commerce markets in
which we have little experience.
|
|
Ÿ
|
We
may not be able to facilitate collaboration between our partner
companies and new companies that we acquire.
|
|
Ÿ
|
To
fund future acquisitions we may be required to incur debt or issue
equity securities, which may be dilutive to existing shareholders.
|
<R>
We may have to take steps to avoid
registration under the Investment Company Act of 1940
</R>
<R>
We
believe that we are actively engaged in the business of B2B
e-commerce through our network of majority-owned subsidiaries and
companies that we are considered to “control.” Under the
Investment Company Act, we are considered to control a company if we
own more than 25% of that company’s voting securities. As of
June 15, 1999, approximately 90% of our total assets consisted of
majority-owned subsidiaries and companies that we are considered to
control. A company may be required to register as an investment
company if more than 45% of its total assets consists of, and more
than 45% of its income/loss and revenue attributable to it over the
last four quarters is derived from, ownership interests in companies
it does not control. Because many of our partner companies are not
majority-owned subsidiaries, and because we own 25% or less of the
voting securities of a number of our partner companies, 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 steps to avoid being required to
register. For example, in order to avoid having income from “
non-controlled” interests, we may not be able to sell minority
interests we would otherwise want to sell or we may have to generate
non-investment income by selling interests in partner companies that
we are considered to control. We may also have to ensure that we
retain more than 25% ownership interests in our partner companies
after any equity offerings. In addition, we may have to acquire
additional income or loss generating majority-owned or controlled
interests that we might not otherwise have acquired or may not be
able to acquire “non-controlling” interests in companies
that we would otherwise want to acquire. 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.
</R>
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
<R>
Fluctuation in the price of VerticalNet’s
common stock may affect the price of our common stock
</R>
<R>
VerticalNet is currently our only partner company with
publicly-traded common stock. The 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 30, 1999 of $105.00, our holdings in
VerticalNet had a market value of approximately $657 million.
Fluctuations in the price of VerticalNet’s common stock are
likely to affect the price of our common stock. As of March 31,
1999, the total carrying value of our assets as reflected in our
balance sheet was approximately $132 million, of which $21.1 million
relates to VerticalNet. However, 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 our partner company
ownership interests are not marked to market in our balance sheet.
</R>
VerticalNet
’s results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
|
ž
|
lack
of acceptance of the Internet as an advertising medium;
|
|
ž
|
inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
|
|
ž
|
lower
advertising rates;
|
|
ž
|
slow
development of the e-commerce market;
|
|
ž
|
lack
of acceptance of its Internet content;
|
|
ž
|
loss
of key content providers;
|
|
ž
|
loss
of key personnel; and
|
|
ž
|
inability to manage growth.
|
The success of our partner companies depends on
the development of the B2B e-commerce market, which is uncertain
<R>
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 providing products and services, our partner companies may not
succeed.
</R>
Our long-term
success depends on widespread market-acceptance of B2B e-commerce. A
number of factors could prevent such acceptance, including the
following:
|
ž
|
the
unwillingness of businesses to shift from traditional processes to
B2B e-commerce processes;
|
|
ž
|
the
necessary network infrastructure for substantial growth in usage
of B2B e-commerce may not be adequately developed;
|
|
ž
|
increased government regulation or taxation may adversely affect
the viability of B2B e-commerce;
|
|
ž
|
insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response
times for the users of B2B e-commerce; and
|
|
ž
|
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:
|
ž
|
purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
|
|
ž
|
dollars spent on consulting services with many established
information systems and management consulting firms; and
|
|
ž
|
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
<R>
Our
partner companies are inventing new ways of doing business. In
support of this innovation, they will develop proprietary
techniques, trademarks, processes and software. Although reasonable
efforts will be taken to protect the rights to this intellectual
property, the complexity of international trade secret, copyright,
trademark and patent law, coupled with the limited resources of
these young companies and the demands of quick delivery of products
and services to market, create risk that their efforts will prove
inadequate. Further, the nature of Internet business demands that
considerable detail about their innovative processes and techniques
be exposed to competitors, because it must be presented on the web
sites in order to attract clients. 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
claims against our partner companies’ proprietary rights, 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.
</R>
Our partner companies that publish or distribute
content over the Internet may be subject to legal liability
<R>
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. 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’ 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
<R>
Our
partner companies often enter into barter transactions in which they
provide advertising for other Internet-related 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 March 31, 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.
</R>
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
<R>
As of
June 30, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet’s
popularity and increasing use, new laws and regulations may be
adopted. These laws
and regulations may cover issues such as the collection and use of
data from Web site visitors and related privacy issues, pricing,
content, copyrights, online gambling, distribution and 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.
RISKS RELATING TO THE OFFERING
Shares eligible for future sale by our current
shareholders may decrease the price of our common stock
<R>
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
86,187,427 shares of common stock, options exercisable into an
aggregate of 709,000 shares of common stock, and warrants
exercisable into an aggregate of 1,150,893 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 5,754,892 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.
</R>
<R>
The
holders of 71,796,310 shares of common stock, the holders of
warrants to purchase 1,636,225 shares of common stock and the
holders of convertible notes that will automatically convert into
8,181,682 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.
</R>
The interests of certain of our significant
shareholders may conflict with our interests and the interests of
our other shareholders
<R>
As a
result of its ownership of our common stock, Safeguard Scientifics
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 this offering
and the concurrent offering, Safeguard Scientifics will beneficially
own 14.4% of our common stock assuming all 3.5 million shares are
purchased by shareholders of Safeguard Scientifics. See “
Directed Share Subscription Program.”
</R>
Anti-takeover provisions and our right to issue
preferred stock could make a third-party acquisition of us difficult
<R>
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.
</R>
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 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:
<R>
|
Ÿ
|
actual or anticipated variations in our quarterly results and
those of our partner companies;
|
</R>
|
Ÿ
|
new
sales formats or new products or services offered by us, our
partner companies and their competitors;
|
|
Ÿ
|
changes in our financial estimates and those of our partner
companies by securities analysts;
|
|
Ÿ
|
conditions or trends in the Internet industry in general and the
B2B e-commerce industry in particular;
|
|
Ÿ
|
announcements by our partner companies and their competitors of
technological innovations;
|
|
Ÿ
|
announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
|
|
Ÿ
|
changes in the market valuations of our partner companies and
other Internet companies;
|
|
Ÿ
|
our
capital commitments;
|
|
Ÿ
|
additions or departures of our key personnel and key personnel of
our partner companies; and
|
|
Ÿ
|
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.
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:
|
Ÿ
|
development of an e-commerce market;
|
|
Ÿ
|
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;
|
|
Ÿ
|
our
ability to successfully execute our business model;
|
|
Ÿ
|
our
partner companies’ ability to compete successfully against
direct and indirect competitors;
|
|
Ÿ
|
our
ability to acquire interests in additional companies;
|
|
Ÿ
|
growth in demand for Internet products and services; and
|
|
Ÿ
|
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.
<R>
Based on
an assumed initial public offering price of $11.00 per share, our
net proceeds from the sale of the 12,000,000 shares of our common
stock offered by us will be approximately $121.7 million ($140.1
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.
</R>
<R>
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. Subsequent to June
30, 1999, we utilized approximately $6 million to acquire interests
in or make advances to two new and existing partner companies. We
have committed an additional $1 million to existing partner
companies. We are in discussions to utilize approximately $15
million to acquire ownership interests in or make advances to three
new and existing partner companies, although we have no binding
obligations to complete these acquisitions. Our bank credit facility
matures in April 2000 and bears interest, at our option, at prime
and/or LIBOR plus 2.5%. At June 30, 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 primarily in cash,
cash equivalents, or direct or guaranteed obligations of the United
States.
</R>
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.
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
<R>
As part
of this offering, we and Safeguard Scientifics are offering
approximately 3.5 million shares of our common stock in a directed
share subscription program to shareholders of Safeguard Scientifics,
one of our principal and founding shareholders. Of these shares, we
are offering 2,250,000 shares and Safeguard Scientifics is offering
1,250,000 shares. Safeguard Scientifics’ shareholders may
subscribe for one share of our common stock for every ten shares of
Safeguard Scientifics’ common stock held by them, and may not
transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least 100
shares of Safeguard Scientifics’ common stock as of June 24,
1999 are eligible to purchase shares directly from us or Safeguard
Scientifics under the program. Shareholders who own less than 100
shares of Safeguard Scientifics’ common stock will be
ineligible to participate in the directed share subscription
program. Subscription orders will be satisfied first from the shares
being sold by us, and then from the shares offered by Safeguard
Scientifics. If any of the shares offered by us under the program
are not purchased by the shareholders of Safeguard Scientifics,
Safeguard Scientifics will purchase these shares from us. Sales
under the directed share subscription program will close on the day
of the closing of the sale of the other shares offered to the
public. It is expected that sales under the directed share
subscription program will be reflected in purchasers’
book-entry accounts at the Depository Trust Company, if any, as soon
as practicable after the closing of these sales. After the closing
of these sales, we will mail stock certificates to all purchasers
who do not maintain book-entry accounts at the Depository Trust
Company. Prior to this offering, Safeguard Scientifics beneficially
owned 17.7% of our common stock. After this offering and the
concurrent offering, Safeguard Scientifics will beneficially own
about 17,811,794 shares, or 14.4%, of our common stock, assuming
that all 3.5 million shares are purchased by shareholders of
Safeguard Scientifics. The purchase price under the program, whether
paid by Safeguard Scientifics or its shareholders, will be the same
price per share as set forth on the cover page of this prospectus.
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.
</R>
<R>
</R>
<R>
IBM
Corporation has entered into an agreement under which they will
purchase directly from us $45 million of shares of our common stock
in a private placement at a price equal to the initial public
offering price per share. The private placement is concurrent with
and conditional upon the completion of our initial public offering.
The $45 million in gross proceeds from the sale of our common stock
to IBM Corporation will be paid directly to us. Merrill Lynch will
act as the placement agent in connection with our offering to IBM
Corporation and will receive a placement agency fee. In connection
with IBM Corporation’s purchase of our common stock, IBM
Corporation has entered into a technology alliance with us. As part
of this alliance, IBM Corporation has agreed to offer its hardware,
software and services to us and our partner companies at preferred
pricing and to appoint a relationship manager to serve as the
primary focal point for us and our partner companies in accessing
IBM Corporation’s technical expertise. We have agreed that IBM
Corporation will be a preferred technology vendor to us and our
partner companies and will be included in our technical support for
our partner companies. In addition, we have agreed to promote IBM
Corporation to our partner companies as a preferred source of
equipment lease financing.
</R>
<R>
The
following table sets forth our capitalization on an Actual basis as
of March 31, 1999 and on a Pro Forma basis to reflect the issuance
of $90 million principal amount of our convertible notes in May 1999
as if it had occurred on March 31, 1999.
</R>
<R></R>
<R>
The
table also sets forth our capitalization on a Pro Forma As Adjusted
basis as if the following events occurred on March 31, 1999 and
assuming the initial public offering price is $11.00 per share:
</R>
<R>
|
·
|
the
automatic conversion of our convertible notes into 8,181,682
shares of our common stock upon completion of this offering;
|
</R>
<R>
|
·
|
the
issuance and sale of 12,000,000 shares of our common stock by us
in this offering; and
|
</R>
<R>
|
·
|
the
issuance and sale of 4,090,909 shares of our common stock by us in
the concurrent offering after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
|
</R>
<R>
The
calculation of shareholders’ equity reflects our Reorganization
on February 2, 1999 and does not reflect:
</R>
<R>
|
·
|
the
waiving of interest that would result upon the conversion of the
convertible notes; and
|
</R>
<R>
|
·
|
the
value attributed to the warrants issued together with the
convertible notes and our credit facility.
|
</R>
<R>
Common
stock data excludes:
</R>
<R>
|
·
|
the
underwriters’ over-allotment option;
|
</R>
<R>
|
·
|
the
shares of common stock reserved for issuance under our 1999 Equity
Compensation Plan, under which options to purchase 1,598,500
shares were outstanding as of July 12, 1999 at a weighted average
exercise price of $5.27 per share;
|
</R>
<R>
|
·
|
the
warrants outstanding to purchase 1,836,225 shares at a weighted
average exercise price of $10.89 per share; and
|
</R>
<R>
|
·
|
approximately 1,136,364 shares of our common stock issuable upon
exercise of an option under an agreement related to the
acquisition of a partner company ownership interest.
|
</R>
<R>
| |
|
March 31, 1999
|
| |
|
Actual
|
|
Pro Forma
|
|
Pro Forma
As Adjusted
|
| 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; 106,278,140
shares issued
and outstanding-pro forma as adjusted
|
|
82,006
|
|
|
82,006
|
|
|
106,278
|
|
| |
| Additional paid-in
capital
|
|
103,758,063
|
|
|
103,758,063
|
|
|
358,213,790
|
|
| |
| Retained earnings
|
|
23,318,903
|
|
|
23,318,903
|
|
|
23,318,903
|
|
| |
| Unamortized
deferred compensation
|
|
(6,661,692
|
)
|
|
(6,661,692
|
)
|
|
(6,661,692
|
)
|
| |
| Accumulated other
comprehensive income
|
|
2,738,180
|
|
|
2,738,180
|
|
|
2,738,180
|
|
| |
|
|
|
|
|
|
|
|
|
| |
| Total shareholders
’ equity
|
|
123,235,460
|
|
|
123,235,460
|
|
|
377,715,459
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total capitalization
|
|
$123,357,125
|
|
|
$213,357,125
|
|
|
$377,837,124
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
<R>
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 $206,428,533,
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:
</R>
<R>
|
Ÿ
|
the
issuance and sale by us of 12,000,000 shares of our common stock
in this offering at an assumed initial public offering price of
$11.00 per share, and the application of the estimated net
proceeds of $121.7 million; and
|
</R>
<R>
|
Ÿ
|
the
sale by us to IBM Corporation of $45 million of shares of our
common stock, or 4,090,090 shares, at an assumed price of $11.00
per share, and the application of the estimated net proceeds of
$42.7 million,
|
</R>
<R>
our pro forma as adjusted net tangible book value
at March 31, 1999 would have been approximately $370,908,532, or
$3.49 per share. This represents an immediate increase in net
tangible book value of $1.20 per share to existing shareholders and
an immediate dilution of $7.51 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.
</R>
<R>
| Assumed initial
public offering price per share
|
|
|
|
$11.00
|
|
Pro forma net tangible book value per share at March
31, 1999
|
|
$2.29
|
|
|
|
Increase per share attributable to this offering
|
|
1.20
|
|
|
| Pro forma as
adjusted net tangible book value per share after this offering
|
|
|
|
3.49
|
| |
|
|
|
|
| Dilution per share
to new investors in this offering
|
|
|
|
$7.51
|
| |
|
|
|
|
</R>
<R>
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 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 $11.00 per
share and before deducting estimated underwriting discounts and
commissions and our estimated offering expenses:
</R>
<R>
| |
|
Shares Purchased
|
|
Total
Consideration
|
|
Average
Price Per
Share
|
| |
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
| Existing
shareholders
|
|
90,187,231
|
|
85
|
%
|
|
$200,500,000
|
|
53
|
%
|
|
$ 2.22
|
| Concurrent
offering
|
|
4,090,909
|
|
4
|
|
|
45,000,000
|
|
12
|
|
|
11.00
|
| New investors
|
|
12,000,000
|
|
11
|
|
|
132,000,000
|
|
35
|
|
|
11.00
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
106,278,140
|
|
100
|
%
|
|
$377,500,000
|
|
100
|
%
|
|
$3.55
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
The
table above assumes the conversion of all the outstanding
convertible notes into shares of common stock and 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 1,800,000 shares.
</R>
<R>
The
foregoing discussion and tables assume no exercise of any stock
options outstanding as of March 31, 1999. From March 31, 1999 to
July 12, 1999, options to purchase a total of 17,795,750 shares of
our common stock were exercised at a weighted average exercise price
of $4.50 per share. As of July 12, 1999, there were options
outstanding to purchase a total of 1,598,500 shares of our common
stock at a weighted average exercise price of $5.27 per share and
1,605,750 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 “
Concurrent Offering,” “Capitalization,” “
Management—Employee Benefit Plans” and Note 9 to the
Consolidated Financial Statements of Internet Capital Group.
</R>
SELECTED CONSOLIDATED FINANCIAL DATA
<R>
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 have been derived from the
unaudited Consolidated Financial Statements included elsewhere in
this prospectus. The pro forma net income and net income per share
information included in the Consolidated Statements of Operations
Data for the year ended December 31, 1998 and the three months ended
March 31, 1999 is unaudited data derived from the Consolidated
Financial Statements included elsewhere in this prospectus and
reflect our taxation as a corporation since January 1, 1998 and
1999, respectively, although we have been taxed as a corporation
only since February 2, 1999.
</R>
<R>
| |
|
March
4, 1996
(Inception) to
December 31,
1996
|
|
Year Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Consolidated
Statements of Operations Data:
|
|
|
|
| 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
|
|
|
3,777,381
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
2,348,368
|
|
|
7,509,623
|
|
|
20,156,359
|
|
|
3,087,025
|
|
|
5,401,144
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,063,228
|
)
|
|
(6,717,801
|
)
|
|
(17,021,590
|
)
|
|
(2,709,654
|
)
|
|
(2,290,109
|
)
|
| |
| Other income, net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,677,471
|
|
| Interest income
(expense), net
|
|
88,098
|
|
|
138,286
|
|
|
924,588
|
|
|
(53,620
|
)
|
|
295,979
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
Before Taxes, Minority Interest
and Equity Income (Loss)
|
|
(1,975,130
|
)
|
|
(6,579,515
|
)
|
|
14,386,175
|
|
|
9,558,888
|
|
|
26,683,341
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| Minority interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
—
|
|
|
146,018
|
|
| Equity income
(loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
|
(289,847
|
)
|
|
(7,412,602
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$ (2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income (loss)
per share—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
|
|
|
|
|
|
$12,232,557
|
|
Pro forma net
income per share—diluted
(unaudited)
|
|
|
|
|
|
|
|
$0.16
|
|
|
|
|
|
$0.17
|
|
</R>
<R>
| |
|
December 31,
|
|
(Unaudited)
March 31,1999
|
| |
|
1996
|
|
1997
|
|
1998
|
| Consolidated
Balance Sheet Data:
|
| Cash and cash
equivalents
|
|
$3,215,256
|
|
$5,967,461
|
|
$26,840,904
|
|
$19,372,129
|
| Working capital
|
|
4,883,129
|
|
2,390,762
|
|
20,452,438
|
|
17,696,769
|
| Total assets
|
|
13,629,407
|
|
31,481,016
|
|
96,785,975
|
|
132,064,721
|
| Long-term debt
|
|
167,067
|
|
399,948
|
|
351,924
|
|
121,665
|
| Total shareholders
’ equity
|
|
12,858,856
|
|
26,634,675
|
|
80,724,378
|
|
123,235,460
|
</R>
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
<R>
Internet
Capital Group is an Internet holding company actively engaged in B2B
e-commerce through a network of partner companies. As of June 30,
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.
</R>
<R>
Because
we acquire significant interests in B2B e-commerce companies, many
of which generate net 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 net losses in many quarters for
the foreseeable future. While our partner companies have
consistently reported 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 “Net
Results of Operations—General ICG Operations—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 fair 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. The business plan objectives and milestones we
consider include, among others, those related to financial
performance such as achievement of planned financial results or
completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of a Web site or
the hiring of key employees. The fair value of our ownership
interests in and advances to privately held partner companies is
generally determined based on the value at which independent third
parties have or have committed to invest in our partner companies.
</R>
<R>
The
presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements
of our partner companies. To the extent our partner companies change
the presentation or content of their financial statements, as may be
required upon review by the Securities and Exchange Commission or
changes in accounting literature, the presentation and content of
our financial statements may also change.
</R>
<R>
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 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.
</R>
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.
<R>
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 net 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 voting 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 voting interest in
Breakaway 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.
</R>
<R>
The
effect of a partner company’s net 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, because 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.
</R>
<R>
Equity Method. Partner companies whose results we do not
consolidate, but over whom we exercise significant influence, are
generally 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.
</R>
<R>
Our
partner companies accounted for under the equity method of
accounting at December 31, 1998 and March 31, 1999 included:
</R>
<R>
| |
|
|
|
Voting Ownership
|
| |
|
Partner
Company
Since
|
|
December 31,
1998
|
|
March 31,
1999
|
| EQUITY METHOD:
|
|
|
|
|
|
|
| BidCom, Inc.
|
|
1999
|
|
N/A
|
|
25%
|
| Blackboard, Inc.
|
|
1998
|
|
35%
|
|
35%
|
| CommerX, Inc.
|
|
1998
|
|
34%
|
|
34%
|
| ComputerJobs.com,
Inc.
|
|
1998
|
|
33%
|
|
33%
|
| Internet Commerce
Systems, Inc.
|
|
1999
|
|
N/A
|
|
43%
|
| LinkShare
Corporation
|
|
1998
|
|
34%
|
|
34%
|
| ONVIA.com, Inc.
|
|
1999
|
|
N/A
|
|
20%
|
| PlanSponsor
Exchange
|
|
1999
|
|
N/A
|
|
24%
|
| SageMaker, Inc.
|
|
1998
|
|
22%
|
|
27%
|
| Sky Alland
Marketing, Inc.
|
|
1996
|
|
31%
|
|
31%
|
| Syncra Software,
Inc.
|
|
1998
|
|
53%
|
|
34%
|
| VerticalNet, Inc.
|
|
1996
|
|
N/A
|
|
37%
|
| Vivant!
Corporation Management
|
|
1998
|
|
23%
|
|
23%
|
</R>
<R>
As of
March 31, 1999, we owned voting convertible preferred stock in all
companies listed except VerticalNet. We owned common stock in
SageMaker, Sky Alland and VerticalNet. Our voting ownership in
VerticalNet consisted only of common stock at March 31, 1999.
VerticalNet was consolidated at December 31, 1998. We have
representation on the board of directors of all of the above partner
companies.
</R>
<R>
Most of
our equity method partner companies are in a very early stage of
development and have not generated significant revenues. In
addition, most equity method partner companies incurred substantial
losses in 1998 and are expected to continue to incur substantial
losses in 1999. One equity method partner company generated a net
profit of less than $1 million in 1998; however, this partner
company is not expected to generate a profit in 1999.
</R>
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.
<R></R>
<R>
Our
partner companies accounted for under the cost method of accounting
at December 31, 1998 and March 31, 1999 included:
</R> <R>
| |
|
|
|
Voting Ownership
|
|
|
|
Partner
Company
Since
|
|
December 31,
1998
|
|
March 31,
1999
|
| COST METHOD:
|
|
|
|
|
|
|
| Benchmarking
Partners, Inc.
|
|
1996
|
|
13%
|
|
12%
|
| ClearCommerce Corp.
|
|
1997
|
|
17%
|
|
16%
|
| Collabria, Inc.
|
|
1999
|
|
N/A
|
|
10%
|
| CommerceQuest, Inc.
|
|
1998
|
|
0%
|
|
0%
|
| Context
Integration, Inc.
|
|
1997
|
|
18%
|
|
18%
|
| Deja.com, Inc.
|
|
1997
|
|
0%
|
|
0%
|
| e-Chemicals, Inc.
|
|
1998
|
|
0%
|
|
0%
|
| Entegrity
Solutions
|
|
1996
|
|
12%
|
|
12%
|
| PrivaSeek, Inc.
|
|
1998
|
|
16%
|
|
16%
|
| RapidAutoNet
Corporation
|
|
1998
|
|
15%
|
|
15%
|
| ServiceSoft
Technologies, Inc.
|
|
1998
|
|
12%
|
|
6%
|
| Universal Access,
Inc.
|
|
1999
|
|
N/A
|
|
11%
|
| US Interactive,
Inc.
|
|
1996
|
|
4%
|
|
3%
|
</R>
<R>
As of
March 31, 1999, we owned voting convertible preferred stock in all
companies listed except CommerceQuest, Deja.com and e-Chemicals, in
which we owned non-voting convertible securities. In most cases, we
have representation on the board of directors of the above
companies, including those in which we hold non-voting securities.
</R>
<R>
Most of
our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In
addition, most cost method partner companies incurred substantial
losses in 1998 and are expected to continue to incur substantial
losses in 1999. Two cost method partner companies were profitable in
1998, one of which is not expected to be profitable in 1999. None of
our cost method partner companies have paid dividends during our
period of ownership and they generally do not intend to pay
dividends in the foreseeable future.
</R>
Effect of Various Accounting Methods on the
Presentation of our Financial Statements
<R>
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 voting 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
voting interest in Breakaway Solutions which we have consolidated
from the date of acquisition. The presentation of our financial
statements looks substantially different as a result of
consolidating Breakaway Solutions and no longer consolidating
VerticalNet in our financial statements for the three months ended
March 31, 1999.
</R>
<R>
To
understand our net 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 which treat 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 the 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.
</R>
<R>
Net Results of Operations
</R>
<R>
Our
reportable segments determined in accordance with Statement of
Financial Accounting Standards No. 131 are 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 months ended March 31, 1999 and
recording our share of earnings or losses of partner companies
accounted for 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.
</R>
<R>
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 operating expenses.
</R>
<R>
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 to
VerticalNet in the form of convertible notes 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.
</R>
<R>
As of
June 30, 1999, VerticalNet owned and operated 43 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.
</R>
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.
<R>
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, resulting in net income in 1996 and 1997 of $.6
million and $1.1 million, respectively, and net loss in 1998 of $.6
million. In 1999, Breakaway Solutions is expanding to provide
service offerings in custom Web development and application hosting
both through internal expansion and acquisitions.
</R>
<R>
A
significant portion of our net results of operations is derived from
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 net 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.
</R>
<R>
Our
consolidated net results of operations consisted of the following:
</R>
<R>
| |
|
March
4, 1996
(Inception) to
December 31,
1996
|
|
Year Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Summary of
Consolidated Net Income (Loss)
|
|
Partner Company Operations
|
|
$ (796,202
|
)
|
|
$(4,778,902
|
)
|
|
$(14,081,522
|
)
|
|
$(2,374,716
|
)
|
|
$(7,812,789
|
)
|
|
General ICG Operations
|
|
(1,266,283
|
)
|
|
(1,800,726
|
)
|
|
27,980,450
|
|
|
11,643,757
|
|
|
27,229,546
|
|
|
Income tax benefit (provision)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) — Consolidated Total
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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
|
|
|
2,044,253
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
987,547
|
|
|
5,455,505
|
|
|
16,643,773
|
|
|
2,386,306
|
|
|
3,668,016
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(702,407
|
)
|
|
(4,663,683
|
)
|
|
(13,509,004
|
)
|
|
(2,008,935
|
)
|
|
(556,981
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,994
|
)
|
|
Interest income
|
|
7,491
|
|
|
10,999
|
|
|
212,130
|
|
|
3,937
|
|
|
31,526
|
|
|
Interest expense
|
|
(13,931
|
)
|
|
(126,105)
|
|
|
(297,401)
|
|
|
(79,871
|
)
|
|
(13,756
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest and
equity
income (loss)
|
|
(708,847
|
)
|
|
(4,778,789
|
)
|
|
(13,594,275
|
)
|
|
(2,084,869
|
)
|
|
(546,205
|
)
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Minority interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
—
|
|
|
146,018
|
|
|
Equity income (loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
|
(289,847
|
)
|
|
(7,412,602
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Partner Company Operations
|
|
$(796,202
|
)
|
|
$(4,778,902
|
)
|
|
$(14,081,522
|
)
|
|
$(2,374,716
|
)
|
|
$(7,812,789
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| General ICG
Operations
|
|
General and administrative
|
|
$1,360,821
|
|
|
$2,054,118
|
|
|
$3,512,586
|
|
|
$700,719
|
|
|
$1,733,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,360,821
|
)
|
|
(2,054,118
|
)
|
|
(3,512,586
|
)
|
|
(700,719
|
)
|
|
(
|
1,733,128)
|
|
Other income (expense), 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
|
)
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from General ICG Operations before income
taxes
|
|
$(1,266,283
|
)
|
|
$(1,800,726
|
)
|
|
$27,980,450
|
|
|
$11,643,757
|
|
|
$27,229,546
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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
|
|
|
3,777,381
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
2,348,368
|
|
|
7,509,623
|
|
|
20,156,359
|
|
|
3,087,025
|
|
|
5,401,144
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,063,228
|
)
|
|
(6,717,801
|
)
|
|
(17,021,590
|
)
|
|
(2,709,654
|
)
|
|
(2,290,109
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,677,471
|
|
|
Interest income
|
|
102,029
|
|
|
264,391
|
|
|
1,305,787
|
|
|
56,400
|
|
|
309,735
|
|
|
Interest expense
|
|
(13,931
|
)
|
|
(126,105
|
)
|
|
(381,199
|
)
|
|
(110,020
|
)
|
|
(13,756
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest and
equity
income (loss)
|
|
(1,975,130
|
)
|
|
(6,579,515)
|
|
|
14,386,175
|
|
|
9,558,888
|
|
|
26,683,341
|
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
|
Minority interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
—
|
|
|
146,018
|
|
|
Equity income (loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
|
(289,847)
|
|
|
(7,412,602
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) — Consolidated Total
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pretax income as reported
|
|
|
|
|
|
|
|
$13,898,928
|
|
|
|
|
|
$19,416,757
|
|
|
Pro forma income tax provision
|
|
|
|
|
|
|
|
(5,142,603
|
)
|
|
|
|
|
(7,184,200
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
|
|
|
|
|
|
$8,756,325
|
|
|
|
|
|
$12,232,557
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
Net Results of Operations-Partner Company
Operations
</R>
<R>
Breakaway Solutions-Analysis of Three
Months Ended March 31, 1999
</R>
<R>
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’ net 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.
</R>
<R>
Revenue. Breakaway Solutions’ revenue of $3.1 million for
the three months 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.
</R>
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.
<R>
General and Administrative Expenses. General and administrative
expenses of $1.7 million for the three months ended March 31, 1999
were directly attributable to 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 amortization of intangible assets that will result from
its 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.
</R>
|
VerticalNet-Analysis of Three Year Period Ended December 31, 1998
|
<R>
For the
periods ended December 31, 1996, 1997 and 1998, VerticalNet was our
only consolidated partner company. The following is a discussion of
VerticalNet’s net results of operations for the three year
period ended December 31, 1998:
</R>
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.
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.
<R></R>
<R>
Net Results of Operations-General ICG
Operations
</R>
|
General and
Administrative
|
<R>
Our
general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and
consulting, and travel-related costs. These costs also include the
amortization of deferred compensation expense in the periods ended
December 31, 1996, 1997 and 1998 of $.1 million, $.2 million and $.3
million, respectively, related to restricted stock issuances. 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 1999 we
significantly increased the number of our employees. As a result of
these initiatives, our general and administrative costs increased
147% for the three months ended March 31, 1999 compared to the
comparable 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.
</R>
<R>
During
the year ended December 31, 1998, the three months ended March 31,
1999, the three months ended June 30, 1999, and the period from July
1, 1999 through July 12, 1999, we recorded aggregate unearned
compensation expense of $.7 million, $5.5 million, $9.6 million and
$1.4 million, respectively, in connection with the grant of stock
options to non-employees and the grant of employee stock options
with exercise prices less than the deemed fair value on the
respective dates of grant. General and administrative costs for the
three months ended March 31, 1999 include $.1 million of
amortization expense related to stock option grants. Amortization of
deferred compensation expense for the year ended December 31, 1999
will be about $2.4 million. We expect to recognize amortization of
deferred compensation expense for each of the years from 2000 to
2003 of about $3.4 million and for 2004 of about $1.2 million.
</R>
<R>
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 issuances of stock by our 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 and advances to partner companies.
</R>
General ICG
Operations’ other income consisted of the following:
| |
|
Year
Ended
December 31, 1998
|
|
Three Months
Ended
March 31,
|
| |
|
|
1998
|
|
1999
|
| 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
|
|
| |
|
|
|
|
|
|
|
|
|
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.
<R>
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 months 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 we account for under the consolidation or
equity method of accounting 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 to
our shareholders’ equity.
</R>
<R>
In
December 1998 we recorded an impairment charge of $1.9 million for
the decrease in value of one of our partner companies accounted for
under the cost method of accounting as a result of selling the
partner company interest below our carrying value. We had acquired
our ownership interest in the partner company during 1996 and 1997.
In December 1998, the partner company agreed to be acquired by an
independent third party. The transaction was completed in January
1999. The impairment charge we recorded was determined by
calculating the difference between the proceeds we received from the
sale and our carrying value.
</R>
<R>
For the
year ended December 31, 1998 and the three months ended March 31,
1999, we recorded impairment charges of $2.0 million and $1.6
million, respectively, for the other than temporary decline in the
value of advances to a cost method partner company. From the date of
our initial advance through December 31, 1998, our advances to this
partner company represented all of the outside capital the company
had available to fund its net losses and capital asset requirements.
During the three months ended March 31, 1999 we fully guaranteed the
partner company’s new bank loan and agreed to provide
additional advances. We provided these additional advances in April
1999. The impairment charges we recorded were determined by the
decrease in net book value of the partner company caused by its net
losses, which were funded entirely based on our advances and bank
guarantee.
</R>
Our cash and
cash equivalents are invested primarily in money market accounts.
During 1998, we received $38.2 million of proceeds from the sale of
our common stock and $36.4 million of proceeds from the sales of a
portion of our holdings in Excite and Lycos. During the three months
ended March 31, 1999, we received $32 million of proceeds from the
sale of shares of our common stock. The increase in interest income
in 1998 and the three months ended March 31, 1999 was primarily due
to the significant increase in our cash and cash equivalents
throughout 1998 and the three months ended March 31, 1999 as a
result of these transactions.
From our
inception on March 4, 1996 to February 2, 1999, we were organized as
a limited liability company and were treated as a partnership for
income tax purposes. As a result of our Reorganization as a
corporation, we will be subject to corporate federal and state
income taxes. For informational purposes, the Consolidated Statement
of Operations for the year ended December 31, 1998 reflects pro
forma income on an after-tax basis assuming we had been taxed as a
corporation since January 1, 1998. We did not have any net operating
loss carry forwards at December 31, 1998.
At the time of
our Reorganization, we recorded a deferred tax benefit and related
deferred tax asset of $7.7 million which primarily represented the
excess of tax basis over book basis of our partner companies. For
the period from the date of the Reorganization through March 31,
1999, we recorded a tax provision of $7.0 million related to our
consolidated results of operations for that period, including $10.5
million related to the $28.3 million gain on VerticalNet’s
initial public offering.
<R>
We have
not recorded a valuation allowance related to our gross deferred tax
assets because we believe it is more likely than not that we will
realize the benefits of these assets. The assets relate primarily to
the excess of tax basis over book basis of our partner companies.
These differences in basis represent capital losses for tax purposes
which, if recognized, can only be deducted to the extent of capital
gains. Additionally, these losses may be carried back three years
and carried forward five years from the year in which they occur.
While selling any portion of our ownership interests in partner
companies is something we will not do in the ordinary course of
business, we would consider pursuing such a sale at the minimum
amount necessary to prevent any capital losses from expiring
unutilized. If we do not believe such a strategy, or an alternative
strategy, will be available in the time periods allowed for carrying
back and carrying forward losses, we will establish a valuation
allowance at that time. Most of our partner companies are in an
early stage of development, currently generate significant losses
and are expected to generate significant losses in the future. The
marketability of the securities we own of our partner companies is
generally limited as they primarily represent ownership interests in
companies whose stock is not publicly traded. As of June 30, 1999,
our only publicly traded partner company is VerticalNet. As a
result, there is significant risk that we may not be able to realize
the benefits of expiring carryforwards.
</R>
<R>
</R>
<R>
A
significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership
interest. These companies are accounted for under the equity method
of accounting. Equity income (loss) fluctuates with the number of
companies accounted for under the equity method, our voting
ownership percentage in these companies, the amortization of
goodwill related to newly acquired equity method companies, and the
net results of operations of these companies. During the year ended
December 31, 1998, the three months ended March 31, 1999, and the
three months ended June 30, 1999, we utilized $25.9 million, $18.3
million and $66.5 million to acquire partner companies accounted for
under the equity method of accounting which resulted in goodwill of
$14.2 million, $12.6 million and $44.2 million, respectively, all of
which will be amortized over 3 years.
</R>
<R>
In the
periods ended December 31, 1996 and 1997, Sky Alland was our only
partner company accounted for under the equity method. Sky Alland
’s net results of operations in 1997 improved compared to 1996.
</R>
<R>
The
significant change in equity income (loss) from 1997 to 1998
reflects a decrease in the net results of operations at Sky Alland
and the effect of equity method partner companies in which we
acquired an interest during 1998. One of these companies, Syncra
Software, Inc., represented approximately $4.3 million of our $5.9
million equity loss in 1998. As of December 31, 1998, we accounted
for eight of our partner companies under the equity method of
accounting. Most of these companies are in a very early stage of
development and incurred substantial losses in 1998, and our share
of these losses was substantial.
</R>
<R>
Our
ownership interest in VerticalNet is not consolidated in our
financial statements for periods after December 31, 1998 but is
accounted for under the equity method of accounting as a result of
our lower
ownership interest in VerticalNet following the completion of its
initial public offering in February 1999. VerticalNet recorded a
loss of $5.6 million on $1.9 million of revenue in the three months
ended March 31, 1999 compared to a loss of $2.1 million on $.4
million of revenue for the comparable period in 1998. VerticalNet
’s revenue increased period to period primarily due to a
significant increase in the number of storefronts as it grew the
number of its vertical trade communities from 16 as of March 31,
1998 to 35 as of March 31, 1999. In addition, barter transactions,
in which VerticalNet received advertising or other services in
exchange for advertising on its Web sites, accounted for 30% of
revenues for the three months ended March 31, 1999 compared to none
for the same period in 1998. VerticalNet’s losses increased
period to period due to its costs of maintaining, operating,
promoting and increasing the number of its vertical trade
communities increasing more than revenue.
</R>
<R>
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.
</R>
<R>
VerticalNet expects to incur significant net losses for the
foreseeable future because of its aggressive expansion plans. Syncra
Software is a development stage company that has not generated
revenue since its inception in early 1998. Due to the early stage of
development of the companies in which we acquire interests, existing
and new partner companies accounted for under the equity method,
including VerticalNet and Syncra Software, are expected to incur
substantial losses. Our share of these losses is expected to be
substantial in 1999.
</R>
<R>
While
VerticalNet and most of the companies accounted for under the equity
method of accounting have generated losses in each of the years in
the three-year period ended December 31, 1998 and the three months
ended March 31, 1999, and therefore in most cases did not incur
income tax liabilities, these companies may generate taxable income
in the future. Our share of these companies’ net income, if
generated, would be reduced to the extent of our share of these
companies’ tax expense.
</R>
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 30, 1999 was $50 million, none of
which was outstanding.
</R>
<R>
In May
1999, we issued $90 million principal amount of three-year
convertible notes. The notes bear interest at an annual rate of
4.99% during the first year and at the prime rate for the remaining
two years. Prior to May 2000, the notes will automatically convert
into shares of our common stock at our initial public offering price
upon consummation of an initial public offering. If the notes are
converted, all accrued interest is waived. We issued warrants to the
holders of these notes to purchase shares of our common stock. The
warrant holders will be entitled to purchase, at the initial public
offering price, 1,636,225 shares of our common stock at an assumed
initial public offering price of $11.00 per share. The warrants
expire in May 2002.
</R>
<R>
In July
1999, we entered into an agreement with IBM Corporation under which
they will purchase directly from us $45 million of shares of our
common stock at the initial public offering price. The private
placement is concurrent with and contingent upon the completion of
our initial public offering.
</R>
<R>
Proceeds
from our initial public offering, proceeds from the concurrent
offering, proceeds from the issuance of our convertible notes,
availability under our revolving bank credit facility, proceeds from
the potential sales of all or a portion of our minority interests
and other internal sources of cash flow are expected to be
sufficient to fund our cash requirements through the next 12 months,
including commitments to new and existing partner companies and
general operations requirements. As of December 31, 1998, we were
contingently obligated for approximately $3.2 million of guarantee
commitments that remain outstanding as of June 30, 1999. Beyond the
next 12 months, we will likely have to raise additional funds
through the issuance of equity securities or obtain additional bank
financing. If additional funds are raised through the issuance of
equity securities, our existing shareholders may experience
significant dilution. Our revolving bank credit facility matures in
April 2000, at which time we may not be able to renew the facility
or obtain additional bank financing, or may only be able to do so on
terms not favorable or acceptable to us.
</R>
<R>
From its
inception through its initial public offering, VerticalNet funded
its operations through a combination of equity, investor and bank
borrowings, and leases. These sources included amounts both advanced
and guaranteed by us. VerticalNet raised $58.3 million in its
initial public offering in February 1999. VerticalNet believes that
these initial public offering funds, together with its existing cash
and cash equivalents, should be sufficient to fund its operations
through March 2000. We have no obligation to provide additional
funding to VerticalNet, and we have no obligations with respect to
its outstanding debt arrangements.
</R>
<R>
Prior to
1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and
leases. In January 1999, we acquired a majority voting interest in
Breakaway Solutions for $8.3 million, of which Breakaway Solutions
used $4.5 million to repurchase treasury stock. The net proceeds to
Breakaway Solutions of $3.8 million were used to fund its negative
cash flow from operations of $1.1 million for the three months ended
March 31, 1999. Breakaway Solutions is expanding through organic
growth and acquisitions. Breakaway Solutions recently completed a
private placement of equity securities of about $20 million, of
which we contributed $4.0 million prior to June 30, 1999 and an
additional $1.0 million in July 1999. Breakaway Solutions expects
these funds, together with its existing cash resources, will be
sufficient to fund its operations through June 2000. We have no
obligation to provide additional funding to Breakaway Solutions, and
we have no obligations with respect to its outstanding debt
arrangements.
</R>
<R>
Consolidated working capital increased to $20.5 million at December
31, 1998, compared to $2.4 million at December 31, 1997. The
increase was primarily due to the net effect of the proceeds from
the equity we raised in 1998 and the proceeds from the sales of a
portion of our Excite and Lycos holdings, offset by the ownership
interests we acquired in 1998. Consolidated working capital
decreased to $17.7 million at March 31, 1999 from $20.5 million at
December 31, 1998 primarily as a result of equity we raised being
more
than offset by the ownership interests we acquired and the
distribution to shareholders during the three months ended March 31,
1999.
Cash used in
operating activities increased in 1997 and 1998 compared to each of
the prior years primarily due to VerticalNet’s increased losses
in each of those years. Cash used in operating activities in the
three months ended March 31, 1999 compared to the same prior year
period increased due to the increased cost of General ICG Operations
general and administrative expenses.
<R>
Cash
used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner
companies, offset in 1998 and the three months ended March 31, 1999
by the proceeds of $36.4 million and $2.6 million, respectively,
from the sales of a portion of our available-for-sale securities,
Excite and Lycos.
</R>
<R>
We
utilized $57.6 million, including $9 million contributed to
VerticalNet, to acquire interests in new and existing partner
companies in 1998 and we expect this amount to more than double in
1999. In 1998, we acquired interests in the following partner
companies: Blackboard, CommerceQuest, CommerX, ComputerJobs.com,
Context Integration, Deja.com, e-Chemicals, Entegrity Solutions,
LinkShare, PrivaSeek, RapidAutoNet, SageMaker, ServiceSoft, Syncra
Software, US Interactive, VerticalNet and Vivant!.
</R>
<R>
We
utilized $32.7 million, including $8.3 million contributed to
Breakaway Solutions, to acquire interests in and make advances to
new and existing partner companies during the three months ended
March 31, 1999. These companies included: BidCom, ClearCommerce,
Collabria, Entegrity Solutions, Internet Commerce Systems, ONVIA.com
PlanSponsor Exchange, SageMaker, SMART Technologies and Universal
Access.
</R>
<R>
We
utilized $84.3 million, including $4.0 million contributed directly
to Breakaway Solutions and an additional $4.0 million used to
purchase an additional ownership interest in Breakaway Solutions
directly from shareholders of Breakaway Solutions, to acquire
interests in or make advances to new and existing partner companies
during the period from April 1, 1999 through June 30, 1999. These
companies included: Arbinet Communications, Blackboard,
ClearCommerce, CommerceQuest, CommerX, Deja.com, e-Chemicals,
eMarketWorld, iParts, PlanSponsor Exchange, PointMent, PrivaSeek,
SageMaker, ServiceSoft, Star-Cite!, Syncra Software, Tradex
Technologies, United Messaging and Universal Access.
</R>
<R>
During
the period from April 1, 1999 to June 30, 1999 we acquired an
interest in a new partner company to be accounted for under the
equity method of accounting for initial consideration of about $11.3
million. We purchased our ownership interest from shareholders of
the partner company. These shareholders have the option, exercisable
at any time through August 2000, of electing to receive from us
about $11.3 million in cash or a number of shares of our common
stock determined by dividing about $11.3 million by the product that
results from multiplying the initial public offering price of our
common stock by .90.
</R>
<R>
We will
divest our ownership interest in SMART Technologies, Inc. due to the
agreement of merger of SMART Technologies, Inc. and i2 Technologies,
Inc. Upon completion of this merger, our ownership interest in and
advances to SMART Technologies, Inc. will be converted into cash,
common stock and warrants to purchase common stock of i2
Technologies, Inc. The transaction had not been completed as of June
30, 1999. Our estimated non-operating gain before taxes from this
transaction will be approximately $2 million and our holdings in i2
Technologies will be accounted for as available-for-sale securities.
</R>
<R>
In May
1999, @Home Corporation exchanged its shares for all of the
outstanding stock of Excite. As part of this merger, we will receive
shares of @Home Corporation in exchange for our shares in Excite.
Our estimated non-operating gain before taxes from this transaction
will be approximately $2.7 million and our holdings in @Home
Corporation will be accounted for as available-for-sale securities.
</R>
<R>
In May
1999, VerticalNet announced it had signed a definitive agreement to
acquire all of the outstanding stock of Isadra, Inc. in exchange for
500,000 shares of VerticalNet common stock and $3 million in
cash. Consummation of the merger is subject to shareholder and
regulatory approvals as well as customary closing conditions. The
transaction had not been completed as of June 30, 1999. Upon
completion of the transaction, our voting ownership will decrease
from 36% to 35%. In addition, we expect to record a non-operating
gain due to the increase in our share of VerticalNet’s net
equity as a result of their issuance of shares.
</R>
<R>
Our
operations are not capital intensive, and capital expenditures in
any year normally will not be significant in relation to our overall
financial position. We expect to commit funds in 1999 to the
buildout of our larger new corporate headquarters in Wayne,
Pennsylvania and the development of our information technology
infrastructure. There were no material capital asset purchase
commitments as of June 30, 1999.
</R>
Recent Accounting Pronouncements
<R>
We do
not expect the adoption of recently issued accounting pronouncements
to have a significant impact on our net results of operations,
financial position or cash flows.
</R>
Year 2000 Readiness Disclosure
Many computer
programs have been written using two digits rather than four digits
to define the applicable year. This poses a problem at the end of
the century because these computer programs may recognize a date
using “00” as the year 1900, rather than the year 2000.
This in turn could result in major system failures or
miscalculations and is generally referred to as the Year 2000 issue.
We currently
use the information technology systems and many non-information
technology systems of Safeguard Scientifics, Inc., one of our
principal shareholders. Safeguard has completed its assessment of
its computer information systems. Safeguard has replaced all
computer systems and software which were determined to be Year 2000
non-compliant. Safeguard is in the process of surveying its vendors
of non-information systems including telecommunications and security
systems, and expects to complete remediation, if necessary, during
1999. If Safeguard determines that its non-information systems are
non-compliant and are at risk to not be remedied in time, it intends
to develop a contingency plan. We will not incur any material
expenses in connection with Safeguard’s Year 2000 efforts. We
plan to survey our vendors of the non-information technology systems
that we use independently of Safeguard and we expect to complete
remediation, if necessary, during 1999. If we determine that these
systems are non-compliant and are at risk to not be remedied in
time, we will develop a contingency plan.
The Year 2000
readiness of VerticalNet is described below. Our partner companies
are in varying stages of assessing, remediating and testing their
internal systems and assessing Year 2000 readiness of their vendors,
business partners, and customers. Our partner companies are also in
varying stages of developing contingency plans to operate in the
event of a Year 2000 problem. The total cost and time which will be
incurred by our partner companies on the Year 2000 readiness effort
has not been determined. There can be no assurance that all
necessary work will be completed in time, or that such costs will
not materially adversely impact one or more of such partner
companies. In addition, required spending on the Year 2000 effort
will cause customers of most of our partner companies to reallocate
at least part of their information systems budgets. Although some of
our partner companies have offerings which may be useful in such
efforts, such reallocations could materially adversely affect the
results of operations of our partner companies.
VerticalNet
may realize exposure and risk if the systems on which it is
dependent to conduct its operations are not Year 2000 compliant.
VerticalNet’s potential areas of exposure include products
purchased from third parties, information technology including
computers and software, and non-information technology including
telephone systems and other equipment used internally. Additionally,
all of the internally-developed production and operation systems for
VerticalNet’s Web sites are undergoing a complete
re-engineering. All new programs are being tested and validated for
Year 2000 compliance.
VerticalNet
has taken steps to ensure that telephone systems and other
non-information technology are Year 2000 compliant. VerticalNet has
replaced its telephone and voicemail systems with new systems which
are Year 2000 compliant. VerticalNet believes all non-information
technology upon which it is materially dependent is Year 2000
compliant. Additionally, with respect to information technology,
VerticalNet expects to resolve any Year 2000 compliance issues
primarily through normal upgrades of its software or, when
necessary, through replacement of existing software with Year 2000
compliant applications. The cost of these upgrades or replacements
is included in VerticalNet’s capital expenditure budget and is
not expected to be material to VerticalNet’s financial position
or results of operations. VerticalNet estimates that its total cost
to become Year 2000 compliant will not exceed $250,000, which it
expects will be funded from working capital or borrowings under its
bank line of credit. However, such upgrades and replacements may not
be completed on schedule or within estimated costs or may not
successfully address VerticalNet’s Year 2000 compliance issues.
VerticalNet
has completed its Year 2000 compliance assessment plan. This plan
includes assessing both its information and non-information
technology as well as its internally-developed production and
operation systems. Based on this assessment, VerticalNet believes
that all non-information technology, all internally-developed
production and operations systems and 80% of its technology are Year
2000 compliant. VerticalNet believes that the remaining 20% of its
information technology that is not Year 2000 compliant is not
critical to its business. VerticalNet intends to complete the
replacement or remediation of these non-compliant technologies, as
well as the testing of any replacement or corrected technologies, by
the end of the second quarter of 1999.
<R>
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.
</R>
In the event
that VerticalNet’s production and operational facilities that
support its Web sites are not Year 2000 compliant, small portions of
its Web sites may become unavailable. VerticalNet’s review of
its systems has shown that there is no single application that would
make its Web sites totally unavailable and VerticalNet believes that
it can quickly address any difficulties that may arise.
In the event
that VerticalNet’s Web-hosting facilities are not Year 2000
compliant, its Web sites would be unavailable and it would not be
able to deliver services to its users.
VerticalNet
does not currently have a contingency plan to deal with the
worst-case scenario that might occur if technologies it is dependent
upon are not Year 2000 compliant and fail to operate effectively
after the Year 2000. VerticalNet intends to develop a plan for this
scenario by the end of the second quarter of 1999.
If VerticalNet
’s present efforts to address the Year 2000 compliance issues
are not successful, or if distributors, suppliers and other third
parties with which it conducts business do not successfully address
such issues, its business, operating results and financial position
could be materially and adversely affected.
Industry Overview
People and
businesses are increasingly relying on the Internet to access and
share information as well as to purchase and sell products and
services. International Data Corporation estimates that at the end
of 1998 more than 142 million people were using the Internet to
communicate, participate in discussion forums and obtain information
about goods and services. IDC projects that this user base will grow
to 502 million people by the end of 2003. A rapidly growing number
of businesses use the Internet to market and sell their products and
streamline business operations. According to Forrester Research, 50%
of all United States businesses will be online by 2002.
<R>
The
Internet’s substantial growth creates tremendous market
opportunities for companies that connect buyers and sellers, and
companies that create applications and systems for traditional
businesses wishing to engage in e-commerce. Historically, B2B
e-commerce has occurred through electronic data interchange over
proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open
platform with common communication protocols to build efficient,
cost-effective networks that facilitate e-commerce. As
Internet-based network reliability, speed and security have improved
in recent years and as more businesses have connected to the
Internet, traditional businesses are beginning to use the Internet
to conduct e-commerce and exchange information with customers,
suppliers and distributors. While the business-to-consumer
e-commerce market currently is significant in size, estimated by IDC
to have been $15 billion in goods and services in 1998, the B2B
e-commerce market is larger and is predicted to grow dramatically.
Forrester Research projects that the B2B e-commerce market, which
Forrester Research defines as the intercompany trade of hard goods
over the Internet, will grow from $43 billion in 1998 to over $1.3
trillion by 2003.
</R>
We believe
that the B2B e-commerce market is beginning a period of rapid
development and growth for the following reasons:
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Expanded Access to New and Existing Customers and Suppliers.
Traditional businesses have relied on their sales forces and
purchasing departments to develop and maintain customer and
supplier relationships. This model is constrained by the time and
cost required to exchange current information regarding
requirements, prices and product availability, and the difficulty
of cost-effectively locating new customers and suppliers and
managing existing relationships. Traditional businesses can
leverage the Internet to obtain real-time, accurate information
regarding requirements, prices and products to a global audience,
including suppliers, customers and business partners. This makes
it easier for businesses to attract new customers and suppliers,
improve service and increase revenue.
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Increased Efficiency and Reduced Cost. Traditional businesses
can utilize the Internet to automate their internal operations,
including manufacturing, finance, sales and purchasing functions.
The Internet can also be used to increase information flow and
access throughout an organization. This increases operational
efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement
costs, and improving responsiveness to customers and suppliers.
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Market
Opportunities for Emerging B2B E-Commerce Companies
|
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.
<R>
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Market Makers.
Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information in a particular industrial sector. Market makers
enable more effective and lower cost commerce for traditional
businesses by providing access through the Internet to a broader
range of buyers and sellers. Market makers typically operate in a
specific industry and tailor their business models to match a
target market’s distinct characteristics. To understand the
different types of markets, we divide market makers into three
categories: distributor, network and community.
|
</R>
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Distributor.
Distributor markets are characterized by comparatively inefficient
distribution channels. To service these markets, distributor
market makers act as principals in transactions, distributing
goods and services between buyers and sellers who connect with
each other over the Internet. Distributor market makers may charge
a fee based on the value of the transactions facilitated.
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Network.
Network markets are characterized by comparatively efficient
distribution channels. Although network market makers do not act
as principals in transactions, they automate existing business
processes so as to make them more efficient. Network market makers
may generate revenue by charging fees for transactions conducted
on their Web sites, and may charge a fee for access to their
Web-based services.
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Community.
Community market makers bring together buyers and sellers that are
typically businesses and professionals with common interests.
Existing relationships among these businesses and professionals
are unstructured, but community market makers facilitate
interaction and transactions among them by providing an electronic
community. Community market makers may charge a fee for
facilitated transactions and receive advertising revenue.
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Infrastructure Service Providers.
Infrastructure service providers sell software and services to
businesses engaged in e-commerce. Many businesses need assistance
in designing business practices to take advantage of the Internet,
and in building and managing the technological infrastructure
needed to support B2B e-commerce. Infrastructure service providers
help businesses in the following ways:
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Strategic Consulting and Systems Integration.
Consultants assist traditional businesses in developing their
e-commerce strategies. Systems integrators develop and implement a
technological infrastructure that enables e-commerce. Systems
integrators also integrate e-commerce applications with existing
enterprise applications. Strategic consultants and systems
integrators typically charge their clients on a project-by-project
basis.
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Software Providers
.
Software providers design and sell software applications, tools
and related services that support e-commerce and integrate
business functions. Software providers may sell or license their
products.
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Outsourced Service Providers.
Outsourced service providers offer software applications,
infrastructure and related services designed to help traditional
businesses reduce cost, improve operational efficiency and
decrease time to market. Outsourced service providers may charge
fees on a per-use or periodic basis.
|
Challenges Facing Emerging B2B E-Commerce Companies
We believe
that emerging B2B e-commerce companies face certain challenges,
including:
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Developing a Successful Business Model.
B2B
e-commerce companies must develop business models that capitalize
on the Internet’s capabilities to provide solutions to
traditional companies in target industries. B2B e-commerce
companies require industry expertise because each industry
has distinct characteristics including existing distribution
channels, levels of concentration and fragmentation among buyers
and sellers, procurement policies, product information and
customer support requirements. B2B e-commerce companies also
require Internet expertise in order to apply its capabilities to
their target industries.
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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.
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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
<R>
Our goal
is to become the premier B2B e-commerce company by establishing an
e-commerce presence in major segments of the economy. We believe
that our sole focus on the B2B e-commerce industry allows us to
capitalize rapidly on new opportunities and to attract and develop
leading B2B e-commerce companies. As of June 30, 1999, we owned
interests in 35 B2B e-commerce companies which we refer to as our
partner companies.
</R>
Our operating
strategy is to integrate our partner companies into a collaborative
network that leverages our collective knowledge and resources. With
the goal of holding our partner company interests for the long-term,
we use these collective resources to actively develop the business
strategies, operations and management teams of our partner
companies. Our resources include the experience, industry
relationships and specific expertise of our management team, our
partner companies and our Advisory Board.
Our strategy
is to:
|
Ÿ
|
create or identify companies with the potential to become industry
leaders;
|
|
Ÿ
|
acquire significant interests in partner companies and incorporate
them into our collaborative network;
|
|
Ÿ
|
provide strategic guidance and operational support to our partner
companies; and
|
|
Ÿ
|
promote collaboration among our partner companies.
|
In
implementing our strategy, we leverage the collective knowledge and
experience of our partner companies, strategic investors and
Advisory Board members. Our Advisory Board consists of over 15
experienced executives from various backgrounds who provide our
network with strategic guidance, sales, marketing and information
technology expertise and industry contacts. Ideally, we would like
to own 40% or more of our partner companies, with management and
public shareholders owning the remaining interests, but we believe
that we can have significant influence with lower ownership levels.
|
Create or
Identify Companies With the Potential to Become Market Leaders
|
Our expertise
in the B2B e-commerce market allows us to build or identify
companies that are positioned to succeed. We apply a disciplined
analysis that capitalizes on this competitive advantage. When we
evaluate whether to enter a market by building a company or
acquiring an interest in an existing company, we weigh the following
industry and partner company factors:
|
Ÿ
|
Inefficiency.
We
consider whether the industry suffers from inefficiencies that may
be alleviated through e-commerce. We also consider the relative
amount of inefficiency, as more inefficient industries present
greater profit potential.
|
|
Ÿ
|
Competition.
We
evaluate the amount of competition that a potential partner
company faces from e-commerce and traditional businesses.
|
|
Ÿ
|
Market Maker Profit Potential.
When
evaluating market makers, we consider the number and dollar value
of transactions in the industry. In the multi-billion dollar
industries that we target, offering even incremental efficiency
improvements presents significant profit potential.
|
|
Ÿ
|
Centralized Information Sources.
When
evaluating market makers, we consider whether the industry has
product catalogs, trade journals and other centralized sources of
information regarding products, prices, customers and other
factors. The availability of this information makes it easier for
a market maker to facilitate communication and transactions. We
generally avoid industries where this information is not available.
|
|
Ÿ
|
Infrastructure Service Provider Profit Potential.
When
evaluating infrastructure service providers, we examine the size
of the market opportunity, the profit potential in serving the
target market and whether the infrastructure service provider can
provide assistance to our market maker partner companies.
|
|
Ÿ
|
Partner Company Criteria
|
|
Ÿ
|
Industry Leader.
We
partner with a company only if we believe that it has the products
and skills to become a leader in its industry.
|
|
Ÿ
|
Management Quality.
We
assess the overall quality and industry expertise of a potential
partner company’s management.
|
|
Ÿ
|
Significant Ownership.
We
consider whether we will be able to obtain a significant position
in the company and exert influence over the company.
|
|
Ÿ
|
Network Synergy.
We
consider the degree to which a potential partner company may
contribute to our network, and benefit from our network and
operational resources.
|
|
Acquire
Interests in Partner Companies
|
<R>
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.
</R>
During our
negotiations with potential partner companies we emphasize the value
of our collaborative network, which we believe gives us a
competitive advantage over other acquirors in successfully
consummating
transactions. Our partner companies, strategic investors and Advisory
Board members assist in these discussions and assist in other stages
of the acquisition process, including the initial evaluation of
potential partner companies and due diligence.
|
Provide
Strategic Guidance and Operational Support to Our Partner Companies
|
After we make
an acquisition or form a partner company, we take an active role in
its affairs by providing both strategic guidance and operational
support:
|
Ÿ
|
Strategic Guidance.
We
provide strategic guidance to our partner companies regarding
market positioning, business model development and market trends.
In addition, we advise partner company management and directors on
day-to-day management and operational issues. Our exclusive focus
on the B2B e-commerce market and the knowledge base of our partner
companies, strategic investors, management and Advisory Board give
us valuable experience that we share with our partner company
network. Advisory Board members who provide strategic guidance to
our partner companies include Jeff Ballowe, a former President of
Ziff-Davis Inc. and the current Chairman of Deja.com, Inc., Alex
W. Hart, a former Chief Executive Officer of MasterCard
International, Ron Hovsepian, Vice President of Business
Development at IBM Corporation and Yossi Sheffi, Ph.D., a
co-founder of Syncra Software, Inc. and e-Chemicals, Inc. and
currently a Professor at the Massachusetts Institute of Technology.
|
|
Ÿ
|
Operational Support.
B2B
e-commerce companies often have difficulty obtaining senior
executive level guidance in the many areas of expertise successful
companies need. We assist our partner companies by providing
access to skilled managers who guide our partner companies in the
following functional areas:
|
<R>
|
Ÿ
|
Sales and Marketing.
Several members of our Advisory Board and management team provide
guidance to our partner companies’ sales, marketing, product
positioning and advertising efforts. These individuals include
Michael H. Forster, a former Senior Vice President of Worldwide
Field Operations at Sybase, Inc. and currently one of our Senior
Partners, Christopher H. Greendale, a former Executive Vice
President at Cambridge Technology Partners and currently one of
our Managing Directors, Rowland Hanson, a former Vice President of
Corporate Communications at Microsoft Corporation and currently
founder of C. Rowland Hanson & Associates, Charles W. Stryker,
Ph.D., President, Marketing Information Solutions, at
IntelliQuest, Inc., and Sergio Zyman, a former Vice President and
Chief Marketing Officer of the Coca-Cola Company.
|
</R>
|
Ÿ
|
Executive Recruiting and Human Resources.
Members of our management team assist our partner companies in
recruiting key executive talent. These individuals include Rick
Devine, one of our Managing Directors and a former partner at
Heidrick & Struggles, Inc., an executive recruiting firm. In
providing this assistance, we leverage the contacts developed by
our network of partner companies, management and Advisory Board.
We believe that this is one of the most important functions that
we perform on behalf of our partner companies. B2B e-commerce
companies must locate executives with both industry and Internet
expertise. The market for these professionals is highly
competitive since few persons possess the necessary mix of skills
and experience.
|
<R>
|
Ÿ
|
Information Technology.
Our
Chief Technology Officer, Richard G. Bunker, is dedicated to
helping our partner companies with their information systems
strategies and solving problems relating to their current
information technology. Members of our Board of Directors and
Advisory Board who provide guidance in this area include K.B.
Chandrasekhar, Chairman of the Board of Directors of Exodus
Communications, and Peter A. Solvik, the Chief Information Officer
of Cisco Systems, Inc.
|
</R>
|
Ÿ
|
Finance.
One
of our Managing Directors, John N. Nickolas, an experienced
finance executive, is dedicated to providing financial guidance to
our partner companies in areas such as corporate finance,
financial reporting, accounting and treasury operations. In
providing these services, Mr. Nickolas leverages the skills and
experience of our internal finance and accounting group, our
partner company network and outside consultants.
|
|
Ÿ
|
Business Development.
B2B
e-commerce companies may be involved in evaluating, structuring
and negotiating joint ventures, strategic alliances, joint
marketing agreements, acquisitions or other transactions. We
provide assistance to our partner companies in all these areas.
Our management team, Advisory Board, strategic investors and
partner companies all assist in this function.
|
|
Promote
Collaboration Among Our Partner Companies
|
One of the
principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in
shared knowledge and business contacts among our partner companies
and the formation of numerous strategic alliances. We promote
collaboration formally by hosting regularly scheduled seminars
relating to partner company operational and business issues. At
these seminars, the executives of partner companies share their
experiences with each other, our management team and the Advisory
Board. For example, at a recent seminar, thirteen chief executive
officers of our market maker and infrastructure service provider
partner companies gathered to discuss e-commerce strategies and
business models. On an informal basis, we promote collaboration by
making introductions and recommending partner companies to each
other.
Recent
examples of collaboration among our partner companies include:
|
Ÿ
|
VerticalNet and e-Chemicals are collaborating to provide customer
leads for e-Chemicals. This relationship enables VerticalNet to
provide a greater breadth of services to its customers in the
chemicals business and provides more buyers for the products
distributed by e-Chemicals.
|
|
Ÿ
|
Deja.com, which provides a Web-based community for potential
purchasers to access user comments on a variety of products and
services, has formed a strategic alliance with VerticalNet to
provide VerticalNet’s Web sites with discussion content. In
addition, Deja.com and ComputerJobs.com have created a discussion
forum that accesses ComputerJobs.com’s database of technology
employment opportunities, increasing ComputerJobs.com’s
exposure to Deja.com’s broad user base.
|
The
collaboration of our partner companies is the result of our role as
the hub of our network. Through the network we identify prospective
alliances, make introductions, assist in strategic planning and
monitor the ongoing relationships among our partner companies. We
encourage and regulate the information flow among our partner
companies. We also control the information flow by determining the
composition of the network. If we believe that a partner company is
not contributing to our network or has lost its strategic
importance, we may sell our interest in that partner company.
Overview of Current Partner Companies
We focus our
efforts on building and operating companies in two areas of the B2B
e-commerce
market—market makers and infrastructure service providers.
Market makers
operate in particular industries, such as chemicals, food or auto
parts. Each industry comprises a distinct market with its own
characteristics. Market makers must tailor their business models to
match their markets. To understand the different types of markets and
help our market maker partner companies position themselves, we
place market makers into one of three categories—distributor,
network or community.
|
Ÿ
|
Distributor. Distributor markets are
characterized by comparatively inefficient distribution channels.
To service these markets, our distributor partner companies act as
principals in transactions, distributing goods and services
between buyers and sellers who connect with each other over the
Internet. Our partner companies in this category generate revenue
by charging fees for transactions conducted on their Web sites. An
example of one of our distributor partner companies is
e-Chemicals. e-Chemicals believes that traditional distribution
channels for chemicals burden customers with excessive transaction
costs, high administrative costs and inefficient logistics. To
solve these problems, e-Chemicals has developed a Web site through
which it will sell a wide range of industrial chemicals to
business customers. e-Chemicals provides products based on
streamlined Web-based ordering processes, outsourced logistics
systems and online support.
|
|
Ÿ
|
Network. Network markets are
characterized by comparatively efficient distribution channels.
Our network partner companies automate existing business processes
so as to make them more efficient. Our partner companies in this
category may charge a fee based on the value of the transactions
facilitated and an ongoing fee for access to their Web sites. An
example of one of our network partner companies is Internet
Commerce Systems, Inc. Internet Commerce Systems is in the process
of establishing an Internet-based product introduction and
promotion service for the food industry. Internet Commerce Systems
’ FoodOne system seeks to replace the traditional practice of
weekly distribution of physical product catalogs and follow-up
calls by telemarketers, food brokers or field salespeople.
Internet Commerce Systems believes that it will increase retail
store sales coverage and provide market feedback to grocery
manufacturers while decreasing order entry, sales and marketing
costs.
|
<R>
|
Ÿ
|
Community. Community market makers
bring together buyers and sellers that are typically businesses
and professionals with common interests. Existing relationships
among these businesses and professionals are unstructured, but our
partner companies stimulate interaction and facilitate
transactions among them by providing an electronic community. Our
partner companies may charge a fee for each facilitated
transaction and receive advertising revenue. One example of our
community partner companies is VerticalNet. As of June 30, 1999,
VerticalNet owned and operated 43 industry-specific Web sites
designed to act as online B2B communities. These vertical trade
communities act as comprehensive sources of information,
interaction and
e-commerce.
|
</R>
<R>
Table
of Market Makers. The partner companies
listed below are integral to our strategy of owning numerous
interests in distributor, network and community market makers. We
believe that establishing an e-commerce presence in major industrial
segments of the economy will enable us to become the premier B2B
e-commerce company. The table shows certain information regarding
our market maker partner companies by category as of June 30, 1999.
Our ownership positions have been calculated based on the issued and
outstanding common stock of each partner company, assuming the
issuance of common stock on the conversion or exercise of preferred
stock and convertible notes, but excluding the effect of options and
warrants.
</R>
<R>
Category
and Name
|
|
Industry
|
|
Description
of Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
| Distributor:
|
|
|
|
|
|
|
|
|
|
CommerX, Inc.
www.commerx.com
|
|
Plastics
|
|
Provides
Internet-based
procurement and sales of raw
materials, tools and maintenance
and repair products for the plastics
industry.
|
|
42
|
%
|
|
1998
|
|
|
|
e-Chemicals, Inc.
www.e-chemicals.com
|
|
Chemicals
|
|
Provides
Internet-based sales and
distribution of industrial chemicals.
|
|
36
|
%
|
|
1998
|
|
|
|
iParts
www.ipartsupply.com
|
|
Electronic Components
|
|
Provides
Internet-based sales and
distribution of electronic
components.
|
|
85
|
%
|
|
1999
|
|
|
|
ONVIA.com, Inc.
www.onvia.com
|
|
Small Business
Services
|
|
Provides small
businesses with a
wide breadth of tailored products
and services over the Internet.
|
|
20
|
%
|
|
1999
|
|
|
|
PaperExchange
www.paperexchange.com
|
|
Paper
|
|
Provides
Internet-based sales and
distribution of all grades of pulp
and paper.
|
|
27
|
%
|
|
1999
|
|
|
|
Universal Access, Inc.
www.universal
accessinc.com
|
|
Telecommunications
|
|
Provides
Internet-based ordering
for provisioning and access and
transportation exchange services
for network service providers
focused on business customers.
|
|
26
|
%
|
|
1999
|
|
|
|
| Network:
|
Arbinet Communications,
Inc.
www.arbinet.com
|
|
Telecommunications
|
|
Provides an
Internet-based trading
floor and clearinghouse for
telecommunications carriers to
purchase bandwidth.
|
|
16
|
%
|
|
1999
|
|
|
|
BidCom, Inc.
www.bidcom.com
|
|
Construction
|
|
Provides
Internet-based project
planning and management services
for the construction industry.
|
|
25
|
%
|
|
1999
|
|
|
|
Collabria Inc.
www.collabria.com
|
|
Printing
|
|
Provides
Internet-based
procurement and production
services for the commercial
printing industry.
|
|
10
|
%
|
|
1999
|
</R>
<R>
Category
and Name
|
|
Industry
|
|
Description
of Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
|
|
|
ComputerJobs.com, Inc.
www.computerjobs.com
|
|
Technology
Employment
|
|
Provides
Internet-based job
screening and resume posting for
information technology
professionals, corporations and
staffing firms.
|
|
33
|
%
|
|
1998
|
|
|
|
Internet Commerce
Systems, Inc.
www.icsfoodone.com
|
|
Food
|
|
Provides
Internet-based product
introduction and promotion services
to wholesale and retail food
distributors.
|
|
43
|
%
|
|
1999
|
|
|
|
PointMent, Inc.
www.pointment.com
|
|
Healthcare
|
|
Provides
Internet-based solutions
for employee health benefits
management across the health care
industry.
|
|
50
|
%
|
|
1999
|
|
|
|
RapidAutoNet
Corporation
www.rapidautonet.com
|
|
Auto Parts
|
|
Provides
Internet-based auto parts
procurement for professional
automotive and truck repair shops.
|
|
15
|
%
|
|
1998
|
|
|
|
Star-Cite!
www.starcite.com
|
|
Travel
|
|
Provide
Internet-based services for
planning and managing corporate
meetings for event planners.
|
|
43
|
%
|
|
1999
|
|
| Community:
|
|
|
|
|
|
|
|
|
|
Deja.com, Inc.
www.deja.com
|
|
Media
|
|
Provides a
Web-based community
for potential purchasers to access
user comments on a variety of
products and services.
|
|
29
|
%
|
|
1997
|
|
|
|
eMarketWorld, Inc.
www.emarketworld.com
|
|
Special Event Services
|
|
Provides industry
specific Web-
based conferences and expositions
that help businesses understand the
Internet.
|
|
42
|
%
|
|
1999
|
|
|
|
PlanSponsor Exchange
www.plansponsor
exchange.com
|
|
Asset Management
|
|
Provides a Web-based community
for asset managers to reach fund
sponsors.
|
|
24
|
%
|
|
1999
|
|
|
|
VerticalNet, Inc.
www.verticalnet.com
|
|
Industrial Services
|
|
Provides
industry-specific Web-
based trade communities for
businesses and professionals.
|
|
36
|
%
|
|
1996
|
</R>
Set forth
below is a more detailed summary of some of our market maker partner
companies.
ComputerJobs.com, Inc. ComputerJobs.com is a network market
maker that provides Internet-based job advertising and resume
posting services for information technology professionals,
corporations and staffing
firms. Identifying and attracting information
technology professionals is an expensive and critical success factor
for many businesses. ComputerJobs.com is focused on improving the
online recruitment process for both information technology job
seekers and employers, including staffing firms and corporations.
Job seekers visit ComputerJobs.com’s regional-specific Web
sites to submit their resume and pursue job opportunities free of
charge. ComputerJobs.com allows jobs seekers to scan job
opportunities by information technology-specific skill requirements,
geographic preferences and other job criteria. Job seekers also have
access to extensive career resources and industry news on the site.
By attracting a significant number of job seekers and their resumes,
ComputerJobs.com offers staffing firms and corporations seeking
information technology professionals the ability to post job
openings as well as search and receive daily resumes of information
technology
candidates for a monthly fee. ComputerJobs.com pre-screens job ads and
resumes prior to placing them into its database and before
dissemination to its Web sites and clients.
ComputerJobs.com has Web sites for the information technology
markets in Atlanta, the Carolinas, Chicago, Florida, Texas, New York
and Washington, D.C. Based on more than 2,620 responses from
recruiters, ComputerJobs.com was ranked number one by Internet
Business Network as the top site in customer satisfaction in a 1998
study of the top 100 job sites. ComputerJobs.com plans to expand
into additional information technology markets by year end. We
identified ComputerJobs.com through a director of one of our partner
companies. We are assisting ComputerJobs.com with overall strategy,
operational management, recruiting, finance and marketing. Douglas
A. Alexander, one of our Managing Directors, is a member of
ComputerJobs.com’s Board of Directors. ComputerJobs.com has
formed a strategic alliance with Deja.com that has enabled Deja.com
to create a channel for accessing ComputerJobs.com’s database
of technology employment opportunities. For 1998, ComputerJobs.com
had revenue of $4.4 million and for the quarter ended March 31,
1999, revenue of $1.7 million.
<R>
Deja.com, Inc. Deja.com, formerly Deja News, is a community
market maker that is the Web’s leading source of shared
knowledge in the form of user-generated ratings and discussions.
With over 160 million page views per month, it is the leading
purveyor of online discussion, offering access to more than 43,000
discussion forums. These forums are populated by knowledgeable
participants who are interested in sharing their knowledge and
experience on a wide variety of subjects.
</R>
Deja.com
recently extended its franchise in shared knowledge with the
consumer-driven feature Deja Ratings, a tool that extends the site
’s ability to support daily decision-making. Deja Ratings
captures consumer opinions on a wide range of products and services
through a scaled voting system that includes product comparisons.
The analytical tools that support decision-making are supplemented
by contextual links to e-commerce retailers and vendors.
Deja.com
derives revenue from sponsors and e-commerce partners, and provides
the marketing community with the compelling proposition of reaching
a highly targeted, self-segmenting audience consisting of highly
active Internet consumers intent on investigating considered
purchases. Deja.com also delivers to those marketers a unique means
of programming to the specific interests of their target consumers,
all in the context of a commerce-friendly platform.
We have been
very active in recruiting Deja.com’s management team and
developing its business strategy. In addition, Kenneth A. Fox and
Douglas A. Alexander, two of our Managing Directors, are members of
Deja.com’s Board of Directors. Deja.com is in discussions with
several partner companies to provide services to its user community.
For 1998, Deja.com had revenue of $5.1 million, and for the quarter
ended March 31, 1999, revenue of $1.7 million.
Universal Access, Inc. Universal Access is a distributor
market maker that provides Internet-based ordering for provisioning
and access and transportation exchange services for network service
providers focused on business customers. For any network service
provider, such as Internet service providers or other
telecommunications carriers, to establish a dedicated connection for
its corporate customers, it must provide provisioning and access.
Provisioning is the initial establishment of a dedicated connection,
and access is the availability of a dedicated connection after
provisioning. Prior to significant deregulation in the
telecommunications industry, network service providers typically
selected one telecommunications carrier to service their corporate
customers. After deregulation, network service providers faced
increasing challenges in dealing with a growing number of local and
long-distance carriers to establish dedicated connections. These
challenges faced by network service providers have been exacerbated
by rapid growth in demand from their business customers for
dedicated Internet access.
Universal
Access enables network service providers to deal with a single
provider, rather than multiple local and long distance
telecommunications carriers, for seamless provisioning and access
among multiple
carriers. Universal Access’ proprietary database contains more
than 27 telecommunication carriers’ routing availability,
pricing and service capabilities which allows it to determine the
most economical and efficient path for bandwidth connectivity. By
providing single party accountability for all of their provisioning,
access, billing and ongoing network reliability needs, Universal
Access enables network service providers to offer their business
customers faster provisioning and superior customer service.
</R>
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.
<R>
VerticalNet, Inc. VerticalNet is a community market maker
that provides industry-specific Web-based trade communities for
businesses and professionals. VerticalNet owns and operates 43
industry-specific Web sites as of June 30, 1999 designed as online
B2B communities, known as vertical trade communities. These vertical
trade communities act as comprehensive sources of information,
interaction and e-commerce. VerticalNet’s objective is to
continue to be a leading owner and operator of industry-specific
vertical trade communities on the Internet.
</R>
<R>
VerticalNet’s 43 vertical trade communities are:
</R>
Process Group
Ÿ
|
Adhesives and Sealants Online (adhesivesandsealants.com)
Manufacturing and Production of Adhesive,
Sealant, and Grout Materials
|
Ÿ
|
Chemical Online (chemicalonline.com)
Manufacturing and Processing Chemicals
|
Ÿ
|
Hydrocarbon Online (hydrocarbononline.com)
Hydrocarbons and Petrochemicals Processing
|
Ÿ
|
Oil
and Gas Online (oilandgasonline.com)
Production and Exploration of Oil and Gas
|
Ÿ
|
Paint
and Coatings Online (paintandcoatingsonline.com)
|
|
|
Manufacturing and
Production of Paint Coatings, Inks and Thick Film Printable
Conductors
|
Ÿ
|
Pharmaceutical Online (pharmaceuticalonline.com)
|
|
|
Development,
Design and Manufacturing of Pharmaceuticals
|
<R></R>
Ÿ
|
Semiconductor Online (Semiconductoronline.com)
|
|
|
Manufacturing of
Semiconductors,
Photovoltaics and Magnetic Data Storage
|
Communication Group
Ÿ
|
Fiber
Optics Online (fiberopticsonline.com)
Design and Production of Fiber Optic
Networks and Network Components
|
Ÿ
|
Photonics Online (photonicsonline.com)
Design and Manufacturing of Lasers, Optics,
Optoelectronics, Fiber Optics and Imaging
Devices
|
Ÿ
|
Premises Networks.com (premisesnetworks.com)
Facilities and Network Infrastructure Design
and Administration
|
Ÿ
|
RF
Globalnet (rfglobalnet.com)
Information, Bookstore and Educational
Center for Radio Frequency, Wireless and
Microwave Engineers
|
Ÿ
|
Wireless Design Online (wirelessdesignonline.com)
Design and Development of Wireless
Communications Systems and Equipment
|
<R>
Ÿ
|
Digital Broadcasting.com (digitalbroadcasting.com)
|
</R> <R>
|
|
Digital Television
Marketplace for Broadcast, Cable, Satellite and Telco Employees
|
</R>
Environmental Group
Ÿ
|
Pollution Online (pollutiononline.com)
Industrial Pollution Control
|
Ÿ
|
Power
Online (poweronline.com)
Power Generation, Electric Utility
Deregulation, Emissions Control, Alternative
Fuels, Power Industry
|
Ÿ
|
Public Works Online (publicworks.com)
Public Works and Municipal Maintenance
|
Ÿ
|
Solid
Waste Online (solidwaste.com)
Solid Waste Disposal
|
Ÿ
|
Water
Online (wateronline.com)
Municipal Water Supply and Municipal
Wastewater Treatment
|
<R>
Ÿ
|
ElectricNet.com (electricnet.com)
|
</R> <R>
|
|
Online Buyer’
s Guide and Other Information for Power Transmission and
Distribution Industry
|
</R>
<R>
Ÿ
|
Pulp
and Paper Online (pulpandpaperonline.com)
|
</R> <R>
|
|
Manufacturing and
Production of Pulp and Paper Products
|
</R>
<R>
Ÿ
|
Safety Online (safetyonline.com)
Industrial and Environmental Safety
|
</R>
Food & Packaging Group
Ÿ
|
Bakery Online (bakeryonline.com)
Production and Procurement of Baking
Ingredients
|
Ÿ
|
Beverage Online (beverageonline.com)
Production and Procurement of Equipment
used in the Production of Beverages
|
Ÿ
|
Dairy
Network.com (dairynetwork.com)
Production, Procurement and Distribution of
Dairy Products
|
Ÿ
|
Food
Ingredients Online (foodingredientsonline.com)
Manufacturing and Processing of Food
Ingredients
|
Ÿ
|
Food
Online (foodonline.com)
Manufacturing and Processing of Food
Products
|
Ÿ
|
Meat
and Poultry Online (meatandpoultryonline.com)
Production, Procurement and Distribution of
Meat and Poultry Products
|
Ÿ
|
Packaging Network.com (packagingnetwork.com)
Production, Purchase, Design and Marketing
of Packaging for All Consumer and
Industrial Products
|
<R>
Foodservice/Hospitality Group
</R>
<R>
Ÿ
|
Foodservice Central.com
(foodservicecentral.com)
|
</R> <R>
|
|
Commercial and
Institutional Foodservice
|
</R>
Healthcare Group
Ÿ
|
Hospital Network.com
(hospitalnetwork.com)
Information for Hospital Purchasing
Decision-Makers
|
Ÿ
|
Nurses.com
(nurses.com)
Clinical, Professional and Other Information
for Nurses
|
<R>
Ÿ
|
E-dental.com
(e-dental.com)
|
</R> <R>
|
|
Clinical,
Professional, Educational and other information for Dentists and
Dentist Professionals
|
</R>
Advanced Technologies Group
Ÿ
|
Aerospace Online
(aerospaceonline.com)
Design and Manufacturing of Products and
Services Relating to the Aerospace Industry
|
Ÿ
|
Computer OEM Online
(computeroemonline.com)
Design and Manufacturing of Computers
and Computerized Electronics Devices
|
Ÿ
|
Embedded Technology Online
(embeddedtechnology.com)
Design and Manufacturing of Embedded
Systems, Computers, Software and Devices
|
Ÿ
|
Medical Design Online
(medicaldesignonline.com)
Design, Manufacturing and Procurement of
Medical Devices
|
Ÿ
|
Plant
Automation.com
(plantautomation.com)
Hardware and Software Used in Industrial
Manufacturing Including Robotics and
Automated Control Systems
|
Ÿ
|
Test
and Measurement
(testandmeasurement.com)
Design, Manufacturing and Procurement of
Test, Measurement, Data Acquisition, Data
Analysis and Instrumentation Equipment
|
Sciences Group
Ÿ
|
Bioresearch Online
(bioresearchonline.com)
Covers all Aspects of Experimental and
Applied Biology Including Biotechnology,
Genomics and Genetics
|
Ÿ
|
Drug
Discovery Online
(drugdiscoveryonline.com)
Early-Stage Pharmaceutical Discovery and
Development
|
Ÿ
|
Laboratory Network.com
(laboratorynetwork.com)
Covers all Aspects of the Research Industry
Focusing on Analytical Instrumentation and
Materials Science
|
Services Group
Ÿ
|
Property and Casualty.com
(propertyandcasualty.com)
Property and Casualty Insurance
|
<R></R>
<R>
Manufacturing and Metals Group
</R>
<R>
Ÿ
|
TechSpex
(techspex.com)
|
</R> <R>
|
|
Machine Tools and
Related Peripherals
|
</R>
Each
VerticalNet community is individually branded, focuses on a single
business sector and caters to individuals with similar professional
interests. VerticalNet designs each of its vertical trade
communities to attract professionals responsible for selecting and
purchasing highly specialized industry related products and
services. VerticalNet’s communities combine product
information, requests for proposals, discussion forums, electronic
commerce opportunities, industry news, directories, classifieds, job
listings, and online professional education courses.
VerticalNet
satisfies a developing market not currently being adequately served
through traditional channels, including trade publishers, trade
shows and trade associations. VerticalNet believes that this market
is not currently being served by Internet companies, which tend to
focus on the consumer and not on the B2B market.
VerticalNet
’s vertical trade communities take advantage of the Internet
’s ability to allow users around the world to contact each
other online, allowing buyers to research, source, contact and
purchase from
suppliers. Although other companies offer B2B services on the
Internet, VerticalNet believes that it is currently the only company
operating a portfolio of specialized B2B communities. A portfolio
strategy permits VerticalNet to:
|
Ÿ
|
offer
consistent content and services in its current vertical trade
communities and replicate these offerings as it launches new
communities;
|
|
Ÿ
|
realize cost savings and operating efficiencies in its technology,
marketing, infrastructure and management resources; and
|
|
Ÿ
|
increase its overall audience, making its individual sites more
appealing to a broad array of advertisers and suppliers who sell
their goods and services over the Internet.
|
VerticalNet
currently generates the majority of its revenue from Internet
advertising, including the development of “storefronts.” A
storefront is a Web page posted on one of its vertical trade
communities that provides information on an advertiser’s
products, links a visitor to the advertiser’s Web site and
generates sales inquiries from interested visitors. VerticalNet
believes that industry professionals using its vertical trade
communities possess the demographic characteristics that are
attractive to its advertisers.
We were first
introduced to VerticalNet through one of our major shareholders. We
helped to recruit several of VerticalNet’s executive officers,
and worked with them to develop VerticalNet’s business
strategy. Douglas A. Alexander, one of our Managing Directors,
currently serves as VerticalNet’s Chairman of the Board of
Directors and Walter W. Buckley, our President and Chief Executive
Officer, is a member of VerticalNet’s Board of Directors. This
year VerticalNet became a public company, trading on the Nasdaq
National Market under the symbol “VERT.” VerticalNet has
formed a strategic alliance with e-Chemicals to provide customer
leads for e-Chemicals and to expand VerticalNet’s services to
its chemical business customers. For 1998, VerticalNet had revenue
of $3.1 million, and for the quarter ended March 31, 1999, revenue
of $1.9 million.
|
Infrastructure Service Provider Categories
|
Infrastructure
service providers assist traditional businesses in the following
ways:
|
Ÿ
|
Strategic Consulting and Systems Integration.
Strategic consultants assist traditional businesses in developing
their e-commerce strategies. Systems integrators develop and
implement technological infrastructure that enables e-commerce.
Systems integrators also integrate e-commerce applications with
existing enterprise applications. Strategic consultants and
systems integrators typically bill their clients on a
project-by-project basis.
|
|
Ÿ
|
Software Providers.
Software providers design and sell software applications that
support e-commerce and integrate business functions. Software
providers may sell or license their products.
|
|
Ÿ
|
Outsourced Service Providers.
Outsourced service providers offer software applications,
infrastructure and related services designed to help traditional
businesses reduce cost, improve operational efficiency and
decrease time to market. Outsourced service providers may charge
fees on a per-use or periodic basis.
|
|
Infrastructure Service Provider Profiles
|
<R>
Table
of Infrastructure Service Providers.
The
partner companies listed below are important to our strategy because
the growth of our partner companies increases the value of our
collaborative network. We believe that infrastructure service
providers will facilitate innovation and growth of our market maker
companies by providing them with critical services. The table shows
certain information regarding our infrastructure service provider
partner companies by category as of June 30, 1999. Our ownership
positions have been calculated based on the issued and outstanding
common stock of each partner company, assuming
the issuance of common stock on the conversion or exercise of
preferred stock and convertible notes, but excluding the effect of
options and warrants.
<R>
Category and
Name
|
|
Description of
Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
Strategic
Consulting and
Systems Integration:
|
Benchmarking Partners, Inc.
www.benchmarking.com
|
|
Provides e-commerce best practices
research and
consulting services to optimize supply and distribution
network management.
|
|
12
|
%
|
|
1996
|
|
|
|
Context Integration, Inc.
www.context.com
|
|
Provides systems integration
services focused on
customer support, data access and e-commerce.
|
|
18
|
%
|
|
1997
|
|
|
|
US Interactive, Inc.
www.usinteractive.com
|
|
Provides a range of consulting and
technical services
relating to Internet marketing solutions.
|
|
3
|
%
|
|
1996
|
|
|
|
| Software
Providers:
|
Blackboard, Inc.
www.blackboard.com
|
|
Provides universities and
corporations with applications
that enable them to host classes and training on the
Internet.
|
|
30
|
%
|
|
1998
|
|
|
|
ClearCommerce Corp.
www.clearcommerce.com
|
|
Provides comprehensive e-commerce
solutions including
transaction and payment processing, credit card
authorization, fraud tracking and reporting functions.
|
|
15
|
%
|
|
1997
|
|
|
|
Entegrity Solutions
www.entegrity.com
|
|
Provides encryption software to
secure transactions and
communications between business applications.
|
|
12
|
%
|
|
1996
|
|
|
|
ServiceSoft Technologies, Inc.
www.servicesoft.com
|
|
Provides tools and services used
by its customers to
create Internet customer service applications consisting
of self-service, e-mail response and live interaction
products.
|
|
6
|
%
|
|
1998
|
|
|
|
Syncra Software, Inc.
www.syncra.com
|
|
Provides software that improves
supply chain
efficiency through collaboration of trading partners
over the Internet.
|
|
35
|
%
|
|
1998
|
|
|
|
Tradex Technologies, Inc.
www.tradex.com
|
|
Provides e-commerce application
software that enables
enterprises to create on-line marketplaces and
exchanges.
|
|
13
|
%
|
|
1999
|
|
|
|
| Outsourced Service Providers:
|
Breakaway Solutions, Inc.
www.breakaway.com
|
|
Provides application service
hosting, e-commerce
consulting and systems integration services to growing
companies.
|
|
53
|
%
|
|
1999
|
|
|
|
CommerceQuest, Inc.
www.commercequest.com
|
|
Provides a messaging service for
data sharing across
separate enterprises. Also provides software, systems
integration services and managed network services for
application integration within enterprises or with
external trading partners and customers.
|
|
29
|
%
|
|
1998
|
|
|
|
LinkShare Corporation
www.linkshare.com
|
|
Establishes affiliate
relationships for online merchants
with other Web sites to facilitate e-commerce.
|
|
34
|
%
|
|
1998
|
</R>
<R>
Category and
Name
|
|
Description of
Business
|
|
Our
Ownership
Percentage
|
|
Partner
Company
Since
|
|
|
|
PrivaSeek, Inc.
www.privaseek.com
|
|
Provides consumers with control of
their Web-based
personal profiles, allowing merchants to offer
consumers incentives for selective disclosure.
|
|
16
|
%
|
|
1998
|
|
|
|
SageMaker, Inc.
www.sagemaker.com
|
|
Provides services that combine an
enterprise’s
external and internal information assets into a single,
Web-based knowledge management platform.
|
|
27
|
%
|
|
1998
|
|
|
|
Sky Alland Marketing, Inc.
www.skyalland.com
|
|
Provides services to improve
customer
communications and relationships.
|
|
31
|
%
|
|
1996
|
|
|
|
United Messaging, Inc.
www.unitedmessaging.com
|
|
Provides high performance
electronic messaging
services for organizations with mission critical e-mail
networks.
|
|
41
|
%
|
|
1999
|
|
|
|
Vivant! Corporation Management
www.vivantcorp.com
|
|
Provides process automation and
decision support
services that enable companies to strategically manage
contractors, consultants and temporary employees.
|
|
23
|
%
|
|
1998
|
</R>
Set forth
below is a more detailed summary of some of our infrastructure
service provider partner companies.
Benchmarking Partners, Inc.
Benchmarking Partners is a strategic consulting and systems
integration infrastructure service company that provides e-commerce
best practices research and consulting services to optimize supply
and distribution network management. The use of best business
practices enabled by information technology established by
Benchmarking Partners allows companies to efficiently manage their
supply and distribution networks. Benchmarking Partners improves
supply and distribution networks in the following ways:
|
Ÿ
|
Integration.
Coordinating diverse business functions such as manufacturing,
logistics, sales and marketing to maximize efficiency.
|
|
Ÿ
|
Optimization.
Developing strategies that increase the efficiency of supply
networks.
|
|
Ÿ
|
Collaboration.
Creating collaborative solutions that incorporate key trading
partners.
|
Benchmarking
Partners’ clients include: companies undergoing business
process and information technology transformation; technology
solution providers hoping to gain a better understanding of the
market requirements for their products; and management consultants
and systems integrators seeking to refine their ability to
effectively support their clients.
We were
introduced to Benchmarking Partners through a member of our Board of
Directors. We have helped Benchmarking Partners recruit key managers
and are currently helping it build and position its best practice
e-commerce Web site. Benchmarking Partners assisted us in assessing
enterprise software markets and provides information technology
advice to other partner companies. Benchmarking Partners is also
working with Sky Alland Marketing and US Interactive to develop
Internet business application opportunities. For 1998, Benchmarking
Partners had revenue of $15.0 million, and for the quarter ended
March 31, 1999, revenue of $5.0 million.
Breakaway Solutions, Inc.
Breakaway Solutions is an outsourced service provider infrastructure
service company that is an application service provider and
e-commerce consulting and systems integration
services provider to middle-market companies. Through its application
service hosting solutions, Breakaway Solutions implements, operates
and supports software applications that can be accessed and used
over the Internet. Breakaway Solutions also offers custom developed,
e-commerce related B2B interactive marketing and other solutions. By
focusing on Internet-based solutions, Breakaway Solutions has
created a library of components that can be redeployed by multiple
clients. This allows Breakaway Solutions to provide rapid,
cost-effective service to clients.
We first met
Breakaway Solutions through one of our shareholders and Advisory
Board members. We helped Breakaway Solutions to complete its
management team and merge with one of our other partner companies.
In addition, Breakaway Solutions is a strategic partner for
installing ClearCommerce’s Web-based transaction and order
processing solutions. Breakaway Solutions is also in discussions to
provide its services to ONVIA.com. Including the effect of options
and warrants, our ownership percentage in Breakaway Solutions is
32%. For 1998, Breakaway Solutions had revenue of $10.0 million, and
for the quarter ended March 31, 1999, revenue of $3.1 million.
<R>
CommerceQuest, Inc. CommerceQuest is an outsourced service
provider infrastructure service company that delivers systems
integration services, software, and managed networked services to
enterprises seeking to enable mission-critical business processes
within their enterprise or with their external trading partners and
customers. The range of computing environments and software
applications utilized across a typical Fortune 500 enterprise is
vast and growing, often involving multiple legacy and client/server
environments, characterized by heterogeneous computer platforms and
various proprietary information formats. Additionally, the recent
growth of the Internet and the use of intranets has increased the
complexity of data sharing among heterogeneous business
applications. CommerceQuest currently employs 200 professionals
dedicated to providing software and system integration services
around IBM Corporation’s MQ series, a messaging-based
middleware software solution that facilitates data sharing among an
enterprise’s disparate applications, databases and operating
systems.
</R>
<R>
CommerceQuest’s recently launched managed network service
leverages its extensive domain expertise in providing middleware
solutions that facilitate data sharing to provide a highly secure,
assured information delivery system between corporations for use
over any network, including the Internet. This managed network
service provides an open platform that seamlessly bridges legacy
e-commerce services, such as electronic data interchange and
proprietary value-added networks, with today’s best-of-breed
Internet technologies. By offering multi-platform and multi-network
interoperability and extensive customer support, CommerceQuest
provides its customers with low cost, rapidly-implemented messaging
services. We believe that the services and software provided by
CommerceQuest can be used throughout our partner company network,
including our market makers interested in tighter integration with
their suppliers and customers. We have assisted CommerceQuest in
recruiting senior management and repositioning it to offer managed
network services. To support the introduction of managed network
services, we provided the company with strategic planning, sales and
marketing support and introductions to potential business partners.
For 1998, CommerceQuest had revenue of $31.9 million, and for the
quarter ended March 31, 1999 had revenue of $4.7 million.
</R>
Government Regulations and Legal Uncertainties
<R>
As of
June 30, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet’s
popularity and increasing use, new laws and regulations may be
adopted. These laws and regulations may cover issues such as the
collection and use of data from Web site visitors and related
privacy issues, pricing, content, copyrights, online gambling,
distribution and the quality of goods and services. The enactment of
any additional laws or regulations may impede the growth of the
Internet and B2B e-commerce, which could decrease the revenue of our
partner companies and place additional financial burdens on them.
</R>
Laws and
regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress
recently enacted laws regarding online copyright infringement and
the
protection of information collected online from children. Although
these laws may not have a direct adverse effect on our business or
those of our partner companies, they add to the legal and regulatory
burden faced by B2B e-commerce companies. Other specific areas of
legislative activity are:
|
Ÿ
|
Taxes. Congress recently enacted a three-year moratorium,
ending on October 21, 2001, on the application of “
discriminatory” or “special” taxes by the states on
Internet access or on products and services delivered over the
Internet. Congress further declared that there will be no federal
taxes on e-commerce until the end of the moratorium. However, this
moratorium does not prevent states from taxing activities or goods
and services that the states would otherwise have the power to
tax. Furthermore, the moratorium does not apply to certain state
taxes that were in place before the moratorium was enacted.
|
|
Ÿ
|
Online Privacy. Both Congress and the Federal Trade Commission
are considering regulating the extent to which companies should be
able to use and disclose information they obtain online from
consumers. If any regulations are enacted, B2B e-commerce
companies may find certain marketing activities restricted. Also,
the European Union has directed its member nations to enact much
more stringent privacy protection laws than are generally found in
the United States, and has threatened to prohibit the export of
certain personal data to United States companies if similar
measures are not adopted. Such a prohibition could limit the
growth of foreign markets for United States B2B e-commerce
companies. The Department of Commerce is negotiating with the
Federal Trade Commission to provide exemptions from the European
Union regulations, but the outcome of these negotiations is
uncertain.
|
|
Ÿ
|
Regulation of Communications Facilities. To some extent, the
rapid growth of the Internet in the United States has been due to
the relative lack of government intervention in the marketplace
for Internet access. Lack of intervention may not continue in the
future. For example, several telecommunications carriers are
seeking to have telecommunications over the Internet regulated by
the Federal Communications Commission in the same manner as other
telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to
regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much the
same manner as telephone services, which could slow the deployment
of broadband Internet access services. Because of these
proceedings or others, new laws or regulations could be enacted
which could burden the companies that provide the infrastructure
on which the Internet is based, thereby slowing the rapid
expansion of the medium and its availability to new users.
|
|
Ÿ
|
Other Regulations. The growth of the Internet and
e-commerce may lead to the enactment of more stringent consumer
protection laws. The Federal Trade Commission may use its existing
jurisdiction to police e-commerce activities, and it is possible
that the Federal Trade Commission will seek authority from
Congress to regulate certain online activities. The Federal Trade
Commission has already issued for public comment proposed
regulations governing the collection of information online from
children.
|
Generally
applicable laws may affect us and our partner companies. The exact
applicability of many of these laws to B2B e-commerce, however, is
uncertain.
Proprietary Rights
Our partner
companies have copyrights with respect to software applications, Web
sites and other materials. These materials may constitute an
important part of our partner companies’ assets and competitive
strengths. Federal law generally protects such copyrights for 90
years from the creation of the underlying material.
Competition
|
Competition
From our Shareholders and Within our Network
|
<R>
We may
compete with our shareholders and partner companies for
Internet-related opportunities. After this offering, Comcast
Corporation, Compaq Computer Corporation, IBM Corporation and
Safeguard Scientifics will beneficially own 9.9%, 4.0%, 3.3% and
14.4% of our common stock, respectively. Excluding any shares
potentially purchased by General Electric Capital Corporation in
this offering, General Electric Capital Corporation will own
approximately 2.9% of our common stock after this offering. These
shareholders may compete with us to acquire interests in B2B
e-commerce companies. Comcast Corporation, General Electric Capital
Corporation and Safeguard Scientifics currently each have a designee
as a member of our board of directors and IBM Corporation has a
right to designate a board observer, which may give these companies
access to our business plan and knowledge about potential
acquisitions. In addition, we may compete with our partner companies
to acquire interests in B2B e-commerce companies, and our partner
companies may compete with each other for acquisitions or other B2B
e-commerce opportunities. In particular, VerticalNet seeks to
expand, in part through acquisition, its number of B2B communities.
VerticalNet, therefore, may seek to acquire companies that we would
find attractive. While we may partner with VerticalNet on future
acquisitions, we have no current contractual obligations to do so.
We do not have any contracts or other understandings with our
shareholders or partner companies that would govern the resolution
of these potential conflicts. Such competition, and the
complications posed by the designated directors, may deter companies
from partnering with us and may limit our business opportunities.
</R>
|
Competition
Facing our Partner Companies
|
Competition
for Internet products and services is intense. As the market for B2B
e-commerce grows, we expect that competition will intensify.
Barriers to entry are minimal, and competitors can offer products
and services at a relatively low cost. Our partner companies compete
for a share of a customer’s:
|
Ÿ
|
purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
|
|
Ÿ
|
dollars spent on consulting services with many established
information systems and management consulting firms; and
|
|
Ÿ
|
advertising budget with online services and traditional off-line
media, such as print and trade associations.
|
In addition, some of our partner companies compete to
attract and retain a critical mass of buyers and sellers. Several
companies offer competitive solutions that compete with one or more
of our partner companies. We expect that additional companies will
offer competing solutions on a stand-alone or combined basis in the
future. Furthermore, our partner companies’ competitors may
develop Internet products or services that are superior to, or have
greater market acceptance than, the solutions offered by our partner
companies. If our partner companies are unable to compete
successfully against their competitors, our partner companies may
fail.
Many of our
partner companies’ competitors have greater brand recognition
and greater financial, marketing and other resources than our
partner companies. This may place our partner companies at a
disadvantage in responding to their competitors’ pricing
strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives.
|
Competition
for Partner Companies
|
We face
competition from other capital providers including publicly-traded
Internet companies, venture capital companies and large
corporations. Many of these competitors have greater financial
resources
and brand name recognition than we do. These competitors may limit our
opportunity to acquire interests in new partner companies. If we
cannot acquire interests in attractive companies, our strategy to
build a collaborative network of partner companies may not succeed.
Facilities
<R>
Our
corporate headquarters are located at 435 Devon Park Drive, Building
800 in an office facility located in Wayne, Pennsylvania, where we
lease approximately 3,650 square feet. We plan to move into a larger
corporate headquarters in Wayne, Pennsylvania during the second half
of 1999. We also maintain offices in Boston, Massachusetts and San
Francisco, California and intend to open an office in Seattle,
Washington.
</R>
Employees
<R>
As of
June 30, 1999, excluding our partner companies, we had 35 employees,
all of whom work with us on a full-time basis. We consider our
relationships with our employees to be good. None of our employees
are covered by collective bargaining agreements.
</R>
<R>
Legal Matters
</R>
<R>
We are
not a party to any material legal proceedings. In connection with
the directed share subscription program, Safeguard Scientifics reset
the record date for participating in the program from June 14, 1999
to June 24, 1999 for regulatory reasons. As a result, two former
shareholders of Safeguard Scientifics have threatened to file a
claim against Safegaurd Scientifics and could also seek to prevent
or delay us from completing our initial public offering. We do not
believe that any attempt to prevent or delay our offering has legal
merit or a likelihood of success.
</R>
Executive Officers and Directors
<R>
Our
executive officers, key employees and directors, their ages and
their positions are as follows:
</R>
<R>
Name
|
|
Age
|
|
Position
|
| Walter W. Buckley,
III
|
|
39
|
|
President, Chief
Executive Officer and Director
|
| Douglas A.
Alexander
|
|
38
|
|
Managing Director
|
| Richard G. Bunker
|
|
37
|
|
Managing Director
and Chief Technology Officer
|
| Richard S. Devine
|
|
41
|
|
Managing Director,
Executive Recruiting
|
| Kenneth A. Fox
|
|
28
|
|
Managing Director
and Director
|
| David D. Gathman
|
|
51
|
|
Chief Financial
Officer and Treasurer
|
| Christopher H.
Greendale
|
|
47
|
|
Managing Director,
Operations
|
| Gregory W. Haskell
|
|
42
|
|
Managing Director,
Operations
|
| Todd G. Hewlin
|
|
32
|
|
Managing Director,
Corporate Strategy and Research
|
| Victor S. Hwang
|
|
30
|
|
Managing Director,
Acquisitions
|
| Sam Jadallah
|
|
35
|
|
Managing Director,
Operations
|
| Mark J. Lotke
|
|
31
|
|
Managing Director,
Acquisitions
|
| Henry N. Nassau
|
|
45
|
|
Managing Director,
General Counsel and Secretary
|
| John N. Nickolas
|
|
32
|
|
Managing Director,
Finance and Assistant Treasurer
|
| Robert A. Pollan
|
|
38
|
|
Managing Director,
Operations
|
| Sherri L. Wolf
|
|
31
|
|
Managing Director,
Investor Relations
|
| Michael H. Forster
|
|
56
|
|
Senior Partner,
Operations
|
| Robert E. Keith,
Jr. (1)
|
|
58
|
|
Chairman and
Director
|
| Julian A. Brodsky
(2)
|
|
65
|
|
Director
|
| E. Michael Forgash
(2)
|
|
41
|
|
Director
|
| Thomas P. Gerrity
(1)
|
|
57
|
|
Director
|
| Scott E. Gould
|
|
34
|
|
Director
|
| Peter A. Solvik(1)
|
|
40
|
|
Director
|
</R>
(1)
|
Member of the compensation committee
|
(2)
|
Member of the audit committee
|
<R>
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.
</R>
<R>
Douglas A. Alexander
has
served as one of our Managing Directors since September 1997. Prior
to joining us, Mr. Alexander co-founded Reality Online, Inc. in 1986
and sold it to Reuters Group in 1994. Mr. Alexander continued to
serve as President and Chief Executive Officer of Reality Online
after its acquisition by Reuters Group until September 1997 and was
a key contributor to Reuters’ Internet initiatives. Mr.
Alexander is Chairman of the Board of VerticalNet, Inc. and serves
as a director of Arbinet Communications, Inc., Blackboard, Inc.,
ComputerJobs.com, Inc., Deja.com, Inc., eMerge Systems, LinkShare
Corporation, SageMaker, Inc. and Star-Cite!.
</R>
Richard G.
Bunker
has
served as one of our Managing Directors and has been our Chief
Technology Officer since April 1999. Prior to joining us, Mr. Bunker
was President and Chief Executive Officer of Reality Online, a
Reuters company, from September 1997 to April 1999. Before becoming
President and Chief
Executive Officer, Mr. Bunker served in various senior management
positions at Reality Online. While President and Chief Executive
Officer of Reality Online, Mr. Bunker built the firm into a leading
online securities trading company. He also served as Senior Vice
President and Chief Information Officer of SEI Investments from
January 1994 to March 1996, and Vice President of the investment
management and trading technology group at State Street Global
Advisors from October 1992 to January 1994.
</R>
<R>
Richard S. Devine has served as our Managing Director of
Executive Recruiting since June 1999. Prior to joining us, Mr.
Devine was a Partner at Heidrick & Struggles, and a member of
its International Technology Practice from October 1997 to June
1999. In this capacity, Mr. Devine led the search for many high
profile executive positions including the Chief Executive Officer of
Global Crossing, President of Transport, a joint venture between
Microsoft Corporation and First Data Corporation, Senior Vice
President of Worldwide Operations at Apple Computer Corporation,
Vice President of Customer Service at Amazon.com, Chief Financial
Officer and Chief Information Officer at Remedy Corporation and
General Manager of the Americas, General Manager of Services and
Vice President of International at Siebel Systems. Mr. Devine also
served as President and Chief Executive Officer of KidSoft LLC from
March 1992 to February 1997.
</R>
<R>
Kenneth A. Fox is a co-founder and has served as one of our
Managing Directors since our inception in March 1996. Mr. Fox has
also served as one of our directors since February 1999. Prior to
co-founding us, Mr. Fox served as Director of West Coast Operations
for Safeguard Scientifics, Inc. and Technology Leaders II, L.P., a
venture capital partnership, from 1994 to 1996. In this capacity,
Mr. Fox led the development of and managed the West coast operations
for these companies. Mr. Fox serves as a director of BidCom,
ClearCommerce Corporation, CommerX, Inc., Context Integration, Inc.,
Deja.com, Inc., Entegrity Solutions Corporation, ONVIA.com, Inc.,
RapidAutoNet and Vivant! Corporation.
</R>
<R>
David
D. Gathman has served as our Chief Financial Officer and
Treasurer since January 1999. Prior to joining us, Mr. Gathman was
Chief Financial Officer and Executive Vice President, Finance and
Administration of Integrated Systems Consulting Group, Inc. from
January 1997 through its merger with First Consulting Group, Inc. in
December 1998. He also served as Chief Operating Officer, Vice
President, Secretary and Assistant Treasurer of Integrated Systems
Consulting Group, Inc. from April 1994 to December 1998 and as a
director of the company. Mr. Gathman brings to us over 30 years of
finance-related experience, the last 16 of which were focused in the
information technology industry.
</R>
<R>
Christopher H. Greendale has served as one of our Managing
Directors since July 1999 and was one of our Senior Partners of
Operations from January 1999 to July 1999. Prior to joining us, Mr.
Greendale served as an independent management consultant from
January 1998 to December 1998. Prior to becoming a consultant, Mr.
Greendale served as Executive Vice President of Cambridge Technology
Partners, a company he co-founded in 1991. Cambridge Technology
Partners is a systems integrator that initiated fixed price, fixed
time, rapid systems development. Mr. Greendale has extensive
experience in sales and marketing, and general management in the
information technology industry.
</R>
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.
<R>
Todd
G. Hewlin has served as our Managing Director of Corporate
Strategy and Research since July 1999. Prior to joining us, Mr.
Hewlin served as a Partner with McKinsey & Company, a global
management consultancy, and has held various positions with McKinsey
& Company from September 1993 to June 1999. During that time,
Mr. Hewlin led technology-intensive strategy projects for leading
organizations in North America and Europe. Mr. Hewlin’s clients
have included world-class technology companies, an Internet bank, a
</R> <R>
global satellite telephony startup,
and a range of traditional companies assessing the impact of the
Internet. From December 1998 to June 1999, Mr. Hewlin co-led McKinsey
’s Global Electronic Commerce practice.
Victor S. Hwang
has
served as one of our Managing Directors of Acquisitions since March
1999. Prior to joining us, Mr. Hwang served from January 1999 to
March 1999 as a General Partner of Softbank Holdings, responsible
for developing an investment fund targeting late-stage private
Internet companies. From August 1995 to January 1999, Mr. Hwang also
served as an investment banker at Goldman, Sachs &
Co., where he was involved in numerous financing and merger
transactions for a broad range of Internet, software, semiconductor,
communications and hardware companies. While at Goldman, Sachs &
Co., Mr. Hwang’s clients included eBay, GeoCities and Yahoo!.
Mr. Hwang obtained a Masters of Business Administration from the
Graduate Business School of Stanford University where he was in
attendance from September 1993 to June 1995.
</R>
<R>
Sam
Jadallah
has
served as one of our Managing Directors of Operations since July
1999. Prior to joining us, Mr. Jadallah served as a Microsoft Vice
President of Worldwide Enterprise Sales from June 1996 to July 1999
where he was responsible for leading sales efforts to business and
academic customers. Prior to holding this position, Mr. Jadallah
served as Manager of Worldwide Business Strategy reporting to Steve
Ballmer, President of Microsoft. Mr. Jadallah also served as General
Manager of Corporate and Developer Support and served as District
Manager leading Microsoft sales to the US Department of Defense from
1990 to 1992. Mr. Jadallah held various other sales, management and
technical positions since joining Microsoft in 1987.
</R>
<R>
Mark
J. Lotke
has
served as one of our Managing Directors of Acquisitions since June
1999. Prior to joining us, Mr. Lotke served from August 1997 to May
1999 as an Associate and from July 1993 to August 1997 as a Junior
Associate at General Atlantic Partners, a private equity firm
focused on investing in global information technology companies.
While at General Atlantic Partners, Mr. Lotke was involved in
numerous private equity transactions across a wide range of
Internet, software, and services companies, including E*trade,
Priceline.com, Inc., LHS Group, Inc., Envoy Corporation, NewSub
Services, Inc., and Predictive Systems. Prior to joining General
Atlantic Partners, Mr. Lotke served as a strategy consultant at
Corporate Decisions, Inc. Mr. Lotke obtained a Masters of Business
Administration from the Graduate Business School of Stanford
University where he was in attendance from September 1995 to June
1997.
</R>
<R>
Henry
N. Nassau
has
served as one of our Managing Directors and as our General Counsel
and Secretary since May 1999. Mr. Nassau was a partner in the law
firm of Dechert Price & Rhoads from September 1987 to May 1999
and was Chair of the Business Department from January 1998 to May
1999. At Dechert Price & Rhoads, Mr. Nassau engaged in the
practice of corporate law, concentrating on mergers and acquisitions.
</R>
John N.
Nickolas
has
served as our Managing Director of Finance and has been our
Assistant Treasurer since January 1999. Prior to joining us, Mr.
Nickolas served from October 1994 to December 1998 in various
finance and accounting positions for Safeguard Scientifics, Inc.,
most recently serving as Corporate Controller from December 1997 to
December 1998. Mr. Nickolas brings to us extensive financial
experience including corporate finance, financial reporting,
accounting and treasury operations. Before joining Safeguard
Scientifics, Inc., Mr. Nickolas was Audit Manager and held various
other positions at KPMG LLP from July 1990 to October 1994.
Robert A.
Pollan
has
served as one of our Managing Directors of Operations since June
1998. Prior to joining us, Mr. Pollan served as a Chief Technology
Officer and Vice President of Business Development at General
Electric Capital Corporation from August 1995 to June 1998. During
his tenure at General Electric Capital Corporation, Mr. Pollan
co-founded and served as President of two supply chain ventures
focused on remote telemetry and third-party logistics, returnable
packaging leasing and logistics. He led several acquisitions in
Europe, Asia and the United States. Mr. Pollan was co-founder and,
from September 1991 to
July 1995, Managing Director of OFR, Ltd., an
advisory firm focused on the organizational and financial
restructuring of industrial enterprises in Central Europe. While in
Central Europe, Mr. Pollan founded the first
Polish industrial group and advised the World Bank and a number of
Eastern European governments. Mr. Pollan serves as a director of
CommerceQuest, Inc., CommerX, Inc., Internet Commerce Systems, Inc.,
iParts, PointMent, and United Messaging and Universal Access, Inc.
</R>
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.
<R></R>
Robert E.
Keith, Jr. has served as the Chairman of our Board of Directors
since our inception in March 1996. Mr. Keith is also Managing
General Partner of Technology Leaders II, L.P. and has had principal
operating responsibility for Technology Leaders II, L.P. since 1988.
Mr. Keith also serves as a director of American Education Centers,
Inc., Cambridge Technology Partners (Massachusetts), Inc., Diablo
Research Corporation, LLC, Interactive Media Systems, Inc.,
Masterpack International, Inc., MultiGen-Paradigm, Inc., National
Media Corporation, Naviant Technology Solutions, Inc., Sansource,
Inc., US Interactive, Inc., and Whisper Communications, Inc. and is
Vice Chairman of the Board of Safeguard Scientifics, Inc.
Julian A.
Brodsky has served as one of our directors since May 1996. Mr.
Brodsky is a founder of Comcast Corporation, a developer of
broadband cable networks, cellular and personal communications
systems and has served as a director of Comcast since 1969 and Vice
Chairman since 1988. He serves as Vice President and a director of
Sural Corporation. Mr. Brodsky serves as a director of Comcast Cable
Communications, Inc., Comcast Cellular Corporation, the RBB Fund,
Inc. and Chairman of Comcast Interactive Capital Group, Inc.
E. Michael
Forgash has served as one of our directors since May 1998. Mr.
Forgash has been Vice President, Operations of Safeguard
Scientifics, Inc. since January, 1998. Prior to joining Safeguard
Scientifics, Mr. Forgash was President and Chief Executive Officer
of Creative Multimedia from August 1996 to October 1997. Prior to
that, Mr. Forgash was President at Continental HealthCare Systems
from November 1994 to July 1996. Mr. Forgash also serves as a
director of US Interactive, Inc., 4anything.com, Inc., eMerge
Vision, Who? Vision Systems, Inc. and Integrated Visions, Inc.
Dr. Thomas
P. Gerrity has served as one of our directors since December
1998. Dr. Gerrity has also served as Dean of The Wharton School of
the University of Pennsylvania since July 1990. Dr. Gerrity is also
a member of the Board of Directors of Fiserv, Inc., Fannie Mae, CVS
Corporation, Sunoco, Inc., Reliance Group Holdings, Inc.,
Knight-Ridder, Inc. and Ikon Office Solutions, Inc. and a trustee of
MAS Funds.
<R>
Scott
E. Gould has served as one of our directors since December 1998.
Mr. Gould is Vice President of G.E. Capital Equity Capital Group,
Inc., a wholly-owned subsidiary of General Electric Corporation, in
charge of Supply Chain Technology, Logistics and Transportation
Investing since August, 1997. Prior to joining G.E. Capital Equity
Capital Group, Mr. Gould was Director of Strategic Planning &
Information from January 1996 to August 1997 and Director of Finance
from February 1994 to January 1996 for DSC Logistics, a logistics
outsourcer and software company. Mr. Gould also works with the
boards of McHugh Software International and IFCO Returnable
Packaging Systems.
</R>
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.
<R>
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.
</R>
<R>
Ron
Hovsepian has served on our Advisory Board since October 1998.
Mr. Hovsepian is the Vice President, Business Development,
Distribution Industry, for IBM Corporation. Prior to holding this
position, Mr. Hovsepian was General Manager of IBM Corporation’
s Global Retail and Distribution Industry Solution Organization, and
had global responsibility for IBM Corporation’s retail store
system and the consumer driven supply chain solution units. Mr.
Hovsepian joined IBM Corporation as a Marketing Representative in
1983.
</R>
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.
<R>
Tom
Kippola has served on our Advisory Board since February 1997.
Mr. Kippola is the Managing Partner of The Chasm Group, which
provides market strategy consulting and training and speaking
services for start-up, growing and established information
technology companies. Prior to his consulting career, Mr. Kippola
was director of marketing for a service automation software vendor.
Mr. Kippola has co-authored a book entitled “The Gorilla Game:
An Investor’s Guide to Picking Winners in High Technology.”
Mr. Kippola serves as a director of Whisper Communications, Inc. and
Thru-Put Technologies. In addition, Mr. Kippola is an advisory board
member of Rubric, RTMS, Inc. and Voyager Capital.
</R>
<R>
Geoffrey A. Moore has served on our Advisory Board since
February 1997. Mr. Moore is Chairman of the Board and founder of The
Chasm Group, where he continues to provide market development and
business strategy services to many leading high-technology
companies. He is also a venture partner with Mohr Davidow Ventures
where he provides market strategy advice to the high-tech portfolio
companies. Prior to founding The Chasm Group, Mr. Moore was a
principal and partner at Regis McKenna, Inc., a leading high-tech
marketing strategy and communications company. Mr. Moore serves as a
director of many companies, including Documentation Inc. and
Objectivity, Inc.
</R>
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.
<R>
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.
</R>
|
Information
Technology Management Guidance
|
K.B.
Chandrasekhar has served on our Advisory Board since April 1999.
Mr. Chandrasekhar is Chairman of the Board of Exodus Communications,
a company he co-founded in 1994. Exodus Communications is a leading
server hosting company for Internet sites. Since establishing its
first Internet data center in 1996, Exodus Communications has
expanded to nine cities with more than 1,000 employees and 1,000
customers. Prior to co-founding Exodus Communications, Mr.
Chandrasekhar founded Fouress, Inc., a network software design and
development firm.
Esther Dyson
has served on our Advisory Board since May 1996. Ms. Dyson is
Chief Executive Officer of EDventure Holdings, Inc. EDventure
Holdings is a company focused on emerging information technology
worldwide, and on the emerging computer markets of Central and
Eastern Europe. EDventure publishes Release 1.0, a monthly
newsletter and sponsors two annual technology forums. Ms. Dyson
serves as a director of Scala Business Solutions N.V., Poland
Online, New World Publishing, Global Business Network, Graphisoft,
PRT Group, Inc., Accent, Medscape Inc. and Cygnus Solutions. Ms.
Dyson also serves on the advisory board of Perot Systems Corporation.
John
McKinley has served on our Advisory Board since July 1998. Mr.
McKinley is Chief Technology Officer of Merrill Lynch & Co. With
Merrill Lynch, Mr. McKinley has responsibility for 8,200 information
technology professionals and is responsible for driving e-commerce
initiatives throughout the company. Prior to joining Merrill Lynch,
Mr. McKinley served as Chief Technology and Information Officer for
General Electric Capital Corporation. Mr. McKinley serves as a
director of Proxicom Inc., a leading Internet-focused systems
integration firm. Mr. McKinley also serves on the Executive Client
Advisory Board of AT&T Corporation.
William
Powar has served on our Advisory Board since June 1998. Mr.
Powar is a principal of Venture Architects, a company he founded in
January 1997. Venture Architects is a consulting firm that provides
strategic guidance and business development expertise to companies
in the e-commerce industry. Prior to founding Venture Architects,
Mr. Powar served 22 years with Visa USA and Visa International
developing new markets and businesses. From 1994 through 1996, Mr.
Powar directed Visa’s venture investments and strategic
alliances. Mr. Powar serves as a director of MobiNetix Systems, Inc.
We expect to
change the composition of our Advisory Board from time to time to
better match the evolving needs of our partner companies.
Classes of the Board
Our Board of
Directors is divided into three classes that serve staggered
three-year terms as follows:
Class
|
|
Expiration
|
|
Member
|
| Class I
|
|
2000
|
|
Messrs. Brodsky
and Gould
|
|
|
|
| Class II
|
|
2001
|
|
Messrs. Keith,
Forgash and Solvik
|
|
|
|
| Class III
|
|
2002
|
|
Messrs. Buckley,
Fox and Gerrity
|
Board Committees
The
compensation committee reviews and makes recommendations to the
Board regarding the compensation to be provided to our Chief
Executive Officer and our directors. In addition, the compensation
committee reviews compensation arrangements for our other executive
officers. The compensation committee also administers our equity
compensation plans. The current members of the compensation
committee are Messrs. Gerrity, Keith and Solvik.
The audit
committee reviews and monitors our corporate financial reporting,
external audits, internal control functions and compliance with laws
and regulations that could have a significant effect on our
financial condition or results of operations. In addition, the audit
committee has the responsibility to consider and recommend the
appointment of, and to review fee arrangements with, our independent
auditors. The current members of the audit committee are Messrs.
Brodsky and Forgash.
Director Compensation and Other Arrangements
<R>
We do
not pay cash compensation to our directors; however they are
reimbursed for the expenses they incur in attending meetings of the
board or board committees. Non-employee directors are eligible to
receive options to purchase common stock awarded under our 1999
Equity Compensation Plan. See “Employee Benefit Plans—
Internet Capital Group, Inc. 1999 Equity Compensation Plan—
Non-Employee Director Option Grants.”
</R>
Compensation Committee Interlocks and Insider
Participation
<R>
Upon
completion of this offering, our compensation committee will make
all compensation decisions. Messrs. Gerrity, Keith and Solvik serve
as the members of the compensation committee. Mr. Buckley previously
served on the compensation committee. Messrs. Alexander and Buckley
serve on the compensation committee of VerticalNet. None of our
other executive officers, directors or compensation committee
members currently serve, or have in the past served, on the
compensation committee of any other company whose directors or
executive officers have served on our compensation committee.
</R>
Executive Compensation
<R>
The
following table provides certain summary information concerning the
compensation earned by our chief executive officer and the other
executive officers employed by us during the fiscal year ended
December 31, 1998. Since January 1, 1999, we have employed twelve
additional executive officers—Messrs. Bunker, Devine, Gathman,
Greendale, Haskell, Hewlin, Hwang, Jadallah, Lotke, Nassau, Nickolas
and Ms. Wolf—each of whom are expected to receive more than
$100,000 in compensation in 1999.
</R>
Summary Compensation Table
<R>
| |
|
Annual
Compensation
|
|
Long-Term
Compensation
Awards
|
Name and
Principal Position
|
|
Salary
|
|
Bonus
|
|
Other
Compensation (1)
|
|
Shares
Underlying
Options
|
| Walter W. Buckley,
III
|
| President and
Chief Executive Officer
|
|
$159,769
|
|
$96,000
|
|
—
|
|
1,300,000
|
|
|
| Douglas A.
Alexander
|
| Managing Director
|
|
225,000
|
|
100,000
|
|
—
|
|
1,250,000
|
|
|
| Kenneth A. Fox
|
| Managing Director
|
|
119,538
|
|
75,000
|
|
—
|
|
1,250,000
|
|
|
| Robert A. Pollan
|
| Managing Director,
Operations
|
|
133,808
|
|
50,000
|
|
—
|
|
1,250,000
|
</R>
(1)
|
The
value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for
any officer in the table above the lesser of either $50,000 or 10%
of the total annual salary and bonus reported for such officer.
|
The following
tables set forth certain information concerning grants to purchase
shares of our common stock of each of the officers named in the
summary compensation table above during the year ended December 31,
1998.
Option Grants During the Year Ended December 31,
1998
<R>
| |
|
Number of
Securities
Underlying
Options
Granted (1)
|
|
Percentage of
Total Options
Granted to
Employees in
1998
|
|
Exercise
Price per
Share (2)
|
|
Expiration
Date
|
|
Potential
Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation for
Option Term (3)
|
Name
|
|
|
|
|
|
5%
|
|
10%
|
| Walter W. Buckley,
III
|
|
1,300,000
|
|
22%
|
|
$2.00
|
|
Dec. 18, 2008
|
|
$20,693,192
|
|
$34,490,521
|
| Douglas A.
Alexander
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
| Kenneth A. Fox
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
| Robert A. Pollan
|
|
1,250,000
|
|
21%
|
|
2.00
|
|
Dec. 18, 2008
|
|
19,897,300
|
|
33,139,663
|
</R>
<R>
(1)
|
All
options granted to employees are immediately exercisable, are
nonqualified stock options and generally vest over five years at
the rate of 20% of the shares subject to the option per year.
Unvested shares are subject to a right of repurchase upon
termination of employment. Options expire ten years from the date
of grant.
|
</R>
(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.
|
<R>
(3)
|
These
amounts represent hypothetical gains that could be achieved for
the respective options if exercised at the end of the option term.
These gains are based on assumed rates of stock price appreciation
of 5% and 10% compounded annually from the date the respective
options were granted to their expiration dates, based upon an
assumed initial public offering price of $11.00 per share. These
assumptions are not intended to forecast future appreciation of
our stock price. The potential realizable value computation does
not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
|
</R>
<R>
The
following table sets forth certain information concerning option
exercises by each of the officers named in the above summary
compensation table.
</R>
Year-End December 31, 1998 Option Values
<R>
| |
|
Shares
Acquired on
Exercise (#)
|
|
Value
Realized ($)
|
|
Number of
Securities Underlying
Unexercised Options at Fiscal
Year-End
|
|
Value of
Unexercised
in-the-Money
Options at Fiscal
Year-End (1)
|
Name
|
|
|
|
Exercisable
(2)
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
| Walter W. Buckley,
III
|
|
—
|
|
—
|
|
1,300,000
|
|
—
|
|
$11,700,000
|
|
—
|
| Douglas A.
Alexander
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
| Kenneth A. Fox
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
| Robert A. Pollan
|
|
—
|
|
—
|
|
1,250,000
|
|
—
|
|
11,250,000
|
|
—
|
</R>
<R>
(1)
|
Based
on an assumed initial public offering price of $11.00 per share,
less the exercise price, multiplied by the number of shares
underlying the option.
|
</R>
(2)
|
All
the options listed below were exercised in May 1999.
|
Employee Benefit Plans
|
Membership
Profit Interest Plan
|
<R>
In 1996,
the board of managers of Internet Capital Group, L.L.C. approved the
Membership Profit Interest Plan, which we refer to as our restricted
stock issuances after the Reorganization. Under the terms of the
Membership Profit Interest Plan, certain employees, consultants and
advisors who are designated by Messrs. Buckley and Fox received
grants of units of membership interest in Internet Capital Group,
L.L.C. These units of membership interest cannot be transferred
until the rights of the holder in the units vest. Twenty percent of
each of these holder’s units of membership interest vest each
year over a five year period beginning on the vesting date
established by our board. If any holder’s relationship with us
is terminated, his or her units of membership interest that have not
vested are forfeited to us.
</R>
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
|
<R>
Our 1998
Equity Compensation Plan and our Managers’ Option Plan were
approved by the board of managers of Internet Capital Group, L.L.C.
on October 13, 1998. After the Reorganization, we converted the 1998
Equity Compensation Plan and the Managers’ Option Plan into our
1999 Equity Compensation Plan, which combines the Equity
Compensation Plan and the Managers’ Option Plan into a single
plan. The 1998 Equity Compensation Plan and Managers’ Option
Plan provided for the grant of non-qualified options for membership
interests in Internet Capital Group, L.L.C., restricted stock, stock
appreciation rights (“SARs”), and performance awards. Our
1999 Equity Compensation Plan provides that options outstanding
under the 1998 Equity Compensation Plan and Managers’ Option
Plan will be considered options issued under the 1999 Equity
Compensation Plan.
</R>
<R>
We have
adopted the Internet Capital Group, Inc. 1999 Equity Compensation
Plan, as amended and restated, effective as of February 2, 1999. The
terms and provisions of the 1999 Equity Compensation Plan are
summarized below. This summary, however, does not purport to be a
complete description of the Equity Compensation and is qualified in
its entirety by the terms of the 1999 Equity Compensation Plan.
</R>
<R>
Purpose. The purpose of the 1999 Equity Compensation Plan is to
provide:
</R>
|
Ÿ
|
designated employees of Internet Capital Group and its
subsidiaries;
|
|
Ÿ
|
certain advisors who perform services for Internet Capital Group
or its subsidiaries; and
|
|
Ÿ
|
non-employee members of our Board of Directors,
|
<R>
with the opportunity to receive grants of
incentive stock options, non-qualified options, share appreciation
rights, restricted shares, performance shares, dividend equivalent
rights and cash awards. We believe that the 1999 Equity Compensation
Plan will encourage the participants to contribute materially to our
growth and will align the economic interests of the participants
with those of our shareholders.
</R>
General.
Subject to adjustment as described below, the plan authorizes
awards to participants of up to 21,000,000 shares of our common
stock. No more than 3,000,000 shares in the aggregate may be granted
to any individual in any calendar year. Such shares may be
authorized but unissued shares of our common stock or may be shares
that we have reacquired, including shares we purchase on the open
market. If any options or stock appreciation rights granted under
the plan expire or are terminated for any reason without being
exercised, or restricted shares or performance shares are forfeited,
the shares of common stock underlying that award will again be
available for grant under the plan.
<R>
Administration of the Plan. A committee appointed by our Board
of Directors administers the 1999 Equity Compensation Plan. The
committee has the sole authority to designate participants, grant
awards and determine the terms of all grants, subject to the terms
of the 1999 Equity Compensation Plan. As a result of our becoming a
publicly-traded company, the compensation committee of the Board of
Directors will become responsible for administering and interpreting
the plan. Prior to that time, the Board of Directors has fulfilled
those roles. The compensation committee will consist of two or more
persons appointed by the Board of Directors from among its members,
each of whom will be a “non-employee director” as defined
by Rule 16b-3 under the Securities Exchange Act of 1934, and an
“outside director” as defined by Section 162(m) of the
Internal Revenue Code and related Treasury regulations. The
committee has the full authority to interpret the 1999 Equity
Compensation Plan and to make rules, regulations, agreements and
instruments for implementing the plan. The committee’s
determinations made under the 1999 Equity Compensation Plan are to
be conclusive and binding on all persons having any interest in the
plan or any awards granted under the plan.
</R>
<R>
Eligibility. Grants may be made to any employee of Internet
Capital Group, Inc. or any of its subsidiaries and to any
non-employee member of the Board of Directors. Key advisors who
perform services for us or any of our subsidiaries are eligible if
they render bona fide services, not as part of the offer or sale of
securities in a capital-raising transaction. As of July 12, 1999,
1,598,500 options were outstanding under the plan.
</R>
<R>
Options. Incentive stock options may be granted only to
employees. The maximum number of shares that may be subject to
incentive stock options over the life of the 1999 Equity
Compensation Plan is 3,000,000. Non-qualified stock options may be
granted to employees, key advisors and non-employee directors. The
exercise price of common stock underlying an option shall be
determined by the compensation committee at the time the option is
granted, and may be equal to, greater than, or less than the fair
market value of such stock on the date the option is granted;
provided that the exercise price of an incentive stock option shall
be equal to or greater than the fair market value of a share of
common stock on the date such incentive stock option is granted, and
the exercise price of an incentive stock option granted to an
employee who owns more than 10% of the common stock may not be less
than 110% of such fair market value.
</R>
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.
<R>
Non-Employee Director Option Grants. The 1999 Equity
Compensation Plan provides that each of our non-employee directors,
other than:
</R>
<R>
|
Ÿ
|
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;
|
</R>
<R>
|
Ÿ
|
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
|
</R>
<R>
|
Ÿ
|
non-employee directors who are granted options under the general
option provisions of the 1999 Equity Compensation Plan are each
entitled to receive an option to purchase 47,000 shares of our
common stock, vesting in equal installments over four years, upon
their initial election to our board of directors, and a service
grant to purchase 20,000 shares every two years, vesting in equal
installments over two years. The plan also allows our board of
directors to grant an option to any of the eligible non-employee
directors who were members of the Board of Directors immediately
following the execution of the Reorganization to compensate any of
those non-employee directors for the cancellation of outstanding
options held immediately prior to the Reorganization. No
non-employee director may be granted more than 107,000 shares of
our common stock under the automatic and conversion grants
described above. Such automatic and conversion grants will
otherwise be generally subject to the terms provided for options
under the 1999 Equity Compensation Plan.
|
</R>
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.
<R>
Cash
Awards. The compensation committee may grant cash awards to
employees under the 1999 Equity Compensation Plan. Such awards shall
be in such amounts and subject to such performance goals and other
terms and conditions as the compensation committee determines.
</R>
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.
<R>
Adjustment Provisions. In the event that certain reorganizations
of Internet Capital Group or similar transactions or events occur,
the maximum number of shares of stock available for grant, the
maximum number of shares that any participant in the 1999 Equity
Compensation Plan may be granted, the number of shares covered by
outstanding grants, the kind of shares issued under the 1999 Equity
Compensation Plan and the price per share or the applicable market
value of such grants shall be adjusted by the committee to reflect
changes to our common stock as a result of such occurrence to
prevent the dilution or enlargement of rights of any individual
under the 1999 Equity Compensation Plan.
</R>
<R>
Change of Control and Reorganization. Upon a Change of Control,
as defined in the 1999 Equity Compensation Plan, the compensation
committee may:
</R>
|
Ÿ
|
determine that the outstanding grants, whether in the form of
options and stock appreciation rights shall immediately vest and
become exercisable;
|
|
Ÿ
|
determine that the restrictions and conditions on all outstanding
restricted stock or performance share awards shall immediately
lapse;
|
|
Ÿ
|
require that grantees surrender their outstanding options and
stock appreciation rights in exchange for payment by us, in cash
or common stock, in an amount equal to the amount by which the
then fair market value of the shares of common stock subject to
the grantee’s unexercised options or stock appreciation
rights exceeds the exercise price of those options; and/or
|
|
Ÿ
|
after
giving grantees an opportunity to exercise their outstanding
options and stock appreciation rights, terminate any or all
unexercised options and stock appreciation rights.
|
<R>
Upon a
Reorganization, as defined in the 1999 Equity Compensation Plan,
where we are not the surviving entity or where we survive only as a
subsidiary of another entity, unless the compensation committee
determines otherwise, all outstanding option or SAR grants shall be
assumed by or replaced with comparable options or rights by the
surviving corporation. In addition, the compensation committee may:
</R>
|
Ÿ
|
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
|
|
Ÿ
|
after
accelerating all vesting and giving grantees an opportunity to
exercise their outstanding options or SARs, terminate any or all
unexercised options and SARs.
|
Federal Tax
Consequences of Stock Options. In general, neither the grant nor
the exercise of an incentive stock option will result in taxable
income to an option holder or a deduction to Internet Capital Group.
To receive special tax treatment as an incentive stock option under
the Internal Revenue Code as to shares acquired upon exercise of an
incentive stock option, an option holder must neither dispose of
such shares within two years after the incentive stock option is
granted nor within one year after the exercise of the option. In
addition, the option holder must be an employee of Internet Capital
Group or one of its subsidiaries at all times between the date of
grant and the date three months, or one year in the case of
disability, before the exercise of the option. Special rules apply
in the case of the death of the option holder. Incentive stock
option treatment under the Internal Revenue Code generally allows
the sale of our common stock received upon the exercise of an
incentive stock option to result in any gain being treated as a
capital gain to the option holder, but we will not be entitled to a
tax deduction. However, the exercise of an incentive stock option,
if the holding period rules described above are satisfied, will give
rise to income includable by the option holder in his or her
alternative minimum tax in an amount equal to the excess of the fair
market value of the stock acquired on the date of the exercise of
the option over the exercise price.
If the
holding rules described above are not satisfied, gain recognized on
the disposition of the shares acquired upon the exercise of an
incentive stock option will be characterized as ordinary income.
Such gain will be equal to the difference between the exercise price
and the fair market value of the shares at the time of exercise.
Special rules may apply to disqualifying dispositions where the
amount realized is less than the value at exercise. We will
generally be entitled to a deduction equal to the amount of such
gain included by an option holder as ordinary income. Any excess of
the amount realized upon such disposition over the fair market value
at exercise will generally be long-term or short-term capital gain
depending on the holding period involved. Notwithstanding the
foregoing, in the event that the exercise of the option is permitted
other than by cash payment of the exercise price, various special
tax rules may apply.
No income will
be recognized by an option holder at the time a non-qualified stock
option is granted. Generally, ordinary income will, however, be
recognized by an option holder at the time a vested non-qualified
stock option is exercised in an amount equal to the excess of the
fair market value of the underlying common stock on the exercise
date over the exercise price. We will generally be entitled to a
deduction for federal income tax purposes in the same amount as the
amount included in ordinary income by the option holder with respect
to his or her non-qualified stock option. Gain or loss on a
subsequent sale or other disposition of the shares acquired upon the
exercise of a vested non-qualified stock option will be measured by
the difference between the amount realized on the disposition and
the tax basis of such shares, and will generally be long-term
capital gain depending on the holding period involved. The tax basis
of the shares acquired upon the exercise of any non-qualified stock
option will be equal to the sum of the exercise price of such
non-qualified stock option and the amount included in income with
respect to such option. Notwithstanding the foregoing, in the event
that exercise of the option is permitted other than by cash payment
of the exercise price, various special tax rules apply.
Unless the
holder of an unvested non-qualified stock option makes an 83(b)
election as described below, there generally will be no tax
consequences as a result of the exercise of an unvested option until
the stock received upon such exercise is no longer subject to a
substantial risk of forfeiture or is transferable. Generally, when
the shares have vested, the holder will recognize ordinary income,
and we will be entitled to a deduction, equal to the difference
between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently
realized changes in the value of the stock generally would be
treated as long-term or short-term capital gain or loss, depending
on the length of time the shares were held prior to disposition of
such shares. In general terms, if a holder were to make an 83(b)
election under Section 83(b) of the Internal Revenue Code upon the
exercise of the unvested option, the holder would recognize ordinary
income on the date of the exercise of such option, and we would be
entitled to a deduction, equal to:
|
Ÿ
|
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
|
|
Ÿ
|
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
exception does exist, however, for performance-based compensation
which includes amounts received upon the
exercise of stock options pursuant to a plan approved by shareholders
that meets certain requirements. The 1999 Equity Compensation Plan
is intended to make grants of stock options and stock appreciation
rights that meet the requirements of performance-based compensation.
Other awards have been structured with the intent that such awards
may qualify as such performance based compensation if so determined
by the compensation committee.
</R>
|
Internet
Capital Group, Inc. Equity Compensation Loan Program
|
<R>
In
accordance with the 1998 Equity Compensation Plan, the 1999 Equity
Compensation Plan and the applicable employee option agreements, and
in consideration of certain restrictive covenants regarding the use
of confidential information and non-competition, we have offered to
loan some employees who have been awarded non-qualified stock
options under the 1999 Equity Compensation Plan an amount necessary
to pay the exercise price of their outstanding options and an amount
to pay some portion of the income tax that these employees will owe
upon the exercise of such options. These loans will generally be
available to those eligible employees who elect to exercise their
options on or prior to a date to be determined by us. The loans will
be full recourse, will bear interest at the Applicable Federal Rate,
and will be for five-year terms. In addition, each eligible employee
will pledge the number of shares acquired pursuant to the exercise
of the applicable option as collateral for the loan. If an eligible
employee sells any shares acquired pursuant to the option exercise,
such eligible employee is obligated under the terms of the loan to
use the proceeds of such sale to repay that percentage of the
original balance of the loan which is equal to the percentage
determined by dividing the number of shares sold by the number of
shares acquired pursuant to the exercise of the applicable option.
If the eligible employee’s employment by us is terminated for
any reason, such eligible employee must repay the full outstanding
loan balance to us within 90 days of such termination. Also, if we
determine that a grantee breaches any of the terms of the
restrictive covenants, such eligible employee must immediately repay
any outstanding loan balance to us.
</R>
|
Internet
Capital Group, Inc. Long-Term Incentive Plan
|
<R>
Our
long-term incentive plan supports our growth strategy since the plan
permits participants to share directly in the growth of our partner
companies. Each year, we will allocate up to 12% of each acquisition
made during the year for the benefit of the participants in the
long-term incentive plan. The plan permits the compensation
committee to award grants in the form of interests in limited
partnerships established by us to hold the interests acquired by us
in a given year, restricted stock in a partner company, or share
units which entitle a participant to share in the appreciation of
the value of the stock of a partner company above established
threshold levels. Grants may be made to any of our employees. As of
June 30, 1999, no grants have been made under the plan. We intend
primarily to grant limited partnership interests to plan
participants to more closely align the participants’ interests
with our interests.
</R>
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
|
<R>
We
sponsor the Internet Capital Group, Inc. 401(k) Plan, a defined
contribution plan that is intended to qualify under Section 401(k)
of the Code. All employees who are at least 21 years old and have
been employed by us for one month are eligible to participate in our
401(k) Plan. An eligible employee of the Company may begin to
participate in our 401(k) Plan on the first day of the plan quarter
after satisfying our 401(k) Plan’s eligibility requirements. A
participating employee may make pre-tax contributions of a
percentage (not less than 1% and not more than 15%) of his or her
eligible compensation, subject to the limitations under the federal
tax laws. Employee contributions and the investment earnings thereon
are fully vested at all times. We may make discretionary
contributions to the 401(k) Plan but we have never done so.
</R>
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.
Name
|
|
Shares of
Common
Stock Purchased
|
|
Date of
Purchase
|
|
Amount
Received
by Internet
Capital Group
|
| Walter W. Buckley,
III
|
|
250,000
|
|
April 1996
|
|
$250,000
|
| |
|
250,000
|
|
November 1996
|
|
250,000
|
| |
|
250,000
|
|
April 1997
|
|
250,000
|
| |
|
250,000
|
|
November 1997
|
|
250,000
|
|
| Kenneth A. Fox
|
|
250,000
|
|
May 1996
|
|
$250,000
|
| |
|
250,000
|
|
November 1996
|
|
250,000
|
| |
|
250,000
|
|
June 1997
|
|
250,000
|
| |
|
250,000
|
|
December 1997
|
|
250,000
|
|
| Safeguard
Scientifics (Delaware), Inc.
|
|
6,139,074
|
|
May 1996
|
|
$6,139,074
|
| |
|
360,926
|
|
November 1996
|
|
360,926
|
| |
|
3,250,000
|
|
April 1997
|
|
3,250,000
|
| |
|
3,250,000
|
|
November 1997
|
|
3,250,000
|
|
| Safeguard 98
Capital L.P.
|
|
4,062,500
|
|
June 1998
|
|
$8,125,000
|
| |
|
4,062,500
|
|
February 1999
|
|
8,125,000
|
<R>
During
1998 and 1999, we leased our corporate offices in Wayne,
Pennsylvania from Safeguard Scientifics, Inc. From January 31, 1998
to June 30, 1999, our monthly lease payments to Safeguard
Scientifics, Inc. totaled approximately $58,000. Prior to this
offering, Safeguard Scientifics, Inc., beneficially owned 18.7% of
our common stock. We believe that our lease in Wayne with Safeguard
Scientifics, Inc. is on terms no less favorable to us than those
that would be available to us in an arm’s-length transaction
with a third party.
</R>
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.
<R>
During
1998 and 1999, we paid Safeguard Scientifics for telephone and
accounting services, health and general insurance coverage, and
other services. From January 31, 1998 to June 30, 1999, our payments
to Safeguard Scientifics totaled approximately $220,000 for these
services. We believe that the services provided to us are on terms
no less favorable to us than those that would be available to us in
an arm’s-length transaction with a third party.
</R>
<R>
After
180 days from the date of this prospectus, each of Comcast ICG,
Inc., CPQ Holdings, Inc., General Electric Capital Corporation, IBM
Corporation, Internet Assets, Inc., Safeguard Scientifics,,
Technology Leaders II L.P. and Technology Leaders II Offshore C.V.
will have the right to demand on no more than two occasions that we
register the shares of our common stock held by them at the time of
this offering and all shares of our common stock held by them after
exercise of any warrants issued to these shareholders at the time of
this offering. After this offering, these shareholders, together,
will be holders of 51,602,064 shares of our common stock and
warrants to purchase 319,871 shares of our common stock.
</R>
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.
<R>
In
January 1997, we granted Christopher H. Greendale, currently one of
our Managing Directors, a ten year option to purchase shares of
Series A Preferred Stock convertible into 58,500 shares of common
stock of Benchmarking Partners, Inc., which we currently own. The
option is exercisable at a purchase price of $2.85 per share and
vests in four annual installments of 14,625 shares beginning one
year after the date of grant. Vesting is contingent upon Mr.
Greendale’s continued service to us.
</R>
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.
<R>
In May
1999, we issued $90 million principal amount of three-year
convertible notes to our largest shareholders, directors, executive
officers, certain members of the immediate families of our executive
officers and others in a round of financing led by Comcast ICG. The
notes bear interest at an annual rate of 4.99% during the first year
and at the prime rate for the remaining two years. The notes mature
on May 10, 2002. Upon completion of this offering, based on an
assumed initial public offering price of $11.00 per share, the notes
will automatically convert into 8,181,682 shares of our common
stock, and all accrued interest will be waived. We issued warrants
to the holders of these notes to purchase shares of our common
stock. The warrant holders will be entitled to purchase, based on an
assumed initial public offering price of $11.00 per share, 1,636,225
shares of our common stock. The warrants expire in May 2002.
</R>
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.
<R>
Name of Holder
|
|
Relationship to
Internet Capital Group
|
|
Amount of
Convertible Note
|
| Ann B. Alexander
|
|
family member of
executive officer
|
|
$ 63,000
|
| Bradley Alexander
|
|
family member of
executive officer
|
|
155,000
|
| Douglas E.
Alexander
|
|
family member of
executive officer
|
|
160,000
|
| Susan R. Buckley
|
|
family member of
executive officer
|
|
55,000
|
| Walter W. Buckley,
Jr.
|
|
family member of
executive officer
|
|
200,000
|
| Walter W. Buckley,
III
|
|
executive officer
and director
|
|
600,000
|
| Comcast ICG, Inc.
|
|
principal
shareholder
|
|
15,000,000
|
| E. Michael Forgash
|
|
director
|
|
100,000
|
| Kenneth A. Fox
|
|
executive officer
and director
|
|
1,000,000
|
| David D. Gathman
|
|
executive officer
|
|
25,000
|
| Thomas P. Gerrity
|
|
director
|
|
77,000
|
| Internet Assets,
Inc.
|
|
principal
shareholder
|
|
1,525,000
|
| Robert E. Keith,
Jr.
|
|
director
|
|
46,000
|
| Henry N. Nassau
|
|
executive officer
|
|
36,000
|
| Robert A. Pollan
|
|
executive officer
|
|
31,000
|
| Peter A. Solvik
|
|
director
|
|
68,000
|
|
| In May 1999, some of our officers
and directors exercised options to purchase our common stock.
Instead of paying us in cash, the officers and directors delivered
promissory notes to us in the aggregate amount of $21,765,000. The
promissory notes bear interest at the rate of 5.22%, mature on or
about May 5, 2004 and are secured by 8,910,000 shares of our
common stock. The following table sets forth the names of the
makers of the promissory notes, their relationship to us and the
amounts owed to us by each of these makers.
|
|
Name of Maker
|
|
Relationship to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Walter W.
Buckley, III
|
|
executive officer
and director
|
|
$ 2,600,000
|
| Douglas A.
Alexander
|
|
executive officer
|
|
2,500,000
|
| Richard G. Bunker
|
|
executive officer
|
|
1,350,000
|
| Kenneth A. Fox
|
|
executive officer
and director
|
|
2,500,000
|
| David D. Gathman
|
|
executive officer
|
|
1,300,000
|
| Christopher H.
Greendale
|
|
executive officer
|
|
300,000
|
| Victor S. Hwang
|
|
executive officer
|
|
4,005,000
|
| Henry N. Nassau
|
|
executive officer
|
|
3,660,000
|
| John N. Nickolas
|
|
executive officer
|
|
800,000
|
| Robert A. Pollan
|
|
executive officer
|
|
2,866,000
|
| Thomas P. Gerrity
|
|
director
|
|
400,000
|
|
| In June 1999, some of our
executive officers exercised options to purchase our common
stock. Instead of paying us cash, the officers and directors
delivered promissory notes to us in the aggregate amount of
$14,783,223. The promissory notes bear interest at the rate of
5.37%, mature on or about June 4, 2004 and are secured by
2,247,750 shares of our common stock. The following table sets
forth the names of the makers of the promissory notes, their
relationship to us and the amounts owed to us by each of these
makers.
|
|
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Gregory W.
Haskell
|
|
executive officer
|
|
$ 6,311,000
|
| Richard S.
Devine
|
|
executive officer
|
|
7,114,223
|
| Richard G.
Bunker
|
|
executive officer
|
|
1,358,000
|
</R>
<R>
In July 1999, some of our officers and directors
exercised options to purchase our common stock. Instead of paying
us cash, the officers and directors delivered promissory notes to
us in the aggregate amount of $39,304,000. The promissory notes
bear interest at the rate of 5.82%, mature on or about July 7,
2004 and are secured by 5,475,000 shares of our common stock. The
following table sets forth the names of the makers of the
promissory notes, their relationship to us and the amounts owed to
us by each of these makers.
</R>
<R>
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Douglas A.
Alexander
|
|
executive officer
|
|
$3,395,000
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
6,790,000
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
6,111,000
|
| Robert A. Pollan
|
|
executive officer
|
|
3,395,000
|
| Todd G. Hewlin
|
|
executive officer
|
|
2,430,000
|
| Mark J. Lotke
|
|
executive officer
|
|
7,058,000
|
| Sam Jadallah
|
|
executive officer
|
|
10,125,000
|
|
| In May 1999, some of our
officers and directors incurred tax liabilities as a result of
exercising their options to purchase our common stock. These
directors and officers borrowed money from us to pay these tax
liabilities. The loans are evidenced by promissory notes
delivered by these officers and directors to us in the aggregate
principal amount of $7,463,307. The promissory notes bear
interest at a rate of 5.22% and mature on May 5, 2004. The
following table sets forth the names of the makers of the
promissory notes, their relationship to us and the amounts owed
to us by each of these makers.
|
|
Name of Maker
|
|
Relationship
to
Internet Capital Group
|
|
Amount of
Promissory Note
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
$ 1,207,440
|
| Douglas A.
Alexander
|
|
executive
officer
|
|
1,161,000
|
| Richard G.
Bunker
|
|
executive
officer
|
|
272,835
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
1,395,000
|
| David D.
Gathman
|
|
executive
officer
|
|
603,720
|
| Christopher H.
Greendale
|
|
executive
officer
|
|
66,552
|
| Victor S. Hwang
|
|
executive
officer
|
|
973,092
|
| John N.
Nickolas
|
|
executive
officer
|
|
371,520
|
| Robert A.
Pollan
|
|
executive
officer
|
|
1,478,700
|
|
| In January 1999, while a
limited liability company, we paid a distribution to some of
our officers, directors and principal stockholders who were
members of Internet Capital Group, L.L.C. The following table
sets forth the names of the recipients of the distribution,
their relationships to us and the amount paid by us to the
recipient.
|
|
Name of
Recipient
|
|
Relationship to
Internet Capital Group
|
|
Amount Paid
to Recipient
|
| Walter W.
Buckley, III
|
|
executive
officer and director
|
|
$ 685,092
|
| Douglas A.
Alexander
|
|
executive
officer
|
|
249,702
|
| Kenneth A. Fox
|
|
executive
officer and director
|
|
514,597
|
| Thomas P.
Gerrity
|
|
director
|
|
6,100
|
| Christopher H.
Greendale
|
|
executive
officer
|
|
37,307
|
| Henry N.
Nassau
|
|
executive
officer
|
|
305
|
| Robert A.
Pollan
|
|
executive
officer
|
|
2,440
|
| Peter A.
Solvik
|
|
director
|
|
29,216
|
| Comcast ICG,
Inc.
|
|
principal
shareholder
|
|
1,401,198
|
| Internet
Assets, Inc.
|
|
principal
shareholder
|
|
122,007
|
| Safeguard
Scientifics (Delaware), Inc.
|
|
principal
shareholder
|
|
2,602,424
|
| Safeguard
Capital 98 LP
|
|
principal
shareholder
|
|
198,262
|
</R>
PRINCIPAL AND SELLING SHAREHOLDERS
<R>
The following table sets forth certain
information regarding beneficial ownership of our common stock
as of July 12, 1999, and as adjusted to reflect the sale of
shares offered hereby, by:
</R>
|
Ÿ
|
each person (or group of affiliated persons) who is known by
us to own more than five percent of the outstanding shares of
our common stock;
|
|
Ÿ
|
each of our directors and our executive officers named in the
summary compensation table; and
|
|
Ÿ
|
all of our executive officers and directors as a group.
|
<R>
Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we
believe that all persons named in the table have sole voting and
sole investment power with respect to all shares beneficially
owned by them. All figures include $90 million principal amount
of convertible notes which automatically convert to 8,181,682
shares of our common stock upon completion of this offering
assuming an $11.00 per share initial public offering price,
shares issuable upon exercise of warrants to purchase an
additional 1,836,225 shares at the initial public offering price
and shares of common stock issuable upon the exercise of options
or warrants exercisable within 60 days of July 12, 1999. These
options and warrants are deemed to be outstanding and to be
beneficially owned by the person holding them for the purpose of
computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the
percentage ownership of any other person. See “Certain
Transactions” for a description of the convertible notes.
</R>
<R>
| |
|
Options and Warrants
Exercisable
Within 60 Days
|
|
Number of Shares
Beneficially Owned
Including Options and
Warrants Exercisable
Within 60 Days
|
|
Percent of Shares Outstanding
|
5%
Beneficial Owners, Directors,
Named Officers
|
|
|
|
Before the Offering
|
|
After the Offering
|
| Comcast ICG,
Inc. (1)
|
|
339,726
|
|
12,303,361
|
|
11.4
|
%
|
|
9.9
|
%
|
|
c/o Comcast
Corporation
|
|
1500 Market
Street
|
|
Philadelphia,
Pennsylvania 19102
|
| Internet
Assets, Inc.
|
|
27,727
|
|
5,166,363
|
|
4.8
|
|
|
4.2
|
|
|
Sahab Tower
|
|
Fahad Alsalim
Street, 10th Floor
|
|
P.O. Box 3216
|
|
Safat, 13033,
Kuwait
|
| Safeguard
Scientifics, Inc.
|
|
—
|
|
19,061,794
|
|
17.7
|
|
|
14.4
|
|
|
435 Devon Park
Drive
|
|
Wayne,
Pennsylvania 19087
|
| Douglas
Alexander (2)
|
|
—
|
|
3,066,374
|
|
2.9
|
|
|
2.5
|
|
| Julian A.
Brodsky (3)
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Walter W.
Buckley, III (4)
|
|
11,909
|
|
6,081,954
|
|
5.7
|
|
|
4.9
|
|
| E. Michael
Forgash (5)
|
|
1,818
|
|
81,533
|
|
*
|
|
|
*
|
|
| Kenneth A. Fox
(6)
|
|
18,181
|
|
5,545,640
|
|
5.2
|
|
|
4.5
|
|
| Dr. Thomas P.
Gerrity (7)
|
|
1,400
|
|
458,400
|
|
*
|
|
|
*
|
|
| Scott E. Gould
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Robert E.
Keith, Jr.
|
|
836
|
|
155,017
|
|
*
|
|
|
*
|
|
| Robert A.
Pollan (8)
|
|
563
|
|
1,928,381
|
|
1.8
|
|
|
1.6
|
|
| Peter A.
Solvik
|
|
219,418
|
|
536,543
|
|
*
|
|
|
*
|
|
All executive
officers and directors
as a group (22 persons) (2) (3)
(4) (5) (6) (7) (8)
|
|
656,142
|
|
27,226,638
|
|
25.1
|
%
|
|
21.9
|
%
|
</R>
* Less than 1%
<R>
(1)
|
Includes convertible notes that convert to 227,272 shares and
warrants to purchase 45,454 shares of common stock held by
Comcast Interactive Investments, Inc. as to which Comcast ICG,
Inc. disclaims beneficial ownership.
|
</R>
<R>
(2)
|
Includes shares of restricted common stock which have not
vested pursuant to the Membership Profit Interest Plan and the
1999 Equity Compensation Plan. See “Management—
Employee Benefit Plans” for a description of the
Membership Profit Interest Plan and the 1999 Equity
Compensation Plan.
|
</R>
(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.
|
<R>
(4)
|
Includes shares of restricted common stock that have not
vested pursuant to the Membership Profit Interest Plan and the
1999 Equity Compensation Plan. Also includes 142,500 shares of
common stock and convertible notes that convert to 5,000
shares and warrants to purchase 1,000 shares of common stock
held by Susan R. Buckley, wife of Walter W. Buckley, III.
|
</R>
<R>
(5)
|
E. Michael Forgash is Vice President-Operations of Safeguard
Scientifics, Inc. Mr. Forgash disclaims beneficial ownership
of shares beneficially owned by Safeguard Scientifics and
Safeguard Scientifics, disclaims beneficial ownership of
shares beneficially owned by Mr. Forgash.
|
</R>
(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
<R>
Safeguard Scientifics 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 sells
all the shares that it is offering, Safeguard Scientifics will
own about 17,811,794 shares of our common stock, or 14.4% of the
outstanding shares, after completion of this offering and the
concurrent offering.
</R>
DESCRIPTION OF CAPITAL STOCK
General
<R>
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 123,765,124 shares
(125,565,124 shares if the underwriters’ over-allotment
option is exercised in full) of common stock issued and
outstanding.
</R>
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
<R>
As of July 12, 1999, there were 99,492,533
shares of our common stock outstanding. As of July 12, 1999,
1,605,750 shares of our common stock were reserved for issuance
under our 1999 Equity Compensation Plan. Upon completion of the
offering, there will be 123,765,124 shares of common stock
outstanding.
</R>
The
holders of our common stock are entitled to dividends as our
board of directors may declare from funds legally available
therefor, subject to the preferential rights of the holders of
our preferred stock, if any. The holders of our common stock are
entitled to one vote per share on any matter to be voted upon by
shareholders. Our certificate of incorporation does not provide
for cumulative voting in connection with the election of
directors, and accordingly, holders of more than 50% of the
shares voting will be able to elect all of the directors. No
holder of our common stock will have any preemptive right to
subscribe for any shares of capital stock issued in the future.
Upon
any voluntary or involuntary liquidation, dissolution, or
winding up of our affairs, the holders of our common stock are
entitled to share ratably in all assets remaining after payment
of creditors and subject to prior distribution rights of our
preferred stock, if any. All of the outstanding shares of common
stock are, and the shares offered by us will be, fully paid and
non-assessable.
Preferred Stock
As
of the closing of this offering, no shares of our preferred
stock will be outstanding. Our certificate of incorporation
provides that our board of directors may by resolution establish
one or more classes or series of preferred stock having such
number of shares and relative voting rights, designation,
dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further shareholder
approval. The holders of our preferred stock may be entitled to
preferences over common shareholders with respect to dividends,
liquidation, dissolution, or our winding up in such amounts as
are established by our board of directors resolutions issuing
such shares.
The
issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of Internet Capital
Group without further action by the shareholders and may
adversely affect voting and other rights of holders of our
common stock. In addition, issuance of preferred stock, while
providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more
difficult for a third party to acquire a majority of the
outstanding shares of voting stock. At present, we have no plans
to issue any shares of preferred stock.
Registration Rights
<R>
After this offering, the holders of 51,602,064
shares of our common stock and warrants exercisable for 319,871
shares of our common stock are entitled to demand registration
of their shares under the Securities Act. The holders of
86,187,427 shares of our common stock and warrants exercisable
for 1,150,893 shares of our common stock, however, have agreed
not to demand registration of their common stock for 180 days
after
the date of this offering. After this 180-day period, any one of
these holders may require us, on not more than two occasions, to
file a registration statement under the Securities Act with
respect to at least twenty-five percent (25%) of his, her or its
shares eligible for demand rights if the gross offering price
would be expected to exceed $5.0 million. We are required to use
our best efforts to effect the registration, subject to certain
conditions and limitations. In addition, if 180 days after the
date of this offering, we prepare to register any of our
securities under the Securities Act, for our own account or the
account of our other holders, we will send notice of this
registration to holders of the shares eligible for demand rights
as well as to holders of all of our convertible notes and
holders who have contributed to us at least $1,000,000 in
capital. Subject to certain conditions and limitations, they may
elect to register their eligible shares. If we are able to file
a registration statement on Form S-3, the holders of shares
eligible for demand rights may register their common stock along
with that registration. The expenses incurred in connection with
such registrations will be borne by us, except that we will pay
expenses of only one registration on Form S-3 at a holder’s
request per year.
</R>
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
|
<R>
Our certificate of incorporation provides for
our Board of Directors to be divided into three classes of
directors, with each class as nearly equal in number as
possible, serving staggered three-year terms (other than
directors who may be elected by holders of preferred stock). As
a result, approximately one-third of our Board of Directors will
be elected each year. The classified board provision will help
to assure the continuity and stability of our Board of Directors
and our business strategies and policies as determined by our
Board of Directors. The classified board provision could have
the effect of discouraging a third party from making an
unsolicited tender offer or otherwise attempting to obtain
control of us without the approval of our Board of
Directors. In addition, the classified board provision could delay
shareholders who do not like the policies of our Board of
Directors from electing a majority of our Board of Directors for
two years.
|
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.
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
|
<R>
The provisions of our certificate of
incorporation that could have anti-takeover effects as described
above are subject to amendment, alteration, repeal, or
rescission by the affirmative vote of the holder of not less
than two-thirds (66
2
/
3
%) of the
outstanding shares of voting securities. This requirement makes
it more difficult for shareholders to make changes to the
provisions in our certificate of incorporation which could have
anti-takeover effects by allowing the holders of a minority of
the voting securities to prevent the holders of a majority of
voting securities from amending these provisions of our
certificate of incorporation.
</R>
Our
certificate of incorporation provides that our bylaws are
subject to adoption, amendment, alteration, repeal, or
rescission either by our Board of Directors without the assent
or vote of our shareholders, or by the affirmative vote of the
holders of not less than two-thirds (66
2
/
3
%) of the
outstanding shares of voting securities. This provision makes it
more difficult for shareholders to make changes in our bylaws by
allowing the holders of a minority of the voting securities to
prevent the holders of a majority of voting securities from
amending our bylaws.
Transfer Agent and Registrar
The
Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services. The Transfer Agent’s address is 4
Station Square, Pittsburgh, Pennsylvania, and its telephone
number is (412) 236-8157.
SHARES ELIGIBLE FOR FUTURE SALE
<R>
Upon completion of this offering, there will
be 123,765,124 shares of our common stock outstanding (assuming
conversion of all of our outstanding convertible notes, and no
exercise of the underwriters’ over-allotment option
exercise of outstanding options and warrants). Of these shares,
the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities
Act, except for any shares held by an existing “affiliate
” of Internet Capital Group, as that term is defined by the
Securities Act, which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act.
</R>
<R>
Upon completion of this offering, 110,515,124
“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.
</R>
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:
<R>
|
Ÿ
|
1% of the then outstanding shares of our common stock
(approximately 123,765,124 shares immediately after the
offering) or;
|
</R>
|
Ÿ
|
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.”
<R>
The holders of 86,187,427 shares of our common
stock have agreed not to demand registration of their common
stock for 180 days after the date of this prospectus without the
prior written consent of the underwriters. After this period, if
the holders cause a large number of shares to be registered and
sold in the public market, those sales could have an adverse
effect on the market price for the common stock.
</R>
<R>
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
</R>
<R>
The following discussion summarizes principal
U.S. federal income and estate tax consequences of the ownership
and disposition of common stock by “Non-U.S. Holders”.
You are a “non-U.S. holder” for U.S. federal income
tax purposes if you are:
</R>
|
Ÿ
|
a
non-resident alien individual,
|
|
Ÿ
|
a
foreign partnership or
|
|
Ÿ
|
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.
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:
|
Ÿ
|
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;
|
|
Ÿ
|
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
|
|
Ÿ
|
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:
|
Ÿ
|
subject to the 30% withholding tax discussed above, or
|
|
Ÿ
|
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.
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:
|
Ÿ
|
derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the U.S.;
|
|
Ÿ
|
is a “controlled foreign corporation” as to the U.S.;
or
|
|
Ÿ
|
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.
General
<R>
We intend to offer our common stock in the
United States and Canada through a number of U.S. underwriters
as well as elsewhere through international managers. Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC, BancBoston Robertson Stephens Inc., Deutsche
Bank Securities Inc. and Wit Capital Corporation are acting as
U.S. representatives of each of the U.S. underwriters. Subject
to the terms and conditions set forth in the purchase agreement
among us and the U.S. underwriters, and concurrently with the
sale of 1,950,000 shares of common stock to the international
managers, we have agreed to sell to each of the U.S.
underwriters, and each of the U.S. underwriters, severally and
not jointly, has agreed to purchase from us the number of shares
of our common stock set forth opposite its name below. The
7,800,000 shares of common stock being purchased by the U.S.
underwriters does not include the 2,250,000 shares of common
stock being sold by us and the 1,250,000 shares being sold by
Safeguard Scientifics through the directed share subscription
program.
</R>
<R>
Underwriters
|
|
Number
of
Shares
|
Merrill Lynch,
Pierce, Fenner & Smith
Incorporated
|
|
|
| Banc of
America Securities LLC
|
|
|
| BancBoston
Robertson Stephens Inc.
|
|
|
| Deutsche Bank
Securities Inc.
|
|
|
| Wit Capital
Corporation
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Total
|
|
9,750,000
|
| |
|
|
</R>
<R>
We have also agreed with certain international
managers outside the United States and Canada, for whom Merrill
Lynch International, Banc of America Securities LLC, BancBoston
Robertson Stephens International Limited and Deutsche Bank AG
London are acting as managers, that, subject to the terms and
conditions set forth in the purchase agreement, and concurrently
with the sale of 7,800,000 common stock to the U.S. underwriters
pursuant to the purchase agreement, to sell to the international
managers, and the international managers severally have agreed
to purchase from us, an aggregate of 1,950,000 common stock.
The public offering price per share and the total underwriting
discount per share of common stock are identical for the U.S.
shares and the international shares.
In
the purchase agreement, the several U.S. underwriters and the
several international managers, respectively, have agreed,
subject to the terms and conditions set forth therein, to
purchase all of the shares of common stock being sold under the
terms of the purchase agreement if any of the shares of common
stock being sold under the purchase agreement are purchased. In
the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase
commitments of the nondefaulting underwriters may be increased
or the purchase agreement may be terminated. The closings with
respect to the sale of shares of common stock to be purchased by
the U.S. underwriters and the international managers are
conditioned upon one another.
We
have agreed to indemnify the U.S. underwriters and the
international managers against some liabilities, including some
liabilities under the Securities Act, or to contribute to
payments the U.S. underwriters and the international managers
may be required to make in respect of those liabilities.
The
shares of common stock are being offered by the several
underwriters, subject to prior sales, when, as and if issued to
and accepted by them, subject to approval of certain legal
matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in
part.
Commissions and Discounts
The
U.S. representatives have advised us that they propose initially
to offer the shares of our common stock to the public at the
initial public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a
concession not in excess of $
per share of common stock.
The U.S. underwriters may allow, and such dealers may reallow, a
discount not in excess of $
per share of common stock
on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may
be changed.
The
following table shows the per share and total public offering
price, underwriting discount to be paid by us to the U.S.
underwriters and the proceeds before expenses to us. This
information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment options.
| |
|
Per
Share
|
|
Without
Option
|
|
With
Option
|
| Public
offering price
|
|
$
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Safeguard Scientifics, Inc.
|
|
$
|
|
$
|
|
$
|
<R>
The expenses of the offering, exclusive of the
underwriting discount, are estimated at $1,525,000 and are
payable by us.
</R>
Intersyndicate Agreement
The
U.S. underwriters and the international managers have entered
into an intersyndicate agreement that provides for the
coordination of their activities. Under the terms of the
intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of common
stock to each other for purposes of resale at the public
offering price, less an amount not greater than the selling
concession. Under the terms of the intersyndicate agreement, the
U.S. underwriters and any dealer to whom they sell shares of
common stock will not offer to sell or sell shares of common
stock to persons who are non-U.S. or non-Canadian persons, or to
persons they believe intend to resell to persons who are
non-U.S. or non-Canadian persons, and the international managers
and any dealer to whom they sell shares of common stock will not
offer to sell or sell shares of common stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to
U.S. or Canadian persons, except in the case of the terms of the
intersyndicate agreement.
Over-allotment Option
<R>
We have granted an option to the U.S.
underwriters, exercisable for 30 days after the date of this
prospectus, to purchase up to an aggregate of 1,440,000
additional shares of common stock at the public offering price
set forth on the cover page of this prospectus, less the
underwriting discount. The U.S. underwriters may exercise this
option solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. To the extent that the U.S.
underwriters exercise this option, each U.S. underwriter will be
obligated, subject to certain conditions, to purchase a number
of additional shares of common stock proportionate to such U.S.
underwriter’s initial amount reflected in the foregoing
table.
</R>
<R>
We have also granted an option to the
international managers, exercisable for 30 days after the date
of this prospectus, to purchase up to an aggregate of 360,000
additional shares of common stock to cover over-allotments, if
any, on terms similar to those granted to the U.S. underwriters.
</R>
<R>
Reserved Shares
</R>
<R>
At our request, the U.S. underwriters have
reserved approximately 2.6 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. In addition, the underwriters have
reserved up to $20 million of shares of our common stock for
sale to General Electric Capital Corporation. This would
represent 1,818,181 shares based on the midpoint of the offering
range. General Electric Capital Corporation has not committed to
purchasing these shares. The number of shares of our common
stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any
reserved shares which are not so orally confirmed for purchase
within one day of the pricing of the offering will be offered by
the underwriters to the general public on the same basis as the
other shares offered by this prospectus.
</R>
Directed Shares Subscription Program
<R>
As part of this offering, we and Safeguard
Scientifics are offering approximately 3.5 million shares of our
common stock in a directed share subscription program to
shareholders of Safeguard Scientifics, one of our principal and
founding shareholders. Safeguard Scientifics may be deemed a
statutory underwriter with respect to the shares of our common
stock offered to the shareholders of Safeguard Scientifics.
Safeguard Scientifics is not an underwriter with respect to the
other shares of our common stock offered and is not included in
the term “underwriter” as used elsewhere in this
prospectus. Of these shares, we are offering 2,250,000 shares
and Safeguard Scientifics is offering 1,250,000 shares.
Safeguard Scientifics’ shareholders may subscribe for one
share of our common stock, for every ten shares of Safeguard
Scientifics’ common stock held by them, and may not
transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least
100 shares of Safeguard Scientifics’ common stock as of
June 24, 1999 are eligible to purchase shares directly from us
or Safeguard Scientifics under the program. Shareholders who own
less than 100 shares of Safeguard Scientifics’ common stock
will be ineligible to participate in the directed share
subscription program. Subscription orders will be satisfied
first from the shares being sold by us, and then from the shares
offered by Safeguard Scientifics. If any of the shares offered
by us under the program are not purchased by the shareholders of
Safeguard Scientifics, Safeguard Scientifics will purchase these
shares from us. Sales under the directed share subscription
program will close on the closing of the sale of the other
shares offered to the public. It is expected that sales under
the directed share subscription program will be reflected in
purchasers’ book-entry accounts at the Depository Trust
Company, if any, upon the closing of these sales. After the
closing of these sales, we will mail stock certificates to all
purchasers who do not maintain book-entry accounts at the
Depository Trust Company. Prior to this offering, Safeguard
Scientifics beneficially owned 17.7% of our common stock. After
this offering and the concurrent offering, Safeguard Scientifics
will beneficially own about 17,811,794 shares, or 14.4%, of our
common stock, assuming that all 3.5 million shares are purchased
by shareholders of Safeguard Scientifics. The purchase price
under the program, whether paid by
Safeguard Scientifics or its shareholders, will be the same price
per share as set forth on the cover page of this prospectus. For
purposes of this prospectus, when we present financial data that
reflect 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
$175,000 or equal to 5% of the aggregate initial offering price
of the 3.5 million shares being sold through the directed share
subscription program. Safeguard Scientifics will not receive any
compensation from us or any other person with respect to this
offering, including any underwriting discounts or commissions.
</R>
No Sales of Similar Securities
<R>
We, our executive officers and directors,
Safeguard Scientifics (Delaware), Safeguard 98 Capital, L.P.,
Comcast ICG, Inc., CPQ Holdings, Inc., IBM Corporation, Internet
Assets, Inc., Technology Leaders II L.P. and Technology Leaders
II Offshore C.V. have agreed, with certain exceptions, not to
directly or indirectly:
</R>
|
Ÿ
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later
acquired by the person executing the agreement or with respect
to which the person executing the agreement has or later
acquires the power of disposition, or file a registration
statement under the Securities Act relating to any of the
foregoing; or
|
|
Ÿ
|
enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of our
common stock,
|
whether any such swap or transaction is to be
settled by delivery of our common stock or other securities, in
cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus. See “Shares Eligible for
Future Sale.”
Quotation on the Nasdaq National Market
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
through negotiations among us and the representatives. Among the
factors considered by us and the representatives in determining
the initial public offering price of our common stock, in
addition to prevailing market conditions, are:
|
Ÿ
|
the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
|
|
Ÿ
|
certain of our financial information;
|
|
Ÿ
|
the history of, and the prospects for, our company and the
industry in which we compete;
|
|
Ÿ
|
an assessment of our management;
|
|
Ÿ
|
our past and present operations;
|
|
Ÿ
|
the prospects for, and timing of, our future revenue;
|
|
Ÿ
|
the present state of our development;
|
|
Ÿ
|
the percentage interest of Internet Capital Group being sold
as compared to the valuation for the entire company; and
|
|
Ÿ
|
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our
common stock will trade in the public market subsequent to the
offering at or above the initial public offering price.
|
We
have applied for a listing of our common stock on the Nasdaq
National Market under the symbol “ICGE.”
The
underwriters have advised us that they do not expect sales to
accounts over which the underwriters exercise discretionary
authority to exceed five percent of the total number of shares
of our common stock offered by them.
Price Stabilization, Short Positions and
Penalty Bids
Until the distribution of our common stock is completed, rules
of the Securities and Exchange Commission may limit the ability
of the underwriters and certain selling group members to bid for
and purchase our common stock. As an exception to these rules,
the U.S. representatives are permitted to engage in certain
transactions that stabilize the price of our common stock. Such
transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock.
If
the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares
of common stock than are set forth on the cover page of this
prospectus, the U.S. representatives may reduce that short
position by purchasing common stock in the open market. The U.S.
representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described
above.
The
U.S. representatives may also impose a penalty bid on certain
underwriters and selling group members. This means that if the
U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters’ short position or
to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and
selling group members who sold those shares as part of the
offering.
In
general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the
price of the security to be higher than it might be in the
absence of such purchases. The imposition of a penalty bid might
also have an effect on the price of our common stock to the
extent that it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters makes any representation that the U.S.
representatives or the lead managers will engage in such
transactions or that such transactions, once commenced, will not
be discontinued without notice.
Electronic Format
Wit
Capital is making a prospectus in electronic format available on
its Internet Web site. All dealers purchasing shares from Wit
Capital in the offering similarly have agreed to make a
prospectus in electronic format available on Web sites
maintained by each of the dealers. The information on these Web
sites relating to the Internet Capital Group offering is filed
as an exhibit to the registration statement. Please see the
exhibit for a more complete description of the information
relating to the offering contained on those Web sites.
<R>
Wit Capital, a member of the National
Association of Securities Dealers, Inc., will participate in the
offering as one of the underwriters. The National Association of
Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as
an underwriter, e-Manager™ or selected dealer in more than
105 public offerings. Except for its participation in this
offering and as disclosed below, Wit Capital has no relationship
with Internet Capital Group or any of its founders or
significant shareholders.
</R>
Robert Lessin, the Chairman, Chief Executive Officer and a
significant shareholder of Wit Capital, owned 154,861 shares of
VerticalNet’s Series C Preferred Stock, which converted
into 154,861 shares of VerticalNet’s common stock prior to
consummation of VerticalNet’s initial public offering.
Except for its participation as e-Manager™ in VerticalNet
’s initial public offering, or as otherwise disclosed in
the underwriting
section of VerticalNet’s initial public offering prospectus,
Wit Capital has no relationship with VerticalNet or any of its
founders or significant shareholders. Walter W. Buckley,
President, Chief Executive Officer and a director of Internet
Capital Group, owns 50,000 shares of Wit Capital Corporation.
Kenneth A. Fox, a Managing Director and director of Internet
Capital Group, owns 50,000 shares of Wit Capital Corporation. An
affiliate of Comcast ICG, Inc., one of our principal
stockholders, owns 1,333,333 shares of Wit Capital Corporation.
Julian A. Brodsky, one of our directors, owns 80,000 shares of
Wit Capital Corporation.
<R>
The validity of our common stock offered
hereby will be passed upon for us by Dechert Price & Rhoads,
Philadelphia, Pennsylvania. Dechert Price & Rhoads
beneficially owns an aggregate of $250,000 principal amount of
convertible notes that will automatically convert into 22,727
shares of our common stock upon completion of this offering
based on an assumed initial public offering price of $11.00 per
share, and warrants exercisable at the initial public offering
price per share to purchase 4,545 shares of our common stock. A
member of Dechert Price & Rhoads beneficially owns
$33,333.33 principal amount of convertible notes that will
automatically convert into 3,030 shares of our common stock upon
completion of this offering based on an assumed initial public
offering price of $11.00 per share, and warrants exercisable at
the initial public offering price per share to purchase 606
shares of our common stock based on an assumed initial public
offering price of $11.00 per share.
</R>
<R>
Certain legal and regulatory matters in
connection with the offering will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
Members of and an attorney associated with Davis Polk &
Wardwell beneficially own an aggregate of $150,000 principal
amount of convertible notes that will automatically convert into
13,636 shares of our common stock upon completion of this
offering based on an assumed initial public offering price of
$11.00 per share, and warrants exercisable at the initial public
offering price per share to purchase an aggregate of 2,727
shares of our common stock based on an assumed initial public
offering price of $11.00 per share.
</R>
<R>
The consolidated financial statements of
Internet Capital Group, Inc. as of December 31, 1997 and 1998
and for the period March 4, 1996 (inception) through December
31, 1996, and for the years ended December 31, 1997 and 1998
have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in auditing and accounting.
</R>
<R>
The financial statements of Applica
Corporation as of December 31, 1998, and for the period from
September 24, 1998 (inception) through December 31, 1998 have
been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in auditing and accounting.
</R>
<R>
The financial statements of Breakaway
Solutions, Inc. as of December 31, 1997 and 1998, and for the
three years ended December 31, 1998 have been included herein
and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
</R>
<R>
The financial statements of CommerceQuest,
Inc. as of December 31, 1997 and 1998 and for each of the three
years in the period ended December 31, 1998 included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
</R>
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.
<R>
The financial statements of United Messaging,
Inc. as of December 31, 1998 and for the period from August 25,
1998 (date of inception) to December 31, 1998 have been included
herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
</R>
<R>
The financial statements of Universal Access,
Inc. as of December 31, 1997 and 1998, and for the period from
October 2, 1997 (date of inception) to December 31, 1997 and in
the year ended December 31, 1998 included in this prospectus,
have been so included in reliance on the report of
PricewaterhouseCoopers LLP given on the authority of said firm
as experts in auditing and accounting.
</R>
<R>
The consolidated financial statements of Web
Yes, Inc. and Subsidiary as of December 31, 1997 and 1998, and
for the two years ended December 31, 1998 have been included
herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
</R>
<R>
The financial statements of WPL Laboratories,
Inc. as of December 31, 1997 and 1998, and for the two years
ended December 31, 1998 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing
and accounting.
</R>
WHERE YOU CAN FIND MORE INFORMATION
We
have filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act with
respect to our common stock offered hereby. This prospectus does
not contain all of the information set forth in the registration
statement and the exhibits to the registration statement. For
further information with respect to Internet Capital Group and
our common stock offered hereby, reference is made to the
Registration Statement and the exhibits filed as a part of the
Registration Statement. Statements contained in this prospectus
concerning the contents of any contract or any other document
are not necessarily complete; reference is made in each instance
to the copy of such contract or any other document filed as an
exhibit to the registration statement. Each such statement is
qualified in all respects by such reference to such exhibit. The
registration statement, including exhibits thereto, may be
inspected without charge at the Commission’s principal
office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission’s regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and at 7 World Trade Center, 13th Floor, New York, New
York 10048 after payment of fees prescribed by the Commission.
The Commission also maintains a World Wide Web site which
provides online access to reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission at the address
http://www.sec.gov.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<R>
</R>
<R>
</R>
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
<R>
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.
</R>
We conducted our audits in accordance with
generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the
reports of the other auditors, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Internet Capital Group, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period
March 4, 1996 (inception) to December 31, 1996 and for the years
ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
May 7, 1999
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<R>
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December 31,
|
|
March 31,
|
| |
|
1997
|
|
1998
|
|
1999
|
| Assets
|
| Current Assets
|
|
Cash and cash
equivalents
|
|
$
5,967,461
|
|
|
$26,840,904
|
|
|
$19,372,129
|
|
Accounts
receivable, less allowances for doubtful accounts
($30,000-1997; $61,037-1998;
$142,560-1999)
|
|
721,381
|
|
|
1,842,137
|
|
|
2,711,325
|
|
|
Prepaid
expenses and other current assets
|
|
148,313
|
|
|
1,119,062
|
|
|
351,716
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
6,837,155
|
|
|
29,802,103
|
|
|
22,435,170
|
|
| |
|
Fixed assets,
net
|
|
544,443
|
|
|
1,151,268
|
|
|
1,063,766
|
|
|
Ownership
interests in and advances to partner companies
|
|
24,045,080
|
|
|
59,491,940
|
|
|
96,380,245
|
|
|
Available-for-sale securities
|
|
—
|
|
|
3,251,136
|
|
|
5,285,644
|
|
|
Intangible
assets, net
|
|
34,195
|
|
|
2,476,135
|
|
|
6,806,927
|
|
|
Other
|
|
20,143
|
|
|
613,393
|
|
|
92,969
|
|
| |
|
|
|
|
|
|
|
|
|
| Total Assets
|
|
$31,481,016
|
|
|
$96,785,975
|
|
|
$132,064,721
|
|
| |
|
|
|
|
|
|
|
|
|
| Liabilities
and Shareholders’ Equity
|
| Current
Liabilities
|
|
Current
maturities of long-term debt
|
|
$
150,856
|
|
|
$
288,016
|
|
|
$275,928
|
|
|
Line of credit
|
|
2,500,000
|
|
|
2,000,000
|
|
|
1,001,991
|
|
|
Accounts
payable
|
|
696,619
|
|
|
1,348,293
|
|
|
759,970
|
|
|
Accrued
expenses
|
|
388,525
|
|
|
1,823,407
|
|
|
1,316,427
|
|
|
Note payable
to partner company
|
|
—
|
|
|
1,713,364
|
|
|
1,285,023
|
|
|
Deferred
revenue
|
|
710,393
|
|
|
2,176,585
|
|
|
99,062
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
4,446,393
|
|
|
9,349,665
|
|
|
4,738,401
|
|
| |
|
Long-term debt
|
|
399,948
|
|
|
351,924
|
|
|
121,665
|
|
|
Minority
interest
|
|
—
|
|
|
6,360,008
|
|
|
3,408,479
|
|
|
Deferred taxes
|
|
—
|
|
|
—
|
|
|
560,716
|
|
|
Commitments
and contingencies (Note 16)
|
| |
| Shareholders
’ Equity
|
|
Preferred
stock, $.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
|
|
|
74,998,459
|
|
|
103,758,063
|
|
|
Retained
earnings (accumulated deficit)
|
|
(8,642,113
|
)
|
|
5,256,815
|
|
|
23,318,903
|
|
|
Unamortized
deferred compensation
|
|
(914,810
|
)
|
|
(1,330,011
|
)
|
|
(6,661,692
|
)
|
|
Accumulated
other comprehensive income
|
|
—
|
|
|
1,733,071
|
|
|
2,738,180
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
26,634,675
|
|
|
80,724,378
|
|
|
123,235,460
|
|
| |
|
|
|
|
|
|
|
|
|
| Total
Liabilities and Shareholders’ Equity
|
|
$31,481,016
|
|
|
$96,785,975
|
|
|
$132,064,721
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<R>
| |
|
March 4, 1996
(Inception) to
December 31,
|
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenue
|
|
$
285,140
|
|
|
$
791,822
|
|
|
$3,134,769
|
|
|
$377,371
|
|
|
$3,111,035
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
Cost of
revenue
|
|
427,470
|
|
|
1,767,017
|
|
|
4,642,528
|
|
|
628,213
|
|
|
1,553,329
|
|
|
Sales and
marketing
|
|
268,417
|
|
|
2,300,365
|
|
|
7,894,662
|
|
|
934,934
|
|
|
70,434
|
|
|
General and
administrative
|
|
1,652,481
|
|
|
3,442,241
|
|
|
7,619,169
|
|
|
1,523,878
|
|
|
3,777,381
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
2,348,368
|
|
|
7,509,623
|
|
|
20,156,359
|
|
|
3,087,025
|
|
|
5,401,144
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(2,063,228
|
)
|
|
(6,717,801
|
)
|
|
(17,021,590
|
)
|
|
(2,709,654
|
)
|
|
(2,290,109
|
)
|
| Other income,
net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,677,471
|
|
| Interest
income
|
|
102,029
|
|
|
264,391
|
|
|
1,305,787
|
|
|
56,400
|
|
|
309,735
|
|
| Interest
expense
|
|
(13,931
|
)
|
|
(126,105
|
)
|
|
(381,199
|
)
|
|
(110,020
|
)
|
|
(13,756
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
Income
(Loss) Before Income Taxes,
Minority Interest and Equity
Income (Loss)
|
|
(1,975,130
|
)
|
|
(6,579,515
|
)
|
|
14,386,175
|
|
|
9,558,888
|
|
|
26,683,341
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| Minority
interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
—
|
|
|
146,018
|
|
| Equity income
(loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
|
(289,847
|
)
|
|
(7,412,602
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$(0.10
|
)
|
|
$(0.19
|
)
|
|
$0.25
|
|
|
$0.20
|
|
|
$0.28
|
|
|
Diluted
|
|
$(0.10
|
)
|
|
$(0.19
|
)
|
|
$0.25
|
|
|
$0.20
|
|
|
$0.27
|
|
|
Weighted
Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
20,395,774
|
|
|
34,098,844
|
|
|
56,102,289
|
|
|
46,783,625
|
|
|
72,646,022
|
|
|
Diluted
|
|
20,395,774
|
|
|
34,098,844
|
|
|
56,149,289
|
|
|
46,783,625
|
|
|
73,699,973
|
|
|
Pro Forma
Information (Unaudited)
(Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma net
income
|
|
Pretax income
|
|
|
|
|
|
|
|
$13,898,928
|
|
|
|
|
|
$19,416,757
|
|
|
Pro forma
income tax provision
|
|
|
|
|
|
|
|
(5,142,603
|
)
|
|
|
|
|
(7,184,200
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income
|
|
|
|
|
|
|
|
$
8,756,325
|
|
|
|
|
|
$12,232,557
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma net
income per share
|
|
Basic
|
|
|
|
|
|
|
|
$
0.16
|
|
|
|
|
|
$0.17
|
|
|
Diluted
|
|
|
|
|
|
|
|
$
0.16
|
|
|
|
|
|
$0.17
|
|
Pro forma
weighted average shares
outstanding
|
|
Basic
|
|
|
|
|
|
|
|
56,102,289
|
|
|
|
|
|
72,646,022
|
|
|
Diluted
|
|
|
|
|
|
|
|
56,149,289
|
|
|
|
|
|
73,699,973
|
|
</R>
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders
’ Equity
<R>
| |
|
Common Stock
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Unamortized
Deferred
Compensation
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
|
|
Balance as of March 4, 1996
|
|
—
|
|
|
$ —
|
|
|
$
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
|
$
—
|
Issuance of common stock,
net
|
|
13,723,426
|
|
|
13,723
|
|
|
13,672,290
|
|
—
|
|
—
|
|
—
|
|
|
13,686,013
|
|
|
|
|
Issuance of common stock
(Note 10)
|
|
6,139,074
|
|
|
6,139
|
|
|
1,102,313
|
|
—
|
|
—
|
|
—
|
|
|
1,108,452
|
|
|
|
|
|
Issuance of restricted stock
|
|
6,027,017
|
|
|
6,027
|
|
|
1,013,639
|
|
—
|
|
(1,019,666)
|
|
—
|
|
|
—
|
|
|
|
|
Amortization of deferred
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
126,876
|
|
—
|
|
|
126,876
|
|
|
|
|
| Net
loss
|
|
—
|
|
|
—
|
|
|
—
|
|
(2,062,485)
|
|
—
|
|
—
|
|
|
(2,062,485)
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1996
|
|
25,889,517
|
|
|
25,889
|
|
|
15,788,242
|
|
(2,062,485)
|
|
(892,790)
|
|
—
|
|
|
12,858,856
|
|
|
|
|
|
Issuance of common stock
|
|
20,137,500
|
|
|
20,138
|
|
|
20,117,367
|
|
—
|
|
—
|
|
—
|
|
|
20,137,505
|
|
|
|
|
|
Issuance of restricted stock
|
|
1,773,053
|
|
|
1,773
|
|
|
416,562
|
|
—
|
|
(418,335)
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeitures of restricted stock
|
|
(1,016,445
|
)
|
|
(1,016
|
)
|
|
(177,357
|
)
|
—
|
|
178,373
|
|
—
|
|
|
—
|
|
|
|
|
Amortization of deferred
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
217,942
|
|
—
|
|
|
217,942
|
|
|
|
|
| Net
loss
|
|
—
|
|
|
—
|
|
|
—
|
|
(6,579,628)
|
|
—
|
|
—
|
|
|
(6,579,628)
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1997
|
|
46,783,625
|
|
|
46,784
|
|
|
36,144,814
|
|
(8,642,113)
|
|
(914,810)
|
|
—
|
|
|
26,634,675
|
|
|
|
|
Issuance of common stock,
net
|
|
19,260,000
|
|
|
19,260
|
|
|
38,185,359
|
|
—
|
|
—
|
|
—
|
|
|
38,204,619
|
|
|
|
|
Issuance of stock options to
non-employees
|
|
—
|
|
|
—
|
|
|
668,286
|
|
—
|
|
(668,286)
|
|
—
|
|
|
—
|
|
|
|
|
Net
unrealized appreciation in
available-for-sale securities
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
1,733,071
|
|
|
1,733,071
|
|
|
|
|
Amortization of deferred
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
253,085
|
|
—
|
|
|
253,085
|
|
|
|
|
| Net
income
|
|
—
|
|
|
—
|
|
|
—
|
|
13,898,928
|
|
—
|
|
—
|
|
|
13,898,928
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
1998
|
|
66,043,625
|
|
|
$ 66,044
|
|
|
$74,998,459
|
|
$5,256,815
|
|
$(1,330,011)
|
|
$1,733,071
|
|
|
$80,724,378
|
|
|
|
|
Three months ended
March 31, 1999—
Unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
15,990,000
|
|
|
15,990
|
|
|
31,964,010
|
|
—
|
|
—
|
|
—
|
|
|
31,980,000
|
|
|
|
|
Issuance of stock options to
non-employees
|
|
—
|
|
|
—
|
|
|
297,141
|
|
—
|
|
(297,141)
|
|
—
|
|
|
—
|
|
|
|
|
Issuance of stock options to
employees below fair market
value
|
|
—
|
|
|
—
|
|
|
5,161,414
|
|
—
|
|
(5,161,414)
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeitures of restricted stock
|
|
(28,076
|
)
|
|
(28
|
)
|
|
(5,025
|
)
|
—
|
|
5,053
|
|
—
|
|
|
—
|
|
|
|
|
Net
unrealized appreciation in
available-for-sale securities
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
1,005,109
|
|
|
1,005,109
|
|
|
|
|
Amortization of deferred
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
121,821
|
|
—
|
|
|
121,821
|
|
|
|
|
Distribution to former LLC
members
|
|
—
|
|
|
—
|
|
|
—
|
|
(10,675,811)
|
|
—
|
|
—
|
|
|
(10,675,811)
|
|
|
|
|
| LLC
termination (Note 3)
|
|
—
|
|
|
—
|
|
|
(8,657,936
|
)
|
8,657,936
|
|
—
|
|
—
|
|
|
—
|
|
|
|
|
| Net
income
|
|
—
|
|
|
—
|
|
|
—
|
|
20,079,963
|
|
—
|
|
—
|
|
|
20,079,963
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 1999
(Unaudited)
|
|
82,005,549
|
|
|
$82,006
|
|
|
$103,758,063
|
|
$23,318,903
|
|
$(6,661,692)
|
|
$2,738,180
|
|
|
$123,235,460
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive
Income (Loss)
<R>
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
$9,269,041
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
Comprehensive Income (Loss) Before Tax
|
Unrealized holding gains
on available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
1,733,071
|
|
5,131,916
|
|
4,530,351
|
|
|
Reclassification
adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
(2,050,837
|
)
|
| Tax Related
to Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
on available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
(1,585,623
|
)
|
|
Reclassification
adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
111,218
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
appreciation in available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
1,733,071
|
|
5,131,916
|
|
1,005,109
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$15,631,999
|
|
$14,400,957
|
|
$21,085,072
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<R>
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
|
|
Year Ended
December 31,
|
|
Three Months
Ended March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
|
| Operating
Activities
|
| Net income
(loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
Adjustments to
reconcile to net cash used in operating
activities:
|
|
Other income
|
|
—
|
|
|
—
|
|
|
(30,483,177
|
)
|
|
(12,322,162
|
)
|
|
(28,684,465
|
)
|
|
Depreciation and
amortization
|
|
481,796
|
|
|
446,289
|
|
|
1,135,269
|
|
|
146,189
|
|
|
551,037
|
|
|
Equity (income) loss
|
|
514,540
|
|
|
(106,298
|
)
|
|
5,868,887
|
|
|
289,847
|
|
|
7,412,602
|
|
|
Minority interest
|
|
(427,185
|
)
|
|
106,411
|
|
|
(5,381,640
|
)
|
|
—
|
|
|
(146,018
|
)
|
|
Deferred taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(913,689
|
)
|
Changes in
assets and liabilities, net of effect of
acquisitions:
|
|
Accounts receivable, net
|
|
(2,176,869
|
)
|
|
1,574,374
|
|
|
(1,183,360
|
)
|
|
34,393
|
|
|
(673,501
|
)
|
|
Prepaid expenses and other
assets
|
|
(69,558
|
)
|
|
(142,384
|
)
|
|
(1,346,515
|
)
|
|
(196,533
|
)
|
|
69,672
|
|
|
Accounts payable
|
|
43,727
|
|
|
565,672
|
|
|
620,127
|
|
|
271,306
|
|
|
(332,937
|
)
|
|
Deferred revenue
|
|
147,100
|
|
|
493,960
|
|
|
1,249,624
|
|
|
200,156
|
|
|
(97,163
|
)
|
|
Accrued expenses
|
|
145,977
|
|
|
204,645
|
|
|
1,415,265
|
|
|
1,421,968
|
|
|
903,002
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
(3,402,957
|
)
|
|
(3,436,959
|
)
|
|
(14,206,592
|
)
|
|
(885,795
|
)
|
|
(1,831,497
|
)
|
| Investing
Activities
|
|
Capital expenditures
|
|
(100,480
|
)
|
|
(272,488
|
)
|
|
(545,432
|
)
|
|
(97,005
|
)
|
|
(156,116
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
—
|
|
|
—
|
|
|
36,431,927
|
|
|
—
|
|
|
2,574,371
|
|
Proceeds from sales of
Partner Company ownership
interests in and advances to a shareholder
|
|
—
|
|
|
—
|
|
|
300,000
|
|
|
—
|
|
|
2,654,880
|
|
|
Advances to Partner
Companies
|
|
(60,000)
|
|
|
(2,800,000
|
)
|
|
(12,778,884
|
)
|
|
—
|
|
|
(1,892,502
|
)
|
|
Repayment of advances to
Partner Companies
|
|
—
|
|
|
950,000
|
|
|
677,084
|
|
|
500,000
|
|
|
1,913,358
|
|
Acquisitions of ownership
interests in Partner
Companies, net of cash acquired
|
|
(6,934,129
|
)
|
|
(14,465,874
|
)
|
|
(35,822,393
|
)
|
|
(3,552,712
|
)
|
|
(22,480,597
|
)
|
|
Other acquisitions (Note
5)
|
|
—
|
|
|
—
|
|
|
(1,858,389
|
)
|
|
—
|
|
|
—
|
|
|
Increase in cash surrender
value of life insurance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,441
|
)
|
Reduction in cash due to
deconsolidation of
VerticalNet
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,645,895
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(7,094,609
|
)
|
|
(16,588,362
|
)
|
|
(13,596,087
|
)
|
|
(3,149,717
|
)
|
|
(23,094,942
|
)
|
| Financing
Activities
|
|
Issuance of common stock,
net
|
|
13,686,013
|
|
|
20,137,505
|
|
|
38,204,619
|
|
|
—
|
|
|
31,980,000
|
|
|
Long-term debt and capital
lease repayments
|
|
(30,191
|
)
|
|
(57,979
|
)
|
|
(321,857
|
)
|
|
(38,403
|
)
|
|
(59,316
|
)
|
|
Line of credit borrowings
|
|
1,208,000
|
|
|
2,500,000
|
|
|
2,000,000
|
|
|
—
|
|
|
576,248
|
|
|
Line of credit repayments
|
|
(1,106,000
|
)
|
|
(2,000
|
)
|
|
(2,500,000
|
)
|
|
—
|
|
|
—
|
|
|
Distribution to former LLC
members
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,675,811
|
)
|
|
Treasury stock purchase by
subsidiary
|
|
(60,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,463,457
|
)
|
|
Issuance of stock by
subsidiary
|
|
15,000
|
|
|
200,000
|
|
|
11,293,360
|
|
|
—
|
|
|
100,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing
activities
|
|
13,712,822
|
|
|
22,777,526
|
|
|
48,676,122
|
|
|
(38,403
|
)
|
|
17,457,664
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash
Equivalents
|
|
3,215,256
|
|
|
2,752,205
|
|
|
20,873,443
|
|
|
(4,073,915
|
)
|
|
(7,468,775
|
)
|
| Cash and cash
equivalents at beginning of period
|
|
—
|
|
|
3,215,256
|
|
|
5,967,461
|
|
|
5,967,461
|
|
|
26,840,904
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
Cash Equivalents at End of Period
|
|
$3,215,256
|
|
|
$5,967,461
|
|
|
$26,840,904
|
|
|
$1,893,546
|
|
|
$19,372,129
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See notes to consolidated financial
statements.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Significant
Accounting Policies
|
Description of the Company
|
Internet Capital Group, Inc. (the “Company”) was
formed on March 4, 1996. The Company is an Internet holding
company actively engaged in business-to-business, or B2B,
e-commerce through a network of companies. The Company defines
e-commerce as conducting or facilitating business transactions
over the Internet. As of December 31, 1998, the Company owned
interests in more than 20 companies engaged in e-commerce, which
the Company calls its “Partner Companies”. The Company
’s goal is to become the premier B2B e-commerce company.
The Company’s operating strategy is to integrate its
Partner Companies into a collaborative network that leverages
the collective knowledge and resources of the Company.
On
February 2, 1999, the Company converted from a Limited Liability
Corporation (“LLC”) to a corporation. All shareholder
transactions have been presented as if the conversion occurred
on March 4, 1996 (inception).
|
Principles of Consolidation
|
<R>
During the periods ending December 31, 1996,
1997 and 1998 the Company acquired equity ownership interests in
VerticalNet for $1.0 million, $2.0 million and $4.0 million,
respectively. The excess of cost over net assets acquired
related to the 1996 and 1997 acquisitions was $.7 million and
$.8 million, respectively. The Company’s carrying value in
VerticalNet, including the excess of cost over net assets
acquired related to the 1996 and 1997 acquisitions, was reduced
to below zero and became a liability as a result of
consolidating VerticalNet’s losses after amounts attributed
to Minority Interest were exhausted. For the same reason, the
1998 acquisition did not result in an intangible asset. In 1998,
the Company made advances in the form of convertible notes to
VerticalNet of $5.0 million. Of this amount, $.8 million was
repaid by VerticalNet, $2.1 million was purchased from the
Company by one of its principal shareholders, and $2.1 million
was converted into common stock during the three months ended
March 31, 1999 (unaudited). The Company’s direct and
indirect voting interest in VerticalNet at December 31, 1997 and
1998 was 63% and 52%, respectively.
</R>
The
consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group
Operations, Inc. (the “Operations Company”) and its
majority owned subsidiary, VerticalNet, Inc. (“VerticalNet
”). The various interests that the Company acquires in its
Partner Companies are accounted for under three broad methods:
consolidation, equity method and cost method. The applicable
accounting method is generally determined based on the Company
’s voting interest in a Partner Company.
Consolidation.
Partner Companies in which the Company directly or indirectly
owns more than 50% of the outstanding voting securities are
generally accounted for under the consolidation method of
accounting. Under this method, a Partner Company’s results
of operations are reflected within the Company’s
Consolidated Statements of Operations. All significant
intercompany accounts and transactions have been eliminated.
Participation of other Partner Company shareholders in the
earnings or losses of a consolidated Partner Company is
reflected in the caption “Minority interest” in the
Company’s Consolidated Statements of Operations. Minority
interest adjusts the Company’s consolidated results of
operations to reflect only the Company’s share of the
earnings or losses of the consolidated Partner Company.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
<R>
Equity Method.
Partner Companies whose results are not consolidated, but over
whom the Company exercises significant influence, are accounted
for under the equity method of accounting. Whether or not the
Company exercises significant influence with respect to a
Partner Company depends on an evaluation of several factors
including, among others, representation on the Partner Company
’s Board of Directors and ownership level, which is
generally a 20% to 50% interest in the voting securities of the
Partner Company, including voting rights associated with the
Company’s holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity
method of accounting, a Partner Company’s results of
operations are not reflected within the Company’s
Consolidated Statements of Operations; however, the Company’
s share of the earnings or losses of the Partner Company is
reflected in the caption “Equity income (loss)” in the
Consolidated Statements of Operations.
</R>
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.
<R>
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. The business plan
objectives and milestones the Company considers include, among
others, those related to financial performance such as
achievement of planned financial results or completion of
capital raising activities, and those that are not primarily
financial in nature such as the launching of a web site or the
hiring of key employees. The fair value of the Company’s
ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which
independent third parties have or have committed to invest in
its Partner Companies.
</R>
|
Available-for-Sale Securities
|
Available-for-sale securities are reported at fair value, based
on quoted market prices, with the net unrealized gain or loss
reported as a component of accumulated other comprehensive
income in shareholders’ equity.
Unrealized gains or losses related to available-for-sale
securities will be recorded net of deferred taxes subsequent to
February 2, 1999, the date the Company converted from an LLC to
a C Corporation.
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
|
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.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Cash
and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at cost which approximates fair
value due to the short-term maturity of these instruments.
Long-term debt is carried at cost which approximates fair value
as the debt bears interest at rates approximating current market
rates.
Goodwill, the excess of cost over net assets of businesses
acquired, is amortized on a straight-line basis over three
years. Goodwill at December 31, 1998 of $2.5 million, net of
accumulated amortization of $.3 million, was attributable to
acquisitions by VerticalNet.
Fixed assets are carried at cost less accumulated depreciation,
which is based on the estimated useful lives of the assets
(approximately three to seven years) computed using the
straight-line method.
Equipment acquired under long-term capital lease arrangements is
recorded at amounts equal to the net present value of the future
minimum lease payments using the interest rate implicit in the
lease. Amortization is provided by use of the straight-line
method over the estimated useful lives of the related assets.
All
of the Company’s revenue from March 4, 1996 (inception)
through December 31, 1998 was attributable to VerticalNet.
VerticalNet’s revenue is derived principally from
advertising contracts which include the initial development of
storefronts. A storefront is a Web page posted on one of
VerticalNet’s trade communities that provides information
on an advertiser’s products, links a visitor to the
advertiser’s Web site and generates sales inquiries from
interested visitors. The advertising contracts generally do not
extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred
revenue of $2.2 million at December 31, 1998 represents the
unearned portion of advertising contracts for which revenue will
be recognized over the remaining period of the advertising
contract.
VerticalNet also generates revenue through providing educational
courses and selling books. Revenue from educational courses is
recognized in the period in which the course is completed and
revenue from the sale of books is recognized in the period in
which the books are shipped.
Barter transactions are recorded at the lower of estimated fair
value of goods or services received or the estimated fair value
of the advertisements given. Barter revenue is recognized when
the VerticalNet advertising impressions (VNAI) are delivered to
the customer and advertising expense is recorded when the
customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to
VerticalNet delivering the VNAI, a liability is recorded, and if
VerticalNet delivers the VNAI to the customer prior to receiving
the CAI, a prepaid expense is recorded. For the period March 4,
1996 (inception) through December 31, 1997, VerticalNet barter
transactions were immaterial. For the year ended December 31,
1998, VerticalNet recognized approximately $.6 million and $.5
million of advertising revenues and expenses, respectively, from
barter transactions. Included in prepaid expenses and other
current assets at December 31, 1998 is approximately $.2 million
relating to barter transactions.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
|
Concentration of Credit Risk
|
VerticalNet performs ongoing credit evaluations of its customers
’ financial condition and generally does not require
collateral on accounts receivable. VerticalNet maintains
allowances for credit losses and such losses have been within
management’s expectations. No single customer accounted for
greater than 10% of total revenue during the period from March
4, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998.
|
Accounting for Impairment of Long-Lived Assets
|
In
accordance with Statement of Financial Accounting Standards
Board No. 121, the Company records an impairment loss on
long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’
carrying amount.
As
of December 31, 1998, specific incremental costs directly
attributable to a planned initial public offering (IPO) of
VerticalNet shares have been deferred. These deferred costs,
totaling $.5 million, are included in non-current other assets
on the Consolidated Balance Sheet. These costs were charged
against VerticalNet’s additional paid-in-capital in
connection with the consummation of VerticalNet’s IPO in
February 1999.
<R>
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).
</R>
In
1998, the Company adopted Statement of Financial Accounting
Standard No. 130, “Reporting Comprehensive Income”
(SFAS 130), which requires companies to report and display
comprehensive income and its components in financial statements.
Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events
and circumstances from non-owner sources. Excluding net income,
the Company’s source of comprehensive income is from net
unrealized appreciation on its available-for-sale securities.
Reclassification adjustments result from the recognition in net
income of gains or losses that were included in comprehensive
income in prior periods.
At
December 31, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, “Disclosures about Segments of
an Enterprise and Related Information” (SFAS 131) which
requires companies to present financial and descriptive segment
information (Note 11).
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Income taxes are accounted for under the asset and liability
method whereby deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
From
the Company’s inception in March 1996 to February 1999, the
Company was not subject to federal and state income taxes. The
Company has no net operating loss carry forwards at December 31,
1998 (Note 2).
Net
income per share (EPS) is computed using the weighted average
number of common shares outstanding during each year. Dilutive
EPS includes common stock equivalents (unless anti-dilutive)
which would arise from the exercise of stock options and
conversion of other convertible securities and is adjusted, if
applicable, for the effect on net income (loss) of such
transactions.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock
and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an
IPO, are required to be included in the calculation of basic and
diluted net income per share as if they were outstanding for all
periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
|
Gain or
Loss on Issuances of Stock By Partner Companies
|
<R>
Pursuant to SEC Staff Accounting Bulletin No.
84, at the time a Partner Company accounted for under the
consolidation or equity method of accounting sells its common
stock at a price different from the Partner Company’s book
value per share, the Company’s share of the Partner Company
’s net equity changes. If at that time, the Partner Company
is not a newly-formed, non-operating entity, nor a research and
development, start-up or development stage company, nor is there
question as to the Company’s ability to continue in
existence, the Company records the change in its share of the
Partner Company’s net equity as a gain or loss in its
Consolidated Statements of Operations (Note 17).
</R>
|
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)
<R>
On February 2, 1999, the Company converted
from an LLC to a C corporation. The Company became subject to
corporate federal and state income taxes concurrent with the
conversion to a C corporation. The accompanying Consolidated
Statements of Operations for the year ended December 31, 1998
and three months ended March 31, 1999 include pro forma
information with respect to income taxes, net income and net
income per share assuming the Company had been taxed as a C
Corporation since January 1, 1998. The unaudited pro forma
information provided does not necessarily reflect the income
taxes, net income and net income per share that would have
occurred had the Company been taxed as a C corporation since
January 1, 1998.
</R>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
<R>
The Company’s pro forma effective tax
rate of 37% differed from the federal statutory rate of 35%
principally due to non-deductible permanent differences.
</R>
Based upon the cumulative temporary differences (primarily
relating to the difference between the book and tax carrying
value of its Partner Companies), the Company would have
recognized a pro forma net deferred federal and state tax asset
of $8.2 million at December 31, 1998. In the opinion of
management, it is more likely than not that such asset would be
realized and accordingly, a valuation allowance was not
considered necessary in calculating this pro forma amount.
Pro
forma basic and diluted net income per share for the year ended
December 31, 1998 of $0.16 was calculated based on pro forma net
income of $8,756,325 and basic and diluted weighted average
shares outstanding of 56,102,289 and 56,149,289, respectively.
The difference between basic and diluted weighted average shares
outstanding of 47,000 was due to the dilutive effect of stock
options.
<R>
Pro forma basic and diluted net income per
share for the three months ended March 31, 1999 of $0.17 was
calculated based on pro forma net income of $12,232,557 and
basic and diluted weighted average shares outstanding of
72,646,022 and 73,699,973, respectively. The difference between
basic and diluted weighted average shares outstanding of
1,053,951 was due to the dilutive effect of stock options.
</R>
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.
<R>
The unaudited interim consolidated financial
statements for the three months ended March 31, 1999 include the
accounts of the Company, its wholly owned subsidiary, Internet
Capital Group Operations, Inc. and its majority owned
subsidiary, Breakaway Solutions, Inc. (“Breakaway Solutions
”). In January 1999, the Company acquired a controlling
majority interest in Breakaway Solutions for $8.3 million.
Breakaway Solutions’ operating activities have historically
consisted primarily of implementation of customer relational
management systems and custom integration to other related
applications. In 1999, Breakaway Solutions is expanding to
provide service offerings in custom web development and
application hosting both through internal expansion and
acquisitions. Breakaway Solutions’ revenue is generally
recognized upon performance of services. In connection with the
acquisition of its ownership interest in Breakaway Solutions,
the Company recorded the excess of cost over net assets acquired
of $5.6 million as goodwill which will be amortized over three
years. Of the Company’s consolidated intangible assets at
March 31, 1999 of $6.8 million, net of $.3 million of
accumulated amortization, $5.3 million was attributable to the
Company’s acquisition of Breakaway Solutions and $1.5
million was attributable to the acquisition of Applica
Corporation by Breakaway Solutions. Breakaway Solutions had
revenue of $2.1 million and $3.1 million for the three months
ended March 31, 1998 and 1999, respectively.
</R>
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.
<R>
Basic and diluted net income per share for the
three months ended March 31, 1999 of $0.28 and $0.27,
respectively, were calculated based on net income of $20,079,963
and basic and diluted weighted average shares outstanding of
72,646,022 and 73,699,973, respectively. The difference between
basic and diluted weighted average shares outstanding of
1,053,951 was due to the dilutive effect of stock options. Basic
and diluted net income per share for the three months ended
March 31, 1998 were the same as there were no outstanding
dilutive securities during the period.
</R>
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.
<R>
The Company’s effective tax rate for the
three months ended March 31, 1999 of (3%) differed from the
federal statutory rate of 35% principally due to the impact of
changing its tax status from an LLC to a corporation on February
2, 1999 and non-deductible permanent differences. On February 2,
1999, the Company recorded a deferred tax benefit and related
deferred tax asset of $7.7 million which primarily represented
the excess of tax basis over book basis of its ownership
interests in and advances to Partner Companies. For the period
from February 2, 1999 through March 31, 1999 the Company
recorded tax expense of $7.0 million, representing 37% of pretax
income for that period, including $10.5 million of tax expense
related to the $28.3 million non-operating gain related to
VerticalNet’s initial public offering.
</R>
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.
<R>
The Company’s revenue and loss from the
Partner Company Operations segment for the three months ended
March 31, 1998 and 1999 was $377,371 and $2,374,716 and
$3,111,035 and $7,812,789, respectively. The Company’s
income before tax from the General ICG Operations segment for
the three months ended March 31, 1998 and 1999 was $11,643,757
and $27,229,546, respectively, primarily due to other income of
$12,322,162 and $28,684,465, respectively.
</R>
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.
<R>
In April 1999, the Company entered into a $50
million revolving bank credit facility (Note 7). The Company
borrowed up to $25 million under the facility during May 1999
which was repaid with the proceeds from the issuance of its
convertible notes (Note 17). As of June 30, 1999, borrowing
availability under the facility was $50 million, of which none
was outstanding.
</R>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
<R>
In March 1999, Breakaway Solutions acquired
all of the outstanding stock of Applica Corporation (Applica).
Subsequent to March 31, 1999, Breakaway Solutions acquired all
of the outstanding stock of WPL Laboratories, Inc. (WPL) and
WebYes, Inc. (WebYes). These acquisitions were accounted for
under the purchase method of accounting. The Applica, WPL and
WebYes acquisitions had a total purchase price of $15.2 million
and resulted in total intangible assets of $13.5 million which
will be amortized over five years.
</R>
<R>
During the three months ended March 31, 1999,
the Company utilized $32.7 million in cash to acquire interests
in and make advances to new and existing Partner Companies,
including $8.3 million contributed to Breakaway Solutions and
$18.3 million utilized to acquire interests in Partner Companies
accounted for under the equity method of accounting. The
acquisition of Breakaway Solutions and the Partner Companies
accounted for under the equity method of accounting during the
three months ended March 31, 1999 resulted in goodwill of $5.5
million and $12.6 million, respectively, all of which will be
amortized over three years.
</R>
<R>
For the period from April 1, 1999 through June
30, 1999 the Company utilized $84.3 million in cash to acquire
interests in and make advances to new and existing Partner
Companies, including $4.0 million contributed directly to
Breakaway Solutions, and an additional $4.0 million used to
purchase Breakaway Solutions shares directly from Breakaway
Solutions shareholders and $55.3 million utilized to acquire
interests in Partner Companies accounted for under the equity
method of accounting. The acquisition of Breakaway and the
Partner Companies accounted for under the equity method of
accounting during the period from April 1, 1999 through June 30,
1999 resulted in goodwill of $5.6 million and $36.2 million,
respectively, all of which will be amortized over three years.
</R>
<R>
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 $8.2 million which will be amortized over three
years. This ownership interest was purchased directly from
shareholders of the Partner Company. These sellers have the
option, exercisable at any time through 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.
</R>
<R>
During the year ended December 31, 1998, the
three months ended March 31, 1999, the three months ended June
30, 1999, and the period from July 1, 1999 through July 12,
1999, the Company recorded aggregate unearned compensation in
the amount of $.7 million, $5.5 million, $9.6 million and $1.4
million, respectively, in connection with the grant of stock
options to non-employees and the grant of employee stock options
with exercise prices less than the deemed fair value on the
respective dates of grant. General and administrative costs for
the three months ended March 31, 1999 include $.1 million of
amortization expense related to stock option grants.
Amortization of deferred compensation expense for the year ended
December 31, 1999 will be about $2.4 million. The Company
expects to recognize amortization of deferred compensation
expense for each of the years from 2000 to 2003 of about $3.4
million and of about $1.2 million for 2004.
</R>
<R>
Subsequent to March 31, 1999, the Company
accepted full recourse promissory notes totaling $80.0 million
from certain of its employees and a director for the purchase of
all or a portion of their vested and unvested stock options and
$8.5 million to pay the income taxes that became due in
connection with the option exercises (Note 17). The promissory
notes bear interest at rates ranging from 5.22% to 5.82% and
mature in 2004.
</R>
<R>
Subsequent to March 31, 1999 the Company
determined it would divest its ownership interest in SMART
Technologies, Inc. due to the agreement of merger of SMART
Technologies, Inc. and i2 Technologies, Inc. Upon completion of
this merger, the Company’s ownership interest in and
advances to SMART
Technologies, Inc. will be converted into cash, common stock and
warrants to purchase common stock of i2 Technologies, Inc. The
transaction had not been completed as of June 30, 1999. The
Company’s estimated non-operating gain before taxes from
this transaction will be approximately $2 million and its
holdings in i2 Technologies will be accounted for as
available-for-sale securities.
</R>
<R>
In May 1999, @Home Corporation exchanged its
shares for all of the outstanding stock of Excite. As part of
this merger, the Company will receive shares of @Home
Corporation in exchange for its shares in Excite. The Company
’s estimated non-operating gain before taxes from this
transaction will be approximately $2.7 million and its holdings
in @Home Corporation will be accounted for as available-for-sale
securities.
</R>
<R>
In May 1999, VerticalNet announced it had
signed a definitive agreement to acquire all of the outstanding
stock of Isadra, Inc. in exchange for 500,000 shares of
VerticalNet common stock and $3 million in
cash. Consummation of the merger is subject to shareholder and
regulatory approvals as well as customary closing conditions.
The transaction had not been completed as of June 30, 1999. Upon
completion of the transaction, the Company’s voting
ownership will decrease from 36% to 35%. In addition, the
Company expects to record a non-operating gain due to the
increase in its share of VerticalNet’s net equity as a
result of their issuance of shares.
</R>
<R></R>
4. Ownership Interests
in and Advances to Partner Companies
The
following summarizes the Company’s ownership interests in
and advances to Partner Companies accounted for under the equity
method or cost method of accounting. The ownership interests are
classified according to applicable accounting methods at
December 31, 1997 and 1998. Cost basis represents the Company
’s original acquisition cost less any impairment charges in
such companies.
| |
|
December 31, 1997
|
|
December 31, 1998
|
| |
|
Carrying
Value
|
|
Cost
Basis
|
|
Carrying
Value
|
|
Cost
Basis
|
| Equity Method
|
|
$
1,200,210
|
|
$
1,608,452
|
|
$21,311,324
|
|
$27,588,451
|
| Cost Method
|
|
22,844,870
|
|
22,844,870
|
|
38,180,616
|
|
38,180,616
|
| |
|
|
|
|
|
|
|
|
| |
|
$24,045,080
|
|
|
|
$59,491,940
|
|
|
| |
|
|
|
|
|
|
|
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
<R>
At December 31, 1998 the Company’s
carrying value in its Partner Companies accounted for under the
equity method exceeded its share of the underlying equity in the
net assets of such companies by $12.7 million. This excess
relates to ownership interests acquired in 1998 and is being
amortized over a three year period. Amortization expense of $.4
million is included in “Equity income (loss)” in the
accompanying Consolidated Statements of Operations for the year
ended December 31, 1998.
</R>
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%.
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
<R>
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Current assets
|
|
$
7,042,767
|
|
$33,645,121
|
| Non-current
assets
|
|
3,876,167
|
|
7,147,665
|
| |
|
|
|
|
|
Total assets
|
|
10,918,934
|
|
40,792,786
|
| |
|
|
|
|
| Current
liabilities
|
|
5,406,510
|
|
11,712,289
|
| Non-current
liabilities
|
|
1,203,524
|
|
758,840
|
| Shareholders
’ equity
|
|
4,308,900
|
|
28,321,657
|
| |
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$10,918,934
|
|
$40,792,786
|
| |
|
|
|
|
</R>
Results of Operations
<R>
| |
|
|
|
Year Ended December 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
| Revenue
|
|
$9,365,872
|
|
|
$18,911,691
|
|
$21,495,832
|
|
| Net income
(loss)
|
|
$(1,369,774
|
)
|
|
$
255,280
|
|
$(14,969,192
|
)
|
</R>
5. Other Acquisitions
In
1998, VerticalNet acquired all of the outstanding capital stock
of Boulder Interactive Technology Services Company (BITC) for
$1.9 million in cash and all of the outstanding capital stock of
Informatrix Worldwide, Inc. (Informatrix) for 49,892 shares of
VerticalNet’s common stock valued at $.2 million. These
acquisitions were accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value
of the net assets acquired of approximately $2.8 million was
recorded as goodwill and is being amortized over three years.
Accumulated amortization relating to this goodwill totaled $.3
million at December 31, 1998.
The
following unaudited pro forma financial information presents the
combined results of operations as if VerticalNet had owned BITC
and Informatrix since January 1, 1997 and October 15, 1997
(inception),
respectively, after giving effect to certain adjustments including
goodwill and income taxes. The unaudited pro forma financial
information does not necessarily reflect the results of
operations that would have occurred had the Company,
VerticalNet, BITC and Informatrix constituted a single entity
during such periods.
| |
|
(Unaudited)
Year Ended December 31,
|
| |
|
1997
|
|
1998
|
| Revenue
|
|
$1,118,030
|
|
|
$3,606,027
|
| Pro forma net
income (loss)
|
|
$(7,590,016
|
)
|
|
$13,166,449
|
| Pro forma net
income (loss) per share
|
|
$(.22
|
)
|
|
$.23
|
6. Fixed Assets
Fixed assets consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Computer
equipment and software
|
|
$681,656
|
|
|
$1,564,297
|
|
| Office
equipment and furniture
|
|
148,430
|
|
|
271,809
|
|
| Trade show
equipment
|
|
34,079
|
|
|
40,587
|
|
| Leasehold
improvements
|
|
29,402
|
|
|
45,864
|
|
| |
|
|
|
|
|
|
| |
|
893,567
|
|
|
1,922,557
|
|
| Less:
accumulated depreciation and amortization
|
|
(349,124
|
)
|
|
(771,289
|
)
|
| |
|
|
|
|
|
|
| |
|
$
544,443
|
|
|
$1,151,268
|
|
| |
|
|
|
|
|
|
7. Debt
|
Revolving Credit Facilities
|
In
March 1998, the Company entered into an unsecured $3 million
revolving credit facility. Borrowings under this facility
accrued interest at a premium to prime ranging from .75% to
1.5%. The Company borrowed up to $2 million under this facility
during 1998. No amounts were outstanding at December 31, 1998
and the facility expired in March 1999.
In
April 1999, the Company entered into a $50 million revolving
bank credit facility. In connection with the facility, the
Company issued 200,000 warrants exercisable for seven years at
$10 per share. The facility matures in April 2000, is subject to
a .25% unused commitment fee, bears interest, at the Company
’s option, at prime and/or LIBOR plus 2.5%, and is secured
by substantially all of the Company’s assets (including the
Company’s holdings in VerticalNet). Borrowing availability
under the facility is based on the fair market value of the
Company’s holdings of publicly traded Partner Companies
(currently only VerticalNet) and the value, as defined in the
facility, of the Company’s private Partner Companies. Based
on the provisions of the borrowing base, borrowing availability
at April 30, 1999 was $32.6 million, of which none was
outstanding. As of May 7, 1999, the Company had borrowed $13
million under the facility.
VerticalNet had a line of credit with a bank in the amount of
$2.5 million at December 31, 1997. Borrowings under the facility
were collateralized by a security interest in all assets of
VerticalNet and required VerticalNet to meet specified financial
ratios. As of December 31, 1997, VerticalNet was in technical
default, as it did not meet the specified financial ratios, but
the bank waived these violations. The facility accrued interest
at prime plus 1.5% (10% at December 31, 1997). The weighted
average interest rate for borrowings under this facility was 10%
for the year ended December 31, 1997.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
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.
All
of the Company’s long-term debt is attributable to
VerticalNet and consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Term notes
with related parties
|
|
$100,000
|
|
|
$
—
|
|
| Term bank
notes
|
|
32,852
|
|
|
—
|
|
| Capital leases
|
|
417,952
|
|
|
639,940
|
|
| |
|
|
|
|
|
|
| |
|
550,804
|
|
|
639,940
|
|
| Less: current
portion
|
|
(150,856
|
)
|
|
(288,016
|
)
|
| |
|
|
|
|
|
|
| Long-term debt
|
|
$399,948
|
|
|
$351,924
|
|
| |
|
|
|
|
|
|
VerticalNet had three unsecured term notes due to shareholders
with an interest rate of 7%. The notes were to mature on
February 2001. One of the holders of these notes is a Board
member of the Company. These notes were repaid in May 1998.
VerticalNet had a term loan with another bank with an interest
rate at prime plus 2.75% (11.25% at December 31, 1997) which was
payable in 36 monthly installments. This note was repaid in May
1998.
VerticalNet has several capital leases on its equipment with
lease terms ranging from three to five years. The interest rates
implicit in the leases are 8% to 20%. At December 31, 1997 and
1998, the book value of assets held under capital leases was
approximately $.3 million and $.5 million, respectively, and the
aggregate remaining minimum lease payments at December 31, 1998
were approximately $.7 million including interest of
approximately $.1 million.
At
December 31, 1998, long-term debt is scheduled to mature as
follows:
| 1999
|
|
$288,016
|
| 2000
|
|
230,338
|
| 2001
|
|
95,718
|
| 2002
|
|
19,810
|
| 2003
|
|
6,058
|
| |
|
|
| Total
|
|
$639,940
|
| |
|
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
8. Accrued Expenses
Accrued expenses consists of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Accrued
compensation and benefits
|
|
$90,833
|
|
$
454,230
|
| Accrued
marketing costs
|
|
—
|
|
446,334
|
| Other
|
|
297,692
|
|
922,843
|
| |
|
|
|
|
| |
|
$
388,525
|
|
$1,823,407
|
| |
|
|
|
|
9. Shareholders’
Equity
The
Company’s authorized capital stock consists of 130,000,000
shares of common stock, par value $.001 per share. The holders
of common stock are entitled to one vote per share and are
entitled to dividends as declared.
Dividends may be restricted by the inability to liquidate
ownership interests in Partner Companies to fund cash dividends
and may be subject to the preferential rights of the holders of
the Company’s preferred stock, if any.
The
Company may establish one or more classes or series of preferred
stock. The holders of the preferred stock may be entitled to
preferences over common stock or shareholders with respect to
dividends, liquidation, dissolution, or winding up of the
Company, as established by the Company’s Board of
Directors. No preferred stock is authorized at December 31, 1998.
Certain shareholders were granted registration rights which
become effective after completion of a public offering.
Shareholders’ equity contributions are recorded when
received. The Company issued 15,990,000 shares of common stock
for net proceeds of $32 million in 1999. These shares had been
subscribed for at December 31, 1998.
During 1996 and 1997, 6,027,017 and 756,608 shares of restricted
common stock (“restricted stock”) were granted, net of
forfeitures, to employees, consultants and advisors at no cost
as performance incentives. The restricted stock vests in equal
annual installments over a five year period.
At
December 31, 1997 and 1998, the 6,783,625 shares of restricted
stock had been granted at a weighted average fair value of $0.19
per share or an aggregate of $1.3 million based on independent
valuations of the shares. These independent valuations took into
account certain factors, primarily the restrictions on the
ability of restricted shareholders to receive distributions of
dividends or profits and the uncertainty of realization of any
return from these shares. The $1.3 million of deferred
compensation is classified as a reduction of shareholders’
equity and is being amortized over the five-year vesting period.
Compensation expense related to the restricted stock totaling
$.1 million, $.2 million and $.3 million was recorded in 1996,
1997 and 1998, respectively.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
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.
The
following table summarizes the activity of the Company’s
stock option plans:
<R>
| |
|
Shares
|
|
Weighted
Average
Exercise Price
|
| Outstanding at
January 1, 1997
|
|
—
|
|
|
$
—
|
|
| Options
granted
|
|
94,000
|
|
|
1.00
|
|
| Options
canceled/forfeited
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
| Outstanding at
December 31, 1997
|
|
94,000
|
|
|
1.00
|
|
| Options
granted
|
|
6,047,000
|
|
|
2.00
|
|
| Options
canceled/forfeited
|
|
(47,000
|
)
|
|
(1.00
|
)
|
| |
|
|
|
|
|
|
| Outstanding at
December 31, 1998
|
|
6,094,000
|
|
|
$1.99
|
|
| |
|
|
|
|
|
|
</R>
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:
<R>
Exercise
Price
|
|
Number
Outstanding at
December 31, 1998
|
|
Weighted
Average
Remaining Contractual
Life (in Years)
|
| $1.00
|
|
47,000
|
|
7
|
| $2.00
|
|
6,047,000
|
|
10
|
</R>
<R>
Included in the 1998 option grants are 497,000
stock options to non-employees. The fair value of these options
of $.7 million was recorded as deferred compensation in 1998 and
is being amortized over the five year vesting period. The fair
value of these options was determined using the Black-Scholes
method assuming a volatility of 80%, a dividend yield of 0%, an
average expected option life of 5 years, and a risk-free
interest rate of 5.2%.
</R>
The
Company applies APB 25 and related interpretations in accounting
for its stock option plans. Had compensation cost been
recognized pursuant to SFAS 123, the Company’s net income
(loss) would have been as follows:
| |
|
Year Ended December 31,
|
| |
|
1997
|
|
1998
|
| Net income
(loss)
|
|
As reported
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
SFAS 123 pro
forma
|
|
$(6,648,952
|
)
|
|
$13,436,582
|
| Net income
(loss) per share
|
|
As reported
|
|
$(.19
|
)
|
|
$.25
|
|
SFAS 123 pro
forma
|
|
$(.19
|
)
|
|
$.24
|
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
<R>
The per share weighted-average fair value of
options issued by the Company during 1997 and 1998 was
approximately $0.22 and $0.45, respectively.
</R>
The
following assumptions were used to determine the fair value of
stock options granted to employees by the Company, its
subsidiaries, and Partner Companies accounted for under the
equity method using the minimum value option-price model:
| Dividend yield
|
|
0
|
%
|
| Average
expected option life
|
|
5 years
|
|
| Risk-free
interest rate
|
|
5.2
|
%
|
<R>
In 1999 through May 7, 1999, the Company
granted 3,584,500 options to employees and non-employees at
exercise prices ranging from $2.00 to $4.88.
</R>
10. Related Parties
The
Company provides strategic and operational support to its
Partner Companies in the normal course of its business. These
services are generally provided by the Company’s employees,
members of its Advisory Board and Board of Directors and outside
consultants. The costs related to employees are paid by the
Company and are reflected by the Company in general and
administrative expenses of the General ICG Operations segment.
Members of the Company’s Advisory Board and Board of
Directors are generally compensated with stock options in the
Company which are accounted for in accordance with Statement of
Financial Accounting Standards No. 123 with any expense related
to these options included in general and administrative expenses
of the General ICG Operations segment. The costs of outside
consultants are generally paid directly by the Partner Company.
A
principal shareholder satisfied a portion of its initial 1996
funding commitment by contributing its interests valued at $6.1
million in the securities of a Partner Company. As this
shareholder controlled the Company at the time of the transfer,
the shareholder’s cost basis in the shares of the Partner
Company ($1.1 million), together with a $.5 million equity
contribution made by the Company, comprise the Company’s
cost basis in the Partner Company.
The
Company entered into various cost sharing arrangements with the
same principal shareholder during 1996, 1997, and 1998, whereby
the Company reimbursed, under fair market terms, this
shareholder for certain operational expenses. The amounts
incurred for such items were $.1 million, $.1 million and $.2
million in 1996, 1997, and 1998, respectively.
The
Company loaned an officer $.1 million during 1998, evidenced by
a term note with an interest rate of prime plus 1% (8.75% at
December 31, 1998) to purchase a portion of the Company’s
interest in a Partner Company at the Company’s cost. This
note was repaid in January 1999 and is included in other current
assets in the December 31, 1998 Consolidated Balance Sheets.
In
September 1998 the Company entered into a $.2 million one-year
consulting contract with a Partner Company.
The
Company shares certain acquisition rights with certain of its
principal shareholders whereby these shareholders have the
ability to purchase a portion of the Company’s interest in
certain Partner Companies. During 1998 and 1999, one shareholder
exercised this right and acquired a portion of the Company’
s interest in or advances to three Partner Companies for cash of
$3.0 million and assumption of $.4 million of a payable to a
Partner Company. At the time of the transactions, there was no
difference between the consideration received and the Company
’s cost basis of the ownership interest or advance sold.
The agreement under which these rights are exercisable will
terminate automatically upon an initial public offering.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Certain executives of the Company and its Partner Companies have
the option to purchase a portion of the Company’s ownership
interest in various Partner Companies at the Company’s cost.
<R>
11.
Segment Information
</R>
<R>
In 1998, the Company adopted SFAS 131, which
requires the reporting of segment information using the “
management approach” versus the “industry approach
” previously required. The Company’s reportable
segments consist of Partner Company Operations and General ICG
Operations. Partner Company Operations includes the effect of
consolidating VerticalNet and recording the Company’s share
of earnings and losses of Partner Companies accounted for under
the equity method. VerticalNet operations include creating and
operating industry-specific trade communities on the Internet.
Partner Companies accounted for under the equity method of
accounting operate in various Internet-related businesses.
General ICG Operations represents the expenses of providing
strategic and operational support to the Internet-related
Partner Companies, as well as the related administrative costs
related to such expenses. General ICG Operations also includes
the effect of transactions and other events incidental to the
Company’s general operations and the Company’s
ownership interests in and advances to Partner Companies. The
Company’s and Partner Companies’ operations were
principally in the United States of America during 1996, 1997
and 1998.
</R>
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.
<R>
| |
|
|
|
Year Ended December 31,
|
| |
|
March 4, 1996
(Inception)
Through
December 31,
1996
|
|
1997
|
|
1998
|
| Partner
Company Operations
|
|
Revenue
|
|
$
285,140
|
|
|
$
791,822
|
|
|
$3,134,769
|
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
Cost of
revenue
|
|
427,470
|
|
|
1,767,017
|
|
|
4,642,528
|
|
|
Sales and
marketing
|
|
268,417
|
|
|
2,300,365
|
|
|
7,894,662
|
|
|
General and
administrative
|
|
291,660
|
|
|
1,388,123
|
|
|
4,106,583
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
987,547
|
|
|
5,455,505
|
|
|
16,643,773
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(702,407
|
)
|
|
(4,663,683
|
)
|
|
(13,509,004
|
)
|
|
Interest income
|
|
7,491
|
|
|
10,999
|
|
|
212,130
|
|
|
Interest expense
|
|
(13,931
|
)
|
|
(126,105
|
)
|
|
(297,401
|
)
|
| |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority
interest and equity
income (loss)
|
|
(708,847
|
)
|
|
(4,778,789
|
)
|
|
(13,594,275
|
)
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Minority interest
|
|
427,185
|
|
|
(106,411
|
)
|
|
5,381,640
|
|
|
Equity income (loss)
|
|
(514,540
|
)
|
|
106,298
|
|
|
(5,868,887
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from Partner Company Operations
|
|
$(796,202
|
)
|
|
$(4,778,902
|
)
|
|
$(14,081,522
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| General ICG
Operations
|
|
General and administrative
|
|
$1,360,821
|
|
|
$2,054,118
|
|
|
$3,512,586
|
|
| |
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
Interest income, net
|
|
94,538
|
|
|
253,392
|
|
|
1,009,859
|
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from General ICG Operations
|
|
$(1,266,283
|
)
|
|
$(1,800,726
|
)
|
|
$27,980,450
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Assets
|
|
| Partner
Company Operations
|
|
Carrying value
of equity method Partner Companies
|
|
$1,200,210
|
|
$21,311,324
|
|
Other
|
|
2,104,087
|
|
12,342,975
|
| |
|
|
|
|
| |
|
3,304,297
|
|
33,654,299
|
| General ICG
Operations
|
|
|
|
|
|
Cash and cash
equivalents
|
|
5,212,745
|
|
21,178,055
|
|
Carrying value
of cost method Partner Companies
|
|
22,844,870
|
|
38,180,616
|
|
Other
|
|
119,104
|
|
3,773,005
|
| |
|
|
|
|
| |
|
28,176,719
|
|
63,131,676
|
| |
|
|
|
|
| |
|
$31,481,016
|
|
$96,785,975
|
| |
|
|
|
|
12. Parent Company
Financial Information
The
Company’s consolidated financial statements reflect
VerticalNet accounted for under the consolidation method of
accounting from the Company’s inception in March 1996
through December 31, 1998 (audited) and under the equity method
of accounting for the three months ended March 31, 1999
(unaudited). The Company’s consolidated financial
statements for the three months ended March 31, 1999 reflect
Breakaway Solutions accounted for under the consolidation method
of accounting (unaudited).
<R>
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.
</R>
Parent Company Balance Sheets
<R>
| |
|
December 31,
|
|
(Unaudited)
|
| |
|
1997
|
|
1998
|
|
March 31,
1999
|
| Assets
|
|
Current assets
|
|
$
5,245,064
|
|
$21,596,575
|
|
$16,437,857
|
|
Ownership
interests in and advances to Partner Companies
|
|
24,045,080
|
|
59,491,940
|
|
104,271,808
|
|
Other
|
|
86,785
|
|
3,354,485
|
|
5,525,104
|
| |
|
|
|
|
|
|
|
Total assets
|
|
29,376,929
|
|
84,443,000
|
|
126,234,769
|
| Liabilities
and shareholders’ equity
|
|
Current
liabilities
|
|
318,729
|
|
2,082,463
|
|
2,438,593
|
|
Non-current
liabilities
|
|
2,423,525
|
|
1,636,159
|
|
560,716
|
|
Shareholders
’ equity
|
|
26,634,675
|
|
80,724,378
|
|
123,235,460
|
| |
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$29,376,929
|
|
$84,443,000
|
|
$126,234,769
|
| |
|
|
|
|
|
|
</R>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
Parent Company Statements of Operations
<R>
| |
|
|
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
March 4, 1996
(Inception) to
December 31,
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenue
|
|
$
—
|
|
|
$
—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses
|
|
General and
administrative
|
|
1,360,821
|
|
|
2,054,118
|
|
|
3,512,586
|
|
|
700,719
|
|
|
1,733,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
1,360,821
|
|
|
2,054,118
|
|
|
3,512,586
|
|
|
700,719
|
|
|
1,733,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,360,821
|
)
|
|
(2,054,118
|
)
|
|
(3,512,586
|
)
|
|
(700,719
|
)
|
|
(1,733,128
|
)
|
| Other income,
net
|
|
—
|
|
|
—
|
|
|
30,483,177
|
|
|
12,322,162
|
|
|
28,684,465
|
|
| Interest
income, net
|
|
94,538
|
|
|
253,392
|
|
|
1,009,859
|
|
|
22,314
|
|
|
278,209
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
and equity income (loss)
|
|
1,266,283
|
|
|
(1,800,726
|
)
|
|
27,980,450
|
|
|
11,643,757
|
|
|
27,229,546
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
663,206
|
|
| Equity income
(loss)
|
|
(796,202
|
)
|
|
(4,778,902
|
)
|
|
(14,081,522
|
)
|
|
(2,374,716
|
)
|
|
(7,812,789
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$(2,062,485
|
)
|
|
$(6,579,628
|
)
|
|
$13,898,928
|
|
|
$9,269,041
|
|
|
$20,079,963
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
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.
<R>
During the year ended December 31, 1998, the
Company exchanged all of its holdings in Matchlogic and Wisewire
for shares of Excite and Lycos, respectively (Note 15).
</R>
Interest paid in the periods ended December 31, 1997 and 1998
was $.l million and $.2 million, respectively.
The
Company paid no income taxes in 1996, 1997 and 1998 due to its
tax status as an LLC.
In
1998, the Company acquired an ownership interest in a Partner
Company in exchange for a $1.7 million note payable. The note is
payable in two equal installments through June 1999, does not
bear interest and is secured with the acquired stock of the
Partner Company. In March 1999, a shareholder of the Company
assumed $.4 million of this note.
14. Defined
Contribution Plan
In
1997, the Company established a defined contribution plan that
covers all of its employees. Participants may contribute 1% to
15% of pre-tax compensation, as defined. The Company may make
discretionary contributions to the plan but has never done so.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
15. Other Income
Other income consists of the following for the year ended
December 31, 1998:
| Sale of
Matchlogic to Excite
|
|
$12,822,162
|
|
| Sale of Excite
holdings
|
|
16,813,844
|
|
| Sale of
WiseWire to Lycos
|
|
3,324,238
|
|
| Sale of Lycos
holdings
|
|
1,471,907
|
|
| Partner
Company impairment charges
|
|
(3,948,974
|
)
|
| |
|
|
|
| |
|
$30,483,177
|
|
| |
|
|
|
Gains on sales of Partner Companies and available-for-sale
securities are determined using average cost.
In
February 1998, the Company exchanged all of its holdings in
MatchLogic for 763,820 shares of Excite. The fair market value
of the Excite shares received of $14.3 million on the date of
exchange was used to determine the gain of $12.8 million.
Throughout the remainder of 1998, the Company sold 716,082
shares of Excite which resulted in $30.2 million of proceeds and
$16.8 million of gains.
In
April 1998, the Company exchanged all of its holdings in
WiseWire for 191,922 shares of Lycos, Inc. The fair market value
of the Lycos shares received of $5.3 million on the date of
exchange was used to determine the gain of $3.3 million.
Throughout the remainder of 1998, the Company sold 169,548
shares of Lycos which resulted in $6.2 million of proceeds and
$1.5 million of gains.
<R>
In December 1998 the Company recorded an
impairment charge of $1.9 million for the decrease in value of
one of its Partner Companies accounted for under the cost method
of accounting as a result of selling the Partner Company
interest below its carrying value. The Company had acquired its
ownership interest in the Partner Company during 1996 and 1997.
In December 1998, the Partner Company agreed to be acquired by
an independent third party. The transaction was completed in
January 1999. The impairment charge the Company recorded was
determined by calculating the difference between the proceeds it
received from the sale and its carrying value.
</R>
<R>
For the year ended December 31, 1998 and the
three months ended March 31, 1999, the Company recorded
impairment charges of $2.0 million and $1.6 million,
respectively, for the other than temporary decline in the value
of advances to a cost method Partner Company. From the date of
its initial advance through December 31, 1998, the Company’
s advances to this Partner Company represented all of the
outside capital the company had available to fund its net losses
and capital asset requirements. During the three months ended
March 31, 1999 the Company fully guaranteed the Partner Company
’s new bank loan and agreed to provide additional advances.
The Company provided these additional advances in April 1999.
The impairment charges the Company recorded were determined by
the decrease in net book value of the Partner Company caused by
its net losses which were funded entirely based on the Company
’s advances and bank guarantee.
</R>
<R></R>
<R></R>
16. Commitments and
Contingencies
The
Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the amount of the ultimate liability with
respect to these actions will not materially affect the
financial position, results of operations or cash flows of the
Company and its subsidiaries.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
In
connection with its ownership interests in certain Partner
Companies, the Company guaranteed $3.2 million of bank loan and
other commitments and has committed capital of $2 million to an
existing Partner Company to be funded in 1999.
The
Company and VerticalNet lease their facilities under operating
lease agreements expiring through 2004. Future minimum lease
payments as of December 31, 1998 under the leases are as follows:
| 1999
|
|
$385,316
|
| 2000
|
|
402,565
|
| 2001
|
|
266,970
|
| 2002
|
|
239,984
|
| 2003
|
|
246,274
|
| Thereafter
|
|
103,385
|
Rent
expense under the noncancelable operating leases was
approximately $.1 million and $.3 million for the years ended
December 31, 1997 and 1998, respectively.
<R>
Because many of its Partner Companies are not
majority-owned subsidiaries, changes in the value of the Company
’s interests in Partner Companies and the income or loss
and revenue attributable to them could require the Company to
register under the Investment Company Act unless it takes action
to avoid being required to register. However, the Company
believes it can take steps to avoid being required to register
under the Investment Company Act which would not adversely
affect its operations or shareholder value.
</R>
On
June 30, 1998, VerticalNet entered into a three year Sponsorship
Agreement with Excite, Inc. (Excite). The Sponsorship Agreement
provides for VerticalNet and Excite to sponsor and promote
thirty co-branded Web pages and for each company to sell
advertising on the Web pages. Excite has guaranteed a minimum
number of advertising impressions for each of the three years.
The agreement is cancelable by either party, as defined, and
requires VerticalNet to pay Excite $0.9 million, $2.0 million
and $3.0 million, respectively, in year one, two and three under
the agreement. Such payments will be charged to expense as the
advertising impressions are provided by Excite. In addition,
each company will provide the other with $.2 million in barter
advertising during the term of the Sponsorship Agreement. As of
December 31, 1998, each company has satisfied the barter
provisions under the Sponsorship Agreement.
On
January 19, 1999, VerticalNet entered into a one-year agreement
with Compaq Computer Corporation (Compaq) and its Internet Web
site known as AltaVista. The agreement provides for VerticalNet
and AltaVista to sponsor and promote thirty-one co-branded Web
pages. The agreement requires VerticalNet to pay Compaq $1.0
million over the term of the agreement based on the number of
advertising impressions delivered. Such amount will be charged
to expense as the advertising impressions are provided by
AltaVista. In addition, each company will provide the other with
$.3 million in barter advertising during the term of the
agreement.
VerticalNet has entered into non-cancelable obligations with
several content service providers and Internet search engines.
Under these agreements, exclusive of the Excite and AltaVista
agreements discussed above, VerticalNet’s obligations are
as follows:
| 1999
|
|
$1,488,734
|
| 2000
|
|
65,500
|
VerticalNet has entered into employment agreements with several
employees. The agreements are cancelable, but require severance
upon termination. As of December 31, 1998, VerticalNet would be
required to pay approximately $1 million in severance in the
event that these employment agreements are canceled.
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
—(Continued)
17. Subsequent Events
The
Company issued 15,990,000 shares of common stock for net
proceeds of $32 million from January through March, 1999 (Note
9).
In
April 1999 the Company’s Board of Directors authorized the
acceptance of full recourse promissory notes from its employees
and a director as consideration for exercising all or a portion
of their vested and unvested stock options. The Company has the
right, but not the obligation, to repurchase unvested shares
under certain circumstances. The exercise of unvested options by
the employees and director and the acceptance of promissory
notes by the Company are in accordance with the terms of the
Company’s equity compensation plans and related option
agreements. The Company’s Board of Directors also approved
loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in
connection with the option exercises.
|
VerticalNet Initial Public Offering
|
In
February 1999, VerticalNet completed its initial public offering
(IPO) of 4,025,000 shares of its common stock at $16.00 per
share. Net proceeds to VerticalNet were approximately $58.3
million. As a result of the VerticalNet IPO, the Company
recorded a gain in 1999 of approximately $28 million relating to
the increase in the Company’s share of VerticalNet’s
net equity.
In
March 1999 the Company made a distribution of $10.7 million to
former LLC members in accordance with the LLC agreements to
satisfy the members’ tax liabilities.
|
Ownership Interests in and Advances to Partner Companies
|
Through May 7, 1999, the Company expended approximately $60
million to acquire interests in or make advances to new and
existing Partner Companies.
|
Revolving Bank Credit Facility
|
In
April 1999, the Company entered into a $50 million revolving
bank credit facility (Note 7).
|
Convertible Subordinated Notes
|
<R>
On May 5, 1999, the Company’s Board of
Directors authorized the issuance of up to $90 million of
convertible subordinated notes. The notes bear interest at an
annual rate of 4.99% during the first year and at the prime rate
for the remaining two years. Prior to May 2000, the notes will
automatically convert into shares of the Company’s common
stock at the initial public offering price upon consummation of
an initial public offering or at the per share value of a
private round of equity financing of at least $50 million. If
the notes are converted, all accrued interest is waived. The
Company’s Board of Directors also approved the issuance of
warrants to the holders of these convertible notes to purchase
shares of the Company’s common stock. The warrant holders
will be entitled to purchase the number of shares of the Company
’s common stock determined by dividing 20% of the principal
amount of the notes by the price per share at which the notes
are convertible. The warrants expire in May 2002.
</R>
On
May 7, 1999 the Company’s Board of Directors authorized the
filing of a registration statement on Form S-1 in connection
with the Company’s initial public offering.
INTERNET CAPITAL GROUP, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
<R>
During 1998 and 1999, the Company acquired
significant minority ownership interests in 19 Partner Companies
accounted for under the equity method of accounting. In January
1999, the Company acquired a controlling majority interest in
Breakaway Solutions, Inc. In March 1999, Breakaway Solutions
acquired all of the outstanding stock of Applica Corporation.
Subsequent to March 31, 1999, Breakaway Solutions acquired all
of the outstanding stock of WPL Laboratories, Inc. and WebYes,
Inc. All acquisitions have been accounted for by the purchase
method of accounting. In addition, the Company deconsolidated
VerticalNet subsequent to December 31, 1998 due to the decrease
in the Company’s ownership percentage from above to below
50%.
</R>
<R>
The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1998
reflects the acquisitions in 1999 of Breakaway Solutions,
Applica, WPL Laboratories, and WebYes, the deconsolidation of
VerticalNet and the 1998 and 1999 acquisitions of significant
minority ownership interests in 19 equity method Partner
Companies as if they had occurred on January 1, 1998.
</R>
<R>
The unaudited pro forma condensed combined
statement of operations for the three months ended March 31,
1999 reflects the acquisitions in 1999 of Applica, WPL
Laboratories WebYes and significant minority ownership interests
in 12 equity method Partner Companies as if they had occurred on
January 1, 1998.
</R>
<R>
An unaudited condensed pro forma balance sheet
at March 31, 1999, has not been presented since Breakaway
Solutions is reflected in the historical financial statements
and the acquisitions of WPL Laboratories, WebYes and equity
method Partner Companies subsequent to March 31, 1999 would not
have had a material effect on the consolidated balance sheet
except for the intangible and other long-term assets recorded in
connection with the acquisitions. The pro forma effect of WPL
Laboratories, WebYes and equity method Partner Companies
acquired subsequent to March 31, 1999, would have been to
increase “Intangible assets” by $12.0 million, “
Ownership interests in and advances to Partner Companies”
by $66.6 million, other assets by $1.8 million, other
liabilities by $11.6 million, “minority interest” by
$8.5 million, “convertible notes” by $40.9 million and
decrease “cash and cash equivalents” by $19.4 million
assuming such acquisitions had occurred on March 31, 1999.
</R>
<R>
Since the pro forma financial information is
based upon the financial condition and operating results of
Breakaway Solutions, Applica, WPL Laboratories, WebYes and the
19 equity method Partner Companies acquired during periods when
they were not under the control, influence or management of the
Company, the information presented may not be indicative of the
results which would have actually been obtained had the
acquisitions been completed as of the respective periods
presented, nor are they indicative of future financial or
operating results. The unaudited pro forma financial information
does not give effect to any synergies that may occur due to the
integration of the Company with Breakaway Solutions, Applica,
WPL Laboratories, WebYes and the equity method Partner
Companies. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical
audited financial statements of the Company and the notes
thereto as well as the audited historical financial statements
of Breakaway Solutions, Applica, WPL Laboratories, WebYes, and
certain equity method Partner Companies and the notes thereto
included elsewhere in this prospectus.
</R>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined
Statements of Operations for the Year Ended December 31, 1998
<R>
| |
|
Internet Capital
Group, Inc.
|
|
Breakaway
Acquisition
|
|
Applica,
WPL and
WebYes
Acquisitions
|
|
VerticalNet
Deconsolidation
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
| Revenue
|
|
$3,134,769
|
|
|
$10,017,947
|
|
|
$2,938,927
|
|
|
$(3,134,769)
|
|
$—
|
|
|
$12,956,874
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
4,642,528
|
|
|
5,903,843
|
|
|
1,870,064
|
|
|
(4,642,528)
|
|
—
|
|
|
7,773,907
|
|
|
Sales and marketing
|
|
7,894,662
|
|
|
—
|
|
|
37,092
|
|
|
(7,894,662)
|
|
—
|
|
|
37,092
|
|
|
General and administrative
|
|
7,619,169
|
|
|
4,814,288
|
|
|
691, 810
|
|
|
(3,823,593)
|
|
6,306,923
|
a
|
|
15,608,597
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
20,156,359
|
|
|
10,718,131
|
|
|
2,598,966
|
|
|
(16,360,783)
|
|
6,306,923
|
|
|
23,419,596
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,021,590
|
)
|
|
(700,184
|
)
|
|
339,961
|
|
|
13,226,014
|
|
(6,306,923
|
)
|
|
(10,462,722
|
)
|
| Other income,
net
|
|
30,483,177
|
|
|
156,945
|
|
|
—
|
|
|
|
|
|
|
|
30,640,122
|
|
| Interest income
|
|
1,305,787
|
|
|
11,191
|
|
|
—
|
|
|
(212,130)
|
|
—
|
|
|
1,104,848
|
|
| Interest
expense
|
|
(381,199
|
)
|
|
(43,127
|
)
|
|
(8,117
|
)
|
|
297,401
|
|
—
|
|
|
(135,042
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes,
Minority Interest and Equity
Income (Loss)
|
|
14,386,175
|
|
|
(575,175
|
)
|
|
331,844
|
|
|
13,311,285
|
|
(6,306,923
|
)
|
|
21,147,206
|
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
c
|
|
—
|
|
| Minority
interest
|
|
5,381,640
|
|
|
247,325
|
|
|
(142,693
|
)
|
|
(5,381,640)
|
|
1,159,980
|
e
|
|
1,264,612
|
|
| Equity income
(loss)
|
|
(5,868,887
|
)
|
|
|
|
|
|
|
|
|
|
(32,309,632
|
)b
|
|
(38,178,519
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$13,898,928
|
|
|
$(327,850
|
)
|
|
$189,151
|
|
|
$7,929,645
|
|
$(37,456,575
|
)
|
|
$(15,766,701
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(0.28)
|
|
|
Diluted
|
|
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(0.28)
|
|
Weighted
Average Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
56,102,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,102,289
|
|
|
Diluted
|
|
56,149,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,102,289
|
|
</R>
Unaudited Pro Forma Condensed Combined
Statements of Operations for the Three Months Ended March 31,
1999
<R>
| |
|
Internet Capital
Group, Inc.
|
|
Applica,
WPL and
WebYes
Acquisitions
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
|
| Revenue
|
|
$3,111,035
|
|
|
$1,229,506
|
|
|
$—
|
|
|
$4,340,541
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
1,553,329
|
|
|
498,227
|
|
|
—
|
|
|
2,051,556
|
|
Sales and marketing
|
|
70,434
|
|
|
68,721
|
|
|
—
|
|
|
139,155
|
|
General and administrative
|
|
3,777,381
|
|
|
412,068
|
|
|
1,291,074
|
a
|
|
5,480,523
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
5,401,144
|
|
|
979,016
|
|
|
1,291,074
|
|
|
7,671,234
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,290,109
|
)
|
|
250,490
|
|
|
(1,291,074
|
)
|
|
(3,330,693)
|
| Other income,
net
|
|
28,677,471
|
|
|
—
|
|
|
—
|
|
|
28,677,471
|
| Interest income
|
|
309,735
|
|
|
—
|
|
|
—
|
|
|
309,735
|
| Interest
expense
|
|
(13,756
|
)
|
|
(6,011
|
)
|
|
—
|
|
|
(19,767)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes, Minority
Interest and Equity Income (Loss)
|
|
26,683,341
|
|
|
244,479
|
|
|
(1,291,074
|
)
|
|
25,636,746
|
|
Income taxes
|
|
663,206
|
|
|
—
|
|
|
2,575,678
|
d
|
|
3,238,884
|
|
Minority interest
|
|
146,018
|
|
|
(105,126
|
)
|
|
289,995
|
e
|
|
330,887
|
|
Equity income (loss)
|
|
(7,412,602
|
)
|
|
—
|
|
|
(5,960,214
|
)b
|
|
(13,372,816)
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net Income
(Loss)
|
|
$20,079,963
|
|
|
$139,353
|
|
|
$(4,385,615
|
)
|
|
$15,833,701
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net Income
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$0.28
|
|
|
|
|
|
|
|
|
$0.22
|
|
Diluted
|
|
$0.27
|
|
|
|
|
|
|
|
|
$0.21
|
| Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
72,646,022
|
|
|
|
|
|
|
|
|
72,646,022
|
|
Diluted
|
|
73,699,973
|
|
|
|
|
|
|
|
|
73,699,973
|
</R>
See notes to unaudited pro forma condensed
combined financial statements.
Internet Capital Group, Inc.
Notes to Unaudited Pro Forma Condensed
Combined Financial Statements
1. Basis of Presentation
<R>
|
The unaudited
pro forma condensed combined statement of operations for the
year ended December 31, 1998, gives effect to the acquisition
(purchase price and goodwill/intangibles in parenthesis) of
Breakaway Solutions ($16.3 and $10.8 million), Applica ($1.6
and $1.4 million), WPL Laboratories ($9.9 and $8.5 million)
and WebYes ($3.7 and $3.6 million), the deconsolidation of
VerticalNet and the acquisitions of significant minority
ownership interests in 19 equity method Partner Companies
($110.9 and $71.1 million) as if they had occurred on January
1, 1998.
|
</R>
<R>
|
The unaudited
pro forma condensed combined statement of operations for the
three months ended March 31, 1999, gives effect to the
acquisition by Breakaway Solutions of Applica, WPL
Laboratories and WebYes and the acquisition by the Company of
significant minority ownership interests in 12 equity method
Partner Companies ($84.9 and $56.9 million) as if they had
occurred on January 1, 1998.
|
</R>
<R>
|
The effects of
the acquisitions have been presented using the purchase method
of accounting and accordingly, the purchase price was
allocated to the assets and liabilities assumed based upon
management’s best preliminary estimate of fair value with
any excess purchase price being allocated to goodwill or other
identifiable intangibles. The preliminary allocation of the
purchase price will be subject to further adjustments, which
are not anticipated to be material, as the Company and
Breakaway finalize their allocations of purchase price in
accordance with generally accepted accounting principles. The
pro forma adjustments related to the purchase price allocation
of the acquisitions represent management’s best estimate
of the effects of the acquisitions.
|
</R>
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:
|
<R>
|
(a)
|
General and administrative expense has been adjusted to
reflect the amortization of intangible assets associated with
the acquisitions of Breakaway Solutions, Applica, WPL
Laboratories and WebYes over an estimated useful life of three
to five years.
|
</R>
<R>
|
(b)
|
Equity (income) loss has been adjusted to reflect the Company
’s ownership interest in the (income) loss of the equity
method Partner Companies and the amortization of the
difference in the Company’s carrying value in the Partner
Company and the Company’s ownership interest in the
underlying net equity of the Partner Company over an estimated
useful life of three years. For the year ended December 31,
1998 and the three months ended March 31, 1999, equity
(income) loss includes $9.0 and $1.6 million, respectively, of
equity (income) loss and $23.3 and $4.4 million, respectively,
in amortization of the difference between cost and equity in
net assets.
|
</R>
|
(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.
|
<R>
|
(e)
|
Minority interest has been adjusted to reflect minority
interest in amortization of goodwill associated with the
acquisitions of Applica, WPL Laboratories and WebYes.
|
</R>
Independent Auditors’ Report
The Board of Directors
Applica Corporation:
<R>
We have audited the accompanying
balance sheet of Applica Corporation (the “Company”),
a development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders’ equity, and
cash flows from September 24, 1998 (inception) through December
31, 1998. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
</R>
We conducted our audit in accordance with
generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
<R>
In our opinion, the financial
statements referred to above present fairly, in all material
respects, the financial position of Applica Corporation at
December 31, 1998 and the results of its operations and its cash
flows from September 24, 1998 (inception) through December 31,
1998, in conformity with generally accepted accounting
principles.
</R>
<R>
</R>
Boston, Massachusetts
June 30, 1999
(A Development-Stage Company)
<R>
Balance Sheet
</R>
December 31, 1998
<R>
| Assets
|
|
|
| Current assets:
|
|
Cash
|
|
$474,205
|
|
|
Subscriptions
receivable
|
|
3,000
|
|
| |
|
|
|
|
Total current
assets
|
|
477,205
|
|
| |
|
|
|
| Property and
equipment, net
|
|
43,259
|
|
| Deposits
|
|
7,332
|
|
| |
|
|
|
|
Total assets
|
|
$527,796
|
|
| |
|
|
|
| Liabilities
and Stockholders’ Equity
|
|
|
|
| Accounts
payable
|
|
$61,775
|
|
| |
|
|
|
|
Total
liabilities
|
|
61,775
|
|
| |
|
|
|
| Commitments
and contingencies
|
| |
| Stockholders
’ equity:
|
Preferred
stock $.001 par value, 5,000,000 shares authorized, 500,000
shares issued and
outstanding (liquidation
preference of $500,000)
|
|
500,000
|
|
Common stock
$.001 par value, 10,000,000 shares authorized, 3,000,000
shares issued and
outstanding
|
|
3,000
|
|
|
Deficit
accumulated during development stage
|
|
(36,979
|
)
|
| |
|
|
|
|
Total
stockholders’ equity
|
|
466,021
|
|
| |
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$527,796
|
|
| |
|
|
|
</R>
See accompanying notes to financial
statements.
(A Development-Stage Company)
<R>
Statement of Operations
</R>
From September 24, 1998
(inception) through December 31, 1998
<R>
| Operating
expenses:
|
|
Organization
costs
|
|
$25,911
|
|
|
Occupancy
|
|
7,331
|
|
|
Depreciation
|
|
1,483
|
|
|
Other
|
|
2,254
|
|
| |
|
|
|
|
Total
operating expenses
|
|
36,979
|
|
| |
|
|
|
|
Net loss
|
|
$(36,979
|
)
|
| |
|
|
|
| Net loss per
share—basic and diluted
|
|
$(0.01
|
)
|
| |
|
|
|
| Weighted
average shares outstanding
|
|
3,000,000
|
|
| |
|
|
|
</R>
See accompanying notes to financial
statements.
(A Development-Stage Company)
<R>
Statement of Stockholders
’ Equity
</R>
<R>
| |
|
Preferred Stock
|
|
Common Stock
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Total
Stockholders’
Equity
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
| Balance,
September 24, 1998
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Subscription
of common stock
|
|
—
|
|
$
—
|
|
3,000,000
|
|
$3,000
|
|
$
—
|
|
|
$3,000
|
|
| Issuance of
preferred stock
|
|
500,000
|
|
500,000
|
|
—
|
|
—
|
|
—
|
|
|
500,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(36,979
|
)
|
|
(36,979
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
500,000
|
|
$500,000
|
|
3,000,000
|
|
$3,000
|
|
$(36,979
|
)
|
|
$466,021
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
(A Development-Stage Company)
<R>
Statement of Cash Flows
</R>
From September 24, 1998
(inception) through December 31, 1998
<R>
| Cash flows
from operating activities:
|
|
|
| Net loss
|
|
$(36,979
|
)
|
| Adjustments to
reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
|
|
1,483
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
Accounts
payable
|
|
61,775
|
|
|
Deposits
|
|
(7,332
|
)
|
| |
|
|
|
|
Net cash
provided by operating activities
|
|
18,947
|
|
| |
|
|
|
| Cash flows
from investing activities:
|
|
|
|
| Additions to
property and equipment
|
|
(44,742
|
)
|
| |
|
|
|
|
Net cash used
in investing activities
|
|
(44,742
|
)
|
| |
|
|
|
| Cash flows
from financing activities:
|
|
|
|
| Issuance of
preferred stock
|
|
500,000
|
|
| |
|
|
|
|
Net cash
provided by financing activities
|
|
500,000
|
|
| |
|
|
|
| Net increase
in cash
|
|
474,205
|
|
| Cash at
beginning of period
|
|
—
|
|
| |
|
|
|
| Cash at end of
period
|
|
$474,205
|
|
| |
|
|
|
</R>
See accompanying notes to financial
statements.
(A Development-Stage Company)
Notes to Financial Statements
December 31, 1998
(1) The Company
<R>
Applica Corporation (the “Company”)
was founded in September 1998 and provides application hosting
services. The Company has experienced losses since inception and
is subject to those risks associated with development-stage
companies. Activities since inception have consisted of
development of a business plan. Since inception and through
December 31, 1998, the Company operated with no salaried
employees. Therefore, recurring operating expenses, such as
salaries and fringe benefits, are not reflected in the
accompanying financial statements. Financial statements in
subsequent periods will reflect salaries and fringe benefits.
</R>
<R>
On March 25, 1999, the Company was acquired by
Breakaway Solutions, Inc. (see note 7b).
</R>
(2) Summary of
Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(b) Impairment of Long-Lived Assets
The
Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the
related assets, which range from five to seven years.
<R>
Equipment under capital leases is stated at
the net present value of minimum lease payments. Equipment held
under capital leases and leasehold improvements are amortized
straight-line over the shorter of the lease term or estimated
useful life of the asset.
</R>
(d) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
<R>
(e) Loss Per Share
</R>
<R>
In 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 (“SFAS
128”), Earnings per Share. SFAS 128 requires the
presentation of basic and diluted net loss per share
for all periods presented. Basic net loss per share is based on
the weighted average number of shares outstanding during the
period. Diluted net loss per share reflects the per share effect
of dilutive stock options and other dilutive common stock
equivalents. As the Company is in a net loss position for the
period ended December 31, 1998, common stock equivalents of
500,000 for the period ended December 31, 1998 were excluded
from the diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same as
basic loss per share, and has not been presented separately.
</R>
<R></R>
<R></R>
(f) Reporting Comprehensive Income
<R>
In 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (“SFAS 130”),
Reporting Comprehensive Income
.
This statement requires that all components of comprehensive
income (loss) be reported in the financial statements in the
period in which they are recognized. For the period presented,
comprehensive loss under SFAS 130 was equivalent to the Company
’s net loss reported in the accompanying statement of
operations.
</R>
<R>
(g) Recent Accounting
Pronouncements
</R>
<R></R>
<R>
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.
</R>
(3) Property and
Equipment
At
December 31, 1998, property and equipment consists of the
following:
| Office
equipment
|
|
$41,683
|
|
| Computer
equipment
|
|
3,059
|
|
| |
|
|
|
|
|
|
44,742
|
|
| Less:
accumulated depreciation
|
|
(1,483
|
)
|
| |
|
|
|
|
Property and
equipment, net
|
|
$43,259
|
|
| |
|
|
|
(4) Preferred Stock
<R>
The Company’s stockholders have
authorized 5,000,000 shares of Series A preferred stock. The
Series A preferred stock is entitled to receive dividends at a
rate of $.05 per share per annum. The Series A preferred stock
is voting and is convertible into shares of common stock on a
share-for-share basis, subject to certain adjustments. In the
event of any liquidation, dissolution or winding up of the
Company, the Series A preferred stock has a liquidation
preference of $1.00 per share. The Series A preferred stock is
convertible into common stock immediately at the option of the
holder, and automatically converts into common stock upon the
completion of a qualified public offering.
</R>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements—
(Continued)
(5) Income Taxes
<R>
The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets at
December 31, 1998, are as follows:
</R>
<R>
| Deferred tax
assets:
|
|
Intangible
assets, principally due to differences in amortization
|
|
$5,372
|
|
|
Net operating
loss carryforward
|
|
195
|
|
| |
|
|
|
|
Total gross
deferred tax assets
|
|
5,567
|
|
| |
|
|
|
| Valuation
allowance
|
|
(5,567
|
)
|
| |
|
|
|
|
Net deferred
tax assets
|
|
$
—
|
|
| |
|
|
|
</R>
<R>
The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes that, after considering all the available objective
evidence, it is more likely than not that these assets will not
be realized.
</R>
(6) Commitments and
Contingencies
The
Company has entered into an operating lease for its office space
which expires in August 1999. Future minimum rental commitments
under the lease in 1999 are $36,000. The Company is currently
exploring alternatives for new space.
<R>
(7)
Subsequent Events
</R>
(a) Loan Agreement
<R>
On March 15, 1999, the Company entered into a
Loan and Security Agreement with a Bank for a $150,000 equipment
credit line which expires on June 15, 2002. This agreement
terminated upon the purchase of the Company (see note 7b).
</R>
(b) Agreement and Plan of Reorganization
<R>
On March 25, 1999, the Company entered into an
Agreement and Plan of Reorganization with Breakaway Solutions,
Inc. (“Breakaway”), a provider of information
technology consulting services. Under the agreement, Breakaway
acquired all of the outstanding stock of the Company in a
transaction accounted for under the purchase method of
accounting. The purchase price was comprised of 904,624 shares
of Breakaway common stock.
</R>
Independent Auditors’ Report
The Board of Directors
Breakaway Solutions, Inc.:
<R>
We have audited the accompanying
balance sheets of Breakaway Solutions, Inc. as of December 31,
1997 and 1998, and the related statements of operations,
stockholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company’
s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
</R>
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.
<R>
In our opinion, the financial
statements referred to above present fairly, in all material
respects, the financial position of Breakaway Solutions, Inc. as
of December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally
accepted accounting principles.
</R>
<R>
</R>
Boston, Massachusetts
June 30, 1999
BREAKAWAY SOLUTIONS, INC.
<R>
BALANCE SHEETS
</R>
<R>
| |
|
December 31,
|
|
March 31,
1999
|
| |
|
1997
|
|
1998
|
| |
|
|
|
|
|
(Unaudited)
|
| Assets
|
|
|
|
|
|
|
|
|
|
| Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
879,136
|
|
|
$
16,954
|
|
|
$3,205,752
|
|
Accounts
receivable, net of allowance for doubtful accounts of $65,000,
$131,000 and $142,560 in 1997,
1998 and 1999, respectively
|
|
960,830
|
|
|
1,445,994
|
|
|
1,911,534
|
|
|
Unbilled
revenues on contracts
|
|
232,258
|
|
|
625,609
|
|
|
799,791
|
|
|
Prepaid
expenses
|
|
27,858
|
|
|
46,211
|
|
|
72,381
|
|
|
Advances to
employees
|
|
—
|
|
|
13,273
|
|
|
7,855
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
2,100,082
|
|
|
2,148,041
|
|
|
5,997,313
|
|
|
Property and
equipment, net
|
|
397,102
|
|
|
553,566
|
|
|
911,487
|
|
|
Intangible
assets
|
|
—
|
|
|
—
|
|
|
1,437,974
|
|
|
Cash surrender
value of life insurance
|
|
—
|
|
|
—
|
|
|
62,441
|
|
|
Deposits
|
|
35,726
|
|
|
40,877
|
|
|
30,528
|
|
| |
|
|
|
|
|
|
|
|
|
| Total assets
|
|
$2,532,910
|
|
|
$2,742,484
|
|
|
$8,439,743
|
|
| |
|
|
|
|
|
|
|
|
|
| Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
| Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
—
|
|
|
$
425,743
|
|
|
$1,001,991
|
|
|
Notes payable
|
|
—
|
|
|
—
|
|
|
141,629
|
|
|
Long-term debt
—current portion
|
|
10,417
|
|
|
—
|
|
|
—
|
|
|
Capital lease
obligation—current portion
|
|
181,042
|
|
|
148,391
|
|
|
134,299
|
|
|
Accounts
payable
|
|
246,060
|
|
|
814,074
|
|
|
298,347
|
|
|
Accrued
compensation and related benefits
|
|
84,349
|
|
|
178,191
|
|
|
397,210
|
|
|
Accrued
expenses
|
|
—
|
|
|
—
|
|
|
68,111
|
|
|
Accrued
acquisition costs
|
|
—
|
|
|
—
|
|
|
159,159
|
|
|
Deferred
revenue on contracts
|
|
—
|
|
|
196,225
|
|
|
99,062
|
|
|
Stockholder
distributions payable
|
|
434,843
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
956,711
|
|
|
1,762,624
|
|
|
2,299,808
|
|
| |
|
|
|
|
|
|
|
|
|
|
Capital lease
obligation—long-term portion
|
|
84,368
|
|
|
67,040
|
|
|
121,665
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
84,368
|
|
|
67,040
|
|
|
121,665
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
1,041,079
|
|
|
1,829,664
|
|
|
2,421,473
|
|
| |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
| |
| Stockholders
’ equity:
|
|
|
|
|
|
|
|
|
|
Series A
preferred stock $.0001 par value, 5,853,000 shares authorized
at
December 31, 1998 and March 31,
1999, none issued and outstanding
in 1997 and 1998, 5,853,000
shares issued and outstanding in 1999
(liquidation preference of
$8,291,945)
|
|
—
|
|
|
—
|
|
|
585
|
|
Common stock
$.0001 par value, 22,100,000 shares authorized,
9,600,000 shares issued in 1997
and 1998 and 7,420,711 shares
issued in 1999, 8,016,000,
7,656,000 and 5,476,711 shares
outstanding in 1997, 1998 and
1999, respectively
|
|
960
|
|
|
960
|
|
|
742
|
|
|
Additional
paid-in capital
|
|
—
|
|
|
—
|
|
|
6,252,488
|
|
|
Less: Treasury
stock, at cost
|
|
(26
|
)
|
|
(32
|
)
|
|
(32
|
)
|
|
Retained
earnings (deficit)
|
|
1,490,897
|
|
|
911,892
|
|
|
(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,491,831
|
|
|
912,820
|
|
|
6,018,270
|
|
| |
|
|
|
|
|
|
|
|
|
| Total
liabilities and stockholders’ equity
|
|
$2,532,910
|
|
|
$2,742,484
|
|
|
$8,439,743
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
<R>
See accompanying notes to
financial statements.
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
STATEMENTS OF OPERATIONS
</R>
<R>
| |
|
Years Ended December 31,
|
|
Three Months
Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
(Unaudited)
|
| Revenues
|
|
$3,462,134
|
|
|
$6,118,058
|
|
|
$10,017,947
|
|
|
$2,124,132
|
|
|
$3,111,035
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
personnel costs
|
|
1,429,952
|
|
|
2,543,147
|
|
|
5,903,843
|
|
|
1,300,419
|
|
|
1,553,329
|
|
Selling,
general and administrative
expenses
|
|
1,368,120
|
|
|
2,559,328
|
|
|
4,814,288
|
|
|
751,676
|
|
|
1,803,995
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
2,798,072
|
|
|
5,102,475
|
|
|
10,718,131
|
|
|
2,052,095
|
|
|
3,357,324
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
664,062
|
|
|
1,015,583
|
|
|
(700,184
|
)
|
|
72,037
|
|
|
(246,289
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
—
|
|
|
—
|
|
|
160,000
|
|
|
(3,021
|
)
|
|
(6,994
|
)
|
|
Interest
income
|
|
3,684
|
|
|
92,823
|
|
|
11,191
|
|
|
7,711
|
|
|
31,526
|
|
|
Interest
expense
|
|
(28,557
|
)
|
|
(32,725
|
)
|
|
(43,127
|
)
|
|
(1,348
|
)
|
|
(13,756
|
)
|
|
Loss on
disposal of equipment
|
|
(20,780
|
)
|
|
(2,030
|
)
|
|
(3,055
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
income (expense)
|
|
(45,653
|
)
|
|
58,068
|
|
|
125,009
|
|
|
3,342
|
|
|
10,776
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss)
before income taxes
|
|
618,409
|
|
|
1,073,651
|
|
|
(575,175
|
)
|
|
75,379
|
|
|
(235,513
|
)
|
| Income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$
618,409
|
|
|
$1,073,651
|
|
|
$(575,175
|
)
|
|
$
75,379
|
|
|
$(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$0.07
|
|
|
$0.13
|
|
|
$(0.07
|
)
|
|
$0.01
|
|
|
$(0.05
|
)
|
| Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
8,301,633
|
|
|
8,016,000
|
|
|
8,000,877
|
|
|
8,016,000
|
|
|
4,698,186
|
|
| |
|
|
|
Pro forma
information (unaudited)
(note 9):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes, as
reported
|
|
$
618,409
|
|
|
$1,073,651
|
|
|
$(575,175
|
)
|
|
$75,379
|
|
|
$ (235,513
|
)
|
|
Pro forma
income taxes (benefit)
|
|
247,364
|
|
|
429,460
|
|
|
(195,560
|
)
|
|
30,152
|
|
|
(94,205
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss)
|
|
$
371,045
|
|
|
$
644,191
|
|
|
$(379,615
|
)
|
|
$45,227
|
|
|
$ (141,308
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per share—
basic and diluted
|
|
$
0.04
|
|
|
$
0.08
|
|
|
$
(0.05
|
)
|
|
$
0.01
|
|
|
$ (0.03
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
weighted average shares
outstanding
|
|
8,301,633
|
|
|
8,016,000
|
|
|
8,000,877
|
|
|
8,016,000
|
|
|
4,698,186
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
See accompanying notes to
financial statements.
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
STATEMENTS OF STOCKHOLDERS
’ EQUITY
</R>
<R>
| |
|
Series A
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
|
Retained
Earnings
(deficit)
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
Stockholders’
Equity
|
| Balance,
January 1, 1996
|
|
—
|
|
$
—
|
|
9,600,000
|
|
|
$960
|
|
|
$—
|
|
|
—
|
|
|
$ —
|
|
|
$330,815
|
|
|
$
331,775
|
|
| Purchase of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
—
|
|
|
(26
|
)
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,841
|
)
|
|
(1,841
|
)
|
| Net income
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
618,409
|
|
|
618,409
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1996
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
947,383
|
|
|
948,317
|
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(530,137
|
)
|
|
(530,137
|
)
|
| Net income
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,073,651
|
|
|
1,073,651
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,584,000
|
)
|
|
(26
|
)
|
|
1,490,897
|
|
|
1,491,831
|
|
| Purchase of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(360,000
|
)
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
| Distributions
to stockholders
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,830
|
)
|
|
(3,830
|
)
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(575,175
|
)
|
|
(575,175
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
—
|
|
—
|
|
9,600,000
|
|
|
960
|
|
|
—
|
|
|
(1,944,000
|
)
|
|
(32
|
)
|
|
911,892
|
|
|
912,820
|
|
| S Corporation
termination
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
911,892
|
|
|
—
|
|
|
—
|
|
|
(911,892
|
)
|
|
—
|
|
| Issuance of
preferred stock
|
|
5,853,000
|
|
585
|
|
—
|
|
|
—
|
|
|
8,291,360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,291,945
|
|
| Repurchase and
retirement of common stock
|
|
—
|
|
—
|
|
(3,154,500
|
)
|
|
(315
|
)
|
|
(4,468,665
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,468,980
|
)
|
Issuance of
common stock for acquired
business
|
|
—
|
|
—
|
|
904,624
|
|
|
90
|
|
|
1,417,908
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,417,998
|
|
| Exercise of
stock options
|
|
—
|
|
—
|
|
70,587
|
|
|
7
|
|
|
99,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(235,513
|
)
|
|
(235,513
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
March 31, 1999 (unaudited)
|
|
5,853,000
|
|
$585
|
|
7,420,711
|
|
|
$742
|
|
|
$6,252,488
|
|
|
(1,944,000
|
)
|
|
$
(32
|
)
|
|
$(235,513
|
)
|
|
$6,018,270
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
See accompanying notes to
financial statements.
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
STATEMENTS OF CASH FLOWS
</R>
<R>
| |
|
Years Ended
December 31,
|
|
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| |
|
|
|
|
|
|
|
(Unaudited)
|
| Net income
(loss)
|
|
$618,409
|
|
|
1,073,651
|
|
|
(575,175
|
)
|
|
75,379
|
|
|
(235,513
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
46,484
|
|
|
254,217
|
|
|
332,994
|
|
|
18,000
|
|
|
104,780
|
|
|
Loss on disposal of fixed assets
|
|
20,780
|
|
|
2,030
|
|
|
3,055
|
|
|
—
|
|
|
—
|
|
Changes in
operating assets and liabilities, net of impact of acquisition
of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(361,107
|
)
|
|
(471,676
|
)
|
|
(485,164
|
)
|
|
(726,282
|
)
|
|
(499,219
|
)
|
|
Unbilled revenues on contracts
|
|
—
|
|
|
—
|
|
|
(393,351
|
)
|
|
—
|
|
|
(174,182
|
)
|
|
Inventory
|
|
12,831
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Prepaid and other assets
|
|
(47,046
|
)
|
|
69,096
|
|
|
(18,353
|
)
|
|
(43,679
|
)
|
|
(5,741
|
)
|
|
Accounts payable
|
|
(39,707
|
)
|
|
222,239
|
|
|
568,014
|
|
|
84,707
|
|
|
(666,829
|
)
|
|
Accrued compensation and related benefits
|
|
—
|
|
|
63,387
|
|
|
93,842
|
|
|
36,522
|
|
|
366,441
|
|
|
Accrued expenses
|
|
1,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,111
|
|
|
Deferred revenue on contracts
|
|
(77,070
|
)
|
|
—
|
|
|
196,225
|
|
|
—
|
|
|
(97,163
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in) operating activities
|
|
175,074
|
|
|
1,212,944
|
|
|
(277,913
|
)
|
|
(555,353
|
)
|
|
(1,139,315
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(18,950
|
)
|
|
(132,937
|
)
|
|
(502,461
|
)
|
|
(97,100
|
)
|
|
(72,442
|
)
|
|
Proceeds from disposal of fixed assets
|
|
—
|
|
|
13,200
|
|
|
9,948
|
|
|
—
|
|
|
—
|
|
|
Increase in cash surrender value of life insurance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,441
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
(18,950
|
)
|
|
(119,737
|
)
|
|
(492,513
|
)
|
|
(97,100
|
)
|
|
(134,883
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,291,945
|
|
|
Proceeds from exercise of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
|
Repurchase and retirement of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,468,980
|
)
|
|
Advances to employees
|
|
—
|
|
|
—
|
|
|
(13,273
|
)
|
|
—
|
|
|
—
|
|
|
Repayments of advances to employees
|
|
163
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,418
|
|
|
Payments on current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
(10,417
|
)
|
|
(3,125
|
)
|
|
—
|
|
|
Proceeds from (repayments of) credit line
|
|
(125,000
|
)
|
|
—
|
|
|
425,743
|
|
|
—
|
|
|
576,248
|
|
|
(Increase) decrease in deposits
|
|
(216
|
)
|
|
(18,211
|
)
|
|
(5,151
|
)
|
|
(3,102
|
)
|
|
17,681
|
|
|
Distributions to stockholders
|
|
(1,841
|
)
|
|
(95,750
|
)
|
|
(438,673
|
)
|
|
—
|
|
|
—
|
|
|
Repurchase of treasury stock
|
|
(26
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
Payments of capital lease obligations
|
|
(38,813
|
)
|
|
(184,224
|
)
|
|
(49,979
|
)
|
|
(6,522
|
)
|
|
(59,316
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in) financing activities
|
|
(165,733
|
)
|
|
(298,185
|
)
|
|
(91,756
|
)
|
|
(12,749
|
)
|
|
4,462,996
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase (decrease) in cash and cash equivalents
|
|
(9,609
|
)
|
|
795,022
|
|
|
(862,182
|
)
|
|
(665,202
|
)
|
|
3,188,798
|
|
| Cash and cash
equivalents at beginning of period
|
|
93,723
|
|
|
84,114
|
|
|
879,136
|
|
|
879,136
|
|
|
16,954
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents at end of period
|
|
$84,114
|
|
|
879,136
|
|
|
16,954
|
|
|
213,934
|
|
|
3,205,752
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$28,557
|
|
|
32,725
|
|
|
43,127
|
|
|
1,348
|
|
|
13,756
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$42,742
|
|
|
331,511
|
|
|
13,720
|
|
|
—
|
|
|
99,849
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions payable to stockholders
|
|
$
—
|
|
|
434,843
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with
acquisition of business
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,417,998
|
|
| Acquisition
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,903,567
|
|
|
Liabilities assumed and issued
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(485,569
|
)
|
|
Common stock issued
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,417,998
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for
acquisition of business
|
|
$
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
BREAKAWAY SOLUTIONS, INC.
<R>
NOTES TO FINANCIAL STATEMENTS
</R>
December 31, 1997 and 1998
and March 31, 1999 (unaudited)
(1) The Company
<R></R>
<R>
Breakaway Solutions, Inc. (the “Company
”), formerly The Counsell Group, Inc., was established in
1992 to provide information technology consulting services to
businesses. The Company specializes in designing, developing and
implementing applications and business solutions for growing
enterprises throughout the United States.
</R>
(2) Summary of
Significant Accounting Policies
<R></R>
<R>
(a) Use of Estimates
</R>
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
<R>
(b) Cash and Cash Equivalents
</R>
For
purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
<R>
(c) Financial Instruments and
Concentration of Credit Risk
</R>
<R>
Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash
and cash equivalents, accounts receivable and debt instruments.
</R>
<R>
The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral on accounts receivable. The Company maintains
allowances for potential credit losses and such losses have been
within management’s expectations. Write-offs of accounts
receivable have not been material for any of the periods
presented. The Company’s customers are headquartered
primarily in North America. At December 31, 1997 and 1998,
amounts due from three customers represented $503,750 or 40% and
$683,149 or 33%, respectively, of total accounts receivable.
</R>
The
fair market values of cash and cash equivalents, accounts
receivable and debt instruments at both December 31, 1997 and
1998 approximate their carrying amounts.
<R>
(d) Property and Equipment
</R>
<R>
Property and equipment are recorded at cost.
Depreciation is recorded on the straight-line basis over the
estimated useful life of the related assets which range from
three to six years. Equipment held under capital leases is
stated at the present value of minimum lease payments at the
inception of the lease and amortized using the straight-line
method over the lease term. Maintenance and repairs are charged
to operations when incurred.
</R>
<R>
(e) Intangible assets
</R>
<R>
Intangible assets relate to the Company’s
purchase of its wholly owned subsidiary, Applica Corporation, in
March 1999 (see note 11b). Such costs are being amortized on a
straight-line basis over five years, the period expected to be
benefited.
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
Notes to Financial Statements
—(Continued)
</R>
<R>
(f) Impairment of
Long-Lived Assets
</R>
The
Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount.
<R>
(g) Revenue Recognition
</R>
<R>
Revenues pursuant to fixed-fee contracts are
recognized as services are rendered on the
percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues
pursuant to time and material contracts are recognized as
services are provided. Unbilled revenues on contracts are
comprised of costs plus earnings. Billings in excess of costs
plus earnings are classified as deferred revenues.
</R>
Provisions for estimated losses on uncompleted contracts are
made on a contract-by-contract basis and are recognized in the
period in which such losses are determined.
<R>
(h) Project Personnel Costs
</R>
<R>
Project personnel costs consist of payroll and
payroll-related expenses for personnel dedicated to client
assignments.
</R>
<R>
(i) Income Taxes
</R>
<R>
The Company was taxed under the provisions of
Subchapter S of the Internal Revenue Code, whereby the corporate
income is taxed to the individual shareholders based on their
proportionate share of the Company’s taxable income.
Massachusetts taxes profits on S Corporations with receipts
exceeding $6,000,000.
</R>
Effective January 1, 1999, the Company terminated its S
Corporation election and is subject to corporate-level federal
and certain additional state income taxes. Accordingly, the
accompanying consolidated statements of operations include a pro
forma income tax adjustment (see note 9) for the income taxes
that would have been recorded if the Company had been a C
Corporation for all periods presented.
<R>
(j) Stock-Based Compensation
</R>
<R>
The Company has adopted Statement of Financial
Accounting Standards No. 123 (“SFAS 123”),
Accounting for Stock-Based Compensation
.
As permitted by SFAS 123, the Company measures compensation
costs in accordance with Accounting Principles Board Opinion No.
25 (“APB No. 25”), Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no
accounting recognition is given to stock options issued to
employees that are granted at fair market value until they are
exercised. Stock options issued to non-employees are recorded at
fair value at the date of grant. Upon exercise, net proceeds,
including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the
Company’s financial condition or results of operations;
however, the pro forma impact on income (loss) per share has
been disclosed in the notes to the consolidated financial
statements as required by SFAS 123 (see note 4c).
</R>
<R>
(k) Net Income (Loss) Per Share
</R>
<R>
In 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 (“SFAS
128”),
Earnings per Share
.
SFAS 128 requires the presentation of basic and diluted income
(loss) per
share for all periods presented. As the Company has been in a net
loss position for the year ended December 31, 1998, common stock
equivalents of 674,474 for the year ended December 31, 1998 were
excluded from the diluted loss per share calculation as they
would be antidilutive. There were no common stock equivalents
outstanding in 1996 and 1997. As a result, diluted loss per
share is the same as basic loss per share, and has not been
presented separately.
</R>
<R></R>
<R>
(l) Reporting Comprehensive Income
</R>
<R>
Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 130 (“SFAS
130”),
Reporting Comprehensive Income
.
This statement requires that all components of comprehensive
income be reported in the financial statements in the period in
which they are recognized. For each year reported, comprehensive
income (loss) under SFAS 130 was equivalent to the Company’
s net income (loss) reported in the accompanying consolidated
statements of operations.
</R>
<R>
(m) Unaudited Interim Financial
Information
</R>
<R>
The financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are
unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial
statements for the interim periods have been included. Results
of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for
the full fiscal year or any future periods.
</R>
<R>
(n) Recent Accounting Pronouncements
</R>
<R></R>
<R>
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.
</R>
<R></R>
(3) Property and
Equipment
Property and equipment consisted of the following at December 31:
| |
|
1997
|
|
1998
|
| Computer
equipment
|
|
$578,724
|
|
|
$1,116,829
|
|
| Office
equipment
|
|
—
|
|
|
11,756
|
|
| Furniture and
fixtures
|
|
134,490
|
|
|
70,481
|
|
| |
|
|
|
|
|
|
|
|
|
713,214
|
|
|
1,199,066
|
|
| Less:
accumulated depreciation and amortization
|
|
(316,112
|
)
|
|
(645,500
|
)
|
| |
|
|
|
|
|
|
|
|
|
$397,102
|
|
|
$
553,566
|
|
| |
|
|
|
|
|
|
<R>
The cost and related accumulated amortization
of property and equipment held under capital leases is as
follows at December 31:
</R>
<R>
| |
|
1997
|
|
1998
|
| Cost
|
|
$400,297
|
|
|
$394,637
|
|
| Less:
Accumulated amortization
|
|
(157,593
|
)
|
|
(332,053
|
)
|
| |
|
|
|
|
|
|
| |
|
$242,704
|
|
|
$62,584
|
|
| |
|
|
|
|
|
|
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
Notes to Financial Statements
—(Continued)
</R>
(4) Capital Stock
(a) Preferred Stock
<R>
In October 1998, the Company’s
stockholders authorized 5,853,000 shares of Series A Convertible
Preferred Stock. The Series A Convertible Preferred Stock is
entitled to receive dividends at a rate of $.1136 per share, as
and if declared. The Series A Convertible Preferred Stock is
voting and is convertible into shares of common stock on a
share-for-share basis, subject to certain adjustments. In the
event of any liquidation, dissolution or winding up of the
Company, the Series A Convertible Preferred Stock has a
liquidation preference of $1.41667 per share. The Series A
Convertible Preferred Stock is convertible into common stock
immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualifying
initial public offering (see note 11a).
</R>
(b) Stock Splits
In
February and December 1998, the Board of Directors approved a
2-for-1 and 3-for-1 stock split of the Company’s common
stock, respectively. All prior periods have been restated to
reflect these stock splits effected as a recapitalization.
(c) Stock Plan
The
Company’s 1998 Stock Plan (the “Stock Plan”)
authorizes the Company to grant options to purchase common
stock, to make awards of restricted common stock, and to issue
certain other equity-related awards to employees and directors
of, and consultants to, the Company. The total number of shares
of common stock which may be issued under the Stock Plan is
9,000,000 shares. The Stock Plan is administered by the Board of
Directors, which selects the persons to whom stock options and
other awards are granted and determines the number of shares,
the exercise or purchase prices, the vesting terms and the
expiration date. Non-qualified stock options may be granted at
exercise prices which are above, equal to, or below the grant
date fair market value of the common stock. The exercise price
of options qualifying as incentive stock options may not be less
than the grant date fair market value of the common stock.
Stock options granted under the Stock Plan are nontransferable,
generally become exercisable over a four-year period, and expire
ten years after the date of grant (subject to earlier
termination in the event of the termination of the optionee’
s employment or other relationship with the Company).
A
summary of the status of the Company’s Stock Plan is
presented below:
<R>
| |
|
Year Ended
December 31, 1998
|
|
(Unaudited)
Three Months Ended
March 31, 1999
|
Fixed
options
|
|
Shares
|
|
Weighted
average
exercise price
|
|
Shares
|
|
Weighted
average
exercise price
|
| Outstanding at
beginning of period
|
|
—
|
|
|
$
—
|
|
5,992,794
|
|
|
$1.00
|
|
Granted
|
|
6,120,879
|
|
|
.99
|
|
3,168,042
|
|
|
1.48
|
|
Exercised
|
|
—
|
|
|
—
|
|
(70,587
|
)
|
|
1.42
|
|
Forfeited
|
|
(128,085
|
)
|
|
.61
|
|
(83,283
|
)
|
|
.54
|
| |
|
|
|
|
|
|
|
|
|
|
| Outstanding at
end of period
|
|
5,992,794
|
|
|
1.00
|
|
9,006,966
|
|
|
1.17
|
| |
|
|
|
|
|
|
|
|
|
|
| Options
exercisable at end of period
|
|
2,610,630
|
|
|
|
|
3,064,927
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
Notes to Financial Statements
—(Continued)
</R>
The following table summarizes information about the Company
’s stock options outstanding at December 31, 1998:
<R>
| |
|
Options outstanding
|
|
Options exercisable
|
Exercise
prices
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual life
|
|
Number
exercisable
|
|
Weighted
average
exercise price
|
|
$.54
|
|
2,776,494
|
|
9.5 years
|
|
1,825,005
|
|
$.54
|
|
.81
|
|
129,900
|
|
9.75 years
|
|
21,000
|
|
.81
|
|
1.42
|
|
3,086,400
|
|
10 years
|
|
764,625
|
|
1.42
|
| |
|
|
|
|
|
|
|
|
| |
|
5,992,794
|
|
9.76 years
|
|
2,610,630
|
|
.80
|
| |
|
|
|
|
|
|
|
|
</R>
The
Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees
,
in accounting for its Stock Plan, and, accordingly, compensation
cost is recognized in the consolidated financial statements for
stock options granted to employees only when the fair value on
the grant date exceeds the exercise price. The Company granted
no stock options during 1996 and 1997. Had the Company
determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123 for 1998 and
1999 grants, its net loss would have been increased to the pro
forma amounts indicated below:
<R>
| |
|
Year Ended
December 31, 1998
|
|
(Unaudited)
Three Months
Ended
March 31, 1999
|
| Net loss:
|
|
|
|
|
|
|
|
As reported
|
|
$(575,175
|
)
|
|
$(235,513
|
)
|
| |
|
|
|
|
|
|
|
Pro forma
|
|
$(686,864
|
)
|
|
$(361,257
|
)
|
| |
|
|
|
|
|
|
| Loss per share:
|
|
|
|
|
|
|
|
As reported
|
|
$(0.07
|
)
|
|
$(0.05
|
)
|
| |
|
|
|
|
|
|
|
Pro forma
|
|
$(0.09
|
)
|
|
$(0.08
|
)
|
| |
|
|
|
|
|
|
</R>
The
per share weighted average fair value of stock options granted
during 1998 and 1999 was $0.50 and $0.75, respectively, on the
date of grant, using the minimum value option-pricing model with
the following weighted average assumptions used: no expected
dividend yield, risk free interest rate of 7%, and expected life
of ten years.
(5) Commitments and
Contingencies
(a) Operating Leases
<R>
The Company leases its facilities under
various operating leases expiring in 2002. Such leases include
provisions that may require the Company to pay its proportionate
share of operating costs, which exceed specific thresholds. Rent
expense for the years ended December 31, 1996, 1997 and 1998 was
$144,499, $203,511 and $576,509, respectively and $62,758 and
$139,981 for the three-months ended March 31, 1998 and 1999,
respectively. Other income in 1998 consists primarily of a
payment received by the Company in connection with the early
termination of its existing office lease.
</R>
BREAKAWAY SOLUTIONS, INC.
<R>
Notes to Financial Statements
—(Continued)
</R>
(b) Capital Leases
<R>
The Company leases certain of its computer and
office equipment under capital leases. Substantially all of such
leases are for two years, with annual interest at rates ranging
from 5.4% to 15.68%. The leased equipment secures all leases.
</R>
<R>
The following is a schedule of future minimum
rental payments required under the above leases as of December
31, 1998:
</R>
<R>
| |
|
Operating
leases
|
|
Capital
leases
|
| 1999
|
|
$
770,762
|
|
$168,253
|
|
| 2000
|
|
702,665
|
|
72,118
|
|
| 2001
|
|
720,518
|
|
—
|
|
| 2002
|
|
488,280
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
$2,682,225
|
|
240,371
|
|
| |
|
|
| Less: amount
representing interest
|
|
|
|
(24,940
|
)
|
|
|
|
|
|
Net present
value of minimum lease payments
|
|
|
|
215,431
|
|
| Less: current
portion of capital lease obligations
|
|
|
|
(148,391
|
)
|
|
|
|
|
|
Capital lease
obligations, net of current portion
|
|
|
|
$
67,040
|
|
|
|
|
|
</R>
(6) Line of Credit
<R>
The Company had a $750,000 bank revolving line
of credit (increased to $1,300,000 in February 1999) at prime
plus
1
/
2
% (8.25% at
December 31, 1998) which terminated in 1999. At December 31,
1997 and 1998, the Company borrowed $0 and $425,743,
respectively under this line of credit.
</R>
(7) Significant
Customers
<R>
The following table summarizes revenues from
major customers (revenues in excess of 10% for the year) as a
percentage of total revenues:
</R>
<R>
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
Years Ended December 31,
|
|
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
—
|
|
|
19
|
%
|
|
27
|
%
|
|
30
|
%
|
|
26
|
%
|
| Customer B
|
|
13
|
%
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer C
|
|
18
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer D
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
| Customer G
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
</R>
(8) Deferred
Compensation Plan
The
Company sponsors a qualified 401(k) deferred compensation plan
(the “Plan”), which covers substantially all of its
employees. Participants are permitted, in accordance with the
provisions of Section
401(k) of the Internal Revenue Code, to contribute up to 15% of
their earnings into the Plan. The Company may make matching
contributions at its discretion. The Company elected not to
contribute to the Plan for the years ended December 31, 1996,
1997 and 1998.
(9) Taxes (Unaudited)
<R>
As discussed in note 2, effective January 1,
1999, the Company terminated its S Corporation election and will
be subject to corporate-level federal and certain state income
taxes. Upon termination of the S Corporation status, deferred
income taxes are recorded for the tax effect of cumulative
temporary differences between the financial reporting and tax
bases of certain assets and liabilities, primarily deferred
revenue that must be recognized currently for tax purposes,
accrued expenses that are not currently deductible, cumulative
tax depreciation and financial reporting allowances, and the
impact of the conversion from an S Corporation to a C
Corporation.
</R>
<R>
Pro forma income tax expense (benefit),
assuming the Company had been a C Corporation and applying the
tax laws in effect during the periods presented, for each of the
three years in the period ended December 31, 1998 would have
been as follows:
</R>
<R>
| |
|
Years Ended December 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
| Federal tax
|
|
$210,259
|
|
$365,042
|
|
$(195,560
|
)
|
| State taxes,
net of federal
|
|
37,105
|
|
64,418
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
$247,364
|
|
$429,460
|
|
$(195,560
|
)
|
| |
|
|
|
|
|
|
|
</R>
<R>
The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes that, after considering all the available objective
evidence, it is more likely than not that these assets will not
be realized.
</R>
<R>
(10)
Operating Segments
</R>
<R>
Historically, the Company has operated in a
single segment. With the acquisition of Applica Corporation, the
Company expanded its operations to include a second segment,
application hosting. To date, Applica Corporation, a
development-stage company, has generated no revenues. Total
assets relating to the application hosting business of Applica
Corporation are $1,903,567 as of March 31, 1999.
</R>
<R>
(11)
Subsequent Events
</R>
(a) Series A Convertible Preferred Stock Financing
<R>
In January 1999, the Company issued 5,853,000
shares of Series A Convertible Preferred Stock, $.0001 par
value, for $1.41667 per share (see note 4a).
</R>
<R>
(b) Litigation
</R>
<R>
On March 2, 1999 the Company and its Chief
Executive Officer (“CEO”) became parties to a civil
action filed by Cambridge Technology Partners, Inc. (“CTP
”). The suit alleges violation of employment and severance
agreements by the CEO who is a former CTP employee. CTP is
seeking monetary damages against the Company for interference
with the former employee’s contractual relations with CTP.
Management of the Company believes that the suit is without
merit and intends to vigorously defend against the action. In
the
opinion of management, the amount of ultimate liability with
respect to this action will not materially affect the financial
position or results of operations of the Company.
</R>
<R>
(c) Acquisitions
</R>
<R>
Subsequent to December 31, 1998, the Company
entered into the following acquisitions, which will be accounted
for under the purchase method of accounting:
</R>
<R>
|
On March 25,
1999, the Company entered into an agreement to acquire all the
outstanding stock of Applica Corporation, a provider of
application hosting services. The purchase price was comprised
of 904,624 shares of Common Stock.
|
</R>
<R>
|
On May 17,
1999, the Company entered into an agreement to acquire all the
outstanding stock of WPL Laboratories, Inc., a provider of
advanced software development services. The purchase price was
comprised of: $5 million in cash, 1,705,175 shares of Common
Stock and the assumption of existing options to purchase
393,506 shares of Common Stock at an exercise price of $2.3824
per share. In connection with the stock issuance, the Company
provided approximately $1,200,000 in loans to stockholders.
The loans, which bear interest at prime plus 1%, are due at
the earlier of the sale of stock or four years.
|
</R>
<R>
</R>
<R>
|
On June 10,
1999, the Company entered into an agreement to acquire all the
outstanding stock of Web Yes, Inc., a provider of web hosting
services, for 571,135 shares of Common Stock.
|
</R>
<R>
(d) Related Party Advances
</R>
<R>
In May 1999, Internet Capital Group, Inc.,
holder of the Company’s Series A Convertible Preferred
Stock, provided $4,000,000 in advances which were converted into
equity on June 30, 1999.
</R>
<R>
(e) Series B Convertible
Preferred Stock
</R>
<R>
On June 30, 1999, the Company issued
approximately 3,000,000 shares of Series B Convertible Preferred
Stock, $.0001 par value, for $6.50 per share. The Series B
Convertible Preferred Stock is entitled to receive dividends at
a rate of $.1136 per share as and if declared. The Series B
Convertible Preferred Stock is voting and is convertible into
shares of common stock on a share-per-share basis, subject to
certain adjustments. In the event of any liquidation,
dissolution or winding up of the Company, the Series B
Convertible Preferred Stock has a liquidation preference of
$6.50 per share. The Series B Convertible Preferred Stock is
convertible into Common Stock immediately at the option of the
holder, and automatically converts into common stock upon the
completion of a qualifying initial public offering.
</R>
<R></R>
<R></R>
<R></R>
<R></R>
<R>
Report of Independent Accountants
</R>
<R>
To the Board of Directors and
Stockholders of
</R>
CommerceQuest, Inc. (formerly
MessageQuest, Inc.)
<R>
In our opinion, the accompanying balance
sheets and the related statements of income, of changes in
stockholders’ (deficit) equity and of cash flows present
fairly, in all material respects, the financial position of
CommerceQuest, Inc. at December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company’s
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
</R>
<R>
PricewaterhouseCoopers LLP
</R>
Tampa, Florida
February 26, 1999,
<R>
except as to the stock split
described in Note 11 and the information included in Note 13,
</R> <R>
for which the
dates are March 10, 1999 and June 1, 1999, respectively
</R>
<R></R>
<R>
</R>
<R>
Balance Sheets
</R>
<R>
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December
31,
1997
|
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
| Current
assets:
|
|
Cash and cash
equivalents
|
|
$709,803
|
|
$1,807,369
|
|
|
$2,234,279
|
|
Accounts
receivable, net of allowance of $48,000 at December
31, 1997 and 1998 and March 31,
1999
|
|
3,639,098
|
|
3,678,627
|
|
|
2,480,205
|
|
|
Unbilled
accounts receivable
|
|
647,206
|
|
2,465,292
|
|
|
864,375
|
|
|
Other current
assets
|
|
48,744
|
|
234,505
|
|
|
279,058
|
|
| |
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
5,044,851
|
|
8,185,793
|
|
|
5,857,917
|
|
| Property and
equipment, net
|
|
781,318
|
|
3,725,818
|
|
|
3,797,876
|
|
| Other assets
|
|
15,780
|
|
363,846
|
|
|
436,511
|
|
| |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$5,841,949
|
|
$12,275,457
|
|
|
$10,092,304
|
|
| |
|
|
|
|
|
|
|
|
| Liabilities
and Stockholders’ (Deficit) Equity
|
| Current
liabilities:
|
|
Accounts
payable and accrued expenses
|
|
$2,927,494
|
|
$5,102,468
|
|
|
$2,169,170
|
|
|
Deferred
revenue
|
|
493,674
|
|
1,013,760
|
|
|
3,017,127
|
|
|
Current
portion of long-term debt
|
|
123,379
|
|
169,402
|
|
|
173,652
|
|
| |
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
3,544,547
|
|
6,285,630
|
|
|
5,359,949
|
|
|
Other
liabilities
|
|
—
|
|
231,518
|
|
|
417,929
|
|
|
Revolving
lines of credit
|
|
—
|
|
233,744
|
|
|
932
|
|
|
Long-term debt
|
|
386,578
|
|
157,771
|
|
|
112,732
|
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
3,931,125
|
|
6,908,663
|
|
|
5,891,542
|
|
| |
|
|
|
|
|
|
|
|
|
Convertible
subordinated debentures
|
|
—
|
|
10,800,000
|
|
|
10,800,000
|
|
| |
|
|
|
|
|
|
|
|
| |
| |
| Commitments
and contingencies (Note 10)
|
| |
| Stockholders
’ (deficit) equity:
|
Common stock;
$.002 par value, 40,000,000 shares authorized,
25,000,000 shares issued
|
|
50,000
|
|
50,000
|
|
|
50,000
|
|
|
Additional
paid-in capital
|
|
431,700
|
|
431,700
|
|
|
431,700
|
|
|
Retained
earnings
|
|
1,429,124
|
|
1,385,059
|
|
|
219,027
|
|
| |
|
|
|
|
|
|
|
|
| |
|
1,910,824
|
|
1,866,759
|
|
|
700,727
|
|
|
Less treasury
stock of 12,725,420 shares, at cost
|
|
0
|
|
(7,299,965
|
)
|
|
(7,299,965
|
)
|
| |
|
|
|
|
|
|
|
|
|
Total
stockholders’ (deficit) equity
|
|
1,910,824
|
|
(5,433,206
|
)
|
|
(6,599,238
|
)
|
| |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$5,841,949
|
|
$12,275,457
|
|
|
$10,092,304
|
|
| |
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
<R>
</R>
<R>
Statements of Income
</R>
<R>
| |
|
|
|
|
|
|
|
(Unaudited)
|
| |
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues:
|
|
Licensed
products
|
|
$4,226,208
|
|
|
$5,000,698
|
|
|
$
4,507,934
|
|
|
$527,078
|
|
|
$
682,498
|
|
|
Professional
services
|
|
5,042,263
|
|
|
5,529,498
|
|
|
12,561,392
|
|
|
2,413,154
|
|
|
3,234,971
|
|
|
Reselling
|
|
9,184,437
|
|
|
13,680,505
|
|
|
14,029,063
|
|
|
1,785,145
|
|
|
770,624
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
18,452,908
|
|
|
24,210,701
|
|
|
31,098,389
|
|
|
4,725,377
|
|
|
4,688,093
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
revenues:
|
|
Technical
support
|
|
—
|
|
|
150,954
|
|
|
500,653
|
|
|
60,702
|
|
|
96,733
|
|
|
Services
|
|
3,191,054
|
|
|
3,817,452
|
|
|
8,094,721
|
|
|
1,561,174
|
|
|
2,048,659
|
|
|
Reselling
|
|
7,957,255
|
|
|
11,385,342
|
|
|
11,184,289
|
|
|
1,438,925
|
|
|
562,097
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
11,148,309
|
|
|
15,353,748
|
|
|
19,779,663
|
|
|
3,060,801
|
|
|
2,707,489
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin
|
|
7,304,599
|
|
|
8,856,953
|
|
|
11,318,726
|
|
|
1,664,576
|
|
|
1,980,604
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Sales and
marketing
|
|
848,681
|
|
|
1,388,530
|
|
|
2,802,482
|
|
|
322,312
|
|
|
1,329,696
|
|
|
Product
development
|
|
1,542,867
|
|
|
2,540,529
|
|
|
2,146,653
|
|
|
354,620
|
|
|
462,488
|
|
|
General and
administrative
|
|
2,932,577
|
|
|
3,003,253
|
|
|
3,964,803
|
|
|
743,730
|
|
|
1,172,845
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
5,324,125
|
|
|
6,932,312
|
|
|
8,913,938
|
|
|
1,420,662
|
|
|
2,965,029
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income
(loss) from operations
|
|
1,980,474
|
|
|
1,924,641
|
|
|
2,404,788
|
|
|
243,914
|
|
|
(984,425
|
)
|
| Other income
(expense):
|
|
Interest
expense
|
|
(26,506
|
)
|
|
(14,513
|
)
|
|
(362,040
|
)
|
|
(8,984
|
)
|
|
(206,194
|
)
|
|
Other income
|
|
11,155
|
|
|
190,283
|
|
|
83,187
|
|
|
4,929
|
|
|
24,587
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss)
|
|
$1,965,123
|
|
|
$2,100,411
|
|
|
$
2,125,935
|
|
|
$239,859
|
|
|
$(1,166,032
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
<R>
</R>
<R>
Statements of Changes in
Stockholders’ (Deficit) Equity
</R> <R>
For the Years
Ended December 31, 1996, 1997 and 1998
</R> <R>
and the Three
Months Ended March 31, 1999 (Unaudited)
</R>
<R>
| |
|
Common Stock
|
|
|
|
Treasury Stock
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Shares
|
|
Amount
|
|
Retained
Earnings
(Deficit)
|
|
Total
|
| Balance,
January 1, 1996
|
|
20,000
|
|
|
$20,000
|
|
|
$1,700
|
|
—
|
|
$—
|
|
|
$(775,810
|
)
|
|
$(754,110
|
)
|
| Stock canceled
|
|
(20,000
|
)
|
|
(20,000
|
)
|
|
20,000
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
| Stock issued
|
|
25,000,000
|
|
|
50,000
|
|
|
410,000
|
|
—
|
|
—
|
|
|
—
|
|
|
460,000
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
1,965,123
|
|
|
1,965,123
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(985,600
|
)
|
|
(985,600
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1996
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
—
|
|
—
|
|
|
203,713
|
|
|
685,413
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
2,100,411
|
|
|
2,100,411
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(875,000
|
)
|
|
(875,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
—
|
|
—
|
|
|
1,429,124
|
|
|
1,910,824
|
|
| Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
2,125,935
|
|
|
2,125,935
|
|
| Dividends
declared
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(2,170,000
|
)
|
|
(2,170,000
|
)
|
| Purchase of
treasury shares
|
|
—
|
|
|
—
|
|
|
—
|
|
12,725,420
|
|
(7,299,965
|
)
|
|
—
|
|
|
(7,299,965
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
25,000,000
|
|
|
50,000
|
|
|
431,700
|
|
12,725,420
|
|
(7,299,965
|
)
|
|
1,385,059
|
|
|
(5,433,206
|
)
|
| Net loss
(Unaudited)
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(1,166,032
|
)
|
|
(1,166,032
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
March 31, 1999 (Unaudited)
|
|
25,000,000
|
|
|
$ 50,000
|
|
|
$431,700
|
|
12,725,420
|
|
$(7,299,965
|
)
|
|
$219,027
|
|
|
$(6,599,238
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
<R>
</R>
<R>
Statements of Cash Flows
</R>
<R>
| |
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
Net income (loss)
|
|
$1,965,123
|
|
|
$2,100,411
|
|
|
$2,125,935
|
|
|
$239,859
|
|
|
($1,166,032
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided
by operating
activities:
|
|
Non-cash compensation
expense
|
|
460,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Depreciation and
amortization
|
|
144,411
|
|
|
323,894
|
|
|
536,454
|
|
|
92,804
|
|
|
177,370
|
|
|
Changes in operating
assets and liabilities:
|
|
Accounts receivable
|
|
(5,475,784
|
)
|
|
2,409,399
|
|
|
(39,529
|
)
|
|
360,672
|
|
|
1,198,422
|
|
|
Unbilled accounts receivable
|
|
—
|
|
|
(623,580
|
)
|
|
(1,818,086
|
)
|
|
(217,862
|
)
|
|
1,600,917
|
|
|
Other receivables
|
|
7,343
|
|
|
3,642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
|
(29,072
|
)
|
|
(30,740
|
)
|
|
(456,083
|
)
|
|
370,230
|
|
|
(117,290
|
)
|
|
Stockholder receivables
|
|
(139,347
|
)
|
|
3,877
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Accounts payable and accrued expenses
|
|
4,754,771
|
|
|
(2,027,734
|
)
|
|
1,902,920
|
|
|
(482,590
|
)
|
|
(2,661,244
|
)
|
|
Deferred revenue
|
|
—
|
|
|
493,674
|
|
|
520,086
|
|
|
71,101
|
|
|
2,003,367
|
|
|
Other liabilities
|
|
—
|
|
|
—
|
|
|
231,518
|
|
|
—
|
|
|
186,411
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
1,687,445
|
|
|
2,652,843
|
|
|
3,003,215
|
|
|
434,214
|
|
|
1,221,921
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
Purchase of property and equipment
|
|
(453,591
|
)
|
|
(641,160
|
)
|
|
(3,208,611
|
)
|
|
(147,972
|
)
|
|
(521,410
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(453,591
|
)
|
|
(641,160
|
)
|
|
(3,208,611
|
)
|
|
(147,972
|
)
|
|
(521,410
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
Proceeds under convertible subordinated debenture
|
|
—
|
|
|
—
|
|
|
5,821,967
|
|
|
—
|
|
|
—
|
|
|
Borrowings under note payable agreements
|
|
138,000
|
|
|
400,000
|
|
|
102,343
|
|
|
—
|
|
|
—
|
|
|
Principal payments on notes payable
|
|
(248,939
|
)
|
|
(28,982
|
)
|
|
(146,188
|
)
|
|
(29,708
|
)
|
|
(40,789
|
)
|
|
Stockholder loans
|
|
531,020
|
|
|
—
|
|
|
729,003
|
|
|
—
|
|
|
—
|
|
|
Payments on stockholder loans
|
|
(1,266,703
|
)
|
|
(85,000
|
)
|
|
(867,942
|
)
|
|
—
|
|
|
—
|
|
|
Borrowings under line of credit
|
|
1,854,000
|
|
|
2,104,000
|
|
|
1,661,126
|
|
|
200,304
|
|
|
903,290
|
|
|
Payments on line of credit
|
|
(2,104,000
|
)
|
|
(2,104,000
|
)
|
|
(1,427,382
|
)
|
|
(200,304
|
)
|
|
(1,136,102
|
)
|
|
Dividends paid
|
|
—
|
|
|
(1,725,130
|
)
|
|
(2,170,000
|
)
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock, at cost
|
|
—
|
|
|
—
|
|
|
(2,399,965
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities
|
|
(1,096,622
|
)
|
|
(1,439,112
|
)
|
|
1,302,962
|
|
|
(29,708
|
)
|
|
(273,601
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase in cash
|
|
137,232
|
|
|
572,571
|
|
|
1,097,566
|
|
|
256,534
|
|
|
426,910
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
137,232
|
|
|
709,803
|
|
|
709,803
|
|
|
1,807,369
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents, end of period
|
|
$137,232
|
|
|
$709,803
|
|
|
$1,807,369
|
|
|
$966,337
|
|
|
$2,234,279
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
Interest paid during the period
|
|
$26,506
|
|
|
$14,513
|
|
|
$130,522
|
|
|
$8,984
|
|
|
$ 19,783
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
See notes 2 and 6
|
</R>
The accompanying notes are an integral
part of these financial statements.
Notes to Financial Statements
1. Organization and
Operations:
<R>
CommerceQuest, Inc. (the “Company,”
formerly MessageQuest) is a solutions provider in the Enterprise
Application Integration and Internet Application Integration
segments of the computer industry. The Company develops software
tools and provides consulting and managed network services based
upon its domain expertise in message oriented middleware. The
Company’s solutions enable its customers to integrate
business information over dissimilar computing platforms and
communication networks. In addition, the Company is a
value-added re-marketer of hardware and software products
manufactured by industry leaders such as IBM, Sun Microsystems
and BMC Software.
</R>
2. Summary of
Significant Accounting Policies:
<R>
Revenue Recognition—The Company
licenses its software products to end users pursuant to
perpetual license agreements. Amounts billed in advance of
installation and pending completion of remaining significant
obligations are deferred. Revenue from software licenses is
recognized upon sale and shipment. Royalty revenue from
licensing agreements with third party distributors is recognized
when earned. For the years ended December 31, 1996 and 1997,
revenue from the sale of software was recognized in accordance
with Statement of Position (“SOP”) 91-1,
Software Revenue Recognition
.
Beginning January 1, 1998, revenue from the sale of software is
recognized in accordance with SOP 97-2,
Software Revenue Recognition
.
SOP 97-2 requires the total contract revenue to be allocated to
the various elements of the contract based upon objective
evidence of the fair values of such elements and allows for only
allocated revenue to be recognized upon completion of those
elements. The effect of the adoption of SOP 97-2 was not
significant to the Company’s results of operations for the
year ended December 31, 1998. Amounts billed in advance of
recognized revenue are deferred. For contracts for professional
services, revenue is recognized as the services are performed.
Revenue from support/maintenance contracts is recognized ratably
over the contract period as the services are performed.
</R>
Unbilled accounts receivable represent revenue on contracts to
be billed in subsequent periods in accordance with the terms of
such contracts, as well as revenue from reselling transactions
for which the customer has yet to be billed.
During 1996, the Company entered into a contract for the sale of
a license for certain message-riented middleware and database
products to BMC Software, Inc. for $5,450,000. The Company
recognized revenues under this contract of approximately
$3,800,000 during 1996. The remaining revenues of approximately
$1,650,000 were recognized during 1997.
Cash and Cash Equivalents—The Company considers all
short-term, highly liquid investments with original maturities
of three months or less to be cash equivalents.
<R>
Product Development Expenses—
Certain costs have been incurred internally in the development
of certain software products. To date, the period between
achieving technological feasibility and the general availability
of such software has been short and software development costs
qualifying for capitalization have been insignificant.
Accordingly, such amounts to date have been expensed as incurred.
</R>
Property and Equipment—Property and equipment are
stated at cost. Additions and major renewals are capitalized.
Repairs and maintenance are charged to expense as incurred. Upon
disposal, the related cost and accumulated depreciation are
removed from the accounts, with the resulting gain or loss
included in income. Depreciation is provided on an accelerated
method over the estimated useful lives of the related assets.
Statement of Cash Flows—During the year ended December
31, 1997, the Company was repaid certain receivables from
stockholders in the amount of $135,470 through a reduction in
dividend payments.
Acquisitions of capital assets of $272,054 were included in
accounts payable and accrued expenses as of December 31, 1998.
Accordingly, these noncash transactions have been excluded from
the accompanying statements of cash flows.
</R>
Use of Estimates—The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<R>
Comprehensive Income—SFAS No. 130,
“Reporting Comprehensive Income,” requires that the
Company report comprehensive income, which includes net income
as well as certain other changes in assets and liabilities
recorded in stockholders’ (deficit) equity in the financial
statements. There were no components of comprehensive income
other than net income for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited).
</R>
<R>
Unaudited Financial Statements—The
financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited; however, in
the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation
of the financial statements for these interim periods have been
included. The results for the three months ended March 31, 1999
are not necessarily indicative of the results to be obtained for
the full fiscal year ending December 31, 1999.
</R>
<R>
Segment Reporting—In 1998, the
Company adopted SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.” SFAS 131 supersedes
SFAS 14, “Financial Reporting for Segments of a Business
Enterprise,” replacing the “industry segment”
approach with the “management” approach. The
management approach designates the internal organization that is
used by management for making operating decisions and assessing
performance as the source of the Company’s reportable
segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. Currently,
there is no additional segment information required to be
disclosed.
</R>
New Accounting Pronouncements—In 1998, the Financial
Accounting Standards Board issued FAS 133, “Accounting for
Derivative Instruments and Hedging,” effective for fiscal
years beginning after June 15, 1999. The new standard requires
that an entity recognize derivatives as either assets or
liabilities in the financial statements, to measure those
instruments at fair value and to reflect the changes in fair
value of those instruments as either components of comprehensive
income or net income, depending on the types of those
instruments. The Company does not use derivatives or other
financial products for speculative purposes. The Company has not
yet determined to what extent the standard will impact its
financial statements.
Reclassifications—Certain items in the 1996 and 1997
financial statements have been reclassified to conform to the
1998 presentation. Such reclassifications had no impact on total
assets, net income, or total cash flows previously reported.
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
3. Concentrations of
Credit Risk:
<R>
Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents and trade receivables.
The Company maintains substantially all of its cash investments
with what it believes to be high credit quality financial
institutions. Sales and accounts receivable to customers that
exceeded 10% of total revenues and total accounts receivable are
as follows:
</R>
<R>
| |
|
Sales
|
|
Accounts Receivable
|
| |
|
|
|
(Unaudited)
|
| |
|
Year Ended
December 31,
|
|
Three Months
Ended
March 31,
|
|
December 31,
|
|
(Unaudited)
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
1997
|
|
1998
|
|
1999
|
| Customer A
|
|
22
|
%
|
|
17
|
%
|
|
—
|
|
|
11
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer B
|
|
32
|
|
|
15
|
|
|
23
|
%
|
|
19
|
|
|
—
|
|
|
26
|
%
|
|
33
|
%
|
|
—
|
|
| Customer C
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer D
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
20
|
%
|
|
—
|
|
|
24
|
|
|
19
|
%
|
| Customer G
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
| Customer H
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
| Customer I
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer J
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer K
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
</R>
4. Property and
Equipment:
Property and equipment consists of the following:
<R>
| |
|
Useful
Lives
|
|
December 31,
|
|
(Unaudited)
March 31,
|
| |
|
|
|
1997
|
|
1998
|
|
1999
|
| Buildings
|
|
39 years
|
|
$—
|
|
|
$2,290,956
|
|
|
$2,466,165
|
|
| Furniture and
equipment
|
|
7 years
|
|
331,902
|
|
|
552,889
|
|
|
578,114
|
|
| Computers
|
|
5 years
|
|
998,424
|
|
|
1,960,863
|
|
|
2,009,785
|
|
| Leasehold
improvements
|
|
7 years
|
|
7,059
|
|
|
13,342
|
|
|
13,342
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337,385
|
|
|
4,818,050
|
|
|
5,067,406
|
|
| Less
accumulated depreciation and amortization
|
|
|
|
(556,067
|
)
|
|
(1,092,232
|
)
|
|
(1,269,530
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$781,318
|
|
|
$3,725,818
|
|
|
$3,797,876
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
Depreciation expense for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited) approximated $144,000,
$324,000, $536,000, $93,000 and $177,000, respectively.
</R>
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
5. Long-Term Debt:
Long-term debt consists of the following:
<R>
| |
|
December 31,
|
|
(Unaudited)
March 31,
1999
|
| |
|
1997
|
|
1998
|
Notes payable,
bearing interest at 9.95%, principal and interest
due in monthly installments;
collateralized by certain fixed
assets
|
|
$371,018
|
|
|
$327,173
|
|
|
$286,384
|
|
Note payable
to stockholder, non-interest bearing, principal
payable in January 1999. Paid in
full during 1998
|
|
138,939
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
509,957
|
|
|
327,173
|
|
|
286,384
|
|
| Less current
portion
|
|
(123,379
|
)
|
|
(169,402
|
)
|
|
(173,652
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$386,578
|
|
|
$157,771
|
|
|
$112,732
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
Maturities of notes payable for the years subsequent to March
31, 1999 (unaudited) are as follows:
| 1999
|
|
$173,652
|
| 2000
|
|
112,732
|
6. Convertible
Subordinated Debentures:
<R>
In September and October 1998, the Company
issued a total of $10,800,000 of 7.00% convertible subordinated
debentures maturing through October 2003. The convertible
subordinated debentures are exchangeable at any time into common
stock of the Company at an exchange price of $2.52 per share,
subject to adjustment. Provisions of the debenture agreements
contain certain covenants, the most restrictive of which limits
the payment of dividends and the creation of additional
indebtedness.
</R>
<R>
In connection with the transaction, $5,300,000
of the proceeds was used to repurchase shares of stock from
certain shareholders. The lender agreed to pay $4,900,000 of
this amount; accordingly, this amount has been reflected as a
non-cash transaction and excluded from the statement of cash
flows for the year ended December 31, 1998. Approximately
$78,000 of the subordinated debenture issue costs were withheld
from the proceeds and have been included in other assets in the
financial statements as of December 31, 1998. Accordingly, this
amount has been reflected as a non-cash transaction and excluded
from the statement of cash flows for the year ended December 31,
1998.
</R>
7. Lines of Credit:
<R>
During 1998, the Company entered into a line
of credit facility with a financial institution in the amount of
$1,000,000 to finance working capital needs. There were no
borrowings under this credit facility at December 31, 1998 and
March 31, 1999. Additionally, during 1998, the Company entered
into a reducing line of credit facility, as defined in the
credit agreement, with an initial available balance of
$1,300,000 to finance the acquisition of the Company’s
headquarters and to provide additional funds for property
improvements. At December 31, 1998 and March 31, 1999
(unaudited) there were $226,850 and $890, respectively, of
borrowings under this credit facility. The credit facilities
mature in ten years and are collateralized by the Company’s
property and equipment. During 1998, the Company also entered
into a reducing line of credit facility, as defined in the
credit agreement, with an initial available balance of $400,000
to provide financing for property
improvements on the Company’s headquarters. The facility is
for seven years and is collateralized by all the assets of the
Company. Interest on the credit lines is payable monthly at a
rate of 2.75% in excess of the 30-day commercial paper rate,
based upon the actual days elapsed over a 360-day year (7.85%
and 7.62% borrowing rates at December 31, 1998 and March 31,
1999 (unaudited), respectively). At December 31, 1998 and March
31, 1999 (unaudited), there were $6,894 and $42, respectively,
of borrowings under this credit facility. There was $2,196,086
and $2,534,525 available under the three facilities at December
31, 1998 and March 31, 1999 (unaudited), respectively. The
weighted-average interest rates under these facilities for the
year ended December 31, 1998 and the three months ended March
31, 1999 (unaudited), were 8.03% and 7.59%, respectively.
</R>
<R>
At December 31, 1997 the Company had a line of
credit agreement with a financial institution for an amount of
$250,000 collateralized by accounts receivable and inventory. At
December 31, 1997, the balance outstanding was $0. During
February 1998, the Company renegotiated the line of credit,
increasing the available credit facility to $500,000. Amounts
drawn under the line of credit bore interest at 1.5 percentage
points above the Bank’s base rate (8.25% borrowing rate at
December 31, 1997). Under the terms of the agreement, the line
of credit was due on demand. This line of credit was terminated
by the Company during 1998.
</R>
8. Fair Value of
Financial Instruments:
<R>
The fair value of short-term financial
instruments, including cash and cash equivalents, accounts
receivable and accounts payable and certain accrued expenses
approximates their carrying amounts in the financial statements
due to the short maturity of such instruments.
</R>
The
carrying amount of the lines of credit issued pursuant to the
Company’s bank credit agreement approximates fair value
because the interest rates change with market interest rates.
The
fair value of the Company’s long-term debt approximates
carrying value based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company
for debt of the same maturities.
The
Company believes that it is not practical to estimate the fair
value of the convertible subordinate debentures with a carrying
value of $10,800,000, as these debentures have numerous unique
features.
9. Income Taxes:
The
stockholders have elected under the provisions of Subchapter S
of the Internal Revenue Code and similar provisions under state
law, to have the Company’s income treated substantially as
if the Company were a partnership, allowing the stockholders to
report the Company’s income on their individual tax
returns. Accordingly, the financial statements reflect no
provision or benefit for federal and state income taxes.
10. Commitments and
Contingencies:
<R>
Operating Leases—The Company
leases office space under operating leases expiring through
August 2001. Rent expense under these leases for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited) approximated $115,000,
$239,000, $357,000, $68,000 and $40,000, respectively.
</R>
COMMERCEQUEST, INC.
Notes to Financial Statements—
(Continued)
<R>
Future basic rental commitments under
noncancelable operating leases at March 31, 1999 (unaudited) are
approximately as follows:
</R>
<R>
| Twelve months
ending March 31:
|
|
|
|
2000
|
|
$121,000
|
|
2001
|
|
75,000
|
|
2002
|
|
15,000
|
| |
|
|
|
Total minimum
payments
|
|
$211,000
|
| |
|
|
</R>
11. Equity:
Stock Compensation—During 1996, the Company issued
common stock as compensation to employees who were previously
covered by a phantom stock agreement. In exchange for the newly
issued shares, the recipients waived all rights and shares
granted them under the phantom stock agreement. The aggregate
compensation earned under the phantom stock plan during 1996
totaled $460,000.
<R>
Stock Split—During January 1997,
October 1998 and on March 10, 1999, the Board of Directors
approved that the Company’s issued and outstanding common
stock, be split on a 5-for-1, 5-for-1, and 2-for-1 basis,
respectively. All share amounts have been retroactively adjusted
in the accompanying financial statements to reflect these stock
splits.
</R>
Stock Option Plan—Effective January 1, 1997, the Board
of Directors approved the adoption of a stock option plan under
which qualified and non-qualified stock options may be granted
to employees, directors, and consultants to the Company. The
Board of Directors also authorized 4,138,750 shares to be
reserved for issuance pursuant to the terms of the plan. The
Company has granted qualified and non-qualified stock options to
certain employees with vesting periods of up to 4 years. These
options give the employee the right to purchase common stock at
an exercise price estimated by management to be at least equal
to the fair value of the stock at the date of the option’s
grant. For all options granted, the term during which employees
may exercise the option was initially 10 years.
The
Company applies APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related Interpretations in
accounting for stock options. Accordingly, no compensation cost
has been recognized in connection with the issuance of these
options. Had compensation cost for the Company’s stock
option plan been determined based on the fair value at the grant
dates for the awards under the plan consistent with the method
of SFAS Statement 123, “Accounting for Stock Based
Compensation,” the Company’s net income would have
been reduced to the adjusted amounts indicated below:
<R>
| |
|
Year Ended December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Pro forma net
income:
|
|
As reported
|
|
$1,965,123
|
|
$2,100,411
|
|
$2,125,935
|
|
$239,859
|
|
$(1,166,032)
|
|
As adjusted
(unaudited)
|
|
1,965,123
|
|
1,152,116
|
|
1,356,486
|
|
133,478
|
|
(1,166,032)
|
</R>
<R>
The estimated per share fair value of options
granted for the years ending December 31, 1997 and 1998 and the
three months ended March 31, 1998 (unaudited) was $0.46, $0.39
and $0.45 respectively. There were no options granted during the
three months ended March 31, 1999. The fair value of each option
granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions for grants in the years ended December 31,
1997 and 1998 and the three months ended March 31, 1998
(unaudited), respectively: no dividend yield for each year
presented; risk-free interest rates of 5.74%, 4.65% and 5.65%,
respectively; expected lives of the options prior to exercise of
8.5 years for each year presented, and volatility of the stock
price was omitted from the pricing model as permitted by SFAS
No. 123. A summary of the status of the Company’s stock
option plan and changes during the years and periods ended on
those dates, is presented below:
</R>
<R>
| |
|
|
|
(Unaudited)
|
| |
|
Year Ended December 31,
|
|
Three Months Ended
March 31, 1999
|
| |
|
1997
|
|
1998
|
Fixed
Options
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
Outstanding at
beginning of
period
|
|
—
|
|
$0.00
|
|
1,957,000
|
|
$1.20
|
|
3,530,000
|
|
$1.21
|
|
Granted
|
|
2,069,500
|
|
$1.20
|
|
1,982,500
|
|
$1.22
|
|
—
|
|
$0.00
|
|
Exercised
|
|
—
|
|
$0.00
|
|
—
|
|
$0.00
|
|
—
|
|
$0.00
|
|
Canceled
|
|
(112,500)
|
|
$1.20
|
|
(409,500)
|
|
$1.20
|
|
—
|
|
$0.00
|
| |
|
|
|
|
|
|
|
|
|
|
| Outstanding at
end of period
|
|
1,957,000
|
|
|
|
3,530,000
|
|
|
|
3,530,000
|
|
|
Options
exercisable at end of
period
|
|
—
|
|
|
|
551,750
|
|
|
|
1,262,750
|
|
|
</R>
The
following table summarizes certain information about stock
options at March 31, 1999 (unaudited):
<R>
Options Outstanding
|
|
Options Exercisable
|
Number
Outstanding
at 3/31/99
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Exercise
Prices
|
|
Number
Exercisable
at 3/31/99
|
|
Exercise
Prices
|
| 3,480,000
|
|
8.55 years
|
|
$1.20
|
|
1,262,750
|
|
$1.20
|
| 50,000
|
|
9.44 years
|
|
$
1.80
|
|
—
|
|
$
0.00
|
</R>
<R>
As of March 31, 1999 (unaudited), options to
purchase 608,750 shares of common stock were available for
future grants.
</R>
12. Employee Benefit
and Incentive Plans:
The
Company sponsors a tax deferred 401(k) defined contribution
savings and profit sharing plan which covers substantially all
employees who meet minimum service requirements. Employees may
defer up to 15% of their annual compensation, which the Company
will match at a rate of 20% of the employee’s contribution
on the first 6% of his or her annual salary. In addition, the
plan allows for annual profit sharing contributions at the
discretion of the Board of Directors.
<R>
Company matching contributions to the 401(k)
plan for the years ended December 31, 1996, 1997 and 1998 and
for the three months ended March 31, 1998 and 1999 (unaudited)
totaled approximately $15,000, $28,000, $52,000, $11,000 and
$23,000, respectively. To date, the Company has not made any
discretionary profit sharing contributions to the 401(k) plan.
</R>
13. Subsequent Event:
On
June 1, 1999, the Company changed its name to CommerceQuest,
Inc. and amended and restated its certificate of incorporation
to increase the number of authorized shares of common stock to
40,000,000.
Report of Independent Auditors
Board of Directors and Stockholders of
ComputerJobs.com, Inc.
We
have audited the accompanying balance sheets of
ComputerJobs.com, Inc. (formerly ComputerJobs Store, Inc.) as of
December 31, 1997 and 1998, and the related statements of
income, changes in stockholders’ equity (deficit), and cash
flows for the period from January 16, 1996 (inception) through
December 31, 1996 and for the years ended December 31, 1997 and
1998. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
ComputerJobs.com, Inc. at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the period from
January 16, 1996 (inception) through December 31, 1996 and for
the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
Atlanta, Georgia
March 11, 1999, except Note 1 as to which the date
is April 1, 1999
Balance Sheets
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Assets
|
|
|
|
|
|
|
| Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
315,213
|
|
|
$
9,385,180
|
|
Trade accounts receivable, net of allowance
for doubtful accounts of $4,000
and
$20,000 at December 31, 1997 and 1998, respectively
|
|
136,528
|
|
|
315,081
|
|
|
Unbilled trade accounts receivable
|
|
17,000
|
|
|
62,990
|
|
|
Prepaid expenses
|
|
—
|
|
|
1,197
|
|
| Loan
receivable from stockholder
|
|
1,086
|
|
|
—
|
|
| |
|
|
|
|
|
|
| Total current
assets
|
|
469,827
|
|
|
9,764,448
|
|
| Property and
equipment:
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
15,291
|
|
|
35,728
|
|
|
Computer and office equipment
|
|
73,721
|
|
|
189,288
|
|
|
Accumulated depreciation
|
|
(21,159
|
)
|
|
(64,249
|
)
|
| |
|
|
|
|
|
|
| Net property
and equipment
|
|
67,853
|
|
|
160,767
|
|
| Other assets
|
|
2,000
|
|
|
99,721
|
|
| |
|
|
|
|
|
|
| Total assets
|
|
$539,680
|
|
|
$10,024,936
|
|
| |
|
|
|
|
|
|
| |
| Liabilities
and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
| Current
liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$47,323
|
|
|
$136,209
|
|
|
Deferred income taxes payable
|
|
—
|
|
|
89,261
|
|
|
Note payable to stockholders
|
|
—
|
|
|
1,000,000
|
|
|
Distribution payable to stockholders
|
|
—
|
|
|
346,817
|
|
|
Current portion of notes payable
|
|
6,279
|
|
|
—
|
|
|
Deferred revenue
|
|
16,271
|
|
|
27,996
|
|
| |
|
|
|
|
|
|
| Total current
liabilities
|
|
69,873
|
|
|
1,600,283
|
|
| Notes payable,
less current portion
|
|
6,354
|
|
|
—
|
|
Series A
Preferred Stock, no par value — ($2 per share redemption
value;
minimum liquidation value of
$10,000,000 plus accrued and unpaid dividends
plus a portion of remaining
assets, as defined), convertible to Class 2
common stock, 5,000,000 shares
authorized, issued and outstanding
|
|
—
|
|
|
9,986,126
|
|
| Stockholders
’ equity:
|
|
|
|
|
|
|
Class 1 common stock, no par value
— 5,500,000 shares authorized,
5,500,000 shares issued and outstanding
|
|
10,510
|
|
|
10,510
|
|
Class 2 common stock, no par value
— 14,000,000 shares authorized, no
shares issued or outstanding
|
|
—
|
|
|
—
|
|
|
Retained earnings (deficit)
|
|
452,943
|
|
|
(1,571,983
|
)
|
| |
|
|
|
|
|
|
| Total
stockholders’ equity (deficit)
|
|
463,453
|
|
|
(1,561,473
|
)
|
| |
|
|
|
|
|
|
| Total
liabilities and stockholders’ equity (deficit)
|
|
$539,680
|
|
|
$10,024,936
|
|
| |
|
|
|
|
|
|
See accompanying notes.
Statements of Income
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year Ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Revenue
|
|
$377,163
|
|
|
$1,504,742
|
|
|
$4,431,060
|
|
| Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
38,477
|
|
|
65,178
|
|
|
469,519
|
|
|
Sales and marketing
|
|
38,509
|
|
|
198,586
|
|
|
1,893,589
|
|
|
General and administrative
|
|
189,126
|
|
|
776,572
|
|
|
1,121,918
|
|
|
Depreciation
|
|
3,617
|
|
|
17,542
|
|
|
45,383
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
269,729
|
|
|
1,057,878
|
|
|
3,530,409
|
|
| Operating
income
|
|
107,434
|
|
|
446,864
|
|
|
900,651
|
|
| Other income
(deductions):
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(982
|
)
|
|
(1,646
|
)
|
|
(12,537
|
)
|
|
Interest income
|
|
401
|
|
|
8,258
|
|
|
53,610
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(581
|
)
|
|
6,612
|
|
|
41,073
|
|
| |
|
|
|
|
|
|
|
|
|
| Income before
income taxes
|
|
106,853
|
|
|
453,476
|
|
|
941,724
|
|
| Income tax
expense
|
|
—
|
|
|
—
|
|
|
89,261
|
|
| |
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
852,463
|
|
| |
|
|
|
|
|
|
|
|
|
| Supplemental
unaudited pro forma information:
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, as above
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
941,724
|
|
|
Pro forma provision for income taxes
|
|
(40,604
|
)
|
|
(172,320
|
)
|
|
(357,853
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
66,249
|
|
|
$
281,156
|
|
|
$
583,871
|
|
| |
|
|
|
|
|
|
|
|
|
|
Basic pro forma earnings per common share
|
|
$0.01
|
|
|
$0.05
|
|
|
$0.09
|
|
|
Average outstanding common shares
|
|
5,500,000
|
|
|
5,500,000
|
|
|
5,500,000
|
|
See accompanying notes.
Statements of Changes in Stockholders’
Equity (Deficit)
| |
|
Class 1
Common
Stock
|
|
Class 2
Common
Stock
|
|
Retained
Earnings
(deficit)
|
|
Total
Shareholders’
Equity (deficit)
|
| Balance at
January 16, 1996 (inception)
|
|
$10,510
|
|
—
|
|
$
—
|
|
|
$
10,510
|
|
|
Net income
|
|
—
|
|
—
|
|
106,853
|
|
|
106,853
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(33,879
|
)
|
|
(33,879
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1996
|
|
10,510
|
|
—
|
|
72,974
|
|
|
83,484
|
|
|
Net income
|
|
—
|
|
—
|
|
453,476
|
|
|
453,476
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(73,507
|
)
|
|
(73,507
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1997
|
|
10,510
|
|
—
|
|
452,943
|
|
|
463,453
|
|
|
Net income
|
|
—
|
|
—
|
|
852,463
|
|
|
852,463
|
|
|
Distribution
to stockholders
|
|
—
|
|
—
|
|
(2,796,817
|
)
|
|
(2,796,817
|
)
|
Accretion and
dividends on Series A
Preferred Stock
|
|
—
|
|
—
|
|
(80,572
|
)
|
|
(80,572
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance at
December, 31 1998
|
|
$
10,510
|
|
—
|
|
$(1,571,983
|
)
|
|
$(1,561,473
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Statements of Cash Flows
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year Ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Operating
activities
|
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
106,853
|
|
|
$
453,476
|
|
|
$
852,463
|
|
Adjustments to
reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
3,617
|
|
|
17,542
|
|
|
45,383
|
|
|
Provision for
deferred taxes
|
|
—
|
|
|
—
|
|
|
89,261
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
(30,880
|
)
|
|
(105,648
|
)
|
|
(178,553
|
)
|
|
Unbilled trade accounts receivable
|
|
—
|
|
|
(17,000
|
)
|
|
(45,990
|
)
|
|
Loan receivable from stockholder
|
|
—
|
|
|
(1,086
|
)
|
|
1,086
|
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
(2,000
|
)
|
|
(98,918
|
)
|
|
Accounts payable and accrued expenses
|
|
12,394
|
|
|
34,930
|
|
|
88,886
|
|
|
Deferred revenue
|
|
21,903
|
|
|
(5,632
|
)
|
|
11,725
|
|
| |
|
|
|
|
|
|
|
|
|
| Net cash
provided by operating activities
|
|
113,887
|
|
|
374,582
|
|
|
765,343
|
|
|
|
|
| Investing
Activities
|
|
|
|
|
|
|
|
|
|
| Purchase of
property and equipment
|
|
(23,980
|
)
|
|
(65,033
|
)
|
|
(138,297
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Net cash used
in investing activities
|
|
(23,980
|
)
|
|
(65,033
|
)
|
|
(138,297
|
)
|
|
|
|
| Financing
Activities
|
|
|
|
|
|
|
|
|
|
| Sale of Series
A Preferred Stock, less expenses
|
|
—
|
|
|
—
|
|
|
9,905,554
|
|
| Distributions
to stockholders
|
|
(33,879
|
)
|
|
(73,507
|
)
|
|
(1,450,000
|
)
|
| Proceeds from
notes payable
|
|
21,100
|
|
|
—
|
|
|
—
|
|
| Repayment of
notes payable
|
|
(2,817
|
)
|
|
(5,650
|
)
|
|
(12,633
|
)
|
| Sales of
common stock
|
|
10,510
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Net cash
provided (used) by financing activities
|
|
(5,086
|
)
|
|
(79,157
|
)
|
|
8,442,921
|
|
| |
|
|
|
|
|
|
|
|
|
| Net increase
in cash and cash equivalents
|
|
84,821
|
|
|
230,392
|
|
|
9,069,967
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
84,821
|
|
|
315,213
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, end of year
|
|
$
84,821
|
|
|
$
315,213
|
|
|
$9,385,180
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
Notes to Financial Statements
December 31, 1998
1. Description of the
Business
The
Company is an Internet-based interactive technology company that
provides an employment Web site for information technology (IT)
professionals. The Company’s web site enables recruiters
and employers to post job opportunities and search for
employment opportunities based on an array of search criteria.
The Company also offers banner advertising and job reposting
services for companies wanting access to IT professionals. The
Company operates primarily on a regional basis and at December
31, 1998, served five regions in the United States: Atlanta, the
Carolinas, Chicago, Florida, and Texas.
On
April 1, 1999 the Company changed its name from ComputerJobs
Store, Inc. to ComputerJobs.com, Inc.
2. Summary of
Significant Accounting Policies
|
Cash and
Cash Equivalents
|
The
Company considers short-term investments with original maturity
dates of 90 days or less at the date of purchase to be cash
equivalents.
|
Concentration of Credit Risk
|
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
equivalents and accounts receivable. Cash equivalents are held
primarily with one financial institution. The Company performs
periodic evaluations of the relative credit standing of this
financial institution. Accounts receivable are unsecured and the
Company is at risk to the extent such amounts become
uncollectible.
The
Company performs periodic credit evaluations of its customers
’ financial condition and generally does not require
collateral. Receivables are generally due within 30 days. Credit
losses have been within management’s expectations.
Property and equipment are stated at cost. The Company provides
for depreciation computed on a straight-line basis over the
estimated useful lives of the related assets which range from 3
to 5 years.
If
facts and circumstances indicate that the property and equipment
or other assets may be impaired, an evaluation of continuing
value would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with these
assets would be compared to their carrying amount to determine
if a write down to fair market value or discounted cash flow
value is required.
The
Company recognizes advertising and service revenue as earned
over the service period. Unbilled trade accounts receivables are
recorded for advertising revenue which is not billed to the
customer until the month following the month in which it is
earned. Advance payments received by the Company are deferred
and credited to operations on the straight-line basis over the
life of the agreement.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
Advertising costs are expensed in the period in which they are
incurred. The Company incurred $11,583, $178,870 and $1,528,590
in advertising costs for the period from January 16, 1996
(inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998, respectively.
The
Company elected to be taxed under the provision of Subchapter S
of the Internal Revenue Code for the period from January 16,
1996 (inception) through November 25, 1998. Under these
provisions, the income of the Company was reported by the stock
or shareholders on their individual income tax returns. As such,
the accompanying financial statements do not include a provision
for income taxes for the period from January 16, 1996
(inception) to November 25, 1998.
In
connection with the Company’s amended and restated articles
of incorporation, the Company terminated its tax status as a
Subchapter S corporation. Effective November 25, 1998, the
Company is taxed as a subchapter C corporation. The deferred tax
effects of the change in tax status of approximately $54,000 are
included in income at the date the change in tax status
occurred. Supplemental unaudited pro forma information related
to net income and earnings per share is presented as if the
Company had been taxed as a subchapter C corporation for all
periods presented.
Income taxes for the period November 25, 1998 through December
31, 1998 have been provided using the liability method in
accordance with FASB Statement 109, Accounting for Income Taxes.
Under the liability method, the Company recognizes deferred tax
liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or
tax returns. Using the enacted tax rates in effect for the year
in which the differences are expected to reverse, deferred tax
liabilities and assets are determined based on the differences
between the book basis for financial reporting and the tax basis
of an asset or liability.
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
During 1998, the Company recorded a distribution payable to the
stockholders of $346,817, a note payable to stockholders for
$1,000,000 and accrued dividends of $79,000 on the Series A
Preferred Stock which are non-cash financing activities.
Certain prior year balances have been reclassified to conform
with the current presentation.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
3. Notes Payable
Notes payable consist of the following:
| |
|
December 31,
|
| |
|
1997
|
|
1998
|
| Note payable;
interest at prime rate plus 2.0% (10.5% at December 31, 1997)
|
|
$5,052
|
|
$ —
|
| Note payable;
interest at prime rate plus 2.0% (10.25% at December 31, 1997)
|
|
7,581
|
|
—
|
| |
|
|
|
|
|
|
|
12,633
|
|
—
|
| Less amounts
due within one year
|
|
6,279
|
|
—
|
| |
|
|
|
|
|
|
|
$6,354
|
|
$
—
|
| |
|
|
|
|
The
notes payables were secured by the property and equipment of the
Company and guaranteed by stockholders of the Company.
Interest paid for the period from January 16, 1996 (inception)
through December 31, 1996 and during the years ended December
31, 1997 and 1998 totaled $982, $1,646 and $1,030, respectively.
At
December 31, 1996 and 1997, the Company had an unused line of
credit of $50,000, for general working capital purposes. The
line of credit expired on April 5, 1998 and was not renewed.
4. Income Taxes
Income tax expense (benefit) consists of the following for the
period from November 25, 1998 through December 31, 1998:
| |
|
Current
|
|
Deferred
|
|
Total
|
| Federal
|
|
$(7,267
|
)
|
|
$86,665
|
|
$79,398
|
| State
|
|
(481
|
)
|
|
10,344
|
|
9,863
|
| |
|
|
|
|
|
|
|
|
|
|
$(7,748
|
)
|
|
$97,009
|
|
$89,261
|
| |
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company’s deferred tax
assets and liabilities as of December 31, 1998 are as follows:
Deferred income tax assets (liabilities):
| Property and
equipment
|
|
$17,420
|
|
| Net operating
loss carryforwards
|
|
7,748
|
|
| Accrual to
cash adjustment
|
|
(114,429
|
)
|
| |
|
|
|
| Net deferred
income taxes
|
|
$(89,261
|
)
|
| |
|
|
|
The
Company uses the cash basis for its calculation of income tax
expense in accordance with internal revenue code 448(b)(3). For
income tax purposes, income is generally reported in the period
that cash is actually received and expenses are generally
reported in the period the payment is actually made.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
Pro forma income tax expense differed from the amounts computed
by applying the statutory federal rate of 34% as a result of the
following:
| |
|
Period from
January 16,
1996 through
December 31,
1996
|
|
Year ended December 31,
|
| |
|
|
1997
|
|
1998
|
| Computed using
a 34% tax rate
|
|
$36,330
|
|
$154,182
|
|
$320,186
|
| State income
taxes, net of federal tax
|
|
4,274
|
|
18,138
|
|
37,667
|
| |
|
|
|
|
|
|
|
|
|
$40,604
|
|
$172,320
|
|
$357,853
|
| |
|
|
|
|
|
|
5. Stockholders’
Equity
On
November 25, 1998, the Company amended and restated its articles
of incorporation. Pursuant to this amendment and restatement,
the Company converted its original 1,000 shares of issued common
stock into 5,500,000 shares of Class 1 common stock. The common
stock authorized, outstanding and issued, as of December 31,
1996 and 1997, has been adjusted to reflect this
recapitalization. The Company also authorized 14,000,000 shares
of Class 2 common stock and 5,000,000 shares of Series A
Preferred Stock. The Company has reserved 2,000,000 shares of
Class 2 common stock for issuance in connection with its stock
option plan.
Each
share of Class 1 common stock is convertible to one share of
Class 2 common stock at the option of the holder. Class 1 common
stock automatically converts to Class 2 common stock upon a
qualifying initial public offering (IPO) of the Company.
The
rights and privileges of Class 1 and Class 2 stockholders are
equal except that Class 1 stockholders are entitled to receive
certain preferences over Class 2 stockholders in the event of
the Company’s liquidation, dissolution or sale or merger.
In
November 1998, the Company sold 5,000,000 shares of Series A
Preferred Stock for an aggregate sales price of $10,000,000. The
Series A Preferred Stock is cumulative and accrues dividends at
8%. Each share of preferred stock is currently convertible into
one share of Class 2 common stock at the option of the holder.
Each holder of Series A Preferred Stock is entitled to certain
protections against sales of common stock at less than the
original Series A purchase price, which may result in the right
of such holder to convert each share of Series A into more than
one share of Class 2 common stock. The Series A preferred stock
automatically converts into Class 2 common stock upon a
qualifying IPO of the Company. The Company has reserved
5,000,000 shares of Class 2 common stock for the conversion of
Series A Preferred Stock.
The
voting rights of the Series A Preferred Stock are equal to the
voting rights of the Class 2 common stock. Dividends are payable
in cash or stock on the sale, liquidation, or merger of the
Company or redemption of such preferred stock. To the extent the
holders have not converted the Series A Preferred Stock into
Class 2 common stock, the holders of least 75% of the preferred
stock may cause the Company to redeem all such preferred stock
at any time after November 25, 2003 at the greater of the
purchase price plus accrued dividends or the appraised value, as
defined.
In
the event of the Company’s liquidation, dissolution or sale
or merger, the holders of Series A Preferred Stock are entitled
to $10,000,000 plus all accrued dividends on the Series A
Preferred Stock before any amounts may be distributed to the
holders of Class 1 or Class 2 common stock.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
No
dividends may be paid to the holders of Class 1 and Class 2
common stock until all outstanding dividends are paid on the
Series A Preferred Stock. In the event that the holders of the
Series A Preferred Stock elect to convert their shares into
Class 2 common stock, the Company is not required to distribute
the accrued dividends on the Series A Preferred Stock.
At
December 31, 1998, the Series A Preferred Stock was increased by
$79,000 representing dividends not currently declared or paid.
The cost of issuance of the Series A Preferred Stock of $94,446
is being accreted over a five year period. Such accretion
amounted to $1,572 in the year ended December 31, 1998.
In
connection with the sale of Series A Preferred Stock, the
Company issued warrants for the purchase of 1,250,000 shares of
Class 2 common stock at $5.00 per share. The Company has not
assigned a value to the warrants as management believes the
warrants are of minimal value. The Company has reserved
1,250,000 shares of Class 2 common stock for the exercise of
these warrants. The warrants expire on the earlier of 1) three
years after an IPO by the Company, 2) the closing date of the
sale or merger of the Company, or 3) December 31, 2003.
6. Earnings Per Share
The
following table sets forth the computation of the unaudited pro
forma earnings per common share:
| |
|
1996
|
|
1997
|
|
1998
|
| Numerator:
|
|
|
|
|
|
|
|
|
Pro forma net
income
|
|
$
66,249
|
|
$281,156
|
|
$583,871
|
|
Accretion and
dividends on Series A Preferred
Stock
|
|
—
|
|
—
|
|
(80,572
|
)
|
| |
|
|
|
|
|
|
|
Numerator for
basic pro forma earnings per common
share—income available to
common
stockholders
|
|
$
66,249
|
|
$281,156
|
|
$503,299
|
|
| |
|
|
|
|
|
|
|
| Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic pro forma earning per
common share—weighted
average shares
|
|
5,500,000
|
|
5,500,000
|
|
5,500,000
|
|
| |
|
|
|
|
|
|
|
| Basic pro
forma earnings per common share
|
|
$
0.01
|
|
$
0.05
|
|
$
0.09
|
|
| |
|
|
|
|
|
|
|
Series A Preferred Stock, which is convertible into Class 2
common stock and was outstanding during 1998 (issued on November
25, 1998), and common shares issuable upon the exercise of
warrants were not included in the computation of pro forma
earnings per share because their effect would be anti-dilutive.
7. Employee Benefits
On
January 1, 1998, the Company established a 401(k) plan that
covers substantially all employees. The Company contributed
$26,965 to the 401(k) plan in 1998.
In
1997, the Company sponsored a simplified employee pension plan
under section 408(k) of the Internal Revenue Code. The plan
provides discretionary contributions in each calendar year to
the individual retirement accounts of all eligible employees.
Full time employees with more than a year of service are
eligible to participate. Total contributions by the Company
totaled $42,119 for the year ended December 31, 1997. The 408(k)
Plan was terminated upon the establishment of the 401(k) Plan.
COMPUTERJOBS.COM, INC.
Notes to Financial Statements—
(Continued)
December 31, 1998
8. Lease Commitments
During December 1998, the Company entered into a five year
operating lease for office space. This lease agreement provides
for rent escalation clauses to cover increases in certain of the
lessors’ operating costs. Rental expense totaled $11,630,
$30,646 and $92,217 for the period from January 16, 1996 through
December 31, 1996 and for the years ended December 31, 1997 and
1998, respectively. Future minimum rental payments (excluding
any estimate of operating costs) under noncancelable operating
leases with terms of one year or more at December 31, 1998 are
$360,679 in 1999, $327,043 in 2000, $320,254 in 2001, $320,254
in 2002 and $320,254 in 2003.
9. Related Party
Transactions
On
November 2, 1998, the Company declared a $2,000,000 distribution
payable to the stockholders. During 1998, $1,000,000 of the
distributions were paid. The Company issued notes to the
stockholders for the remaining $1,000,000. These notes accrue
interest at the federal funds interest rate and are payable in
February 1999.
10. Fair Value of
Financial Instruments
The
carrying amounts reported in the accompanying balance sheets for
cash and cash equivalents, accounts receivable, accounts payable
and notes payable approximates their fair value.
11. Year 2000 Issue
(Unaudited)
Year
2000 issues may arise if computer programs have been written
using two digits rather than four digits to define the
applicable year. In such cases, programs that have time
sensitive logic may recognize a date using “00” as the
year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The
Company has determined that it will not need to modify or
replace significant portions of its software so that its
computer systems will function properly with respect to dates in
the year 2000 and beyond. The Company anticipates that any
remaining costs to ensure year 2000 compliance will not be
significant.
Although no formal assessment of the information and operational
systems of its major clients and vendors has been made, the
Company is not aware of any significant problems as a result of
the year 2000. However, if the customers and clients encounter
operational problems related to year 2000 and are unable to
resolve such problems in a timely manner, it could result in a
material financial risk to the Company.
Report of Independent Accountants
To the Board of Directors and Stockholders of
Syncra Software, Inc.
In
our opinion, the accompanying balance sheet and the related
statements of operations, of changes in redeemable preferred
stock and stockholders’ deficit and of cash flows present
fairly, in all material respects, the financial position of
Syncra Software, Inc. (a development stage enterprise) at
December 31, 1998 and the results of its operations and its cash
flows for the period from inception (February 11, 1998) through
December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company’s management; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
(a development stage enterprise)
Balance Sheet
<R>
| |
|
|
|
(Unaudited)
|
| |
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
|
|
|
| Current
Assets:
|
|
|
|
|
Cash and cash
equivalents
|
|
$1,700,370
|
|
|
$176,953
|
|
|
Prepaid
expenses
|
|
185,506
|
|
|
149,366
|
|
|
Other current
assets
|
|
22,704
|
|
|
19,991
|
|
| |
|
|
|
|
|
|
|
Total current
assets
|
|
1,908,580
|
|
|
346,310
|
|
| Fixed assets,
net
|
|
351,752
|
|
|
342,690
|
|
| Deposits
|
|
136,998
|
|
|
136,998
|
|
| |
|
|
|
|
|
|
|
|
|
$2,397,330
|
|
|
$825,998
|
|
| |
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock and Stockholders’
Deficit
|
|
|
|
| Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
233,281
|
|
|
$226,688
|
|
|
Accrued
expenses
|
|
316,918
|
|
|
347,771
|
|
|
Notes payable
to stockholders
|
|
3,926,370
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
Total current
liabilities
|
|
4,476,569
|
|
|
574,459
|
|
| |
|
|
|
|
|
|
|
|
|
| Redeemable
Preferred Stock:
|
|
|
|
|
|
|
Series A
redeemable convertible preferred stock, $0.001 par value
Authorized: 2,941,031 and
2,586,207 shares at December 31, 1998 and
March 31, 1999 (unaudited),
respectively; issued and outstanding:
2,586,207 shares at December 31,
1998 and March 31, 1999 (unaudited)
plus accrued dividends of
$334,652 and $454,513 at December 31, 1998
and March 31, 1999 (unaudited),
respectively; liquidation value of
$6,334,651 and $6,454,512 at
December 31, 1998 and March 31, 1999
(unaudited), respectively
|
|
6,334,651
|
|
|
6,454,512
|
|
Series B
redeemable convertible preferred stock, $0.001 par value
Authorized: 3,737,602 shares;
subscribed and issued and outstanding:
3,287,602 shares at March 31,
1999 (unaudited); liquidation value of
$13,150,408 at March 31, 1999
(unaudited)
|
|
—
|
|
|
13,150,408
|
|
|
Subscriptions
receivable (unaudited)
|
|
—
|
|
|
(9,000,000
|
)
|
|
Preferred
stock warrants
|
|
120,000
|
|
|
120,000
|
|
Redeemable
non-voting, non-convertible preferred stock, $0.001 par value
Authorized: 150,000 and 130,000
shares at December 31, 1998 and March 31,
1999 (unaudited), respectively;
issued and outstanding: 130,000 shares at
December 31, 1998 and March 31,
1999 (unaudited) plus accrued dividends
of $89,468 and $116,001 at
December 31, 1998 and March 31, 1999
(unaudited), respectively;
liquidation value of $1,389,468 and $1,416,001 at
December 31, 1998 and March 31,
1999 (unaudited), respectively
|
|
1,389,468
|
|
|
1,416,001
|
|
| |
|
|
|
|
|
|
|
Total
redeemable preferred stock
|
|
7,844,119
|
|
|
12,140,921
|
|
| |
|
|
|
|
|
|
|
|
|
| Stockholders
’ Deficit:
|
|
|
|
|
|
|
Common stock,
$0.001 par value; 10,000,000 shares authorized;
396,000 shares issued and
outstanding at December 31, 1998 and March
31, 1999 (unaudited)
|
|
396
|
|
|
396
|
|
|
Deficit
accumulated during the development stage
|
|
(9,923,754
|
)
|
|
(11,889,778
|
)
|
| |
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(9,923,358
|
)
|
|
(11,889,382
|
)
|
| |
|
|
|
|
|
|
| Commitments
(Note 14)
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$2,397,330
|
|
|
$825,998
|
|
| |
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Operations
<R>
| |
|
For the Period
from Inception
(February 11,
1998) through
December 31, 1998
|
|
(Unaudited)
For the Three Months Ended
March 31,
|
| |
|
|
1998
|
|
1999
|
| Costs and
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
$1,501,267
|
|
|
$235,127
|
|
|
$480,701
|
|
|
Selling and
marketing
|
|
2,425,532
|
|
|
271,723
|
|
|
767,148
|
|
|
General and
administrative
|
|
1,950,153
|
|
|
685,788
|
|
|
355,164
|
|
|
Impairment
charge for intangible assets
|
|
1,312,500
|
|
|
—
|
|
|
—
|
|
|
Settlement
charge
|
|
1,795,333
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Loss from
operations
|
|
(8,984,785
|
)
|
|
(1,192,638
|
)
|
|
(1,603,013
|
)
|
| Interest
expense, net
|
|
(90,430
|
)
|
|
(2,565
|
)
|
|
(156,617
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(9,075,215
|
)
|
|
$(1,195,203
|
)
|
|
$(1,759,630
|
)
|
| |
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Changes in Redeemable Preferred
Stock and Stockholders’ Deficit
<R></R>
<R>
| |
|
Series A Redeemable
Preferred Stock
|
|
Series B Redeemable
Preferred Stock
|
|
Subscriptions
Receivable
|
|
Preferred
Stock Warrants
|
|
Redeemable Non-
voting
Non-convertible
Preferred Stock
|
|
Common stock
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Total
|
| |
|
Shares
|
|
Carrying
Value
|
|
Shares
|
|
Carrying
Value
|
|
|
Carrying
Value
|
|
Shares
|
|
Carrying
Value
|
|
Shares
|
|
Par
Value
|
Issuance of
common
stock to founders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,396,000
|
|
|
$1,396
|
|
|
|
|
|
$
1,396
|
|
Issuance of
redeemable
non-voting, non-
convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
$1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Series A
redeemable
convertible
preferred stock,
issuance costs of
$170,752:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial closing
|
|
948,276
|
|
$2,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second closing
|
|
646,551
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third closing
|
|
991,380
|
|
2,299,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(170,752
|
)
|
|
(170,752
|
)
|
Repurchase and
retirement of
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
(1,000
|
)
|
|
(249,000
|
)
|
|
(250,000
|
)
|
Redemption of
redeemable non-
voting, non-
convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
(204,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
redeemable
convertible
preferred stock
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
$120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of
cumulative
dividends on
redeemable
preferred stock
|
|
|
|
334,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,135
|
|
|
|
|
|
|
|
|
(428,787
|
)
|
|
(428,787
|
)
|
| Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,075,215
|
)
|
|
(9,075,215
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December
31, 1998
|
|
2,586,207
|
|
6,334,651
|
|
|
|
|
|
|
|
|
120,000
|
|
130,000
|
|
|
1,389,468
|
|
|
396,000
|
|
|
396
|
|
|
(9,923,754
|
)
|
|
(9,923,358
|
)
|
Issuance of
Series B
redeemable
convertible
preferred stock,
issuance costs of
$60,000
(Unaudited)
|
|
|
|
|
|
3,287,602
|
|
$13,150,408
|
|
$(9,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000
|
)
|
|
(60,000
|
)
|
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited)
|
|
|
|
119,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,533
|
|
|
|
|
|
|
|
|
(146,394
|
)
|
|
(146,394
|
)
|
| Net loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,759,630
|
)
|
|
(1,759,630
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31,
1999 (Unaudited)
|
|
2,586,207
|
|
$ 6,454,512
|
|
3,287,602
|
|
$13,150,408
|
|
$(9,000,000
|
)
|
|
$120,000
|
|
130,000
|
|
|
$1,416,001
|
|
|
396,000
|
|
|
$396
|
|
|
$(11,889,778
|
)
|
|
$(11,889,382
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Statement of Cash Flows
<R></R>
<R>
| |
|
For the Period
From Inception
(February 11,
1998) Through
December 31, 1998
|
|
(Unaudited)
For the Three Months Ended
March 31,
|
| |
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(9,075,215
|
)
|
|
$(1,195,203
|
)
|
|
$(1,759,630
|
)
|
Adjustments to
reconcile net loss to net cash used for
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
58,537
|
|
|
506
|
|
|
28,522
|
|
|
Amortization
and impairment of intangible assets
|
|
1,500,000
|
|
|
125,000
|
|
|
—
|
|
|
Amortization
of discounts on notes payable
|
|
46,370
|
|
|
—
|
|
|
73,630
|
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
(185,506
|
)
|
|
—
|
|
|
36,140
|
|
|
Other current
assets
|
|
(22,704
|
)
|
|
(54,333
|
)
|
|
2,713
|
|
|
Accounts
payable
|
|
233,281
|
|
|
1,691
|
|
|
(6,593
|
)
|
|
Accrued
expenses
|
|
316,918
|
|
|
126,233
|
|
|
121,261
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
for operating activities
|
|
(7,128,319
|
)
|
|
(996,106
|
)
|
|
(1,503,957
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
| Purchases of
fixed assets
|
|
(410,289
|
)
|
|
(28,543
|
)
|
|
(19,460
|
)
|
| Increase in
deposits
|
|
(136,998
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
for investing activities
|
|
(547,287
|
)
|
|
(28,543
|
)
|
|
(19,460
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
| Proceeds from
issuance of notes payable to stockholders
|
|
4,000,000
|
|
|
—
|
|
|
—
|
|
Proceeds from
Series A redeemable convertible preferred
stock, net of issuance costs
|
|
5,829,247
|
|
|
1,829,248
|
|
|
—
|
|
| Proceeds from
issuance of common stock
|
|
1,396
|
|
|
1,396
|
|
|
—
|
|
Redemption of
non-voting, non-convertible redeemable
preferred stock and related
dividends
|
|
(204,667
|
)
|
|
—
|
|
|
—
|
|
| Repurchase of
common stock
|
|
(250,000
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
9,375,976
|
|
|
1,830,644
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Net increase
(decrease) in cash and cash equivalents
|
|
1,700,370
|
|
|
805,995
|
|
|
(1,523,417
|
)
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
—
|
|
|
1,700,370
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, end of period
|
|
$1,700,370
|
|
|
$805,995
|
|
|
$176,953
|
|
| |
|
|
|
|
|
|
|
|
|
| Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Software
acquired in exchange for 150,000 shares of
non-voting, non-convertible
redeemable preferred
stock
|
|
$1,500,000
|
|
|
$1,500,000
|
|
|
$—
|
|
| |
|
|
|
|
|
|
|
|
|
Conversion of
notes payable to stockholders plus accrued
interest of $150,408 into
1,037,602 shares of Series B
Preferred Stock
|
|
$—
|
|
|
$—
|
|
|
$4,150,408
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements
(a development stage enterprise)
Notes to Financial Statements
1. Nature of the
Business
<R>
Syncra Software, Inc. (“Syncra” or
the “Company”) was incorporated in Delaware on
February 11, 1998. Syncra was formed to design, develop, produce
and market supply chain collaboration software and solutions.
Since its inception, Syncra has devoted substantially all of its
efforts to business planning, research and development,
recruiting management and technical staff, acquiring operating
assets, raising capital, marketing and business development.
Accordingly, Syncra is considered to be in the development stage
as defined in Statement of Financial Accounting Standards (“
SFAS”) No. 7, “Accounting and Reporting by Development
Stage Enterprises”.
</R>
<R>
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.
</R>
2. Summary of
Significant Accounting Policies
|
Cash and
Cash Equivalents
|
Syncra considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be
cash equivalents. Included in cash and cash equivalents at
December 31, 1998 is approximately $1.6 million in money market
accounts.
The
carrying amount of Syncra’s financial instruments,
principally cash, notes payable, and redeemable preferred stock,
approximates their fair values at December 31, 1998.
Fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Repairs
and maintenance costs are expensed as incurred.
|
Research
and Development and Software Development Costs
|
Costs incurred in the research and development of Syncra’s
products are expensed as incurred, except for certain research
and development costs. Costs associated with the development of
computer software are expensed prior to the establishment of
technological feasibility, as defined by SFAS No. 86, “
Accounting for the Cost of Computer Software to be Sold, Leased
or Otherwise Marketed.” Costs incurred subsequent to the
establishment of technological feasibility and prior to the
general release of the products are capitalized. During the
period ended December 31, 1998, costs eligible for
capitalization were immaterial.
|
Accounting for Impairment of Long Lived Assets
|
<R>
In accordance with SFAS No. 121, “
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of”, the Company records
impairment of losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less
than the assets’ carrying amount.
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
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.
</R>
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.
<R>
|
Unaudited Interim Financial Statements
|
</R>
<R>
The financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are
unaudited. In the opinion of Syncra’s management, the March
31, 1998 and 1999 unaudited interim financial statements include
all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position and
results of operation for that period. The results of operations
for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations to be expected for the
year ending December 31, 1999.
</R>
3. Prepaid Expenses
Prepaid expenses consist of the following at December 31, 1998:
| Trade shows
and other marketing prepayments
|
|
$135,774
|
| Others
|
|
49,732
|
| |
|
|
|
|
|
$185,506
|
| |
|
|
4. Fixed Assets
Fixed assets consist of the following:
| |
|
Estimated
useful life
(years)
|
|
December
31,
1998
|
| Computer
equipment
|
|
3
|
|
$246,631
|
| Office
equipment
|
|
5
|
|
71,783
|
| Furniture and
fixtures
|
|
7
|
|
91,875
|
| |
|
|
|
|
|
|
|
|
|
410,289
|
| Less:
accumulated depreciation
|
|
|
|
58,537
|
| |
|
|
|
|
|
|
|
|
|
$351,752
|
| |
|
|
|
|
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
5. Impairment of
Intangible Assets
<R>
In accordance with SFAS No. 121, Syncra
reviews for impairment of long-lived assets when events or
changes in circumstances indicate that an asset’s carrying
value may not be recoverable. In connection with the
organization of Syncra in February 1998, Syncra purchased the
rights to certain software from Benchmarking Partners, Inc. (
“Benchmarking”) in exchange for the issuance of
150,000 shares of Syncra’s non-voting, non-convertible
Redeemable Preferred Stock (Note 8). Syncra did not obtain an
independent valuation of the technology and the fair value of
the Redeemable Preferred Stock was not objectively determinable.
Therefore, Syncra recorded the technology based upon the amount
of the Redeemable Preferred Stock as determined by Syncra’s
Board of Directors. Syncra expected to use the acquired software
as a core technology in its product development. In May 1998,
management reassessed the status of Syncra’s product
development and the additional features and functionality
planned to be included in Syncra’s products. As a result of
this re-evaluation, management concluded that the core
technology acquired from Benchmarking would not be able to
support Syncra’s planned products. Accordingly, management
decided to restart Syncra’s product development activities
without the use of the acquired software. An impairment charge
of $1,312,500 was recognized in the December 31, 1998 statement
of operations.
</R>
6. Notes Payable to
Stockholders
<R>
During 1998, the Company received aggregate
cash proceeds totaling $4,000,000 pursuant to the issuance of
convertible promissory notes (the “Notes”) payable to
certain of its stockholders. No repayments of principal or
interest (which accrues at a rate of 9% per annum) were made
during the year. The Note holders were also issued 344,828
warrants to purchase Series A Preferred Stock (“Preferred
Stock Warrants”) at $2.32 per share in 1998. The aggregate
value of the Preferred Stock Warrants issued to all Note holders
was estimated to be $120,000, which was accounted for as
discount on the Notes and Preferred Stock Warrants. The discount
is being amortized over the term of the Notes. Upon closing of
the Series B Preferred Stock financing, each Note holder is
entitled to a number of warrants equal to 20% of the face value
of the Note held by such holder divided by the price per share
of Series B Preferred Stock. As a result of the Series B
Preferred Stock financing in 1999, the Notes were converted into
shares of Series B Preferred Stock. Additionally, the Preferred
Stock Warrants were converted to the equivalent number of
warrants for Series B Preferred Stock totaling 200,000 shares at
$4.00 per share (Note 7). The Preferred Stock Warrants have a
term of ten years.
</R>
<R>
7.
Redeemable Convertible Preferred Stock
</R>
<R>
At December 31, 1998, the Company had
authorized preferred stock of 5,000,000 shares, $.001 par value
per share, of which 2,941,031 shares were designated as
redeemable convertible Series A Preferred Stock (“Series A
Preferred Stock”) and 150,000 shares of which were
designated as Redeemable Preferred Stock (the “Redeemable
Preferred Stock”).
</R>
<R>
On March 31, 1999, the Company’s
authorized Preferred Stock was increased to 6,453,809 shares
with a par value of $.001 per share of which 2,586,207 shares
were designated as redeemable convertible Series A Preferred
Stock, 3,737,602 shares as redeemable convertible Series B
Preferred Stock (“Series B Preferred Stock”) and
130,000 shares as Redeemable Preferred Stock. Of the designated
Series B Preferred Stock, the Company issued 3,287,602 shares on
March 31, 1999 in exchange for net cash proceeds of $9.0 million
received on April 1, 1999 and the conversion of all principal
and accrued interest due on the Notes (Note 6).
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
The Series A and B Preferred Stock have the
following characteristics:
</R>
<R>
Holders of Series A and B Preferred Stock are
entitled to that number of votes equal to the number of shares
of common stock into which the shares of Series A and B
Preferred Stock are then convertible.
</R>
<R>
Holders of Series A and B Preferred Stock are
entitled to receive out of funds legally available, cumulative
dividends at the rate of 8% per share per annum on the Base
Amount of each share. The Base Amount of each share is equal to
the price paid for each share of Series A and B Preferred Stock
of $2.32 and $4.00, respectively, plus unpaid dividends which
accrue commencing on the date of original issuance of the Series
A and B Preferred Stock. In the event that the full amount of
dividends is not paid in any twelve-month period, the Base
Amount will be increased by the amount of the unpaid dividend.
After payment of all dividends owing to the holders of Series A
and B Preferred Stock, such holders will not participate in any
other dividends thereafter paid on Redeemable Preferred Stock or
Common Stock.
</R>
<R>
In the event of any liquidation, dissolution
or winding-up of the affairs of the Company, the holders of
Series A and B Preferred Stock are entitled to receive, prior to
and in preference to holders of both Redeemable Preferred Stock
and Common Stock, an amount equal to $2.32 and $4.00 per share,
respectively, plus all unpaid cumulative dividends on each
share. After full payment of (i) the foregoing amounts and (ii)
amounts to be paid to the holders of Redeemable Preferred Stock
pursuant to the terms thereof (Note 8), the remaining assets of
the Company will be distributed ratably among the holders of
Common Stock.
</R>
<R>
Each share of Series A and B Preferred Stock
may be converted at any time, at the option of the stockholder,
into one share of Common Stock, subject to certain anti-dilution
adjustments, as defined in the terms of the Series A and B
Preferred Stock.
</R>
<R>
The Series A and B Preferred Stock will
automatically convert into shares of Common Stock upon (i) a
public offering of Syncra’s Common Stock which results in
gross proceeds to Syncra of at least $10,000,000, at a price per
share of the Common Stock of at least three times the Series B
Preferred Stock original purchase price per share (as adjusted
for stock splits, stock dividends, combinations,
reorganizations, reclassifications or similar events) or (ii)
upon approval of the two-thirds of the outstanding Series A and
B Preferred Stockholders, voting separately, to convert all
outstanding shares of Series A and B Preferred Stock to Common
Stock.
</R>
<R>
Any time after March 31, 2004, at the option
of the holders of the Series A and B Preferred Stock, Syncra
shall redeem all, but not less than all of such holder’s
shares of Series A and B Preferred Stock, at a redemption price
equal to the original purchase price of $2.32 and $4.00 per
share, respectively, plus all unpaid dividends thereon which
have accrued through and including the redemption date.
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
The issuance cost incurred by the Company was
accreted in full in 1998 and at March 31, 1999 as an adjustment
to the carrying value of redeemable convertible Series A and B
Preferred Stock.
</R>
8. Non-voting,
Non-convertible Redeemable Preferred Stock
As
described in Note 5, Syncra’s Redeemable Preferred Stock
was issued in a non-cash exchange with Benchmarking for certain
software. Subsequent to the issuance of the Redeemable Preferred
Stock to Benchmarking, Syncra repurchased 20,000 shares of its
Redeemable Preferred Stock from Benchmarking at a price per
share of $10.00 plus accrued dividends of $4,667. In a separate
transaction, Benchmarking transferred the remaining 130,000
shares of the Redeemable Preferred Stock to Internet Capital
Group, Inc. (“ICG”), an existing stockholder of Syncra
in exchange for a $1.3 million note, bearing interest at 8% per
annum. At December 31, 1998, ICG continued to hold the 130,000
shares of Redeemable Preferred Stock. ICG is also a stockholder
of Benchmarking.
The
Redeemable Preferred Stock has the following characteristics:
Except as required by law, holders of Redeemable Preferred Stock
are not entitled to vote on any matters submitted to a vote of
the stockholders of Syncra, including the election of directors.
<R>
Holders of Redeemable Preferred Stock are
entitled to receive out of funds legally available, cumulative
dividends at the rate of 8% per share per annum on the Base
Amount of each share. The Base Amount of each share is equal to
purchase price paid for such share of Redeemable Preferred Stock
($10.00) plus unpaid dividends which accrue commencing on the
date of original issuance of the Redeemable Preferred Stock. In
the event that the full amount of dividends is not paid in any
twelve- month period, the Base Amount will be increased by the
amount of the unpaid dividends. After payment of all dividends
owing to the holders of Redeemable Preferred Stock, such holders
will not participate in any other dividends thereafter paid on
the Series A and B Preferred Stock or the Common Stock.
</R>
<R>
In the event of any liquidation, dissolution
or winding-up of the affairs of Syncra, the holders of
Redeemable Preferred Stock are entitled to receive, prior to and
in preference to any holders of Common Stock, but after all
distribution or payments required to be made to the holders of
Series A and B Preferred Stock, an amount equal to $10.00 per
share plus accrued but unpaid dividends. After payment in full
of the amounts owed to holders of the Redeemable Preferred
Stock, such holders are not entitled to share in the
distribution of the remaining assets of Syncra.
</R>
<R>
At any time after March 31, 2004, each holder
may require Syncra to redeem all or any portion of such holder
’s shares at a redemption price equal to the original
issuance price per share ($10.00) plus all unpaid dividends
thereon which have accrued through and including the redemption
date.
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
At
any time, and from time to time, Syncra may elect to redeem all,
or any portion of the outstanding shares of its Redeemable
Preferred Stock, at a redemption price equal to the original
issuance price per share ($10.00) plus all unpaid dividends
thereon which have accrued through and including the redemption
date.
<R>
Redeemable Preferred Stock is also redeemable
by Syncra upon the earlier of (i) a public offering of Syncra
’s Common Stock which results in gross proceeds to Syncra
of at least $10,000,000, at a price per share of the Common
Stock of at least three times the Series B Preferred Stock
original purchase price per share (as adjusted for stock splits,
stock dividends, combinations, reclassifications,
reorganizations or other similar events); or (ii) the
consummation of a sale of all or substantially all of Syncra
’s assets or capital stock, either through a direct sale,
merger, reorganization or other form of business combination in
which control of Syncra is transferred and as a result holders
of Series A and B Preferred Stock receive at least three times
the Series B Preferred Stock original purchase price per share
(as adjusted for stock splits, stock dividends, combination,
reorganizations, reclassifications or other similar events).
</R>
9. Common Stock
<R>
Each share of Common Stock entitles the holder
to one vote on all matters submitted to a vote of Syncra’s
stockholders. Common stockholders are entitled to receive
dividends, if any, as may be declared by the Board of Directors,
subject to the preferential dividend rights of the holders of
the Series A and B Preferred Stock and the Redeemable Preferred
Stock.
</R>
|
Restricted Stock Agreements
|
<R>
Syncra has entered into agreements with
certain of its employee stockholders providing for restrictions
on transfers of the shares subject to such agreement. Each
agreement provides Syncra with a right to repurchase the shares
held by such individual, in the event that the Company
terminates the employment of the individual. The number of
shares which may be repurchased by the Company and the price at
which such shares may be repurchased differs per individual and
is contingent on whether such individual’s termination is
for ‘cause’ (as defined in the agreement) or other
than for ‘cause’. At December 31, 1998, none of the
restricted shares were subject to repurchase due to the
restrictions contained in these agreements.
</R>
<R>
Pursuant to a stockholders’ agreement, as
amended and restated on March 31, 1999, all of the outstanding
capital stock (including the Common Stock, Series A and B
Preferred Stock and Redeemable Preferred Stock) of the Company
is subject to certain restrictions as to sale or transfer of
such shares pursuant to a stockholders’ agreement. The
Company and its non-founder stockholders also hold rights of
first refusal, under certain circumstances, on shares offered by
a stockholder for sale to third parties, at the price per share
to be paid by such third party.
</R>
At
December 31, 1998, 2,833,857 shares were reserved for issuance
upon conversion of the Series A Preferred Stock and exercise of
outstanding options.
10. Repurchase of
Common Stock and Redemption of Preferred Stock
On
June 5, 1998, the Company repurchased 1,000,000 shares of Common
Stock and redeemed 20,000 shares of its Redeemable Preferred
Stock from Benchmarking, one of the original founders in
exchange for $2,250,000. The transaction was financed through
the sale of additional Series A Preferred Stock to certain of
the existing holders of Series A Preferred Stock. Of the 150,000
shares of Redeemable Preferred Stock originally issued to
Benchmarking, the remaining 130,000 shares were transferred by
Benchmarking to ICG (see Note 8).
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
In
addition to the shares acquired, the withdrawal of Benchmarking
as a stockholder eliminated a potential conflict of interest for
Syncra and its other stockholders with Benchmarking and its
customers. The transaction also settled potential claims by
Benchmarking against Syncra with respect to the transfer of
technical talent from Benchmarking to Syncra and other potential
claims by Benchmarking against the potential future value of
Syncra.
The
difference between the total amount paid to Benchmarking and the
aggregate of the redemption value of the Redeemable Preferred
Stock plus accrued dividends of $204,667 and the fair value of
the Common Stock of $250,000 was treated as settlement charge in
the statement of operations.
11. Stock Option Plan
In
1998, the Company adopted the 1998 Stock Option Plan (the “
1998 Plan”) which provides for the grant of incentive stock
options and non-qualified stock options, stock awards and stock
purchase rights for the purchase of up to 1,000,000 shares of
the Company’s Common Stock by officers, employees,
consultants, and directors of the Company. The Board of
Directors is responsible for administration of the 1998 Plan.
The Board determines the term of each option, the option
exercise price, the number of shares for which each option is
granted, the rate at which each option is exercisable and the
vesting period (generally ratably over four to five years).
Incentive stock options may be granted to any officer or
employee at an exercise price of not less than the fair value
per common share on the date of the grant (not less than 110% of
the fair value in the case of holders of more than 10% of the
Company’s voting stock) and with a term not to exceed ten
years from the date of the grant (five years for incentive stock
options granted to holders of more than 10% of the Company’
s voting stock). Non-qualified stock options may be granted to
any officer, employee, consultant, or director at an exercise
price per share of not less than the book value per share.
<R></R>
<R>
During the period from inception (February 11,
1998) through December 31, 1998, Syncra granted options
aggregating 803,300 shares with a weighted average exercise
price of $0.87 per share. Of the total options granted, 99,374
shares were exercisable at December 31, 1998. None of these
vested options were exercised during the period. Options
totaling 196,700 were available for future grant at December 31,
1998. The weighted-average remaining contractual life of the
options outstanding is 9.5 years. No compensation expense has
been recognized for employee stock-based compensation in 1998.
</R>
<R>
The exercise price of the options is more than
the fair market value of the common stock, therefore, the
weighted average grant date fair value per share of the options
granted during the year using the Black-Scholes option-pricing
model is zero at December 31, 1998. As a result, had
compensation expense been determined based on the fair value of
the options granted to employees at the grant date consistent
with the provision of SFAS No. 123, the Company’s pro forma
net loss would have been the same. The impact on the pro forma
net loss is not necessarily indicative of the effects on future
results of operations because the Company expects to grant
options in future years.
</R>
<R>
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.
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
12. Income Taxes
Deferred tax assets consist of the following at December 31,
1998:
| Net operating
loss carryforward
|
|
$2,386,619
|
| Fixed and
intangible assets
|
|
482,690
|
| Research and
development credit carryforwards
|
|
90,891
|
| Accrued
vacation
|
|
35,687
|
| |
|
|
| Net deferred
tax assets
|
|
2,995,887
|
| Deferred tax
asset valuation allowance
|
|
2,995,887
|
| |
|
|
|
|
|
$
—
|
| |
|
|
The
Company has provided a valuation allowance for the full amount
of its net deferred tax assets since realization of any future
benefit from deductible temporary differences and net operating
loss and tax credit carryforwards cannot be sufficiently assured
at December 31, 1998.
At
December 31, 1998, the Company has federal and state net
operating loss carryforwards of approximately $5.9 million
available to reduce future taxable income, which will expire in
2019. The Company also has federal and state research and
development tax credit carryforwards of approximately $72,490
and $27,881, respectively, available to reduce future tax
liabilities.
Under the provisions of the Internal Revenue Code, certain
substantial changes in the Company’s ownership may limit
the amount of net operating loss carryforwards and research and
development credit carryforwards which could be utilized
annually to offset future taxable income and taxes payable.
13. 401(K) Savings Plan
The
Company has established a retirement savings plan under Section
401(k) of the Internal Revenue Code (the “401(k) Plan”
). The 401(k) Plan covers substantially all employees of the
Company who meet minimum age and service requirements, and
allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the
401(k) Plan may be made at the discretion of the Board of
Directors. The Company has not made any contributions to the
401(k) Plan through December 31, 1998.
<R>
14.
Commitments
</R>
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:
<R>
| Year
ending December 31,
|
|
Operating
Leases
|
|
1999
|
|
$
272,328
|
|
2000
|
|
254,728
|
|
2001
|
|
254,728
|
|
2002
|
|
254,728
|
|
Thereafter
|
|
127,364
|
| |
|
|
|
|
|
$1,163,876
|
| |
|
|
</R>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements—
(Continued)
15. Related Party
Transactions
In
the normal course of business, Syncra had transactions with
Benchmarking during the period from inception until May 1998 for
certain operating expenses such as organizational costs,
payroll, marketing, legal and other expenses. The total expenses
reimbursed by Syncra to Benchmarking amounted to $496,344.
Furthermore, Syncra also paid Benchmarking a management fee
totaling $80,000 during the same period.
In
addition to the above transactions, Syncra also reimbursed ICG
$500,000 related to professional services provided by
Benchmarking to Syncra that originally were funded by ICG.
16. Subsequent Events
<R></R>
<R>
In April 1999, Syncra issued 250,000 shares of
Series B Preferred Stock for $1.0 million to a new investor.
</R>
Independent Auditors’ Report
The Board of Directors and Stockholders
United Messaging, Inc.:
We
have audited the accompanying balance sheet of United Messaging,
Inc. (a development-stage enterprise) as of December 31, 1998,
and the related statements of operations, stockholders’
deficit and cash flows for the period from August 25, 1998
(inception) to December 31, 1998. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
United Messaging, Inc. (a development stage enterprise) as of
December 31, 1998, and the results of its operations and its
cash flows for the period August 25, 1998 (inception) to
December 31, 1998, in conformity with generally accepted
accounting principles.
<R>
</R>
Philadelphia, Pennsylvania
July 6, 1999
(a development-stage enterprise)
BALANCE SHEETS
<R>
December 31, 1998 (Audited)
and March 31, 1999 (Unaudited)
</R>
<R>
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December 31,
1998
|
|
March 31,
1999
|
| Assets
|
| Current assets:
|
|
Cash
|
|
$
613
|
|
|
$
1,909
|
|
|
Prepaid
expenses
|
|
917
|
|
|
641
|
|
|
Due from
employees
|
|
—
|
|
|
27,969
|
|
| |
|
|
|
|
|
|
|
Total current
assets
|
|
1,530
|
|
|
30,519
|
|
Property and
equipment, net of accumulated depreciation of $1,572 and
$2,682,
respectively (note 2)
|
|
19,192
|
|
|
20,241
|
|
| |
|
|
|
|
|
|
| Total assets
|
|
$
20,722
|
|
|
$
50,760
|
|
| |
|
|
|
|
|
|
| Liabilities
and Stockholders’ Deficit
|
| Current
liabilities:
|
|
Accounts
payable
|
|
$
6,973
|
|
|
$
16,612
|
|
|
Accrued
expenses
|
|
53,669
|
|
|
125,005
|
|
|
Due to
employees
|
|
10,882
|
|
|
23,614
|
|
|
Advances from
stockholder (note 4)
|
|
53,197
|
|
|
84,945
|
|
| |
|
|
|
|
|
|
|
Total
liabilities
|
|
124,721
|
|
|
250,176
|
|
| Stockholders
’ Deficit (note 4):
|
Preferred stock
—Series A non-voting, authorized 250,000, $1 par value, no
shares issued
|
|
—
|
|
|
—
|
|
Preferred stock
—Series B non-voting, authorized 250,000, $1 par value, no
shares issued
|
|
—
|
|
|
—
|
|
Common stock,
authorized 9,500,000 shares, $.001 par value, 2,066,677
shares issued and outstanding at
December 31, 1998 and 3,333,350 at
March 31, 1999
|
|
2,067
|
|
|
3,333
|
|
|
Additional
paid-in capital
|
|
—
|
|
|
11,402
|
|
|
Deficit
accumulated during the development stage
|
|
(106,066
|
)
|
|
(214,151
|
)
|
| |
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(103,999
|
)
|
|
(199,416
|
)
|
| |
|
|
|
|
|
|
| Total
liabilities and stockholders’ deficit
|
|
$
20,722
|
|
|
$
50,760
|
|
| |
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Operations
<R>
Period from August 25, 1998
(Inception) through December 31, 1998 (Audited),
</R> <R>
the three
months ended March 31, 1999 (Unaudited), and
</R> <R>
the period
from August 25, 1998 (Inception) through March 31, 1999
(Unaudited)
</R>
<R>
| |
|
(Audited)
|
|
|
|
(Unaudited)
|
| |
|
Period From
August 25, 1998
(Inception) Through
December 31, 1998
|
|
(Unaudited)
Three Months
Ended
March 31, 1999
|
|
Period From
August 25, 1998
(Inception) Through
March 31, 1999
|
| Revenues
|
|
$
—
|
|
|
$
—
|
|
|
$
—
|
|
| |
| Expenses
incurred in the development stage:
|
|
Selling and
marketing
|
|
69,429
|
|
|
51,952
|
|
|
121,381
|
|
|
Operations
|
|
20,940
|
|
|
46,469
|
|
|
67,409
|
|
|
Administration
|
|
14,125
|
|
|
8,554
|
|
|
22,679
|
|
|
Depreciation
|
|
1,572
|
|
|
1,110
|
|
|
2,682
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
106,066
|
|
|
108,085
|
|
|
214,151
|
|
| |
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(106,066
|
)
|
|
$(108,085
|
)
|
|
$(214,151
|
)
|
| |
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Stockholders’ Deficit
<R>
Period from August 25, 1998
(Inception) through December 31, 1998 (Audited)
and the three months ended March 31, 1999 (Unaudited)
</R>
<R>
| |
|
Series A
Preferred
Stock
|
|
Series B
Preferred
Stock
|
|
Common
Stock
(Shares)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Deficit
|
Balance,
August 25, 1998
(Inception)
|
|
$—
|
|
$—
|
|
—
|
|
$—
|
|
$—
|
|
$—
|
|
|
$—
|
|
| Issuance of
common stock
|
|
—
|
|
—
|
|
2,066,677
|
|
2,067
|
|
—
|
|
—
|
|
|
2,067
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(106,066
|
)
|
|
(106,066
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
—
|
|
—
|
|
2,066,677
|
|
2,067
|
|
—
|
|
(106,066
|
)
|
|
(103,999
|
)
|
| Issuance of
common stock
|
|
—
|
|
—
|
|
1,266,673
|
|
1,266
|
|
11,402
|
|
—
|
|
|
12,668
|
|
| Net loss
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(108,085
|
)
|
|
(108,085
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 1999
(Unaudited)
|
|
$
—
|
|
$—
|
|
3,333,350
|
|
$3,333
|
|
$11,402
|
|
$(214,151
|
)
|
|
$(199,416
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
(a development-stage enterprise)
Statements of Cash Flows
<R>
Period from August 25, 1998
(Inception) through December 31, 1998 (Audited),
</R> <R>
the three
months ended March 31, 1999 (Unaudited), and
</R> <R>
the period
from August 25, 1998 (Inception) through March 31, 1999
(Unaudited)
</R>
<R>
| |
|
(Audited)
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
Period From
August 25, 1998
(Inception) Through
December 31,
1998
|
|
Three Months
Ended
March 31,
1999
|
|
Period From
August 25, 1998
(Inception) Through
March 31,
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(106,066
|
)
|
|
$(108,085
|
)
|
|
$(214,151
|
)
|
Adjustments to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
1,572
|
|
|
1,110
|
|
|
2,682
|
|
|
Increase
(decrease) in cash due to changes in:
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
(917
|
)
|
|
276
|
|
|
(641
|
)
|
|
Due from employees
|
|
—
|
|
|
(27,969
|
)
|
|
(27,969
|
)
|
|
Accounts payable
|
|
6,973
|
|
|
9,639
|
|
|
16,612
|
|
|
Accrued expenses
|
|
53,669
|
|
|
71,336
|
|
|
125,005
|
|
|
Due to employees
|
|
10,882
|
|
|
12,732
|
|
|
23,614
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
(33,887
|
)
|
|
(40,961
|
)
|
|
(74,848
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(20,764
|
)
|
|
(2,159
|
)
|
|
(22,923
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing activities
|
|
(20,764
|
)
|
|
(2,159
|
)
|
|
(22,923
|
)
|
| |
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
—
|
|
|
14,735
|
|
|
14,735
|
|
|
Advances from stockholder
|
|
55,264
|
|
|
29,681
|
|
|
84,945
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
55,264
|
|
|
44,416
|
|
|
99,680
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase
in cash
|
|
613
|
|
|
1,296
|
|
|
1,909
|
|
| Cash,
beginning of period
|
|
—
|
|
|
613
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Cash, end of
period
|
|
$
613
|
|
|
$1,909
|
|
|
$1,909
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
(a development-stage enterprise)
Notes to Financial Statements
<R>
December 31, 1998 (Audited)
and March 31, 1999 (Unaudited)
</R>
(1) Summary of
Significant Accounting Policies
(a) Description of Business
United Messaging, Inc. (the Company) was incorporated in
Delaware on August 25, 1998 (inception), for the purpose of
becoming the premier worldwide provider of electronic messaging
networks.
Since inception, the Company has been engaged principally in
organizational activities, including raising capital, recruiting
a management team and employees, executing agreements,
negotiating strategic relationships, and developing operational
plans and marketing activities. Accordingly, the Company is in
the development stage, as defined by the Statement of Accounting
Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage Enterprises.
(b) Unaudited Interim Financial Information
The
interim financial statements of the Company for the three months
ended March 31, 1999 and the period August 25, 1998 (inception)
through March 31, 1999, included herein have been prepared by
the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted
pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the
accompanying unaudited interim financial statements reflect all
adjustments, consisting only of normal, recurring adjustments,
necessary to present fairly the financial position of the
Company at March 31, 1999, and the results of its operations and
its cash flows for the three months ended March 31, 1999 and the
period August 25, 1998 (inception) to March 31, 1999.
(c) Financial Instruments
The
Company’s financial instruments principally consist of cash
and accounts payable. Cash and accounts payable are carried at
cost which approximates fair value because of the short maturity
of these instruments.
(d) Property and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation.
Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets as follows:
| Software
|
|
3 years
|
| Computer
equipment
|
|
5 years
|
(e) Long-Lived Assets
In
accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets to be
Disposed Of
,
the Company periodically evaluates the carrying value of
long-lived assets when events and circumstances warrant such
review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized in the amount by
which the carrying value exceeds the fair market value of the
long-lived asset. The Company has identified no such impairment
losses.
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
December 31, 1998 (Audited)
and March 31, 1999 (Unaudited)
</R>
(f) Income Taxes
The
Company has elected under the
Internal Revenue Code
to
be an S corporation for federal income tax purposes. In lieu of
corporate income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company’s taxable
income or are allocated a portion of the Company’s net
operating loss. Therefore, no provision or liability for federal
income taxes has been included in the financial statements.
The
Company is not an S corporation for state income tax purposes
and, therefore, is responsible for state income taxes and
liabilities. Due to the Company’s net operating losses, no
state income tax has been provided. At December 31, 1998 and
March 31, 1999, management has established a valuation allowance
of approximately $9,000 and $19,000 as of December 31, 1998
(audited) and March 31, 1999 (unaudited) to eliminate the state
deferred tax asset arising from the state net operating loss
carry forward, which total approximately $9,000 and $19,000 as
of December 31, 1998 (audited) and March 31, 1999 (unaudited)
and expire in 2008.
On
May 21, 1999 in connection with the sale of Series A convertible
preferred stock (note 4) the Company’s S corporation status
for federal income taxes was terminated. Therefore, subsequent
to that date, the Company is responsible for both federal and
state income tax liabilities.
(g) Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Property and
Equipment
A
summary of property and equipment is as follows:
<R>
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December
31,
1998
|
|
March
31,
1999
|
| Computer
equipment
|
|
$20,764
|
|
$22,923
|
| Less:
accumulated depreciation
|
|
1,572
|
|
2,682
|
| |
|
|
|
|
| Property and
equipment, net
|
|
$19,192
|
|
$20,241
|
| |
|
|
|
|
</R>
<R>
(3)
Accrued Expenses
</R>
Accrued expenses consist of the following:
<R>
| |
|
(Audited)
|
|
(Unaudited)
|
| |
|
December
31,
1998
|
|
March
31,
1999
|
| Employee
compensation and related taxes
|
|
$40,739
|
|
$109,781
|
| Other
|
|
12,930
|
|
15,224
|
| |
|
|
|
|
|
|
|
$53,669
|
|
$125,005
|
| |
|
|
|
|
</R>
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
December 31, 1998 (Audited)
and March 31, 1999 (Unaudited)
</R>
(4) Capital Structure
As
of December 31, 1998 and March 31, 1999, the capital structure
of the Company consisted of one class of Common voting stock and
two classes of Preferred stock, series A non-voting stock and
series B non-voting convertible stock.
On
February 1, 1999, the Company issued 1,266,670 shares of common
stock to founding employees of the Company at fair market value
of $.01 per share as determined by the Board, given the
development stage of the Company.
<R>
On May 10, 1999, the Company increased the
authorized shares of common stock from 1,000,000 to 9,500,000,
cancelled the 250,000 authorized shares of Preferred A
non-voting stock and the 250,000 shares of Preferred B
non-voting stock, and authorized 4,500,000 shares of preferred
stock with a par value of $.001 per share. Additionally, the
Company declared a thousand for one stock split for all common
stock outstanding, and accordingly the par value changed from $1
per share to $.001 per share. Share information as of and for
the period August 25, 1998 through December 31, 1998 and as of
and for the three months ended March 31, 1999, retroactively
reflects these changes.
</R>
<R>
On May 21, 1999, the Company sold 4,500,000
shares of Series A convertible preferred stock at a price of
$1.25 per share, resulting in proceeds to the Company of
$5,625,000. Each share of Series A convertible preferred stock
is convertible at the option of the holder into common stock at
$1.25 per share subject to certain adjustments of the conversion
price. The holders of the Series A convertible preferred stock
are entitled to receive dividends at a rate of $0.08 per share.
Such dividends are payable when declared by the Board of
Directors and are not cumulative.
</R>
<R>
In the event of liquidation of the Company,
the holders of Series A convertible preferred stock are also
entitled to receive $1.25 per share (adjusted for stock
dividends, combinations, or splits) for each share of Series A
preferred prior to and in preference to any distribution to
holders of common stock.
</R>
<R>
On June 30, 1999, the board of directors
granted to certain officers and employees of the Company options
to purchase 566,500 shares of common stock at an exercise price
of $.125 per share. The options vest over a four year period.
</R>
(5) Related-Party
Transactions
A
stockholder has advanced funds and paid expenses on behalf of
the Company which are recorded as an advance from stockholder in
the balance sheet. Such amounts are noninterest bearing and
unsecured.
The
Company’s operating facilities are located in Malvern,
Pennsylvania. During the period from inception through March 31,
1999, the Company occupied an office building partially owned by
the sole stockholder. The Company incurred no rent expense in
1998.
(6) Subsequent Events
<R>
On April 9, 1999, the Company borrowed
$400,000 from an investor payable May 26, 1999, with interest at
5% thereafter. The borrowing is in the form of a convertible
promissory note, convertible into Series A preferred stock. The
borrowing was repaid in May 1999 in conjunction with the
issuance of Series A convertible preferred stock (note 4).
</R>
UNITED MESSAGING, INC.
(a development-stage enterprise)
Notes to Financial Statements—
(Continued)
<R>
December 31, 1998 (Audited)
and March 31, 1999 (Unaudited)
</R>
On
April 22, 1999, the Company entered into a lease for a
commercial office building in Pennsylvania, which is partially
owned by a stockholder. The lease is for one year beginning May
1, 1999, with an annual rent of $88,800. Also, in April 1999,
the Company entered into a one-year lease for an office facility
in Virginia beginning May 1, 1999, and a lease for an operating
facility in Pennsylvania beginning June 1, 1999, and ending
December 31, 2002.
Future annual minimum lease payments for noncancellable
operating leases are as follows:
<R></R>
<R>
Year Ended
December 31,
|
|
|
| 1999
|
|
$115,788
|
| 2000
|
|
135,206
|
| 2001
|
|
110,834
|
| 2002
|
|
116,922
|
</R>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Universal Access, Inc.:
In our opinion, the accompanying balance sheets
and the related statements of operations, of cash flows and of
stockholders’ deficit present fairly, in all material
respects, the financial position of Universal Access, Inc. (the
Company) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from October 2,
1997 (date of inception) to December 31, 1997 and the year ended
December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company’s management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/S
/ PRICEWATERHOUSE
COOPERS
LLP
Chicago, Illinois
April 6, 1999, except as to Note 2,
which is as of June 23, 1999
<R></R>
Balance Sheets
<R>
| |
|
|
|
|
|
(Unaudited)
|
| |
|
December 31,
1997
|
|
December 31,
1998
|
|
March 31,
1999
|
| ASSETS
|
|
|
|
|
|
|
|
|
|
| Current assets:
|
|
Cash and cash
equivalents
|
|
$
1,000
|
|
|
$
844,000
|
|
|
$5,570,000
|
|
|
Accounts
receivable, net
|
|
44,000
|
|
|
657,000
|
|
|
1,271,000
|
|
|
Prepaid
expenses and other current assets
|
|
—
|
|
|
15,000
|
|
|
217,000
|
|
|
Security
deposits
|
|
54,000
|
|
|
85,000
|
|
|
113,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
99,000
|
|
|
1,601,000
|
|
|
7,171,000
|
|
| Restricted
cash
|
|
—
|
|
|
149,000
|
|
|
134,000
|
|
| Property and
equipment, net
|
|
1,000
|
|
|
219,000
|
|
|
263,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
100,000
|
|
|
$1,969,000
|
|
|
$7,568,000
|
|
| |
|
|
|
|
|
|
|
|
|
| |
| LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
| Current
liabilities:
|
|
Accounts
payable
|
|
$
56,000
|
|
|
$
577,000
|
|
|
$
334,000
|
|
|
Accrued
expenses and other current liabilities
|
|
2,000
|
|
|
75,000
|
|
|
278,000
|
|
|
Unearned
revenue, net
|
|
—
|
|
|
381,000
|
|
|
625,000
|
|
|
Notes payable
—shareholders
|
|
76,000
|
|
|
126,000
|
|
|
100,000
|
|
|
Short-term
borrowings
|
|
—
|
|
|
—
|
|
|
500,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
134,000
|
|
|
1,159,000
|
|
|
1,837,000
|
|
| Note payable
|
|
—
|
|
|
149,000
|
|
|
134,000
|
|
| Commitments
and contingencies (Note 6)
|
Redeemable
cumulative convertible Series A Preferred Stock, no par
value; 1,000,000 shares authorized
at December 31, 1998 and
March 31, 1999; 335,334 and
772,331 shares issued and outstanding
plus accrued dividends of $20,000
and $37,000 (liquidation value of
$903,000 and $2,039,000) at
December 31, 1998 and March 31,
1999, respectively
|
|
—
|
|
|
903,000
|
|
|
2,039,000
|
|
| Redeemable
cumulative convertible Series A Preferred Stock warrants
|
|
—
|
|
|
36,000
|
|
|
83,000
|
|
| Unissued
redeemable cumulative convertible Series A Preferred Stock
|
|
—
|
|
|
1,004,000
|
|
|
—
|
|
Redeemable
cumulative convertible Series B Preferred Stock, no par
value; 2,000,000 shares
authorized, issued and outstanding plus
accrued dividends of $50,000
(liquidation value of $4,613,000) at
March 31, 1999—unaudited
|
|
—
|
|
|
—
|
|
|
4,613,000
|
|
Redeemable
cumulative convertible Series B Preferred Stock
warrants—unaudited
|
|
—
|
|
|
—
|
|
|
1,197,000
|
|
| Stockholders
’ deficit:
|
Common stock,
no par value; 15,000,000, 150,000,000 and
150,000,000 shares authorized at
December 31, 1997,
December 31, 1998 and March 31,
1999, respectively;
11,899,500, 15,150,000 and
15,300,000 shares issued and
outstanding at December 31,
1997, December 31, 1998 and
March 31, 1999, respectively
|
|
136,000
|
|
|
225,000
|
|
|
225,000
|
|
|
Common stock
warrants
|
|
—
|
|
|
—
|
|
|
13,000
|
|
|
Additional
paid-in-capital
|
|
—
|
|
|
487,000
|
|
|
518,000
|
|
|
Deferred stock
option plan compensation
|
|
—
|
|
|
(422,000
|
)
|
|
(394,000
|
)
|
|
Accumulated
deficit
|
|
(170,000
|
)
|
|
(1,572,000
|
)
|
|
(2,697,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
(34,000
|
)
|
|
(1,282,000
|
)
|
|
(2,335,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$100,000
|
|
|
$1,969,000
|
|
|
$7,568,000
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
Statements of Operations
<R>
| |
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
From
Inception to
December 31,
1997
|
|
For the
Year Ended
December 31,
1998
|
|
For
the
Three Month
Period Ended
March 31,
1998
|
|
For
the
Three Month
Period Ended
March 31,
1999
|
| Revenues:
|
|
Access
|
|
$
77,000
|
|
|
$1,589,000
|
|
|
$168,000
|
|
|
$1,508,000
|
|
|
Co-location
|
|
—
|
|
|
40,000
|
|
|
—
|
|
|
23,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
77,000
|
|
|
$1,629,000
|
|
|
168,000
|
|
|
1,531,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Cost of
revenues
|
|
66,000
|
|
|
1,256,000
|
|
|
125,000
|
|
|
1,286,000
|
|
|
Operations and
administration
|
|
180,000
|
|
|
1,516,000
|
|
|
135,000
|
|
|
1,175,000
|
|
|
Depreciation
|
|
—
|
|
|
47,000
|
|
|
—
|
|
|
24,000
|
|
|
Stock option
plan compensation
|
|
—
|
|
|
65,000
|
|
|
—
|
|
|
28,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
246,000
|
|
|
2,884,000
|
|
|
260,000
|
|
|
2,513,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(169,000
|
)
|
|
(1,255,000
|
)
|
|
(92,000
|
)
|
|
(982,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other income
and expense:
|
|
Interest
expense
|
|
(1,000
|
)
|
|
(27,000
|
)
|
|
(2,000
|
)
|
|
(3,000
|
)
|
|
Interest
income
|
|
—
|
|
|
8,000
|
|
|
—
|
|
|
2,000
|
|
|
Other expense
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
income and expenses
|
|
(1,000
|
)
|
|
(119,000
|
)
|
|
(2,000
|
)
|
|
(1,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
(170,000
|
)
|
|
(1,374,000
|
)
|
|
(94,000
|
)
|
|
(983,000
|
)
|
Accretion and
dividends on redeemable cumulative
convertible preferred stock
|
|
—
|
|
|
(28,000
|
)
|
|
—
|
|
|
(142,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
applicable to common stockholders
|
|
$(170,000
|
)
|
|
$(1,402,000
|
)
|
|
$(94,000
|
)
|
|
$(1,125,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
Statements of Cash Flows
<R>
| |
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
| |
|
From
Inception to
December 31,
1997
|
|
For the
Year Ended
December 31,
1998
|
|
For
the
Three Month
Period Ended
March 31,
1998
|
|
For
the
Three Month
Period Ended
March 31,
1999
|
| Cash flows
from operating activities:
|
|
Net loss
|
|
$(170,000
|
)
|
|
$(1,374,000
|
)
|
|
$(94,000
|
)
|
|
$(983,000
|
)
|
|
Adjustments to
reconcile net loss to net
|
|
cash used for operating activities:
|
|
Depreciation
|
|
—
|
|
|
47,000
|
|
|
—
|
|
|
24,000
|
|
|
Stock option
plan compensation
|
|
—
|
|
|
65,000
|
|
|
—
|
|
|
28,000
|
|
|
Provision for
doubtful accounts
|
|
4,000
|
|
|
42,000
|
|
|
6,000
|
|
|
106,000
|
|
|
Changes in
operating assets and liabilities:
|
|
Accounts receivable
|
|
(48,000
|
)
|
|
(655,000
|
)
|
|
(50,000
|
)
|
|
(720,000
|
)
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
(15,000
|
)
|
|
—
|
|
|
(202,000
|
)
|
|
Security deposits
|
|
(54,000
|
)
|
|
(31,000
|
)
|
|
(10,000
|
)
|
|
(28,000
|
)
|
|
Accounts payable
|
|
56,000
|
|
|
521,000
|
|
|
43,000
|
|
|
(243,000
|
)
|
|
Accrued expenses and other current
liabilities
|
|
2,000
|
|
|
73,000
|
|
|
(1,000
|
)
|
|
203,000
|
|
|
Unearned revenue
|
|
—
|
|
|
381,000
|
|
|
—
|
|
|
244,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
for operating activities
|
|
(210,000
|
)
|
|
(946,000
|
)
|
|
(106,000
|
)
|
|
(1,571,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
Purchase of
property and equipment
|
|
(1,000
|
)
|
|
(265,000
|
)
|
|
(1,000
|
)
|
|
(68,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
Net borrowings
on line of credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
|
Proceeds from
notes payable
|
|
76,000
|
|
|
199,000
|
|
|
51,000
|
|
|
100,000
|
|
|
Payments on
notes payable
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(141,000
|
)
|
Proceeds from
unissued redeemable Series A
preferred stock
|
|
—
|
|
|
1,004,000
|
|
|
—
|
|
|
—
|
|
Proceeds from
redeemable Series A preferred
stock
|
|
—
|
|
|
875,000
|
|
|
—
|
|
|
70,000
|
|
Proceeds from
redeemable Series B preferred
stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,564,000
|
|
|
Proceeds from
common stock
|
|
136,000
|
|
|
89,000
|
|
|
79,000
|
|
|
—
|
|
Proceeds from
redeemable Series A preferred
stock warrants
|
|
—
|
|
|
36,000
|
|
|
—
|
|
|
47,000
|
|
Proceeds from
redeemable Series B preferred
stock warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,197,000
|
|
|
Proceeds from
common stock warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,000
|
|
|
Cash deposit
to collateralize note payable, net
|
|
—
|
|
|
(149,000
|
)
|
|
—
|
|
|
15,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
212,000
|
|
|
2,054,000
|
|
|
130,000
|
|
|
6,365,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase in cash and cash equivalents
|
|
1,000
|
|
|
843,000
|
|
|
23,000
|
|
|
4,726,000
|
|
| Cash and cash
equivalents, beginning of period
|
|
—
|
|
|
1,000
|
|
|
1,000
|
|
|
844,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents, end of period
|
|
$
1,000
|
|
|
$844,000
|
|
|
$
24,000
|
|
|
$5,570,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
<R>
No amounts were paid for income
taxes or interest during 1997 and 1998.
</R>
The accompanying notes are an integral
part of these financial statements.
Statements of Stockholders’ Deficit
<R>
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
</R>
<R>
| |
|
Common Stock
|
|
Common
Stock
Warrants
|
|
Additional
Paid-In
Capital
|
|
Deferred
Stock
Option
Plan
Compensation
|
|
Accumulated
Deficit
|
|
Total
|
| |
|
Shares
Issued
|
|
No Par
Value
|
| Balance at
October 2, 1997
|
|
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
$
—
|
|
|
$
—
|
|
|
$
—
|
|
| Issuance of
common stock
|
|
11,899,500
|
|
136,000
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
136,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(170,000
|
)
|
|
(170,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1997
|
|
11,899,500
|
|
136,000
|
|
—
|
|
—
|
|
—
|
|
|
(170,000
|
)
|
|
(34,000
|
)
|
| Issuance of
common stock
|
|
3,100,500
|
|
89,000
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
89,000
|
|
| Exercise of
stock options
|
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred stock
option plan
compensation
|
|
—
|
|
—
|
|
—
|
|
487,000
|
|
(487,000
|
)
|
|
—
|
|
|
—
|
|
| Stock option
plan compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
65,000
|
|
|
—
|
|
|
65,000
|
|
| Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(1,374,000
|
)
|
|
(1,374,000
|
)
|
Accretion and
dividends on Series A
Preferred Stock
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(28,000
|
)
|
|
(28,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1998
|
|
15,150,000
|
|
225,000
|
|
—
|
|
487,000
|
|
(422,000
|
)
|
|
(1,572,000
|
)
|
|
(1,282,000
|
)
|
Issuance of
common stock warrants
(Unaudited)
|
|
—
|
|
—
|
|
13,000
|
|
—
|
|
—
|
|
|
—
|
|
|
13,000
|
|
Issuance of
common stock options by
certain shareholders (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
31,000
|
|
—
|
|
|
—
|
|
|
31,000
|
|
| Exercise of
stock options (Unaudited)
|
|
150,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock option
plan compensation
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
28,000
|
|
|
—
|
|
|
28,000
|
|
| Net loss
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(983,000
|
)
|
|
(983,000
|
)
|
Accretion and
dividends on Series A
Preferred Stock (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(62,000
|
)
|
|
(62,000
|
)
|
Accretion and
dividends on Series B
Preferred Stock (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(80,000
|
)
|
|
(80,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 1999
(Unaudited)
|
|
15,300,000
|
|
$225,000
|
|
$13,000
|
|
$518,000
|
|
$(394,000
|
)
|
|
$(2,697,000
|
)
|
|
$(2,335,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
The accompanying notes are an integral
part of these financial statements.
Notes to Financial Statements
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is
Unaudited)
Note 1—Summary of Significant Accounting
Policies
The Company
Universal Access, Inc. (the “Company” or “UAI
”), an Illinois corporation, was organized and commenced
operations on October 2, 1997 for the purpose of providing
provisioning, co-location and high-capacity bandwidth to “
services providers” that include Internet, Applications,
DSL and Telecommunications providers. The Company operated as a
subchapter S-Corporation until September 27, 1998, at which time
it converted to a C-Corporation.
Basis of Presentation
The
accompanying interim financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 and the
related notes have not been audited. However, they have been
prepared in conformity with the accounting principles stated in
the audited financial statements for the period from October 2,
1997 to December 31, 1997 and the year ended December 31, 1998
and include all adjustments, which were of a normal and
recurring nature, which in the opinion of management are
necessary to present fairly the financial position of the
Company and results of operations and cash flows for the periods
presented. The operating results for the interim periods are not
necessarily indicative of results expected for the full years.
Revenue Recognition
Access and co-location services are billed a month in advance
under long-term contracts ranging from twelve to sixty months.
UAI recognizes revenue in the month the service is provided.
Advance billings are recorded by the Company as unearned
revenue. UAI recognizes revenue from one-time fees for
installation and maintenance when the related services are
performed.
Cash and Cash Equivalents
Cash
and cash equivalents include cash on hand, money market funds
and all investments with an initial maturity of three months or
less. All cash equivalents are recorded at cost.
Accounts Receivable
The
allowance for doubtful accounts was $4,000, $46,000 and $152,000
at December 31, 1997 and 1998 and March 31, 1999, respectively.
<R>
Financial instruments that could potentially
subject UAI to concentration of credit risk primarily include
accounts receivable. Two customers represented 38% of total
accounts receivable as of December 31, 1998, and 31% of total
sales during 1998. Three customers represented 94% of total
accounts receivable as of December 31, 1997, and 81% of total
sales during 1997. If any of these individually significant
customers are unable to meet their financial obligations,
results of operations of the Company could be adversely
affected. UAI performs ongoing credit evaluations of its
customers’ financial condition and to date has not
experienced significant losses with respect to revenues from any
of its significant customers.
</R>
Stock-Based Compensation
The
Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan.
Accordingly, when options are granted, a non-cash charge
representing the
difference between the exercise price and the fair market value of
the Common Stock underlying the vested options on the date of
grant is recorded as option plan compensation expense with the
balance deferred and amortized over the remaining vesting period.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided for using the straight-line method.
Leasehold improvements are amortized over the life of the lease.
| Furniture and
fixtures
|
|
3 years
|
| Co-location
equipment
|
|
3 years
|
| Equipment
|
|
3 years
|
Repairs and maintenance, which do not significantly increase the
life of the related assets, are expensed as incurred.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The Company estimates the future cash flows
expected to result from operations, and if the sum of the
expected undiscounted future cash flows is less than the
carrying amount of the long-lived asset, the Company recognizes
an impairment loss by reducing the depreciated cost of the
long-lived asset to its estimated fair value. To date the
Company has not recognized impairment on any long-lived assets.
Income Taxes
On
September 27, 1998, UAI changed status from an S-Corporation to
a C-Corporation. As of this date, the Company established a
deferred tax asset which reflects the tax consequences in future
years of differences between the tax basis of assets and
liabilities and their financial reporting amounts. The deferred
tax asset was recorded net of a valuation allowance to reduce
the deferred tax asset to an amount that is more likely than not
to be realized.
Prior to September 27, 1998, all attributes for federal income
taxes passed through to the stockholders. Accordingly, no income
tax provision or deferred tax amounts were recorded prior to
this date. Had the Company been a C-Corporation from October 2,
1997 (inception) to December 31, 1998, no income taxes would
have been due since the Company incurred losses during this time
period.
Note 2—Stock Splits
The
Company effected a 500-for-1 common stock split in July 1998, a
2-for-1 common stock split in February 1999 and a 3-for-2 common
stock split on June 23, 1999. All share amounts have been
retroactively restated to reflect such splits.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
Note 3—Property and Equipment
Property and equipment consists of the following, stated at cost:
| |
|
December
31,
1997
|
|
December 31,
1998
|
| Furniture and
fixtures
|
|
$
—
|
|
$119,000
|
|
| Co-location
equipment
|
|
—
|
|
85,000
|
|
| Equipment
|
|
1,000
|
|
62,000
|
|
| |
|
|
|
|
|
| |
|
1,000
|
|
266,000
|
|
| Less:
Accumulated depreciation
|
|
—
|
|
(47,000
|
)
|
| |
|
|
|
|
|
| Property and
equipment, net
|
|
$
1,000
|
|
$219,000
|
|
| |
|
|
|
|
|
Note 4—Notes Payable
Notes payable are summarized as follows:
| |
|
December
31,
1997
|
|
December
31,
1998
|
| Note payable
(interest at 7.5%)
|
|
$
—
|
|
$149,000
|
| Borrowings
under line of credit
|
|
—
|
|
—
|
| Notes payable
to shareholders (weighted average interest at 9.7%)
|
|
76,000
|
|
126,000
|
| |
|
|
|
|
| Notes payable
|
|
$76,000
|
|
$275,000
|
| |
|
|
|
|
In
November of 1997 and March of 1998, the Company entered into
separate note payable agreements with two of its shareholders in
the original principal amounts of $76,000 and $50,000,
respectively. The notes payable bear interest at a rate of 8.25%
and 12%, respectively, and are due upon demand. The note with
the original principal amount of $76,000 is collateralized by a
$63,000 security deposit. The $50,000 note payable is unsecured.
In
November 1998, the Company entered into a 36-month term loan
agreement with a Bank, in the original principal amount of
$149,000, for the purchase of office furniture and equipment.
The note payable is collateralized by the Company’s
property and equipment, and cash deposits and money market
accounts with the Bank. The Company is required to maintain a
balance in their money market account of an amount not less than
the original amount of the note.
In
April 1998, the Company entered into a $500,000 revolving line
of credit agreement with a Bank. Borrowings are at the prime
rate plus 0.5% (8.25% at December 31, 1998) and the agreement
expires in May 1999. Borrowings under the revolving line of
credit are unsecured. As of December 31, 1998, no borrowings
were outstanding under this agreement.
The
Company executed unsecured promissory notes with a shareholder
dated December 29, 1998, in the original aggregate principal
amount of $100,000. The notes bear interest at a rate of 10% per
year and are due upon demand, after March 31, 1999. The Company
did not receive the proceeds of these promissory notes until
after December 31, 1998; as such the notes payable were offset
by the proceeds receivable at that date for presentation
purposes.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
Note 5—Income Taxes
There is no current provision or benefit for income taxes
recorded for the period from September 27, 1998, the date of
C-Corporation conversion, to December 31, 1998, as the Company
has generated net operating losses for income taxes purposes for
which there is no carryback potential. There is no deferred
provision or benefit for income taxes recorded as the Company is
in a net asset position for which a full valuation allowance has
been recorded due to uncertainty of realization.
The
components of the deferred income tax asset at December 31, 1998
are as follows:
| Net operating
loss
|
|
$
93,000
|
|
| Stock option
plan compensation
|
|
18,000
|
|
| Allowance for
doubtful accounts
|
|
19,000
|
|
| Other
|
|
21,000
|
|
| |
|
|
|
|
|
|
151,000
|
|
| Valuation
allowance
|
|
(151,000
|
)
|
| |
|
|
|
|
Total
|
|
$
—
|
|
| |
|
|
|
At
December 31, 1998, the Company had a federal net operating loss
carryforward of $227,000 which will expire in 2018.
Note 6—Commitments and Contingencies
The
Company leases office facilities and certain equipment over
periods ranging from two to three years. Total rent expense for
the years ended December 31, 1997 and 1998 was $0 and $46,000,
respectively. Future rentals for operating leases at December
31, 1998 are as follows:
| 1999
|
|
$74,000
|
| 2000
|
|
78,000
|
| 2001
|
|
34,000
|
| 2002
|
|
—
|
| |
|
|
|
Total minimum
lease payments
|
|
$186,000
|
| |
|
|
In
addition to the above leases, the Company has entered into
leased line agreements with telecommunications vendors for
high-capacity bandwidth. These leases are cancelable at any time
with a maximum 30-day notice. The Company, in turn, contracts
with customers for the use of the leased high-capacity
bandwidth. The customer contracts provide for cancellation
penalties equal to the sum of all payments due through the
remainder of the contract, less 6%.
The
Company entered into an agreement with a telecommunications
vendor, whereby the Company agreed to purchase a minimum of
$250,000 of network services per month, beginning June 29, 1999
and continuing for a period of ten years.
UAI
has standby letters of credit which have been issued on its
behalf totaling $172,000 securing performance of certain
contracts with carriers and landlords. All letters of credit
expire within one year. On February 15, 1999, an outstanding
letter of credit for $100,000 was replaced by a $250,000 letter
of credit in support of certain ongoing contracts.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
Note 7—Related Party
Transactions
During 1998, UAI entered into certain transactions with
shareholders and directors for the lease of office space and
pager equipment. Rent expense for these leases approximated
$65,000 in 1998.
Note 8—Employee Benefit Plans and
Employment Agreements
Employee Savings and Benefit Plans
As
of January 1, 1999, UAI implemented a retirement savings plan
pursuant to Section 401(k) of the Internal Revenue Code, which
covers substantially all of the Company’s employees.
Employer contributions to the retirement savings plan are
discretionary.
Employment Agreements
UAI
has entered into employment agreements with several of its key
employees which have initial terms ranging from one to three
years, after which they are renewable for additional one-year
periods. The employment agreements entitle the employee to
receive certain severance payments for termination of employment
without cause, as defined by the agreements.
Employee Stock Option Plan
In
July of 1998, UAI’s Board of Directors adopted the 1998
Employee Stock Option Plan (the “Plan”) for the Company
’s directors, officers, employees and key advisors. The
total number of shares of UAI no par value Common Stock (the
“Common Stock”) reserved for issuance under the Plan
is 4,500,000. Awards granted under the plan are at the
discretion of the Company’s Board of Directors, or a
compensation committee appointed by the Board of Directors, and
may be in the form of either incentive or nonqualified stock
options. At December 31, 1998, 2,448,000 shares of Common Stock
were available for additional awards under the plan.
If
the Company had elected to recognize compensation cost based on
the fair value of the options as prescribed by Statement of
Financial Accounting Standard No. 123, “Accounting for
Stock-Based Compensation”, the following results would have
occurred for the year ended December 31, 1998 using the
Black-Scholes option-pricing model with the listed assumptions:
| Pro forma net
loss
|
|
$1,375,000
|
|
| Volatility
|
|
0
|
%
|
| Dividend yield
|
|
0
|
%
|
| Risk-free
interest rate
|
|
5
|
%
|
| Expected life
in years
|
|
5
|
|
During 1998, the Company recognized $65,000 of option plan
compensation expense and expects to recognize additional expense
of approximately $422,000 over the next four years as such
options vest.
The
vesting term of options granted under the Plan shall be fixed by
the Board of Directors, or compensation committee elected by the
Board of Directors, but in no case shall be exercisable for more
than 10 years after the date the option is granted.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
The following information relates to stock options with an
exercise price which was less than the fair market value of the
underlying stock on the date of grant:
| |
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
| Balance at
December 31, 1997
|
|
—
|
|
|
—
|
|
Granted
|
|
1,725,000
|
|
|
$
0.0027
|
|
Exercised
|
|
(150,000
|
)
|
|
0.000007
|
|
Forfeited
|
|
—
|
|
|
—
|
| |
|
|
|
|
|
| Balance at
December 31, 1998
|
|
1,575,000
|
|
|
$
0.003
|
| |
|
|
|
|
|
| Weighted
average fair value of options granted during 1998
|
|
$
0.28
|
|
|
|
The
following information relates to stock options with an exercise
price which equaled the fair market value of the underlying
common stock on the date of grant:
| |
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
| Balance at
December 31, 1997
|
|
—
|
|
—
|
|
Granted
|
|
327,000
|
|
$0.18
|
|
Exercised
|
|
—
|
|
—
|
|
Forfeited
|
|
—
|
|
—
|
| |
|
|
|
|
| Balance at
December 31, 1998
|
|
327,000
|
|
$0.18
|
| |
|
|
|
|
| Weighted
average fair value of options granted during 1998
|
|
$
0.04
|
|
|
The
following information relates to stock options as of December
31, 1998:
| |
|
Exercise Prices
|
| |
|
$0.000007
to $0.0033
|
|
$0.133
to $0.22
|
|
$0.5067
to $0.53
|
| Stock Options
Outstanding
|
|
Number
|
|
1,575,000
|
|
291,000
|
|
36,000
|
|
Weighted
average exercise price
|
|
$
0.003
|
|
$
0.14
|
|
$0.5267
|
Weighted
average remaining contractual life
(years)
|
|
4.67
|
|
4.51
|
|
4.91
|
| Stock Options
Exercisable
|
|
Number
|
|
150,000
|
|
—
|
|
—
|
|
Weighted
average exercise price
|
|
$0.000007
|
|
—
|
|
—
|
The
above disclosures include options to purchase 300,000 shares of
common stock issued to non-employees for services rendered
during 1998. These options were issued with an exercise price of
$0.000007 and were immediately exercisable. These non-employee
options comprised $40,000 of the $65,000 stock option plan
compensation expense recognized during 1998. During 1998,
options covering 150,000 shares related to these non-employee
options were exercised, and as of December 31, 1998, options
covering 150,000 shares related to these non-employee options
were outstanding. All of these remaining nonemployee options
were exercised during the three months ended March 31, 1999.
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
Note 9—Redeemable
Cumulative Convertible Preferred Stock
Series A Redeemable Cumulative Convertible Preferred Stock
During 1998, UAI issued 335,334 shares of Series A Redeemable
Cumulative Convertible Preferred Stock (“Series A Preferred
Stock”) for gross proceeds of $1,006,000. Additionally, UAI
received cash and accepted subscription documents for 385,830
shares of Series A Redeemable Cumulative Convertible Preferred
Stock (“Unissued Series A Preferred Stock”) for gross
proceeds of $1,157,000. As of December 31, 1998, the Company had
authorized 1,000,000 shares of Series A Preferred Stock. Stock
certificates for the Unissued Series A Preferred Stock were
issued as of February 8, 1999.
Holders of the Series A Preferred Stock are entitled to
cumulative dividends at an annual rate of 8%, payable in cash or
stock, at the Company’s discretion. The Series A Preferred
Stock holders have the right to convert their shares at any time
into shares of UAI Common Stock on a 3-for-1 basis. A qualified
initial public offering of at least $3 per share triggers a
mandatory conversion of the Series A Preferred Stock into Common
Stock.
Holders of Series A Preferred Stock have the right to demand the
Company to redeem one-third of the shares originally purchased
on each of the fourth, fifth, and sixth anniversaries of the
closing. UAI has the right to redeem not less than all of the
outstanding Series A Preferred Stock between the third and sixth
anniversaries of the closing. All redemptions are to be made at
amount equal to the sum of the original purchase price of the
Series A Preferred Stock plus accumulated but unpaid dividends.
Series A Preferred Stock holders vote as a class on all matters
and are entitled to one vote per each Common Stock equivalent
share. Series A Preferred Stock holders, as a class, may elect
one representative to the Board of Directors.
Upon
liquidation or dissolution, shareholders of Series A Preferred
Stock will be distributed available assets up to the sum of the
original purchase price plus accumulated but unpaid dividends.
This distribution has preference over any distribution to common
stock holders.
Series A Redeemable Cumulative Convertible Preferred Stock
Warrants
In
connection with the sale of Series A Preferred Stock, UAI issued
warrants (the “Series A Warrants”) to purchase an
additional 33,334 shares of Series A Preferred Stock at $3.00
per share, exercisable for a period of five years from September
21, 1998, the issuance date of the warrants.
The
fair market value of the Series A Warrants was established at
the time of issuance to be $36,000, based on the Black-Scholes
valuation model. The Series A Preferred Stock is shown net of
the fair market value of the Series A Warrants.
Note 10—Common Stock
At
December 31, 1998, UAI had authorized 150,000,000 shares of no
par value Common Stock and 15,150,000 shares were issued and
outstanding.
<R>
As of February 8, 1999, the Company ratified
changes to the composition of its Board of Directors (the “
New Board of Directors”). The New Board of Directors is
composed of seven Directors; three Directors elected by the
Common Stock holders, one Director elected by the Series A
Preferred Stock holders, two Directors elected by the Series B
Preferred Stock holders and one Director, who is to be an
industry expert, nominated by the Common Stock holders and
approved by all shareholders jointly.
</R>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements—
(Continued)
<R>
(Information Presented for
the Three Month
</R> <R>
Periods Ended
March 31, 1998 and 1999 is Unaudited)
</R>
The Company has a sufficient number of authorized Common Stock
shares available to issue upon the conversion of the outstanding
preferred stock, warrants and stock options.
As
of December 31, 1998, Common Stock shares reserved for issuance
are as follows:
| Redeemable
Series A Preferred Stock
|
|
2,316,990
|
| Employee stock
options outstanding
|
|
1,752,000
|
| Series A
Warrants
|
|
231,699
|
| |
|
|
| Total
|
|
4,300,689
|
| |
|
|
Note 11—Subsequent Events
On
February 8, 1999, UAI issued 2,000,000 shares of Series B
Redeemable Cumulative Convertible Preferred Stock (“Series
B Preferred Stock”) for gross proceeds of $6,000,000. In
conjunction with the issuance of the Series B Preferred Stock,
the Company issued warrants to purchase an additional 400,000
shares of Series B Preferred Stock (the “Series B Warrants
”) at an exercise price of $0.01 per share and warrants to
purchase 180,000 shares of Common Stock at $1.00 per share, and
caused options to purchase 420,000 shares of Common Stock to be
granted by certain principal shareholders of the Company’s
Common Stock. The 420,000 common stock options granted by the
principal shareholders were valued at $31,000 using the
Black-Scholes valuation model. This amount was recorded as
additional paid-in capital. Series B Preferred Stock is
convertible into Common Stock on a 3-for-1 basis.
Note 12—Subsequent Events (Unaudited)
On
April 30, 1999, UAI issued 666,667 shares of Series C
Convertible Preferred Stock (“Series C Preferred Stock”
) for gross proceeds of $1,950,000. Series C Preferred Stock is
convertible into Common Stock on a 3-for-2 basis.
<R>
On June 30, 1999, UAI issued 3,764,706 shares
of Series D Cumulative Convertible Preferred Stock (“Series
D Preferred Stock”) for gross proceeds of $16,000,000.
Series D Preferred Stock is convertible into Common Stock on a
3-for-2 basis.
</R>
On
May 3, 1999, the Company renegotiated its existing line of
credit to increase the maximum borrowings under the line to
$4,000,000. This new line of credit agreement bears the same
rate of interest as the previous line of credit agreement and
expires on April 10, 2000. Subsequent to March 31, 1999, the
Company entered into additional operating leases with minimum
lease payments totaling approximately $5,000,000 over the next
five years.
During 1999, the Company signed a letter of intent to acquire
Pacific Crest Networks, Inc. The total purchase price is
$1,000,000 with $400,000 payable in cash, $350,000 payable in
Series D preferred stock and $250,000 of debt to be assumed.
Independent Auditors’ Report
The Board of Directors
Web Yes, Inc.:
<R>
We have audited the accompanying consolidated
balance sheets of Web Yes, Inc. and subsidiary as of December
31, 1997 and 1998, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the
years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
</R>
We
conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
<R>
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Web Yes, Inc. and subsidiary
as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
</R>
<R>
</R>
Boston, Massachusetts
June 30, 1999
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Consolidated Balance Sheets
<R>
| |
|
December 31,
|
|
(Unaudited)
|
| |
|
1997
|
|
1998
|
|
March
31,
1999
|
| |
|
|
| Assets:
|
|
|
|
|
|
|
|
| Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
4,729
|
|
|
$10,204
|
|
$
1,480
|
|
Accounts
receivable
|
|
15,415
|
|
|
13,899
|
|
31,764
|
| |
|
|
|
|
|
|
|
|
Total current
assets
|
|
20,144
|
|
|
24,103
|
|
33,244
|
| |
|
|
|
|
|
|
|
| Computer
equipment
|
|
56,509
|
|
|
190,948
|
|
221,142
|
| Less:
Accumulated depreciation and amortization
|
|
6,667
|
|
|
26,095
|
|
37,601
|
| |
|
|
|
|
|
|
|
|
Net computer
equipment
|
|
49,842
|
|
|
164,853
|
|
183,541
|
| |
|
|
|
|
|
|
|
| Deposits
|
|
100
|
|
|
2,281
|
|
2,281
|
| |
|
|
|
|
|
|
|
|
Total assets
|
|
$70,086
|
|
|
$191,237
|
|
$219,066
|
| |
|
|
|
|
|
|
|
| |
| Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
| Current
liabilities:
|
|
|
|
|
|
|
|
| |
|
Current
portion of capital lease obligations
|
|
$
4,782
|
|
|
$18,633
|
|
$19,951
|
|
Loans and
advances payable to stockholders
|
|
45,007
|
|
|
29,251
|
|
42,296
|
|
Accounts
payable
|
|
12,652
|
|
|
49,414
|
|
30,563
|
|
Accrued
expenses
|
|
2,010
|
|
|
14,925
|
|
28,134
|
| |
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
64,451
|
|
|
112,223
|
|
120,944
|
| Capital lease
obligations, net of current portion
|
|
13,652
|
|
|
43,056
|
|
37,344
|
| |
|
|
|
|
|
|
|
|
Total
liabilities
|
|
78,103
|
|
|
155,279
|
|
158,288
|
| |
|
|
|
|
|
|
|
| Commitments
and contingencies
|
|
|
|
|
|
|
|
| |
| Stockholders
’ equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value, 200,000 shares authorized, none issued
and outstanding in 1997, 70,000
shares issued and outstanding in
1998 and 1999 (liquidation
preference of $1 per share)
|
|
—
|
|
|
70,000
|
|
70,000
|
Common stock,
no par value, 1,000,000 shares authorized, 13,395
shares issued and outstanding in
1997, 691,897 shares issued and
outstanding in 1998 and 1999
|
|
134
|
|
|
6,919
|
|
6,919
|
| Additional
paid-in capital
|
|
—
|
|
|
55,985
|
|
55,985
|
| Accumulated
deficit
|
|
(8,151
|
)
|
|
(90,726)
|
|
(65,906)
|
| Less:
Subscriptions receivable
|
|
—
|
|
|
(6,220)
|
|
(6,220)
|
| |
|
|
|
|
|
|
|
|
Total
stockholders’ equity (deficit)
|
|
(8,017
|
)
|
|
35,958
|
|
60,778
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$70,086
|
|
|
$191,237
|
|
$219,066
|
| |
|
|
|
|
|
|
|
</R>
See accompanying notes to consolidated
financial statements.
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Consolidated Statements of Operations
<R>
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months
Ended March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues
|
|
$108,669
|
|
|
$288,512
|
|
|
$54,464
|
|
|
$141,828
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
personnel costs
|
|
—
|
|
|
38,750
|
|
|
—
|
|
|
37,067
|
|
|
Other direct
costs
|
|
39,163
|
|
|
111,650
|
|
|
9,529
|
|
|
15,051
|
|
|
Selling,
general and administrative expenses
|
|
70,894
|
|
|
214,238
|
|
|
23,375
|
|
|
57,953
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
110,057
|
|
|
364,638
|
|
|
32,904
|
|
|
110,071
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
(1,388
|
)
|
|
(76,126
|
)
|
|
21,560
|
|
|
31,757
|
|
|
Interest
expense
|
|
(4,182
|
)
|
|
(6,449
|
)
|
|
(916
|
)
|
|
(6,937
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$(5,570
|
)
|
|
$(82,575
|
)
|
|
$20,644
|
|
|
$24,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) per share—basic and diluted
|
|
$(.42
|
)
|
|
$(.37
|
)
|
|
$1.52
|
|
|
$
.04
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted
average shares outstanding
|
|
13,395
|
|
|
223,452
|
|
|
13,595
|
|
|
691,897
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to consolidated
financial statements.
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Consolidated Statements of Stockholders
’ Equity
<R>
| |
|
Common stock
|
|
Preferred stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
deficit
|
|
Subscriptions
receivable
|
|
Total
stockholders’
equity
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
| Balance,
January 1, 1997
|
|
13,395
|
|
$134
|
|
—
|
|
$—
|
|
$—
|
|
$(2,581
|
)
|
|
$—
|
|
|
$(2,447
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,570
|
)
|
|
—
|
|
|
(5,570
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
13,395
|
|
134
|
|
—
|
|
—
|
|
—
|
|
(8,151
|
)
|
|
|
|
|
(8,017
|
)
|
Issuance of common stock to
founders
|
|
621,952
|
|
6,220
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(6,220
|
)
|
|
—
|
|
Issuance of common stock in
exchange for
services
|
|
56,550
|
|
565
|
|
—
|
|
—
|
|
55,985
|
|
—
|
|
|
—
|
|
|
56,550
|
|
|
Issuance of preferred shares
|
|
—
|
|
—
|
|
70,000
|
|
70,000
|
|
—
|
|
—
|
|
|
—
|
|
|
70,000
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(82,575
|
)
|
|
—
|
|
|
(82,575
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
691,897
|
|
6,919
|
|
70,000
|
|
70,000
|
|
55,985
|
|
(90,726
|
)
|
|
(6,220
|
)
|
|
35,958
|
|
|
Net income (Unaudited)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24,820
|
|
|
—
|
|
|
24,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March
31, 1999
(Unaudited)
|
|
691,897
|
|
$6,919
|
|
70,000
|
|
$70,000
|
|
$55,985
|
|
$(65,906
|
)
|
|
$(6,220
|
)
|
|
$60,778
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to consolidated
financial statements.
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Consolidated Statements of Cash Flows
<R>
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months
Ended March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$(5,570
|
)
|
|
$(82,575
|
)
|
|
$20,644
|
|
|
$24,820
|
|
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
6,018
|
|
|
20,023
|
|
|
3,000
|
|
|
11,507
|
|
|
Common stock
issued to non-employees for services
|
|
—
|
|
|
56,550
|
|
|
—
|
|
|
—
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(14,552
|
)
|
|
1,516
|
|
|
1,634
|
|
|
(17,865
|
)
|
|
Accounts
payable
|
|
11,346
|
|
|
36,762
|
|
|
(9,426
|
)
|
|
(18,851
|
)
|
|
Accrued
expenses
|
|
1,716
|
|
|
12,915
|
|
|
500
|
|
|
13,209
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating
activities
|
|
(1,042
|
)
|
|
45,191
|
|
|
16,352
|
|
|
12,820
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of computer equipment
|
|
(19,724
|
)
|
|
(78,286
|
)
|
|
(6,147
|
)
|
|
(30,195
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing activity
|
|
(19,724
|
)
|
|
(78,286
|
)
|
|
(6,147
|
)
|
|
(30,195
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of preferred stock
|
|
—
|
|
|
55,000
|
|
|
5,000
|
|
|
—
|
|
|
Increase in
deposits
|
|
(100
|
)
|
|
(2,181
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from
loans and advances payable to stockholders
|
|
37,007
|
|
|
15,033
|
|
|
22,543
|
|
|
8,651
|
|
|
Repayment of
capital lease obligations
|
|
(750
|
)
|
|
(8,967
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds
(repayment) of loans payable
|
|
(11,008
|
)
|
|
(20,315
|
)
|
|
(30,007
|
)
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
25,149
|
|
|
38,570
|
|
|
(2,464
|
)
|
|
8,651
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Increase
(decrease) in cash
|
|
4,383
|
|
|
5,475
|
|
|
7,741
|
|
|
(8,724
|
)
|
| Cash,
beginning of period
|
|
346
|
|
|
4,729
|
|
|
4,729
|
|
|
10,204
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash, end of
period
|
|
$ 4,729
|
|
|
$10,204
|
|
|
$12,470
|
|
|
$ 1,480
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$ 2,466
|
|
|
$ 8,460
|
|
|
$916
|
|
|
$ 1,796
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
preferred stock in exchange for advances from
stockholders
|
|
—
|
|
|
$15,000
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
obligations
|
|
$19,150
|
|
|
$56,748
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to consolidated
financial statements.
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
<R>
and March 31, 1999 (Unaudited)
</R>
(1) The Company
<R></R>
<R>
Web Yes, Inc. (the “Company”), which
was incorporated in July 1996, provides application hosting
services. Since inception and through September 1998 the Company
operated with no salaried employees. Therefore, recurring
operating expenses such as salaries and benefits are not
reflected in the accompanying financial statements. Financial
statements for periods after September 1998 include salaries and
fringe benefits.
</R>
<R>
Web Developers Network, Inc., a wholly owned
subsidiary of the Company, has been inactive since inception.
</R>
(2) Summary of
Significant Accounting Policies
(a) Principles of Consolidation
<R>
The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiary, Web Developers Network, Inc. All significant
intercompany transactions have been eliminated in consolidation.
</R>
(b) Use of Estimates
<R>
Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets
and liabilities and disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
</R>
<R>
(c) Computer Equipment
</R>
<R>
Computer equipment is recorded at cost.
Depreciation is recorded on the straight-line basis over the
estimated useful life of the related assets (three to five
years). Equipment held under capital leases is stated at the net
present value of minimum lease payments at the inception of the
lease and amortized using the straight-line method over the
lease term. Maintenance and repairs are charged to operations
when incurred.
</R>
(d) Financial Instruments and Concentration of
Credit Risk
<R>
Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash,
accounts receivable and debt instruments.
</R>
The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable.
The Company maintains allowances for potential credit losses and
such losses have been within management’s expectations.
Write-offs of accounts receivable have not been material for any
of the periods presented. The Company operates in one industry
segment and its customers are headquartered primarily in North
America.
<R>
The fair market values of cash, accounts
receivable and debt instruments at both December 31, 1997 and
1998 approximate their carrying amounts.
</R>
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Notes to Consolidated Financial Statements
—(Continued)
(e) Impairment of Long-Lived Assets
The
Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount.
(f) Revenue Recognition
<R>
Revenues pursuant to time and materials
contracts are recognized as services are provided. Revenues from
application hosting agreements are recognized ratably over the
terms of the agreements.
</R>
<R>
(g) Direct Personnel Costs
and Other Direct Costs
</R>
<R>
Direct personnel costs consist of payroll and
payroll-related expenses for personnel dedicated to client
assignments. Other direct costs consist of hardware.
</R>
(h) Income Taxes
<R>
The Company records income taxes using the
asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
</R>
<R>
(i) Net Income (Loss) Per
Share
</R>
<R>
In 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 (“SFAS
128”),
Earnings per Share
.
SFAS 128 requires the presentation of basic and diluted net
income (loss) per share for all periods presented. Basic
earnings per share were calculated based on weighted average
common shares outstanding. There were no common stock
equivalents outstanding for any of the periods presented;
accordingly, basic and fully diluted earnings per share are the
same. As the Company has been in a net loss position for the
years ended December 31, 1997 and 1998, common stock equivalents
of zero and 200,000 were excluded from the diluted loss per
share calculation as they would be antidilutive. As a result,
diluted loss per share is the same as basic loss per share, and
has not been presented separately.
</R>
<R></R>
(j) Reporting Comprehensive Income
<R>
Effective July 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 130 (“SFAS
130”),
Reporting Comprehensive Income
.
This statement requires that all components of comprehensive
income (loss) be reported in the consolidated financial
statements in the period in which they are recognized. For each
period presented, comprehensive income (loss) under SFAS 130 was
equivalent to the Company’s net income (loss) reported in
the accompanying consolidated statements of operations.
</R>
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Notes to Consolidated Financial Statements
—(Continued)
(k) Unaudited Interim Financial Information
<R>
The consolidated financial statements as of
March 31, 1999 and for the three months ended March 31, 1998 and
1999 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial
statements for the interim periods have been included. Results
of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for
the full fiscal year or any other future periods.
</R>
(l) Recent Accounting Pronouncements
<R></R>
<R>
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.
</R>
<R>
(3)
Loans and Advances Payable to Stockholders
</R>
<R>
The Company has various loans and advances
payable to stockholders for working capital purposes. The loans,
which accrue interest at 8%, have no definitive repayment terms.
</R>
(4) Stockholders’
Equity
(a) Common Stock
<R>
In September 1998, the Company amended its
articles of incorporation to adjust the number of authorized
shares of common stock from 20,000 shares to 1,000,000 shares.
The Company then issued 621,952 shares of common stock at $.01
per share to the founders of the Company in order to adjust the
equity ownership to planned percentages. Subsequent to this
issuance the founders began to draw salaries.
</R>
<R>
During 1998, the Company issued common stock
to employees and non-employees in exchange for services
rendered. The Company recorded expense of $56,550 for the fair
value of the stock issued.
</R>
(b) Preferred Stock
<R>
In 1998, the Company authorized 200,000 shares
of preferred stock and issued 70,000 shares at $1.00 per share.
The preferred stock is voting and is convertible into one share
of common stock immediately at the option of the holder, and
automatically converts into common stock upon the completion of
a qualifying initial public offering. The preferred stock has a
$1 per share liquidation preference.
</R>
(5) Capital Leases
<R>
The Company leases certain of its computer and
office equipment under capital leases. Substantially all of such
leases are for four years, with interest rates ranging from
12.9% to 21.6%. The leased equipment secures all leases.
</R>
<R>
WEB YES, INC. AND SUBSIDIARY
</R>
Notes to Consolidated Financial Statements
—(Continued)
<R>
The following is a schedule by year of
future minimum lease payments due under capital leases, and the
net present value of the minimum lease payments as of December
31, 1998:
</R>
<R>
| 1999
|
|
$27,184
|
| 2000
|
|
26,228
|
| 2001
|
|
17,146
|
| 2002
|
|
7,459
|
| |
|
|
|
Total minimum
lease payments
|
|
78,017
|
| Less: amount
representing interest
|
|
16,328
|
| |
|
|
|
Net present
value of minimum lease payments
|
|
61,689
|
| Less: current
portion of capital lease obligations
|
|
18,633
|
| |
|
|
|
Capital lease
obligations, net of current portion
|
|
$43,056
|
| |
|
|
</R>
(6) Significant
Customers
<R>
The following table summarizes revenues from
major customers (revenues in excess of 10% for the year) as a
percentage of total revenues:
</R>
<R>
| |
|
Years ended
December 31,
|
|
(Unaudited)
Three months
ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
29
|
%
|
|
24
|
%
|
|
22
|
%
|
|
49
|
%
|
| Customer B
|
|
—
|
|
|
35
|
|
|
10
|
|
|
22
|
|
</R>
(7) Income Taxes
<R>
The tax effects of temporary differences that
give rise to significant portions of deferred tax assets at
December 31, 1997 and 1998 are as follows:
</R>
| |
|
1997
|
|
1998
|
| Deferred tax
assets:
|
|
Accrued
expenses
|
|
$
492
|
|
|
$
978
|
|
|
Net operating
loss carryforward
|
|
714
|
|
|
3,735
|
|
| |
|
|
|
|
|
|
|
Total gross
deferred tax assets
|
|
1,206
|
|
|
4,713
|
|
| Valuation
allowance
|
|
(1,206
|
)
|
|
(4,713
|
)
|
| |
|
|
|
|
|
|
|
Net deferred
tax asset
|
|
$
—
|
|
|
$
—
|
|
| |
|
|
|
|
|
|
<R>
The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes that after considering all the available objective
evidence it is more likely than not that these assets will not
be realized.
</R>
<R>
(8)
Subsequent Event
</R>
<R>
On June 10, 1999, the Company entered into an
Agreement and Plan of Reorganization with Breakaway Solutions,
Inc. (“Breakaway”), a provider of information
technology consulting services. Under the agreement, Breakaway
acquired all the outstanding capital stock of the Company in a
transaction accounted for under the purchase method of
accounting. The total purchase price was comprised of 571,135
shares of common stock of Breakaway.
</R>
Independent Auditors’ Report
The Board of Directors
WPL Laboratories, Inc.:
<R>
We have audited the accompanying
balance sheets of WPL Laboratories, Inc. as of December 31, 1997
and 1998, and the related statements of income, stockholders
’ equity and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company
’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
</R>
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.
<R>
In our opinion, the financial
statements referred to above present fairly, in all material
respects, the financial position of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.
</R>
<R>
</R>
Boston, Massachusetts
June 30, 1999
Balance Sheets
<R>
| |
|
December 31,
|
|
(Unaudited)
March 31,
1999
|
| |
|
1997
|
|
1998
|
| Assets
|
| Current assets:
|
|
Cash
|
|
$81,232
|
|
|
$240,310
|
|
|
$415,368
|
|
|
Accounts
receivable
|
|
371,869
|
|
|
746,982
|
|
|
983,462
|
|
|
Employee
advances
|
|
—
|
|
|
103,300
|
|
|
103,300
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
453,101
|
|
|
1,090,592
|
|
|
1,502,130
|
|
| |
|
|
|
|
|
|
|
|
|
| Property and
equipment
|
|
|
|
|
Office and
computer equipment
|
|
103,703
|
|
|
169,668
|
|
|
203,230
|
|
|
Software
|
|
5,000
|
|
|
9,512
|
|
|
10,334
|
|
|
Automobile
|
|
7,500
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
116,203
|
|
|
179,180
|
|
|
213,564
|
|
|
Less:
Accumulated depreciation and amortization
|
|
(64,556
|
)
|
|
(83,737
|
)
|
|
(94,647
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Net property
and equipment
|
|
51,647
|
|
|
95,443
|
|
|
118,917
|
|
| |
|
|
|
|
|
|
|
|
|
| Other assets
|
|
1,915
|
|
|
103,909
|
|
|
244,503
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$506,663
|
|
|
$1,289,944
|
|
|
$1,865,550
|
|
| |
|
|
|
|
|
|
|
|
|
| Liabilities
and Stockholders’ Equity
|
| Current
liabilities:
|
|
Related-party
advance and accrued interest
|
|
$23,333
|
|
|
$25,000
|
|
|
$—
|
|
|
Accounts
payable
|
|
10,947
|
|
|
8,278
|
|
|
11,862
|
|
|
Accrued
compensation and related benefits
|
|
68,341
|
|
|
206,192
|
|
|
266,689
|
|
|
Other accrued
expenses
|
|
19,469
|
|
|
23,052
|
|
|
12,500
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
122,090
|
|
|
262,522
|
|
|
291,051
|
|
| |
|
|
|
|
|
|
|
|
|
| Commitments
and contingencies
|
|
|
|
| Stockholders
’ equity:
|
Common stock
$.01 par value, 10,000,000 shares authorized,
1,248,980 shares issued and
outstanding in 1997 and
1,800,000 shares issued and
outstanding in 1998 and 1999
|
|
12,490
|
|
|
18,000
|
|
|
18,000
|
|
|
Additional
paid-in capital
|
|
99
|
|
|
242,589
|
|
|
242,589
|
|
|
Retained
earnings
|
|
371,984
|
|
|
766,833
|
|
|
1,313,910
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
384,573
|
|
|
1,027,422
|
|
|
1,574,499
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$506,663
|
|
|
$1,289,944
|
|
|
$1,865,550
|
|
| |
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
Statements of Income
<R>
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Revenues
|
|
$1,611,284
|
|
|
$2,650,415
|
|
|
$434,585
|
|
$1,087,678
|
| |
|
|
|
|
|
|
|
|
|
|
| Operating
expenses:
|
|
Project
personnel costs
|
|
1,191,193
|
|
|
1,719,664
|
|
|
193,316
|
|
446,109
|
|
Sales and
marketing
|
|
45,579
|
|
|
37,092
|
|
|
12,271
|
|
10,768
|
|
General and
administrative
|
|
186,461
|
|
|
497,143
|
|
|
52,333
|
|
84,650
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
1,423,233
|
|
|
2,253,899
|
|
|
257,920
|
|
541,527
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
188,051
|
|
|
396,516
|
|
|
176,665
|
|
546,151
|
| |
|
|
|
|
|
|
|
|
|
|
| Other income
(expense):
|
|
Interest
expense
|
|
(2,250
|
)
|
|
(1,667
|
)
|
|
—
|
|
—
|
|
Interest
income
|
|
—
|
|
|
—
|
|
|
—
|
|
926
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total other
income (expense)
|
|
(2,250
|
)
|
|
(1,667
|
)
|
|
—
|
|
926
|
| |
|
|
|
|
|
|
|
|
|
|
| Net income
|
|
$
185,801
|
|
|
$
394,849
|
|
|
$
176,665
|
|
$
547,077
|
| |
|
|
|
|
|
|
|
|
|
|
| |
| Net income per
share—basic
|
|
$0.15
|
|
|
$0.24
|
|
|
$
0.14
|
|
$0.30
|
| |
|
|
|
|
|
|
|
|
|
|
| Net income per
share—diluted
|
|
$0.15
|
|
|
$0.24
|
|
|
$
0.14
|
|
$0.29
|
| |
|
|
|
|
|
|
|
|
|
|
| |
| Weighted
average shares outstanding
|
|
1,248,980
|
|
|
1,664,132
|
|
|
1,248,980
|
|
1,800,000
|
| Weighted
average stock equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
66,415
|
| |
|
|
|
|
|
|
|
|
|
|
| Weighted
average shares outstanding and stock equivalents
|
|
1,248,980
|
|
|
1,664,132
|
|
|
1,248,980
|
|
1,866,415
|
| |
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
Statements of Stockholders’ Equity
<R>
| |
|
Common Stock
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Total
Stockholders’
Equity
|
| Balance,
January 1, 1997
|
|
1,248,980
|
|
$12,490
|
|
$99
|
|
$267,993
|
|
$280,582
|
|
|
Stockholders
’ distributions
|
|
—
|
|
—
|
|
—
|
|
|
(81,810
|
)
|
|
(81,810
|
)
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
|
185,801
|
|
|
185,801
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1997
|
|
1,248,980
|
|
12,490
|
|
99
|
|
|
371,984
|
|
|
384,573
|
|
Common stock
issued to
employees for services
rendered
|
|
551,020
|
|
5,510
|
|
242,490
|
|
|
—
|
|
|
248,000
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
|
394,849
|
|
|
394,849
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Balance,
December 31, 1998
|
|
1,800,000
|
|
18,000
|
|
242,589
|
|
|
766,833
|
|
|
1,027,422
|
|
|
Net income
(Unaudited)
|
|
—
|
|
—
|
|
—
|
|
|
547,077
|
|
|
547,077
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 1999
(Unaudited)
|
|
1,800,000
|
|
$
18,000
|
|
$242,589
|
|
|
$1,313,910
|
|
|
$1,574,499
|
|
| |
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
Statements of Cash Flows
<R>
| |
|
Years Ended
December 31,
|
|
(Unaudited)
Three Months Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Operating
activities:
|
|
Net income
|
|
$185,801
|
|
|
$394,849
|
|
|
$176,665
|
|
|
$547,077
|
|
Adjustments to reconcile net income to net
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
14,300
|
|
|
26,681
|
|
|
6,671
|
|
|
10,910
|
|
Common stock
issued to employees for services
rendered
|
|
—
|
|
|
248,000
|
|
|
—
|
|
|
—
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(68,745
|
)
|
|
(375,113
|
)
|
|
30,936
|
|
|
(236,480
|
)
|
|
Employee
advances
|
|
—
|
|
|
(103,300
|
)
|
|
—
|
|
|
—
|
|
|
Accounts
payable
|
|
(2,902
|
)
|
|
(2,669
|
)
|
|
868
|
|
|
3,584
|
|
|
Accrued
compensation and related benefits
|
|
59,033
|
|
|
137,851
|
|
|
(87,810
|
)
|
|
60,497
|
|
|
Accrued
expenses
|
|
—
|
|
|
3,583
|
|
|
—
|
|
|
(10,552
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating
activities
|
|
187,487
|
|
|
329,882
|
|
|
127,330
|
|
|
375,036
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(41,106
|
)
|
|
(70,477
|
)
|
|
(1,025
|
)
|
|
(34,384
|
)
|
|
Increase in other assets
|
|
(1,240
|
)
|
|
(101,994
|
)
|
|
(1,119
|
)
|
|
(140,594
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
(42,346
|
)
|
|
(172,471
|
)
|
|
(2,144
|
)
|
|
(174,978
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) related party
advance
|
|
—
|
|
|
1,667
|
|
|
—
|
|
|
(25,000
|
)
|
|
Stockholders’ distribution
|
|
(81,810
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in)
financing activities
|
|
(81,810
|
)
|
|
1,667
|
|
|
—
|
|
|
(25,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
in cash
|
|
63,331
|
|
|
159,078
|
|
|
125,186
|
|
|
175,058
|
|
| Cash at
beginning of period
|
|
17,901
|
|
|
81,232
|
|
|
81,232
|
|
|
240,310
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash at end of
period
|
|
$81,232
|
|
|
$240,310
|
|
|
$206,418
|
|
|
$415,368
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
584
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
</R>
See accompanying notes to financial
statements.
Notes to Financial Statements
December 31, 1997 and 1998
<R>
and March 31, 1999 (Unaudited)
</R>
(1) The Company
<R></R>
<R>
WPL Laboratories, Inc. (the “Company”
) provides advanced software development services to businesses.
The Company’s projects include sales force automation,
distribution, management, personnel management, e-commerce
application development, product analysis and Internet enabling
applications.
</R>
(2) Summary of
Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(b) Financial Instruments and Concentration of
Credit Risk
<R>
Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash
and accounts receivable.
</R>
The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable.
The Company maintains allowances for potential credit losses and
such losses have been within management’s expectations.
Write-offs of accounts receivable have not been material for any
of the periods presented. The Company operates in one industry
segment and its customers are headquartered primarily in North
America.
<R>
The fair market values of cash and accounts
receivable at both December 31, 1997 and 1998 approximate their
carrying amounts.
</R>
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using
the straight-line method over three years for office and
computer equipment and software and five years for the
automobile.
(d) Impairment of Long-Lived Assets
The
Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount.
(e) Stockholders’ Equity
On
April 1, 1998, the Company amended its articles of incorporation
to change the par value of its common stock from $1.00 to $.01
and adjust the number of authorized shares. In addition, the
Company approved a stock dividend of 1,248,880 shares. All
related share information for all periods presented has been
restated to reflect this amendment.
<R>
WPL LABORATORIES, INC.
</R>
<R>
Notes to Financial Statements
—(Continued)
</R>
(f) Revenue Recognition
<R>
The Company generally recognizes revenue on
projects as work is performed based on hourly billable rates. In
addition, a limited number of projects are performed under
fixed-price contracts. Revenue from these contracts is
recognized on the percentage of completion method based on the
percentage that incurred costs to date bear to the most recently
estimated total costs. Anticipated losses on uncompleted
contracts, if any, are recognized in full when determined.
</R>
<R>
(g) Project Personnel Costs
</R>
<R>
Project personnel costs consists of payroll
and payroll-related expenses for personnel dedicated to client
assignments.
</R>
(h) Income Taxes
The
Company has elected to be taxed under the provisions of
subchapter S of the Internal Revenue Code, whereby the corporate
income is taxed to the individual shareholders based on their
proportionate share of the Company’s taxable income.
<R>
(i) Stock-Based Compensation
</R>
<R>
The Company has adopted Statement of Financial
Accounting Standards No. 123 (“SFAS” 123”),
Accounting for Stock-Based Compensation
.
As permitted by SFAS 123, the Company measures compensation
costs in accordance with Accounting Principles Board Opinion No.
25 (“APB No. 25”),
Accounting for Stock Issued to Employees,
and
related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted
at fair market value until they are exercised. Stock options
issued to non-employees are recorded at the fair value of the
stock at the date of grant. Upon exercise, net proceeds,
including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the
Company’s financial condition or results of operations.
</R>
<R>
(j) Net Income Per Share
</R>
<R>
The Company adopted the provisions of SFAS No.
128,
Earnings Per Share
during 1997. This statement requires the presentation of basic
and diluted net income per share for all periods presented.
Under SFAS 128, the Company presents both basic net income per
share and diluted net income per share. Basic net income per
share is calculated based on weighted average common shares
outstanding. Diluted net income per share reflects the per share
effect of dilutive stock options and other dilutive common stock
equivalents.
</R>
<R></R>
<R>
(k) Reporting Comprehensive
Income
</R>
<R>
Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards 130 (“SFAS 130
”),
Reporting Comprehensive Income
.
This statement requires that all components of comprehensive
income be reported in the financial statements in the period in
which they are recognized. For each year reported, comprehensive
income under SFAS 130 was equivalent to the Company’s net
income reported in the accompanying statements of income.
</R>
<R>
(l) Unaudited Interim
Financial Information
</R>
<R>
The financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are
unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements
for the interim periods have been included. Results of
operations for the interim periods presented are not necessarily
indicative of the results that may be expected for the full
fiscal year or any future periods.
</R>
<R>
WPL LABORATORIES, INC.
</R>
<R>
Notes to Financial Statements
—(Continued)
</R>
<R>
(m) Recent Accounting
Pronouncements
</R>
<R>
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.
</R>
<R></R>
(3) Related-Party
Advance and Accrued Interest
<R>
In 1996, the Company received a working
capital advance of $20,000, with no defined terms, from a
relative of its major stockholder. The advance has been accruing
interest at 8.3% per year. Interest expense on the advance was
$2,250, and $1,667 for the years ended December 31, 1997 and
1998, respectively, and $417 and $0 for the three months ended
March 31, 1998 and 1999, respectively.
</R>
(4) Common Stock
<R>
In April 1998, the Company awarded 551,020
shares of common stock to certain employees for services
rendered. Accordingly, the Company recorded compensation expense
of $248,000, which represented the estimated fair value of the
common stock issued. In connection with the award, the Company
advanced $103,300 to the employees to pay certain personal
income taxes. These advances are outstanding as of December 31,
1998.
</R>
(5) Employee Benefit
Plan
<R>
The Company maintains a defined contribution
plan in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. The plan covers all full-time employees
of the Company. Participants may contribute up to the greater of
15% of their total compensation or $10,000 to the plan, with the
Company matching on a discretionary basis. For the years ended
December 31, 1997 and 1998, the Company did not contribute to
the plan.
</R>
(6) Significant
Customers
<R>
The following table summarizes revenues from
significant customers (revenues in excess of 10% for the year)
as a percentage of total revenues:
</R>
<R>
| |
|
|
|
(Unaudited)
|
| |
|
Years Ended
December 31,
|
|
Three Months
Ended
March 31,
|
| |
|
1997
|
|
1998
|
|
1998
|
|
1999
|
| Customer A
|
|
52
|
%
|
|
38
|
%
|
|
53
|
%
|
|
32
|
%
|
| Customer B
|
|
—
|
|
|
18
|
|
|
31
|
|
|
—
|
|
| Customer C
|
|
—
|
|
|
15
|
|
|
—
|
|
|
22
|
|
| Customer D
|
|
25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Customer E
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
| Customer F
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
</R>
(7) Lease Commitments
<R>
The Company has entered into operating leases
for its office facility and equipment that expire through July
2000. Rent expense for the years ended December 31, 1997 and
1998 was $43,613, and $43,893, respectively. Future minimum
lease payments under the operating leases as of December 31,
1998 are $119,054 in 1999, $167,064 in 2000, $164,664 in 2001
and $41,166 in 2002.
</R>
WPL LABORATORIES, INC.
Notes to Financial Statements—
(Continued)
(8) Subsequent Events
(a) Stock Option Plan
<R>
On January 1, 1999, the Company instituted the
WPL Laboratories, Inc. 1999 Stock Option Plan (the “Plan
”) which authorizes the Company to grant options to
purchase common stock, to make awards of restricted common
stock, and to issue certain other equity-related awards to
employees and directors of, and consultants to, the Company. The
total number of shares of common stock which may be issued under
the Plan is 200,000 shares. The Plan is administered by the
Board of Directors, which selects the persons to whom stock
options and other awards are granted and determines the number
of shares, the exercise or purchase prices, the vesting terms
and the expiration date. Non-qualified stock options may be
granted at exercise prices which are above, equal to, or below
the grant date fair market value of the common stock. The
exercise price of options qualifying as incentive stock options
may not be less than the grant date fair market value of the
common stock. Stock options granted under the Plan are
nontransferable, generally become exercisable over a four-year
period, and expire ten years after the date of grant (subject to
earlier termination in the event of the termination of the
optionee’s employment or other relationship with the
Company). Subsequent to December 31, 1998 and through May 14,
1999, the Company granted 186,208 options under the Plan to
purchase common stock at $4.00 per share.
</R>
(b) Line of Credit
<R>
On February 22, 1999, the Company entered into
a line of credit agreement with a commercial bank under which it
may borrow up to $750,000 at the bank’s prime rate plus
.5%. Borrowings under the line are secured by substantially all
assets of the Company and are subject to certain financial and
nonfinancial covenants which include, among others, maintenance
of a ratio of debt to cash flow, minimum tangible net worth and
a ratio of current assets to current liabilities. The line of
credit expires on April 15, 2000. This agreement terminated upon
the purchase of the Company (see note 8d).
</R>
(c) Consulting Agreement
<R>
On March 17, 1999, the Company signed a
consulting agreement with Plansponsor.com, Inc. (“
PlanSponsor”). The agreement calls for the Company to
provide 3,000 hours of services, including work previously
performed for PlanSponsor in exchange for shares of common stock
in PlanSponsor. As of December 31, 1998, the Company had
performed $100,875 of services based on the agreement’s
contractual rates. This amount is included in other assets on
the accompanying balance sheet and will ultimately be settled by
issuance of shares of PlanSponsor common stock. In May 1999, the
Company declared a dividend of the PlanSponsor stock to the
stockholders of the Company.
</R>
(d) Reorganization Agreement
<R>
On May 17, 1999, the Company entered into a
Reorganization Agreement with Breakaway Solutions, Inc. (“
Breakaway”), a provider of information technology
consulting services. Under the agreement, Breakaway acquired all
of the outstanding stock of the Company in a transaction
accounted for under the purchase method of accounting. The
purchase price was comprised of $5 million in cash, 1,705,175
shares of common stock and the assumption of options to purchase
393,506 shares of common stock at an exercise price of $2.3824
per share.
</R>
[Partner Company Logos Will Be Placed Here]
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.
<R>
13,250,000 Shares
</R>
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
PROSPECTUS
Merrill Lynch & Co.
<R>
Banc of America Securities LLC
</R>
<R>
BancBoston Robertson Stephens
</R>
Deutsche Banc Alex. Brown
Wit Capital Corporation
, 1999
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
<R>
Preliminary Prospectus dated
July 16, 1999
</R>
PROSPECTUS
<R>
13,250,000 Shares
</R>
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
<R>
This is Internet Capital Group, Inc.’s
initial public offering of shares of common stock. Of the
13,250,000 shares being offered, we are offering 12,000,000
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. Safeguard
Scientifics may be deemed a statutory underwriter with respect
to the shares of our common stock offered to the shareholders of
Safeguard Scientifics. Safeguard Scientifics is not an
underwriter with respect to the other shares of our common stock
offered and is not included in the term “underwriter”
as used elsewhere in this prospectus.
</R>
<R>
We expect the public offering price to be
between $10.00 and $12.00 per share. Currently, no public market
exists for the shares. After pricing of the offering, we expect
that the common stock will trade on the Nasdaq National Market
under the symbol “ICGE.”
</R>
<R>
International Business Machines Corporation
has agreed to purchase directly from us $45 million of shares of
our common stock in a private placement at a price equal to the
initial public offering price per share. The private placement
is concurrent with and conditioned upon the completion of our
initial public offering. At our request, the underwriters have
reserved approximately 2.6 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. In addition, the underwriters have
reserved up to $20 million of shares of our common stock for
sale to General Electric Capital Corporation at the initial
public offering price. This represents 1,818,181 shares based on
the mid-point of the offering range. General Electric Capital
Corporation has not committed to purchasing these shares.
</R>
<R>
Investing in our common stock involves
risks which are described in the “Risk Factors”
section beginning on page 8 of this prospectus.
</R>
<R>
| |
|
Per
Share
|
|
Total
|
| Public
offering price
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Safeguard Scientifics
|
|
$
|
|
$
|
</R>
<R>
The underwriters may also purchase from us up
to an additional 1,800,000 shares at the public offering price,
less the underwriting discount, within 30 days from the date of
this prospectus to cover over-allotments.
</R>
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
<R>
|
Banc of
America Securities LLC
|
</R>
|
BancBoston
Robertson Stephens
|
<R></R>
The date of this prospectus is
,
1999.
Alternate International Page
UNDERWRITING
General
<R>
We intend to offer our common stock outside
the United States and Canada through a number of international
managers, as well as in the United States and Canada through a
number of U.S. underwriters. Merrill Lynch International, Banc
of America Securities LLC, BancBoston Robertson Stephens
International Limited and Deutsche Bank AG London are acting as
managers of each of the international managers named below.
Subject to the terms and conditions set forth in the purchase
agreement among us and the international managers, and
concurrently with the sale of 7,800,000 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.
</R>
<R>
Underwriters
|
|
Number
of
Shares
|
| Merrill Lynch
International
|
|
|
| Banc of
America Securities LLC
|
|
|
| BancBoston
Robertson International Limited
|
|
|
| Deutsche Bank
AG London
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Total
|
|
1,950,000
|
| |
|
|
</R>
<R>
We have also agreed with certain U.S.
underwriters in the United States and Canada, for whom Merrill
Lynch, Pierce, Fenner & Smith, Incorporated, Banc of America
Securities LLC, BancBoston Robertson Stephens Inc., Deutsche
Bank Securities Inc. and Wit Capital Corporation are acting as
managers, that, subject to the terms and conditions set forth in
the purchase agreement, and concurrently with the sale of
1,950,000 shares of common stock to the international managers
pursuant to the purchase agreement, to sell to the U.S.
underwriters, and the U.S. underwriters severally have agreed to
purchase from us, an aggregate of 7,800,000 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.
</R>
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
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.
| |
|
Per
Share
|
|
Without
Option
|
|
With
Option
|
| Public
offering price
|
|
$
|
|
$
|
|
$
|
| Underwriting
discount
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Internet Capital Group, Inc.
|
|
$
|
|
$
|
|
$
|
| Proceeds,
before expenses, to Safeguard Scientifics, Inc.
|
|
$
|
|
$
|
|
$
|
<R>
The expenses of the offering, exclusive of the
underwriting discount, are estimated at $1,525,000 and are
payable by us.
</R>
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.
Alternate International Page
Over-allotment Option
<R>
We have granted an option to the international
managers, exercisable for 30 days after the date of this
prospectus, to purchase up to an aggregate of 360,000 additional
shares of common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting
discount. The international managers may exercise this option
solely to cover over-allotments, if any, made on the sale of the
common stock offered hereby. To the extent that the
international managers exercise this option, each international
manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of common stock
proportionate to such international manager’s initial
amount reflected in the foregoing table.
</R>
<R>
We have also granted an option to the U.S.
underwriters, exercisable for 30 days after the date of this
prospectus, to purchase up to an aggregate of 1,440,000
additional shares of common stock to cover over-allotments, if
any, on terms similar to those granted to the U.S. underwriters.
</R>
<R>
Reserved Shares
</R>
<R>
At our request, the international managers and
U.S. underwriters have reserved approximately 2.6 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. In addition, the
underwriters have reserved up to $20 million of shares of our
common stock for sale to General Electric Capital Corporation at
the initial offering price. This represents 1,818,181 shares
based on the mid-point of the offering range. General Electric
Capital Corporation has not committed to purchasing these
shares. The number of shares of our common stock available for
sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which
are not so orally confirmed for purchase within one day of the
pricing of the offering will be offered by the underwriters to
the general public on the same basis as the other shares offered
by this prospectus.
</R>
Directed Share Subscription Program
<R>
As part of this offering, we and Safeguard
Scientifics are offering approximately 3.5 million shares of our
common stock in a directed share subscription program to
shareholders of Safeguard Scientifics, one of our principal and
founding shareholders. Safeguard Scientifics may be deemed a
statutory underwriter with respect to the shares of our common
stock offered to the shareholders of Safeguard Scientifics.
Safeguard Scientifics is not an underwriter with respect to the
other shares of our common stock offered and is not included in
the term “underwriter” as used elsewhere in this
Prospectus. Of these shares, we are offering 2,250,000 shares
and Safeguard Scientifics is offering 1,250,000 shares.
Safeguard Scientifics’ shareholders may subscribe for one
share of our common stock for every ten shares of Safeguard
Scientifics’ common stock held by them, and may not
transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least
100 shares of Safeguard Scientifics’ common stock as of
June 24, 1999 are eligible to purchase shares directly from us
or Safeguard Scientifics under the program. Shareholders who own
less than 100 shares of Safeguard Scientifics common stock will
be ineligible to participate in the directed share subscription
program. Subscription orders will be satisfied first from the
shares being sold by us, and then from the shares offered by
Safeguard Scientifics. If any of the shares offered by us under
the program are not purchased by the shareholders of Safeguard
Scientifics, Safeguard Scientifics will purchase these shares
from us. Sales under the directed share subscription program
will close on the closing of the sale of the other shares
offered to the public. It is expected that sales under the
directed share subscription program will be reflected in
purchasers’ book-entry accounts at the Depository Trust
Company, if any, upon the closing of these sales. After the
closing of these sales, we will mail stock certificates to all
purchasers who do not maintain book-entry accounts at the
Depository Trust Company. Prior to this offering, Safeguard
Scientifics beneficially owned 17.7% of our common stock. After
this offering and the concurrent offering, Safeguard Scientifics
will beneficially own about 17,811,794 shares, or 14.4%, of our
common stock, assuming that all 3.5 million shares are purchased
by shareholders of Safeguard Scientifics. The purchase price
under
</R>
Alternate International Page
<R>
the program, whether paid by
Safeguard Scientifics, or its shareholders will be the same
price per share as set forth on the cover page of this
prospectus. For purposes of this prospectus, when we present
financial data that reflect 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 $175,000 or equal to 5% of the
aggregate initial offering price of the 3.5 million shares being
sold through the directed share subscription program. Safeguard
Scientifics will not receive any compensation from us or any
other person with respect to this offering, including any
underwriting discounts or commissions.
</R>
No Sales of Similar Securities
<R>
We, our executive officers and directors,
Safeguard Scientifics (Delaware), Safeguard 98 Capital, L.P.,
Comcast ICG, Inc., CPQ Holdings, Inc., IBM Corporation, Internet
Assets, Inc., Technology Leaders II L.P. and Technology Leaders
II Offshore C.V. have agreed, with certain exceptions, not to
directly or indirectly:
</R>
|
Ÿ
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later
acquired by the person executing the agreement or with respect
to which the person executing the agreement has or later
acquires the power of disposition, or file a registration
statement under the Securities Act relating to any of the
foregoing; or
|
|
Ÿ
|
enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of our
common stock,
|
whether any such swap or transaction is to be
settled by delivery of our common stock or other securities, in
cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus. See “Shares Eligible for
Future Sale.”
Quotation on the Nasdaq National Market
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
through negotiations among us and the representatives. Among the
factors considered by us and the representatives in determining
the initial public offering price of our common stock, in
addition to prevailing market conditions, are:
|
Ÿ
|
the trading multiples of publicly-traded companies that the
representatives believe to be comparable to us;
|
|
Ÿ
|
certain of our financial information;
|
|
Ÿ
|
the history of, and the prospects for, our company and the
industry in which we compete;
|
|
Ÿ
|
an assessment of our management;
|
|
Ÿ
|
our past and present operations;
|
|
Ÿ
|
the prospects for, and timing of, our future revenue;
|
|
Ÿ
|
the present state of our development;
|
|
Ÿ
|
the percentage interest of Internet Capital Group being sold
as compared to the valuation for the entire company; and
|
|
Ÿ
|
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our
common stock will trade in the public market subsequent to the
offering at or above the initial public offering price.
|
Alternate International Page
We
have applied for a listing of our common stock on the Nasdaq
National Market under the symbol “ICGE.”
The
underwriters have advised us that they do not expect sales to
accounts over which the underwriters exercise discretionary
authority to exceed five percent of the total number of shares
of our common stock offered by them.
Price Stabilization, Short Positions and
Penalty Bids
Until the distribution of our common stock is completed, rules
of the Securities and Exchange Commission may limit the ability
of the underwriters and certain selling group members to bid for
and purchase our common stock. As an exception to these rules,
the U.S. representatives are permitted to engage in certain
transactions that stabilize the price of our common stock. Such
transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock.
If
the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares
of common stock than are set forth on the cover page of this
prospectus, the U.S. representatives may reduce that short
position by purchasing common stock in the open market. The U.S.
representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described
above.
The
U.S. representatives may also impose a penalty bid on certain
underwriters and selling group members. This means that if the
U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters’ short position or
to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and
selling group members who sold those shares as part of the
offering.
In
general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the
price of the security to be higher than it might be in the
absence of such purchases. The imposition of a penalty bid might
also have an effect on the price of our common stock to the
extent that it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters makes any representation that the U.S.
representatives or the lead managers will engage in such
transactions or that such transactions, once commenced, will not
be discontinued without notice.
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.
<R>
13,250,000 Shares
</R>
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
PROSPECTUS
Merrill Lynch International
<R>
Banc of America Securities LLC
</R>
BancBoston Robertson Stephens
International Limited
Deutsche Bank
, 1999
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The
expenses to be paid by Internet Capital Group in connection with
the distribution of the securities being registered, other than
underwriting discounts and commissions, are as follows:
<R>
| |
|
Amount
(1)
|
| Securities and
Exchange Commission Registration Fee
|
|
$
73,531
|
| NASD Filing
Fee
|
|
26,950
|
| Nasdaq
National Market Listing Fee
|
|
95,000
|
| Accounting
Fees and Expenses
|
|
500,000
|
| Blue Sky Fees
and Expenses
|
|
1,000
|
| Legal Fees and
Expenses
|
|
450,000
|
| Transfer Agent
and Registrar Fees and Expenses
|
|
10,000
|
| Printing and
Engraving Expenses
|
|
200,000
|
| Director and
Officer Liability Insurance (2)
|
|
150,000
|
| Miscellaneous
Fees and Expenses
|
|
18,519
|
| |
|
|
|
Total
|
|
$1,525,000
|
| |
|
|
</R>
(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.
<R></R>
<R></R>
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.
<R>
|
(1)
|
In April 1996, Internet Capital Group, L.L.C. issued 525,000
units of Membership Interests to employees, directors, and
consultants in a subscription offering for an aggregate
purchase price of $525,000.
|
</R>
|
(2)
|
On May 9, 1996, Internet Capital Group, L.L.C. issued
6,139,074 units of Membership Interests to Safeguard
Scientifics (Delaware), Inc. for an aggregate purchase price
of $6,139,074 consisting of the assignment of 182,500 shares
of Common Stock, 127,000 shares of Series C Preferred Stock,
855,400 shares of Series D Preferred Stock and 134,375 shares
of Series F Preferred Stock of Sky Alland Marketing, Inc. and
related rights and obligations in respect thereof.
|
|
(3)
|
In May 1996, Internet Capital Group, L.L.C. issued 2,925,000
units of Membership Interests to employees, consultants, and
other purchasers in a subscription offering for an aggregate
purchase price of $2,925,000.
|
|
(4)
|
In June 1996, Internet Capital Group, L.L.C. issued 2,000,000
units of Membership Interests to employees, consultants, and
other purchasers in a subscription offering for an aggregate
purchase price of $2,000,000
|
|
(5)
|
In July 1996, Internet Capital Group, L.L.C. issued an
aggregate of 800,000 units of Membership Interests to
BancBoston Investments, Inc., The HRG Corporation, and Mr.
Robert S. Adelson in a subscription offering for an aggregate
purchase price of $800,000.
|
|
(6)
|
In August 1996, Internet Capital Group, L.L.C. issued 168,750
units of Membership Interests to S.M.M Internet, M. Reid &
Company and Mr. Robert E. Keith, a director of Internet
Capital Group, and Mrs. Margot W. Keith in a subscription
offering for an aggregate purchase price of $168,750.
|
|
(7)
|
In September 1996, Internet Capital Group, L.L.C issued
175,000 units of Membership Interests to Mr. Herbert and Mrs.
Karen Lotman, F.B.A. Trust F/B/O Shelly Lotman Fisher, and
F.E.A. Trust F/B/O Jeffrey Lotman in a subscription offering
for an aggregate purchase price of $175,000.
|
|
(8)
|
On September 30 1996, Internet Capital Group, L.L.C. issued an
aggregate of 4,968,935 units of Membership Profit Interests to
employees, directors and consultants pursuant to the
Membership Profit Interest Plan in consideration for services
rendered to Internet Capital Group, L.L.C.
|
|
(9)
|
In October 1996, Internet Capital Group, L.L.C. issued 25,000
units of Membership Interests to Mrs. Jean C. Tempel in a
subscription offering for a purchase price of $25,000.
|
|
(10)
|
In November 1996, Internet Capital Group, L.L.C. issued
6,754,676 units of Membership Interests to employees,
consultants, directors, and other purchasers in a subscription
offering for an aggregate purchase price of $6,754,676.
|
|
(11)
|
In December 1996, Internet Capital Group, L.L.C. issued
300,000 units of Membership Interests to Mr. Walter W.
Buckley, III, Chief Executive Officer and a director of
Internet Capital Group, and to Mr. Douglas A. Alexander, a
Managing Director of Internet Capital Group in a subscription
offering for an aggregate purchase price of $300,000.
|
|
(12)
|
In December 1996, Internet Capital Group, L.L.C. issued an
aggregate of 20,000 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(13)
|
In February 1997, Internet Capital Group, L.L.C. issued an
aggregate of 210,070 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(14)
|
On March 31, 1997, Internet Capital Group, L.L.C. issued
87,500 units of Membership Interests to Mr. Douglas A.
Alexander, a Managing Director of Internet Capital Group, Mrs.
Jean C. Tempel, and to Mr. Robert E. Keith, a director of
Internet Capital Group and Mrs. Margot W. Keith in a
subscription offering for an aggregate purchase price of
$87,500.
|
|
(15)
|
On April 11, 1997, Internet Capital Group, L.L.C. issued
46,783 units of Membership Interests to Mr. Lou Ryan pursuant
to the Membership Profit Interest Plan in consideration for
services rendered to Internet Capital Group, L.L.C.
|
|
(16)
|
In April 1997, Internet Capital Group, L.L.C. issued 9,318,750
units of Membership Interests to employees, consultants,
directors, and other purchasers in a subscription offering for
an aggregate purchase price of $9,318,750.
|
|
(17)
|
In June 1997, Internet Capital Group, L.L.C. issued 550,000
units of Membership Interests to Mr. Walter W. Buckley, III,
Chief Executive Officer and a director of Internet Capital
Group, Mr. Kenneth A. Fox, a Managing Director and a director
of Internet Capital Group, and Mr. John C. Maxwell, III in a
subscription offering for an aggregate purchase price of
$550,000.
|
|
(18)
|
In August 1997, Internet Capital Group, L.L.C. issued 50,000
units of Membership Interests to the Tom Kippola Pension Plan
a subscription offering for a purchase price of $50,000.
|
|
(19)
|
In September 1997, Internet Capital Group, L.L.C. issued an
aggregate of 1,209,519 units of Membership Profit Interests to
employees and consultants to the Membership Profit Interest
Plan in consideration for services rendered to Internet
Capital Group, L.L.C.
|
|
(20)
|
In November 1997, Internet Capital Group, L.L.C. issued
9,456,250 units of Membership Interests to employees,
consultants, directors, and other purchasers in a subscription
offering for an aggregate purchase price of $9,456,250.
|
|
(21)
|
In November 1997, Internet Capital Group, L.L.C. issued an
aggregate of 115,175 units of Membership Profit Interests to
employees and consultants pursuant to the Membership Profit
Interest Plan in consideration for services rendered to
Internet Capital Group, L.L.C.
|
|
(22)
|
In December 1997, Internet Capital Group, L.L.C. issued
725,000 units of Membership Interests to employees,
consultants, directors, and other purchasers in a subscription
offering for an aggregate purchase price of $725,000.
|
|
(23)
|
In December 1997, Internet Capital Group, L.L.C. issued
185,000 units of Membership Profit Interests to employees and
consultants pursuant to the Membership Profit Interest Plan in
consideration for services rendered to Internet Capital Group,
L.L.C.
|
|
(24)
|
In March 1998, Internet Capital Group, L.L.C. issued 250,000
units of Membership Interests to Mr. Austin Hearst in a
subscription offering for an aggregate purchase price of
$500,000.
|
|
(25)
|
In April 1998, Internet Capital Group, L.L.C. issued an
aggregate of 125,000 units of Membership Interests to Mr.
Britton Murdock, Mr. Robert E. Keith and Mrs. Margot W. Keith
in a subscription offering for an aggregate purchase price of
$250,000.
|
|
(26)
|
In May 1998, Internet Capital Group, L.L.C. issued an
aggregate of 1,912,500 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $3,825,000.
|
|
(27)
|
In June 1998, Internet Capital Group, L.L.C. issued an
aggregate of 11,143,750 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $22,287,500.
|
|
(28)
|
In July 1998, Internet Capital Group, L.L.C. issued an
aggregate of 551,250 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $1,102,500.
|
|
(29)
|
In August 1998, Internet Capital Group, L.L.C. issued an
aggregate of 225,000 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $450,000.
|
|
(30)
|
In September 1998, Internet Capital Group, L.L.C. issued an
aggregate of 1,092,500 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $2,185,000.
|
|
(31)
|
In October 1998, Internet Capital Group, L.L.C. issued an
aggregate of 3,883,750 units of Membership Interests to
employees, consultants and other purchasers in a subscription
offering for an aggregate purchase price of $7,767,500.
|
|
(32)
|
In November 1998, Internet Capital Group, L.L.C. issued an
aggregate of 76,250 units of Membership Interests to Mr. Roger
S. Penske, Jr., Mr. Ron Trichon and Mr. T. Richard Butera in a
subscription offering for an aggregate purchase price of
$152,500.
|
|
(33)
|
In January 1999, Internet Capital Group, L.L.C. issued an
aggregate of 158,750 units of Membership Interests to Mr.
Samuel A. Plum, Mrs. Susan R. Buckley and Dr. Thomas P.
Gerrity, a director of Internet Capital Group, in a
subscription offering for an aggregate purchase price of
$317,500.
|
|
(34)
|
On February 2, 1999, each unit of the foregoing Membership
Interests and Membership Profit Interests was converted into
one share of Common Stock of Internet Capital Group as a
result of the merger of Internet Capital Group, L.L.C. into
Internet Capital Group.
|
|
(35)
|
In February 1999, Internet Capital Group issued an aggregate
of 14,706,250 shares of Common Stock to employees, directors,
consultants and other purchasers in a subscription offering
for an aggregate purchase price of $29,412,500.
|
|
(36)
|
In March 1999, Internet Capital Group issued an aggregate of
1,125,000 shares of Common Stock to consultants and other
purchasers in a subscription offering for an aggregate
purchase price of $2,250,000.
|
|
Warrants to Purchase Common Stock
|
<R>
On May 10, 1999, in connection with Internet
Capital Group’s issuance of the convertible notes, Internet
Capital Group granted warrants, exercisable at the initial
public offering price, to the holders of the convertible notes
to purchase a number shares of common stock of Internet Capital
Group equal to $18 million divided by the initial public
offering price.
</R>
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:
<R>
| |
|
No. of
Shares
|
|
Weighted
Averge
Exercise Prices
|
| 1996
|
|
—
|
|
N/A
|
| 1997
|
|
94,000
|
|
$1.00
|
| 1998
|
|
6,047,000
|
|
$ 2.00
|
| 1999
|
|
13,301,750
|
|
$ 5.74
|
</R>
<R>
The sale and issuance of securities in the
transactions described above were exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities
Act as transactions by an issuer not involving a public
offering, where the purchasers were sophisticated investors who
represented their intention to acquire securities for investment
only and not with a view to distribution and received or had
access to adequate information about the Registrant or in
reliance on rule 701 promulgated under the Securities Act.
</R>
Appropriate restrictive legends were affixed to the stock
certificates issued in the above transactions. Similar legends
were imposed in connection with any subsequent sales of any such
securities. No underwriters were employed in any of the above
transactions.
Item 16. Exhibits and
Financial Statement Schedules
(a)
Exhibits
<R>
Exhibit
Number
|
|
Document
|
| 1.1
|
|
Form of
Underwriting Agreement for U.S. Offering
|
| 1.2
|
|
Form of
Underwriting Agreement for International Offering
|
| 2.1**
|
|
Agreement of
Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and
Internet Capital Group, Inc.
|
| 3.1*
|
|
Restated
Certificate of Incorporation
|
| 3.2*
|
|
Amended and
Restated Bylaws
|
| 4.1*
|
|
Specimen
Certificate for Internet Capital Group’s Common Stock
|
| 5.1*
|
|
Opinion of
Dechert Price & Rhoads as to the legality of the shares of
Common Stock being
registered
|
| 10.1**
|
|
Internet
Capital Group, L.L.C. 1998 Equity Compensation Plan
|
| 10.1.1**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan
|
| 10.1.2**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1,
1999
|
| 10.1.3
|
|
Amendment No.
1 to the Internet Capital Group, Inc. 1999 Equity Compensation
Plan as
Amended and Restated May 1, 1999
|
| 10.2**
|
|
Internet
Capital Group, L.L.C. Option Plan for Non-Employee Managers
|
| 10.2.1**
|
|
Internet
Capital Group, Inc. Directors’ Option Plan
|
| 10.3**
|
|
Internet
Capital Group, L.L.C. Membership Profit Interest Plan
|
| 10.4*
|
|
Internet
Capital Group, Inc. Long-Term Incentive Plan
|
| 10.5**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated September 30, 1998
|
| 10.5.1**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated January 4, 1999
|
| 10.6**
|
|
Securities
Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and
certain securities holders named therein
|
| 10.7**
|
|
Amended and
Restated 1996 Equity Compensation Plan of VerticalNet, Inc.
(incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the Registration
Statement on Form S-1 filed by
VerticalNet, Inc. on January 22, 1999 (Registration No.
333-68053) (“VerticalNet Amendment
No. 1”))
|
| 10.8**
|
|
Employment
Letter with Mark L. Walsh (incorporated by reference to
Exhibit 10.2 to Amendment
No. 2 to the Registration Statement on Form S-1 filed by
VerticalNet, Inc. on February 8, 1999
(Registration No. 333-68053) (“VerticalNet Amendment No. 2
”))
|
| 10.9**
|
|
Employment
Letter with Bary E. Wynkoop (incorporated by reference to
Exhibit 10.3 to
VerticalNet Amendment No. 2)
|
| 10.10**
|
|
Share Purchase
Agreement dated September 1, 1998, between Boulder Interactive
Technology
Services Co. and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.4 to VerticalNet
Amendment No. 1)
|
| 10.11**
|
|
Agreement and
Plan of Merger dated September 30, 1998, among VerticalNet,
Inc., Informatrix
Acquisition Corp., Informatrix Worldwide, Inc. and the
Stockholders of Informatrix Worldwide,
Inc. (incorporated by reference to Exhibit 10.5 to VerticalNet
Amendment No. 2)
|
| 10.12**
|
|
Sponsorship
Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.
(incorporated by reference to Exhibit 10.6 to VerticalNet
Amendment No. 1)
|
| 10.13**
|
|
Internet
Services Agreement dated as of January 19, 1999 by and between
Compaq Computer
Corporation and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.7 to Amendment No. 3
to the Registration Statement on Form S-1 filed by VerticalNet,
Inc. on February 10, 1999
(Registration No. 333-68053))
|
</R>
<R></R>
<R>
Exhibit
Number
|
|
Document
|
| 10.14**
|
|
Asset Purchase
Agreement dated January 13, 1999 by and among VerticalNet,
Inc., Coastal Video
Communications Corp., Paul V. Michels and Phillip P. Price
(incorporated by reference to Exhibit
10.8 to VerticalNet Amendment No. 1)
|
| 10.15**
|
|
Common Stock
Purchase Warrant to purchase 40,000 or 60,000 shares of
VerticalNet, Inc.
Common Stock dated November 25, 1998 issued to Progress Capital,
Inc. (incorporated by
reference to Exhibit 10.9 to VerticalNet Amendment No. 1)
|
| 10.16**
|
|
Form of
VerticalNet, Inc. Common Stock Purchase Warrant dated November
25, 1998 issued in
connection with the Convertible Note (incorporated by reference
to Exhibit 10.10 to VerticalNet
Amendment No. 1)
|
| 10.17**
|
|
Form of
VerticalNet, Inc. Convertible Note dated November 25, 1998
(incorporated by reference
to Exhibit 10.11 to VerticalNet Amendment No. 1)
|
| 10.18**
|
|
Series A
Preferred Stock Purchase Agreement dated as of September 12,
1996 between Internet
Capital Group, L.L.C. and Water Online, Inc. (incorporated by
reference to Exhibit 10.12 to
VerticalNet Amendment No. 2)
|
| 10.19**
|
|
Series D
Investor Rights Agreement dated as of May 8, 1998 by and among
VerticalNet, Inc. and
the Investors (incorporated by reference to Exhibit 10.13 to
VerticalNet Amendment No. 2)
|
| 10.20**
|
|
Registration
Rights Agreement dated as of November 25, 1998 between
VerticalNet, Inc. and the
Convertible Note Holders (incorporated by reference to Exhibit
10.14 to VerticalNet Amendment
No. 2)
|
| 10.20.1
|
|
Agreement and
Plan of Merger among VerticalNet, Inc., TSX Acquisition Corp.,
Techspex, Inc.
and the Stockholders of Techspex, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K filed
by VerticalNet, Inc. on June 25, 1999 (SEC File No. 333-72143))
|
| 10.21**
|
|
Form of
Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May , 1999 issued
in connection with the Convertible Note
|
| 10.22**
|
|
Form of
Internet Capital Group, Inc. Convertible Note dated May 10,
1999
|
| 10.23*
|
|
Stock Purchase
Agreement between Internet Capital Group and Safeguard
Scientifics, Inc.
|
| 10.23.1
|
|
Stock Purchase
Agreement between Internet Capital Group, Inc. and
International Business
Machines Corporation
|
| 10.24**
|
|
Letter
describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for
premises located in Wayne, Pennsylvania.
|
| 10.25**
|
|
Office Lease
dated July 22, 1996 between State Street Bank and Trust,
Internet Capital Group, The
Access Fund, Hamilton Lane Advisors and Martin S. Gans for
office space in San Francisco,
California.
|
| 10.26
|
|
Letter
describing the oral lease between Internet Capital Group and
Jean C. Tempel for premises
located in Boston, Massachusetts
|
| 10.27**
|
|
Office Lease
dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc.
|
| 10.28**
|
|
Credit
Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC
Bank, N.A.
|
| 10.29**
|
|
Benchmarking
Partners, Inc. Option Agreement dated January 1, 1997 by and
between Christopher
H. Greendale and Internet Capital Group, L.L.C.
|
| 10.30**
|
|
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, June and July of 1999
|
| 10.34**
|
|
Form of
Restrictive Covenant Agreement executed in connection with
exercise of Internet Capital
Group’s stock options
|
| 21.1
|
|
Subsidiaries
of Internet Capital Group
|
</R>
<R>
Exhibit
Number
|
|
Document
|
| 23.1
|
|
Consent of
KPMG LLP regarding Internet Capital Group
|
| 23.2*
|
|
Consent of
Dechert Price & Rhoads, included in Exhibit 5.1
|
| 23.3
|
|
Consent of
KPMG LLP regarding Applica Corporation
|
| 23.4
|
|
Consent of
KPMG LLP regarding Breakaway Solutions, Inc.
|
| 23.5
|
|
Consent of
PricewaterhouseCoopers LLP regarding Commerce Quest, Inc.
|
| 23.6
|
|
Consent of
Ernst & Young LLP regarding ComputerJobs.com, Inc.
|
| 23.7
|
|
Consent of
PricewaterhouseCoopers LLP regarding Syncra Software, Inc.
|
| 23.8
|
|
Consent of
KPMG LLP regarding United Messaging, Inc.
|
| 23.9
|
|
Consent of
PricewaterhouseCoopers LLP regarding Universal Access, Inc.
|
| 23.10
|
|
Consent of
KPMG LLP regarding Web Yes, Inc.
|
| 23.11
|
|
Consent of
KPMG LLP regarding WPL Laboratories
|
| 24.1**
|
|
Power of
Attorney, included on the signature page hereof
|
| 24.2
|
|
Power of
Attorney for Peter A. Solvik
|
| 27.1
|
|
Financial Data
Schedule
|
| 99.1
|
|
Form of Letter
from Internet Capital Group, Inc. to Safeguard Scientifics,
Inc.’s shareholders
describing the Directed Share Subscription Program
|
| 99.2**
|
|
Form of Letter
from Merrill Lynch & Co. to Safeguard Scientifics, Inc.
’s shareholders to
accompany the Internet Capital Group, Inc. letter to Safeguard
Scientifics, Inc. shareholders
|
| 99.3
|
|
Form of Letter
from Internet Capital Group, Inc. to Brokers describing the
Directed Share
Subscription Program
|
| 99.4
|
|
Form of
Subscription Form for Directed Share Subscription Program
|
| 99.5*
|
|
Information
placed by Wit Capital on its Web site regarding Internet
Capital Group, Inc.
|
</R>
<R>
* To be filed by amendment.
</R> <R>
** Previously
filed.
</R>
<R></R>
(b)
Financial Statement Schedules
<R>
Schedules have been omitted since they are not
required or are not applicable or the required information is
shown in the financial statements or related notes.
</R>
Item 17. Undertakings
The
undersigned Registrant hereby undertakes to provide the
underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1)
For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2)
For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
<R>
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 16th day of
July, 1999.
</R>
|
INTERNET
CAPITAL GROUP, INC.
|
|
President
and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<R>
Signature
|
|
Title
|
|
Date
|
|
|
|
WALTER
W. BUCKLEY
, III
Walter W. Buckley, III
|
|
President,
Chief Executive
Officer and Director
(principal executive officer)
|
|
July 16, 1999
|
|
|
|
DAVID
D. GATHMAN
David D. Gathman
|
|
Chief
Financial Officer and
Treasurer (principal financial
and accounting officer)
|
|
July 16, 1999
|
|
|
|
*
Julian A. Brodsky
|
|
Director
|
|
July 16, 1999
|
|
|
|
*
E. Michael Forgash
|
|
Director
|
|
July 16, 1999
|
|
|
|
*
Kenneth A. Fox
|
|
Director
|
|
July 16, 1999
|
|
|
|
*
Dr. Thomas P. Gerrity
|
|
Director
|
|
July 16, 1999
|
|
|
|
*
Scott Gould
|
|
Director
|
|
July 16, 1999
|
|
|
|
*
Robert E. Keith, Jr.
|
|
Director
|
|
July 16, 1999
|
|
*
Peter A. Solvik
|
|
Director
|
|
July 16, 1999
|
</R>
* By:
EXHIBIT INDEX
<R>
Exhibit
Number
|
|
Document
|
| 1.1
|
|
Form of
Underwriting Agreement for U.S. Offering
|
| 1.2
|
|
Form of
Underwriting Agreement for International Offering
|
| 2.1**
|
|
Agreement of
Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and
Internet Capital Group, Inc.
|
| 3.1*
|
|
Restated
Certificate of Incorporation
|
| 3.2*
|
|
Amended and
Restated Bylaws
|
| 4.1*
|
|
Specimen
Certificate for Internet Capital Group’s Common Stock
|
| 5.1*
|
|
Opinion of
Dechert Price & Rhoads as to the legality of the shares of
Common Stock being
registered
|
| 10.1**
|
|
Internet
Capital Group, L.L.C. 1998 Equity Compensation Plan
|
| 10.1.1**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan
|
| 10.1.2**
|
|
Internet
Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1,
1999
|
| 10.1.3
|
|
Amendment No.
1 to the Internet Capital Group, Inc. 1999 Equity Compensation
Plan as
Amended and Restated May 1, 1999
|
| 10.2**
|
|
Internet
Capital Group, L.L.C. Option Plan for Non-Employee Managers
|
| 10.2.1**
|
|
Internet
Capital Group, Inc. Directors’ Option Plan
|
| 10.3**
|
|
Internet
Capital Group, L.L.C. Membership Profit Interest Plan
|
| 10.4*
|
|
Internet
Capital Group, Inc. Long-Term Incentive Plan
|
| 10.5**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated September 30, 1998
|
| 10.5.1**
|
|
Amended and
Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C.
dated January 4, 1999
|
| 10.6**
|
|
Securities
Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and
certain securities holders named therein
|
| 10.7**
|
|
Amended and
Restated 1996 Equity Compensation Plan of VerticalNet, Inc.
(incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the Registration
Statement on Form S-1 filed by
VerticalNet, Inc. on January 22, 1999 (Registration No.
333-68053) (“VerticalNet Amendment
No. 1”))
|
| 10.8**
|
|
Employment
Letter with Mark L. Walsh (incorporated by reference to
Exhibit 10.2 to Amendment
No. 2 to the Registration Statement on Form S-1 filed by
VerticalNet, Inc. on February 8, 1999
(Registration No. 333-68053) (“VerticalNet Amendment No. 2
”))
|
| 10.9**
|
|
Employment
Letter with Bary E. Wynkoop (incorporated by reference to
Exhibit 10.3 to
VerticalNet Amendment No. 2)
|
| 10.10**
|
|
Share Purchase
Agreement dated September 1, 1998, between Boulder Interactive
Technology
Services Co. and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.4 to VerticalNet
Amendment No. 1)
|
| 10.11**
|
|
Agreement and
Plan of Merger dated September 30, 1998, among VerticalNet,
Inc., Informatrix
Acquisition Corp., Informatrix Worldwide, Inc. and the
Stockholders of Informatrix Worldwide,
Inc. (incorporated by reference to Exhibit 10.5 to VerticalNet
Amendment No. 2)
|
| 10.12**
|
|
Sponsorship
Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.
(incorporated by reference to Exhibit 10.6 to VerticalNet
Amendment No. 1)
|
| 10.13**
|
|
Internet
Services Agreement dated as of January 19, 1999 by and between
Compaq Computer
Corporation and VerticalNet, Inc. (incorporated by reference to
Exhibit 10.7 to Amendment No. 3
to the Registration Statement on Form S-1 filed by VerticalNet,
Inc. on February 10, 1999
(Registration No. 333-68053))
|
</R>
<R></R>
<R>
Exhibit
Number
|
|
Document
|
| 10.14**
|
|
Asset Purchase
Agreement dated January 13, 1999 by and among VerticalNet,
Inc., Coastal
Video Communications Corp., Paul V. Michels and Phillip P. Price
(incorporated by reference to
Exhibit 10.8 to VerticalNet Amendment No. 1)
|
| 10.15**
|
|
Common Stock
Purchase Warrant to purchase 40,000 or 60,000 shares of
VerticalNet, Inc.
Common Stock dated November 25, 1998 issued to Progress Capital,
Inc. (incorporated by
reference to Exhibit 10.9 to VerticalNet Amendment No. 1)
|
| 10.16**
|
|
Form of
VerticalNet, Inc. Common Stock Purchase Warrant dated November
25, 1998 issued in
connection with the Convertible Note (incorporated by reference
to Exhibit 10.10 to VerticalNet
Amendment No. 1)
|
| 10.17**
|
|
Form of
VerticalNet, Inc. Convertible Note dated November 25, 1998
(incorporated by reference
to Exhibit 10.11 to VerticalNet Amendment No. 1)
|
| 10.18**
|
|
Series A
Preferred Stock Purchase Agreement dated as of September 12,
1996 between Internet
Capital Group, L.L.C. and Water Online, Inc. (incorporated by
reference to Exhibit 10.12 to
VerticalNet Amendment No. 2)
|
| 10.19**
|
|
Series D
Investor Rights Agreement dated as of May 8, 1998 by and among
VerticalNet, Inc. and
the Investors (incorporated by reference to Exhibit 10.13 to
VerticalNet Amendment No. 2)
|
| 10.20**
|
|
Registration
Rights Agreement dated as of November 25, 1998 between
VerticalNet, Inc. and the
Convertible Note Holders (incorporated by reference to Exhibit
10.14 to VerticalNet Amendment
No. 2)
|
| 10.20.1**
|
|
Agreement and
Plan of Merger among VerticalNet, Inc., TSX Acquisition Corp.,
Techspex, Inc.
and the Stockholders of Techspex, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K
filed by VerticalNet, Inc. on June 25, 1999 (SEC File No.
333-72143))
|
| 10.21**
|
|
Form of
Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May , 1999
issued in connection with the Convertible Note
|
| 10.22**
|
|
Form of
Internet Capital Group, Inc. Convertible Note dated May 10,
1999
|
| 10.23*
|
|
Stock Purchase
Agreement between Internet Capital Group and Safeguard
Scientifics, Inc.
|
| 10.23.1
|
|
Stock Purchase
Agreement between Internet Capital Group, Inc. and
International Business
Machines Corporation
|
| 10.24**
|
|
Letter
describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc.
for premises located in Wayne, Pennsylvania.
|
| 10.25**
|
|
Office Lease
dated July 22, 1996 between State Street Bank and Trust,
Internet Capital Group,
The Access Fund, Hamilton Lane Advisors and Martin S. Gans for
office space in San Francisco,
California.
|
| 10.26
|
|
Letter
describing the oral lease between Internet Capital Group and
Jean C. Tempel for premises
located in Boston, Massachusetts
|
| 10.27**
|
|
Office Lease
dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc.
|
| 10.28**
|
|
Credit
Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC
Bank, N.A.
|
| 10.29**
|
|
Benchmarking
Partners, Inc. Option Agreement dated January 1, 1997 by and
between
Christopher H. Greendale and Internet Capital Group, L.L.C.
|
| 10.30**
|
|
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, June and July of 1999
|
| 10.34**
|
|
Form of
Restrictive Covenant Agreement executed in connection with
exercise of Internet
Capital Group’s stock options
|
| 21.1
|
|
Subsidiaries
of Internet Capital Group
|
</R>
<R>
Exhibit
Number
|
|
Document
|
| 23.1
|
|
Consent of
KPMG LLP regarding Internet Capital Group
|
| 23.2*
|
|
Consent of
Dechert Price & Rhoads, included in Exhibit 5.1
|
| 23.3
|
|
Consent of
KPMG LLP regarding Applica Corporation
|
| 23.4
|
|
Consent of
KPMG LLP regarding Breakaway Solutions, Inc.
|
| 23.5
|
|
Consent of
PricewaterhouseCoopers LLP regarding Commerce Quest, Inc.
|
| 23.6
|
|
Consent of
Ernst & Young LLP regarding ComputerJobs.com, Inc.
|
| 23.7
|
|
Consent of
PricewaterhouseCoopers LLP regarding Syncra Software, Inc.
|
| 23.8
|
|
Consent of
KPMG LLP regarding United Messaging, Inc.
|
| 23.9
|
|
Consent of
PricewaterhouseCoopers LLP regarding Universal Access, Inc.
|
| 23.10
|
|
Consent of
KPMG LLP regarding Web Yes, Inc.
|
| 23.11
|
|
Consent of
KPMG LLP regarding WPL Laboratories
|
| 24.1**
|
|
Power of
Attorney, included on the signature page hereof
|
| 24.2
|
|
Power of
Attorney for Peter A. Solvik
|
| 27.1
|
|
Financial Data
Schedule
|
| 99.1
|
|
Form of Letter
from Internet Capital Group, Inc. to Safeguard Scientifics,
Inc.’s shareholders
describing the Directed Share Subscription Program
|
| 99.2**
|
|
Form of Letter
from Merrill Lynch & Co. to Safeguard Scientifics, Inc.
’s shareholders to
accompany the Internet Capital Group, Inc. letter to Safeguard
Scientifics, Inc. shareholders
|
| 99.3
|
|
Form of Letter
from Internet Capital Group, Inc. to Brokers describing the
Directed Share
Subscription Program
|
| 99.4
|
|
Form of
Subscription Form for Directed Share Subscription Program
|
| 99.5*
|
|
Information
placed by Wit Capital on its Web site regarding Internet
Capital Group, Inc.
|
</R>
* To be filed by amendment.
** Previously filed.
