<PAGE>
As filed with the Securities and Exchange Commission on November 22, 1999.
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------
INTERNET CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7389 23-2996071
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
------------
435 Devon Park Drive
Building 800
Wayne, Pennsylvania 19087
(610) 989-0111
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------
Walter W. Buckley, III
President and Chief Executive Officer
Internet Capital Group, Inc.
435 Devon Park Drive
Building 800
Wayne, Pennsylvania 19087
(610) 989-0111
(Name, address including zip code, and telephone number, including area code,
of agent for service)
------------
With copies to:
Christopher G. Karras, Esq. Bruce K. Dallas, Esq.
Dechert Price & Rhoads Sarah Beshar, Esq.
4000 Bell Atlantic Tower Davis Polk & Wardwell
1717 Arch Street 450 Lexington Avenue
Philadelphia, Pennsylvania 19103 New York, New York 10017
(215) 994-4000 (212) 450-4000
------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price (1) Registration Fee (2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.001
per share.................. $575,000,000 $159,850
- --------------------------------------------------------------------------------
% Convertible Subordinated
Notes due 2004............. $287,500,000(3) $ 79,925
- --------------------------------------------------------------------------------
Common Stock, par value $.001
per share, issuable upon
conversion of % Convertible
Subordinated Notes due
2004(4).................... -- --
- --------------------------------------------------------------------------------
Total...................... $862,500,000 $239,775
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) The Registrant paid $73,531 in connection with its initial filing of a
Form S-1 registration statement for its initial public offering, of which
$15,151 is available to apply against the current registration fee.
(3) Exclusive of accrued interest, if any. Estimated solely for the purpose of
computing the amount of the registration fee.
(4) No additional consideration will be received for any shares of common
stock issued upon conversion of the % Convertible Subordinated Notes.
Pursuant to Rule 416 under the Securities Act of 1933, this registration
statement also includes an indeterminate number of shares that may be
issued upon conversion of the % Convertible Subordinated Notes as a
result of anti-dilution and other provisions of the notes.
------------
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.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains three separate prospectuses. Two
prospectuses relate to a public offering of our common stock, par value $.001
per share. One of the common stock prospectuses will be used in connection with
a United States and Canadian offering and the other will be used in a
concurrent international offering. The two common stock prospectuses will be
identical except for the cover page and underwriting section. The form of
prospectus for the United States and Canadian common stock offerings is
included in this registration statement and the form of the cover page and
underwriting section for the international common stock prospectus follows the
United States common stock prospectus. The third prospectus relates to a
concurrent United States and Canadian offering of our % convertible
subordinated notes due 2004.
<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 an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated November 22, 1999
PROSPECTUS
6,000,000 Shares
[LOGO OF INTERNET CAPITAL GROUP]
Common Stock
-----------
Internet Capital Group, Inc. is selling 6,000,000 shares of common stock.
The common stock trades on the Nasdaq National Market under the symbol "ICGE."
On November 18, 1999, the last reported sale price for the common stock on the
Nasdaq National Market was $160.00 per share. After giving effect to our 2 for
1 stock split on December 6, 1999, the last reported sale price of our common
stock on November 18, 1999 would have been $80.00 per share.
Concurrent with this offering, we are offering $250,000,000 aggregate
principal amount of our % convertible subordinated notes due 2004. The notes
will be convertible into shares of our common stock at the option of the
holder. The convertible notes are offered by a separate prospectus. Completion
of the convertible notes offering is not a condition to the completion of this
offering.
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 6 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount................................... $ $
Proceeds, before expenses, to Internet Capital Group,
Inc. ................................................... $ $
</TABLE>
The underwriters may also purchase up to an additional 900,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co. Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
Lehman Brothers
Robertson Stephens
----------
The date of this prospectus is , 1999.
<PAGE>
Inside of front cover of prospectus:
[Graphic of "Internet Capital Group" surrounded by "Market Makers" and
"Infrastructure Service Providers"]
Text of Artwork:
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 global economy. 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 45 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.
Inside of gatefold of front cover of prospectus:
Graphic from inside front cover of prospectus with "Internet Capital Group"
surrounded by the text: "Identify Market Leaders," "Integrate into Network,"
"Influence Strategic Direction," "Provide Best-of-Class Business Services" and
"Share Best Practices." In an outer ring of the graphic the terms "Software,"
"Outsourced Services" and "Strategic Consulting and Systems Integration" appear
as "Infrastructure Service Providers," the terms "Chemicals," "Printing,"
"Paper," "Plastics," "Food," "Healthcare," "Auto Parts," "Electronic
Components," "Telecommunications," "Financial Services" and "Construction"
appear as "Vertical Market Makers" and the terms "Used Capital Equipment,"
"Asset Disposition," "Small Business" and "Logistics" appear as "Horizontal
Market Makers."
Text of Artwork:
. 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.
. MARKET MAKERS bring buyers and sellers in a particular industrial
marketplace together to exchange products, services and
information via the Internet. Market makers typically operate in a
specific industry or provide specific goods and services across
multiple industries. Market Makers tailor their business models to
match a target market's distinct characteristics. We refer to
market makers operating in a particular industry as vertical
market makers, and to market makers operating across multiple
industries as horizontal market makers.
. 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Price Range of Common Stock.............................................. 20
The Reorganization....................................................... 21
Concurrent Offering...................................................... 21
Capitalization........................................................... 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 24
Our Business............................................................. 42
Management............................................................... 62
Certain Transactions..................................................... 78
Principal Shareholders................................................... 83
Description Of Capital Stock............................................. 85
Shares Eligible For Future Sale.......................................... 89
Principal United States Tax Consequences To Non-U.S. Holders............. 91
Underwriting............................................................. 94
Legal Matters............................................................ 97
Experts.................................................................. 97
Where You Can Find More Information...................................... 99
Index To Consolidated Financial Statements............................... F-1
</TABLE>
---------------
ABOUT THIS PROSPECTUS
The terms "Internet Capital Group," "our" and "we," as used in this
prospectus, refer to Internet Capital Group, L.L.C. and its wholly-owned
subsidiary, Internet Capital Group Operations, Inc. (formerly known as Internet
Capital Group, Inc.), for periods before the reorganization of Internet Capital
Group, L.L.C. into Internet Capital Group, Inc., except where it is clear that
the term refers only to Internet Capital Group, Inc. For periods after the
reorganization, these terms refer to Internet Capital Group, Inc. and its
wholly-owned subsidiaries Internet Capital Group Operations, Inc., IBIS (505)
Limited, ICG Holding, Inc. and ICG Holding, Inc.'s wholly-owned subsidiaries,
except where it is clear that the term refers only to Internet Capital Group,
Inc. In addition, all information in this prospectus gives effect to the
reorganization described in "The Reorganization" that was effected before this
offering.
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 for 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 expect to furnish our shareholders with annual reports containing
consolidated financial statements audited by an independent accounting firm.
<PAGE>
SUMMARY
This summary is not complete and may not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision. Unless otherwise specifically stated, the information in this
prospectus has been adjusted to reflect a 2 for 1 stock split of all shares of
our common stock outstanding on December 6, 1999. This prospectus does not take
into account the possible sale of additional shares of common stock to the
underwriters under the underwriters' right to purchase additional shares to
cover over-allotments.
Internet Capital Group, Inc.
Internet Capital Group is an Internet holding company actively engaged in
business-to-business, or B2B, e-commerce through a network of partner
companies. Our goal is to become the premier B2B e-commerce company by
establishing an e-commerce presence in major segments of the global 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 November 18, 1999, we owned interests in 46 B2B
e-commerce companies which we refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we
use these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, our partner companies and our Advisory Board. Currently, our Advisory
Board consists of individuals with executive-level experience in general
management, sales and marketing and information technology at such leading
companies as 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.
The substantial growth in B2B e-commerce creates tremendous market
opportunities for new emerging companies. Forrester Research estimates that the
United States 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. IDC projects that the Western European B2B e-commerce market
will grow from $3.8 billion in 1998 to over $350 billion by 2003. We focus on
two types of B2B e-commerce companies, which we call market makers and
infrastructure service providers.
. Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information. Market makers enable more effective and lower cost
commerce for traditional businesses by providing access through the
Internet to a broader range of buyers and sellers. Market makers
typically operate in a specific industry or provide specific goods
and services across multiple industries. Market makers tailor their
business models to match a target market's distinct
characteristics. Our partner company network currently includes
significant interests in 27 market makers: AgProducer Network,
Animated Images, Arbinet Communications, asseTrade, AUTOVIA,
Bidcom, Collabria, CommerX, ComputerJobs.com, CourtLink, Deja.com,
e-Chemicals, eMarketWorld, eMerge Interactive, EmployeeLife.com,
Internet Commerce Systems, iParts, JusticeLink, NetVendor,
ONVIA.com, PaperExchange.com, Plan Sponsor Exchange, Residential
Delivery Services, StarCite, traffic.com, Universal Access and
VerticalNet.
1
<PAGE>
. 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 19 infrastructure
service providers: Benchmarking Partners, Blackboard, Breakaway
Solutions, ClearCommerce, CommerceQuest, Context Integration,
Entegrity Solutions, LinkShare, PrivaSeek, Purchasing Solutions,
SageMaker, Servicesoft Technologies, Sky Alland Marketing, Syncra
Software, TRADEX Technologies, United Messaging, US Interactive,
VitalTone and Vivant!
We have grown rapidly since our inception in 1996. In 1998, we added 12
B2B e-commerce companies to our network and from the beginning of 1999 to
November 18, 1999, we added 26 B2B e-commerce companies to our network. All of
our acquisitions to date have been of B2B e-commerce companies headquartered in
the United States. We expect to continue to evaluate additional acquisition
opportunities in the United States. In addition, we recently opened an office
in London, England that will focus on European B2B e-commerce opportunities.
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; Boston, Massachusetts; Seattle, Washington; and London, England. 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.
2
<PAGE>
The Offering
The offering information provided below is as of November 15, 1999, after
giving effect to our 2 for 1 stock split of all shares outstanding on December
6, 1999 and excludes:
. shares of common stock issuable upon conversion of the
convertible notes being offered concurrently with this offering;
. 4,898,000 shares of common stock issuable upon exercise of stock
options at a weighted average exercise price of $19.44 per share;
. 1,591,032 shares of common stock issuable upon exercise of options
reserved for grant;
. 2,975,068 shares of common stock issuable upon exercise of warrants
with an exercise price of $6.00 per share;
. 400,000 shares of common stock issuable upon exercise of warrants
with an exercise price of $5.00 per share related to our revolving
bank credit facility;
. 1,574,063 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
. the exercise of the underwriters' over-allotment option.
<TABLE>
<C> <S>
Common stock offered in public offering.. 6,000,000 shares
Shares outstanding after the offering.... 259,226,152 shares
Over-allotment option.................... 900,000 shares
Use of proceeds.......................... We estimate that the net proceeds
from this offering without exercise
of the over-allotment option will be
about $458.3 million at an assumed
public offering price of $80.00 per
share based on the closing price of
our common stock on November 18,
1999. In addition, we estimate that
the net proceeds from our concurrent
offering of convertibles notes will
be about $241.8 million without
exercise of the over-allotment
option. We intend to use these net
proceeds to repay any balance
outstanding on our revolving bank
credit facility, to make
acquisitions, to pay interest on our
convertible notes and for general
corporate purposes including working
capital.
Risk factors............................. See "Risk Factors" and the other
information included in this
prospectus for a discussion of
factors you should carefully
consider before deciding to invest
in shares of our common stock.
Nasdaq National Market symbol............ "ICGE"
</TABLE>
3
<PAGE>
Concurrent Offering
Concurrently with our offering of common stock, we are offering by means
of a separate prospectus $250,000,000 aggregate principal amount of our %
convertible subordinated notes due 2004. The convertible notes will be
convertible at the option of the holder into shares of our common stock. The
completion of the convertible notes offering is not a condition to the
completion of this offering. The sale of our convertible notes is described in
greater detail below under the heading "Concurrent Offering."
4
<PAGE>
Summary Consolidated Financial Data
The following summary historical and pro forma consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus. The summary pro forma data does not purport to represent what our
results would have been if the events described below had occurred at the dates
indicated. The Pro Forma columns included in the Consolidated Statements of
Operations Data for the year ended December 31, 1998 and the nine months ended
September 30, 1999, derived from elsewhere in this prospectus, reflect the
effect of our 1998 and 1999 acquisitions of companies accounted for under the
consolidation and equity methods, the deconsolidation of VerticalNet, and the
acquisition of our ownership interest in Breakaway Solutions as a company
accounted for under the equity method 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 nine months ended September 30, 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 as of September 30, 1999, derived from elsewhere in this
prospectus, reflect the effect of our acquisitions subsequent to September 30,
1999 as if they had occurred on September 30, 1999. The Pro Forma As Adjusted
Consolidated Balance Sheet Data reflect the sale of 6,000,000 shares of our
common stock in this offering at an assumed public offering price of $80.00 per
share and the issuance and sale of $250,000,000 of our convertible notes in a
concurrent offering after deduction of estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
Nine Months Ended
March 4, 1996 Year Ended December 31, September 30,
(Inception) to ------------------------------ -----------------------------
December 31, 1997 1998 1998 1998 1999 1999
1996 Actual Actual Pro Forma Actual Actual Pro Forma
-------------- ------- -------- ----------- -------- -------- ---------
(Unaudited) (Unaudited)
(In Thousands Except Per Share Data)
Consolidated Statements
of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 285 $ 792 $ 3,135 $ 6,456 $ 1,862 $ 14,783 $ 7,186
Operating Expenses...... 2,348 7,510 20,156 11,366 12,728 38,427 21,668
------- ------- -------- -------- -------- -------- --------
(2,063) (6,718) (17,021) (4,910) (10,866) (23,644) (14,482)
Other income, net....... -- -- 30,483 30,483 23,514 47,001 46,989
Interest income (ex-
pense), net............ 88 138 924 (814) 513 2,407 2,401
------- ------- -------- -------- -------- -------- --------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975) (6,580) 14,386 24,759 13,161 25,764 34,908
Income taxes............ -- -- -- -- -- 12,840 28,073
Minority interest....... 427 (106) 5,382 553 2,699 4,133 720
Equity income (loss).... (514) 106 (5,869) (78,997) (3,969) (49,142) (94,824)
------- ------- -------- -------- -------- -------- --------
Net Income (Loss)....... $(2,062) $(6,580) $ 13,899 $(53,685) $ 11,891 $ (6,405) $(31,123)
======= ======= ======== ======== ======== ======== ========
Net income (loss) per
share-- diluted........ $ (0.05) $ (0.10) $ 0.12 $ (0.48) $ 0.11 $ (0.03) $ (0.17)
Weighted average shares
outstanding--diluted... 40,792 68,198 112,299 112,205 105,675 185,104 185,104
Ratio of earnings to
fixed charges
(unaudited) (a)........ 38.7x 13.2x
Pro forma net income
(loss) (unaudited)..... $ 8,756 $(12,509)
Pro forma net income
(loss) per share--
diluted (unaudited).... $ 0.08 $ (0.07)
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(Unaudited)
(In Thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C>
Cash and cash equivalents........................ $186,137 $ 79,523 $ 779,623
Short-term investments........................... 22,845 22,845 22,845
Working capital.................................. 200,370 67,831 767,931
Total assets..................................... 470,227 471,067 1,179,352
Long-term debt................................... 1,633 3,000 3,000
Convertible subordinated notes................... -- -- 250,000
Total shareholders' equity....................... 418,517 418,517 876,802
</TABLE>
- --------
(a) Earnings were insufficient to cover fixed charges by $1,975,130 and
$6,327,305 during the period March 4, 1996 (inception) to December 31, 1996
and the year ended December 31, 1997, respectively.
5
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Internet Capital Group. As one of our shareholders, your investment
will be subject to risks inherent in our business. The price of our common
stock may decline. You should carefully consider the following factors as well
as other information contained in this prospectus before deciding to invest in
shares of our common stock.
RISKS PARTICULAR TO INTERNET CAPITAL GROUP
We have a limited operating history upon which you may evaluate us
We were formed in March 1996. Although we have grown significantly since
then, we have a limited operating history upon which you may evaluate our
business and prospects. We and our partner companies are among the many
companies that have entered into the emerging B2B e-commerce market. Many of
our partner companies are in the early stages of their development. Our
business and prospects must be considered in light of the risk, expense and
difficulties frequently encountered by companies in 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.
Our business depends upon the performance of our partner companies, which is
uncertain
Economic, governmental, industry and internal company factors outside our
control affect each of our partner companies. If our partner companies do not
succeed, the value of our assets and the price of our common stock could
decline. The material risks relating to our partner companies include:
. fluctuations in the market price of the common stock of
VerticalNet and Breakaway Solutions, two of our publicly traded
partner companies, and other future publicly traded partner
companies, which are likely to affect the price of our common
stock;
. lack of the widespread commercial use of the Internet, which may
prevent our partner companies from succeeding; and
. intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our
partner companies.
Of our $470 million in total assets as of September 30, 1999, $168.7
million, or 36%, consisted of ownership interests in and advances to our
partner companies. On a pro forma basis, adjusted for our acquisitions
subsequent to September 30, 1999 as if they had occurred on September 30, 1999,
our assets on September 30, 1999 were $471.1 million, of which $293.9 million,
or 62.4%, consisted of ownership interests in 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, the effect of
adjustments to our carrying value resulting from certain issuances of equity
securities by our partner companies 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 and Breakaway Solutions are two of our publicly traded partner
companies and on November 15, 1999 our holdings in VerticalNet and Breakaway
Solutions had respective market values of approximately $1.2 billion and $429
million. A decline in the market value of VerticalNet or Breakaway Solutions
will likely cause a decline in the price of our common stock.
6
<PAGE>
Other material risks relating to our partner companies are more fully
described below under "Risks Particular to Our Partner Companies."
Our business model is unproven
Our strategy is based on an unproven business model. Our business model
depends on the willingness of companies to join our collaborative network and
the ability of the collaborative network to assist our partner companies. Our
business model depends on our ability to share information within our network
of partner companies. If competition develops among our partner companies, we
may be unable to fully benefit from the sharing of information within our
network of partner companies. If we cannot convince companies of the value of
our business model, our ability to attract new companies will be adversely
affected and our strategy of building a collaborative network may not succeed.
Fluctuations in our quarterly results may adversely affect our stock price
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
. the operating results of our partner companies;
. changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in partner
companies;
. changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership
percentages of our partner companies;
. sales of equity securities by our partner companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
. the pace of development or a decline in growth of the B2B e-
commerce market;
. intense competition from other potential acquirors of B2B e-
commerce companies, which could increase our cost of acquiring
interests in additional companies, and competition for the goods
and services offered by our partner companies; and
. our ability to effectively manage our growth and the growth of our
partner companies during the anticipated rapid growth of the
global B2B e-commerce market.
We believe that period-to-period comparisons of our operating results are
not meaningful. 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.
As of November 15, 1999, fourteen of our nineteen management personnel
have worked for us for less than one year. 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.
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The success of some of our partner companies also depends on their having
highly trained technical and marketing personnel. Our partner companies will
need to continue to hire additional personnel as their businesses grow. A
shortage in the number of trained technical and marketing personnel could limit
the ability of our partner companies to increase sales of their existing
products and services and launch new product offerings.
We have had a history of losses and expect continued losses in the foreseeable
future
Our net loss for the nine months ended September 30, 1999 of $6.4 million
includes gains of $29.0 million, net of deferred taxes, related to the issuance
of stock by VerticalNet and a $7.7 million deferred tax benefit related to our
conversion from a limited liability company to a taxable corporation. Without
the $36.7 million effect of these items on our net results, we would have had a
net loss of $43.1 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 nine
months ended September 30, 1999 would have been reduced by $67.6 million and
$24.7 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. Without the effect of
any significant non-operating gains during the three months ended December 31,
1999, we expect to incur a significant net loss for this period.
Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
. broaden our partner company support capabilities;
. explore acquisition opportunities and alliances with other
companies;
. facilitate business arrangements among our partner companies; and
. expand our business internationally.
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.
Our partner companies are growing rapidly and we may have difficulty assisting
them in managing their growth
Our partner companies have grown, and we expect them to continue to grow
rapidly, by adding new products and services and hiring new employees. This
growth is likely to place significant strain on their resources and on the
resources we allocate to assist our partner companies. In addition, our
management may be unable to convince our partner companies to adopt our ideas
for effectively and successfully managing their growth.
We may compete with some of our shareholders and partner companies, and our
partner companies may compete with each other
We may compete with some of our shareholders and partner companies for
Internet-related opportunities. After this offering, Comcast Corporation and
Safeguard Scientifics, Inc. will own 9.4% and 14.0% of our outstanding common
stock, respectively, based on the number of shares held by each of them on
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November 15, 1999. These shareholders may compete with us to acquire interests
in B2B e-commerce companies. Comcast 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
acquisitions, 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 policies, contracts or other understandings with
any of 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.
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 on reasonable terms, our strategy to build a
collaborative network of partner companies may not succeed.
Our global expansion exposes us to less developed markets, currency
fluctuations and political instability
We are pursuing B2B e-commerce opportunities outside the United States.
We recently opened an office in London whose personnel will focus on B2B e-
commerce opportunities in Europe. This international expansion exposes us to
several risks, including the following:
. Less Developed Markets. We believe that e-commerce markets outside
the United States are less developed than the United States e-
commerce market. If the e-commerce markets outside the United
States do not continue to mature, any of our partner companies
outside the United States may not succeed.
. Currency Fluctuations. When we purchase interests in non-United
States partner companies for cash, we will likely have to pay for
the interests using the currency of the country where the
prospective partner company is located. Similarly, although it is
our intention to act as a long-term partner to our partner
companies, if we sold an interest in a non-United States partner
company we might receive foreign currency. To the extent that we
transact in foreign currencies, fluctuations in the relative value
of these currencies and the United States dollar may adversely
impact our financial results.
. Compliance with Laws. As we expand internationally, we will become
increasingly subject to the laws and regulations of foreign
countries. We may not be familiar with these laws and regulations,
and these laws and regulations may change at any time.
. Political Instability. We may purchase interests in foreign
partner companies that are located, or transact business in, parts
of the world that experience political instability. Political
instability may have an adverse impact on the subject country's
economy, and may limit or eliminate a partner company's ability to
conduct business.
Our growth could be impaired by limitations on our and our partner companies
access to the capital markets
We are dependent on the capital markets for access to funds for
acquisitions and other purposes. Our partner companies are also dependent on the
capital markets to raise capital for their own purposes. To
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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, our ability and the ability of our
partner companies to grow and access the capital markets will be impaired.
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 an interest in a partner company, we may not
receive maximum value for this position. For partner companies with publicly-
traded stock, we may be unable to sell our interest at then-quoted market
prices. Furthermore, for those partner companies that do not have publicly-
traded stock, the realizable value of our interests may ultimately prove to be
lower than the carrying value currently reflected in our consolidated financial
statements.
We may not have opportunities to acquire interests in additional companies
We may be unable to identify companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable
to acquire an interest in the company for many reasons, including:
. a failure to agree on the terms of the acquisition, such as the
amount or price of our acquired interest;
. incompatibility between us and management of the company;
. competition from other acquirors of B2B e-commerce companies;
. a lack of capital to acquire an interest in the company; and
. the unwillingness of the company to partner with us.
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. We
may also spend more on individual acquisitions than we have in the past. These
larger acquisitions may place significantly greater strain on our resources,
ability to manage such companies and ability to integrate them into our
collaborative network. Future acquisitions are subject to the following risks:
. Our acquisitions may cause a disruption in our ongoing support of
our partner companies, distract our management and other resources
and make it difficult to maintain our standards, controls and
procedures.
. We may acquire interests in companies in B2B e-commerce markets in
which we have little experience.
. We may not be able to facilitate collaboration between our partner
companies and new companies that we acquire.
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. To fund future acquisitions we may be required to incur debt or
issue equity securities, which may be dilutive to existing
shareholders.
We may have to buy, sell or retain assets when we would otherwise not wish to
in order to avoid registration under the Investment Company Act of 1940
We believe that we are actively engaged in the business of B2B e-commerce
through our network of majority-owned subsidiaries and companies that we are
considered to "control." Under the Investment Company Act, a company is
considered to control another company if it owns more than 25% of that
company's voting securities. 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 subject
us to regulation under the Investment Company Act unless we took precautionary
steps. For example, in order to avoid having excessive income from "non-
controlled" interests, we may not 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
need 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 be regulated as an investment company because the
Investment Company Act rules are inconsistent with our strategy of actively
managing, operating and promoting collaboration among our network of partner
companies. On August 23, 1999 the Securities and Exchange Commission granted
our request for an exemption under Section 3(b)(2) of the Investment Company
Act declaring us to be primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities. This
exemptive order reduces the risk that we may have to take action to avoid
registration as an investment company, but it does not eliminate the risk.
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.
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RISKS PARTICULAR TO OUR PARTNER COMPANIES
Fluctuation in the price of the common stock of our publicly-traded partner
companies may affect the price of our common stock
VerticalNet and Breakaway Solutions are two of our publicly-traded
partner companies. The price of their common stock has been highly volatile. On
February 16, 1999, VerticalNet completed its initial public offering at a price
of $8.00 per share and its common stock has since traded as high as $110.00 per
share, adjusted for a two for one stock split. On October 6, 1999, Breakaway
Solutions completed its initial public offering at a price of $14.00 per share
and its common stock has since traded as high as $71.00 per share. The market
value of our holdings in these partner companies changes with these
fluctuations. Based on the closing price of VerticalNet's common stock on
November 15, 1999 of $93.00, our holdings in VerticalNet had a market value of
approximately $1.2 billion. Based on the closing price of Breakaway Solutions'
common stock on November 15, 1999 of $61.50, our holdings in Breakaway
Solutions had a market value of approximately $429 million. Fluctuations in the
price of VerticalNet's, Breakaway Solutions' and other publicly-traded partner
companies' common stock are likely to affect the price of our common stock.
VerticalNet's results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. lack of acceptance of the Internet as an advertising medium;
. inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
. inability to generate significant e-commerce transaction revenues
from its communities;
. lower advertising rates; and
. loss of key content providers.
Breakaway Solutions' results of operations, and accordingly the price of
its common stock, may be adversely affected by the following factors:
. growing enterprises' failure to accept e-commerce solutions;
. inability to open new regional offices;
. loss of money on fixed-fee or performance-based contracts; and
. inability to develop brand awareness.
As of September 30, 1999, our assets as reflected in our balance sheet
were approximately $470 million, of which $48.4 million relates to VerticalNet,
Breakaway Solutions and other publicly traded partner companies. However, we
believe that comparisons of the value of our holdings in partner companies to
the value of our total assets are not meaningful because not all of our partner
company ownership interests are marked to market in our balance sheet.
The success of our partner companies depends on the development of the B2B e-
commerce market, which is uncertain
All of our partner companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective medium for providing products and
services, our partner companies may not succeed.
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Our long-term success depends on widespread market-acceptance of B2B e-
commerce. A number of factors could prevent such acceptance, including the
following:
. the unwillingness of businesses to shift from traditional
processes to B2B e-commerce processes;
. the necessary network infrastructure for substantial growth in
usage of B2B e-commerce may not be adequately developed;
. increased government regulation or taxation may adversely affect
the viability of B2B e-commerce;
. insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response
times for the users of B2B e-commerce; and
. concern and adverse publicity about the security of B2B e-commerce
transactions.
Our partner companies may fail if their competitors provide superior Internet-
related offerings or continue to have greater resources than our partner
companies have
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, we expect that competition will intensify. Barriers
to entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain
a critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our partner companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail.
Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives.
Some of our partner companies may be unable to protect their proprietary rights
and may infringe on the proprietary rights of others
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
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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.
Our partner companies that publish or distribute content over the Internet may
be subject to legal liability
Some of our partner companies may be subject to legal claims relating to
the content on their Web sites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of
material. In addition, some of the content provided by our partner companies on
their Web sites is drawn from data compiled by other parties, including
governmental and commercial sources. 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
market maker partner companies are particularly dependent on content to attract
users to their Web sites. Our success depends upon
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the ability of these partner companies to deliver compelling Internet content
to their targeted users. If our partner companies are unable to develop
Internet content that attracts a loyal user base, the revenues and
profitability of our partner companies could be impaired. Internet users can
freely navigate and instantly switch among a large number of Web sites. Many of
these Web sites offer original content. Thus, our partner companies may have
difficulty distinguishing the content on their Web sites to attract a loyal
base of users.
Our partner companies may be unable to acquire or maintain easily identifiable
Web site addresses or prevent third parties from acquiring Web site addresses
similar to theirs
Some of our partner companies hold various Web site addresses relating to
their brands. These partner companies may not be able to prevent third parties
from acquiring Web site addresses that are similar to their addresses, which
could adversely affect the use by businesses of our partner companies' Web
sites. In these instances, our partner companies may not grow as we expect. The
acquisition and maintenance of Web site addresses generally is regulated by
governmental agencies and their designees. The regulation of Web site addresses
in the United States and in foreign countries is subject to change. As a
result, our partner companies may not be able to acquire or maintain relevant
Web site addresses in all countries where they conduct business. Furthermore,
the relationship between regulations governing such addresses and laws
protecting trademarks is unclear.
Some of our partner companies are dependent on barter transactions that do not
generate cash revenue
Our partner companies often enter into barter transactions in which they
provide advertising for other Internet-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 nine month period ended September
30, 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 nine-month period ending September 30, 1999, approximately 23%
of VerticalNet's revenue was attributable to barter transactions.
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.
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Rapid technological changes may prevent our partner companies from remaining
current with their technical resources and maintaining competitive product and
service offerings
The markets in which our partner companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our partner companies are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
condition and operating results will be adversely affected. To be successful,
our partner companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Our success will depend, in part, on our partner companies' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our partner companies will also need to
respond to technological advances and emerging industry standards in a cost-
effective and timely manner.
Government regulations and legal uncertainties may place financial burdens on
our business and the businesses of our partner companies
As of November 15, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and quality of goods and services. The enactment of any
additional laws or regulations may impede the growth of the Internet and B2B e-
commerce, which could decrease the revenue of our partner companies and place
additional financial burdens on our business and the businesses of our partner
companies.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, the United States
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
We may issue securities which may dilute your ownership interest
In the future, we may issue securities to raise cash for acquisitions,
and we may also pay for interests in additional partner companies by using a
combination of cash and our common stock, or just our common stock. Any of
these events may dilute your ownership interest in us and have an adverse
impact on the price of our common stock. In addition, if we issue securities
convertible into our common stock, including the convertible notes being
offered in the concurrent offering, the conversion of these securities may
dilute your ownership interest and have an adverse impact on the price of our
common stock.
Shares eligible for future sale by our current shareholders may decrease the
price of our common stock
If our shareholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the public
market following the offering, then the market price of our common stock could
fall. Restrictions under the securities laws and certain repurchase and lock-up
agreements limit the number of shares of common stock available for sale in the
public market. Prior to this offering, the holders of 197,934,362 shares of
common stock, options exercisable into an aggregate of 1,348,000 shares of
common stock, and warrants exercisable into an aggregate of 2,548,318 shares of
common stock agreed not to
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sell any of these securities until February 1, 2000 without the prior written
consent of Merrill Lynch. In connection with this offering, the holders of
shares of our common stock have agreed not to sell any of these securities
until without the consent of Merrill Lynch. However, Merrill Lynch may, in
its sole discretion, release all or any portion of the securities subject to
these lock-up agreements.
The holders of 169,974,220 shares of common stock and the holders of
warrants to purchase 2,975,068 shares of common stock have demand or piggy-back
registration rights. Prior to this offering, the holders of these securities
that have demand registration rights agreed not to demand that their securities
be registered until February 1, 2000 without the prior written consent of
Merrill Lynch. In connection with this offering, the holders of shares of
our common stock that have demand registration rights have agreed not to demand
that their securities be registered until without the prior written
consent of Merrill Lynch. We also may shortly file a registration statement to
register all shares of common stock under our stock option plans. After that
registration statement is effective, common stock issued upon exercise of stock
options under our benefit plans will be eligible for resale in the public
market without restriction.
The interests of certain of our significant shareholders may conflict with our
interests and the interests of our other shareholders
As a result of its ownership of our common stock, Safeguard Scientifics
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 about 14.0% of our common stock.
Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult
Our certificate of incorporation provides that our board of directors may
issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a three-year
term. The issuance of preferred stock and the existence of a classified board
could make it more difficult for a third-party to acquire us without the
approval of our board.
Our common stock price is highly volatile
The market price for our common stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. The trading price of our common stock has increased
significantly from our initial public offering price of $6.00 per share, as
adjusted for our 2 for 1 stock split. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could depress
our stock price regardless of our results.
The following factors will add to our common stock price's volatility:
. actual or anticipated variations in our quarterly results and
those of our partner companies;
. new sales formats or new products or services offered by us, our
partner companies and their competitors;
. changes in our financial estimates and those of our partner
companies by securities analysts;
. changes in the size, form or rate of our acquisitions;
. conditions or trends in the Internet industry in general and the
B2B e-commerce industry in particular;
17
<PAGE>
. announcements by our partner companies and their competitors of
technological innovations;
. announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint
ventures;
. changes in the market valuations of our partner companies and
other Internet companies;
. our capital commitments;
. negative changes in the public's perception of the prospects of e-
commerce companies;
. general economic conditions such as a recession, or interest rate
or currency rate fluctuations;
. additions or departures of our key personnel and key personnel of
our partner companies; and
. additional sales of our securities.
Many of these factors are beyond our control. These factors may decrease the
market price of our common stock, regardless of our operating performance. In
the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on our business,
operating results and financial condition.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to known and unknown risks, uncertainties and assumptions about us and
our partner companies, that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. These factors are discussed in the "Risk
Factors" section beginning on page 6 of this prospectus, and include, among
other things:
. development of an e-commerce market;
. our ability to identify trends in our markets and the markets of
our partner companies and to offer new solutions that address the
changing needs of these markets;
. our ability to successfully execute our business model;
. our partner companies' ability to compete successfully against
direct and indirect competitors;
. our ability to acquire interests in additional companies;
. our ability to expand our business successfully into international
markets;
. growth in demand for Internet products and services; and
. adoption of the Internet as an advertising medium.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "could", "would", "expect", "plan",
"anticipate", "believe", "estimate", "continue", or the negative of such terms
or other similar expressions. All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements included in this prospectus. 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.
19
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $80.00 per share adjusted to show
the effect of a 2 for 1 stock split of all shares of our common stock
outstanding on December 6, 1999, our net proceeds from the sale of the
6,000,000 shares of our common stock offered by us will be approximately $458.3
million ($527.2 million if the underwriters' over-allotment option is exercised
in full), after deduction of underwriting discounts and commissions and
estimated offering expenses payable by us. The net proceeds to us from the
concurrent convertible notes offering are expected to be approximately $241.8
million after deduction of underwriting discounts and commissions and estimated
offering expenses payable by us.
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, to pay interest on our convertible notes, and
for general corporate purposes, including working capital. During the period
from October 1, 1999 through November 18, 1999, we used approximately $106.5
million to acquire interests in or make advances to seventeen new and existing
partner companies. As of November 18, 1999, we were contingently obligated for
approximately $3.3 million of guarantee commitments and as of November 18,
1999, our commitments to new and existing partner companies that require
funding in the next 12 months totaled $30.1 million. We are continually in
discussions to acquire ownership interests in new or existing partner
companies, although we have no binding obligations except as described above.
Our bank credit facility matures in April 2000 and bears interest, at our
option, at prime and/or LIBOR plus 2.5%. At November 18, 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,
direct or guaranteed obligations of the United States or other highly liquid,
high quality debt instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock, and
we do not intend to pay cash dividends in the foreseeable future. We plan to
retain any earnings for use in the operation of our business and to fund future
growth.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market since
August 5, 1999 under the symbol "ICGE." Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the high and low prices per share of the common stock on the Nasdaq
National Market adjusted to show the effect of a 2 for 1 stock split of all
shares of our common stock outstanding on December 6, 1999.
<TABLE>
<CAPTION>
1999 High Low
---- ------ ------
<S> <C> <C>
Third Quarter (from August 5, 1999)......................... $53.75 $ 7.00
Fourth Quarter (through November 18, 1999).................. $97.78 $43.00
</TABLE>
On November 18, 1999, the last reported sale price for our common stock
on the Nasdaq National Market was $80.00 per share. As of November 18, 1999,
there were approximately 978 holders of record of our common stock.
20
<PAGE>
THE REORGANIZATION
Internet Capital Group, Inc. is a successor to a business originally
founded in March 1996 as a Delaware limited liability company under the name
Internet Capital Group, L.L.C. As a limited liability company, Internet Capital
Group, L.L.C. was treated for income tax purposes as a partnership with taxes
on the income generated by Internet Capital Group, L.L.C. paid by its members.
Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on
February 2, 1999, with Internet Capital Group, Inc. surviving (the
"Reorganization"). In connection with the Reorganization and as required by its
limited liability company agreement to satisfy the members' tax liabilities,
Internet Capital Group, L.L.C. declared a $10.7 million distribution to its
members. Internet Capital Group, Inc. has assumed all liabilities of Internet
Capital Group, L.L.C., including the distribution to members of Internet
Capital Group, L.L.C. The distributions made to some of the members of Internet
Capital Group, L.L.C. are described in detail below under the heading "Certain
Transactions." Also as part of the Reorganization, Internet Capital Group, Inc.
issued 164,011,098 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.
CONCURRENT OFFERING
The convertible notes to be offered in the concurrent offering will be in
an aggregate principal amount of $250,000,000, excluding $37,500,000 principal
amount subject to an over-allotment option. The convertible notes will be due
on , 2004. Interest will accrue on the convertible notes at the rate of %
per year on the principal amount, payable semiannually in arrears on and
of each year commencing on , 2000. The convertible notes are
convertible at the option of the holder into common stock. The initial
conversion price is $ per share, which is equal to a conversion rate of
shares per $1,000 principal amount of notes, subject to adjustment. We may
redeem some or all of the notes at any time on or after , 2002, and before
, 2002 if the closing price of our common stock has exceeded 150% of the
conversion price. Redemption prices vary depending on the date of redemption.
If there is a change in control of Internet Capital Group, each holder of the
convertible notes may require us to repurchase in cash, or at our option in
common stock, all or a portion of its notes. The convertible notes will be
unsecured and will be subordinated to our existing and future senior
indebtedness. The convertible notes will be effectively subordinated to the
indebtedness and other obligations of our subsidiaries. The indenture relating
to the convertible notes does not restrict the incurrence by us and our
subsidiaries of debt or other obligations.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization on an Actual basis as
of September 30, 1999.
The table also sets forth our capitalization on an As Adjusted basis as
if the following events occurred on September 30, 1999:
. the issuance and sale of 6,000,000 shares of our common stock in
this offering; and
. the issuance and sale of $250,000,000 of our % convertible
subordinated notes due 2004 in the concurrent offering.
With respect to this offering, the table below includes deductions for
estimated underwriting discounts and commissions, and for estimated offering
expenses.
Common stock data is as of November 15, 1999 and excludes:
. the shares of common stock issuable upon conversion of the
convertible notes being offered concurrently with this offering;
. the exercise of the underwriters' over-allotment options in
connection with this offering and the concurrent offering;
. options to purchase 4,898,000 shares of common stock under our
equity plans at a weighted average exercise price of $19.44 per
share;
. the warrants outstanding to purchase 3,375,068 shares at a
weighted average exercise price of $5.88 per share; and
. 1,574,063 shares of our common stock issuable upon exercise of an
option under an agreement related to the acquisition of a partner
company ownership interest.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
Actual As Adjusted(1)
------------ ---------------
<S> <C> <C>
Long-term debt.................................. $ 1,633,360 $ 1,633,360
Convertible subordinated notes.................. -- 250,000,000
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued and
outstanding-actual, and as adjusted.......... -- --
Common stock, $.001 par value; 300,000,000
shares authorized; 253,014,086 shares issued
and outstanding-actual;
259,014,086 shares issued and outstanding as
adjusted..................................... 253,014 259,014
Additional paid-in capital...................... 510,325,881 968,604,811
Retained earnings............................... (3,165,920) (3,165,920)
Unamortized deferred compensation............... (14,371,190) (14,371,190)
Notes receivable--shareholders.................. (81,147,592) (81,147,592)
Accumulated other comprehensive income.......... 6,622,404 6,622,404
------------ ---------------
Total shareholders' equity.................. 418,516,597 876,801,527
------------ ---------------
Total capitalization...................... $420,149,957 $ 1,128,434,887
============ ===============
</TABLE>
- --------
(1) Completion of the convertible note offering is not a condition to the
completion of this offering. If we do not complete the issuance and sale of
$250,000,000 of our convertible notes in the concurrent offering, as
adjusted long-term debt would be $1,633,360 and as adjusted total
capitalization would be $878,434,887.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our Consolidated Financial Statements, including the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The Consolidated
Statements of Operations Data from March 4, 1996, the date of our inception,
through December 31, 1996 and for the years ended December 31, 1997 and 1998,
and Consolidated Balance Sheet Data at December 31, 1997 and 1998 have been
derived from the Consolidated Financial Statements, that have been audited by
KPMG LLP, independent auditors, included elsewhere in this prospectus. The
Consolidated Balance Sheet Data at December 31, 1996 has been derived from the
Consolidated Financial Statements that have been audited by KPMG LLP,
independent auditors, which are not included in this prospectus. The
Consolidated Statements of Operations Data for the nine months ended September
30, 1998 and 1999 and the Consolidated Balance Sheet Data at September 30, 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 nine months ended September 30, 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.
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Nine Months Ended
(Inception) to Year Ended December 31, September 30,
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating Expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
------------ ----------- ------------ ----------- ------------
Total operating
expenses.............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
------------ ----------- ------------ ----------- ------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income, net....... -- -- 30,483,177 23,514,321 47,001,191
Interest income
(expense), net......... 88,098 138,286 924,588 513,652 2,406,446
------------ ----------- ------------ ----------- ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes............ -- -- -- -- 12,840,423
Minority interest....... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss).... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
------------ ----------- ------------ ----------- ------------
Net Income (Loss)....... $ (2,062,485) $(6,579,628) $ 13,898,928 $11,890,856 $ (6,404,860)
============ =========== ============ =========== ============
Net Income (loss) per
share--diluted......... $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (0.03)
Weighted average shares
outstanding--diluted... 40,791,548 68,197,688 112,298,578 105,674,672 185,103,758
Pro forma net income
(unaudited)............ $ 8,756,325 $(12,509,434)
Pro forma net income per
share--diluted
(unaudited)............ $ 0.08 $ (0.07)
Ratio of earnings to
fixed charges
(unaudited) (a)........ 38.7x 13.2x
</TABLE>
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------------------------- September 30,
1996 1997 1998 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 3,215,256 $ 5,967,461 $26,840,904 $186,137,151
Working capital............. 4,883,129 2,390,762 20,452,438 200,369,744
Total assets................ 13,629,407 31,481,016 96,785,975 470,227,369
Long-term debt.............. 167,067 399,948 351,924 1,633,360
Total shareholders' equity.. 12,858,856 26,634,675 80,724,378 418,516,597
</TABLE>
- --------
(a) Earnings were insufficient to cover fixed charges by $1,975,130 and
$6,327,305 during the period March 4, 1996 (inception) to December 31, 1996
and the year ended December 31, 1997, respectively.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
audited Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
General
Internet Capital Group is an Internet holding company actively engaged in
B2B e-commerce through a network of partner companies. As of September 30,
1999, we owned interests in 39 B2B e-commerce companies, which we refer to as
our partner companies. We focus on two types of B2B e-commerce companies, which
we call market makers and infrastructure service providers.
Because we acquire significant interests in B2B e-commerce companies,
many of which generate 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 invested or have committed to invest in
our partner companies.
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.
On August 23, 1999 the Securities and Exchange Commission granted our
request for an exemption under Section 3(b)(2) of the Investment Company Act,
declaring us to be primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities. Because of
our operating focus, the significant ownership interests we hold in our partner
companies and the greater operating flexibility we obtain from the exemptive
order, we do not believe that the Investment Company Act will adversely affect
our operations or shareholder value.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
24
<PAGE>
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 below 50%. Therefore, we
apply the equity method of accounting beginning in February 1999. We acquired
controlling majority voting interests in Breakaway Solutions during the three
months ended March 31, 1999, EmployeeLife.com and iParts during the three
months ended June 30, 1999, and AgProducer Network during the three months
ended September 30, 1999, each of which was consolidated from the date of its
acquisition. As of September 30, 1999, AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts were our only consolidated partner companies.
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.
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 September 30, 1999, we accounted for 22 of our partner
companies under this method.
Our partner companies accounted for under the equity method of accounting
at December 31, 1998 and September 30, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
EQUITY METHOD:
asseTrade.com, Inc. ...................... 1999 N/A 26%
Bidcom, Inc. ............................. 1999 N/A 24%
Blackboard Inc. .......................... 1998 35% 30%
CommerceQuest, Inc. ...................... 1998 N/A 29%
CommerX, Inc. ............................ 1998 34% 42%
ComputerJobs.com, Inc. ................... 1998 33% 33%
eMarketWorld, Inc. ....................... 1999 N/A 42%
Internet Commerce Systems, Inc. .......... 1999 N/A 43%
LinkShare Corporation..................... 1998 34% 34%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
EQUITY METHOD:
NetVendor Inc............................ 1999 N/A 26%
ONVIA.com, Inc. ......................... 1999 N/A 20%
PaperExchange.com LLC.................... 1999 N/A 27%
Plan Sponsor Exchange, Inc............... 1999 N/A 46%
Residential Delivery Services, Inc....... 1999 N/A 38%
SageMaker, Inc. ......................... 1998 22% 27%
Sky Alland Marketing, Inc. .............. 1996 31% 31%
StarCite, Inc............................ 1999 N/A 43%
Syncra Software, Inc. ................... 1998 53% 35%
United Messaging, Inc.................... 1999 N/A 41%
Universal Access, Inc.................... 1999 N/A 26%
VerticalNet, Inc. ....................... 1996 N/A 35%
Vivant! Corporation ..................... 1998 23% 23%
</TABLE>
As of September 30, 1999, we owned voting convertible preferred stock in
all companies listed except VerticalNet. In addition, we also owned common
stock in CommerceQuest, SageMaker, Sky Alland Marketing and Universal Access.
Our voting ownership in VerticalNet consisted only of common stock at September
30, 1999. VerticalNet was consolidated at December 31, 1998. CommerceQuest and
Universal Access were accounted for under the cost method of accounting at
December 31, 1998. We have representation on the board of directors of all of
the above partner companies.
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 at December 31, 1998 generated a net profit of less than $1
million in 1998; however, this partner company is not expected to generate a
profit in 1999.
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.
26
<PAGE>
Our partner companies accounted for under the cost method of accounting
at December 31, 1998 and September 30, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc............... 1999 N/A 16%
AUTOVIA Corporation....................... 1998 15% 15%
Benchmarking Partners, Inc. .............. 1996 13% 13%
ClearCommerce Corp. ...................... 1997 17% 15%
Collabria, Inc. .......................... 1999 N/A 12%
CommerceQuest, Inc. ...................... 1998 0% N/A
Context Integration, Inc. ................ 1997 18% 18%
Deja.com, Inc. ........................... 1997 0% 1%
e-Chemicals, Inc. ........................ 1998 0% 0%
Entegrity Solutions Corporation........... 1996 12% 12%
PrivaSeek, Inc. .......................... 1998 16% 16%
Servicesoft Technologies, Inc. ........... 1998 12% 6%
TRADEX Technologies, Inc. ................ 1999 N/A 10%
US Interactive, Inc. ..................... 1996 4% 3%
</TABLE>
In most cases, we have representation on the board of directors of the
above companies, including those in which we hold non-voting securities. As of
September 30, 1999, we owned voting convertible preferred stock in all
companies listed except Deja.com, in which we owned non-voting convertible
preferred stock, and e-Chemicals, in which we owned non-voting convertible
debentures. We record our ownership in debt securities at cost as we have the
ability and intent to hold these securities until maturity. In addition to our
investments in voting and non-voting equity and debt securities, we also
periodically make advances to our partner companies in the form of promissory
notes. There were advances to cost method partner companies totaling $0.8
million at September 30, 1999. During the three months ended September 30,
1999, RapidAutoNet Corporation changed its name to AUTOVIA Corporation.
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.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, since our inception
through December 31, 1998 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 below 50%.
Therefore, we have applied the equity method of accounting since February 1999.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts
during the three months ended June 30, 1999, and AgProducer Network during the
three months ended September 30, 1999, each of which was consolidated from the
date of its acquisition. The presentation of our financial statements looks
substantially different as a result of consolidating AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts and no longer consolidating
VerticalNet in our financial statements for the nine months ended September 30,
1999 versus the comparable period in the prior year.
27
<PAGE>
To understand our net results of operations and financial position
without the effect of consolidating our majority owned subsidiaries, Note 12 to
our Consolidated Financial Statements summarizes our Parent Company Statements
of Operations and Balance Sheets which treat VerticalNet, AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts as if they were accounted for
under the equity method of accounting for all periods presented. Our share of
the losses of VerticalNet, AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts 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, AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts as of September 30, 1999 are
included in "Ownership interests in and advances to Partner Companies" in the
Parent Company Balance Sheets.
Net Results of Operations
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 AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts from their dates of acquisition in 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.
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 and nine
months ended September 30, 1999, Breakaway Solutions was consolidated and
accounted for nearly all of our consolidated revenue and a significant portion
of our consolidated operating expenses.
AgProducer Network, Breakaway Solutions, EmployeeLife.com, and iParts
were consolidated during the period ended September 30, 1999. These companies
are development stage companies, have generated negligible revenue since their
inception, and incurred operating expenses of $1.4 million during the nine
months ended September 30, 1999.
During the periods ending December 31, 1996, 1997 and 1998 we acquired
equity ownership interests in VerticalNet for $1 million, $2 million and $4
million, respectively. In 1998, we made advances to VerticalNet in the form of
convertible notes of $5 million, of which $.8 million was repaid by
VerticalNet, $2.1 million was purchased from us by one of our shareholders, and
$2.1 million was converted into common stock during the three months ended
March 31, 1999.
As of September 30, 1999, VerticalNet owned and operated 51 industry-
specific trade communities. Advertising revenue and Web site development fees
represented all of VerticalNet's revenue in 1996 and 1997. In 1998, most of
VerticalNet's revenue was generated from selling advertisements to industry
suppliers in its trade communities.
VerticalNet sells storefront and banner advertising and event
sponsorships in its trade communities. The duration of a storefront
advertisement is typically for a period of one year, while banner
advertisements are typically for a period of three months. All advertising
revenue is recognized ratably in the period in which the advertisement is
displayed, provided that the collection is reasonably assured. VerticalNet also
generates revenue from career services, education, and e-commerce, specifically
the sale of books and third party software for which they receive a transaction
fee, and from barter transactions.
28
<PAGE>
Breakaway Solutions is a full service provider of e-business solutions
that allow growing enterprises to capitalize on the power of the Internet to
reach and support customers and markets. Breakaway Solutions' services consist
of Breakaway Solutions strategy consulting, Breakaway Solutions Internet
solutions, Breakaway Solutions eCRM solutions and Breakaway Solutions
application hosting. From Breakaway Solutions' inception in 1992 through 1998,
Breakaway Solutions' operating activities primarily consisted of providing
strategy consulting and systems integration services. Prior to Breakaway
Solutions' acquisition of Applica in 1999, Breakaway Solutions derived no
revenues from application hosting. Breakaway Solutions believes, however, that
application hosting will account for a significantly greater portion of
revenues in the future. Breakaway Solutions generated $3.5 million, $6.1
million and $10 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 a net loss in 1998 of $.6 million.
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 September 30, 1999, we accounted for 22 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.
29
<PAGE>
Our consolidated net results of operations consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Nine Months Ended
(Inception) to Year Ended December 31, September 30,
December 31, ------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Summary of Consolidated
Net Income (Loss)
Partner Company
Operations............ $ (796,202) $(4,778,902) $(14,081,522) $ (9,605,039) $(55,858,002)
General ICG
Operations............ (1,266,283) (1,800,726) 27,980,450 21,495,895 49,453,142
----------- ----------- ------------ ------------ ------------
Net income (loss) --
Consolidated Total... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
=========== =========== ============ ============ ============
Partner Company
Operations
Revenue................ $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 560,077 3,688,488 12,001,245 7,312,682 18,267,184
----------- ----------- ------------ ------------ ------------
Total operating
expenses.............. 987,547 5,455,505 16,643,773 10,211,382 25,691,778
----------- ----------- ------------ ------------ ------------
(702,407) (4,663,683) (13,509,004) (8,349,583) (10,908,682)
Other income (expense),
net................... -- -- -- -- 27,607
Interest income........ 7,491 10,999 212,130 164,535 85,946
Interest expense....... (13,931) (126,105) (297,401) (149,369) (53,969)
----------- ----------- ------------ ------------ ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (708,847) (4,778,789) (13,594,275) (8,334,417) (10,849,098)
Income taxes........... -- -- -- -- --
Minority interest...... 427,185 (106,411) 5,381,640 2,699, 112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ------------ ------------
Loss from Partner
Company Operations.... $ (796,202) $(4,778,902) $(14,081,522) $ (9,605,039) $(55,858,002)
=========== =========== ============ ============ ============
General ICG Operations
General and
administrative........ $ 1,360,821 $ 2,054,118 $ 3,512,586 $ 2,516,912 $ 12,735,334
----------- ----------- ------------ ------------ ------------
(1,360,821) (2,054,118) (3,512,586) (2,516,912) (12,735,334)
Other income (expense),
net................... -- -- 30,483,177 23,514,321 46,973,584
Interest income........ 94,538 253,392 1,093,657 582,234 4,090,824
Interest expense....... -- -- (83,798) (83,748) (1,716,355)
----------- ----------- ------------ ------------ ------------
Income (loss) from
General ICG Operations
before income taxes... (1,266,283) (1,800,726) 27,980,450 21,495,895 36,612,719
Income taxes........... -- -- -- -- 12,840,423
----------- ----------- ------------ ------------ ------------
Income (loss) from
General ICG
Operations............ $(1,266,283) $(1,800,726) $ 27,980,450 $ 21,495,895 $ 49,453,142
=========== =========== ============ ============ ============
Consolidated Total
Revenue................ $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
----------- ----------- ------------ ------------ ------------
Total operating
expenses.............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
----------- ----------- ------------ ------------ ------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income (expense),
net................... -- -- 30,483,177 23,514,321 47,001,191
Interest income........ 102,029 264,391 1,305,787 746,769 4,176,770
Interest expense....... (13,931) (126,105) (381,199) (233,117) (1,770,324)
----------- ----------- ------------ ------------ ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes........... -- -- -- -- 12,840,423
Minority interest...... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ------------ ------------
Net income (loss) --
Consolidated Total... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
=========== =========== ============ ============ ============
Pretax income (loss)... $ 13,898,928 $(19,245,283)
Pro forma income
taxes................. (5,142,603) 6,735,849
------------ ------------
Pro forma net income
(loss)................ $ 8,756,325 $(12,509,434)
============ ============
</TABLE>
30
<PAGE>
Net Results of Operations-Partner Company Operations
Breakaway Solutions-Analysis of Nine Months Ended September 30, 1999
The following is a discussion of Breakaway Solutions' net results of
operations for the nine months ended September 30, 1999. Breakaway Solutions'
comparative results of operations for the nine months ended September 30, 1998
are not meaningful.
Revenue. Breakaway Solutions' revenue of $14.7 million for the nine
months ended September 30, 1999, was derived primarily from Internet
professional services and eCRM solutions. Through organic growth and
acquisitions, Breakaway Solutions has expanded in 1999 into custom Web
development and application hosting.
Cost of Revenue. Cost of revenue of $7 million for the nine months ended
September 30, 1999, consists primarily of Breakaway Solutions' personnel-
related costs of providing its services. As Breakaway Solutions expands into
custom Web development and application hosting, it is incurring the direct
costs of these operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $14.7 million for the nine months ended September
30, 1999, consist of trade show expenses, personnel costs, facility costs,
professional fees and general costs to support operations. Breakaway Solutions
expects selling, general and administrative expenses to increase significantly
in future periods due to the expected growth in its infrastructure, hiring of
additional dedicated sales and marketing employees and the expected significant
amortization of intangible assets from its acquisitions. Also included in
selling, general and administrative expenses for the nine months ended
September 30, 1999 was $2.5 million of goodwill amortization related to the
acquisition of our ownership interest in Breakaway Solutions.
VerticalNet-Analysis of Three Year Period Ended December 31, 1998
For the periods ended December 31, 1996, 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:
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.
Selling, General and Administrative Expenses. Selling 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 selling 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 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
31
<PAGE>
staffing levels, higher facility costs, professional fees to support the growth
of VerticalNet's infrastructure and goodwill amortization related to
VerticalNet's 1998 acquisitions.
Equity Income (Loss)
A significant portion of our 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 and the nine months ended September 30, 1999, we utilized
$119.1 million to acquire partner companies accounted for under the equity
method of accounting which resulted in goodwill of $77.4 million, which will be
amortized over 3 years.
In the periods ended December 31, 1996 and 1997, Sky Alland Marketing was
our only partner company accounted for under the equity method. Sky Alland
Marketing's net results of operations in 1997 improved compared to 1996.
The significant change in equity income (loss) from 1997 to 1998 reflects
a decrease in the net results of operations at Sky Alland Marketing and the
effect of equity method partner companies in which we acquired an interest
during 1998. One of these companies, Syncra Software, Inc., represented
approximately $4.3 million of our $5.9 million equity loss in 1998. As of
December 31, 1998, we accounted for eight of our partner companies under the
equity method of accounting. Most of these companies are in a very early stage
of development and incurred substantial losses in 1998, and our share of these
losses was substantial.
Our ownership interest in VerticalNet is not consolidated in our
financial statements for periods after December 31, 1998 but is accounted for
under the equity method of accounting as a result of our lower ownership
interest in VerticalNet following the completion of its initial public offering
in February 1999. For the nine months ended September 30, 1999, VerticalNet had
revenue of $10.7 million, and a net loss of $38.2 million compared to revenue
of $1.9 million and a net loss of $8.3 million 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 29 as of September 30, 1998 to 51 as of
September 30, 1999. In addition, barter transactions, in which VerticalNet
received advertising or other services in exchange for advertising on its Web
sites, accounted for 23% of revenues for the nine months ended September 30,
1999 compared to 19% 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 and a one time non-recurring charge of $13.6
million for in-process research and development expensed in August 1999
relating to VerticalNet's acquisition of Isadra.
During the nine months ended September 30, 1999 we accounted for 22
companies under the equity method of accounting, including VerticalNet,
compared to three companies during the comparable 1998 periods. All 22 of the
companies incurred losses in the period ended September 30, 1999. Our equity
loss of $49.1 million for the nine months ended September 30, 1999 consisted of
$37.9 million related to our share of the equity method companies' losses and
$11.2 million of amortization of the excess of cost over net book value of
these companies. Of the $22.8 million and $37.9 million equity loss related to
our share of the losses of companies accounted for under the equity method for
the three and nine months ended September 30, 1999, $9.0 million and $14.0
million, respectively, were attributable to VerticalNet, while the other 21
companies accounted for the remaining equity losses.
VerticalNet expects to incur significant net losses for the foreseeable
future because of its aggressive expansion plans. Due to the early stage of
development of the other companies in which we acquire interests, existing and
new partner companies accounted for under the equity method, are expected to
incur substantial losses. Our share of these losses is expected to be
substantial in 1999.
32
<PAGE>
While VerticalNet and most of the companies accounted for under the
equity method of accounting have generated losses in each of the 1998 and 1999
periods, 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.
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. 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 established operations in Seattle, Washington,
and we significantly increased the number of our employees nationwide. As a
result of these initiatives, our general and administrative costs increased
406% for the nine months ended September 30, 1999 compared to the comparable
periods 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 to continue to be
substantially higher compared to historical periods.
During the year ended December 31, 1998, and the nine months ended
September 30, 1999, we recorded aggregate unearned compensation expense of $.7
million and $16.5 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 nine months ended September 30, 1999
include $3.3 million of amortization expense related to stock option grants.
Amortization of deferred compensation expense for the year ended December 31,
1999 is expected to approximate $5.8 million. We expect to recognize
amortization of deferred compensation expense of $5.6 million in 2000, $3.4
million in 2001, $1.9 million in 2002, $.9 million in 2003 and $.2 million in
2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the 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.
General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December September 30,
31, ------------------------
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Sale of Matchlogic to Excite........ $12,822,162 $12,822,162 $ --
Sales of Excite holdings............ 16,813,844 7,303,162 2,050,837
Sale of Excite to @Home Corpora-
tion............................... -- -- 2,719,466
Sale of WiseWire to Lycos........... 3,324,238 3,324,238 --
Sales of Lycos holdings............. 1,471,907 1,202,944 --
Sale of SMART Technologies, to i2
Technologies....................... -- -- 2,941,806
Issuance of stock by VerticalNet.... -- -- 44,595,738
Partner company impairment charges.. (3,948,974) (643,049) (5,340,293)
Other............................... -- (495,136) 6,030
----------- ----------- -----------
$30,483,177 $23,514,321 $46,973,584
=========== =========== ===========
</TABLE>
33
<PAGE>
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 May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in
a non-operating gain before taxes of $2.7 million.
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.
In August 1999, we divested 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 during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. Our non-operating gain before
taxes from this transaction was $2.9 million.
Our remaining holdings of @Home Corporation, Lycos, and i2 Technologies
at September 30, 1999 are accounted for as available-for-sale securities and
are marked to market, with the difference between carrying value and market
value, net of deferred taxes, 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.
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for an acquisition in 1999, our
share of VerticalNet's net equity increased by $44.6 million. This increase
adjusts our carrying value in VerticalNet and results in a non-operating gain
of $44.6 million, before deferred taxes of $15.6 million, in the nine months
ended September 30, 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 these, 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.
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.
For the year ended December 31, 1998 and the three months ended September
30, 1999, we recorded impairment charges of $2 million and $5.3 million,
respectively, for the other than temporary decline in the fair value of a cost
method partner company. From the date we initially acquired an ownership
interest in this partner company through September 30, 1999, our funding to
this partner company represented all of the outside capital the company had
available to fund its net losses and capital asset requirements. During the
nine months ended September 30, 1999 we fully guaranteed the partner company's
new bank loan and agreed to provide additional
34
<PAGE>
funding. We acquired additional non-voting convertible debentures of this
partner company for $5 million in April 1999. The impairment charges we
recorded were determined by the decrease in net book value of the partner
company caused by its net losses, which were funded entirely based on our
funding and bank guarantee. Given its continuing losses, we will continue to
determine and record impairment charges in a similar manner for this partner
company until the status of its financial position improves.
Interest Income
Our cash, cash equivalents and short-term investments are invested
primarily in money market accounts and highly liquid, high quality debt
instruments. 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 nine months ended September 30,
1999, we received $32 million of proceeds from the sale of shares of our common
stock, $90 million in convertible notes and approximately $209.1 million in our
initial public offering. The increase in interest income in 1998 and the nine
months ended September 30, 1999 was primarily due to the significant increase
in our cash and cash equivalents throughout 1998 and 1999 as a result of these
transactions.
Interest Expense
During the nine months ended September 30, 1999, we issued $90 million in
convertible notes bearing interest at 4.99%. The increase in interest expense
in the nine months ended September 30, 1999 was a result of this transaction.
Interest accrued through August 5, 1999, the date of our initial public
offering, was waived in accordance with the terms of the notes and reclassed to
Additional Paid-in-Capital as a result of the conversion of the convertible
notes in connection with our initial public offering.
Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were
organized as a limited liability company and were treated as a partnership for
income tax purposes. As a result of our Reorganization as a corporation, we are
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 September 30, 1999, we recorded an
additional tax benefit of $5.1 million related to our consolidated results of
operations for that period, net of deferred tax expense of $15.6 million
relating to our gain on VerticalNet's common stock issuances.
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
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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
September 30, 1999, our only publicly traded partner company are VerticalNet
and US Interactive. As a result, there is significant risk that we may not be
able to realize the benefits of expiring carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of a
portion of our Excite and Lycos holdings, and borrowings under bank credit
facilities.
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 was received in 1998 and $32 million was received
during the nine months ended September 30, 1999, respectively.
In August 1999, we completed our initial public offering of 30,620,000
shares of our common stock at $6.00 per share. Concurrently, we completed a
private placement of 7,500,000 shares at the $6.00 initial public offering
price. Net proceeds to us from these transactions aggregated approximately
$209.1 million (net of underwriters' commission and offering expenses of
approximately $19.6 million).
In May 1999, we issued $90 million of convertible subordinated notes
which converted to 14,999,732 shares of our common stock upon the completion of
our initial public offering in August 1999. Upon the conversion of these notes,
we issued 3,000,000 warrants to purchase our common stock at $6.00 per share
through May 2002. In accordance with the terms of the notes, all accrued
interest was waived upon conversion.
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
nine months ended September 30, 1999.
In April 1999, we entered into a $50 million revolving bank credit
facility. In connection with the facility, we issued warrants to purchase
400,000 shares of common stock for an exercise price of $5.00 per share
exercisable for seven years. We valued these warrants at $1 million 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 (VerticalNet, Breakaway Solutions and US Interactive as of November
15, 1999) and the value, as defined in the facility, of our private partner
companies. If the market price of our publicly traded partner companies
declines, 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 September 30, 1999 was $50 million, none of which was
outstanding.
Existing cash, cash equivalents and short-term investments, 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 November 18, 1999, we were contingently
obligated for approximately $3.3 million of guarantee commitments and as of
November 18, 1999, our commitments to new and existing partner companies that
require funding in the next 12 months totaled $30.5 million. We will continue
to evaluate acquisition opportunities and expect to acquire additional
ownership interests in new and existing partner companies in the next 12 months
which may
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make it necessary for us to raise additional funds. We will likely have to
raise additional funds through the issuance of equity securities or obtain
additional bank financing. If additional funds are raised through the issuance
of equity securities, our existing shareholders may experience significant
dilution. Our revolving bank credit facility matures in April 2000, at which
time we may not be able to renew the facility or obtain additional bank
financing, or may only be able to do so on terms not favorable or acceptable to
us.
From its inception through its initial public offering, VerticalNet
funded its operations through a combination of equity, investor and bank
borrowings, and leases. These sources included amounts both advanced and
guaranteed by us. VerticalNet raised $58.3 million in its initial public
offering in February 1999. VerticalNet believes that these initial public
offering funds, together with its existing cash and cash equivalents, should be
sufficient to fund its operations through March 2000. We have no obligation to
provide additional funding to VerticalNet, and we have no obligations with
respect to its outstanding debt arrangements.
Prior to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and leases. In
January 1999, we acquired a majority voting interest in Breakaway Solutions for
$8.3 million, of which Breakaway Solutions used $4.5 million to repurchase
treasury stock. In July 1999, Breakaway Solutions completed a private placement
of equity securities of about $19.1 million, of which we contributed $5
million. In October 1999, Breakaway Solutions completed its initial public
offering raising approximately $45 million. We will record a non-operating gain
during the three months ended December 31, 1999 due to the increase in our
share of Breakaway Solution's net equity as a result of their issuance of
shares. Our ownership interest in Breakaway Solutions after their initial
public offering is about 41% and will be accounted for under the equity method.
Breakaway Solutions expects its existing cash resources will be sufficient to
fund its operations through the next 12 months. We have no obligation to
provide additional funding to Breakaway Solutions, and we have no obligations
with respect to its outstanding debt arrangements.
Consolidated working capital increased to $20.5 million at December 31,
1998, compared to $2.4 million at December 31, 1997. The increase was primarily
due to the net effect of the proceeds from the equity we raised in 1998 and the
proceeds from the sales of a portion of our Excite and Lycos holdings, offset
by the ownership interests we acquired in 1998. Consolidated working capital
increased to $200.4 million at September 30, 1999, from $20.5 million at
December 31, 1998 primarily as a result of equity we raised early in 1999 and
from our initial public offering more than offsetting the ownership interests
we acquired and the tax distribution to shareholders during the nine months
ended September 30, 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 nine months ended
September 30, 1999 compared to the same prior year period increased due to the
increased cost of General ICG Operations general and administrative expenses.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies,
offset in 1998 and the nine months ended September 30, 1999 by the proceeds of
$36.4 million and $2.5 million, respectively, from the sales of a portion of
our available-for-sale securities, Excite and Lycos.
We utilized $57.6 million, including $9 million contributed to
VerticalNet, to acquire interests in new and existing partner companies in
1998. In 1998, we acquired interests in the following partner companies:
AUTOVIA, Blackboard, CommerceQuest, CommerX, ComputerJobs.com, Context
Integration, Deja.com, e-Chemicals, Entegrity Solutions, LinkShare, PrivaSeek,
SageMaker, Servicesoft Technologies, Syncra Software, US Interactive,
VerticalNet and Vivant!.
We utilized $145.9 million, including $13.2 million contributed directly
to Breakaway Solutions and an additional $4 million used to purchase an
additional ownership interest in Breakaway Solutions directly
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from shareholders of Breakaway Solutions, and including $8.8 million in the
aggregate to acquire our majority ownership interest in AgProducer Network,
EmployeeLife.com and iParts, to acquire interests in or make advances to new
and existing partner companies during the nine months ended September 30, 1999.
These companies included: Arbinet Communications, asseTrade.com, Bidcom,
Blackboard, ClearCommerce, Collabria, CommerceQuest, CommerX, Deja.com, e-
Chemicals, eMarketWorld, Entegrity Solutions, Internet Commerce Systems,
NetVendor, ONVIA.com, Plan Sponsor Exchange, PrivaSeek, Residential Delivery
Services, SageMaker, Servicesoft Technologies, StarCite, SMART Technologies,
Syncra Software, TRADEX Technologies, United Messaging and Universal Access.
During the nine months ended September 30, 1999, we acquired an interest
in a new partner company from shareholders of the partner company who have an
option, exercisable at any time through August 2000, of electing to receive
cash of $11.3 million or 2,083,333 shares of our common stock. As of September
30, 1999, $2.8 million of the obligation has been converted into 509,270 shares
of our common stock.
In November 1999, we acquired an interest in eMerge Interactive, Inc. for
a combination of cash of $27 million and a note due one year after issuance of
$23 million, of which $5 million may be payable on or after March 25, 2000
under certain circumstances.
In addition to the eMerge Interactive transaction, we utilized $79.5
million to acquire ownership interests in or make advances to new and existing
partner companies during the period from October 1, 1999 through November 18,
1999. These companies included: Animated Images, Benchmarking Partners,
ClearCommerce, CommerceQuest, CourtLink, JusticeLink, ONVIA.com,
PaperExchange.com, PrivaSeek, Purchasing Solutions, SageMaker, traffic.com,
VerticalNet, VitalTone and Vivant!.
In November 1999, VerticalNet announced it had signed a definitive
agreement to acquire all of the outstanding stock of NECX Exchange LLC in
exchange for 95,000 shares of VerticalNet common stock, $10 million in cash and
the assumption of debt and certain other liabilities. Consummation of the
transaction is subject to regulatory approvals as well as customary closing
conditions. The transaction had not been completed as of September 30, 1999.
Upon completion of the transaction, our voting ownership in VerticalNet will
decrease from 35% to approximately 34%. In addition, we expect to record a non-
operating gain due to the increase in our share of VerticalNet's net equity as
a result of their issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We expect to commit funds in 1999 and 2000 to the buildout of our
larger new corporate headquarters in Wayne, Pennsylvania, our international
expansions, and the development of our information technology infrastructure.
There were no material capital asset purchase commitments as of September 30,
1999.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting
pronouncements to have a significant impact on our net results of operations,
financial position or cash flows.
Year 2000 Readiness Disclosure
Many computer programs have been written using two digits rather than
four digits to define the applicable year. This poses a problem at the end of
the century because these computer programs may recognize a date using "00" as
the year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 issue.
We currently use the information technology systems and many non-
information technology systems of Safeguard Scientifics, Inc., one of our
principal shareholders. Safeguard Scientifics has completed its
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assessment of its computer information systems. Safeguard Scientifics has
replaced all computer systems and software which were determined to be non-
compliant. These replacements were generally part of Safeguard Scientifics'
program of regularly upgrading its computer systems, and Safeguard Scientifics
has not incurred and does not expect to incur any material extraordinary
expense to remediate its systems. Safeguard Scientifics has completed testing
and implementation of its computer systems. Safeguard Scientifics has received
verification from its vendors that its information systems are Year 2000 ready
and expects to complete any necessary remediation of non-information systems
during 1999. Safeguard Scientifics has a back-up generator in its data center
which enables a "disaster recovery" area to support critical computer and
telecommunications in the case of power loss.
The Year 2000 readiness of VerticalNet and Breakaway Solutions is
described below. Our partner companies are in varying stages of assessing,
remediating and testing their internal systems and assessing Year 2000
readiness of their vendors, business partners, and customers. Our partner
companies are also in varying stages of developing contingency plans to operate
in the event of a Year 2000 problem. The total cost and time which will be
incurred by our partner companies on the Year 2000 readiness effort has not
been determined. There can be no assurance that all necessary work will be
completed in time, or that such costs will not materially adversely impact one
or more of such partner companies. In addition, required spending on the Year
2000 effort will cause customers of most of our partner companies to reallocate
at least part of their information systems budgets. Although some of our
partner companies have offerings which may be useful in such efforts, such
reallocations could materially adversely affect the results of operations of
our partner companies.
VerticalNet
VerticalNet may realize exposure and risk if the systems on which it is
dependent to conduct its operations are not Year 2000 compliant. VerticalNet's
potential areas of exposure include products purchased from third parties,
information technology including computers and software, and non-information
technology including telephone systems and other equipment used internally. The
internally-developed production and operation systems for VerticalNet's Web
sites have recently undergone a complete re-engineering. All new programs have
been substantially tested and validated for Year 2000 compliance.
VerticalNet's communications infrastructure was recently overhauled,
including a full conversion of its telephone and voicemail systems. VerticalNet
believes all non-information technology upon which it is materially dependent
is Year 2000 compliant. Additionally, with respect to information technology,
VerticalNet has resolved all Year 2000 compliance issues primarily through
normal upgrades of its software or replacements included in VerticalNet's
capital expenditure budget and these costs are not expected to be material to
VerticalNet's financial position or results of operations. VerticalNet's
original Year 2000 compliance cost estimate did not exceed $250,000 and remains
valid. However, such upgrades and replacements may not successfully address
VerticalNet's Year 2000 compliance issues as represented by VerticalNet's
distributors, vendors and suppliers.
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 all of its
technology are Year 2000 compliant.
In addition, VerticalNet has obtained verification from its key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not fully compliant, to provide a description of their plans to become
so. VerticalNet has received certification from 100% of its distributors,
vendors and suppliers that they are either complete or in accordance with their
scheduled Year 2000 compliance plan. VerticalNet will continue to monitor the
status of all of its key vendors with the intent of terminating and replacing
those relationships which may jeopardize its own Year 2000 compliance plan.
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In the event that VerticalNet's production and operational facilities
that support its Web sites are disrupted, 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. Having completed a specific analysis of its Web-hosting facilities, all
functionalities are in compliance with VerticalNet's Year 2000 compliance
assessment plan. 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 has developed a comprehensive list of contingency models to
forecast 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. All identified scenarios have been determined to be
resolvable by an on-site staff which will be maintained throughout the Year
2000 date changeover with the exception of the Exodus hosting functionalities.
Exodus has remitted Year 2000 certification and VerticalNet is in the process
of reviewing potential back-up sites within its disaster recovery planning.
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 is conducts business do not successfully address such
issues, its business, operating results and financial position could be
materially and adversely affected.
Breakaway Solutions
Breakaway Solutions has established a Year 2000 readiness team to carry
out a program for the assessment of its vulnerability to the Year 2000 issues
and remediation of identified problems. The team consists of senior
information technology and business professionals and meets on a regular
basis. An outside consultant is also working with the readiness team on a
temporary basis to assist them in carrying out their tasks.
The readiness team has developed a program with the following key phases
to assess its state of Year 2000 readiness:
. Develop a complete inventory of its hardware and software, and
assess whether that hardware and software is Year 2000 ready;
. Test its internal hardware and software which Breakaway Solutions
believes have a significant impact on its daily operations to
assess whether it is Year 2000 ready;
. Upgrade, remediate or replace any other hardware or software that
is not Year 2000 ready; and
. Develop a business continuity plan to address possible Year 2000
consequences which Breakaway Solutions cannot control directly or
which it has not been able to test or remediate.
Breakaway Solutions has completed a number of the tasks which its
program requires, as follows:
. Completed the inventory of hardware and software at all of its
locations and have determined that all of the inventoried hardware
and software which Breakaway Solutions believes have a significant
impact on its daily operations are Year 2000 ready or can be made
ready with minimal changes or replacements, based on its vendors'
Web site certification statements and commercially available Year
2000 testing products;
. Implemented internal policies to require that a senior information
technology professional approves as Year 2000 ready any hardware
or software that its plans to purchase;
. Developed a list of all vendors which it deems to have a
significant business relationship with Breakaway Solutions. Of the
approximately 20 vendors it has identified, it has obtained web
site certifications or made written inquiries for information or
assurances with respect to the Year 2000 readiness of products or
services that it purchases from those vendors;
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. Completed test plans for date sensitive applications which it
determined to be Year 2000 ready and which Breakaway Solutions
believes will have a significant impact on its daily operations;
. Completed an internal review to determine the commitments it has
made to its customers with respect to the Year 2000 readiness of
solutions which it has provided to those customers;
. Reviewed evaluations of questionnaires regarding Year 2000
readiness to its critical vendors; and
. Formulated a business continuity plan that encompasses Breakaway
Solutions' strategy for preparation, notification and recovery in
the event of a failure due to the year 2000 issue. The plan
includes procedures to minimize downtime and expedite resumption of
business operations and other solutions for responding to internal
failures with its information technology department as well as
widespread external failures related to the Year 2000 issue.
Breakaway Solutions has specific tasks to complete with respect to its
Year 2000 program, including;
. Testing of its internal hardware and software which it believes
have a significant impact on its daily operations to confirm its
Year 2000 readiness; and
. Implementation of any necessary changes, identified as a result of
testing, to its internal software and hardware.
Costs
To date, Breakaway Solutions has not incurred material expenses in
connection with its Year 2000 readiness program. It may need to purchase
replacement products, hire additional consultants or other third parties to
assist it, although it does not currently expect that it will need to take
such steps. It currently estimates that the cost of its Year 2000 readiness
program will be approximately $25,000. This amount includes internal labor
costs, legal and outside consulting costs and additional hardware and software
purchases. Breakaway Solutions expects that it will refine this estimate as it
completes the final phase of its Year 2000 readiness program.
Risks
If Breakaway Solutions fails to solve a Year 2000 problem with respect to
any of its systems, it could experience a significant interruption of its
normal business operations. It believes that the most reasonably likely worst
case scenarios related to the Year 2000 issue for its business are as follows:
. If a solution which it provided to a client causes damage or injury
to that client because the solution was not Year 2000 compliant, it
could be liable to the client for breach of warranty. In a number
of cases, its contracts with clients do not limit its liability for
this type of breach;
. If there is a significant and protracted interruption of
telecommunication services to its main office, it would be unable
to conduct business because of its reliance on telecommunication
systems to support daily operations, such as internal
communications through e-mail; and
. If there is a significant and protracted interruption of electrical
power or telecommunications services to its application hosting
facilities, it would be unable to provide its application hosting
services. This failure could significantly slow the growth of its
application hosting business which is an important part of its
strategic plan. It has sought to locate its application hosting
facilities in leased space in co-location facilities which have
back-up power systems and redundant telecommunications services.
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OUR BUSINESS
Industry Overview
Growth of the Internet
People and businesses are increasingly relying on the Internet to access
and share information as well as to purchase and sell products and services.
International Data Corporation estimates that at the end of 1998 more than 142
million people were using the Internet to communicate, participate in
discussion forums and obtain information about goods and services. IDC projects
that this user base will grow to 502 million people by the end of 2003. A
rapidly growing number of businesses use the Internet to market and sell their
products and streamline business operations. According to Forrester Research,
50% of all United States businesses will be online by 2002.
Growth of B2B E-Commerce
The Internet's substantial growth creates tremendous market opportunities
for companies that connect buyers and sellers, and companies that create
applications and systems for traditional businesses wishing to engage in e-
commerce. Historically, B2B e-commerce has occurred through electronic data
interchange over proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open platform with
common communication protocols to build efficient, cost-effective networks that
facilitate e-commerce. As Internet-based network reliability, speed and
security have improved in recent years and as more businesses have connected to
the Internet, traditional businesses are beginning to use the Internet to
conduct e-commerce and exchange information with customers, suppliers and
distributors. While the business-to-consumer e-commerce market currently is
significant in size, estimated by IDC to have been $15 billion in goods and
services in 1998, the B2B e-commerce market is larger and is predicted to grow
dramatically. Forrester Research projects that the United States 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. IDC projects that the Western European B2B e-commerce market
will grow from $3.8 billion in 1998 to over $350 billion by 2003.
We believe that the B2B e-commerce market is beginning a period of rapid
development and growth for the following reasons:
. Expanded Access to New and Existing Customers and
Suppliers. Traditional businesses have relied on their sales
forces and purchasing departments to develop and maintain customer
and supplier relationships. This model is constrained by the time
and cost required to exchange current information regarding
requirements, prices and product availability, and the difficulty
of cost-effectively locating new customers and suppliers and
managing existing relationships. Traditional businesses can
leverage the Internet to obtain real-time, accurate information
regarding requirements, prices and products to a global audience,
including suppliers, customers and business partners. This makes
it easier for businesses to attract new customers and suppliers,
improve service and increase revenue.
. Increased Efficiency and Reduced Cost. Traditional businesses can
utilize the Internet to automate their internal operations,
including manufacturing, finance, sales and purchasing functions.
The Internet can also be used to increase information flow and
access throughout an organization. This increases operational
efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement
costs, and improving responsiveness to customers and suppliers.
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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.
. Market Makers. Market makers bring buyers and sellers together by
creating Internet-based markets for the exchange of goods,
services and information. Market makers enable more effective and
lower cost commerce for traditional businesses by providing access
through the Internet to a broader range of buyers and sellers.
Market makers typically operate in a specific industry or provide
specific goods and services across multiple industries. Market
makers tailor their business models to match a target market's
distinct characteristics. We refer to market makers operating in a
particular industry as vertical market makers, and to market
makers operating across multiple industries as horizontal market
makers. Vertical and horizontal market makers may:
. act as principals in transactions;
. automate business processes so as to make them more efficient;
. operate exchanges where buyers and sellers dynamically
negotiate prices; or
. facilitate interaction and transactions among businesses and
professionals with common interests by providing an electronic
community.
Market makers may generate revenue by:
. selling products and services;
. charging fees based on the value of the transactions they
facilitate;
. charging fees for access to their Internet-based services; or
. selling advertising on their Web sites.
. Infrastructure Service Providers. Infrastructure service providers
sell software and services to businesses engaged in e-commerce.
Many businesses need assistance in designing business practices to
take advantage of the Internet, and in building and managing the
technological infrastructure needed to support B2B e-commerce.
Infrastructure service providers help businesses in the following
ways:
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing their
e-commerce strategies. Systems integrators develop and
implement a technological infrastructure that enables e-
commerce. Systems integrators also integrate e-commerce
applications with existing enterprise applications. Strategic
consultants and systems integrators typically charge their
clients on a project-by-project basis.
. Software Providers. Software providers design and sell software
applications, tools and related services that support e-
commerce and integrate business functions. Software providers
may sell or license their products.
. Outsourced Service Providers. Outsourced service providers
offer software applications, infrastructure and related
services designed to help traditional businesses reduce cost,
improve operational efficiency and decrease time to market.
Outsourced service providers may charge fees on a per-use or
periodic basis.
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Challenges Facing Emerging B2B E-Commerce Companies
We believe that emerging B2B e-commerce companies face certain
challenges, including:
. Developing a Successful Business Model. B2B e-commerce companies
must develop business models that capitalize on the Internet's
capabilities to provide solutions to traditional companies in
target industries. B2B e-commerce companies require industry
expertise because each industry and market has distinct
characteristics including existing distribution channels, levels
of concentration and fragmentation among buyers and sellers,
procurement policies, product information and customer support
requirements. B2B e-commerce companies also require Internet
expertise in order to apply its capabilities to their target
industries.
. Building Corporate Infrastructure. Many B2B e-commerce companies
have been recently formed and require sales and marketing,
executive recruiting and human resources, information technology,
and finance and business development assistance. These companies
also require capital as significant resources may be required to
build technological capabilities and internal operations.
. Finding the Best People. Entrants into the B2B e-commerce market
require management with expertise in the applicable market, an
understanding of the Internet's capabilities, the ability to
manage rapid growth and the flexibility to adapt to the changing
Internet marketplace. We believe that very few people have these
skills, and those that do are highly sought after. To be
successful, companies must attract and retain highly qualified
personnel.
We believe that the most successful B2B e-commerce companies will rapidly
identify market demands and move quickly to satisfy those demands. B2B e-
commerce companies that accomplish this goal may establish new standards, gain
market share, secure critical partnerships and create a brand name, making
competition more difficult for new entrants. In addition, B2B e-commerce
companies must keep abreast of Internet and industry-specific developments and
adapt to a rapidly changing environment.
Our Solution and Strategy
Our goal is to become the premier B2B e-commerce company by establishing
an e-commerce presence in major segments of the global 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 November 18, 1999, we owned interests in 46 B2B e-commerce
companies which we refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we
use these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, partner companies, strategic investors and Advisory Board.
Our strategy is to:
. create or identify companies with the potential to become industry
leaders;
. acquire significant interests in partner companies and incorporate
them into our collaborative network;
. provide strategic guidance and operational support to our partner
companies; and
. promote collaboration among our partner companies.
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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.
Our strategy includes acquiring interests in partner companies based in
the United States and abroad. We recently opened an office in London that will
focus on European B2B opportunities. We have staffed our London office with two
executives from one of Europe's leading private equity firms. These two
executives worked together on Internet acquisitions in Europe and cultivated a
broad network of technology and vertical market contacts. We anticipate opening
an office in continental Europe during 2000. We plan to staff our European
offices with personnel that will provide strategic guidance and operational
support to our partner companies operating in Europe.
We plan to acquire interests in European B2B e-commerce companies. If we
wish to enter a European market in which we cannot locate an attractive partner
company candidate, we may create a new company or assist one of our partner
companies located in the United States to expand overseas. In addition, our
worldwide personnel will focus on providing connections and resources to all
our partner companies, creating an international expansion platform for each
member of the network.
Create or Identify Companies With the Potential to Become Market Leaders
Our expertise in the B2B e-commerce market allows us to build or identify
companies that are positioned to succeed. We apply a disciplined analysis that
capitalizes on this competitive advantage. When we evaluate whether to enter a
market by building a company or acquiring an interest in an existing company,
we weigh the following industry and partner company factors:
. Industry Criteria
. Inefficiency. We consider whether the industry suffers from
inefficiencies that may be alleviated through e-commerce. We
also consider the relative amount of inefficiency, as more
inefficient industries present greater profit potential.
. Competition. We evaluate the amount of competition that a
potential partner company faces from e-commerce and
traditional businesses.
. Significance of Vertical Market. Our strategy includes
acquiring interests in market makers doing business in the
principal vertical markets of the global economy. When
evaluating market makers, we consider whether the market maker
has the potential to be a leader in its vertical market.
. Industry Potential. When evaluating a market maker, we
consider the number and dollar value of transactions in its
corresponding industry. We evaluate the incremental efficiency
to be gained from conducting or supporting transactions online
and estimate the potential to transfer transactions online. By
considering these factors, we can focus on vertical industries
for which the leading market maker can eventually generate
significant dollar volumes of profits for the market maker.
. 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.
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. Infrastructure Service Provider Profit Potential. When
evaluating infrastructure service providers, we examine the
size of the market opportunity, the profit potential in
serving the target market and whether the infrastructure
service provider can provide assistance to our market maker
partner companies.
. Partner Company Criteria
. Industry Leader. We partner with a company only if we believe
that it has the products and skills to become a leader in its
industry.
. Significant Ownership. We consider whether we will be able to
obtain a significant position in the company and exert
influence over the company.
. Network Synergy. We consider the degree to which a potential
partner company may contribute to our network, and benefit
from our network and operational resources.
. Management Quality. We assess the overall quality and industry
expertise of a potential partner company's management.
Acquire Interests in Partner Companies
After we identify an attractive potential partner company, we negotiate
the acquisition of a significant interest in the company. As a condition to an
acquisition, we require representation on the company's board of directors to
ensure our ability to provide active guidance to the partner company. We
structure acquisitions to permit the partner company's management and key
personnel to retain an equity stake in the company. As a result of our
experience, we believe that we have the ability to complete acquisitions
quickly and efficiently. After acquiring interests in partner companies, we
frequently participate in their follow-on financings and seek to increase our
ownership positions.
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:
. Strategic Guidance. We provide strategic guidance to our partner
companies regarding market positioning, business model development
and market trends. In addition, we advise our partner companies'
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 and
management team members who provide strategic guidance to our
partner companies include Todd Hewlin, a former Partner with
McKinsey & Company, 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.
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. Operational Support. B2B e-commerce companies often have
difficulty obtaining senior executive level guidance in the many
areas of expertise successful companies need. We assist our
partner companies by providing access to skilled managers who
guide our partner companies in the following functional areas:
. Sales and Marketing. Several members of our Advisory Board and
management team provide guidance to our partner companies'
sales, marketing, product positioning and advertising efforts.
These individuals include Michael H. Forster, a former Senior
Vice President of Worldwide Field Operations at Sybase, Inc.
and currently one of our Senior Partners, Christopher H.
Greendale, a former Executive Vice President at Cambridge
Technology Partners and currently one of our 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.
. Executive Recruiting and Human Resources. Members of our
management team assist our partner companies in recruiting key
executive talent. These individuals include Rick Devine, one
of our Managing Directors and a former partner at Heidrick &
Struggles, Inc., an executive recruiting firm. In providing
this assistance, we leverage the contacts developed by our
network of partner companies, management and Advisory Board.
We believe that this is one of the most important functions
that we perform on behalf of our partner companies. B2B e-
commerce companies must locate executives with both industry
and Internet expertise. The market for these professionals is
highly competitive since few persons possess the necessary mix
of skills and experience.
. Information Technology. Our Chief Technology Officer, Richard
G. Bunker, is dedicated to helping our partner companies with
their information systems strategies and solving problems
relating to their current information technology. Members of
our Board of Directors and Advisory Board who provide guidance
in this area include K.B. Chandrasekhar, Chairman of the Board
of Directors of Exodus Communications, and Peter A. Solvik,
the Chief Information Officer of Cisco Systems, Inc.
. Finance. One of our Managing Directors, John N. Nickolas, an
experienced finance executive, is dedicated to providing
financial guidance to our partner companies in areas such as
corporate finance, financial reporting, accounting and
treasury operations. In providing these services, Mr. Nickolas
leverages the skills and experience of our internal finance
and accounting group, our partner company network and outside
consultants.
. Business Development. B2B e-commerce companies may be involved
in evaluating, structuring and negotiating joint ventures,
strategic alliances, joint marketing agreements, acquisitions
or other transactions. We provide assistance to our partner
companies in all these areas. Our management team, Advisory
Board, strategic investors and partner companies all assist in
this function.
Promote Collaboration Among Our Partner Companies
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in shared
knowledge and business contacts among our partner companies and the formation
of numerous strategic alliances. We promote collaboration formally by hosting
regularly scheduled seminars relating to partner company operational and
business issues. At these seminars, the executives of partner companies share
their experiences with each other, our management team and the Advisory Board.
For example, at a seminar earlier this year, thirteen chief executive officers
of our market maker and infrastructure service provider partner companies
gathered to discuss e-commerce strategies and
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business models. In addition, in the past six months we hosted four conferences
for our partner companies on various operational issues ranging from financing
strategies to the use of technology. 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:
. PaperExchange.com and VerticalNet have developed a strategic
alliance that provides PaperExchange with co-branded access to
leading industry content, including news, feature articles and
interviews from VerticalNet's PulpandPaper Online property.
VerticalNet's members will get access to PaperExchange's leading
pulp and paper exchange, which is an Internet-based marketplace
for buying and selling pulp and paper products. In addition, the
companies are joining forces to create a comprehensive equipment
listing and career site. By linking their sites together,
PaperExchange.com and VerticalNet are seeking to establish a
leading destination for pulp and paper professionals.
. CommerX, Inc., a provider of e-commerce solutions for the
industrial processing market, has formed a strategic alliance with
CommerceQuest, Inc. to provide integration solutions to connect
efficiently the systems of processors and manufacturers within the
industries served by CommerX. CommerX will use CommerceQuest's
enableNet solution for deployment of PlasticsNet.com, the plastics
industry's leading electronic marketplace. CommerceQuest's
enableNet provides reliable, real-time delivery of data with
enterprise-strength security and accurate data transformation
across many formats and applications. This relationship allows
PlasticsNet.com users to conduct e-commerce over their clients'
network of choice or private lines. This state-of-the-art
e-commerce infrastructure will allow for less expensive
implementation and integration with faster and more seamless
transactions.
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 facilitate the
information flow among our partner companies. We also control the information
flow by determining the composition of the network. If we believe that a
partner company is not contributing to our network or has lost its strategic
importance, we may sell our interest in that partner company.
Overview of Current Partner Companies
We focus our efforts on building and operating companies in two areas of
the B2B e-commerce market--market makers and infrastructure service providers.
Market Maker Categories
Market makers may operate in particular industries, such as chemicals,
food or auto parts, or may sell goods and services across multiple industries.
Market makers must tailor their business models to match their markets. We
refer to market makers operating in a particular industry as vertical market
makers, and to market makers operating across multiple industries as horizontal
market makers. Examples of horizontal and vertical market makers are as
follows:
. Vertical. An example of one of our vertical market maker 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 an Internet-based
marketplace 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.
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<PAGE>
. Horizontal. One example of our horizontal market maker partner
companies is VerticalNet. As of November 15, 1999, VerticalNet
owned and operated over 50 industry-specific Web sites designed to
act as online B2B communities. These trade communities act as
comprehensive sources of information, interaction and e-commerce.
Market Maker Profiles
Table of Market Makers. The partner companies listed below are integral
to our goal of owning numerous interests in vertical and horizontal market
makers that are strategically complementary to each other. 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 November 18, 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.
49
<PAGE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
------------------------ ------------------ ------------------------ ---------- -------
<C> <C> <S> <C> <C>
Vertical:
AgProducer Network, Inc. Agriculture Developing a system to 75% 1999
provide an Internet-
based service for
agricultural producers
to purchase services and
inputs, as well as
market their grain crops
that include corn, wheat
and soybeans.
Animated Images, Inc. Apparel Provides Internet-based 37% 1999
www.appliedintranet.com design, communication,
and procurement services
for the apparel and sewn
goods industries.
Arbinet Communications, Telecommunications Provides an Internet- 16% 1999
Inc. based trading floor and
www.arbinet.com clearinghouse for
telecommunications
carriers to purchase
bandwidth.
AUTOVIA Corporation Auto Parts Developing a system to 15% 1998
www.autovia.net provide Internet-based
auto parts procurement
for professional
automotive and truck
repair shops.
Bidcom, Inc. Construction Provides Internet-based 25% 1999
www.bidcom.com project planning and
management services for
the construction
industry.
Collabria, Inc. Printing Provides Internet-based 12% 1999
www.collabria.com procurement and
production services for
the commercial printing
industry.
CommerX, Inc. Plastics Provides Internet-based 42% 1998
www.commerx.com procurement and sales of
raw materials, tools and
maintenance and repair
products for the
plastics industry.
ComputerJobs.com, Inc. Technology Provides Internet-based 33% 1998
www.computer jobs.com Employment job screening and resume
posting for information
technology
professionals,
corporations and
staffing firms.
CourtLink Legal Provides online access 33% 1999
www.courtlink.com to court documents.
Deja.com, Inc. Media Provides a Web-based 31% 1997
www.deja.com community for potential
purchasers to access
user comments on a
variety of products and
services.
e-Chemicals, Inc. Chemicals Provides Internet-based 36% 1998
www.e-chemicals.com sales and distribution
of industrial chemicals.
eMerge Interactive, Inc. Livestock Provides Internet-based 28% 1999
www.emergeinteractive content, community and
.com transaction services in
an online marketplace
for the cattle industry.
EmployeeLife.com Healthcare Provides Internet-based 52% 1999
www.employeelife.com solutions for employee
health benefits
management across the
health care industry.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
--------------------- --------------------- ------------------------ ---------- -------
<C> <C> <S> <C> <C>
Internet Commerce Food Provides Internet-based 43% 1999
Systems, Inc. product introduction and
www.icsfoodone.com promotion services to
wholesale and retail
food distributors.
iParts Electronic Components Provides Internet-based 85% 1999
www.ipartsupply.com sales and distribution
of electronic
components.
JusticeLink, Inc. Legal Provides electronic 37% 1999
www.justicelink.com filing, service and
retrieval of legal
documents and
information among
courts, attorneys, their
clients and other
interested parties.
PaperExchange.com LLC Paper Provides Internet-based 27% 1999
www.paperexchange sales and distribution
.com of all grades of pulp
and paper.
Plan Sponsor Asset Management Provides a Web-based 46% 1999
Exchange, Inc. community for asset
www.plansponsor managers to reach fund
exchange.com sponsors.
StarCite, Inc. Travel Provides Internet-based 43% 1999
www.starcite.com services for planning
and managing corporate
meetings for event
planners.
traffic.com, Inc. Transportation Provides real time 20% 1999
www.traffic.com and Logistics traffic monitoring for
logistics and
transportation
optimization.
Universal Access, Telecommunications Provides Internet-based 26% 1999
Inc. www.universal ordering for
accessinc.com provisioning and access
and transportation
exchange services for
network service
providers focused on
business customers.
Horizontal:
asseTrade.Com, Inc. Industrial Services Provides Internet-based 26% 1999
www.assetrade.com asset and inventory
recovery, disposal and
management solutions.
eMarketWorld, Inc. Special Event Provides industry 42% 1999
www.emarket Services specific Web-based
world.com conferences and
expositions that help
businesses understand
the Internet.
NetVendor Inc. Industrial Services Provides B2B, industry- 26% 1999
www.netvendor.com specific Internet
commerce solutions for
mid-size manufacturers
and distributors of
automotive, industrial
and electronic products.
ONVIA.com, Inc. Small Business Provides small 24% 1999
www.onvia.com Services businesses with a wide
breadth of tailored
products and services
over the Internet.
Residential Delivery Logistics Provides home delivery 38% 1999
Services, Inc. services to e-commerce
www.rdshome.com companies, retailers,
and catalog companies
through a branded
network of local agents.
VerticalNet, Inc. Industrial Services Provides industry- 35% 1996
www.verticalnet.com specific Web-based trade
communities for
businesses and
professionals.
</TABLE>
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Set forth below is a more detailed summary of some of our market maker
partner companies.
CommerX, Inc. CommerX is a vertical market maker that provides Internet-
based procurement and sales of raw materials, tools and maintenance and repair
products for the plastics industry. CommerX developed the PlasticsNet.com
("PlasticsNet") Web site in 1995 with the goal of establishing the first e-
commerce vertical marketplace for the plastics industry. CommerX provides this
service under the PlasticsNet brand name and develops the software to support
PlasticsNet.
PlasticsNet is a leading provider of e-commerce solutions for processors
and suppliers in the US plastics industry. Its vertical marketplace provides a
comprehensive platform for buyers and suppliers to streamline the sourcing and
procurement process for plastics products and services. The company's solutions
are designed to be a compelling and integral part of a plastics processor's
procurement and business processes while providing suppliers with cost-
effective, high-quality access to a large pool of buyers.
Our initial contact with CommerX came through our focus on the plastics
industry as a strong potential market for a market maker. We researched the
plastics industry and concluded, based upon the founding management and
business model, that CommerX was best positioned in the plastics market.
Kenneth A. Fox and Robert A. Pollan, two of our Managing Directors, are members
of CommerX's Board of Directors. We have assisted the founders in recruiting
key executives including the Chief Operating Officer, Chief Financial Officer,
Vice President of Sales and Vice President of Supplier Relations. In addition,
we have helped the company design their back office systems and assisted them
with various financial initiatives. CommerX is currently working on a strategic
partnership with CommerceQuest, another one of our partner companies. For 1998,
CommerX had revenue of $.5 million and for the nine months ended September 30,
1999, revenue of $.9 million.
ComputerJobs.com, Inc. ComputerJobs.com is a vertical 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
areas such as 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 nine months ended
September 30, 1999, revenue of $6.4 million.
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Deja.com, Inc. Deja.com, formerly Deja News, is a vertical market maker
that is the Web's leading source of shared knowledge in the form of user-
generated ratings and discussions. With over 160 million page views per month,
it is the leading purveyor of online discussion, offering access to more than
43,000 discussion forums. These forums are populated by knowledgeable
participants who are interested in sharing their knowledge and experience on a
wide variety of subjects.
Deja.com recently extended its franchise in shared knowledge with the
consumer-driven feature Deja Ratings, a tool that extends the site's ability to
support daily decision-making. Deja Ratings captures consumer opinions on a
wide range of products and services through a scaled voting system that
includes product comparisons. The analytical tools that support decision-making
are supplemented by contextual links to e-commerce retailers and vendors.
Deja.com derives revenue from sponsors and e-commerce partners, and
provides the marketing community with the compelling proposition of reaching a
highly targeted, self-segmenting audience consisting of highly active Internet
consumers intent on investigating considered purchases. Deja.com also delivers
to those marketers a unique means of programming to the specific interests of
their target consumers, all in the context of a commerce-friendly platform.
We have been very active in recruiting Deja.com's management team and
developing its business strategy. In addition, Kenneth A. Fox and Douglas A.
Alexander, two of our Managing Directors, are members of Deja.com's Board of
Directors. Deja.com is in discussions with several partner companies to provide
services to its user community. For 1998, Deja.com had revenue of $5.1 million,
and for the nine months ended September 30, 1999, revenue of $6.1 million.
eMerge Interactive, Inc. eMerge Interactive is a vertical market maker
that combines content, community and transaction services to create an online
marketplace for the cattle industry. eMerge Interactive believes that the
production chain of the cattle industry, which includes cattle producers,
feedlots, packers and suppliers, contains inefficiencies that reduce animal
health and value. These inefficiencies, which include excessive animal
transportation and handling, result in additional transaction costs and reduced
beef quality.
eMerge Interactive offers its comprehensive cattle solution through its
Internet-based information and transaction platform, its Web-enabled private
network and its direct sales force. eMerge Interactive's products and services
are designed to create an efficient market for the purchase and sale of cattle
and to improve quality and productivity in the cattle industry. eMerge
Interactive's family of integrated Web sites and Web-enabled private network
provide:
. livestock procurement services consisting of cattle sales and
auctions;
. customer-specific daily feedlot operations analysis, comparative
cattle industry analysis and benchmarking studies;
. cattle inventory management tools; and
. livestock health management and quality enhancement products.
We acquired our interest in eMerge Interactive in November, 1999 after
identifying it as a potential market leader in the e-commerce market for the
livestock industry. Douglas Alexander, one of our Managing Directors, and E.
Michael Forgash, one of our directors, are members of eMerge Interactive's
Board of Directors. For 1998, eMerge Interactive had revenue of $1.8 million,
and for the nine months ended September 30, 1999, revenue of $18.3 million.
ONVIA.com, Inc. ONVIA.com is a horizontal market maker that provides
products and services to small businesses over the Internet. ONVIA.com is a B2B
online operations center devoted to helping small
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<PAGE>
businesses succeed. ONVIA.com provides small businesses with business products,
direct purchase and request for quote services, customer lead generation and
expert advice.
ONVIA.com was introduced to us through a member of our network. Kenneth
A. Fox, one of our Managing Directors, is a member of ONVIA.com's Board of
Directors. Alex W. Hart, a member of our Advisory Board, is a member of
ONVIA.com's Advisory Board. We have facilitated a partnership between ONVIA.com
and Bidcom, one of our other partner companies, helped design ONVIA.com's back
office systems, and our executive recruiting personnel recruited their Vice
President of Marketing. For 1998, ONVIA.com had revenue of $1 million, and for
the nine months ended September 30, 1999, had revenue of $13.2 million.
Universal Access, Inc. Universal Access is a vertical market maker that
is a Web-enabled business-to business intermediary that facilitates the
provisioning, installation and servicing of dedicated, point-to-point
communications circuits for service providers who buy network capacity, and
transport suppliers who sell network capacity. Universal Access aggregates
network information, manages facilities where communications networks can be
physically interconnected, provides ongoing dedicated circuit access and offers
client support services. Through these services, Universal Access provides its
clients with an outsourced, integrated solution to the challenges of the
fragmented network services market.
As an independent intermediary, Universal Access has been able to collect
and aggregate network information from multiple transport suppliers. Universal
Access' Web-enabled Universal Information Exchange, or UIX, consists of several
proprietary interrelated databases containing capacity, availability, location
and pricing information from transport suppliers and physical sites. Through
the UIX, Universal Access provides its clients with point-to-point network
connections efficiently and cost-effectively. In addition, Universal Access
operates network interconnection facilities called Universal Transport
Exchanges, of UTXs, where various transport suppliers can easily access the
network connections of any other transport supplier in that facility. Universal
Access also provides a single point of contact for network management services,
including network monitoring, maintenance and restoration.
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 nine months ended September 30, 1999,
revenue of $8.4 million.
VerticalNet, Inc. VerticalNet is a horizontal market maker that provides
industry-specific Web-based trade communities for businesses and professionals.
VerticalNet owns and operates over 50 industry-specific Web sites as of
November 15, 1999 designed as online B2B communities, known as vertical trade
communities. These vertical trade communities act as comprehensive sources of
information, interaction and e-commerce. VerticalNet's objective is to continue
to be a leading owner and operator of industry-specific vertical trade
communities on the Internet.
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.
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VerticalNet's vertical trade communities take advantage of the Internet's
ability to allow users around the world to contact each other online, allowing
buyers to research, source, contact and purchase from suppliers. Although other
companies offer B2B services on the Internet, VerticalNet believes that it is
currently the only company operating a portfolio of specialized B2B
communities. A portfolio strategy permits VerticalNet to:
. offer consistent content and services in its current vertical
trade communities and replicate these offerings as it launches new
communities;
. realize cost savings and operating efficiencies in its technology,
marketing, infrastructure and management resources; and
. increase its overall audience, making its individual sites more
appealing to a broad array of advertisers and suppliers who sell
their goods and services over the Internet.
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." In addition to its strategic alliance with
PaperExchange, VerticalNet has also 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 nine months ended September 30, 1999, revenue of
$10.7 million.
Infrastructure Service Provider Categories
Infrastructure service providers assist traditional businesses in the
following ways:
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing their e-
commerce strategies. Systems integrators develop and implement
technological infrastructure that enables e-commerce. Systems
integrators also integrate e-commerce applications with existing
enterprise applications. Strategic consultants and systems
integrators typically bill their clients on a project-by-project
basis.
. Software Providers. Software providers design and sell software
applications that support e-commerce and integrate business
functions. Software providers may sell or license their products.
. Outsourced Service Providers. Outsourced service providers offer
software applications, infrastructure and related services
designed to help traditional businesses reduce cost, improve
operational efficiency and decrease time to market. Outsourced
service providers may charge fees on a per-use or periodic basis.
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Infrastructure Service Provider Profiles
Table of Infrastructure Service Providers. The partner companies listed
below are important to our strategy because the growth of our partner companies
increases the value of our collaborative network. We believe that
infrastructure service providers will facilitate innovation and growth of our
market maker companies by providing them with critical services. The table
shows certain information regarding our infrastructure service provider partner
companies by category as of November 18, 1999. Our ownership positions have
been calculated based on the issued and outstanding common stock of each
partner company, assuming the issuance of common stock on the conversion or
exercise of preferred stock and convertible notes, but excluding the effect of
options and warrants.
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
------------------------------- ------------------------ ---------- -------
<C> <S> <C> <C>
Strategic Consulting and
Systems Integration:
Benchmarking Partners, Inc. Provides e-commerce best 13% 1996
www.benchmarking.com practices research and
consulting services to
maximize return on
investment from
demand/supply chain and
e-business initiatives.
Context Integration, Inc. Provides systems 18% 1997
www.context.com integration services
focused on customer
support, data access and
e-commerce.
US Interactive, Inc. Provides a range of 3% 1996
www.usinteractive.com consulting and technical
services relating to
Internet marketing
solutions.
Software Providers:
Blackboard Inc. Provides universities 30% 1998
www.blackboard.com and corporations with
applications that enable
them to host classes and
training on the
Internet.
ClearCommerce Corp. Provides comprehensive 15% 1997
www.clearcommerce.com e-commerce solutions
including transaction
and payment processing,
credit card
authorization, fraud
tracking and reporting
functions.
Entegrity Solutions Corporation Provides encryption 12% 1996
www.entegrity.com software to secure
transactions and
communications between
business applications.
Servicesoft Technologies, Inc. Provides tools and 6% 1998
www.servicesoft.com services used by its
customers to create
Internet customer
service applications
consisting of self-
service, e-mail response
and live interaction
products.
Syncra Software, Inc. Provides software that 35% 1998
www.syncra.com improves supply chain
efficiency through
collaboration of trading
partners over the
Internet.
TRADEX Technologies, Inc. Provides e-commerce 10% 1999
www.tradex.com application software
that enables enterprises
to create on-line
marketplaces and
exchanges.
Outsourced Service Providers:
Breakaway Solutions, Inc. Provides application 41% 1999
www.breakaway.com service hosting, e-
commerce consulting and
systems integration
services to growing
companies.
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</TABLE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
-------------------------- ---------------------------- ---------- -------
<C> <S> <C> <C>
CommerceQuest, Inc. Provides a messaging service 29% 1998
www.commercequest.com 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.
LinkShare Corporation Establishes affiliate 34% 1998
www.linkshare.com relationships for online
merchants with other Web
sites to facilitate e-
commerce.
PrivaSeek, Inc. Provides consumers with 16% 1998
www.privaseek.com control of their Web-based
personal profiles, allowing
merchants to offer consumers
incentives for selective
disclosure.
Purchasing Solutions, Inc. Provides strategic sourcing 60% 1999
consulting and on-line
Internet purchasing.
SageMaker, Inc. Provides services that 27% 1998
www.sagemaker.com combine an enterprise's
external and internal
information assets into a
single, Web-based knowledge
management platform.
Sky Alland Marketing, Inc. Provides services to improve 31% 1996
www.skyalland.com customer communications and
relationships.
United Messaging, Inc. Provides high performance 41% 1999
www.unitedmessaging.com electronic messaging
services for organizations
with mission critical e-mail
networks.
VitalTone Inc. Provides integrated 21% 1999
www.vitaltone.com application service provider
services to middle market
companies.
Vivant! Corporation Provides process automation 23% 1998
www.vivantcorp.com and decision support
services that enable
companies to strategically
manage contractors,
consultants and temporary
employees.
</TABLE>
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 research
and consulting company that provides e-commerce best practices research and
consulting services to maximize return on investment from demand/supply chain
and e-business initiatives. The use of best business practices enabled by
information technology established by Benchmarking Partners allows companies to
efficiently manage their e-business initiatives. Benchmarking Partners improves
supply and distribution networks in the following ways:
. Integration. Coordinating diverse business functions such as
manufacturing, logistics, sales and marketing to maximize
efficiency.
. Optimization. Developing strategies that increase the efficiency
of supply networks.
. Collaboration. Creating collaborative solutions that incorporate
key trading partners.
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Benchmarking Partners' clients include: companies undergoing business 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 $15.9 million, and for the nine months ended September
30, 1999, revenue of $14.6 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. This year Breakaway
Solutions became a public company, trading on the Nasdaq National Market under
the symbol "BWAY." Including the effect of options and warrants, our ownership
percentage in Breakaway Solutions is approximately 41%. For 1998, Breakaway
Solutions had revenue of $10 million, and for the nine months ended September
30, 1999, revenue of $14.8 million.
CommerceQuest, Inc. CommerceQuest is an outsourced service provider of
B2B infrastructure solutions for mission-critical e-business applications. The
company provides infrastructure solutions to leading global companies and
Internet market makers that need to exchange business-critical information
across geographically and technologically diverse boundaries. CommerceQuest
currently employs 300 professionals, and the company has extensive experience
in software and systems integration, and building solutions around IBM
Corporation's MQSeries messaging middleware.
At the core of CommerceQuest's portfolio is enableNet, an outsourced
managed service designed to provide trusted B2B integration over the Internet.
enableNet is augmented by industry-leading software products and professional
services designed to provide maximum flexibility of integration options.
enableNet is a network independent service that allows businesses to exploit
the Internet, or their choice of network, to exchange business-critical
information with business partners and customers. enableNet delivers security,
reliability and manageability to the Internet making it an industrial-strength,
cost-effective alternative to traditional value-added networks. enableNet
contributes the capability to bridge Web-based processes with legacy or
traditional EDI services. The service also allows organizations to reliably and
securely exchange any form of operational data internally or with business
partners via the Internet or other networks. In addition, enableNet provides
end-to-end integration capability, which provides message delivery across
multiple systems, such as applications, databases, clients, or servers, even
when using a wide range of networks and protocols.
We believe that the services and software provided by CommerceQuest can
be used throughout our partner company network, including our market makers
interested in tight integration with their suppliers and
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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 revenues of $31.1 million, and for the nine months
ended September 30, 1999 had revenue of $13.6 million.
Government Regulations and Legal Uncertainties
As of November 15, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and the quality of goods and services. The enactment of
any additional laws or regulations may impede the growth of the Internet and
B2B e-commerce, which could decrease the revenue of our partner companies and
place additional financial burdens on them.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our partner companies, they
add to the legal and regulatory burden faced by B2B e-commerce companies. Other
specific areas of legislative activity are:
. Taxes. Congress recently enacted a three-year moratorium, ending
on October 21, 2001, on the application of "discriminatory" or
"special" taxes by the states on Internet access or on products
and services delivered over the Internet. Congress further
declared that there will be no federal taxes on e-commerce until
the end of the moratorium. However, this moratorium does not
prevent states from taxing activities or goods and services that
the states would otherwise have the power to tax. Furthermore, the
moratorium does not apply to certain state taxes that were in
place before the moratorium was enacted.
. Online Privacy. Both Congress and the Federal Trade Commission are
considering regulating the extent to which companies should be
able to use and disclose information they obtain online from
consumers. If any regulations are enacted, B2B e-commerce
companies may find certain marketing activities restricted. The
Federal Trade Commission has issued regulations enforcing the
Children's Online Privacy Protection Act, which take effect on
April 21, 2000. These regulations make it illegal to collect
information online from children under the age of 13 without first
obtaining parental consent. These regulations also require Web
site operators to allow parents to inspect and remove their
children's information from any database. Compliance with these
regulations could pose a significant administrative burden for Web
site operators whose products and services are targeted to
children or may be attractive to children. 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 European Union to provide
exemptions from the European Union regulations, but the outcome of
these negotiations is uncertain.
. 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
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<PAGE>
other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to
regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much the
same manner as telephone services, which could slow the deployment
of broadband Internet access services. Because of these
proceedings or others, new laws or regulations could be enacted
which could burden the companies that provide the infrastructure
on which the Internet is based, thereby slowing the rapid
expansion of the medium and its availability to new users.
. Other Regulations. The growth of the Internet and e-commerce may
lead to the enactment of more stringent consumer protection laws.
The Federal Trade Commission may use its existing jurisdiction to
police e-commerce activities, and it is possible that the Federal
Trade Commission will seek authority from Congress to regulate
certain online activities.
Generally applicable laws may affect us and our partner companies. The
exact applicability of many of these laws to B2B e-commerce, however, is
uncertain.
Proprietary Rights
Our partner companies have copyrights with respect to software
applications, Web sites and other materials. These materials may constitute an
important part of our partner companies' assets and competitive strengths.
Federal law generally protects such copyrights for 90 years from the creation
of the underlying material.
Competition
Competition From our Shareholders and Within our Network
We may compete with our shareholders and partner companies for Internet-
related opportunities. After this offering, Comcast Corporation, and Safeguard
Scientifics, Inc. will own 9.4% and 14.0% of our outstanding common stock,
respectively, based on the number of shares held by each of them on November
15, 1999. These shareholders may compete with us to acquire interests in B2B
e-commerce companies. Comcast Corporation and Safeguard Scientifics currently
each have a designee as a member of our board of directors and IBM Corporation
has a right to designate a board observer, which may give these companies
access to our business plan and knowledge about potential acquisitions. In
addition, we may compete with our partner companies to acquire interests in
B2B e-commerce companies, and our partner companies may compete with each
other for acquisitions or other B2B e-commerce opportunities. In particular,
VerticalNet seeks to expand, in part through acquisition, its number of B2B
communities. VerticalNet, therefore, may seek to acquire companies that we
would find attractive. While we may partner with VerticalNet on future
acquisitions, we have no current contractual obligations to do so. We do not
have any contracts or other understandings with our shareholders or partner
companies that would govern the resolution of these potential conflicts. Such
competition, and the complications posed by the designated directors, may
deter companies from partnering with us and may limit our business
opportunities.
Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, we expect that competition will intensify. Barriers
to entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a
customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
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<PAGE>
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain a
critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our partner companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail.
Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives.
Competition for Partner Companies
We face competition from other capital providers including publicly-
traded Internet companies, venture capital companies and large corporations.
Many of these competitors have greater financial resources and brand name
recognition than we do. These competitors may limit our opportunity to acquire
interests in new partner companies. If we cannot acquire interests in
attractive companies, our strategy to build a collaborative network of partner
companies may not succeed.
Facilities
Our corporate headquarters are located at 435 Devon Park Drive, Building
800 in an office facility located in Wayne, Pennsylvania, where we lease
approximately 3,650 square feet. We plan to move into a larger corporate
headquarters in Wayne, Pennsylvania during the first half of 2000. We also
maintain offices in San Francisco, California; Boston, Massachusetts; Seattle,
Washington; and London, England.
Employees
As of November 15, 1999, excluding our partner companies, we had 61
employees, 60 of whom work with us on a full-time basis. We consider our
relationships with our employees to be good. None of our employees are covered
by collective bargaining agreements.
Legal Matters
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
Our executive officers, key employees and directors, their ages and
their positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Walter W. Buckley, III 39 President, Chief Executive Officer and Director
Douglas A. Alexander 38 Managing Director, East Coast Operations
Matthias Allgaier 33 Managing Director, European Operations
Richard G. Bunker, Jr. 38 Managing Director and Chief Technology Officer
Richard S. Devine 41 Managing Director, Executive Recruiting
Stephen Duckett 32 Managing Director, European Operations
Kenneth A. Fox 29 Managing Director, West Coast Operations and Director
David D. Gathman 52 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 31 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 39 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) 66 Director
E. Michael Forgash (2) 41 Director
Thomas P. Gerrity (1) 58 Director
Peter A. Solvik(1) 40 Director
</TABLE>
- --------
(1) Member of the compensation committee
(2) Member of the audit committee
Walter W. Buckley, III, is a co-founder and has served as our President
and Chief Executive Officer and as one of our directors since March 1996.
Prior to co-founding us, Mr. Buckley worked for Safeguard Scientifics, Inc. as
Vice President of Acquisitions from 1991 to February 1996. Mr. Buckley
directed many of Safeguard Scientifics' investments and was responsible for
developing and executing Safeguard Scientifics' multimedia and Internet
investment strategies. Mr. Buckley serves as a director of Breakaway
Solutions, Inc., e-Chemicals, Inc., PrivaSeek, Inc., Sky Alland Marketing,
Inc., Syncra Software, Inc., VerticalNet, Inc. and Who?Vision Systems, Inc.
Douglas A. Alexander has served as one of our Managing Directors since
September 1997. Prior to joining us, Mr. Alexander co-founded Reality Online,
Inc. in 1986 and sold it to Reuters Group in 1994. Mr. Alexander continued to
serve as President and Chief Executive Officer of Reality Online after its
acquisition by Reuters Group until September 1997 and was a key contributor to
Reuters' Internet initiatives. Mr. Alexander is Chairman of the Board of
VerticalNet, Inc. and serves as a director of Arbinet Communications, Inc.,
Blackboard Inc., ComputerJobs.com, Inc., Deja.com, Inc., eMerge Interactive,
Inc., LinkShare Corporation, SageMaker, Inc., StarCite, Inc. and traffic.com,
Inc.
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Matthias Allgaier has served as one of our Managing Directors of our
European operations since November 1999. Prior to joining us, Mr. Allgaier was
an Assistant Director at Apax Partners since 1997. In this capacity, Mr.
Allgaier headed the software and services divisions of Apax Partners'
Information Technology group and was responsible for generation and execution
of acquisitions. Prior to this Mr. Allgaier was associated with Broadview
Associates since 1994, where he worked on a variety of acquisitions.
Richard G. Bunker, Jr. 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 market leading builder and
host of online securities trading and account inquiry Web sites, and provider
of market data to the online securities industry. He also served as Senior Vice
President and Chief Information Officer of SEI Investments from January 1994 to
March 1996, and Vice President of the investment management and trading
technology group at State Street Global Advisors from October 1992 to January
1994.
Richard S. Devine has served as our Managing Director of Executive
Recruiting since June 1999. Prior to joining us, Mr. Devine was a Partner at
Heidrick & Struggles, and a member of its International Technology Practice
from October 1997 to June 1999. In this capacity, Mr. Devine led the search for
many high profile executive positions including the Chief Executive Officer of
Global Crossing, President of Transport, a joint venture between Microsoft
Corporation and First Data Corporation, Senior Vice President of Worldwide
Operations at Apple Computer Corporation, Vice President of Customer Service at
Amazon.com, Chief Financial Officer and Chief Information Officer at Remedy
Corporation and General Manager of the Americas, General Manager of Services
and Vice President of International at Siebel Systems. Mr. Devine also served
as President and Chief Executive Officer of KidSoft LLC from March 1992 to
February 1997.
Stephen Duckett has served as one of our Managing Directors of our
European operations since November 1999. For the past five years, Mr. Duckett
was associated with Apax Partners where he generated and executed acquisitions,
managed ownership interests, and helped to establish an Internet group.
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 AUTOVIA
Corporation, Bidcom, Inc., CommerX, Inc., Deja.com, Inc., Entegrity Solutions
Corporation, ONVIA.com, Inc. and Vivant! Corporation.
David D. Gathman has served as our Chief Financial Officer and Treasurer
since January 1999. Prior to joining us, Mr. Gathman was Chief Financial
Officer and Executive Vice President, Finance and Administration of Integrated
Systems Consulting Group, Inc. from January 1997 through its merger with First
Consulting Group, Inc. in December 1998. He also served as Chief Operating
Officer, Vice President, Secretary and Assistant Treasurer of Integrated
Systems Consulting Group, Inc. from April 1994 to December 1998 and as a
director of the company. Mr. Gathman brings to us over 30 years of finance-
related experience, the last 16 of which were focused in the information
technology industry.
Christopher H. Greendale has served as one of our Managing Directors
since July 1999 and was one of our Senior Partners of Operations from January
1999 to July 1999. Prior to joining us, Mr. Greendale served as an independent
management consultant from January 1998 to December 1998. Prior to becoming a
consultant, Mr. Greendale served as Executive Vice President of Cambridge
Technology Partners, a company he co-founded in 1991. Cambridge Technology
Partners is a systems integrator that initiated fixed price, fixed
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time, rapid systems development. Mr. Greendale has extensive experience in
sales and marketing, and general management in the information technology
industry.
Gregory W. Haskell has served as one of our Managing Directors of
Operations since June 1999. Prior to joining us, Mr. Haskell served from
January 1994 to June 1999 as President and Chief Operating Officer of XL
Vision, Inc., a business and technology incubator that builds companies and
spins them out into stand alone public companies. During his tenure at XL
Vision, Mr. Haskell co-founded four technology-based spinout companies. Mr.
Haskell serves as a director of AgProducer Network, Inc., asseTrade.com, Inc.,
Axcess, Inc., ComputerJobs.com, Inc., e-Chemicals, Inc., Integrated Visions,
Inc., PaperExchange.com LLC and XL Vision, Inc.
Todd G. Hewlin has served as our Managing Director of Corporate Strategy
and Research since July 1999. Prior to joining us, Mr. Hewlin served as a
Partner with McKinsey & Company, a global management consultancy, and has held
various positions with McKinsey & Company from September 1993 to June 1999.
During that time, Mr. Hewlin led technology-intensive strategy projects for
leading organizations in North America and Europe. Mr. Hewlin's clients have
included world-class technology companies, an Internet bank, a global satellite
telephony startup, and a range of traditional companies assessing the impact of
the Internet. From December 1998 to June 1999, Mr. Hewlin co-led McKinsey's
Global Electronic Commerce practice.
Victor S. Hwang has served as one of our Managing Directors of
Acquisitions since March 1999. Prior to joining us, Mr. Hwang served from
January 1999 to March 1999 as a General Partner of Softbank Holdings,
responsible for developing an investment fund targeting late-stage private
Internet companies. From August 1995 to January 1999, Mr. Hwang also served as
an investment banker at Goldman, Sachs & Co., where he was involved in numerous
financing and merger transactions for a broad range of Internet, software,
semiconductor, communications and hardware companies. While at Goldman, Sachs &
Co., Mr. Hwang's clients included eBay, GeoCities and Yahoo!. Mr. Hwang
obtained a Masters of Business Administration from the Graduate Business School
of Stanford University where he was in attendance from September 1993 to June
1995.
Sam Jadallah has served as one of our Managing Directors of Operations
since July 1999. Prior to joining us, Mr. Jadallah served as a Microsoft Vice
President of Worldwide Enterprise Sales from June 1996 to July 1999 where he
was responsible for leading sales efforts to business and academic customers.
Prior to holding this position, Mr. Jadallah served as Manager of Worldwide
Business Strategy reporting to Steve Ballmer, President of Microsoft. Mr.
Jadallah also served as General Manager of Corporate and Developer Support and
served as District Manager leading Microsoft sales to the US Department of
Defense from 1990 to 1992. Mr. Jadallah held various other sales, management
and technical positions since joining Microsoft in 1987.
Mark J. Lotke has served as one of our Managing Directors of Acquisitions
since June 1999. Prior to joining us, Mr. Lotke served from August 1997 to May
1999 as an Associate and from July 1993 to August 1997 as a Junior Associate at
General Atlantic Partners, a private equity firm focused on investing in global
information technology companies. While at General Atlantic Partners, Mr. Lotke
was involved in numerous private equity transactions across a wide range of
Internet, software, and services companies, including E*Trade, Priceline.com,
Inc., LHS Group, Inc., Envoy Corporation, NewSub Services, Inc., and Predictive
Systems. Prior to joining General Atlantic Partners, Mr. Lotke served as a
strategy consultant at Corporate Decisions, Inc. Mr. Lotke obtained a Masters
of Business Administration from the Graduate Business School of Stanford
University where he was in attendance from September 1995 to June 1997. Mr.
Lotke serves as a director of Animated Images, Inc. and Residential Delivery
Services, Inc.
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. Mr. Nassau serves as a director of
The Albert Abela Corporation, Bliley Electric Company, JusticeLink, Inc. and
Data West Corporation which does business as CourtLink.
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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., EmployeeLife.com, Internet Commerce
Systems, Inc., iParts, Purchasing Solutions, Inc., United Messaging, Inc. and
Universal Access, Inc.
Sherri L. Wolf has served as our Managing Director of Investor Relations
since May 1999. Prior to joining us, Ms. Wolf served as a Vice President in
equity research at Adams, Harkness & Hill, an investment banking firm, from
September 1994 to May 1999. While with Adams, Harkness & Hill, Ms. Wolf focused
on the Internet and the information technology services sectors and covered
such companies as CMG Information Services, Inc., Safeguard Scientifics, Inc.,
Lycos and Forrester Research. Ms. Wolf obtained a Masters of Science from the
Massachusetts Institute of Technology's Sloan School of Management where she
was in attendance from September 1992 to June 1994.
Michael H. Forster has served as one of our Senior Partners of Operations
since June, 1998. Before joining us, Mr. Forster served as Senior Vice
President of Worldwide Field Operations for Sybase, Inc. from April 1996 to
March 1999. Prior to this position with the company, Mr. Forster was Sybase's
Senior Vice President and President of the company's Information Connection
Division from April 1994 to March 1996. Mr. Forster has over 30 years of sales,
marketing and general management experience in the information technology
industry. Mr. Forster serves as a director of SageMaker, Inc., Syncra Software,
Inc., and Tangram Enterprise Solutions.
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, Masterpack
International, Inc., MultiGen-Paradigm, Inc., Naviant Technology Solutions,
Inc., Sunsource, 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., the RBB Fund, Inc. and Chief Executive
Officer of Comcast Interactive Capital Group L.P.
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,
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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 eMerge Interactive, Inc., Integrated Visions,
Inc., US Interactive, Inc., Who? Vision Systems, Inc., and 4anything.com, Inc.
Dr. Thomas P. Gerrity has served as one of our directors since December
1998. Dr. Gerrity also served as the Dean of The Wharton School of the
University of Pennsylvania from July 1990 to June 1999. He is currently
Professor and Director of the Wharton School Electronic Commerce Forum. Dr.
Gerrity also serves as a director of CVS Corporation, Fannie Mae, Fiserv, Inc.,
Ikon Office Solutions, Inc., Knight-Ridder, Inc., Reliance Group Holdings,
Inc., Sunoco, Inc. and a trustee of MAS Funds.
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 serves as a director of Asera Inc., Cohera Corp. and Context
Integration, 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., where he was in charge of ZDNet, ZDTV, Ziff-Davis' Internet
Publications, and Ziff-Davis, Inc.'s investments. 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 a director of drkoop.com, Inc., GiveMeTalk.com, Inc.,
Jupiter Communications, Inc., SuperGroups, Inc., VerticalNet, Inc. and ZDTV,
Inc.
Alex W. "Pete" Hart has served on our Advisory Board since March 1998.
Mr. Hart is a consultant in consumer financial services specializing in
emerging payment and distribution systems. Mr. Hart has served in numerous
positions, including Chief Executive Officer, of Advanta Corporation from March
1994 to October 1997. Prior to joining Advanta Corporation, Mr. Hart served as
President and Chief Executive Officer of MasterCard International. Mr. Hart
serves as a director of Sanchez Computer Associates, Who?Vision Systems,
4anything.com, HNC Software, Integrated Vision and Destiny Systems and on the
advisory board of ONVIA.com, Inc. and Qpass.
Ron Hovsepian has served on our Advisory Board since April 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
serves as a director of Ann Taylor.
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 Peppers and Rogers Group/Marketing 1
to 1 since 1994. Peppers and Rogers Group/Marketing 1 to 1 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.
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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 that sends invitations and
manages RSVPs for events and Nowonder, Inc., a privately-held start-up that
matches people who have technical support questions with experts who can answer
them.
Gary C. Wendt has served on our Advisory Board since May 1999. Mr. Wendt
served as President, Chairman and Chief Executive Officer of General Electric
Capital Services, Inc. from 1986 to 1998. During Mr. Wendt's tenure as leader
of General Electric Capital Services, the company became General Electric
Corporation's largest business sector. Mr. Wendt serves as a director of iXL
Enterprises, Inc., Sanchez Computer Associates, Inc. and LAPA Lineas Aereas
Privadas Argentinas S.A.
Sales and Marketing Guidance
Rowland Hanson has served on our Advisory Board September 1996. Mr.
Hanson is founder and President of C. Rowland Hanson & Associates which
provides strategic planning, marketing and communications to a variety of
software companies. Mr. Hanson has also been involved in the founding,
development and sale or merger of several software companies. Prior to founding
C. Rowland Hanson & Associates, Mr. Hanson served as Vice President of
Corporate Communications at Microsoft Corporation, where he is credited with
developing and executing the company's original branding strategy. Mr. Hanson
serves as a director of Webforia and Sequel Technology.
Tom Kippola has served on our Advisory Board since February 1997. Mr.
Kippola is the Managing Partner of The Chasm Group, which provides market
strategy consulting and training and speaking services for start-up, growing
and established information technology companies. Prior to his consulting
career, Mr. Kippola was director of marketing for a service automation software
vendor. Mr. Kippola has co-authored a book entitled "The Gorilla Game: An
Investor's Guide to Picking Winners in High Technology." Mr. Kippola serves as
a director of Whisper Communications, Inc. and The EC Company. In addition, Mr.
Kippola is an advisory board member of eCustomers.com, Rubric, RTMS, Inc. and
Voyager Capital.
Geoffrey A. Moore has served on our Advisory Board since February 1997.
Mr. Moore is Chairman of the Board and founder of The Chasm Group, where he
continues to provide market development and business strategy services to many
leading high-technology companies. He is also a venture partner with Mohr
Davidow Ventures where he provides market strategy advice to the high-tech
portfolio companies. Prior to founding The Chasm Group, Mr. Moore was a
principal and partner at Regis McKenna, Inc., a leading high-tech marketing
strategy and communications company. Mr. Moore serves as a director of many
companies, including Documentation Inc. and Objectivity, Inc.
John A. Miller, Jr. has served on our Advisory Board since July 1996. Mr.
Miller has served as President and Chief Executive Officer of Miller Consulting
Group since founding the company in 1996. Miller Consulting Group is a
strategy-driven public relations firm that integrates market positioning with
tactical public relations for emerging information technology companies. Prior
to founding the Miller Consulting
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Group, Mr. Miller founded Miller Communications, a leader in the field of high
technology public relations, which advised Compaq Computer Corporation, Lotus
Corporation and more than 100 other emerging information technology firms
throughout the 1980s.
Don Peppers has served on our Advisory Board since August 1996. Mr.
Peppers is a founding partner at Pepper and Rogers Group/Marketing 1 to 1, 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 is President and CEO of Naviant, Inc. Naviant is
focused on providing information enabling marketers to precisely target their
customers and prospects in both the physical and on-line worlds. 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. Dr. Stryker is a director of 24/7 Media (TFSM) and Sky Alland,
Inc.
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(R), Diet Coke(R),
Fruitopia(R) and the New Coke initiative. Since leaving Coca-Cola, Mr. Zyman
has also authored a book entitled "The End of Marketing As We Know It." Mr.
Zyman serves as a director of Gap, Inc., Netcentives, Inc. and VC Television
Network Corp.
Information Technology Management Guidance
K.B. Chandrasekhar has served on our Advisory Board since April 1999. Mr.
Chandrasekhar is Chairman of the Board of Exodus Communications, a company he
co-founded in 1994. Exodus Communications is a leading server hosting company
for Internet sites. Since establishing its first Internet data center in 1996,
Exodus Communications has expanded to nine cities with more than 1,000
employees and 1,000 customers. Prior to co-founding Exodus Communications, Mr.
Chandrasekhar founded Fouress, Inc., a network software design and development
firm. Mr. Chandrasekhar also founded VitalTone, one of our partner companies.
Esther Dyson has served on our Advisory Board since May 1996. Ms. Dyson
is Chairman of EDventure Holdings, Inc. EDventure Holdings is a company focused
on emerging technologies worldwide, and on the computer markets of the United
States and 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, Graphisoft, PRT Group, Inc., Languageware, Medscape Inc., Thinking
Tools and WPP Group. 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
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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 match the evolving needs of our partner companies.
Classes of the Board
Our Board of Directors is divided into three classes that serve staggered
three-year terms as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- --------------------------------
<C> <C> <S>
Class I 2000 Messrs. Brodsky and Forgash
Class II 2001 Messrs. Keith and Solvik
Class III 2002 Messrs. Buckley, Fox and Gerrity
</TABLE>
Board Committees
The compensation committee reviews and makes recommendations to the Board
regarding the compensation to be provided to our Chief Executive Officer and
our directors. In addition, the compensation committee reviews compensation
arrangements for our other executive officers. The compensation committee also
administers our equity compensation plans. The current members of the
compensation committee are Messrs. Gerrity, Keith and Solvik.
The audit committee reviews and monitors our corporate financial
reporting, external audits, internal control functions and compliance with laws
and regulations that could have a significant effect on our financial condition
or results of operations. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Messrs. Brodsky and Forgash.
Director Compensation and Other Arrangements
We do not pay cash compensation to our directors; however they are
reimbursed for the expenses they incur in attending meetings of the board or
board committees. Non-employee directors are eligible to receive options to
purchase common stock awarded under our 1999 Equity Compensation Plan. See
"Employee Benefit Plans--Internet Capital Group, Inc. 1999 Equity Compensation
Plan--Non-Employee Director Option Grants," below.
IBM Corporation has designated James Corgel as an observer to our board of
directors.
Compensation Committee Interlocks and Insider Participation
Our compensation committee makes 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.
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Executive Compensation
The following table provides certain summary information concerning the
compensation earned by our chief executive officer and the other executive
officers employed by us during the fiscal year ended December 31, 1998. Since
January 1, 1999, we have employed fourteen additional executive officers--
Messrs. Allgaier, Bunker, Devine, Duckett, Gathman, Greendale, Haskell, Hewlin,
Hwang, Jadallah, Lotke, Nassau, Nickolas and Ms. Wolf--each of whom are
expected to receive more than $100,000 in compensation in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Shares
Other Underlying
Name and Principal Position Salary Bonus Compensation (1) Options
- --------------------------- -------- ------- ---------------- ------------
<S> <C> <C> <C> <C>
Walter W. Buckley, III
President and Chief Executive
Officer........................ $159,769 $96,000 -- 2,600,000
Douglas A. Alexander
Managing Director, East Coast
Operations..................... 225,000 100,000 -- 2,500,000
Kenneth A. Fox
Managing Director, West Coast
Operations..................... 119,538 75,000 -- 2,500,000
Robert A. Pollan
Managing Director, Operations... 133,808 50,000 -- 2,500,000
</TABLE>
- --------
(1) The value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for any officer
in the table above the lesser of either $50,000 or 10.0% 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
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term (3)
Options Employees in Price per Expiration -----------------------
Name Granted (1) 1998 Share (2) Date 5% 10%
---- ----------- ------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. 2,600,000 22% $1.00 Dec. 18, 2008 $22,810,756 $37,862,382
Douglas A. Alexander.... 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
Kenneth A. Fox.......... 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
Robert A. Pollan........ 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
</TABLE>
- --------
(1) All options granted to employees are immediately exercisable, are
nonqualified stock options and generally vest over five years at the rate
of 20.0% of the shares subject to the option per year. Unvested shares are
subject to a right of repurchase upon termination of employment. Options
expire ten years from the date of grant.
(2) We granted options at an exercise price equal to the fair market value of
our common stock on the date of grant, as determined by our Board of
Directors.
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(3) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5.0% and 10.0%
compounded annually from the date the respective options were granted to
their expiration dates, based upon the initial public offering price of
$6.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
The following table sets forth certain information concerning option
exercises by each of the officers named in the above summary compensation
table.
Year-End December 31, 1998 Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying in-the-Money
Unexercised Options at Fiscal Options at Fiscal
Shares Year-End Year-End (1)
Acquired on Value ------------------------------------ -------------------------
Name Exercise (#) Realized ($) Exercisable (2) Unexercisable Exercisable Unexercisable
---- ------------ ------------ ------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. -- -- 2,600,000 -- $13,000,000 --
Douglas A. Alexander.... -- -- 2,500,000 -- 12,500,000 --
Kenneth A. Fox.......... -- -- 2,500,000 -- 12,500,000 --
Robert A. Pollan........ -- -- 2,500,000 -- 12,500,000 --
</TABLE>
- --------
(1) Based on the initial public offering price of $6.00 per share, less the
exercise price, multiplied by the number of shares underlying the option,
adjusted for our two for one stock split.
(2) All the options listed were exercised in May 1999.
Employee Benefit Plans
Membership Profit Interest Plan
In 1996, the board of managers of Internet Capital Group, L.L.C. approved
the Membership Profit Interest Plan, which we refer to as our restricted stock
issuances after the Reorganization. Under the terms of the Membership Profit
Interest Plan, certain employees, consultants and advisors who are designated
by Messrs. Buckley and Fox received grants of units of membership interest in
Internet Capital Group, L.L.C. These units of membership interest cannot be
transferred until the rights of the holder in the units vest. Twenty percent of
each of these holder's units of membership interest vest each year over a five
year period beginning on the vesting date established by our board. If any
holder's relationship with us is terminated, his or her units of membership
interest that have not vested are forfeited to us.
Following the Reorganization, all outstanding grants became grants under
our new Membership Profit Interest Plan. As of December 31, 1998 a total of
13,567,250 shares of common stock have been issued under the Membership Profit
Interest Plan, all of which were outstanding, leaving no shares available for
grant at a later date. Our board of directors has the power, subject to the
limitations contained in the Membership Profit Interest Plan, to prescribe the
terms and conditions of any award granted under the Membership Profit Interest
Plan, including the total number of shares awarded to each grantee and any
applicable vesting schedule.
Internet Capital Group, Inc. 1999 Equity Compensation Plan
Our 1998 Equity Compensation Plan and our Managers' Option Plan were
approved by the board of managers of Internet Capital Group, L.L.C. on October
13, 1998. 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. After the
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Reorganization, we converted the 1998 Equity Compensation Plan and the
Managers' Option Plan into our 1999 Equity Compensation Plan. Our 1999 Equity
Compensation Plan provides that options and any other grants outstanding under
the 1998 Equity Compensation Plan and Managers' Option Plan will be considered
options issued under the 1999 Equity Compensation Plan.
We have adopted the Internet Capital Group, Inc. 1999 Equity Compensation
Plan, as amended and restated, effective as of February 2, 1999. The terms and
provisions of the 1999 Equity Compensation Plan are summarized below. This
summary, however, does not purport to be a complete description of the Equity
Compensation and is qualified in its entirety by the terms of the 1999 Equity
Compensation Plan.
Purpose. The purpose of the 1999 Equity Compensation Plan is to provide:
. designated employees of Internet Capital Group and its
subsidiaries;
. certain advisors who perform services for Internet Capital Group
or its subsidiaries; and
. non-employee members of our board of directors,
with the opportunity to receive grants of incentive stock options, non-
qualified options, share appreciation rights, restricted shares, performance
shares, dividend equivalent rights and cash awards. We believe that the 1999
Equity Compensation Plan will encourage the participants to contribute
materially to our growth and will align the economic interests of the
participants with those of our shareholders.
General. Subject to adjustment as described below, the plan authorizes
awards to participants of up to 42,000,000 shares of our common stock. No more
than 6,000,000 shares in the aggregate may be granted to any individual in any
calendar year. Such shares may be authorized but unissued shares of our common
stock or may be shares that we have reacquired, including shares we purchase on
the open market. If any options or stock appreciation rights granted under the
plan expire or are terminated for any reason without being exercised, or
restricted shares or performance shares are forfeited, the shares of common
stock underlying that award will again be available for grant under the plan.
Administration of the Plan. A committee appointed by our board of
directors administers the 1999 Equity Compensation Plan. The committee has the
sole authority to designate participants, grant awards and determine the terms
of all grants, subject to the terms of the 1999 Equity Compensation Plan. As a
result of our becoming a publicly-traded company, the compensation committee of
the board of directors became responsible for administering and interpreting
the plan. Prior to that time, the board of directors had fulfilled those roles.
The compensation committee consists of two or more persons appointed by the
Board of Directors from among its members, each of whom is a "non-employee
director" as defined by Rule 16b-3 under the Securities Exchange Act of 1934,
and an "outside director" as defined by Section 162(m) of the Internal Revenue
Code and related Treasury regulations. The committee has the full authority to
interpret the 1999 Equity Compensation Plan and to make rules, regulations,
agreements and instruments for implementing the plan. The committee's
determinations made under the 1999 Equity Compensation Plan are to be
conclusive and binding on all persons having any interest in the plan or any
awards granted under the plan.
Eligibility. Grants may be made to any employee of Internet Capital
Group, Inc. or any of its subsidiaries and to any non-employee member of the
Board of Directors. Key advisors who perform services for us or any of our
subsidiaries are eligible if they render bona fide services, not as part of the
offer or sale of securities in a capital-raising transaction. As of November
15, 1999, 4,898,000 options were outstanding under the plan.
Options. Incentive stock options may be granted only to employees. The
maximum number of shares that may be subject to incentive stock options over
the life of the 1999 Equity Compensation Plan is 6,000,000. Non-qualified stock
options may be granted to employees, key advisors and non-employee directors.
The
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exercise price of common stock underlying an option shall be determined by the
compensation committee at the time the option is granted, and may be equal to,
greater than, or less than the fair market value of such stock on the date the
option is granted; provided that the exercise price of an incentive stock
option shall be equal to or greater than the fair market value of a share of
common stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of such fair market
value.
Unless the applicable option agreement provides otherwise, a participant
can exercise an option award at any time, before or after the option has fully
vested, by paying the applicable exercise price in cash, or, with the approval
of the compensation committee, by delivering shares of common stock owned by
the grantee and having a fair market value on the date of exercise equal to the
exercise price of the grants, or by such other method as the compensation
committee shall approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. In addition,
the plan provides that we may make loans to participants or guarantee loans
made by third parties to the participant for the purpose of assisting
participants to exercise their options. The compensation committee has the
authority to set the terms and conditions that will apply to any loan or
guarantee.
Options vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument. In general, the
options that have already been granted under the plan are subject to a five
year vesting schedule with twenty percent of each grant vesting on each
anniversary of the grant date. The compensation committee will determine the
term of each option up to a maximum of ten years from the date of grant except
that the term of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the date of grant.
The compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason.
Non-Employee Director Option Grants. The 1999 Equity Compensation Plan
provides that each of our non-employee directors, other than:
. 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;
. non-employee directors who at any time during their membership on
our board of directors are employees of TL Ventures, Inc. or any
of its subsidiaries or affiliates; or
. non-employee directors who are granted options under the general
option provisions of the 1999 Equity Compensation Plan are each
entitled to receive an option to purchase 94,000 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 40,000 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 214,000 shares of our
common stock under the automatic and conversion grants described
above. Such automatic and conversion grants will otherwise be
generally subject to the terms provided for options under the 1999
Equity Compensation Plan.
Restricted Stock. The compensation committee shall determine the number
of restricted shares granted to a participant, subject to the maximum plan
limit described above. Grants of restricted shares will be conditioned on such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the compensation committee may determine in its
sole discretion. The restrictions shall remain in force during a restriction
period set by the compensation committee. If the grantee is no longer employed
by us during the restriction period or if any other conditions are not met, the
restricted shares grant will terminate as
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to all shares covered by the grant for which the restrictions are still
applicable, and those shares must be immediately returned to us.
Stock Appreciation Rights. The compensation committee may grant stock
appreciation rights (SARs) to any participant, subject to the maximum plan
limit described above. At any time, the compensation committee may grant an SAR
award, either separately or in connection with any option; provided, that if an
SAR is granted in connection with an incentive stock option, it must be granted
at the same time that the underlying option is granted. The compensation
committee will determine the base amount of the SAR at the time that it is
granted and will establish any applicable vesting provisions, transfer
restrictions or other restrictions as it may determine is appropriate in its
sole discretion. When a participant exercises an SAR, he or she will receive
the amount by which the value of the stock has appreciated since the SAR was
granted, which may be payable to the participant in cash, shares, or a
combination of cash and shares, as determined by the compensation committee.
Performance Share Awards. The compensation committee may grant
performance share awards to any employee or key advisor. A performance share
award represents the right to receive an amount based on the value of our
stock, but may be payable only if certain performance goals that are
established by the compensation committee are met. If the compensation
committee determines that the applicable performance goals have been met, a
performance share award will be payable to the participant in cash, shares or a
combination of cash and shares, as determined by the compensation committee.
Dividend Equivalent Rights. The compensation committee may grant dividend
equivalent rights to any participant. A dividend equivalent right is a right to
receive payments in amounts equal to dividends declared on shares of our common
stock with respect to the number of shares and payable on such dates as
determined by the compensation committee. The compensation committee shall
determine all other terms applicable to dividend equivalent rights.
Cash Awards. The compensation committee may grant cash awards to
employees under the 1999 Equity Compensation Plan. Such awards shall be in such
amounts and subject to such performance goals and other terms and conditions as
the compensation committee determines.
Amendment and Termination of the Plan. The compensation committee may
amend or terminate the plan at any time. The plan will terminate on the tenth
anniversary of its effective date, unless the compensation committee terminates
it earlier or extends it with the approval of the shareholders.
Adjustment Provisions. In the event that certain reorganizations of
Internet Capital Group or similar transactions or events occur, the maximum
number of shares of stock available for grant, the maximum number of shares
that any participant in the 1999 Equity Compensation Plan may be granted, the
number of shares covered by outstanding grants, the kind of shares issued under
the 1999 Equity Compensation Plan and the price per share or the applicable
market value of such grants shall be adjusted by the committee to reflect
changes to our common stock as a result of such occurrence to prevent the
dilution or enlargement of rights of any individual under the 1999 Equity
Compensation Plan.
Change of Control and Reorganization. Upon a Change of Control, as
defined in the 1999 Equity Compensation Plan, the compensation committee may:
. determine that the outstanding grants, whether in the form of
options and stock appreciation rights, shall immediately vest and
become exercisable;
. determine that the restrictions and conditions on all outstanding
restricted stock or performance share awards shall immediately
lapse;
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. require that grantees surrender their outstanding options and
stock appreciation rights in exchange for payment by us, in cash
or common stock, in an amount equal to the amount by which the
then fair market value of the shares of common stock subject to
the grantee's unexercised options or stock appreciation rights
exceeds the exercise price of those options; and/or
. after giving grantees an opportunity to exercise their outstanding
options and stock appreciation rights, terminate any or all
unexercised options and stock appreciation rights.
Upon a Reorganization, as defined in the 1999 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:
. require that grantees surrender their outstanding options in
exchange for payment by us, in cash or common stock, at an amount
equal to the amount by which the then fair market value of the
shares of common stock subject to the grantee's unexercised
options exceeds the exercise price of those options; and/or
. after accelerating all vesting and giving grantees an opportunity
to exercise their outstanding options or SARs, terminate any or
all unexercised options and SARs.
Federal Tax Consequences of Stock Options. In general, neither the grant
nor the exercise of an incentive stock option will result in taxable income to
an option holder or a deduction to Internet Capital Group. To receive special
tax treatment as an incentive stock option under the Internal Revenue Code as
to shares acquired upon exercise of an incentive stock option, an option holder
must neither dispose of such shares within two years after the incentive stock
option is granted nor within one year after the exercise of the option. In
addition, the option holder must be an employee of Internet Capital Group or
one of its subsidiaries at all times between the date of grant and the date
three months, or one year in the case of disability, before the exercise of the
option. Special rules apply in the case of the death of the option holder.
Incentive stock option treatment under the Internal Revenue Code generally
allows the sale of our common stock received upon the exercise of an incentive
stock option to result in any gain being treated as a capital gain to the
option holder, but we will not be entitled to a tax deduction. However, the
exercise of an incentive stock option, if the holding period rules described
above are satisfied, will give rise to income includable by the option holder
in his or her alternative minimum tax in an amount equal to the excess of the
fair market value of the stock acquired on the date of the exercise of the
option over the exercise price.
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
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<PAGE>
shares acquired upon the exercise of a vested non-qualified stock option will
be measured by the difference between the amount realized on the disposition
and the tax basis of such shares, and will generally be long-term capital gain
depending on the holding period involved. The tax basis of the shares acquired
upon the exercise of any non-qualified stock option will be equal to the sum of
the exercise price of such non-qualified stock option and the amount included
in income with respect to such option. Notwithstanding the foregoing, in the
event that exercise of the option is permitted other than by cash payment of
the exercise price, various special tax rules apply.
Unless the holder of an unvested non-qualified stock option makes an
83(b) election as described below, there generally will be no tax consequences
as a result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will recognize
ordinary income, and we will be entitled to a deduction, equal to the
difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-term
capital gain or loss, depending on the length of time the shares were held
prior to disposition of such shares. In general terms, if a holder were to make
an 83(b) election under Section 83(b) of the Internal Revenue Code upon the
exercise of the unvested option, the holder would recognize ordinary income on
the date of the exercise of such option, and we would be entitled to a
deduction, equal to:
. the fair market value of the stock received pursuant to such
exercise as though the stock were not subject to a substantial
risk of forfeiture or transferable, minus
. the exercise price paid for the stock.
If an 83(b) election were made, there would generally be no tax
consequences to the holder upon the vesting of the stock, and all subsequent
appreciation in the stock would generally be eligible for capital gains
treatment.
Additional special tax rules may apply to those option holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act of
1934. The foregoing tax discussion is a general description of certain expected
federal income tax results under current law, and all affected individuals
should consult their own advisors if they wish any further details or have
special questions.
Section 162(m). Section 162(m) of the Internal Revenue Code may preclude
us from claiming a federal income tax deduction if we pay total remuneration in
excess of $1 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.
Internet Capital Group, Inc. Equity Compensation Loan Program
In accordance with the 1998 Equity Compensation Plan, the 1999 Equity
Compensation Plan and the applicable employee option agreements, and in
consideration of certain restrictive covenants regarding the use of
confidential information and non-competition, we have offered to loan some
employees who have been awarded non-qualified stock options under the 1999
Equity Compensation Plan an amount necessary to pay the exercise price of their
outstanding options and an amount to pay some portion of the income tax that
these employees will owe upon the exercise of such options. These loans will
generally be available to those eligible
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<PAGE>
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.
Internet Capital Group, Inc. Long-Term Incentive Plan
Our long-term incentive plan supports our growth strategy since the plan
permits participants to share directly in the growth of our partner companies.
Each year, we will allocate up to 12% of each acquisition made during the year
for the benefit of the participants in the long-term incentive plan. The plan
permits the compensation committee to award grants in the form of interests in
limited partnerships established by us to hold the interests acquired by us in
a given year. Grants may be made to any of our employees. We intend primarily
to grant limited partnership interests to plan participants to more closely
align the participants' interests with our interests. All grants are subject to
the attainment of specified threshold levels, but the compensation committee
can accelerate payout.
Internet Capital Group, Inc. 401(k) Plan
We sponsor the Internet Capital Group, Inc. 401(k) Plan, a defined
contribution plan that is intended to qualify under Section 401(k) of the Code.
All employees who are at least 21 years old and have been employed by us for
one month are eligible to participate in our 401(k) Plan. An eligible employee
of the Company may begin to participate in our 401(k) Plan on the first day of
the plan quarter after satisfying our 401(k) Plan's eligibility requirements. A
participating employee may make pre-tax contributions of a percentage (not less
than 1.0% and not more than 15.0%) of his or her eligible compensation, subject
to the limitations under the federal tax laws. Employee contributions and the
investment earnings thereon are fully vested at all times. We may make
discretionary contributions to the 401(k) Plan but we have never done so.
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CERTAIN TRANSACTIONS
Walter W. Buckley, III and Kenneth A. Fox, two of our executive officers,
and Safeguard Scientifics, Inc., one of our principal stockholders, were all
involved in our founding and organization and may be considered our promoters.
Under our Membership Profit Interest Plan, we issued 5,136,000 shares of common
stock to Mr. Buckley in March 1996 and 2,573,100 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 2,600,000 and 2,500,000 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 2,000,000 and
1,800,000 shares of common stock, respectively. In addition, Safeguard
Scientifics, Inc., through its affiliates Safeguard Scientifics (Delaware),
Inc. and Safeguard 98 Capital L.P., and Mr. Buckley and Mr. Fox, have purchased
common stock from us. The following table sets forth the number of shares of
our common stock purchased by Mr. Buckley, Mr. Fox and Safeguard Scientifics,
Inc. through Safeguard Scientifics (Delaware), Inc. and Safeguard 98 Capital
L.P., the date of each purchase and the amounts received by us from each of
these purchasers of our common stock.
<TABLE>
<CAPTION>
Amount Received
Shares of Common Date of by Internet
Name Stock Purchased Purchase Capital Group
---- ---------------- ------------- ---------------
<S> <C> <C> <C>
Walter W. Buckley, III......... 500,000 April 1996 $ 250,000
500,000 November 1996 250,000
500,000 April 1997 250,000
500,000 November 1997 250,000
Kenneth A. Fox................. 500,000 May 1996 $ 250,000
500,000 November 1996 250,000
500,000 June 1997 250,000
500,000 December 1997 250,000
Safeguard Scientifics
(Delaware), Inc............... 12,278,148 May 1996 $6,139,074
721,852 November 1996 360,926
6,500,000 April 1997 3,250,000
6,500,000 November 1997 3,250,000
Safeguard 98 Capital L.P....... 8,125,000 June 1998 $8,125,000
8,125,000 February 1999 8,125,000
</TABLE>
During 1998 and 1999, we leased our corporate offices in Wayne,
Pennsylvania from Safeguard Scientifics. From January 31, 1998 to September 30,
1999, our monthly lease payments to Safeguard Scientifics totaled approximately
$70,200. Prior to this offering, Safeguard Scientifics, beneficially owned
about 14.3% of our common stock. We believe that our lease in Wayne with
Safeguard Scientifics is on terms no less favorable to us than those that would
be available to us in an arm's-length transaction with a third party.
In the first half of 2000, we intend to lease new corporate office space
in Wayne, Pennsylvania from Safeguard Scientifics. We expect that our new lease
with Safeguard Scientifics will be on terms no less favorable to us than those
terms that would be available to us in an arm's-length transaction with a third
party.
During 1998 and 1999, we paid Safeguard Scientifics for telephone and
accounting services, health and general insurance coverage, and other services.
From January 31, 1998 to September 30, 1999, our payments to Safeguard
Scientifics totaled approximately $269,000 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.
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<PAGE>
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. has 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 our initial public offering and
all shares of our common stock held by them after exercise of any warrants
issued to these shareholders at the time of our initial public offering.
Immediately after our initial public offering, these shareholders, together,
were holders of 102,921,620 shares of our common stock, excluding shares
purchased in the initial public offering, and warrants to purchase 586,433
shares of our common stock.
In January 1998, we loaned Douglas A. Alexander, one of our Managing
Directors, $117,669. Mr. Alexander used the proceeds from the loan to purchase
a portion of our interest in VerticalNet at our cost. Mr. Alexander agreed to
pay the principal amount of the loan with interest at an annual rate equal to
the prime rate plus 1% within 30 days of the date we request payment. On
January 5, 1999, Mr. Alexander paid us $128,820, representing the outstanding
principal amount of the loan plus accrued interest.
In January 1997, we granted Christopher H. Greendale, one of our Managing
Directors, a ten year option to purchase shares of Series A Preferred Stock
convertible into 58,500 shares of common stock of Benchmarking Partners, Inc.,
which we currently own. The option is exercisable at a purchase price of $2.85
per share and vests in four annual installments of 14,625 shares beginning one
year after the date of grant. Vesting is contingent upon Mr. Greendale's
continued service to us. In August 1999, we loaned Mr. Greendale $600,000. Mr.
Greendale used these funds to purchase shares of our common stock in connection
with our initial public offering. Mr. Greendale agreed to pay the principal
amount of the loan with interest at an annual rate equal to 4.98% on August 10,
2000. The loan is secured by 200,000 shares of our common stock.
In October 1998, we sold our 100,000 shares of Series B Preferred Stock
of Who?Vision Systems, Inc. for $300,000 to Comcast.
In January 1999, we sold our convertible notes of VerticalNet for
$2,083,221 to Comcast Corporation. At the time of this sale to Comcast, the
outstanding principal amount of these convertible notes was $2,083,221.
In March 1999, we sold our convertible notes of PrivaSeek for $571,659 to
Comcast and the assumption by Comcast of one of our notes payable in the
outstanding principal amount of $428,341. At the time of this sale to Comcast,
the outstanding principal amount of these convertible notes was $1 million.
In April 1999, in connection with our obtaining a bank credit facility,
Safeguard Scientifics, Inc. delivered a letter to the agent for the banks
stating that it intends to take any action that may in the future be necessary
to promptly cure certain defaults that could occur under our bank credit
facility.
In May 1999, we issued $90 million principal amount of three-year
convertible notes to our largest shareholders, directors, executive officers,
certain members of the immediate families of our executive officers and others
in a round of financing led by Comcast ICG. Based on our initial public
offering price of $6.00 per share, the notes have automatically converted into
14,999,732 shares of our common stock, and all accrued interest has been
waived. We issued warrants to the holders of these notes to purchase shares of
our common stock. As of November 18, 1999, these warrant holders are entitled
to purchase 2,975,068 shares of our common stock. The warrants expire in May
2002.
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<PAGE>
The following table sets forth the names of the holders of certain
convertible notes and warrants, their relationship to us and the amounts of
each of their convertible notes. All convertible notes converted into common
stock at a rate of $6.00 per share in connection with our initial public
offering on August 5, 1999.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Holder Internet Capital Group Convertible Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Ann B. Alexander........... family member of executive officer $ 63,000
Bradley Alexander.......... family member of executive officer 155,000
Douglas E. Alexander....... family member of executive officer 160,000
Susan R. Buckley........... family member of executive officer 55,000
Walter W. Buckley, Jr. .... family member of executive officer 200,000
Walter W. Buckley, III..... executive officer and director 600,000
Comcast ICG, Inc. ......... principal shareholder 15,000,000
E. Michael Forgash......... director 100,000
Kenneth A. Fox............. executive officer and director 1,000,000
David D. Gathman........... executive officer 25,000
Thomas P. Gerrity.......... director 77,000
Internet Assets, Inc. ..... principal shareholder 1,525,000
Robert E. Keith, Jr. ...... director 46,000
Henry N. Nassau............ executive officer 36,000
Robert A. Pollan........... executive officer 31,000
Peter A. Solvik............ director 1,068,000
In May 1999, some of our officers and directors exercised options to
purchase our common stock. Instead of paying us in cash, the officers and
directors delivered promissory notes to us in the aggregate amount of
$21,765,000. The promissory notes bear interest at the rate of 5.22%, mature on
or about May 5, 2004 and are secured by 17,820,000 shares of our common stock.
The following table sets forth the names of the makers of the promissory notes,
their relationship to us and the amounts owed to us by each of these makers.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Walter W. Buckley, III..... executive officer and director $ 2,600,000
Douglas A. Alexander....... executive officer 2,500,000
Richard G. Bunker.......... executive officer 1,350,000
Kenneth A. Fox............. executive officer and director 2,500,000
David D. Gathman........... executive officer 1,300,000
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 2,650,000
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 4,495,500 shares of our common stock.
The following table sets forth the names of the makers of the promissory notes,
their relationship to us and the amounts owed to us by each of these makers.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Gregory W. Haskell......... executive officer $ 6,311,000
Richard S. Devine.......... executive officer 7,114,223
Richard G. Bunker.......... executive officer 1,358,000
</TABLE>
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<PAGE>
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 10,950,000 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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
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.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III......... executive officer and director $ 1,207,440
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.
<CAPTION>
Relationship to Amount Paid
Name of Recipient Internet Capital Group to Recipient
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III......... executive officer and director $ 685,092
Douglas A. Alexander........... executive officer 249,702
Kenneth A. Fox................. executive officer and director 514,597
Thomas P. Gerrity.............. director 6,100
Christopher H. Greendale ...... executive officer 37,304
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
</TABLE>
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On November 16, 1999 we acquired an interest in eMerge Interactive, Inc.
pursuant to a Securities Purchase Agreement among us, eMerge Interactive and J
Technologies, LLC, a South Dakota limited liability company.
Pursuant to the Securities Purchase Agreement, we acquired from eMerge
Interactive 4,555,556 shares of eMerge Interactive series D preferred stock and
a warrant to purchase 911,111 shares of eMerge Interactive class B common
stock. Pursuant to the Securities Purchase Agreement, we also purchased
1,000,000 shares of eMerge Interactive class A common stock from
J Technologies. The aggregate purchase price for the stock and the warrant was
$50,000,000, composed of $27,000,000 in cash and a promissory note for
$23,000,000. The cash portion of the purchase price was funded from our
existing cash. The promissory note is non interest-bearing and is due and
payable one year after issuance; provided, however, that in the event that
eMerge Interactive does not consummate a public offering of its common stock by
March 15, 2000, eMerge Interactive can require us to prepay up to $5,000,000 in
principal on or after March 25, 2000.
Each share of eMerge Interactive series D preferred stock will convert
into one share of eMerge Interactive class B common stock upon our election,
completion of an initial public offering of eMerge Interactive's common stock
or a specified vote of the holders of all eMerge Interactive's preferred stock.
Each of our shares of eMerge Interactive class B common stock will convert into
one share of class A common stock upon transfer to a person that is not
affiliated with us. Each share of eMerge Interactive series D preferred stock
and each share of eMerge Interactive class B common stock is entitled to two
and one half votes. Each share of eMerge Interactive class A common stock is
entitled to one vote. We currently have beneficial ownership (assuming
conversion of each share of eMerge Interactive preferred stock) of 30.7% of the
eMerge Interactive common stock and have 45.9% of the voting power with respect
to eMerge Interactive. We may exercise the warrant during the three-year period
beginning upon the first to occur of an initial public offering of eMerge
Interactive's common stock, the closing of new equity financing from private
investors of at least $20,000,000 and the one-year anniversary of the issuance
of the warrant. The exercise price will equal the purchase price per share to
investors in the first to occur of the initial public offering or private
equity financing described in the preceding sentence or, if the one-year
anniversary of the issuance of the warrant occur first, $9.00 per share.
We have entered into a Joint Venture Agreement with Safeguard Scientifics
pursuant to which we and Safeguard Scientifics have agreed, among other things,
to vote our respective shares of eMerge Interactive to elect two designees of
ours and two designees of Safeguard Scientifics to the board of directors of
eMerge Interactive and to attempt to agree on mutually beneficial courses of
action. Additionally, the Joint Venture Agreement provides for rights of first
refusal with respect to certain sales securities of eMerge Interactive.
In connection with the Securities Purchase Agreement, we also entered
into a Stockholder Agreement with eMerge Interactive and certain stockholders
of eMerge Interactive, including Safeguard Scientifics and certain of its
affiliates. The Stockholder Agreement provides for, among other things,
restrictions on the transferability of securities and co-sale, drag-along and
preemptive rights. The Stockholders Agreement terminates upon an initial public
offering of eMerge Interactive's common stock. We and eMerge Interactive are
also parties to a Registration Rights Agreement in which eMerge Interactive
granted us certain demand and piggyback registration rights.
Douglas A. Alexander, one of our Managing Directors, and E. Michael
Forgash, one of our directors, are members of the Board of Directors of eMerge
Interactive.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 15, 1999, and as adjusted to
reflect the sale of shares offered hereby, by:
. each person (or group of affiliated persons) who is known by us to
own more than five percent of the outstanding shares of our common
stock;
. each of our directors and our executive officers named in the
summary compensation table; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures include shares of
our common stock issuable upon exercise of warrants to purchase an additional
3,375,068 shares at a weighted average exercise price of $5.88 per share and
shares of common stock issuable upon the exercise of other options or warrants
exercisable within 60 days of November 15, 1999. These options and warrants are
deemed to be outstanding and to be beneficially owned by the person holding
them for the purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
<TABLE>
<CAPTION>
Number of Shares Percent of
Options and Beneficially Owned Shares Outstanding
Warrants Including Options and -------------------------
5% Beneficial Owners, Directors, Exercisable Warrants Exercisable Before After
Named Officers Within 60 Days Within 60 Days the Offering the Offering
- -------------------------------- -------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Comcast ICG, Inc. (1)... 634,000 24,333,998 9.6% 9.4%
c/o Comcast Corporation
1500 Market Street
Philadelphia,
Pennsylvania 19102
Safeguard Scientifics,
Inc. (2)............... -- 36,289,456 14.3 14.0
435 Devon Park Drive
Wayne, Pennsylvania
19087
Douglas A. Alexander
(3).................... -- 6,132,748 2.4 2.4
Julian A. Brodsky (4)... -- 17,000 * *
Walter W. Buckley, III
(5).................... 21,833 11,967,999 4.7 4.6
E. Michael Forgash (6).. 3,333 161,569 * *
Kenneth A. Fox (7)...... 33,333 11,093,099 4.4 4.3
Dr. Thomas P. Gerrity
(8).................... 2,566 916,398 * *
Robert E. Keith,
Jr.(9)................. 1,533 310,441 * *
Robert A. Pollan (10)... 1,033 3,862,199 1.5 1.5
Peter A. Solvik (11).... 35,600 1,056,670 * *
All executive officers
and directors as a
group (9 persons) (3)
(4) (5) (6) (7) (8) (9)
(11)................... 300,233 28,600,377 11.3 11.0
</TABLE>
- --------
* Less than 1%
(1) Includes 416,666 shares of common stock and warrants to purchase 83,333
shares of common stock held by Comcast Interactive Investments, Inc. as
to which Comcast ICG, Inc. disclaims beneficial ownership.
(2) Private equity funds affiliated with Safeguard Scientifics, Inc. own an
additional 8,266,666 shares of common stock and warrants to purchase
45,333 shares of common stock.
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<PAGE>
(3) 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.
Also includes 500,000 shares of common stock held by the Douglas A.
Alexander Qualified Grantor Annuity Trust and 4,000 shares of common
stock held by each of two trusts for the benefit of certain of Mr.
Alexander's relatives.
(4) Includes 3,500 shares of common stock held by the Julian A. and Lois G.
Brodsky Foundation, of which Mr. Brodsky is Chairman. Mr. Brodsky
disclaims beneficial ownership of shares held by the Julian A. and Lois
G. Brodsky Foundation. Mr. Brodsky is also 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.
(5) 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 294,166 shares of common stock and warrants to
purchase 1,833 shares of common stock held by Susan R. Buckley, wife of
Walter W. Buckley, III, and 250,000 shares of common stock held by each
of two trusts for the benefit of certain of Mr. Buckley's relatives.
(6) Includes 100,000 shares of common stock held by the E. Michael Forgash,
Jr. 1999 Qualified Grantor Retained Annuity Trust. 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.
(7) Includes shares of restricted common stock that have not vested pursuant
to the Membership Profit Interest Plan and the 1999 Equity Compensation
Plan.
(8) Includes shares of restricted common stock that have not vested pursuant
to the 1999 Equity Compensation Plan. Also includes 80,000 shares of
common stock held by the Thomas P. Gerrity Generation Skipping Trust U/A
3/17/92.
(9) Includes 2,000 shares of common stock held by Susan Keith, 20,000 shares
of common stock held by Robert E. Keith, III, 10,000 shares held by the
Keith 1999 Irrevocable Trust and 20,000 shares held by Leslie Hulsizer.
(10) Includes shares of restricted common stock which have not vested
pursuant to the Membership Profit Interest Plan and the 1999 Equity
Compensation Plan. Also includes 500,000 shares of common stock held by
the Robert A. Pollan Qualified Grantor Annuity Trust and 4,000 shares of
common stock held by each of two trusts for the benefit of certain of
Mr. Pollan's relatives.
(11) Includes 178,000 shares of common stock held by the Peter A. Solvik
Annuity Trust u/i dtd. July 30, 1999, 178,000 shares of common stock held
by the Patricia A. Solvik Annuity Trust u/i dtd. July 30, 1999 and 1,500
shares of common stock held by each of two trusts for the benefit of
certain of Mr. Solvik's realtives.
84
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 300,000,000 shares of common
stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share. Upon completion of this offering, we will have
approximately 259,226,152 shares (260,126,152 shares if the underwriters' over-
allotment option is exercised in full) of common stock issued and outstanding.
The following is qualified in its entirety by reference to our
certificate of incorporation and bylaws, copies of which are filed as exhibits
to the Registration Statement of which this prospectus is a part.
Common Stock
As of November 15, 1999, there were 253,226,152 shares of our common
stock outstanding and 6,495,032 shares of our common stock were reserved for
issuance under our 1999 Equity Compensation Plan. Upon completion of the
offering, there will be 259,226,152 shares of common stock outstanding.
The holders of our common stock are entitled to dividends as our board of
directors may declare from funds legally available therefor, subject to the
preferential rights of the holders of our preferred stock, if any. The holders
of our common stock are entitled to one vote per share on any matter to be
voted upon by shareholders. Our certificate of incorporation does not provide
for cumulative voting in connection with the election of directors, and
accordingly, holders of more than 50% of the shares voting will be able to
elect all of the directors. No holder of our common stock will have any
preemptive right to subscribe for any shares of capital stock issued in the
future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock, if any. All of the outstanding
shares of common stock are, and the shares offered by us will be, fully paid
and non-assessable.
Preferred Stock
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Our certificate of incorporation provides that our board of
directors may by resolution establish one or more classes or series of
preferred stock having such number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further shareholder approval. The
holders of our preferred stock may be entitled to preferences over common
shareholders with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of directors
resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of Internet Capital Group without
further action by the shareholders and may adversely affect voting and other
rights of holders of our common stock. In addition, issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the outstanding shares of voting stock. At
present, we have no plans to issue any shares of preferred stock.
Registration Rights
After this offering, the holders of 102,921,620 shares of our common
stock and warrants exercisable for 586,433 shares of our common stock are
entitled to demand registration of their shares under the Securities
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<PAGE>
Act. In conjunction with our initial public offering the holders of 197,934,362
shares of our common stock and warrants exercisable for 2,548,318 shares of our
common stock agreed not to demand registration of their common stock until
February 1, 2000 without the prior written consent of the underwriters of our
initial public offering. In connection with this offering, the holders of
shares of our common stock and warrants exercisable for shares of our
common stock have further agreed not to demand registration of their common
stock for days after the date of this prospectus without the prior written
consent of the underwriters of this offering. After this -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 25.0%
of his, her or its shares eligible for demand rights if the gross offering
price would be expected to exceed $5 million. We are required to use our best
efforts to effect the registration, subject to certain conditions and
limitations. In addition, if 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 and piggy-back registration
rights. Subject to certain conditions and limitations, they may elect to
register their eligible shares. If we are able to file a registration statement
on Form S-3, the holders of shares eligible for demand rights may register
their common stock along with that registration. The expenses incurred in
connection with such registrations will be borne by us, except that we will pay
expenses of only one registration on Form S-3 at a holder's request per year.
Section 203 of the Delaware General Corporation Law; Certain Anti-Takeover,
Limited Liability and Indemnification Provisions
Section 203 of the Delaware General Corporation Law
The following is a description of the provisions of the Delaware General
Corporation Law, and our certificate of incorporation and bylaws that we
believe are material to investors. This summary does not purport to be complete
and is qualified in its entirety by reference to the Delaware General
Corporation Law, and our certificate of incorporation and bylaws.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. A "business combination" includes certain mergers,
asset sales, and other transactions resulting in a financial benefit to the
"interested stockholder." Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% of the corporation's voting stock.
Certain provisions of our certificate of incorporation and bylaws could
have anti-takeover effects. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our corporate
policies formulated by our Board of Directors. In addition, these provisions
also are intended to ensure that our Board of Directors will have sufficient
time to act in what the board of directors believes to be in the best interests
of us and our shareholders. These provisions also are designed to reduce our
vulnerability to an unsolicited proposal for our takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the restructuring or sale of all or part of Internet Capital
Group. The provisions are also intended to discourage certain tactics that may
be used in proxy fights. However, these provisions could delay or frustrate the
removal of incumbent directors or the assumption of control of us by the holder
of a large block of common stock, and could also discourage or make more
difficult a merger, tender offer, or proxy contest, even if such event would be
favorable to the interest of our shareholders.
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<PAGE>
Classified Board of Directors
Our certificate of incorporation provides for our Board of Directors to
be divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms (other than directors
who may be elected by holders of preferred stock). As a result, approximately
one-third of our Board of Directors will be elected each year. The classified
board provision will help to assure the continuity and stability of our Board
of Directors and our business strategies and policies as determined by our
Board of Directors. The classified board provision could have the effect of
discouraging a third party from making an unsolicited tender offer or otherwise
attempting to obtain control of us without the approval of our Board of
Directors. In addition, the classified board provision could delay shareholders
who do not like the policies of our Board of Directors from electing a majority
of our Board of Directors for two years.
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
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<PAGE>
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.
Indemnification
We have included in our certificate of incorporation and bylaws
provisions to eliminate the personal liability of our directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware General Corporation Law, and to indemnify our directors and
officers to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
Certificate of Incorporation
The provisions of our certificate of incorporation that could have anti-
takeover effects as described above are subject to amendment, 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.
Bylaws
Our certificate of incorporation provides that our bylaws are subject to
adoption, amendment, alteration, repeal, or rescission either by our Board of
Directors without the assent or vote of our shareholders, or by the affirmative
vote of the holders of not less than two-thirds (66 2/3%) of the outstanding
shares of voting securities. This provision makes it more difficult for
shareholders to make changes in our bylaws by allowing the holders of a
minority of the voting securities to prevent the holders of a majority of
voting securities from amending our bylaws.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services. The Transfer Agent's address is 4 Station Square,
Pittsburgh, Pennsylvania, and its telephone number is (412) 236-8157.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock, including our
common stock issued upon exercise of outstanding options and warrants, in the
public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through the sale of equity securities.
Upon completion of this offering, there will be 259,226,152 shares of our
common stock outstanding (assuming no exercise of the underwriters' over-
allotment option or exercise of outstanding options and warrants). Of these
shares, shares sold in this offering and 27,562,062 shares sold in our
initial public offering and 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. The shares of common stock issuable upon
conversion of the convertible notes sold in the concurrent note offering will
be fully tradeable in a similar manner.
Upon completion of this offering, 222,606,152 "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 date of this prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased from us (or
any affiliate) at least one year previously, including a person who may be
deemed our affiliate, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock
(approximately 2,592,262 shares immediately after the offering)
or;
. the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities
and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. Any person (or persons whose shares are aggregated) who
is not deemed to have been our affiliate at any time during the 90 days
preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us
(or any affiliate) at least two years previously, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
We have agreed not to offer, sell or otherwise dispose of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for our common stock or any rights to acquire our common stock for
a period of 90 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."
Prior to this offering, the holders of 197,934,362 shares of our common
stock, options exercisable into an aggregate of 1,348,000 shares of common
stock, and warrants exercisable into an aggregate of 2,548,318 shares of our
common stock agreed not to sell any of these securities until February 1, 2000
without the prior written consent of Merrill Lynch. In connection with this
offering, the holders of have agreed not to sell any of these securities
until without the consent of Merrill Lynch.
The holders of 102,921,620 shares of our common stock have previously
agreed not to demand registration of their common stock until February 1, 2000
without the prior written consent of Merrill Lynch. In addition, the holders of
shares of our common stock and warrants exercisable for shares of
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our common stock have further agreed not to demand registration of their common
stock for days after the date of this prospectus without the prior written
consent of Merrill Lynch. After these periods, if any of these 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.
After giving effect to restrictions imposed by federal securities laws,
these contractual restrictions and shares that may be issued upon exercise of
outstanding options and warrants, we estimate that additional shares of our
common stock will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Approximate Number of
Date Shares Eligible for Sale
---- ------------------------
<S> <C>
November 19 through January 2000.................. 0
February 2000..................................... 159,039,914
March 2000 through June 2000...................... 26,625,480
Thereafter........................................ 39,998,696
</TABLE>
Since many of these shares were purchased at prices substantially below
current market prices, we believe a significant number of these shares will be
sold when eligible for resale.
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PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion summarizes principal U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by
"Non-U.S. Holders." You are a "non-U.S. holder" for U.S. federal income tax
purposes if you are:
. a non-resident alien individual,
. a foreign corporation or other foreign entity taxed as a
corporation or,
. an estate or trust that in either case is not subject to U.S.
federal income tax on a net income basis on income or gain from
common stock.
If you are a partner in a foreign or domestic partnership, your tax
treatment will generally depend upon your status and the activities of the
partnership. If you hold common stock through a partnership, please contact
your tax advisor.
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
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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:
. the gain is effectively connected with your conduct of a trade or
business in the U.S., and the gain is attributable to a permanent
establishment that you maintain in the U.S., if that is required
by an applicable income tax treaty as a condition for subjecting
you to U.S. taxation on a net income basis on gain from the sale
or other disposition of the common stock;
. you are an individual, you hold the common stock as a capital
asset and you are present in the U.S. for 183 or more days in the
taxable year of the sale and certain other conditions exist; or
. we are or have been a "United States real property holding
corporation" for federal income tax purposes and you held,
directly or indirectly, at any time during the five-year period
ending on the date of disposition, more than 5% of our common
stock, and you are not eligible for any treaty exemption.
Effectively connected gains recognized by a corporate non-U.S. holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or at a lower rate if so specified in an applicable income
tax treaty.
We have not been, are not, and do not anticipate becoming a "United
States real property holding corporation" for federal income tax purposes.
Federal Estate Taxes
Common stock held by an individual non-U.S. holder at the time of death
will be included in the holder's gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate taxes, unless an applicable
estate tax treaty provides otherwise.
Information Reporting And Backup Withholding
In general, U.S. information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
. subject to the 30% withholding tax discussed above, or
. not subject to the 30% withholding tax because an applicable tax
treaty reduces or eliminates such withholding tax,
although dividend payments to you will be reported for purposes of the
withholding tax. See the discussion under "Dividends" above for further
discussion of the reporting of dividend payments. If you do not meet either of
these requirements for exemption and you fail to provide certain information,
including your U.S. taxpayer identification number, or otherwise establish your
status as an "exempt recipient," you may be subject to backup withholding of
U.S. federal income tax at a rate of 31% on dividends paid with respect to
common stock.
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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:
. is a U.S. person;
. derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the U.S.;
. is a "controlled foreign corporation" as to the U.S.; or
. with respect to payments made after December 31, 2000, is a
foreign partnership with certain connections to the U.S.
in each case, unless the broker has documentary evidence in its records that
the holder or beneficial owner is a non-U.S. person and has no knowledge to the
contrary or the holder otherwise establishes an exemption.
Payment of the proceeds of a sale of common stock to or through a U.S.
office of a broker is subject to both U.S. backup withholding and information
reporting unless the holder certifies its non-U.S. status under penalty of
perjury or otherwise establishes an exemption.
Backup withholding is not an additional tax and you may apply any taxes
that are withheld against your tax liability and you generally may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing a refund claim with the Internal Revenue Service.
93
<PAGE>
UNDERWRITING
General
We intend to offer our common stock in the United States and Canada
through a number of U.S. underwriters as well as elsewhere through
international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., Deutsche Bank Securities Inc., Lehman Brothers Inc. and
BancBoston Robertson Stephens Inc. 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 1,200,000 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.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Goldman, Sachs & Co. ..............................................
Deutsche Bank Securities Inc. .....................................
Lehman Brothers Inc. ..............................................
BancBoston Robertson Stephens Inc. ................................
---------
Total......................................................... 4,800,000
=========
</TABLE>
We have also agreed with certain international managers outside the
United States and Canada, for whom Merrill Lynch International, Goldman Sachs
International, Deutsche Bank AG London, Lehman Brothers International (Europe)
and BancBoston Robertson Stephens International Limited, are acting as
managers, that,
94
<PAGE>
subject to the terms and conditions set forth in the purchase agreement, and
concurrently with the sale of 4,800,000 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 1,200,000 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 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.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the U.S. underwriters and the
proceeds before expenses to us. This information is presented assuming either
no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price...........................
Underwriting discount...........................
Proceeds, before expenses, to Internet Capital
Group, Inc. ...................................
</TABLE>
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
95
<PAGE>
offer to sell or sell shares of common stock to U.S. persons or to Canadian
persons or to persons they believe intend to resell to U.S. or Canadian
persons, except in the case of the terms of the intersyndicate agreement.
Over-allotment Option
We have granted an option to the U.S. underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
720,000 additional shares of common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
U.S. underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of the common stock offered hereby. To the extent that
the U.S. underwriters exercise this option, each U.S. underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of common stock proportionate to such U.S. underwriter's initial amount
reflected in the foregoing table.
We have also granted an option to the international managers, exercisable
for 30 days after the date of this prospectus, to purchase up to an aggregate
of 180,000 additional shares of common stock to cover over-allotments, if any,
on terms similar to those granted to the U.S. underwriters.
No Sales of Similar Securities
We, our executive officers and directors, Safeguard Scientifics
(Delaware), Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ Holdings, Inc.,
IBM Corporation, Technology Leaders II L.P. and Technology Leaders II Offshore
C.V. have agreed, with certain exceptions, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of
or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for our common
stock, whether now owned or later acquired by the person executing
the agreement or with respect to which the person executing the
agreement has or later acquires the power of disposition, or file
a registration statement under the Securities Act relating to any
of the foregoing; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our common
stock,
whether any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of days
after the date of this prospectus. See "Shares Eligible for Future Sale."
In addition, holders of Internet Capital Group's common stock and
warrants issued in conjunction with our May 1999 convertible note offering who
are affiliated or associated with NASD members who participated in the initial
public offering of our common stock have agreed not to sell these securities
for a period of one-year from August 4, 1999.
Price Stabilization and Short Positions
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.
96
<PAGE>
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.
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.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for
us by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Dechert Price &
Rhoads beneficially owns 41,666 shares of our common stock and warrants
exercisable at $6.00 per share to purchase 8,333 shares of our common stock.
Members of and attorneys associated with Dechert Price & Rhoads beneficially
own an aggregate of 12,554 shares of our common stock and warrants exercisable
at $6.00 per share to purchase 1,111 shares of our common stock.
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. Davis Polk & Wardwell benefically owns 50,000 shares of our common stock.
Members of and attorneys associated with Davis Polk & Wardwell beneficially own
an aggregate of 25,450 shares of our common stock and warrants exercisable at
$6.00 per share to purchase an aggregate of 5,000 shares of our common stock.
Davis Polk & Wardwell is also acting as special Investment Company Act counsel
to us and the underwriters.
EXPERTS
The consolidated financial statements of Internet Capital Group, Inc. as
of December 31, 1997 and 1998 and for the period March 4, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998
have been included herein and in the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in auditing and
accounting.
The financial statements of Applica Corporation as of December 31, 1998,
and for the period from September 24, 1998 (inception) through December 31,
1998 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of Breakaway Solutions, Inc. as of December 31,
1997 and 1998, and for each of the years in the three year period ended
December 31, 1998 have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
The financial statements of CommerceQuest, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of CommerX, Inc. as of December 31, 1998 and for
the year ended December 31, 1998 included in this prospectus, have been so
included in reliance on the report of
97
<PAGE>
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of ComputerJobs.com, Inc. as of December 31,
1997 and 1998, and for the period from January 16, 1996 (inception) through
December 31, 1996 and for the years ended December 31, 1997 and 1998 appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth on their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of said firm as experts in auditing and accounting.
The financial statements of eMerge Interactive, Inc. as of December 31,
1997 and 1998 and for each of the years in the three-year period ended December
31, 1998 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of ONVIA.com, Inc. included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in auditing and accounting.
The combined financial statements of Purchasing Group, Inc. and
Integrated Sourcing, LLC as of September 30, 1999 and for the nine months then
ended have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
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, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of traffic.com, Inc. as of December 31, 1998 and
for the period from January 8, 1998 (commencement of activities) to December
31, 1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of United Messaging, Inc. as of December 31,
1998 and for the period from August 25, 1998 (date of inception) to December
31, 1998 included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance on the authority of said firm as experts in giving
said reports.
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 for the year ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of VitalTone Inc. as of September 30, 1999 and
for the period from July 12, 1999 (inception) to September 30, 1999 have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing and accounting.
The financial statements of Vivant! Corporation as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and the periods from August
7, 1997 (Inception) through December 31, 1997 and
98
<PAGE>
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Web Yes, Inc. and Subsidiary as
of December 31, 1997 and 1998, and for the two years ended December 31, 1998
have been included herein and in the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in auditing and
accounting.
The financial statements of WPL Laboratories, Inc. as of December 31,
1997 and 1998, and for the years then ended have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act and we file reports, proxy and information statements and other
information with the Commission. You may read and copy all or any portion of
the reports, proxy and information statements or other information we file 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. Please call the Commission at 1-800-SEC-0330 for further
information on operation of the public reference rooms. 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.
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the common stock to be sold in this
offering. 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 locations described above, or obtained upon
payment of fees prescribed by the Commission.
99
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors........................................... F-5
Consolidated Balance Sheets.............................................. F-6
Consolidated Statements of Operations.................................... F-7
Consolidated Statements of Shareholders' Equity.......................... F-8
Consolidated Statements of Comprehensive Income (Loss)................... F-9
Consolidated Statements of Cash Flows.................................... F-10
Notes to Consolidated Financial Statements............................... F-11
INTERNET CAPITAL GROUP, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Condensed Combined Financial Statements Basis of
Presentation............................................................ F-34
Unaudited Pro Forma Condensed Combined Balance Sheet..................... F-35
Unaudited Pro Forma Condensed Combined Statements of Operations.......... F-36
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..... F-37
APPLICA CORPORATION
Independent Auditors' Report............................................. F-40
Balance Sheet............................................................ F-41
Statement of Operations.................................................. F-42
Statement of Stockholders' Equity........................................ F-43
Statement of Cash Flows.................................................. F-44
Notes to Financial Statements............................................ F-45
BREAKAWAY SOLUTIONS, INC.
Independent Auditors' Report............................................. F-48
Balance Sheets........................................................... F-49
Statements of Operations................................................. F-50
Statements of Stockholders' Equity....................................... F-51
Statements of Cash Flows................................................. F-52
Notes to Financial Statements............................................ F-53
COMMERCEQUEST, INC.
Report of Independent Certified Public Accountants....................... F-64
Balance Sheets........................................................... F-65
Statements of Operations................................................. F-66
Statements of Changes in Stockholders' (Deficit) Equity.................. F-67
Statements of Cash Flows................................................. F-68
Notes to Financial Statements............................................ F-69
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMMERX, INC.
Report of Independent Accountants........................................ F-79
Balance Sheets........................................................... F-80
Statements of Operations................................................. F-81
Statements of Changes in Stockholders' Deficit........................... F-82
Statements of Cash Flows................................................. F-83
Notes to Financial Statements............................................ F-84
COMPUTERJOBS.COM, INC.
Report of Independent Auditors........................................... F-94
Balance Sheets........................................................... F-95
Statements of Income..................................................... F-96
Statements of Changes in Stockholders' Equity (Deficit).................. F-97
Statements of Cash Flows................................................. F-98
Notes to Financial Statements............................................ F-99
EMERGE INTERACTIVE, INC.
Independent Auditors' Report............................................. F-105
Consolidated Balance Sheets.............................................. F-106
Consolidated Statements of Operations.................................... F-107
Consolidated Statements of Stockholders' Equity (Deficit)................ F-108
Consolidated Statements of Cash Flows.................................... F-109
Notes to Consolidated Financial Statements............................... F-110
ONVIA.COM, INC.
Independent Auditors' Report............................................. F-122
Consolidated Balance Sheets.............................................. F-123
Consolidated Statements of Operations.................................... F-124
Consolidated Statements of Changes in Shareholders' Deficit (Equity)..... F-125
Consolidated Statements of Cash Flows.................................... F-126
Notes to Consolidated Financial Statements............................... F-127
PURCHASING GROUP, INC. AND INTEGRATED SOURCING, LLC
Independent Auditors' Report............................................. F-141
Combined Balance Sheet................................................... F-142
Combined Statement of Operations......................................... F-143
Combined Statements of Stockholders' Deficit and Members' Capital........ F-144
Combined Statement of Cash Flows......................................... F-145
Notes to Combined Financial Statements................................... F-146
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SYNCRA SOFTWARE, INC.
Report of Independent Accountants....................................... F-150
Balance Sheet........................................................... F-151
Statement of Operations................................................. F-152
Statement of Changes in Redeemable Preferred Stock and Stockholders'
Deficit................................................................ F-153
Statement of Cash Flows................................................. F-154
Notes to Financial Statements........................................... F-155
TRAFFIC.COM, Inc.
Report of Independent Accountants....................................... F-164
Balance Sheets.......................................................... F-165
Statements of Operations................................................ F-166
Statements of Shareholders' Deficit..................................... F-167
Statements of Cash Flows................................................ F-168
Notes to Financial Statements........................................... F-169
UNITED MESSAGING, INC.
Report of Independent Public Accountants................................ F-177
Balance Sheets.......................................................... F-178
Statements of Operations................................................ F-179
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................ F-180
Statements of Cash Flows................................................ F-181
Notes to Financial Statements........................................... F-182
UNIVERSAL ACCESS, INC.
Report of Independent Accountants....................................... F-187
Balance Sheets.......................................................... F-188
Statements of Operations................................................ F-189
Statements of Cash Flows................................................ F-190
Statements of Stockholders' (Deficit) Equity............................ F-191
Notes to Financial Statements........................................... F-192
VITALTONE, INC.
Independent Auditors' Report............................................ F-202
Balance Sheet........................................................... F-203
Statement of Operations................................................. F-204
Statement of Stockholders' Equity....................................... F-205
Statement of Cash Flows................................................. F-206
Notes to Financial Statements........................................... F-207
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VIVANT! CORPORATION
Report of Independent Accountants......................................... F-213
Balance Sheets............................................................ F-214
Statements of Operations.................................................. F-215
Statements of Stockholders' Equity (Deficit).............................. F-216
Statements of Cash Flows.................................................. F-217
Notes to Financial Statements............................................. F-218
WEB YES, INC. AND SUBSIDIARY
Independent Auditors' Report.............................................. F-227
Consolidated Balance Sheets............................................... F-228
Consolidated Statements of Operations..................................... F-229
Consolidated Statements of Stockholders' Equity........................... F-230
Consolidated Statements of Cash Flows..................................... F-231
Notes to Consolidated Financial Statements................................ F-232
WPL LABORATORIES, INC.
Independent Auditors' Report.............................................. F-236
Balance Sheets............................................................ F-237
Statements of Income...................................................... F-238
Statements of Stockholders' Equity........................................ F-239
Statements of Cash Flows.................................................. F-240
Notes to Financial Statements............................................. F-241
</TABLE>
F-4
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders Internet Capital Group, Inc.:
When the transaction referred to in the last paragraph of Note 3 of the Notes
to Consolidated Financial Statements has been consummated, we will be in a
position to render the following report.
KPMG LLP
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 were $8,392,155, and its equity in net income (loss) of these
nonsubsidiary investee companies was $3,876,148 for the year ended December 31,
1998. The financial statements of these nonsubsidiary investee companies were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for these nonsubsidiary
investee companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Internet Capital Group, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period March 4, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
May 7, 1999
F-5
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
------------------------ -------------
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents............ $ 5,967,461 $26,840,904 $186,137,151
Short-term investments............... -- -- 22,845,079
Accounts receivable, less allowances
for doubtful accounts ($30,000-1997;
$61,037-1998; $208,645-1999)........ 721,381 1,842,137 8,531,879
Prepaid expenses and other current
assets.............................. 148,313 1,119,062 7,024,086
----------- ----------- ------------
Total current assets................. 6,837,155 29,802,103 224,538,195
Fixed assets, net.................... 544,443 1,151,268 6,169,802
Ownership interests in and advances
to Partner Companies................ 24,045,080 59,491,940 168,690,379
Available-for-sale securities........ -- 3,251,136 19,233,805
Intangible assets, net............... 34,195 2,476,135 22,854,350
Deferred taxes....................... -- -- 18,845,639
Other................................ 20,143 613,393 9,895,199
----------- ----------- ------------
Total Assets........................... $31,481,016 $96,785,975 $470,227,369
=========== =========== ============
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term
debt................................ $ 150,856 $ 288,016 $ 735,885
Line of credit....................... 2,500,000 2,000,000 --
Accounts payable..................... 696,619 1,348,293 4,478,916
Accrued expenses..................... 388,525 1,823,407 10,336,185
Note payable to Partner Company...... -- 1,713,364 --
Deferred revenue..................... 710,393 2,176,585 117,523
Convertible note (Note 3)............ -- -- 8,499,942
----------- ----------- ------------
Total current liabilities............ 4,446,393 9,349,665 24,168,451
Long-term debt....................... 399,948 351,924 1,633,360
Minority interest.................... -- 6,360,008 25,908,961
Commitments and contingencies (Note
16)
Shareholders' Equity
Preferred stock, $.01 par value;
10,000,000 shares authorized........ -- -- --
Common stock, $.001 par value;
authorized 300,000,000 shares;
93,567,250 (1997), 132,087,250
(1998) and 253,014,086 (1999) issued
and outstanding..................... 93,567 132,087 253,014
Additional paid-in capital........... 36,098,031 74,932,416 510,325,881
Retained earnings (accumulated
deficit)............................ (8,642,113) 5,256,815 (3,165,920)
Unamortized deferred compensation.... (914,810) (1,330,011) (14,371,190)
Notes receivable-shareholders........ -- -- (81,147,592)
Accumulated other comprehensive
income.............................. -- 1,733,071 6,622,404
----------- ----------- ------------
Total shareholders' equity........... 26,634,675 80,724,378 418,516,597
----------- ----------- ------------
Total Liabilities and Shareholders'
Equity................................ $31,481,016 $96,785,975 $470,227,369
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
March 4, 1996 (Unaudited)
(Inception) to Year Ended December 31, Nine Months Ended September 30,
December 31, ------------------------- --------------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
----------- ----------- ------------ --------------- ---------------
Operating Expenses
Cost of revenue....... 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative....... 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
----------- ----------- ------------ --------------- ---------------
Total operating
expenses............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
----------- ----------- ------------ --------------- ---------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income, net....... -- -- 30,483,177 23,514,321 47,001,191
Interest income......... 102,029 264,391 1,305,787 746,769 4,176,770
Interest expense........ (13,931) (126,105) (381,199) (233,117) (1,770,324)
----------- ----------- ------------ --------------- ---------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes............ -- -- -- -- 12,840,423
Minority interest....... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss).... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ --------------- ---------------
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $11,890,856 $ (6,404,860)
=========== =========== ============ =============== ===============
Net Income (Loss) Per
Share
Basic................. $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (.03)
Diluted............... $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (.03)
Weighted Average
Shares Outstanding
Basic................. 40,791,548 68,197,688 112,204,578 105,627,672 185,103,758
Diluted............... 40,791,548 68,197,688 112,298,578 105,674,672 185,103,758
Pro Forma Information
(Unaudited) (Note 2):
Pro forma net income
(loss)
Pretax income (loss).. $ 13,898,928 $ (19,245,283)
Pro forma income
taxes................ (5,142,603) 6,735,849
------------ ---------------
Pro forma net income
(loss)............... $ 8,756,325 $ (12,509,434)
============ ===============
Pro forma net income
(loss) per share
Basic................. $ 0.08 $ (0.07)
Diluted............... $ 0.08 $ (0.07)
Pro forma weighted
average shares
outstanding
Basic................. 112,204,578 185,103,758
Diluted............... 112,298,578 185,103,758
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Notes Unamortized Other
--------------------- Paid-In (Accumulated Receivable Deferred Comprehensive
Shares Amount Capital Deficit) Employees Compensation Income Total
----------- -------- ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
March 4, 1996.... -- $ -- $ -- $ -- -- $ -- $ -- $ --
Issuance of common
stock, net....... 27,446,852 27,447 13,658,566 -- -- -- -- 13,686,013
Issuance of common
stock
(Note 10)........ 12,278,148 12,278 1,096,174 -- -- -- -- 1,108,452
Issuance of
restricted
stock............ 12,054,034 12,054 1,007,612 -- -- (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............. 51,779,034 51,779 15,762,352 (2,062,485) -- (892,790) -- 12,858,856
Issuance of common
stock............ 40,275,000 40,275 20,097,230 -- -- -- -- 20,137,505
Issuance of
restricted
stock............ 3,546,106 3,546 414,789 -- -- (418,335) -- --
Forfeitures of
restricted
stock............ (2,032,890) (2,033) (176,340) -- -- 178,373 -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 217,942 -- 217,942
Net loss.......... -- -- -- (6,579,628) -- -- -- (6,579,628)
----------- -------- ------------ ----------- ------------ ------------ ---------- ------------
Balance as of
December 31,
1997............. 93,567,250 93,567 36,098,031 (8,642,113) -- (914,810) -- 26,634,675
Issuance of common
stock, net....... 38,520,000 38,520 38,166,099 -- -- -- -- 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............. 132,087,250 132,087 74,932,416 5,256,815 -- (1,330,011) 1,733,071 80,724,378
Nine months ended
September 30,
1999--Unaudited:
Issuance of common
stock, net....... 70,100,000 70,100 241,046,796 -- -- -- -- 241,116,896
Issuance of common
stock and income
tax benefit upon
exercise of
options.......... 35,991,500 35,992 90,512,442 -- (81,147,592) -- -- 9,400,842
Issuance of common
stock for
ownership
interest
including value
of beneficial
conversion
feature.......... 509,270 509 3,999,549 -- -- -- -- 4,000,058
Issuance of stock
options to non-
employees........ -- -- 3,691,158 -- -- (3,691,158) -- --
Issuance of stock
options to
employees below
deemed fair value
on date of
grant............ -- -- 12,731,085 -- -- (12,731,085) -- --
Issuance of common
stock and waiving
of accrued
interest upon
conversion of
convertible
notes............ 14,999,732 15,000 91,070,325 -- -- -- -- 91,085,325
Net unrealized
appreciation in
available- for-
sale securities.. -- -- -- -- -- -- 4,889,333 4,889,333
Amortization of
deferred
compensation..... -- -- -- -- -- 3,321,021 -- 3,321,021
Issuance of
warrants in
connection with
line of credit... -- -- 1,030,000 -- -- -- -- 1,030,000
LLC termination
(Note 3)......... -- -- (8,657,936) 8,657,936 -- -- -- --
Distribution to
former LLC
members.......... -- -- -- (10,675,811) -- -- -- (10,675,811)
Other............. (673,666) (674) (29,954) -- -- 60,043 -- 29,415
Net loss.......... -- -- -- (6,404,860) -- -- -- (6,404,860)
----------- -------- ------------ ----------- ------------ ------------ ---------- ------------
Balance as of
September 30,
1999
(unaudited)...... 253,014,086 $253,014 $510,325,881 $(3,165,920) $(81,147,592) $(14,371,190) $6,622,404 $418,516,597
=========== ======== ============ =========== ============ ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31, Nine Months Ended September 30,
------------------------ -------------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $ 11,890,856 $ (6,404,860)
----------- ----------- ----------- --------------- ---------------
Other Comprehensive
Income (Loss) Before
Tax
Unrealized holding
gains on available-
for-sale securities... -- -- 1,733,071 16,723,419 16,167,352
Reclassification
adjustments........... -- -- -- (8,506,106) (7,712,109)
Tax Related to
Comprehensive Income
(Loss)
Unrealized holding
gains on available-
for-sale securities... -- -- -- -- (5,658,573)
Reclassification
adjustments........... -- -- -- -- 2,092,663
----------- ----------- ----------- --------------- ---------------
Net unrealized
appreciation in
available-for-sale
securities............ -- -- 1,733,071 8,217,313 4,889,333
----------- ----------- ----------- --------------- ---------------
Comprehensive Income
(Loss)................. $(2,062,485) $(6,579,628) $15,631,999 $20,108,169 $ (1,515,527)
=========== =========== =========== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year Ended Nine Months
December 31, Ended September 30,
------------------------- ---------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
Adjustments to
reconcile to net cash
used in operating
activities:
Other income.......... -- -- (30,483,177) (23,514,321) (46,973,584)
Depreciation and
amortization......... 481,796 446,289 1,135,269 438,769 8,103,725
Equity (income)
loss................. 514,540 (106,298) 5,868,887 3,969,734 49,141,961
Minority interest..... (427,185) 106,411 (5,381,640) (2,699,112) (4,133,057)
Deferred taxes........ -- -- -- -- (13,090,907)
Changes in assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable,
net.................. (2,176,869) 1,574,374 (1,183,360) (332,010) (5,528,323)
Prepaid expenses and
other assets......... (69,558) (142,384) (1,346,515) (464,814) (7,282,894)
Accounts payable...... 43,727 565,672 620,127 1,072,999 3,150,538
Deferred revenue...... 147,100 493,960 1,249,624 579,915 (78,702)
Accrued expenses...... 145,977 204,645 1,415,265 1,731,545 9,119,022
----------- ----------- ------------ ------------ -------------
Net cash used in
operating
activities......... (3,402,957) (3,436,959) (14,206,592) (7,326,439) (13,977,081)
Investing Activities
Capital
expenditures......... (100,480) (272,488) (545,432) (426,945) (5,187,261)
Proceeds from sales
of available-for-
sale
securities........... -- -- 36,431,927 20,460,424 2,495,842
Proceeds from sales
of Partner Company
ownership interests
and advances to a
shareholder.......... -- -- 300,000 -- 3,446,972
Advances to Partner
Companies............ (60,000) (2,800,000) (12,778,884) (2,604,800) (3,758,702)
Repayment of advances
to Partner
Companies............ -- 950,000 677,084 500,000 4,590,272
Acquisitions of
ownership interests
in Partner
Companies, net of
cash acquired........ (6,934,129) (14,465,874) (35,822,393) (21,059,795) (123,976,262)
Other acquisitions
(Note 5)............. -- -- (1,858,389) (1,858,389) (2,103,165)
Purchase of short-
term investments..... -- -- -- -- (22,845,079)
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) (4,989,505) (152,983,278)
Financing Activities
Issuance of common
stock, net........... 13,686,013 20,137,505 38,204,619 29,546,443 241,226,510
Long-term debt and
capital lease
repayments........... (30,191) (57,979) (321,857) (255,761) (448,205)
Proceeds from
convertible
subordinated notes... -- -- -- -- 90,000,000
Line of credit
borrowings........... 1,208,000 2,500,000 2,000,000 -- --
Line of credit
repayments........... (1,106,000) (2,000) (2,500,000) (2,500,000) (280,942)
Distribution to
former LLC members... -- -- -- -- (10,675,811)
Advances to
employees............ -- -- -- -- (8,765,483)
Treasury stock
purchase by
subsidiary........... (60,000) -- -- -- (4,468,980)
Issuance of stock by
subsidiary........... 15,000 200,000 11,293,360 11,291,961 19,669,517
----------- ----------- ------------ ------------ -------------
Net cash provided by
financing
activities......... 13,712,822 22,777,526 48,676,122 38,082,643 326,256,606
----------- ----------- ------------ ------------ -------------
Net Increase in Cash
and Cash Equivalents.. 3,215,256 2,752,205 20,873,443 25,766,699 159,296,247
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 $ 31,734,160 $ 186,137,151
=========== =========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Description of the Company
Internet Capital Group, Inc. (the "Company") was formed on March 4, 1996.
The Company is an Internet holding company actively engaged in business-to-
business, or B2B, e-commerce through a network of companies. The Company
defines e-commerce as conducting or facilitating business transactions over the
Internet. As of December 31, 1998, the Company owned interests in more than 20
companies engaged in e-commerce, which the Company calls its "Partner
Companies". The Company's goal is to become the premier B2B e-commerce company.
The Company's operating strategy is to integrate its Partner Companies into a
collaborative network that leverages the collective knowledge and resources of
the Company and the network.
Basis of Presentation
On February 2, 1999, the Company converted from a Limited Liability
Corporation ("LLC") to a corporation. All shareholder transactions have been
presented as if the conversion occurred on March 4, 1996 (inception).
Principles of Consolidation
During the periods ending December 31, 1996, 1997 and 1998 the Company
acquired equity ownership interests in VerticalNet for $1.0 million, $2.0
million and $4.0 million, respectively. 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 nine months ended September 30, 1999 (unaudited). The
Company's direct and indirect voting interest in VerticalNet at December 31,
1997 and 1998 was 63% and 52%, respectively.
The audited 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.
F-11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an
evaluation of several factors including, among others, representation on the
Partner Company's Board of Directors and ownership level, which is generally a
20% to 50% interest in the voting securities of the Partner Company, including
voting rights associated with the Company's holdings in common, preferred and
other convertible instruments in the Partner Company. Under the equity method
of accounting, a Partner Company's results of operations are not reflected
within the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the Partner Company is reflected
in the caption "Equity income (loss)" in the Consolidated Statements of
Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the
consolidation or equity method of accounting is amortized on a straight-line
basis over three years which adjusts the Company's share of the Partner
Company's earnings or losses.
Cost Method. Partner Companies not accounted for under the consolidation
or the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method impairment charges are recognized in the Consolidated
Statement of Operations with the new cost basis not written-up if circumstances
suggest that the value of the Partner Company has subsequently recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interest in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily
determinable fair values based on quoted market prices, in which case these
interests would be classified as available-for-sale securities or some other
classification in accordance with SFAS No. 115. In addition to the Company's
investments in voting and non-voting equity and debt securities, it also
periodically makes advances to its Partner Companies in the form of promissory
notes which are accounted for in accordance with SFAS No. 114.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have or have committed to invest in its Partner Companies.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
accumulated other comprehensive income in shareholders' equity.
Unrealized gains or losses related to available-for-sale securities will
be recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a C Corporation.
F-12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.
Cash and cash equivalents at December 31, 1998 are invested principally in
money market accounts.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at cost which approximates fair value due to the
short-term maturity of these instruments. Long-term debt is carried at cost
which approximates fair value as the debt bears interest at rates approximating
current market rates.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, is
amortized on a straight-line basis over three years. Goodwill at December 31,
1998 of $2.5 million, net of accumulated amortization of $.3 million, was
attributable to acquisitions by VerticalNet.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation, which is
based on the estimated useful lives of the assets (approximately three to seven
years) computed using the straight-line method.
Equipment acquired under long-term capital lease arrangements is recorded
at amounts equal to the net present value of the future minimum lease payments
using the interest rate implicit in the lease. Amortization is provided by use
of the straight-line method over the estimated useful lives of the related
assets.
Revenue Recognition
All of the Company's revenue from March 4, 1996 (inception) through
December 31, 1998 was attributable to VerticalNet.
VerticalNet's revenue is derived principally from advertising contracts
which include the initial development of storefronts. A storefront is a Web
page posted on one of VerticalNet's trade communities that provides information
on an advertiser's products, links a visitor to the advertiser's Web site and
generates sales inquiries from interested visitors. The advertising contracts
generally do not extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred revenue of
$2.2 million at December 31, 1998 represents the unearned portion of
advertising contracts for which revenue will be recognized over the remaining
period of the advertising contract.
VerticalNet also generates revenue through providing educational courses
and selling books. Revenue from educational courses is recognized in the period
in which the course is completed and revenue from the sale of books is
recognized in the period in which the books are shipped.
F-13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Barter transactions are recorded at the lower of estimated fair value of
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the VerticalNet advertising
impressions (VNAI) are delivered to the customer and advertising expense is
recorded when the customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to VerticalNet
delivering the VNAI, a liability is recorded, and if VerticalNet delivers the
VNAI to the customer prior to receiving the CAI, a prepaid expense is recorded.
For the period March 4, 1996 (inception) through December 31, 1997, VerticalNet
barter transactions were immaterial. For the year ended December 31, 1998,
VerticalNet recognized approximately $.6 million and $.5 million of advertising
revenues and expenses, respectively, from barter transactions. Included in
prepaid expenses and other current assets at December 31, 1998 is approximately
$.2 million relating to barter transactions.
Concentration of Credit Risk
VerticalNet performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral on accounts
receivable. VerticalNet maintains allowances for credit losses and such losses
have been within management's expectations. No single customer accounted for
greater than 10% of total revenue during the period from March 4, 1996
(inception) to December 31, 1996 and the years ended December 31, 1997 and
1998.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards Board No.
121, the Company records an impairment loss on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Deferred Offering Costs
As of December 31, 1998, specific incremental costs directly attributable
to a planned initial public offering (IPO) of VerticalNet shares have been
deferred. These deferred costs, totaling $.5 million, are included in non-
current other assets on the Consolidated Balance Sheet. These costs were
charged against VerticalNet's additional paid-in-capital in connection with the
consummation of VerticalNet's IPO in February 1999.
Stock Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock Based
Compensation." As permitted by SFAS No. 123. the Company measures compensation
cost in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no accounting recognition is given to stock options issued to
employees that are granted at fair market value until they are exercised. Stock
options issued to non-employees are recorded at fair value at the date of
grant. Upon exercise, net proceeds, including tax benefits realized, are
credited to equity. Therefore, the adoption of SFAS No. 123 was not material to
the Company's financial condition or results of operations; however, the pro
forma impact on income (loss) per share has been disclosed in the Notes to
Consolidated Financial Statements as required by SFAS No. 123 (Note 9).
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" (SFAS 130), which requires companies
to report and display comprehensive income and its components in financial
statements. Comprehensive income is the change in equity of a business
F-14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Excluding net income, the Company's source of
comprehensive income is from net unrealized appreciation on its available-for-
sale securities. Reclassification adjustments result from the recognition in
net income of gains or losses that were included in comprehensive income in
prior periods.
Segment Information
At December 31, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131) which requires companies to present financial
and descriptive segment information (Note 11).
Income Taxes
Income taxes are accounted for under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes. The Company has no net
operating loss carry forwards at December 31, 1998 (Note 2).
Net Income Per Share
Net income per share (EPS) is computed using the weighted average number
of common shares outstanding during each year. Dilutive EPS includes common
stock equivalents (unless anti-dilutive) which would arise from the exercise of
stock options and conversion of other convertible securities and is adjusted,
if applicable, for the effect on net income (loss) of such transactions.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Gain or Loss on Issuances of Stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
sells its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations (Note
17).
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
F-15
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
2. Pro Forma Information (Unaudited)
On February 2, 1999, the Company converted from an LLC to a C
corporation. The Company became subject to corporate federal and state income
taxes concurrent with the conversion to a C corporation. The accompanying
Consolidated Statements of Operations for the year ended December 31, 1998 and
nine months ended September 30, 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.
Pro Forma Income Taxes
The Company's 1998 pro forma effective tax rate of 37% differed from the
federal statutory rate of 35% principally due to non-deductible permanent
differences.
Based upon the cumulative temporary differences (primarily relating to
the difference between the book and tax carrying value of its Partner
Companies), the Company would have recognized a pro forma net deferred federal
and state tax asset of $8.2 million at December 31, 1998. In the opinion of
management, it is more likely than not that such asset would be realized and
accordingly, a valuation allowance was not considered necessary in calculating
this pro forma amount.
Pro forma basic and diluted net income per share for the year ended
December 31, 1998 of $0.08 was calculated based on pro forma net income of
$8,756,325 and basic and diluted weighted average shares outstanding of
112,204,578 and 112,298,578, respectively. The difference between basic and
diluted weighted average shares outstanding of 94,000 was due to the dilutive
effect of stock options.
Pro forma basic and diluted net loss per share for the nine months ended
September 30, 1999 of ($0.03) was calculated based on pro forma net loss of
$12,509,434 and basic and diluted weighted average shares outstanding of
185,103,758.
3. Interim Financial Information (Unaudited)
The interim financial statements of the Company for the nine months ended
September 30, 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 nine months ended September 30, 1998 and
1999. The accompanying unaudited interim financial statements are not
necessarily indicative of full year results.
The unaudited interim consolidated financial statements for the nine
months ended September 30, 1999 include the accounts of the Company, its wholly
owned subsidiary, Internet Capital Group Operations, Inc. and its majority
owned subsidiaries, AgProducerNetwork, Inc. ("AgProducer"), Breakaway
Solutions, Inc. ("Breakaway Solutions"), EmployeeLife.com and iParts. In 1999,
the Company acquired a controlling majority interest in Breakaway Solutions for
$17.3 million and in AgProducer, EmployeeLife.com and iParts ("Other Majority
Owned Subsidiaries") for $8.8 million in the aggregate. Breakaway Solutions'
operating activities
F-16
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
have historically consisted primarily of implementation of customer relational
management systems and custom integration to other related applications. In
1999, Breakaway Solutions has expanded 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. The Other Majority Owned Subsidiaries are development
stage companies that have generated negligible revenue since their inception.
In connection with the acquisition of its ownership interest in Breakaway
Solutions and the Other Majority Owned Subsidiaries, the Company recorded the
excess of cost over net assets acquired of $9.1 million and $2.5 million,
respectively, as goodwill which is being amortized over three years. During the
nine months ended September 30, 1999, Breakaway Solutions acquired all of the
outstanding stock of Applica Corporation (Applica), 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. Of the Company's
consolidated intangible assets at September 30, 1999 of $22.9 million, net of
$3.7 million of accumulated amortization, $9.1 million was attributable to the
Company's acquisition of Breakaway Solutions and the Other Majority Owned
Subsidiaries, and $13.8 million was attributable to Breakaway Solutions'
acquisitions of Applica, WPL and WebYes. Breakaway Solutions had revenue of
$7.5 million and $14.7 million for the nine months ended September 30, 1998 and
1999, respectively.
The consolidated financial statements through December 31, 1998,
including the unaudited interim consolidated financial statements for the nine
months ended September 30, 1998, reflect VerticalNet accounted for on the
consolidation method of accounting. The unaudited interim consolidated
financial statements for the nine months ended September 30, 1999 reflect
VerticalNet accounted for on the equity method of accounting due to the
decrease in the Company's ownership below 50%.
The Company's carrying value and cost basis of Partner Companies
accounted for under the equity method of accounting at September 30, 1999 was
$120.0 million and $175.5 million, respectively. The Company's carrying value
and cost basis of Partner Companies accounted for under the cost method of
accounting at September 30, 1999 was $48.7 million and $56.1 million,
respectively.
At September 30, 1999, the Company's carrying value in its Partner
Companies accounted for under the equity method of accounting exceeded its
share of the underlying equity in the net assets of such companies by $65.9
million.
The Company's Partner Companies accounted for under the equity method of
accounting had total revenues of $15.5 million and $73.4 million and total net
loss of $7.1 million and $123.7 million during the nine months ended September
30, 1998 and 1999, respectively.
Basic and diluted net income per share for the nine months ended
September 30, 1999 of $(.03) was calculated based on net loss of $6,404,860 and
basic and diluted weighted average shares outstanding of 185,103,758. Basic and
diluted net income per share and weighted average shares outstanding for the
nine months ended September 30, 1999 were the same due to the Company's net
loss.
On February 2, 1999, the Company converted from an LLC to a corporation.
The Company's accumulated deficit of $8,657,936 at that date was reclassed to
additional paid-in capital.
The Company's effective tax rate for the nine months ended September 30,
1999 of (67%) 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 September 30, 1999 the Company recorded an
additional tax benefit of
F-17
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
$5.1 million, related to the Company's consolidated results for that period,
including $15.6 million of tax expense related to the Company's non-operating
gains related to VerticalNet's common stock issuance.
The Company's net deferred tax asset of $18.8 million at September 30,
1999 consists of a deferred tax asset of $25.6 million relating to the
difference between the book and tax carrying values of its Partner Companies
and the tax effect of stock option compensation and a deferred tax liability of
$6.8 million relating to the tax effect of stock option compensation and the
tax effect of net unrealized appreciation in available-for-sale securities.
In April 1999, the Company entered into a $50 million revolving bank
credit facility (Note 7). The Company borrowed $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 September 30, 1999, borrowing availability
under the facility was $50 million, of which none was outstanding.
During the nine months ended September 30, 1999, the Company utilized
$145.9 million in cash to acquire interests in and make advances to new and
existing Partner Companies, including $13.2 million contributed to Breakaway
Solutions, $4.0 million used to purchase Breakaway Solutions shares directly
from Breakaway Solutions shareholders, $8.8 million in the aggregate to acquire
the Company's ownership interests in the Other Majority Owned Subsidiaries, and
$93.1 million utilized to acquire interests in Partner Companies accounted for
under the equity method of accounting.
During the nine months ended September 30, 1999 the Company acquired an
interest in a new Partner Company from shareholders of the Partner Company who
have an option, exercisable at any time through August 2000, of electing to
receive cash of $11.3 million or 2,083,333 shares of the Company's common
stock. As of September 30, 1999, $8.5 million remains outstanding as $2.8
million of the obligation has been converted into 509,270 shares of the
Company's common stock.
In April through September 1999 the Company's Board of Directors
authorized the acceptance of full recourse promissory notes totaling $81.1
million from its employees and a director as consideration for exercising all
or a portion of their vested and unvested stock options. (A total of 35,991,500
shares of common stock were issued). The $81.1 million notes receivable from
employees is recorded as a reduction of Shareholders' Equity at September 30,
1999 to offset the increase in Additional Paid-In-Capital as a result of the
common stock issuance. 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 was 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. These loans totaled $8.1 million and are
classified as Other Assets.
Through September 30, 1999, the Company recorded aggregate unearned
compensation expense of $18.3 million, net of approximately $3.9 million in
accumulated amortization at September 30, 1999, 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.
In August 1999, the Company completed its initial public offering ("IPO")
of 30,620,000 shares of its common stock at $6.00 per share. Concurrently, the
Company completed a private placement of 7,500,000 shares of its common stock
at the $6.00 IPO price. Upon consummation of the IPO, the $90 million of
Convertible Subordinated Notes discussed in Note 17 converted into 14,999,732
shares of the Company's
F-18
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
common stock. Warrants to acquire 3,000,000 shares of common stock at an
exercise price of $6.00 per share were issued with such notes and remain
outstanding at September 30, 1999.
In October 1999, Breakaway Solutions completed its initial public
offering raising approximately $45 million. As a result of this, the Company's
ownership interest in Breakaway Solutions was reduced to below 50% and will be
accounted for under the equity method beginning in October 1999.
In November 1999, the Company acquired an ownership interest that will be
accounted for under the equity method in eMerge Interactive Inc. for a
combination of cash of $27 million and a non interest bearing note of $23
million. The note has a one year maturity of which $5 million may be payable
earlier under certain circumstances.
On November 15, 1999, the Company's Board of Directors authorized the
filing of a registration statement in connection with a public offering of
common stock and convertible notes of the Company. On the same date, the
Company's Board of Directors authorized a two for one stock split of all shares
of common stock outstanding on the twelfth calendar day after the date that the
Company files the registration statement. All of the information in these
financial statements have been retroactively restated to give effect to the
split as if it had occurred on March 4, 1996 (inception).
4. Ownership Interests in and Advances to Partner Companies
The following summarizes the Company's ownership interests in and
advances to Partner Companies accounted for under the equity method or cost
method of accounting. The ownership interests are classified according to
applicable accounting methods at December 31, 1997 and 1998. Cost basis
represents the Company's original acquisition cost less any impairment charges
in such companies.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------------- --------------------------
Carrying Value Cost Basis Carrying Value Cost Basis
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Equity Method............. $ 1,200,210 $ 1,608,452 $21,311,324 $27,588,451
Cost Method............... 22,844,870 22,844,870 38,180,616 38,180,616
----------- -----------
$24,045,080 $59,491,940
=========== ===========
</TABLE>
At December 31, 1998 the Company's carrying value in its Partner
Companies accounted for under the equity method exceeded its share of the
underlying equity in the net assets of such companies by $12.7 million. This
excess relates to ownership interests acquired in 1998 and is being amortized
over a three year period. Amortization expense of $.4 million is included in
"Equity income (loss)" in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1998.
Of the $5.9 million of equity loss recorded by the Company in 1998,
approximately $4.3 million was attributable to Syncra Software, Inc.
As of December 31, 1998, the Company had $5.2 million in advances to
Partner Companies which mature on various dates through November 25, 1999 and
bear interest at fixed rates between 7% and 10%.
F-19
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following summarized financial information for Partner Companies
accounted for under the equity method of accounting at December 31, 1997 and
1998 has been compiled from the financial statements of the respective Partner
Companies:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets......................................... $ 7,042,767 $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
=========== ===========
</TABLE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Revenue................................ $ 9,365,872 $18,911,691 $ 21,495,832
Net income (loss)...................... $(1,369,774) $ 255,280 $(14,969,192)
</TABLE>
5. Other Acquisitions
In 1998, VerticalNet acquired all of the outstanding capital stock of
Boulder Interactive Technology Services Company (BITC) for $1.9 million in cash
and all of the outstanding capital stock of Informatrix Worldwide, Inc.
(Informatrix) for 99,784 shares of VerticalNet's common stock valued at $.2
million. These acquisitions were accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of the net
assets acquired of approximately $2.8 million was recorded as goodwill and is
being amortized over three years. Accumulated amortization relating to this
goodwill totaled $.3 million at December 31, 1998.
The following unaudited pro forma financial information presents the
combined results of operations as if VerticalNet had owned BITC and Informatrix
since January 1, 1997 and October 15, 1997 (inception), respectively, after
giving effect to certain adjustments including goodwill and income taxes. The
unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company, VerticalNet,
BITC and Informatrix constituted a single entity during such periods.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue.............................................. $ 1,118,030 $ 3,606,027
Pro forma net income (loss).......................... $(7,590,016) $13,166,449
Pro forma net income (loss) per share................ $ (.11) $ (.12)
</TABLE>
F-20
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
6. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment and software........................... $681,656 $1,564,297
Office equipment and furniture............................ 148,430 271,809
Trade show equipment...................................... 34,079 40,587
Leasehold improvements.................................... 29,402 45,864
-------- ----------
893,567 1,922,557
Less: accumulated depreciation and amortization........... (349,124) (771,289)
-------- ----------
$544,443 $1,151,268
======== ==========
</TABLE>
7. Debt
Revolving Credit Facilities
In March 1998, the Company entered into an unsecured $3 million revolving
credit facility. Borrowings under this facility accrued interest at a premium
to prime ranging from .75% to 1.5%. The Company borrowed up to $2 million under
this facility during 1998. No amounts were outstanding at December 31, 1998 and
the facility expired in March 1999.
In April 1999, the Company entered into a $50 million revolving bank
credit facility. In connection with the facility, the Company issued 400,000
warrants exercisable for seven years at $5 per share. The facility matures in
April 2000, is subject to a .25% unused commitment fee, bears interest, at the
Company's option, at prime and/or LIBOR plus 2.5%, and is secured by
substantially all of the Company's assets (including the Company's holdings in
VerticalNet). Borrowing availability under the facility is based on the fair
market value of the Company's holdings of publicly traded Partner Companies
(currently only VerticalNet) and the value, as defined in the facility, of the
Company's private Partner Companies. Based on the provisions of the borrowing
base, borrowing availability at April 30, 1999 was $32.6 million, of which none
was outstanding. As of May 7, 1999, the Company had borrowed $13 million under
the facility.
VerticalNet had a line of credit with a bank in the amount of $2.5
million at December 31, 1997. Borrowings under the facility were collateralized
by a security interest in all assets of VerticalNet and required VerticalNet to
meet specified financial ratios. As of December 31, 1997, VerticalNet was in
technical default, as it did not meet the specified financial ratios, but the
bank waived these violations. The facility accrued interest at prime plus 1.5%
(10% at December 31, 1997). The weighted average interest rate for borrowings
under this facility was 10% for the year ended December 31, 1997.
As of June 1998, VerticalNet modified the agreement, reducing its line of
credit with the bank to $.5 million. On November 25, 1998, the agreement was
additionally amended allowing the Company to execute a $2.0 million note with
the bank. The note accrues interest at prime plus 1.5% and matures at the
earlier of March 31, 1999 or the completion of VerticalNet's next financing. In
connection with the loan, VerticalNet issued warrants to purchase 20,513 shares
of VerticalNet's common stock at an exercise price of $16 per share with an
estimated fair value of $.1 million. As of December 31, 1998, the outstanding
balance for borrowings under this facility was $2 million and the weighted
average interest rate for the year ended December 31, 1998 was 10%. Upon the
completion of VerticalNet's IPO in February 1999, VerticalNet repaid $2 million
and the line of credit with the bank was reduced to $.5 million.
F-21
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Long-Term Debt
All of the Company's long-term debt is attributable to VerticalNet and
consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Term notes with related parties............................. $100,000 $ --
Term bank notes............................................. 32,852 --
Capital leases.............................................. 417,952 639,940
-------- --------
550,804 639,940
Less: current portion....................................... (150,856) (288,016)
-------- --------
Long-term debt.............................................. $399,948 $351,924
======== ========
</TABLE>
VerticalNet had three unsecured term notes due to shareholders with an
interest rate of 7%. The notes were to mature on February 2001. One of the
holders of these notes is a Board member of the Company. These notes were
repaid in May 1998.
VerticalNet had a term loan with another bank with an interest rate at
prime plus 2.75% (11.25% at December 31, 1997) which was payable in 36 monthly
installments. This note was repaid in May 1998.
VerticalNet has several capital leases on its equipment with lease terms
ranging from three to five years. The interest rates implicit in the leases
are 8% to 20%. At December 31, 1997 and 1998, the book value of assets held
under capital leases was approximately $.3 million and $.5 million,
respectively, and the aggregate remaining minimum lease payments at December
31, 1998 were approximately $.7 million including interest of approximately
$.1 million.
At December 31, 1998, long-term debt is scheduled to mature as follows:
<TABLE>
<S> <C>
1999............................................................. $288,016
2000............................................................. 230,338
2001............................................................. 95,718
2002............................................................. 19,810
2003............................................................. 6,058
--------
Total............................................................ $639,940
========
</TABLE>
8. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Accrued compensation and benefits.......................... $ 90,833 $ 454,230
Accrued marketing costs.................................... -- 446,334
Other...................................................... 297,692 922,843
-------- ----------
$388,525 $1,823,407
======== ==========
</TABLE>
F-22
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
9. Shareholders' Equity
The Company's authorized capital stock consists of 130,000,000 shares of
common stock, par value $.001 per share. The holders of common stock are
entitled to one vote per share and are entitled to dividends as declared.
Dividends may be restricted by the inability to liquidate ownership
interests in Partner Companies to fund cash dividends and may be subject to the
preferential rights of the holders of the Company's preferred stock, if any.
The Company may establish one or more classes or series of preferred
stock. The holders of the preferred stock may be entitled to preferences over
common stock or shareholders with respect to dividends, liquidation,
dissolution, or winding up of the Company, as established by the Company's
Board of Directors. No preferred stock is authorized at December 31, 1998.
Certain shareholders were granted registration rights which become
effective after completion of a public offering.
Shareholders' equity contributions are recorded when received. The
Company issued 31,980,000 shares of common stock for net proceeds of $32
million in 1999. These shares had been subscribed for at December 31, 1998.
Restricted Stock
During 1996 and 1997, 12,054,034 and 1,513,216 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 13,567,250 shares of restricted stock
had been granted at a weighted average fair value of $0.10 per share or an
aggregate of $1.3 million based on independent valuations of the shares. These
independent valuations took into account certain factors, primarily the
restrictions on the ability of restricted shareholders to receive distributions
of dividends or profits and the uncertainty of realization of any return from
these shares. The $1.3 million of deferred compensation is classified as a
reduction of shareholders' equity and is being amortized over the five-year
vesting period. Compensation expense related to the restricted stock totaling
$.1 million, $.2 million and $.3 million was recorded in 1996, 1997 and 1998,
respectively.
Stock Option Plans
Incentive or non-qualified stock options may be granted to Company
employees, directors and consultants under several stock option plans
("Plans"). Generally, the options vest over a four to five year period and
expire eight to ten years after the date of grant. At December 31, 1998, the
Company reserved 10,470,000 shares of common stock for possible future issuance
under the Plans. VerticalNet and most Partner Companies also maintain their own
stock option plans.
F-23
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following table summarizes the activity of the Company's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1997....................... -- $ --
Options granted...................................... 188,000 0.50
Options canceled/forfeited........................... -- --
----------
Outstanding at December 31, 1997..................... 188,000 0.50
Options granted...................................... 12,094,000 1.00
Options canceled/forfeited........................... (94,000) (0.50)
----------
Outstanding at December 31, 1998..................... 12,188,000 $ 1.00
==========
</TABLE>
No options were issued by the Company in 1996. At December 31, 1997 there
were no options exercisable under the Plans. At December 31, 1998 there were
11,750 options exercisable at $1.00 per share under the Plans.
The following table summarizes information about stock options
outstanding:
<TABLE>
<CAPTION>
Weighted Average
Number Outstanding at Remaining Contractual
Exercise Price December 31, 1998 Life (in Years)
-------------- --------------------- ---------------------
<S> <C> <C>
$0.50......................... 94,000 7
$1.00......................... 12,094,000 10
</TABLE>
Included in the 1998 option grants are 994,000 stock options to non-
employees. The fair value of these options of $.7 million was recorded as
deferred compensation in 1998 and is being amortized over the five year vesting
period. The fair value of these options was determined using the Black-Scholes
method assuming a volatility of 80%, a dividend yield of 0%, an average
expected option life of 5 years, and a risk-free interest rate of 5.2%.
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Had compensation cost been recognized pursuant to SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net income (loss)
As reported......................................... $(6,579,628) $13,898,928
SFAS 123 pro forma.................................. $(6,648,952) $13,436,582
Net income (loss) per share
As reported......................................... $ (.10) $ .12
SFAS 123 pro forma.................................. $ (.10) $ .12
</TABLE>
The per share weighted-average fair value of options issued by the
Company during 1997 and 1998 was approximately $0.11 and $0.22, respectively.
F-24
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following assumptions were used to determine the fair value of stock
options granted to employees by the Company, its subsidiaries, and Partner
Companies accounted for under the equity method using the minimum value option-
price model:
<TABLE>
<S> <C>
Dividend yield................................................... 0%
Average expected option life..................................... 5 years
Risk-free interest rate.......................................... 5.2%
</TABLE>
In 1999 through May 7, 1999, the Company granted 7,169,000 options to
employees and non-employees at exercise prices ranging from $1.00 to $2.44.
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.
F-25
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Certain executives of the Company and its Partner Companies have the
option to purchase a portion of the Company's ownership interest in various
Partner Companies at the Company's cost.
11. Segment Information
In 1998, the Company adopted SFAS 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of
Partner Company Operations and General ICG Operations. Partner Company
Operations includes the effect of consolidating VerticalNet for the periods
ended December 31, 1996, 1997 and 1998 and the nine months ended September 30,
1999 and AgProducer Inc., Breakaway Solutions, EmployeeLife.com and iParts for
the period from acquisition in 1999 through September 30, 1999, and recording
the Company's share of earnings and losses of Partner Companies accounted for
under the equity method. VerticalNet's operations include creating and
operating industry-specific trade communities on the Internet. Breakaway
Solutions' operations include implementation of various computer applications.
AgProducer, EmployeeLife.com and iParts are development stage companies that
have generated negligible revenue since their inception. 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, 1998 and 1999.
F-26
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following summarizes information related to the Company's segments.
All significant intersegment activity has been eliminated. Assets are owned or
allocated assets used by each operating segment.
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------- -------------------------
March 4, 1996
(Inception)
Through
December 31,
1996 1997 1998 1998 1999
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Partner Company
Operations
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
----------- ----------- ------------ ----------- ------------
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 291,660 1,388,123 4,106,583 7,312,682 18,267,184
----------- ----------- ------------ ----------- ------------
Total operating
expenses.............. 987,547 5,455,505 16,643,773 10,211,382 25,691,778
----------- ----------- ------------ ----------- ------------
(702,407) (4,663,683) (13,509,004) (8,349,583) (10,908,682)
Other income (expense),
net................... -- -- -- -- 27,607
Interest income........ 7,491 10,999 212,130 164,535 85,946
Interest expense....... (13,931) (126,105) (297,401) (149,369) (53,969)
----------- ----------- ------------ ----------- ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (708,847) (4,778,789) (13,594,275) (8,334,417) (10,849,098)
Income taxes........... -- -- -- -- --
Minority interest...... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ----------- ------------
Loss from Partner
Company Operations..... $ (796,202) $(4,778,902) $(14,081,522) $(9,605,039) $(55,858,002)
=========== =========== ============ =========== ============
General ICG Operations
General and
administrative........ $ 1,360,821 $ 2,054,118 $ 3,512,586 $ 2,516,912 $ 12,735,334
----------- ----------- ------------ ----------- ------------
Other income, net...... -- -- 30,483,177 23,514,321 46,973,584
Interest income, net... 94,538 253,392 1,009,859 498,486 2,374,469
Income taxes........... -- -- -- -- 12,840,423
----------- ----------- ------------ ----------- ------------
Income (loss) from
General ICG
Operations............ $(1,266,283) $(1,800,726) $ 27,980,450 $21,495,895 $ 49,453,142
=========== =========== ============ =========== ============
</TABLE>
F-27
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------------- September
1997 1998 30, 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Partner Company Operations
Carrying value of equity method Partner
Companies.............................. $ 1,200,210 $21,311,324 $120,034,751
Other................................... 2,104,087 12,342,975 57,608,628
----------- ----------- ------------
3,304,297 33,654,299 177,643,379
General ICG Operations
Cash and cash equivalents............... 5,212,745 21,178,055 173,658,018
Carrying value of cost method Partner
Companies.............................. 22,844,870 38,180,616 48,655,628
Other................................... 119,104 3,773,005 70,270,344
----------- ----------- ------------
28,176,719 63,131,676 292,583,990
----------- ----------- ------------
$31,481,016 $96,785,975 $470,227,369
=========== =========== ============
</TABLE>
12. Parent Company Financial Information
The Company's consolidated financial statements reflect VerticalNet
accounted for under the consolidation method of accounting from the Company's
inception in March 1996 through December 31, 1998 (audited) and under the
equity method of accounting for the nine months ended September 30, 1999
(unaudited). The Company's consolidated financial statements for the nine
months ended September 30, 1999 reflect AgProducer, Breakaway Solutions,
EmployeeLife.com and iParts ("1999 Consolidated Companies") accounted for under
the consolidation method of accounting (unaudited).
Parent company financial information is provided to present the financial
position and results of operations of the Company as if VerticalNet and the
1999 Consolidated Companies were accounted for under the equity method of
accounting for all periods presented during which the Company owned its
ownership interest in each company. The Company's share of VerticalNet's and
the 1999 Consolidated Companies 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
the 1999 Consolidated Companies as of September 30, 1999 are included in
"Ownership interests in and advances to Partner Companies" in the Parent
Company Balance Sheets. The September 30, 1999 Parent Company Balance Sheet and
the Parent Company Statements of Operations for the nine months ended September
30, 1998 and 1999 are unaudited.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------- (Unaudited)
September
1997 1998 30, 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Current assets.......................... $ 5,245,064 $21,596,575 $194,524,991
Ownership interests in and advances to
Partner Companies...................... 24,045,080 59,491,940 187,997,023
Other................................... 86,785 3,354,485 49,403,371
----------- ----------- ------------
Total assets.......................... 29,376,929 84,443,000 431,925,385
Liabilities and shareholders' equity
Current liabilities..................... 318,729 2,082,463 13,408,788
Non-current liabilities................. 2,423,525 1,636,159 --
Shareholders' equity.................... 26,634,675 80,724,378 418,516,597
----------- ----------- ------------
Total liabilities and shareholders'
equity............................... $29,376,929 $84,443,000 $431,925,385
=========== =========== ============
</TABLE>
F-28
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Parent Company Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------- ------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ -- $ --
----------- ----------- ------------ ----------- -----------
Operating expenses
General and
administrative....... 1,360,821 2,054,118 3,512,586 2,516,912 12,735,334
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 1,360,821 2,054,118 3,512,586 2,516,912 12,735,334
----------- ----------- ------------ ----------- -----------
(1,360,821) (2,054,118) (3,512,586) (2,516,912) (12,735,334)
Other income, net....... -- -- 30,483,177 23,514,321 46,973,584
Interest income, net.... 94,538 253,392 1,009,859 498,486 2,374,469
----------- ----------- ------------ ----------- -----------
Income (loss) before
income taxes and equity
income (loss).......... 1,266,283 (1,800,726) 27,980,450 21,495,895 36,612,719
Income taxes............ -- -- -- -- 12,840,423
Equity income (loss).... (796,202) (4,778,902) (14,081,522) (9,605,039) (55,858,002)
----------- ----------- ------------ ----------- -----------
Net income (loss)....... $(2,062,485) $(6,579,628) $ 13,898,928 $11,890,856 $(6,404,860)
=========== =========== ============ =========== ===========
</TABLE>
13. Supplemental non-cash financing and investing activities
During the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999 (unaudited), the Company converted $1.4 million, $1.8
million and $6.4 million, respectively, of advances to Partner Companies into
ownership interests in Partner Companies.
During the year ended December 31, 1998, the Company exchanged all of its
holdings in Matchlogic and Wisewire for shares of Excite and Lycos,
respectively (Note 15).
Interest paid in the periods ended December 31, 1997 and 1998 was $.l
million and $.2 million, respectively.
The Company paid no income taxes in 1996, 1997 and 1998 due to its tax
status as an LLC.
In 1998, the Company acquired an ownership interest in a Partner Company
in exchange for a $1.7 million note payable. The note is payable in two equal
installments through June 1999, does not bear interest and is secured with the
acquired stock of the Partner Company. In March 1999, a shareholder of the
Company assumed $.4 million of this note.
14. Defined Contribution Plan
In 1997, the Company established a defined contribution plan that covers
all of its employees. Participants may contribute 1% to 15% of pre-tax
compensation, as defined. The Company may make discretionary contributions to
the plan but has never done so.
F-29
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
15. Other Income
Other income consists of the following for the year ended December 31,
1998:
<TABLE>
<S> <C>
Sale of Matchlogic to Excite.................................... $12,822,162
Sale of Excite holdings......................................... 16,813,844
Sale of WiseWire to Lycos....................................... 3,324,238
Sale of Lycos holdings.......................................... 1,471,907
Partner Company impairment charges.............................. (3,948,974)
-----------
$30,483,177
===========
</TABLE>
Gains on sales of Partner Companies and available-for-sale securities are
determined using average cost.
In February 1998, the Company exchanged all of its holdings in MatchLogic
for 763,820 shares of Excite. The fair market value of the Excite shares
received of $14.3 million on the date of exchange was used to determine the
gain of $12.8 million. Throughout the remainder of 1998, the Company sold
716,082 shares of Excite which resulted in $30.2 million of proceeds and $16.8
million of gains.
In April 1998, the Company exchanged all of its holdings in WiseWire for
191,922 shares of Lycos, Inc. The fair market value of the Lycos shares
received of $5.3 million on the date of exchange was used to determine the
gain of $3.3 million. Throughout the remainder of 1998, the Company sold
169,548 shares of Lycos which resulted in $6.2 million of proceeds and $1.5
million of gains.
In December 1998 the Company recorded an impairment charge of $1.9
million for the decrease in value of one of its Partner Companies accounted
for under the cost method of accounting as a result of selling the Partner
Company interest below its carrying value. The Company had acquired its
ownership interest in the Partner Company during 1996 and 1997. In December
1998, the Partner Company agreed to be acquired by an independent third party.
The transaction was completed in January 1999. The impairment charge the
Company recorded was determined by calculating the difference between the
proceeds it received from the sale and its carrying value.
For the year ended December 31, 1998 and the nine months ended September
30, 1999, the Company recorded impairment charges of $2.0 million and $5.3
million (unaudited), respectively, for the other than temporary decline in the
fair value of a cost method Partner Company. From the date of its initial
acquisition of an ownership interest in this Partner Company through December
31, 1998, the Company's funding to this Partner Company represented all of the
outside capital the company had available to fund its net losses and capital
asset requirements. During the nine months ended September 30, 1999 the
Company fully guaranteed the Partner Company's new bank loan and agreed to
provide additional funding. The Company acquired an additional ownership
interest in this Partner Company for $5.0 million in April 1999. The
impairment charges the Company recorded were determined by the decrease in net
book value of the Partner Company caused by its net losses which were funded
entirely based on the Company's funding and bank guarantee. Given its
continuing losses, the Company will continue to determine and record
impairment charges in a similar manner for this Partner Company until the
status of its financial position improves.
16. Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the amount of the ultimate liability with respect to
F-30
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
these actions will not materially affect the financial position, results of
operations or cash flows of the Company and its subsidiaries.
In connection with its ownership interests in certain Partner Companies,
the Company guaranteed $3.2 million of bank loan and other commitments and has
committed capital of $2 million to an existing Partner Company to be funded in
1999.
The Company and VerticalNet lease their facilities under operating lease
agreements expiring through 2004. Future minimum lease payments as of December
31, 1998 under the leases are as follows:
<TABLE>
<S> <C>
1999............................................................. $385,316
2000............................................................. 402,565
2001............................................................. 266,970
2002............................................................. 239,984
2003............................................................. 246,274
Thereafter....................................................... 103,385
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$.1 million and $.3 million for the years ended December 31, 1997 and 1998,
respectively.
Because many of its Partner Companies are not majority-owned
subsidiaries, changes in the value of the Company's interests in Partner
Companies and the income or loss and revenue attributable to them could require
the Company to register under the Investment Company Act unless it takes action
to avoid being required to register. However, the Company believes it can take
steps to avoid being required to register under the Investment Company Act
which would not adversely affect its operations or shareholder value.
On June 30, 1998, VerticalNet entered into a three year Sponsorship
Agreement with Excite, Inc. (Excite). The Sponsorship Agreement provides for
VerticalNet and Excite to sponsor and promote thirty co-branded Web pages and
for each company to sell advertising on the Web pages. Excite has guaranteed a
minimum number of advertising impressions for each of the three years. The
agreement is cancelable by either party, as defined, and requires VerticalNet
to pay Excite $0.9 million, $2.0 million and $3.0 million, respectively, in
year one, two and three under the agreement. Such payments will be charged to
expense as the advertising impressions are provided by Excite. In addition,
each company will provide the other with $.2 million in barter advertising
during the term of the Sponsorship Agreement. As of December 31, 1998, each
company has satisfied the barter provisions under the Sponsorship Agreement.
On January 19, 1999, VerticalNet entered into a one-year agreement with
Compaq Computer Corporation (Compaq) and its Internet Web site known as
AltaVista. The agreement provides for VerticalNet and AltaVista to sponsor and
promote thirty-one co-branded Web pages. The agreement requires VerticalNet to
pay Compaq $1.0 million over the term of the agreement based on the number of
advertising impressions delivered. Such amount will be charged to expense as
the advertising impressions are provided by AltaVista. In addition, each
company will provide the other with $.3 million in barter advertising during
the term of the agreement.
VerticalNet has entered into non-cancelable obligations with several
content service providers and Internet search engines. Under these agreements,
exclusive of the Excite and AltaVista agreements discussed above, VerticalNet's
obligations are as follows:
<TABLE>
<S> <C>
1999........................................................... $1,488,734
2000........................................................... 65,500
</TABLE>
F-31
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
VerticalNet has entered into employment agreements with several
employees. The agreements are cancelable, but require severance upon
termination. As of December 31, 1998, VerticalNet would be required to pay
approximately $1 million in severance in the event that these employment
agreements are canceled.
17. Fiscal 1999 Events
Issuance of Common Stock
The Company issued 15,990,000 shares of common stock for net proceeds of
$32 million from January through March, 1999 (Note 9).
In April 1999 the Company's Board of Directors authorized the acceptance
of full recourse promissory notes from its employees and a director as
consideration for exercising all or a portion of their vested and unvested
stock options. The Company has the right, but not the obligation, to repurchase
unvested shares under certain circumstances. The exercise of unvested options
by the employees and director and the acceptance of promissory notes by the
Company are in accordance with the terms of the Company's equity compensation
plans and related option agreements. The Company's Board of Directors also
approved loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in connection with
the option exercises.
VerticalNet Initial Public Offering
In February 1999, VerticalNet completed its initial public offering (IPO)
of 4,025,000 shares of its common stock at $16.00 per share. Net proceeds to
VerticalNet were approximately $58.3 million. As a result of the VerticalNet
IPO, the Company recorded a gain in 1999 of approximately $28 million relating
to the increase in the Company's share of VerticalNet's net equity.
Tax Distribution
In March 1999 the Company made a distribution of $10.7 million to former
LLC members in accordance with the LLC agreements to satisfy the members' tax
liabilities.
Ownership Interests in and Advances to Partner Companies
Through May 7, 1999, the Company expended approximately $60 million to
acquire interests in or make advances to new and existing Partner Companies.
Revolving Bank Credit Facility
In April 1999, the Company entered into a $50 million revolving bank
credit facility (Note 7).
Convertible Subordinated Notes
On May 5, 1999, the Company's Board of Directors authorized the issuance
of up to $90 million of convertible subordinated notes. The notes bear interest
at an annual rate of 4.99% during the first year and at the prime rate for the
remaining two years. Prior to May 2000, the notes will automatically convert
into shares of the Company's common stock at the initial public offering price
upon consummation of an initial public offering or at the per share value of a
private round of equity financing of at least $50 million. If the notes are
F-32
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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.
F-33
<PAGE>
INTERNET CAPITAL GROUP, INC.
Pro Forma Condensed Combined Financial Statements
Basis of Presentation
(Unaudited)
During 1998 and 1999, the Company acquired significant minority ownership
interests in 27 Partner Companies accounted for under the equity method of
accounting. In October 1999, the Company acquired a majority ownership interest
in Purchasing Solutions, Inc. In October 1999, Purchasing Solutions, Inc.
acquired all of the assets of Purchasing Group, Inc. and Integrated Sourcing,
LLC, two related businesses. In November 1999, the Company acquired a
significant minority ownership interest in eMerge Interactive, Inc. for total
purchase consideration of $48.2 million. All acquisitions have been accounted
for using the purchase method of accounting. In addition, the Company
deconsolidated VerticalNet, Inc. subsequent to December 31, 1998 and Breakaway
Solutions, Inc. subsequent to September 30, 1999 due to the decrease in the
Company's voting ownership percentage in each company from above to below 50%.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1998 gives effect to the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc., the
acquisitions of Purchasing Solutions, Inc., Purchasing Group, Inc. and
Integrated Sourcing, LLC, the deconsolidation of VerticalNet, Inc, the 1998 and
1999 acquisitions of significant minority ownership interests in 27 equity
method Partner Companies, and the acquisition of the Company's ownership
interest in Breakaway Solutions, Inc. as a company accounted for under the
equity method as if the transactions had occurred on January 1, 1998. As
Breakaway Solutions, Inc. was initially acquired in the first quarter of 1999,
no pro forma adjustments to the 1998 financial statements are necessary to
reflect its deconsolidation subsequent to September 30, 1999.
The unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 1999 gives effect to the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc., the
acquisitions of Purchasing Solutions, Inc., Purchasing Group, Inc. and
Integrated Sourcing, LLC, the 1999 acquisitions of significant minority
ownership interests in 19 equity method Partner Companies, and the acquisition
of the Company's ownership interest in Breakaway Solutions, Inc. as a company
accounted for under the equity method as if the transactions had occurred on
January 1, 1998. As VerticalNet, Inc. was deconsolidated in the first quarter
of 1999, no pro forma adjustments to the consolidated statement of operations
for the nine months ended September 30, 1999 are necessary to reflect its
deconsolidation.
The unaudited pro forma condensed combined balance sheet as of September
30, 1999 gives effect to the acquisition of a significant minority ownership
interest in eMerge Interactive, Inc., the acquisitions of Purchasing Solutions,
Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC, the deconsolidation
of Breakaway Solutions, Inc., and the acquisitions during the period from
October 1, 1999 through November 18, 1999 of significant minority ownership
interests in five new and six existing equity method Partner Companies as if
the transactions had occurred on September 30, 1999.
The unaudited pro forma condensed combined financial statements have been
prepared by the management of the Company and should be read in conjunction
with the Company's historical consolidated financial statements contained
elsewhere herein, and the historical consolidated financial statements of
eMerge Interactive, Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC
which are included elsewhere herein. Since the unaudited pro forma financial
statements which follow are based upon the financial condition and operating
results of eMerge Interactive, Inc., Purchasing Solutions, Inc., Purchasing
Group, Inc., Integrated Sourcing, LLC and the equity method Partner Companies
acquired during periods when they were not under the control 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 on
the pro forma dates reflected 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 Purchasing Solutions, Inc., Purchasing Group, Inc., Integrated Sourcing,
LLC, eMerge Interactive, Inc. and the other equity method Partner Companies.
F-34
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet September 30, 1999
<TABLE>
<CAPTION>
Internet
Capital Breakaway Pro Forma Sub- e-Merge Pro Forma
Group, Inc. Deconsolidation Adjustments Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash
equivalents........... $186,137,151 $ (7,747,165) $(65,612,408)b $106,523,328 $(27,000,000)a $ 79,523,328
(7,699,800)c
1,445,550 c
Short-term
investments........... 22,845,079 -- -- 22,845,079 -- 22,845,079
Accounts receivable,
less allowance for
doubtful accounts..... 8,531,879 (8,531,879) 2,136,623 c 2,136,623 -- 2,136,623
Prepaid expenses and
other current assets.. 7,024,086 (5,077,192) 4,000,000 c 5,946,894 -- 5,946,894
------------ ------------ ------------ ------------ ------------ ------------
Total current assets... 224,538,195 (21,356,236) (65,730,035) 137,451,924 (27,000,000) 110,451,924
Fixed assets, net...... 6,169,802 (4,465,033) 55,626 c 1,760,395 -- 1,760,395
Ownership interests in
and advances to
Partner Companies..... 168,690,379 -- 65,612,408 b 245,691,816 48,160,000 a 293,851,816
11,389,029 d
Available-for-sale
securities............ 19,233,805 -- -- 19,233,805 -- 19,233,805
Intangible assets,
net................... 22,854,350 (13,731,600) 15,041,425 c 17,302,757 -- 17,302,757
(6,861,418)d
Deferred taxes......... 18,845,639 -- -- 18,845,639 -- 18,845,639
Other.................. 9,895,199 (274,641) -- 9,620,558 -- 9,620,558
------------ ------------ ------------ ------------ ------------ ------------
Total Assets............ $470,227,369 $(39,827,510) $ 19,507,035 $449,906,894 $ 21,160,000 $471,066,894
============ ============ ============ ============ ============ ============
Liabilities and
Shareholders' Equity
Current Liabilities
Current maturities of
long-term debt........ $ 735,885 $ (735,885) $ 4,141,625 c $ 4,141,625 -- $ 4,141,625
Accounts payable....... 4,478,916 (3,720,060) 3,837,799 c 4,596,655 -- 4,596,655
Accrued expenses....... 10,336,185 (6,113,895) -- 4,222,290 -- 4,222,290
Notes payable to
Partner Company....... -- -- -- -- $ 21,160,000 a 21,160,000
Deferred revenue....... 117,523 (117,523) -- -- -- --
Convertible note....... 8,499,942 -- -- 8,499,942 -- 8,499,942
------------ ------------ ------------ ------------ ------------ ------------
Total current
liabilities........... 24,168,451 (10,687,363) 7,979,424 21,460,512 21,160,000 42,620,512
--
Long-term debt......... 1,633,360 (1,633,360) 3,000,000 c 3,000,000 -- 3,000,000
Minority interest...... 25,908,961 -- 4,000,000 c 6,929,785 -- 6,929,785
(22,979,176)d
Shareholders' Equity
Total shareholders'
equity................ 418,516,597 (27,506,787) 27,506,787 d 418,516,597 -- 418,516,597
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity... $470,227,369 $(39,827,510) $ 19,507,035 $449,906,894 $ 21,160,000 $471,066,894
============ ============ ============ ============ ============ ============
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
F-35
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations for the Year
Ended December 31, 1998
<TABLE>
<CAPTION>
Internet
Capital VerticalNet Pro Forma eMerge Pro Forma
Group, Inc. Deconsolidation Adjustments Sub-Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 3,134,769 $ (3,134,769) 6,455,747 f $ 6,455,747 -- $ 6,455,747
------------ ------------ ------------ ------------ ------------ ------------
Operating Expenses
Cost of revenue........ 4,642,528 (4,642,528) -- -- -- --
Selling, general and
administrative........ 15,513,831 (12,001,245) 7,853,901 f 11,366,487 -- 11,366,487
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses.............. 20,156,359 (16,643,773) 7,853,901 11,366,487 -- 11,366,487
------------ ------------ ------------ ------------ ------------ ------------
(17,021,590) 13,509,004 (1,398,154) (4,910,740) -- (4,910,740)
Other income, net....... 30,483,177 -- -- 30,483,177 -- 30,483,177
Interest income......... 1,305,787 (212,130) 16,506 f 1,110,163 -- 1,110,163
Interest expense........ (381,199) 297,401 -- (83,798) (1,840,000)e (1,923,798)
------------ ------------ ------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 14,386,175 13,594,275 (1,381,648) 26,598,802 (1,840,000) 24,758,802
Income taxes............ -- -- -- h -- -- h --
Minority interest....... 5,381,640 -- (4,828,981)f,j 552,659 -- 552,659
Equity income (loss).... (5,868,887) -- (58,817,710)g (64,686,597) (14,309,948)e (78,996,545)
------------ ------------ ------------ ------------ ------------ ------------
Net Income (Loss)....... $ 13,898,928 $ 13,594,275 $(65,028,339) $(37,535,136) $(16,149,948) $(53,685,084)
============ ============ ============ ============ ============ ============
Net Income (Loss) Per
Share
Basic.................. $ 0.12 $ (0.48)
Diluted................ $ 0.12 $ (0.48)
Weighted Average Shares
Outstanding
Basic.................. 112,204,578 112,204,578
Diluted................ 112,298,578 112,204,578
Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine
Months Ended September 30, 1999
<CAPTION>
Internet
Capital Breakaway Pro Forma eMerge Pro Forma
Group, Inc. Deconsolidation Adjustments Sub-Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 14,783,096 $(14,743,431) 7,146,689 f 7,186,354 -- $ 7,186,354
------------ ------------ ------------ ------------ ------------ ------------
Operating Expenses
Cost of revenue........ 7,424,594 (7,038,070) -- 386,524 -- 386,524
Selling, general and
administrative........ 31,002,518 (14,722,352) 5,002,096 f,j 21,282,262 -- 21,282,262
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses.............. 38,427,112 (21,760,422) 5,002,096 21,668,786 -- 21,668,786
------------ ------------ ------------ ------------ ------------ ------------
(23,644,016) 7,016,991 2,144,593 (14,482,432) -- (14,482,432)
Other income, net....... 47,001,191 (27,607) 15,348 f 46,988,932 -- 46,988,932
Interest income......... 4,176,770 (59,510) -- 4,117,260 -- 4,117,260
Interest expense........ (1,770,324) 53,969 -- (1,716,355) -- (1,716,355)
------------ ------------ ------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 25,763,621 6,983,843 2,159,941 34,907,405 -- 34,907,405
Income taxes............ 12,840,423 -- 10,963,208 f,i 23,803,631 4,269,730 e 28,073,361
Minority interest....... 4,133,057 -- (3,412,725)f,j 720,332 -- 720,332
Equity income (loss).... (49,141,961) -- (33,483,392)g,j (82,625,353) (12,199,229)e (94,824,582)
------------ ------------ ------------ ------------ ------------ ------------
Net Income (Loss)....... $ (6,404,860) $ 6,983,843 $(23,772,968) $(23,193,985) $ (7,929,499) $(31,123,484)
============ ============ ============ ============ ============ ============
Net Income Per Share
Basic.................. $ (0.03) $ (0.17)
Diluted................ $ (0.03) $ (0.17)
Weighted Average Shares
Outstanding
Basic.................. 185,103,758 185,103,758
Diluted................ 185,103,758 185,103,758
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-36
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
1 . Basis of presentation
The unaudited pro forma condensed combined balance sheet as of September
30, 1999 gives effect to the acquisitions of Purchasing Solutions, Inc.,
Purchasing Group, Inc. and Integrated Sourcing, LLC, the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc. in November
1999, the deconsolidation of Breakaway Solutions, Inc., and the acquisition of
significant minority ownership interests in five new and six existing equity
method Partner Companies as if the transactions had occurred on September 30,
1999.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1998 gives effect to the acquisitions of Purchasing
Solutions, Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC, the
acquisition of a significant minority ownership interest in eMerge Interactive,
Inc., the deconsolidation of VerticalNet, Inc., the 1998 and 1999 acquisitions
of significant minority ownership interests in 27 equity method Partner
Companies, and the acquisition of the Company's ownership interest in Breakaway
Solutions, Inc. as a company accounted for under the equity method as if the
transactions had occurred on January 1, 1998.
The unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 1999 gives effect to the acquisitions of
Purchasing Solutions, Inc., Purchasing Group, Inc. and Integrated Sourcing,
LLC, the acquisition of a significant minority ownership interest in eMerge
Interactive, Inc., the deconsolidation of Breakaway Solutions, Inc., the 1999
acquisitions of significant minority ownership interests in 19 equity method
Partner Companies and the acquisition of the Company's ownership interest in
Breakaway Solutions, Inc. as a company accounted for under the equity method,
as if the transactions had occurred on January 1, 1998.
The effects of the acquisitions have been presented using the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets and liabilities assumed based upon management's best preliminary
estimate of fair value with any excess purchase price being allocated to
goodwill or other indentifiable 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 Purchasing Solutions, Inc.
finalize their allocations of purchase price in accordance with generally
accepted accounting principles.
2. Pro Forma Balance Sheet Adjustments
The pro forma balance sheet adjustments as of September 30, 1999 reflect:
(a) The acquisition in November 1999 of a significant minority ownership
interest in eMerge Interactive, Inc. for $48.2 million consisting of
$27.0 million in cash and a $21.2 million note payable due in one
year, net of imputed interest discount of $1.8 million.
(b) The acquisition during the period from October 1, 1999 through
November 18, 1999 of new and additional significant minority
ownership interests in equity method Partner Companies for aggregate
cash consideration of $65.6 million.
(c) The acquisition of Purchasing Group, Inc. and Integrated Sourcing,
LLC for $7.7 million in cash, $6.0 million in a note payable, $1.1
million in other debt, $0.2 million of assumed net liabilities and
$0.2 million in common stock of Purchasing Solutions, Inc. The total
purchase price of approximately $15.2 million was allocated as
follows: cash--$1.4 million, net receivables--$2.1 million, fixed
and other assets--$0.1 million, accounts payables and accruals--$3.8
million and
F-37
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
goodwill and intangibles--$15.0 million. Additionally, approximately
$4.0 million is due from another investor and is reflected as both an
other asset and minority interest.
(d) The elimination of $27.5 million for the equity accounts of
Breakaway Solutions, Inc. and the reclassification of the Company's
carrying value of its ownership interest of $11.4 million in
Breakaway Solutions, Inc. to the equity method of accounting from
consolidation.
3. Pro Forma Statements of Operations Adjustments
The pro forma statements of operations adjustments for the year ended
December 31, 1998 and the nine months ended September 30, 1999 consist of:
(e) Equity income (loss) has been adjusted to reflect the Company's
acquisition of a significant minority ownership interest in eMerge
Interactive, Inc. and the related interest in the income (loss) and
amortization of the difference in the Company's carrying value and
ownership interest in the underlying net equity of eMerge
Interactive, Inc. over an estimated useful life of three years. For
the year ended December 31, 1998 and the nine months ended September
30, 1999, equity income (loss) of $14.3 million and $12.2 million
includes $2.4 million and $3.3 million, respectively, of equity
income (loss), and $11.9 million and $8.9 million, respectively, in
amortization of the difference between cost and equity in net
assets. For the nine months ended September 30, 1999, income tax
benefit has been adjusted $4.3 million to reflect the tax effect of
the eMerge Interactive, Inc. pro forma adjustments. Additionally,
$1.8 million of interest expense is reflected during the year ended
December 31, 1998 relating to the imputed interest discount on the
$23.0 million non-interest bearing note. No interest expense is
reflected in 1999 as the note is payable in one year (assumed from
January 1, 1998).
(f) Reflects additional revenue of $6.5 million and $7.1 million,
general and administrative expenses of $7.9 million and $7.3 million
(net of excess executive compensation of approximately $3.0 million
and $3.5 million for the year ended December 31, 1998 and the nine
months ended September 30, 1999, respectively), other income of
$16,506 and $15,348, income tax of $0 and $(34,998), and minority
interest of $(552,659) and $(25,998) related to the acquisitions of
Purchasing Group, Inc. and Integrated Sourcing, LLC. Included in
general and administrative expenses is approximately $5.0 million
and $3.8 million of goodwill amortization during the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively, relating to these acquisitions.
(g) Equity income (loss) has been adjusted by $58.8 million and $31.2
million to reflect the Company's ownership interests 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
Companies and the Company's ownership interest in the underlying net
equity of the Partner Companies over an estimated useful life of
three years. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, equity income (loss) includes $23.8
million and $12.1 million, respectively, of equity income (loss) and
$35.0 million and $19.1 million, respectively, in amortization of
the difference between cost and equity in net assets.
(h) No income tax provision is required in 1998 due to the Company's tax
status as an LLC.
F-38
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
(i) Income tax benefit has been adjusted $10.9 million for the nine
months ended September 30, 1999 to reflect the tax effect of the pro
forma adjustments.
(j) Reflects elimination of $5.4 million and $3.4 million for the year
ended December 31, 1998 and the nine months ended September 30,
1999, respectively, related to VerticalNet, Inc. and Breakaway
Solutions, Inc. upon their deconsolidation, and the reclass of $2.3
million of amortization of goodwill related to the Company's
acquisition of Breakaway Solutions, Inc. from selling, general and
administrative expense to equity income (loss) upon its
deconsolidation.
F-39
<PAGE>
Independent Auditors' Report
The Board of Directors
Applica Corporation:
We have audited the accompanying balance sheet of Applica Corporation (the
"Company"), a development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows from
September 24, 1998 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applica Corporation at
December 31, 1998 and the results of its operations and its cash flows from
September 24, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-40
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
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
========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Operations
From September 24, 1998 (inception) through December 31, 1998
<TABLE>
<S> <C>
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
=========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock During Total
---------------- ---------------- Development Stockholders'
Shares Amount Shares Amount Stage Equity
------- -------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ========= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Cash Flows
From September 24, 1998 (inception) through December 31, 1998
<TABLE>
<S> <C>
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
========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements
December 31, 1998
(1) The Company
Applica Corporation (the "Company") was founded in September 1998 and
provides application hosting services. The Company has experienced losses since
inception and is subject to those risks associated with development-stage
companies. Activities since inception have consisted of development of a
business plan. Since inception and through December 31, 1998, the Company
operated with no salaried employees. Therefore, recurring operating expenses,
such as salaries and fringe benefits, are not reflected in the accompanying
financial statements. Financial statements in subsequent periods will reflect
salaries and fringe benefits.
On March 25, 1999, the Company was acquired by Breakaway Solutions, Inc.
(see note 7b).
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from five to seven years.
Equipment under capital leases is stated at the net present value of
minimum lease payments. Equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of the lease term or
estimated useful life of the asset.
(d) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-45
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements--(Continued)
(e) Loss Per Share
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128
requires the presentation of basic and diluted net loss per share for all
periods presented. Basic net loss per share is based on the weighted average
number of shares outstanding during the period. Diluted net loss per share
reflects the per share effect of dilutive stock options and other dilutive
common stock equivalents. As the Company is in a net loss position for the
period ended December 31, 1998, common stock equivalents of 500,000 for the
period ended December 31, 1998 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(f) Reporting Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income. This statement requires
that all components of comprehensive income (loss) be reported in the financial
statements in the period in which they are recognized. For the period
presented, comprehensive loss under SFAS 130 was equivalent to the Company's
net loss reported in the accompanying statement of operations.
(g) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Property and Equipment
At December 31, 1998, property and equipment consists of the following:
<TABLE>
<S> <C>
Office equipment.................................................... $41,683
Computer equipment.................................................. 3,059
-------
44,742
Less: accumulated depreciation...................................... (1,483)
-------
Property and equipment, net....................................... $43,259
=======
</TABLE>
(4) Preferred Stock
The Company's stockholders have authorized 5,000,000 shares of Series A
preferred stock. The Series A preferred stock is entitled to receive dividends
at a rate of $.05 per share per annum. The Series A preferred stock is voting
and is convertible into shares of common stock on a share-for-share basis,
subject to certain adjustments. In the event of any liquidation, dissolution or
winding up of the Company, the Series A preferred stock has a liquidation
preference of $1.00 per share. The Series A preferred stock is convertible into
common stock immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualified public offering.
F-46
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements--(Continued)
(5) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998, are as follows:
<TABLE>
<S> <C>
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....................................... $ --
=======
</TABLE>
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
(6) Commitments and Contingencies
The Company has entered into an operating lease for its office space
which expires in August 1999. Future minimum rental commitments under the lease
in 1999 are $36,000. The Company is currently exploring alternatives for new
space.
(7) Subsequent Events
(a) Loan Agreement
On March 15, 1999, the Company entered into a Loan and Security Agreement
with a Bank for a $150,000 equipment credit line which expires on June 15,
2002. This agreement terminated upon the purchase of the Company (see note 7b).
(b) Agreement and Plan of Reorganization
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all of the outstanding stock of the Company in a transaction accounted
for under the purchase method of accounting. The purchase price was comprised
of 904,624 shares of Breakaway common stock.
F-47
<PAGE>
Independent Auditors' Report
The Board of Directors Breakaway Solutions, Inc.:
We have audited the accompanying balance sheets of Breakaway Solutions, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Breakaway Solutions, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999 except for Note 11
which is as of July 12, 1999
and Note 13 which is as of October 5, 1999
F-48
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 879,136 $ 16,954 $3,205,752
Accounts receivable, net of allowance for
doubtful accounts of $65,000, $131,000
and $142,560 in 1997, 1998 and 1999,
respectively............................ 960,830 1,445,994 1,911,534
Unbilled revenues on contracts........... 232,258 625,609 799,791
Prepaid expenses......................... 27,858 46,211 72,381
Advances to employees.................... -- 13,273 7,855
---------- ---------- ----------
Total current assets..................... 2,100,082 2,148,041 5,997,313
Property and equipment, net.............. 397,102 553,566 911,487
Intangible assets, net .................. -- -- 1,437,974
Cash surrender value of life insurance... -- -- 62,441
Deposits................................. 35,726 40,877 30,528
---------- ---------- ----------
Total assets............................... $2,532,910 $2,742,484 $8,439,743
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit........................... $ -- $ 425,743 $1,001,991
Notes payable............................ -- -- 141,629
Long-term debt--current portion.......... 10,417 -- --
Capital lease obligation--current
portion................................. 181,042 148,391 134,299
Accounts payable......................... 246,060 814,074 298,347
Accrued compensation and related
benefits................................ 84,349 178,191 397,210
Accrued expenses......................... -- -- 68,111
Accrued acquisition costs................ -- -- 159,159
Deferred revenue on contracts............ -- 196,225 99,062
Stockholder distributions payable........ 434,843 -- --
---------- ---------- ----------
Total current liabilities................ 956,711 1,762,624 2,299,808
---------- ---------- ----------
Capital lease obligation--long-term
portion................................. 84,368 67,040 121,665
---------- ---------- ----------
Total 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 $.000125 par value,
80,000,000 shares authorized, 7,680,000
shares issued in 1997 and 1998 and
5,936,568 shares issued in 1999,
6,412,800, 6,124,800 and 4,381,368
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
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Years Ended December 31, Ended March 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 1,180,419 1,553,329
Sales and marketing
costs................ 3,225 13,748 50,631 9,665 114,415
General and
administrative
expenses............. 1,364,895 2,545,580 4,763,657 780,620 1,689,580
---------- ---------- ----------- ---------- ----------
Total operating
expenses........... 2,798,072 5,102,475 10,718,131 1,970,704 3,357,324
---------- ---------- ----------- ---------- ----------
Income (loss) from
operations......... 664,062 1,015,583 (700,184) 153,428 (246,289)
---------- ---------- ----------- ---------- ----------
Other income (expense):
Other income
(expense)............ -- -- 160,000 (3,021) (6,994)
Interest income....... 3,684 92,823 11,191 7,711 31,526
Interest expense...... (28,557) (32,725) (43,127) (1,348) (13,756)
Loss on disposal of
equipment............ (20,780) (2,030) (3,055) -- --
---------- ---------- ----------- ---------- ----------
Total other income
(expense).......... (45,653) 58,068 125,009 3,342 10,776
---------- ---------- ----------- ---------- ----------
Income (loss) before
income taxes........... 618,409 1,073,651 (575,175) 156,770 (235,513)
Income taxes............ -- -- -- -- --
---------- ---------- ----------- ---------- ----------
Net income (loss)....... $ 618,409 $1,073,651 $ (575,175) $ 156,770 $ (235,513)
========== ========== =========== ========== ==========
Net income (loss) per
share:
Basic and diluted..... $ 0.09 $ 0.17 $ (0.09) $ 0.02 $ (0.06)
Weighted average shares
outstanding:
Basic and diluted..... 6,641,306 6,412,800 6,340,208 6,412,800 3,758,548
Pro forma information
(Unaudited) (note 9):
Income (loss) before
taxes, as reported... $ 618,409 $1,073,651 $ (575,175) $ 156,770 $ (235,513)
Pro forma income taxes
(benefit)............ 247,364 429,460 (195,560) 62,708 (80,074)
---------- ---------- ----------- ---------- ----------
Pro forma net income
(loss)............. $ 371,045 $ 644,191 $ (379,615) $ 94,062 $ (155,439)
========== ========== =========== ========== ==========
Pro forma net income
(loss) per share--basic
and diluted............ $ 0.06 $ 0.10 $ (0.06) $ 0.01 $ (0.04)
Pro forma weighted
average shares
outstanding............ 6,641,306 6,412,800 6,340,208 6,412,800 3,758,548
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Treasury Stock
---------------- ------------------ ------------------
Additional Retained Total
Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital Shares Amount (Deficit) Equity
--------- ------ ---------- ------ ----------- ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... -- $ -- 7,680,000 $960 $ -- -- $ -- $ 330,815 $ 331,775
Purchase of treasury
stock.................. -- -- -- -- -- (1,267,200) (26) -- (26)
Distributions to
stockholders........... -- -- -- -- -- -- -- (1,841) (1,841)
Net income.............. -- -- -- -- -- -- -- 618,409 618,409
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1996................... -- -- 7,680,000 960 -- (1,267,200) (26) 947,383 948,317
Distributions to
stockholders........... -- -- -- -- -- -- -- (530,137) (530,137)
Net income.............. -- -- -- -- -- -- -- 1,073,651 1,073,651
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1997................... -- -- 7,680,000 960 -- (1,267,200) (26) 1,490,897 1,491,831
Purchase of treasury
stock.................. -- -- -- -- -- (288,000) (6) -- (6)
Distributions to
stockholders........... -- -- -- -- -- -- -- (3,830) (3,830)
Net loss................ -- -- -- -- -- -- -- (575,175) (575,175)
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1998................... -- -- 7,680,000 960 -- (1,555,200) (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.................. -- -- (2,523,600) (315) (4,468,665) -- -- -- (4,468,980)
Issuance of common stock
for acquired business.. -- -- 723,699 90 1,417,908 -- -- -- 1,417,998
Exercise of stock
options................ -- -- 56,469 7 99,993 -- -- -- 100,000
Net loss................ -- -- -- -- -- -- -- (235,513) (235,513)
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, March 31, 1999
(Unaudited)............ 5,853,000 $585 5,936,568 $742 $ 6,252,488 (1,555,200) $(32) $ (235,513) $ 6,018,270
========= ==== ========== ==== =========== ========== ==== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ 618,409 1,073,651 (575,175) 156,770 (235,513)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 46,484 254,217 332,994 56,609 104,780
Loss on disposal of
fixed assets.......... 20,780 2,030 3,055 -- --
Changes in operating
assets and liabilities,
net of impact of
acquisition of
business:
Accounts receivable.... (361,107) (471,676) (485,164) (726,282) (499,219)
Unbilled revenues on
contracts............. -- -- (393,351) -- (174,182)
Inventory.............. 12,831 -- -- -- --
Prepaid and other
assets................ (47,046) 69,096 (18,353) (43,679) (5,741)
Accounts payable....... (39,707) 222,239 568,014 84,707 (666,829)
Accrued compensation
and related benefits.. -- 63,387 93,842 (83,478) 366,441
Accrued expenses....... 1,500 -- -- -- 68,111
Deferred revenue on
contracts............. (77,070) -- 196,225 -- (97,163)
--------- ---------- --------- -------- ----------
Net cash provided by
(used in) operating
activities............ 175,074 1,212,944 (277,913) (555,353) (1,139,315)
--------- ---------- --------- -------- ----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (18,950) (132,937) (502,461) (97,100) (72,442)
Proceeds from disposal
of fixed assets....... -- 13,200 9,948 -- --
Increase in cash
surrender value of
life insurance........ -- -- -- -- (62,441)
--------- ---------- --------- -------- ----------
Net cash used in
investing activities.. (18,950) (119,737) (492,513) (97,100) (134,883)
--------- ---------- --------- -------- ----------
Cash flows from
financing activities:
Proceeds from issuance
of preferred stock.... -- -- -- -- 8,291,945
Proceeds from exercise
of stock options...... -- -- -- -- 100,000
Repurchase and
retirement of common
stock................. -- -- -- -- (4,468,980)
Advances to employees.. -- -- (13,273) -- --
Repayments of advances
to employees.......... 163 -- -- -- 5,418
Payments on current
portion of long-term
debt.................. -- -- (10,417) (3,125) --
Proceeds from
(repayments of) credit
line.................. (125,000) -- 425,743 -- 576,248
(Increase) decrease in
deposits.............. (216) (18,211) (5,151) (3,102) 17,681
Distributions to
stockholders.......... (1,841) (95,750) (438,673) -- --
Repurchase of treasury
stock................. (26) -- (6) -- --
Payments of capital
lease obligations..... (38,813) (184,224) (49,979) (6,522) (59,316)
--------- ---------- --------- -------- ----------
Net cash provided by
(used in) financing
activities............ (165,733) (298,185) (91,756) (12,749) 4,462,996
--------- ---------- --------- -------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (9,609) 795,022 (862,182) (665,202) 3,188,798
Cash and cash
equivalents at
beginning of period.... 93,723 84,114 879,136 879,136 16,954
--------- ---------- --------- -------- ----------
Cash and cash
equivalents at end of
period................. $ 84,114 879,136 16,954 213,934 3,205,752
========= ========== ========= ======== ==========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ 28,557 32,725 43,127 1,348 13,756
========= ========== ========= ======== ==========
Supplemental disclosures
of non-cash investing
and financing
activities:
Capital lease
obligations........... $ 42,742 331,511 13,720 -- 99,849
========= ========== ========= ======== ==========
Distributions payable
to stockholders....... $ -- 434,843 -- -- --
========= ========== ========= ======== ==========
Issuance of common
stock in connection
with acquisition of
business.............. $ -- -- -- -- 1,417,998
========= ========== ========= ======== ==========
Acquisition of business:
Assets acquired........ $ -- -- -- -- 1,903,567
Liabilities assumed and
issued................ -- -- -- -- (485,569)
Common stock issued.... -- -- -- -- (1,417,998)
--------- ---------- --------- -------- ----------
Net cash paid for
acquisition of
business.............. $ -- -- -- -- --
========= ========== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes To Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (unaudited)
(1) The Company
Breakaway Solutions, Inc. (the "Company"), formerly The Counsell Group,
Inc., was established in 1992 to provide information technology consulting
services to businesses. The Company specializes in designing, developing and
implementing applications and business solutions for growing enterprises
throughout the United States.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
(c) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and debt instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company's customers are
headquartered primarily in North America. At December 31, 1997 and 1998,
amounts due from three customers represented $503,750 or 40% and $683,149 or
33%, respectively, of total accounts receivable.
The fair market values of cash and cash equivalents, accounts receivable
and debt instruments at both December 31, 1997 and 1998 approximate their
carrying amounts.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded on
the straight-line basis over the estimated useful life of the related assets
which range from three to six years. Equipment held under capital leases is
stated at the present value of minimum lease payments at the inception of the
lease and amortized using the straight-line method over the lease term.
Maintenance and repairs are charged to operations when incurred.
F-53
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(e) Intangible assets
Intangible assets relate to the Company's purchase of its wholly owned
subsidiary, Applica Corporation, on March 25, 1999 (see note 11c). Such costs
are being amortized on a straight-line basis over five years, the period
expected to be benefited. Intangible assets consisted of the following at March
31, 1999:
<TABLE>
<S> <C>
Assembled workforce............................................ $ 201,000
Goodwill....................................................... 1,236,974
----------
1,437,974
Less: accumulated amortization................................. --
----------
$1,437,974
==========
</TABLE>
(f) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(g) Revenue Recognition
Revenues pursuant to fixed-fee contracts are recognized as services are
rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues pursuant to time
and material contracts are recognized as services are provided. Unbilled
revenues on contracts are comprised of costs plus earnings. Billings in excess
of costs plus earnings are classified as deferred revenues.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such
losses are determined.
(h) Project Personnel Costs
Project personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(i) Income Taxes
The Company was taxed under the provisions of Subchapter S of the
Internal Revenue Code, whereby the corporate income is taxed to the individual
shareholders based on their proportionate share of the Company's taxable
income. Massachusetts taxes profits on S Corporations with receipts exceeding
$6,000,000.
Effective January 1, 1999, the Company terminated its S Corporation
election and is subject to corporate-level federal and certain additional state
income taxes. Accordingly, the accompanying consolidated statements of
operations include a pro forma income tax adjustment (see note 9) for the
income taxes that would have been recorded if the Company had been a C
Corporation for all periods presented.
(j) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation. As permitted by SFAS
123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock
F-54
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
Issued to Employees, and related interpretations. Accordingly, no accounting
recognition is given to stock options issued to employees that are granted at
fair market value until they are exercised. Stock options issued to non-
employees are recorded at fair value at the date of grant. Upon exercise, net
proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the pro forma impact on income
(loss) per share has been disclosed in the notes to the financial statements as
required by SFAS 123 (see note 4c).
(k) Net Income (Loss) Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128
requires the presentation of basic and diluted income (loss) per share for all
periods presented. As the Company has been in a net loss position for the year
ended December 31, 1998 and the three months ended March 31, 1999, common stock
equivalents of 647,474 for the year ended December 31, 1998 and 859,558 for the
three months ended March 31, 1999 were excluded from the diluted loss per share
calculation as they would be antidilutive. There were no common stock
equivalents outstanding in 1996 and 1997. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(l) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. For each
year reported, comprehensive income (loss) under SFAS 130 was equivalent to the
Company's net income (loss) reported in the accompanying consolidated
statements of operations.
(m) Unaudited Interim Financial Information
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been included. Results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected
for the full fiscal year or any future periods.
(n) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
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
========= ==========
</TABLE>
F-55
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The cost and related accumulated amortization of property and equipment
held under capital leases is as follows at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cost................................................... $ 400,297 $ 394,637
Less: Accumulated amortization......................... (157,593) (332,053)
--------- ---------
$ 242,704 $ 62,584
========= =========
</TABLE>
(4) Capital Stock
(a) Preferred Stock
In October 1998, the Company's stockholders authorized 5,853,000 shares
of Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock is entitled to receive dividends at a rate of $.1136 per share, as and if
declared. The Series A Convertible Preferred Stock is voting and is convertible
into shares of common stock on a share-for-share basis, subject to certain
adjustments. In the event of any liquidation, dissolution or winding up of the
Company, the Series A Convertible Preferred Stock has a liquidation preference
of $1.41667 per share. The Series A Convertible Preferred Stock is convertible
into common stock immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualifying initial public
offering (see note 11a).
(b) Stock Splits
In June 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).
F-56
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
A summary of the status of the Company's Stock Plan is presented below:
<TABLE>
<CAPTION>
(Unaudited)
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
------------------------- -------------------------
Weighted Weighted
average average
Fixed options Shares exercise price Shares exercise price
- ------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period................ -- $ -- 4,794,235 $1.25
Granted................. 4,896,703 1.24 2,534,433 1.85
Exercised............... -- -- (56,469) 1.78
Forfeited............... (102,468) 0.76 (66,626) .68
--------- ----- --------- -----
Outstanding at end of pe-
riod..................... 4,794,235 1.25 7,205,573 1.46
========= =========
Options exercisable at end
of period................ 2,088,504 2,451,941
========= =========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------- --------------------------
Weighted average Weighted
Number remaining Number average
Exercise prices outstanding contractual life exercisable exercise price
--------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$0.68 2,221,195 9.5 years 1,460,004 $0.68
1.01 103,920 9.75 years 16,800 1.01
1.79 2,469,120 10 years 611,700 1.79
--------- ---------
4,794,235 9.76 years 2,088,504 1.00
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
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)
========= =========
</TABLE>
F-57
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The per share weighted average fair value of stock options granted during
1998 and 1999 was $0.50 and $0.75, respectively, on the date of grant, using
the minimum value option-pricing model with the following weighted average
assumptions used: no expected dividend yield, risk free interest rate of 7%,
and expected life of ten years.
(5) Commitments and Contingencies
(a) Operating Leases
The Company leases its facilities under various operating leases expiring
in 2002. Such leases include provisions that may require the Company to pay its
proportionate share of operating costs, which exceed specific thresholds. Rent
expense for the years ended December 31, 1996, 1997 and 1998 was $144,499,
$203,511 and $576,509, respectively and $62,758 and $139,981 for the three-
months ended March 31, 1998 and 1999, respectively. Other income in 1998
consists primarily of a payment received by the Company in connection with the
early termination of its existing office lease.
(b) Capital Leases
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for two years, with annual
interest at rates ranging from 5.4% to 15.68%. The leased equipment secures all
leases.
The following is a schedule of future minimum rental payments required
under the above leases as of December 31, 1998:
<TABLE>
<CAPTION>
Operating Capital
leases leases
---------- ---------
<S> <C> <C>
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
=========
</TABLE>
(6) Line of Credit
The Company had a $750,000 bank revolving line of credit (increased to
$1,300,000 in February 1999) at prime plus 1/2% (8.25% at December 31, 1998)
which terminated in 1999. At December 31, 1997 and 1998, the Company borrowed
$0 and $425,743, respectively under this line of credit.
F-58
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(7) Significant Customers
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
Years Ended December 31, March 31,
------------------------ ------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(8) Deferred Compensation Plan
The Company sponsors a qualified 401(k) deferred compensation plan (the
"Plan"), which covers substantially all of its employees. Participants are
permitted, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, to contribute up to 15% of their earnings into the Plan. The
Company may make matching contributions at its discretion. The Company elected
not to contribute to the Plan for the years ended December 31, 1996, 1997 and
1998.
(9) Taxes (Unaudited)
As discussed in note 2, effective January 1, 1999, the Company terminated
its S Corporation election and will be subject to corporate-level federal and
certain state income taxes. Upon termination of the S Corporation status,
deferred income taxes are recorded for the tax effect of cumulative temporary
differences between the financial reporting and tax bases of certain assets and
liabilities, primarily deferred revenue that must be recognized currently for
tax purposes, accrued expenses that are not currently deductible, cumulative
differences between tax depreciation and financial reporting allowances, and
the impact of the conversion from the cash method to the accrual method of
reporting for tax purposes.
Pro forma income tax expense (benefit), assuming the Company had been a C
Corporation and applying the tax laws in effect during the periods presented,
for each of the three years in the period ended December 31, 1998 would have
been as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
Years Ended December 31, March 31,
--------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Federal tax................. $210,259 $365,042 $(195,560) $25,629 $(80,074)
State taxes, net of
federal.................... 37,105 64,418 -- 4,523 --
-------- -------- --------- ------- --------
$247,364 $429,460 $(195,560) $30,152 $(80,074)
======== ======== ========= ======= ========
</TABLE>
F-59
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
(10) Operating Segments
Historically, the Company has operated in a single segment. With the
acquisition of Applica Corporation, the Company expanded its operations to
include a second segment, application hosting. To date, Applica Corporation, a
development-stage company, has generated no revenues. Total assets relating to
the application hosting business of Applica Corporation are $1,903,567 as of
March 31, 1999.
(11) Subsequent Events
(a) Series A Convertible Preferred Stock Financing
In January 1999, the Company issued 5,853,000 shares of Series A
Convertible Preferred Stock, $.0001 par value, for $1.41667 per share (see note
4a).
(b) Litigation
On March 2, 1999 the Company and its Chief Executive Officer ("CEO")
became parties to a civil action filed by Cambridge Technology Partners, Inc.
("CTP"). The suit alleges violation of employment and severance agreements by
the CEO who is a former CTP employee. CTP is seeking monetary damages against
the Company for interference with the former employee's contractual relations
with CTP. Management of the Company believes that the suit is without merit and
intends to vigorously defend against the action. In the opinion of management,
the amount of ultimate liability with respect to this action will not
materially affect the financial position or results of operations of the
Company.
(c) Acquisitions
Subsequent to December 31, 1998, the Company entered into the following
acquisitions, which will be accounted for under the purchase method of
accounting:
.Applica Corporation
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 723,699 shares of common stock.
.WPL Laboratories, Inc.
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, 1,364,140 shares of common stock
and the assumption of all outstanding WPL stock options, which
became exercisable for 314,804 shares of the Company's common
stock at a an exercise price of $2.36 per share with a four-year
vesting period. The WPL stockholders received one half of their
cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder
does not voluntarily terminate his employment and is not
terminated for cause. Of the shares of common stock issued to the
former WPL stockholders, approximately fifty-
F-60
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
percent are subject to the Company's right, which lapses
incrementally over a four-year period, to repurchase the shares of
a particular stockholder, at their value at the time of the
acquisition, upon the stockholder's resignation or the Company's
termination of the stockholder for cause. In connection with the
stock issuance, the Company provided approximately $1,200,000 in
loans to stockholders. The loans which bear interest at prime plus
1% are due at the earlier of the sale of stock or four years.
.Web Yes, Inc.
On June 10, 1999, the Company entered into an agreement to acquire
all the outstanding stock of Web Yes, Inc., a provider of web
hosting services. The purchase price was comprised of 456,908
shares of common stock. Of the shares of common stock issued to
the former Web Yes stockholders, 342,680 are subject to the
Company's right, which lapses incrementally over a four-year
period, to repurchase the shares of the particular stockholder
upon the termination of his employment with Breakaway. The
repurchase price shall be either at the share value at the time of
the acquisition if the stockholder terminates employment or is
terminated for cause, or at the fair market value if the
stockholder's employment is terminated without cause.
Related Party Advances
In May 1999, Internet Capital Group, holder of the Company's Series A
Convertible Preferred Stock, provided $4,000,000 in advances which were
converted into equity in July, 1999. In connection with this transaction, the
Company issued Internet Capital Group a warrant to purchase 73,872 shares of
common stock at an exercise price of $8.13 per share.
Series B Convertible Preferred Stock
In July 1999, the Company issued 2,931,849 shares of Series B Convertible
Preferred Stock, $.0001 par value, for $6.50 per share. The Series B
Convertible Preferred Stock is entitled to receive dividends at a rate of $0.52
per share as and if declared. The Series B Convertible Preferred Stock is
voting and is convertible into shares of common stock on a share-per-share
basis, subject to certain adjustments. In the event of any liquidation,
dissolution or winding up of the Company, the Series B Convertible Preferred
Stock has a liquidation preference of $6.50 per share. The Series B Convertible
Preferred Stock is convertible into common stock immediately at the option of
the holder, and automatically converts into common stock upon the completion of
a qualifying initial public offering.
1999 Stock Incentive Plan
The 1999 Stock Incentive Plan was adopted in July 1999. The 1999 plan is
intended to replace the 1998 plan. Up to 4,800,000 shares of common stock
(subject to adjustment in the event of stock splits and other similar events)
may be issued pursuant to awards granted under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted in July 1999. The
purchase plan authorizes the issuance of up to a total of 400,000 shares of
common stock to participating employees.
F-61
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The following employees, including directors who are employees and
employees of any participating subsidiaries, are eligible to participate in the
purchase plan:
. Employees who are customarily employed for more than 20 hours per
week and for more than five months per year; and
. Employees employed for at least three months prior to enrolling in
the purchase plan.
Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the Company's stock or any subsidiary
are not eligible to participate.
(12) Purchase Price Allocation (Unaudited)
In August 1999 the Company finalized the allocation of the tangible and
intangible assets of the Acquired Companies. As a result, the excess of
purchase price over the fair value of tangible assets and liabilities has been
recorded as intangible assets, as follows:
<TABLE>
<CAPTION>
APPLICA WPL WEB YES
---------- ---------- ----------
<S> <C> <C> <C>
Purchase consideration:
Cash...................................... -- $4,674,997 $ 188,075
Issuance of common stock.................. $1,417,998 4,825,811 3,712,378
---------- ---------- ----------
Total purchase consideration.......... 1,417,998 9,500,808 3,900,453
Direct cost of acquisition.................. 159,159 105,654 179,210
---------- ---------- ----------
Total purchase price.................. $1,577,157 $9,606,462 $4,079,663
========== ========== ==========
Tangible assets and liabilities:
Cash and cash equivalents................. $ 147,422 $ 238,242 $ 11,171
Accounts receivable....................... -- 791,980 139,973
Prepaid expense........................... 20,429 -- --
Property and equipment.................... 290,410 166,202 190,700
Other assets.............................. 7,332 16,934 34,298
Notes payable............................. (141,629) -- --
Accounts payable.......................... (151,102) (35,751) (10,970)
Accrued expenses.......................... (33,679) (196,728) (33,080)
Deferred tax liability.................... -- (567,000) (188,000)
Capital leases............................ -- -- (133,806)
---------- ---------- ----------
Net tangible assets..................... $ 139,183 $ 413,879 $ 10,286
Intangible assets:
Customer base............................. -- $1,037,000 $ 426,000
Workforce in place........................ $ 201,000 445,000 206,000
---------- ---------- ----------
Goodwill.................................. 1,236,974 7,710,583 3,437,377
---------- ---------- ----------
Total intangible assets............... 1,437,974 9,192,583 4,069,377
---------- ---------- ----------
Total purchase price.................. $1,577,157 $9,606,462 $4,079,663
========== ========== ==========
</TABLE>
Intangible assets will be amortized over the useful lives of three years
for both assembled workforce and customer base and five years for goodwill.
F-62
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(13) Authorized Share Increase and Stock Split
In July 1999 the Board of Directors approved an increase in the number of
authorized common shares from 20,000,000 to 80,000,000, and is expected to
approve, in September 1999, approved a four-for-five stock split. All share
data shown in the accompanying financial statements have been retroactively
restated to reflect this stock split.
(14) Initial Public Offering (Unaudited)
On October 5, 1999 the Company issued 3,450,000 shares of its common
stock (450,000 shares of which represented the underwriters exercise of its
overallotment option), $0.000125 par value per share, for proceeds of
approximately $39,600,000 (net of underwriting discounts and costs). The
Company intends to use the proceeds for working capital and other general
corporate purposes.
F-63
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of CommerceQuest, Inc.
(formerly MessageQuest, Inc.)
In our opinion, the accompanying balance sheets and the related
statements of income, of changes in stockholders' (deficit) equity and of cash
flows present fairly, in all material respects, the financial position of
CommerceQuest, Inc. at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
February 26, 1999, except as to the stock split described in note 11 for which
the date is March 10, 1999
F-64
<PAGE>
COMMERCEQUEST, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, (Unaudited)
---------------------- September
1997 1998 30, 1999
---------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............... $ 709,803 $ 1,807,369 $ 707,962
Accounts receivable, net of allowance of
$48,000 at December 31, 1997 and 1998
and September 30, 1999................. 3,639,098 3,678,627 2,691,676
Unbilled accounts receivable............ 647,206 2,465,292 528,187
Other current assets.................... 48,744 234,505 233,210
---------- ----------- -----------
Total current assets.................. 5,044,851 8,185,793 4,161,035
Property and equipment, net............... 781,318 3,725,818 4,591,555
Capitalized software...................... -- -- 1,363,784
Other assets.............................. 15,780 363,846 698,111
---------- ----------- -----------
Total assets.......................... $5,841,949 $12,275,457 $10,814,485
========== =========== ===========
Liabilities and Stockholders' (Deficit)
Equity
Current liabilities:
Accounts payable and accrued expenses... $2,927,494 $ 5,102,468 $ 2,731,016
Deferred revenue........................ 493,674 1,013,760 3,201,202
Current portion of long-term debt....... 123,379 169,402 233,932
---------- ----------- -----------
Total current liabilities............. 3,544,547 6,285,630 6,166,150
Other liabilities....................... -- 231,518 862,744
Revolving lines of credit............... -- 233,744 426,338
Long-term debt.......................... 386,578 157,771 141,756
---------- ----------- -----------
Total liabilities..................... 3,931,125 6,908,663 7,596,988
---------- ----------- -----------
Convertible subordinated debentures..... -- 10,800,000 15,800,000
---------- ----------- -----------
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 (deficit)............. 1,429,124 1,385,059 (5,764,238)
---------- ----------- -----------
1,910,824 1,866,759 (5,282,538)
Less treasury stock of 12,725,420
shares, at cost........................ -- (7,299,965) (7,299,965)
---------- ----------- -----------
Total stockholders' (deficit) equity.. 1,910,824 (5,433,206) (12,582,503)
---------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity................... $5,841,949 $12,275,457 $10,814,485
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
COMMERCEQUEST, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensed products..... $ 4,226,208 $ 5,000,698 $ 4,507,934 $ 2,986,830 $ 2,622,399
Professional
services............. 5,042,263 5,529,498 12,561,392 9,092,199 9,051,629
Reselling............. 9,184,437 13,680,505 14,029,063 9,812,574 1,959,625
----------- ----------- ----------- ----------- -----------
18,452,908 24,210,701 31,098,389 21,891,603 13,633,653
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Technical support..... -- 150,954 500,653 292,310 245,486
Services.............. 3,191,054 3,817,452 8,094,721 5,860,561 6,140,266
Reselling............. 7,957,255 11,385,342 11,184,289 8,037,260 1,437,509
----------- ----------- ----------- ----------- -----------
11,148,309 15,353,748 19,779,663 14,190,131 7,823,261
----------- ----------- ----------- ----------- -----------
Gross margin............ 7,304,599 8,856,953 11,318,726 7,701,472 5,810,392
Operating expenses:
Sales and marketing... 848,681 1,388,530 2,802,482 1,371,210 5,993,333
Product development... 1,542,867 2,540,529 2,146,653 1,308,619 1,445,373
General and
administrative....... 2,932,577 3,003,253 3,964,803 3,264,140 4,314,024
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,324,125 6,932,312 8,913,938 5,943,969 11,752,730
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. 1,980,474 1,924,641 2,404,788 1,757,503 (5,942,338)
Other income (expense):
Interest expense...... (26,506) (14,513) (362,040) (130,097) (698,873)
Other................. 11,155 190,283 83,187 67,872 (88,950)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 1,965,123 $ 2,100,411 $ 2,125,935 $ 1,695,278 $(6,730,161)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
COMMERCEQUEST, INC.
Statements of Changes in Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Retained
-------------------- Paid-In ---------------------- Earnings
Shares Amount Capital Shares Amount (Deficit) Total
---------- -------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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).... -- -- -- -- -- (6,730,161) (6,730,161)
Dividends declared and
paid (unaudited)....... -- -- -- -- -- (419,136) (419,136)
---------- -------- -------- ---------- ----------- ----------- ------------
Balance, September 30,
1999
(unaudited)............ 25,000,000 $ 50,000 $431,700 12,725,420 $(7,299,965) $(5,764,238) $(12,582,503)
========== ======== ======== ========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
COMMERCEQUEST, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 1,965,123 $ 2,100,411 $ 2,125,935 $ 1,695,278 $(6,730,161)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Non-cash compensation
expense.............. 460,000 -- -- -- --
Depreciation and
amortization......... 144,411 323,894 536,454 353,347 657,962
Loss on disposal of
property............. -- -- -- -- 45,764
Accrued interest on
convertible
debentures........... -- -- -- 42,192 633,228
Changes in operating
assets and
liabilities:
Accounts receivable.. (5,475,784) 2,409,399 (39,529) 1,186,141 1,055,678
Unbilled accounts
receivable.......... -- (623,580) (1,818,086) 269,922 1,937,105
Other receivables.... 7,343 3,642 -- -- --
Other assets......... (29,072) (30,740) (456,083) (342,988) (227,172)
Stockholder
receivables......... (139,347) 3,877 -- -- --
Accounts payable and
accrued expenses.... 4,754,771 (2,027,734) 1,902,920 1,944,475 (2,393,999)
Deferred revenue..... -- 493,674 520,086 360,024 2,187,442
Other liabilities.... -- -- 231,518 -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
operating
activities......... 1,687,445 2,652,843 3,003,215 5,508,391 (2,834,153)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (453,591) (641,160) (3,208,611) (2,095,934) (1,592,263)
Proceeds from disposal
of property and
equipment............ -- -- -- -- 22,800
Acquisition of
business, net of cash
received............. -- -- -- -- (151,978)
Capitalized software
development costs.... -- -- -- -- (1,363,784)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (453,591) (641,160) (3,208,611) (2,095,934) (3,085,225)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds under
convertible
subordinated
debenture............ -- -- 5,821,967 5,821,967 5,000,000
Borrowings under note
payable agreements... 138,000 400,000 102,343 102,343 173,980
Principal payments on
notes payable........ (248,939) (28,982) (146,188) (106,396) (127,467)
Stockholder loans..... 531,020 -- 729,003 729,003 --
Payments on
stockholder loans.... (1,266,703) (85,000) (867,942) (867,942) --
Borrowings under line
of credit............ 1,854,000 2,104,000 1,661,126 -- 5,325,205
Payments on line of
credit............... (2,104,000) (2,104,000) (1,427,382) -- (5,132,611)
Dividends paid........ -- (1,725,130) (2,170,000) (2,170,000) (419,136)
Purchase of treasury
stock, at cost....... -- -- (2,399,965) (1,369,872) --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
financing
activities......... (1,096,622) (1,439,112) 1,302,962 2,139,103 4,819,971
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 137,232 572,571 1,097,566 5,551,560 (1,099,407)
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 $ 6,261,363 $ 707,962
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Interest paid during
the period........... $ 26,506 $ 14,513 $ 130,522 $ 87,900 $ 65,700
=========== =========== =========== =========== ===========
Supplemental disclosure
of non-cash financing
activities:
See notes 2 and 6
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements
For the Years Ended December 31, 1996, 1997 and 1998
And the Nine Months Ended September 30, 1998 and 1999 (Unaudited)
1. Organization and Operations
CommerceQuest, Inc. (the "Company," formerly MessageQuest, Inc.) 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.
Effective August 2, 1999, the Company acquired 100% of the outstanding
common shares of Electronic Trends, Inc. The business primarily provided staff
services in the electronic data interface professional services market.
Consideration included $151,978, net of cash acquired. The acquisition has been
accounted for using the purchase method of accounting for acquisitions and,
accordingly, the results of operations have been included in the September 30,
1999 (unaudited) financial statements since the effective date of acquisition.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company licenses its software products to end users pursuant to
perpetual license agreements. Amounts billed in advance of installation and
pending completion of remaining significant obligations are deferred. Revenue
from software licenses is recognized upon sale and shipment. Royalty revenue
from licensing agreements with third-party distributors is recognized when
earned. For the years ended December 31, 1996 and 1997, revenue from the sale
of software was recognized in accordance with Statement of Position ("SOP") 91-
1, Software Revenue Recognition. Beginning January 1, 1998, revenue from the
sale of software is recognized in accordance with SOP 97-2, Software Revenue
Recognition. SOP 97-2 requires the total contract revenue to be allocated to
the various elements of the contract based upon objective evidence of the fair
values of such elements and allows for only allocated revenue to be recognized
upon completion of those elements. The effect of the adoption of SOP 97-2 was
not significant to the Company's results of operations for the year ended
December 31, 1998. Amounts billed in advance of recognized revenue are
deferred. For contracts for professional services, revenue is recognized as the
services are performed. Revenue from support/maintenance contracts is
recognized ratably over the contract period as the services are performed.
Unbilled accounts receivable represent revenue on contracts to be billed
in subsequent periods in accordance with the terms of such contracts, as well
as revenue from reselling transactions for which the customer has yet to be
billed.
During 1996, the Company entered into a contract for the sale of a
license for certain message-oriented middleware and database products to BMC
Software, Inc. for $5,450,000. The Company recognized revenues under this
contract of approximately $3,800,000 during 1996. The remaining revenues of
approximately $1,650,000 were recognized during 1997.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with
original maturities of three months or less to be cash equivalents.
F-69
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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.
Software Development Costs
Development costs incurred in the research and development of new
software products and enhancements to existing software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standard
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Capitalization ceases upon general release to
customers. Such costs are amortized over the economic life of the related
product. Through December 31, 1998, the period between achieving technological
feasibility and the general availability of such software have been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, such amounts to date have been expensed as
incurred. The Company performs an annual review of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
Income Taxes
Prior to June 1999, the Company elected to be taxed as an S Corporation
under the provision of the Internal Revenue Code whereby taxable income is
generally reported by the shareholders on their individual income tax returns.
The S Corporation election was terminated on June 2, 1999, and subsequently the
Company became subject to U.S. federal and state income taxes as a C
Corporation. The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recorded to
reflect the tax consequences on future years differences between the tax basis
of assets and liabilities and their financial reporting amounts at each year-
end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. A valuation
allowance is provided against the future benefit of deferred tax assets if it
is determined that it is more likely than not that the future tax benefits
associated with the deferred tax asset will not be realized.
Statement of Cash Flows
During the year ended December 31, 1997, the Company was repaid certain
receivables from stockholders in the amount of $135,470 through a reduction in
dividend payments. Acquisitions of capital assets of $272,054 were included in
accounts payable and accrued expenses as of December 31, 1998. Accordingly,
these noncash transactions have been excluded from the accompanying statements
of cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-70
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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 nine months ended September 30, 1998 and 1999 (unaudited).
Unaudited Financial Statements
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 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 nine months ended September 30,
1999 are not necessarily indicative of the results to be obtained for the full
fiscal year ending December 31, 1999.
Segment Reporting
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 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 No. 131 also requires disclosures about
products and services, geographic areas, and major customers. Currently, there
is no additional segment information required to be disclosed.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 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. This statement was amended by SFAS No. 137, "Accounting for
Derivatives and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." As a result, SFAS No. 133 will be effective in 2001 for the
Company. 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.
F-71
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
3. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company maintains substantially all of its cash
investments with what it believes to be high credit quality financial
institutions. Sales and accounts receivable to customers that exceeded 10% of
total revenues and total accounts receivable are as follows:
<TABLE>
<CAPTION>
Sales Accounts Receivable
--------------------------------------------------- -------------------------------
(Unaudited)
Nine Months
Year Ended December 31, Ended September 30, December 31, (Unaudited)
--------------------------- ------------------- --------------- September 30,
1996 1997 1998 1998 1999 1997 1998 1999
------- ------- ------- --------- --------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer A.............. 22% 17% -- -- -- -- -- --
Customer B.............. 32% 15% 23% 23% -- 26% 33% --
Customer C.............. -- 15% -- -- -- -- -- --
Customer D.............. -- -- 12% 12% -- -- 24% --
Customer E.............. -- -- -- -- -- -- 15% --
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, (Unaudited)
Useful ----------------------- September 30,
Lives 1997 1998 1999
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Buildings..................... 39 years $ -- $ 2,290,956 $ 2,538,151
Furniture and equipment....... 7 years 331,902 552,889 516,988
Computers..................... 5 years 998,424 1,960,863 3,163,543
Leasehold improvements........ 7 years 7,059 13,342 13,342
---------- ----------- -----------
1,337,385 4,818,050 6,232,024
Less accumulated depreciation
and amortization............. (556,067) (1,092,232) (1,640,469)
---------- ----------- -----------
$ 781,318 $ 3,725,818 $ 4,591,555
========== =========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
and for the nine months ended September 30, 1998 and 1999 (unaudited)
approximated $144,000, $324,000, $536,000, $353,000 and $658,000, respectively.
F-72
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------- September 30,
1997 1998 1999
--------- --------- --------------
<S> <C> <C> <C>
Notes payable, bearing interest at
9.95%, principal and interest due
in monthly installments;
collateralized by certain fixed
assets............................ $ 371,018 $ 327,173 $ 201,708
Note payable, bearing interest at
8.95%, principal and interest due
in quarterly installments;
collateralized by certain computer
software.......................... -- -- 173,980
Notes payable to stockholder, non-
interest bearing, principal
payable in January 1999. Paid in
full during 1998.................. 138,939 -- --
--------- --------- ---------
509,957 327,173 375,688
Less current portion............... (123,379) (169,402) (233,932)
--------- --------- ---------
$ 386,578 $ 157,771 $ 141,756
========= ========= =========
</TABLE>
Maturities of notes payable for the years subsequent to September 30,
1999 (unaudited) are as follows:
<TABLE>
<S> <C>
2000........................................................... $235,934
2001........................................................... 77,704
2002........................................................... 62,050
</TABLE>
6. Convertible Subordinated Debentures
In September and October 1998, the Company issued a total of $10,800,000
of 7.00% convertible subordinated debentures maturing through October 2003.
The convertible subordinated debentures are exchangeable at any time into
common stock of the Company at an exchange price of $2.52 per share, subject
to adjustment. Provisions of the debenture agreements contain certain
covenants, the most restrictive of which limits the payment of dividends and
the creation of additional indebtedness.
In connection with the transaction, $5,300,000 of the proceeds was used
to repurchase shares of stock from certain shareholders. The lender agreed to
pay $4,900,000 of this amount; accordingly, this amount has been reflected as
a non-cash transaction and excluded from the statement of cash flows for the
year ended December 31, 1998. Approximately $78,000 of the subordinated
debenture issue costs were withheld from the proceeds and have been included
in other assets in the financial statements as of December 31, 1998.
Accordingly, this amount has been reflected as a non-cash transaction and
excluded from the statement of cash flows for the year ended December 31,
1998.
During July 1999, the Company issued a total of $5,000,000 of 7.00%
convertible subordinated debentures maturing on July 19, 2004. The convertible
subordinated debentures are exchangeable at any time into common stock of the
Company at an exchange price of $4.1637 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.
F-73
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
7. Lines of Credit
During 1998, the Company entered into a line of credit facility with a
financial institution in the amount of $1,000,000 to finance working capital
needs. At December 31, 1998 and September 30, 1999 (unaudited) there were $0
and $425,648, respectively, of borrowings under this facility. 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
September 30, 1999 (unaudited) there were $226,850 and $0, 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 8.11% borrowing rates at December 31, 1998 and
September 30, 1999 (unaudited), respectively). At December 31, 1998 and
September 30, 1999 (unaudited), there were $6,894 and $690, respectively, of
borrowings under this credit facility. There was $2,196,086 and $2,273,662
available under the three facilities at December 31, 1998 and September 30,
1999 (unaudited), respectively. The weighted-average interest rates under these
facilities for the year ended December 31, 1998 and the nine months ended
September 30, 1999 (unaudited), were 8.03% and 6.59%, respectively.
8. Fair Value of Financial Instruments
The fair value of short-term financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable and certain accrued
expenses approximates their carrying amounts in the financial statements due to
the short maturity of such instruments.
The carrying amount of the lines of credit issued pursuant to the
Company's bank credit agreement approximates fair value because the interest
rates change with market interest rates.
The fair value of the Company's long-term debt approximates carrying
value based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturities.
The Company believes that it is not practical to estimate the fair value
of the convertible subordinate debentures with a carrying value of $15,800,000,
as these debentures have numerous unique features.
F-74
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
9. Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal....................... $ -- $ -- $ --
State and local............... -- -- --
------ ------ ------
-- -- --
------ ------ ------
Deferred:
Federal....................... -- -- --
State and local............... -- -- --
------ ------ ------
Total provision for income
taxes...................... $ -- $ -- $ --
====== ====== ======
</TABLE>
Prior to June 2, 1999, the Company had elected to be taxed as an S-
corporation and thus, all income of the Company was passed through to the
shareholders and taxed at their level. Effective June 2, 1999, the Company
elected C-corporation status for income tax reporting purposes and at this time
adopted Statement of Financial Accounting Standard No. 109, Accounting for
Income Taxes (FAS 109). To account for this change in tax status, the Company
recorded a deferred benefit of $60,760. This provision reflected the temporary
differences between the tax basis of assets and liabilities and their financial
statement carrying values. The temporary differences result from reserves
created for bad debts and sales returns that are not currently deductible for
income tax purposes. The Company provides a valuation allowance against net
deferred tax assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. The tax benefit of these temporary differences and the net operating
loss generated during the C-corporation period beginning June 2, 1999 and
ending September 30, 1999 has been offset by a valuation allowance.
As of September 30, 1999, the Company had approximately $4,700,000 of net
operating loss carryforwards for federal and state income tax purposes, which
expire in the year 2018.
F-75
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
10. Commitments and Contingencies
Operating Leases
The Company leases office space under operating leases expiring through
August 2001. Rent expense under these leases for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999
(unaudited) approximated $115,000, $239,000, $357,000, $225,000 and $194,000,
respectively.
Future basic rental commitments under noncancelable operating leases at
September 30, 1999 (unaudited) are approximately as follows:
<TABLE>
<S> <C>
Twelve months ending September 30,
2000........................................................ $ 634,000
2001........................................................ 431,000
2002........................................................ 289,000
2003........................................................ 6,000
2004........................................................ 1,500
----------
Total minimum payments...................................... $1,361,500
==========
</TABLE>
11. Equity
Stock Compensation
During 1996, the Company issued common stock as compensation to employees
who were previously covered by a phantom stock agreement. In exchange for the
newly issued shares, the recipients waived all rights and shares granted them
under the phantom stock agreement. The aggregate compensation earned under the
phantom stock plan during 1996 totaled $460,000.
Stock Split
During January 1997, October 1998 and on March 10, 1999, the Board of
Directors approved that the Company's issued and outstanding common stock, be
split on a 5-for-1, 5-for-1, and 2-for-1 basis, respectively. All share amounts
have been retroactively adjusted in the accompanying financial statements to
reflect these stock splits.
Stock Option Plan
Effective January 1, 1997, the Board of Directors approved the adoption
of a stock option plan under which qualified and non-qualified stock options
may be granted to employees, directors, and consultants to the Company. The
Board of Directors also authorized 4,138,750 shares to be reserved for issuance
pursuant to the terms of the plan. The Company has granted qualified and non-
qualified stock options to certain employees with vesting periods of up to 4
years. These options give the employee the right to purchase common stock at an
exercise price estimated by management to be at least equal to the fair value
of the stock at the date of the option's grant. For all options granted, the
term during which employees may exercise the option was initially 10 years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for stock options.
Accordingly, no compensation cost has been recognized in
F-76
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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:
<TABLE>
<CAPTION>
(unaudited)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Pro forma net income
(loss):
As reported........... $1,965,123 $2,100,411 $2,125,935 $1,695,278 $(6,730,161)
As adjusted
(unaudited).......... 1,965,123 1,152,116 1,356,486 $1,361,075 $(7,207,107)
</TABLE>
The estimated per share fair value of options granted for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998 and
1999 (unaudited) was $0.46, $0.39, $0.37 and $1.20, respectively. 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 nine months
ended September 30, 1998 and 1999 (unaudited), respectively: no dividend yield
for each year presented; risk-free interest rates of 5.74%, 4.65%, 4.38% and
6.10%, 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:
<TABLE>
<CAPTION>
Year Ended December 31, (unaudited)
--------------------------------------------------- Nine Months Ended
1997 1998 September 30, 1999
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 $1.22 401,500 $2.97
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 3,931,500
========= ========= =========
Options exercisable at
end of period.......... -- 551,750 1,028,500
========= ========= =========
</TABLE>
F-77
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
The following table summarizes certain information about stock options at
September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------
Number Weighted-Average Number
of Shares Remaining Exercise of Shares Exercise
at 9/30/99 Contractual Life (years) Prices at 9/30/99 Prices
---------- ------------------------ -------- ---------- --------
<S> <C> <C> <C> <C>
3,881,500 8.34 $1.20 1,016,000 $1.20
50,000 8.94 $1.80 12,500 $1.80
</TABLE>
As of September 30, 1999 (unaudited), options to purchase 207,250 shares
of common stock were available for future grants.
12. Employee Benefit and Incentive Plans
The Company sponsors a tax deferred 401(k) defined contribution savings
and profit sharing plan which covers substantially all employees who meet
minimum service requirements. Employees may defer up to 15% of their annual
compensation, which the Company will match at a rate of 20% of the employee's
contribution on the first 6% of his or her annual salary. In addition, the plan
allows for annual profit sharing contributions at the discretion of the Board
of Directors.
Company matching contributions to the 401(k) plan for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1998 and 1999 (unaudited) totaled approximately $15,000, $28,000, $52,000,
$39,000 and $67,000, respectively. To date, the Company has not made any
discretionary profit sharing contributions to the 401(k) plan.
13. Subsequent Event (Unaudited)
On November 12, 1999, the Company issued a total of $5,000,000 of 5.77%
promissory notes maturing August 12, 2000. The principal plus accrued interest
are convertible into equity securities of the Company, at an exchange price to
be determined based upon the closing of future equity financings or at $7.022
per share, subject to adjustment, in the event of an acquisition of the Company
or other liquidating event.
F-78
<PAGE>
Report of Independent Accountants
To the Board of Directors
Commerx, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Commerx, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, 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
March 26, 1999
Chicago, Illinois
F-79
<PAGE>
COMMERX, INC.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................... $ 3,302,954 $ 1,599,915
Short-term investments............................ 200,000 200,000
Trade accounts receivable (net of allowance of
$26,363 at September 30, 1999)................... 20,127 459,249
Other current assets.............................. 22,436 105,895
----------- ------------
Total current assets............................ 3,545,517 2,365,059
----------- ------------
Property and equipment, net of accumulated
depreciation....................................... 206,026 1,307,003
Security deposits................................... -- 200,000
Other assets........................................ -- 54,793
----------- ------------
Total assets.................................... $ 3,751,543 $ 3,926,855
=========== ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable.................................. $ 364,116 $ 768,667
Due to related party.............................. 92,713 98,776
Accrued expenses.................................. 177,166 1,846,321
Deferred revenue.................................. 180,909 355,321
Notes payable--stockholders....................... -- 1,802,194
Notes payable--current............................ -- 87,548
Obligation under capital lease--current........... -- 321,176
----------- ------------
Total current liabilities....................... 814,904 5,280,003
----------- ------------
Notes payable--noncurrent........................... -- 183,690
Obligation under capital lease...................... -- 813,065
----------- ------------
Total liabilities............................... 814,904 6,276,758
----------- ------------
Commitments and contingencies (Note 9)
Redeemable convertible Series A preferred stock,
$.001 par value, redeemable at $1.05 per share,
8,570,000 shares authorized; 6,665,428 and
8,570,000 shares issued and outstanding as of De-
cember 31, 1998 and September 30, 1999, respec-
tively (aggregate liquidation preference of $1.05
per share)......................................... 5,009,520 7,009,520
Stockholders' deficit:
Common stock, $.001 par value, 20,000,000 shares
authorized; 7,430,000 shares issued and
outstanding...................................... 7,430 7,430
Deferred compensation............................. -- (879,528)
Additional paid-in capital........................ 2,256,130 3,459,633
Accumulated deficit............................... (4,336,441) (11,946,958)
----------- ------------
Total stockholders' deficit..................... (2,072,881) (9,359,423)
----------- ------------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit...... $ 3,751,543 $ 3,926,855
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
COMMERX, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the
year (Unaudited)
ended For the nine months
December ended September 30,
31, ------------------------
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Service............................... $ 375,037 $ 263,568 $ 388,216
Transaction........................... -- -- 445,263
----------- ----------- -----------
Total revenue....................... 375,037 263,568 833,479
----------- ----------- -----------
Cost of revenues........................ -- -- 426,209
----------- ----------- -----------
Total gross margin.................. 375,037 263,568 407,270
----------- ----------- -----------
Operating expenses:
Selling and marketing................. 577,324 317,645 1,952,141
Information technology................ 514,946 274,267 1,972,444
Production and operations............. 140,161 112,984 518,577
General and administrative............ 1,134,764 553,149 3,594,746
----------- ----------- -----------
Total operating expenses............ 2,367,195 1,258,045 8,037,908
----------- ----------- -----------
Operating loss.......................... (1,992,158) (994,477) (7,630,638)
Nonoperating income (expense):
Interest income....................... -- -- 59,147
Interest expense...................... (185,825) (133,210) (39,026)
----------- ----------- -----------
Total other income (expense)........ (185,825) (133,210) 20,121
----------- ----------- -----------
Net loss................................ $(2,177,983) $(1,127,687) $(7,610,517)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE>
COMMERX, INC.
Statements of Changes in Stockholders' Deficit
December 31, 1998 and September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------- Unamortized Additional Total
Number Carrying Stock Paid-In Accumulated Stockholders'
of Shares Value Compensation Capital Deficit Deficit
---------- --------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 16,950,000 $ 200,000 $ -- $ -- $ (2,158,458) $(1,958,458)
Conversion of
shareholder notes and
accrued interest to
donated capital........ -- -- -- 2,073,080 -- 2,073,080
Conversion of common
stock, no par to $0.001
par value common
stock.................. -- (183,050) -- 183,050 -- --
Exchange of common stock
for Series A redeemable
convertible preferred
stock.................. (9,520,000) (9,520) -- -- -- (9,520)
Net loss................ -- -- -- -- (2,177,983) (2,177,983)
---------- --------- --------- ---------- ------------ -----------
Balance at December 31,
1998................... 7,430,000 7,430 -- 2,256,130 (4,336,441) (2,072,881)
Issuance of stock
options................ (939,503) 939,503 -- --
Stock compensation
recognized............. 59,975 -- -- 59,975
Issuance of Series A
preferred stock
warrants .............. -- -- -- 60,000 -- 60,000
Issuance of Series A
preferred stock
warrants .............. -- -- -- 14,000 -- 14,000
Issuance of Series B
preferred stock
warrants .............. -- -- -- 190,000 -- 190,000
Net loss................ -- -- -- -- (7,610,517) (7,610,517)
---------- --------- --------- ---------- ------------ -----------
Balance at September 30,
1999................... 7,430,000 $ 7,430 $(879,528) $3,459,633 $(11,946,958) $(9,359,423)
========== ========= ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-82
<PAGE>
COMMERX, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
For the year For the nine months ended
ended September 30,
December 31, --------------------------
1998 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(2,177,983) $ (1,127,687) $ (7,610,517)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation........................ 45,627 28,047 220,325
Interest expense on shareholder
notes.............................. 225,160 133,210 6,063
Amortization of debt discount....... -- -- 8,369
Amortization of compensation
expense............................ -- -- 59,975
Changes in operating assets and
liabilities:
Increase in accounts receivable... (7,029) (39,786) (439,122)
(Increase) decrease in other
current assets................... (208,585) 4,914 (83,459)
(Increase) in security deposits... -- -- (200,000)
Increase in other non-current
assets........................... -- -- (54,793)
Increase (decrease) in accounts
payable.......................... 360,953 98,122 404,551
Increase in accrued expenses...... 91,962 40,560 1,669,155
Increase in deferred revenue...... 89,727 148,038 174,412
----------- ------------ ------------
Net cash used by operations..... (1,580,168) (714,582) (5,845,041)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of plant, property, and
equipment.......................... (144,444) (78,525) (388,506)
----------- ------------ ------------
Net cash used in investing
activities..................... (144,444) (78,525) (388,506)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from shareholder notes..... 100,000 100,000 1,991,809
Decrease in amount due to related
party.............................. (124,596) 734,323 --
Gross proceeds from issuance of note
payable............................ -- -- 300,000
Repayment of note payable........... -- -- (15,325)
Obligations under capital lease..... -- -- 254,024
Proceeds from sale of Series A
redeemable convertible preferred
stock.............................. 5,000,000 -- 2,000,000
----------- ------------ ------------
Net cash provided from financing
activities..................... 4,975,404 834,323 4,530,508
----------- ------------ ------------
Net increase (decrease) in cash....... 3,250,792 41,216 (1,703,039)
Cash and cash equivalents at beginning
of year.............................. 52,162 52,162 3,302,954
Cash and cash equivalents at end of
year................................. $ 3,302,954 $ 93,378 $ 1,599,915
Supplemental cash flow information:
Interest paid........................ $ 45,868 $ -- $ 7,545
Non-cash financing activities:
Conversion of shareholder notes and
interest to additional paid-in
capital............................ $ 2,073,080 $ -- $ --
Exchange of common stock for Series
A redeemable convertible preferred
stock.............................. $ 9,520 $ -- $ --
Estimated fair value of warrants--
recorded as debt discount.......... $ -- $ -- $ 264,000
Equipment obtained under capital
lease.............................. $ -- $ -- $ 932,796
Incentive plan stock issuances...... $ -- $ -- $ 939,503
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE>
COMMERX, INC.
Notes to Financial Statements
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
1. Nature of Business and Organization
Commerx, Inc. ("Commerx" or the "Company") was formed in July, 1995, as
an Illinois Company, and is an internet commerce company creating electronic
business to business commerce through the development and management of the
company owned web site, the Plastics Network (www.PlasticsNet.Com) serving the
plastics industry.
In December 1998 pursuant to an Agreement of Merger, the Company merged
with Commerx, Inc. ("Commerx Delaware"), a Delaware Corporation formed in
December 1998. The outstanding shares of the Company's common stock were
converted to common stock of Commerx Delaware at a ratio of one to one. Upon
completion of the merger, Commerx Delaware became the surviving corporation.
The Company's proprietary technology provides users with an industry
specific environment that promotes the ability to initiate business to business
transactions.
In 1998, the Company derived its revenue from the establishment and
maintenance of customer business centers (commercial storefronts) on
PlasticsNet.Com along with advertising revenue. The Company also earned fees
for the production of advertising for customers that required ad creation
services.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital. During
1998 (as described in Note 6), the Company sold $5 million of preferred stock
and obtained a commitment for the purchase of an additional $2 million of
preferred stock. In March 1999, the Company's Board of Directors approved a
resolution initiating the sale of preferred stock under this commitment. The
sale of $2 million of preferred stock was completed in June of 1999. Management
believes that its current funds will be sufficient to enable the Company to
meet its planned expenditures for fiscal 1999. In addition, with other
anticipated sources of funding, the Company expects to fund planned
expenditures for the year 2000, as well.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim financial statements as of September 30, 1999
and for the nine months ended September 30, 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 of 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
Revenues are recognized over the period that services are provided.
Advertising revenue is contracted generally on a quarterly basis and recognized
equally over each of the three months. Business center set-ups and renewals are
contracted generally on an annual basis and recognized equally over each of the
twelve months.
F-84
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Transaction revenues consist primarily of product sales to customers and
charges to customers for outbound freight. Commerx acts as a principal when
purchasing products from suppliers and reselling them to customers. Products
are shipped directly to customers by suppliers based on customer delivery date
specifications. Under principal-based agreements, Commerx is responsible for
selling products, collecting payment from customers, ensuring that the shipment
reaches customers and processing returns. In addition, Commerx takes title to
products upon shipment and bears the risk of loss for collection, delivery and
product returns from customers. Commerx provides an allowance for sales
returns, which has been insignificant to date, at the time of sale. Commerx
recognizes revenues from product sales when products are shipped to customers.
Barter transactions are valued at the lower of estimated fair value of
the services received or the estimated value of the services provided in
exchange. Service revenue and advertising expenses are equal in amounts,
totaling $93,700 for the year ended December 31, 1998 and $70,275 and $70,275
for the nine month periods ended September 30, 1998 and 1999, respectively. To
date, barter transactions have not been recognized in the financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located primarily in the United States and are
denominated in U.S. dollars. Management believes its credit policies are
prudent and reflect normal industry terms and business risk.
At December 31, 1998, the Company had five customers that accounted for
approximately 11.7%, 12.0%, 12.2%, 17.0%, and 26% respectively of the accounts
receivable balance. At September 30, 1999, 38.2% and 20.2% of the Company's
accounts receivable were due from two customers.
During 1998 one customer accounted for 20% of the Company's revenues. For
the period ending September 30, 1999, two customers accounted for 32.8% and
10.9% of the Company's revenues.
In May 1999, the Company entered into a collection date factoring
agreement with a third party allowing for the factoring of trade accounts
receivable. Under the terms of the agreement, the third party will assume the
credit risk on all approved accounts up to a certain preapproved threshold. The
Company will be required to pay the third party a factoring commission of 0.8%
with a minimum annual charge of $40,000.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments. The carrying value for all long-term debt outstanding at
the end of all periods presented approximates fair value where fair value is
based on market prices for the same or similar debt and maturities.
F-85
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon estimated useful lives ranging from 3 to 5
years. Maintenance and repair charges are expensed as incurred.
As of September 30, 1999, the Company changed the estimated useful lives
for depreciation from 5 to 7 years to 3 to 5 years to better reflect the life
of the assets, and to comply with industry standards. The Company took a
$113,142 charge to general and administrative expense as of September 30, 1999
to reflect the change in accounting estimate.
Income Taxes
Deferred tax assets and liabilities are recorded to reflect the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based upon the difference between the financial statement
and tax bases of assets and liabilities and for tax carryforwards using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
In December 1998, in connection with the private placement of preferred
stock (see Note 6), the Company was required to change its corporate status
from an S-Corporation to a C-Corporation and therefore, is subject to federal
and state income taxes effective January 1, 1999. As a result of the conversion
in tax status, the Company has recorded deferred tax assets and liabilities as
of December 31, 1998.
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$69,421 as of December 31, 1998 and $51,962 and $531,528 for the nine months
ended September 30, 1998 and 1999, respectively.
Product Development Costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred. The software development costs
component of product development costs are required to be capitalized beginning
when a product's technological feasibility has been established and ending when
a product is available for general release to customers. To date, completion of
a working model of the Company's products and the date of general release have
substantially coincided. Costs incurred by the Company between the completion
of the working model and the point at which the product is ready for general
release have been insignificant.
F-86
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages, but does not require, companies to
record compensation cost for stock-based compensation at fair value. The
Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair market value of a share of the Company's
stock at the date of the grant over the amount that must be paid to acquire the
stock.
Recent Pronouncements
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income is defined as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. The Company does
not have any other comprehensive income.
The FASB also issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 specifies revised guidelines
for determining an entity's operating segment and the type and level of
financial information to be disclosed. This standard requires that management
identify operating segments based on the way that management disaggregates the
entity for making internal operating decisions. The Company currently operates
under the definition of one segment.
Both of these statements are effective for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company currently
does not have any derivative investments.
3. Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation using the straight-line method based on the estimated useful lives
of the assets. The estimated useful lives are three years for computer software
and equipment and five years for furniture and fixtures and other equipment.
When property and equipment are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the account, and any
gain or loss is included in results of operations. Amounts expended for
maintenance and repairs are charged to expense as incurred.
F-87
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Plant, property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Equipment...................................... $ 36,461 $ 105,693
Furniture and fixtures......................... 28,448 298,507
Computer software and equipment................ 244,572 1,226,584
--------- ----------
309,481 1,630,784
Less: Accumulated depreciation................. (103,455) (323,781)
--------- ----------
$ 206,026 $1,307,003
========= ==========
</TABLE>
On June 8, 1999, the Company entered into a master lease agreements with
two financing companies for the lease of office furniture and fixtures and
computer equipment used in its business. Each borrowing under the lease has a
three to four-year term and is collateralized by the assets purchased.
Equipment obtained pursuant to these leases is capitalized and is included in
property and equipment on the balance sheet.
In connection with one of the aforementioned arrangements, the Company
issued warrants to purchase certain of its equity securities to the lessor
(Note 7).
4. Notes Payable to Related Parties
On September 28, 1999, the Company entered into six-month subordinated,
convertible borrowing agreements with certain officers of the Company under
which such individuals agreed to loan the company $1,991,809. Such loan is
carried at $1,802,104, net of debt discounts. The notes are required to be paid
on the earlier of March 28, 2000 or the completion of the next round of
financing in which the Company receives proceeds of at least $15 million. The
notes are convertible into the Company's Series B preferred stock at a
conversion rate based on a formula which includes the conversion price of
Series B preferred stock. The conversion price will be determined based upon
the completion of the Series B Preferred Stock round of financing. Interest is
payable upon maturity or conversion of the note at an annual rate of prime plus
1% (9.25% at September 30, 1999). In the event of default, this rate increases
to prime plus 3%. The interest due on the notes is also convertible into shares
of Series B Preferred Stock. In connection with the financing, the Company
issued warrants to purchase shares of the Company's Series B Preferred Stock
(Note 7).
In November 1998, the Board of Directors approved a resolution under
which certain outstanding shareholder demand notes were contributed to the
Company as additional paid-in capital. The total amount of capital contributed
was $2,073,080 which was comprised of $1,847,920 of outstanding principal and
$225,160 of accrued interest due on the respective notes.
Additionally, the Company has recorded amounts due to a related party of
$92,713 as of December 31, 1998 and $98,776 as of September 30, 1999 (Note 10).
F-88
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
5. Notes Payable
On August 16, 1999, the Company entered into a borrowing agreement with a
third party under which the lender agreed to loan $300,000 to the Company for a
period of 30 months such loan is reflected net of $14,000 of debt discount. The
proceeds of which were to be used to finance the acquisition of fixed assets
and for working capital purposes. Interest payments are due on a monthly basis
at an annual interest rate of 8.75% and the note is due on February 1, 2002. On
February 1, 2002, a $51,000 balloon payment is due. In connection with the
borrowing, the Company also issued warrants to purchase shares of the Company's
Series A Preferred Stock (Note 7).
6. Redeemable Convertible Series A Preferred Stock
In December 1998, the Company authorized the sale and issuance of up to
8,570,000 shares of Redeemable Series A Convertible Preferred Stock ("Series A
Preferred"). Subject to first closing as defined in the Series A Preferred
Stock Purchase Agreement, the Company issued 4,761,428 shares to a certain
investment group in exchange for $5,000,000. The purchase price consists of
cash payments totaling $4,750,000 and the extinguishment of a note payable in
the amount of $250,000.
In June 1999, the Company issued 1,904,572 additional shares of Series A
Preferred shares to an investment group for $2,000,000. The transaction
fulfilled the second closing as defined in the Series A Preferred Stock
Purchase Agreement.
Holders of Series A Preferred shares are entitled to receive non-
cumulative dividends in preference to holders of common stock at the rate of 8%
per share per annum if and when declared by the Board of Directors. The holders
of Series A Preferred shares shall have the right to convert the Series A
Preferred shares into an equal number of shares of common stock at the option
of the holder and have the right to that number of votes equal to the number of
shares of common stock issuable upon conversion of the Series A Preferred. All
series of preferred stock and common stock are required to vote together as a
class except that holders of Series A Preferred are entitled to elect two
representatives to the Board of Directors.
Additionally, the Series A Preferred automatically converts into common
stock at the then applicable conversion rate in the event of either (i) the
completion of an initial public offering with aggregate offering proceeds to
the Company of at least $5,000,000 and a per share price to the public of at
least 2.5 times the purchase price of the Series A Preferred or (ii) the
election of the holders of at least two-thirds of the outstanding Series A
Preferred.
Upon written election of holders of two-thirds of the Series A Preferred,
the Series A Preferred is required to be redeemed to the extent of one-third of
the shares of Series A Preferred on the fifth, sixth, and seventh anniversary
dates of the Closing. The redemption price of $1.05 is to be adjusted for any
stock dividends, contributions, or splits plus any accrued, but unpaid
dividends.
The consent of a majority of the Series A Preferred is required for any
action that authorizes or issues shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity
with the Series A Preferred or that authorizes a merger, sale of substantially
all of the assets of the Company or a recapitalization/reorganization of the
Company.
F-89
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Upon liquidation or dissolution, shareholders of Series A Preferred Stock
are to receive a distribution of available assets up to the sum of the original
purchase price plus any declared but unpaid dividends. This distribution has
preference over any distribution to common stockholders.
7. Common Stock and Warrants
In December 1998, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 500,000 with no par value to 20,000,000 with $.001
par value and also authorized the issuance of up to 8,570,000 shares of Series
A Preferred Stock. The change in par value did not affect any of the existing
rights of shareholders and has been recorded as an adjustment to additional
paid-in capital and common stock. The Company subsequently affected an 84.75 to
1 stock-split of the issued and outstanding common stock of the Company as of
December 22, 1998. All share information retroactively reflects the effect of
this split. The Company has reserved 8,570,000 shares of common stock for
issuance upon conversion of the Series A Preferred.
In March 1999, the Company's Board of Directors adopted a Combined
Incentive and Non-statutory Stock Option Plan ("the Plan"). Under the Plan,
employees of the Company who elect to participate are granted incentive stock
options to purchase common stock at not less than the fair market value on the
date of grant. In the case of grants of non-statutory stock options, options
will be granted at a per share price of no less than 85% of the fair market
value on the date of grant. The term of the options is 10 years from the
initial grant date with the options generally vesting over a four year period.
The Plan is administered by the Option Committee of the Board of
Directors. The total number of shares of common stock that may be issued
pursuant to options granted under the Plan is 4,000,000.
Deferred compensation was recorded in connection with the granting of
stock options at an exercise price that was less than the deemed fair value.
Deferred compensation of $939,503 which is reflected as a separate component of
stockholders' equity and is being amortized over a four-year vesting period (as
stated by the Plan). Compensation expense of $59,975 was recognized for the
nine months ended September 30, 1999.
The following information relates to stock options outstanding as of
September 30, 1999.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
-------------------
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at beginning of period.......................... -- --
Granted..................................................... 4,071,500 $0.82
Exercised................................................... -- --
Forfeited/expired........................................... (253,000) $0.51
--------- -----
Outstanding at end of period................................ 3,818,500 $0.84
========= =====
</TABLE>
In connection with the lease agreement entered into in June 1999 (Note
3), the Company granted the lessor warrants to purchase 91,429 shares of the
Company's Series A Preferred Stock at a price of $1.05 per
F-90
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
share. These warrants can be exercised at any time between the earlier of a
period of seven years or three years from the effective date of the Company's
initial public offering. The estimated fair value of these warrants equaled
$60,000 and was recorded as debt discount and is being amortized to interest
expense over the term of the lease.
In connection with the note payable to a third party in August 1999 (Note
5), the Company granted the lender warrants to purchase 21,429 shares of the
Company's Series A Preferred Stock at a price of $1.05 per share. These
warrants can be exercised at any time before the earlier of a period of seven
years or three years from the effective date of the Company's initial public
offering. The estimated fair value of these warrants equaled $14,000 and was
recorded as debt discount and is being amortized to interest expense over the
term of the note.
In connection with a debt financing agreements entered into with related
parties (Note 4), the Company issued warrants to purchase shares of Series B
Preferred Stock. The total number of Series B Preferred Stock shares to be
issued is based on a formula which includes the conversion price of Series B
Preferred Stock. The conversion price will be determined based upon the
completion of a future round of financing. The estimated fair value of these
warrants determined as of September 30, 1999 equaled $190,000 and has been
recorded as debt discount. The discount is being amortized to interest expense
over the term of the note.
The term of the warrant agreement begins upon the closing of a private
placement of the Company's Series B Preferred Stock and ends on September 28,
2004.
8. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the carrying amounts of assets and
liabilities and their respective tax bases using enacted tax rates in effect
for the year in which the differences are expected to reverse.
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
Accrued expenses........................................... $ 209,267
Deferred revenue........................................... 68,745
---------
Total deferred tax assets................................ 278,012
Deferred tax liabilities:
Accounts receivable........................................ 7,648
Book over tax basis depreciation........................... 19,000
---------
Less: Valuation allowance.................................. (251,364)
---------
Net deferred tax asset (liability)....................... $ --
=========
</TABLE>
The valuation allowance relates principally to deferred tax assets that
the Company estimates may not be realizable based upon available evidence.
F-91
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
9. Commitments and Contingencies
During 1988, the Company leased the space in Chicago, Illinois under an
operating lease. The lease called for minimum rent with an annual escalation.
The lease expired on October 1998.
The Company has entered into a new operating lease for office space,
which commenced in January 1999 and expires on December 31, 2008. The lease
calls for minimum rents with an annual escalation.
Additionally, the Company entered into an operating lease for internet
data services which commenced on June 30, 1999. The lease calls for monthly
payments of $7,150. The lease expires on November 3, 1999, but the Company
intends to renew the lease through November 3, 2000.
Total rental expense was $88,747, during 1998, and $185,156 for the nine
month period ended September 30, 1999.
The following is a schedule of future minimum rentals required for
operating leases that have remaining noncancelable lease terms in excess of one
year, as of December 31, 1998:
<TABLE>
<CAPTION>
Total
----------
<S> <C>
1999.......................................................... $ 235,895
2000.......................................................... 240,312
2001.......................................................... 244,730
2002.......................................................... 249,147
2003.......................................................... 253,565
Thereafter.................................................... 1,334,085
----------
Total....................................................... $2,557,734
==========
Future payments under a noncancelable capital lease agreement are as
follows:
1999.......................................................... $ 60,327
2000.......................................................... 438,163
2001.......................................................... 419,047
2002.......................................................... 335,411
2003 and thereafter........................................... 87,753
----------
1,340,701
Less amounts representing interest and debt discount.......... (206,660)
Net present value of minimum lease payments................... 1,134,241
----------
Less current portion.......................................... (321,176)
----------
$ 813,065
==========
</TABLE>
On September 30, 1999, the Company signed an agreement with a third party
for the purchase of a software license to be used in the business activity of
the Company. Subject to the terms of the agreement, the Company is obligated to
pay $25,000 of license fees by October 31, 1999 and $225,000 by March 31, 2000.
Effective September 30, 1999, the Company entered into a three year
agreement with a third party. In exchange for services provided to the Company,
per the terms of the agreement, the Company will pay an annual fee of $50,000
plus transactions costs based on usage of the third party's services.
F-92
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
10. Related Party Transactions
The Company and Fast Heat, Inc. (Fast Heat) are related parties through a
common group of shareholders which hold a substantial ownership interest in
both companies. In 1998, Fast Heat provided funding to the Company for
operations. At September 30, 1999 amounts due to Fast Heat were $98,776. The
amount is due on demand and accrued interest at 8.5% in 1999.
In 1998, the Company provided internet related services to Fast Heat. The
amount of revenues earned for these services was $2,025 in 1998. No such
services were performed in the period ending September 30, 1999.
In 1998, the Company provided bartered services to an affiliated entity
in exchange for print advertising and certain trade show benefits valued at
$93,700 under bartered transactions.
In December 1998, the Company issued 1,904,000 of Series A Preferred
Shares to certain related party common stockholders in exchange for 9,520,000
shares of common stock.
11. Defined Contribution Savings Plan
The Company maintains a defined contribution 401(k) profit sharing plan
covering substantially all eligible employees meeting certain minimum age and
months of service requirements, as defined. Participants may make elective
contributions up to established limits. All amounts contributed by participants
and earnings on these contributions are fully vested at all times. The Plan
provides for matching and discretionary contributions by the Company. The
Company's expense for the defined contribution plan totaled $8,680 for the year
ended December 31, 1998, and $6,235 and $8,085 for the periods ended September
30, 1998 and 1999, respectively.
12. Subsequent Event
In November 1999, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 20,000,000 to 100,000,000. The Board also
authorized an increase in the number of authorized shares of Series A Preferred
Stock from 8,570,000 shares to 8,632,858, as well as authorizing the issuance
of up to 3,218,021 shares of Series B Preferred Stock.
In November 1999 Commerx issued 1,923,109 shares of Redeemable Series B
Preferred Stock ("Series B Preferred Stock") for gross proceeds of $23.9
million.
F-93
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders of
ComputerJobs.com, Inc.
We have audited the accompanying balance sheets of ComputerJobs.com, Inc.
(formerly ComputerJobs Store, Inc.) as of December 31, 1997 and 1998, and the
related statements of income, changes in stockholders' equity (deficit), and
cash flows for the period from January 16, 1996 (inception) through December
31, 1996 and for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ComputerJobs.com,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for the period from January 16, 1996 (inception) through December
31, 1996 and for the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 11, 1999, except Note 1 as to which the date
is April 1, 1999
F-94
<PAGE>
COMPUTERJOBS.COM, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
-------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $315,213 $ 9,385,180
Trade accounts receivable, net of allowance for
doubtful accounts of $4,000 and $20,000 at December
31, 1997 and 1998, respectively....................... 136,528 315,081
Unbilled trade accounts receivable..................... 17,000 62,990
Prepaid expenses....................................... -- 1,197
Loan receivable from stockholder........................ 1,086 --
-------- -----------
Total current assets.................................... 469,827 9,764,448
Property and equipment:
Furniture and fixtures................................. 15,291 35,728
Computer and office equipment.......................... 73,721 189,288
Accumulated depreciation............................... (21,159) (64,249)
-------- -----------
Net property and equipment.............................. 67,853 160,767
Other assets............................................ 2,000 99,721
-------- -----------
Total assets............................................ $539,680 $10,024,936
======== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses.................. $ 47,323 $ 136,209
Deferred income taxes payable.......................... -- 89,261
Note payable to stockholders........................... -- 1,000,000
Distribution payable to stockholders................... -- 346,817
Current portion of notes payable....................... 6,279 --
Deferred revenue....................................... 16,271 27,996
-------- -----------
Total current liabilities............................... 69,873 1,600,283
Notes payable, less current portion..................... 6,354 --
Series A Preferred Stock, no par value -- ($2 per share
redemption value; minimum liquidation value of
$10,000,000 plus accrued and unpaid dividends plus a
portion of remaining assets, as defined), convertible
to Class 2 common stock, 5,000,000 shares authorized,
issued and outstanding................................. -- 9,986,126
Stockholders' equity:
Class 1 common stock, no par value -- 5,500,000 shares
authorized, 5,500,000 shares issued and outstanding... 10,510 10,510
Class 2 common stock, no par value -- 14,000,000 shares
authorized, no shares issued or outstanding........... -- --
Retained earnings (deficit)............................ 452,943 (1,571,983)
-------- -----------
Total stockholders' equity (deficit).................... 463,453 (1,561,473)
-------- -----------
Total liabilities and stockholders' equity (deficit).... $539,680 $10,024,936
======== ===========
</TABLE>
See accompanying notes.
F-95
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Income
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year Ended December 31,
December 31, ------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenue................................ $ 377,163 $ 1,504,742 $ 4,431,060
Expenses:
Operations............................ 38,477 65,178 469,519
Sales and marketing................... 38,509 198,586 1,893,589
General and administrative............ 189,126 776,572 1,121,918
Depreciation.......................... 3,617 17,542 45,383
--------- ----------- -----------
269,729 1,057,878 3,530,409
Operating income....................... 107,434 446,864 900,651
Other income (deductions):
Interest expense...................... (982) (1,646) (12,537)
Interest income....................... 401 8,258 53,610
--------- ----------- -----------
(581) 6,612 41,073
--------- ----------- -----------
Income before income taxes............. 106,853 453,476 941,724
Income tax expense..................... -- -- 89,261
--------- ----------- -----------
Net income............................. $ 106,853 $ 453,476 $ 852,463
========= =========== ===========
Supplemental unaudited pro forma
information:
Income before taxes, as above......... $ 106,853 $ 453,476 $ 941,724
Pro forma provision for income taxes.. (40,604) (172,320) (357,853)
--------- ----------- -----------
Pro forma net income.................. $ 66,249 $ 281,156 $ 583,871
========= =========== ===========
Basic pro forma earnings per common
share................................ $0.01 $0.05 $0.09
Average outstanding common shares..... 5,500,000 5,500,000 5,500,000
</TABLE>
See accompanying notes.
F-96
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Retained Total
Class 1 Common Class 2 Common Earnings Shareholders'
Stock Stock (deficit) Equity (deficit)
-------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at January 16,
1996 (inception)....... $10,510 -- $ -- $ 10,510
Net income............ -- -- 106,853 106,853
Distribution to
stockholders......... -- -- (33,879) (33,879)
------- --- ----------- -----------
Balance at December 31,
1996................... 10,510 -- 72,974 83,484
Net income............ -- -- 453,476 453,476
Distribution to
stockholders......... -- -- (73,507) (73,507)
------- --- ----------- -----------
Balance at December 31,
1997................... 10,510 -- 452,943 463,453
Net income............ -- -- 852,463 852,463
Distribution to
stockholders......... -- -- (2,796,817) (2,796,817)
Accretion and
dividends on Series A
Preferred Stock...... -- -- (80,572) (80,572)
------- --- ----------- -----------
Balance at December 31,
1998................... $10,510 -- $(1,571,983) $(1,561,473)
======= === =========== ===========
</TABLE>
See accompanying notes.
F-97
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 16, Year Ended December
1996 through 31,
December 31, ----------------------
1996 1997 1998
------------ --------- -----------
<S> <C> <C> <C>
Operating activities
Net income............................... $106,853 $ 453,476 $ 852,463
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 3,617 17,542 45,383
Provision for deferred taxes........... -- -- 89,261
Changes in operating assets and
liabilities:
Trade accounts receivable............. (30,880) (105,648) (178,553)
Unbilled trade accounts receivable.... -- (17,000) (45,990)
Loan receivable from stockholder...... -- (1,086) 1,086
Prepaid expenses and other assets..... -- (2,000) (98,918)
Accounts payable and accrued
expenses............................. 12,394 34,930 88,886
Deferred revenue...................... 21,903 (5,632) 11,725
-------- --------- -----------
Net cash provided by operating
activities.............................. 113,887 374,582 765,343
Investing Activities
Purchase of property and equipment....... (23,980) (65,033) (138,297)
-------- --------- -----------
Net cash used in investing activities.... (23,980) (65,033) (138,297)
Financing Activities
Sale of Series A Preferred Stock, less
expenses................................ -- -- 9,905,554
Distributions to stockholders............ (33,879) (73,507) (1,450,000)
Proceeds from notes payable.............. 21,100 -- --
Repayment of notes payable............... (2,817) (5,650) (12,633)
Sales of common stock.................... 10,510 -- --
-------- --------- -----------
Net cash provided (used) by financing
activities.............................. (5,086) (79,157) 8,442,921
-------- --------- -----------
Net increase in cash and cash
equivalents............................. 84,821 230,392 9,069,967
Cash and cash equivalents, beginning of
period.................................. -- 84,821 315,213
-------- --------- -----------
Cash and cash equivalents, end of year... $ 84,821 $ 315,213 $ 9,385,180
======== ========= ===========
</TABLE>
See accompanying notes.
F-98
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements
December 31, 1998
1. Description of the Business
The Company is an Internet-based interactive technology company that
provides an employment Web site for information technology (IT) professionals.
The Company's web site enables recruiters and employers to post job
opportunities and search for employment opportunities based on an array of
search criteria. The Company also offers banner advertising and job reposting
services for companies wanting access to IT professionals. The Company operates
primarily on a regional basis and at December 31, 1998, served five regions in
the United States: Atlanta, the Carolinas, Chicago, Florida, and Texas.
On April 1, 1999 the Company changed its name from ComputerJobs Store,
Inc. to ComputerJobs.com, Inc.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers short-term investments with original maturity dates
of 90 days or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash equivalents and
accounts receivable. Cash equivalents are held primarily with one financial
institution. The Company performs periodic evaluations of the relative credit
standing of this financial institution. Accounts receivable are unsecured and
the Company is at risk to the extent such amounts become uncollectible.
Accounts Receivable
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
generally due within 30 days. Credit losses have been within management's
expectations.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation computed on a straight-line basis over the estimated useful lives
of the related assets which range from 3 to 5 years.
If facts and circumstances indicate that the property and equipment or
other assets may be impaired, an evaluation of continuing value would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with these assets would be compared to their carrying amount
to determine if a write down to fair market value or discounted cash flow value
is required.
Revenue Recognition
The Company recognizes advertising and service revenue as earned over the
service period. Unbilled trade accounts receivables are recorded for
advertising revenue which is not billed to the customer until the month
following the month in which it is earned. Advance payments received by the
Company are deferred and credited to operations on the straight-line basis over
the life of the agreement.
F-99
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
Advertising Costs
Advertising costs are expensed in the period in which they are incurred.
The Company incurred $11,583, $178,870 and $1,528,590 in advertising costs for
the period from January 16, 1996 (inception) through December 31, 1996 and for
the years ended December 31, 1997 and 1998, respectively.
Income Taxes
The Company elected to be taxed under the provision of Subchapter S of
the Internal Revenue Code for the period from January 16, 1996 (inception)
through November 25, 1998. Under these provisions, the income of the Company
was reported by the stock or shareholders on their individual income tax
returns. As such, the accompanying financial statements do not include a
provision for income taxes for the period from January 16, 1996 (inception) to
November 25, 1998.
In connection with the Company's amended and restated articles of
incorporation, the Company terminated its tax status as a Subchapter S
corporation. Effective November 25, 1998, the Company is taxed as a subchapter
C corporation. The deferred tax effects of the change in tax status of
approximately $54,000 are included in income at the date the change in tax
status occurred. Supplemental unaudited pro forma information related to net
income and earnings per share is presented as if the Company had been taxed as
a subchapter C corporation for all periods presented.
Income taxes for the period November 25, 1998 through December 31, 1998
have been provided using the liability method in accordance with FASB Statement
109, Accounting for Income Taxes. Under the liability method, the Company
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Using the enacted tax rates in effect for the year in which the
differences are expected to reverse, deferred tax liabilities and assets are
determined based on the differences between the book basis for financial
reporting and the tax basis of an asset or liability.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Flow Information
During 1998, the Company recorded a distribution payable to the
stockholders of $346,817, a note payable to stockholders for $1,000,000 and
accrued dividends of $79,000 on the Series A Preferred Stock which are non-cash
financing activities.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current presentation.
F-100
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
3. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------- ------
<S> <C> <C>
Note payable; interest at prime rate plus 2.0% (10.5% at
December 31, 1997).......................................... $ 5,052 $ --
Note payable; interest at prime rate plus 2.0% (10.25% at
December 31, 1997).......................................... 7,581 --
------- -----
12,633 --
Less amounts due within one year............................. 6,279 --
------- -----
$ 6,354 $ --
======= =====
</TABLE>
The notes payables were secured by the property and equipment of the
Company and guaranteed by stockholders of the Company.
Interest paid for the period from January 16, 1996 (inception) through
December 31, 1996 and during the years ended December 31, 1997 and 1998 totaled
$982, $1,646 and $1,030, respectively.
At December 31, 1996 and 1997, the Company had an unused line of credit
of $50,000, for general working capital purposes. The line of credit expired on
April 5, 1998 and was not renewed.
4. Income Taxes
Income tax expense (benefit) consists of the following for the period
from November 25, 1998 through December 31, 1998:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal............................................ $(7,267) $86,665 $79,398
State.............................................. (481) 10,344 9,863
------- ------- -------
$(7,748) $97,009 $89,261
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax assets and liabilities as of December 31, 1998 are as
follows:
Deferred income tax assets (liabilities):
<TABLE>
<S> <C>
Property and equipment.......................................... $ 17,420
Net operating loss carryforwards................................ 7,748
Accrual to cash adjustment...................................... (114,429)
--------
Net deferred income taxes....................................... $(89,261)
========
</TABLE>
The Company uses the cash basis for its calculation of income tax expense
in accordance with internal revenue code 448(b)(3). For income tax purposes,
income is generally reported in the period that cash is actually received and
expenses are generally reported in the period the payment is actually made.
F-101
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
Pro forma income tax expense differed from the amounts computed by
applying the statutory federal rate of 34% as a result of the following:
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year ended December 31,
December 31, -----------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Computed using a 34% tax rate......... $36,330 $ 154,182 $ 320,186
State income taxes, net of federal
tax.................................. 4,274 18,138 37,667
------- ----------- -----------
$40,604 $ 172,320 $ 357,853
======= =========== ===========
</TABLE>
5. Stockholders' Equity
On November 25, 1998, the Company amended and restated its articles of
incorporation. Pursuant to this amendment and restatement, the Company
converted its original 1,000 shares of issued common stock into 5,500,000
shares of Class 1 common stock. The common stock authorized, outstanding and
issued, as of December 31, 1996 and 1997, has been adjusted to reflect this
recapitalization. The Company also authorized 14,000,000 shares of Class 2
common stock and 5,000,000 shares of Series A Preferred Stock. The Company has
reserved 2,000,000 shares of Class 2 common stock for issuance in connection
with its stock option plan.
Each share of Class 1 common stock is convertible to one share of Class 2
common stock at the option of the holder. Class 1 common stock automatically
converts to Class 2 common stock upon a qualifying initial public offering
(IPO) of the Company.
The rights and privileges of Class 1 and Class 2 stockholders are equal
except that Class 1 stockholders are entitled to receive certain preferences
over Class 2 stockholders in the event of the Company's liquidation,
dissolution or sale or merger.
Preferred Stock
In November 1998, the Company sold 5,000,000 shares of Series A Preferred
Stock for an aggregate sales price of $10,000,000. The Series A Preferred Stock
is cumulative and accrues dividends at 8%. Each share of preferred stock is
currently convertible into one share of Class 2 common stock at the option of
the holder. Each holder of Series A Preferred Stock is entitled to certain
protections against sales of common stock at less than the original Series A
purchase price, which may result in the right of such holder to convert each
share of Series A into more than one share of Class 2 common stock. The Series
A preferred stock automatically converts into Class 2 common stock upon a
qualifying IPO of the Company. The Company has reserved 5,000,000 shares of
Class 2 common stock for the conversion of Series A Preferred Stock.
The voting rights of the Series A Preferred Stock are equal to the voting
rights of the Class 2 common stock. Dividends are payable in cash or stock on
the sale, liquidation, or merger of the Company or redemption of such preferred
stock. To the extent the holders have not converted the Series A Preferred
Stock into Class 2 common stock, the holders of least 75% of the preferred
stock may cause the Company to redeem all such preferred stock at any time
after November 25, 2003 at the greater of the purchase price plus accrued
dividends or the appraised value, as defined.
F-102
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
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.
No dividends may be paid to the holders of Class 1 and Class 2 common
stock until all outstanding dividends are paid on the Series A Preferred
Stock. In the event that the holders of the Series A Preferred Stock elect to
convert their shares into Class 2 common stock, the Company is not required to
distribute the accrued dividends on the Series A Preferred Stock.
At December 31, 1998, the Series A Preferred Stock was increased by
$79,000 representing dividends not currently declared or paid. The cost of
issuance of the Series A Preferred Stock of $94,446 is being accreted over a
five year period. Such accretion amounted to $1,572 in the year ended December
31, 1998.
Warrants
In connection with the sale of Series A Preferred Stock, the Company
issued warrants for the purchase of 1,250,000 shares of Class 2 common stock
at $5.00 per share. The Company has not assigned a value to the warrants as
management believes the warrants are of minimal value. The Company has
reserved 1,250,000 shares of Class 2 common stock for the exercise of these
warrants. The warrants expire on the earlier of 1) three years after an IPO by
the Company, 2) the closing date of the sale or merger of the Company, or 3)
December 31, 2003.
6. Earnings Per Share
The following table sets forth the computation of the unaudited pro forma
earnings per common share:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Numerator:
Pro forma net income....................... $ 66,249 $ 281,156 $ 583,871
Accretion and dividends on Series A
Preferred Stock........................... -- -- (80,572)
--------- --------- ---------
Numerator for basic pro forma earnings per
common share--income available to common
stockholders.............................. $ 66,249 $ 281,156 $ 503,299
========= ========= =========
Denominator:
Denominator for basic pro forma earning per
common share--weighted average shares..... 5,500,000 5,500,000 5,500,000
========= ========= =========
Basic pro forma earnings per common share.... $ 0.01 $ 0.05 $ 0.09
========= ========= =========
</TABLE>
Series A Preferred Stock, which is convertible into Class 2 common stock
and was outstanding during 1998 (issued on November 25, 1998), and common
shares issuable upon the exercise of warrants were not included in the
computation of pro forma earnings per share because their effect would be
anti-dilutive.
F-103
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
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.
8. Lease Commitments
During December 1998, the Company entered into a five year operating
lease for office space. This lease agreement provides for rent escalation
clauses to cover increases in certain of the lessors' operating costs. Rental
expense totaled $11,630, $30,646 and $92,217 for the period from January 16,
1996 through December 31, 1996 and for the years ended December 31, 1997 and
1998, respectively. Future minimum rental payments (excluding any estimate of
operating costs) under noncancelable operating leases with terms of one year or
more at December 31, 1998 are $360,679 in 1999, $327,043 in 2000, $320,254 in
2001, $320,254 in 2002 and $320,254 in 2003.
9. Related Party Transactions
On November 2, 1998, the Company declared a $2,000,000 distribution
payable to the stockholders. During 1998, $1,000,000 of the distributions were
paid. The Company issued notes to the stockholders for the remaining
$1,000,000. These notes accrue interest at the federal funds interest rate and
are payable in February 1999.
10. Fair Value of Financial Instruments
The carrying amounts reported in the accompanying balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and notes payable
approximates their fair value.
11. Year 2000 Issue (Unaudited)
Year 2000 issues may arise if computer programs have been written using
two digits rather than four digits to define the applicable year. In such
cases, programs that have time sensitive logic may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company
anticipates that any remaining costs to ensure year 2000 compliance will not be
significant.
Although no formal assessment of the information and operational systems
of its major clients and vendors has been made, the Company is not aware of any
significant problems as a result of the year 2000. However, if the customers
and clients encounter operational problems related to year 2000 and are unable
to resolve such problems in a timely manner, it could result in a material
financial risk to the Company.
F-104
<PAGE>
Independent Auditors' Report
To the Board of Directors of
eMerge Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of eMerge
Interactive, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eMerge Interactive,
Inc. at December 31, 1997 and 1998 and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
April 20, 1999
F-105
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash................................. $ 400 $ 268 $ 1,650,134
Trade accounts receivable............ -- 368,421 2,790,427
Inventories (note 3)................. 635,963 706,557 655,129
Cattle deposits...................... -- -- 489,760
Prepaid expenses..................... 33,642 27,837 103,242
Net assets of discontinued operations
(note 12)........................... 1,066,804 2,285,341 390,336
----------- ------------ ------------
Total current assets................. 1,736,809 3,388,424 6,079,028
Property and equipment, net (note 4).. 428,140 513,837 1,711,404
Capitalized offering costs............ -- -- 341,967
Investment in Turnkey Computer
Systems, Inc. (note 12).............. -- -- 1,831,133
Intangibles, net (note 5)............. -- 2,699,828 6,273,309
----------- ------------ ------------
Total assets....................... $ 2,164,949 $ 6,602,089 $ 16,236,841
=========== ============ ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current installments of capital lease
obligation with related party (note
9).................................. $ -- $ 79,852 $ 83,917
Note payable (note 12)............... -- -- 500,000
Accounts payable..................... 725,369 423,946 1,633,132
Accrued liabilities:
Salaries and benefits................ 175,597 283,103 908,271
Other................................ 98,704 319,989 1,435,987
Advance payments from customers...... -- -- 619,270
Due to related parties (notes 9 and
12)................................. 8,040,304 5,187,334 13,405,957
----------- ------------ ------------
Total current liabilities............ 9,039,974 6,294,224 18,586,534
Capital lease obligation with related
party, excluding current installments
(note 9)............................. -- 305,018 242,673
Note payable (note 12)................ -- -- 900,000
----------- ------------ ------------
Total liabilities.................... 9,039,974 6,599,242 19,729,207
----------- ------------ ------------
Commitments and contingencies (notes
11 and 12)
Class A common stock subject to a put
(note 12)............................ -- -- 400,000
----------- ------------ ------------
Stockholders' equity (deficit) (notes
6, 8 and 12):
Preferred stock, $.01 par value,
authorized 15,000,000 shares:
Series A preferred stock, (aggregate
involuntary liquidation preference
of $6,741,954 in 1997 and
$7,386,314 in 1998), designated
6,500,000 shares, issued and
outstanding 6,443,606 shares in
1997, 1998 and 1999................. 64,436 64,436 64,436
Series B junior preferred stock,
(aggregate involuntary liquidation
preference of $-0- in 1997 and
$4,801,315 in 1998), designated
2,400,000 shares, issued and
outstanding -0- shares in 1997 and
2,400,000 shares in 1998 and 1999... -- 24,000 24,000
Series C preferred stock, designated
1,300,000 shares, issued and
outstanding -0- shares in 1997 and
1998 and 1,100,000 shares in 1999... -- -- 11,000
Series D preferred stock, designated
4,555,556 shares, no shares issued
and outstanding in 1997, 1998 and
1999................................ -- -- --
Common stock, $.01 par value,
authorized 100,000,000 shares:
Class A common stock, designated
92,711,110 shares, issued and
outstanding 2,606,500 shares in
1997, 4,676,500 shares in 1998 and
5,616,155 shares in 1999............ 26,065 46,765 55,662
Class B common stock, designated
7,288,890 shares; no shares issued
and outstanding in 1997, 1998 and
1999................................ -- -- --
Additional paid-in capital........... 1,982,986 16,648,286 23,468,470
Accumulated deficit.................. (8,948,512) (16,780,640) (27,452,825)
Unearned compensation................ -- -- (63,109)
----------- ------------ ------------
Total stockholders' equity
(deficit)......................... (6,875,025) 2,847 (3,892,366)
----------- ------------ ------------
Total liabilities and stockholders'
equity (deficit).................. $ 2,164,949 $ 6,602,089 $ 16,236,841
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-106
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue (note 10)....... $ -- $ -- $ 1,792,471 $ 1,106,452 $ 18,338,645
Cost of revenue......... -- -- 2,623,447 1,628,757 18,282,330
----------- ----------- ----------- ----------- ------------
Gross profit
(loss)............. -- -- (830,976) (522,305) 56,315
----------- ----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative (note
9)................... -- 627,606 3,659,810 2,427,944 7,539,689
Research and
development.......... -- 727,753 1,109,382 759,434 2,756,262
----------- ----------- ----------- ----------- ------------
Total operating
expenses........... -- 1,355,359 4,769,192 3,187,378 10,295,951
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing operations.. -- (1,355,359) (5,600,168) (3,709,683) (10,239,636)
Interest expense (note
9)..................... -- (141,167) (331,594) (231,000) (458,624)
Other income............ -- -- -- -- 15,655
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing
operations before
income taxes....... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Income tax expense
(benefit) (note 7)..... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing
operations......... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Discontinued operations
(note 12):
Income (loss) from
operations of
discontinued
transportation
segment (note 9)..... (1,719,492) (3,987,097) (1,808,951) (1,721,060) 10,420
Loss on disposal of
transportation
segment.............. -- -- (91,415) -- --
----------- ----------- ----------- ----------- ------------
Net profit (loss)....... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-107
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred
Preferred Stock Preferred Stock Preferred Stock Stock Common Stock Common Stock
Series A Series B Series C Series D Class A Class B
----------------- ----------------- ----------------- ------------- ----------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- --------- ------- ------ ------ --------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ -- $ -- -- $ -- -- $ -- -- $-- 1,000 $ 10 -- $--
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share....... -- -- -- -- -- -- -- -- 199,000 1,990 -- --
Issuance of
common stock for
cash at $.01 per
share........... -- -- -- -- -- -- -- -- 140,000 1,400 -- --
Exercise of
stock options
for cash at $.01
per share....... -- -- -- -- -- -- -- -- 20,000 200 -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1996............ -- -- -- -- -- -- -- -- 360,000 3,600 -- --
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share (note
9).............. -- -- -- -- -- -- -- -- 2,246,500 22,465 -- --
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 6)........ 6,443,606 64,436 -- -- -- -- -- -- -- -- -- --
Transfer of
technology by XL
Vision, Inc.
(note 9)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1997............ 6,443,606 64,436 -- -- -- -- -- -- 2,606,500 26,065 -- --
Contribution of
debt to equity
by XL Vision,
Inc. (note 9)... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock
in exchange for
contribution of
debt to equity
by XL Vision,
Inc. at $2.00
per share (notes
6 and 9)........ -- -- 2,400,000 24,000 -- -- -- -- -- -- -- --
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$1.00 per share
(note 5)........ -- -- -- -- -- -- -- -- 2,070,000 20,700 -- --
Contribution of
put rights by XL
Vision, Inc.
(note 5)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1998............ 6,443,606 64,436 2,400,000 24,000 -- -- -- -- 4,676,500 46,765 -- --
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... -- -- -- -- -- -- -- -- 87,280 873 -- --
Issuance of
common stock in
connection with
CIN transaction
at $1.20 per
share (note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 600,000 6,000 -- --
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$2.25 per share
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 200,000 2,000 -- --
Issuance of
Series C
preferred stock
at $5.00 per
share (note 12)
(unaudited)..... -- -- -- -- 1,100,000 11,000 -- -- -- -- -- --
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... -- -- -- -- -- -- -- -- 2,375 24 -- --
Issuance of
common stock in
connection with
Turnkey Computer
Systems, Inc at
$8.00 per share
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 50,000 500 -- --
Reclassification
of common stock
subject to a put
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- -- (500) -- --
Put on Class A
common stock
issued in
connection with
Turnkey Computer
Systems, Inc.
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Unearned
compensation
(note 8)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Amortization of
unearned
compensation
(note 8)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
September 30,
1999
(unaudited)..... 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 -- $-- 5,616,155 $55,662 -- $--
========= ======= ========= ======= ========= ======= === === ========= ======= === ===
<CAPTION>
Additional
Paid-in Accumulated Unearned
Capital Deficit Compensation Total
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balances at
December 31,
1995............ $ 3,816 $ (1,745,397) $ -- $(1,741,571)
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share....... -- -- -- 1,990
Issuance of
common stock for
cash at $.01 per
share........... -- -- -- 1,400
Exercise of
stock options
for cash at $.01
per share....... -- -- -- 200
Net profit
(loss).......... -- (1,719,492) -- (1,719,492)
------------ ------------- ------------ ------------
Balances at
December 31,
1996............ 3,816 (3,464,889) -- (3,457,473)
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share (note
9).............. -- -- -- 22,465
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 6)........ 6,379,170 -- -- 6,443,606
Transfer of
technology by XL
Vision, Inc.
(note 9)........ (4,400,000) -- -- (4,400,000)
Net profit
(loss).......... -- (5,483,623) -- (5,483,623)
------------ ------------- ------------ ------------
Balances at
December 31,
1997............ 1,982,986 (8,948,512) -- (6,875,025)
Contribution of
debt to equity
by XL Vision,
Inc. (note 9)... 7,500,000 -- -- 7,500,000
Issuance of
Series B
preferred stock
in exchange for
contribution of
debt to equity
by XL Vision,
Inc. at $2.00
per share (notes
6 and 9)........ 4,776,000 -- -- 4,800,000
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$1.00 per share
(note 5)........ 2,049,300 -- -- 2,070,000
Contribution of
put rights by XL
Vision, Inc.
(note 5)........ 340,000 -- -- 340,000
Net profit
(loss).......... -- (7,832,128) -- (7,832,128)
------------ ------------- ------------ ------------
Balances at
December 31,
1998............ 16,648,286 (16,780,640) -- 2,847
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... 86,407 -- -- 87,280
Issuance of
common stock in
connection with
CIN transaction
at $1.20 per
share (note 12)
(unaudited)..... 714,000 -- -- 720,000
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$2.25 per share
(note 12)
(unaudited)..... 448,000 -- -- 450,000
Issuance of
Series C
preferred stock
at $5.00 per
share (note 12)
(unaudited)..... 5,489,000 -- -- 5,500,000
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... 2,351 -- -- 2,375
Issuance of
common stock in
connection with
Turnkey Computer
Systems, Inc at
$8.00 per share
(note 12)
(unaudited)..... 399,500 -- -- 400,000
Reclassification
of common stock
subject to a put
(note 12)
(unaudited)..... (399,500) -- -- (400,000)
Put on Class A
common stock
issued in
connection with
Turnkey Computer
Systems, Inc.
(note 12)
(unaudited)..... 8,300 -- -- 8,300
Net profit
(loss)
(unaudited)..... -- (10,672,185) -- (10,672,185)
Unearned
compensation
(note 8)
(unaudited)..... 72,126 -- (72,126) --
Amortization of
unearned
compensation
(note 8)
(unaudited)..... -- -- 9,017 9,017
------------ ------------- ------------ ------------
Balances at
September 30,
1999
(unaudited)..... $23,468,470 $(27,452,825) $(63,109) $(3,892,366)
============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-108
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net profit (loss)....... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
Adjustments to reconcile
net profit (loss) to
net cash used in
operating activities:
Depreciation and
amortization.......... 1,503 122,486 438,576 230,964 1,380,940
Amortization of
unearned
compensation.......... -- -- -- -- 9,017
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net....... -- -- (368,421) (138,705) (2,733,765)
Inventories............ -- (635,963) (70,594) (30,741) 51,428
Cattle deposits........ -- -- -- -- (489,760)
Prepaid expenses and
other assets.......... (1,304) (32,338) 5,805 (77,079) (75,405)
Net assets of
discontinued
operations............ (96,209) (853,501) (1,140,425) (1,477,150) 2,137,166
Accounts payable....... 5,675 719,694 (301,423) (32,037) 1,209,186
Accrued liabilities.... 75,542 198,759 328,791 151,016 1,741,166
Advance payments from
customers............. -- -- -- -- 619,270
----------- ----------- ----------- ----------- ------------
Net cash used by
operating
activities........... (1,734,285) (5,964,486) (8,939,819) (7,035,475) (6,822,942)
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Purchases of property
and equipment.......... (56,861) (506,540) (460,290) (269,831) (1,767,093)
Purchase of
intangibles............ (100,000) -- (431,923) (431,923) (3,145,297)
Investment in Turnkey
Computer Systems,
Inc.................... -- -- -- -- (22,833)
----------- ----------- ----------- ----------- ------------
Net cash used by
investing
activities........... (156,861) (506,540) (892,213) (701,754) (4,935,223)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Net borrowings from
related parties........ 1,889,101 3,810 9,447,030 7,737,227 8,218,623
Proceeds from capital
lease financing with
related party.......... -- -- 440,832 -- --
Payments on capital
lease obligations...... -- -- (55,962) -- (58,280)
Offering costs.......... -- -- -- -- (341,967)
Sale of preferred
stock.................. -- 6,443,606 -- -- 5,500,000
Sale of common stock.... 3,590 22,465 -- -- 89,655
----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities........... 1,892,691 6,469,881 9,831,900 7,737,227 13,408,031
----------- ----------- ----------- ----------- ------------
Net increase
(decrease) in cash... 1,545 (1,145) (132) (2) 1,649,866
Cash--beginning of
period................. -- 1,545 400 400 268
----------- ----------- ----------- ----------- ------------
Cash--end of period..... $ 1,545 $ 400 $ 268 $ 398 $ 1,650,134
=========== =========== =========== =========== ============
Supplemental
disclosures:
Cash paid for interest.. $ -- $ -- $ 23,594 $ 13,517 $ 20,628
Non-cash investing and
financing activities:
Transfer of technology
by XL Vision, Inc.
(note 9).............. -- 4,400,000 -- -- --
Contribution of debt to
equity by XL Vision,
Inc. (note 9)......... -- -- 7,500,000 -- --
Issuance of preferred
stock in exchange for
contribution of debt
to equity by XL
Vision, Inc. (note
9).................... -- -- 4,800,000 -- --
Non-cash issuance of
Class A common stock
in connection with
Nutri-Charge
transaction (note 5).. -- -- 2,070,000 2,070,000 --
Contribution of put
rights by XL Vision,
Inc. (note 5)......... -- -- 340,000 340,000 --
Issuance of Class A
common stock in
connection with CIN
transaction (note
12)................... -- -- -- -- 720,000
Issuance of Class A
common stock with
Cyberstockyard
transaction (note
12)................... -- -- -- -- 450,000
Issuance of Class A
common stock with
Turnkey Computer
Systems, Inc.
transaction (note
12)................... -- -- -- -- 400,000
Put on Class A common
stock issued in
connection with
Turnkey Computer
Systems, Inc.
transaction (note
12)................... -- -- -- -- 8,300
Issuance of note
payable to Turnkey
Computer Systems, Inc.
(note 12)............. -- -- -- -- 1,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-109
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
(Information insofar as it relates to September 30, 1999 or the nine months
ended
September 30, 1998 and 1999 is unaudited)
(1) Organization
(a) Overview
eMerge Interactive, Inc. (the "Company") is a Delaware corporation that
was incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly
owned subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was
changed to eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge
Interactive, Inc. on June 11, 1999.
The Company was incorporated to develop and commercialize infrared
technology focused on the transportation segment. In 1997, the Company entered
a new business segment, animal sciences, by developing an infrared camera
system for use primarily by veterinarians. The Company further expanded its
operations in 1998 by licensing NutriCharge and infrared technology (see note
5) for commercialization. In December 1998, the Company's Board of Directors
decided to dispose of the transportation segment. The Company's AMIRIS thermal
imaging system, which was the sole product sold by the transportation segment,
was sold on January 15, 1999.
(b) Basis of Presentation
The consolidated financial statements as of December 31, 1998 include
the accounts of eMerge Interactive, Inc. and its wholly-owned subsidiary, STS
Agriventures, Ltd. ("STS"), a Canadian corporation. The consolidated financial
statements as of September 30, 1999 also include another wholly-owned
subsidiary, Cyberstockyard, Inc. ("Cyberstockyard").
All significant intercompany balances and transactions have been
eliminated upon consolidation.
(c) Management's Plans
As of September 30, 1999, the Company had a working capital deficiency
of $12,507,506 and stockholders' deficit of $3,892,366. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts for its products. Subsequent to September 30, 1999,
the Company obtained additional equity financing (see note 12). The Company
anticipates that net proceeds from its planned IPO of common stock will be
sufficient to satisfy its operating cash needs for at least eighteen months
following the IPO. Although management believes that its IPO will be
successful, there can be no assurances that it will be achieved or that the
Company will be successful in raising other financing. If the Company is
unable to obtain sufficient additional funds, the Company may have to delay,
scale back or eliminate some or all of its marketing and development
activities.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenue in accordance with the terms of the sale
or contract, generally as products are shipped or services are provided. The
Company bears inventory risk until the sales of their products and credit risk
until full payment is received from its customers. In cattle sales
transactions, the
F-110
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Company purchases cattle from the seller, takes title at shipment and records
the cattle as inventory until delivered to and accepted by the buyer,
typically a 24 to 48 hour period. In both cattle auction and resale
transactions, the Company acts as a principal in purchasing cattle from
suppliers and sales to customers so that the Company recognizes revenue equal
to the amount paid by customers for the cattle.
(b) Inventories
Inventories are stated at standard cost which approximates the lower of
first-in, first-out cost or market.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Amortization of equipment under capital lease is computed
over the shorter of the lease term or the estimated useful life of the related
assets.
(d) Intangibles
Intangibles are stated at amortized cost. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.
(e) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and 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.
(f) Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
(g) Use of Estimates
The preparation of the Company's consolidated 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, disclosure of contingent Assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
F-111
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(h) Estimated Fair Value of Financial Instruments
The carrying value of cash, trade accounts receivable, accounts payable,
accrued liabilities and amounts due to related parties reflected in the
consolidated financial statements approximates fair value due to the short-term
maturity of these instruments.
(i) Interim Financial Information
The consolidated financial statements as of September 30, 1999, and for
the periods ended September 30, 1998 and 1999, are unaudited but reflect
adjustments which are, in the opinion of management, necessary for the fair
presentation of financial position and results of operations. Operating results
for the nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the full year.
(3) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Raw materials............................. $346,335 $424,130 $594,337
Work-in-process........................... 289,628 282,427 60,792
-------- -------- --------
$635,963 $706,557 $655,129
======== ======== ========
</TABLE>
(4) Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31,
----------------- Estimated
1997 1998 useful lives
-------- -------- ------------
<S> <C> <C> <C>
Engineering and manufacturing equipment.. $258,082 $366,150 5 years
Office and computer equipment............ 179,315 259,462 3 years
Furniture and fixtures................... 67,282 104,706 7 years
Leasehold improvements................... 46,865 46,865 7 years
Automobiles.............................. -- -- 5 years
-------- --------
551,544 777,183
Less accumulated depreciation and
amortization............................ 123,404 263,346
-------- --------
Property and equipment, net.............. $428,140 $513,837
======== ========
</TABLE>
Assets under capital lease amounted to $-0- and $440,832 and as of
December 31, 1997 and 1998, respectively. Accumulated amortization for assets
under capital lease totaled approximately $-0- and $152,300 as of December 31,
1997 and 1998, respectively.
F-112
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(5) Intangibles
Intangibles consists of:
<TABLE>
<CAPTION>
December 31,
--------------- Estimated
1997 1998 useful life
---- ---------- -----------
<S> <C> <C> <C>
NutriCharge license........................... $ -- $2,273,538 10 years
Infrared technology license................... -- 568,385 5 years
---- ----------
-- 2,841,923
Less accumulated amortization................. -- 142,095
---- ----------
Intangibles, net.............................. $ -- $2,699,828
==== ==========
</TABLE>
On July 29, 1998, the Company acquired licenses for NutriCharge and
infrared technology. The purchase price of $2,841,923 (consisting of $300,000
in cash, 2,070,000 of the Company's Class A common shares valued at $1 per
share, $131,923 in acquisition costs and the estimated fair value of put rights
granted by XL Vision) was allocated to the acquired NutriCharge and infrared
technology licenses based on estimated fair values determined by estimated cash
flows from the underlying licensed product. In connection with the transaction,
XL Vision granted a put right that allows the sellers to require XL Vision to
purchase up to 1,000,000 shares of the Company's Class A common stock at $3.00
per share in the event certain operating targets related to the licensed
product are not met by years four through seven after the transaction. The put
expires at the end of year seven after the transaction. The fair value of the
put was estimated to be $340,000 and was credited to additional paid-in
capital.
(6) Equity
Common Stock
As of December 31, 1998, the Company had authorized the issuance of
100,000,000 shares of common stock.
Class A--In 1999, the Company designated 92,711,110 as Class A common
stock.
Class B--In 1999, the Company designated 7,288,890 shares as Class B
common stock. Holders of Class B common stock are entitled to two and one-half
votes for each share. The shares of Class A and Class B are identical in all
other respects.
Preferred Stock
As of December 31, 1998, the Company had authorized the issuance of
10,000,000 shares of preferred stock and had designated 6,500,000 as Series A
shares, and 2,400,000 as Series B shares. Each share of preferred stock is
convertible into one share of Class A common stock at the option of the holder
or upon the vote of holders of two-thirds of the respective preferred stock
class outstanding except for Series D shares which is convertible at the
offering price into Class B common stock. Preferred stock is automatically
converted into common stock upon a qualified IPO of at least $10 million with a
Company valuation of at least $30 million or upon a public rights offering of
the Company to shareholders of Safeguard Scientifics, Inc. In 1999, the Company
increased the authorized preferred stock to 15,000,000 shares.
F-113
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Series A--The Series A shares are entitled to a liquidation preference
before any distribution to common stockholders equal to the greater of (a)
$1.00 per share plus an additional $.10 per year (pro rated for partial years)
from July 16, 1997 or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to Class A common stock prior to
liquidation. The holders of Series A preferred stock are entitled to vote as a
separate class to elect two directors to the Board of Directors of the Company.
Series B--Series B shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $2.00 per
share plus an additional $.20 for each year (pro rated for partial years) from
December 31, 1998 or until the date of distribution of available assets or (b)
the amount which would be distributed if all of the preferred stock of the
Company were converted to Class A common stock prior to liquidation. Series B
shares are junior to Series A, C and D shares.
Series C--On April 15, 1999, the Company designated 1,300,000 as Series C
shares. Series C shares are entitled to a liquidation preference before any
distribution to common stockholders equal to the greater of (a) $5.00 per share
plus an additional $.50 for each year (pro rated for partial years) from April
15, 1999 or until the date of distribution of available assets or (b) the
amount which would be distributed if all of the preferred stock of the Company
were converted to Class A common stock prior to liquidation. Series C shares
are on parity with Series A and D shares except as to voting rights.
Series D (Unaudited)--On October 26, 1999, the Company designated
4,555,556 shares as Series D shares. Series D shares are entitled to a
liquidation preference before any distribution to common stockholders equal to
the greater of (a) $10.00 per share plus an additional $1.00 for each year (pro
rated for partial years) from August 24, 1999 or until the date of distribution
of available assets or (b) the amount which would be distributed if all the
preferred stock of the Company were converted to Class B common stock prior to
liquidation. Series D shares are on parity with Series A and C shares except as
to voting rights. Series D stockholders are entitled to two and one-half votes
per share.
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liability are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $3,237,000 $5,967,000
Amortization of acquired technology from XL
Vision (note 9)............................... 1,829,000 1,704,000
Research and experimentation tax credits....... 294,000 448,000
Other.......................................... 125,000 596,000
---------- ----------
5,485,000 8,715,000
Less valuation allowance....................... 5,370,000 8,715,000
---------- ----------
Net deferred tax assets...................... 115,000 --
Deferred tax liability:
Imputed interest............................... (115,000) --
---------- ----------
Net deferred tax assets (liability).......... $ -- $ --
========== ==========
</TABLE>
F-114
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The Company has available at December 31, 1998, unused net operating loss
carryforwards of approximately $15,000,000 which may be applied against future
taxable income and expires in years beginning in 2010. The Company also has
approximately $448,000 in research and experimentation credits carryforwards.
The research and experimentation credits, which begin to expire in 2010, can
also be used to offset future regular tax liabilities. A valuation allowance
for deferred tax assets is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The difference between the "expected" tax benefit (computed by applying
the federal corporate income tax rate of 34% to the loss before income taxes)
and the actual tax benefit is primarily due to the effect of the valuation
allowance.
(8) Stock Plan
In January 1996, the Company adopted an equity compensation plan (the
"1996 Plan") pursuant to which the Company's Board of Directors may grant
shares of common stock or options to acquire common stock to certain directors,
advisors and employees. The Plan authorizes grants of shares or options to
purchase up to 1,735,000 shares of authorized but unissued common stock. Stock
options granted have a maximum term of ten years and have vesting schedules
which are at the discretion of the Compensation Committee of the Board of
Directors and determined on the effective date of the grant.
A summary of option transactions follows:
<TABLE>
<CAPTION>
Weighted
Range of average
exercise Weighted remaining
price per average contractual
Shares share exercise price life (in years)
--------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding,
December 31, 1996...... 2,500 $ 1.00 $1.00 4.85
====
Granted................ 268,000 1.00 1.00
--------- ---------- -----
Balance outstanding,
December 31, 1997....... 270,500 1.00 1.00 9.64
====
Granted................ 1,354,000 1.00-2.00 1.05
Canceled............... (318,500) 1.00 1.00
--------- ---------- -----
Balance outstanding
December 31, 1998....... 1,306,000 $1.00-2.00 $1.05 9.48
========= ========== ===== ====
</TABLE>
At December 31, 1997 and 1998, there were 61,375 and 331,500 shares
exercisable, respectively, at weighted average exercise prices of $1.00 and
$1.02, respectively.
At December 31, 1997 and 1998, 79,500 and 409,000 shares available for
grant, respectively.
F-115
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The per share weighted-average fair value of stock options granted was $0
in 1996, $0 in 1997 and $0.10 in 1998 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Volatility.............................................. 0% 0% 0%
Dividend paid........................................... 0% 0% 0%
Risk-free interest rate................................. 6.35% 6.11% 4.73%
Expected life in years.................................. 5.77 6.75 5.57
</TABLE>
No volatility was assumed due to the use of the Minimum Value Method of
computation for options issued by the Company as a private entity as prescribed
by SFAS No. 123.
All stock options granted, except as noted in the paragraph below, have
been granted to directors or employees with an exercise price equal to the fair
value of the common stock at the date of grant. The Company applies APB Opinion
No. 25 for issuances to directors and employees in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements through December 31, 1998.
On March 19, 1999, the Company granted 288,500 stock options with an
exercise price of $2.00 and a fair value of $2.25. The Company recorded $72,126
of unearned compensation at the date of grant and is amortizing the unearned
compensation over the vesting period. Compensation expense amounted to $9,017
for the nine months ended September 30, 1999.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported............... $(1,719,492) $(5,483,623) $(7,832,128)
=========== =========== ===========
Pro forma net loss................. $(1,719,492) $(5,483,623) $(7,964,078)
=========== =========== ===========
</TABLE>
(9) Related Party Transactions
Direct Charge Fee
Prior to April 1, 1997 personnel, and other services were provided by XL
Vision and the costs were allocated to the Company. Effective April 1, 1997,
the Company entered into a direct charge fee agreement with XL Vision which
allows for cost-based charges based upon actual hours incurred. Costs allocated
to or service fees charged by XL Vision were approximately $468,000 in 1996,
$720,000 in 1997 and $460,000 in 1998. A portion of the fees in 1998 and all of
the costs and fees in 1996 and 1997 were allocated to the discontinued
transportation segment.
Administrative Services Fee
Effective December 15, 1997, the Company entered into an agreement which
requires accrual of an administrative services fee based upon a percentage of
gross revenues. The fee for administrative support
F-116
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
services, including management consultation, investor relations, legal services
and tax planning, is payable monthly to XL Vision and Safeguard Scientifics,
Inc., the largest shareholder of XL Vision, based upon an aggregate of 1.5% of
gross revenues with such service fees to be not more than $300,000 annually.
Effective August 17, 1999, the agreement was amended such that the
administrative services fee is applied to net contribution margin on cattle
sales and gross revenue for all other sales. The fee is accrued monthly but is
only payable in months during which the Company has achieved positive cash flow
from operations. The agreement extends through December 31, 2002 and continues
thereafter unless terminated by any party. Administrative service fees were
approximately $10,300 in 1997 and $37,200 in 1998.
Technology Fee
On July 15, 1997, the Company entered into an agreement with XL Vision
for the transfer of certain technology that is used by the Company in the sale
of its products for a $4,400,000 note payable. The transfer was accounted for
as a distribution to XL Vision as it represented amounts paid for an asset to
an entity under common control in excess of the cost of such asset. The note
payable bears interest at 7% per annum. Interest expense was $141,167 in 1997
and $308,000 in 1998.
Lease
The Company leases equipment under a capital lease, effective April 20,
1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments,
including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000,
$92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was
$23,594 in 1998.
The Company has a verbal lease with XL Vision for its facilities. Rent
expense varies based on space occupied by the Company and includes charges for
base rent, repairs and maintenance, telephone and networking expenses, real
estate taxes and insurance. Rent expense was $68,000 in 1996, $354,000 in 1997,
and $1,129,000 in 1998.
Amounts Due to XL Vision, Inc.
Amounts due to XL Vision consists of:
<TABLE>
<S> <C>
Balance as of December 31, 1996................................... $ 3,636,494
Allocation of costs and funding of working capital to the
Company........................................................ 6,318,405
Technology transfer fee......................................... 4,400,000
Interest charges on technology transferred...................... 141,167
Proceeds from Series A Preferred Stock.......................... (6,443,606)
Issuance of Class A common stock................................ (22,465)
-----------
Balance as of December 31, 1997................................... 8,029,995
Allocation of costs and funding of working capital to the
Company........................................................ 9,120,441
Interest charges on technology transferred...................... 308,000
Contribution of debt to equity.................................. (7,500,000)
Contribution of debt to equity in exchange for Series B
Preferred Stock................................................ (4,800,000)
-----------
Balance as of December 31, 1998................................... $ 5,158,436
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$2,690,900 in 1996, $6,239,600 in 1997 and $12,782,400 in 1998.
F-117
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Amounts Due to Safeguard Scientifics, Inc.
As of December 31, 1997 and December 31, 1998, the Company owed Safeguard
Scientifics, Inc. $10,309 and $28,898.
(10) Segment Information
In 1998, the Company adopted SFAS No. 131, which requires the reporting
of segment information using the "management approach" versus the "industry
approach" previously required. The management approach requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker. The Company's chief
operating decision-maker receives revenue and contribution margin (revenue less
direct costs and excluding overhead) by source, and all other statement of
operations data and balance sheet data on a consolidated basis. The Company's
reportable segments consist of cattle sales and animal sciences products and
services. While the Company operates entirely in the animal science
marketplace, the contribution margin associated with cattle sales and the
related prospects for this portion of the Company's business differ from the
rest of the Company's product offerings.
The following summarizes revenue and contribution margin information
related to the Company's two operating segments:
<TABLE>
<CAPTION>
Nine months Nine months
Year ended ended ended
December 31, September 30, September 30,
1998 1998 1999
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue:
Cattle............................... $ -- $ -- $ 17,022,862
Animal sciences...................... 1,792,471 1,106,452 1,315,783
---------- ----------- ------------
Total................................ $1,792,471 $ 1,106,452 $ 18,338,645
========== =========== ============
Direct costs:
Cattle............................... $ -- $ -- $ 16,860,452
Animal sciences...................... 900,824 603,410 492,115
---------- ----------- ------------
$ 900,824 $ 603,410 $ 17,352,567
========== =========== ============
Contribution margin:
Cattle............................... $ -- $ -- $ 162,410
Animal sciences...................... 891,647 503,042 823,668
---------- ----------- ------------
Total................................ $ 891,647 $ 503,042 $ 986,078
========== =========== ============
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(11) Commitments and Contingencies
Voluntary Employee Savings 401(k) Plan
The Company established a voluntary employee savings 401(k) plan in 1997
which is available to all full time employees 21 years or older. The plan
provides for a matching by the Company of the employee's contribution to the
plan for 50% of the first 6% of the employee's annual compensation. The
Company's matching contributions were $6,300 in 1996, $38,195 in 1997 and
$62,108 in 1998.
F-118
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Royalties
In connection with the NutriCharge license, the Company is obligated to a
royalty of 5% of gross revenues from the sale of NutriCharge products and
infrared technology related to the Company's Canadian license agreement.
The Company is also obligated to a royalty of 6% of net revenues from
product or services related to technology patented by Iowa State University.
(12) Subsequent Events
On January 1, 1999, the Company signed a revolving promissory note with
XL Vision for up to $3,000,000. The revolving promissory note bears interest at
the prime rate plus 1% and is due in full when the Company completes an IPO or
sells all of its assets or stock. The note is included in current liabilities
in the accompanying September 30, 1999 consolidated balance sheet.
Discontinued Operations
In December 1998, the Company's Board of Directors decided to dispose of
its transportation segment. The Company's AMIRIS thermal imaging system, which
was the sole product sold in the transportation segment, was sold on January
15, 1999 to Sperry Marine, Inc. for approximately $1,900,000. The Company
received $200,000 of cash at closing and will receive the balance upon receipt
of the inventory by Sperry Marine, Inc. The Company is entitled to a royalty of
8% of net AMIRIS system sales, up to a maximum royalty of $4.3 million over a
four year period or up to a maximum royalty of $5.0 million, if $4.3 million is
not received within four years.
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Accounts receivable.............................. $ 145,500 $ 381,435
Inventory, net................................... 1,076,043 2,020,625
Property and equipment, net...................... 22,650 134,098
Intangibles, net................................. 94,444 61,108
Accounts payable................................. (271,833) (80,510)
Accrued liabilities including provision for
operating loss during phase out period of
$72,667 in 1998................................. -- (231,415)
---------- ----------
Net assets................................... $1,066,804 $2,285,341
========== ==========
</TABLE>
Note Payable to XL Vision, Inc.
License
In February 1999, the Company signed a license agreement with XL Vision,
granting XL Vision a license to use Company software for the limited purpose of
evaluating whether the software could provide the basis for a new company that
would operate in the agricultural industry. The license agreement terminates on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license
F-119
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
agreement. In addition, XL Vision is obligated to give the Company at least a
25% interest in the new company. The Company is obligated to transfer all
amounts up to 25% of the new company to Lost Pelican, L.L.C.
Acquisitions (Unaudited after April 20, 1999)
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of CIN, LLC d/b/a/ Cattlemen's Information
Network ("CIN"). Immediately after the closing, CIN changed its name to Lost
Pelican, L.L.C. The purchase price for the assets consisted of 600,000 shares
of the Company's Class A common stock valued at $720,000, the assumption of up
to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and
an agreement to pay the first $350,000 from Internet sales of third party
products over the Company's Web site. In addition, the Company agreed to assume
$177,000 in liabilities related to employee bonuses and an outstanding grant
obligation. CIN is in the business of selling access to its cattle feedlot
performance measurements database.
On March 29, 1999, the Company acquired 100% of the stock of
Cyberstockyard, Inc. The purchase price consisted of 200,000 shares of the
Company's Class A common stock valued at $450,000. Cyberstockyard, Inc. is in
the business of selling cattle through its proprietary auction software over
the Internet.
On May 19, 1999, the Company acquired substantially all of the tangible
and intangible assets of PCC, LLC d/b/a Professional Cattle Consultants, L.L.C.
("PCC") for a cash payment of $1,800,000 and an assumption of approximately
$30,000 of liabilities. PCC is in the business of providing comparative
analysis and market information for the feedlot industry.
The aggregate purchase price of the above acquisitions was approximately
$4,606,600, which included related acquisition costs of approximately $97,000,
and was allocated as follows:
<TABLE>
<S> <C>
Goodwill..................................................... $4,015,300
Non-compete agreements....................................... 300,000
Equipment.................................................... 358,000
Current assets............................................... 28,300
Current liabilities.......................................... (95,000)
----------
$4,606,600
==========
</TABLE>
Goodwill is amortized on a straight-line basis over a period of three to
five years.
Unaudited pro forma information for the Company as if the acquisitions
above had been consummated as of January 1, 1998 and 1999 follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenue......................................... $ 1,687,077 18,560,565
=========== ===========
Net profit (loss)............................... $(4,987,862) (11,097,329)
=========== ===========
</TABLE>
F-120
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Sale of Series C Preferred Stock (Unaudited)
On May 4, 1999, the Company issued 1,100,000 shares of Series C preferred
stock for $5.00 per share.
Stock Plan (Unaudited)
On May 10, 1999, the Company's stockholders approved the 1999 Equity
Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional
1,000,000 shares of authorized, unissued shares of common stock of the Company
are reserved for issuance to employees, advisors and for non-employee members
of the Board of Directors. Option terms under the 1999 Plan may not exceed 10
years.
Note Payable to Safeguard Delaware, Inc.--a Related Party (Unaudited)
On July 21, 1999, the Company obtained a $3,000,000 revolving note
payable from Safeguard Delaware, Inc. ("Safeguard"). The revolving note
payable, as amended in October 1999, bears interest payable monthly at the
prime rate plus 1% and is due November 30, 1999.
In August, September and October 1999, the Company signed demand notes
with interest payable monthly at the prime rate plus 1% with Safeguard for
$2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled
in October 1999, in exchange for a $7,050,000 note due in full on October 25,
2000, the repayment of a promissory note issued concurrently with the sale of
Series D preferred stock or an IPO, whichever is earlier.
Investment in Turnkey Computer Systems, Inc. (Unaudited)
On August 16, 1999, the Company acquired 19% of the common stock of
Turnkey Computer Systems, Inc. ("Turnkey") for 50,000 shares of the Company's
Class A common stock valued at $400,000 and $1,400,000 in cash payable upon the
earlier of the completion of the Company's IPO or $500,000 at December 31,
1999, $500,000 at December 31, 2000 and $400,000 at December 31, 2001. In
addition, the common stock purchase agreement with Turnkey contains a put right
which allows Turnkey to have a one time right to put to the Company its 50,000
common shares with a fixed purchase price of $500,000. The put right can only
be exercised upon a change in control or after December 31, 2001, if the
Company has not completed an IPO. The fair value of the put was estimated to be
$8,300 and was credited to additional paid-in capital.
Sale of Series D Preferred Stock (Unaudited)
On October 26, 1999, the Company agreed to issue 4,555,556 shares of
Series D preferred stock and a warrant to acquire 911,000 shares of Class B
common stock for $38,815,000. Series D preferred shares convert into Class B
common stock at the offering price. The warrants are exercisable at the
Company's IPO price and are valued at $3,325,555. The Company will receive
$18,000,000 in cash in November 1999 and a non-interest bearing, promissory
note in the amount of $23,000,000 due on October 26, 2000. Imputed interest at
9.5% amounts to $2,185,000 over the life of the note.
Registration Statement (Unaudited)
On October 27, 1999, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission to register shares of its
common stock.
F-121
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Onvia.com, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Onvia.com, Inc. and subsidiary (the Company) as of December 31, 1998 and
September 30, 1999, and the related consolidated statements of operations,
changes in shareholders' (deficit) equity, and cash flows for the period from
March 25, 1997 (inception) through December 31, 1997, for the year ended
December 31, 1998, and for the nine months ended September 30, 1999. These
consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and September 30, 1999, and the results of its operations and its cash
flows for the period from March 25, 1997 (inception) through December 31, 1997,
for the year ended December 31, 1998, and for the nine months ended September
30, 1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
November 18, 1999
F-122
<PAGE>
ONVIA.COM, INC.
Consolidated Balance Sheets
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $ 44,659 $26,036,867
Accounts receivable............................... 47,072 192,827
Inventory......................................... 65,204 531,942
Prepaid expenses.................................. 2,212 1,638,946
Stock subscription receivable..................... -- 4,000,000
-------- -----------
Total current assets.............................. 159,147 32,400,582
Property and equipment, net......................... 20,925 4,826,993
Other assets........................................ -- 971,283
-------- -----------
Total assets...................................... $180,072 $38,198,858
======== ===========
Liabilities and Shareholders' (Deficit) Equity
Current Liabilities:
Accounts payable.................................. $219,852 $ 3,137,379
Accrued expenses.................................. 365,820 2,699,175
Unearned revenue.................................. 42,425 253,721
Convertible notes................................. 344,407
Current portion of long-term debt................. -- 3,766,192
-------- -----------
Total current liabilities......................... 972,504 9,856,467
Long-term debt...................................... -- 5,464,670
-------- -----------
Total liabilities................................. 972,504 15,321,137
-------- -----------
Commitments and contingencies (Note 6)
Shareholders' (Deficit) Equity:
Convertible preferred stock; no par value:
Series A; 12,000,000 shares authorized;
10,109,748 shares issued and outstanding;
($11,819,991 liquidation preference)........... -- 12,724,961
Series B; 8,000,000 shares authorized; 7,272,085
shares issued and outstanding; ($25,000,000
liquidation preference)........................ -- 24,969,851
Common stock; no par value: 62,000,000 shares
authorized; 4,000,400 and 12,024,232 shares
issued and outstanding........................... 10,070 5,390,468
Unearned stock compensation....................... -- (3,202,708)
Accumulated deficit............................... (802,502) (17,004,851)
-------- -----------
Total shareholders' (deficit) equity.............. (792,432) 22,877,721
-------- -----------
Total liabilities and shareholders' (deficit)
equity........................................... $180,072 $38,198,858
======== ===========
</TABLE>
See notes to consolidated financial statements.
F-123
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Operations
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
Nine months
March 25, 1997 ended
(inception) to Year ended September
December 31, December 31, 30,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Revenue............................. $ 62,174 $1,037,271 $ 13,168,472
Cost of goods sold.................. 46,894 1,082,448 15,708,812
--------- ---------- ------------
Gross margin.................... 15,280 (45,177) (2,540,340)
Operating expenses:
Sales and marketing............... -- 297,615 7,007,493
Technology and development........ 11,239 114,855 2,899,331
General and administrative........ 134,413 210,875 3,429,813
--------- ---------- ------------
Total operating expenses........ 145,652 623,345 13,336,637
--------- ---------- ------------
Loss from operations................ (130,372) (668,522) (15,876,977)
Other income (expense):
Interest income................... -- -- 182,463
Interest expense.................. -- (3,608) (507,835)
--------- ---------- ------------
Net loss............................ $(130,372) $ (672,130) $(16,202,349)
========= ========== ============
Basic and diluted net loss per
common share....................... $ (0.03) $ (0.17) $ (2.97)
========= ========== ============
Basic and diluted weighted average
shares outstanding................. 4,000,400 4,000,400 5,451,293
========= ========== ============
</TABLE>
See notes to consolidated financial statements.
F-124
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
M-Depot Internet
Series A Series B Onvia.com, Inc. Superstore, Inc.
preferred stock preferred stock common stock common stock
---------------------- --------------------- ---------------------- ------------------- Unearned
Shares Amount Shares Amount Shares Amount Shares Amount compensation
---------- ----------- --------- ----------- ---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 25,
1997
(inception)...... -- $ -- -- $ -- 4,000,000 $ 10,000 -- $ -- $ --
Issuance of
common stock.... -- -- -- -- -- -- 400 70 --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance December
31, 1997......... -- -- -- -- 4,000,000 10,000 400 70 --
Exchange of M-
Depot Internet
Superstore, Inc.
common stock for
Onvia.com, Inc.
common stock.... -- -- -- -- 400 70 (400) (70) --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance December
31, 1998......... -- -- -- -- 4,000,400 10,070 -- -- --
Cancellation of
inception
shares.......... -- -- -- -- (4,000,400) -- -- -- --
Issuance of
nonvested common
stock........... -- -- -- -- 11,992,180 697,569 -- -- (476,144)
Conversion of
notes payable
into Series A
preferred
stock........... 1,129,018 1,319,997 -- -- -- -- -- -- --
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ 8,980,730 10,251,821 -- -- -- -- -- -- --
Issuance of
common stock
warrants........ -- -- -- -- -- 241,853 -- -- --
Issuance of
Series A
preferred
warrants........ -- 1,153,143 -- -- -- -- -- -- --
Exercise of
common stock
warrants........ -- -- -- -- 32,052 160 -- -- --
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- -- 7,272,085 24,969,851 -- -- -- -- --
Unearned
compensation
expense relating
to issuance of
stock options... -- -- -- -- -- 3,569,221 -- -- (3,569,221)
Change in
unearned
compensation for
consultants..... -- -- -- -- -- 871,595 -- -- (871,595)
Amortization of
unearned
compensation on
nonvested common
stock........... -- -- -- -- -- -- -- -- 331,235
Amortization of
unearned
compensation on
stock options... -- -- -- -- -- -- -- -- 1,383,017
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance September
30, 1999......... 10,109,748 $12,724,961 7,272,085 $24,969,851 12,024,232 $5,390,468 -- $ -- $(3,202,708)
========== =========== ========= =========== ========== ========== ======== ======= ===========
<CAPTION>
Accumulated
deficit Total
------------- ------------
<S> <C> <C>
Balance March 25,
1997
(inception)...... $ -- $ 10,000
Issuance of
common stock.... -- 70
Net loss........ (130,372) (130,372)
------------- ------------
Balance December
31, 1997......... (130,372) (120,302)
Exchange of M-
Depot Internet
Superstore, Inc.
common stock for
Onvia.com, Inc.
common stock.... -- --
Net loss........ (672,130) (672,130)
------------- ------------
Balance December
31, 1998......... (802,502) (792,432)
Cancellation of
inception
shares.......... -- --
Issuance of
nonvested common
stock........... -- 221,425
Conversion of
notes payable
into Series A
preferred
stock........... -- 1,319,997
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ -- 10,251,821
Issuance of
common stock
warrants........ -- 241,853
Issuance of
Series A
preferred
warrants........ -- 1,153,143
Exercise of
common stock
warrants........ -- 160
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- 24,969,851
Unearned
compensation
expense relating
to issuance of
stock options... -- --
Change in
unearned
compensation for
consultants..... -- --
Amortization of
unearned
compensation on
nonvested common
stock........... -- 331,235
Amortization of
unearned
compensation on
stock options... -- 1,383,017
Net loss........ (16,202,349) (16,202,349)
------------- ------------
Balance September
30, 1999......... $(17,004,851) $22,877,721
============= ============
</TABLE>
See notes to consolidated financial statements.
F-125
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Cash Flows
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
March 25, 1997 Nine months
(inception) to Year ended ended
December 31, December 31, September
1997 1998 30, 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss............................ $(130,372) $(672,130) $(16,202,349)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization..... 10,000 2,158 636,680
Amortization of unearned stock-
based compensation............... -- -- 1,714,252
Amortization of debt discount..... -- -- 70,218
Noncash interest expense related
to issuance of common stock
warrants......................... -- -- 241,853
Change in certain assets and
liabilities
Accounts receivable............... -- (48,268) (142,279)
Inventory......................... (2,873) (64,116) (463,368)
Prepaid expenses.................. (3,631) 1,177 (1,235,845)
Other assets...................... -- -- (1,018,634)
Accounts payable.................. 9,130 216,784 2,901,854
Accrued expenses.................. 121,871 246,798 2,539,667
Unearned revenue.................. 2,148 41,644 208,594
--------- --------- ------------
Net cash provided (used) by
operating activities............. 6,273 (275,953) (10,749,357)
--------- --------- ------------
Cash flows from investing
activities:
Additions to property and
equipment.......................... -- (23,083) (4,133,365)
Cash flows from financing
activities:
Proceeds from convertible debt...... -- 344,407 975,590
Proceeds from issuance of long-term
debt............................... -- -- 9,163,888
Repayments on long-term debt........ -- -- (508,715)
Proceeds from issuance of common
stock.............................. 70 -- 12,828
Proceeds from issuance of Series A
preferred stock, net............... -- -- 10,251,821
Proceeds from issuance of Series B
preferred stock, net............... -- -- 20,969,851
--------- --------- ------------
Net cash provided by financing
activities......................... 70 344,407 40,865,263
--------- --------- ------------
Effect of exchange rate changes on
cash............................... (736) (6,319) 9,667
--------- --------- ------------
Net increase in cash and cash
equivalents........................ 5,607 39,052 25,992,208
Cash and cash equivalents, beginning
of year............................ -- 5,607 44,659
--------- --------- ------------
Cash and cash equivalents, end of
year............................... $ 5,607 $ 44,659 $ 26,036,867
========= ========= ============
</TABLE>
See notes to consolidated financial statements.
F-126
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 1: Summary of Significant Accounting Policies
Description of business
Onvia.com, Inc., formerly known as Megadepot.com, Inc., (the "Company")
was incorporated on March 25, 1997 as MegaDepot, Inc. in the State of
Washington. M-Depot Internet Superstore, Inc., a company owned by the majority
shareholder of the Company, was incorporated in British Columbia, Canada on
June 6, 1997. In June 1998, the Company moved its headquarters from Vancouver,
B.C. to Seattle, Washington. On December 28, 1998, MegaDepot, Inc. exchanged
shares of its common stock for all of the outstanding common stock of M-Depot
Internet Superstore, Inc. (the "Subsidiary"). In February 1999, the Company
changed its name from MegaDepot, Inc. to MegaDepot.com, Inc., and in May 1999,
changed its name from MegaDepot.com, Inc. to Onvia.com, Inc.
The Company is an online supplier of goods and services to the small
business market. Through its web site customers can order a wide variety of
products commonly used by small businesses, such as computer hardware, computer
software, office supplies, office machines, office furniture and phone systems.
In addition, customers can order a variety of services commonly used by small
businesses, such as long distance phone service, cellular phone service, credit
card processing and payroll service.
The Company also provides an online business exchange service that
connects small business buyers and sellers. Small business buyers can specify
their needs across 26 different service categories and receive tailored quotes
from the Company's network of over 2,000 service providers. As a seller, small
businesses can receive qualified leads from buyers in this exchange network.
Basis of consolidation
The financial statements include the accounts of the Company and its
wholly owned Subsidiary. As the companies were under common control from
inception of the Company, the financial statements are presented on a
consolidated or combined basis for all periods presented. All significant
intercompany accounts and transactions have been eliminated.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, prepaid expenses, other assets, accounts payable, accrued
liabilities, convertible notes and long-term debt. Except for long-term debt
and convertible notes, the carrying amounts of financial instruments
approximate fair value due to their short maturities. The fair values of long-
term debt and convertible notes are not materially different from their
carrying amounts, based on interest rates available to the Company for similar
types of arrangements.
Significant vendors
Approximately 78% of inventory purchases were from one supplier in the
nine months ended September 30, 1999. Three suppliers comprised 75%, 13% and
10%, respectively, of total inventory purchases for the year ended December 31,
1998. Two suppliers comprised 76% and 14%, respectively, of total inventory
purchases for the period from March 25, 1997 (inception) to December 31, 1997.
F-127
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Inventory represents
product shipped by the Company's suppliers, which have not been received by
customers. The Company does not stock its own inventory or maintain warehouse
locations, however, the Company does take ownership at the time of shipment
from the supplier until the product is received by the customer.
Property and equipment
Equipment is stated at cost. Depreciation expense is recorded using the
straight-line method over estimated useful lives ranging from three to five
years. Leasehold improvements are depreciated over the lesser of the useful
lives or term of the lease.
Revenue recognition
Revenue from product sales is recognized upon receipt by the customer.
Unearned revenue consists of payments received from customers for product in
transit to the customer. Revenue from services provided to customers was
insignificant for all periods presented.
Income taxes
The Company accounts for income taxes using the asset and liability
method under which deferred tax assets, including the tax benefit from net
operating loss carryforwards and liabilities are determined based on temporary
differences between the book and tax bases of assets and liabilities. A
valuation allowance has been established for the full amount of the deferred
tax assets.
Valuation of long-lived assets
The Company periodically evaluates the carrying value of its long-lived
assets, including, but not limited to, property and equipment and other assets.
The carrying value of a long-lived asset is considered impaired when the
undiscounted net cash flow from such asset is estimated to be less than its
carrying value. Management does not believe that there were any long-lived
assets subject to impairment at September 30, 1999.
F-128
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Detachable stock purchase warrants
Proceeds from debt issued with detachable stock purchase warrants are
allocated between the debt and the warrants based on their relative fair
values. The value ascribed to the warrants is recorded as a debt discount and
amortized to interest expense over the term of the related debt using the
effective interest method.
Stock-based compensation
The Company's stock option plan is subject to the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the provisions of this standard, employee and
director stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), or the fair value
method described in SFAS 123. Companies choosing the intrinsic-value method are
required to disclose the pro forma impact of the fair value method on net
income. The Company has elected to account for its employee and director stock-
based awards under the provisions of APB 25. Under APB 25, compensation cost
for stock options is measured as the excess, if any, of the fair value of the
underlying common stock on the date of grant over the exercise price of the
stock option. The Company is required to implement the provisions of SFAS 123
for stock-based awards to those other than employees and directors. Stock-based
compensation expense for all equity instruments is recognized on an accelerated
basis.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expense,
excluding amounts for co-branding agreements, for the nine months ended
September 30, 1999 and the year ended December 31, 1998 was $3,533,955 and
$22,560, respectively. There was no advertising expense for the period from
March 25, 1997 (inception) to December 31, 1997. At September 30, 1999, prepaid
advertising costs of $1,075,534, which are for future advertising placements,
are included in prepaid expenses.
Comprehensive income
The Company has adopted the provisions of Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130")
effective January 1, 1998. SFAS No. 130 requires the presentation of
comprehensive income and its components. Comprehensive income is the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. For the nine
months ended September 30, 1999 and the year ended December 31, 1998, the
components of other comprehensive income were insignificant.
Foreign currency adjustment
The functional currency of the Subsidiary in Canada is the Canadian
dollar. Realized foreign currency transaction gains and losses are
insignificant and are included in cost of sales. Assets and liabilities of the
Subsidiary in Canada have been translated to U.S. dollars at year-end exchange
rates. Revenues and expenses have been translated at average monthly exchange
rates.
F-129
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Commitments and contingencies
The Company is subject to various legal proceedings that arise in the
ordinary course of business. In the opinion of management, the outcome of these
matters is not expected to have a material effect on the consolidated financial
position or results of operations of the Company.
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period, including
contingently issuable shares for which all necessary conditions have been
satisfied. Diluted net loss per share is computed by dividing net loss by the
weighted average number of common shares and dilutive potential common shares
outstanding during the period. Securities totaling 27,774,279 and 147,288
shares in the nine months ended September 30, 1999 and for the year ended
December 31, 1998, respectively, have been excluded from the computation of
diluted net loss per share as their effects would be antidilutive. There were
no dilutive common stock equivalents for the period from March 25, 1997
(inception) through December 31, 1997.
Internally developed software
Effective for fiscal years beginning after December 15, 1998, the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP 98-1 on
January 1, 1999 and capitalized $198,814 in internally developed software
costs. Capitalized software costs are amortized on a straight-line basis over a
useful life ranging from one to three years. Amortization related to the
capitalized software was $47,381 for the nine months ended September 30, 1999.
Start-up costs
In April 1998, the AICPA issued Statements of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities." This statement requires
companies to expense the costs of start-up activities and organization costs as
incurred. The Company adopted SOP 98-5 on January 1, 1999, and there was no
material impact on the accompanying financial statements.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for the Company for the fiscal year and
quarters beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
expect the potential effect of adopting the provisions of SFAS No. 133 to have
a significant impact on the Company's financial position, results of operations
and cash flows.
F-130
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 2: Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer equipment............................. $17,921 $2,569,830
Software....................................... 558 1,797,337
Furniture and fixtures......................... 4,604 587,091
Leasehold improvements......................... 268,995
------- ----------
23,083 5,223,253
Less: Accumulated depreciation................. (2,158) (396,260)
------- ----------
$20,925 $4,826,993
======= ==========
</TABLE>
Note 3: Convertible Notes
During 1998, the Company issued convertible promissory notes in the
amount of $344,407, which accrued interest at 8% and matured one year from
issuance. In connection with these notes, the Company issued warrants to the
noteholders to purchase up to 416,676 shares of common stock at $0.005 per
share upon the closing of the Company's Series A preferred financing on
February 25, 1999. Interest expense of $241,853 was recorded upon issuance of
the warrants.
In February 1999, the Company issued additional convertible promissory
notes in the amount of $975,590 to new and existing noteholders. The notes bore
interest at 6% and matured one year from issuance.
On February 25, 1999, the outstanding principal on the convertible notes
of $1,319,997 was converted into 1,129,018 shares of the Company's Series A
preferred stock in conjunction with the Series A preferred financing described
in Note 8.
Note 4: Long-Term Debt
In August 1999, the Company obtained financing for the purchase of
software and post-contract software support in the amount of $1,658,614. The
debt bears interest at 13.8% per annum and matures in September 2000. Payments
of $110,278, including principal and interest are to be made monthly through
September 2000.
In August 1999, the Company also entered into a subordinated debt
arrangement with two lenders to provide financing in the amount of $7,000,000.
The obligation bears interest at a coupon interest rate of 13.2% with an
effective rate of 24.2% per annum and matures in February 2002. Monthly
principal payments of $259,259 are scheduled beginning December 1999 through
February 2002. The debt is collateralized by all assets of the Company. In
conjunction with the debt financing, the Company issued warrants to purchase
582,655 shares of Series A preferred stock at $1.80 per share. The exercise
price on these warrants may be reduced based upon certain events to occur in
the future. The debt and warrants were recorded at their fair values of
$5,905,770 and $1,094,230, respectively.
F-131
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
In June 1999, the Company obtained an equipment loan financing in the
aggregate amount of up to $3,000,000 for the acquisition of capital equipment.
The loan bears interest at an average rate of 8.5% with an effective rate of
19.6% per annum and matures on August 1, 2002. The principal amount is payable
in 36 monthly payments; the first 35 payments of $68,514 and the last payment
of $393,097, which is due in August 2002. The loan is secured by the equipment
of the Company. In conjunction with the loan, the Company issued warrants to
purchase 48,664 shares of Series A preferred stock at $2.47 per share. The debt
and warrants were recorded at their fair values of $2,106,045 and $57,843,
respectively. As of September 30, 1999, the Company has $836,112 available to
borrow on the equipment financing agreement.
Debt consists of the following at September 30, 1999:
<TABLE>
<S> <C>
Note payable................................................. $ 1,255,863
Subordinated debt obligation................................. 7,000,000
Equipment term loan.......................................... 2,057,924
-----------
10,313,787
Less: Unamortized debt discount.............................. (1,082,925)
-----------
$ 9,230,862
===========
</TABLE>
Maturities of long-term debt at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000......................................................... $ 4,460,714
2001......................................................... 3,834,893
2002......................................................... 2,018,180
-----------
10,313,787
Less: Unamortized debt discount.............................. (1,082,925)
-----------
9,230,862
Less: Current portion, net of discount....................... (3,766,192)
-----------
$ 5,464,670
===========
</TABLE>
F-132
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 5: Income Taxes
At September 30, 1999, the Company had net operating loss carryforwards
of approximately $16,832,860, which may be used to offset future taxable
income. These carryforwards expire beginning in 2017. Should certain changes
in the Company's ownership occur, there could be a limitation on the
utilization of its net operating losses.
A reconciliation of taxes on net loss at the federal statutory rate to
actual tax expense is as follows:
<TABLE>
<CAPTION>
Period from
March 25, 1997 Nine months
through Year ended ended
December 31, December 31, September 30,
1997 1998 1999
-------------- ------------ -------------
<S> <C> <C> <C>
Tax at statutory rate................ (34.0)% (34.0)% (34.0)%
Stock-based compensation............. 29.4 % 4.4 % 3.6 %
Other................................ 0.6 % 0.2 % 0.1 %
Change in valuation allowance........ 4.0 % 29.4 % 30.3 %
------ ------ ------
0.0 % 0.0 % 0.0 %
====== ====== ======
</TABLE>
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 187,732 $ 5,723,172
Prepaid expenses and other assets.................... -- (596,491)
Other accruals....................................... 484 46,660
Fixed assets......................................... 14,920 (63,137)
--------- -----------
Net deferred tax assets.............................. 203,136 5,110,204
Less: Valuation allowance............................ (203,136) (5,110,204)
--------- -----------
Net deferred tax asset............................... $ -- $ --
========= ===========
</TABLE>
The Company has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
F-133
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 6: Commitments and Contingencies
Operating leases: The Company is committed under non-cancelable operating
leases for its current and former office space. During 1999, the Company
subleased certain office space for amounts equal to the rental obligation,
which expire in 2001. Future receipts under the operating subleases are
approximately $76,000.
Total rent expense was approximately $127,340 and $20,330 for the nine
months ended September 30, 1999 and for the year ended December 31, 1998,
respectively. Future minimum lease payments required on non-cancelable
operating leases are approximately as follows:
<TABLE>
<CAPTION>
For the years ended September 30,
---------------------------------
<S> <C>
2000...................................................... $ 551,256
2001...................................................... 545,510
2002...................................................... 515,769
2003...................................................... 515,769
2004...................................................... 506,352
Thereafter................................................ 852,190
----------
$3,486,846
==========
</TABLE>
Lease deposit: The Company's leasing arrangement for its main corporate
facilities requires a letter of credit of $650,000 to be issued to the
landlord. This letter of credit is secured by a deposit of $650,000, which is
recorded in other assets. The letter of credit expires in May 2000; however,
the letter of credit is required to be renewed for consecutive one-year periods
for the term of the leasing arrangement.
Advertising agreement: In 1998, the Subsidiary entered into an agreement
to pay 4% of its revenues to a third party in exchange for advertising
services. Advertising expenses of $156,775 and $22,560 were incurred under this
agreement for the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively.
Co-branding agreements: During 1999, the Company entered into
approximately 20 co-branding agreements. These agreements require monthly
license fees, and certain agreements require payments of 4% to 5% of sales
generated on the co-branded site. These agreements typically lapse over a
period of three to twelve months or upon 30 days notice by either party to the
agreement. The related co-branding royalties are included in sales and
marketing expenses. The Company recorded $955,736 in co-branding fees in the
nine months ended September 30, 1999.
Note 7: Stock Options
In February 1999, the Company adopted a combined stock option plan (the
"1999 Plan") which provides for the issuance of incentive and nonstatutory
common stock options to employees, directors and consultants of the Company.
The Board of Directors reserved 5,200,000 shares of common stock to be issued
in conjunction with the 1999 Plan. In conjunction with the Series B preferred
financing discussed in Note 8, the Board of Directors reserved an additional
1,454,415 shares of common stock for issuance under the 1999 Plan. Pursuant to
a common stock purchase agreement described in Note 8, 513,112 shares were
issued from the 1999 Plan option pool.
F-134
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Stock options are granted at exercise prices and vesting schedules
determined by the Board of Directors. All options granted to employees have
been approved by the Board of Directors with four year vesting schedules.
Options granted to consultants of the Company have been approved by the Board
of Directors with varying vesting schedules of up to four years. Stock options
expire ten years after the date of grant. The following table summarizes stock
option activity for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Weighted-
average
Options exercise
outstanding price
----------- ---------
<S> <C> <C>
Options granted..................................... 4,572,016 $0.30
Options forfeited................................... (94,000) $0.30
---------
Outstanding at September 30, 1999................... 4,478,016 $0.30
=========
Options exercisable at September 30, 1999........... 1,103,828 $0.17
=========
</TABLE>
There were 1,663,287 shares available for issuance under the 1999 Plan as
of September 30, 1999, and the weighted average fair value of options granted
during this period was $0.84 per share. During the nine months ended September
30, 1999, the Company recorded compensation expense of $172,381 related to the
issuance of stock options for services provided by consultants and $1,210,636
on stock options
issued to employees. The Company did not issue any stock options during the
year ended December 31, 1998 or the period from March 25, 1997 (inception) to
December 31, 1997.
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1999.
<TABLE>
<CAPTION>
Options outstanding
---------------------
Weighted-
average
ange ofR remaining
xercisee Number of contractual Options
prices Options life exercisable
- -------- --------- ----------- -----------
<S> <C> <C> <C>
$0.13............................................... 1,756,956 8.91 742,622
$0.25............................................... 1,836,560 9.08 361,206
$0.50............................................... 69,000 9.71 --
$0.75............................................... 707,000 9.86 --
$1.00............................................... 108,500 9.96 --
--------- ---------
4,478,016 9.17 1,103,828
========= =========
</TABLE>
F-135
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
In accordance with SFAS 123, the fair value of each employee option grant
is estimated on the date of grant using the minimum value option-pricing model
assuming the following weighted average assumptions: risk free interest rate of
5.60%; volatility of 0%; dividends of $0; and an expected life of four years.
Had the Company determined compensation expense based on the fair value of the
option at the grant date for all stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Nine months
ended
September 30,
1999
-------------
<S> <C>
Net loss
As reported.............................................. $(16,202,349)
Pro forma................................................ $(16,307,094)
Net loss per share
As reported-basic and diluted............................ $ (2.97)
Pro forma-basic and diluted.............................. $ (2.99)
</TABLE>
Note 8: Shareholders' (Deficit) Equity
Authorized shares
On September 29, 1999, the Articles of Incorporation were amended to
increase the number of authorized shares of common stock from 50,000,000 to
62,000,000 and increase the number of authorized shares of preferred stock from
12,000,000 to 20,000,000, of which 12,000,000 are designated as Series A
preferred stock and 8,000,000 are designated as Series B preferred stock.
Common stock splits
On February 16, 1999, the Board of Directors amended the Company's
Articles of Incorporation and authorized a two-for-one common stock split. The
number of authorized shares of common stock of the Company was increased from
10,000,000 shares to 20,000,000 shares. In addition, on July 29, 1999, the
Board of Directors approved an additional two-for-one common stock split. The
stock splits were effected in the form of a stock dividend. These stock splits
have been presented retroactively in the accompanying financial statements.
Convertible preferred stock
On February 25, 1999, the Company issued 8,980,730 shares of Series A
convertible voting preferred stock at $1.17 per share resulting in proceeds of
$10,251,821, net of issuance costs of $232,580 and stock subscription
receivables of $15,593. A consulting firm was issued 59,872 shares as a part of
this financing round in consideration for past services provided to the
Company. Expense of $70,050 was recorded in conjunction with this transaction.
The $344,407 of convertible promissory notes outstanding as of December
31, 1998 were converted into 294,576 shares of Series A preferred stock as part
of this transaction. In addition, convertible promissory notes for $975,590
issued in February 1999 were converted into 834,442 shares of Series A
preferred stock.
F-136
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
On September 30, 1999, the Company issued 7,272,085 shares of its Series
B preferred stock at $3.44 per share resulting in proceeds of $24,969,851, net
of issuance costs of $30,149. Proceeds of $4,000,000 were received by the
Company subsequent to period end and are recorded as a stock subscription
receivable within total current assets at September 30, 1999.
Each share of Series A and Series B preferred stock is convertible on a
one for one basis to common stock at the option of the holder, subject to
adjustment in certain instances or automatically upon registration of the
Company's common stock pursuant to a public offering under the Securities Act
of 1933 ("an Offering"). The Series A and Series B preferred stock would be
converted upon an Offering at a price of not less than $6.89 per share with
aggregate proceeds of not less than $30,000,000, or by the written consent of
the holders of seventy-five percent of the outstanding shares of Series B
preferred stock.
The holder of each share of preferred stock has the right to one vote for
each share of common stock into which such preferred stock can be converted.
Preferred shareholders have the same voting rights and powers as common
shareholders. Holders of the Company's preferred stock and warrants have no
registration rights.
Dividends are based on a rate of $.105 and $.31 per share per annum on
each outstanding share of Series A and Series B preferred stock, respectively,
or, if greater, an amount equal to any dividend paid on any other outstanding
shares of the Company. Dividends are not cumulative and are payable when and if
declared by the Board of Directors.
In the event of a liquidation of the Company, the holders of Series B
preferred stock will receive a liquidation preference of up to $3.44 per share
over the holders of Series A preferred and common stock. Upon satisfaction of
Series B preferences, distributions will be made to Series A preferred
shareholders in an amount
up to $1.17 per share. Upon completion of preference distributions to Series A
and Series B preferred shareholders, any remaining amounts will be distributed
among the common shareholders on a pro rata basis.
Issuance and cancellation of common stock
On March 25, 1997, the Company issued 4,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On January 18, 1999, the Company cancelled all 4,000,400 outstanding
shares of the Company's common stock, pursuant to the issuance of 11,479,068
shares of nonvested common stock to employees and other outside parties.
Issuance of nonvested common stock
In January 1999, the Company issued 11,479,068 shares of nonvested common
stock to employees and other outside parties for services performed. These
shares are subject to a repurchase option, which allows the Company the right
to repurchase the shares upon termination of employment. The repurchase option
on the nonvested common stock expires ratably over four years from date of hire
or commencement of services on a monthly basis. The expiration of the
repurchase option may accelerate upon certain change of control transactions.
Expense of $44,994, $86,084 and $122,673 was recognized for the issuance of
these shares during the nine months ended September 30, 1999, the year ended
December 31, 1998 and the period from March 25,
F-137
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
1997 (inception) through December 31, 1997, respectively. Expense relating to
nonvested common stock to third parties was $136,582 for the nine months ended
September 30, 1999.
In April 1999, the Company issued 513,112 shares of nonvested common
stock under the 1999 Plan to the chairman of the Board of Directors in exchange
for $12,828. The issued shares had a fair value of $0.79 per share as of the
grant date. These shares are subject to a repurchase option which allows the
Company the right to repurchase the shares upon termination of employment or
consulting services provided. The repurchase option expires over four years
with a 25% cliff after the first year and ratably thereafter on a monthly
basis, and may accelerate upon certain change of control transactions.
Compensation expense in the amount of $149,659 was recognized for these shares
for the nine months ended September 30, 1999.
Warrants to purchase Series A preferred stock
During 1999, the Company issued warrants to purchase up to 582,655 shares
of its Series A preferred stock at $1.80 per share in conjunction with its
subordinated debt financing. These warrants are exercisable immediately upon
grant and expire through the later of ten years after date of grant or five
years after the closing of an Offering. The exercise price of the warrants is
subject to adjustment upon the occurrence of certain corporate events or the
Company meeting specified operating criteria. The Series A preferred stock
purchase warrants automatically convert into common stock purchase warrants
upon the effectiveness of an Offering.
The Company also issued warrants to purchase up to 48,664 shares of its
Series A preferred stock at $2.47 per share in conjunction with its equipment
line financing. These warrants are exercisable immediately upon grant and
expire through the later of nine years after date of grant or four years after
the closing of an Offering. The warrants automatically convert into common
stock purchase warrants upon the effectiveness of an Offering.
Warrants to purchase common stock
In February 1999, the Company issued warrants to purchase up to 416,676
shares of its common stock in conjunction with its convertible debt financing
in 1998. The warrants are exercisable at $0.005 per share and vest immediately
upon issuance. The warrants expire on the earliest of five years from the date
of issuance; upon a change of control, as defined; or upon the closing of an
initial public offering. In July 1999, a warrant holder exercised warrants to
purchase 32,052 shares of common stock.
Note 9: Related Party Transactions
The Company paid a company owned by the majority shareholder of the
Company $92,808, $83,761 and $17,497 for the nine months ended September 30,
1999, the year ended December 31, 1998 and the period from March 25, 1997
(inception) through December 31, 1997, respectively, for certain services,
including wages, benefits, management fees, office expenses and other
miscellaneous expenses. As of September 30, 1999, and December 31, 1998 and
1997, the Company owed $12,753, $10,880 and $17,497 to this affiliated entity
for services performed during the respective periods. For the nine months ended
September 30, 1999, the year ended December 31, 1998 and the period from March
25, 1997 (inception) through December 31, 1997, respectively, the Company had
sales of $34,916, $0 and $15,132 to this affiliated entity. In February 1999,
the Company entered into an agreement with this affiliated entity to pay $3,300
per month for certain shared costs.
F-138
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
This agreement was terminated in August 1999. In August 1999, the Company
subleased its former office space to this affiliated entity. The lease expires
in May 2001 with monthly payments of $2,279. The Company is a guarantor of the
primary lease in the event that the affiliated entity fails to meet its
obligations under the sublease.
A director and shareholder provided legal and professional services to
the Company in the amount of $247,055 during the nine month period ended
September 30, 1999. Additionally, as of December 31, 1998, the Company owed
certain employees $44,407 under convertible debt agreements.
Subsequent to September 30, 1999, the Company received a promissory note
from its majority shareholder in the amount of $350,000 collateralized by
shares of the Company's common stock. The note bears interest at 6% per annum.
The principal and interest are payable upon demand at the earlier of October
2004 or the expiration of any lock-up period after an Offering. The note also
becomes due if certain change of control events take place.
Note 10: Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131")
"Disclosures about Segments of an Enterprise and Related Information"
establishes reporting and disclosure standards for an enterprise's operating
segments. The Company uses identical principles to account for segment
information as used in the accompanying financial statements. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by management.
Management operates its business based upon geographic area. Operating results
by business segment are as follows:
<TABLE>
<CAPTION>
US Canada Totals
------------ ---------- ------------
<S> <C> <C> <C>
Period from March 25, 1997 (inception)
to December 31, 1997
Net revenue........................... $ -- $ 62,174 $ 62,174
Net loss.............................. $ (112,518) $ (17,854) $ (130,372)
Total assets.......................... $ 193 $ 11,717 $ 11,910
Year ended December 31, 1998
Net revenue........................... $ 153,356 $ 883,915 $ 1,037,271
Net loss.............................. $ (406,795) $ (265,335) $ (672,130)
Total assets.......................... $ 67,402 $ 112,670 $ 180,072
Property and equipment................ $ 17,319 $ 3,606 $ 20,925
Depreciation and amortization......... $ 1,288 $ 870 $ 2,158
Interest expense...................... $ -- $ (3,608) $ (3,608)
Additions to property and equipment... $ 19,477 $ 3,606 $ 23,083
Nine months ended September 30, 1999
Net revenue........................... $ 9,917,034 $3,251,435 $ 13,168,472
Net loss.............................. $(15,215,774) $ (986,575) $(16,202,349)
Total assets.......................... $ 37,481,352 $ 717,506 $ 38,198,858
Property and equipment................ $ 4,605,905 $ 221,088 $ 4,826,993
Other assets.......................... $ 945,602 $ 25,681 $ 971,283
Depreciation and amortization......... $ 614,668 $ 22,012 $ 636,680
Interest income....................... $ 182,463 $ -- $ 182,463
Interest expense...................... $ (507,835) $ -- $ (507,835)
Noncash compensation expense.......... $ 1,628,324 $ 85,928 $ 1,714,252
Additions to property and equipment... $ 5,152,549 $ 236,327 $ 5,388,876
Additions to other assets............. $ 992,953 $ 25,681 $ 1,018,634
</TABLE>
F-139
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 11: Supplemental Cash Flow Information
Noncash investing and financing activities are as follows:
On March 25, 1997, the Company issued 4,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On February 25, 1999, the Company issued warrants to purchase its common
stock at $.005 per share. The noncash value allocated to these warrants was
$241,853.
On February 25, 1999, the outstanding convertible debt of the Company in
the amount of $1,319,997 was converted into shares of its Series A preferred
stock.
On June 15, 1999 and August 5, 1999, the Company issued warrants to
purchase its Preferred A stock in conjunction with its debt financings on these
dates. The value allocated to the warrants was $1,153,143.
In conjunction with its Series B preferred stock financing on September
30, 1999, the Company issued a stock subscription receivable for shares with a
value of $4,000,000. The proceeds from this receivable were collected
subsequent to September 30, 1999.
On August 13, 1999, the Company purchased software of $1,255,511 and
post-contract support of $403,103 in exchange for a promissory note.
Supplemental cash flow information:
Cash paid for interest during the nine months ended September 30, 1999
was $320,684. The Company paid no cash for interest in the year ended December
31, 1998 or the period from March 25, 1997 (inception) to December 31, 1997.
F-140
<PAGE>
Independent Auditors' Report
The Board of Directors, Shareholders and Members
Purchasing Group, Inc. and Integrated Sourcing, LLC:
We have audited the accompanying combined balance sheet of Purchasing
Group, Inc. and Integrated Sourcing, LLC (together, the Company) as of
September 30, 1999 and the related combined statements of operations,
stockholder's deficit and members' capital, and cash flows for the nine months
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 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Purchasing Group, Inc. and Integrated Sourcing, LLC as of September 30, 1999,
and the results of their operations and their cash flows for the nine months
ended September 30, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Philadelphia, Pennsylvania
November 17, 1999
F-141
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Balance Sheet
September 30, 1999
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $1,445,550
Accounts receivable, net of allowance for doubtful accounts of
$47,000......................................................... 2,123,958
Other current assets............................................. 12,665
----------
Total current assets............................................. 3,582,173
Deposits......................................................... 5,987
Property and equipment, net...................................... 49,639
----------
Total assets..................................................... $3,637,799
==========
Liabilities, Stockholder's Deficit and Members' Capital
Current liabilities:
Accounts payable................................................. $ 413,844
Accrued expenses................................................. 3,470,371
Unearned revenue................................................. 3,400
Loans from shareholder........................................... 203
----------
Total current liabilities and total liabilities.................. 3,887,818
Stockholder's deficit and members' capital:
Common stock of Purchasing Group, Inc., no par value,
1000 shares authorized, 100 shares issued and outstanding........ 100
Integrated Sourcing, LLC members' capital........................ 72,959
Accumulated deficit.............................................. (323,078)
----------
Total stockholder's deficit and members' capital................. (250,019)
----------
Total liabilities, stockholder's deficit and members' capital...... $3,637,799
==========
</TABLE>
See accompanying notes to combined financial statements.
F-142
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statement of Operations
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Revenues:
Service revenues.................................................. $6,539,109
Product revenues.................................................. 607,580
----------
Total revenue................................................... 7,146,689
Operating expenses:
Project personnel costs........................................... 1,420,944
Product costs..................................................... 551,564
Selling, general and administrative............................... 4,483,660
Depreciation...................................................... 45,507
----------
Total operating expenses........................................ 6,501,675
----------
Income from operations.......................................... 645,014
Other income:
Interest income................................................... 15,348
----------
Net income.......................................................... $ 660,362
==========
</TABLE>
See accompanying notes to combined financial statements.
F-143
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statements of Stockholder's Deficit and Members' Capital
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Retained
Common Stock Earnings/
------------- Members' (Accumulated
Shares Amount Capital Deficit) Total
------ ------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999.. 100 100 56,159 996,481 1,052,740
Net income.................. -- -- 16,800 643,562 660,362
Dividend distribution....... -- -- -- (1,963,121) (1,963,121)
--- ---- ------- ----------- -----------
Balance at September 30,
1999....................... 100 $100 $72,959 $ (323,078) $ (250,019)
=== ==== ======= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-144
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statement of Cash Flows
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income...................................................... $ 660,362
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 45,507
Changes in operating assets and liabilities:
Accounts receivable......................................... (860,253)
Other current assets........................................ 39,267
Deposits.................................................... (2,857)
Accounts payable............................................ 329,753
Accrued expenses............................................ 1,555,713
Deferred revenue............................................ (35,927)
-----------
Net cash provided by operating activities................... 1,731,565
-----------
Cash flows from investing activities:
Acquisition of property and equipment........................... (34,531)
-----------
Net cash used by investing activities....................... (34,531)
-----------
Cash flows from financing activities:
Repayments to shareholder....................................... (177,100)
Shareholder distributions....................................... (1,963,121)
-----------
Net cash used in financing activities....................... (2,140,221)
-----------
Net increase in cash and cash equivalents................... (443,187)
Cash and cash equivalents:
Beginning of period............................................. 1,888,737
-----------
End of period................................................... $ 1,445,550
===========
</TABLE>
See accompanying notes to combined financial statements.
F-145
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements
(1) Business and Organization
These combined financial statements include the operations of Purchasing
Group, Inc (PGI) and Integrated Sourcing, LLC (ISL), a business related to PGI
through common ownership and management and through business operations that
leverage common expertise in the area of procurement PGI and ISL also share
common facilities. Together these businesses are referred to as the Company.
Both PGI and ISL were involved in the business combination referred to in note
5. PGI was incorporated in the Commonwealth of Pennsylvania in February 1992 to
provide strategic cost reduction consulting services to businesses and
specializes in evaluating and streamlining the purchasing habits of businesses.
ISL was organized as a limited liability company in the Commonwealth of
Pennsylvania in September 1997 to provide integrated buying and purchasing
functions for its customers.
The Company's top five customers accounted for approximately 74% of
revenues for the nine months ended September 30, 1999, and 68% of accounts
receivable at September 30, 1999.
One customer accounted for approximately 51% of revenues for the nine
months ended September 30, 1999, and 51% of accounts receivable at September
30, 1999.
(2) Summary of Significant Accounting Policies
(a) Principles of Combination
The accompanying financial statements include the accounts of PGI and
ISL. ISL is 50% owned by the sole shareholder of PGI. All significant
transactions between the combined entities, which principally involve certain
purchasing services provided by ISL for PGI, have been eliminated in
combination.
(b) Use of Estimates
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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.
(c) Cash and Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less when acquired to be cash equivalents. At
September 30, 1999, cash equivalents consist of money market accounts of
approximately $1,106,000 and a certificate of deposit of approximately $3,000.
(d) Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on long-
lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted
F-146
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
future cash flows estimated to be generated by those assets are less than the
assets' carrying amount. If such assets are impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying value or fair value, less costs to sell.
(e) Revenue Recognition
Service revenues are recognized as work is performed on a contract by
contract basis, adjusted for any anticipated losses in the period in which such
losses are identified. No such losses have been incurred during the nine months
ended September 30, 1999. Certain service contracts provide for contingent
payments to the Company based on an agreed level of savings from services
provided. Contingent revenue is recognized when the related savings have been
identified and agreed with the client. Contingent revenue recognized during the
nine months ended September 30, 1999, are approximately $430,000. Out-of-pocket
expenses are reimbursed by clients and are offset against expenses incurred by
the Company.
Product revenues are recognized upon delivery of product to the customer
based upon specific shipping terms.
(f) Project Personnel Costs
Project personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(g) Income Taxes
PGI has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under the Subchapter S provisions of the Code and
similar state tax provisions, the stockholder includes the Company's corporate
income on his personal income tax returns. Accordingly, the Company was not
subject to Federal and state corporate income taxes.
ISL operates as a Limited Liability Corporation (LLC), and therefore is
exempt from taxation according to the partnership provisions of the Internal
Revenue Code. Under the partnership provisions of the Code, the members of the
LLC include their share of the LLC's income on their personal income tax
returns. Accordingly, the Company was not subject to Federal and state
corporate income taxes during the periods reported herein.
(h) Advertising Costs
The Company expenses the cost of advertising and promoting its services
as incurred. Such costs were approximately $17,000.
(i) Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of September 30, 1999, the Company had concentrations
of credit risk in one financial institution in the form of a money market
account in the
F-147
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
approximate amount of $1,095,000. At September 30, 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
(j) Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. This statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
(3) Balance Sheet Components
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the related
assets, generally ranging from three to five years.
<TABLE>
<S> <C>
Property and equipment, stated at cost:
Computer equipment.......................................... $ 215,162
Furniture and fixtures...................................... 5,372
----------
220,534
Less: accumulated depreciation.............................. 170,895
----------
$ 49,639
==========
Accrued expenses:
Accrued payroll expenses.................................. $3,384,236
Accrued commissions....................................... 65,000
Accrued taxes............................................. 21,135
----------
$3,470,371
==========
</TABLE>
Included in accrued payroll expenses is an accrued bonus payable of
approximately $3,100,000 to the president and sole shareholder of PGI which has
been included in selling, general, and administrative expenses.
F-148
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
(4) Leases
The Company has various non-cancelable operating leases expiring at
various dates through 2001. Future minimum annual lease payments under non-
cancelable operating leases as of September 30, 1999, are as follows:
<TABLE>
<S> <C>
1999............................................................. $24,657
2000............................................................. 12,090
2001............................................................. 5,269
-------
Total minimum payments......................................... $42,016
=======
</TABLE>
(5) Subsequent Event
On October 19, 1999, all outstanding shares and members' interests of PGI
and ISL were acquired by Purchasing Systems, Inc. (PSI), a holding company
established by Internet Capital Group, Inc. and EnerTech Capital Partners II
L.P., in exchange for cash, a note and shares of PSI common stock.
Upon consummation of the sale of shares and members' interests to PSI,
PGI and ISL will be included in the consolidated tax return of PSI which will
be subject to both Federal and state income taxes.
F-149
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Syncra Software, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in redeemable preferred stock and stockholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of Syncra Software, Inc. (a development stage enterprise) at
December 31, 1998 and the results of its operations and its cash flows for the
period from inception (February 11, 1998) through December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
F-150
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Balance Sheet
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
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
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-151
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Operations
<TABLE>
<CAPTION>
For the Period (Unaudited)
from Inception For the Three
(February 11, Months Ended March 31,
1998) through ------------------------
December 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-152
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Changes in Redeemable Preferred Stock and Stockholders' Deficit
<TABLE>
<CAPTION>
Series A Redeemable Series B Redeemable Preferred
Preferred Stock Preferred Stock Stock Warrants
--------------------- --------------------- --------------
Carrying Carrying Subscriptions Carrying
Shares Value Shares Value Receivable Value
--------- ----------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders.......
Issuance of
redeemable non-
voting, non-
convertible
preferred
stock..........
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
Repurchase and
retirement of
common stock...
Redemption of
redeemable non-
voting, non-
convertible
preferred
stock..........
Series A
redeemable
convertible
preferred stock
warrants....... $120,000
Accrual of
cumulative
dividends on
redeemable
preferred
stock.......... 334,652
Net loss........
--------- ----------- --------- ----------- ----------- --------
Balance at
December 31,
1998........... 2,586,207 6,334,651 120,000
Issuance of
Series B
redeemable
convertible
preferred
stock, issuance
costs of
$60,000
(Unaudited).... 3,287,602 $13,150,408 $(9,000,000)
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited).... 119,861
Net loss
(Unaudited)....
--------- ----------- --------- ----------- ----------- --------
Balance at March
31, 1999
(Unaudited).... 2,586,207 $ 6,454,512 3,287,602 $13,150,408 $(9,000,000) $120,000
========= =========== ========= =========== =========== ========
<CAPTION>
Redeemable Non-
voting
Non-convertible Deficit
Preferred Stock Common stock Accumulated
-------------------- --------------------- During
Carrying Development
Shares Value Shares Par Value Stage Total
-------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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.......
Second
closing.......
Third closing.. $ (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.......
Accrual of
cumulative
dividends on
redeemable
preferred
stock.......... 94,135 (428,787) (428,787)
Net loss........ (9,075,215) (9,075,215)
-------- ----------- ----------- --------- ------------- -------------
Balance at
December 31,
1998........... 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).... (60,000) (60,000)
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited).... 26,533 (146,394) (146,394)
Net loss
(Unaudited).... (1,759,630) (1,759,630)
-------- ----------- ----------- --------- ------------- -------------
Balance at March
31, 1999
(Unaudited).... 130,000 $1,416,001 396,000 $ 396 $(11,889,778) $(11,889,382)
======== =========== =========== ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-153
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Period (Unaudited)
From Inception For the Three Months
(February 11, Ended March 31,
1998) Through ------------------------
December 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-154
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements
1. Nature of the Business
Syncra Software, Inc. ("Syncra" or the "Company") was incorporated in
Delaware on February 11, 1998. Syncra was formed to design, develop, produce
and market supply chain collaboration software and solutions. Since its
inception, Syncra has devoted substantially all of its efforts to business
planning, research and development, recruiting management and technical staff,
acquiring operating assets, raising capital, marketing and business
development. Accordingly, Syncra is considered to be in the development stage
as defined in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises".
Syncra is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological changes, growth and
commercial acceptances of the Internet, dependence on principal products and
third party technology, new product development and performance, new product
introductions and other activities of competitors, dependence on key personnel,
development of a distribution channel, international expansion, lengthy sales
cycles and limited operating history.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Syncra considers all highly liquid instruments with an original maturity
of three months or less at the time of purchase to be cash equivalents.
Included in cash and cash equivalents at December 31, 1998 is approximately
$1.6 million in money market accounts.
Financial Instruments
The carrying amount of Syncra's financial instruments, principally cash,
notes payable, and redeemable preferred stock, approximates their fair values
at December 31, 1998.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repairs and maintenance costs are
expensed as incurred.
Research and Development and Software Development Costs
Costs incurred in the research and development of Syncra's products are
expensed as incurred, except for certain research and development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility, as defined by SFAS No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed." Costs incurred subsequent to the establishment of technological
feasibility and prior to the general release of the products are capitalized.
During the period ended December 31, 1998, costs eligible for capitalization
were immaterial.
Accounting for Impairment of Long Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of", the Company records
impairment of losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
F-155
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Stock-Based Compensation
Syncra accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of Syncra's Common Stock at the date of grant. Syncra has
adopted the provisions of SFAS No. 123, " Accounting for Stock-Based
Compensation", through disclosure only (Note 11). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited. In the opinion of Syncra's
management, the March 31, 1998 and 1999 unaudited interim financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operation for
that period. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 1999.
3. Prepaid Expenses
Prepaid expenses consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Trade shows and other marketing prepayments...................... $135,774
Others........................................................... 49,732
--------
$185,506
========
</TABLE>
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful life December 31,
(years) 1998
----------- ------------
<S> <C> <C>
Computer equipment.................................. 3 $246,631
Office equipment.................................... 5 71,783
Furniture and fixtures.............................. 7 91,875
--------
410,289
Less: accumulated depreciation...................... 58,537
--------
$351,752
========
</TABLE>
F-156
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
5. Impairment of Intangible Assets
In accordance with SFAS No. 121, Syncra reviews for impairment of long-
lived assets when events or changes in circumstances indicate that an asset's
carrying value may not be recoverable. In connection with the organization of
Syncra in February 1998, Syncra purchased the rights to certain software from
Benchmarking Partners, Inc. ("Benchmarking") in exchange for the issuance of
150,000 shares of Syncra's non-voting, non-convertible Redeemable Preferred
Stock (Note 8). Syncra did not obtain an independent valuation of the
technology and the fair value of the Redeemable Preferred Stock was not
objectively determinable. Therefore, Syncra recorded the technology based upon
the amount of the Redeemable Preferred Stock as determined by Syncra's Board of
Directors. Syncra expected to use the acquired software as a core technology in
its product development. In May 1998, management reassessed the status of
Syncra's product development and the additional features and functionality
planned to be included in Syncra's products. As a result of this re-evaluation,
management concluded that the core technology acquired from Benchmarking would
not be able to support Syncra's planned products. Accordingly, management
decided to restart Syncra's product development activities without the use of
the acquired software. An impairment charge of $1,312,500 was recognized in the
December 31, 1998 statement of operations.
6. Notes Payable to Stockholders
During 1998, the Company received aggregate cash proceeds totaling
$4,000,000 pursuant to the issuance of convertible promissory notes (the
"Notes") payable to certain of its stockholders. No repayments of principal or
interest (which accrues at a rate of 9% per annum) were made during the year.
The Note holders were also issued 344,828 warrants to purchase Series A
Preferred Stock ("Preferred Stock Warrants") at $2.32 per share in 1998. The
aggregate value of the Preferred Stock Warrants issued to all Note holders was
estimated to be $120,000, which was accounted for as discount on the Notes and
Preferred Stock Warrants. The discount is being amortized over the term of the
Notes. Upon closing of the Series B Preferred Stock financing, each Note holder
is entitled to a number of warrants equal to 20% of the face value of the Note
held by such holder divided by the price per share of Series B Preferred Stock.
As a result of the Series B Preferred Stock financing in 1999, the Notes were
converted into shares of Series B Preferred Stock. Additionally, the Preferred
Stock Warrants were converted to the equivalent number of warrants for Series B
Preferred Stock totaling 200,000 shares at $4.00 per share (Note 7). The
Preferred Stock Warrants have a term of ten years.
7. Redeemable Convertible Preferred Stock
At December 31, 1998, the Company had authorized preferred stock of
5,000,000 shares, $.001 par value per share, of which 2,941,031 shares were
designated as redeemable convertible Series A Preferred Stock ("Series A
Preferred Stock") and 150,000 shares of which were designated as Redeemable
Preferred Stock (the "Redeemable Preferred Stock").
On March 31, 1999, the Company's authorized Preferred Stock was increased
to 6,453,809 shares with a par value of $.001 per share of which 2,586,207
shares were designated as redeemable convertible Series A Preferred Stock,
3,737,602 shares as redeemable convertible Series B Preferred Stock ("Series B
Preferred Stock") and 130,000 shares as Redeemable Preferred Stock. Of the
designated Series B Preferred Stock, the Company issued 3,287,602 shares on
March 31, 1999 in exchange for net cash proceeds of $9.0 million received on
April 1, 1999 and the conversion of all principal and accrued interest due on
the Notes (Note 6).
F-157
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
The Series A and B Preferred Stock have the following characteristics:
Voting
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.
Dividends
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.
Liquidation
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.
Conversion
Each share of Series A and B Preferred Stock may be converted at any
time, at the option of the stockholder, into one share of Common Stock, subject
to certain anti-dilution adjustments, as defined in the terms of the Series A
and B Preferred Stock.
The Series A and B Preferred Stock will automatically convert into shares
of Common Stock upon (i) a public offering of Syncra's Common Stock which
results in gross proceeds to Syncra of at least $10,000,000, at a price per
share of the Common Stock of at least three times the Series B Preferred Stock
original purchase price per share (as adjusted for stock splits, stock
dividends, combinations, reorganizations, reclassifications or similar events)
or (ii) upon approval of the two-thirds of the outstanding Series A and B
Preferred Stockholders, voting separately, to convert all outstanding shares of
Series A and B Preferred Stock to Common Stock.
Redemption
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.
F-158
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Accretion
The issuance cost incurred by the Company was accreted in full in 1998
and at March 31, 1999 as an adjustment to the carrying value of redeemable
convertible Series A and B Preferred Stock.
8. Non-voting, Non-convertible Redeemable Preferred Stock
As described in Note 5, Syncra's Redeemable Preferred Stock was issued in
a non-cash exchange with Benchmarking for certain software. Subsequent to the
issuance of the Redeemable Preferred Stock to Benchmarking, Syncra repurchased
20,000 shares of its Redeemable Preferred Stock from Benchmarking at a price
per share of $10.00 plus accrued dividends of $4,667. In a separate
transaction, Benchmarking transferred the remaining 130,000 shares of the
Redeemable Preferred Stock to Internet Capital Group, Inc. ("ICG"), an existing
stockholder of Syncra in exchange for a $1.3 million note, bearing interest at
8% per annum. At December 31, 1998, ICG continued to hold the 130,000 shares of
Redeemable Preferred Stock. ICG is also a stockholder of Benchmarking.
The Redeemable Preferred Stock has the following characteristics:
Voting
Except as required by law, holders of Redeemable Preferred Stock are not
entitled to vote on any matters submitted to a vote of the stockholders of
Syncra, including the election of directors.
Dividends
Holders of Redeemable Preferred Stock are entitled to receive out of
funds legally available, cumulative dividends at the rate of 8% per share per
annum on the Base Amount of each share. 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.
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs
of Syncra, the holders of Redeemable Preferred Stock are entitled to receive,
prior to and in preference to any holders of Common Stock, but after all
distribution or payments required to be made to the holders of Series A 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.
Redemption
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.
F-159
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
At any time, and from time to time, Syncra may elect to redeem all, or
any portion of the outstanding shares of its Redeemable Preferred Stock, at a
redemption price equal to the original issuance price per share ($10.00) plus
all unpaid dividends thereon which have accrued through and including the
redemption date.
Redeemable Preferred Stock is also redeemable by Syncra upon the earlier
of (i) a public offering of Syncra's Common Stock which results in gross
proceeds to Syncra of at least $10,000,000, at a price per share of the Common
Stock of at least three times the Series B Preferred Stock original purchase
price per share (as adjusted for stock splits, stock dividends, combinations,
reclassifications, reorganizations or other similar events); or (ii) the
consummation of a sale of all or substantially all of Syncra's assets or
capital stock, either through a direct sale, merger, reorganization or other
form of business combination in which control of Syncra is transferred and as a
result holders of Series A and B Preferred Stock receive at least three times
the Series B Preferred Stock original purchase price per share (as adjusted for
stock splits, stock dividends, combination, reorganizations, reclassifications
or other similar events).
9. Common Stock
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of Syncra's stockholders. Common stockholders are entitled
to receive dividends, if any, as may be declared by the Board of Directors,
subject to the preferential dividend rights of the holders of the Series A and
B Preferred Stock and the Redeemable Preferred Stock.
Restricted Stock Agreements
Syncra has entered into agreements with certain of its employee
stockholders providing for restrictions on transfers of the shares subject to
such agreement. Each agreement provides Syncra with a right to repurchase the
shares held by such individual, in the event that the Company terminates the
employment of the individual. The number of shares which may be repurchased by
the Company and the price at which such shares may be repurchased differs per
individual and is contingent on whether such individual's termination is for
"cause' (as defined in the agreement) or other than for "cause'. At December
31, 1998, none of the restricted shares were subject to repurchase due to the
restrictions contained in these agreements.
Pursuant to a stockholders' agreement, as amended and restated on March
31, 1999, all of the outstanding capital stock (including the Common Stock,
Series A and B Preferred Stock and Redeemable Preferred Stock) of the Company
is subject to certain restrictions as to sale or transfer of such shares
pursuant to a stockholders' agreement. The Company and its non-founder
stockholders also hold rights of first refusal, under certain circumstances, on
shares offered by a stockholder for sale to third parties, at the price per
share to be paid by such third party.
Reserved Shares
At December 31, 1998, 2,833,857 shares were reserved for issuance upon
conversion of the Series A Preferred Stock and exercise of outstanding options.
F-160
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
10. Repurchase of Common Stock and Redemption of Preferred Stock
On June 5, 1998, the Company repurchased 1,000,000 shares of Common Stock
and redeemed 20,000 shares of its Redeemable Preferred Stock from Benchmarking,
one of the original founders in exchange for $2,250,000. The transaction was
financed through the sale of additional Series A Preferred Stock to certain of
the existing holders of Series A Preferred Stock. Of the 150,000 shares of
Redeemable Preferred Stock originally issued to Benchmarking, the remaining
130,000 shares were transferred by Benchmarking to ICG (see Note 8).
In addition to the shares acquired, the withdrawal of Benchmarking as a
stockholder eliminated a potential conflict of interest for Syncra and its
other stockholders with Benchmarking and its customers. The transaction also
settled potential claims by Benchmarking against Syncra with respect to the
transfer of technical talent from Benchmarking to Syncra and other potential
claims by Benchmarking against the potential future value of Syncra.
The difference between the total amount paid to Benchmarking and the
aggregate of the redemption value of the Redeemable Preferred Stock plus
accrued dividends of $204,667 and the fair value of the Common Stock of
$250,000 was treated as settlement charge in the statement of operations.
11. Stock Option Plan
In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan")
which provides for the grant of incentive stock options and non-qualified stock
options, stock awards and stock purchase rights for the purchase of up to
1,000,000 shares of the Company's Common Stock by officers, employees,
consultants, and directors of the Company. The Board of Directors is
responsible for administration of the 1998 Plan. The Board determines the term
of each option, the option exercise price, the number of shares for which each
option is granted, the rate at which each option is exercisable and the vesting
period (generally ratably over four to five years). Incentive stock options may
be granted to any officer or employee at an exercise price of not less than the
fair value per common share on the date of the grant (not less than 110% of the
fair value in the case of holders of more than 10% of the Company's voting
stock) and with a term not to exceed ten years from the date of the grant (five
years for incentive stock options granted to holders of more than 10% of the
Company's voting stock). Non-qualified stock options may be granted to any
officer, employee, consultant, or director at an exercise price per share of
not less than the book value per share.
During the period from inception (February 11, 1998) through December 31,
1998, Syncra granted options aggregating 803,300 shares with a weighted average
exercise price of $0.87 per share. Of the total options granted, 99,374 shares
were exercisable at December 31, 1998. None of these vested options were
exercised during the period. Options totaling 196,700 were available for future
grant at December 31, 1998. The weighted-average remaining contractual life of
the options outstanding is 9.5 years. No compensation expense has been
recognized for employee stock-based compensation in 1998.
The exercise price of the options is more than the fair market value of
the common stock, therefore, the weighted average grant date fair value per
share of the options granted during the year using the Black-Scholes option-
pricing model is zero at December 31, 1998. As a result, had compensation
expense been determined based on the fair value of the options granted to
employees at the grant date consistent with the provision of SFAS No. 123, the
Company's pro forma net loss would have been the same. The impact on the pro
forma net loss is not necessarily indicative of the effects on future results
of operations because the Company expects to grant options in future years.
F-161
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
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.
12. Income Taxes
Deferred tax assets consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Net operating loss carryforward................................ $2,386,619
Fixed and intangible assets.................................... 482,690
Research and development credit carryforwards.................. 90,891
Accrued vacation............................................... 35,687
----------
Net deferred tax assets........................................ 2,995,887
Deferred tax asset valuation allowance......................... 2,995,887
----------
$ --
==========
</TABLE>
The Company has provided a valuation allowance for the full amount of its
net deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards
cannot be sufficiently assured at December 31, 1998.
At December 31, 1998, the Company has federal and state net operating
loss carryforwards of approximately $5.9 million available to reduce future
taxable income, which will expire in 2019. The Company also has federal and
state research and development tax credit carryforwards of approximately
$72,490 and $27,881, respectively, available to reduce future tax liabilities.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may limit the amount of net operating loss
carryforwards and research and development credit carryforwards which could be
utilized annually to offset future taxable income and taxes payable.
13. 401(K) Savings Plan
The Company has established a retirement savings plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan through December 31, 1998.
F-162
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
14. Commitments
The Company leases its office space and certain office equipment under
noncancelable operating leases. Total rent expense under these operating leases
was approximately $134,000 for the period ended December 31, 1998.
Future minimum lease commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Year ending December 31, ----------------
<S> <C>
1999......................................................... $ 272,328
2000......................................................... 254,728
2001......................................................... 254,728
2002......................................................... 254,728
Thereafter................................................... 127,364
----------
$1,163,876
==========
</TABLE>
15. Related Party Transactions
In the normal course of business, Syncra had transactions with
Benchmarking during the period from inception until May 1998 for certain
operating expenses such as organizational costs, payroll, marketing, legal and
other expenses. The total expenses reimbursed by Syncra to Benchmarking
amounted to $496,344. Furthermore, Syncra also paid Benchmarking a management
fee totaling $80,000 during the same period.
In addition to the above transactions, Syncra also reimbursed ICG
$500,000 related to professional services provided by Benchmarking to Syncra
that originally were funded by ICG.
16. Subsequent Events
In April 1999, Syncra issued 250,000 shares of Series B Preferred Stock
for $1.0 million to a new investor.
F-163
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of traffic.com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of traffic.com, Inc. (a development
stage enterprise) at December 31, 1998, and the results of its operations and
its cash flows for the period from January 8, 1998 (commencement of activities)
to 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
Philadelphia, Pennsylvania
November 17, 1999
F-164
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Balance Sheets
December 31, 1998
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................... $ 84,541 $ 256,600
Accounts receivable (net of allowance of $35,355
as of September 30, 1999)........................ -- 261,587
Unbilled accounts receivable--state contracts..... -- 150,378
Inventoried costs relating to state contracts..... -- 116,553
Notes receivable--employees....................... -- 32,000
Other assets...................................... 35 15,038
--------- -----------
Total current assets............................ 84,576 832,156
Property and equipment, net......................... 2,615 1,036,190
Excess of cost over fair value of net assets
acquired, net.................................... -- 1,125,794
Intangible assets, net............................ -- 117,778
--------- -----------
Total assets.................................... $ 87,191 $ 3,111,918
========= ===========
Liabilities, Redeemable Preferred Stock and
Shareholders' Deficit
Current liabilities
Accounts payable.................................. $ 28,223 $ 1,372,775
Short-term debt................................... -- 144,200
Current maturities of long-term debt.............. -- 64,591
Notes payable--related parties, net............... -- 1,496,875
--------- -----------
Total current liabilities....................... 28,223 3,078,441
Long-term debt.................................... -- 170,434
--------- -----------
Total liabilities............................... 28,223 3,248,875
--------- -----------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock.. 500,000 745,000
Preferred stock warrants............................ -- 75,000
--------- -----------
500,000 820,000
--------- -----------
Shareholders' deficit
Common stock, $.01 par value, 5,000,000 shares
authorized, 3,500,000 shares issued and
outstanding at December 31, 1998 and 4,750,000
shares issued and outstanding at September 30,
1999............................................. 35 12,535
Additional paid-in capital........................ -- 1,237,500
Deficit accumulated during the development stage.. (441,067) (2,206,992)
--------- -----------
Total shareholders' deficit..................... (441,032) (956,957)
--------- -----------
Total liabilities, redeemable preferred stock
and shareholders' deficit...................... $ 87,191 $ 3,111,918
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-165
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
January 8,
1998 (Commencement (Unaudited)
of Activities) For the Nine Months
through Ended September 30,
December 31, ---------------------
1998 1998 1999
------------------ -------- -----------
<S> <C> <C> <C>
Revenues............................. $ -- $ -- $ 878,382
--------- -------- -----------
Operating expenses:
Cost of revenues................... -- -- 973,465
Selling, general and
administrative.................... 432,278 58,541 1,589,054
--------- -------- -----------
Total expense.................... 432,278 58,541 2,562,519
--------- -------- -----------
Loss from operations................. (432,278) (58,541) (1,684,137)
Interest income...................... 4,285 -- 8,529
Interest expense..................... -- -- (87,647)
Other income (expense), net.......... (13,074) -- (2,670)
--------- -------- -----------
Net loss............................. $(441,067) $(58,541) $(1,765,925)
========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-166
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Shareholders' Deficit
<TABLE>
<CAPTION>
Common Stock
----------------------------
Deficit
Accumulated
Additional During the
Par Paid-in Development
Shares Value Capital Stage Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 8,
1998 (commencement of
activities)
Issuance of common
stock.................. 3,500 $ 35 $ -- $ -- $ 35
Stock split (1,000 to 1;
July 1998)............. 3,496,500 -- -- -- --
Net loss................ -- -- -- (441,067) (441,067)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1998................... 3,500,000 35 -- (441,067) (441,032)
Issuance of common stock
for acquisition (March
1999).................. 1,250,000 12,500 1,237,500 -- 1,250,000
Net loss (unaudited).... -- -- -- (1,765,925) (1,765,925)
--------- ------- ---------- ----------- -----------
Balance at September 30,
1999 (unaudited)....... 4,750,000 $12,535 $1,237,500 $(2,206,992) $ (956,957)
========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-167
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
January 8, 1998
(Commencement (Unaudited)
of Activities) For the Nine Months Ended
to September 30,
December 31, ---------------------------
1998 1998 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(441,067) $ (58,541) $ (1,765,925)
Adjustments to reconcile net
loss to cash used in operating
activities:
Depreciation and
amortization................. 654 -- 383,155
Valuation allowance on advance
to target company............ 140,000 -- --
Provision for bad debts....... -- -- 35,355
Loss on disposal of fixed
assets....................... 13,076 -- --
Changes in assets and
liabilities, net of effects
of acquisition:
Accounts receivable......... -- -- 100,496
Unbilled accounts
receivable................. -- -- (150,378)
Inventoried costs........... -- -- (41,553)
Other assets................ (35) (35) 20,071
Accounts payable............ 28,223 -- 1,274,284
--------- ----------- --------------
Net cash used in operating
activities............... (259,149) (58,576) (144,495)
--------- ----------- --------------
Cash flows from investing
activities:
Payment for business acquired,
net of cash acquired ($37,318
at September 30, 1999)......... -- -- 37,318
Capital expenditures............ (16,345) -- (992,320)
Advance to target company....... (140,000) -- --
Acquisition of URL address...... -- -- (132,500)
--------- ----------- --------------
Net cash used in investing
activities............... (156,345) -- (1,087,502)
--------- ----------- --------------
Cash flows from financing
activities:
Net change in line of credit.... -- -- (6,241)
Proceeds from issuance of debt.. -- -- 1,140,297
Payments on notes payable....... -- -- (50,000)
Proceeds from issuance of common
stock.......................... 35 35 --
Proceeds from issuance of
preferred stock warrants....... -- -- 75,000
Proceeds from issuance of
redeemable preferred stock..... 500,000 500,000 245,000
--------- ----------- --------------
Net cash provided by
financing activities..... 500,035 500,035 1,404,056
--------- ----------- --------------
Net increase in cash and cash
equivalents...................... 84,541 441,459 172,059
Cash and cash equivalents,
beginning of period.............. -- -- 84,541
--------- ----------- --------------
Cash and cash equivalents, end of
period........................... $ 84,541 $ 441,459 $256,600
========= =========== ==============
Supplemental disclosure of cash
flow:
Cash paid for interest.......... $ -- $ -- $ 15,772
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-168
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1998
1. Organization and Liquidity
traffic.com, Inc. (the "Company") commenced its current operations on
January 8, 1998. The Company is a development stage company, as defined in
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting By
Development Stage Enterprises." traffic.com is currently developing a
nationwide traffic and logistics data collection network which will provide
real time data to end users. The Company plans to distribute its data products
through several distribution channels, including broadcast media, wireless
communication and the internet, as well as to logistics, fleet and engineering
businesses. The Company has incurred losses since its inception as it has
devoted substantially all of its efforts toward building network infrastructure
and internal staffing, developing systems, expanding into new markets, and
raising capital. The Company has generated no revenue to date from distribution
of data products and is subject to a number of risks similar to those of other
development stage companies, including dependence on key individuals, the
ability to demonstrate technological feasibility, and the need to obtain
adequate additional financing necessary to fund the development and marketing
of its products and services, and customer acceptance. The Company is in
discussions with potential customers regarding its products and services.
See Note 3 for description of business of subsidiary acquired after
December 31, 1998.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Cash and cash equivalents
Cash and cash equivalents represent cash and highly liquid short-term
investments with original maturities of three months or less. Such investments
are carried at amortized cost, which approximates fair value because of the
short maturity of these instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the related
assets.
Under the terms of a government contract, the Company has been engaged to
provide traffic data to various federal and state agencies for research,
planning and congestion management. As part of the contract, the Company will
install digital traffic surveillance systems, the cost of which will be
partially reimbursed by the government. Such reimbursements are billed upon the
achievement of defined milestones and are recorded as a reduction of the
capital expenditures incurred in the installation of the digital system as
shown in Note 4. As part of the terms of the government contract, in the event
the Company terminates the contract, the government has the right to all
equipment acquired with government funds at no cost and a right to purchase all
equipment acquired with private funds at fair value.
F-169
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Intangible asset
The intangible asset represents the Company's purchase of the traffic.com
URL address and is being amortized over a useful life of 3 years. Amortization
expense for the nine months ended September 30, 1999 was $14,722.
Asset valuation
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the carrying value of long-lived assets and
certain identifiable intangible assets will be evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such a review for recoverability, the Company will
compare the expected future cash flows (estimated undiscounted cash flows
associated with such assets) to the carrying value of the long-lived assets and
identifiable intangibles. If the expected future cash flows are less than the
carrying amount of such assets, the Company will recognize an impairment loss
for the difference between the carrying amount of the assets and their
estimated fair value.
Revenue recognition
The Company recognizes revenue and expense relating to government
contracts on the percentage-of-completion method, measured on the basis of
costs incurred as compared to management's estimate of total costs.
Management's estimates of costs are reviewed periodically as the work on
contracts progresses. Provisions for estimated contract losses are recorded
when identified. Unbilled receivables and inventoried costs and estimated
earnings can be invoiced upon attaining certain milestones under fixed-price
contracts and upon completion of construction on certain projects.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the establishment of a deferred tax asset or liability for the
recognition of future deductions or taxable amounts, and operating loss and tax
credit carryforwards. Deferred tax expense or benefit is recognized as a result
of the change in the deferred asset or liability during the year. If necessary,
the Company will establish a valuation allowance to reduce any deferred tax
asset to an amount which will, more likely than not, be realized.
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 amount 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.
F-170
<PAGE>
TRAFFIC.COM, INC
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Stock-based compensation
Stock based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair market
value of the Company's stock at the date of grant over the amount an individual
must pay to acquire the stock and is amortized over the vesting period. All
transactions in which goods and services are the consideration received for the
issuance of equity instruments, such as stock options, are expensed based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The Company has
adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Comprehensive income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes a standard for reporting and
displaying comprehensive income and its components within the financial
statements. Comprehensive income includes charges and credits to equity that
are not the results of transactions with shareholders. Comprehensive income is
comprised of net income and other comprehensive income. There were no
components of other comprehensive income for the period ended December 31, 1998
or for the nine months ended September 30, 1998 and 1999 (unaudited).
Unaudited interim financial statements
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are unaudited. In the opinion of management,
the September 30, 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 operations for those
periods. The results of operations for the nine months ended September 1999 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 1999.
3. Acquisition (Unaudited)
On March 1, 1999, the Company acquired all of the outstanding common
stock of Sensor Management Systems, Inc. (SMS) for a purchase price of
$1,550,000. SMS is a government contractor specializing in installation of
traffic monitoring systems. The purchase consideration consisted of $300,000 in
notes payable and 1,250,000 shares of the Company's Common Stock valued at
$1,250,000. The purchase agreement also includes additional consideration of
$75,000 which is contingent upon certain performance metrics. Such
consideration will be recognized when the contingency is resolved and the
consideration becomes payable. The acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion 16 "Business
Combinations". Goodwill of $1,415,641 related to the acquisition is being
amortized on a straight-line basis over a useful life of three years.
Amortization expense for the nine months ended September 30, 1999 was $289,847.
F-171
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
4. Property and Equipment, Net
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30, Useful
1998 1999 Life
------------ ------------- ---------
<S> <C> <C> <C>
Machinery and equipment............... $ -- $ 87,794 10 years
Office furniture and equipment........ -- 6,738 5 years
Computer hardware and software........ 3,269 39,734 3-5 years
Vehicles.............................. -- 213,442 5 years
Construction in progress.............. -- 869,839
------ ----------
3,269 1,217,547
Accumulated depreciation.............. (654) (7,365)
Construction in progress cost
reimbursement........................ -- (173,992)
------ ----------
$2,615 $1,036,190
====== ==========
</TABLE>
Depreciation expense was $654 and $6,711 for the period ended December
31, 1998 and the nine months ended September 30, 1999.
5. Short-term Debt (Unaudited)
A subsidiary of the Company is a party to a $100,000 revolving credit
facility which bears interest at prime plus 1% and is payable on demand. The
line of credit is collateralized by the assets of the subsidiary. The facility
expires in January 2000. At September 30, 1999, the outstanding balance on this
line of credit was $97,200 at an interest rate of 9.25%.
A subsidiary of the Company is a party to a promissory note which bears
interest at prime plus 1.5% and is payable on demand. The note is
collateralized by the assets of the subsidiary. At September 30, 1999, the
outstanding balance on this note was $47,000 at an interest rate of 9.75%.
6. Notes Payable--Related Parties (Unaudited)
SMS note payable
In connection with the acquisition of SMS (Note 3), the Company entered
into a promissory note in the amount of $375,000 with the sellers of SMS, who
are now shareholders of the Company. The note bears interest at 6% and is
payable in two installments. The first installment of $300,000 is due upon
completion of an equity financing by the Company in excess of $1,000,000. The
remaining $75,000 will be recognized upon resolution of certain purchase price
contingencies. See Note 12 for payment of the first installment subsequent to
September 30, 1999.
Convertible demand note payable
On April 22, 1999, the Company issued a convertible note payable in the
amount of $1,200,000 to certain holders of the Company's Preferred Stock (Note
9). The note bears interest at 9%, is payable on demand and is collateralized
by the assets of the Company. The note may be converted at the option of the
holder into shares of any new class or series of equity securities issued by
the Company within one year from the date of the note or into shares of Series
A Convertible Preferred Stock at a conversion price of $1.00 per share.
F-172
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
In conjunction with issuance of the note, the Company issued warrants to
purchase 600,000 shares of Series A Convertible Preferred Stock at a purchase
price of $1.00 per share, exercisable through April 22, 2009. The aggregate
value of the warrants was estimated at $75,000 and was accounted for as
discount on the note payable. The discount is being amortized over the
estimated period to conversion of the note. At September 30, 1999, the
remaining unamortized discount balance was $3,125. See Note 12 regarding
conversion of the note subsequent to September 30, 1999.
7. Long-term Debt (Unaudited)
As a consequence of the acquisition of SMS, the Company is a party to
various long-term collateralized vehicle and equipment loans. A portion of
these loans bear interest at prime plus .25% while the remainder carry fixed
rates from 8.75% to 9.75%. Monthly payments of principal and interest under
these loans amount to $6,709. The loans mature at various dates, beginning
December 4, 2000 through January 4, 2004.
8. Income Taxes
At December 31, 1998 and September 30, 1999, the Company had net
deductible temporary differences and net operating loss carryforwards of
approximately $441,000 and $2,200,000, respectively. The tax loss carryforwards
expire beginning in 2013. A full valuation allowance has been provided for the
net deductible temporary differences and tax loss carryforwards due to
uncertainty regarding their utilization.
9. Mandatorily Redeemable Convertible Preferred Stock
Fiscal 1998
On September 22, 1998, the Company issued 500,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock"), $0.01 par value, at a
purchase price of $1.00 per share for total proceeds of $500,000. Each share of
Series A Preferred Stock is convertible into one share of Common Stock at the
option of the holder and converts automatically upon an initial public offering
of Common Stock. The conversion ratio is subject to change based on certain
dilution events, as defined in the preferred stock purchase agreement. The
Series A Preferred Stock is entitled to receive any dividends declared on the
Company's Common Stock based on the number of shares into which the Series A
Preferred Stock is convertible. Each holder of the Series A Preferred Stock is
entitled to one vote for each share of Common Stock into which such share of
Series A Preferred Stock is convertible. In addition, the Series A Preferred
Stock holders, voting as a separate class, are entitled to elect two of the
Company's five directors. The Series A Preferred Stock is redeemable by the
holder at any time after the fifth anniversary of the original issuance date in
an amount equal to the original purchase price plus any declared but unpaid
dividends. In the event of liquidation, the Series A Preferred Stock carries a
premium of 8% per year.
Nine months ended September 30, 1999 (unaudited)
On January 27, 1999; May 26, 1999 and August 6, 1999, the Company issued
45,000; 100,000 and 100,000 additional shares of Series A Preferred Stock,
respectively, to new investors at a purchase price of $1.00 per share.
See Note 12 for changes to the terms of the Series A Preferred Stock
subsequent to September 30, 1999.
F-173
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
10. Shareholders' Deficit
Common stock
The Company is authorized to issue 5,000,000 shares of $.01 par value
common stock. Common shareholders have the right to one vote for each share of
Common Stock held. Common shareholders have the right to elect two members of
the Board of Directors, and one additional member to be voted with the
preferred shareholders.
Preferred stock
The Company is authorized to issue 750,000 shares of $.01 par value
preferred stock. The Board of Directors has the authority to issue shares and
to fix voting privileges, dividend rates, conversion privileges and any other
rights of the preferred stock.
See Note 12 for changes to the Company's Articles of Incorporation
subsequent to September 30, 1999.
11. Commitments and Contingencies (Unaudited)
Legal proceedings
During 1998, the Company was engaged in merger negotiations which were
subsequently terminated in February 1999. In July 1999, the former target
company filed a civil suit in connection with the termination of merger
negotiations. The case is in the preliminary stages; however, the Company does
not believe that the suit will result in a material adverse impact on the
financial condition or results of operations of the Company.
Prior to termination of negotiations, the Company advanced $140,000 to
the target company. A valuation allowance has been established related to this
advance based on uncertainty regarding its collection.
12. Subsequent Events (Unaudited)
Amended and Restated Articles of Incorporation
On October 6, 1999, the Company amended and restated its Articles of
Incorporation to increase the number of authorized shares to 45,000,000,
divided into a class of 33,800,000 shares of Common Stock, $0.01 par value per
share, and a class of 11,200,000 shares of Preferred Stock, $0.01 par value per
share. The 11,200,000 shares of Preferred Stock are further designated as
2,600,000 shares of Series A Convertible Preferred Stock (Note 9); 5,000,000
shares of Series B Convertible Preferred Stock and 3,600,000 shares of Series C
Convertible Preferred Stock. In addition, the number of directors was increased
to seven.
The amendment altered the voting rights of the Common Stock such that
holders of Common Stock, voting together with the holders of the Series A,
Series B and Series C Preferred Stock, are entitled to elect three directors of
the Company.
As a result of the amendment, the terms of the Series A Preferred Stock
were changed to reflect a mandatory redemption date of five years from the date
of the first issuance of Series B Preferred Stock for one-
F-174
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
third of the outstanding Series A Preferred Stock. The remaining two-thirds may
be redeemed in equal installments on the sixth and seventh anniversary of the
first issuance of Series B Preferred Stock. The voting rights of the Series A
Preferred Stock were changed to allow the holders of Series A Preferred Stock
to elect one director, voting as a separate class.
The newly authorized Series B Preferred Stock is convertible into one
share of Common Stock at the option of the holder and converts automatically
upon an initial public offering of Common Stock. The conversion ratio is
subject to change based on certain dilution events. The Series B Preferred
Stock is entitled to receive non-cumulative dividends of $0.19 per share as
well as any dividends declared on the Company's Common Stock based on the
number of shares into which the Series B Preferred Stock is convertible. Each
holder of the Series B Preferred Stock is entitled to one and one-half votes
for each share of Common Stock into which such share of Series B Preferred
Stock is convertible. In addition, the Series B Preferred Stock holders, voting
as a separate class, are entitled to elect two directors. The Series B
Preferred Stock is redeemable by the holder in one-third increments on the
fifth, sixth and seventh anniversary of the first issuance of Series B
Preferred Stock. In the event of liquidation, the Series B Preferred Stock
carries a premium of 8% per year.
The newly authorized Series C Preferred Stock is convertible into one
share of Common Stock at the option of the holder and converts automatically
upon an initial public offering of Common Stock. The conversion ratio is
subject to change based on certain dilution events. The Series C Preferred
Stock is entitled to receive non-cumulative dividends of $0.19 per share as
well as any dividends declared on the Company's Common Stock based on the
number of shares into which the Series C Preferred Stock is convertible. Each
holder of the Series C Preferred Stock is entitled to one vote for each share
of Common Stock into which such share of Series C Preferred Stock is
convertible. In addition, the Series C Preferred Stock holders, voting as a
separate class, are entitled to elect one director. The Series C Preferred
Stock is redeemable by the holder in one-third increments on the fifth, sixth
and seventh anniversary of the first issuance of Series B Preferred Stock. In
the event of liquidation, the Series C Preferred Stock carries a premium of 8%
per year.
Sale of Preferred Stock
On October 7, 1999, the Company entered into a preferred stock purchase
agreement with a group of investors. Under the terms of the agreement, the
Company agreed to sell 4,824,563 shares of Series B Convertible Preferred Stock
and 3,508,771 shares of Series C Convertible Preferred Stock. The shares are to
be sold in three separate increments of 2,026, 316 shares of Series B and
1,473,683 shares of Series C; 1,490,852 shares of Series B and 1,084,256 shares
of Series C; and 1,307,395 shares of Series B and 950,832 shares of Series C,
each at a purchase price of $2.00, $2.33 and $2.66 per share, respectively.
The first purchase of shares was completed on October 7, 1999 and
resulted in proceeds to the Company of approximately $7,000,000. The second and
third purchases are subject to the Company's achievement of certain performance
metrics set forth in the agreement no later than September 30, 2000 and
September 30, 2001, respectively.
Conversion of Note Payable
On October 7, 1999, the outstanding convertible demand note in the amount
of $1,200,000 plus accrued interest of $48,378 was converted in accordance with
its terms into 1,248,378 shares of Series A Preferred Stock at a conversion
price of $1 per share. The remaining unamortized discount was recognized as
interest expense at the date of conversion.
F-175
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Stock Option Plans
In October 1999, the Company's Board of Directors and shareholders
approved the 1999 Long-Term Incentive Plan which reserves 1,157,000 shares of
Common Stock for issuance to directors, officers and other key employees. The
plan is administered by the Board and provides for grants of stock options,
stock appreciation rights, restricted stock, deferred stock, stock bonuses,
dividend equivalents and other stock-based awards. Stock options granted under
the plan have an exercise price equal to 100% of fair market value (as
determined by the Board) on the date of grant, expire ten years from the date
of grant and are exercisable as determined by the Board. On October 6, 1999,
456,000 stock options were granted to employees at an exercise price of $0.25
per share.
In October 1999, the Company's Board of Directors and shareholders
approved the 1999 Non-Employees' Stock Plan which reserves 1,200,000 shares of
Common Stock for issuance to non-employee directors, advisors and consultants.
The plan is administered by the Board and provides for grants of stock options
and restricted stock, as well as the payment of directors' fees in the form of
shares or deferred shares of Common Stock. Stock options granted under the plan
have an exercise price equal to 100% of fair market value (as determined by the
Board) on the date of grant, expire ten years from the date of grant and are
exercisable in 25% increments each year following the first anniversary of the
date of grant. On October 6, 1999, 716,000 stock options were granted to non-
employee directors at an exercise price of $0.25 per share.
SMS Note Payable
As a result of the first closing of the Series B and Series C Preferred
Stock, on October 13, 1999, the Company repaid the $300,000 note payable to the
sellers of SMS, in accordance with the terms of the note.
F-176
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Messaging, Inc.:
We have audited the accompanying balance sheet of United Messaging, Inc.
(a development-stage enterprise) (the Company) as of December 31, 1998, and the
related statements of operations, redeemable convertible preferred stock and
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
and 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.
Arthur Andersen LLP
Philadelphia, Pennsylvania,
November 9, 1999
F-177
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
(Audited) (Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash.............................................. $ 613 $ 2,490,333
Accounts receivable............................... -- 94,530
Prepaid expenses.................................. 917 305,091
--------- -----------
Total current assets............................ 1,530 2,889,954
--------- -----------
Property and equipment, net of accumulated
depreciation of $1,572 and $56,617, respectively... 19,192 887,886
--------- -----------
Total assets.................................... $ 20,722 $ 3,777,840
========= ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.................................. $ 6,973 $ 380,279
Accrued expenses.................................. 53,669 493,302
Deferred revenues................................. -- 57,000
Due to employees.................................. 10,882 345
Advances from stockholder......................... 53,197 --
--------- -----------
Total liabilities............................... 124,721 930,926
--------- -----------
Commitments and contingences (note 8)
Redeemable Series A convertible preferred stock..... -- 5,784,041
--------- -----------
Stockholders' deficit:
Preferred stock, $.001 par value, 4,500,000 shares
authorized, none outstanding at December 31,
1998, 4,500,000 Redeemable Series A Convertible
shares issued and outstanding at September 30,
1999............................................. -- --
Common stock, $.001 par value, 9,500,000 shares
authorized, 2,066,677 issued and outstanding at
December 31, 1998, 3,333,350 issued and
outstanding at September 30, 1999................ 2,067 3,333
Additional paid-in capital........................ -- --
Additional paid-in capital--warrants.............. -- 53,727
Deficit accumulated during the development stage.. (106,066) (2,994,187)
--------- -----------
Total stockholders' deficit..................... (103,999) (2,937,127)
--------- -----------
Total liabilities and stockholders' deficit..... $ 20,722 $ 3,777,840
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-178
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
(Audited) (Unaudited) (Unaudited)
Period From Period From Period From
August 25, August 25, (Unaudited) August 25,
1998 1998 Nine 1998
(Inception) (Inception) Months (Inception)
Through Through Ended Through
December 31, September 30, September 30, September 30,
1998 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ 37,530 $ 37,530
Expenses Incurred in the
Development Stage:
Operations............ 20,940 -- 813,809 834,749
Selling and
marketing............ 69,429 -- 727,924 797,353
Administration........ 14,125 255 1,280,452 1,294,577
Depreciation.......... 1,572 -- 55,045 56,617
--------- ----- ----------- -----------
Total expenses...... 106,066 255 2,877,230 2,983,296
--------- ----- ----------- -----------
Operating loss........ (106,066) (255) (2,839,700) (2,945,766)
Interest Income......... -- -- 64,464 64,464
--------- ----- ----------- -----------
Net Loss................ (106,066) (255) (2,775,236) (2,881,302)
Preferred Stock
Dividends.............. -- -- 159,041 159,041
--------- ----- ----------- -----------
Net Loss Applicable to
Common Shareholders.... $(106,066) $(255) $(2,934,277) $(3,040,343)
========= ===== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-179
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
<TABLE>
<CAPTION>
Stockholders' Deficit
-----------------------------------------------------------------
Redeemable Additional Total
Convertible Common Common Additional Paid-in Stock-
Preferred Stock Stock Paid-in Capital- Accumulated holders'
Stock (Shares) (Amount) Capital Warrants Deficit Deficit
----------- --------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
(unaudited)......................... -- 1,266,673 1,266 11,400 -- -- 12,666
Issuance of Preferred stock
(unaudited)......................... 5,625,000 -- -- -- -- -- --
Contribution by stockholder of
advance (Note 4) (unaudited)........ -- -- -- 34,756 -- -- 34,756
Issuance of warrants to bank
(unaudited)......................... -- -- -- -- 53,727 -- 53,727
Preferred stock dividends
(unaudited)......................... 159,041 -- -- (46,156) -- (112,885) (159,041)
Net Loss (unaudited)................. -- -- -- -- -- (2,775,236) (2,775,236)
---------- --------- ------ -------- ------- ----------- -----------
Balance, September 30, 1999
(Unaudited).......................... $5,784,041 3,333,350 $3,333 $ -- $53,727 $(2,994,187) $(2,937,127)
========== ========= ====== ======== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-180
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
(Audited) (Unaudited) (Unaudited)
Period From Period From Period From
August 25, August 25, August 25,
1998 1998 (Unaudited) 1998
(Inception) (Inception) Nine Months (Inception)
Through Through Ended Through
December 31, September 30, September 30, September 30,
1998 1998 1999 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Activities:
Net loss.............. $(106,066) $(393) $(2,775,236) $(2,881,302)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation......... 1,572 -- 55,045 56,617
Increase (decrease)
in cash due to
changes in:
Prepaid expenses... (917) -- (250,447) (251,364)
Accounts
receivable........ -- -- (94,530) (94,530)
Accounts payable... 6,973 393 373,306 380,279
Accrued expenses... 53,669 -- 439,633 493,302
Deferred revenue... -- -- 57,000 57,000
Due to employees... 10,882 -- (10,537) 345
--------- ----- ----------- -----------
Net cash used in
operating
activities...... (33,887) -- (2,205,766) (2,239,653)
--------- ----- ----------- -----------
Investing Activities:
Capital expenditures.. (20,764) -- (923,739) (944,503)
--------- ----- ----------- -----------
Net cash used in
investing
activities...... (20,764) -- (923,739) (944,503)
--------- ----- ----------- -----------
Financing Activities:
Proceeds from issuance
of common stock...... -- -- 12,666 12,666
Proceeds from issuance
of preferred stock... -- -- 5,625,000 5,625,000
Advances from
stockholder.......... 55,264 -- (18,441) 36,823
--------- ----- ----------- -----------
Net cash provided
by financing
activities...... 55,264 -- 5,619,225 5,674,489
--------- ----- ----------- -----------
Net Increase in Cash... 613 -- 2,489,720 2,490,333
Cash, beginning of
period................ -- -- 613 --
--------- ----- ----------- -----------
Cash, End of Period.... $ 613 $ -- $ 2,490,333 $ 2,490,333
========= ===== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-181
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements
(Information as of September 30, 1999 and for the period from inception to
September 30,
1998 and for the nine months ended September 30, 1999 is unaudited)
1. Background:
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 Financial
Accounting Standards (SFAS) No. 7 Accounting and Reporting by Development Stage
Enterprises.
2. Significant Accounting Policies:
Interim Financial Statements
The financial statements for the period from inception to September 30,
1998 and for the nine months ended September 30, 1999 are unaudited, and in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position as of September 30, 1999 and the results of its operations for the
period from inception to September 30, 1998 and the nine months ended September
30, 1999. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the
entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash and
accounts payable. Cash and accounts payable are carried at cost which
approximates fair value because of the short maturity of these instruments.
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:
<TABLE>
<S> <C>
Software........................................................ 3 years
Computer equipment.............................................. 5 years
</TABLE>
F-182
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
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.
Income Taxes
At inception, the Company elected to be an S corporation under the
Internal Revenue Code 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 loss. Therefore, the
Company did not record a provision or benefit for federal income taxes prior to
May 21, 1999. The Company is not an S corporation for state income tax purposes
and, therefore, is responsible for state income taxes and liabilities. On May
21, 1999, in connection with the sale of Series A convertible preferred stock
(see 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. Due to the Company's net
operating loss in the period from May 22, 1999 to September 30, 1999 no
provision for federal or state income taxes has been provided. The Company has
recorded a valuation allowance against its net deferred tax asset.
Recapitalization
On May 10, 1999, the Company increased its authorized shares of common
stock from 1,000,000 to 9,500,000, and authorized 4,500,000 shares of preferred
stock with a par value of $.001 per share. Additionally, the Company effected a
1,000-for-one stock split and changed the par value of its Common stock to
$.001 per share. All references in the financial statements to the number of
shares and to per share amounts have been retroactively restated to reflect
these changes.
3. Property and Equipment:
A summary of property and equipments is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer and software equipment.............. $20,764 $944,503
Less: Accumulated depreciation............. 1,572 56,617
------- --------
Property and equipment, net.................. $19,192 $887,886
======= ========
</TABLE>
4. Advances from Officer:
During 1998 and the nine months ended September 30, 1999 an
employee/officer advanced $74,481 and $51,357, respectively, to the Company.
The Company paid back $21,282 in 1998 and $69,800 in the nine months ended
September 30, 1999. On August 19, 1999 the employee and the Company agreed that
the remaining $34,756 of the advance would be forgiven and contributed to
capital. Such amount has been reflected as an increase to additional paid in
capital in the accompanying financial statements.
F-183
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
5. Accrued Expenses:
Accrued expenses included $40,739 and $282,119 of employee compensation
and related benefits at December 31, 1998 and September 30, 1999.
6. Credit Facility:
On September 30, 1999, the Company obtained a credit facility from a bank
that expires on September 29, 2000 (the "Credit Facility"). The Credit Facility
consists provides for revolving advances (the "Revolving Facility") and
equipment advances (the "Equipment Facility"). The Company may borrow up to
$1,000,000 on the Equipment Facility and $500,000 on the Revolving Facility.
The availability under the Equipment Facility will automatically increase to
$1,500,000 if the Company closes an equity offering which raises at least
$5,000,000. Advances under the Revolving Facility bear interest at prime plus
1.25%, and mature on September 29, 2000. Advances under the Equipment Facility
can not be made after September 29, 2000, are repayable in 36 monthly
installments from the date of the advance and bear interest at the greater of
7.5% or the 36 month treasury rate as of the date of the advance plus 3.25%.
The Credit Facility has no financial covenants.
In connection with the Credit Facility, the Company issued a warrant to
purchase 60,000 shares of its Common stock to the bank (see Note 8). Using the
Black-scholes valuation method, the Company assigned a value of $53,757 to the
warrant. This amount has been recorded as an other asset and will be amortized
as interest expense over the repayment term of the advances under the facility.
7. Debt:
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 8).
8. Redeemable Convertible Preferred Stock and Stockholders' Deficit:
Preferred Stock
On May 21, 1999, the Company sold 4,500,000 shares of Series A redeemable
convertible preferred stock ("Series A Preferred") at a price of $1.25 per
share, resulting in proceeds to the Company of $5,625,000. Each share of Series
A Preferred 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 Preferred are entitled to receive dividends at a rate
of $0.08 per share per year. Such dividends are payable when declared by the
Board of Directors. The Series A convertible preferred stock is redeemable at
the option of its holders at any time after May 21, 2004 at a redemption price
equal to $1.25 per share plus accrued but unpaid dividends.
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 plus
accrued but unpaid dividends (adjusted for stock dividends, combination, or
splits) for each share of Series A preferred prior to and in preference to any
distribution to holders of common stock.
F-184
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
Common Stock
On February 1, 1999, the Company issued 1,266,673 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.
Stock Options
The Company has an option plan which provides for the issuance of up to
1,666,650 shares of Common stock for incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs") and restricted shares. ISOs are granted
with exercise prices at or above fair value as determined by the Board of
Directors. NQSOs are granted with exercise prices determined by the Board of
Directors. During the nine months ended September 30, 1999, the board of
directors granted to certain officers and employees of the Company options to
purchase 827,500 shares of common stock at an exercise price of $.125 per
share. The options vest over a four year period.
The Company applies Accounting Principal Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for options issued under the 1999 Plan. Under APB No. 25,
compensation cost related to stock options granted to employees is computed
based on the intrinsic value of the stock option at the date of grant, which
represents the difference between the exercise price and the fair value of the
Company's Common stock. Under SFAS No. 123, "Accounting for Stock-Based
Compensation," compensation cost related to stock options granted to employees
is computed based on the value of the stock option at the date of grant using
an option valuation methodology, typically the Black-Scholes pricing model.
SFAS No. 123 can be applied either by recording the fair value of the options
or by continuing to record the APB No. 25 value and disclosing the SFAS No. 123
impact on a proforma basis. The Company has elected the disclosure method of
SFAS No. 123.
Warrants
On September 30, 1999 the Company issued to a bank a warrant to purchase
60,000 shares of Common stock at $1.25 per share (see Note 6). The warrant
expires on September 29, 2006.
9. 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 (see Note 4).
The Company's operating facilities are located in Malvern, Pennsylvania.
During the period from inception through December 31, 1998, the Company
occupied an office building partially owned by the sole stockholder. The
Company incurred no rent expense in 1998.
F-185
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
10. Commitments and Contingencies:
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
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1999............................................................ $115,788
2000............................................................ 135,206
2001............................................................ 110,834
2002............................................................ 116,922
</TABLE>
F-186
<PAGE>
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) equity 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 6, 1999, except as to Note 2,
which is as of September 15, 1999
F-187
<PAGE>
UNIVERSAL ACCESS, INC.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, March 31,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
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)
Equity
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
Unissued redeemable cumulative
convertible Series A Preferred Stock.. -- 1,004,000 --
--------- ----------- -----------
Total current liabilities............ 134,000 2,163,000 1,837,000
Note payable............................ -- 149,000 134,000
--------- ----------- -----------
Total liabilities.................... 134,000 2,312,000 1,971,000
--------- ----------- -----------
Commitments and contingencies (Note 6)
Redeemable cumulative convertible Series
A Preferred Stock, no par value;
1,000,000 shares authorized; 335,334
shares issued and outstanding plus ac-
crued dividends of $20,000 (liquidation
value of $903,000)..................... -- 903,000 --
Redeemable cumulative convertible Series
A Preferred Stock warrants............. -- 36,000 --
Stockholders' (deficit) equity:
Cumulative convertible Series A
Preferred Stock, no par value;
1,000,000 shares authorized; 772,331
shares issued and outstanding plus
accrued dividends of $37,000
(liquidation value of $2,004,000)--
unaudited............................. -- -- 2,004,000
Cumulative convertible Series A
Preferred Stock warrants--unaudited... -- -- 83,000
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
$4,582,000)--unaudited................ -- -- 4,582,000
Cumulative convertible Series B
Preferred Stock warrants--unaudited... -- -- 1,197,000
Common stock, no par value; 300,000,000
shares authorized; 23,799,000 and
30,600,000 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) (2,631,000)
--------- ----------- -----------
Total stockholders' (deficit)
equity.............................. (34,000) (1,282,000) 5,597,000
--------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity.................... $ 100,000 $ 1,969,000 $ 7,568,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-188
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the For the For the
From Year Ended Three Month Three Month
Inception to December Period Ended Period Ended
December 31, 31, March 31, March 31,
1997 1998 1998 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
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) -- (76,000)
--------- ----------- -------- -----------
Net loss applicable to
common stockholders....... $(170,000) $(1,402,000) $(94,000) $(1,059,000)
========= =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-189
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the For the
From For the Three Month Three Month
Inception to Year Ended Period Ended Period Ended
December 31, December 31, March 31, March 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 -- 71,000
Proceeds from Series B
preferred stock......... -- -- -- 4,563,000
Proceeds from common
stock................... 136,000 89,000 79,000 --
Proceeds from redeemable
Series A preferred stock
warrants................ -- 36,000 -- 47,000
Proceeds from 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
========= =========== ========= ===========
</TABLE>
No amounts were paid for income taxes or interest during 1997 and 1998.
The accompanying notes are an integral part of these financial statements.
F-190
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Stockholders' (Deficit) Equity
December 31, 1997 and 1998 and March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Deferred
------------------- Preferred -------------------- Common Additonal Stock
Stock Shares No Par Stock Paind-in Options Plan Accumulated
Shares Amount Warrants Issued Value Warrants Capital Compensation Deficit Total
------- ----------- ----------- ---------- --------- -------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 2,
1997........... -- $ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- 23,799,000 136,000 -- -- -- -- 136,000
Net loss........ -- -- -- -- -- -- -- -- (170,000) (170,000)
------- ----------- ----------- ---------- --------- -------- --------- ---------- ------------ -----------
Balance at
December 31,
1997........... -- -- -- 23,799,000 136,000 -- -- -- (170,000) (34,000)
Issuance of
common stock... -- -- -- 6,201,000 89,000 -- -- -- -- 89,000
Exercise of
stock options.. -- -- -- 600,000 -- -- -- -- -- --
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........... -- -- -- 30,600,000 225,000 -- 487,000 (422,000) (1,572,000) (1,282,000)
Accretion on
redeemable
Series A
Preferred Stock
(unaudited).... -- -- -- -- -- -- -- -- (9,000) (9,000)
Termination of
mandatory
redemption
feature of
Series A
Preferred Stock
(unaudited).... 335,334 912,000 36,000 -- -- -- -- -- -- 948,000
Issuance of
Series A
Preferred Stock
(unaudited).... 436,997 1,075,000 -- -- -- -- -- -- -- 1,075,000
Issuance of
Series A
Preferred Stock
warrants
(unaudited).... -- -- 47,000 -- -- -- -- -- -- 47,000
Issuance of
Series B
Preferred Stock
(unaudited).... 200,000 4,532,000 -- -- -- -- -- -- -- 4,532,000
Issuance of
Series B
Preferred Stock
warrants
(unaudited).... -- -- 1,197,000 -- -- -- -- -- -- 1,197,000
Dividends on
Series A
Preferred Stock
(unaudited).... -- 17,000 -- -- -- -- -- -- (17,000) --
Dividends on
Series B
Preferred Stock
(unaudited).... -- 50,000 -- -- -- -- -- -- (50,000) --
Issuance of
common stock
warrants
(unaudited).... -- -- -- -- -- 13,000 -- -- -- 13,000
Issuance of
common stock
options by
certain
shareholders
(unaudited).... -- -- -- -- -- -- 31,000 -- -- 31,000
Stock option
plan
compensation
(unaudited).... -- -- -- -- -- -- -- 28,000 -- 28,000
Net loss
(unaudited).... -- -- -- -- -- -- -- -- (983,000) (983,000)
------- ----------- ----------- ---------- --------- -------- --------- ---------- ------------ -----------
Balance at March
31, 1999
(unaudited).... 972,331 $ 6,586,000 $ 1,280,000 30,600,000 $ 225,000 $ 13,000 $ 518,000 $ (394,000) $ (2,631,000) $ 5,597,000
======= =========== =========== ========== ========= ======== ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-191
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 1--Summary of Significant Accounting Policies
The Company
Universal Access, Inc. (the "Company" or "UAI"), an Illinois corporation,
was organized and commenced operations on October 2, 1997 for the purpose of
providing provisioning, co-location and high-capacity bandwidth to "services
providers" that include Internet, Applications, DSL and Telecommunications
providers. The Company operated as a subchapter S-Corporation until September
27, 1998, at which time it converted to a C-Corporation.
Basis of Presentation
The accompanying interim financial statements as of March 31, 1999 and
for the three months ended March 31, 1998 and 1999 and the related notes have
not been audited. However, they have been prepared in conformity with the
accounting principles stated in the audited financial statements for the period
from October 2, 1997 to December 31, 1997 and the year ended December 31, 1998
and include all adjustments, which were of a normal and recurring nature, which
in the opinion of management are necessary to present fairly the financial
position of the Company and results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results expected for the full years.
Revenue Recognition
Access and co-location services are billed a month in advance under long-
term contracts ranging from twelve to sixty months. UAI recognizes revenue in
the month the service is provided. Advance billings are recorded by the Company
as unearned revenue. UAI recognizes revenue from one-time fees for installation
and maintenance when the related services are performed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and
all investments with an initial maturity of three months or less. All cash
equivalents are recorded at cost.
Accounts Receivable
The allowance for doubtful accounts was $4,000, $46,000 and $152,000 at
December 31, 1997 and 1998 and March 31, 1999, respectively.
Financial instruments that could potentially subject UAI to concentration
of credit risk primarily include accounts receivable. Two customers represented
38% of total accounts receivable as of December 31, 1998, and 31% of total
sales during 1998. Three customers represented 94% of total accounts receivable
as of December 31, 1997, and 81% of total sales during 1997. If any of these
individually significant customers are unable to meet their financial
obligations, results of operations of the Company could be adversely affected.
UAI performs ongoing credit evaluations of its customers' financial condition
and to date has not experienced significant losses with respect to revenues
from any of its significant customers.
F-192
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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.
<TABLE>
<S> <C>
Furniture and fixtures............................................. 3 years
Co-location equipment.............................................. 3 years
Equipment.......................................................... 3 years
</TABLE>
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.
F-193
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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 and declared a 1-for-1 stock dividend on September 15, 1999. All
share amounts have been retroactively restated to reflect such splits.
Note 3--Property and Equipment
Property and equipment consists of the following, stated at cost:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
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
====== ========
</TABLE>
Note 4--Notes Payable
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
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
======= ========
</TABLE>
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
F-194
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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.
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:
<TABLE>
<S> <C>
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........................................................... $ --
=========
</TABLE>
At December 31, 1998, the Company had a federal net operating loss
carryforward of $227,000 which will expire in 2018.
F-195
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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:
<TABLE>
<S> <C>
1999............................................................... $ 74,000
2000............................................................... 78,000
2001............................................................... 34,000
2002............................................................... --
--------
Total minimum lease payments..................................... $186,000
========
</TABLE>
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.
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.
During February 1999, UAI paid Broadmark Capital Corporation
("Broadmark"), an entity for which a member of the UAI Board of Directors
serves as Chairman, $200,000 for services provided in connection with placement
of the Series A Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock"). This amount was recorded as an issuance cost, and deducted from the
gross proceeds received on the Series A Preferred Stock. In addition, as
described in Note 11, certain principal shareholders of the Company granted
options to Broadmark to purchase 840,000 of their common stock shares.
F-196
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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 9,000,000. 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, 4,896,000 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:
<TABLE>
<S> <C>
Pro forma net loss............................................... $1,375,000
Volatility....................................................... 0%
Dividend yield................................................... 0%
Risk-free interest rate.......................................... 5%
Expected life in years........................................... 5
</TABLE>
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.
F-197
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
The following information relates to stock options with an exercise price
which was less than the fair market value of the underlying stock on the date
of grant:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- ---------
<S> <C> <C>
Balance at December 31, 1997.......................... -- --
Granted............................................. 3,450,000 $0.000654
Exercised........................................... 600,000 0.000006
Forfeited........................................... -- --
---------- ---------
Balance at December 31, 1998.......................... 2,850,000 $0.000079
========== =========
Weighted average fair value of options granted during
1998................................................. $ 0.14
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at December 31, 1997............................ -- --
Granted............................................... 654,000 $0.091
Exercised............................................. -- --
Forfeited............................................. 6,000 0.02
-------- ------
Balance at December 31, 1998............................ 327,000 $0.092
======== ======
Weighted average fair value of options granted during
1998................................................... $ 0.02
</TABLE>
The following information relates to stock options as of December 31,
1998:
<TABLE>
<CAPTION>
Exercise Prices
----------------------------------------------------
$0.000003 to $0.0017 $0.67 to $0.11 $0.2533 to $0.27
-------------------- -------------- ----------------
<S> <C> <C> <C>
Stock Options Outstanding
Number ................. 2,850,000 582,000 66,000
Weighted average
exercise price......... $ 0.0007 $ 0.07 $ 0.27
Weighted average
remaining contractual
life (years)........... 4.67 4.51 4.91
</TABLE>
During 1998, 600,000 stock options were issued to non-employees for
services rendered during 1998. These options were issued with an exercise price
of $0.000003, were immediately exercisable, and comprised $40,000 of the
$65,000 stock option plan compensation expense recognized during 1998. During
1998, all options issued to non-employees were exercised.
F-198
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 9--Redeemable Cumulative Convertible Preferred Stock
Series A Redeemable Cumulative Convertible Preferred Stock
During 1998, UAI issued 335,334 shares of Series A Redeemable Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") for gross proceeds of
$1,006,000. Additionally, UAI received cash and accepted subscription documents
for 385,830 shares of Series A Redeemable Cumulative Convertible Preferred
Stock ("Unissued Series A Preferred Stock") for gross proceeds of $1,157,000.
As of December 31, 1998, the Company had authorized 1,000,000 shares of Series
A Preferred Stock. Stock certificates for the Unissued Series A Preferred Stock
were issued as of February 8, 1999.
Holders of the Series A Preferred Stock are entitled to cumulative
dividends at an annual rate of 8%, payable in cash or stock, at the Company's
discretion. The Series A Preferred Stock holders have the right to convert
their shares at any time into shares of UAI Common Stock on a 6-for-1 basis. A
qualified initial public offering of at least $1 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. On February 3, 1999, the Series A
Preferred Stock holders approved an amended Certificate of Designations, Rights
and Preferences whereby this mandatory redemption feature was terminated.
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 33,333 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.
F-199
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 10--Common Stock
At December 31, 1998, UAI had authorized 300,000,000 shares of no par
value Common Stock and 30,600,000 shares were issued and outstanding.
As of February 8, 1999, the Company ratified changes to the composition
of its Board of Directors (the "New Board of Directors"). The New Board of
Directors is composed of seven Directors; three Directors elected by the Common
Stock holders, one Director elected by the Series A Preferred Stock holders,
two Directors elected by the Series B Preferred Stock holders and one Director,
who is to be an industry expert, nominated by the Common Stock holders and
approved by all shareholders jointly.
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:
<TABLE>
<S> <C>
Redeemable Series A Preferred Stock............................. 4,037,988
Employee stock options outstanding.............................. 3,504,000
Series A Warrants............................................... 463,398
---------
Total........................................................... 8,005,386
=========
</TABLE>
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 360,000 shares of Common
Stock at $0.50 per share, and caused options to purchase 840,000 shares of
Common Stock to be granted by certain principal shareholders of the Company's
Common Stock. The 840,000 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 6-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-1 basis.
On May 27, 1999, UAI executed a full-recourse promissory note with the
Company's Chief Operating Officer for a principal amount of $200,000 with a per
annum interest rate of 6%. The promissory note will become immediately due and
payable on April 30, 2004.
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. During July and August 1999, UAI issued an
F-200
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
additional 2,118,647 shares of Series D Preferred Stock for gross proceeds of
$9,000,000. Series D Preferred Stock is convertible into Common Stock on a 3-
for-1 basis.
On July 30, 1999, UAI acquired substantially all of the assets and
liabilities of Pacific Crest Networks, Inc. ("PCN") in exchange for $774,000 in
cash, $224,000 in the assumption of debt, and 82,353 shares of Series D
Preferred Stock. Assets purchased included all property and equipment, cash,
accounts receivables, software, customer lists and intellectual property. Also,
as part of purchase, UAI assumed certain liabilities of PCN including $276,000
of accounts payable and obligations under leases and vendor contracts.
On August 4, 1999, the President, Chief Operating Officer and Chief
Financial Officer were granted options to purchase a total of 1,000,000 shares
of common stock at exercise prices from $1.38 to $1.51 per share. These stock
options vested immediately and were exercised on the date of grant. In
connection with the exercise, the UAI board of directors authorized secured
loans to these officers, pursuant to non-recourse promissory notes for a total
amount of $1,485,000 with an annual interest rate of 6%. The promissory notes
will become immediately due and payable on August 4, 2004.
During August 1999, UAI terminated its revolving line of credit
agreement.
On November 1, 1999, UAI acquired substantially all of the assets of
Stuff Software, Inc. ("Stuff Software") in exchange for $930,000 in cash and
50,021 shares of UAI common stock. Assets purchased include accounts
receivable, deferred revenue, customer lists, software and intellectual
property.
On November 10, 1999, UAI issued 1,557,386 shares of Series E Cumulative
Convertible Preferred Stock ("Series E Preferred Stock") for gross proceeds of
$28.5 million. Series E Preferred Stock is convertible into common stock on a
3-for-1 basis. The conversion ratio for the Series E Preferred Stock will be
multiplied by the lesser of 3.75 or the quotient of $750 million divided by the
product of the number of shares of common stock outstanding immediately before
an initial public offering multiplied by the initial public offering per share
price (such quotient is not to be less than 1).
F-201
<PAGE>
Independent Auditors' Report
The Board of Directors
VitalTone Inc.:
We have audited the accompanying balance sheet of VitalTone Inc. (the Company),
a development stage company, as of September 30, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from July 12, 1999 (inception) to September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 VitalTone Inc. (a development
stage company) as of September 30, 1999, and the results of its operations and
its cash flows for the period from July 12, 1999 (inception) to September 30,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
November 11, 1999
F-202
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Balance Sheet
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $1,437
Prepaid expenses............................................... 1
------
Total current assets........................................... 1,438
Property and equipment, net...................................... 197
Other assets..................................................... 93
------
$1,728
======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................... $ 282
Accrued expenses............................................... 81
------
Total liabilities.............................................. 363
Commitments
Stockholders' equity:
Common stock, $0.01 par value; 35,000,000 shares authorized
11,440,000 shares issued and outstanding...................... 114
Preferred stock ............................................... 2,005
Notes receivable from stockholders............................. (19)
Deficit accumulated during the development stage............... (735)
------
Total stockholders' equity..................................... 1,365
------
$1,728
======
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
July 12, 1999 (inception)
September 30, 1999
-------------------------
<S> <C>
Operating expenses:
Research and development............................ $171
Sales and marketing................................. 118
General and administrative.......................... 446
----
Net loss.......................................... $735
====
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Stockholders' Equity
Period from July 12, 1999 (inception) to September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Deficit
Notes Accumulated
Common stock Preferred receivable during the Total
----------------- Stock from development stockholders'
Shares Amount Issuable stockholders Stage equity
---------- ------ --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of July 12,
1999................... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders for notes
receivable............. 1,940,000 19 -- (19) -- --
Issuance of common
stock.................. 9,500,000 95 -- -- -- 95
Stock subscription...... -- -- 2,005 -- -- 2,005
Net loss................ -- -- -- -- (735) (735)
---------- ---- ------ ---- ----- ------
Balances as of September
30, 1999............... 11,440,000 $114 $2,005 $(19) $(735) $1,365
========== ==== ====== ==== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-205
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Period from
July 12, 1999
(inception) to
September 30, 1999
------------------
<S> <C>
Cash flows from operating activities:
Net loss................................................. $ (735)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 10
Changes in operating assets and liabilities:
Prepaid expenses and other assets.................... (94)
Accounts payable and accrued expenses................ 363
------
Net cash used for operating activities............. (456)
------
Cash flows used in investing activities--acquisition of
property and equipment.................................... (207)
------
Cash flows provided by financing activities:
Proceeds from issuance of common stock................... 95
Stock subscription....................................... 2,005
------
Net cash provided by financing activities.......... 2,100
------
Net increase in cash and cash equivalents.................. 1,437
Cash and cash equivalents, beginning of period............. --
------
Cash and cash equivalents, end of period................... $1,437
======
Supplemental disclosure of cash flow information:
Noncash financing activities:
Common stock issued for notes receivable............... $ 19
======
</TABLE>
See accompanying notes to financial statements.
F-206
<PAGE>
VITALTONE INC.
Notes to Financial Statements
September 30, 1999
(1) Business of the Company
VitalTone Inc. (the Company) was incorporated in Delaware in July 1999
and commenced operations at that time. The Company provides a highly reliable
source for the procurement, delivery, world-class support, and billing of an
array of key IT services and products. VitalTone enables midsized companies to
focus their internal MIS resources of strategic initiatives while receiving
improved service and tighter control at lower cost.
VitalTone is in the development stage, and its primary activities to date
have included raising capital necessary for infrastructure, hiring key
personnel, and acquiring property and equipment.
(2) Summary of Significant Accounting Policies
(a) 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 expenses during the reporting period.
Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
such as money market funds, with remaining maturities of less than 90 days as
of the date of purchase. The Company is exposed to credit risk in the event of
default by the financial institutions or the issuers of these investments to
the extent of the amounts recorded on the balance sheet.
(c) Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents approximates fair market value. Financial instruments that
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents.
(d) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful lives of the respective assets generally one to seven
years. Leasehold improvements are amortized of the shorter of the estimated
useful lives of the assets or the lease term.
(e) Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value
F-207
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount of the assets or fair value less costs to sell.
(f) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be recovered.
(g) Comprehensive Income
The Company has no material components of other comprehensive income
(loss) for all periods presented.
(h) Segment Reporting
In 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the manner in which public
companies report information about operating segments in annual and interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The method
for determining what information to report is based on the way management
organizes the operating segments within the Company for making operating
decisions and assessing financial performances. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO). The CEO
reviews financial information presented on an entity-level basis for purposes
of making operating decisions and assessing financial performance. The entity-
level financial information is identical to the information presented in the
accompanying statement of operations. Therefore, the Company has determined
that it operates in a single operating segment: enterprise service portal
systems.
(i) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. Because the Company does not currently hold any
derivative instruments and does not engage in hedging activities, the Company
expects that the adoption of SFAS No. 133 will not have a material impact on
its financial position, results of operations, or cash flows. The Company will
be required to adopt SFAS No. 133 in fiscal 2001.
F-208
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(3) Property and Equipment
A summary of property and equipment consisted of the following (in
thousands):
<TABLE>
<S> <C>
Computers and software.............................................. $194
Furniture and fixtures.............................................. 9
Leasehold improvements.............................................. 4
----
207
Less accumulated depreciation and amortization...................... 10
----
$197
====
</TABLE>
(4) Stockholders' Equity
(a) Preferred Stock Issuable
In July 1999, the Company received a cash advance in the amount of
$2,005,000. This advance has been converted into series A preferred stock upon
the completion of the financing described in note 6 (b).
(b) Stock Plan
The Company has reserved 6,500,000 shares of common stock for issuance
under its 1999 equity incentive plan (the Plan). The plan provides for the
issuance of stock purchase rights, incentive stock options, or nonstatutory
stock options.
Under the Plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning less than 10% of the
voting power of all classes of stock.
Under the Plan, options generally expire in 10 years. However, the term
of the options may be limited to 5 years if the optionee owns stock
representing more than 10% of the voting power of all classes of stock. Vesting
periods are determined by the Company's Board of Directors and generally
provide for shares to vest ratably over a three to four year period.
As of September 30, 1999, there were 3,483,800 additional shares
available for grants under the stock plan.
(c) Stock-Based Compensation
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's pro
forma net loss would not have differed materially from those amounts as
reported in the accompanying financial statements.
F-209
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
The Company's computation of the pro forma amounts reflects only options
granted in fiscal 1999. Therefore, the full impact of calculating compensation
cost is reflected over the vesting period of four years.
The fair value of each option was estimated on the date of grant using
the minimum value method with the following weighted-average assumption: no
dividends; risk-free interest rate of 5.8%; and expected life of 4 years.
A summary of the status of the Company's options as of September 30,
1999, is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
average
exercise
Shares price
--------- --------
<S> <C> <C>
Outstanding at beginning of period..................... -- $ --
Granted................................................ 3,016,200 0.01
Exercised.............................................. -- --
Canceled............................................... -- --
---------
Outstanding at end of period........................... 3,016,200
=========
Options exercisable at end of period................... --
=========
</TABLE>
The weighted-average fair value of options granted for the period ended
September 30, 1999, was $0.01.
As of September 30, 1999, the range of exercise prices and weighted-
average remaining contractual life of outstanding options were as follows
(number of options in thousands):
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------
Weighted-
average
remaining Weighted-
Range of Number of contractual average
exercise options life exercise
prices outstanding (years) price
-------- ----------- ----------- ---------
<S> <C> <C> <C>
$0.01 2,816,200 9.91 $0.01
0.08 200,000 10.00 0.08
---------
3,016,200
=========
</TABLE>
F-210
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(5) Income Taxes
The differences between the income tax benefit computed at the federal
statutory rate and the Company's tax provision for all periods presented
primarily relate to net operating losses not benefited.
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities as of September 30, 1999
are as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Deferred tax assets:
Start up costs.................................................... $193
Net operating loss and tax credit carryforwards................... 57
----
Gross deferred tax assets........................................... 250
Less valuation allowance............................................ (250)
----
Total deferred tax assets....................................... --
====
</TABLE>
In light of the Company's recent history of operating losses, the Company
has provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized.
As of September 30, 1999, the Company had approximately $167,000 of
federal and California net operating loss carryforwards. The federal loss
expires primarily in the year 2019, and the California net operating loss
expires in the year 2007.
The difference between the federal loss carryforward and the accumulated
deficit results primarily from start-up costs deferred for tax purposes.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. The Company has not yet determined if an ownership change has
occurred. If such ownership change has occurred, utilization of the net
operating losses will be subject to an annual limitation in future years.
(6) Subsequent Events
(a) Leases
Subsequent to September 30, 1999, the Company entered into a
noncancelable operating lease agreement expiring in the year 2001 for its
facilities.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999............................................................. $ 217
2000............................................................. 870
2001............................................................. 652
------
Future minimum lease payments.................................... $1,739
======
</TABLE>
F-211
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(b) Series A Preferred Stock
During November 1999, the Company issued 9,500,000 shares of Series A
preferred stock for $3.125 per share.
The rights, preferences, and privileges of the holders of Series A
preferred stock are as follows:
. Each share of Series A preferred stock shall be convertible at the
option of the holder, at any time after the date of issuance, into
one fully paid and nonassessable share of common stock, subject to
adjustment for certain dilutive events. Each share has voting
rights equal to the common stock on an "as if converted" basis.
. Conversion into common stock is automatic upon the closing of a
public offering of the Company's common stock at a purchase price
of not less than $9.375 per share and at an aggregate offering
price of not less than $50,000,000 for Series A preferred stock.
. Holders of Series A preferred stock are entitled to noncumulative
dividends when and if declared by the Company's Board of
Directors. As of September 30, 1999, no dividends have been
declared.
. Each share of Series A preferred stock has a liquidation
preference of $3.125, plus all declared but unpaid dividends.
. In the event of liquidation of the Company after payment has been
made to the holders of Series A preferred stock of the full
preferential amounts, any remaining assets would be distributed
ratably among the common and convertible preferred shareholders in
proportion to their common ownership on an "as if converted"
basis.
. Series A preferred stock is redeemable at any time after November
2, 2004, after the receipt by the Company of a written request
from the holders of two-thirds of the then outstanding shares of
Series A preferred stock, at the greater of the original issuance
price or the fair market value on the date of redemption.
The preferred stock investors received warrants to purchase 1,000,000
shares of Series A preferred stock for at an exercise price of $6.25 a share.
The fair market value of the warrants at the date of issuance was $1,500,000
which will be amortized against retained earnings through the redemption date
of the Series A preferred stock.
F-212
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders ofVivant! Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Vivant! Corporation
(a development stage company) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for the year ended December 31, 1998 and the
periods from August 7, 1997 (Inception) through December 31, 1997 and December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 17, 1999, except for Note 10,
which is as of November 18, 1999
F-213
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
---------------------- -------------
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 162,000 $ 978,000 $ 243,000
Short term investments................. -- 2,348,000 716,000
Related party receivable (Note 9)...... 128,000 100,000 --
Other current assets................... 18,000 35,000 40,000
--------- ----------- -----------
Total current assets................. 308,000 3,461,000 999,000
Property and equipment, net.............. 64,000 121,000 229,000
Other assets........................... -- 17,000 20,000
--------- ----------- -----------
$ 372,000 $ 3,599,000 $ 1,248,000
========= =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of long-term
obligations........................... $ -- $ 25,000 $ 76,000
Bank line of credit.................... -- -- 492,000
Accounts payable....................... 8,000 125,000 228,000
Accrued liabilities.................... 17,000 12,000 134,000
Convertible promissory notes payable... 125,000 -- --
Convertible promissory note payable--
related party (Note 9)................ 400,000 -- --
--------- ----------- -----------
Total current liabilities............ 550,000 162,000 930,000
Long-term obligations, less current
portion................................. -- 102,000 162,000
--------- ----------- -----------
550,000 264,000 1,092,000
--------- ----------- -----------
Commitments (Note 5)
Stockholders' equity (deficit):
Convertible Preferred Stock: $0.001 par
value; 10,200,000 shares authorized; no
shares, 4,908,301 and 4,908,301 shares
issued and outstanding in 1997, 1998 and
1999.................................... -- 5,000 5,000
Common Stock: $0.001 par value;
20,000,000 shares authorized;
3,978,220, 3,979,370 and 4,037,480
shares issued and outstanding in 1997,
1998 and 1999, respectively........... 1,000 4,000 4,000
Additional paid-in capital............. -- 4,900,000 4,906,000
Accumulated other comprehensive
income................................ -- 53,000 108,000
Deficit accumulated during the
development stage..................... (179,000) (1,627,000) (4,867,000)
--------- ----------- -----------
Total stockholders' equity
(deficit)........................... (178,000) 3,335,000 156,000
--------- ----------- -----------
$ 372,000 $ 3,599,000 $ 1,248,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-214
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period from Period from
August 7, 1997 August 7, 1997 (unaudited)
(Inception) (Inception) Nine Months Ended
through Year Ended through September 30,
December 31, December December 31, ----------------------
1997 31, 1998 1998 1998 1999
-------------- ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development.......... $ 80,000 $ 795,000 $ 875,000 $ 450,000 $ 1,758,000
Sales and marketing... 5,000 344,000 349,000 143,000 1,023,000
General and
administrative....... 84,000 308,000 392,000 236,000 451,000
--------- ----------- ----------- --------- -----------
Total operating
expenses........... 169,000 1,447,000 1,616,000 829,000 3,232,000
--------- ----------- ----------- --------- -----------
Loss from operations.... (169,000) (1,447,000) (1,616,000) (829,000) (3,232,000)
Interest income......... 3,000 42,000 45,000 7,000 11,000
Interest and other
expense................ (13,000) (43,000) (56,000) (38,000) (19,000)
--------- ----------- ----------- --------- -----------
Net loss................ $(179,000) $(1,448,000) $(1,627,000) $(860,000) $(3,240,000)
========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-215
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated Accumulated Total
Preferred Stock Common Stock Additional Other During the Stockholders'
---------------- ---------------- Paid-In Comprehensive Development Equity
Shares Amount Shares Amount Capital Income Stage (Deficit)
--------- ------ --------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception, August 7,
1997
Issuance of Common Stock
to founder in August
1997................... -- $ -- 3,978,220 $1,000 $ -- $ -- $ -- $ 1,000
Net loss................ -- -- -- -- -- -- (179,000) (179,000)
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at December 31,
1997................... -- -- 3,978,220 1,000 -- -- (179,000) (178,000)
-----------
Unrealized gain on
investments............ -- -- -- -- -- 53,000 -- 53,000
Net loss................ -- -- -- -- -- -- (1,448,000) (1,448,000)
-----------
Comprehensive loss...... -- -- -- -- -- -- -- (1,395,000)
Issuance of Series A
Convertible Preferred
Stock in August 1998... 4,025,000 4,000 -- 3,000 4,018,000 -- -- 4,025,000
Conversion of promissory
notes and accrued
interest into Series A
Convertible Preferred
Stock in August 1998... 883,301 1,000 -- -- 882,000 -- -- 883,000
Exercise of Common Stock
options in October
1998................... -- -- 1,150 -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at December 31,
1998................... 4,908,301 5,000 3,979,370 4,000 4,900,000 53,000 (1,627,000) 3,335,000
-----------
Unrealized gain on
investments
(unaudited)............ -- -- -- -- -- 55,000 -- 55,000
Net loss (unaudited).... -- -- -- -- -- -- (3,240,000) (3,240,000)
-----------
Comprehensive loss
(unaudited)............ -- -- -- -- -- -- -- 3,185,000
Exercise of Common Stock
options in January,
February and May, 1999
(unaudited)............ -- -- 58,210 -- 6,000 -- -- 6,000
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at September 30,
1999 (unaudited)....... 4,908,301 $5,000 4,037,580 $4,000 $4,906,000 $108,000 $(4,867,000) $ 156,000
========= ====== ========= ====== ========== ======== =========== ===========
</TABLE>
F-216
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
August 7, 1997 August 7, 1997 (Unaudited)
(Inception) (Inception) Nine Months Ended
through Year Ended through September 30,
December 31, December 31, December 31, -----------------------
1997 1998 1998 1998 1999
-------------- ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(179,000) $(1,448,000) $(1,627,000) $ (860,000) $(3,240,000)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 5,000 26,000 31,000 17,000 52,000
Changes in assets and
liabilities:
Related party
receivable.......... (128,000) 28,000 (100,000) 128,000 100,000
Other assets......... (18,000) (34,000) (52,000) (34,000) (8,000)
Accounts payable.... 8,000 117,000 125,000 47,000 103,000
Accrued
liabilities........ 17,000 43,000 60,000 77,000 122,000
--------- ----------- ----------- ---------- -----------
Net cash used in
operating
activities....... (295,000) (1,268,000) (1,563,000) (625,000) (2,871,000)
--------- ----------- ----------- ---------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (69,000) (83,000) (152,000) (26,000) (160,000)
Purchase of
investments.......... -- (7,367,000) (7,367,000) (7,367,000) --
Sale of investments... -- 5,072,000 5,072,000 3,865,000 1,687,000
--------- ----------- ----------- ---------- -----------
Net cash provided
by (used in)
investing
activities....... (69,000) (2,378,000) (2,447,000) (3,528,000) 1,527,000
--------- ----------- ----------- ---------- -----------
Cash flows from
financing activities:
Proceeds from
convertible
promissory notes
payable.............. 525,000 310,000 835,000 310,000 --
Proceeds from issuance
of Convertible
Preferred Stock...... -- 4,025,000 4,025,000 4,025,000 --
Proceeds from issuance
of Common Stock...... 1,000 -- 1,000 -- 6,000
Proceeds from
equipment lease
line................. -- 127,000 127,000 -- 111,000
Proceeds from bank
line of credit....... -- -- -- -- 492,000
Proceeds from
promissory notes..... -- -- -- -- 90,000
Repayment of
promissory notes..... -- -- -- -- (90,000)
--------- ----------- ----------- ---------- -----------
Net cash provided
by financing
activities....... 526,000 4,462,000 4,988,000 4,335,000 609,000
--------- ----------- ----------- ---------- -----------
Net increase in cash
and cash equivalents.. 162,000 816,000 978,000 182,000 (735,000)
Cash and cash
equivalents at
beginning of period... -- 162,000 -- 162,000 978,000
--------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................ $ 162,000 $ 978,000 $ 978,000 $ 344,000 $ 243,000
========= =========== =========== ========== ===========
Supplemental non-cash
investing and
financing activity:
Conversion of
convertible
promissory notes and
accrued interest into
convertible preferred
stock................ $ -- $ 883,000 $ 883,000 $ 883,000 $ --
========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-217
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Vivant! Corporation (the "Company"), formerly Illuminate Corporation, was
incorporated on August 7, 1997 in Delaware to deliver a web-based Extended
Workforce Management System. The Vivant! Solution will enable organizations to
respond more quickly to changing business requirements and time-to-delivery
demands through faster access to and more cost-effective management of outside
expertise and skills.
Vivant! is focused on Global 2000 organizations that leverage many
Information Technology contractors. The Company's suite of web-based
applications will link together hiring decision-makers with expertise and skill
suppliers, automate the selection and contracting process, and deliver
corporate-wide visibility and management of requirements, rates, service
quality and supplier information.
The Company is in the development stage, devoting substantially all of
its efforts to product development and raising capital financing. Accordingly,
the accompanying financial statements are not indicative of a normal operating
period.
The Company has funded its operating losses since inception through the
issuance of convertible promissory notes payable and the sale of equity
securities. The Company expects to generate revenues beginning in the fourth
fiscal quarter of 1999 through the licensing of its software products. The
Company also expects to continue its research and development activity.
Management's plans for funding continuing research and development efforts
primarily includes the sale of equity securities, software license fees and the
utilization of a credit facility (see Note 4). Operations of the Company beyond
fiscal 1999 are expected to be financed with cash primarily from operations.
The Company's failure to raise sufficient capital or to sell its products would
unfavorably impact the Company's ability to continue as a going concern. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.
Unaudited Interim Results
The accompanying interim financial statements as of September 30, 1999,
and for the nine months ended September 30, 1998 and 1999, are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows as of September 30, 1999 and for the nine months ended September 30, 1998
and 1999. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
Management's estimates and assumptions
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
F-218
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Cash, cash equivalents and short-term investments
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with initial maturity periods of greater than 90 days are classified as short-
term investments. The Company accounts for short-term investments in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." At
December 31, 1998, the Company's short-term investments consisted primarily of
certificates of deposit and commercial paper. The Company has classified its
investments as available-for-sale and carries such investments at fair value,
with unrealized gains and losses reported in stockholders' equity until
disposition.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and short-term
investments. Substantially all the Company's cash, cash equivalents and short-
term investments are held by financial institutions that management believes
are of high credit quality.
Comprehensive income
Effective January 1, 1997, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The difference between net loss and
comprehensive loss for the Company results from unrealized gains on available-
for-sale securities.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization
is computed using the straight-line method over the shorter of the estimated
useful lives of the assets, generally two to five years, or the lease term, if
applicable.
Research and development
Research and development costs include expenses incurred by the Company
to develop and enhance its web-based extended workforce management system.
Research and development costs are expensed as incurred.
Capitalized software development costs
Software development costs are included in research and development and
are expensed as incurred. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost is
then amortized on a straight-line basis over the greater of the estimated
product life, or on the ratio of current revenues to total projected product
revenues. As the Company is in the development stage, technological
feasibility, which the Company has defined as the establishment of a working
model which typically occurs when the beta testing commences, has not been
established. As such, software development costs have not been capitalized as
of December 31, 1998, and still have not been capitalized as of September 30,
1999.
F-219
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of FAS No. 123, "Accounting for Stock-Based
Compensation."
Income taxes
Income taxes are accounted for using an asset and liability approach,
which requires the recognition of taxes payable or refundable for the current
year and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Recent accounting pronouncements
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. As of January 1,
1999, the Company adopted SOP 98-1, which did not have a material impact on its
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 2000 and establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its financial statements.
F-220
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
----------------- -------------
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Property and equipment, net:
Computers and equipment..................... $37,000 $103,000 $228,000
Furniture and fixtures...................... 32,000 49,000 84,000
------- -------- --------
69,000 152,000 312,000
Less: Accumulated depreciation and
amortization............................... (5,000) (31,000) (83,000)
------- -------- --------
$64,000 $121,000 $229,000
======= ======== ========
Accrued liabilities:
Payroll and related expenses................ $ 4,000 $ 12,000 $ 67,000
Interest.................................... 13,000 -- --
Accrued expenses............................ -- -- 67,000
------- -------- --------
$17,000 $ 12,000 $134,000
======= ======== ========
</TABLE>
Note 3--Income Taxes:
No provision for income taxes has been recorded as the Company has
incurred net losses since inception.
The Company was a Subchapter C Corporation from its inception through
December 31, 1997 whereby deferred income taxes were established for the period
ended December 31, 1997. The Company changed its status as a Subchapter S
Corporation from January 1, 1998 through August 6, 1998, whereby the tax
effects of the Company's activities accrued directly to its shareholder.
Effective August 7, 1998 in connection with its issuance of Preferred Stock
(see Note 6), the Company's status terminated as a Subchapter S Corporation to
a Subchapter C Corporation for income tax purposes.
As of December 31, 1998, the Company had deferred tax assets of
approximately $354,000. Deferred tax assets relate primarily to net operating
loss and research and development credit carryforwards. Management believes
that, based on a number of factors, it is more likely than not that the
deferred tax assets will not be utilized, such that a full valuation allowance
has been recorded.
At December 31, 1998, the Company had approximately $350,000 of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2015. Under the Tax Reform
Act of 1986, the amounts of and benefits from net operating loss carryforwards
may be impaired or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
F-221
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 4--Borrowings:
Lines of credit
In October 1998, the Company entered into a Loan and Security Agreement
with a bank which provides for borrowings under (i) a revolving line of credit
up to $500,000 and (ii) an equipment line of credit up to $750,000. The
aggregate outstanding amounts under the revolving line and the equipment line
cannot exceed $750,000, are secured by substantially all of the Company's
assets and accrue interest at the bank's prime rate plus 1% per annum (8.75% as
of December 31, 1998). The revolving line expires on April 22, 2000. The
equipment line expires on November 22, 1999 and provides for the repayment of
any outstanding amounts in equal installments over three years. Purchases under
the equipment line prior to May 23, 1999 will be repaid over three years from
that date, and purchases from May 23, 1999 to November 22, 1999 will also be
repaid over three years, commencing November 22, 1999. At September 30, 1999,
the Company borrowed the maximum amount under the line of credit.
Notes payable
In 1997 and 1998, the Company issued various convertible promissory notes
payable for $525,000 and $310,000, respectively. Certain of the notes were with
related parties (see Note 9). These notes were repayable upon maturity
(generally within one year from date of issuance) and accrued interest at rates
ranging from 8.5% to 9.0% per annum. In August 1998, the principal and accrued
interest were converted into 883,301 shares of Series A Preferred Stock (see
Note 6).
Note 5--Commitments:
Leases
The Company leases office space under a noncancelable operating lease
that expires on December 31, 2000. Rent expense was $77,000 and $14,000 for the
year ended December 31, 1998 and the period from August 7, 1997 (Inception) to
December 31, 1997, respectively. The terms of the lease provide for rental
payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period.
Future minimum lease payments under the noncancelable operating lease at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Operating
December 31, Leases
------------ ---------
<S> <C>
1999............................................................ $150,000
2000............................................................ 198,000
Thereafter...................................................... --
--------
$348,000
========
</TABLE>
F-222
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 6--Convertible Preferred Stock:
In August 1998, the Company issued 4,908,301 shares of Series A
Convertible Preferred Stock ("Preferred Stock") at $1.00 per share.
Convertible Preferred Stock at December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Series Authorized Outstanding Amount
------ ---------- ----------- -----------
<S> <C> <C> <C>
A...................................... 5,100,000 4,908,301 $4,908,000
A-1.................................... 5,100,000 -- --
---------- --------- ----------
10,200,000 4,908,301 $4,908,000
========== ========= ==========
</TABLE>
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Series A and A-1 has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes
together as one class with the Common Stock.
As long as at least 1,500,000 shares of Series A and A-1 Convertible
Preferred Stock remain outstanding, the holders of Series A and A-1 Convertible
Preferred Stock, voting as a separate class, shall be entitled to elect two
directors. The holders of Common Stock, voting as a separate class, shall be
entitled to elect two directors. The holders of Common Stock and the holders of
Preferred Stock, voting as a single class on an as-converted basis, shall be
entitled to elect one director. The Company must obtain approval from a
majority of the holders of Convertible Preferred Stock in order to pay or
declare a dividend on Common Stock or repurchase any shares of Common Stock
other than shares subject to the right of repurchase by the Company, amend or
add a provision to the Company's Articles of Incorporation or Bylaws to
increase or decrease the authorized Preferred or to change the preferences,
rights, privileges or powers of the Preferred, issue shares of any equity
security having any preference superior to or on parity with any Preferred
Stock, or effect a merger, consolidation or sale of assets where the existing
shareholders retain less than 50% of the voting stock of the surviving entity.
Dividends
Holders of Series A and A-1 Convertible Preferred Stock are entitled to
receive noncumulative dividends prior to and in preference to any declaration
of payment of any dividend on Common Stock at the per annum rate of $0.08 per
share, when and if declared by the Board of Directors. No dividends on
Convertible Preferred Stock have been declared by the Board from inception
through December 31, 1998.
Liquidation
In the event of liquidation, dissolution or winding up of the
Corporation, the holders of Series A and A-1 Convertible Preferred Stock are
entitled to receive, prior and in preference to any distribution of any of the
assets of the Company to the holders of Common Stock, an amount of $1.00 per
share for each share of Series A and A-1 plus any declared but unpaid
dividends. Should the Company's legally available assets be
F-223
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
insufficient to satisfy the liquidation preferences, the funds will be
distributed to the holders of Series A and A-1 Convertible Preferred Stock in
proportion to the original issue price of the respective series of Preferred
Stock held by such holders. The remaining assets, if any, shall be distributed
among the holders of Series A and A-1 Convertible Preferred Stock and Common
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion of Series A and Series A-1 Convertible Preferred Stock)
until the holders of Series A and A-1 Convertible Preferred Stock receive an
aggregate of $5.00 per share. Thereafter, any remaining assets of the Company
shall be distributed ratably among the holders of Common Stock.
Conversion
Each share of Series A Convertible Preferred Stock is convertible, at the
option of the holder, according to a conversion ratio, subject to adjustment
for dilution. Each share of Series A and A-1 Convertible Preferred Stock
automatically converts into the number of shares of Common Stock into which
such shares are convertible at the then effective conversion ratio upon: (1)
the closing of a public offering of Common Stock at a per share price of at
least $3.00 per share with gross proceeds of at least $15,000,000, or (2) the
consent of the holders of at least 50% of the shares of Convertible Preferred
Stock.
At December 31, 1998, the Company reserved 4,908,301 shares of Common
Stock for the conversion of Series A Convertible Preferred Stock.
Note 7--Common Stock:
In July 1998, the Company's Board of Directors effected a 3,978.22 for
one stock split of the Company's outstanding shares. Par value remained at
$0.001 per share. All share information included in these financial statements
have been retroactively adjusted to reflect this stock split. After adjusting
for the split, a total of 3,978,220 shares of Common Stock were issued to the
Company's founder in August 1997.
Note 8--Stock Option Plan:
In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the Plan may be either Incentive Stock
Options ("ISO") or Nonqualified Stock Options ("NSO"). Stock Purchase rights
may also be granted under the Plan. Incentive Stock Options may be granted only
to Company employees (including officers and directors who are also employees).
Nonqualified Stock Options may be granted to Company employees and consultants.
The Company has reserved 2,221,178 shares of Common Stock for issuance under
the Plan.
Options under the Plan may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares on the
date of grant as determined by the Board of Directors, provided, however, that
(i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of
the estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall
not be less than 110% of the estimated fair value of the shares on the date of
grant and the term of the option shall be five years from the date of grant,
respectively. Options are exercisable immediately subject to repurchase options
held by the Company which lapse over a maximum period of 5 years at such times
and under such conditions as determined by the Board of Directors. To date,
options granted generally vest over four years.
F-224
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
The following summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Options Outstanding
--------------------
Weighted
Shares Average
Available Number Exercise
for Grant Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1997................. -- -- $ --
Authorized................................. 2,221,178 -- --
Granted.................................... (802,577) 802,577 0.10
Committed for future issuance.............. (47,662) -- --
Exercised.................................. -- (1,150) 0.10
---------- ------- -----
Balance at December 31, 1998................. 1,370,939 801,427 0.10
Granted (unaudited)........................ 223,800 223,800 0.10
Committed for future issuance (unaudited).. (194,450) -- --
Exercised (unaudited)...................... -- 58,210 0.10
Canceled (unaudited)....................... 37,500 (37,500) 0.10
---------- ------- -----
Balance at September 30, 1999 (unaudited).... 990,819 929,517 0.10
========== ======= =====
Options vested at September 30, 1999
(unaudited)................................. 104,482 $0.10
======= =====
</TABLE>
The following table summarizes the information about stock options
outstanding and vested as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable at
at December 31, 1998 December 31, 1998
-------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
-------- ----------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$0.10 801,427 10.0 $0.10 95,288 $ 0.10
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan
been determined based on minimum value at the grant dates for the awards under
a method prescribed by SFAS No. 123, the Company's net loss would not have been
materially different.
The Company calculated the minimum value of each option grant on the date
of grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of four years; risk
free interest rate of 4.56% to 5.47% for the year ended December 31, 1998. The
weighted average fair value of options granted during 1998 was $0.10.
F-225
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 9--Related Party Transactions:
In September 1997, the Company issued convertible promissory notes
payable to an executive and an external member of the Board of Directors
totaling $400,000 (see Note 4).
In December 1997, the Company agreed to prepay the annual salary of an
executive of the Company totaling approximately $128,000 which was fully
recognized by December 31, 1998.
In March and April 1998, the Company issued additional convertible
promissory notes payable to the same individuals totaling $270,000 (see Note
4). The cumulative debt was converted to Series A Convertible Preferred Stock
in August 1998.
In December 1998, the Company entered into an agreement to prepay the
annual salary of an executive of the Company totaling approximately $100,000
which will be fully recognized by December 31, 1999.
In January 1999, the Company extended a non-interest bearing note payable
to an executive of the Company in the amount of $90,000. Principal payments of
$11,250 shall be made monthly beginning January 31, 1999. The Note was repaid
as of September 30, 1999.
Note 10--Subsequent Events:
In October 1999, the Company launched its web business portal,
vivant.com, for sourcing and managing Information Technology contractors
through an open network of suppliers.
In November 1999, the Company issued an aggregate of 1,804,734 shares of
Series B Convertible Preferred Stock ("Series B") at $3.38 per share, for an
aggregate purchase price of $6,100,000. Series B is convertible into shares of
Common Stock at the rate of one share of Common Stock for each share of Series
B. The terms and conditions for series B are similar to those described in note
6 relating to Series A except that the liquidation amount per share is $3.38
per share and dividend per share of $0.2704 per annum and Series B takes
preference over Series A in a liquidation.
F-226
<PAGE>
Independent Auditors' Report
The Board of Directors
Web Yes, Inc.:
We have audited the accompanying consolidated balance sheets of Web Yes,
Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Web Yes,
Inc. and subsidiary as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-227
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------- (Unaudited)
March 31,
1997 1998 1999
------- -------- -----------
<S> <C> <C> <C>
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
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-228
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months
December 31, Ended March 31,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-229
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Total
-------------- ---------------- Paid-In Accumulated Subscriptions Stockholders'
Shares Amount Shares Amount Capital Deficit Receivable Equity
------- ------ ------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-230
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months
December 31, Ended March 31,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
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 -- --
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-231
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
Web Yes, Inc. (the "Company"), which was incorporated in July 1996,
provides application hosting services. Since inception and through September
1998 the Company operated with no salaried employees. Therefore, recurring
operating expenses such as salaries and benefits are not reflected in the
accompanying financial statements. Financial statements for periods after
September 30, 1998 reflect salaries and fringe benefits.
Web Developers Network, Inc., a wholly owned subsidiary of the Company,
has been inactive since inception.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Web Developers Network, Inc.
All significant intercompany transactions have been eliminated in
consolidation.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(c) Computer Equipment
Computer equipment is recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets (three
to five years). Equipment held under capital leases is stated at the net
present value of minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to operations when incurred.
(d) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, accounts receivable and debt
instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North
America.
The fair market values of cash, accounts receivable and debt instruments
at both December 31, 1997 and 1998 approximate their carrying amounts.
F-232
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
(e) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(f) Revenue Recognition
Revenues pursuant to time and materials contracts are recognized as
services are provided. Revenues from application hosting agreements are
recognized ratably over the terms of the agreements.
(g) Direct Personnel Costs and Other Direct Costs
Direct personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments. Other direct costs consist of
hardware.
(h) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Net Income (Loss) Per Share
Basic net income (loss) per share was calculated based on weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted earnings per share are the same. As the Company has been in a net loss
position for the years ended December 31, 1997 and 1998, common stock
equivalents of zero and 200,000 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(j) Reporting Comprehensive Income
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income (loss) be
reported in the consolidated financial statements in the period in which they
are recognized. For each period presented, comprehensive income (loss) under
SFAS 130 was equivalent to the Company's net income (loss) reported in the
accompanying consolidated statements of operations.
(k) Unaudited Interim Financial Information
The consolidated financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 are unaudited; however, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
statements for the interim
F-233
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
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.
(l) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Loans and Advances Payable to Stockholders
The Company has various loans and advances payable to stockholders for
working capital purposes. The loans, which accrue interest at 8%, have no
definitive repayment terms.
(4) Stockholders' Equity
(a) Common Stock
In September 1998, the Company amended its articles of incorporation to
adjust the number of authorized shares of common stock from 20,000 shares to
1,000,000 shares. The Company then issued 621,952 shares of common stock at
$.01 per share to the founders of the Company in order to adjust the equity
ownership to planned percentages. Subsequent to this issuance the founders
began to draw salaries.
During 1998, the Company issued common stock to employees and non-
employees in exchange for services rendered. The Company recorded expense of
$56,550 for the fair value of the stock issued.
(b) Preferred Stock
In September 1998, the Company authorized 200,000 shares of preferred
stock and issued 70,000 shares of preferred stock at $1.00 per share. The
preferred stock is voting and is convertible into one share of common stock
immediately at the option of the holder, and automatically converts into common
stock upon the completion of a qualifying initial public offering. The
preferred stock has a $1 per share liquidation preference.
(5) Capital Leases
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for four years, with
interest rates ranging from 12.9% to 21.6%. The leased equipment secures all
leases.
The following is a schedule by year of future minimum lease payments due
under capital leases, and the net present value of the minimum lease payments
as of December 31, 1998:
<TABLE>
<S> <C>
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
=======
</TABLE>
F-234
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
(6) Significant Customers
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three months
Years ended ended
December 31, March 31,
--------------- ---------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer A............................... 29% 24% 22% 49%
Customer B............................... -- 35 10 22
</TABLE>
(7) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
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................................. $ -- $ --
======= =======
</TABLE>
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that after considering all the available
objective evidence it is more likely than not that these assets will not be
realized.
(8) Subsequent Event
On June 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding capital stock of the Company in a transaction
accounted for under the purchase method of accounting. The total purchase price
was comprised of 571,135 shares of common stock of Breakaway. Of the shares of
common stock issued to the former Web Yes stockholders, 428,351 are subject to
the Company's right, which lapses incrementally over a four-year period, to
repurchase the shares of the particular stockholder upon the termination of his
employment with Breakaway. The repurchase price shall be either at the share
value at the time of the acquisition if the stockholder terminates employment
or is terminated for cause, or at their fair market value if stockholder's
employment is terminated without cause.
F-235
<PAGE>
Independent Auditors' Report
The Board of Directors
WPL Laboratories, Inc.:
We have audited the accompanying balance sheets of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the related statements of income, stockholders'
equity and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-236
<PAGE>
WPL LABORATORIES, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------- March 31,
1997 1998 1999
-------- ---------- -----------
<S> <C> <C> <C>
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
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE>
WPL LABORATORIES, INC.
Statements of Income
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
---------------------- --------------------
1997 1998 1998 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-238
<PAGE>
WPL LABORATORIES, INC.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
-----------------
Additional Total
Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
========= ======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-239
<PAGE>
WPL LABORATORIES, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
------------------- -------------------
1997 1998 1998 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
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 -- -- --
======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-240
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
WPL Laboratories, Inc. (the "Company") provides advanced software
development services to businesses. The Company's projects include sales force
automation, distribution, management, personnel management, e-commerce
application development, product analysis and Internet enabling applications.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North
America.
The fair market values of cash and accounts receivable at both December
31, 1997 and 1998 approximate their carrying amounts.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over three years for office and computer equipment and
software and five years for the automobile.
(d) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(e) Stockholders' Equity
On April 1, 1998, the Company amended its articles of incorporation to
change the par value of its common stock from $1.00 to $.01 and adjust the
number of authorized shares. In addition, the Company approved a stock dividend
of 1,248,880 shares. All related share information for all periods presented
has been restated to reflect this amendment.
F-241
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(f) Revenue Recognition
The Company generally recognizes revenue on projects as work is performed
based on hourly billable rates. In addition, a limited number of projects are
performed under fixed-price contracts. Revenue from these contracts is
recognized on the percentage of completion method based on the percentage that
incurred costs to date bear to the most recently estimated total costs.
Anticipated losses on uncompleted contracts, if any, are recognized in full
when determined.
(g) Project Personnel Costs
Project personnel costs consists of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(h) Income Taxes
The Company has elected to be taxed under the provisions of subchapter S
of the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income.
(i) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 ("SFAS" 123"), Accounting for Stock-Based Compensation. As permitted by
SFAS 123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted at fair market
value until they are exercised. Stock options issued to non-employees are
recorded at the fair value of the stock at the date of grant. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations.
(j) Net Income Per Share
The Company adopted the provisions of SFAS No. 128, Earnings Per Share
during 1997. This statement requires the presentation of basic and diluted net
income per share for all periods presented. Under SFAS 128, the Company
presents both basic net income per share and diluted net income per share.
Basic net income per share is calculated based on weighted average common
shares outstanding. Diluted net income per share reflects the per share effect
of dilutive stock options and other dilutive common stock equivalents.
(k) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. For each
year reported, comprehensive income under SFAS 130 was equivalent to the
Company's net income reported in the accompanying statements of income.
(l) Unaudited Interim Financial Information
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been included. Results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected
for the full fiscal year or any future periods.
F-242
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(m) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Related-Party Advance and Accrued Interest
In 1996, the Company received a working capital advance of $20,000, with
no defined terms, from a relative of its major stockholder. The advance has
been accruing interest at 8.3% per year. Interest expense on the advance was
$2,250, and $1,667 for the years ended December 31, 1997 and 1998,
respectively, and $417 and $0 for the three months ended March 31, 1998 and
1999, respectively.
(4) Common Stock
In April 1998, the Company awarded 551,020 shares of common stock to
certain employees for services rendered. Accordingly, the Company recorded
compensation expense of $248,000, which represented the estimated fair value of
the common stock issued. In connection with the award, the Company advanced
$103,300 to the employees to pay certain personal income taxes. These advances
are outstanding as of December 31, 1998.
(5) Employee Benefit Plan
The Company maintains a defined contribution plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers all
full-time employees of the Company. Participants may contribute up to the
greater of 15% of their total compensation or $10,000 to the plan, with the
Company matching on a discretionary basis. For the years ended December 31,
1997 and 1998, the Company did not contribute to the plan.
(6) Significant Customers
The following table summarizes revenues from significant customers
(revenues in excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Years Ended Ended
December 31, March 31,
--------------- ---------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer A............................... 52% 38% 53% 32%
Customer B............................... -- 18 31 --
Customer C............................... -- 15 -- 22
Customer D............................... 25 -- -- --
Customer E............................... -- -- -- 12
Customer F............................... -- -- -- 12
</TABLE>
F-243
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(7) Lease Commitments
The Company has entered into operating leases for its office facility and
equipment that expire through July 2000. Rent expense for the years ended
December 31, 1997 and 1998 was $43,613, and $43,893, respectively. Future
minimum lease payments under the operating leases as of December 31, 1998 are
$119,054 in 1999, $167,064 in 2000, $164,664 in 2001 and $41,166 in 2002.
(8) Subsequent Events
(a) Stock Option Plan
On January 1, 1999, the Company instituted the WPL Laboratories, Inc.
1999 Stock Option Plan (the "Plan") which authorizes the Company to grant
options to purchase common stock, to make awards of restricted common stock,
and to issue certain other equity-related awards to employees and directors of,
and consultants to, the Company. The total number of shares of common stock
which may be issued under the Plan is 200,000 shares. The Plan is administered
by the Board of Directors, which selects the persons to whom stock options and
other awards are granted and determines the number of shares, the exercise or
purchase prices, the vesting terms and the expiration date. Non-qualified stock
options may be granted at exercise prices which are above, equal to, or below
the grant date fair market value of the common stock. The exercise price of
options qualifying as incentive stock options may not be less than the grant
date fair market value of the common stock. Stock options granted under the
Plan are nontransferable, generally become exercisable over a four-year period,
and expire ten years after the date of grant (subject to earlier termination in
the event of the termination of the optionee's employment or other relationship
with the Company). Subsequent to December 31, 1998 and through May 14, 1999,
the Company granted 186,208 options under the Plan to purchase common stock at
$4.00 per share.
(b) Line of Credit
On February 22, 1999, the Company entered into a line of credit agreement
with a commercial bank under which it may borrow up to $750,000 at the bank's
prime rate plus .5%. Borrowings under the line are secured by substantially all
assets of the Company and are subject to certain financial and nonfinancial
covenants which include, among others, maintenance of a ratio of debt to cash
flow, minimum tangible net worth and a ratio of current assets to current
liabilities. The line of credit expires on April 15, 2000. This agreement
terminated upon the purchase of the Company (see note 8d).
(c) Consulting Agreement
On March 17, 1999, the Company signed a consulting agreement with
Plansponsor.com, Inc. ("PlanSponsor"). The agreement calls for the Company to
provide 3,000 hours of services, including work previously performed for
PlanSponsor in exchange for shares of common stock in PlanSponsor. As of
December 31, 1998, the Company had performed $100,875 of services based on the
agreement's contractual rates. This amount is included in other assets on the
accompanying balance sheet and will ultimately be settled by issuance of shares
of PlanSponsor common stock. In May 1999, the Company declared a dividend of
the PlanSponsor stock to the stockholders of the Company.
F-244
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(d) Reorganization Agreement
On May 17, 1999, the Company entered into a Reorganization Agreement with
Breakaway Solutions, Inc. ("Breakaway"), a provider of information technology
consulting services. Under the agreement, Breakaway acquired all of the
outstanding stock of the Company in a transaction accounted for under the
purchase method of accounting. The purchase price was comprised of $5 million
in cash, 1,705,175 shares of common stock and the assumption of all outstanding
WPL stock options, which became exercisable for 393,506 shares of the Company's
common stock at an exercise price of $2.38 per share with a four-year vesting
period. The WPL stockholders received one half of their cash consideration at
closing and will receive the remainder incrementally over a four-year period so
long as the stockholder does not voluntarily terminate his employment and is
not terminated for cause. Of the shares of common stock issued to the former
WPL stockholders, approximately fifty-percent are subject to Breakaway's right,
which lapses incrementally over a four-year period, to repurchase the shares of
a particular stockholder at their value at the time of the acquisition upon the
stockholder's resignation or our termination of the stockholder for cause.
F-245
<PAGE>
Inside back cover of prospectus:
Graphic listing the different categories of "Market Makers" and
"Infrastructure Service Providers" under which each of the Internet Capital
Group partner Companies logos is presented.
The categories of Market Makers are: "Vertical," and "Horizontal". Under
the Vertical Market Maker category, the logos for AgProducer Network, Inc.,
Animated Images, Inc., Arbinet Communications, Inc., AUTOVIA Corporation,
Bidcom, Inc., Collabria, Inc., CommerX, Inc., ComputerJobs.com, Inc.,
CourtLink, Deja.com, Inc., e-Chemicals, Inc., eMerge Interactive Inc.,
EmployeeLife.com, Internet Commerce Systems, Inc., iParts, JusticeLink, Inc.,
Paper Exchange.com LLC, Plan Sponsor Exchange, Inc., StarCite, Inc.,
traffic.com, Inc. and Universal Access, Inc. are presented. Under the
Horizontal Market Maker category, the logos for asseTrade.com, Inc.,
eMarketWorld, Inc., NetVendor Inc., ONVIA.com, Inc., Residential Delivery
Services, Inc. and VerticalNet, Inc. are presented.
The categories of Infrastructure Service Providers are: "Strategic
Consulting and Systems Integration," "Software" and "Outsourced Services"
providers. Under the Strategic Consulting and System Integration category, the
logos for Benchmarking Partners, Inc., U.S. Interactive, Inc. and Context
Integration, Inc. are presented. Under the Software category, the logos for
Syncra Software, Inc., Entegrity Solutions Corporation, Blackboard Inc.,
ClearCommerce Corp., Servicesoft Technologies, Inc. and TRADEX Technologies,
Inc. are presented. Under the Outsourced Services category, the logos for
Residential Delivery Services, Inc., LinkShare Corporation, Purchasing
Solutions, Inc., Vivant! Corporation, PrivaSeek, Inc., United Messaging, Inc.,
Breakaway Solutions, Inc., SageMaker, Inc., VitalTone Inc., Sky Alland
Marketing, Inc. and CommerceQuest, Inc. are presented.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,000,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
Lehman Brothers
Robertson Stephens
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated November 22, 1999
PROSPECTUS
6,000,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
-----------
Internet Capital Group, Inc. is selling 6,000,000 shares of common stock.
The common stock trades on the Nasdaq National Market under the symbol "ICGE."
On November 18, 1999, the last reported sale price for the common stock on the
Nasdaq National Market was $160.00 per share. After giving effect to our 2 for
1 stock split on December 6, 1999, the last reported sale price of our common
stock on November 18, 1999, would have been $80.00 per share.
Concurrent with this offering, we are offering $250,000,000 aggregate
principal amount of our % convertible subordinated notes due 2004. The notes
will be convertible into shares of our common stock at the option of the
holder. The convertible notes are offered by a separate prospectus. Completion
of the convertible note offering is not a condition to the completion of this
offering.
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 8 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount................................... $ $
Proceeds, before expenses, to Internet Capital Group,
Inc. ................................................... $ $
</TABLE>
The underwriters may also purchase up to an additional 900,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch International Goldman Sachs International
Deutsche Bank
Lehman Brothers
Robertson Stephens International Limited
-----------
The date of this prospectus is , 1999.
<PAGE>
UNDERWRITING
General
We intend to offer our common stock outside the United States and Canada
through a number of international managers, as well as in the United States and
Canada through a number of U.S. underwriters. Merrill Lynch International,
Goldman Sachs International, Deutsche Bank AG London, Lehman Brothers
International (Europe) and BancBoston Robertson Stephens International Limited
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 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.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch International .....................................
Goldman Sachs International .....................................
Deutsche Bank AG London .........................................
Lehman Brothers International (Europe) ..........................
BancBoston Robertson Stephens International Limited .............
---------
Total....................................................... 1,200,000
=========
</TABLE>
We have also agreed with certain U.S. underwriters in the United States
and Canada, for whom Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
Goldman, Sachs & Co., Deutsche Bank Securities Inc., Lehman Brothers Inc. and
BancBoston Robertson Stephens Inc. are acting as managers, that, subject to the
terms and conditions set forth in the purchase agreement, and concurrently with
the sale of 1,200,000 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
4,800,000 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.
In the purchase agreement, the several international managers and the
several U.S. underwriters, respectively, have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of common stock
being sold under the terms of the purchase agreement if any of the shares of
common stock being sold under the purchase agreement are purchased. In the
event of a default by an underwriter, the purchase agreement provides that, in
certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be terminated. The
closings with respect to the sale of shares of common stock to be purchased by
the international managers and the U.S. underwriters are conditioned upon one
another.
We have agreed to indemnify the international managers and the U.S.
underwriters against some liabilities, including some liabilities under the
Securities Act, or to contribute to payments the international managers and the
U.S. underwriters may be required to make in respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sales, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
1
<PAGE>
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 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
public offering, the public offering price, concession and discount may be
changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the international managers and the
U.S. underwriters and the proceeds before expenses to us. This information is
presented assuming either no exercise or full exercise by the international
managers and the U.S. underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to Internet Capital
Group, Inc. ................................... $ $ $
</TABLE>
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the terms of the intersyndicate agreement, the international
managers and the U.S. underwriters are permitted to sell shares of common stock
to each other for purposes of resale at the public offering price, less an
amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the international managers and any dealer to whom
they sell shares of common stock will not offer to sell or sell shares of
common stock to persons who are U.S. or Canadian persons, or to persons they
believe intend to resell to persons who are U.S. or Canadian persons, and the
U.S. underwriters and any dealer to whom they sell shares of common stock will
not offer to sell or sell shares of common stock to non-U.S. persons or to non-
Canadian persons or to persons they believe intend to resell to non-U.S. or
non-Canadian persons, except in the case of the terms of the intersyndicate
agreement.
Over-allotment Option
We have granted an option to the international managers, exercisable for
30 days after the date of this prospectus, to purchase up to an aggregate of
180,000 additional shares of common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
international managers may exercise this option solely to cover over-
allotments, if any, made on the sale of the common stock offered hereby. To the
extent that the international managers exercise this option, each international
manager will be obligated, subject to certain conditions, to purchase a number
of additional shares of common stock proportionate to such international
manager's initial amount reflected in the foregoing table.
We have also granted an option to the U.S. underwriters, exercisable for
30 days after the date of this prospectus, to purchase up to an aggregate of
720,000 additional shares of common stock to cover over-allotments, if any, on
terms similar to those granted to the international managers.
2
<PAGE>
No Sales of Similar Securities
We, our executive officers and directors, Safeguard Scientifics
(Delaware), Safeguard 98 Capital, L.P., Comcast ICG, Inc., CPQ Holdings, Inc.,
IBM Corporation, Technology Leaders II L.P. and Technology Leaders II Offshore
C.V. have agreed, with certain exceptions, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of
or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for our common
stock, whether now owned or later acquired by the person executing
the agreement or with respect to which the person executing the
agreement has or later acquires the power of disposition, or file
a registration statement under the Securities Act relating to any
of the foregoing; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our common
stock,
whether any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of days
after the date of this prospectus. See "Shares Eligible for Future Sale."
In addition, holders of Internet Capital Group's common stock and
warrants issued in conjunction with our May 1999 convertible note offering who
are affiliated or associated with NASD members who participated in the initial
public offering of our common stock have agreed not to sell these securities
for a period of one-year from August 4, 1999.
Price Stabilization and Short Positions
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.
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.
Sales in the United Kingdom
Each international manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the closing of
the offering, will not offer or sell any shares of the common stock of the
company to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their
3
<PAGE>
businesses or otherwise in circumstances which do not constitute an offer to
the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the common stock of the company in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issuance of our common stock to a person who is of
a kind described in Article 11(3) of the Financial Services Act of 1986
(Investments Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom such document may otherwise lawfully be issued or passed on.
No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of shares of common stock,
or in possession, circulation or distribution of this prospectus or any other
material relating to the company or shares of common stock in any jurisdiction
where action for that purpose is required. Accordingly, shares of common stock
may not be offered or sold, directly or indirectly, and neither this prospectus
nor any other offering material or advertisements in connection with shares of
common stock may be distributed or published, in or from any country or
jurisdiction except in compliance with any applicable rules and regulations of
any such country or jurisdiction.
Purchasers of the shares of common stock offered hereby may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the offering price set forth on the
cover page hereof.
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,000,000 Shares
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch International
Goldman Sachs International
Deutsche Bank
Lehman Brothers
Robertson Stephens International Limited
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Internet Capital Group
[Private Placement in Canada of Shares of Common Stock]
The Offering
The shares being offered in Canada are part of an offering (the
"Offering") of 6,000,000 shares of common stock ("Shares") of Internet Capital
Group, Inc. (the "Company") (6,900,000 shares if the Underwriters' over-
allotment option is exercised in full).
Attached hereto is a copy of the prospectus filed with the Securities and
Exchange Commission in the United States regarding the offering being made in
the United States. The offering in Canada is being made solely in the Province
of Ontario.
Resale Restrictions
The distribution of Shares in Canada is being made on a private placement
basis. Accordingly, any resale of such Shares must be made in accordance with
an exemption from the registration and prospectus requirements of applicable
securities laws. Purchasers of the Shares are advised to seek legal advice
prior to any resale of the Shares.
Representation by Purchasers
Confirmations of the acceptance of offers to purchase the Shares will be
sent to purchasers in Canada who have not withdrawn their offers to purchase
prior to the issuance of such confirmations. Each purchaser who receives a
purchase confirmation will, by the purchaser's receipt thereof, be deemed to
represent to the Company and the dealer from whom such purchase confirmation is
received that such purchaser is entitled under applicable provincial securities
laws to purchase such Shares without the benefit of a prospectus qualified
under such securities laws.
Enforcement of Legal Rights
Ontario The Shares being offered are those of a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by section 32 of the Regulation under the Securities Act (Ontario). As a
result, Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the Company's directors and officers and the experts named herein
may be located outside Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the Company
or such persons. All or a substantial portion of the assets of the Company and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the Company or such persons in Canada or
to enforce a judgment obtained in Canadian courts against the Company or such
persons outside of Canada.
<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 an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated November 22, 1999
PROSPECTUS
$250,000,000
[LOGO OF INTERNET CAPITAL GROUP]
% Convertible Subordinated Notes due 2004
-----------
Internet Capital Group, Inc. is selling $250,000,000 aggregate principal
amount of % Convertible Subordinated Notes due 2004. Concurrent with this
offering, we are offering 6,000,000 shares of our common stock. The common
stock is offered by a separate prospectus. Completion of the common stock
offering is not a condition to the completion of this offering.
The notes are convertible, at the option of the holder, at any time on or
before maturity into shares of our common stock. The notes are convertible at a
conversion price of $ per share, which is equal to a conversion rate of
shares per $1,000 principal amount of notes, subject to adjustment. Our common
stock is traded on the Nasdaq National Market under the symbol "ICGE." On
November 18, 1999, the last reported sale price of our common stock was $160.00
per share. After giving effect to our 2 for 1 stock split on December 6, 1999,
the last reported sale price of our common stock on November 18, 1999 would
have been $80.00 per share.
We will pay interest on the notes on and of each year, beginning
, 2000. The notes will mature on , 2004. We may redeem some or all of the
notes at any time on or after , 2002 at redemption prices described in this
prospectus. We may redeem some or all of the notes at any time before 2002 if
the closing price of our common stock exceeds 150% of the conversion price at
the redemption prices as described in this prospectus.
The notes are unsecured and subordinated to our existing and future senior
indebtedness. In addition, the notes effectively rank junior to our
subsidiaries' liabilities.
Investing in the notes involves risks which are described in the "Risk
Factors" section beginning on page 7 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Note Total
-------- -----
<S> <C> <C>
Public offering price(1)......................... % $
Underwriting discount............................ % $
Proceeds, before expenses, to Internet Capital
Group, Inc. .................................... % $
</TABLE>
(1) Plus accrued interest from , 1999, if settlement occurs after that
date.
The underwriters may also purchase up to an additional $37,500,000
aggregate principal amount of notes at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The notes will be ready for delivery in book-entry form only through The
Depositary Trust Company on or about , 1999.
-----------
Merrill Lynch & Co. Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
-----------
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Price Range of Common Stock.............................................. 22
The Reorganization....................................................... 23
Concurrent Offering...................................................... 23
Capitalization........................................................... 24
Selected Consolidated Financial Data..................................... 25
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 26
Our Business............................................................. 44
Management............................................................... 64
Certain Transactions..................................................... 80
Principal Shareholders................................................... 85
Description of Notes .................................................... 87
Description Of Capital Stock............................................. 102
Shares Eligible For Future Sale.......................................... 107
U.S. Federal Income Tax Consideration.................................... 108
Underwriting............................................................. 111
Legal Matters............................................................ 113
Experts.................................................................. 113
Where You Can Find More Information...................................... 115
Index To Consolidated Financial Statements............................... F-1
</TABLE>
---------------
ABOUT THIS PROSPECTUS
The terms "Internet Capital Group," "our" and "we," as used in this
prospectus, refer to Internet Capital Group, L.L.C. and its wholly-owned
subsidiary, Internet Capital Group Operations, Inc. (formerly known as Internet
Capital Group, Inc.), for periods before the reorganization of Internet Capital
Group, L.L.C. into Internet Capital Group, Inc., except where it is clear that
the term refers only to Internet Capital Group, Inc. For periods after the
reorganization, these terms refer to Internet Capital Group, Inc. and its
wholly-owned subsidiaries Internet Capital Group Operations, Inc., IBIS (505)
Limited, ICG Holding, Inc. and ICG Holding, Inc.'s wholly-owned subsidiaries,
except where it is clear that the term refers only to Internet Capital Group,
Inc. In addition, all information in this prospectus gives effect to the
reorganization described in "The Reorganization" that was effected before this
offering.
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 for 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 expect to furnish our shareholders with annual reports containing
consolidated financial statements audited by an independent accounting firm.
<PAGE>
SUMMARY
This summary is not complete and may not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision. Unless otherwise specifically stated, the information in this
prospectus has been adjusted to reflect a 2 for 1 stock split of all shares of
our common stock outstanding on December 6, 1999. This prospectus does not take
into account the possible sale of additional notes to the underwriters under
the underwriters' right to purchase additional notes to cover over-allotments.
Internet Capital Group, Inc.
Internet Capital Group is an Internet holding company actively engaged in
business-to-business, or B2B, e-commerce through a network of partner
companies. Our goal is to become the premier B2B e-commerce company by
establishing an e-commerce presence in major segments of the global 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 November 18, 1999, we owned interests in 46 B2B
e-commerce companies which we refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we
use these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, our partner companies and our Advisory Board. Currently, our Advisory
Board consists of individuals with executive-level experience in general
management, sales and marketing and information technology at such leading
companies as 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.
The substantial growth in B2B e-commerce creates tremendous market
opportunities for new emerging companies. Forrester Research estimates that the
United States 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. IDC projects that the Western European B2B e-commerce market
will grow from $3.8 billion in 1998 to over $350 billion by 2003. We focus on
two types of B2B e-commerce companies, which we call market makers and
infrastructure service providers.
. Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information. Market makers enable more effective and lower cost
commerce for traditional businesses by providing access through the
Internet to a broader range of buyers and sellers. Market makers
typically operate in a specific industry or provide specific goods
and services across multiple industries. Market makers tailor their
business models to match a target market's distinct
characteristics. Our partner company network currently includes
significant interests in 27 market makers: AgProducer Network,
Animated Images, Arbinet Communications, asseTrade, AUTOVIA,
Bidcom, Collabria, CommerX, ComputerJobs.com, CourtLink, Deja.com,
e-Chemicals, eMarketWorld, eMerge Interactive, EmployeeLife.com,
Internet Commerce Systems, iParts, JusticeLink, NetVendor,
ONVIA.com, PaperExchange.com, Plan Sponsor Exchange, Residential
Delivery Services, StarCite, traffic.com, Universal Access and
VerticalNet.
<PAGE>
. 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 19 infrastructure
service providers: Benchmarking Partners, Blackboard, Breakaway
Solutions, ClearCommerce, CommerceQuest, Context Integration,
Entegrity Solutions, LinkShare, PrivaSeek, Purchasing Solutions,
SageMaker, Servicesoft Technologies, Sky Alland Marketing, Syncra
Software, TRADEX Technologies, United Messaging, US Interactive,
VitalTone and Vivant!
We have grown rapidly since our inception in 1996. In 1998, we added 12
B2B e-commerce companies to our network and from the beginning of 1999 to
November 18, 1999, we added 26 B2B e-commerce companies to our network. All of
our acquisitions to date have been of B2B e-commerce companies headquartered in
the United States. We expect to continue to evaluate additional acquisition
opportunities in the United States. In addition, we recently opened an office
in London, England that will focus on European B2B e-commerce opportunities.
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; Boston, Massachusetts; Seattle, Washington; and London, England. 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.
2
<PAGE>
The Offering
The following is a brief summary of some of the terms of this notes
offering. For a more complete description of the terms of the notes, see
"Description of the Notes" in this prospectus.
Securities Offered........ $250,000,000 aggregate principal amount (excluding
$37,500,000 aggregate principal amount subject to
the over-allotment option) of % Convertible
Subordinated Notes due 2004.
Maturity.................. , 2004.
Interest.................. % per annum on the principal amount, payable
semiannually on and of each year beginning
, 2000.
Conversion Rights......... The notes are convertible, at the option of the
holder, at any time on or before maturity into
shares of our common stock at a conversion price of
$ per share, which is equal to a conversion rate
of shares per $1,000 principal amount of notes.
The conversion rate is subject to adjustment.
Ranking................... The notes will be unsecured and subordinated to our
existing and future senior indebtedness. In
addition, the notes will effectively rank junior to
our subsidiaries' liabilities. At November 15,
1999, we had no senior indebtedness outstanding but
our subsidiaries had approximately $1.6 million of
senior indebtedness outstanding, and we are party
to a $50 million senior revolving bank credit
facility. Because the notes are subordinated, in
the event of bankruptcy, liquidation or dissolution
and acceleration of payment on the senior
indebtedness, holders of the notes will not receive
any payment until holders of the senior
indebtedness have been paid in full. The indenture
under which the notes will be issued will not
prevent us or our subsidiaries from incurring
additional senior indebtedness or other
obligations.
Provisional Redemption.... We may redeem the notes, in whole or in part, at
any time before , 2002, at a redemption
price equal to $1,000 per $1,000 principal amount
of notes to be redeemed plus accrued and unpaid
interest, if any, to the date of redemption if the
closing price of our common stock has exceeded 150%
of the conversion price then in effect for at least
20 trading days within a period of 30 consecutive
trading days ending on the trading day before the
date of mailing of the provisional redemption
notice. Upon any provisional redemption, we will
make an additional payment in cash with respect to
the notes called for redemption in an amount equal
to $ per $1,000 principal amount of notes, less
the amount of any interest actually paid on the
note before the call for redemption. WE WILL BE
OBLIGATED TO MAKE THIS ADDITIONAL PAYMENT ON ALL
NOTES CALLED FOR PROVISIONAL REDEMPTION, INCLUDING
ANY NOTES CONVERTED AFTER THE NOTICE DATE AND
BEFORE THE PROVISIONAL REDEMPTION DATE.
3
<PAGE>
Optional Redemption....... We may redeem some or all of the notes at any time
on or after , 2002, at redemption prices
described in this prospectus plus accrued and
unpaid interest.
Change of Control......... Upon a change of control event, each holder of the
notes may require us to repurchase some or all of
its notes at a purchase price equal to 100% of the
principal amount of the notes plus accrued and
unpaid interest. We may, at our option, instead of
paying the change in control purchase price in
cash, pay it in our common stock valued at 95% of
the average of the closing sales prices of our
common stock for the five trading days immediately
preceding and including the third day prior to the
date we are required to repurchase the notes. We
cannot pay the change in control purchase price in
common stock unless we satisfy the conditions
described in the indenture under which the notes
will be issued.
Use of Proceeds........... We intend to use the net proceeds from this
offering and the concurrent offering to repay any
balance outstanding on our revolving bank credit
facility, to make acquisitions, to pay interest on
our notes and for general corporate purposes
including working capital.
DTC Eligibility........... Except as provided in this prospectus, the notes
will be issued in fully registered book-entry form
without coupons and in minimum denominations of
$1,000. Purchasers will not receive individually
certificated notes. Instead, the notes will be
represented by one or more permanent global notes
without coupons deposited with a custodian for and
registered in the name of a nominee of The
Depositary Trust Company (DTC) in New York, New
York. Beneficial interests in any global note will
be shown on, and transfers thereof will be effected
only through, records maintained by DTC and its
direct and indirect participants, and any such
beneficial interest may not be exchanged for
certificated notes, except in limited circumstances
described in this prospectus. Settlement and all
secondary market trading activity for the notes
will be in same day funds. See "Description of
Notes--Book-Entry System."
Listing................... The notes will not be listed on any securities
exchange or quoted on the Nasdaq National Market.
The underwriters have advised us that they intend
to make a market in the notes. The underwriters are
not obligated, however, to make a market in the
notes, and any such market making may be
discontinued at any time at the sole discretion of
the underwriters without notice.
Nasdaq National Market
Symbol for our common
stock.................... ICGE
4
<PAGE>
Concurrent Offering
Concurrently with our offering of notes, we are offering by means of a
separate prospectus 6,000,000 shares of our common stock. The completion of the
common stock offering is not a condition to the completion of this offering.
The sale of our common stock is described in greater detail below under the
heading "Concurrent Offering."
5
<PAGE>
Summary Consolidated Financial Data
The following summary historical and pro forma consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus. The summary pro forma data does not purport to represent what our
results would have been if the events described below had occurred at the dates
indicated. The Pro Forma columns included in the Consolidated Statements of
Operations Data for the year ended December 31, 1998 and the nine months ended
September 30, 1999, derived from elsewhere in this prospectus, reflect the
effect of our 1998 and 1999 acquisitions of companies accounted for under the
consolidation and equity methods, the deconsolidation of VerticalNet, and the
acquisition of our ownership interest in Breakaway Solutions as a company
accounted for under the equity method 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 nine months ended September 30, 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 as of September 30, 1999, derived from elsewhere in this
prospectus, reflect the effect of our acquisitions subsequent to September 30,
1999 as if they had occurred on September 30, 1999. The Pro Forma As Adjusted
Consolidated Balance Sheet Data reflect the sale of 6,000,000 shares of our
common stock in the concurrent offering at an assumed public offering price of
$80.00 per share and the issuance and sale of $250,000,000 of our convertible
notes in this offering after deduction of estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
Nine Months Ended
March 4, 1996 Year Ended December 31, September 30,
(Inception) to ------------------------------ -----------------------------
December 31, 1997 1998 1998 1998 1999 1999
1996 Actual Actual Pro Forma Actual Actual Pro Forma
-------------- ------- -------- ----------- -------- -------- ---------
(Unaudited) (Unaudited)
(In Thousands Except Per Share Data)
Consolidated Statements
of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 285 $ 792 $ 3,135 $ 6,456 $ 1,862 $ 14,783 $ 7,186
Operating Expenses...... 2,348 7,510 20,156 11,366 12,728 38,427 21,668
------- ------- -------- -------- -------- -------- --------
(2,063) (6,718) (17,021) (4,910) (10,866) (23,644) (14,482)
Other income, net....... -- -- 30,483 30,483 23,514 47,001 46,989
Interest income (ex-
pense), net............ 88 138 924 (814) 513 2,407 2,401
------- ------- -------- -------- -------- -------- --------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975) (6,580) 14,386 24,759 13,161 25,764 34,908
Income taxes............ -- -- -- -- -- 12,840 28,073
Minority interest....... 427 (106) 5,382 553 2,699 4,133 720
Equity income (loss).... (514) 106 (5,869) (78,997) (3,969) (49,142) (94,824)
------- ------- -------- -------- -------- -------- --------
Net Income (Loss)....... $(2,062) $(6,580) $ 13,899 $(53,685) $ 11,891 $ (6,405) $(31,123)
======= ======= ======== ======== ======== ======== ========
Net income (loss) per
share-- diluted........ $ (0.05) $ (0.10) $ 0.12 $ (0.48) $ 0.11 $ (0.03) $ (0.17)
Weighted average shares
outstanding--diluted... 40,792 68,198 112,299 112,205 105,675 185,104 185,104
Ratio of earnings to
fixed charges
(unaudited)(a)......... 38.7x 13.2x
Pro forma net income
(loss) (unaudited)..... $ 8,756 $(12,509)
Pro forma net income
(loss) per share--
diluted (unaudited).... $ 0.08 $ (0.07)
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(Unaudited)
(In Thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C>
Cash and cash equivalents........................ $186,137 $ 79,523 $ 779,623
Short-term investments........................... 22,845 22,845 22,845
Working capital.................................. 200,370 67,846 767,946
Total assets..................................... 470,227 471,067 1,179,352
Long-term debt................................... 1,633 3,000 3,000
Convertible subordinated notes................... -- -- 250,000
Total shareholders' equity....................... 418,517 418,517 876,802
</TABLE>
- --------
(a) Earnings were insufficient to cover fixed charges by $1,975,130 and
$6,327,305 during the period March 4, 1996 (inception) to Decmber 31, 1996
and the year ended December 31, 1997, respectively.
6
<PAGE>
RISK FACTORS
Investing in our notes will subject you to risks inherent in our
business. Your notes are convertible into shares of our common stock, and 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 our notes.
RISKS PARTICULAR TO INTERNET CAPITAL GROUP
We have a limited operating history upon which you may evaluate us
We were formed in March 1996. Although we have grown significantly since
then, we have a limited operating history upon which you may evaluate our
business and prospects. We and our partner companies are among the many
companies that have entered into the emerging B2B e-commerce market. Many of
our partner companies are in the early stages of their development. Our
business and prospects must be considered in light of the risk, expense and
difficulties frequently encountered by companies in 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.
Our business depends upon the performance of our partner companies, which is
uncertain
Economic, governmental, industry and internal company factors outside our
control affect each of our partner companies. If our partner companies do not
succeed, the value of our assets and the price of our common stock could
decline. The material risks relating to our partner companies include:
. fluctuations in the market price of the common stock of
VerticalNet and Breakaway Solutions, two of our publicly traded
partner companies, and other future publicly traded partner
companies, which are likely to affect the price of our common
stock;
. lack of the widespread commercial use of the Internet, which may
prevent our partner companies from succeeding; and
. intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our
partner companies.
Of our $470 million in total assets as of September 30, 1999, $168.7
million, or 36%, consisted of ownership interests in and advances to our
partner companies. On a pro forma basis, adjusted for our acquisitions
subsequent to September 30, 1999 as if they had occurred on September 30, 1999,
our assets on September 30, 1999 were $471.1 million, of which $293.9 million,
or 62.4%, consisted of ownership interests in 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, the effect of
adjustments to our carrying value resulting from certain issuances of equity
securities by our partner companies 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 and Breakaway Solutions are two of our publicly traded partner
companies and on November 15, 1999 our holdings in VerticalNet and Breakaway
Solutions had respective market values of approximately $1.2 billion and $429
million. A decline in the market value of VerticalNet or Breakaway Solutions
will likely cause a decline in the price of our common stock.
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Other material risks relating to our partner companies are more fully
described below under "Risks Particular to Our Partner Companies."
Our business model is unproven
Our strategy is based on an unproven business model. Our business model
depends on the willingness of companies to join our collaborative network and
the ability of the collaborative network to assist our partner companies. Our
business model depends on our ability to share information within our network
of partner companies. If competition develops among our partner companies, we
may be unable to fully benefit from the sharing of information within our
network of partner companies. If we cannot convince companies of the value of
our business model, our ability to attract new companies will be adversely
affected and our strategy of building a collaborative network may not succeed.
Fluctuations in our quarterly results may adversely affect our stock price
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
. the operating results of our partner companies;
. changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in partner
companies;
. changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership
percentages of our partner companies;
. sales of equity securities by our partner companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
. the pace of development or a decline in growth of the B2B e-
commerce market;
. intense competition from other potential acquirors of B2B e-
commerce companies, which could increase our cost of acquiring
interests in additional companies, and competition for the goods
and services offered by our partner companies; and
. our ability to effectively manage our growth and the growth of our
partner companies during the anticipated rapid growth of the
global B2B e-commerce market.
We believe that period-to-period comparisons of our operating results are
not meaningful. 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.
As of November 15, 1999, fourteen of our nineteen management personnel
have worked for us for less than one year. 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.
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The success of some of our partner companies also depends on their having
highly trained technical and marketing personnel. Our partner companies will
need to continue to hire additional personnel as their businesses grow. A
shortage in the number of trained technical and marketing personnel could limit
the ability of our partner companies to increase sales of their existing
products and services and launch new product offerings.
We have had a history of losses and expect continued losses in the foreseeable
future
Our net loss for the nine months ended September 30, 1999 of $6.4 million
includes gains of $29.0 million, net of deferred taxes, related to the issuance
of stock by VerticalNet and a $7.7 million deferred tax benefit related to our
conversion from a limited liability company to a taxable corporation. Without
the $36.7 million effect of these items on our net results, we would have had a
net loss of $43.1 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 nine
months ended September 30, 1999 would have been reduced by $67.6 million and
$24.7 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. Without the effect of
any significant non-operating gains during the three months ended December 31,
1999, we expect to incur a significant net loss for this period.
Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
. broaden our partner company support capabilities;
. explore acquisition opportunities and alliances with other
companies;
. facilitate business arrangements among our partner companies; and
. expand our business internationally.
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.
Our partner companies are growing rapidly and we may have difficulty assisting
them in managing their growth
Our partner companies have grown, and we expect them to continue to grow
rapidly, by adding new products and services and hiring new employees. This
growth is likely to place significant strain on their resources and on the
resources we allocate to assist our partner companies. In addition, our
management may be unable to convince our partner companies to adopt our ideas
for effectively and successfully managing their growth.
We may compete with some of our shareholders and partner companies, and our
partner companies may compete with each other
We may compete with some of our shareholders and partner companies for
Internet-related opportunities. After this offering, Comcast Corporation and
Safeguard Scientifics, Inc. will own 9.4% and 14.0% of our outstanding common
stock, respectively, based on the number of shares held by each of them on
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November 15, 1999. These shareholders may compete with us to acquire interests
in B2B e-commerce companies. Comcast 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
acquisitions, 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 policies, contracts or other understandings with
any of 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.
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 on reasonable terms, our strategy to build a
collaborative network of partner companies may not succeed.
Our global expansion exposes us to less developed markets, currency
fluctuations and political instability
We are pursuing B2B e-commerce opportunities outside the United States.
We recently opened an office in London whose personnel will focus on B2B e-
commerce opportunities in Europe. This international expansion exposes us to
several risks, including the following:
. Less Developed Markets. We believe that e-commerce markets outside
the United States are less developed than the United States e-
commerce market. If the e-commerce markets outside the United
States do not continue to mature, any of our partner companies
outside the United States may not succeed.
. Currency Fluctuations. When we purchase interests in non-United
States partner companies for cash, we will likely have to pay for
the interests using the currency of the country where the
prospective partner company is located. Similarly, although it is
our intention to act as a long-term partner to our partner
companies, if we sold an interest in a non-United States partner
company we might receive foreign currency. To the extent that we
transact in foreign currencies, fluctuations in the relative value
of these currencies and the United States dollar may adversely
impact our financial results.
. Compliance with Laws. As we expand internationally, we will become
increasingly subject to the laws and regulations of foreign
countries. We may not be familiar with these laws and regulations,
and these laws and regulations may change at any time.
. Political Instability. We may purchase interests in foreign
partner companies that are located, or transact business in, parts
of the world that experience political instability. Political
instability may have an adverse impact on the subject country's
economy, and may limit or eliminate a partner company's ability to
conduct business.
Our growth could be impaired by limitations on our and our partner companies
access to the capital markets
We are dependent on the capital markets for access to funds for
acquisitions and other purposes. Our partner companies are also dependent on the
capital markets to raise capital for their own purposes. To
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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, our ability and the ability of our
partner companies to grow and access the capital markets will be impaired.
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 an interest in a partner company, we may not
receive maximum value for this position. For partner companies with publicly-
traded stock, we may be unable to sell our interest at then-quoted market
prices. Furthermore, for those partner companies that do not have publicly-
traded stock, the realizable value of our interests may ultimately prove to be
lower than the carrying value currently reflected in our consolidated financial
statements.
We may not have opportunities to acquire interests in additional companies
We may be unable to identify companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable
to acquire an interest in the company for many reasons, including:
. a failure to agree on the terms of the acquisition, such as the
amount or price of our acquired interest;
. incompatibility between us and management of the company;
. competition from other acquirors of B2B e-commerce companies;
. a lack of capital to acquire an interest in the company; and
. the unwillingness of the company to partner with us.
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. We
may also spend more on individual acquisitions than we have in the past. These
larger acquisitions may place significantly greater strain on our resources,
ability to manage such companies and ability to integrate them into our
collaborative network. Future acquisitions are subject to the following risks:
. Our acquisitions may cause a disruption in our ongoing support of
our partner companies, distract our management and other resources
and make it difficult to maintain our standards, controls and
procedures.
. We may acquire interests in companies in B2B e-commerce markets in
which we have little experience.
. We may not be able to facilitate collaboration between our partner
companies and new companies that we acquire.
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. To fund future acquisitions we may be required to incur debt or
issue equity securities, which may be dilutive to existing
shareholders.
We may have to buy, sell or retain assets when we would otherwise not wish to
in order to avoid registration under the Investment Company Act of 1940
We believe that we are actively engaged in the business of B2B e-commerce
through our network of majority-owned subsidiaries and companies that we are
considered to "control." Under the Investment Company Act, a company is
considered to control another company if it owns more than 25% of that
company's voting securities. 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 subject
us to regulation under the Investment Company Act unless we took precautionary
steps. For example, in order to avoid having excessive income from "non-
controlled" interests, we may not 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
need 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 be regulated as an investment company because the
Investment Company Act rules are inconsistent with our strategy of actively
managing, operating and promoting collaboration among our network of partner
companies. On August 23, 1999 the Securities and Exchange Commission granted
our request for an exemption under Section 3(b)(2) of the Investment Company
Act declaring us to be primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities. This
exemptive order reduces the risk that we may have to take action to avoid
registration as an investment company, but it does not eliminate the risk.
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.
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RISKS PARTICULAR TO OUR PARTNER COMPANIES
Fluctuation in the price of the common stock of our publicly-traded partner
companies may affect the price of our common stock
VerticalNet and Breakaway Solutions are two of our publicly-traded
partner companies. The price of their common stock has been highly volatile. On
February 16, 1999, VerticalNet completed its initial public offering at a price
of $8.00 per share and its common stock has since traded as high as $110.00 per
share, adjusted for a two for one stock split. On October 6, 1999, Breakaway
Solutions completed its initial public offering at a price of $14.00 per share
and its common stock has since traded as high as $71.00 per share. The market
value of our holdings in these partner companies changes with these
fluctuations. Based on the closing price of VerticalNet's common stock on
November 15, 1999 of $93.00, our holdings in VerticalNet had a market value of
approximately $1.2 billion. Based on the closing price of Breakaway Solutions'
common stock on November 15, 1999 of $61.50, our holdings in Breakaway
Solutions had a market value of approximately $429 million. Fluctuations in the
price of VerticalNet's, Breakaway Solutions' and other publicly-traded partner
companies' common stock are likely to affect the price of our common stock.
VerticalNet's results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. lack of acceptance of the Internet as an advertising medium;
. inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
. inability to generate significant e-commerce transaction revenues
from its communities;
. lower advertising rates; and
. loss of key content providers.
Breakaway Solutions' results of operations, and accordingly the price of
its common stock, may be adversely affected by the following factors:
. growing enterprises' failure to accept e-commerce solutions;
. inability to open new regional offices;
. loss of money on fixed-fee or performance-based contracts; and
. inability to develop brand awareness.
As of September 30, 1999, our assets as reflected in our balance sheet
were approximately $470 million, of which $48.4 million relates to VerticalNet,
Breakaway Solutions and other publicly traded partner companies. However, we
believe that comparisons of the value of our holdings in partner companies to
the value of our total assets are not meaningful because not all of our partner
company ownership interests are marked to market in our balance sheet.
The success of our partner companies depends on the development of the B2B e-
commerce market, which is uncertain
All of our partner companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective medium for providing products and
services, our partner companies may not succeed.
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Our long-term success depends on widespread market-acceptance of B2B e-
commerce. A number of factors could prevent such acceptance, including the
following:
. the unwillingness of businesses to shift from traditional
processes to B2B e-commerce processes;
. the necessary network infrastructure for substantial growth in
usage of B2B e-commerce may not be adequately developed;
. increased government regulation or taxation may adversely affect
the viability of B2B e-commerce;
. insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response
times for the users of B2B e-commerce; and
. concern and adverse publicity about the security of B2B e-commerce
transactions.
Our partner companies may fail if their competitors provide superior Internet-
related offerings or continue to have greater resources than our partner
companies have
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, we expect that competition will intensify. Barriers
to entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain
a critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our partner companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail.
Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives.
Some of our partner companies may be unable to protect their proprietary rights
and may infringe on the proprietary rights of others
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
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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.
Our partner companies that publish or distribute content over the Internet may
be subject to legal liability
Some of our partner companies may be subject to legal claims relating to
the content on their Web sites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of
material. In addition, some of the content provided by our partner companies on
their Web sites is drawn from data compiled by other parties, including
governmental and commercial sources. 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
market maker partner companies are particularly dependent on content to attract
users to their Web sites. Our success depends upon
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the ability of these partner companies to deliver compelling Internet content
to their targeted users. If our partner companies are unable to develop
Internet content that attracts a loyal user base, the revenues and
profitability of our partner companies could be impaired. Internet users can
freely navigate and instantly switch among a large number of Web sites. Many of
these Web sites offer original content. Thus, our partner companies may have
difficulty distinguishing the content on their Web sites to attract a loyal
base of users.
Our partner companies may be unable to acquire or maintain easily identifiable
Web site addresses or prevent third parties from acquiring Web site addresses
similar to theirs
Some of our partner companies hold various Web site addresses relating to
their brands. These partner companies may not be able to prevent third parties
from acquiring Web site addresses that are similar to their addresses, which
could adversely affect the use by businesses of our partner companies' Web
sites. In these instances, our partner companies may not grow as we expect. The
acquisition and maintenance of Web site addresses generally is regulated by
governmental agencies and their designees. The regulation of Web site addresses
in the United States and in foreign countries is subject to change. As a
result, our partner companies may not be able to acquire or maintain relevant
Web site addresses in all countries where they conduct business. Furthermore,
the relationship between regulations governing such addresses and laws
protecting trademarks is unclear.
Some of our partner companies are dependent on barter transactions that do not
generate cash revenue
Our partner companies often enter into barter transactions in which they
provide advertising for other Internet-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 nine month period ended September
30, 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 nine-month period ending September 30, 1999, approximately 23%
of VerticalNet's revenue was attributable to barter transactions.
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.
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Rapid technological changes may prevent our partner companies from remaining
current with their technical resources and maintaining competitive product and
service offerings
The markets in which our partner companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our partner companies are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
condition and operating results will be adversely affected. To be successful,
our partner companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Our success will depend, in part, on our partner companies' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our partner companies will also need to
respond to technological advances and emerging industry standards in a cost-
effective and timely manner.
Government regulations and legal uncertainties may place financial burdens on
our business and the businesses of our partner companies
As of November 15, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and quality of goods and services. The enactment of any
additional laws or regulations may impede the growth of the Internet and B2B e-
commerce, which could decrease the revenue of our partner companies and place
additional financial burdens on our business and the businesses of our partner
companies.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, the United States
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
Your right to receive payments on the notes is subordinated to all of our
existing and future senior indebtedness and the notes are effectively
subordinated to indebtedness of our subsidiaries.
The notes will be unsecured obligations and will be subordinated in right
of payment, as provided in the indenture under which they are issued, to the
prior payment in full in cash or other payment satisfactory to holders of
senior indebtedness of all our existing and future senior indebtedness. Senior
indebtedness is defined to include, among other things, all indebtedness for
money borrowed and indebtedness evidenced by securities, debentures, bonds or
other similar instruments. Senior indebtedness does not include indebtedness
that is expressly junior in right of payment to the notes or ranks pari passu
in right of payment to the notes. At November 15, 1999, we had no senior
indebtedness outstanding but our subsidiaries had approximately $1.6 million
senior indebtedness outstanding, and we are party to a $50 million senior
revolving bank credit facility. The terms of the notes do not limit the amount
of additional indebtedness, including senior indebtedness, which we can create,
incur, assume or guarantee. Upon any distribution of our assets upon any
insolvency, dissolution or reorganization, the payment of the principal of and
interest on the notes will be subordinated to the extent provided in the
indenture to the prior payment in full of all of our senior indebtedness, and
there may not be sufficient assets remaining to pay amounts due on any or all
of the notes then outstanding.
17
<PAGE>
The notes are effectively subordinated to all existing and future
liabilities of our subsidiaries. Any right of ours to receive assets of any of
our subsidiaries upon their liquidation or reorganization, and the consequent
right of the holders of the notes to participate in those assets, will be
subject to the claims of that subsidiary's creditors. If we ourselves are a
creditor of that subsidiary, our claims would still be subordinate to any
security interests in the assets of that subsidiary and any senior indebtedness
of that subsidiary.
We may not be able to satisfy a change of control offer
The indenture governing the notes contains provisions that apply to a
change of control of our company. If someone triggers a change of control as
defined in the indenture, we must offer to purchase those notes with cash, or
at our option with our common stock, subject to the terms and conditions of the
indenture. If we have to make that offer, we cannot be sure that we will have
enough funds or common stock to pay for all the notes that the holders could
tender.
Our notes have never been publicly traded so we cannot predict the extent to
which a trading market will develop for our notes
There has not been a public market for our notes. We cannot predict the
extent to which a trading market will develop or how liquid that market might
become, which could limit the liquidity of your investment in the note.
Our concurrent stock offering may not be completed, in which case we may need
additional financing to fund the interest payments on the notes
This offering is not contingent on the completion of the common stock
offering. We cannot assure you that our concurrent common stock offering will
be completed. If the concurrent common stock offering is not completed, then we
may need additional financing to fund the interest payments on the notes.
We may issue securities which may dilute your ownership interest
In the future, we may issue securities to raise cash for acquisitions,
and we may also pay for interests in additional partner companies by using a
combination of cash and our common stock, or just our common stock. Any of
these events may dilute your ownership interest in us if you have converted
your notes into our common stock, and may have an adverse impact on the price
of our common stock. In addition, if we issue securities convertible into our
common stock, other than the notes being offered in this concurrent offering,
the conversion of these securities may dilute your ownership interest and have
an adverse impact on the price of our common stock.
Shares eligible for future sale by our current shareholders may decrease the
price of our common stock
If our shareholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the public
market following the offering, then the market price of our common stock could
fall. Restrictions under the securities laws and certain repurchase and lock-up
agreements limit the number of shares of common stock available for sale in the
public market. Prior to this offering, the holders of 197,934,362 shares of
common stock, options exercisable into an aggregate of 1,348,000 shares of
common stock, and warrants exercisable into an aggregate of 2,548,318 shares of
common stock agreed not to sell any of these securities until February 1, 2000
without the prior written consent of Merrill Lynch. In connection with the
concurrent offering, the holders of shares of our common stock have agreed
not to sell any of these securities until without the consent of Merrill
Lynch. However, Merrill Lynch may, in its sole discretion, release all or any
portion of the securities subject to these lock-up agreements.
18
<PAGE>
The holders of 169,974,220 shares of common stock and the holders of
warrants to purchase 2,975,068 shares of common stock have demand or piggy-back
registration rights. Prior to this offering, the holders of these securities
that have demand registration rights agreed not to demand that their securities
be registered until February 1, 2000 without the prior written consent of
Merrill Lynch. In connection with the concurrent offering, the holders of
shares of our common stock that have demand registration rights have agreed not
to demand that their securities be registered until without the prior
written consent of Merrill Lynch. We also may shortly file a registration
statement to register all shares of common stock under our stock option plans.
After that registration statement is effective, common stock issued upon
exercise of stock options under our benefit plans will be eligible for resale
in the public market without restriction.
The interests of certain of our significant shareholders may conflict with our
interests and the interests of our other shareholders
As a result of its ownership of our common stock, Safeguard Scientifics
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 about 14.0% of our common stock.
Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult
Our certificate of incorporation provides that our board of directors may
issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a three-year
term. The issuance of preferred stock and the existence of a classified board
could make it more difficult for a third-party to acquire us without the
approval of our board.
Our common stock price is highly volatile
The market price for our common stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. The trading price of our common stock has increased
significantly from our initial public offering price of $6.00 per share, as
adjusted for our 2 for 1 stock split. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could depress
our stock price regardless of our results.
The following factors will add to our common stock price's volatility:
. actual or anticipated variations in our quarterly results and
those of our partner companies;
. new sales formats or new products or services offered by us, our
partner companies and their competitors;
. changes in our financial estimates and those of our partner
companies by securities analysts;
. changes in the size, form or rate of our acquisitions;
. conditions or trends in the Internet industry in general and the
B2B e-commerce industry in particular;
. announcements by our partner companies and their competitors of
technological innovations;
. announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint
ventures;
. changes in the market valuations of our partner companies and
other Internet companies;
19
<PAGE>
. our capital commitments;
. negative changes in the public's perception of the prospects of e-
commerce companies;
. general economic conditions such as a recession, or interest rate
or currency rate fluctuations;
. additions or departures of our key personnel and key personnel of
our partner companies; and
. additional sales of our securities.
Many of these factors are beyond our control. These factors may decrease the
market price of our common stock, regardless of our operating performance. In
the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on our business,
operating results and financial condition.
20
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to known and unknown risks, uncertainties and assumptions about us and
our partner companies, that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. These factors are discussed in the "Risk
Factors" section beginning on page 7 of this prospectus, and include, among
other things:
. development of an e-commerce market;
. our ability to identify trends in our markets and the markets of
our partner companies and to offer new solutions that address the
changing needs of these markets;
. our ability to successfully execute our business model;
. our partner companies' ability to compete successfully against
direct and indirect competitors;
. our ability to acquire interests in additional companies;
. our ability to expand our business successfully into international
markets;
. growth in demand for Internet products and services; and
. adoption of the Internet as an advertising medium.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "could", "would", "expect", "plan",
"anticipate", "believe", "estimate", "continue", or the negative of such terms
or other similar expressions. All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements included in this prospectus. 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.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the offering are expected to be approximately
$241.8 million after deduction of underwriting discounts and commissions and
estimated offering expenses payable by us. Based on an assumed offering price
of $80.00 per share adjusted to show the effect of a 2 for 1 stock split of all
shares of our common stock outstanding on December 6, 1999, our net proceeds
from the sale of the 6,000,000 shares of our common stock in the concurrent
offering will be approximately $458.3 million ($527.2 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.
We intend to use the net proceeds from this offering and the concurrent
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, to pay
interest on our convertible notes, and for general corporate purposes,
including working capital. During the period from October 1, 1999 through
November 18, 1999, we used approximately $106.5 million to acquire interests in
or make advances to seventeen new and existing partner companies. As of
November 18, 1999, we were contingently obligated for approximately $3.3
million of guarantee commitments and as of November 18, 1999, our commitments
to new and existing partner companies that require funding in the next 12
months totaled $30.1 million. We are continually in discussions to acquire
ownership interests in new or existing partner companies, although we have no
binding obligations except as described above. Our bank credit facility matures
in April 2000 and bears interest, at our option, at prime and/or LIBOR plus
2.5%. At November 18, 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, direct or guaranteed obligations of the
United States or other highly liquid, high quality debt instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock, and
we do not intend to pay cash dividends in the foreseeable future. We plan to
retain any earnings for use in the operation of our business and to fund future
growth.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market since
August 5, 1999 under the symbol "ICGE." Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the high and low prices per share of the common stock on the Nasdaq
National Market adjusted to show the effect of a 2 for 1 stock split of all
shares of our common stock outstanding on December 6, 1999.
<TABLE>
<CAPTION>
1999 High Low
---- ------ ------
<S> <C> <C>
Third Quarter (from August 5, 1999)......................... $53.75 $ 7.00
Fourth Quarter (through November 18, 1999).................. $97.78 $43.00
</TABLE>
On November 18, 1999, the last reported sale price for our common stock
on the Nasdaq National Market was $80.00 per share. As of November 18, 1999,
there were approximately 978 holders of record of our common stock.
22
<PAGE>
THE REORGANIZATION
Internet Capital Group, Inc. is a successor to a business originally
founded in March 1996 as a Delaware limited liability company under the name
Internet Capital Group, L.L.C. As a limited liability company, Internet Capital
Group, L.L.C. was treated for income tax purposes as a partnership with taxes
on the income generated by Internet Capital Group, L.L.C. paid by its members.
Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on
February 2, 1999, with Internet Capital Group, Inc. surviving (the
"Reorganization"). In connection with the Reorganization and as required by its
limited liability company agreement to satisfy the members' tax liabilities,
Internet Capital Group, L.L.C. declared a $10.7 million distribution to its
members. Internet Capital Group, Inc. has assumed all liabilities of Internet
Capital Group, L.L.C., including the distribution to members of Internet
Capital Group, L.L.C. The distributions made to some of the members of Internet
Capital Group, L.L.C. are described in detail below under the heading "Certain
Transactions." Also as part of the Reorganization, Internet Capital Group, Inc.
issued 164,011,098 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.
CONCURRENT OFFERING
We are offering 6,000,000 shares of our common stock in the concurrent
offering. Completion of the common stock offering is not a condition to the
completion of this offering.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization on an Actual basis as
of September 30, 1999.
The table also sets forth our capitalization on an As Adjusted basis as
if the following events occurred on September 30, 1999:
. the issuance and sale of $250 million of our % convertible
subordinated notes due 2004 in this offering; and
. the issuance and sale of 6,000,000 shares of our common stock in
the concurrent offering.
With respect to this offering, the table below includes deductions for
estimated underwriting discounts and commissions, and for estimated offering
expenses.
Common stock data is as of November 15, 1999 and excludes:
. the shares of common stock issuable upon conversion of the notes;
. the exercise of the underwriters' over-allotment options in
connection with this offering and the concurrent offering;
. options to purchase 4,898,000 shares of common stock under our
equity plans at a weighted average exercise price of $19.44 per
share;
. the warrants outstanding to purchase 3,375,068 shares at a
weighted average exercise price of $5.88 per share; and
. 1,574,063 shares of our common stock issuable upon exercise of an
option under an agreement related to the acquisition of a partner
company ownership interest.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
Actual As Adjusted(1)
------------ ---------------
<S> <C> <C>
Long-term debt.................................. $ 1,633,360 $ 1,633,360
Convertible subordinated notes.................. -- 250,000,000
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued and
outstanding-actual, and as adjusted.......... -- --
Common stock, $.001 par value; 300,000,000
shares authorized; 253,014,086 shares issued
and outstanding-actual;
259,014,086 shares issued and outstanding as
adjusted..................................... 253,014 259,014
Additional paid-in capital...................... 510,325,881 968,604,811
Retained earnings............................... (3,165,920) (3,165,920)
Unamortized deferred compensation............... (14,371,190) (14,371,190)
Notes receivable--shareholders.................. (81,147,592) (81,147,592)
Accumulated other comprehensive income.......... 6,622,404 6,622,404
------------ ---------------
Total shareholders' equity.................. 418,516,597 876,801,527
------------ ---------------
Total capitalization...................... $420,149,957 $ 1,128,434,887
============ ===============
</TABLE>
- --------
(1) Completion of the concurrent offering is not a condition to the completion
of this offering. If we do not complete the issuance and sale of 6,000,000
shares of our common stock in the concurrent offering, as adjusted common
stock would be $253,014, adjusted additional paid-in capital would be
$510,325,881, as adjusted total stockholder's equity would be $418,516,597
and adjusted total capitalization would be $670,149,957.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our Consolidated Financial Statements, including the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The Consolidated
Statements of Operations Data from March 4, 1996, the date of our inception,
through December 31, 1996 and for the years ended December 31, 1997 and 1998,
and Consolidated Balance Sheet Data at December 31, 1997 and 1998 have been
derived from the Consolidated Financial Statements, that have been audited by
KPMG LLP, independent auditors, included elsewhere in this prospectus. The
Consolidated Balance Sheet Data at December 31, 1996 has been derived from the
Consolidated Financial Statements that have been audited by KPMG LLP,
independent auditors, which are not included in this prospectus. The
Consolidated Statements of Operations Data for the nine months ended September
30, 1998 and 1999 and the Consolidated Balance Sheet Data at September 30, 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 nine months ended September 30, 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.
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Nine Months Ended
(Inception) to Year Ended December 31, September 30,
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating Expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
------------ ----------- ------------ ----------- ------------
Total operating
expenses.............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
------------ ----------- ------------ ----------- ------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income, net....... -- -- 30,483,177 23,514,321 47,001,191
Interest income
(expense), net......... 88,098 138,286 924,588 513,652 2,406,446
------------ ----------- ------------ ----------- ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes............ -- -- -- -- 12,840,423
Minority interest....... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss).... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
------------ ----------- ------------ ----------- ------------
Net Income (Loss)....... $ (2,062,485) $(6,579,628) $ 13,898,928 $11,890,856 $ (6,404,860)
============ =========== ============ =========== ============
Net Income (loss) per
share--diluted......... $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (0.03)
Weighted average shares
outstanding--diluted... 40,791,548 68,197,688 112,298,578 105,674,672 185,103,758
Pro forma net income
(unaudited)............ $ 8,756,325 $(12,509,434)
Pro forma net income per
share--diluted
(unaudited)............ $ 0.08 $ (0.07)
Ratio of earnings to
fixed charges
(unaudited)(a)......... 38.7x 13.2x
</TABLE>
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------------------------- September 30,
1996 1997 1998 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 3,215,256 $ 5,967,461 $26,840,904 $186,137,151
Working capital............. 4,883,129 2,390,762 20,452,438 200,369,744
Total assets................ 13,629,407 31,481,016 96,785,975 470,227,369
Long-term debt.............. 167,067 399,948 351,924 1,633,360
Total shareholders' equity.. 12,858,856 26,634,675 80,724,378 418,516,597
</TABLE>
- --------
(a) Earnings were insufficient to cover fixed charges by $1,975,130 and
$6,327,305 during the period March 4, 1996 (inception) to December 31, 1996
and the year ended December 31, 1997, respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
audited Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
General
Internet Capital Group is an Internet holding company actively engaged in
B2B e-commerce through a network of partner companies. As of September 30,
1999, we owned interests in 39 B2B e-commerce companies, which we refer to as
our partner companies. We focus on two types of B2B e-commerce companies, which
we call market makers and infrastructure service providers.
Because we acquire significant interests in B2B e-commerce companies,
many of which generate 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 invested or have committed to invest in
our partner companies.
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.
On August 23, 1999 the Securities and Exchange Commission granted our
request for an exemption under Section 3(b)(2) of the Investment Company Act,
declaring us to be primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities. Because of
our operating focus, the significant ownership interests we hold in our partner
companies and the greater operating flexibility we obtain from the exemptive
order, we do not believe that the Investment Company Act will adversely affect
our operations or shareholder value.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
26
<PAGE>
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 below 50%. Therefore, we
apply the equity method of accounting beginning in February 1999. We acquired
controlling majority voting interests in Breakaway Solutions during the three
months ended March 31, 1999, EmployeeLife.com and iParts during the three
months ended June 30, 1999, and AgProducer Network during the three months
ended September 30, 1999, each of which was consolidated from the date of its
acquisition. As of September 30, 1999, AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts were our only consolidated partner companies.
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.
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 September 30, 1999, we accounted for 22 of our partner
companies under this method.
Our partner companies accounted for under the equity method of accounting
at December 31, 1998 and September 30, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
EQUITY METHOD:
asseTrade.com, Inc. ...................... 1999 N/A 26%
Bidcom, Inc. ............................. 1999 N/A 24%
Blackboard Inc. .......................... 1998 35% 30%
CommerceQuest, Inc. ...................... 1998 N/A 29%
CommerX, Inc. ............................ 1998 34% 42%
ComputerJobs.com, Inc. ................... 1998 33% 33%
eMarketWorld, Inc. ....................... 1999 N/A 42%
Internet Commerce Systems, Inc. .......... 1999 N/A 43%
LinkShare Corporation..................... 1998 34% 34%
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
EQUITY METHOD:
NetVendor Inc............................ 1999 N/A 26%
ONVIA.com, Inc. ......................... 1999 N/A 20%
PaperExchange.com LLC.................... 1999 N/A 27%
Plan Sponsor Exchange, Inc............... 1999 N/A 46%
Residential Delivery Services, Inc....... 1999 N/A 38%
SageMaker, Inc. ......................... 1998 22% 27%
Sky Alland Marketing, Inc. .............. 1996 31% 31%
StarCite, Inc............................ 1999 N/A 43%
Syncra Software, Inc. ................... 1998 53% 35%
United Messaging, Inc.................... 1999 N/A 41%
Universal Access, Inc.................... 1999 N/A 26%
VerticalNet, Inc. ....................... 1996 N/A 35%
Vivant! Corporation ..................... 1998 23% 23%
</TABLE>
As of September 30, 1999, we owned voting convertible preferred stock in
all companies listed except VerticalNet. In addition, we also owned common
stock in CommerceQuest, SageMaker, Sky Alland Marketing and Universal Access.
Our voting ownership in VerticalNet consisted only of common stock at September
30, 1999. VerticalNet was consolidated at December 31, 1998. CommerceQuest and
Universal Access were accounted for under the cost method of accounting at
December 31, 1998. We have representation on the board of directors of all of
the above partner companies.
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 at December 31, 1998 generated a net profit of less than $1
million in 1998; however, this partner company is not expected to generate a
profit in 1999.
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.
28
<PAGE>
Our partner companies accounted for under the cost method of accounting
at December 31, 1998 and September 30, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner --------------------------
Company December 31, September 30,
Since 1998 1999
------- ------------ -------------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc............... 1999 N/A 16%
AUTOVIA Corporation....................... 1998 15% 15%
Benchmarking Partners, Inc. .............. 1996 13% 13%
ClearCommerce Corp. ...................... 1997 17% 15%
Collabria, Inc. .......................... 1999 N/A 12%
CommerceQuest, Inc. ...................... 1998 0% N/A
Context Integration, Inc. ................ 1997 18% 18%
Deja.com, Inc. ........................... 1997 0% 1%
e-Chemicals, Inc. ........................ 1998 0% 0%
Entegrity Solutions Corporation........... 1996 12% 12%
PrivaSeek, Inc. .......................... 1998 16% 16%
Servicesoft Technologies, Inc. ........... 1998 12% 6%
TRADEX Technologies, Inc. ................ 1999 N/A 10%
US Interactive, Inc. ..................... 1996 4% 3%
</TABLE>
In most cases, we have representation on the board of directors of the
above companies, including those in which we hold non-voting securities. As of
September 30, 1999, we owned voting convertible preferred stock in all
companies listed except Deja.com, in which we owned non-voting convertible
preferred stock, and e-Chemicals, in which we owned non-voting convertible
debentures. We record our ownership in debt securities at cost as we have the
ability and intent to hold these securities until maturity. In addition to our
investments in voting and non-voting equity and debt securities, we also
periodically make advances to our partner companies in the form of promissory
notes. There were advances to cost method partner companies totaling $0.8
million at September 30, 1999. During the three months ended September 30,
1999, RapidAutoNet Corporation changed its name to AUTOVIA Corporation.
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.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, since our inception
through December 31, 1998 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 below 50%.
Therefore, we have applied the equity method of accounting since February 1999.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts
during the three months ended June 30, 1999, and AgProducer Network during the
three months ended September 30, 1999, each of which was consolidated from the
date of its acquisition. The presentation of our financial statements looks
substantially different as a result of consolidating AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts and no longer consolidating
VerticalNet in our financial statements for the nine months ended September 30,
1999 versus the comparable period in the prior year.
29
<PAGE>
To understand our net results of operations and financial position
without the effect of consolidating our majority owned subsidiaries, Note 12 to
our Consolidated Financial Statements summarizes our Parent Company Statements
of Operations and Balance Sheets which treat VerticalNet, AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts as if they were accounted for
under the equity method of accounting for all periods presented. Our share of
the losses of VerticalNet, AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts 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, AgProducer Network,
Breakaway Solutions, EmployeeLife.com and iParts as of September 30, 1999 are
included in "Ownership interests in and advances to Partner Companies" in the
Parent Company Balance Sheets.
Net Results of Operations
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 AgProducer Network, Breakaway Solutions,
EmployeeLife.com and iParts from their dates of acquisition in 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.
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 and nine
months ended September 30, 1999, Breakaway Solutions was consolidated and
accounted for nearly all of our consolidated revenue and a significant portion
of our consolidated operating expenses.
AgProducer Network, Breakaway Solutions, EmployeeLife.com, and iParts
were consolidated during the period ended September 30, 1999. These companies
are development stage companies, have generated negligible revenue since their
inception, and incurred operating expenses of $1.4 million during the nine
months ended September 30, 1999.
During the periods ending December 31, 1996, 1997 and 1998 we acquired
equity ownership interests in VerticalNet for $1 million, $2 million and $4
million, respectively. In 1998, we made advances to VerticalNet in the form of
convertible notes of $5 million, of which $.8 million was repaid by
VerticalNet, $2.1 million was purchased from us by one of our shareholders, and
$2.1 million was converted into common stock during the three months ended
March 31, 1999.
As of September 30, 1999, VerticalNet owned and operated 51 industry-
specific trade communities. Advertising revenue and Web site development fees
represented all of VerticalNet's revenue in 1996 and 1997. In 1998, most of
VerticalNet's revenue was generated from selling advertisements to industry
suppliers in its trade communities.
VerticalNet sells storefront and banner advertising and event
sponsorships in its trade communities. The duration of a storefront
advertisement is typically for a period of one year, while banner
advertisements are typically for a period of three months. All advertising
revenue is recognized ratably in the period in which the advertisement is
displayed, provided that the collection is reasonably assured. VerticalNet also
generates revenue from career services, education, and e-commerce, specifically
the sale of books and third party software for which they receive a transaction
fee, and from barter transactions.
30
<PAGE>
Breakaway Solutions is a full service provider of e-business solutions
that allow growing enterprises to capitalize on the power of the Internet to
reach and support customers and markets. Breakaway Solutions' services consist
of Breakaway Solutions strategy consulting, Breakaway Solutions Internet
solutions, Breakaway Solutions eCRM solutions and Breakaway Solutions
application hosting. From Breakaway Solutions' inception in 1992 through 1998,
Breakaway Solutions' operating activities primarily consisted of providing
strategy consulting and systems integration services. Prior to Breakaway
Solutions' acquisition of Applica in 1999, Breakaway Solutions derived no
revenues from application hosting. Breakaway Solutions believes, however, that
application hosting will account for a significantly greater portion of
revenues in the future. Breakaway Solutions generated $3.5 million, $6.1
million and $10 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 a net loss in 1998 of $.6 million.
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 September 30, 1999, we accounted for 22 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.
31
<PAGE>
Our consolidated net results of operations consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
March 4, 1996 Nine Months Ended
(Inception) to Year Ended December 31, September 30,
December 31, ------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Summary of Consolidated
Net Income (Loss)
Partner Company
Operations............ $ (796,202) $(4,778,902) $(14,081,522) $ (9,605,039) $(55,858,002)
General ICG
Operations............ (1,266,283) (1,800,726) 27,980,450 21,495,895 49,453,142
----------- ----------- ------------ ------------ ------------
Net income (loss) --
Consolidated Total... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
=========== =========== ============ ============ ============
Partner Company
Operations
Revenue................ $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 560,077 3,688,488 12,001,245 7,312,682 18,267,184
----------- ----------- ------------ ------------ ------------
Total operating
expenses.............. 987,547 5,455,505 16,643,773 10,211,382 25,691,778
----------- ----------- ------------ ------------ ------------
(702,407) (4,663,683) (13,509,004) (8,349,583) (10,908,682)
Other income (expense),
net................... -- -- -- -- 27,607
Interest income........ 7,491 10,999 212,130 164,535 85,946
Interest expense....... (13,931) (126,105) (297,401) (149,369) (53,969)
----------- ----------- ------------ ------------ ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (708,847) (4,778,789) (13,594,275) (8,334,417) (10,849,098)
Income taxes........... -- -- -- -- --
Minority interest...... 427,185 (106,411) 5,381,640 2,699, 112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ------------ ------------
Loss from Partner
Company Operations.... $ (796,202) $(4,778,902) $(14,081,522) $ (9,605,039) $(55,858,002)
=========== =========== ============ ============ ============
General ICG Operations
General and
administrative........ $ 1,360,821 $ 2,054,118 $ 3,512,586 $ 2,516,912 $ 12,735,334
----------- ----------- ------------ ------------ ------------
(1,360,821) (2,054,118) (3,512,586) (2,516,912) (12,735,334)
Other income (expense),
net................... -- -- 30,483,177 23,514,321 46,973,584
Interest income........ 94,538 253,392 1,093,657 582,234 4,090,824
Interest expense....... -- -- (83,798) (83,748) (1,716,355)
----------- ----------- ------------ ------------ ------------
Income (loss) from
General ICG Operations
before income taxes... (1,266,283) (1,800,726) 27,980,450 21,495,895 36,612,719
Income taxes........... -- -- -- -- 12,840,423
----------- ----------- ------------ ------------ ------------
Income (loss) from
General ICG
Operations............ $(1,266,283) $(1,800,726) $ 27,980,450 $ 21,495,895 $ 49,453,142
=========== =========== ============ ============ ============
Consolidated Total
Revenue................ $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
----------- ----------- ------------ ------------ ------------
Total operating
expenses.............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
----------- ----------- ------------ ------------ ------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income (expense),
net................... -- -- 30,483,177 23,514,321 47,001,191
Interest income........ 102,029 264,391 1,305,787 746,769 4,176,770
Interest expense....... (13,931) (126,105) (381,199) (233,117) (1,770,324)
----------- ----------- ------------ ------------ ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes........... -- -- -- -- 12,840,423
Minority interest...... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ------------ ------------
Net income (loss) --
Consolidated Total... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
=========== =========== ============ ============ ============
Pretax income (loss)... $ 13,898,928 $(19,245,283)
Pro forma income
taxes................. (5,142,603) 6,735,849
------------ ------------
Pro forma net income
(loss)................ $ 8,756,325 $(12,509,434)
============ ============
</TABLE>
32
<PAGE>
Net Results of Operations-Partner Company Operations
Breakaway Solutions-Analysis of Nine Months Ended September 30, 1999
The following is a discussion of Breakaway Solutions' net results of
operations for the nine months ended September 30, 1999. Breakaway Solutions'
comparative results of operations for the nine months ended September 30, 1998
are not meaningful.
Revenue. Breakaway Solutions' revenue of $14.7 million for the nine
months ended September 30, 1999, was derived primarily from Internet
professional services and eCRM solutions. Through organic growth and
acquisitions, Breakaway Solutions has expanded in 1999 into custom Web
development and application hosting.
Cost of Revenue. Cost of revenue of $7 million for the nine months ended
September 30, 1999, consists primarily of Breakaway Solutions' personnel-
related costs of providing its services. As Breakaway Solutions expands into
custom Web development and application hosting, it is incurring the direct
costs of these operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $14.7 million for the nine months ended September
30, 1999, consist of trade show expenses, personnel costs, facility costs,
professional fees and general costs to support operations. Breakaway Solutions
expects selling, general and administrative expenses to increase significantly
in future periods due to the expected growth in its infrastructure, hiring of
additional dedicated sales and marketing employees and the expected significant
amortization of intangible assets from its acquisitions. Also included in
selling, general and administrative expenses for the nine months ended
September 30, 1999 was $2.5 million of goodwill amortization related to the
acquisition of our ownership interest in Breakaway Solutions.
VerticalNet-Analysis of Three Year Period Ended December 31, 1998
For the periods ended December 31, 1996, 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:
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.
Selling, General and Administrative Expenses. Selling 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 selling 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 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
33
<PAGE>
staffing levels, higher facility costs, professional fees to support the growth
of VerticalNet's infrastructure and goodwill amortization related to
VerticalNet's 1998 acquisitions.
Equity Income (Loss)
A significant portion of our 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 and the nine months ended September 30, 1999, we utilized
$119.1 million to acquire partner companies accounted for under the equity
method of accounting which resulted in goodwill of $77.4 million, which will be
amortized over 3 years.
In the periods ended December 31, 1996 and 1997, Sky Alland Marketing was
our only partner company accounted for under the equity method. Sky Alland
Marketing's net results of operations in 1997 improved compared to 1996.
The significant change in equity income (loss) from 1997 to 1998 reflects
a decrease in the net results of operations at Sky Alland Marketing and the
effect of equity method partner companies in which we acquired an interest
during 1998. One of these companies, Syncra Software, Inc., represented
approximately $4.3 million of our $5.9 million equity loss in 1998. As of
December 31, 1998, we accounted for eight of our partner companies under the
equity method of accounting. Most of these companies are in a very early stage
of development and incurred substantial losses in 1998, and our share of these
losses was substantial.
Our ownership interest in VerticalNet is not consolidated in our
financial statements for periods after December 31, 1998 but is accounted for
under the equity method of accounting as a result of our lower ownership
interest in VerticalNet following the completion of its initial public offering
in February 1999. For the nine months ended September 30, 1999, VerticalNet had
revenue of $10.7 million, and a net loss of $38.2 million compared to revenue
of $1.9 million and a net loss of $8.3 million 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 29 as of September 30, 1998 to 51 as of
September 30, 1999. In addition, barter transactions, in which VerticalNet
received advertising or other services in exchange for advertising on its Web
sites, accounted for 23% of revenues for the nine months ended September 30,
1999 compared to 19% 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 and a one time non-recurring charge of $13.6
million for in-process research and development expensed in August 1999
relating to VerticalNet's acquisition of Isadra.
During the nine months ended September 30, 1999 we accounted for 22
companies under the equity method of accounting, including VerticalNet,
compared to three companies during the comparable 1998 periods. All 22 of the
companies incurred losses in the period ended September 30, 1999. Our equity
loss of $49.1 million for the nine months ended September 30, 1999 consisted of
$37.9 million related to our share of the equity method companies' losses and
$11.2 million of amortization of the excess of cost over net book value of
these companies. Of the $22.8 million and $37.9 million equity loss related to
our share of the losses of companies accounted for under the equity method for
the three and nine months ended September 30, 1999, $9.0 million and $14.0
million, respectively, were attributable to VerticalNet, while the other 21
companies accounted for the remaining equity losses.
VerticalNet expects to incur significant net losses for the foreseeable
future because of its aggressive expansion plans. Due to the early stage of
development of the other companies in which we acquire interests, existing and
new partner companies accounted for under the equity method, are expected to
incur substantial losses. Our share of these losses is expected to be
substantial in 1999.
34
<PAGE>
While VerticalNet and most of the companies accounted for under the
equity method of accounting have generated losses in each of the 1998 and 1999
periods, 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.
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. 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 established operations in Seattle, Washington,
and we significantly increased the number of our employees nationwide. As a
result of these initiatives, our general and administrative costs increased
406% for the nine months ended September 30, 1999 compared to the comparable
periods 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 to continue to be
substantially higher compared to historical periods.
During the year ended December 31, 1998, and the nine months ended
September 30, 1999, we recorded aggregate unearned compensation expense of $.7
million and $16.5 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 nine months ended September 30, 1999
include $3.3 million of amortization expense related to stock option grants.
Amortization of deferred compensation expense for the year ended December 31,
1999 is expected to approximate $5.8 million. We expect to recognize
amortization of deferred compensation expense of $5.6 million in 2000, $3.4
million in 2001, $1.9 million in 2002, $.9 million in 2003 and $.2 million in
2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the 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.
General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December September 30,
31, ------------------------
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Sale of Matchlogic to Excite........ $12,822,162 $12,822,162 $ --
Sales of Excite holdings............ 16,813,844 7,303,162 2,050,837
Sale of Excite to @Home Corpora-
tion............................... -- -- 2,719,466
Sale of WiseWire to Lycos........... 3,324,238 3,324,238 --
Sales of Lycos holdings............. 1,471,907 1,202,944 --
Sale of SMART Technologies, to i2
Technologies....................... -- -- 2,941,806
Issuance of stock by VerticalNet.... -- -- 44,595,738
Partner company impairment charges.. (3,948,974) (643,049) (5,340,293)
Other............................... -- (495,136) 6,030
----------- ----------- -----------
$30,483,177 $23,514,321 $46,973,584
=========== =========== ===========
</TABLE>
35
<PAGE>
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 May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in
a non-operating gain before taxes of $2.7 million.
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.
In August 1999, we divested 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 during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. Our non-operating gain before
taxes from this transaction was $2.9 million.
Our remaining holdings of @Home Corporation, Lycos, and i2 Technologies
at September 30, 1999 are accounted for as available-for-sale securities and
are marked to market, with the difference between carrying value and market
value, net of deferred taxes, 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.
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for an acquisition in 1999, our
share of VerticalNet's net equity increased by $44.6 million. This increase
adjusts our carrying value in VerticalNet and results in a non-operating gain
of $44.6 million, before deferred taxes of $15.6 million, in the nine months
ended September 30, 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 these, 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.
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.
For the year ended December 31, 1998 and the three months ended September
30, 1999, we recorded impairment charges of $2 million and $5.3 million,
respectively, for the other than temporary decline in the fair value of a cost
method partner company. From the date we initially acquired an ownership
interest in this partner company through September 30, 1999, our funding to
this partner company represented all of the outside capital the company had
available to fund its net losses and capital asset requirements. During the
nine months ended September 30, 1999 we fully guaranteed the partner company's
new bank loan and agreed to provide additional
36
<PAGE>
funding. We acquired additional non-voting convertible debentures of this
partner company for $5 million in April 1999. The impairment charges we
recorded were determined by the decrease in net book value of the partner
company caused by its net losses, which were funded entirely based on our
funding and bank guarantee. Given its continuing losses, we will continue to
determine and record impairment charges in a similar manner for this partner
company until the status of its financial position improves.
Interest Income
Our cash, cash equivalents and short-term investments are invested
primarily in money market accounts and highly liquid, high quality debt
instruments. 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 nine months ended September 30,
1999, we received $32 million of proceeds from the sale of shares of our common
stock, $90 million in convertible notes and approximately $209.1 million in our
initial public offering. The increase in interest income in 1998 and the nine
months ended September 30, 1999 was primarily due to the significant increase
in our cash and cash equivalents throughout 1998 and 1999 as a result of these
transactions.
Interest Expense
During the nine months ended September 30, 1999, we issued $90 million in
convertible notes bearing interest at 4.99%. The increase in interest expense
in the nine months ended September 30, 1999 was a result of this transaction.
Interest accrued through August 5, 1999, the date of our initial public
offering, was waived in occordance with the terms of the notes and reclassed to
Additional Paid-in-Capital as a result of the conversion of the convertible
notes in connection with our initial public offering.
Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were
organized as a limited liability company and were treated as a partnership for
income tax purposes. As a result of our Reorganization as a corporation, we are
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 September 30, 1999, we recorded an
additional tax benefit of $5.1 million related to our consolidated results of
operations for that period, net of deferred tax expense of $15.6 million
relating to our gain on VerticalNet's common stock issuances.
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
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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
September 30, 1999, our only publicly traded partner company are VerticalNet
and US Interactive. As a result, there is significant risk that we may not be
able to realize the benefits of expiring carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of a
portion of our Excite and Lycos holdings, and borrowings under bank credit
facilities.
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 was received in 1998 and $32 million was received
during the nine months ended September 30, 1999, respectively.
In August 1999, we completed our initial public offering of 30,620,000
shares of our common stock at $6.00 per share. Concurrently, we completed a
private placement of 7,500,000 shares at the $6.00 initial public offering
price. Net proceeds to us from these transactions aggregated approximately
$209.1 million (net of underwriters' commission and offering expenses of
approximately $19.6 million).
In May 1999, we issued $90 million of convertible subordinated notes
which converted to 14,999,732 shares of our common stock upon the completion of
our initial public offering in August 1999. Upon the conversion of these notes,
we issued 3,000,000 warrants to purchase our common stock at $6.00 per share
through May 2002. In accordance with the terms of the notes, all accrued
interest was waived upon conversion.
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
nine months ended September 30, 1999.
In April 1999, we entered into a $50 million revolving bank credit
facility. In connection with the facility, we issued warrants to purchase
400,000 shares of common stock for an exercise price of $5.00 per share
exercisable for seven years. We valued these warrants at $1 million 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 (VerticalNet, Breakaway Solutions and US Interactive as of November
15, 1999) and the value, as defined in the facility, of our private partner
companies. If the market price of our publicly traded partner companies
declines, 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 September 30, 1999 was $50 million, none of which was
outstanding.
Existing cash, cash equivalents and short-term investments, 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 November 18, 1999, we were contingently
obligated for approximately $3.3 million of guarantee commitments and as of
November 18, 1999, our commitments to new and existing partner companies that
require funding in the next 12 months totaled $30.5 million. We will continue
to evaluate acquisition opportunities and expect to acquire additional
ownership interests in new and existing partner companies in the next 12 months
which may
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make it necessary for us to raise additional funds. We will likely have to
raise additional funds through the issuance of equity securities or obtain
additional bank financing. If additional funds are raised through the issuance
of equity securities, our existing shareholders may experience significant
dilution. Our revolving bank credit facility matures in April 2000, at which
time we may not be able to renew the facility or obtain additional bank
financing, or may only be able to do so on terms not favorable or acceptable to
us.
From its inception through its initial public offering, VerticalNet
funded its operations through a combination of equity, investor and bank
borrowings, and leases. These sources included amounts both advanced and
guaranteed by us. VerticalNet raised $58.3 million in its initial public
offering in February 1999. VerticalNet believes that these initial public
offering funds, together with its existing cash and cash equivalents, should be
sufficient to fund its operations through March 2000. We have no obligation to
provide additional funding to VerticalNet, and we have no obligations with
respect to its outstanding debt arrangements.
Prior to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and leases. In
January 1999, we acquired a majority voting interest in Breakaway Solutions for
$8.3 million, of which Breakaway Solutions used $4.5 million to repurchase
treasury stock. In July 1999, Breakaway Solutions completed a private placement
of equity securities of about $19.1 million, of which we contributed $5
million. In October 1999, Breakaway Solutions completed its initial public
offering raising approximately $45 million. We will record a non-operating gain
during the three months ended December 31, 1999 due to the increase in our
share of Breakaway Solution's net equity as a result of their issuance of
shares. Our ownership interest in Breakaway Solutions after their initial
public offering is about 41% and will be accounted for under the equity method.
Breakaway Solutions expects its existing cash resources will be sufficient to
fund its operations through the next 12 months. We have no obligation to
provide additional funding to Breakaway Solutions, and we have no obligations
with respect to its outstanding debt arrangements.
Consolidated working capital increased to $20.5 million at December 31,
1998, compared to $2.4 million at December 31, 1997. The increase was primarily
due to the net effect of the proceeds from the equity we raised in 1998 and the
proceeds from the sales of a portion of our Excite and Lycos holdings, offset
by the ownership interests we acquired in 1998. Consolidated working capital
increased to $200.4 million at September 30, 1999, from $20.5 million at
December 31, 1998 primarily as a result of equity we raised early in 1999 and
from our initial public offering more than offsetting the ownership interests
we acquired and the tax distribution to shareholders during the nine months
ended September 30, 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 nine months ended
September 30, 1999 compared to the same prior year period increased due to the
increased cost of General ICG Operations general and administrative expenses.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies,
offset in 1998 and the nine months ended September 30, 1999 by the proceeds of
$36.4 million and $2.5 million, respectively, from the sales of a portion of
our available-for-sale securities, Excite and Lycos.
We utilized $57.6 million, including $9 million contributed to
VerticalNet, to acquire interests in new and existing partner companies in
1998. In 1998, we acquired interests in the following partner companies:
AUTOVIA, Blackboard, CommerceQuest, CommerX, ComputerJobs.com, Context
Integration, Deja.com, e-Chemicals, Entegrity Solutions, LinkShare, PrivaSeek,
SageMaker, Servicesoft Technologies, Syncra Software, US Interactive,
VerticalNet and Vivant!.
We utilized $145.9 million, including $13.2 million contributed directly
to Breakaway Solutions and an additional $4 million used to purchase an
additional ownership interest in Breakaway Solutions directly from shareholders
of Breakaway Solutions, and including $8.8 million in the aggregate to acquire
our majority ownership interest in AgProducer Network, EmployeeLife.com and
iParts, to acquire interests in or make
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advances to new and existing partner companies during the nine months ended
September 30, 1999. These companies included: Arbinet Communications,
asseTrade.com, Bidcom, Blackboard, ClearCommerce, Collabria, CommerceQuest,
CommerX, Deja.com, e-Chemicals, eMarketWorld, Entegrity Solutions, Internet
Commerce Systems, NetVendor, ONVIA.com, Plan Sponsor Exchange, PrivaSeek,
Residential Delivery Services, SageMaker, Servicesoft Technologies, StarCite,
SMART Technologies, Syncra Software, TRADEX Technologies, United Messaging and
Universal Access.
During the nine months ended September 30, 1999, we acquired an interest
in a new partner company from shareholders of the partner company who have an
option, exercisable at any time through August 2000, of electing to receive
cash of $11.3 million or 2,083,333 shares of our common stock. As of September
30, 1999, $2.8 million of the obligation has been converted into 509,270 shares
of our common stock.
In November 1999, we acquired an interest in eMerge Interactive, Inc. for
a combination of cash of $27 million and a note due one year after issuance of
$23 million, of which $5 million may be payable on or after March 25, 2000
under certain circumstances.
In addition to the eMerge Interactive transaction, we utilized $79.5
million to acquire ownership interests in or make advances to new and existing
partner companies during the period from October 1, 1999 through November 18,
1999. These companies included: Animated Images, Benchmarking Partners,
ClearCommerce, CommerceQuest, CourtLink, JusticeLink, ONVIA.com,
PaperExchange.com, PrivaSeek, Purchasing Solutions, SageMaker, traffic.com,
VerticalNet, VitalTone and Vivant!.
In November 1999, VerticalNet announced it had signed a definitive
agreement to acquire all of the outstanding stock of NECX Exchange LLC in
exchange for 95,000 shares of VerticalNet common stock, $10 million in cash and
the assumption of debt and certain other liabilities. Consummation of the
transaction is subject to regulatory approvals as well as customary closing
conditions. The transaction had not been completed as of September 30, 1999.
Upon completion of the transaction, our voting ownership in VerticalNet will
decrease from 35% to approximately 34%. In addition, we expect to record a non-
operating gain due to the increase in our share of VerticalNet's net equity as
a result of their issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We expect to commit funds in 1999 and 2000 to the buildout of our
larger new corporate headquarters in Wayne, Pennsylvania, our international
expansions, and the development of our information technology infrastructure.
There were no material capital asset purchase commitments as of September 30,
1999.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting
pronouncements to have a significant impact on our net results of operations,
financial position or cash flows.
Year 2000 Readiness Disclosure
Many computer programs have been written using two digits rather than
four digits to define the applicable year. This poses a problem at the end of
the century because these computer programs may recognize a date using "00" as
the year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 issue.
We currently use the information technology systems and many non-
information technology systems of Safeguard Scientifics, Inc., one of our
principal shareholders. Safeguard Scientifics has completed its assessment of
its computer information systems. Safeguard Scientifics has replaced all
computer systems and software which were determined to be non-compliant. These
replacements were generally part of Safeguard
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Scientifics' program of regularly upgrading its computer systems, and Safeguard
Scientifics has not incurred and does not expect to incur any material
extraordinary expense to remediate its systems. Safeguard Scientifics has
completed testing and implementation of its computer systems. Safeguard
Scientifics has received verification from its vendors that its information
systems are Year 2000 ready and expects to complete any necessary remediation
of non-information systems during 1999. Safeguard Scientifics has a back-up
generator in its data center which enables a "disaster recovery" area to
support critical computer and telecommunications in the case of power loss.
The Year 2000 readiness of VerticalNet and Breakaway Solutions is
described below. Our partner companies are in varying stages of assessing,
remediating and testing their internal systems and assessing Year 2000
readiness of their vendors, business partners, and customers. Our partner
companies are also in varying stages of developing contingency plans to operate
in the event of a Year 2000 problem. The total cost and time which will be
incurred by our partner companies on the Year 2000 readiness effort has not
been determined. There can be no assurance that all necessary work will be
completed in time, or that such costs will not materially adversely impact one
or more of such partner companies. In addition, required spending on the Year
2000 effort will cause customers of most of our partner companies to reallocate
at least part of their information systems budgets. Although some of our
partner companies have offerings which may be useful in such efforts, such
reallocations could materially adversely affect the results of operations of
our partner companies.
VerticalNet
VerticalNet may realize exposure and risk if the systems on which it is
dependent to conduct its operations are not Year 2000 compliant. VerticalNet's
potential areas of exposure include products purchased from third parties,
information technology including computers and software, and non-information
technology including telephone systems and other equipment used internally. The
internally-developed production and operation systems for VerticalNet's Web
sites have recently undergone a complete re-engineering. All new programs have
been substantially tested and validated for Year 2000 compliance.
VerticalNet's communications infrastructure was recently overhauled,
including a full conversion of its telephone and voicemail systems. VerticalNet
believes all non-information technology upon which it is materially dependent
is Year 2000 compliant. Additionally, with respect to information technology,
VerticalNet has resolved all Year 2000 compliance issues primarily through
normal upgrades of its software or replacements included in VerticalNet's
capital expenditure budget and these costs are not expected to be material to
VerticalNet's financial position or results of operations. VerticalNet's
original Year 2000 compliance cost estimate did not exceed $250,000 and remains
valid. However, such upgrades and replacements may not successfully address
VerticalNet's Year 2000 compliance issues as represented by VerticalNet's
distributors, vendors and suppliers.
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 all of its
technology are Year 2000 compliant.
In addition, VerticalNet has obtained verification from its key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not fully compliant, to provide a description of their plans to become
so. VerticalNet has received certification from 100% of its distributors,
vendors and suppliers that they are either complete or in accordance with their
scheduled Year 2000 compliance plan. VerticalNet will continue to monitor the
status of all of its key vendors with the intent of terminating and replacing
those relationships which may jeopardize its own Year 2000 compliance plan.
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In the event that VerticalNet's production and operational facilities
that support its Web sites are disrupted, 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. Having completed a specific analysis of its Web-hosting facilities, all
functionalities are in compliance with VerticalNet's Year 2000 compliance
assessment plan. 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 has developed a comprehensive list of contingency models to
forecast 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. All identified scenarios have been determined to be
resolvable by an on-site staff which will be maintained throughout the Year
2000 date changeover with the exception of the Exodus hosting functionalities.
Exodus has remitted Year 2000 certification and VerticalNet is in the process
of reviewing potential back-up sites within its disaster recovery planning.
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 is conducts business do not successfully address such
issues, its business, operating results and financial position could be
materially and adversely affected.
Breakaway Solutions
Breakaway Solutions has established a Year 2000 readiness team to carry
out a program for the assessment of its vulnerability to the Year 2000 issues
and remediation of identified problems. The team consists of senior
information technology and business professionals and meets on a regular
basis. An outside consultant is also working with the readiness team on a
temporary basis to assist them in carrying out their tasks.
The readiness team has developed a program with the following key phases
to assess its state of Year 2000 readiness:
. Develop a complete inventory of its hardware and software, and
assess whether that hardware and software is Year 2000 ready;
. Test its internal hardware and software which Breakaway Solutions
believes have a significant impact on its daily operations to
assess whether it is Year 2000 ready;
. Upgrade, remediate or replace any other hardware or software that
is not Year 2000 ready; and
. Develop a business continuity plan to address possible Year 2000
consequences which Breakaway Solutions cannot control directly or
which it has not been able to test or remediate.
Breakaway Solutions has completed a number of the tasks which its
program requires, as follows:
. Completed the inventory of hardware and software at all of its
locations and have determined that all of the inventoried hardware
and software which Breakaway Solutions believes have a significant
impact on its daily operations are Year 2000 ready or can be made
ready with minimal changes or replacements, based on its vendors'
Web site certification statements and commercially available Year
2000 testing products;
. Implemented internal policies to require that a senior information
technology professional approves as Year 2000 ready any hardware
or software that its plans to purchase;
. Developed a list of all vendors which it deems to have a
significant business relationship with Breakaway Solutions. Of the
approximately 20 vendors it has identified, it has obtained web
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site certifications or made written inquiries for information or
assurances with respect to the Year 2000 readiness of products or
services that it purchases from those vendors;
. Completed test plans for date sensitive applications which it
determined to be Year 2000 ready and which Breakaway Solutions
believes will have a significant impact on its daily operations;
. Completed an internal review to determine the commitments it has
made to its customers with respect to the Year 2000 readiness of
solutions which it has provided to those customers;
. Reviewed evaluations of questionnaires regarding Year 2000
readiness to its critical vendors; and
. Formulated a business continuity plan that encompasses Breakaway
Solutions' strategy for preparation, notification and recovery in
the event of a failure due to the year 2000 issue. The plan
includes procedures to minimize downtime and expedite resumption of
business operations and other solutions for responding to internal
failures with its information technology department as well as
widespread external failures related to the Year 2000 issue.
Breakaway Solutions has specific tasks to complete with respect to its
Year 2000 program, including;
. Testing of its internal hardware and software which it believes
have a significant impact on its daily operations to confirm its
Year 2000 readiness; and
. Implementation of any necessary changes, identified as a result of
testing, to its internal software and hardware.
Costs
To date, Breakaway Solutions has not incurred material expenses in
connection with its Year 2000 readiness program. It may need to purchase
replacement products, hire additional consultants or other third parties to
assist it, although it does not currently expect that it will need to take
such steps. It currently estimates that the cost of its Year 2000 readiness
program will be approximately $25,000. This amount includes internal labor
costs, legal and outside consulting costs and additional hardware and software
purchases. Breakaway Solutions expects that it will refine this estimate as it
completes the final phase of its Year 2000 readiness program.
Risks
If Breakaway Solutions fails to solve a Year 2000 problem with respect to
any of its systems, it could experience a significant interruption of its
normal business operations. It believes that the most reasonably likely worst
case scenarios related to the Year 2000 issue for its business are as follows:
. If a solution which it provided to a client causes damage or injury
to that client because the solution was not Year 2000 compliant, it
could be liable to the client for breach of warranty. In a number
of cases, its contracts with clients do not limit its liability for
this type of breach;
. If there is a significant and protracted interruption of
telecommunication services to its main office, it would be unable
to conduct business because of its reliance on telecommunication
systems to support daily operations, such as internal
communications through e-mail; and
. If there is a significant and protracted interruption of electrical
power or telecommunications services to its application hosting
facilities, it would be unable to provide its application hosting
services. This failure could significantly slow the growth of its
application hosting business which is an important part of its
strategic plan. It has sought to locate its application hosting
facilities in leased space in co-location facilities which have
back-up power systems and redundant telecommunications services.
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OUR BUSINESS
Industry Overview
Growth of the Internet
People and businesses are increasingly relying on the Internet to access
and share information as well as to purchase and sell products and services.
International Data Corporation estimates that at the end of 1998 more than 142
million people were using the Internet to communicate, participate in
discussion forums and obtain information about goods and services. IDC projects
that this user base will grow to 502 million people by the end of 2003. A
rapidly growing number of businesses use the Internet to market and sell their
products and streamline business operations. According to Forrester Research,
50% of all United States businesses will be online by 2002.
Growth of B2B E-Commerce
The Internet's substantial growth creates tremendous market opportunities
for companies that connect buyers and sellers, and companies that create
applications and systems for traditional businesses wishing to engage in e-
commerce. Historically, B2B e-commerce has occurred through electronic data
interchange over proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open platform with
common communication protocols to build efficient, cost-effective networks that
facilitate e-commerce. As Internet-based network reliability, speed and
security have improved in recent years and as more businesses have connected to
the Internet, traditional businesses are beginning to use the Internet to
conduct e-commerce and exchange information with customers, suppliers and
distributors. While the business-to-consumer e-commerce market currently is
significant in size, estimated by IDC to have been $15 billion in goods and
services in 1998, the B2B e-commerce market is larger and is predicted to grow
dramatically. Forrester Research projects that the United States 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. IDC projects that the Western European B2B e-commerce market
will grow from $3.8 billion in 1998 to over $350 billion by 2003.
We believe that the B2B e-commerce market is beginning a period of rapid
development and growth for the following reasons:
. Expanded Access to New and Existing Customers and
Suppliers. Traditional businesses have relied on their sales
forces and purchasing departments to develop and maintain customer
and supplier relationships. This model is constrained by the time
and cost required to exchange current information regarding
requirements, prices and product availability, and the difficulty
of cost-effectively locating new customers and suppliers and
managing existing relationships. Traditional businesses can
leverage the Internet to obtain real-time, accurate information
regarding requirements, prices and products to a global audience,
including suppliers, customers and business partners. This makes
it easier for businesses to attract new customers and suppliers,
improve service and increase revenue.
. Increased Efficiency and Reduced Cost. Traditional businesses can
utilize the Internet to automate their internal operations,
including manufacturing, finance, sales and purchasing functions.
The Internet can also be used to increase information flow and
access throughout an organization. This increases operational
efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement
costs, and improving responsiveness to customers and suppliers.
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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.
. Market Makers. Market makers bring buyers and sellers together by
creating Internet-based markets for the exchange of goods,
services and information. Market makers enable more effective and
lower cost commerce for traditional businesses by providing access
through the Internet to a broader range of buyers and sellers.
Market makers typically operate in a specific industry or provide
specific goods and services across multiple industries. Market
makers tailor their business models to match a target market's
distinct characteristics. We refer to market makers operating in a
particular industry as vertical market makers, and to market
makers operating across multiple industries as horizontal market
makers. Vertical and horizontal market makers may:
. act as principals in transactions;
. automate business processes so as to make them more efficient;
. operate exchanges where buyers and sellers dynamically
negotiate prices; or
. facilitate interaction and transactions among businesses and
professionals with common interests by providing an electronic
community.
Market makers may generate revenue by:
. selling products and services;
. charging fees based on the value of the transactions they
facilitate;
. charging fees for access to their Internet-based services; or
. selling advertising on their Web sites.
. Infrastructure Service Providers. Infrastructure service providers
sell software and services to businesses engaged in e-commerce.
Many businesses need assistance in designing business practices to
take advantage of the Internet, and in building and managing the
technological infrastructure needed to support B2B e-commerce.
Infrastructure service providers help businesses in the following
ways:
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing their
e-commerce strategies. Systems integrators develop and
implement a technological infrastructure that enables e-
commerce. Systems integrators also integrate e-commerce
applications with existing enterprise applications. Strategic
consultants and systems integrators typically charge their
clients on a project-by-project basis.
. Software Providers. Software providers design and sell software
applications, tools and related services that support e-
commerce and integrate business functions. Software providers
may sell or license their products.
. Outsourced Service Providers. Outsourced service providers
offer software applications, infrastructure and related
services designed to help traditional businesses reduce cost,
improve operational efficiency and decrease time to market.
Outsourced service providers may charge fees on a per-use or
periodic basis.
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Challenges Facing Emerging B2B E-Commerce Companies
We believe that emerging B2B e-commerce companies face certain
challenges, including:
. Developing a Successful Business Model. B2B e-commerce companies
must develop business models that capitalize on the Internet's
capabilities to provide solutions to traditional companies in
target industries. B2B e-commerce companies require industry
expertise because each industry and market has distinct
characteristics including existing distribution channels, levels
of concentration and fragmentation among buyers and sellers,
procurement policies, product information and customer support
requirements. B2B e-commerce companies also require Internet
expertise in order to apply its capabilities to their target
industries.
. Building Corporate Infrastructure. Many B2B e-commerce companies
have been recently formed and require sales and marketing,
executive recruiting and human resources, information technology,
and finance and business development assistance. These companies
also require capital as significant resources may be required to
build technological capabilities and internal operations.
. Finding the Best People. Entrants into the B2B e-commerce market
require management with expertise in the applicable market, an
understanding of the Internet's capabilities, the ability to
manage rapid growth and the flexibility to adapt to the changing
Internet marketplace. We believe that very few people have these
skills, and those that do are highly sought after. To be
successful, companies must attract and retain highly qualified
personnel.
We believe that the most successful B2B e-commerce companies will rapidly
identify market demands and move quickly to satisfy those demands. B2B e-
commerce companies that accomplish this goal may establish new standards, gain
market share, secure critical partnerships and create a brand name, making
competition more difficult for new entrants. In addition, B2B e-commerce
companies must keep abreast of Internet and industry-specific developments and
adapt to a rapidly changing environment.
Our Solution and Strategy
Our goal is to become the premier B2B e-commerce company by establishing
an e-commerce presence in major segments of the global 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 November 18, 1999, we owned interests in 46 B2B e-commerce
companies which we refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we
use these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, partner companies, strategic investors and Advisory Board.
Our strategy is to:
. create or identify companies with the potential to become industry
leaders;
. acquire significant interests in partner companies and incorporate
them into our collaborative network;
. provide strategic guidance and operational support to our partner
companies; and
. promote collaboration among our partner companies.
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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.
Our strategy includes acquiring interests in partner companies based in
the United States and abroad. We recently opened an office in London that will
focus on European B2B opportunities. We have staffed our London office with two
executives from one of Europe's leading private equity firms. These two
executives worked together on Internet acquisitions in Europe and cultivated a
broad network of technology and vertical market contacts. We anticipate opening
an office in continental Europe during 2000. We plan to staff our European
offices with personnel that will provide strategic guidance and operational
support to our partner companies operating in Europe.
We plan to acquire interests in European B2B e-commerce companies. If we
wish to enter a European market in which we cannot locate an attractive partner
company candidate, we may create a new company or assist one of our partner
companies located in the United States to expand overseas. In addition, our
worldwide personnel will focus on providing connections and resources to all
our partner companies, creating an international expansion platform for each
member of the network.
Create or Identify Companies With the Potential to Become Market Leaders
Our expertise in the B2B e-commerce market allows us to build or identify
companies that are positioned to succeed. We apply a disciplined analysis that
capitalizes on this competitive advantage. When we evaluate whether to enter a
market by building a company or acquiring an interest in an existing company,
we weigh the following industry and partner company factors:
. Industry Criteria
. Inefficiency. We consider whether the industry suffers from
inefficiencies that may be alleviated through e-commerce. We
also consider the relative amount of inefficiency, as more
inefficient industries present greater profit potential.
. Competition. We evaluate the amount of competition that a
potential partner company faces from e-commerce and
traditional businesses.
. Significance of Vertical Market. Our strategy includes
acquiring interests in market makers doing business in the
principal vertical markets of the global economy. When
evaluating market makers, we consider whether the market maker
has the potential to be a leader in its vertical market.
. Industry Potential. When evaluating a market maker, we
consider the number and dollar value of transactions in its
corresponding industry. We evaluate the incremental efficiency
to be gained from conducting or supporting transactions online
and estimate the potential to transfer transactions online. By
considering these factors, we can focus on vertical industries
for which the leading market maker can eventually generate
significant dollar volumes of profits for the market maker.
. 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.
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. Infrastructure Service Provider Profit Potential. When
evaluating infrastructure service providers, we examine the
size of the market opportunity, the profit potential in
serving the target market and whether the infrastructure
service provider can provide assistance to our market maker
partner companies.
. Partner Company Criteria
. Industry Leader. We partner with a company only if we believe
that it has the products and skills to become a leader in its
industry.
. Significant Ownership. We consider whether we will be able to
obtain a significant position in the company and exert
influence over the company.
. Network Synergy. We consider the degree to which a potential
partner company may contribute to our network, and benefit
from our network and operational resources.
. Management Quality. We assess the overall quality and industry
expertise of a potential partner company's management.
Acquire Interests in Partner Companies
After we identify an attractive potential partner company, we negotiate
the acquisition of a significant interest in the company. As a condition to an
acquisition, we require representation on the company's board of directors to
ensure our ability to provide active guidance to the partner company. We
structure acquisitions to permit the partner company's management and key
personnel to retain an equity stake in the company. As a result of our
experience, we believe that we have the ability to complete acquisitions
quickly and efficiently. After acquiring interests in partner companies, we
frequently participate in their follow-on financings and seek to increase our
ownership positions.
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:
. Strategic Guidance. We provide strategic guidance to our partner
companies regarding market positioning, business model development
and market trends. In addition, we advise our partner companies'
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 and
management team members who provide strategic guidance to our
partner companies include Todd Hewlin, a former Partner with
McKinsey & Company, 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.
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. Operational Support. B2B e-commerce companies often have
difficulty obtaining senior executive level guidance in the many
areas of expertise successful companies need. We assist our
partner companies by providing access to skilled managers who
guide our partner companies in the following functional areas:
. Sales and Marketing. Several members of our Advisory Board and
management team provide guidance to our partner companies'
sales, marketing, product positioning and advertising efforts.
These individuals include Michael H. Forster, a former Senior
Vice President of Worldwide Field Operations at Sybase, Inc.
and currently one of our Senior Partners, Christopher H.
Greendale, a former Executive Vice President at Cambridge
Technology Partners and currently one of our 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.
. Executive Recruiting and Human Resources. Members of our
management team assist our partner companies in recruiting key
executive talent. These individuals include Rick Devine, one
of our Managing Directors and a former partner at Heidrick &
Struggles, Inc., an executive recruiting firm. In providing
this assistance, we leverage the contacts developed by our
network of partner companies, management and Advisory Board.
We believe that this is one of the most important functions
that we perform on behalf of our partner companies. B2B e-
commerce companies must locate executives with both industry
and Internet expertise. The market for these professionals is
highly competitive since few persons possess the necessary mix
of skills and experience.
. Information Technology. Our Chief Technology Officer, Richard
G. Bunker, is dedicated to helping our partner companies with
their information systems strategies and solving problems
relating to their current information technology. Members of
our Board of Directors and Advisory Board who provide guidance
in this area include K.B. Chandrasekhar, Chairman of the Board
of Directors of Exodus Communications, and Peter A. Solvik,
the Chief Information Officer of Cisco Systems, Inc.
. Finance. One of our Managing Directors, John N. Nickolas, an
experienced finance executive, is dedicated to providing
financial guidance to our partner companies in areas such as
corporate finance, financial reporting, accounting and
treasury operations. In providing these services, Mr. Nickolas
leverages the skills and experience of our internal finance
and accounting group, our partner company network and outside
consultants.
. Business Development. B2B e-commerce companies may be involved
in evaluating, structuring and negotiating joint ventures,
strategic alliances, joint marketing agreements, acquisitions
or other transactions. We provide assistance to our partner
companies in all these areas. Our management team, Advisory
Board, strategic investors and partner companies all assist in
this function.
Promote Collaboration Among Our Partner Companies
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in shared
knowledge and business contacts among our partner companies and the formation
of numerous strategic alliances. We promote collaboration formally by hosting
regularly scheduled seminars relating to partner company operational and
business issues. At these seminars, the executives of partner companies share
their experiences with each other, our management team and the Advisory Board.
For example, at a seminar earlier this year, thirteen chief executive officers
of our market maker and infrastructure service provider partner companies
gathered to discuss e-commerce strategies and
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business models. In addition, in the past six months we hosted four conferences
for our partner companies on various operational issues ranging from financing
strategies to the use of technology. 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:
. PaperExchange.com and VerticalNet have developed a strategic
alliance that provides PaperExchange with co-branded access to
leading industry content, including news, feature articles and
interviews from VerticalNet's PulpandPaper Online property.
VerticalNet's members will get access to PaperExchange's leading
pulp and paper exchange, which is an Internet-based marketplace
for buying and selling pulp and paper products. In addition, the
companies are joining forces to create a comprehensive equipment
listing and career site. By linking their sites together,
PaperExchange.com and VerticalNet are seeking to establish a
leading destination for pulp and paper professionals.
. CommerX, Inc., a provider of e-commerce solutions for the
industrial processing market, has formed a strategic alliance with
CommerceQuest, Inc. to provide integration solutions to connect
efficiently the systems of processors and manufacturers within the
industries served by CommerX. CommerX will use CommerceQuest's
enableNet solution for deployment of PlasticsNet.com, the plastics
industry's leading electronic marketplace. CommerceQuest's
enableNet provides reliable, real-time delivery of data with
enterprise-strength security and accurate data transformation
across many formats and applications. This relationship allows
PlasticsNet.com users to conduct e-commerce over their clients'
network of choice or private lines. This state-of-the-art
e-commerce infrastructure will allow for less expensive
implementation and integration with faster and more seamless
transactions.
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 facilitate the
information flow among our partner companies. We also control the information
flow by determining the composition of the network. If we believe that a
partner company is not contributing to our network or has lost its strategic
importance, we may sell our interest in that partner company.
Overview of Current Partner Companies
We focus our efforts on building and operating companies in two areas of
the B2B e-commerce market--market makers and infrastructure service providers.
Market Maker Categories
Market makers may operate in particular industries, such as chemicals,
food or auto parts, or may sell goods and services across multiple industries.
Market makers must tailor their business models to match their markets. We
refer to market makers operating in a particular industry as vertical market
makers, and to market makers operating across multiple industries as horizontal
market makers. Examples of horizontal and vertical market makers are as
follows:
. Vertical. An example of one of our vertical market maker 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 an Internet-based
marketplace 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.
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. Horizontal. One example of our horizontal market maker partner
companies is VerticalNet. As of November 15, 1999, VerticalNet
owned and operated over 50 industry-specific Web sites designed to
act as online B2B communities. These trade communities act as
comprehensive sources of information, interaction and e-commerce.
Market Maker Profiles
Table of Market Makers. The partner companies listed below are integral
to our goal of owning numerous interests in vertical and horizontal market
makers that are strategically complementary to each other. 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 November 18, 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.
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
------------------------ ------------------ ------------------------ ---------- -------
<C> <C> <S> <C> <C>
Vertical:
AgProducer Network, Inc. Agriculture Developing a system to 75% 1999
provide an Internet-
based service for
agricultural producers
to purchase services and
inputs, as well as
market their grain crops
that include corn, wheat
and soybeans.
Animated Images, Inc. Apparel Provides Internet-based 37% 1999
www.appliedintranet.com design, communication,
and procurement services
for the apparel and sewn
goods industries.
Arbinet Communications, Telecommunications Provides an Internet- 16% 1999
Inc. based trading floor and
www.arbinet.com clearinghouse for
telecommunications
carriers to purchase
bandwidth.
AUTOVIA Corporation Auto Parts Developing a system to 15% 1998
www.autovia.net provide Internet-based
auto parts procurement
for professional
automotive and truck
repair shops.
Bidcom, Inc. Construction Provides Internet-based 25% 1999
www.bidcom.com project planning and
management services for
the construction
industry.
Collabria, Inc. Printing Provides Internet-based 12% 1999
www.collabria.com procurement and
production services for
the commercial printing
industry.
CommerX, Inc. Plastics Provides Internet-based 42% 1998
www.commerx.com procurement and sales of
raw materials, tools and
maintenance and repair
products for the
plastics industry.
ComputerJobs.com, Inc. Technology Provides Internet-based 33% 1998
www.computer jobs.com Employment job screening and resume
posting for information
technology
professionals,
corporations and
staffing firms.
CourtLink Legal Provides online access 33% 1999
www.courtlink.com to court documents.
Deja.com, Inc. Media Provides a Web-based 31% 1997
www.deja.com community for potential
purchasers to access
user comments on a
variety of products and
services.
e-Chemicals, Inc. Chemicals Provides Internet-based 36% 1998
www.e-chemicals.com sales and distribution
of industrial chemicals.
eMerge Interactive, Inc. Livestock Provides Internet-based 28% 1999
www.emergeinteractive content, community and
.com transaction services in
an online marketplace
for the cattle industry.
EmployeeLife.com Healthcare Provides Internet-based 52% 1999
www.employeelife.com solutions for employee
health benefits
management across the
health care industry.
</TABLE>
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
--------------------- --------------------- ------------------------ ---------- -------
<C> <C> <S> <C> <C>
Internet Commerce Food Provides Internet-based 43% 1999
Systems, Inc. product introduction and
www.icsfoodone.com promotion services to
wholesale and retail
food distributors.
iParts Electronic Components Provides Internet-based 85% 1999
www.ipartsupply.com sales and distribution
of electronic
components.
JusticeLink, Inc. Legal Provides electronic 37% 1999
www.justicelink.com filing, service and
retrieval of legal
documents and
information among
courts, attorneys, their
clients and other
interested parties.
PaperExchange.com LLC Paper Provides Internet-based 27% 1999
www.paperexchange sales and distribution
.com of all grades of pulp
and paper.
Plan Sponsor Asset Management Provides a Web-based 46% 1999
Exchange, Inc. community for asset
www.plansponsor managers to reach fund
exchange.com sponsors.
StarCite, Inc. Travel Provides Internet-based 43% 1999
www.starcite.com services for planning
and managing corporate
meetings for event
planners.
traffic.com, Inc. Transportation Provides real time 20% 1999
www.traffic.com and Logistics traffic monitoring for
logistics and
transportation
optimization.
Universal Access, Telecommunications Provides Internet-based 26% 1999
Inc. www.universal ordering for
accessinc.com provisioning and access
and transportation
exchange services for
network service
providers focused on
business customers.
Horizontal:
asseTrade.Com, Inc. Industrial Services Provides Internet-based 26% 1999
www.assetrade.com asset and inventory
recovery, disposal and
management solutions.
eMarketWorld, Inc. Special Event Provides industry 42% 1999
www.emarket Services specific Web-based
world.com conferences and
expositions that help
businesses understand
the Internet.
NetVendor Inc. Industrial Services Provides B2B, industry- 26% 1999
www.netvendor.com specific Internet
commerce solutions for
mid-size manufacturers
and distributors of
automotive, industrial
and electronic products.
ONVIA.com, Inc. Small Business Provides small 24% 1999
www.onvia.com Services businesses with a wide
breadth of tailored
products and services
over the Internet.
Residential Delivery Logistics Provides home delivery 38% 1999
Services, Inc. services to e-commerce
www.rdshome.com companies, retailers,
and catalog companies
through a branded
network of local agents.
VerticalNet, Inc. Industrial Services Provides industry- 35% 1996
www.verticalnet.com specific Web-based trade
communities for
businesses and
professionals.
</TABLE>
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Set forth below is a more detailed summary of some of our market maker
partner companies.
CommerX, Inc. CommerX is a vertical market maker that provides Internet-
based procurement and sales of raw materials, tools and maintenance and repair
products for the plastics industry. CommerX developed the PlasticsNet.com
("PlasticsNet") Web site in 1995 with the goal of establishing the first e-
commerce vertical marketplace for the plastics industry. CommerX provides this
service under the PlasticsNet brand name and develops the software to support
PlasticsNet.
PlasticsNet is a leading provider of e-commerce solutions for processors
and suppliers in the US plastics industry. Its vertical marketplace provides a
comprehensive platform for buyers and suppliers to streamline the sourcing and
procurement process for plastics products and services. The company's solutions
are designed to be a compelling and integral part of a plastics processor's
procurement and business processes while providing suppliers with cost-
effective, high-quality access to a large pool of buyers.
Our initial contact with CommerX came through our focus on the plastics
industry as a strong potential market for a market maker. We researched the
plastics industry and concluded, based upon the founding management and
business model, that CommerX was best positioned in the plastics market.
Kenneth A. Fox and Robert A. Pollan, two of our Managing Directors, are members
of CommerX's Board of Directors. We have assisted the founders in recruiting
key executives including the Chief Operating Officer, Chief Financial Officer,
Vice President of Sales and Vice President of Supplier Relations. In addition,
we have helped the company design their back office systems and assisted them
with various financial initiatives. CommerX is currently working on a strategic
partnership with CommerceQuest, another one of our partner companies. For 1998,
CommerX had revenue of $.5 million and for the nine months ended September 30,
1999, revenue of $.9 million.
ComputerJobs.com, Inc. ComputerJobs.com is a vertical 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
areas such as 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 nine months ended
September 30, 1999, revenue of $6.4 million.
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Deja.com, Inc. Deja.com, formerly Deja News, is a vertical market maker
that is the Web's leading source of shared knowledge in the form of user-
generated ratings and discussions. With over 160 million page views per month,
it is the leading purveyor of online discussion, offering access to more than
43,000 discussion forums. These forums are populated by knowledgeable
participants who are interested in sharing their knowledge and experience on a
wide variety of subjects.
Deja.com recently extended its franchise in shared knowledge with the
consumer-driven feature Deja Ratings, a tool that extends the site's ability to
support daily decision-making. Deja Ratings captures consumer opinions on a
wide range of products and services through a scaled voting system that
includes product comparisons. The analytical tools that support decision-making
are supplemented by contextual links to e-commerce retailers and vendors.
Deja.com derives revenue from sponsors and e-commerce partners, and
provides the marketing community with the compelling proposition of reaching a
highly targeted, self-segmenting audience consisting of highly active Internet
consumers intent on investigating considered purchases. Deja.com also delivers
to those marketers a unique means of programming to the specific interests of
their target consumers, all in the context of a commerce-friendly platform.
We have been very active in recruiting Deja.com's management team and
developing its business strategy. In addition, Kenneth A. Fox and Douglas A.
Alexander, two of our Managing Directors, are members of Deja.com's Board of
Directors. Deja.com is in discussions with several partner companies to provide
services to its user community. For 1998, Deja.com had revenue of $5.1 million,
and for the nine months ended September 30, 1999, revenue of $6.1 million.
eMerge Interactive, Inc. eMerge Interactive is a vertical market maker
that combines content, community and transaction services to create an online
marketplace for the cattle industry. eMerge Interactive believes that the
production chain of the cattle industry, which includes cattle producers,
feedlots, packers and suppliers, contains inefficiencies that reduce animal
health and value. These inefficiencies, which include excessive animal
transportation and handling, result in additional transaction costs and reduced
beef quality.
eMerge Interactive offers its comprehensive cattle solution through its
Internet-based information and transaction platform, its Web-enabled private
network and its direct sales force. eMerge Interactive's products and services
are designed to create an efficient market for the purchase and sale of cattle
and to improve quality and productivity in the cattle industry. eMerge
Interactive's family of integrated Web sites and Web-enabled private network
provide:
. livestock procurement services consisting of cattle sales and
auctions;
. customer-specific daily feedlot operations analysis, comparative
cattle industry analysis and benchmarking studies;
. cattle inventory management tools; and
. livestock health management and quality enhancement products.
We acquired our interest in eMerge Interactive in November, 1999 after
identifying it as a potential market leader in the e-commerce market for the
livestock industry. Douglas Alexander, one of our Managing Directors, and E.
Michael Forgash, one of our directors, are members of eMerge Interactive's
Board of Directors. For 1998, eMerge Interactive had revenue of $1.8 million,
and for the nine months ended September 30, 1999, revenue of $18.3 million.
ONVIA.com, Inc. ONVIA.com is a horizontal market maker that provides
products and services to small businesses over the Internet. ONVIA.com is a B2B
online operations center devoted to helping small
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businesses succeed. ONVIA.com provides small businesses with business products,
direct purchase and request for quote services, customer lead generation and
expert advice.
ONVIA.com was introduced to us through a member of our network. Kenneth
A. Fox, one of our Managing Directors, is a member of ONVIA.com's Board of
Directors. Alex W. Hart, a member of our Advisory Board, is a member of
ONVIA.com's Advisory Board. We have facilitated a partnership between ONVIA.com
and Bidcom, one of our other partner companies, helped design ONVIA.com's back
office systems, and our executive recruiting personnel recruited their Vice
President of Marketing. For 1998, ONVIA.com had revenue of $1 million, and for
the nine months ended September 30, 1999, had revenue of $13.2 million.
Universal Access, Inc. Universal Access is a vertical market maker that
is a Web-enabled business-to business intermediary that facilitates the
provisioning, installation and servicing of dedicated, point-to-point
communications circuits for service providers who buy network capacity, and
transport suppliers who sell network capacity. Universal Access aggregates
network information, manages facilities where communications networks can be
physically interconnected, provides ongoing dedicated circuit access and offers
client support services. Through these services, Universal Access provides its
clients with an outsourced, integrated solution to the challenges of the
fragmented network services market.
As an independent intermediary, Universal Access has been able to collect
and aggregate network information from multiple transport suppliers. Universal
Access' Web-enabled Universal Information Exchange, or UIX, consists of several
proprietary interrelated databases containing capacity, availability, location
and pricing information from transport suppliers and physical sites. Through
the UIX, Universal Access provides its clients with point-to-point network
connections efficiently and cost-effectively. In addition, Universal Access
operates network interconnection facilities called Universal Transport
Exchanges, of UTXs, where various transport suppliers can easily access the
network connections of any other transport supplier in that facility. Universal
Access also provides a single point of contact for network management services,
including network monitoring, maintenance and restoration.
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 nine months ended September 30, 1999,
revenue of $8.4 million.
VerticalNet, Inc. VerticalNet is a horizontal market maker that provides
industry-specific Web-based trade communities for businesses and professionals.
VerticalNet owns and operates over 50 industry-specific Web sites as of
November 15, 1999 designed as online B2B communities, known as vertical trade
communities. These vertical trade communities act as comprehensive sources of
information, interaction and e-commerce. VerticalNet's objective is to continue
to be a leading owner and operator of industry-specific vertical trade
communities on the Internet.
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.
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VerticalNet's vertical trade communities take advantage of the Internet's
ability to allow users around the world to contact each other online, allowing
buyers to research, source, contact and purchase from suppliers. Although other
companies offer B2B services on the Internet, VerticalNet believes that it is
currently the only company operating a portfolio of specialized B2B
communities. A portfolio strategy permits VerticalNet to:
. offer consistent content and services in its current vertical
trade communities and replicate these offerings as it launches new
communities;
. realize cost savings and operating efficiencies in its technology,
marketing, infrastructure and management resources; and
. increase its overall audience, making its individual sites more
appealing to a broad array of advertisers and suppliers who sell
their goods and services over the Internet.
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." In addition to its strategic alliance with
PaperExchange, VerticalNet has also 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 nine months ended September 30, 1999, revenue of
$10.7 million.
Infrastructure Service Provider Categories
Infrastructure service providers assist traditional businesses in the
following ways:
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing their e-
commerce strategies. Systems integrators develop and implement
technological infrastructure that enables e-commerce. Systems
integrators also integrate e-commerce applications with existing
enterprise applications. Strategic consultants and systems
integrators typically bill their clients on a project-by-project
basis.
. Software Providers. Software providers design and sell software
applications that support e-commerce and integrate business
functions. Software providers may sell or license their products.
. Outsourced Service Providers. Outsourced service providers offer
software applications, infrastructure and related services
designed to help traditional businesses reduce cost, improve
operational efficiency and decrease time to market. Outsourced
service providers may charge fees on a per-use or periodic basis.
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Infrastructure Service Provider Profiles
Table of Infrastructure Service Providers. The partner companies listed
below are important to our strategy because the growth of our partner companies
increases the value of our collaborative network. We believe that
infrastructure service providers will facilitate innovation and growth of our
market maker companies by providing them with critical services. The table
shows certain information regarding our infrastructure service provider partner
companies by category as of November 18, 1999. Our ownership positions have
been calculated based on the issued and outstanding common stock of each
partner company, assuming the issuance of common stock on the conversion or
exercise of preferred stock and convertible notes, but excluding the effect of
options and warrants.
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
------------------------------- ------------------------ ---------- -------
<C> <S> <C> <C>
Strategic Consulting and
Systems Integration:
Benchmarking Partners, Inc. Provides e-commerce best 13% 1996
www.benchmarking.com practices research and
consulting services to
maximize return on
investment from
demand/supply chain and
e-business initiatives.
Context Integration, Inc. Provides systems 18% 1997
www.context.com integration services
focused on customer
support, data access and
e-commerce.
US Interactive, Inc. Provides a range of 3% 1996
www.usinteractive.com consulting and technical
services relating to
Internet marketing
solutions.
Software Providers:
Blackboard Inc. Provides universities 30% 1998
www.blackboard.com and corporations with
applications that enable
them to host classes and
training on the
Internet.
ClearCommerce Corp. Provides comprehensive 15% 1997
www.clearcommerce.com e-commerce solutions
including transaction
and payment processing,
credit card
authorization, fraud
tracking and reporting
functions.
Entegrity Solutions Corporation Provides encryption 12% 1996
www.entegrity.com software to secure
transactions and
communications between
business applications.
Servicesoft Technologies, Inc. Provides tools and 6% 1998
www.servicesoft.com services used by its
customers to create
Internet customer
service applications
consisting of self-
service, e-mail response
and live interaction
products.
Syncra Software, Inc. Provides software that 35% 1998
www.syncra.com improves supply chain
efficiency through
collaboration of trading
partners over the
Internet.
TRADEX Technologies, Inc. Provides e-commerce 10% 1999
www.tradex.com application software
that enables enterprises
to create on-line
marketplaces and
exchanges.
Outsourced Service Providers:
Breakaway Solutions, Inc. Provides application 41% 1999
www.breakaway.com service hosting, e-
commerce consulting and
systems integration
services to growing
companies.
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</TABLE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
-------------------------- ---------------------------- ---------- -------
<C> <S> <C> <C>
CommerceQuest, Inc. Provides a messaging service 29% 1998
www.commercequest.com 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.
LinkShare Corporation Establishes affiliate 34% 1998
www.linkshare.com relationships for online
merchants with other Web
sites to facilitate e-
commerce.
PrivaSeek, Inc. Provides consumers with 16% 1998
www.privaseek.com control of their Web-based
personal profiles, allowing
merchants to offer consumers
incentives for selective
disclosure.
Purchasing Solutions, Inc. Provides strategic sourcing 60% 1999
consulting and on-line
Internet purchasing.
SageMaker, Inc. Provides services that 27% 1998
www.sagemaker.com combine an enterprise's
external and internal
information assets into a
single, Web-based knowledge
management platform.
Sky Alland Marketing, Inc. Provides services to improve 31% 1996
www.skyalland.com customer communications and
relationships.
United Messaging, Inc. Provides high performance 41% 1999
www.unitedmessaging.com electronic messaging
services for organizations
with mission critical e-mail
networks.
VitalTone Inc. Provides integrated 21% 1999
www.vitaltone.com application service provider
services to middle market
companies.
Vivant! Corporation Provides process automation 23% 1998
www.vivantcorp.com and decision support
services that enable
companies to strategically
manage contractors,
consultants and temporary
employees.
</TABLE>
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 research
and consulting company that provides e-commerce best practices research and
consulting services to maximize return on investment from demand/supply chain
and e-business initiatives. The use of best business practices enabled by
information technology established by Benchmarking Partners allows companies to
efficiently manage their e-business initiatives. Benchmarking Partners improves
supply and distribution networks in the following ways:
. Integration. Coordinating diverse business functions such as
manufacturing, logistics, sales and marketing to maximize
efficiency.
. Optimization. Developing strategies that increase the efficiency
of supply networks.
. Collaboration. Creating collaborative solutions that incorporate
key trading partners.
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Benchmarking Partners' clients include: companies undergoing business 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 $15.9 million, and for the nine months ended September
30, 1999, revenue of $14.6 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. This year Breakaway
Solutions became a public company, trading on the Nasdaq National Market under
the symbol "BWAY." Including the effect of options and warrants, our ownership
percentage in Breakaway Solutions is approximately 41%. For 1998, Breakaway
Solutions had revenue of $10 million, and for the nine months ended September
30, 1999, revenue of $14.8 million.
CommerceQuest, Inc. CommerceQuest is an outsourced service provider of
B2B infrastructure solutions for mission-critical e-business applications. The
company provides infrastructure solutions to leading global companies and
Internet market makers that need to exchange business-critical information
across geographically and technologically diverse boundaries. CommerceQuest
currently employs 300 professionals, and the company has extensive experience
in software and systems integration, and building solutions around IBM
Corporation's MQSeries messaging middleware.
At the core of CommerceQuest's portfolio is enableNet, an outsourced
managed service designed to provide trusted B2B integration over the Internet.
enableNet is augmented by industry-leading software products and professional
services designed to provide maximum flexibility of integration options.
enableNet is a network independent service that allows businesses to exploit
the Internet, or their choice of network, to exchange business-critical
information with business partners and customers. enableNet delivers security,
reliability and manageability to the Internet making it an industrial-strength,
cost-effective alternative to traditional value-added networks. enableNet
contributes the capability to bridge Web-based processes with legacy or
traditional EDI services. The service also allows organizations to reliably and
securely exchange any form of operational data internally or with business
partners via the Internet or other networks. In addition, enableNet provides
end-to-end integration capability, which provides message delivery across
multiple systems, such as applications, databases, clients, or servers, even
when using a wide range of networks and protocols.
We believe that the services and software provided by CommerceQuest can
be used throughout our partner company network, including our market makers
interested in tight integration with their suppliers and
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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 revenues of $31.1 million, and for the nine months
ended September 30, 1999 had revenue of $13.6 million.
Government Regulations and Legal Uncertainties
As of November 15, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and the quality of goods and services. The enactment of
any additional laws or regulations may impede the growth of the Internet and
B2B e-commerce, which could decrease the revenue of our partner companies and
place additional financial burdens on them.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our partner companies, they
add to the legal and regulatory burden faced by B2B e-commerce companies. Other
specific areas of legislative activity are:
. Taxes. Congress recently enacted a three-year moratorium, ending
on October 21, 2001, on the application of "discriminatory" or
"special" taxes by the states on Internet access or on products
and services delivered over the Internet. Congress further
declared that there will be no federal taxes on e-commerce until
the end of the moratorium. However, this moratorium does not
prevent states from taxing activities or goods and services that
the states would otherwise have the power to tax. Furthermore, the
moratorium does not apply to certain state taxes that were in
place before the moratorium was enacted.
. Online Privacy. Both Congress and the Federal Trade Commission are
considering regulating the extent to which companies should be
able to use and disclose information they obtain online from
consumers. If any regulations are enacted, B2B e-commerce
companies may find certain marketing activities restricted. The
Federal Trade Commission has issued regulations enforcing the
Children's Online Privacy Protection Act, which take effect on
April 21, 2000. These regulations make it illegal to collect
information online from children under the age of 13 without first
obtaining parental consent. These regulations also require Web
site operators to allow parents to inspect and remove their
children's information from any database. Compliance with these
regulations could pose a significant administrative burden for Web
site operators whose products and services are targeted to
children or may be attractive to children. 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 European Union to provide
exemptions from the European Union regulations, but the outcome of
these negotiations is uncertain.
. 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
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other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to
regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much the
same manner as telephone services, which could slow the deployment
of broadband Internet access services. Because of these
proceedings or others, new laws or regulations could be enacted
which could burden the companies that provide the infrastructure
on which the Internet is based, thereby slowing the rapid
expansion of the medium and its availability to new users.
. Other Regulations. The growth of the Internet and e-commerce may
lead to the enactment of more stringent consumer protection laws.
The Federal Trade Commission may use its existing jurisdiction to
police e-commerce activities, and it is possible that the Federal
Trade Commission will seek authority from Congress to regulate
certain online activities.
Generally applicable laws may affect us and our partner companies. The
exact applicability of many of these laws to B2B e-commerce, however, is
uncertain.
Proprietary Rights
Our partner companies have copyrights with respect to software
applications, Web sites and other materials. These materials may constitute an
important part of our partner companies' assets and competitive strengths.
Federal law generally protects such copyrights for 90 years from the creation
of the underlying material.
Competition
Competition From our Shareholders and Within our Network
We may compete with our shareholders and partner companies for Internet-
related opportunities. After this offering, Comcast Corporation, and Safeguard
Scientifics, Inc. will own 9.4% and 14.0% of our outstanding common stock,
respectively, based on the number of shares held by each of them on November
15, 1999. These shareholders may compete with us to acquire interests in B2B
e-commerce companies. Comcast Corporation and Safeguard Scientifics currently
each have a designee as a member of our board of directors and IBM Corporation
has a right to designate a board observer, which may give these companies
access to our business plan and knowledge about potential acquisitions. In
addition, we may compete with our partner companies to acquire interests in
B2B e-commerce companies, and our partner companies may compete with each
other for acquisitions or other B2B e-commerce opportunities. In particular,
VerticalNet seeks to expand, in part through acquisition, its number of B2B
communities. VerticalNet, therefore, may seek to acquire companies that we
would find attractive. While we may partner with VerticalNet on future
acquisitions, we have no current contractual obligations to do so. We do not
have any contracts or other understandings with our shareholders or partner
companies that would govern the resolution of these potential conflicts. Such
competition, and the complications posed by the designated directors, may
deter companies from partnering with us and may limit our business
opportunities.
Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, we expect that competition will intensify. Barriers
to entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a
customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
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. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain a
critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our partner companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail.
Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives.
Competition for Partner Companies
We face competition from other capital providers including publicly-
traded Internet companies, venture capital companies and large corporations.
Many of these competitors have greater financial resources and brand name
recognition than we do. These competitors may limit our opportunity to acquire
interests in new partner companies. If we cannot acquire interests in
attractive companies, our strategy to build a collaborative network of partner
companies may not succeed.
Facilities
Our corporate headquarters are located at 435 Devon Park Drive, Building
800 in an office facility located in Wayne, Pennsylvania, where we lease
approximately 3,650 square feet. We plan to move into a larger corporate
headquarters in Wayne, Pennsylvania during the first half of 2000. We also
maintain offices in San Francisco, California; Boston, Massachusetts; Seattle,
Washington; and London, England.
Employees
As of November 15, 1999, excluding our partner companies, we had 61
employees, 60 of whom work with us on a full-time basis. We consider our
relationships with our employees to be good. None of our employees are covered
by collective bargaining agreements.
Legal Matters
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
Our executive officers, key employees and directors, their ages and
their positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Walter W. Buckley, III 39 President, Chief Executive Officer and Director
Douglas A. Alexander 38 Managing Director, East Coast Operations
Matthias Allgaier 33 Managing Director, European Operations
Richard G. Bunker, Jr. 38 Managing Director and Chief Technology Officer
Richard S. Devine 41 Managing Director, Executive Recruiting
Stephen Duckett 32 Managing Director, European Operations
Kenneth A. Fox 29 Managing Director, West Coast Operations and Director
David D. Gathman 52 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 31 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 39 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) 66 Director
E. Michael Forgash (2) 41 Director
Thomas P. Gerrity (1) 58 Director
Peter A. Solvik(1) 40 Director
</TABLE>
- --------
(1) Member of the compensation committee
(2) Member of the audit committee
Walter W. Buckley, III, is a co-founder and has served as our President
and Chief Executive Officer and as one of our directors since March 1996.
Prior to co-founding us, Mr. Buckley worked for Safeguard Scientifics, Inc. as
Vice President of Acquisitions from 1991 to February 1996. Mr. Buckley
directed many of Safeguard Scientifics' investments and was responsible for
developing and executing Safeguard Scientifics' multimedia and Internet
investment strategies. Mr. Buckley serves as a director of Breakaway
Solutions, Inc., e-Chemicals, Inc., PrivaSeek, Inc., Sky Alland Marketing,
Inc., Syncra Software, Inc., VerticalNet, Inc. and Who?Vision Systems, Inc.
Douglas A. Alexander has served as one of our Managing Directors since
September 1997. Prior to joining us, Mr. Alexander co-founded Reality Online,
Inc. in 1986 and sold it to Reuters Group in 1994. Mr. Alexander continued to
serve as President and Chief Executive Officer of Reality Online after its
acquisition by Reuters Group until September 1997 and was a key contributor to
Reuters' Internet initiatives. Mr. Alexander is Chairman of the Board of
VerticalNet, Inc. and serves as a director of Arbinet Communications, Inc.,
Blackboard Inc., ComputerJobs.com, Inc., Deja.com, Inc., eMerge Interactive,
Inc., LinkShare Corporation, SageMaker, Inc., StarCite, Inc. and traffic.com,
Inc.
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Matthias Allgaier has served as one of our Managing Directors of our
European operations since November 1999. Prior to joining us, Mr. Allgaier was
an Assistant Director at Apax Partners since 1997. In this capacity, Mr.
Allgaier headed the software and services divisions of Apax Partners'
Information Technology group and was responsible for generation and execution
of acquisitions. Prior to this Mr. Allgaier was associated with Broadview
Associates since 1994, where he worked on a variety of acquisitions.
Richard G. Bunker, Jr. 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 market leading builder and
host of online securities trading and account inquiry Web sites, and provider
of market data to the online securities industry. He also served as Senior Vice
President and Chief Information Officer of SEI Investments from January 1994 to
March 1996, and Vice President of the investment management and trading
technology group at State Street Global Advisors from October 1992 to January
1994.
Richard S. Devine has served as our Managing Director of Executive
Recruiting since June 1999. Prior to joining us, Mr. Devine was a Partner at
Heidrick & Struggles, and a member of its International Technology Practice
from October 1997 to June 1999. In this capacity, Mr. Devine led the search for
many high profile executive positions including the Chief Executive Officer of
Global Crossing, President of Transport, a joint venture between Microsoft
Corporation and First Data Corporation, Senior Vice President of Worldwide
Operations at Apple Computer Corporation, Vice President of Customer Service at
Amazon.com, Chief Financial Officer and Chief Information Officer at Remedy
Corporation and General Manager of the Americas, General Manager of Services
and Vice President of International at Siebel Systems. Mr. Devine also served
as President and Chief Executive Officer of KidSoft LLC from March 1992 to
February 1997.
Stephen Duckett has served as one of our Managing Directors of our
European operations since November 1999. For the past five years, Mr. Duckett
was associated with Apax Partners where he generated and executed acquisitions,
managed ownership interests, and helped to establish an Internet group.
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 AUTOVIA
Corporation, Bidcom, Inc., CommerX, Inc., Deja.com, Inc., Entegrity Solutions
Corporation, ONVIA.com, Inc. and Vivant! Corporation.
David D. Gathman has served as our Chief Financial Officer and Treasurer
since January 1999. Prior to joining us, Mr. Gathman was Chief Financial
Officer and Executive Vice President, Finance and Administration of Integrated
Systems Consulting Group, Inc. from January 1997 through its merger with First
Consulting Group, Inc. in December 1998. He also served as Chief Operating
Officer, Vice President, Secretary and Assistant Treasurer of Integrated
Systems Consulting Group, Inc. from April 1994 to December 1998 and as a
director of the company. Mr. Gathman brings to us over 30 years of finance-
related experience, the last 16 of which were focused in the information
technology industry.
Christopher H. Greendale has served as one of our Managing Directors
since July 1999 and was one of our Senior Partners of Operations from January
1999 to July 1999. Prior to joining us, Mr. Greendale served as an independent
management consultant from January 1998 to December 1998. Prior to becoming a
consultant, Mr. Greendale served as Executive Vice President of Cambridge
Technology Partners, a company he co-founded in 1991. Cambridge Technology
Partners is a systems integrator that initiated fixed price, fixed
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time, rapid systems development. Mr. Greendale has extensive experience in
sales and marketing, and general management in the information technology
industry.
Gregory W. Haskell has served as one of our Managing Directors of
Operations since June 1999. Prior to joining us, Mr. Haskell served from
January 1994 to June 1999 as President and Chief Operating Officer of XL
Vision, Inc., a business and technology incubator that builds companies and
spins them out into stand alone public companies. During his tenure at XL
Vision, Mr. Haskell co-founded four technology-based spinout companies. Mr.
Haskell serves as a director of AgProducer Network, Inc., asseTrade.com, Inc.,
Axcess, Inc., ComputerJobs.com, Inc., e-Chemicals, Inc., Integrated Visions,
Inc., PaperExchange.com LLC and XL Vision, Inc.
Todd G. Hewlin has served as our Managing Director of Corporate Strategy
and Research since July 1999. Prior to joining us, Mr. Hewlin served as a
Partner with McKinsey & Company, a global management consultancy, and has held
various positions with McKinsey & Company from September 1993 to June 1999.
During that time, Mr. Hewlin led technology-intensive strategy projects for
leading organizations in North America and Europe. Mr. Hewlin's clients have
included world-class technology companies, an Internet bank, a global satellite
telephony startup, and a range of traditional companies assessing the impact of
the Internet. From December 1998 to June 1999, Mr. Hewlin co-led McKinsey's
Global Electronic Commerce practice.
Victor S. Hwang has served as one of our Managing Directors of
Acquisitions since March 1999. Prior to joining us, Mr. Hwang served from
January 1999 to March 1999 as a General Partner of Softbank Holdings,
responsible for developing an investment fund targeting late-stage private
Internet companies. From August 1995 to January 1999, Mr. Hwang also served as
an investment banker at Goldman, Sachs & Co., where he was involved in numerous
financing and merger transactions for a broad range of Internet, software,
semiconductor, communications and hardware companies. While at Goldman, Sachs &
Co., Mr. Hwang's clients included eBay, GeoCities and Yahoo!. Mr. Hwang
obtained a Masters of Business Administration from the Graduate Business School
of Stanford University where he was in attendance from September 1993 to June
1995.
Sam Jadallah has served as one of our Managing Directors of Operations
since July 1999. Prior to joining us, Mr. Jadallah served as a Microsoft Vice
President of Worldwide Enterprise Sales from June 1996 to July 1999 where he
was responsible for leading sales efforts to business and academic customers.
Prior to holding this position, Mr. Jadallah served as Manager of Worldwide
Business Strategy reporting to Steve Ballmer, President of Microsoft. Mr.
Jadallah also served as General Manager of Corporate and Developer Support and
served as District Manager leading Microsoft sales to the US Department of
Defense from 1990 to 1992. Mr. Jadallah held various other sales, management
and technical positions since joining Microsoft in 1987.
Mark J. Lotke has served as one of our Managing Directors of Acquisitions
since June 1999. Prior to joining us, Mr. Lotke served from August 1997 to May
1999 as an Associate and from July 1993 to August 1997 as a Junior Associate at
General Atlantic Partners, a private equity firm focused on investing in global
information technology companies. While at General Atlantic Partners, Mr. Lotke
was involved in numerous private equity transactions across a wide range of
Internet, software, and services companies, including E*Trade, Priceline.com,
Inc., LHS Group, Inc., Envoy Corporation, NewSub Services, Inc., and Predictive
Systems. Prior to joining General Atlantic Partners, Mr. Lotke served as a
strategy consultant at Corporate Decisions, Inc. Mr. Lotke obtained a Masters
of Business Administration from the Graduate Business School of Stanford
University where he was in attendance from September 1995 to June 1997. Mr.
Lotke serves as a director of Animated Images, Inc. and Residential Delivery
Services, Inc.
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. Mr. Nassau serves as a director of
The Albert Abela Corporation, Bliley Electric Company, JusticeLink, Inc. and
Data West Corporation which does business as CourtLink.
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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., EmployeeLife.com, Internet Commerce
Systems, Inc., iParts, Purchasing Solutions, Inc., United Messaging, Inc. and
Universal Access, Inc.
Sherri L. Wolf has served as our Managing Director of Investor Relations
since May 1999. Prior to joining us, Ms. Wolf served as a Vice President in
equity research at Adams, Harkness & Hill, an investment banking firm, from
September 1994 to May 1999. While with Adams, Harkness & Hill, Ms. Wolf focused
on the Internet and the information technology services sectors and covered
such companies as CMG Information Services, Inc., Safeguard Scientifics, Inc.,
Lycos and Forrester Research. Ms. Wolf obtained a Masters of Science from the
Massachusetts Institute of Technology's Sloan School of Management where she
was in attendance from September 1992 to June 1994.
Michael H. Forster has served as one of our Senior Partners of Operations
since June, 1998. Before joining us, Mr. Forster served as Senior Vice
President of Worldwide Field Operations for Sybase, Inc. from April 1996 to
March 1999. Prior to this position with the company, Mr. Forster was Sybase's
Senior Vice President and President of the company's Information Connection
Division from April 1994 to March 1996. Mr. Forster has over 30 years of sales,
marketing and general management experience in the information technology
industry. Mr. Forster serves as a director of SageMaker, Inc., Syncra Software,
Inc., and Tangram Enterprise Solutions.
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, Masterpack
International, Inc., MultiGen-Paradigm, Inc., Naviant Technology Solutions,
Inc., Sunsource, 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., the RBB Fund, Inc. and Chief Executive
Officer of Comcast Interactive Capital Group L.P.
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,
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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 eMerge Interactive, Inc., Integrated Visions,
Inc., US Interactive, Inc., Who? Vision Systems, Inc., and 4anything.com, Inc.
Dr. Thomas P. Gerrity has served as one of our directors since December
1998. Dr. Gerrity also served as the Dean of The Wharton School of the
University of Pennsylvania from July 1990 to June 1999. He is currently
Professor and Director of the Wharton School Electronic Commerce Forum. Dr.
Gerrity also serves as a director of CVS Corporation, Fannie Mae, Fiserv, Inc.,
Ikon Office Solutions, Inc., Knight-Ridder, Inc., Reliance Group Holdings,
Inc., Sunoco, Inc. and a trustee of MAS Funds.
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 serves as a director of Asera Inc., Cohera Corp. and Context
Integration, 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., where he was in charge of ZDNet, ZDTV, Ziff-Davis' Internet
Publications, and Ziff-Davis, Inc.'s investments. 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 a director of drkoop.com, Inc., GiveMeTalk.com, Inc.,
Jupiter Communications, Inc., SuperGroups, Inc., VerticalNet, Inc. and ZDTV,
Inc.
Alex W. "Pete" Hart has served on our Advisory Board since March 1998.
Mr. Hart is a consultant in consumer financial services specializing in
emerging payment and distribution systems. Mr. Hart has served in numerous
positions, including Chief Executive Officer, of Advanta Corporation from March
1994 to October 1997. Prior to joining Advanta Corporation, Mr. Hart served as
President and Chief Executive Officer of MasterCard International. Mr. Hart
serves as a director of Sanchez Computer Associates, Who?Vision Systems,
4anything.com, HNC Software, Integrated Vision and Destiny Systems and on the
advisory board of ONVIA.com, Inc. and Qpass.
Ron Hovsepian has served on our Advisory Board since April 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
serves as a director of Ann Taylor.
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 Peppers and Rogers Group/Marketing 1
to 1 since 1994. Peppers and Rogers Group/Marketing 1 to 1 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.
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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 that sends invitations and
manages RSVPs for events and Nowonder, Inc., a privately-held start-up that
matches people who have technical support questions with experts who can answer
them.
Gary C. Wendt has served on our Advisory Board since May 1999. Mr. Wendt
served as President, Chairman and Chief Executive Officer of General Electric
Capital Services, Inc. from 1986 to 1998. During Mr. Wendt's tenure as leader
of General Electric Capital Services, the company became General Electric
Corporation's largest business sector. Mr. Wendt serves as a director of iXL
Enterprises, Inc., Sanchez Computer Associates, Inc. and LAPA Lineas Aereas
Privadas Argentinas S.A.
Sales and Marketing Guidance
Rowland Hanson has served on our Advisory Board September 1996. Mr.
Hanson is founder and President of C. Rowland Hanson & Associates which
provides strategic planning, marketing and communications to a variety of
software companies. Mr. Hanson has also been involved in the founding,
development and sale or merger of several software companies. Prior to founding
C. Rowland Hanson & Associates, Mr. Hanson served as Vice President of
Corporate Communications at Microsoft Corporation, where he is credited with
developing and executing the company's original branding strategy. Mr. Hanson
serves as a director of Webforia and Sequel Technology.
Tom Kippola has served on our Advisory Board since February 1997. Mr.
Kippola is the Managing Partner of The Chasm Group, which provides market
strategy consulting and training and speaking services for start-up, growing
and established information technology companies. Prior to his consulting
career, Mr. Kippola was director of marketing for a service automation software
vendor. Mr. Kippola has co-authored a book entitled "The Gorilla Game: An
Investor's Guide to Picking Winners in High Technology." Mr. Kippola serves as
a director of Whisper Communications, Inc. and The EC Company. In addition, Mr.
Kippola is an advisory board member of eCustomers.com, Rubric, RTMS, Inc. and
Voyager Capital.
Geoffrey A. Moore has served on our Advisory Board since February 1997.
Mr. Moore is Chairman of the Board and founder of The Chasm Group, where he
continues to provide market development and business strategy services to many
leading high-technology companies. He is also a venture partner with Mohr
Davidow Ventures where he provides market strategy advice to the high-tech
portfolio companies. Prior to founding The Chasm Group, Mr. Moore was a
principal and partner at Regis McKenna, Inc., a leading high-tech marketing
strategy and communications company. Mr. Moore serves as a director of many
companies, including Documentation Inc. and Objectivity, Inc.
John A. Miller, Jr. has served on our Advisory Board since July 1996. Mr.
Miller has served as President and Chief Executive Officer of Miller Consulting
Group since founding the company in 1996. Miller Consulting Group is a
strategy-driven public relations firm that integrates market positioning with
tactical public relations for emerging information technology companies. Prior
to founding the Miller Consulting
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Group, Mr. Miller founded Miller Communications, a leader in the field of high
technology public relations, which advised Compaq Computer Corporation, Lotus
Corporation and more than 100 other emerging information technology firms
throughout the 1980s.
Don Peppers has served on our Advisory Board since August 1996. Mr.
Peppers is a founding partner at Pepper and Rogers Group/Marketing 1 to 1, 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 is President and CEO of Naviant, Inc. Naviant is
focused on providing information enabling marketers to precisely target their
customers and prospects in both the physical and on-line worlds. 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. Dr. Stryker is a director of 24/7 Media (TFSM) and Sky Alland
Marketing, Inc.
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(R), Diet Coke(R),
Fruitopia(R) and the New Coke initiative. Since leaving Coca-Cola, Mr. Zyman
has also authored a book entitled "The End of Marketing As We Know It." Mr.
Zyman serves as a director of Gap, Inc., Netcentives, Inc. and VC Television
Network Corp.
Information Technology Management Guidance
K.B. Chandrasekhar has served on our Advisory Board since April 1999. Mr.
Chandrasekhar is Chairman of the Board of Exodus Communications, a company he
co-founded in 1994. Exodus Communications is a leading server hosting company
for Internet sites. Since establishing its first Internet data center in 1996,
Exodus Communications has expanded to nine cities with more than 1,000
employees and 1,000 customers. Prior to co-founding Exodus Communications, Mr.
Chandrasekhar founded Fouress, Inc., a network software design and development
firm. Mr. Chandrasekhar founded VitalTone, one of our partner companies.
Esther Dyson has served on our Advisory Board since May 1996. Ms. Dyson
is Chairman of EDventure Holdings, Inc. EDventure Holdings is a company focused
on emerging technologies worldwide, and on the computer markets of the United
States and 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, Graphisoft, PRT Group, Inc., Languageware, Medscape Inc., Thinking
Tools and WPP Group. 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
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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 match the evolving needs of our partner companies.
Classes of the Board
Our Board of Directors is divided into three classes that serve staggered
three-year terms as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- --------------------------------
<C> <C> <S>
Class I 2000 Messrs. Brodsky and Forgash
Class II 2001 Messrs. Keith and Solvik
Class III 2002 Messrs. Buckley, Fox and Gerrity
</TABLE>
Board Committees
The compensation committee reviews and makes recommendations to the Board
regarding the compensation to be provided to our Chief Executive Officer and
our directors. In addition, the compensation committee reviews compensation
arrangements for our other executive officers. The compensation committee also
administers our equity compensation plans. The current members of the
compensation committee are Messrs. Gerrity, Keith and Solvik.
The audit committee reviews and monitors our corporate financial
reporting, external audits, internal control functions and compliance with laws
and regulations that could have a significant effect on our financial condition
or results of operations. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Messrs. Brodsky and Forgash.
Director Compensation and Other Arrangements
We do not pay cash compensation to our directors; however they are
reimbursed for the expenses they incur in attending meetings of the board or
board committees. Non-employee directors are eligible to receive options to
purchase common stock awarded under our 1999 Equity Compensation Plan. See
"Employee Benefit Plans--Internet Capital Group, Inc. 1999 Equity Compensation
Plan--Non-Employee Director Option Grants," below.
IBM Corporation has designated James Corgel as an observer to our board of
directors.
Compensation Committee Interlocks and Insider Participation
Our compensation committee makes 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.
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Executive Compensation
The following table provides certain summary information concerning the
compensation earned by our chief executive officer and the other executive
officers employed by us during the fiscal year ended December 31, 1998. Since
January 1, 1999, we have employed fourteen additional executive officers--
Messrs. Allgaier, Bunker, Devine, Duckett, Gathman, Greendale, Haskell, Hewlin,
Hwang, Jadallah, Lotke, Nassau, Nickolas and Ms. Wolf--each of whom are
expected to receive more than $100,000 in compensation in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Shares
Other Underlying
Name and Principal Position Salary Bonus Compensation (1) Options
- --------------------------- -------- ------- ---------------- ------------
<S> <C> <C> <C> <C>
Walter W. Buckley, III
President and Chief Executive
Officer........................ $159,769 $96,000 -- 2,600,000
Douglas A. Alexander
Managing Director, East Coast
Operations..................... 225,000 100,000 -- 2,500,000
Kenneth A. Fox
Managing Director, West Coast
Operations..................... 119,538 75,000 -- 2,500,000
Robert A. Pollan
Managing Director, Operations... 133,808 50,000 -- 2,500,000
</TABLE>
- --------
(1) The value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for any officer
in the table above the lesser of either $50,000 or 10.0% 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
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term (3)
Options Employees in Price per Expiration -----------------------
Name Granted (1) 1998 Share (2) Date 5% 10%
---- ----------- ------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. 2,600,000 22% $1.00 Dec. 18, 2008 $22,810,756 $37,862,382
Douglas A. Alexander.... 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
Kenneth A. Fox.......... 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
Robert A. Pollan........ 2,500,000 21% 1.00 Dec. 18, 2008 21,933,419 36,406,137
</TABLE>
- --------
(1) All options granted to employees are immediately exercisable, are
nonqualified stock options and generally vest over five years at the rate
of 20.0% of the shares subject to the option per year. Unvested shares are
subject to a right of repurchase upon termination of employment. Options
expire ten years from the date of grant.
(2) We granted options at an exercise price equal to the fair market value of
our common stock on the date of grant, as determined by our Board of
Directors.
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(3) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5.0% and 10.0%
compounded annually from the date the respective options were granted to
their expiration dates, based upon the initial public offering price of
$6.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
The following table sets forth certain information concerning option
exercises by each of the officers named in the above summary compensation
table.
Year-End December 31, 1998 Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying in-the-Money
Unexercised Options at Fiscal Options at Fiscal
Shares Year-End Year-End (1)
Acquired on Value ------------------------------------ -------------------------
Name Exercise (#) Realized ($) Exercisable (2) Unexercisable Exercisable Unexercisable
---- ------------ ------------ ------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. -- -- 2,600,000 -- $13,000,000 --
Douglas A. Alexander.... -- -- 2,500,000 -- 12,500,000 --
Kenneth A. Fox.......... -- -- 2,500,000 -- 12,500,000 --
Robert A. Pollan........ -- -- 2,500,000 -- 12,500,000 --
</TABLE>
- --------
(1) Based on the initial public offering price of $6.00 per share, less the
exercise price, multiplied by the number of shares underlying the option,
adjusted for our two for one stock split.
(2) All the options listed were exercised in May 1999.
Employee Benefit Plans
Membership Profit Interest Plan
In 1996, the board of managers of Internet Capital Group, L.L.C. approved
the Membership Profit Interest Plan, which we refer to as our restricted stock
issuances after the Reorganization. Under the terms of the Membership Profit
Interest Plan, certain employees, consultants and advisors who are designated
by Messrs. Buckley and Fox received grants of units of membership interest in
Internet Capital Group, L.L.C. These units of membership interest cannot be
transferred until the rights of the holder in the units vest. Twenty percent of
each of these holder's units of membership interest vest each year over a five
year period beginning on the vesting date established by our board. If any
holder's relationship with us is terminated, his or her units of membership
interest that have not vested are forfeited to us.
Following the Reorganization, all outstanding grants became grants under
our new Membership Profit Interest Plan. As of December 31, 1998 a total of
13,567,250 shares of common stock have been issued under the Membership Profit
Interest Plan, all of which were outstanding, leaving no shares available for
grant at a later date. Our board of directors has the power, subject to the
limitations contained in the Membership Profit Interest Plan, to prescribe the
terms and conditions of any award granted under the Membership Profit Interest
Plan, including the total number of shares awarded to each grantee and any
applicable vesting schedule.
Internet Capital Group, Inc. 1999 Equity Compensation Plan
Our 1998 Equity Compensation Plan and our Managers' Option Plan were
approved by the board of managers of Internet Capital Group, L.L.C. on October
13, 1998. 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. After the
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Reorganization, we converted the 1998 Equity Compensation Plan and the
Managers' Option Plan into our 1999 Equity Compensation Plan. Our 1999 Equity
Compensation Plan provides that options and any other grants outstanding under
the 1998 Equity Compensation Plan and Managers' Option Plan will be considered
options issued under the 1999 Equity Compensation Plan.
We have adopted the Internet Capital Group, Inc. 1999 Equity Compensation
Plan, as amended and restated, effective as of February 2, 1999. The terms and
provisions of the 1999 Equity Compensation Plan are summarized below. This
summary, however, does not purport to be a complete description of the Equity
Compensation and is qualified in its entirety by the terms of the 1999 Equity
Compensation Plan.
Purpose. The purpose of the 1999 Equity Compensation Plan is to provide:
. designated employees of Internet Capital Group and its
subsidiaries;
. certain advisors who perform services for Internet Capital Group
or its subsidiaries; and
. non-employee members of our board of directors,
with the opportunity to receive grants of incentive stock options, non-
qualified options, share appreciation rights, restricted shares, performance
shares, dividend equivalent rights and cash awards. We believe that the 1999
Equity Compensation Plan will encourage the participants to contribute
materially to our growth and will align the economic interests of the
participants with those of our shareholders.
General. Subject to adjustment as described below, the plan authorizes
awards to participants of up to 42,000,000 shares of our common stock. No more
than 6,000,000 shares in the aggregate may be granted to any individual in any
calendar year. Such shares may be authorized but unissued shares of our common
stock or may be shares that we have reacquired, including shares we purchase on
the open market. If any options or stock appreciation rights granted under the
plan expire or are terminated for any reason without being exercised, or
restricted shares or performance shares are forfeited, the shares of common
stock underlying that award will again be available for grant under the plan.
Administration of the Plan. A committee appointed by our board of
directors administers the 1999 Equity Compensation Plan. The committee has the
sole authority to designate participants, grant awards and determine the terms
of all grants, subject to the terms of the 1999 Equity Compensation Plan. As a
result of our becoming a publicly-traded company, the compensation committee of
the board of directors became responsible for administering and interpreting
the plan. Prior to that time, the board of directors had fulfilled those roles.
The compensation committee consists of two or more persons appointed by the
Board of Directors from among its members, each of whom is a "non-employee
director" as defined by Rule 16b-3 under the Securities Exchange Act of 1934,
and an "outside director" as defined by Section 162(m) of the Internal Revenue
Code and related Treasury regulations. The committee has the full authority to
interpret the 1999 Equity Compensation Plan and to make rules, regulations,
agreements and instruments for implementing the plan. The committee's
determinations made under the 1999 Equity Compensation Plan are to be
conclusive and binding on all persons having any interest in the plan or any
awards granted under the plan.
Eligibility. Grants may be made to any employee of Internet Capital
Group, Inc. or any of its subsidiaries and to any non-employee member of the
Board of Directors. Key advisors who perform services for us or any of our
subsidiaries are eligible if they render bona fide services, not as part of the
offer or sale of securities in a capital-raising transaction. As of November
15, 1999, 4,898,000 options were outstanding under the plan.
Options. Incentive stock options may be granted only to employees. The
maximum number of shares that may be subject to incentive stock options over
the life of the 1999 Equity Compensation Plan is 6,000,000. Non-qualified stock
options may be granted to employees, key advisors and non-employee directors.
The
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exercise price of common stock underlying an option shall be determined by the
compensation committee at the time the option is granted, and may be equal to,
greater than, or less than the fair market value of such stock on the date the
option is granted; provided that the exercise price of an incentive stock
option shall be equal to or greater than the fair market value of a share of
common stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of such fair market
value.
Unless the applicable option agreement provides otherwise, a participant
can exercise an option award at any time, before or after the option has fully
vested, by paying the applicable exercise price in cash, or, with the approval
of the compensation committee, by delivering shares of common stock owned by
the grantee and having a fair market value on the date of exercise equal to the
exercise price of the grants, or by such other method as the compensation
committee shall approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. In addition,
the plan provides that we may make loans to participants or guarantee loans
made by third parties to the participant for the purpose of assisting
participants to exercise their options. The compensation committee has the
authority to set the terms and conditions that will apply to any loan or
guarantee.
Options vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument. In general, the
options that have already been granted under the plan are subject to a five
year vesting schedule with twenty percent of each grant vesting on each
anniversary of the grant date. The compensation committee will determine the
term of each option up to a maximum of ten years from the date of grant except
that the term of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the date of grant.
The compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason.
Non-Employee Director Option Grants. The 1999 Equity Compensation Plan
provides that each of our non-employee directors, other than:
. 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;
. non-employee directors who at any time during their membership on
our board of directors are employees of TL Ventures, Inc. or any
of its subsidiaries or affiliates; or
. non-employee directors who are granted options under the general
option provisions of the 1999 Equity Compensation Plan are each
entitled to receive an option to purchase 94,000 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 40,000 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 214,000 shares of our
common stock under the automatic and conversion grants described
above. Such automatic and conversion grants will otherwise be
generally subject to the terms provided for options under the 1999
Equity Compensation Plan.
Restricted Stock. The compensation committee shall determine the number
of restricted shares granted to a participant, subject to the maximum plan
limit described above. Grants of restricted shares will be conditioned on such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the compensation committee may determine in its
sole discretion. The restrictions shall remain in force during a restriction
period set by the compensation committee. If the grantee is no longer employed
by us during the restriction period or if any other conditions are not met, the
restricted shares grant will terminate as
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<PAGE>
to all shares covered by the grant for which the restrictions are still
applicable, and those shares must be immediately returned to us.
Stock Appreciation Rights. The compensation committee may grant stock
appreciation rights (SARs) to any participant, subject to the maximum plan
limit described above. At any time, the compensation committee may grant an SAR
award, either separately or in connection with any option; provided, that if an
SAR is granted in connection with an incentive stock option, it must be granted
at the same time that the underlying option is granted. The compensation
committee will determine the base amount of the SAR at the time that it is
granted and will establish any applicable vesting provisions, transfer
restrictions or other restrictions as it may determine is appropriate in its
sole discretion. When a participant exercises an SAR, he or she will receive
the amount by which the value of the stock has appreciated since the SAR was
granted, which may be payable to the participant in cash, shares, or a
combination of cash and shares, as determined by the compensation committee.
Performance Share Awards. The compensation committee may grant
performance share awards to any employee or key advisor. A performance share
award represents the right to receive an amount based on the value of our
stock, but may be payable only if certain performance goals that are
established by the compensation committee are met. If the compensation
committee determines that the applicable performance goals have been met, a
performance share award will be payable to the participant in cash, shares or a
combination of cash and shares, as determined by the compensation committee.
Dividend Equivalent Rights. The compensation committee may grant dividend
equivalent rights to any participant. A dividend equivalent right is a right to
receive payments in amounts equal to dividends declared on shares of our common
stock with respect to the number of shares and payable on such dates as
determined by the compensation committee. The compensation committee shall
determine all other terms applicable to dividend equivalent rights.
Cash Awards. The compensation committee may grant cash awards to
employees under the 1999 Equity Compensation Plan. Such awards shall be in such
amounts and subject to such performance goals and other terms and conditions as
the compensation committee determines.
Amendment and Termination of the Plan. The compensation committee may
amend or terminate the plan at any time. The plan will terminate on the tenth
anniversary of its effective date, unless the compensation committee terminates
it earlier or extends it with the approval of the shareholders.
Adjustment Provisions. In the event that certain reorganizations of
Internet Capital Group or similar transactions or events occur, the maximum
number of shares of stock available for grant, the maximum number of shares
that any participant in the 1999 Equity Compensation Plan may be granted, the
number of shares covered by outstanding grants, the kind of shares issued under
the 1999 Equity Compensation Plan and the price per share or the applicable
market value of such grants shall be adjusted by the committee to reflect
changes to our common stock as a result of such occurrence to prevent the
dilution or enlargement of rights of any individual under the 1999 Equity
Compensation Plan.
Change of Control and Reorganization. Upon a Change of Control, as
defined in the 1999 Equity Compensation Plan, the compensation committee may:
. determine that the outstanding grants, whether in the form of
options and stock appreciation rights, shall immediately vest and
become exercisable;
. determine that the restrictions and conditions on all outstanding
restricted stock or performance share awards shall immediately
lapse;
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. require that grantees surrender their outstanding options and
stock appreciation rights in exchange for payment by us, in cash
or common stock, in an amount equal to the amount by which the
then fair market value of the shares of common stock subject to
the grantee's unexercised options or stock appreciation rights
exceeds the exercise price of those options; and/or
. after giving grantees an opportunity to exercise their outstanding
options and stock appreciation rights, terminate any or all
unexercised options and stock appreciation rights.
Upon a Reorganization, as defined in the 1999 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:
. require that grantees surrender their outstanding options in
exchange for payment by us, in cash or common stock, at an amount
equal to the amount by which the then fair market value of the
shares of common stock subject to the grantee's unexercised
options exceeds the exercise price of those options; and/or
. after accelerating all vesting and giving grantees an opportunity
to exercise their outstanding options or SARs, terminate any or
all unexercised options and SARs.
Federal Tax Consequences of Stock Options. In general, neither the grant
nor the exercise of an incentive stock option will result in taxable income to
an option holder or a deduction to Internet Capital Group. To receive special
tax treatment as an incentive stock option under the Internal Revenue Code as
to shares acquired upon exercise of an incentive stock option, an option holder
must neither dispose of such shares within two years after the incentive stock
option is granted nor within one year after the exercise of the option. In
addition, the option holder must be an employee of Internet Capital Group or
one of its subsidiaries at all times between the date of grant and the date
three months, or one year in the case of disability, before the exercise of the
option. Special rules apply in the case of the death of the option holder.
Incentive stock option treatment under the Internal Revenue Code generally
allows the sale of our common stock received upon the exercise of an incentive
stock option to result in any gain being treated as a capital gain to the
option holder, but we will not be entitled to a tax deduction. However, the
exercise of an incentive stock option, if the holding period rules described
above are satisfied, will give rise to income includable by the option holder
in his or her alternative minimum tax in an amount equal to the excess of the
fair market value of the stock acquired on the date of the exercise of the
option over the exercise price.
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
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<PAGE>
shares acquired upon the exercise of a vested non-qualified stock option will
be measured by the difference between the amount realized on the disposition
and the tax basis of such shares, and will generally be long-term capital gain
depending on the holding period involved. The tax basis of the shares acquired
upon the exercise of any non-qualified stock option will be equal to the sum of
the exercise price of such non-qualified stock option and the amount included
in income with respect to such option. Notwithstanding the foregoing, in the
event that exercise of the option is permitted other than by cash payment of
the exercise price, various special tax rules apply.
Unless the holder of an unvested non-qualified stock option makes an
83(b) election as described below, there generally will be no tax consequences
as a result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will recognize
ordinary income, and we will be entitled to a deduction, equal to the
difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-term
capital gain or loss, depending on the length of time the shares were held
prior to disposition of such shares. In general terms, if a holder were to make
an 83(b) election under Section 83(b) of the Internal Revenue Code upon the
exercise of the unvested option, the holder would recognize ordinary income on
the date of the exercise of such option, and we would be entitled to a
deduction, equal to:
. the fair market value of the stock received pursuant to such
exercise as though the stock were not subject to a substantial
risk of forfeiture or transferable, minus
. the exercise price paid for the stock.
If an 83(b) election were made, there would generally be no tax
consequences to the holder upon the vesting of the stock, and all subsequent
appreciation in the stock would generally be eligible for capital gains
treatment.
Additional special tax rules may apply to those option holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act of
1934. The foregoing tax discussion is a general description of certain expected
federal income tax results under current law, and all affected individuals
should consult their own advisors if they wish any further details or have
special questions.
Section 162(m). Section 162(m) of the Internal Revenue Code may preclude
us from claiming a federal income tax deduction if we pay total remuneration in
excess of $1 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.
Internet Capital Group, Inc. Equity Compensation Loan Program
In accordance with the 1998 Equity Compensation Plan, the 1999 Equity
Compensation Plan and the applicable employee option agreements, and in
consideration of certain restrictive covenants regarding the use of
confidential information and non-competition, we have offered to loan some
employees who have been awarded non-qualified stock options under the 1999
Equity Compensation Plan an amount necessary to pay the exercise price of their
outstanding options and an amount to pay some portion of the income tax that
these employees will owe upon the exercise of such options. These loans will
generally be available to those eligible
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<PAGE>
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.
Internet Capital Group, Inc. Long-Term Incentive Plan
Our long-term incentive plan supports our growth strategy since the plan
permits participants to share directly in the growth of our partner companies.
Each year, we will allocate up to 12% of each acquisition made during the year
for the benefit of the participants in the long-term incentive plan. The plan
permits the compensation committee to award grants in the form of interests in
limited partnerships established by us to hold the interests acquired by us in
a given year. Grants may be made to any of our employees. We intend primarily
to grant limited partnership interests to plan participants to more closely
align the participants' interests with our interests. All grants are subject to
the attainment of specified threshold levels, but the compensation committee
can accelerate payout.
Internet Capital Group, Inc. 401(k) Plan
We sponsor the Internet Capital Group, Inc. 401(k) Plan, a defined
contribution plan that is intended to qualify under Section 401(k) of the Code.
All employees who are at least 21 years old and have been employed by us for
one month are eligible to participate in our 401(k) Plan. An eligible employee
of the Company may begin to participate in our 401(k) Plan on the first day of
the plan quarter after satisfying our 401(k) Plan's eligibility requirements. A
participating employee may make pre-tax contributions of a percentage (not less
than 1.0% and not more than 15.0%) of his or her eligible compensation, subject
to the limitations under the federal tax laws. Employee contributions and the
investment earnings thereon are fully vested at all times. We may make
discretionary contributions to the 401(k) Plan but we have never done so.
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CERTAIN TRANSACTIONS
Walter W. Buckley, III and Kenneth A. Fox, two of our executive officers,
and Safeguard Scientifics, Inc., one of our principal stockholders, were all
involved in our founding and organization and may be considered our promoters.
Under our Membership Profit Interest Plan, we issued 5,136,000 shares of common
stock to Mr. Buckley in March 1996 and 2,573,100 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 2,600,000 and 2,500,000 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 2,000,000 and
1,800,000 shares of common stock, respectively. In addition, Safeguard
Scientifics, Inc., through its affiliates Safeguard Scientifics (Delaware),
Inc. and Safeguard 98 Capital L.P., and Mr. Buckley and Mr. Fox, have purchased
common stock from us. The following table sets forth the number of shares of
our common stock purchased by Mr. Buckley, Mr. Fox and Safeguard Scientifics,
Inc. through Safeguard Scientifics (Delaware), Inc. and Safeguard 98 Capital
L.P., the date of each purchase and the amounts received by us from each of
these purchasers of our common stock.
<TABLE>
<CAPTION>
Amount Received
Shares of Common Date of by Internet
Name Stock Purchased Purchase Capital Group
---- ---------------- ------------- ---------------
<S> <C> <C> <C>
Walter W. Buckley, III......... 500,000 April 1996 $ 250,000
500,000 November 1996 250,000
500,000 April 1997 250,000
500,000 November 1997 250,000
- --------------------------------------------------------------------------------
Kenneth A. Fox................. 500,000 May 1996 $ 250,000
500,000 November 1996 250,000
500,000 June 1997 250,000
500,000 December 1997 250,000
- --------------------------------------------------------------------------------
Safeguard Scientifics
(Delaware), Inc............... 12,278,148 May 1996 $6,139,074
721,852 November 1996 360,926
6,500,000 April 1997 3,250,000
6,500,000 November 1997 3,250,000
- --------------------------------------------------------------------------------
Safeguard 98 Capital L.P....... 8,125,000 June 1998 $8,125,000
8,125,000 February 1999 8,125,000
</TABLE>
During 1998 and 1999, we leased our corporate offices in Wayne,
Pennsylvania from Safeguard Scientifics. From January 31, 1998 to September 30,
1999, our monthly lease payments to Safeguard Scientifics totaled approximately
$70,200. Prior to this offering, Safeguard Scientifics, beneficially owned
about 14.3% of our common stock. We believe that our lease in Wayne with
Safeguard Scientifics is on terms no less favorable to us than those that would
be available to us in an arm's-length transaction with a third party.
In the first half of 2000, we intend to lease new corporate office space
in Wayne, Pennsylvania from Safeguard Scientifics. We expect that our new lease
with Safeguard Scientifics will be on terms no less favorable to us than those
terms that would be available to us in an arm's-length transaction with a third
party.
During 1998 and 1999, we paid Safeguard Scientifics for telephone and
accounting services, health and general insurance coverage, and other services.
From January 31, 1998 to September 30, 1999, our payments to Safeguard
Scientifics totaled approximately $269,000 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.
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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. has 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 our initial public offering and
all shares of our common stock held by them after exercise of any warrants
issued to these shareholders at the time of our initial public offering.
Immediately after our initial public offering, these shareholders, together,
were holders of 102,921,620 shares of our common stock, excluding shares
purchased in the initial public offering, and warrants to purchase 586,433
shares of our common stock.
In January 1998, we loaned Douglas A. Alexander, one of our Managing
Directors, $117,669. Mr. Alexander used the proceeds from the loan to purchase
a portion of our interest in VerticalNet at our cost. Mr. Alexander agreed to
pay the principal amount of the loan with interest at an annual rate equal to
the prime rate plus 1% within 30 days of the date we request payment. On
January 5, 1999, Mr. Alexander paid us $128,820, representing the outstanding
principal amount of the loan plus accrued interest.
In January 1997, we granted Christopher H. Greendale, one of our Managing
Directors, a ten year option to purchase shares of Series A Preferred Stock
convertible into 58,500 shares of common stock of Benchmarking Partners, Inc.,
which we currently own. The option is exercisable at a purchase price of $2.85
per share and vests in four annual installments of 14,625 shares beginning one
year after the date of grant. Vesting is contingent upon Mr. Greendale's
continued service to us. In August 1999, we loaned Mr. Greendale $600,000. Mr.
Greendale used these funds to purchase shares of our common stock in connection
with our initial public offering. Mr. Greendale agreed to pay the principal
amount of the loan with interest at an annual rate equal to 4.98% on August 10,
2000. The loan is secured by 200,000 shares of our common stock.
In October 1998, we sold our 100,000 shares of Series B Preferred Stock
of Who?Vision Systems, Inc. for $300,000 to Comcast.
In January 1999, we sold our convertible notes of VerticalNet for
$2,083,221 to Comcast Corporation. At the time of this sale to Comcast, the
outstanding principal amount of these convertible notes was $2,083,221.
In March 1999, we sold our convertible notes of PrivaSeek for $571,659 to
Comcast and the assumption by Comcast of one of our notes payable in the
outstanding principal amount of $428,341. At the time of this sale to Comcast,
the outstanding principal amount of these convertible notes was $1 million.
In April 1999, in connection with our obtaining a bank credit facility,
Safeguard Scientifics, Inc. delivered a letter to the agent for the banks
stating that it intends to take any action that may in the future be necessary
to promptly cure certain defaults that could occur under our bank credit
facility.
In May 1999, we issued $90 million principal amount of three-year
convertible notes to our largest shareholders, directors, executive officers,
certain members of the immediate families of our executive officers and others
in a round of financing led by Comcast ICG. Based on our initial public
offering price of $6.00 per share, the notes have automatically converted into
14,999,732 shares of our common stock, and all accrued interest has been
waived. We issued warrants to the holders of these notes to purchase shares of
our common stock. As of November 18, 1999, these warrant holders are entitled
to purchase 2,975,068 shares of our common stock. The warrants expire in May
2002.
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<PAGE>
The following table sets forth the names of the holders of certain
convertible notes and warrants, their relationship to us and the amounts of
each of their convertible notes. All convertible notes converted into common
stock at a rate of $6.00 per share in connection with our initial public
offering on August 5, 1999.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Holder Internet Capital Group Convertible Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Ann B. Alexander........... family member of executive officer $ 63,000
Bradley Alexander.......... family member of executive officer 155,000
Douglas E. Alexander....... family member of executive officer 160,000
Susan R. Buckley........... family member of executive officer 55,000
Walter W. Buckley, Jr. .... family member of executive officer 200,000
Walter W. Buckley, III..... executive officer and director 600,000
Comcast ICG, Inc. ......... principal shareholder 15,000,000
E. Michael Forgash......... director 100,000
Kenneth A. Fox............. executive officer and director 1,000,000
David D. Gathman........... executive officer 25,000
Thomas P. Gerrity.......... director 77,000
Internet Assets, Inc. ..... principal shareholder 1,525,000
Robert E. Keith, Jr. ...... director 46,000
Henry N. Nassau............ executive officer 36,000
Robert A. Pollan........... executive officer 31,000
Peter A. Solvik............ director 1,068,000
In May 1999, some of our officers and directors exercised options to
purchase our common stock. Instead of paying us in cash, the officers and
directors delivered promissory notes to us in the aggregate amount of
$21,765,000. The promissory notes bear interest at the rate of 5.22%, mature on
or about May 5, 2004 and are secured by 17,820,000 shares of our common stock.
The following table sets forth the names of the makers of the promissory notes,
their relationship to us and the amounts owed to us by each of these makers.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Walter W. Buckley, III..... executive officer and director $ 2,600,000
Douglas A. Alexander....... executive officer 2,500,000
Richard G. Bunker.......... executive officer 1,350,000
Kenneth A. Fox............. executive officer and director 2,500,000
David D. Gathman........... executive officer 1,300,000
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 2,650,000
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 4,495,500 shares of our common stock.
The following table sets forth the names of the makers of the promissory notes,
their relationship to us and the amounts owed to us by each of these makers.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- --------------------------- ---------------------------------- ----------------
<S> <C> <C>
Gregory W. Haskell......... executive officer $ 6,311,000
Richard S. Devine.......... executive officer 7,114,223
Richard G. Bunker.......... executive officer 1,358,000
</TABLE>
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<PAGE>
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 10,950,000 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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
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.
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III......... executive officer and director $ 1,207,440
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.
<CAPTION>
Relationship to Amount Paid
Name of Recipient Internet Capital Group to Recipient
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
Walter W. Buckley, III......... executive officer and director $ 685,092
Douglas A. Alexander........... executive officer 249,702
Kenneth A. Fox................. executive officer and director 514,597
Thomas P. Gerrity.............. director 6,100
Christopher H. Greendale ...... executive officer 37,304
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
</TABLE>
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On November 16, 1999 we acquired an interest in eMerge Interactive, Inc.
pursuant to a Securities Purchase Agreement among us, eMerge Interactive and J
Technologies, LLC, a South Dakota limited liability company.
Pursuant to the Securities Purchase Agreement, we acquired from eMerge
Interactive 4,555,556 shares of eMerge Interactive series D preferred stock and
a warrant to purchase 911,111 shares of eMerge Interactive class B common
stock. Pursuant to the Securities Purchase Agreement, we also purchased
1,000,000 shares of eMerge Interactive class A common stock from
J Technologies. The aggregate purchase price for the stock and the warrant was
$50,000,000, composed of $27,000,000 in cash and a promissory note for
$23,000,000. The cash portion of the purchase price was funded from our
existing cash. The promissory note is non interest-bearing and is due and
payable one year after issuance; provided, however, that in the event that
eMerge Interactive does not consummate a public offering of its common stock by
March 15, 2000, eMerge Interactive can require us to prepay up to $5,000,000 in
principal on or after March 25, 2000.
Each share of eMerge Interactive series D preferred stock will convert
into one share of eMerge Interactive class B common stock upon our election,
completion of an initial public offering of eMerge Interactive's common stock
or a specified vote of the holders of all eMerge Interactive's preferred stock.
Each of our shares of eMerge Interactive class B common stock will convert into
one share of class A common stock upon transfer to a person that is not
affiliated with us. Each share of eMerge Interactive series D preferred stock
and each share of eMerge Interactive class B common stock is entitled to two
and one half votes. Each share of eMerge Interactive class A common stock is
entitled to one vote. We currently have beneficial ownership (assuming
conversion of each share of eMerge Interactive preferred stock) of 30.7% of the
eMerge Interactive common stock and have 45.9% of the voting power with respect
to eMerge Interactive. We may exercise the warrant during the three-year period
beginning upon the first to occur of an initial public offering of eMerge
Interactive's common stock, the closing of new equity financing from private
investors of at least $20,000,000 and the one-year anniversary of the issuance
of the warrant. The exercise price will equal the purchase price per share to
investors in the first to occur of the initial public offering or private
equity financing described in the preceding sentence or, if the one-year
anniversary of the issuance of the warrant occur first, $9.00 per share.
We have entered into a Joint Venture Agreement with Safeguard Scientifics
pursuant to which we and Safeguard Scientifics have agreed, among other things,
to vote our respective shares of eMerge Interactive to elect two designees of
ours and two designees of Safeguard Scientifics to the board of directors of
eMerge Interactive and to attempt to agree on mutually beneficial courses of
action. Additionally, the Joint Venture Agreement provides for rights of first
refusal with respect to certain sales securities of eMerge Interactive.
In connection with the Securities Purchase Agreement, we also entered
into a Stockholder Agreement with eMerge Interactive and certain stockholders
of eMerge Interactive, including Safeguard Scientifics and certain of its
affiliates. The Stockholder Agreement provides for, among other things,
restrictions on the transferability of securities and co-sale, drag-along and
preemptive rights. The Stockholders Agreement terminates upon an initial public
offering of eMerge Interactive's common stock. We and eMerge Interactive are
also parties to a Registration Rights Agreement in which eMerge Interactive
granted us certain demand and piggyback registration rights.
Douglas A. Alexander, one of our Managing Directors, and E. Michael
Forgash, one of our directors, are members of the Board of Directors of eMerge
Interactive.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 15, 1999, and as adjusted to
reflect the sale of shares offered in the concurrent offering, by:
. each person (or group of affiliated persons) who is known by us to
own more than five percent of the outstanding shares of our common
stock;
. each of our directors and our executive officers named in the
summary compensation table; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures include shares of
our common stock issuable upon exercise of warrants to purchase an additional
3,375,068 shares at a weighted average exercise price of $5.88 per share and
shares of common stock issuable upon the exercise of other options or warrants
exercisable within 60 days of November 15, 1999. These options and warrants are
deemed to be outstanding and to be beneficially owned by the person holding
them for the purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
<TABLE>
<CAPTION>
Percent of
Number of Shares Shares Outstanding
Options and Beneficially Owned -----------------------------
Warrants Including Options and Before After
5% Beneficial Owners, Directors, Exercisable Warrants Exercisable the Concurrent the Concurrent
Named Officers Within 60 Days Within 60 Days Offering Offering
- -------------------------------- -------------- --------------------- -------------- --------------
<S> <C> <C> <C> <C>
Comcast ICG, Inc. (1)... 634,000 24,333,998 9.6% 9.4%
c/o Comcast Corporation
1500 Market Street
Philadelphia,
Pennsylvania 19102
Safeguard Scientifics,
Inc. (2)............... -- 36,289,456 14.3 14.0
435 Devon Park Drive
Wayne, Pennsylvania
19087
Douglas A. Alexander
(3).................... -- 6,132,748 2.4 2.4
Julian A. Brodsky (4)... -- 17,000 * *
Walter W. Buckley, III
(5).................... 21,833 11,967,999 4.7 4.6
E. Michael Forgash (6).. 3,333 161,569 * *
Kenneth A. Fox (7)...... 33,333 11,093,099 4.4 4.3
Dr. Thomas P. Gerrity
(8).................... 2,566 916,398 * *
Robert E. Keith,
Jr.(9)................. 1,533 310,441 * *
Robert A. Pollan (10)... 1,033 3,862,199 1.5 1.5
Peter A. Solvik (11).... 35,600 1,056,670 * *
All executive officers
and directors as a
group (9 persons) (3)
(4) (5) (6) (7) (8) (9)
(11)................... 300,233 28,600,377 11.3 11.0
</TABLE>
- --------
* Less than 1%
(1) Includes 416,666 shares of common stock and warrants to purchase 83,333
shares of common stock held by Comcast Interactive Investments, Inc. as
to which Comcast ICG, Inc. disclaims beneficial ownership.
(2) Private equity funds affiliated with Safeguard Scientifics, Inc. own an
additional 8,266,666 shares of common stock and warrants to purchase
45,333 shares of common stock.
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(3) 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.
Also includes 500,000 shares of common stock held by the Douglas A.
Alexander Qualified Grantor Annuity Trust and 4,000 shares of common
stock held by each of two trusts for the benefit of certain of Mr.
Alexander's relatives.
(4) Includes 3,500 shares of common stock held by the Julian A. and Lois G.
Brodsky Foundation, of which Mr. Brodsky is Chairman. Mr. Brodsky
disclaims beneficial ownership of shares held by the Julian A. and Lois
G. Brodsky Foundation. Mr. Brodsky is also 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.
(5) 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 294,166 shares of common stock and warrants to
purchase 1,833 shares of common stock held by Susan R. Buckley, wife of
Walter W. Buckley, III, and 250,000 shares of common stock held by each
of two trusts for the benefit of certain of Mr. Buckley's relatives.
(6) Includes 100,000 shares of common stock held by the E. Michael Forgash,
Jr. 1999 Qualified Grantor Retained Annuity Trust. 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.
(7) Includes shares of restricted common stock that have not vested pursuant
to the Membership Profit Interest Plan and the 1999 Equity Compensation
Plan.
(8) Includes shares of restricted common stock that have not vested pursuant
to the 1999 Equity Compensation Plan. Also includes 80,000 shares of
common stock held by the Thomas P. Gerrity Generation Skipping Trust U/A
3/17/92.
(9) Includes 2,000 shares of common stock held by Susan Keith, 20,000 shares
of common stock held by Robert E. Keith, III, 10,000 shares held by the
Keith 1999 Irrevocable Trust and 20,000 shares held by Leslie Hulsizer.
(10) Includes shares of restricted common stock which have not vested pursuant
to the Membership Profit Interest Plan and the 1999 Equity Compensation
Plan. Also includes 500,000 shares of common stock held by the Robert A.
Pollan Qualified Grantor Annuity Trust and 4,000 shares of common stock
held by each of two trusts for the benefit of certain of Mr. Pollan's
relatives.
(11) Includes 178,000 shares of common stock held by the Peter A. Solvik
Annuity Trust u/i dtd. July 30, 1999, 178,000 shares of common stock held
by the Patricia A. Solvik Annuity Trust u/i dtd. July 30, 1999 and 1,500
shares of common stock held by each of two trusts for the benefit of
certain of Mr. Solvik's relatives.
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DESCRIPTION OF NOTES
The notes will be issued under the indenture dated as of , 1999 (the
"Indenture") between Internet Capital Group, Inc. and Chase Manhattan Trust
Company, National Association, as trustee (the "Trustee"). We have filed the
form of the indenture as an exhibit to the registration statement. A copy of
the form of Indenture also will be made available to prospective investors in
the notes upon request to us and will be available for inspection during normal
business hours at the corporate trust office of the Trustee.
We have summarized portions of the indenture below. This summary is not
complete. We urge you to read the indenture because it defines your rights as a
holder of the notes. Terms not defined in this description have the meanings
given them in the Indenture. In this section, "Internet Capital Group," "we"
and "us" each refers only to Internet Capital Group, Inc. and not to any of its
subsidiaries.
General
The notes will be unsecured, subordinated obligations of Internet Capital
Group limited to an aggregate principal amount of $250,000,000 (aggregate
principal amount of $287,500,000 if the underwriters' over-allotment option is
exercised in full) and will mature on , 2004. The principal amount of each
note is $1,000 and will be payable at the office of the Paying Agent, which
initially will be the Trustee, or an office or agency maintained by us for that
purpose in the Borough of Manhattan, City of New York.
The notes will bear interest at the rate of % per annum on the principal
amount from the date of issuance of the notes, or from the most recent date to
which interest has been paid or provided for until the notes are paid in full
or funds are made available for payment in full of the notes in accordance with
the Indenture. Interest will be payable at the date of maturity (or earlier
purchase, redemption or, in some circumstances, conversion) and semiannually on
and of each year (each an "Interest Payment Date"), commencing on
, 2000, to holders of record at the close of business on and
(whether or not a business day) immediately preceding each Interest Payment
Date (each a "Regular Record Date"). Each payment of interest on the notes will
include interest accrued through the day before the applicable Interest Payment
Date or the date of maturity (or earlier purchase, redemption or, in some
circumstances, conversion), as the case may be. Any payment of principal and
cash interest required to be made on any day that is not a business day will be
made on the next succeeding business day. Interest will be computed on the
basis of a 360-day year composed of twelve 30-day months. We currently expect
to fund interest payments through proceeds from this offering and the
concurrent offering of shares of our common stock. We cannot assure you that
these offerings may be accomplished on terms advantageous to us, or at all, or
that alternative sources of financing will be available to fund the interest
payments.
In the event of the maturity, conversion, purchase by us at the option of
a holder or redemption of a note, interest will cease to accrue on that note,
under the terms and subject to the conditions of the Indenture. We may not
reissue a note that has matured or been converted, redeemed or otherwise
canceled, except for registration of transfer, exchange or replacement of that
note.
You may present the notes for conversion at the office of the Conversion
Agent and for exchange or registration of transfer at the office of the
Registrar. Each of these agents will initially be the Trustee.
The indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness (defined below)
or the issuance or repurchase of securities by us. The indenture contains no
covenants or other provisions to protect holders of the notes in the event of a
highly leveraged transaction or a change in control, except to the extent
described below under "--Change in Control Permits Purchase of Notes at the
Option of the Holder."
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Subordination
The notes will be our unsecured obligations and will be subordinated in
right of payment, as provided in the indenture, to the prior payment in full in
cash or other payment satisfactory to holders of Senior Indebtedness, of all
our existing and future Senior Indebtedness.
At November 15, 1999, we had no Senior Indebtedness outstanding but our
subsidiaries had approximately $1.6 million of Senior Indebtedness outstanding,
and we are party to a $50 million senior revolving credit facility. The
indenture does not restrict the incurrence by us or our subsidiaries of
indebtedness or other obligations.
The term "Senior Indebtedness" means the principal, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and all other amounts
owed in respect of all our Indebtedness (defined below), whether outstanding on
the date of the Indenture or thereafter created, incurred, assumed, guaranteed
or in effect guaranteed by us, including all deferrals, renewals, extensions,
refinancings, replacements, restatements or refundings of, or amendments,
modifications or supplements to, the foregoing, except for:
. any such Indebtedness the terms of which expressly provide that
such Indebtedness shall not be senior in right of payment to the
notes
. any such Indebtedness that is by its terms subordinated to or pari
passu with the notes, and
. any Indebtedness between or among us or any of our subsidiaries, a
majority of the voting stock of which we directly or indirectly
own or our affiliates, including all other debt securities and
guarantees in respect of those debt securities issued to any
trust, or trustees of any trust, partnership or other entity
affiliated with us that is, directly or indirectly, a financing
vehicle used by us in connection with the issuance by that
financing vehicle of preferred securities or other securities that
rank pari passu with, or junior to, the notes.
The term "Indebtedness" means, with respect to any person:
. all indebtedness, obligations and other liabilities, contingent or
otherwise, of that person for borrowed money (including
obligations of that person in respect of overdrafts, foreign
exchange contracts, currency exchange or similar agreements,
interest rate protection, hedging or similar agreements, and any
loans or advances from banks, whether or not evidenced by notes or
similar instruments) or evidenced by bonds, debentures, notes or
similar instruments (whether or not the recourse of the lender is
to the whole of the assets of that person or to only a portion
thereof), other than any account payable or other accrued current
liability or obligation, in each case incurred in the ordinary
course of business in connection with the obtaining of materials
or services
. all reimbursement obligations and other liabilities, contingent or
otherwise, of that person with respect to letters of credit, bank
guarantees, bankers' acceptances, security purchase facilities or
similar credit transactions
. all obligations and liabilities, contingent or otherwise, in
respect of leases of that person required, in conformity with
generally accepted accounting principles, to be accounted for as
capitalized lease obligations on the balance sheet of that person
and all obligations and other liabilities, contingent or
otherwise, under any lease or related document, including, without
limitation, the balance deferred and unpaid on any purchase price
of any property and a purchase agreement, in connection with the
lease of real property which provides that that person is
contractually obligated to purchase or cause a third party to
purchase the leased property and thereby guarantee a minimum
residual value of the leased property to the lessor
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<PAGE>
and the obligations of that person under that lease or related
document to purchase or to cause a third party to purchase that
leased property
. all obligations of that person, contingent or otherwise, with
respect to an interest rate or other swap, cap or collar agreement
or other similar instrument or agreement or foreign currency
hedge, exchange, purchase or similar instrument or agreement
. all direct or indirect guarantees or similar agreements by that
person in respect of, and obligations or liabilities, contingent
or otherwise, of that person to purchase or otherwise acquire or
otherwise assure a creditor against loss in respect of
indebtedness, obligations or liabilities of another person of the
kind described in the above clauses
. any indebtedness, or other obligations described in the above
clauses secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by that person,
regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by that person, and
. any and all deferrals, renewals, extensions, refinancings,
replacements, restatements and refundings of, or amendments,
modifications or supplements to, or any indebtedness or obligation
issued in exchange for, any indebtedness, obligation or liability
of the kind described in the above clauses.
Any Senior Indebtedness will continue to be Senior Indebtedness and will
be entitled to the benefits of the subordination provisions irrespective of
any amendment, modification or waiver of any of its terms.
By reason of the application of the subordination provisions, in the
event of dissolution, insolvency, bankruptcy or other similar proceedings,
upon any distribution of our assets:
. the holders of the notes are required to pay over their share of
that distribution to the trustee in bankruptcy, receiver or other
person distributing our assets for application to the payment of
all Senior Indebtedness remaining unpaid, to the extent necessary
to pay all holders of Senior Indebtedness in full in cash or other
payment satisfactory to the holders of Senior Indebtedness, and
. unsecured creditors of ours who are not holders of notes or
holders of Senior Indebtedness of ours may recover less, ratably,
than holders of Senior Indebtedness of ours, and may recover more,
ratably, than the holders of notes.
In addition, we may not pay the principal amount, the Change in Control
Purchase Price, any redemption amounts or interest with respect to any notes,
and we may not acquire any notes for cash or property, except as provided in
the Indenture, if:
(1) any payment default on any Senior Indebtedness has occurred and is
continuing beyond any applicable grace period or
(2) any default, other than a payment default, with respect to Senior
Indebtedness occurs and is continuing that permits the acceleration
of the maturity of that Senior Indebtedness and that default is
either the subject of judicial proceedings or we receive a written
notice of that default (a "Senior Indebtedness Default Notice").
Notwithstanding the foregoing, payments with respect to the notes may
resume and we may acquire notes for cash when:
(a) the default with respect to the Senior Indebtedness is cured or
waived or ceases to exist or
(b) in the case of a default described in (2) above, 179 or more days
pass after notice of the default is received by us, provided that
the terms of the Indenture otherwise permit the payment or
acquisition of the notes at that time.
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If we receive a Senior Indebtedness Default Notice, then a similar notice
received within nine months after receiving that Senior Indebtedness Default
Notice relating to the same default on the same issue of Senior Indebtedness
will not be effective to prevent the payment or acquisition of the notes as
provided above. In addition, no payment may be made on the notes if any notes
are declared due and payable prior to their Stated Maturity by reason of the
occurrence of an Event of Default until the earlier of:
. 120 days after the date of acceleration of the maturity of that
Senior Indebtedness or
. the payment in full of all Senior Indebtedness
but only if payment on the notes is then otherwise permitted under the terms of
the Indenture.
Upon any payment or distribution of our assets to creditors upon any
dissolution, winding up, liquidation or reorganization of us, whether voluntary
or involuntary, or in bankruptcy, insolvency, receivership or other similar
proceedings, the holders of all the Senior Indebtedness will first be entitled
to receive payment in full, in cash or other payment satisfactory to the
holders of Senior Indebtedness, of all amounts due or to become due on that
Senior Indebtedness, or payment of those amounts must have been provided for,
before the holders of the notes will be entitled to receive any payment or
distribution with respect to any notes.
The notes are effectively subordinated to all existing and future
liabilities of our subsidiaries. Any right of ours to receive assets of any of
our subsidiaries upon their liquidation or reorganization, and the consequent
right of the holders of the notes to participate in those assets, will be
subject to the claims of that subsidiary's creditors, including trade
creditors, except to the extent that we ourselves are recognized as a creditor
of that subsidiary, in which case our claims would still be subordinate to any
security interests in the assets of that subsidiary and any indebtedness of
that subsidiary senior to that held by us.
Conversion Rights
A holder of a note is entitled to convert it into shares of common stock
at any time on or before maturity, provided, that if a note is called for
redemption, the holder is entitled to convert it at any time before the close
of business on the redemption date. A note in respect of which a holder has
delivered a Change in Control Purchase Notice (as defined) exercising that
holder's option to require us to purchase that holder's note, may be converted
only if the Change in Control Purchase Notice is withdrawn by a written notice
of withdrawal delivered by the holder to the Paying Agent prior to the close of
business on the Change in Control Purchase Date, in accordance with the terms
of the Indenture.
The initial conversion price for the notes is $ per share of common
stock, which is equal to a Conversion Rate of shares per $1,000 principal
amount of notes. The Conversion Rate is subject to adjustment upon the
occurrence of some events described below. A holder otherwise entitled to a
fractional share of common stock will receive cash in an amount equal to the
market value of that fractional share based on the closing sale price on the
trading day immediately preceding the Conversion Date. A holder may convert a
portion of that holder's notes so long as that portion is $1,000 principal
amount or an integral multiple of $1,000.
To convert a note, a holder must:
. complete and manually sign the conversion notice on the back of
the note, or complete and manually sign a facsimile of the note,
and deliver the conversion notice to the Conversion Agent,
initially the Trustee, at the office maintained by the Conversion
Agent for that purpose
. surrender the note to the Conversion Agent
. if required, furnish appropriate endorsements and transfer
documents, and
. if required, pay all transfer or similar taxes.
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Under the Indenture, the date on which all of these requirements have
been satisfied is the Conversion Date.
Upon conversion of a note, a holder will not receive, except as provided
below, any cash payment representing accrued interest on the note. Our delivery
to the holder of the fixed number of shares of common stock into which the note
is convertible, together with any cash payment to be made instead of any
fractional shares, will satisfy our obligation to pay the principal amount of
the note, and the accrued and unpaid interest to the Conversion Date. Thus, the
accrued but unpaid interest to the Conversion Date will be deemed to be paid in
full rather than cancelled, extinguished or forfeited. Notwithstanding the
foregoing, accrued but unpaid cash interest will be payable upon any conversion
of notes at the option of the holder made concurrently with or after
acceleration of the notes following an Event of Default described under "--
Events of Default" below. Notes surrendered for conversion during the period
from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on that Interest Payment Date,
except notes to be redeemed on a date within that period, must be accompanied
by payment of an amount equal to the interest on the surrendered notes that the
registered holder is to receive. Except where notes surrendered for conversion
must be accompanied by payment as described above, no interest on converted
notes will be payable by us on any Interest Payment Date subsequent to the date
of conversion. The Conversion Rate will not be adjusted at any time during the
term of the notes for accrued interest.
A certificate for the number of full shares of common stock into which
any note is converted, and any cash payment to be made instead of any
fractional shares, will be delivered as soon as practicable, but in any event
no later than the seventh business day following the Conversion Date. For a
summary of the U.S. federal income tax treatment of a holder receiving common
stock upon conversion, see "U.S. Federal Income Tax Considerations--Conversion
of Notes."
The Conversion Rate is subject to adjustment in some events, including:
. the issuance of shares of common stock as a dividend or a
distribution with respect to common stock
. some subdivisions and combinations of common stock
. the issuance to all holders of common stock of rights or warrants
entitling them, for a period not exceeding 45 days, to subscribe
for shares of common stock at less than the then Market Price (as
defined below) of the common stock
. the distribution to holders of common stock of evidences of our
indebtedness, securities or capital stock, cash or assets,
including securities, but excluding common stock distributions
covered above, those rights, warrants, dividends and distributions
referred to above, dividends and distributions paid exclusively in
cash and distributions upon mergers or consolidations resulting in
a reclassification, conversion, exchange or cancellation of common
stock covered in a Transaction adjustment described below
. the payment of dividends and other distributions on common stock
paid exclusively in cash, excluding cash dividends if the
aggregate amount of dividends and other distributions, when taken
together with:
--other all-cash distributions made within the preceding 12 months
not triggering a Conversion Rate adjustment and
--any cash and the fair market value, as of the expiration of the
tender or exchange offer referred to below, of consideration
payable in respect of any tender or exchange offer by us or one
of our subsidiaries for the common stock concluded within the
preceding 12 months not triggering a Conversion Rate adjustment,
does not exceed 10% of our aggregate market capitalization on the
date of the payment of those dividends and other distributions.
The aggregate market capitalization is the product of
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the current market price of common stock as of the trading day
immediately preceding the date of declaration of the applicable
dividend multiplied by the number of shares of common stock then
outstanding and
. payment to holders of common stock in respect of a tender or
exchange offer, other than an odd-lot offer, by us or one of our
subsidiaries for common stock as of the trading day next
succeeding the last date tenders or exchanges may be made pursuant
to a tender or exchange offer by us or one of our subsidiaries,
which involves an aggregate consideration that, together with:
--any cash and the fair market value of other consideration
payable in respect of any tender or exchange offer by us or one
of our subsidiaries for the common stock concluded within the
preceding 12 months not triggering a Conversion Rate adjustment
and
--the aggregate amount of any all-cash distributions to all
holders of our common stock made within the preceding 12 months
not triggering a Conversion Rate adjustment,
exceeds 10% of our aggregate market capitalization.
However, adjustment is not necessary if holders may participate in the
transactions otherwise giving rise to an adjustment on a basis and with notice
that our Board of Directors determines to be fair and appropriate, or in some
other cases specified in the Indenture. In cases where the fair market value of
the portion of assets, debt securities or rights, warrants or options to
purchase our securities applicable to one share of common stock distributed to
stockholders exceeds the Average Sale Price (as defined in the Indenture) per
share of common stock, or the Average Sale Price per share of common stock
exceeds the fair market value of that portion of assets, debt securities or
rights, warrants or options so distributed by less than $1.00, rather than
being entitled to an adjustment in the Conversion Rate, the holder of a note
upon conversion of the note will be entitled to receive, in addition to the
shares of common stock into which that note is convertible, the kind and
amounts of assets, debt securities or rights, options or warrants comprising
the distribution that the holder of that note would have received if that
holder had converted that note immediately prior to the record date for
determining the stockholders entitled to receive the distribution. The
Indenture permits us to increase the Conversion Rate from time to time.
"Market Price" means, on any date in question, subject to adjustment, the
average of the daily closing prices for the 5 consecutive trading days selected
by us commencing not more than 20 trading days before, and ending not later
than, the date in question.
In the event that we become a party to any transaction, including, and
with some exceptions:
. any recapitalization or reclassification of the common stock
. any consolidation of us with, or merger of us into, any other
Person, or any merger of another Person into us
. any sale, transfer or lease of all or substantially all of our
assets or
. any compulsory share exchange
pursuant to which the common stock is converted into the right to receive other
securities, cash or other property (each of the above being referred to as a
"Transaction"), then the holders of notes then outstanding will have the right
to convert the notes into the kind and amount of securities, cash or other
property receivable upon the consummation of that Transaction by a holder of
the number of shares of common stock issuable upon conversion of those notes
immediately prior to that Transaction.
In the case of a Transaction, each note will become convertible into the
securities, cash or property receivable by a holder of the number of shares of
the common stock into which the note was convertible
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immediately prior to that Transaction. This change could substantially lessen
or eliminate the value of the conversion privilege associated with the notes in
the future. For example, if we were acquired in a cash merger, each note would
become convertible solely into cash and would no longer be convertible into
securities whose value would vary depending on our future prospects and other
factors.
In the event of a taxable distribution to holders of common stock which
results in an adjustment of the Conversion Rate, or in which holders otherwise
participate, or in the event the Conversion Rate is increased at our
discretion, the holders of the notes may, in some circumstances, be deemed to
have received a distribution subject to United States federal income tax as a
dividend. Moreover, in some other circumstances, the absence of an adjustment
to the Conversion Rate may result in a taxable dividend to holders of common
stock. See "U.S. Federal Income Tax Considerations--Adjustment of Conversion
Rate."
Provisional Redemption
We may redeem the notes, in whole or in part, at any time prior to ,
2002, at a redemption price equal to $1,000 per $1,000 principal amount of
notes to be redeemed plus accrued and unpaid interest, if any, to the
provisional redemption date if the closing price of our common stock has
exceeded 150% of the conversion price then in effect for at least 20 trading
days within a period of 30 consecutive trading days ending on the trading day
prior to the date of mailing of the provisional redemption notice (which date
shall be no more than 60 nor less than 30 days prior to the provisional
redemption date.)
Upon any provisional redemption, we will make an additional payment in
cash with respect to the notes called for redemption to holders on the notice
date in an amount equal to $ per $1,000 principal amount of notes, less the
amount of any interest actually paid on the notes prior to the Notice Date. WE
WILL BE OBLIGATED TO MAKE THIS ADDITIONAL PAYMENT ON ALL NOTES CALLED FOR
PROVISIONAL REDEMPTION, INCLUDING ANY NOTES CONVERTED AFTER THE NOTICE DATE AND
BEFORE THE PROVISIONAL REDEMPTION DATE.
Redemption of Notes At Our Option
There is no sinking fund for the notes. On and after, , 2000, we will
be entitled to redeem the notes for cash as a whole at any time, or from time
to time in part, upon not less than 30 days' nor more than 60 days' notice of
redemption given by mail to holders of notes, unless a shorter notice is
satisfactory to the Trustee, at the redemption prices set out below plus
accrued cash interest to the redemption date. Any redemption of the notes must
be in integral multiples of $1,000 principal amount.
The table below shows redemption prices of a note per $1,000 principal
amount if redeemed during the twelve-month periods described below.
<TABLE>
<CAPTION>
Period Redemption Price
- ------ ----------------
<S> <C>
, 2002 through , 2003..................................... %
Thereafter..................................................... %
</TABLE>
If fewer than all of the notes are to be redeemed, the Trustee will
select the notes to be redeemed in principal amounts at maturity of $1,000 or
integral multiples of $1,000 by lot, pro rata or by another method the Trustee
considers fair and appropriate. If a portion of a holder's notes is selected
for partial redemption and that holder converts a portion of those notes prior
to the redemption, the converted portion will be deemed, solely for purposes of
determining the aggregate principal amount of the notes to be redeemed by us,
to be of the portion selected for redemption.
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Change In Control Permits Purchase of Notes at the Option of the Holder
In the event of any Change in Control (as defined below) of Internet
Capital Group, each holder of notes will have the right, at the holder's
option, subject to the terms and conditions of the Indenture, to require us to
purchase all or any part, provided that the principal amount must be $1,000 or
an integral multiple of $1,000, of the holder's notes. Each holder of notes
will have the right to require us to make that purchase, on the date that is 45
business days after the occurrence of the Change in Control (the "Change in
Control Purchase Date") at a price equal to 100% of the principal amount of
that holder's notes plus accrued interest to the Change in Control Purchase
Date (the "Change in Control Purchase Price").
We may, at our option, instead of paying the Change in Control Purchase
Price in cash, pay the Change in Control Purchase Price in our common stock
valued at 95% of the average of the closing sales prices of our common stock
for the five trading days immediately preceding and including the third day
prior to the Change in Control Date. We cannot pay the Change in Control
Purchase Price in common stock unless we satisfy the conditions as described in
the Indenture.
Within 15 business days after the Change in Control, we will mail to the
Trustee and to each holder, and to beneficial owners as required by applicable
law, a notice regarding the Change in Control, which will state, among other
things:
. the date of the Change in Control and, briefly, the events causing
the Change in Control
. the date by which the Change in Control Purchase Notice (as
defined below) must be given
. the Change in Control Purchase Date
. the Change in Control Purchase Price
. the name and address of the Paying Agent and the Conversion Agent
. the Conversion Rate and any adjustments to the Conversion Rate
. the procedures that holders must follow to exercise these rights
. the procedures for withdrawing a Change in Control Purchase Notice
. that holders who want to convert notes must satisfy the
requirements provided in the notes, and
. briefly, the conversion rights of holders of notes.
We will cause a copy of the notice regarding the Change in Control to be
published in The Wall Street Journal or another daily newspaper of national
circulation.
To exercise the purchase right, the holder must deliver written notice of
the exercise of the purchase right (a "Change in Control Purchase Notice") to
the Paying Agent or an office or agency maintained by us for that purpose in
the Borough of Manhattan, The City of New York, prior to the close of business,
on the Change in Control Purchase Date. Any Change in Control Purchase Notice
must state:
. the certificate numbers of the notes to be delivered by the holder
of those notes for purchase by us
. the portion of the principal amount of notes to be purchased,
which portion must be $1,000 or an integral multiple of $1,000,
and
. that the notes are to be purchased by us pursuant to the
applicable provisions of the notes.
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A holder may withdraw any Change in Control Purchase Notice by a written
notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Change in Control Purchase Date. The notice of withdrawal must
state the principal amount and the certificate numbers of the notes as to which
the withdrawal notice relates and the principal amount, if any, which remains
subject to a Change in Control Purchase Notice.
Payment of the Change in Control Purchase Price for a note for which a
Change in Control Purchase Notice has been delivered and not withdrawn is
conditioned upon delivery of the note, together with necessary endorsements, to
the Paying Agent or an office or agency maintained by us for that purpose in
the Borough of Manhattan, The City of New York, at any time, whether prior to,
on or after the Change in Control Purchase Date, after the delivery of the
Change in Control Purchase Notice. Payment of the Change in Control Purchase
Price for the note will be made promptly following the later of the business
day following the Change in Control Purchase Date and the time of delivery of
the note. If the Paying Agent holds, in accordance with the terms of the
Indenture, money sufficient to pay the Change in Control Purchase Price of that
note on the business day following the Change in Control Purchase Date, then,
immediately after the Change in Control Purchase Date, that note will cease to
be outstanding and interest on that note will cease to accrue and will be
deemed paid, whether or not that note is delivered to the Paying Agent, and all
other rights of the holder will terminate, other than the right to receive the
Change in Control Purchase Price upon delivery of that note.
Under the Indenture, a "Change in Control" of Internet Capital Group is
deemed to have occurred upon the occurrence of any of the following events:
. any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), acquires the beneficial ownership
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, through a
purchase, merger or other acquisition transaction, of more than
50% of our total outstanding voting stock other than an
acquisition by us, any of our subsidiaries or any of our employee
benefit plans.
. we consolidate with, or merge with or into another Person or
convey, transfer, lease or otherwise dispose of all or
substantially all of our assets to any Person, or any Person
consolidates with or merges with or into us, in any such event
pursuant to a transaction in which our outstanding voting stock is
converted into or exchanged for cash, securities or other
property, other than where:
--our voting stock is not converted or exchanged at all, except to
the extent necessary to reflect a change in our jurisdiction of
incorporation, or is converted into or exchanged for voting
stock, other than Redeemable Capital Stock, of the surviving or
transferee corporation and
--immediately after such transaction, no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange
Act) is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a Person will be deemed
to have "beneficial ownership" of all securities that such Person
has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total outstanding voting
stock of the surviving or transferee corporation
. during any consecutive two-year period, individuals who at the
beginning of that two-year period constituted our Board of
Directors (together with any new directors whose election to such
Board of Directors, or whose nomination for election by our
stockholders, was approved by a vote of a majority the directors
then still in office who were either directors at the
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beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to
constitute a majority of our Board of Directors then in office or
. our stockholders pass a special resolution approving a plan of
liquidation or dissolution.
"Redeemable Capital Stock" means any class or series of capital stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to the final stated maturity of the notes or is redeemable at the option
of the holder of the notes at any time prior to such final stated maturity, or
is convertible into or exchangeable for debt securities at any time prior to
such final stated maturity. Redeemable Capital Stock will not include any
common stock the holder of which has a right to put to us upon some
terminations of employment.
The Indenture does not permit the Board of Directors to waive our
obligation to purchase notes at the option of a holder in the event of a Change
in Control of Internet Capital Group.
We will comply with the provisions of Rule 13e-4, Rule 14e-1 and any
other tender offer rules under the Exchange Act which may then be applicable,
and will file Schedule 13E-4 or any other schedule required under the Exchange
Act in connection with any offer by us to purchase notes at the option of the
holders of notes upon a Change in Control. In some circumstances, the Change in
Control purchase feature of the notes may make more difficult or discourage a
takeover of us and, thus, the removal of incumbent management. The Change in
Control purchase feature, however, is not the result of management's knowledge
of any specific effort to accumulate shares of common stock or to obtain
control of us by means of a merger, tender offer, solicitation or otherwise, or
part of a plan by management to adopt a series of anti-takeover provisions.
Instead, the Change in Control purchase feature is the result from negotiations
between us and the Underwriters.
If a Change in Control were to occur, we cannot assure you that we would
have funds sufficient to pay the Change in Control Purchase Price for all of
the notes that might be delivered by holders seeking to exercise the purchase
right, because we or our subsidiaries might also be required to prepay some
indebtedness or obligations having financial covenants with change of control
provisions in favor of the holders of that indebtedness or those obligations.
In addition, our other indebtedness may have cross-default provisions that
could be triggered by a default under the Change in Control provisions thereby
possibly accelerating the maturity of that other indebtedness. In that case,
the holders of the notes would be subordinated to the prior claims of the
holders of other indebtedness having cross-default provisions. In addition, our
ability to purchase the notes with cash may be limited by the terms of our
then-existing borrowing agreements. No notes may be purchased pursuant to the
provisions described above if there has occurred and is continuing an Event of
Default described under "--Events of Default" below (other than a default in
the payment of the Change in Control Purchase Price with respect to those
notes).
Consolidation, Merger And Sale Of Assets
We, without the consent of any holders of outstanding notes, are entitled
to consolidate with or merge into or transfer or lease our assets substantially
as an entirety to, any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof (each
a "Person"), and any Person is entitled to consolidate with or merge into, or
transfer or lease its assets substantially as an entirety to us, provided that:
. the Person, if other than us, formed by a consolidation or into
which we are merged or the Person which acquires or leases our
assets substantially as an entirety is a corporation, partnership,
limited liability company or trust organized and existing under
the laws of any United States jurisdiction and expressly assumes
our obligations on the notes and under the Indenture
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. immediately after giving effect to the consolidation, merger,
transfer or lease, no Event of Default (as defined above), and no
event which, after notice or lapse of time or both, would become
an Event of Default, happened and is continuing, and
. an officer's certificate and an opinion of counsel, each stating
that the consolidation, merger, transfer or lease complies with
the provisions of the Indenture, have been delivered by us to the
Trustee.
Events Of Default
The Indenture provides that, if an Event of Default specified in the
Indenture occurs and is continuing, either the Trustee or the holders of not
less than 25% in aggregate principal amount of the notes then outstanding may
declare the principal amount of, and accrued interest to the date of that
declaration, on all the notes to be immediately due and payable. In the case of
some events of bankruptcy or insolvency, the principal amount of, and accrued
interest on all the notes to the date of the occurrence of that event, will
automatically become and be immediately due and payable. Upon any acceleration
of the payment of principal amount and accrued interest, the subordination
provisions of the Indenture will preclude any payment being made to holders of
notes until the earlier of:
. 120 days or more after the date of that acceleration and
. the payment in full of all Senior Indebtedness,
but only if such payment is then otherwise permitted under the terms of the
Indenture. See "--Subordination."
Under some circumstances, the holders of a majority in aggregate
principal amount of the outstanding notes may rescind any acceleration with
respect to the notes and its consequences.
Interest will accrue and be payable on demand upon a default in:
. the payment of:
--principal and interest when due
--redemption amounts or
--Change in Control Purchase Price
. the delivery of shares of common stock to be delivered on
conversion of notes or
. the payment of cash in lieu of fractional shares to be paid on
conversion of notes
in each case to the extent that the payment of interest which is due, is
legally enforceable.
Under the Indenture, Events of Default include:
. default in payment of the principal amount, interest when due (if
that default in payment of interest continues for 30 days), any
redemption amounts or the Change in Control Purchase Price with
respect to any note, when that principal amount, interest,
redemption amount or Change in Control Purchase Price becomes due
and payable (whether or not that payment is prohibited by the
provisions of the Indenture)
. failure by us to deliver shares of common stock, together with
cash instead of fractional shares, when those shares of common
stock, or cash instead of fractional shares, are required to be
delivered following conversion of a note, and that default
continues for 10 days
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. failure by us to comply with any of our other agreements in the
notes or the Indenture upon the receipt by us of notice of that
default from the Trustee or from holders of not less than 25% in
aggregate principal amount of the notes then outstanding and our
failure to cure that default within 60 days after our receipt of
that notice
. default under any bond, note or other evidence of indebtedness for
money borrowed by us having an aggregate outstanding principal
amount in excess of $10 million, which default shall have resulted
in that indebtedness being accelerated, without that indebtedness
being discharged or that acceleration having been rescinded or
annulled within 30 days after our receipt of the notice of default
from the Trustee or receipt by us and the Trustee of the notice of
default from the holders of not less than 25% in aggregate
principal amount of the notes then outstanding, unless that
default has been cured or waived or
. some events of bankruptcy or insolvency.
The Trustee will, within 90 days after the occurrence of any default,
mail to all holders of the notes notice of all defaults of which the Trustee is
aware, unless those defaults have been cured or waived before the giving of
that notice. The Trustee may withhold notice as to any default other than a
payment default, if it determines in good faith that withholding the notice is
in the interests of the holders. The term default for the purpose of this
provision means any event that is, or after notice or lapse of time or both
would become, an Event of Default with respect to the notes.
The holders of a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that the direction must not be in
conflict with any law or the Indenture and the direction is subject to some
other limitations. The Trustee may refuse to perform any duty or exercise any
right or power or extend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense. No holder of any note will have any right to pursue any
remedy with respect to the Indenture or the notes, unless:
. that holder has previously given the Trustee written notice of a
continuing Event of Default
. the holders of at least 25% in aggregate principal amount of the
outstanding notes have made a written request to the Trustee to
pursue the relevant remedy
. the holder giving that written notice has, or the holders making
that written request have, offered to the Trustee reasonable
security or indemnity against any loss, liability or expense
satisfactory to it
. the Trustee has failed to comply with the request within 60 days
after receipt of that notice, request and offer of security or
indemnity, and
. the holders of a majority in aggregate principal amount of the
outstanding notes have not given the Trustee a direction
inconsistent with that request within 60 days after receipt of
that request.
The right of any holder:
. to receive payment of principal, any redemption amounts, the
Change in Control Purchase Price or interest in respect of the
notes held by that holder on or after the respective due dates
expressed in the notes
. to convert those notes or
. to bring suit for the enforcement of any payment of principal, any
redemption amounts, the Change in Control Purchase Price or
interest in respect of those notes held by that holder on
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or after the respective due dates expressed in the notes, or the
right to convert, will not be impaired or adversely affected
without that holder's consent.
The holders of a majority in aggregate principal amount of notes at the
time outstanding may waive any existing default and its consequences except:
. any default in any payment on the notes
. any default with respect to the conversion rights of the notes or
. any default in respect of the covenants or provisions in the
Indenture which may not be modified without the consent of the
holder of each note as described in "--Modification, Waiver and
Meetings" below.
When a default is waived, it is deemed cured and will cease to exist, but
that waiver does not extend to any subsequent or other default or impair any
consequent right.
We will be required to furnish to the Trustee annually a statement as to
any default by us in the performance and observance of our obligations under
the Indenture. In addition, we will be required to file with the Trustee
written notice of the occurrence of any default or Event of Default within five
business days of our becoming aware of the occurrence of any default or Event
of Default.
Modification, Waiver And Meetings
The Indenture or the notes may be modified or amended by us and the
Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the notes then outstanding. The Indenture or the
notes may not be modified or amended by us without the consent of each holder
affected thereby, to, among other things:
. reduce the principal amount, Change in Control Purchase Price or
any redemption amounts with respect to any note, or extend the
stated maturity of any note or alter the manner of payment or rate
of interest on any note or make any note payable in money or
securities other than that stated in the note
. make any reduction in the principal amount of notes whose holders
must consent to an amendment or any waiver under the Indenture or
modify the Indenture provisions relating to those amendments or
waivers
. make any change that adversely affects the right of a holder to
convert any note
. modify the provisions of the Indenture relating to the ranking of
the notes in a manner adverse to the holders of the notes or
. impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the notes.
Without the consent of any holder of notes, we and the Trustee may amend
the Indenture to:
. cure any ambiguity, defect or inconsistency, provided, however,
that the amendment to cure any ambiguity, defect or inconsistency
does not materially adversely affect the rights of any holder of
notes
. provide for the assumption by a successor of our obligations under
the Indenture
. provide for uncertificated notes in addition to certificated
notes, as long as those uncertificated notes are in registered
form for United States federal income tax purposes
. make any change that does not adversely affect the rights of any
holder of notes
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. make any change to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended
. add to our covenants or our obligations under the Indenture for
the protection of holders of the notes or
. surrender any right, power or option conferred by the Indenture on
us.
Form, Denomination, Exchange, Registration, Transfer and Payment
We expect to initially issue the notes in the form of one or more global
notes. The global notes will be deposited with, or on behalf of, The Depositary
Trust Company ("DTC"), and registered in the name of DTC or its nominee. The
notes will be issued in denominations of $1,000 and $1,000 multiples.
The principal, any premium and any interest on the notes will be payable,
without coupons, and the exchange of and the transfer of the notes will be
registrable, at our office or agency maintained for that purpose in the Borough
of Manhattan, City of New York and at any other office or agency maintained for
the purpose.
Holders may present the notes for exchange, and for registration of
transfer, with the form of transfer endorsed on those notes, or with a
satisfactory written instrument of transfer, duly executed, at the office of
the appropriate securities registrar or at the office of any transfer agent
designated by us for that purpose, without service charge and upon payment of
any taxes and other governmental charges as described in the Indenture. We will
appoint the Trustee of the notes as securities registrar under the Indenture.
We may at any time rescind designation of any transfer agent or approve a
change in the location through which any transfer agent acts, provided that we
maintain a transfer agent in each place of payment for the notes. We may at any
time designate additional transfer agents for the notes.
All moneys paid by us to a paying agent for the payment of principal, any
premium or any interest, on any note which remains unclaimed for two years
after the principal, premium or interest has become due and payable may be
repaid to us, and after the two-year period, the holder of that note may look
only to us for payment.
In the event of any redemption, we will not be required to:
. issue, register the transfer of or exchange notes during a period
beginning at the opening of business 15 days before the day of the
mailing of a notice of redemption of notes to be redeemed and ending
at the close of business on the day of that mailing or
. register the transfer of or exchange any note called for redemption,
except, in the case of any notes being redeemed in part, any portion
not being redeemed.
Book-Entry System
Upon the issuance of a global note, DTC will credit, on its book-entry
registration and transfer system, the respective principal amounts of the notes
represented by that global note to the accounts of institutions or persons,
commonly known as participants, that have accounts with DTC or its nominee. The
accounts to be credited will be designated by the underwriters, dealers or
agents. Ownership of beneficial interests in a global note will be limited to
participants or persons that may hold interests through participants. Ownership
of interests in a global note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by DTC
(with respect to participants' interests) and the participants (with respect to
the owners of beneficial interests in that global note). The laws of some
jurisdictions may require that some purchasers of securities take physical
delivery of the securities in definitive form. These limits and laws may impair
the ability to transfer beneficial interests in a global note.
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So long as DTC, or its nominee, is the registered holder and owner of the
global note, DTC or its nominee, as the case may be, will be considered the
sole owner and holder for all purposes of the notes and for all purposes under
the Indenture. Except as described below, owners of beneficial interests in a
global note will not be entitled to have the notes represented by that global
note registered in their names, will not receive or be entitled to receive
physical delivery of notes in definitive form and will not be considered to be
the owners or holders of any notes under the Indenture or that global note.
Accordingly, each person owning a beneficial interest in a global note must
rely on the procedures of DTC and, if that person is not a participant, on the
procedures of the participant through which that person owns its interest, to
exercise any rights of a holder of notes under the Indenture of that global
note. We understand that under existing industry practice, in the event we
request any action of holders of notes or if an owner of a beneficial interest
in a global note desires to take any action that DTC, as the holder of that
global note is entitled to take, DTC would authorize the participants to take
that action, and that the participants would authorize beneficial owners owning
through them to take those actions or would otherwise act upon the instructions
of beneficial owners owning through them.
Payments of principal of and any premium and any interest on the notes
represented by a global note will be made to DTC or its nominee, as the case
may be, as the registered owner and holder of that global note, against
surrender of the notes at the principal corporate trust office of the Trustee.
Interest payments will be made at the principal corporate trust office of the
Trustee or by a check mailed to the holder at its registered address.
We expect that DTC, upon receipt of any payment of principal, and any
premium and any interest, in respect of a global note, will immediately credit
the participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of that global note as
shown on the records of the DTC. We expect that payments by participants to
owners of beneficial interests in a global note held through those participants
will be governed by standing instructions and customary practices, as is now
the case with securities held for the accounts of customers in bearer form or
registered in "street name,' and will be the responsibility of those
participants. We, our agent, the Trustee and its agent will not have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in a global note or
for maintaining, supervising or reviewing any records relating to those
beneficial ownership interests or for any other aspect of the relationship
between DTC and its participants or the relationship between those participants
and the owners of beneficial interests in that global note owning through those
participants.
Unless and until it is exchanged in whole or in part for notes in
definitive form, a global note may not be transferred except as a whole by DTC
to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC.
The notes represented by a global note will be exchangeable for notes in
definitive form of like tenor as that global note in denominations of $1,000
and in any greater amount that is an integral multiple of $1,000 if:
. DTC notifies us and the Trustee that it is unwilling or unable to
continue as DTC for that global note or if at any time DTC ceases
to be a clearing agency registered under the Exchange Act and a
successor depositary is not appointed by us within 90 days
. we, in our sole discretion, determine not to have all of the notes
represented by a global note and notify the Trustee of that
determination or
. there is, or continues to be, an event of default or there is an
event which, with the giving of notice or lapse of time, or both,
would constitute an event of default with respect to the notes.
Any note that is exchangeable pursuant to the preceding sentence is
exchangeable for notes registered in the names which DTC will instruct the
Trustee. It is expected that DTC's instructions may be based upon directions
received by DTC from its participants with respect to ownership of beneficial
interests in that global
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note. Subject to the foregoing, a global note is not exchangeable except for a
global note or global notes of the same aggregate denominations to be
registered in the name of DTC or its nominee.
Notices
Except as otherwise provided in the Indenture, notices to holders of
notes will be given by mail to the addresses of holders of the notes as they
appear in the Security Register.
Replacement Of Notes
Any mutilated note will be replaced by us at the expense of the holder
upon surrender of that note to the Trustee. Notes that become destroyed, stolen
or lost will be replaced by us at the expense of the holder upon delivery to
the Trustee of notes or evidence of the destruction, loss or theft of the notes
satisfactory to us and the Trustee. In the case of a destroyed, lost or stolen
note, an indemnity satisfactory to the Trustee and us may be required at the
expense of the holder of that note before a replacement note will be issued.
Governing Law
The Indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York.
Information Regarding The Trustee
Chase Manhattan Trust Company, National Association is the Trustee,
Securities Registrar, Paying Agent and Conversion Agent under the Indenture.
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DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 300,000,000 shares of common
stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share. Upon completion of the concurrent offering, we will have
approximately 259,226,152 shares (260,126,152 shares if the underwriters' over-
allotment option is exercised in full) of common stock issued and outstanding.
The following is qualified in its entirety by reference to our
certificate of incorporation and bylaws, copies of which are filed as exhibits
to the Registration Statement of which this prospectus is a part.
Common Stock
As of November 15, 1999, there were 253,226,152 shares of our common
stock outstanding and 6,495,032 shares of our common stock were reserved for
issuance under our 1999 Equity Compensation Plan. Upon completion of the
concurrent offering, there will be 259,226,152 shares of common stock
outstanding.
The holders of our common stock are entitled to dividends as our board of
directors may declare from funds legally available therefor, subject to the
preferential rights of the holders of our preferred stock, if any. The holders
of our common stock are entitled to one vote per share on any matter to be
voted upon by shareholders. Our certificate of incorporation does not provide
for cumulative voting in connection with the election of directors, and
accordingly, holders of more than 50% of the shares voting will be able to
elect all of the directors. No holder of our common stock will have any
preemptive right to subscribe for any shares of capital stock issued in the
future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock, if any. All of the outstanding
shares of common stock are, and the shares offered by us will be, fully paid
and non-assessable.
Preferred Stock
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Our certificate of incorporation provides that our board of
directors may by resolution establish one or more classes or series of
preferred stock having such number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further shareholder approval. The
holders of our preferred stock may be entitled to preferences over common
shareholders with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of directors
resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of Internet Capital Group without
further action by the shareholders and may adversely affect voting and other
rights of holders of our common stock. In addition, issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the outstanding shares of voting stock. At
present, we have no plans to issue any shares of preferred stock.
Registration Rights
After the concurrent offering, the holders of 102,921,620 shares of our
common stock and warrants exercisable for 586,433 shares of our common stock
are entitled to demand registration of their shares under
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the Securities Act. In conjunction with our initial public offering the holders
of 197,934,362 shares of our common stock and warrants exercisable for
2,548,318 shares of our common stock agreed not to demand registration of their
common stock until February 1, 2000 without the prior written consent of the
underwriters of our initial public offering. In connection with the concurrent
offering, the holders of shares of our common stock and warrants
exercisable for shares of our common stock have further agreed not to
demand registration of their common stock for days after the date of the
prospectus for the concurrent offering without the prior written consent of the
underwriters of this offering. After this -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 25.0% of his, her
or its shares eligible for demand rights if the gross offering price would be
expected to exceed $5 million. We are required to use our best efforts to
effect the registration, subject to certain conditions and limitations. In
addition, if days after the date of the concurrent 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 and piggy-back registration rights.
Subject to certain conditions and limitations, they may elect to register their
eligible shares. If we are able to file a registration statement on Form S-3,
the holders of shares eligible for demand rights may register their common
stock along with that registration. The expenses incurred in connection with
such registrations will be borne by us, except that we will pay expenses of
only one registration on Form S-3 at a holder's request per year.
Section 203 of the Delaware General Corporation Law; Certain Anti-Takeover,
Limited Liability and Indemnification Provisions
Section 203 of the Delaware General Corporation Law
The following is a description of the provisions of the Delaware General
Corporation Law, and our certificate of incorporation and bylaws that we
believe are material to investors. This summary does not purport to be complete
and is qualified in its entirety by reference to the Delaware General
Corporation Law, and our certificate of incorporation and bylaws.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. A "business combination" includes certain mergers,
asset sales, and other transactions resulting in a financial benefit to the
"interested stockholder." Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% of the corporation's voting stock.
Certain provisions of our certificate of incorporation and bylaws could
have anti-takeover effects. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our corporate
policies formulated by our Board of Directors. In addition, these provisions
also are intended to ensure that our Board of Directors will have sufficient
time to act in what the board of directors believes to be in the best interests
of us and our shareholders. These provisions also are designed to reduce our
vulnerability to an unsolicited proposal for our takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the restructuring or sale of all or part of Internet Capital
Group. The provisions are also intended to discourage certain tactics that may
be used in proxy fights. However, these provisions could delay or frustrate the
removal of incumbent directors or the assumption of control of us by the holder
of a large block of common stock, and could also discourage or make more
difficult a merger, tender offer, or proxy contest, even if such event would be
favorable to the interest of our shareholders.
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Classified Board of Directors
Our certificate of incorporation provides for our Board of Directors to
be divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms (other than directors
who may be elected by holders of preferred stock). As a result, approximately
one-third of our Board of Directors will be elected each year. The classified
board provision will help to assure the continuity and stability of our Board
of Directors and our business strategies and policies as determined by our
Board of Directors. The classified board provision could have the effect of
discouraging a third party from making an unsolicited tender offer or otherwise
attempting to obtain control of us without the approval of our Board of
Directors. In addition, the classified board provision could delay shareholders
who do not like the policies of our Board of Directors from electing a majority
of our Board of Directors for two years.
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
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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.
Indemnification
We have included in our certificate of incorporation and bylaws
provisions to eliminate the personal liability of our directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware General Corporation Law, and to indemnify our directors and
officers to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
Certificate of Incorporation
The provisions of our certificate of incorporation that could have anti-
takeover effects as described above are subject to amendment, 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.
Bylaws
Our certificate of incorporation provides that our bylaws are subject to
adoption, amendment, alteration, repeal, or rescission either by our Board of
Directors without the assent or vote of our shareholders, or by the affirmative
vote of the holders of not less than two-thirds (66 2/3%) of the outstanding
shares of voting securities. This provision makes it more difficult for
shareholders to make changes in our bylaws by allowing the holders of a
minority of the voting securities to prevent the holders of a majority of
voting securities from amending our bylaws.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services. The Transfer Agent's address is 4 Station Square,
Pittsburgh, Pennsylvania, and its telephone number is (412) 236-8157.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock, including our
common stock issued upon exercise of outstanding options and warrants, in the
public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through the sale of equity securities.
Upon completion of the concurrent offering, there will be 259,562,062
shares of our common stock outstanding (assuming no exercise of the
underwriters' over-allotment option or exercise of outstanding options and
warrants). Of these shares, shares sold in the concurrent offering and
27,727,930 shares sold in our initial public offering and 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.
The shares of common stock issuable upon conversion of the notes sold in this
offering will be fully tradeable in a similar manner.
Upon completion of the concurrent offering, 222,606,152 "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 date of this prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased from us (or
any affiliate) at least one year previously, including a person who may be
deemed our affiliate, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock
(approximately 2,592,262 shares immediately after the concurrent
offering) or;
. the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities
and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. Any person (or persons whose shares are aggregated) who
is not deemed to have been our affiliate at any time during the 90 days
preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us
(or any affiliate) at least two years previously, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
We have agreed not to offer, sell or otherwise dispose of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for our common stock or any rights to acquire our common stock for
a period of 90 days after the date of the prospectus for the concurrent
offering, without the prior written consent of the representatives of the
underwriters, subject to certain limited exceptions. See "Underwriting."
Prior to this offering, the holders of 197,934,362 shares of our common
stock, options exercisable into an aggregate of 1,348,000 shares of common
stock, and warrants exercisable into an aggregate of 2,548,318 shares of our
common stock agreed not to sell any of these securities until February 1, 2000
without the prior written consent of Merrill Lynch. In connection with the
concurrent offering, the holders of have agreed not to sell any of these
securities until without the consent of Merrill Lynch.
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The holders of 102,921,620 shares of our common stock have previously
agreed not to demand registration of their common stock until February 1, 2000
without the prior written consent of Merrill Lynch. In addition, the holders of
shares of our common stock and warrants exercisable for shares of our
common stock have further agreed not to demand registration of their common
stock for days after the date of the prospectus for the concurrent offering
without the prior written consent of Merrill Lynch. After these periods, if any
of these 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.
After giving effect to restrictions imposed by federal securities laws,
these contractual restrictions and shares that may be issued upon exercise of
outstanding options and warrants, we estimate that additional shares of our
common stock will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Approximate Number of
Date Shares Eligible for Sale
---- ------------------------
<S> <C>
November 19 through January 2000.................. 0
February 2000..................................... 159,039,914
March 2000 through June 2000...................... 26,625,480
Thereafter........................................ 39,998,696
</TABLE>
Since many of these shares were purchased at prices substantially below
current market prices, we believe a significant number of these shares will be
sold when eligible for resale.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income and
certain estate tax considerations relating to the purchase, ownership and
disposition of the notes and common stock into which the notes may be
converted. This discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed Treasury Regulations, and judicial
decisions and administrative interpretations thereunder, as of the date hereof,
all of which are subject to change, possibly with retroactive effect. There can
be no assurance that the Internal Revenue Service (the "IRS") will not
challenge one or more of the tax results described herein, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
U.S. federal tax consequences of acquiring or holding notes or common stock.
This discussion does not purport to address all tax considerations that
may be important to a particular holder in light of the holder's circumstances
(such as the alternative minimum tax provisions of the Code), or to certain
categories of investors (such as certain financial institutions, tax-exempt
organizations, dealers in securities, persons who hold notes or common stock as
part of a hedge, conversion or constructive sale transaction, or straddle or
other risk reduction transaction or persons who have ceased to be United States
citizens or to be taxed as resident aliens) that may be subject to special
rules. This discussion is limited to holders of notes who hold the notes and
any common stock into which the notes are converted as capital assets. This
discussion also does not address the tax consequences arising under the laws of
any foreign, state or local jurisdiction.
Persons considering the purchase of a note should consult their own tax
advisors as to the particular tax consequences to them of acquiring, holding,
converting or otherwise disposing of the notes and common stock, including the
effect and applicability of state, local or foreign tax laws.
For purposes of this discussion, the term "U.S. Holder" means a
beneficial owner of a note or common stock that is for U.S. federal income tax
purposes:
. a citizen or resident of the United States,
. a corporation or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or
. an estate or trust, the income of which is subject to United
States federal income taxation regardless of its source.
If a partnership holds notes, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding notes or common stock should
consult their tax advisers.
Tax Consequences to U.S. Holders
Payments of Interest. Interest paid on a note will generally be taxable
to a U.S. Holder as ordinary income at the time it accrues or is received in
accordance with the U.S. Holder's method of accounting for federal income tax
purposes. The notes will not generally be treated as bearing original issue
discount for federal income tax purposes.
Sale, Exchange or Retirement of Notes. Upon the sale, exchange or
retirement of a note, a U.S. Holder will recognize taxable gain or loss equal
to the difference between such holder's adjusted tax basis in the note and the
amount realized on the sale, exchange or retirement (other than amounts
representing interest not previously included in income). A U.S. Holder's
adjusted tax basis in a note will generally equal the cost of the note to such
holder. In general, gain or loss realized on the sale, exchange or retirement
of a note will be capital gain or loss. Prospective investors should consult
their tax advisers regarding the treatment of capital
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gains (which may be taxed at lower rates than ordinary income for taxpayers who
are individuals, trust or estates and have held their notes for more than one
year) and losses (the deductibility of which is subject to limitations).
Conversion of Notes. A U.S. Holder's conversion of a note into common
stock will generally not be a taxable event (except with respect to interest
that has accrued but not been included in income and cash received in lieu of a
fractional share). A U.S. Holder's basis in the common stock received on
conversion of a note will be the same as the U.S. Holder's basis in the note at
the time of conversion (reduced by any tax basis allocable to a fractional
share and increased by the income recognized with respect to accrued interest),
and the holding period for the common stock received on conversion will include
the holding period of the note converted, except that the holding period of the
common stock allocable to interest that has accrued but not been included in
income may commence with the conversion. Upon a U.S. Holder's conversion of a
note into common stock, interest that has accrued but not been included in
income will be taxable to the U.S. Holder as ordinary interest income. The
receipt of cash in lieu of a fractional share of common stock should generally
result in capital gain or loss (measured by the difference between the cash
received for the fractional share interest and the U.S. Holder's tax basis in
the fractional share interest), the taxation of which is described above in "--
Sale, Exchange or Retirement of Notes."
Ownership and Disposition of Common Stock. Dividends, if any, paid on the
common stock generally will be includable in the income of a U.S. Holder as
ordinary income to the extent of the U.S. Holder's ratable share of our current
or accumulated earnings and profits. Upon the sale or exchange of common stock,
a U.S. Holder generally will recognize capital gain or capital loss equal to
the difference between the amount realized on such sale or exchange and the
holder's adjusted tax basis in such shares. Prospective investors should
consult their tax advisers regarding the treatment of capital gains (which may
be taxed at lower rates than ordinary income for taxpayers who are individuals,
trust or estates and have held their common stock for more than one year) and
losses (the deductibility of which is subject to limitations).
Adjustment of Conversion Rate. If at any time we make a distribution of
property to shareholders that would be taxable to such shareholders as a
dividend for federal income tax purposes (for example, distributions of
evidences of indebtedness or our assets, but generally not stock dividends or
rights to subscribe for common stock) and, pursuant to the anti-dilution
provisions of the Indenture, the Conversion Rate of the notes is increased,
such increase may be deemed to be the payment of a taxable dividend to U.S.
Holders of notes. If the Conversion Rate is increased at our discretion or in
certain other circumstances, such increase also may be deemed to be the payment
of a taxable dividend to U.S. Holders of notes. Moreover, in certain other
circumstances, the absence of such an adjustment to the Conversion Rate of the
notes may result in a taxable dividend to the holders of common stock.
Information Reporting Requirements and Backup Withholding
Information reporting will apply to payments of interest or dividends
made by us on, or the proceeds of the sale or other disposition of, the notes
or shares of common stock with respect to certain noncorporate U.S. Holders,
and backup withholding at a rate of 31% may apply unless the recipient of such
payment supplies a taxpayer identification number, certified under penalties of
perjury, as well as certain other information or otherwise establishes an
exemption from backup withholding. Any amount withheld under the backup
withholding rules is allowable as a credit against the U.S. Holder's federal
income tax, provided that the required information is provided to the IRS.
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UNDERWRITING
General
We intend to offer our notes through the underwriters. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Deutsche Bank
Securities, Inc. are acting as representatives of each of the underwriters
named below. Subject to the terms and conditions provided in a purchase
agreement among us and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally has agreed to purchase
from us, the aggregate principal amount of notes identified opposite its name
below.
<TABLE>
<CAPTION>
Principal
Underwriter Amount
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. $
Goldman, Sachs & Co...............................................
Deutsche Bank Securities Inc......................................
------------
Total........................................................ $250,000,000
============
</TABLE>
The underwriters have agreed to purchase all of the notes being sold
pursuant to the terms and conditions of the purchase agreement if any of those
notes are purchased. If an underwriter defaults, the purchase agreement
provides that the purchase commitments of the non-defaulting underwriters may
be increased or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of those liabilities.
The notes are being offered by the 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 offers to the
public and to reject orders in whole or in part.
Commissions and Discounts
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price on the cover page of this
prospectus and to dealers at that price less a concession not in excess of %
of the principal amount of the notes. The underwriters may allow, and the
dealers may reallow, a discount not in excess of % of the principal amount of
the notes to other dealers. After the initial public offering of the notes, the
public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and the proceeds before expenses to us. The information assumes either
no exercise or full exercise by the underwriters of their over-allotment
option.
<TABLE>
<CAPTION>
Without With
Per Note Option Option
-------- ------- ------
<S> <C> <C> <C>
Public offering price............................ $ $ $
Underwriting discount............................ $ $ $
Proceeds, before expenses, to Internet Capital
Group, Inc. .................................... $ $ $
</TABLE>
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<PAGE>
The expenses of the offering, not including the underwriting discount,
are estimated at $684,930 and are payable by us.
Over-allotment Option
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to $37.5 million of the notes
at the public offering price on the cover page of this prospectus, less the
underwriting discount. The underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of our notes offered hereby. If
the underwriters exercise this option, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional notes
proportionate to that underwriter's initial amount reflected in the above
table.
No Sales of Similar Securities
We have agreed, with some exceptions, 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, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise
dispose of or transfer any convertible debt or preferred
securities, whether now owned or later acquired by the person
executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition,
or file a registration statement under the Securities Act relating
to any convertible debt or preferred securities or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our convertible
debt whether any such swap or transaction is to be settled by
delivery of our convertible debt or other securities, in cash or
otherwise.
Price Stabilization and Short Positions
Until the distribution of the notes is completed, rules of the SEC may
limit the ability of the underwriters and some selling group members to bid for
and purchase our notes or the shares of our common stock into which the notes
are convertible. However, the underwriters may engage in transactions that
stabilize the price of our notes or the shares of our common stock into which
the notes are convertible. These transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of these securities.
If the underwriters create a short position in our notes or common stock
in connection with the offering, i.e., if they sell more notes than are listed
on the cover page of this prospectus, the underwriters may reduce that short
position by purchasing our notes or shares of our common stock in the open
market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
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 notes or of the price of our
common stock. In addition, neither we nor any of the underwriters makes any
representation that the underwriters will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
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LEGAL MATTERS
The validity of our notes offered hereby will be passed upon for us by
Dechert Price & Rhoads, Philadelphia, Pennsylvania. Dechert Price & Rhoads
beneficially owns 41,666 shares of our common stock and warrants exercisable at
$6.00 per share to purchase 8,333 shares of our common stock. Members of and
attorneys associated with Dechert Price & Rhoads beneficially own an aggregate
of 12,554 shares of our common stock and warrants exercisable at $6.00 per
share to purchase 1,111 shares of our common stock.
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. Davis Polk & Wardwell beneficially owns 50,000 shares of our common
stock. Members of and attorneys associated with Davis Polk & Wardwell
beneficially own an aggregate of 25,450 shares of our common stock and warrants
exercisable at $6.00 per share to purchase an aggregate of 5,000 shares of our
common stock. Davis Polk & Wardwell is also acting as special Investment
Company Act counsel to us and underwriters.
EXPERTS
The consolidated financial statements of Internet Capital Group, Inc. as
of December 31, 1997 and 1998 and for the period March 4, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998
have been included herein and in the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in auditing and
accounting.
The financial statements of Applica Corporation as of December 31, 1998,
and for the period from September 24, 1998 (inception) through December 31,
1998 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of Breakaway Solutions, Inc. as of December 31,
1997 and 1998, and for each of the years in the three year period ended
December 31, 1998 have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in auditing and accounting.
The financial statements of CommerceQuest, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of CommerX, Inc. as of December 31, 1998 and for
the year ended December 31, 1998 included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of ComputerJobs.com, Inc. as of December 31,
1997 and 1998, and for the period from January 16, 1996 (inception) through
December 31, 1996 and for the years ended December 31, 1997 and 1998 appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth on their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of said firm as experts in auditing and accounting.
113
<PAGE>
The financial statements of eMerge Interactive, Inc. as of December 31,
1997 and 1998 and for each of the years in the three-year period ended December
31, 1998 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of ONVIA.com, Inc. included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in auditing and accounting.
The combined financial statements of Purchasing Group, Inc. and
Integrated Sourcing, LLC as of September 30, 1999 and for the nine months then
ended have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
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, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of traffic.com, Inc. as of December 31, 1998 and
for the period from January 8, 1998 (commencement of activities) to December
31, 1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of United Messaging, Inc. as of December 31,
1998 and for the period from August 25, 1998 (date of inception) to December
31, 1998 included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance on the authority of said firm as experts in giving
said reports.
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 for the year ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of VitalTone Inc. as of September 30, 1999 and
for the period from July 12, 1999 (inception) to September 30, 1999 have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing and accounting.
The financial statements of Vivant! Corporation as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and the periods from August
7, 1997 (Inception) through December 31, 1997 and 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Web Yes, Inc. and Subsidiary as
of December 31, 1997 and 1998, and for the two years ended December 31, 1998
have been included herein and in the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in auditing and
accounting.
The financial statements of WPL Laboratories, Inc. as of December 31,
1997 and 1998, and for the years then ended have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon authority of
said firm as experts in auditing and accounting.
114
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act and we file reports, proxy and information statements and other
information with the Commission. You may read and copy all or any portion of
the reports, proxy and information statements or other information we file 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. Please call the Commission at 1-800-SEC-0330 for further
information on operation of the public reference rooms. 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.
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the notes to be sold in this offering.
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 locations described above, or obtained upon
payment of fees prescribed by the Commission.
115
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors........................................... F-5
Consolidated Balance Sheets.............................................. F-6
Consolidated Statements of Operations.................................... F-7
Consolidated Statements of Shareholders' Equity.......................... F-8
Consolidated Statements of Comprehensive Income (Loss)................... F-9
Consolidated Statements of Cash Flows.................................... F-10
Notes to Consolidated Financial Statements............................... F-11
INTERNET CAPITAL GROUP, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Condensed Combined Financial Statements Basis of
Presentation............................................................ F-34
Unaudited Pro Forma Condensed Combined Balance Sheet..................... F-35
Unaudited Pro Forma Condensed Combined Statements of Operations.......... F-36
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..... F-37
APPLICA CORPORATION
Independent Auditors' Report............................................. F-40
Balance Sheet............................................................ F-41
Statement of Operations.................................................. F-42
Statement of Stockholders' Equity........................................ F-43
Statement of Cash Flows.................................................. F-44
Notes to Financial Statements............................................ F-45
BREAKAWAY SOLUTIONS, INC.
Independent Auditors' Report............................................. F-48
Balance Sheets........................................................... F-49
Statements of Operations................................................. F-50
Statements of Stockholders' Equity....................................... F-51
Statements of Cash Flows................................................. F-52
Notes to Financial Statements............................................ F-53
COMMERCEQUEST, INC.
Report of Independent Certified Public Accountants....................... F-64
Balance Sheets........................................................... F-65
Statements of Operations................................................. F-66
Statements of Changes in Stockholders' (Deficit) Equity.................. F-67
Statements of Cash Flows................................................. F-68
Notes to Financial Statements............................................ F-69
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMMERX, INC.
Report of Independent Accountants........................................ F-79
Balance Sheets........................................................... F-80
Statements of Operations................................................. F-81
Statements of Changes in Stockholders' Deficit........................... F-82
Statements of Cash Flows................................................. F-83
Notes to Financial Statements............................................ F-84
COMPUTERJOBS.COM, INC.
Report of Independent Auditors........................................... F-94
Balance Sheets........................................................... F-95
Statements of Income..................................................... F-96
Statements of Changes in Stockholders' Equity (Deficit).................. F-97
Statements of Cash Flows................................................. F-98
Notes to Financial Statements............................................ F-99
EMERGE INTERACTIVE, INC.
Independent Auditors' Report............................................. F-105
Consolidated Balance Sheets.............................................. F-106
Consolidated Statements of Operations.................................... F-107
Consolidated Statements of Stockholders' Equity (Deficit)................ F-108
Consolidated Statements of Cash Flows.................................... F-109
Notes to Consolidated Financial Statements............................... F-110
ONVIA.COM, INC.
Independent Auditors' Report............................................. F-122
Consolidated Balance Sheets.............................................. F-123
Consolidated Statements of Operations.................................... F-124
Consolidated Statements of Changes in Shareholders' Deficit (Equity)..... F-125
Consolidated Statements of Cash Flows.................................... F-126
Notes to Consolidated Financial Statements............................... F-127
PURCHASING GROUP, INC. AND INTEGRATED SOURCING, LLC
Independent Auditors' Report............................................. F-141
Combined Balance Sheet................................................... F-142
Combined Statement of Operations......................................... F-143
Combined Statements of Stockholders' Deficit and Members' Capital........ F-144
Combined Statement of Cash Flows......................................... F-145
Notes to Combined Financial Statements................................... F-146
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SYNCRA SOFTWARE, INC.
Report of Independent Accountants....................................... F-150
Balance Sheet........................................................... F-151
Statement of Operations................................................. F-152
Statement of Changes in Redeemable Preferred Stock and Stockholders'
Deficit................................................................ F-153
Statement of Cash Flows................................................. F-154
Notes to Financial Statements........................................... F-155
TRAFFIC.COM, Inc.
Report of Independent Accountants....................................... F-164
Balance Sheets.......................................................... F-165
Statements of Operations................................................ F-166
Statements of Shareholders' Deficit..................................... F-167
Statements of Cash Flows................................................ F-168
Notes to Financial Statements........................................... F-169
UNITED MESSAGING, INC.
Report of Independent Public Accountants................................ F-177
Balance Sheets.......................................................... F-178
Statements of Operations................................................ F-179
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................ F-180
Statements of Cash Flows................................................ F-181
Notes to Financial Statements........................................... F-182
UNIVERSAL ACCESS, INC.
Report of Independent Accountants....................................... F-187
Balance Sheets.......................................................... F-188
Statements of Operations................................................ F-189
Statements of Cash Flows................................................ F-190
Statements of Stockholders' (Deficit) Equity............................ F-191
Notes to Financial Statements........................................... F-192
VITALTONE, INC.
Independent Auditors' Report............................................ F-202
Balance Sheet........................................................... F-203
Statement of Operations................................................. F-204
Statement of Stockholders' Equity....................................... F-205
Statement of Cash Flows................................................. F-206
Notes to Financial Statements........................................... F-207
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VIVANT! CORPORATION
Report of Independent Accountants......................................... F-213
Balance Sheets............................................................ F-214
Statements of Operations.................................................. F-215
Statements of Stockholders' Equity (Deficit).............................. F-216
Statements of Cash Flows.................................................. F-217
Notes to Financial Statements............................................. F-218
WEB YES, INC. AND SUBSIDIARY
Independent Auditors' Report.............................................. F-227
Consolidated Balance Sheets............................................... F-228
Consolidated Statements of Operations..................................... F-229
Consolidated Statements of Stockholders' Equity........................... F-230
Consolidated Statements of Cash Flows..................................... F-231
Notes to Consolidated Financial Statements................................ F-232
WPL LABORATORIES, INC.
Independent Auditors' Report.............................................. F-236
Balance Sheets............................................................ F-237
Statements of Income...................................................... F-238
Statements of Stockholders' Equity........................................ F-239
Statements of Cash Flows.................................................. F-240
Notes to Financial Statements............................................. F-241
</TABLE>
F-4
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders Internet Capital Group, Inc.:
When the transaction referred to in the last paragraph of Note 3 of the Notes
to Consolidated Financial Statements has been consummated, we will be in a
position to render the following report.
KPMG LLP
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 were $8,392,155, and its equity in net income (loss) of these
nonsubsidiary investee companies was $3,876,148 for the year ended December 31,
1998. The financial statements of these nonsubsidiary investee companies were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for these nonsubsidiary
investee companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Internet Capital Group, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period March 4, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
May 7, 1999
F-5
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
------------------------ -------------
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents............ $ 5,967,461 $26,840,904 $186,137,151
Short-term investments............... -- -- 22,845,079
Accounts receivable, less allowances
for doubtful accounts ($30,000-1997;
$61,037-1998; $208,645-1999)........ 721,381 1,842,137 8,531,879
Prepaid expenses and other current
assets.............................. 148,313 1,119,062 7,024,086
----------- ----------- ------------
Total current assets................. 6,837,155 29,802,103 224,538,195
Fixed assets, net.................... 544,443 1,151,268 6,169,802
Ownership interests in and advances
to Partner Companies................ 24,045,080 59,491,940 168,690,379
Available-for-sale securities........ -- 3,251,136 19,233,805
Intangible assets, net............... 34,195 2,476,135 22,854,350
Deferred taxes....................... -- -- 18,845,639
Other................................ 20,143 613,393 9,895,199
----------- ----------- ------------
Total Assets........................... $31,481,016 $96,785,975 $470,227,369
=========== =========== ============
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term
debt................................ $ 150,856 $ 288,016 $ 735,885
Line of credit....................... 2,500,000 2,000,000 --
Accounts payable..................... 696,619 1,348,293 4,478,916
Accrued expenses..................... 388,525 1,823,407 10,336,185
Note payable to Partner Company...... -- 1,713,364 --
Deferred revenue..................... 710,393 2,176,585 117,523
Convertible note (Note 3)............ -- -- 8,499,942
----------- ----------- ------------
Total current liabilities............ 4,446,393 9,349,665 24,168,451
Long-term debt....................... 399,948 351,924 1,633,360
Minority interest.................... -- 6,360,008 25,908,961
Commitments and contingencies (Note
16)
Shareholders' Equity
Preferred stock, $.01 par value;
10,000,000 shares authorized........ -- -- --
Common stock, $.001 par value;
authorized 300,000,000 shares;
93,567,250 (1997), 132,087,250
(1998) and 253,014,086 (1999) issued
and outstanding..................... 93,567 132,087 253,014
Additional paid-in capital........... 36,098,031 74,932,416 510,325,881
Retained earnings (accumulated
deficit)............................ (8,642,113) 5,256,815 (3,165,920)
Unamortized deferred compensation.... (914,810) (1,330,011) (14,371,190)
Notes receivable-shareholders........ -- -- (81,147,592)
Accumulated other comprehensive
income.............................. -- 1,733,071 6,622,404
----------- ----------- ------------
Total shareholders' equity........... 26,634,675 80,724,378 418,516,597
----------- ----------- ------------
Total Liabilities and Shareholders'
Equity................................ $31,481,016 $96,785,975 $470,227,369
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
March 4, 1996 (Unaudited)
(Inception) to Year Ended December 31, Nine Months Ended September 30,
December 31, ------------------------- --------------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
----------- ----------- ------------ --------------- ---------------
Operating Expenses
Cost of revenue....... 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative....... 1,920,898 5,742,606 15,513,831 9,829,594 31,002,518
----------- ----------- ------------ --------------- ---------------
Total operating
expenses............. 2,348,368 7,509,623 20,156,359 12,728,294 38,427,112
----------- ----------- ------------ --------------- ---------------
(2,063,228) (6,717,801) (17,021,590) (10,866,495) (23,644,016)
Other income, net....... -- -- 30,483,177 23,514,321 47,001,191
Interest income......... 102,029 264,391 1,305,787 746,769 4,176,770
Interest expense........ (13,931) (126,105) (381,199) (233,117) (1,770,324)
----------- ----------- ------------ --------------- ---------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975,130) (6,579,515) 14,386,175 13,161,478 25,763,621
Income taxes............ -- -- -- -- 12,840,423
Minority interest....... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss).... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ --------------- ---------------
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $11,890,856 $ (6,404,860)
=========== =========== ============ =============== ===============
Net Income (Loss) Per
Share
Basic................. $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (.03)
Diluted............... $ (0.05) $ (0.10) $ 0.12 $ 0.11 $ (.03)
Weighted Average
Shares Outstanding
Basic................. 40,791,548 68,197,688 112,204,578 105,627,672 185,103,758
Diluted............... 40,791,548 68,197,688 112,298,578 105,674,672 185,103,758
Pro Forma Information
(Unaudited) (Note 2):
Pro forma net income
(loss)
Pretax income (loss).. $ 13,898,928 $ (19,245,283)
Pro forma income
taxes................ (5,142,603) 6,735,849
------------ ---------------
Pro forma net income
(loss)............... $ 8,756,325 $ (12,509,434)
============ ===============
Pro forma net income
(loss) per share
Basic................. $ 0.08 $ (0.07)
Diluted............... $ 0.08 $ (0.07)
Pro forma weighted
average shares
outstanding
Basic................. 112,204,578 185,103,758
Diluted............... 112,298,578 185,103,758
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Notes Unamortized Other
--------------------- Paid-In (Accumulated Receivable Deferred Comprehensive
Shares Amount Capital Deficit) Employees Compensation Income Total
----------- -------- ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
March 4, 1996.... -- $ -- $ -- $ -- -- $ -- $ -- $ --
Issuance of common
stock, net....... 27,446,852 27,447 13,658,566 -- -- -- -- 13,686,013
Issuance of common
stock
(Note 10)........ 12,278,148 12,278 1,096,174 -- -- -- -- 1,108,452
Issuance of
restricted
stock............ 12,054,034 12,054 1,007,612 -- -- (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............. 51,779,034 51,779 15,762,352 (2,062,485) -- (892,790) -- 12,858,856
Issuance of common
stock............ 40,275,000 40,275 20,097,230 -- -- -- -- 20,137,505
Issuance of
restricted
stock............ 3,546,106 3,546 414,789 -- -- (418,335) -- --
Forfeitures of
restricted
stock............ (2,032,890) (2,033) (176,340) -- -- 178,373 -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 217,942 -- 217,942
Net loss.......... -- -- -- (6,579,628) -- -- -- (6,579,628)
----------- -------- ------------ ----------- ------------ ------------ ---------- ------------
Balance as of
December 31,
1997............. 93,567,250 93,567 36,098,031 (8,642,113) -- (914,810) -- 26,634,675
Issuance of common
stock, net....... 38,520,000 38,520 38,166,099 -- -- -- -- 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............. 132,087,250 132,087 74,932,416 5,256,815 -- (1,330,011) 1,733,071 80,724,378
Nine months ended
September 30,
1999--Unaudited:
Issuance of common
stock, net....... 70,100,000 70,100 241,046,796 -- -- -- -- 241,116,896
Issuance of common
stock and income
tax benefit upon
exercise of
options.......... 35,991,500 35,992 90,512,442 -- (81,147,592) -- -- 9,400,842
Issuance of common
stock for
ownership
interest
including value
of beneficial
conversion
feature.......... 509,270 509 3,999,549 -- -- -- -- 4,000,058
Issuance of stock
options to non-
employees........ -- -- 3,691,158 -- -- (3,691,158) -- --
Issuance of stock
options to
employees below
deemed fair value
on date of
grant............ -- -- 12,731,085 -- -- (12,731,085) -- --
Issuance of common
stock and waiving
of accrued
interest upon
conversion of
convertible
notes............ 14,999,732 15,000 91,070,325 -- -- -- -- 91,085,325
Net unrealized
appreciation in
available- for-
sale securities.. -- -- -- -- -- -- 4,889,333 4,889,333
Amortization of
deferred
compensation..... -- -- -- -- -- 3,321,021 -- 3,321,021
Issuance of
warrants in
connection with
line of credit... -- -- 1,030,000 -- -- -- -- 1,030,000
LLC termination
(Note 3)......... -- -- (8,657,936) 8,657,936 -- -- -- --
Distribution to
former LLC
members.......... -- -- -- (10,675,811) -- -- -- (10,675,811)
Other............. (673,666) (674) (29,954) -- -- 60,043 -- 29,415
Net loss.......... -- -- -- (6,404,860) -- -- -- (6,404,860)
----------- -------- ------------ ----------- ------------ ------------ ---------- ------------
Balance as of
September 30,
1999
(unaudited)...... 253,014,086 $253,014 $510,325,881 $(3,165,920) $(81,147,592) $(14,371,190) $6,622,404 $418,516,597
=========== ======== ============ =========== ============ ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31, Nine Months Ended September 30,
------------------------ -------------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)....... $(2,062,485) $(6,579,628) $13,898,928 $ 11,890,856 $ (6,404,860)
----------- ----------- ----------- --------------- ---------------
Other Comprehensive
Income (Loss) Before
Tax
Unrealized holding
gains on available-
for-sale securities... -- -- 1,733,071 16,723,419 16,167,352
Reclassification
adjustments........... -- -- -- (8,506,106) (7,712,109)
Tax Related to
Comprehensive Income
(Loss)
Unrealized holding
gains on available-
for-sale securities... -- -- -- -- (5,658,573)
Reclassification
adjustments........... -- -- -- -- 2,092,663
----------- ----------- ----------- --------------- ---------------
Net unrealized
appreciation in
available-for-sale
securities............ -- -- 1,733,071 8,217,313 4,889,333
----------- ----------- ----------- --------------- ---------------
Comprehensive Income
(Loss)................. $(2,062,485) $(6,579,628) $15,631,999 $20,108,169 $ (1,515,527)
=========== =========== =========== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year Ended Nine Months
December 31, Ended September 30,
------------------------- ---------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $(2,062,485) $(6,579,628) $ 13,898,928 $ 11,890,856 $ (6,404,860)
Adjustments to
reconcile to net cash
used in operating
activities:
Other income.......... -- -- (30,483,177) (23,514,321) (46,973,584)
Depreciation and
amortization......... 481,796 446,289 1,135,269 438,769 8,103,725
Equity (income)
loss................. 514,540 (106,298) 5,868,887 3,969,734 49,141,961
Minority interest..... (427,185) 106,411 (5,381,640) (2,699,112) (4,133,057)
Deferred taxes........ -- -- -- -- (13,090,907)
Changes in assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable,
net.................. (2,176,869) 1,574,374 (1,183,360) (332,010) (5,528,323)
Prepaid expenses and
other assets......... (69,558) (142,384) (1,346,515) (464,814) (7,282,894)
Accounts payable...... 43,727 565,672 620,127 1,072,999 3,150,538
Deferred revenue...... 147,100 493,960 1,249,624 579,915 (78,702)
Accrued expenses...... 145,977 204,645 1,415,265 1,731,545 9,119,022
----------- ----------- ------------ ------------ -------------
Net cash used in
operating
activities......... (3,402,957) (3,436,959) (14,206,592) (7,326,439) (13,977,081)
Investing Activities
Capital
expenditures......... (100,480) (272,488) (545,432) (426,945) (5,187,261)
Proceeds from sales
of available-for-
sale
securities........... -- -- 36,431,927 20,460,424 2,495,842
Proceeds from sales
of Partner Company
ownership interests
and advances to a
shareholder.......... -- -- 300,000 -- 3,446,972
Advances to Partner
Companies............ (60,000) (2,800,000) (12,778,884) (2,604,800) (3,758,702)
Repayment of advances
to Partner
Companies............ -- 950,000 677,084 500,000 4,590,272
Acquisitions of
ownership interests
in Partner
Companies, net of
cash acquired........ (6,934,129) (14,465,874) (35,822,393) (21,059,795) (123,976,262)
Other acquisitions
(Note 5)............. -- -- (1,858,389) (1,858,389) (2,103,165)
Purchase of short-
term investments..... -- -- -- -- (22,845,079)
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) (4,989,505) (152,983,278)
Financing Activities
Issuance of common
stock, net........... 13,686,013 20,137,505 38,204,619 29,546,443 241,226,510
Long-term debt and
capital lease
repayments........... (30,191) (57,979) (321,857) (255,761) (448,205)
Proceeds from
convertible
subordinated notes... -- -- -- -- 90,000,000
Line of credit
borrowings........... 1,208,000 2,500,000 2,000,000 -- --
Line of credit
repayments........... (1,106,000) (2,000) (2,500,000) (2,500,000) (280,942)
Distribution to
former LLC members... -- -- -- -- (10,675,811)
Advances to
employees............ -- -- -- -- (8,765,483)
Treasury stock
purchase by
subsidiary........... (60,000) -- -- -- (4,468,980)
Issuance of stock by
subsidiary........... 15,000 200,000 11,293,360 11,291,961 19,669,517
----------- ----------- ------------ ------------ -------------
Net cash provided by
financing
activities......... 13,712,822 22,777,526 48,676,122 38,082,643 326,256,606
----------- ----------- ------------ ------------ -------------
Net Increase in Cash
and Cash Equivalents.. 3,215,256 2,752,205 20,873,443 25,766,699 159,296,247
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 $ 31,734,160 $ 186,137,151
=========== =========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Description of the Company
Internet Capital Group, Inc. (the "Company") was formed on March 4, 1996.
The Company is an Internet holding company actively engaged in business-to-
business, or B2B, e-commerce through a network of companies. The Company
defines e-commerce as conducting or facilitating business transactions over the
Internet. As of December 31, 1998, the Company owned interests in more than 20
companies engaged in e-commerce, which the Company calls its "Partner
Companies". The Company's goal is to become the premier B2B e-commerce company.
The Company's operating strategy is to integrate its Partner Companies into a
collaborative network that leverages the collective knowledge and resources of
the Company and the network.
Basis of Presentation
On February 2, 1999, the Company converted from a Limited Liability
Corporation ("LLC") to a corporation. All shareholder transactions have been
presented as if the conversion occurred on March 4, 1996 (inception).
Principles of Consolidation
During the periods ending December 31, 1996, 1997 and 1998 the Company
acquired equity ownership interests in VerticalNet for $1.0 million, $2.0
million and $4.0 million, respectively. 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 nine months ended September 30, 1999 (unaudited). The
Company's direct and indirect voting interest in VerticalNet at December 31,
1997 and 1998 was 63% and 52%, respectively.
The audited 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.
F-11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an
evaluation of several factors including, among others, representation on the
Partner Company's Board of Directors and ownership level, which is generally a
20% to 50% interest in the voting securities of the Partner Company, including
voting rights associated with the Company's holdings in common, preferred and
other convertible instruments in the Partner Company. Under the equity method
of accounting, a Partner Company's results of operations are not reflected
within the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the Partner Company is reflected
in the caption "Equity income (loss)" in the Consolidated Statements of
Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the
consolidation or equity method of accounting is amortized on a straight-line
basis over three years which adjusts the Company's share of the Partner
Company's earnings or losses.
Cost Method. Partner Companies not accounted for under the consolidation
or the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method impairment charges are recognized in the Consolidated
Statement of Operations with the new cost basis not written-up if circumstances
suggest that the value of the Partner Company has subsequently recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interest in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily
determinable fair values based on quoted market prices, in which case these
interests would be classified as available-for-sale securities or some other
classification in accordance with SFAS No. 115. In addition to the Company's
investments in voting and non-voting equity and debt securities, it also
periodically makes advances to its Partner Companies in the form of promissory
notes which are accounted for in accordance with SFAS No. 114.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have or have committed to invest in its Partner Companies.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
accumulated other comprehensive income in shareholders' equity.
Unrealized gains or losses related to available-for-sale securities will
be recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a C Corporation.
F-12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.
Cash and cash equivalents at December 31, 1998 are invested principally in
money market accounts.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at cost which approximates fair value due to the
short-term maturity of these instruments. Long-term debt is carried at cost
which approximates fair value as the debt bears interest at rates approximating
current market rates.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, is
amortized on a straight-line basis over three years. Goodwill at December 31,
1998 of $2.5 million, net of accumulated amortization of $.3 million, was
attributable to acquisitions by VerticalNet.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation, which is
based on the estimated useful lives of the assets (approximately three to seven
years) computed using the straight-line method.
Equipment acquired under long-term capital lease arrangements is recorded
at amounts equal to the net present value of the future minimum lease payments
using the interest rate implicit in the lease. Amortization is provided by use
of the straight-line method over the estimated useful lives of the related
assets.
Revenue Recognition
All of the Company's revenue from March 4, 1996 (inception) through
December 31, 1998 was attributable to VerticalNet.
VerticalNet's revenue is derived principally from advertising contracts
which include the initial development of storefronts. A storefront is a Web
page posted on one of VerticalNet's trade communities that provides information
on an advertiser's products, links a visitor to the advertiser's Web site and
generates sales inquiries from interested visitors. The advertising contracts
generally do not extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred revenue of
$2.2 million at December 31, 1998 represents the unearned portion of
advertising contracts for which revenue will be recognized over the remaining
period of the advertising contract.
VerticalNet also generates revenue through providing educational courses
and selling books. Revenue from educational courses is recognized in the period
in which the course is completed and revenue from the sale of books is
recognized in the period in which the books are shipped.
F-13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Barter transactions are recorded at the lower of estimated fair value of
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the VerticalNet advertising
impressions (VNAI) are delivered to the customer and advertising expense is
recorded when the customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to VerticalNet
delivering the VNAI, a liability is recorded, and if VerticalNet delivers the
VNAI to the customer prior to receiving the CAI, a prepaid expense is recorded.
For the period March 4, 1996 (inception) through December 31, 1997, VerticalNet
barter transactions were immaterial. For the year ended December 31, 1998,
VerticalNet recognized approximately $.6 million and $.5 million of advertising
revenues and expenses, respectively, from barter transactions. Included in
prepaid expenses and other current assets at December 31, 1998 is approximately
$.2 million relating to barter transactions.
Concentration of Credit Risk
VerticalNet performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral on accounts
receivable. VerticalNet maintains allowances for credit losses and such losses
have been within management's expectations. No single customer accounted for
greater than 10% of total revenue during the period from March 4, 1996
(inception) to December 31, 1996 and the years ended December 31, 1997 and
1998.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards Board No.
121, the Company records an impairment loss on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Deferred Offering Costs
As of December 31, 1998, specific incremental costs directly attributable
to a planned initial public offering (IPO) of VerticalNet shares have been
deferred. These deferred costs, totaling $.5 million, are included in non-
current other assets on the Consolidated Balance Sheet. These costs were
charged against VerticalNet's additional paid-in-capital in connection with the
consummation of VerticalNet's IPO in February 1999.
Stock Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock Based
Compensation." As permitted by SFAS No. 123. the Company measures compensation
cost in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no accounting recognition is given to stock options issued to
employees that are granted at fair market value until they are exercised. Stock
options issued to non-employees are recorded at fair value at the date of
grant. Upon exercise, net proceeds, including tax benefits realized, are
credited to equity. Therefore, the adoption of SFAS No. 123 was not material to
the Company's financial condition or results of operations; however, the pro
forma impact on income (loss) per share has been disclosed in the Notes to
Consolidated Financial Statements as required by SFAS No. 123 (Note 9).
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" (SFAS 130), which requires companies
to report and display comprehensive income and its components in financial
statements. Comprehensive income is the change in equity of a business
F-14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Excluding net income, the Company's source of
comprehensive income is from net unrealized appreciation on its available-for-
sale securities. Reclassification adjustments result from the recognition in
net income of gains or losses that were included in comprehensive income in
prior periods.
Segment Information
At December 31, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131) which requires companies to present financial
and descriptive segment information (Note 11).
Income Taxes
Income taxes are accounted for under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes. The Company has no net
operating loss carry forwards at December 31, 1998 (Note 2).
Net Income Per Share
Net income per share (EPS) is computed using the weighted average number
of common shares outstanding during each year. Dilutive EPS includes common
stock equivalents (unless anti-dilutive) which would arise from the exercise of
stock options and conversion of other convertible securities and is adjusted,
if applicable, for the effect on net income (loss) of such transactions.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Gain or Loss on Issuances of Stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
sells its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations (Note
17).
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
F-15
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
2. Pro Forma Information (Unaudited)
On February 2, 1999, the Company converted from an LLC to a C
corporation. The Company became subject to corporate federal and state income
taxes concurrent with the conversion to a C corporation. The accompanying
Consolidated Statements of Operations for the year ended December 31, 1998 and
nine months ended September 30, 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.
Pro Forma Income Taxes
The Company's 1998 pro forma effective tax rate of 37% differed from the
federal statutory rate of 35% principally due to non-deductible permanent
differences.
Based upon the cumulative temporary differences (primarily relating to
the difference between the book and tax carrying value of its Partner
Companies), the Company would have recognized a pro forma net deferred federal
and state tax asset of $8.2 million at December 31, 1998. In the opinion of
management, it is more likely than not that such asset would be realized and
accordingly, a valuation allowance was not considered necessary in calculating
this pro forma amount.
Pro forma basic and diluted net income per share for the year ended
December 31, 1998 of $0.08 was calculated based on pro forma net income of
$8,756,325 and basic and diluted weighted average shares outstanding of
112,204,578 and 112,298,578, respectively. The difference between basic and
diluted weighted average shares outstanding of 94,000 was due to the dilutive
effect of stock options.
Pro forma basic and diluted net loss per share for the nine months ended
September 30, 1999 of ($0.03) was calculated based on pro forma net loss of
$12,509,434 and basic and diluted weighted average shares outstanding of
185,103,758.
3. Interim Financial Information (Unaudited)
The interim financial statements of the Company for the nine months ended
September 30, 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 nine months ended September 30, 1998 and
1999. The accompanying unaudited interim financial statements are not
necessarily indicative of full year results.
The unaudited interim consolidated financial statements for the nine
months ended September 30, 1999 include the accounts of the Company, its wholly
owned subsidiary, Internet Capital Group Operations, Inc. and its majority
owned subsidiaries, AgProducerNetwork, Inc. ("AgProducer"), Breakaway
Solutions, Inc. ("Breakaway Solutions"), EmployeeLife.com and iParts. In 1999,
the Company acquired a controlling majority interest in Breakaway Solutions for
$17.3 million and in AgProducer, EmployeeLife.com and iParts ("Other Majority
Owned Subsidiaries") for $8.8 million in the aggregate. Breakaway Solutions'
operating activities
F-16
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
have historically consisted primarily of implementation of customer relational
management systems and custom integration to other related applications. In
1999, Breakaway Solutions has expanded 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. The Other Majority Owned Subsidiaries are development
stage companies that have generated negligible revenue since their inception.
In connection with the acquisition of its ownership interest in Breakaway
Solutions and the Other Majority Owned Subsidiaries, the Company recorded the
excess of cost over net assets acquired of $9.1 million and $2.5 million,
respectively, as goodwill which is being amortized over three years. During the
nine months ended September 30, 1999, Breakaway Solutions acquired all of the
outstanding stock of Applica Corporation (Applica), 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. Of the Company's
consolidated intangible assets at September 30, 1999 of $22.9 million, net of
$3.7 million of accumulated amortization, $9.1 million was attributable to the
Company's acquisition of Breakaway Solutions and the Other Majority Owned
Subsidiaries, and $13.8 million was attributable to Breakaway Solutions'
acquisitions of Applica, WPL and WebYes. Breakaway Solutions had revenue of
$7.5 million and $14.7 million for the nine months ended September 30, 1998 and
1999, respectively.
The consolidated financial statements through December 31, 1998,
including the unaudited interim consolidated financial statements for the nine
months ended September 30, 1998, reflect VerticalNet accounted for on the
consolidation method of accounting. The unaudited interim consolidated
financial statements for the nine months ended September 30, 1999 reflect
VerticalNet accounted for on the equity method of accounting due to the
decrease in the Company's ownership below 50%.
The Company's carrying value and cost basis of Partner Companies
accounted for under the equity method of accounting at September 30, 1999 was
$120.0 million and $175.5 million, respectively. The Company's carrying value
and cost basis of Partner Companies accounted for under the cost method of
accounting at September 30, 1999 was $48.7 million and $56.1 million,
respectively.
At September 30, 1999, the Company's carrying value in its Partner
Companies accounted for under the equity method of accounting exceeded its
share of the underlying equity in the net assets of such companies by $65.9
million.
The Company's Partner Companies accounted for under the equity method of
accounting had total revenues of $15.5 million and $73.4 million and total net
loss of $7.1 million and $123.7 million during the nine months ended September
30, 1998 and 1999, respectively.
Basic and diluted net income per share for the nine months ended
September 30, 1999 of $(.03) was calculated based on net loss of $6,404,860 and
basic and diluted weighted average shares outstanding of 185,103,758. Basic and
diluted net income per share and weighted average shares outstanding for the
nine months ended September 30, 1999 were the same due to the Company's net
loss.
On February 2, 1999, the Company converted from an LLC to a corporation.
The Company's accumulated deficit of $8,657,936 at that date was reclassed to
additional paid-in capital.
The Company's effective tax rate for the nine months ended September 30,
1999 of (67%) 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 September 30, 1999 the Company recorded an
additional tax benefit of
F-17
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
$5.1 million, related to the Company's consolidated results for that period,
including $15.6 million of tax expense related to the Company's non-operating
gains related to VerticalNet's common stock issuance.
The Company's net deferred tax asset of $18.8 million at September 30,
1999 consists of a deferred tax asset of $25.6 million relating to the
difference between the book and tax carrying values of its Partner Companies
and the tax effect of stock option compensation and a deferred tax liability of
$6.8 million relating to the tax effect of stock option compensation and the
tax effect of net unrealized appreciation in available-for-sale securities.
In April 1999, the Company entered into a $50 million revolving bank
credit facility (Note 7). The Company borrowed $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 September 30, 1999, borrowing availability
under the facility was $50 million, of which none was outstanding.
During the nine months ended September 30, 1999, the Company utilized
$145.9 million in cash to acquire interests in and make advances to new and
existing Partner Companies, including $13.2 million contributed to Breakaway
Solutions, $4.0 million used to purchase Breakaway Solutions shares directly
from Breakaway Solutions shareholders, $8.8 million in the aggregate to acquire
the Company's ownership interests in the Other Majority Owned Subsidiaries, and
$93.1 million utilized to acquire interests in Partner Companies accounted for
under the equity method of accounting.
During the nine months ended September 30, 1999 the Company acquired an
interest in a new Partner Company from shareholders of the Partner Company who
have an option, exercisable at any time through August 2000, of electing to
receive cash of $11.3 million or 2,083,333 shares of the Company's common
stock. As of September 30, 1999, $8.5 million remains outstanding as $2.8
million of the obligation has been converted into 509,270 shares of the
Company's common stock.
In April through September 1999 the Company's Board of Directors
authorized the acceptance of full recourse promissory notes totaling $81.1
million from its employees and a director as consideration for exercising all
or a portion of their vested and unvested stock options. (A total of 35,991,500
shares of common stock were issued). The $81.1 million notes receivable from
employees is recorded as a reduction of Shareholders' Equity at September 30,
1999 to offset the increase in Additional Paid-In-Capital as a result of the
common stock issuance. 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 was 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. These loans totaled $8.1 million and are
classified as Other Assets.
Through September 30, 1999, the Company recorded aggregate unearned
compensation expense of $18.3 million, net of approximately $3.9 million in
accumulated amortization at September 30, 1999, 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.
In August 1999, the Company completed its initial public offering ("IPO")
of 30,620,000 shares of its common stock at $6.00 per share. Concurrently, the
Company completed a private placement of 7,500,000 shares of its common stock
at the $6.00 IPO price. Upon consummation of the IPO, the $90 million of
Convertible Subordinated Notes discussed in Note 17 converted into 14,999,732
shares of the Company's
F-18
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
common stock. Warrants to acquire 3,000,000 shares of common stock at an
exercise price of $6.00 per share were issued with such notes and remain
outstanding at September 30, 1999.
In October 1999, Breakaway Solutions completed its initial public
offering raising approximately $45 million. As a result of this, the Company's
ownership interest in Breakaway Solutions was reduced to below 50% and will be
accounted for under the equity method beginning in October 1999.
In November 1999, the Company acquired an ownership interest that will be
accounted for under the equity method in eMerge Interactive Inc. for a
combination of cash of $27 million and a non interest bearing note of $23
million. The note has a one year maturity of which $5 million may be payable
earlier under certain circumstances.
On November 15, 1999, the Company's Board of Directors authorized the
filing of a registration statement in connection with a public offering of
common stock and convertible notes of the Company. On the same date, the
Company's Board of Directors authorized a two for one stock split of all shares
of common stock outstanding on the twelfth calendar day after the date that the
Company files the registration statement. All of the information in these
financial statements have been retroactively restated to give effect to the
split as if it had occurred on March 4, 1996 (inception).
4. Ownership Interests in and Advances to Partner Companies
The following summarizes the Company's ownership interests in and
advances to Partner Companies accounted for under the equity method or cost
method of accounting. The ownership interests are classified according to
applicable accounting methods at December 31, 1997 and 1998. Cost basis
represents the Company's original acquisition cost less any impairment charges
in such companies.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------------- --------------------------
Carrying Value Cost Basis Carrying Value Cost Basis
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Equity Method............. $ 1,200,210 $ 1,608,452 $21,311,324 $27,588,451
Cost Method............... 22,844,870 22,844,870 38,180,616 38,180,616
----------- -----------
$24,045,080 $59,491,940
=========== ===========
</TABLE>
At December 31, 1998 the Company's carrying value in its Partner
Companies accounted for under the equity method exceeded its share of the
underlying equity in the net assets of such companies by $12.7 million. This
excess relates to ownership interests acquired in 1998 and is being amortized
over a three year period. Amortization expense of $.4 million is included in
"Equity income (loss)" in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1998.
Of the $5.9 million of equity loss recorded by the Company in 1998,
approximately $4.3 million was attributable to Syncra Software, Inc.
As of December 31, 1998, the Company had $5.2 million in advances to
Partner Companies which mature on various dates through November 25, 1999 and
bear interest at fixed rates between 7% and 10%.
F-19
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following summarized financial information for Partner Companies
accounted for under the equity method of accounting at December 31, 1997 and
1998 has been compiled from the financial statements of the respective Partner
Companies:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets......................................... $ 7,042,767 $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
=========== ===========
</TABLE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Revenue................................ $ 9,365,872 $18,911,691 $ 21,495,832
Net income (loss)...................... $(1,369,774) $ 255,280 $(14,969,192)
</TABLE>
5. Other Acquisitions
In 1998, VerticalNet acquired all of the outstanding capital stock of
Boulder Interactive Technology Services Company (BITC) for $1.9 million in cash
and all of the outstanding capital stock of Informatrix Worldwide, Inc.
(Informatrix) for 99,784 shares of VerticalNet's common stock valued at $.2
million. These acquisitions were accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of the net
assets acquired of approximately $2.8 million was recorded as goodwill and is
being amortized over three years. Accumulated amortization relating to this
goodwill totaled $.3 million at December 31, 1998.
The following unaudited pro forma financial information presents the
combined results of operations as if VerticalNet had owned BITC and Informatrix
since January 1, 1997 and October 15, 1997 (inception), respectively, after
giving effect to certain adjustments including goodwill and income taxes. The
unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company, VerticalNet,
BITC and Informatrix constituted a single entity during such periods.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue.............................................. $ 1,118,030 $ 3,606,027
Pro forma net income (loss).......................... $(7,590,016) $13,166,449
Pro forma net income (loss) per share................ $ (.11) $ (.12)
</TABLE>
F-20
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
6. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment and software........................... $681,656 $1,564,297
Office equipment and furniture............................ 148,430 271,809
Trade show equipment...................................... 34,079 40,587
Leasehold improvements.................................... 29,402 45,864
-------- ----------
893,567 1,922,557
Less: accumulated depreciation and amortization........... (349,124) (771,289)
-------- ----------
$544,443 $1,151,268
======== ==========
</TABLE>
7. Debt
Revolving Credit Facilities
In March 1998, the Company entered into an unsecured $3 million revolving
credit facility. Borrowings under this facility accrued interest at a premium
to prime ranging from .75% to 1.5%. The Company borrowed up to $2 million under
this facility during 1998. No amounts were outstanding at December 31, 1998 and
the facility expired in March 1999.
In April 1999, the Company entered into a $50 million revolving bank
credit facility. In connection with the facility, the Company issued 400,000
warrants exercisable for seven years at $5 per share. The facility matures in
April 2000, is subject to a .25% unused commitment fee, bears interest, at the
Company's option, at prime and/or LIBOR plus 2.5%, and is secured by
substantially all of the Company's assets (including the Company's holdings in
VerticalNet). Borrowing availability under the facility is based on the fair
market value of the Company's holdings of publicly traded Partner Companies
(currently only VerticalNet) and the value, as defined in the facility, of the
Company's private Partner Companies. Based on the provisions of the borrowing
base, borrowing availability at April 30, 1999 was $32.6 million, of which none
was outstanding. As of May 7, 1999, the Company had borrowed $13 million under
the facility.
VerticalNet had a line of credit with a bank in the amount of $2.5
million at December 31, 1997. Borrowings under the facility were collateralized
by a security interest in all assets of VerticalNet and required VerticalNet to
meet specified financial ratios. As of December 31, 1997, VerticalNet was in
technical default, as it did not meet the specified financial ratios, but the
bank waived these violations. The facility accrued interest at prime plus 1.5%
(10% at December 31, 1997). The weighted average interest rate for borrowings
under this facility was 10% for the year ended December 31, 1997.
As of June 1998, VerticalNet modified the agreement, reducing its line of
credit with the bank to $.5 million. On November 25, 1998, the agreement was
additionally amended allowing the Company to execute a $2.0 million note with
the bank. The note accrues interest at prime plus 1.5% and matures at the
earlier of March 31, 1999 or the completion of VerticalNet's next financing. In
connection with the loan, VerticalNet issued warrants to purchase 20,513 shares
of VerticalNet's common stock at an exercise price of $16 per share with an
estimated fair value of $.1 million. As of December 31, 1998, the outstanding
balance for borrowings under this facility was $2 million and the weighted
average interest rate for the year ended December 31, 1998 was 10%. Upon the
completion of VerticalNet's IPO in February 1999, VerticalNet repaid $2 million
and the line of credit with the bank was reduced to $.5 million.
F-21
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Long-Term Debt
All of the Company's long-term debt is attributable to VerticalNet and
consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Term notes with related parties............................. $100,000 $ --
Term bank notes............................................. 32,852 --
Capital leases.............................................. 417,952 639,940
-------- --------
550,804 639,940
Less: current portion....................................... (150,856) (288,016)
-------- --------
Long-term debt.............................................. $399,948 $351,924
======== ========
</TABLE>
VerticalNet had three unsecured term notes due to shareholders with an
interest rate of 7%. The notes were to mature on February 2001. One of the
holders of these notes is a Board member of the Company. These notes were
repaid in May 1998.
VerticalNet had a term loan with another bank with an interest rate at
prime plus 2.75% (11.25% at December 31, 1997) which was payable in 36 monthly
installments. This note was repaid in May 1998.
VerticalNet has several capital leases on its equipment with lease terms
ranging from three to five years. The interest rates implicit in the leases
are 8% to 20%. At December 31, 1997 and 1998, the book value of assets held
under capital leases was approximately $.3 million and $.5 million,
respectively, and the aggregate remaining minimum lease payments at December
31, 1998 were approximately $.7 million including interest of approximately
$.1 million.
At December 31, 1998, long-term debt is scheduled to mature as follows:
<TABLE>
<S> <C>
1999............................................................. $288,016
2000............................................................. 230,338
2001............................................................. 95,718
2002............................................................. 19,810
2003............................................................. 6,058
--------
Total............................................................ $639,940
========
</TABLE>
8. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Accrued compensation and benefits.......................... $ 90,833 $ 454,230
Accrued marketing costs.................................... -- 446,334
Other...................................................... 297,692 922,843
-------- ----------
$388,525 $1,823,407
======== ==========
</TABLE>
F-22
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
9. Shareholders' Equity
The Company's authorized capital stock consists of 130,000,000 shares of
common stock, par value $.001 per share. The holders of common stock are
entitled to one vote per share and are entitled to dividends as declared.
Dividends may be restricted by the inability to liquidate ownership
interests in Partner Companies to fund cash dividends and may be subject to the
preferential rights of the holders of the Company's preferred stock, if any.
The Company may establish one or more classes or series of preferred
stock. The holders of the preferred stock may be entitled to preferences over
common stock or shareholders with respect to dividends, liquidation,
dissolution, or winding up of the Company, as established by the Company's
Board of Directors. No preferred stock is authorized at December 31, 1998.
Certain shareholders were granted registration rights which become
effective after completion of a public offering.
Shareholders' equity contributions are recorded when received. The
Company issued 31,980,000 shares of common stock for net proceeds of $32
million in 1999. These shares had been subscribed for at December 31, 1998.
Restricted Stock
During 1996 and 1997, 12,054,034 and 1,513,216 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 13,567,250 shares of restricted stock
had been granted at a weighted average fair value of $0.10 per share or an
aggregate of $1.3 million based on independent valuations of the shares. These
independent valuations took into account certain factors, primarily the
restrictions on the ability of restricted shareholders to receive distributions
of dividends or profits and the uncertainty of realization of any return from
these shares. The $1.3 million of deferred compensation is classified as a
reduction of shareholders' equity and is being amortized over the five-year
vesting period. Compensation expense related to the restricted stock totaling
$.1 million, $.2 million and $.3 million was recorded in 1996, 1997 and 1998,
respectively.
Stock Option Plans
Incentive or non-qualified stock options may be granted to Company
employees, directors and consultants under several stock option plans
("Plans"). Generally, the options vest over a four to five year period and
expire eight to ten years after the date of grant. At December 31, 1998, the
Company reserved 10,470,000 shares of common stock for possible future issuance
under the Plans. VerticalNet and most Partner Companies also maintain their own
stock option plans.
F-23
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following table summarizes the activity of the Company's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1997....................... -- $ --
Options granted...................................... 188,000 0.50
Options canceled/forfeited........................... -- --
----------
Outstanding at December 31, 1997..................... 188,000 0.50
Options granted...................................... 12,094,000 1.00
Options canceled/forfeited........................... (94,000) (0.50)
----------
Outstanding at December 31, 1998..................... 12,188,000 $ 1.00
==========
</TABLE>
No options were issued by the Company in 1996. At December 31, 1997 there
were no options exercisable under the Plans. At December 31, 1998 there were
11,750 options exercisable at $1.00 per share under the Plans.
The following table summarizes information about stock options
outstanding:
<TABLE>
<CAPTION>
Weighted Average
Number Outstanding at Remaining Contractual
Exercise Price December 31, 1998 Life (in Years)
-------------- --------------------- ---------------------
<S> <C> <C>
$0.50......................... 94,000 7
$1.00......................... 12,094,000 10
</TABLE>
Included in the 1998 option grants are 994,000 stock options to non-
employees. The fair value of these options of $.7 million was recorded as
deferred compensation in 1998 and is being amortized over the five year vesting
period. The fair value of these options was determined using the Black-Scholes
method assuming a volatility of 80%, a dividend yield of 0%, an average
expected option life of 5 years, and a risk-free interest rate of 5.2%.
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Had compensation cost been recognized pursuant to SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net income (loss)
As reported......................................... $(6,579,628) $13,898,928
SFAS 123 pro forma.................................. $(6,648,952) $13,436,582
Net income (loss) per share
As reported......................................... $ (.10) $ .12
SFAS 123 pro forma.................................. $ (.10) $ .12
</TABLE>
The per share weighted-average fair value of options issued by the
Company during 1997 and 1998 was approximately $0.11 and $0.22, respectively.
F-24
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following assumptions were used to determine the fair value of stock
options granted to employees by the Company, its subsidiaries, and Partner
Companies accounted for under the equity method using the minimum value option-
price model:
<TABLE>
<S> <C>
Dividend yield................................................... 0%
Average expected option life..................................... 5 years
Risk-free interest rate.......................................... 5.2%
</TABLE>
In 1999 through May 7, 1999, the Company granted 7,169,000 options to
employees and non-employees at exercise prices ranging from $1.00 to $2.44.
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.
F-25
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Certain executives of the Company and its Partner Companies have the
option to purchase a portion of the Company's ownership interest in various
Partner Companies at the Company's cost.
11. Segment Information
In 1998, the Company adopted SFAS 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of
Partner Company Operations and General ICG Operations. Partner Company
Operations includes the effect of consolidating VerticalNet for the periods
ended December 31, 1996, 1997 and 1998 and the nine months ended September 30,
1999 and AgProducer Inc., Breakaway Solutions, EmployeeLife.com and iParts for
the period from acquisition in 1999 through September 30, 1999, and recording
the Company's share of earnings and losses of Partner Companies accounted for
under the equity method. VerticalNet's operations include creating and
operating industry-specific trade communities on the Internet. Breakaway
Solutions' operations include implementation of various computer applications.
AgProducer, EmployeeLife.com and iParts are development stage companies that
have generated negligible revenue since their inception. 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, 1998 and 1999.
F-26
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
The following summarizes information related to the Company's segments.
All significant intersegment activity has been eliminated. Assets are owned or
allocated assets used by each operating segment.
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------- -------------------------
March 4, 1996
(Inception)
Through
December 31,
1996 1997 1998 1998 1999
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Partner Company
Operations
Revenue................. $ 285,140 $ 791,822 $ 3,134,769 $ 1,861,799 $ 14,783,096
----------- ----------- ------------ ----------- ------------
Operating expenses
Cost of revenue........ 427,470 1,767,017 4,642,528 2,898,700 7,424,594
Selling, general and
administrative........ 291,660 1,388,123 4,106,583 7,312,682 18,267,184
----------- ----------- ------------ ----------- ------------
Total operating
expenses.............. 987,547 5,455,505 16,643,773 10,211,382 25,691,778
----------- ----------- ------------ ----------- ------------
(702,407) (4,663,683) (13,509,004) (8,349,583) (10,908,682)
Other income (expense),
net................... -- -- -- -- 27,607
Interest income........ 7,491 10,999 212,130 164,535 85,946
Interest expense....... (13,931) (126,105) (297,401) (149,369) (53,969)
----------- ----------- ------------ ----------- ------------
Income (loss) before
income taxes, minority
interest and equity
income (loss)......... (708,847) (4,778,789) (13,594,275) (8,334,417) (10,849,098)
Income taxes........... -- -- -- -- --
Minority interest...... 427,185 (106,411) 5,381,640 2,699,112 4,133,057
Equity income (loss)... (514,540) 106,298 (5,868,887) (3,969,734) (49,141,961)
----------- ----------- ------------ ----------- ------------
Loss from Partner
Company Operations..... $ (796,202) $(4,778,902) $(14,081,522) $(9,605,039) $(55,858,002)
=========== =========== ============ =========== ============
General ICG Operations
General and
administrative........ $ 1,360,821 $ 2,054,118 $ 3,512,586 $ 2,516,912 $ 12,735,334
----------- ----------- ------------ ----------- ------------
Other income, net...... -- -- 30,483,177 23,514,321 46,973,584
Interest income, net... 94,538 253,392 1,009,859 498,486 2,374,469
Income taxes........... -- -- -- -- 12,840,423
----------- ----------- ------------ ----------- ------------
Income (loss) from
General ICG
Operations............ $(1,266,283) $(1,800,726) $ 27,980,450 $21,495,895 $ 49,453,142
=========== =========== ============ =========== ============
</TABLE>
F-27
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------------- September
1997 1998 30, 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Partner Company Operations
Carrying value of equity method Partner
Companies.............................. $ 1,200,210 $21,311,324 $120,034,751
Other................................... 2,104,087 12,342,975 57,608,628
----------- ----------- ------------
3,304,297 33,654,299 177,643,379
General ICG Operations
Cash and cash equivalents............... 5,212,745 21,178,055 173,658,018
Carrying value of cost method Partner
Companies.............................. 22,844,870 38,180,616 48,655,628
Other................................... 119,104 3,773,005 70,270,344
----------- ----------- ------------
28,176,719 63,131,676 292,583,990
----------- ----------- ------------
$31,481,016 $96,785,975 $470,227,369
=========== =========== ============
</TABLE>
12. Parent Company Financial Information
The Company's consolidated financial statements reflect VerticalNet
accounted for under the consolidation method of accounting from the Company's
inception in March 1996 through December 31, 1998 (audited) and under the
equity method of accounting for the nine months ended September 30, 1999
(unaudited). The Company's consolidated financial statements for the nine
months ended September 30, 1999 reflect AgProducer, Breakaway Solutions,
EmployeeLife.com and iParts ("1999 Consolidated Companies") accounted for under
the consolidation method of accounting (unaudited).
Parent company financial information is provided to present the financial
position and results of operations of the Company as if VerticalNet and the
1999 Consolidated Companies were accounted for under the equity method of
accounting for all periods presented during which the Company owned its
ownership interest in each company. The Company's share of VerticalNet's and
the 1999 Consolidated Companies 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
the 1999 Consolidated Companies as of September 30, 1999 are included in
"Ownership interests in and advances to Partner Companies" in the Parent
Company Balance Sheets. The September 30, 1999 Parent Company Balance Sheet and
the Parent Company Statements of Operations for the nine months ended September
30, 1998 and 1999 are unaudited.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------- (Unaudited)
September
1997 1998 30, 1999
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Current assets.......................... $ 5,245,064 $21,596,575 $194,524,991
Ownership interests in and advances to
Partner Companies...................... 24,045,080 59,491,940 187,997,023
Other................................... 86,785 3,354,485 49,403,371
----------- ----------- ------------
Total assets.......................... 29,376,929 84,443,000 431,925,385
Liabilities and shareholders' equity
Current liabilities..................... 318,729 2,082,463 13,408,788
Non-current liabilities................. 2,423,525 1,636,159 --
Shareholders' equity.................... 26,634,675 80,724,378 418,516,597
----------- ----------- ------------
Total liabilities and shareholders'
equity............................... $29,376,929 $84,443,000 $431,925,385
=========== =========== ============
</TABLE>
F-28
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
Parent Company Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------- ------------------------
March 4, 1996
(Inception) to
December 31,
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ -- $ --
----------- ----------- ------------ ----------- -----------
Operating expenses
General and
administrative....... 1,360,821 2,054,118 3,512,586 2,516,912 12,735,334
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 1,360,821 2,054,118 3,512,586 2,516,912 12,735,334
----------- ----------- ------------ ----------- -----------
(1,360,821) (2,054,118) (3,512,586) (2,516,912) (12,735,334)
Other income, net....... -- -- 30,483,177 23,514,321 46,973,584
Interest income, net.... 94,538 253,392 1,009,859 498,486 2,374,469
----------- ----------- ------------ ----------- -----------
Income (loss) before
income taxes and equity
income (loss).......... 1,266,283 (1,800,726) 27,980,450 21,495,895 36,612,719
Income taxes............ -- -- -- -- 12,840,423
Equity income (loss).... (796,202) (4,778,902) (14,081,522) (9,605,039) (55,858,002)
----------- ----------- ------------ ----------- -----------
Net income (loss)....... $(2,062,485) $(6,579,628) $ 13,898,928 $11,890,856 $(6,404,860)
=========== =========== ============ =========== ===========
</TABLE>
13. Supplemental non-cash financing and investing activities
During the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999 (unaudited), the Company converted $1.4 million, $1.8
million and $6.4 million, respectively, of advances to Partner Companies into
ownership interests in Partner Companies.
During the year ended December 31, 1998, the Company exchanged all of its
holdings in Matchlogic and Wisewire for shares of Excite and Lycos,
respectively (Note 15).
Interest paid in the periods ended December 31, 1997 and 1998 was $.l
million and $.2 million, respectively.
The Company paid no income taxes in 1996, 1997 and 1998 due to its tax
status as an LLC.
In 1998, the Company acquired an ownership interest in a Partner Company
in exchange for a $1.7 million note payable. The note is payable in two equal
installments through June 1999, does not bear interest and is secured with the
acquired stock of the Partner Company. In March 1999, a shareholder of the
Company assumed $.4 million of this note.
14. Defined Contribution Plan
In 1997, the Company established a defined contribution plan that covers
all of its employees. Participants may contribute 1% to 15% of pre-tax
compensation, as defined. The Company may make discretionary contributions to
the plan but has never done so.
F-29
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
15. Other Income
Other income consists of the following for the year ended December 31,
1998:
<TABLE>
<S> <C>
Sale of Matchlogic to Excite.................................... $12,822,162
Sale of Excite holdings......................................... 16,813,844
Sale of WiseWire to Lycos....................................... 3,324,238
Sale of Lycos holdings.......................................... 1,471,907
Partner Company impairment charges.............................. (3,948,974)
-----------
$30,483,177
===========
</TABLE>
Gains on sales of Partner Companies and available-for-sale securities are
determined using average cost.
In February 1998, the Company exchanged all of its holdings in MatchLogic
for 763,820 shares of Excite. The fair market value of the Excite shares
received of $14.3 million on the date of exchange was used to determine the
gain of $12.8 million. Throughout the remainder of 1998, the Company sold
716,082 shares of Excite which resulted in $30.2 million of proceeds and $16.8
million of gains.
In April 1998, the Company exchanged all of its holdings in WiseWire for
191,922 shares of Lycos, Inc. The fair market value of the Lycos shares
received of $5.3 million on the date of exchange was used to determine the
gain of $3.3 million. Throughout the remainder of 1998, the Company sold
169,548 shares of Lycos which resulted in $6.2 million of proceeds and $1.5
million of gains.
In December 1998 the Company recorded an impairment charge of $1.9
million for the decrease in value of one of its Partner Companies accounted
for under the cost method of accounting as a result of selling the Partner
Company interest below its carrying value. The Company had acquired its
ownership interest in the Partner Company during 1996 and 1997. In December
1998, the Partner Company agreed to be acquired by an independent third party.
The transaction was completed in January 1999. The impairment charge the
Company recorded was determined by calculating the difference between the
proceeds it received from the sale and its carrying value.
For the year ended December 31, 1998 and the nine months ended September
30, 1999, the Company recorded impairment charges of $2.0 million and $5.3
million (unaudited), respectively, for the other than temporary decline in the
fair value of a cost method Partner Company. From the date of its initial
acquisition of an ownership interest in this Partner Company through December
31, 1998, the Company's funding to this Partner Company represented all of the
outside capital the company had available to fund its net losses and capital
asset requirements. During the nine months ended September 30, 1999 the
Company fully guaranteed the Partner Company's new bank loan and agreed to
provide additional funding. The Company acquired an additional ownership
interest in this Partner Company for $5.0 million in April 1999. The
impairment charges the Company recorded were determined by the decrease in net
book value of the Partner Company caused by its net losses which were funded
entirely based on the Company's funding and bank guarantee. Given its
continuing losses, the Company will continue to determine and record
impairment charges in a similar manner for this Partner Company until the
status of its financial position improves.
16. Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the amount of the ultimate liability with respect to
F-30
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
these actions will not materially affect the financial position, results of
operations or cash flows of the Company and its subsidiaries.
In connection with its ownership interests in certain Partner Companies,
the Company guaranteed $3.2 million of bank loan and other commitments and has
committed capital of $2 million to an existing Partner Company to be funded in
1999.
The Company and VerticalNet lease their facilities under operating lease
agreements expiring through 2004. Future minimum lease payments as of December
31, 1998 under the leases are as follows:
<TABLE>
<S> <C>
1999............................................................. $385,316
2000............................................................. 402,565
2001............................................................. 266,970
2002............................................................. 239,984
2003............................................................. 246,274
Thereafter....................................................... 103,385
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$.1 million and $.3 million for the years ended December 31, 1997 and 1998,
respectively.
Because many of its Partner Companies are not majority-owned
subsidiaries, changes in the value of the Company's interests in Partner
Companies and the income or loss and revenue attributable to them could require
the Company to register under the Investment Company Act unless it takes action
to avoid being required to register. However, the Company believes it can take
steps to avoid being required to register under the Investment Company Act
which would not adversely affect its operations or shareholder value.
On June 30, 1998, VerticalNet entered into a three year Sponsorship
Agreement with Excite, Inc. (Excite). The Sponsorship Agreement provides for
VerticalNet and Excite to sponsor and promote thirty co-branded Web pages and
for each company to sell advertising on the Web pages. Excite has guaranteed a
minimum number of advertising impressions for each of the three years. The
agreement is cancelable by either party, as defined, and requires VerticalNet
to pay Excite $0.9 million, $2.0 million and $3.0 million, respectively, in
year one, two and three under the agreement. Such payments will be charged to
expense as the advertising impressions are provided by Excite. In addition,
each company will provide the other with $.2 million in barter advertising
during the term of the Sponsorship Agreement. As of December 31, 1998, each
company has satisfied the barter provisions under the Sponsorship Agreement.
On January 19, 1999, VerticalNet entered into a one-year agreement with
Compaq Computer Corporation (Compaq) and its Internet Web site known as
AltaVista. The agreement provides for VerticalNet and AltaVista to sponsor and
promote thirty-one co-branded Web pages. The agreement requires VerticalNet to
pay Compaq $1.0 million over the term of the agreement based on the number of
advertising impressions delivered. Such amount will be charged to expense as
the advertising impressions are provided by AltaVista. In addition, each
company will provide the other with $.3 million in barter advertising during
the term of the agreement.
VerticalNet has entered into non-cancelable obligations with several
content service providers and Internet search engines. Under these agreements,
exclusive of the Excite and AltaVista agreements discussed above, VerticalNet's
obligations are as follows:
<TABLE>
<S> <C>
1999........................................................... $1,488,734
2000........................................................... 65,500
</TABLE>
F-31
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
VerticalNet has entered into employment agreements with several
employees. The agreements are cancelable, but require severance upon
termination. As of December 31, 1998, VerticalNet would be required to pay
approximately $1 million in severance in the event that these employment
agreements are canceled.
17. Fiscal 1999 Events
Issuance of Common Stock
The Company issued 15,990,000 shares of common stock for net proceeds of
$32 million from January through March, 1999 (Note 9).
In April 1999 the Company's Board of Directors authorized the acceptance
of full recourse promissory notes from its employees and a director as
consideration for exercising all or a portion of their vested and unvested
stock options. The Company has the right, but not the obligation, to repurchase
unvested shares under certain circumstances. The exercise of unvested options
by the employees and director and the acceptance of promissory notes by the
Company are in accordance with the terms of the Company's equity compensation
plans and related option agreements. The Company's Board of Directors also
approved loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in connection with
the option exercises.
VerticalNet Initial Public Offering
In February 1999, VerticalNet completed its initial public offering (IPO)
of 4,025,000 shares of its common stock at $16.00 per share. Net proceeds to
VerticalNet were approximately $58.3 million. As a result of the VerticalNet
IPO, the Company recorded a gain in 1999 of approximately $28 million relating
to the increase in the Company's share of VerticalNet's net equity.
Tax Distribution
In March 1999 the Company made a distribution of $10.7 million to former
LLC members in accordance with the LLC agreements to satisfy the members' tax
liabilities.
Ownership Interests in and Advances to Partner Companies
Through May 7, 1999, the Company expended approximately $60 million to
acquire interests in or make advances to new and existing Partner Companies.
Revolving Bank Credit Facility
In April 1999, the Company entered into a $50 million revolving bank
credit facility (Note 7).
Convertible Subordinated Notes
On May 5, 1999, the Company's Board of Directors authorized the issuance
of up to $90 million of convertible subordinated notes. The notes bear interest
at an annual rate of 4.99% during the first year and at the prime rate for the
remaining two years. Prior to May 2000, the notes will automatically convert
into shares of the Company's common stock at the initial public offering price
upon consummation of an initial public offering or at the per share value of a
private round of equity financing of at least $50 million. If the notes are
F-32
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
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.
F-33
<PAGE>
INTERNET CAPITAL GROUP, INC.
Pro Forma Condensed Combined Financial Statements
Basis of Presentation
(Unaudited)
During 1998 and 1999, the Company acquired significant minority ownership
interests in 27 Partner Companies accounted for under the equity method of
accounting. In October 1999, the Company acquired a majority ownership interest
in Purchasing Solutions, Inc. In October 1999, Purchasing Solutions, Inc.
acquired all of the assets of Purchasing Group, Inc. and Integrated Sourcing,
LLC, two related businesses. In November 1999, the Company acquired a
significant minority ownership interest in eMerge Interactive, Inc. for total
purchase consideration of $48.2 million. All acquisitions have been accounted
for using the purchase method of accounting. In addition, the Company
deconsolidated VerticalNet, Inc. subsequent to December 31, 1998 and Breakaway
Solutions, Inc. subsequent to September 30, 1999 due to the decrease in the
Company's voting ownership percentage in each company from above to below 50%.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1998 gives effect to the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc., the
acquisitions of Purchasing Solutions, Inc., Purchasing Group, Inc. and
Integrated Sourcing, LLC, the deconsolidation of VerticalNet, Inc, the 1998 and
1999 acquisitions of significant minority ownership interests in 27 equity
method Partner Companies, and the acquisition of the Company's ownership
interest in Breakaway Solutions, Inc. as a company accounted for under the
equity method as if the transactions had occurred on January 1, 1998. As
Breakaway Solutions, Inc. was initially acquired in the first quarter of 1999,
no pro forma adjustments to the 1998 financial statements are necessary to
reflect its deconsolidation subsequent to September 30, 1999.
The unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 1999 gives effect to the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc., the
acquisitions of Purchasing Solutions, Inc., Purchasing Group, Inc. and
Integrated Sourcing, LLC, the 1999 acquisitions of significant minority
ownership interests in 19 equity method Partner Companies, and the acquisition
of the Company's ownership interest in Breakaway Solutions, Inc. as a company
accounted for under the equity method as if the transactions had occurred on
January 1, 1998. As VerticalNet, Inc. was deconsolidated in the first quarter
of 1999, no pro forma adjustments to the consolidated statement of operations
for the nine months ended September 30, 1999 are necessary to reflect its
deconsolidation.
The unaudited pro forma condensed combined balance sheet as of September
30, 1999 gives effect to the acquisition of a significant minority ownership
interest in eMerge Interactive, Inc., the acquisitions of Purchasing Solutions,
Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC, the deconsolidation
of Breakaway Solutions, Inc., and the acquisitions during the period from
October 1, 1999 through November 18, 1999 of significant minority ownership
interests in five new and six existing equity method Partner Companies as if
the transactions had occurred on September 30, 1999.
The unaudited pro forma condensed combined financial statements have been
prepared by the management of the Company and should be read in conjunction
with the Company's historical consolidated financial statements contained
elsewhere herein, and the historical consolidated financial statements of
eMerge Interactive, Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC
which are included elsewhere herein. Since the unaudited pro forma financial
statements which follow are based upon the financial condition and operating
results of eMerge Interactive, Inc., Purchasing Solutions, Inc., Purchasing
Group, Inc., Integrated Sourcing, LLC and the equity method Partner Companies
acquired during periods when they were not under the control 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 on
the pro forma dates reflected 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 Purchasing Solutions, Inc., Purchasing Group, Inc., Integrated Sourcing,
LLC, eMerge Interactive, Inc. and the other equity method Partner Companies.
F-34
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet September 30, 1999
<TABLE>
<CAPTION>
Internet
Capital Breakaway Pro Forma Sub- e-Merge Pro Forma
Group, Inc. Deconsolidation Adjustments Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash
equivalents........... $186,137,151 $ (7,747,165) $(65,612,408)b $106,523,328 $(27,000,000)a $ 79,523,328
(7,699,800)c
1,445,550 c
Short-term
investments........... 22,845,079 -- -- 22,845,079 -- 22,845,079
Accounts receivable,
less allowance for
doubtful accounts..... 8,531,879 (8,531,879) 2,136,623 c 2,136,623 -- 2,136,623
Prepaid expenses and
other current assets.. 7,024,086 (5,077,192) 4,000,000 c 5,946,894 -- 5,946,894
------------ ------------ ------------ ------------ ------------ ------------
Total current assets... 224,538,195 (21,356,236) (65,730,035) 137,451,924 (27,000,000) 110,451,924
Fixed assets, net...... 6,169,802 (4,465,033) 55,626 c 1,760,395 -- 1,760,395
Ownership interests in
and advances to
Partner Companies..... 168,690,379 -- 65,612,408 b 245,691,816 48,160,000 a 293,851,816
11,389,029 d
Available-for-sale
securities............ 19,233,805 -- -- 19,233,805 -- 19,233,805
Intangible assets,
net................... 22,854,350 (13,731,600) 15,041,425 c 17,302,757 -- 17,302,757
(6,861,418)d
Deferred taxes......... 18,845,639 -- -- 18,845,639 -- 18,845,639
Other.................. 9,895,199 (274,641) -- 9,620,558 -- 9,620,558
------------ ------------ ------------ ------------ ------------ ------------
Total Assets............ $470,227,369 $(39,827,510) $ 19,507,035 $449,906,894 $ 21,160,000 $471,066,894
============ ============ ============ ============ ============ ============
Liabilities and
Shareholders' Equity
Current Liabilities
Current maturities of
long-term debt........ $ 735,885 $ (735,885) $ 4,141,625 c $ 4,141,625 -- $ 4,141,625
Accounts payable....... 4,478,916 (3,720,060) 3,837,799 c 4,596,655 -- 4,596,655
Accrued expenses....... 10,336,185 (6,113,895) -- 4,222,290 -- 4,222,290
Notes payable to
Partner Company....... -- -- -- -- $ 21,160,000 a 21,160,000
Deferred revenue....... 117,523 (117,523) -- -- -- --
Convertible note....... 8,499,942 -- -- 8,499,942 -- 8,499,942
------------ ------------ ------------ ------------ ------------ ------------
Total current
liabilities........... 24,168,451 (10,687,363) 7,979,424 21,460,512 21,160,000 42,620,512
--
Long-term debt......... 1,633,360 (1,633,360) 3,000,000 c 3,000,000 -- 3,000,000
Minority interest...... 25,908,961 -- 4,000,000 c 6,929,785 -- 6,929,785
(22,979,176)d
Shareholders' Equity
Total shareholders'
equity................ 418,516,597 (27,506,787) 27,506,787 d 418,516,597 -- 418,516,597
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity... $470,227,369 $(39,827,510) $ 19,507,035 $449,906,894 $ 21,160,000 $471,066,894
============ ============ ============ ============ ============ ============
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
F-35
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations for the Year
Ended December 31, 1998
<TABLE>
<CAPTION>
Internet
Capital VerticalNet Pro Forma eMerge Pro Forma
Group, Inc. Deconsolidation Adjustments Sub-Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 3,134,769 $ (3,134,769) 6,455,747 f $ 6,455,747 -- $ 6,455,747
------------ ------------ ------------ ------------ ------------ ------------
Operating Expenses
Cost of revenue........ 4,642,528 (4,642,528) -- -- -- --
Selling, general and
administrative........ 15,513,831 (12,001,245) 7,853,901 f 11,366,487 -- 11,366,487
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses.............. 20,156,359 (16,643,773) 7,853,901 11,366,487 -- 11,366,487
------------ ------------ ------------ ------------ ------------ ------------
(17,021,590) 13,509,004 (1,398,154) (4,910,740) -- (4,910,740)
Other income, net....... 30,483,177 -- -- 30,483,177 -- 30,483,177
Interest income......... 1,305,787 (212,130) 16,506 f 1,110,163 -- 1,110,163
Interest expense........ (381,199) 297,401 -- (83,798) (1,840,000)e (1,923,798)
------------ ------------ ------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 14,386,175 13,594,275 (1,381,648) 26,598,802 (1,840,000) 24,758,802
Income taxes............ -- -- -- h -- -- h --
Minority interest....... 5,381,640 -- (4,828,981)f,j 552,659 -- 552,659
Equity income (loss).... (5,868,887) -- (58,817,710)g (64,686,597) (14,309,948)e (78,996,545)
------------ ------------ ------------ ------------ ------------ ------------
Net Income (Loss)....... $ 13,898,928 $ 13,594,275 $(65,028,339) $(37,535,136) $(16,149,948) $(53,685,084)
============ ============ ============ ============ ============ ============
Net Income (Loss) Per
Share
Basic.................. $ 0.12 $ (0.48)
Diluted................ $ 0.12 $ (0.48)
Weighted Average Shares
Outstanding
Basic.................. 112,204,578 112,204,578
Diluted................ 112,298,578 112,204,578
Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine
Months Ended September 30, 1999
<CAPTION>
Internet
Capital Breakaway Pro Forma eMerge Pro Forma
Group, Inc. Deconsolidation Adjustments Sub-Total Acquisition Combined
------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 14,783,096 $(14,743,431) 7,146,689 f 7,186,354 -- $ 7,186,354
------------ ------------ ------------ ------------ ------------ ------------
Operating Expenses
Cost of revenue........ 7,424,594 (7,038,070) -- 386,524 -- 386,524
Selling, general and
administrative........ 31,002,518 (14,722,352) 5,002,096 f,j 21,282,262 -- 21,282,262
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses.............. 38,427,112 (21,760,422) 5,002,096 21,668,786 -- 21,668,786
------------ ------------ ------------ ------------ ------------ ------------
(23,644,016) 7,016,991 2,144,593 (14,482,432) -- (14,482,432)
Other income, net....... 47,001,191 (27,607) 15,348 f 46,988,932 -- 46,988,932
Interest income......... 4,176,770 (59,510) -- 4,117,260 -- 4,117,260
Interest expense........ (1,770,324) 53,969 -- (1,716,355) -- (1,716,355)
------------ ------------ ------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 25,763,621 6,983,843 2,159,941 34,907,405 -- 34,907,405
Income taxes............ 12,840,423 -- 10,963,208 f,i 23,803,631 4,269,730 e 28,073,361
Minority interest....... 4,133,057 -- (3,412,725)f,j 720,332 -- 720,332
Equity income (loss).... (49,141,961) -- (33,483,392)g,j (82,625,353) (12,199,229)e (94,824,582)
------------ ------------ ------------ ------------ ------------ ------------
Net Income (Loss)....... $ (6,404,860) $ 6,983,843 $(23,772,968) $(23,193,985) $ (7,929,499) $(31,123,484)
============ ============ ============ ============ ============ ============
Net Income Per Share
Basic.................. $ (0.03) $ (0.17)
Diluted................ $ (0.03) $ (0.17)
Weighted Average Shares
Outstanding
Basic.................. 185,103,758 185,103,758
Diluted................ 185,103,758 185,103,758
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-36
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
1 . Basis of presentation
The unaudited pro forma condensed combined balance sheet as of September
30, 1999 gives effect to the acquisitions of Purchasing Solutions, Inc.,
Purchasing Group, Inc. and Integrated Sourcing, LLC, the acquisition of a
significant minority ownership interest in eMerge Interactive, Inc. in November
1999, the deconsolidation of Breakaway Solutions, Inc., and the acquisition of
significant minority ownership interests in five new and six existing equity
method Partner Companies as if the transactions had occurred on September 30,
1999.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1998 gives effect to the acquisitions of Purchasing
Solutions, Inc., Purchasing Group, Inc. and Integrated Sourcing, LLC, the
acquisition of a significant minority ownership interest in eMerge Interactive,
Inc., the deconsolidation of VerticalNet, Inc., the 1998 and 1999 acquisitions
of significant minority ownership interests in 27 equity method Partner
Companies, and the acquisition of the Company's ownership interest in Breakaway
Solutions, Inc. as a company accounted for under the equity method as if the
transactions had occurred on January 1, 1998.
The unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 1999 gives effect to the acquisitions of
Purchasing Solutions, Inc., Purchasing Group, Inc. and Integrated Sourcing,
LLC, the acquisition of a significant minority ownership interest in eMerge
Interactive, Inc., the deconsolidation of Breakaway Solutions, Inc., the 1999
acquisitions of significant minority ownership interests in 19 equity method
Partner Companies and the acquisition of the Company's ownership interest in
Breakaway Solutions, Inc. as a company accounted for under the equity method,
as if the transactions had occurred on January 1, 1998.
The effects of the acquisitions have been presented using the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets and liabilities assumed based upon management's best preliminary
estimate of fair value with any excess purchase price being allocated to
goodwill or other indentifiable 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 Purchasing Solutions, Inc.
finalize their allocations of purchase price in accordance with generally
accepted accounting principles.
2. Pro Forma Balance Sheet Adjustments
The pro forma balance sheet adjustments as of September 30, 1999 reflect:
(a) The acquisition in November 1999 of a significant minority ownership
interest in eMerge Interactive, Inc. for $48.2 million consisting of
$27.0 million in cash and a $21.2 million note payable due in one
year, net of imputed interest discount of $1.8 million.
(b) The acquisition during the period from October 1, 1999 through
November 18, 1999 of new and additional significant minority
ownership interests in equity method Partner Companies for aggregate
cash consideration of $65.6 million.
(c) The acquisition of Purchasing Group, Inc. and Integrated Sourcing,
LLC for $7.7 million in cash, $6.0 million in a note payable, $1.1
million in other debt, $0.2 million of assumed net liabilities and
$0.2 million in common stock of Purchasing Solutions, Inc. The total
purchase price of approximately $15.2 million was allocated as
follows: cash--$1.4 million, net receivables--$2.1 million, fixed
and other assets--$0.1 million, accounts payables and accruals--$3.8
million and
F-37
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
goodwill and intangibles--$15.0 million. Additionally, approximately
$4.0 million is due from another investor and is reflected as both an
other asset and minority interest.
(d) The elimination of $27.5 million for the equity accounts of
Breakaway Solutions, Inc. and the reclassification of the Company's
carrying value of its ownership interest of $11.4 million in
Breakaway Solutions, Inc. to the equity method of accounting from
consolidation.
3. Pro Forma Statements of Operations Adjustments
The pro forma statements of operations adjustments for the year ended
December 31, 1998 and the nine months ended September 30, 1999 consist of:
(e) Equity income (loss) has been adjusted to reflect the Company's
acquisition of a significant minority ownership interest in eMerge
Interactive, Inc. and the related interest in the income (loss) and
amortization of the difference in the Company's carrying value and
ownership interest in the underlying net equity of eMerge
Interactive, Inc. over an estimated useful life of three years. For
the year ended December 31, 1998 and the nine months ended September
30, 1999, equity income (loss) of $14.3 million and $12.2 million
includes $2.4 million and $3.3 million, respectively, of equity
income (loss), and $11.9 million and $8.9 million, respectively, in
amortization of the difference between cost and equity in net
assets. For the nine months ended September 30, 1999, income tax
benefit has been adjusted $4.3 million to reflect the tax effect of
the eMerge Interactive, Inc. pro forma adjustments. Additionally,
$1.8 million of interest expense is reflected during the year ended
December 31, 1998 relating to the imputed interest discount on the
$23.0 million non-interest bearing note. No interest expense is
reflected in 1999 as the note is payable in one year (assumed from
January 1, 1998).
(f) Reflects additional revenue of $6.5 million and $7.1 million,
general and administrative expenses of $7.9 million and $7.3 million
(net of excess executive compensation of approximately $3.0 million
and $3.5 million for the year ended December 31, 1998 and the nine
months ended September 30, 1999, respectively), other income of
$16,506 and $15,348, income tax of $0 and $(34,998), and minority
interest of $(552,659) and $(25,998) related to the acquisitions of
Purchasing Group, Inc. and Integrated Sourcing, LLC. Included in
general and administrative expenses is approximately $5.0 million
and $3.8 million of goodwill amortization during the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively, relating to these acquisitions.
(g) Equity income (loss) has been adjusted by $58.8 million and $31.2
million to reflect the Company's ownership interests 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
Companies and the Company's ownership interest in the underlying net
equity of the Partner Companies over an estimated useful life of
three years. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, equity income (loss) includes $23.8
million and $12.1 million, respectively, of equity income (loss) and
$35.0 million and $19.1 million, respectively, in amortization of
the difference between cost and equity in net assets.
(h) No income tax provision is required in 1998 due to the Company's tax
status as an LLC.
F-38
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
(i) Income tax benefit has been adjusted $10.9 million for the nine
months ended September 30, 1999 to reflect the tax effect of the pro
forma adjustments.
(j) Reflects elimination of $5.4 million and $3.4 million for the year
ended December 31, 1998 and the nine months ended September 30,
1999, respectively, related to VerticalNet, Inc. and Breakaway
Solutions, Inc. upon their deconsolidation, and the reclass of $2.3
million of amortization of goodwill related to the Company's
acquisition of Breakaway Solutions, Inc. from selling, general and
administrative expense to equity income (loss) upon its
deconsolidation.
F-39
<PAGE>
Independent Auditors' Report
The Board of Directors
Applica Corporation:
We have audited the accompanying balance sheet of Applica Corporation (the
"Company"), a development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows from
September 24, 1998 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applica Corporation at
December 31, 1998 and the results of its operations and its cash flows from
September 24, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-40
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
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
========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Operations
From September 24, 1998 (inception) through December 31, 1998
<TABLE>
<S> <C>
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
=========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock During Total
---------------- ---------------- Development Stockholders'
Shares Amount Shares Amount Stage Equity
------- -------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ========= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Statement of Cash Flows
From September 24, 1998 (inception) through December 31, 1998
<TABLE>
<S> <C>
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
========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements
December 31, 1998
(1) The Company
Applica Corporation (the "Company") was founded in September 1998 and
provides application hosting services. The Company has experienced losses since
inception and is subject to those risks associated with development-stage
companies. Activities since inception have consisted of development of a
business plan. Since inception and through December 31, 1998, the Company
operated with no salaried employees. Therefore, recurring operating expenses,
such as salaries and fringe benefits, are not reflected in the accompanying
financial statements. Financial statements in subsequent periods will reflect
salaries and fringe benefits.
On March 25, 1999, the Company was acquired by Breakaway Solutions, Inc.
(see note 7b).
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from five to seven years.
Equipment under capital leases is stated at the net present value of
minimum lease payments. Equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of the lease term or
estimated useful life of the asset.
(d) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-45
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements--(Continued)
(e) Loss Per Share
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128
requires the presentation of basic and diluted net loss per share for all
periods presented. Basic net loss per share is based on the weighted average
number of shares outstanding during the period. Diluted net loss per share
reflects the per share effect of dilutive stock options and other dilutive
common stock equivalents. As the Company is in a net loss position for the
period ended December 31, 1998, common stock equivalents of 500,000 for the
period ended December 31, 1998 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(f) Reporting Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income. This statement requires
that all components of comprehensive income (loss) be reported in the financial
statements in the period in which they are recognized. For the period
presented, comprehensive loss under SFAS 130 was equivalent to the Company's
net loss reported in the accompanying statement of operations.
(g) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Property and Equipment
At December 31, 1998, property and equipment consists of the following:
<TABLE>
<S> <C>
Office equipment.................................................... $41,683
Computer equipment.................................................. 3,059
-------
44,742
Less: accumulated depreciation...................................... (1,483)
-------
Property and equipment, net....................................... $43,259
=======
</TABLE>
(4) Preferred Stock
The Company's stockholders have authorized 5,000,000 shares of Series A
preferred stock. The Series A preferred stock is entitled to receive dividends
at a rate of $.05 per share per annum. The Series A preferred stock is voting
and is convertible into shares of common stock on a share-for-share basis,
subject to certain adjustments. In the event of any liquidation, dissolution or
winding up of the Company, the Series A preferred stock has a liquidation
preference of $1.00 per share. The Series A preferred stock is convertible into
common stock immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualified public offering.
F-46
<PAGE>
APPLICA CORPORATION
(A Development-Stage Company)
Notes to Financial Statements--(Continued)
(5) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998, are as follows:
<TABLE>
<S> <C>
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....................................... $ --
=======
</TABLE>
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
(6) Commitments and Contingencies
The Company has entered into an operating lease for its office space
which expires in August 1999. Future minimum rental commitments under the lease
in 1999 are $36,000. The Company is currently exploring alternatives for new
space.
(7) Subsequent Events
(a) Loan Agreement
On March 15, 1999, the Company entered into a Loan and Security Agreement
with a Bank for a $150,000 equipment credit line which expires on June 15,
2002. This agreement terminated upon the purchase of the Company (see note 7b).
(b) Agreement and Plan of Reorganization
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all of the outstanding stock of the Company in a transaction accounted
for under the purchase method of accounting. The purchase price was comprised
of 904,624 shares of Breakaway common stock.
F-47
<PAGE>
Independent Auditors' Report
The Board of Directors Breakaway Solutions, Inc.:
We have audited the accompanying balance sheets of Breakaway Solutions, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Breakaway Solutions, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999 except for Note 11
which is as of July 12, 1999
and Note 13 which is as of October 5, 1999
F-48
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 879,136 $ 16,954 $3,205,752
Accounts receivable, net of allowance for
doubtful accounts of $65,000, $131,000
and $142,560 in 1997, 1998 and 1999,
respectively............................ 960,830 1,445,994 1,911,534
Unbilled revenues on contracts........... 232,258 625,609 799,791
Prepaid expenses......................... 27,858 46,211 72,381
Advances to employees.................... -- 13,273 7,855
---------- ---------- ----------
Total current assets..................... 2,100,082 2,148,041 5,997,313
Property and equipment, net.............. 397,102 553,566 911,487
Intangible assets, net .................. -- -- 1,437,974
Cash surrender value of life insurance... -- -- 62,441
Deposits................................. 35,726 40,877 30,528
---------- ---------- ----------
Total assets............................... $2,532,910 $2,742,484 $8,439,743
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit........................... $ -- $ 425,743 $1,001,991
Notes payable............................ -- -- 141,629
Long-term debt--current portion.......... 10,417 -- --
Capital lease obligation--current
portion................................. 181,042 148,391 134,299
Accounts payable......................... 246,060 814,074 298,347
Accrued compensation and related
benefits................................ 84,349 178,191 397,210
Accrued expenses......................... -- -- 68,111
Accrued acquisition costs................ -- -- 159,159
Deferred revenue on contracts............ -- 196,225 99,062
Stockholder distributions payable........ 434,843 -- --
---------- ---------- ----------
Total current liabilities................ 956,711 1,762,624 2,299,808
---------- ---------- ----------
Capital lease obligation--long-term
portion................................. 84,368 67,040 121,665
---------- ---------- ----------
Total 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 $.000125 par value,
80,000,000 shares authorized, 7,680,000
shares issued in 1997 and 1998 and
5,936,568 shares issued in 1999,
6,412,800, 6,124,800 and 4,381,368
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
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Years Ended December 31, Ended March 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 1,180,419 1,553,329
Sales and marketing
costs................ 3,225 13,748 50,631 9,665 114,415
General and
administrative
expenses............. 1,364,895 2,545,580 4,763,657 780,620 1,689,580
---------- ---------- ----------- ---------- ----------
Total operating
expenses........... 2,798,072 5,102,475 10,718,131 1,970,704 3,357,324
---------- ---------- ----------- ---------- ----------
Income (loss) from
operations......... 664,062 1,015,583 (700,184) 153,428 (246,289)
---------- ---------- ----------- ---------- ----------
Other income (expense):
Other income
(expense)............ -- -- 160,000 (3,021) (6,994)
Interest income....... 3,684 92,823 11,191 7,711 31,526
Interest expense...... (28,557) (32,725) (43,127) (1,348) (13,756)
Loss on disposal of
equipment............ (20,780) (2,030) (3,055) -- --
---------- ---------- ----------- ---------- ----------
Total other income
(expense).......... (45,653) 58,068 125,009 3,342 10,776
---------- ---------- ----------- ---------- ----------
Income (loss) before
income taxes........... 618,409 1,073,651 (575,175) 156,770 (235,513)
Income taxes............ -- -- -- -- --
---------- ---------- ----------- ---------- ----------
Net income (loss)....... $ 618,409 $1,073,651 $ (575,175) $ 156,770 $ (235,513)
========== ========== =========== ========== ==========
Net income (loss) per
share:
Basic and diluted..... $ 0.09 $ 0.17 $ (0.09) $ 0.02 $ (0.06)
Weighted average shares
outstanding:
Basic and diluted..... 6,641,306 6,412,800 6,340,208 6,412,800 3,758,548
Pro forma information
(Unaudited) (note 9):
Income (loss) before
taxes, as reported... $ 618,409 $1,073,651 $ (575,175) $ 156,770 $ (235,513)
Pro forma income taxes
(benefit)............ 247,364 429,460 (195,560) 62,708 (80,074)
---------- ---------- ----------- ---------- ----------
Pro forma net income
(loss)............. $ 371,045 $ 644,191 $ (379,615) $ 94,062 $ (155,439)
========== ========== =========== ========== ==========
Pro forma net income
(loss) per share--basic
and diluted............ $ 0.06 $ 0.10 $ (0.06) $ 0.01 $ (0.04)
Pro forma weighted
average shares
outstanding............ 6,641,306 6,412,800 6,340,208 6,412,800 3,758,548
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Treasury Stock
---------------- ------------------ ------------------
Additional Retained Total
Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital Shares Amount (Deficit) Equity
--------- ------ ---------- ------ ----------- ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... -- $ -- 7,680,000 $960 $ -- -- $ -- $ 330,815 $ 331,775
Purchase of treasury
stock.................. -- -- -- -- -- (1,267,200) (26) -- (26)
Distributions to
stockholders........... -- -- -- -- -- -- -- (1,841) (1,841)
Net income.............. -- -- -- -- -- -- -- 618,409 618,409
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1996................... -- -- 7,680,000 960 -- (1,267,200) (26) 947,383 948,317
Distributions to
stockholders........... -- -- -- -- -- -- -- (530,137) (530,137)
Net income.............. -- -- -- -- -- -- -- 1,073,651 1,073,651
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1997................... -- -- 7,680,000 960 -- (1,267,200) (26) 1,490,897 1,491,831
Purchase of treasury
stock.................. -- -- -- -- -- (288,000) (6) -- (6)
Distributions to
stockholders........... -- -- -- -- -- -- -- (3,830) (3,830)
Net loss................ -- -- -- -- -- -- -- (575,175) (575,175)
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, December 31,
1998................... -- -- 7,680,000 960 -- (1,555,200) (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.................. -- -- (2,523,600) (315) (4,468,665) -- -- -- (4,468,980)
Issuance of common stock
for acquired business.. -- -- 723,699 90 1,417,908 -- -- -- 1,417,998
Exercise of stock
options................ -- -- 56,469 7 99,993 -- -- -- 100,000
Net loss................ -- -- -- -- -- -- -- (235,513) (235,513)
--------- ---- ---------- ---- ----------- ---------- ---- ---------- -----------
Balance, March 31, 1999
(Unaudited)............ 5,853,000 $585 5,936,568 $742 $ 6,252,488 (1,555,200) $(32) $ (235,513) $ 6,018,270
========= ==== ========== ==== =========== ========== ==== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ 618,409 1,073,651 (575,175) 156,770 (235,513)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 46,484 254,217 332,994 56,609 104,780
Loss on disposal of
fixed assets.......... 20,780 2,030 3,055 -- --
Changes in operating
assets and liabilities,
net of impact of
acquisition of
business:
Accounts receivable.... (361,107) (471,676) (485,164) (726,282) (499,219)
Unbilled revenues on
contracts............. -- -- (393,351) -- (174,182)
Inventory.............. 12,831 -- -- -- --
Prepaid and other
assets................ (47,046) 69,096 (18,353) (43,679) (5,741)
Accounts payable....... (39,707) 222,239 568,014 84,707 (666,829)
Accrued compensation
and related benefits.. -- 63,387 93,842 (83,478) 366,441
Accrued expenses....... 1,500 -- -- -- 68,111
Deferred revenue on
contracts............. (77,070) -- 196,225 -- (97,163)
--------- ---------- --------- -------- ----------
Net cash provided by
(used in) operating
activities............ 175,074 1,212,944 (277,913) (555,353) (1,139,315)
--------- ---------- --------- -------- ----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (18,950) (132,937) (502,461) (97,100) (72,442)
Proceeds from disposal
of fixed assets....... -- 13,200 9,948 -- --
Increase in cash
surrender value of
life insurance........ -- -- -- -- (62,441)
--------- ---------- --------- -------- ----------
Net cash used in
investing activities.. (18,950) (119,737) (492,513) (97,100) (134,883)
--------- ---------- --------- -------- ----------
Cash flows from
financing activities:
Proceeds from issuance
of preferred stock.... -- -- -- -- 8,291,945
Proceeds from exercise
of stock options...... -- -- -- -- 100,000
Repurchase and
retirement of common
stock................. -- -- -- -- (4,468,980)
Advances to employees.. -- -- (13,273) -- --
Repayments of advances
to employees.......... 163 -- -- -- 5,418
Payments on current
portion of long-term
debt.................. -- -- (10,417) (3,125) --
Proceeds from
(repayments of) credit
line.................. (125,000) -- 425,743 -- 576,248
(Increase) decrease in
deposits.............. (216) (18,211) (5,151) (3,102) 17,681
Distributions to
stockholders.......... (1,841) (95,750) (438,673) -- --
Repurchase of treasury
stock................. (26) -- (6) -- --
Payments of capital
lease obligations..... (38,813) (184,224) (49,979) (6,522) (59,316)
--------- ---------- --------- -------- ----------
Net cash provided by
(used in) financing
activities............ (165,733) (298,185) (91,756) (12,749) 4,462,996
--------- ---------- --------- -------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (9,609) 795,022 (862,182) (665,202) 3,188,798
Cash and cash
equivalents at
beginning of period.... 93,723 84,114 879,136 879,136 16,954
--------- ---------- --------- -------- ----------
Cash and cash
equivalents at end of
period................. $ 84,114 879,136 16,954 213,934 3,205,752
========= ========== ========= ======== ==========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ 28,557 32,725 43,127 1,348 13,756
========= ========== ========= ======== ==========
Supplemental disclosures
of non-cash investing
and financing
activities:
Capital lease
obligations........... $ 42,742 331,511 13,720 -- 99,849
========= ========== ========= ======== ==========
Distributions payable
to stockholders....... $ -- 434,843 -- -- --
========= ========== ========= ======== ==========
Issuance of common
stock in connection
with acquisition of
business.............. $ -- -- -- -- 1,417,998
========= ========== ========= ======== ==========
Acquisition of business:
Assets acquired........ $ -- -- -- -- 1,903,567
Liabilities assumed and
issued................ -- -- -- -- (485,569)
Common stock issued.... -- -- -- -- (1,417,998)
--------- ---------- --------- -------- ----------
Net cash paid for
acquisition of
business.............. $ -- -- -- -- --
========= ========== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes To Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (unaudited)
(1) The Company
Breakaway Solutions, Inc. (the "Company"), formerly The Counsell Group,
Inc., was established in 1992 to provide information technology consulting
services to businesses. The Company specializes in designing, developing and
implementing applications and business solutions for growing enterprises
throughout the United States.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
(c) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and debt instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company's customers are
headquartered primarily in North America. At December 31, 1997 and 1998,
amounts due from three customers represented $503,750 or 40% and $683,149 or
33%, respectively, of total accounts receivable.
The fair market values of cash and cash equivalents, accounts receivable
and debt instruments at both December 31, 1997 and 1998 approximate their
carrying amounts.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded on
the straight-line basis over the estimated useful life of the related assets
which range from three to six years. Equipment held under capital leases is
stated at the present value of minimum lease payments at the inception of the
lease and amortized using the straight-line method over the lease term.
Maintenance and repairs are charged to operations when incurred.
F-53
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(e) Intangible assets
Intangible assets relate to the Company's purchase of its wholly owned
subsidiary, Applica Corporation, on March 25, 1999 (see note 11c). Such costs
are being amortized on a straight-line basis over five years, the period
expected to be benefited. Intangible assets consisted of the following at March
31, 1999:
<TABLE>
<S> <C>
Assembled workforce............................................ $ 201,000
Goodwill....................................................... 1,236,974
----------
1,437,974
Less: accumulated amortization................................. --
----------
$1,437,974
==========
</TABLE>
(f) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(g) Revenue Recognition
Revenues pursuant to fixed-fee contracts are recognized as services are
rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues pursuant to time
and material contracts are recognized as services are provided. Unbilled
revenues on contracts are comprised of costs plus earnings. Billings in excess
of costs plus earnings are classified as deferred revenues.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such
losses are determined.
(h) Project Personnel Costs
Project personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(i) Income Taxes
The Company was taxed under the provisions of Subchapter S of the
Internal Revenue Code, whereby the corporate income is taxed to the individual
shareholders based on their proportionate share of the Company's taxable
income. Massachusetts taxes profits on S Corporations with receipts exceeding
$6,000,000.
Effective January 1, 1999, the Company terminated its S Corporation
election and is subject to corporate-level federal and certain additional state
income taxes. Accordingly, the accompanying consolidated statements of
operations include a pro forma income tax adjustment (see note 9) for the
income taxes that would have been recorded if the Company had been a C
Corporation for all periods presented.
(j) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation. As permitted by SFAS
123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock
F-54
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
Issued to Employees, and related interpretations. Accordingly, no accounting
recognition is given to stock options issued to employees that are granted at
fair market value until they are exercised. Stock options issued to non-
employees are recorded at fair value at the date of grant. Upon exercise, net
proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the pro forma impact on income
(loss) per share has been disclosed in the notes to the financial statements as
required by SFAS 123 (see note 4c).
(k) Net Income (Loss) Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128
requires the presentation of basic and diluted income (loss) per share for all
periods presented. As the Company has been in a net loss position for the year
ended December 31, 1998 and the three months ended March 31, 1999, common stock
equivalents of 647,474 for the year ended December 31, 1998 and 859,558 for the
three months ended March 31, 1999 were excluded from the diluted loss per share
calculation as they would be antidilutive. There were no common stock
equivalents outstanding in 1996 and 1997. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(l) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. For each
year reported, comprehensive income (loss) under SFAS 130 was equivalent to the
Company's net income (loss) reported in the accompanying consolidated
statements of operations.
(m) Unaudited Interim Financial Information
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been included. Results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected
for the full fiscal year or any future periods.
(n) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
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
========= ==========
</TABLE>
F-55
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The cost and related accumulated amortization of property and equipment
held under capital leases is as follows at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cost................................................... $ 400,297 $ 394,637
Less: Accumulated amortization......................... (157,593) (332,053)
--------- ---------
$ 242,704 $ 62,584
========= =========
</TABLE>
(4) Capital Stock
(a) Preferred Stock
In October 1998, the Company's stockholders authorized 5,853,000 shares
of Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock is entitled to receive dividends at a rate of $.1136 per share, as and if
declared. The Series A Convertible Preferred Stock is voting and is convertible
into shares of common stock on a share-for-share basis, subject to certain
adjustments. In the event of any liquidation, dissolution or winding up of the
Company, the Series A Convertible Preferred Stock has a liquidation preference
of $1.41667 per share. The Series A Convertible Preferred Stock is convertible
into common stock immediately at the option of the holder, and automatically
converts into common stock upon the completion of a qualifying initial public
offering (see note 11a).
(b) Stock Splits
In June 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).
F-56
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
A summary of the status of the Company's Stock Plan is presented below:
<TABLE>
<CAPTION>
(Unaudited)
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
------------------------- -------------------------
Weighted Weighted
average average
Fixed options Shares exercise price Shares exercise price
- ------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period................ -- $ -- 4,794,235 $1.25
Granted................. 4,896,703 1.24 2,534,433 1.85
Exercised............... -- -- (56,469) 1.78
Forfeited............... (102,468) 0.76 (66,626) .68
--------- ----- --------- -----
Outstanding at end of pe-
riod..................... 4,794,235 1.25 7,205,573 1.46
========= =========
Options exercisable at end
of period................ 2,088,504 2,451,941
========= =========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------- --------------------------
Weighted average Weighted
Number remaining Number average
Exercise prices outstanding contractual life exercisable exercise price
--------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$0.68 2,221,195 9.5 years 1,460,004 $0.68
1.01 103,920 9.75 years 16,800 1.01
1.79 2,469,120 10 years 611,700 1.79
--------- ---------
4,794,235 9.76 years 2,088,504 1.00
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
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)
========= =========
</TABLE>
F-57
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The per share weighted average fair value of stock options granted during
1998 and 1999 was $0.50 and $0.75, respectively, on the date of grant, using
the minimum value option-pricing model with the following weighted average
assumptions used: no expected dividend yield, risk free interest rate of 7%,
and expected life of ten years.
(5) Commitments and Contingencies
(a) Operating Leases
The Company leases its facilities under various operating leases expiring
in 2002. Such leases include provisions that may require the Company to pay its
proportionate share of operating costs, which exceed specific thresholds. Rent
expense for the years ended December 31, 1996, 1997 and 1998 was $144,499,
$203,511 and $576,509, respectively and $62,758 and $139,981 for the three-
months ended March 31, 1998 and 1999, respectively. Other income in 1998
consists primarily of a payment received by the Company in connection with the
early termination of its existing office lease.
(b) Capital Leases
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for two years, with annual
interest at rates ranging from 5.4% to 15.68%. The leased equipment secures all
leases.
The following is a schedule of future minimum rental payments required
under the above leases as of December 31, 1998:
<TABLE>
<CAPTION>
Operating Capital
leases leases
---------- ---------
<S> <C> <C>
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
=========
</TABLE>
(6) Line of Credit
The Company had a $750,000 bank revolving line of credit (increased to
$1,300,000 in February 1999) at prime plus 1/2% (8.25% at December 31, 1998)
which terminated in 1999. At December 31, 1997 and 1998, the Company borrowed
$0 and $425,743, respectively under this line of credit.
F-58
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(7) Significant Customers
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
Years Ended December 31, March 31,
------------------------ ------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(8) Deferred Compensation Plan
The Company sponsors a qualified 401(k) deferred compensation plan (the
"Plan"), which covers substantially all of its employees. Participants are
permitted, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, to contribute up to 15% of their earnings into the Plan. The
Company may make matching contributions at its discretion. The Company elected
not to contribute to the Plan for the years ended December 31, 1996, 1997 and
1998.
(9) Taxes (Unaudited)
As discussed in note 2, effective January 1, 1999, the Company terminated
its S Corporation election and will be subject to corporate-level federal and
certain state income taxes. Upon termination of the S Corporation status,
deferred income taxes are recorded for the tax effect of cumulative temporary
differences between the financial reporting and tax bases of certain assets and
liabilities, primarily deferred revenue that must be recognized currently for
tax purposes, accrued expenses that are not currently deductible, cumulative
differences between tax depreciation and financial reporting allowances, and
the impact of the conversion from the cash method to the accrual method of
reporting for tax purposes.
Pro forma income tax expense (benefit), assuming the Company had been a C
Corporation and applying the tax laws in effect during the periods presented,
for each of the three years in the period ended December 31, 1998 would have
been as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
Years Ended December 31, March 31,
--------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Federal tax................. $210,259 $365,042 $(195,560) $25,629 $(80,074)
State taxes, net of
federal.................... 37,105 64,418 -- 4,523 --
-------- -------- --------- ------- --------
$247,364 $429,460 $(195,560) $30,152 $(80,074)
======== ======== ========= ======= ========
</TABLE>
F-59
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
(10) Operating Segments
Historically, the Company has operated in a single segment. With the
acquisition of Applica Corporation, the Company expanded its operations to
include a second segment, application hosting. To date, Applica Corporation, a
development-stage company, has generated no revenues. Total assets relating to
the application hosting business of Applica Corporation are $1,903,567 as of
March 31, 1999.
(11) Subsequent Events
(a) Series A Convertible Preferred Stock Financing
In January 1999, the Company issued 5,853,000 shares of Series A
Convertible Preferred Stock, $.0001 par value, for $1.41667 per share (see note
4a).
(b) Litigation
On March 2, 1999 the Company and its Chief Executive Officer ("CEO")
became parties to a civil action filed by Cambridge Technology Partners, Inc.
("CTP"). The suit alleges violation of employment and severance agreements by
the CEO who is a former CTP employee. CTP is seeking monetary damages against
the Company for interference with the former employee's contractual relations
with CTP. Management of the Company believes that the suit is without merit and
intends to vigorously defend against the action. In the opinion of management,
the amount of ultimate liability with respect to this action will not
materially affect the financial position or results of operations of the
Company.
(c) Acquisitions
Subsequent to December 31, 1998, the Company entered into the following
acquisitions, which will be accounted for under the purchase method of
accounting:
.Applica Corporation
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 723,699 shares of common stock.
.WPL Laboratories, Inc.
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, 1,364,140 shares of common stock
and the assumption of all outstanding WPL stock options, which
became exercisable for 314,804 shares of the Company's common
stock at a an exercise price of $2.36 per share with a four-year
vesting period. The WPL stockholders received one half of their
cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder
does not voluntarily terminate his employment and is not
terminated for cause. Of the shares of common stock issued to the
former WPL stockholders, approximately fifty-
F-60
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
percent are subject to the Company's right, which lapses
incrementally over a four-year period, to repurchase the shares of
a particular stockholder, at their value at the time of the
acquisition, upon the stockholder's resignation or the Company's
termination of the stockholder for cause. In connection with the
stock issuance, the Company provided approximately $1,200,000 in
loans to stockholders. The loans which bear interest at prime plus
1% are due at the earlier of the sale of stock or four years.
.Web Yes, Inc.
On June 10, 1999, the Company entered into an agreement to acquire
all the outstanding stock of Web Yes, Inc., a provider of web
hosting services. The purchase price was comprised of 456,908
shares of common stock. Of the shares of common stock issued to
the former Web Yes stockholders, 342,680 are subject to the
Company's right, which lapses incrementally over a four-year
period, to repurchase the shares of the particular stockholder
upon the termination of his employment with Breakaway. The
repurchase price shall be either at the share value at the time of
the acquisition if the stockholder terminates employment or is
terminated for cause, or at the fair market value if the
stockholder's employment is terminated without cause.
Related Party Advances
In May 1999, Internet Capital Group, holder of the Company's Series A
Convertible Preferred Stock, provided $4,000,000 in advances which were
converted into equity in July, 1999. In connection with this transaction, the
Company issued Internet Capital Group a warrant to purchase 73,872 shares of
common stock at an exercise price of $8.13 per share.
Series B Convertible Preferred Stock
In July 1999, the Company issued 2,931,849 shares of Series B Convertible
Preferred Stock, $.0001 par value, for $6.50 per share. The Series B
Convertible Preferred Stock is entitled to receive dividends at a rate of $0.52
per share as and if declared. The Series B Convertible Preferred Stock is
voting and is convertible into shares of common stock on a share-per-share
basis, subject to certain adjustments. In the event of any liquidation,
dissolution or winding up of the Company, the Series B Convertible Preferred
Stock has a liquidation preference of $6.50 per share. The Series B Convertible
Preferred Stock is convertible into common stock immediately at the option of
the holder, and automatically converts into common stock upon the completion of
a qualifying initial public offering.
1999 Stock Incentive Plan
The 1999 Stock Incentive Plan was adopted in July 1999. The 1999 plan is
intended to replace the 1998 plan. Up to 4,800,000 shares of common stock
(subject to adjustment in the event of stock splits and other similar events)
may be issued pursuant to awards granted under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted in July 1999. The
purchase plan authorizes the issuance of up to a total of 400,000 shares of
common stock to participating employees.
F-61
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
The following employees, including directors who are employees and
employees of any participating subsidiaries, are eligible to participate in the
purchase plan:
. Employees who are customarily employed for more than 20 hours per
week and for more than five months per year; and
. Employees employed for at least three months prior to enrolling in
the purchase plan.
Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the Company's stock or any subsidiary
are not eligible to participate.
(12) Purchase Price Allocation (Unaudited)
In August 1999 the Company finalized the allocation of the tangible and
intangible assets of the Acquired Companies. As a result, the excess of
purchase price over the fair value of tangible assets and liabilities has been
recorded as intangible assets, as follows:
<TABLE>
<CAPTION>
APPLICA WPL WEB YES
---------- ---------- ----------
<S> <C> <C> <C>
Purchase consideration:
Cash...................................... -- $4,674,997 $ 188,075
Issuance of common stock.................. $1,417,998 4,825,811 3,712,378
---------- ---------- ----------
Total purchase consideration.......... 1,417,998 9,500,808 3,900,453
Direct cost of acquisition.................. 159,159 105,654 179,210
---------- ---------- ----------
Total purchase price.................. $1,577,157 $9,606,462 $4,079,663
========== ========== ==========
Tangible assets and liabilities:
Cash and cash equivalents................. $ 147,422 $ 238,242 $ 11,171
Accounts receivable....................... -- 791,980 139,973
Prepaid expense........................... 20,429 -- --
Property and equipment.................... 290,410 166,202 190,700
Other assets.............................. 7,332 16,934 34,298
Notes payable............................. (141,629) -- --
Accounts payable.......................... (151,102) (35,751) (10,970)
Accrued expenses.......................... (33,679) (196,728) (33,080)
Deferred tax liability.................... -- (567,000) (188,000)
Capital leases............................ -- -- (133,806)
---------- ---------- ----------
Net tangible assets..................... $ 139,183 $ 413,879 $ 10,286
Intangible assets:
Customer base............................. -- $1,037,000 $ 426,000
Workforce in place........................ $ 201,000 445,000 206,000
---------- ---------- ----------
Goodwill.................................. 1,236,974 7,710,583 3,437,377
---------- ---------- ----------
Total intangible assets............... 1,437,974 9,192,583 4,069,377
---------- ---------- ----------
Total purchase price.................. $1,577,157 $9,606,462 $4,079,663
========== ========== ==========
</TABLE>
Intangible assets will be amortized over the useful lives of three years
for both assembled workforce and customer base and five years for goodwill.
F-62
<PAGE>
BREAKAWAY SOLUTIONS, INC.
Notes to Financial Statements--(Continued)
(13) Authorized Share Increase and Stock Split
In July 1999 the Board of Directors approved an increase in the number of
authorized common shares from 20,000,000 to 80,000,000, and is expected to
approve, in September 1999, approved a four-for-five stock split. All share
data shown in the accompanying financial statements have been retroactively
restated to reflect this stock split.
(14) Initial Public Offering (Unaudited)
On October 5, 1999 the Company issued 3,450,000 shares of its common
stock (450,000 shares of which represented the underwriters exercise of its
overallotment option), $0.000125 par value per share, for proceeds of
approximately $39,600,000 (net of underwriting discounts and costs). The
Company intends to use the proceeds for working capital and other general
corporate purposes.
F-63
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of CommerceQuest, Inc.
(formerly MessageQuest, Inc.)
In our opinion, the accompanying balance sheets and the related
statements of income, of changes in stockholders' (deficit) equity and of cash
flows present fairly, in all material respects, the financial position of
CommerceQuest, Inc. at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
February 26, 1999, except as to the stock split described in note 11 for which
the date is March 10, 1999
F-64
<PAGE>
COMMERCEQUEST, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, (Unaudited)
---------------------- September
1997 1998 30, 1999
---------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............... $ 709,803 $ 1,807,369 $ 707,962
Accounts receivable, net of allowance of
$48,000 at December 31, 1997 and 1998
and September 30, 1999................. 3,639,098 3,678,627 2,691,676
Unbilled accounts receivable............ 647,206 2,465,292 528,187
Other current assets.................... 48,744 234,505 233,210
---------- ----------- -----------
Total current assets.................. 5,044,851 8,185,793 4,161,035
Property and equipment, net............... 781,318 3,725,818 4,591,555
Capitalized software...................... -- -- 1,363,784
Other assets.............................. 15,780 363,846 698,111
---------- ----------- -----------
Total assets.......................... $5,841,949 $12,275,457 $10,814,485
========== =========== ===========
Liabilities and Stockholders' (Deficit)
Equity
Current liabilities:
Accounts payable and accrued expenses... $2,927,494 $ 5,102,468 $ 2,731,016
Deferred revenue........................ 493,674 1,013,760 3,201,202
Current portion of long-term debt....... 123,379 169,402 233,932
---------- ----------- -----------
Total current liabilities............. 3,544,547 6,285,630 6,166,150
Other liabilities....................... -- 231,518 862,744
Revolving lines of credit............... -- 233,744 426,338
Long-term debt.......................... 386,578 157,771 141,756
---------- ----------- -----------
Total liabilities..................... 3,931,125 6,908,663 7,596,988
---------- ----------- -----------
Convertible subordinated debentures..... -- 10,800,000 15,800,000
---------- ----------- -----------
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 (deficit)............. 1,429,124 1,385,059 (5,764,238)
---------- ----------- -----------
1,910,824 1,866,759 (5,282,538)
Less treasury stock of 12,725,420
shares, at cost........................ -- (7,299,965) (7,299,965)
---------- ----------- -----------
Total stockholders' (deficit) equity.. 1,910,824 (5,433,206) (12,582,503)
---------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity................... $5,841,949 $12,275,457 $10,814,485
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
COMMERCEQUEST, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensed products..... $ 4,226,208 $ 5,000,698 $ 4,507,934 $ 2,986,830 $ 2,622,399
Professional
services............. 5,042,263 5,529,498 12,561,392 9,092,199 9,051,629
Reselling............. 9,184,437 13,680,505 14,029,063 9,812,574 1,959,625
----------- ----------- ----------- ----------- -----------
18,452,908 24,210,701 31,098,389 21,891,603 13,633,653
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Technical support..... -- 150,954 500,653 292,310 245,486
Services.............. 3,191,054 3,817,452 8,094,721 5,860,561 6,140,266
Reselling............. 7,957,255 11,385,342 11,184,289 8,037,260 1,437,509
----------- ----------- ----------- ----------- -----------
11,148,309 15,353,748 19,779,663 14,190,131 7,823,261
----------- ----------- ----------- ----------- -----------
Gross margin............ 7,304,599 8,856,953 11,318,726 7,701,472 5,810,392
Operating expenses:
Sales and marketing... 848,681 1,388,530 2,802,482 1,371,210 5,993,333
Product development... 1,542,867 2,540,529 2,146,653 1,308,619 1,445,373
General and
administrative....... 2,932,577 3,003,253 3,964,803 3,264,140 4,314,024
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,324,125 6,932,312 8,913,938 5,943,969 11,752,730
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. 1,980,474 1,924,641 2,404,788 1,757,503 (5,942,338)
Other income (expense):
Interest expense...... (26,506) (14,513) (362,040) (130,097) (698,873)
Other................. 11,155 190,283 83,187 67,872 (88,950)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 1,965,123 $ 2,100,411 $ 2,125,935 $ 1,695,278 $(6,730,161)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
COMMERCEQUEST, INC.
Statements of Changes in Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Retained
-------------------- Paid-In ---------------------- Earnings
Shares Amount Capital Shares Amount (Deficit) Total
---------- -------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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).... -- -- -- -- -- (6,730,161) (6,730,161)
Dividends declared and
paid (unaudited)....... -- -- -- -- -- (419,136) (419,136)
---------- -------- -------- ---------- ----------- ----------- ------------
Balance, September 30,
1999
(unaudited)............ 25,000,000 $ 50,000 $431,700 12,725,420 $(7,299,965) $(5,764,238) $(12,582,503)
========== ======== ======== ========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
COMMERCEQUEST, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 1,965,123 $ 2,100,411 $ 2,125,935 $ 1,695,278 $(6,730,161)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Non-cash compensation
expense.............. 460,000 -- -- -- --
Depreciation and
amortization......... 144,411 323,894 536,454 353,347 657,962
Loss on disposal of
property............. -- -- -- -- 45,764
Accrued interest on
convertible
debentures........... -- -- -- 42,192 633,228
Changes in operating
assets and
liabilities:
Accounts receivable.. (5,475,784) 2,409,399 (39,529) 1,186,141 1,055,678
Unbilled accounts
receivable.......... -- (623,580) (1,818,086) 269,922 1,937,105
Other receivables.... 7,343 3,642 -- -- --
Other assets......... (29,072) (30,740) (456,083) (342,988) (227,172)
Stockholder
receivables......... (139,347) 3,877 -- -- --
Accounts payable and
accrued expenses.... 4,754,771 (2,027,734) 1,902,920 1,944,475 (2,393,999)
Deferred revenue..... -- 493,674 520,086 360,024 2,187,442
Other liabilities.... -- -- 231,518 -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
operating
activities......... 1,687,445 2,652,843 3,003,215 5,508,391 (2,834,153)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (453,591) (641,160) (3,208,611) (2,095,934) (1,592,263)
Proceeds from disposal
of property and
equipment............ -- -- -- -- 22,800
Acquisition of
business, net of cash
received............. -- -- -- -- (151,978)
Capitalized software
development costs.... -- -- -- -- (1,363,784)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (453,591) (641,160) (3,208,611) (2,095,934) (3,085,225)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds under
convertible
subordinated
debenture............ -- -- 5,821,967 5,821,967 5,000,000
Borrowings under note
payable agreements... 138,000 400,000 102,343 102,343 173,980
Principal payments on
notes payable........ (248,939) (28,982) (146,188) (106,396) (127,467)
Stockholder loans..... 531,020 -- 729,003 729,003 --
Payments on
stockholder loans.... (1,266,703) (85,000) (867,942) (867,942) --
Borrowings under line
of credit............ 1,854,000 2,104,000 1,661,126 -- 5,325,205
Payments on line of
credit............... (2,104,000) (2,104,000) (1,427,382) -- (5,132,611)
Dividends paid........ -- (1,725,130) (2,170,000) (2,170,000) (419,136)
Purchase of treasury
stock, at cost....... -- -- (2,399,965) (1,369,872) --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
financing
activities......... (1,096,622) (1,439,112) 1,302,962 2,139,103 4,819,971
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 137,232 572,571 1,097,566 5,551,560 (1,099,407)
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 $ 6,261,363 $ 707,962
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Interest paid during
the period........... $ 26,506 $ 14,513 $ 130,522 $ 87,900 $ 65,700
=========== =========== =========== =========== ===========
Supplemental disclosure
of non-cash financing
activities:
See notes 2 and 6
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements
For the Years Ended December 31, 1996, 1997 and 1998
And the Nine Months Ended September 30, 1998 and 1999 (Unaudited)
1. Organization and Operations
CommerceQuest, Inc. (the "Company," formerly MessageQuest, Inc.) 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.
Effective August 2, 1999, the Company acquired 100% of the outstanding
common shares of Electronic Trends, Inc. The business primarily provided staff
services in the electronic data interface professional services market.
Consideration included $151,978, net of cash acquired. The acquisition has been
accounted for using the purchase method of accounting for acquisitions and,
accordingly, the results of operations have been included in the September 30,
1999 (unaudited) financial statements since the effective date of acquisition.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company licenses its software products to end users pursuant to
perpetual license agreements. Amounts billed in advance of installation and
pending completion of remaining significant obligations are deferred. Revenue
from software licenses is recognized upon sale and shipment. Royalty revenue
from licensing agreements with third-party distributors is recognized when
earned. For the years ended December 31, 1996 and 1997, revenue from the sale
of software was recognized in accordance with Statement of Position ("SOP") 91-
1, Software Revenue Recognition. Beginning January 1, 1998, revenue from the
sale of software is recognized in accordance with SOP 97-2, Software Revenue
Recognition. SOP 97-2 requires the total contract revenue to be allocated to
the various elements of the contract based upon objective evidence of the fair
values of such elements and allows for only allocated revenue to be recognized
upon completion of those elements. The effect of the adoption of SOP 97-2 was
not significant to the Company's results of operations for the year ended
December 31, 1998. Amounts billed in advance of recognized revenue are
deferred. For contracts for professional services, revenue is recognized as the
services are performed. Revenue from support/maintenance contracts is
recognized ratably over the contract period as the services are performed.
Unbilled accounts receivable represent revenue on contracts to be billed
in subsequent periods in accordance with the terms of such contracts, as well
as revenue from reselling transactions for which the customer has yet to be
billed.
During 1996, the Company entered into a contract for the sale of a
license for certain message-oriented middleware and database products to BMC
Software, Inc. for $5,450,000. The Company recognized revenues under this
contract of approximately $3,800,000 during 1996. The remaining revenues of
approximately $1,650,000 were recognized during 1997.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with
original maturities of three months or less to be cash equivalents.
F-69
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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.
Software Development Costs
Development costs incurred in the research and development of new
software products and enhancements to existing software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standard
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Capitalization ceases upon general release to
customers. Such costs are amortized over the economic life of the related
product. Through December 31, 1998, the period between achieving technological
feasibility and the general availability of such software have been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, such amounts to date have been expensed as
incurred. The Company performs an annual review of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
Income Taxes
Prior to June 1999, the Company elected to be taxed as an S Corporation
under the provision of the Internal Revenue Code whereby taxable income is
generally reported by the shareholders on their individual income tax returns.
The S Corporation election was terminated on June 2, 1999, and subsequently the
Company became subject to U.S. federal and state income taxes as a C
Corporation. The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recorded to
reflect the tax consequences on future years differences between the tax basis
of assets and liabilities and their financial reporting amounts at each year-
end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. A valuation
allowance is provided against the future benefit of deferred tax assets if it
is determined that it is more likely than not that the future tax benefits
associated with the deferred tax asset will not be realized.
Statement of Cash Flows
During the year ended December 31, 1997, the Company was repaid certain
receivables from stockholders in the amount of $135,470 through a reduction in
dividend payments. Acquisitions of capital assets of $272,054 were included in
accounts payable and accrued expenses as of December 31, 1998. Accordingly,
these noncash transactions have been excluded from the accompanying statements
of cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-70
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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 nine months ended September 30, 1998 and 1999 (unaudited).
Unaudited Financial Statements
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 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 nine months ended September 30,
1999 are not necessarily indicative of the results to be obtained for the full
fiscal year ending December 31, 1999.
Segment Reporting
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 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 No. 131 also requires disclosures about
products and services, geographic areas, and major customers. Currently, there
is no additional segment information required to be disclosed.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 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. This statement was amended by SFAS No. 137, "Accounting for
Derivatives and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." As a result, SFAS No. 133 will be effective in 2001 for the
Company. 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.
F-71
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
3. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company maintains substantially all of its cash
investments with what it believes to be high credit quality financial
institutions. Sales and accounts receivable to customers that exceeded 10% of
total revenues and total accounts receivable are as follows:
<TABLE>
<CAPTION>
Sales Accounts Receivable
--------------------------------------------------- -------------------------------
(Unaudited)
Nine Months
Year Ended December 31, Ended September 30, December 31, (Unaudited)
--------------------------- ------------------- --------------- September 30,
1996 1997 1998 1998 1999 1997 1998 1999
------- ------- ------- --------- --------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer A.............. 22% 17% -- -- -- -- -- --
Customer B.............. 32% 15% 23% 23% -- 26% 33% --
Customer C.............. -- 15% -- -- -- -- -- --
Customer D.............. -- -- 12% 12% -- -- 24% --
Customer E.............. -- -- -- -- -- -- 15% --
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, (Unaudited)
Useful ----------------------- September 30,
Lives 1997 1998 1999
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Buildings..................... 39 years $ -- $ 2,290,956 $ 2,538,151
Furniture and equipment....... 7 years 331,902 552,889 516,988
Computers..................... 5 years 998,424 1,960,863 3,163,543
Leasehold improvements........ 7 years 7,059 13,342 13,342
---------- ----------- -----------
1,337,385 4,818,050 6,232,024
Less accumulated depreciation
and amortization............. (556,067) (1,092,232) (1,640,469)
---------- ----------- -----------
$ 781,318 $ 3,725,818 $ 4,591,555
========== =========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
and for the nine months ended September 30, 1998 and 1999 (unaudited)
approximated $144,000, $324,000, $536,000, $353,000 and $658,000, respectively.
F-72
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------- September 30,
1997 1998 1999
--------- --------- --------------
<S> <C> <C> <C>
Notes payable, bearing interest at
9.95%, principal and interest due
in monthly installments;
collateralized by certain fixed
assets............................ $ 371,018 $ 327,173 $ 201,708
Note payable, bearing interest at
8.95%, principal and interest due
in quarterly installments;
collateralized by certain computer
software.......................... -- -- 173,980
Notes payable to stockholder, non-
interest bearing, principal
payable in January 1999. Paid in
full during 1998.................. 138,939 -- --
--------- --------- ---------
509,957 327,173 375,688
Less current portion............... (123,379) (169,402) (233,932)
--------- --------- ---------
$ 386,578 $ 157,771 $ 141,756
========= ========= =========
</TABLE>
Maturities of notes payable for the years subsequent to September 30,
1999 (unaudited) are as follows:
<TABLE>
<S> <C>
2000........................................................... $235,934
2001........................................................... 77,704
2002........................................................... 62,050
</TABLE>
6. Convertible Subordinated Debentures
In September and October 1998, the Company issued a total of $10,800,000
of 7.00% convertible subordinated debentures maturing through October 2003.
The convertible subordinated debentures are exchangeable at any time into
common stock of the Company at an exchange price of $2.52 per share, subject
to adjustment. Provisions of the debenture agreements contain certain
covenants, the most restrictive of which limits the payment of dividends and
the creation of additional indebtedness.
In connection with the transaction, $5,300,000 of the proceeds was used
to repurchase shares of stock from certain shareholders. The lender agreed to
pay $4,900,000 of this amount; accordingly, this amount has been reflected as
a non-cash transaction and excluded from the statement of cash flows for the
year ended December 31, 1998. Approximately $78,000 of the subordinated
debenture issue costs were withheld from the proceeds and have been included
in other assets in the financial statements as of December 31, 1998.
Accordingly, this amount has been reflected as a non-cash transaction and
excluded from the statement of cash flows for the year ended December 31,
1998.
During July 1999, the Company issued a total of $5,000,000 of 7.00%
convertible subordinated debentures maturing on July 19, 2004. The convertible
subordinated debentures are exchangeable at any time into common stock of the
Company at an exchange price of $4.1637 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.
F-73
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
7. Lines of Credit
During 1998, the Company entered into a line of credit facility with a
financial institution in the amount of $1,000,000 to finance working capital
needs. At December 31, 1998 and September 30, 1999 (unaudited) there were $0
and $425,648, respectively, of borrowings under this facility. 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
September 30, 1999 (unaudited) there were $226,850 and $0, 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 8.11% borrowing rates at December 31, 1998 and
September 30, 1999 (unaudited), respectively). At December 31, 1998 and
September 30, 1999 (unaudited), there were $6,894 and $690, respectively, of
borrowings under this credit facility. There was $2,196,086 and $2,273,662
available under the three facilities at December 31, 1998 and September 30,
1999 (unaudited), respectively. The weighted-average interest rates under these
facilities for the year ended December 31, 1998 and the nine months ended
September 30, 1999 (unaudited), were 8.03% and 6.59%, respectively.
8. Fair Value of Financial Instruments
The fair value of short-term financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable and certain accrued
expenses approximates their carrying amounts in the financial statements due to
the short maturity of such instruments.
The carrying amount of the lines of credit issued pursuant to the
Company's bank credit agreement approximates fair value because the interest
rates change with market interest rates.
The fair value of the Company's long-term debt approximates carrying
value based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturities.
The Company believes that it is not practical to estimate the fair value
of the convertible subordinate debentures with a carrying value of $15,800,000,
as these debentures have numerous unique features.
F-74
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
9. Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal....................... $ -- $ -- $ --
State and local............... -- -- --
------ ------ ------
-- -- --
------ ------ ------
Deferred:
Federal....................... -- -- --
State and local............... -- -- --
------ ------ ------
Total provision for income
taxes...................... $ -- $ -- $ --
====== ====== ======
</TABLE>
Prior to June 2, 1999, the Company had elected to be taxed as an S-
corporation and thus, all income of the Company was passed through to the
shareholders and taxed at their level. Effective June 2, 1999, the Company
elected C-corporation status for income tax reporting purposes and at this time
adopted Statement of Financial Accounting Standard No. 109, Accounting for
Income Taxes (FAS 109). To account for this change in tax status, the Company
recorded a deferred benefit of $60,760. This provision reflected the temporary
differences between the tax basis of assets and liabilities and their financial
statement carrying values. The temporary differences result from reserves
created for bad debts and sales returns that are not currently deductible for
income tax purposes. The Company provides a valuation allowance against net
deferred tax assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. The tax benefit of these temporary differences and the net operating
loss generated during the C-corporation period beginning June 2, 1999 and
ending September 30, 1999 has been offset by a valuation allowance.
As of September 30, 1999, the Company had approximately $4,700,000 of net
operating loss carryforwards for federal and state income tax purposes, which
expire in the year 2018.
F-75
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
10. Commitments and Contingencies
Operating Leases
The Company leases office space under operating leases expiring through
August 2001. Rent expense under these leases for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999
(unaudited) approximated $115,000, $239,000, $357,000, $225,000 and $194,000,
respectively.
Future basic rental commitments under noncancelable operating leases at
September 30, 1999 (unaudited) are approximately as follows:
<TABLE>
<S> <C>
Twelve months ending September 30,
2000........................................................ $ 634,000
2001........................................................ 431,000
2002........................................................ 289,000
2003........................................................ 6,000
2004........................................................ 1,500
----------
Total minimum payments...................................... $1,361,500
==========
</TABLE>
11. Equity
Stock Compensation
During 1996, the Company issued common stock as compensation to employees
who were previously covered by a phantom stock agreement. In exchange for the
newly issued shares, the recipients waived all rights and shares granted them
under the phantom stock agreement. The aggregate compensation earned under the
phantom stock plan during 1996 totaled $460,000.
Stock Split
During January 1997, October 1998 and on March 10, 1999, the Board of
Directors approved that the Company's issued and outstanding common stock, be
split on a 5-for-1, 5-for-1, and 2-for-1 basis, respectively. All share amounts
have been retroactively adjusted in the accompanying financial statements to
reflect these stock splits.
Stock Option Plan
Effective January 1, 1997, the Board of Directors approved the adoption
of a stock option plan under which qualified and non-qualified stock options
may be granted to employees, directors, and consultants to the Company. The
Board of Directors also authorized 4,138,750 shares to be reserved for issuance
pursuant to the terms of the plan. The Company has granted qualified and non-
qualified stock options to certain employees with vesting periods of up to 4
years. These options give the employee the right to purchase common stock at an
exercise price estimated by management to be at least equal to the fair value
of the stock at the date of the option's grant. For all options granted, the
term during which employees may exercise the option was initially 10 years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for stock options.
Accordingly, no compensation cost has been recognized in
F-76
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
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:
<TABLE>
<CAPTION>
(unaudited)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Pro forma net income
(loss):
As reported........... $1,965,123 $2,100,411 $2,125,935 $1,695,278 $(6,730,161)
As adjusted
(unaudited).......... 1,965,123 1,152,116 1,356,486 $1,361,075 $(7,207,107)
</TABLE>
The estimated per share fair value of options granted for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998 and
1999 (unaudited) was $0.46, $0.39, $0.37 and $1.20, respectively. 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 nine months
ended September 30, 1998 and 1999 (unaudited), respectively: no dividend yield
for each year presented; risk-free interest rates of 5.74%, 4.65%, 4.38% and
6.10%, 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:
<TABLE>
<CAPTION>
Year Ended December 31, (unaudited)
--------------------------------------------------- Nine Months Ended
1997 1998 September 30, 1999
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 $1.22 401,500 $2.97
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 3,931,500
========= ========= =========
Options exercisable at
end of period.......... -- 551,750 1,028,500
========= ========= =========
</TABLE>
F-77
<PAGE>
COMMERCEQUEST, INC.
Notes to Financial Statements--(Continued)
The following table summarizes certain information about stock options at
September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------
Number Weighted-Average Number
of Shares Remaining Exercise of Shares Exercise
at 9/30/99 Contractual Life (years) Prices at 9/30/99 Prices
---------- ------------------------ -------- ---------- --------
<S> <C> <C> <C> <C>
3,881,500 8.34 $1.20 1,016,000 $1.20
50,000 8.94 $1.80 12,500 $1.80
</TABLE>
As of September 30, 1999 (unaudited), options to purchase 207,250 shares
of common stock were available for future grants.
12. Employee Benefit and Incentive Plans
The Company sponsors a tax deferred 401(k) defined contribution savings
and profit sharing plan which covers substantially all employees who meet
minimum service requirements. Employees may defer up to 15% of their annual
compensation, which the Company will match at a rate of 20% of the employee's
contribution on the first 6% of his or her annual salary. In addition, the plan
allows for annual profit sharing contributions at the discretion of the Board
of Directors.
Company matching contributions to the 401(k) plan for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1998 and 1999 (unaudited) totaled approximately $15,000, $28,000, $52,000,
$39,000 and $67,000, respectively. To date, the Company has not made any
discretionary profit sharing contributions to the 401(k) plan.
13. Subsequent Event (Unaudited)
On November 12, 1999, the Company issued a total of $5,000,000 of 5.77%
promissory notes maturing August 12, 2000. The principal plus accrued interest
are convertible into equity securities of the Company, at an exchange price to
be determined based upon the closing of future equity financings or at $7.022
per share, subject to adjustment, in the event of an acquisition of the Company
or other liquidating event.
F-78
<PAGE>
Report of Independent Accountants
To the Board of Directors
Commerx, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Commerx, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, 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
March 26, 1999
Chicago, Illinois
F-79
<PAGE>
COMMERX, INC.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................... $ 3,302,954 $ 1,599,915
Short-term investments............................ 200,000 200,000
Trade accounts receivable (net of allowance of
$26,363 at September 30, 1999)................... 20,127 459,249
Other current assets.............................. 22,436 105,895
----------- ------------
Total current assets............................ 3,545,517 2,365,059
----------- ------------
Property and equipment, net of accumulated
depreciation....................................... 206,026 1,307,003
Security deposits................................... -- 200,000
Other assets........................................ -- 54,793
----------- ------------
Total assets.................................... $ 3,751,543 $ 3,926,855
=========== ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable.................................. $ 364,116 $ 768,667
Due to related party.............................. 92,713 98,776
Accrued expenses.................................. 177,166 1,846,321
Deferred revenue.................................. 180,909 355,321
Notes payable--stockholders....................... -- 1,802,194
Notes payable--current............................ -- 87,548
Obligation under capital lease--current........... -- 321,176
----------- ------------
Total current liabilities....................... 814,904 5,280,003
----------- ------------
Notes payable--noncurrent........................... -- 183,690
Obligation under capital lease...................... -- 813,065
----------- ------------
Total liabilities............................... 814,904 6,276,758
----------- ------------
Commitments and contingencies (Note 9)
Redeemable convertible Series A preferred stock,
$.001 par value, redeemable at $1.05 per share,
8,570,000 shares authorized; 6,665,428 and
8,570,000 shares issued and outstanding as of De-
cember 31, 1998 and September 30, 1999, respec-
tively (aggregate liquidation preference of $1.05
per share)......................................... 5,009,520 7,009,520
Stockholders' deficit:
Common stock, $.001 par value, 20,000,000 shares
authorized; 7,430,000 shares issued and
outstanding...................................... 7,430 7,430
Deferred compensation............................. -- (879,528)
Additional paid-in capital........................ 2,256,130 3,459,633
Accumulated deficit............................... (4,336,441) (11,946,958)
----------- ------------
Total stockholders' deficit..................... (2,072,881) (9,359,423)
----------- ------------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit...... $ 3,751,543 $ 3,926,855
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
COMMERX, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the
year (Unaudited)
ended For the nine months
December ended September 30,
31, ------------------------
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Service............................... $ 375,037 $ 263,568 $ 388,216
Transaction........................... -- -- 445,263
----------- ----------- -----------
Total revenue....................... 375,037 263,568 833,479
----------- ----------- -----------
Cost of revenues........................ -- -- 426,209
----------- ----------- -----------
Total gross margin.................. 375,037 263,568 407,270
----------- ----------- -----------
Operating expenses:
Selling and marketing................. 577,324 317,645 1,952,141
Information technology................ 514,946 274,267 1,972,444
Production and operations............. 140,161 112,984 518,577
General and administrative............ 1,134,764 553,149 3,594,746
----------- ----------- -----------
Total operating expenses............ 2,367,195 1,258,045 8,037,908
----------- ----------- -----------
Operating loss.......................... (1,992,158) (994,477) (7,630,638)
Nonoperating income (expense):
Interest income....................... -- -- 59,147
Interest expense...................... (185,825) (133,210) (39,026)
----------- ----------- -----------
Total other income (expense)........ (185,825) (133,210) 20,121
----------- ----------- -----------
Net loss................................ $(2,177,983) $(1,127,687) $(7,610,517)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE>
COMMERX, INC.
Statements of Changes in Stockholders' Deficit
December 31, 1998 and September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------- Unamortized Additional Total
Number Carrying Stock Paid-In Accumulated Stockholders'
of Shares Value Compensation Capital Deficit Deficit
---------- --------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 16,950,000 $ 200,000 $ -- $ -- $ (2,158,458) $(1,958,458)
Conversion of
shareholder notes and
accrued interest to
donated capital........ -- -- -- 2,073,080 -- 2,073,080
Conversion of common
stock, no par to $0.001
par value common
stock.................. -- (183,050) -- 183,050 -- --
Exchange of common stock
for Series A redeemable
convertible preferred
stock.................. (9,520,000) (9,520) -- -- -- (9,520)
Net loss................ -- -- -- -- (2,177,983) (2,177,983)
---------- --------- --------- ---------- ------------ -----------
Balance at December 31,
1998................... 7,430,000 7,430 -- 2,256,130 (4,336,441) (2,072,881)
Issuance of stock
options................ (939,503) 939,503 -- --
Stock compensation
recognized............. 59,975 -- -- 59,975
Issuance of Series A
preferred stock
warrants .............. -- -- -- 60,000 -- 60,000
Issuance of Series A
preferred stock
warrants .............. -- -- -- 14,000 -- 14,000
Issuance of Series B
preferred stock
warrants .............. -- -- -- 190,000 -- 190,000
Net loss................ -- -- -- -- (7,610,517) (7,610,517)
---------- --------- --------- ---------- ------------ -----------
Balance at September 30,
1999................... 7,430,000 $ 7,430 $(879,528) $3,459,633 $(11,946,958) $(9,359,423)
========== ========= ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-82
<PAGE>
COMMERX, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
For the year For the nine months ended
ended September 30,
December 31, --------------------------
1998 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(2,177,983) $ (1,127,687) $ (7,610,517)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation........................ 45,627 28,047 220,325
Interest expense on shareholder
notes.............................. 225,160 133,210 6,063
Amortization of debt discount....... -- -- 8,369
Amortization of compensation
expense............................ -- -- 59,975
Changes in operating assets and
liabilities:
Increase in accounts receivable... (7,029) (39,786) (439,122)
(Increase) decrease in other
current assets................... (208,585) 4,914 (83,459)
(Increase) in security deposits... -- -- (200,000)
Increase in other non-current
assets........................... -- -- (54,793)
Increase (decrease) in accounts
payable.......................... 360,953 98,122 404,551
Increase in accrued expenses...... 91,962 40,560 1,669,155
Increase in deferred revenue...... 89,727 148,038 174,412
----------- ------------ ------------
Net cash used by operations..... (1,580,168) (714,582) (5,845,041)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of plant, property, and
equipment.......................... (144,444) (78,525) (388,506)
----------- ------------ ------------
Net cash used in investing
activities..................... (144,444) (78,525) (388,506)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from shareholder notes..... 100,000 100,000 1,991,809
Decrease in amount due to related
party.............................. (124,596) 734,323 --
Gross proceeds from issuance of note
payable............................ -- -- 300,000
Repayment of note payable........... -- -- (15,325)
Obligations under capital lease..... -- -- 254,024
Proceeds from sale of Series A
redeemable convertible preferred
stock.............................. 5,000,000 -- 2,000,000
----------- ------------ ------------
Net cash provided from financing
activities..................... 4,975,404 834,323 4,530,508
----------- ------------ ------------
Net increase (decrease) in cash....... 3,250,792 41,216 (1,703,039)
Cash and cash equivalents at beginning
of year.............................. 52,162 52,162 3,302,954
Cash and cash equivalents at end of
year................................. $ 3,302,954 $ 93,378 $ 1,599,915
Supplemental cash flow information:
Interest paid........................ $ 45,868 $ -- $ 7,545
Non-cash financing activities:
Conversion of shareholder notes and
interest to additional paid-in
capital............................ $ 2,073,080 $ -- $ --
Exchange of common stock for Series
A redeemable convertible preferred
stock.............................. $ 9,520 $ -- $ --
Estimated fair value of warrants--
recorded as debt discount.......... $ -- $ -- $ 264,000
Equipment obtained under capital
lease.............................. $ -- $ -- $ 932,796
Incentive plan stock issuances...... $ -- $ -- $ 939,503
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE>
COMMERX, INC.
Notes to Financial Statements
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
1. Nature of Business and Organization
Commerx, Inc. ("Commerx" or the "Company") was formed in July, 1995, as
an Illinois Company, and is an internet commerce company creating electronic
business to business commerce through the development and management of the
company owned web site, the Plastics Network (www.PlasticsNet.Com) serving the
plastics industry.
In December 1998 pursuant to an Agreement of Merger, the Company merged
with Commerx, Inc. ("Commerx Delaware"), a Delaware Corporation formed in
December 1998. The outstanding shares of the Company's common stock were
converted to common stock of Commerx Delaware at a ratio of one to one. Upon
completion of the merger, Commerx Delaware became the surviving corporation.
The Company's proprietary technology provides users with an industry
specific environment that promotes the ability to initiate business to business
transactions.
In 1998, the Company derived its revenue from the establishment and
maintenance of customer business centers (commercial storefronts) on
PlasticsNet.Com along with advertising revenue. The Company also earned fees
for the production of advertising for customers that required ad creation
services.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital. During
1998 (as described in Note 6), the Company sold $5 million of preferred stock
and obtained a commitment for the purchase of an additional $2 million of
preferred stock. In March 1999, the Company's Board of Directors approved a
resolution initiating the sale of preferred stock under this commitment. The
sale of $2 million of preferred stock was completed in June of 1999. Management
believes that its current funds will be sufficient to enable the Company to
meet its planned expenditures for fiscal 1999. In addition, with other
anticipated sources of funding, the Company expects to fund planned
expenditures for the year 2000, as well.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim financial statements as of September 30, 1999
and for the nine months ended September 30, 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 of 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
Revenues are recognized over the period that services are provided.
Advertising revenue is contracted generally on a quarterly basis and recognized
equally over each of the three months. Business center set-ups and renewals are
contracted generally on an annual basis and recognized equally over each of the
twelve months.
F-84
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Transaction revenues consist primarily of product sales to customers and
charges to customers for outbound freight. Commerx acts as a principal when
purchasing products from suppliers and reselling them to customers. Products
are shipped directly to customers by suppliers based on customer delivery date
specifications. Under principal-based agreements, Commerx is responsible for
selling products, collecting payment from customers, ensuring that the shipment
reaches customers and processing returns. In addition, Commerx takes title to
products upon shipment and bears the risk of loss for collection, delivery and
product returns from customers. Commerx provides an allowance for sales
returns, which has been insignificant to date, at the time of sale. Commerx
recognizes revenues from product sales when products are shipped to customers.
Barter transactions are valued at the lower of estimated fair value of
the services received or the estimated value of the services provided in
exchange. Service revenue and advertising expenses are equal in amounts,
totaling $93,700 for the year ended December 31, 1998 and $70,275 and $70,275
for the nine month periods ended September 30, 1998 and 1999, respectively. To
date, barter transactions have not been recognized in the financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located primarily in the United States and are
denominated in U.S. dollars. Management believes its credit policies are
prudent and reflect normal industry terms and business risk.
At December 31, 1998, the Company had five customers that accounted for
approximately 11.7%, 12.0%, 12.2%, 17.0%, and 26% respectively of the accounts
receivable balance. At September 30, 1999, 38.2% and 20.2% of the Company's
accounts receivable were due from two customers.
During 1998 one customer accounted for 20% of the Company's revenues. For
the period ending September 30, 1999, two customers accounted for 32.8% and
10.9% of the Company's revenues.
In May 1999, the Company entered into a collection date factoring
agreement with a third party allowing for the factoring of trade accounts
receivable. Under the terms of the agreement, the third party will assume the
credit risk on all approved accounts up to a certain preapproved threshold. The
Company will be required to pay the third party a factoring commission of 0.8%
with a minimum annual charge of $40,000.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments. The carrying value for all long-term debt outstanding at
the end of all periods presented approximates fair value where fair value is
based on market prices for the same or similar debt and maturities.
F-85
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon estimated useful lives ranging from 3 to 5
years. Maintenance and repair charges are expensed as incurred.
As of September 30, 1999, the Company changed the estimated useful lives
for depreciation from 5 to 7 years to 3 to 5 years to better reflect the life
of the assets, and to comply with industry standards. The Company took a
$113,142 charge to general and administrative expense as of September 30, 1999
to reflect the change in accounting estimate.
Income Taxes
Deferred tax assets and liabilities are recorded to reflect the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based upon the difference between the financial statement
and tax bases of assets and liabilities and for tax carryforwards using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
In December 1998, in connection with the private placement of preferred
stock (see Note 6), the Company was required to change its corporate status
from an S-Corporation to a C-Corporation and therefore, is subject to federal
and state income taxes effective January 1, 1999. As a result of the conversion
in tax status, the Company has recorded deferred tax assets and liabilities as
of December 31, 1998.
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$69,421 as of December 31, 1998 and $51,962 and $531,528 for the nine months
ended September 30, 1998 and 1999, respectively.
Product Development Costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred. The software development costs
component of product development costs are required to be capitalized beginning
when a product's technological feasibility has been established and ending when
a product is available for general release to customers. To date, completion of
a working model of the Company's products and the date of general release have
substantially coincided. Costs incurred by the Company between the completion
of the working model and the point at which the product is ready for general
release have been insignificant.
F-86
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages, but does not require, companies to
record compensation cost for stock-based compensation at fair value. The
Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair market value of a share of the Company's
stock at the date of the grant over the amount that must be paid to acquire the
stock.
Recent Pronouncements
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income is defined as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. The Company does
not have any other comprehensive income.
The FASB also issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 specifies revised guidelines
for determining an entity's operating segment and the type and level of
financial information to be disclosed. This standard requires that management
identify operating segments based on the way that management disaggregates the
entity for making internal operating decisions. The Company currently operates
under the definition of one segment.
Both of these statements are effective for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company currently
does not have any derivative investments.
3. Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation using the straight-line method based on the estimated useful lives
of the assets. The estimated useful lives are three years for computer software
and equipment and five years for furniture and fixtures and other equipment.
When property and equipment are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the account, and any
gain or loss is included in results of operations. Amounts expended for
maintenance and repairs are charged to expense as incurred.
F-87
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Plant, property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Equipment...................................... $ 36,461 $ 105,693
Furniture and fixtures......................... 28,448 298,507
Computer software and equipment................ 244,572 1,226,584
--------- ----------
309,481 1,630,784
Less: Accumulated depreciation................. (103,455) (323,781)
--------- ----------
$ 206,026 $1,307,003
========= ==========
</TABLE>
On June 8, 1999, the Company entered into a master lease agreements with
two financing companies for the lease of office furniture and fixtures and
computer equipment used in its business. Each borrowing under the lease has a
three to four-year term and is collateralized by the assets purchased.
Equipment obtained pursuant to these leases is capitalized and is included in
property and equipment on the balance sheet.
In connection with one of the aforementioned arrangements, the Company
issued warrants to purchase certain of its equity securities to the lessor
(Note 7).
4. Notes Payable to Related Parties
On September 28, 1999, the Company entered into six-month subordinated,
convertible borrowing agreements with certain officers of the Company under
which such individuals agreed to loan the company $1,991,809. Such loan is
carried at $1,802,104, net of debt discounts. The notes are required to be paid
on the earlier of March 28, 2000 or the completion of the next round of
financing in which the Company receives proceeds of at least $15 million. The
notes are convertible into the Company's Series B preferred stock at a
conversion rate based on a formula which includes the conversion price of
Series B preferred stock. The conversion price will be determined based upon
the completion of the Series B Preferred Stock round of financing. Interest is
payable upon maturity or conversion of the note at an annual rate of prime plus
1% (9.25% at September 30, 1999). In the event of default, this rate increases
to prime plus 3%. The interest due on the notes is also convertible into shares
of Series B Preferred Stock. In connection with the financing, the Company
issued warrants to purchase shares of the Company's Series B Preferred Stock
(Note 7).
In November 1998, the Board of Directors approved a resolution under
which certain outstanding shareholder demand notes were contributed to the
Company as additional paid-in capital. The total amount of capital contributed
was $2,073,080 which was comprised of $1,847,920 of outstanding principal and
$225,160 of accrued interest due on the respective notes.
Additionally, the Company has recorded amounts due to a related party of
$92,713 as of December 31, 1998 and $98,776 as of September 30, 1999 (Note 10).
F-88
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
5. Notes Payable
On August 16, 1999, the Company entered into a borrowing agreement with a
third party under which the lender agreed to loan $300,000 to the Company for a
period of 30 months such loan is reflected net of $14,000 of debt discount. The
proceeds of which were to be used to finance the acquisition of fixed assets
and for working capital purposes. Interest payments are due on a monthly basis
at an annual interest rate of 8.75% and the note is due on February 1, 2002. On
February 1, 2002, a $51,000 balloon payment is due. In connection with the
borrowing, the Company also issued warrants to purchase shares of the Company's
Series A Preferred Stock (Note 7).
6. Redeemable Convertible Series A Preferred Stock
In December 1998, the Company authorized the sale and issuance of up to
8,570,000 shares of Redeemable Series A Convertible Preferred Stock ("Series A
Preferred"). Subject to first closing as defined in the Series A Preferred
Stock Purchase Agreement, the Company issued 4,761,428 shares to a certain
investment group in exchange for $5,000,000. The purchase price consists of
cash payments totaling $4,750,000 and the extinguishment of a note payable in
the amount of $250,000.
In June 1999, the Company issued 1,904,572 additional shares of Series A
Preferred shares to an investment group for $2,000,000. The transaction
fulfilled the second closing as defined in the Series A Preferred Stock
Purchase Agreement.
Holders of Series A Preferred shares are entitled to receive non-
cumulative dividends in preference to holders of common stock at the rate of 8%
per share per annum if and when declared by the Board of Directors. The holders
of Series A Preferred shares shall have the right to convert the Series A
Preferred shares into an equal number of shares of common stock at the option
of the holder and have the right to that number of votes equal to the number of
shares of common stock issuable upon conversion of the Series A Preferred. All
series of preferred stock and common stock are required to vote together as a
class except that holders of Series A Preferred are entitled to elect two
representatives to the Board of Directors.
Additionally, the Series A Preferred automatically converts into common
stock at the then applicable conversion rate in the event of either (i) the
completion of an initial public offering with aggregate offering proceeds to
the Company of at least $5,000,000 and a per share price to the public of at
least 2.5 times the purchase price of the Series A Preferred or (ii) the
election of the holders of at least two-thirds of the outstanding Series A
Preferred.
Upon written election of holders of two-thirds of the Series A Preferred,
the Series A Preferred is required to be redeemed to the extent of one-third of
the shares of Series A Preferred on the fifth, sixth, and seventh anniversary
dates of the Closing. The redemption price of $1.05 is to be adjusted for any
stock dividends, contributions, or splits plus any accrued, but unpaid
dividends.
The consent of a majority of the Series A Preferred is required for any
action that authorizes or issues shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity
with the Series A Preferred or that authorizes a merger, sale of substantially
all of the assets of the Company or a recapitalization/reorganization of the
Company.
F-89
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
Upon liquidation or dissolution, shareholders of Series A Preferred Stock
are to receive a distribution of available assets up to the sum of the original
purchase price plus any declared but unpaid dividends. This distribution has
preference over any distribution to common stockholders.
7. Common Stock and Warrants
In December 1998, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 500,000 with no par value to 20,000,000 with $.001
par value and also authorized the issuance of up to 8,570,000 shares of Series
A Preferred Stock. The change in par value did not affect any of the existing
rights of shareholders and has been recorded as an adjustment to additional
paid-in capital and common stock. The Company subsequently affected an 84.75 to
1 stock-split of the issued and outstanding common stock of the Company as of
December 22, 1998. All share information retroactively reflects the effect of
this split. The Company has reserved 8,570,000 shares of common stock for
issuance upon conversion of the Series A Preferred.
In March 1999, the Company's Board of Directors adopted a Combined
Incentive and Non-statutory Stock Option Plan ("the Plan"). Under the Plan,
employees of the Company who elect to participate are granted incentive stock
options to purchase common stock at not less than the fair market value on the
date of grant. In the case of grants of non-statutory stock options, options
will be granted at a per share price of no less than 85% of the fair market
value on the date of grant. The term of the options is 10 years from the
initial grant date with the options generally vesting over a four year period.
The Plan is administered by the Option Committee of the Board of
Directors. The total number of shares of common stock that may be issued
pursuant to options granted under the Plan is 4,000,000.
Deferred compensation was recorded in connection with the granting of
stock options at an exercise price that was less than the deemed fair value.
Deferred compensation of $939,503 which is reflected as a separate component of
stockholders' equity and is being amortized over a four-year vesting period (as
stated by the Plan). Compensation expense of $59,975 was recognized for the
nine months ended September 30, 1999.
The following information relates to stock options outstanding as of
September 30, 1999.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
-------------------
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at beginning of period.......................... -- --
Granted..................................................... 4,071,500 $0.82
Exercised................................................... -- --
Forfeited/expired........................................... (253,000) $0.51
--------- -----
Outstanding at end of period................................ 3,818,500 $0.84
========= =====
</TABLE>
In connection with the lease agreement entered into in June 1999 (Note
3), the Company granted the lessor warrants to purchase 91,429 shares of the
Company's Series A Preferred Stock at a price of $1.05 per
F-90
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
share. These warrants can be exercised at any time between the earlier of a
period of seven years or three years from the effective date of the Company's
initial public offering. The estimated fair value of these warrants equaled
$60,000 and was recorded as debt discount and is being amortized to interest
expense over the term of the lease.
In connection with the note payable to a third party in August 1999 (Note
5), the Company granted the lender warrants to purchase 21,429 shares of the
Company's Series A Preferred Stock at a price of $1.05 per share. These
warrants can be exercised at any time before the earlier of a period of seven
years or three years from the effective date of the Company's initial public
offering. The estimated fair value of these warrants equaled $14,000 and was
recorded as debt discount and is being amortized to interest expense over the
term of the note.
In connection with a debt financing agreements entered into with related
parties (Note 4), the Company issued warrants to purchase shares of Series B
Preferred Stock. The total number of Series B Preferred Stock shares to be
issued is based on a formula which includes the conversion price of Series B
Preferred Stock. The conversion price will be determined based upon the
completion of a future round of financing. The estimated fair value of these
warrants determined as of September 30, 1999 equaled $190,000 and has been
recorded as debt discount. The discount is being amortized to interest expense
over the term of the note.
The term of the warrant agreement begins upon the closing of a private
placement of the Company's Series B Preferred Stock and ends on September 28,
2004.
8. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the carrying amounts of assets and
liabilities and their respective tax bases using enacted tax rates in effect
for the year in which the differences are expected to reverse.
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
Accrued expenses........................................... $ 209,267
Deferred revenue........................................... 68,745
---------
Total deferred tax assets................................ 278,012
Deferred tax liabilities:
Accounts receivable........................................ 7,648
Book over tax basis depreciation........................... 19,000
---------
Less: Valuation allowance.................................. (251,364)
---------
Net deferred tax asset (liability)....................... $ --
=========
</TABLE>
The valuation allowance relates principally to deferred tax assets that
the Company estimates may not be realizable based upon available evidence.
F-91
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
9. Commitments and Contingencies
During 1988, the Company leased the space in Chicago, Illinois under an
operating lease. The lease called for minimum rent with an annual escalation.
The lease expired on October 1998.
The Company has entered into a new operating lease for office space,
which commenced in January 1999 and expires on December 31, 2008. The lease
calls for minimum rents with an annual escalation.
Additionally, the Company entered into an operating lease for internet
data services which commenced on June 30, 1999. The lease calls for monthly
payments of $7,150. The lease expires on November 3, 1999, but the Company
intends to renew the lease through November 3, 2000.
Total rental expense was $88,747, during 1998, and $185,156 for the nine
month period ended September 30, 1999.
The following is a schedule of future minimum rentals required for
operating leases that have remaining noncancelable lease terms in excess of one
year, as of December 31, 1998:
<TABLE>
<CAPTION>
Total
----------
<S> <C>
1999.......................................................... $ 235,895
2000.......................................................... 240,312
2001.......................................................... 244,730
2002.......................................................... 249,147
2003.......................................................... 253,565
Thereafter.................................................... 1,334,085
----------
Total....................................................... $2,557,734
==========
Future payments under a noncancelable capital lease agreement are as
follows:
1999.......................................................... $ 60,327
2000.......................................................... 438,163
2001.......................................................... 419,047
2002.......................................................... 335,411
2003 and thereafter........................................... 87,753
----------
1,340,701
Less amounts representing interest and debt discount.......... (206,660)
Net present value of minimum lease payments................... 1,134,241
----------
Less current portion.......................................... (321,176)
----------
$ 813,065
==========
</TABLE>
On September 30, 1999, the Company signed an agreement with a third party
for the purchase of a software license to be used in the business activity of
the Company. Subject to the terms of the agreement, the Company is obligated to
pay $25,000 of license fees by October 31, 1999 and $225,000 by March 31, 2000.
Effective September 30, 1999, the Company entered into a three year
agreement with a third party. In exchange for services provided to the Company,
per the terms of the agreement, the Company will pay an annual fee of $50,000
plus transactions costs based on usage of the third party's services.
F-92
<PAGE>
COMMERX, INC.
Notes to Financial Statements--(Continued)
(Information presented for the nine months ended
September 30, 1999 and 1998 is unaudited)
10. Related Party Transactions
The Company and Fast Heat, Inc. (Fast Heat) are related parties through a
common group of shareholders which hold a substantial ownership interest in
both companies. In 1998, Fast Heat provided funding to the Company for
operations. At September 30, 1999 amounts due to Fast Heat were $98,776. The
amount is due on demand and accrued interest at 8.5% in 1999.
In 1998, the Company provided internet related services to Fast Heat. The
amount of revenues earned for these services was $2,025 in 1998. No such
services were performed in the period ending September 30, 1999.
In 1998, the Company provided bartered services to an affiliated entity
in exchange for print advertising and certain trade show benefits valued at
$93,700 under bartered transactions.
In December 1998, the Company issued 1,904,000 of Series A Preferred
Shares to certain related party common stockholders in exchange for 9,520,000
shares of common stock.
11. Defined Contribution Savings Plan
The Company maintains a defined contribution 401(k) profit sharing plan
covering substantially all eligible employees meeting certain minimum age and
months of service requirements, as defined. Participants may make elective
contributions up to established limits. All amounts contributed by participants
and earnings on these contributions are fully vested at all times. The Plan
provides for matching and discretionary contributions by the Company. The
Company's expense for the defined contribution plan totaled $8,680 for the year
ended December 31, 1998, and $6,235 and $8,085 for the periods ended September
30, 1998 and 1999, respectively.
12. Subsequent Event
In November 1999, the Board of Directors approved an amendment to the
Company's certificate of incorporation which increased the number of authorized
shares of common stock from 20,000,000 to 100,000,000. The Board also
authorized an increase in the number of authorized shares of Series A Preferred
Stock from 8,570,000 shares to 8,632,858, as well as authorizing the issuance
of up to 3,218,021 shares of Series B Preferred Stock.
In November 1999 Commerx issued 1,923,109 shares of Redeemable Series B
Preferred Stock ("Series B Preferred Stock") for gross proceeds of $23.9
million.
F-93
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders of
ComputerJobs.com, Inc.
We have audited the accompanying balance sheets of ComputerJobs.com, Inc.
(formerly ComputerJobs Store, Inc.) as of December 31, 1997 and 1998, and the
related statements of income, changes in stockholders' equity (deficit), and
cash flows for the period from January 16, 1996 (inception) through December
31, 1996 and for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ComputerJobs.com,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for the period from January 16, 1996 (inception) through December
31, 1996 and for the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 11, 1999, except Note 1 as to which the date
is April 1, 1999
F-94
<PAGE>
COMPUTERJOBS.COM, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
-------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $315,213 $ 9,385,180
Trade accounts receivable, net of allowance for
doubtful accounts of $4,000 and $20,000 at December
31, 1997 and 1998, respectively....................... 136,528 315,081
Unbilled trade accounts receivable..................... 17,000 62,990
Prepaid expenses....................................... -- 1,197
Loan receivable from stockholder........................ 1,086 --
-------- -----------
Total current assets.................................... 469,827 9,764,448
Property and equipment:
Furniture and fixtures................................. 15,291 35,728
Computer and office equipment.......................... 73,721 189,288
Accumulated depreciation............................... (21,159) (64,249)
-------- -----------
Net property and equipment.............................. 67,853 160,767
Other assets............................................ 2,000 99,721
-------- -----------
Total assets............................................ $539,680 $10,024,936
======== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses.................. $ 47,323 $ 136,209
Deferred income taxes payable.......................... -- 89,261
Note payable to stockholders........................... -- 1,000,000
Distribution payable to stockholders................... -- 346,817
Current portion of notes payable....................... 6,279 --
Deferred revenue....................................... 16,271 27,996
-------- -----------
Total current liabilities............................... 69,873 1,600,283
Notes payable, less current portion..................... 6,354 --
Series A Preferred Stock, no par value -- ($2 per share
redemption value; minimum liquidation value of
$10,000,000 plus accrued and unpaid dividends plus a
portion of remaining assets, as defined), convertible
to Class 2 common stock, 5,000,000 shares authorized,
issued and outstanding................................. -- 9,986,126
Stockholders' equity:
Class 1 common stock, no par value -- 5,500,000 shares
authorized, 5,500,000 shares issued and outstanding... 10,510 10,510
Class 2 common stock, no par value -- 14,000,000 shares
authorized, no shares issued or outstanding........... -- --
Retained earnings (deficit)............................ 452,943 (1,571,983)
-------- -----------
Total stockholders' equity (deficit).................... 463,453 (1,561,473)
-------- -----------
Total liabilities and stockholders' equity (deficit).... $539,680 $10,024,936
======== ===========
</TABLE>
See accompanying notes.
F-95
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Income
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year Ended December 31,
December 31, ------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenue................................ $ 377,163 $ 1,504,742 $ 4,431,060
Expenses:
Operations............................ 38,477 65,178 469,519
Sales and marketing................... 38,509 198,586 1,893,589
General and administrative............ 189,126 776,572 1,121,918
Depreciation.......................... 3,617 17,542 45,383
--------- ----------- -----------
269,729 1,057,878 3,530,409
Operating income....................... 107,434 446,864 900,651
Other income (deductions):
Interest expense...................... (982) (1,646) (12,537)
Interest income....................... 401 8,258 53,610
--------- ----------- -----------
(581) 6,612 41,073
--------- ----------- -----------
Income before income taxes............. 106,853 453,476 941,724
Income tax expense..................... -- -- 89,261
--------- ----------- -----------
Net income............................. $ 106,853 $ 453,476 $ 852,463
========= =========== ===========
Supplemental unaudited pro forma
information:
Income before taxes, as above......... $ 106,853 $ 453,476 $ 941,724
Pro forma provision for income taxes.. (40,604) (172,320) (357,853)
--------- ----------- -----------
Pro forma net income.................. $ 66,249 $ 281,156 $ 583,871
========= =========== ===========
Basic pro forma earnings per common
share................................ $0.01 $0.05 $0.09
Average outstanding common shares..... 5,500,000 5,500,000 5,500,000
</TABLE>
See accompanying notes.
F-96
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Retained Total
Class 1 Common Class 2 Common Earnings Shareholders'
Stock Stock (deficit) Equity (deficit)
-------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at January 16,
1996 (inception)....... $10,510 -- $ -- $ 10,510
Net income............ -- -- 106,853 106,853
Distribution to
stockholders......... -- -- (33,879) (33,879)
------- --- ----------- -----------
Balance at December 31,
1996................... 10,510 -- 72,974 83,484
Net income............ -- -- 453,476 453,476
Distribution to
stockholders......... -- -- (73,507) (73,507)
------- --- ----------- -----------
Balance at December 31,
1997................... 10,510 -- 452,943 463,453
Net income............ -- -- 852,463 852,463
Distribution to
stockholders......... -- -- (2,796,817) (2,796,817)
Accretion and
dividends on Series A
Preferred Stock...... -- -- (80,572) (80,572)
------- --- ----------- -----------
Balance at December 31,
1998................... $10,510 -- $(1,571,983) $(1,561,473)
======= === =========== ===========
</TABLE>
See accompanying notes.
F-97
<PAGE>
COMPUTERJOBS.COM, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 16, Year Ended December
1996 through 31,
December 31, ----------------------
1996 1997 1998
------------ --------- -----------
<S> <C> <C> <C>
Operating activities
Net income............................... $106,853 $ 453,476 $ 852,463
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 3,617 17,542 45,383
Provision for deferred taxes........... -- -- 89,261
Changes in operating assets and
liabilities:
Trade accounts receivable............. (30,880) (105,648) (178,553)
Unbilled trade accounts receivable.... -- (17,000) (45,990)
Loan receivable from stockholder...... -- (1,086) 1,086
Prepaid expenses and other assets..... -- (2,000) (98,918)
Accounts payable and accrued
expenses............................. 12,394 34,930 88,886
Deferred revenue...................... 21,903 (5,632) 11,725
-------- --------- -----------
Net cash provided by operating
activities.............................. 113,887 374,582 765,343
Investing Activities
Purchase of property and equipment....... (23,980) (65,033) (138,297)
-------- --------- -----------
Net cash used in investing activities.... (23,980) (65,033) (138,297)
Financing Activities
Sale of Series A Preferred Stock, less
expenses................................ -- -- 9,905,554
Distributions to stockholders............ (33,879) (73,507) (1,450,000)
Proceeds from notes payable.............. 21,100 -- --
Repayment of notes payable............... (2,817) (5,650) (12,633)
Sales of common stock.................... 10,510 -- --
-------- --------- -----------
Net cash provided (used) by financing
activities.............................. (5,086) (79,157) 8,442,921
-------- --------- -----------
Net increase in cash and cash
equivalents............................. 84,821 230,392 9,069,967
Cash and cash equivalents, beginning of
period.................................. -- 84,821 315,213
-------- --------- -----------
Cash and cash equivalents, end of year... $ 84,821 $ 315,213 $ 9,385,180
======== ========= ===========
</TABLE>
See accompanying notes.
F-98
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements
December 31, 1998
1. Description of the Business
The Company is an Internet-based interactive technology company that
provides an employment Web site for information technology (IT) professionals.
The Company's web site enables recruiters and employers to post job
opportunities and search for employment opportunities based on an array of
search criteria. The Company also offers banner advertising and job reposting
services for companies wanting access to IT professionals. The Company operates
primarily on a regional basis and at December 31, 1998, served five regions in
the United States: Atlanta, the Carolinas, Chicago, Florida, and Texas.
On April 1, 1999 the Company changed its name from ComputerJobs Store,
Inc. to ComputerJobs.com, Inc.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers short-term investments with original maturity dates
of 90 days or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash equivalents and
accounts receivable. Cash equivalents are held primarily with one financial
institution. The Company performs periodic evaluations of the relative credit
standing of this financial institution. Accounts receivable are unsecured and
the Company is at risk to the extent such amounts become uncollectible.
Accounts Receivable
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
generally due within 30 days. Credit losses have been within management's
expectations.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation computed on a straight-line basis over the estimated useful lives
of the related assets which range from 3 to 5 years.
If facts and circumstances indicate that the property and equipment or
other assets may be impaired, an evaluation of continuing value would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with these assets would be compared to their carrying amount
to determine if a write down to fair market value or discounted cash flow value
is required.
Revenue Recognition
The Company recognizes advertising and service revenue as earned over the
service period. Unbilled trade accounts receivables are recorded for
advertising revenue which is not billed to the customer until the month
following the month in which it is earned. Advance payments received by the
Company are deferred and credited to operations on the straight-line basis over
the life of the agreement.
F-99
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
Advertising Costs
Advertising costs are expensed in the period in which they are incurred.
The Company incurred $11,583, $178,870 and $1,528,590 in advertising costs for
the period from January 16, 1996 (inception) through December 31, 1996 and for
the years ended December 31, 1997 and 1998, respectively.
Income Taxes
The Company elected to be taxed under the provision of Subchapter S of
the Internal Revenue Code for the period from January 16, 1996 (inception)
through November 25, 1998. Under these provisions, the income of the Company
was reported by the stock or shareholders on their individual income tax
returns. As such, the accompanying financial statements do not include a
provision for income taxes for the period from January 16, 1996 (inception) to
November 25, 1998.
In connection with the Company's amended and restated articles of
incorporation, the Company terminated its tax status as a Subchapter S
corporation. Effective November 25, 1998, the Company is taxed as a subchapter
C corporation. The deferred tax effects of the change in tax status of
approximately $54,000 are included in income at the date the change in tax
status occurred. Supplemental unaudited pro forma information related to net
income and earnings per share is presented as if the Company had been taxed as
a subchapter C corporation for all periods presented.
Income taxes for the period November 25, 1998 through December 31, 1998
have been provided using the liability method in accordance with FASB Statement
109, Accounting for Income Taxes. Under the liability method, the Company
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Using the enacted tax rates in effect for the year in which the
differences are expected to reverse, deferred tax liabilities and assets are
determined based on the differences between the book basis for financial
reporting and the tax basis of an asset or liability.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Flow Information
During 1998, the Company recorded a distribution payable to the
stockholders of $346,817, a note payable to stockholders for $1,000,000 and
accrued dividends of $79,000 on the Series A Preferred Stock which are non-cash
financing activities.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current presentation.
F-100
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
3. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------- ------
<S> <C> <C>
Note payable; interest at prime rate plus 2.0% (10.5% at
December 31, 1997).......................................... $ 5,052 $ --
Note payable; interest at prime rate plus 2.0% (10.25% at
December 31, 1997).......................................... 7,581 --
------- -----
12,633 --
Less amounts due within one year............................. 6,279 --
------- -----
$ 6,354 $ --
======= =====
</TABLE>
The notes payables were secured by the property and equipment of the
Company and guaranteed by stockholders of the Company.
Interest paid for the period from January 16, 1996 (inception) through
December 31, 1996 and during the years ended December 31, 1997 and 1998 totaled
$982, $1,646 and $1,030, respectively.
At December 31, 1996 and 1997, the Company had an unused line of credit
of $50,000, for general working capital purposes. The line of credit expired on
April 5, 1998 and was not renewed.
4. Income Taxes
Income tax expense (benefit) consists of the following for the period
from November 25, 1998 through December 31, 1998:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal............................................ $(7,267) $86,665 $79,398
State.............................................. (481) 10,344 9,863
------- ------- -------
$(7,748) $97,009 $89,261
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax assets and liabilities as of December 31, 1998 are as
follows:
Deferred income tax assets (liabilities):
<TABLE>
<S> <C>
Property and equipment.......................................... $ 17,420
Net operating loss carryforwards................................ 7,748
Accrual to cash adjustment...................................... (114,429)
--------
Net deferred income taxes....................................... $(89,261)
========
</TABLE>
The Company uses the cash basis for its calculation of income tax expense
in accordance with internal revenue code 448(b)(3). For income tax purposes,
income is generally reported in the period that cash is actually received and
expenses are generally reported in the period the payment is actually made.
F-101
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
Pro forma income tax expense differed from the amounts computed by
applying the statutory federal rate of 34% as a result of the following:
<TABLE>
<CAPTION>
Period from
January 16,
1996 through Year ended December 31,
December 31, -----------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Computed using a 34% tax rate......... $36,330 $ 154,182 $ 320,186
State income taxes, net of federal
tax.................................. 4,274 18,138 37,667
------- ----------- -----------
$40,604 $ 172,320 $ 357,853
======= =========== ===========
</TABLE>
5. Stockholders' Equity
On November 25, 1998, the Company amended and restated its articles of
incorporation. Pursuant to this amendment and restatement, the Company
converted its original 1,000 shares of issued common stock into 5,500,000
shares of Class 1 common stock. The common stock authorized, outstanding and
issued, as of December 31, 1996 and 1997, has been adjusted to reflect this
recapitalization. The Company also authorized 14,000,000 shares of Class 2
common stock and 5,000,000 shares of Series A Preferred Stock. The Company has
reserved 2,000,000 shares of Class 2 common stock for issuance in connection
with its stock option plan.
Each share of Class 1 common stock is convertible to one share of Class 2
common stock at the option of the holder. Class 1 common stock automatically
converts to Class 2 common stock upon a qualifying initial public offering
(IPO) of the Company.
The rights and privileges of Class 1 and Class 2 stockholders are equal
except that Class 1 stockholders are entitled to receive certain preferences
over Class 2 stockholders in the event of the Company's liquidation,
dissolution or sale or merger.
Preferred Stock
In November 1998, the Company sold 5,000,000 shares of Series A Preferred
Stock for an aggregate sales price of $10,000,000. The Series A Preferred Stock
is cumulative and accrues dividends at 8%. Each share of preferred stock is
currently convertible into one share of Class 2 common stock at the option of
the holder. Each holder of Series A Preferred Stock is entitled to certain
protections against sales of common stock at less than the original Series A
purchase price, which may result in the right of such holder to convert each
share of Series A into more than one share of Class 2 common stock. The Series
A preferred stock automatically converts into Class 2 common stock upon a
qualifying IPO of the Company. The Company has reserved 5,000,000 shares of
Class 2 common stock for the conversion of Series A Preferred Stock.
The voting rights of the Series A Preferred Stock are equal to the voting
rights of the Class 2 common stock. Dividends are payable in cash or stock on
the sale, liquidation, or merger of the Company or redemption of such preferred
stock. To the extent the holders have not converted the Series A Preferred
Stock into Class 2 common stock, the holders of least 75% of the preferred
stock may cause the Company to redeem all such preferred stock at any time
after November 25, 2003 at the greater of the purchase price plus accrued
dividends or the appraised value, as defined.
F-102
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
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.
No dividends may be paid to the holders of Class 1 and Class 2 common
stock until all outstanding dividends are paid on the Series A Preferred
Stock. In the event that the holders of the Series A Preferred Stock elect to
convert their shares into Class 2 common stock, the Company is not required to
distribute the accrued dividends on the Series A Preferred Stock.
At December 31, 1998, the Series A Preferred Stock was increased by
$79,000 representing dividends not currently declared or paid. The cost of
issuance of the Series A Preferred Stock of $94,446 is being accreted over a
five year period. Such accretion amounted to $1,572 in the year ended December
31, 1998.
Warrants
In connection with the sale of Series A Preferred Stock, the Company
issued warrants for the purchase of 1,250,000 shares of Class 2 common stock
at $5.00 per share. The Company has not assigned a value to the warrants as
management believes the warrants are of minimal value. The Company has
reserved 1,250,000 shares of Class 2 common stock for the exercise of these
warrants. The warrants expire on the earlier of 1) three years after an IPO by
the Company, 2) the closing date of the sale or merger of the Company, or 3)
December 31, 2003.
6. Earnings Per Share
The following table sets forth the computation of the unaudited pro forma
earnings per common share:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Numerator:
Pro forma net income....................... $ 66,249 $ 281,156 $ 583,871
Accretion and dividends on Series A
Preferred Stock........................... -- -- (80,572)
--------- --------- ---------
Numerator for basic pro forma earnings per
common share--income available to common
stockholders.............................. $ 66,249 $ 281,156 $ 503,299
========= ========= =========
Denominator:
Denominator for basic pro forma earning per
common share--weighted average shares..... 5,500,000 5,500,000 5,500,000
========= ========= =========
Basic pro forma earnings per common share.... $ 0.01 $ 0.05 $ 0.09
========= ========= =========
</TABLE>
Series A Preferred Stock, which is convertible into Class 2 common stock
and was outstanding during 1998 (issued on November 25, 1998), and common
shares issuable upon the exercise of warrants were not included in the
computation of pro forma earnings per share because their effect would be
anti-dilutive.
F-103
<PAGE>
COMPUTERJOBS.COM, INC.
Notes to Financial Statements--(Continued)
December 31, 1998
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.
8. Lease Commitments
During December 1998, the Company entered into a five year operating
lease for office space. This lease agreement provides for rent escalation
clauses to cover increases in certain of the lessors' operating costs. Rental
expense totaled $11,630, $30,646 and $92,217 for the period from January 16,
1996 through December 31, 1996 and for the years ended December 31, 1997 and
1998, respectively. Future minimum rental payments (excluding any estimate of
operating costs) under noncancelable operating leases with terms of one year or
more at December 31, 1998 are $360,679 in 1999, $327,043 in 2000, $320,254 in
2001, $320,254 in 2002 and $320,254 in 2003.
9. Related Party Transactions
On November 2, 1998, the Company declared a $2,000,000 distribution
payable to the stockholders. During 1998, $1,000,000 of the distributions were
paid. The Company issued notes to the stockholders for the remaining
$1,000,000. These notes accrue interest at the federal funds interest rate and
are payable in February 1999.
10. Fair Value of Financial Instruments
The carrying amounts reported in the accompanying balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and notes payable
approximates their fair value.
11. Year 2000 Issue (Unaudited)
Year 2000 issues may arise if computer programs have been written using
two digits rather than four digits to define the applicable year. In such
cases, programs that have time sensitive logic may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company
anticipates that any remaining costs to ensure year 2000 compliance will not be
significant.
Although no formal assessment of the information and operational systems
of its major clients and vendors has been made, the Company is not aware of any
significant problems as a result of the year 2000. However, if the customers
and clients encounter operational problems related to year 2000 and are unable
to resolve such problems in a timely manner, it could result in a material
financial risk to the Company.
F-104
<PAGE>
Independent Auditors' Report
To the Board of Directors of
eMerge Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of eMerge
Interactive, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eMerge Interactive,
Inc. at December 31, 1997 and 1998 and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
April 20, 1999
F-105
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash................................. $ 400 $ 268 $ 1,650,134
Trade accounts receivable............ -- 368,421 2,790,427
Inventories (note 3)................. 635,963 706,557 655,129
Cattle deposits...................... -- -- 489,760
Prepaid expenses..................... 33,642 27,837 103,242
Net assets of discontinued operations
(note 12)........................... 1,066,804 2,285,341 390,336
----------- ------------ ------------
Total current assets................. 1,736,809 3,388,424 6,079,028
Property and equipment, net (note 4).. 428,140 513,837 1,711,404
Capitalized offering costs............ -- -- 341,967
Investment in Turnkey Computer
Systems, Inc. (note 12).............. -- -- 1,831,133
Intangibles, net (note 5)............. -- 2,699,828 6,273,309
----------- ------------ ------------
Total assets....................... $ 2,164,949 $ 6,602,089 $ 16,236,841
=========== ============ ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current installments of capital lease
obligation with related party (note
9).................................. $ -- $ 79,852 $ 83,917
Note payable (note 12)............... -- -- 500,000
Accounts payable..................... 725,369 423,946 1,633,132
Accrued liabilities:
Salaries and benefits................ 175,597 283,103 908,271
Other................................ 98,704 319,989 1,435,987
Advance payments from customers...... -- -- 619,270
Due to related parties (notes 9 and
12)................................. 8,040,304 5,187,334 13,405,957
----------- ------------ ------------
Total current liabilities............ 9,039,974 6,294,224 18,586,534
Capital lease obligation with related
party, excluding current installments
(note 9)............................. -- 305,018 242,673
Note payable (note 12)................ -- -- 900,000
----------- ------------ ------------
Total liabilities.................... 9,039,974 6,599,242 19,729,207
----------- ------------ ------------
Commitments and contingencies (notes
11 and 12)
Class A common stock subject to a put
(note 12)............................ -- -- 400,000
----------- ------------ ------------
Stockholders' equity (deficit) (notes
6, 8 and 12):
Preferred stock, $.01 par value,
authorized 15,000,000 shares:
Series A preferred stock, (aggregate
involuntary liquidation preference
of $6,741,954 in 1997 and
$7,386,314 in 1998), designated
6,500,000 shares, issued and
outstanding 6,443,606 shares in
1997, 1998 and 1999................. 64,436 64,436 64,436
Series B junior preferred stock,
(aggregate involuntary liquidation
preference of $-0- in 1997 and
$4,801,315 in 1998), designated
2,400,000 shares, issued and
outstanding -0- shares in 1997 and
2,400,000 shares in 1998 and 1999... -- 24,000 24,000
Series C preferred stock, designated
1,300,000 shares, issued and
outstanding -0- shares in 1997 and
1998 and 1,100,000 shares in 1999... -- -- 11,000
Series D preferred stock, designated
4,555,556 shares, no shares issued
and outstanding in 1997, 1998 and
1999................................ -- -- --
Common stock, $.01 par value,
authorized 100,000,000 shares:
Class A common stock, designated
92,711,110 shares, issued and
outstanding 2,606,500 shares in
1997, 4,676,500 shares in 1998 and
5,616,155 shares in 1999............ 26,065 46,765 55,662
Class B common stock, designated
7,288,890 shares; no shares issued
and outstanding in 1997, 1998 and
1999................................ -- -- --
Additional paid-in capital........... 1,982,986 16,648,286 23,468,470
Accumulated deficit.................. (8,948,512) (16,780,640) (27,452,825)
Unearned compensation................ -- -- (63,109)
----------- ------------ ------------
Total stockholders' equity
(deficit)......................... (6,875,025) 2,847 (3,892,366)
----------- ------------ ------------
Total liabilities and stockholders'
equity (deficit).................. $ 2,164,949 $ 6,602,089 $ 16,236,841
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-106
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue (note 10)....... $ -- $ -- $ 1,792,471 $ 1,106,452 $ 18,338,645
Cost of revenue......... -- -- 2,623,447 1,628,757 18,282,330
----------- ----------- ----------- ----------- ------------
Gross profit
(loss)............. -- -- (830,976) (522,305) 56,315
----------- ----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative (note
9)................... -- 627,606 3,659,810 2,427,944 7,539,689
Research and
development.......... -- 727,753 1,109,382 759,434 2,756,262
----------- ----------- ----------- ----------- ------------
Total operating
expenses........... -- 1,355,359 4,769,192 3,187,378 10,295,951
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing operations.. -- (1,355,359) (5,600,168) (3,709,683) (10,239,636)
Interest expense (note
9)..................... -- (141,167) (331,594) (231,000) (458,624)
Other income............ -- -- -- -- 15,655
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing
operations before
income taxes....... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Income tax expense
(benefit) (note 7)..... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Profit (loss) from
continuing
operations......... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Discontinued operations
(note 12):
Income (loss) from
operations of
discontinued
transportation
segment (note 9)..... (1,719,492) (3,987,097) (1,808,951) (1,721,060) 10,420
Loss on disposal of
transportation
segment.............. -- -- (91,415) -- --
----------- ----------- ----------- ----------- ------------
Net profit (loss)....... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-107
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred
Preferred Stock Preferred Stock Preferred Stock Stock Common Stock Common Stock
Series A Series B Series C Series D Class A Class B
----------------- ----------------- ----------------- ------------- ----------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- --------- ------- ------ ------ --------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ -- $ -- -- $ -- -- $ -- -- $-- 1,000 $ 10 -- $--
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share....... -- -- -- -- -- -- -- -- 199,000 1,990 -- --
Issuance of
common stock for
cash at $.01 per
share........... -- -- -- -- -- -- -- -- 140,000 1,400 -- --
Exercise of
stock options
for cash at $.01
per share....... -- -- -- -- -- -- -- -- 20,000 200 -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1996............ -- -- -- -- -- -- -- -- 360,000 3,600 -- --
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share (note
9).............. -- -- -- -- -- -- -- -- 2,246,500 22,465 -- --
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 6)........ 6,443,606 64,436 -- -- -- -- -- -- -- -- -- --
Transfer of
technology by XL
Vision, Inc.
(note 9)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1997............ 6,443,606 64,436 -- -- -- -- -- -- 2,606,500 26,065 -- --
Contribution of
debt to equity
by XL Vision,
Inc. (note 9)... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock
in exchange for
contribution of
debt to equity
by XL Vision,
Inc. at $2.00
per share (notes
6 and 9)........ -- -- 2,400,000 24,000 -- -- -- -- -- -- -- --
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$1.00 per share
(note 5)........ -- -- -- -- -- -- -- -- 2,070,000 20,700 -- --
Contribution of
put rights by XL
Vision, Inc.
(note 5)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
December 31,
1998............ 6,443,606 64,436 2,400,000 24,000 -- -- -- -- 4,676,500 46,765 -- --
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... -- -- -- -- -- -- -- -- 87,280 873 -- --
Issuance of
common stock in
connection with
CIN transaction
at $1.20 per
share (note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 600,000 6,000 -- --
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$2.25 per share
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 200,000 2,000 -- --
Issuance of
Series C
preferred stock
at $5.00 per
share (note 12)
(unaudited)..... -- -- -- -- 1,100,000 11,000 -- -- -- -- -- --
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... -- -- -- -- -- -- -- -- 2,375 24 -- --
Issuance of
common stock in
connection with
Turnkey Computer
Systems, Inc at
$8.00 per share
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- 50,000 500 -- --
Reclassification
of common stock
subject to a put
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- -- (500) -- --
Put on Class A
common stock
issued in
connection with
Turnkey Computer
Systems, Inc.
(note 12)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Unearned
compensation
(note 8)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
Amortization of
unearned
compensation
(note 8)
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --- --- --------- ------- --- ---
Balances at
September 30,
1999
(unaudited)..... 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 -- $-- 5,616,155 $55,662 -- $--
========= ======= ========= ======= ========= ======= === === ========= ======= === ===
<CAPTION>
Additional
Paid-in Accumulated Unearned
Capital Deficit Compensation Total
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balances at
December 31,
1995............ $ 3,816 $ (1,745,397) $ -- $(1,741,571)
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share....... -- -- -- 1,990
Issuance of
common stock for
cash at $.01 per
share........... -- -- -- 1,400
Exercise of
stock options
for cash at $.01
per share....... -- -- -- 200
Net profit
(loss).......... -- (1,719,492) -- (1,719,492)
------------ ------------- ------------ ------------
Balances at
December 31,
1996............ 3,816 (3,464,889) -- (3,457,473)
Issuance of
common stock to
XL Vision, Inc.,
for cash at $.01
per share (note
9).............. -- -- -- 22,465
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 6)........ 6,379,170 -- -- 6,443,606
Transfer of
technology by XL
Vision, Inc.
(note 9)........ (4,400,000) -- -- (4,400,000)
Net profit
(loss).......... -- (5,483,623) -- (5,483,623)
------------ ------------- ------------ ------------
Balances at
December 31,
1997............ 1,982,986 (8,948,512) -- (6,875,025)
Contribution of
debt to equity
by XL Vision,
Inc. (note 9)... 7,500,000 -- -- 7,500,000
Issuance of
Series B
preferred stock
in exchange for
contribution of
debt to equity
by XL Vision,
Inc. at $2.00
per share (notes
6 and 9)........ 4,776,000 -- -- 4,800,000
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$1.00 per share
(note 5)........ 2,049,300 -- -- 2,070,000
Contribution of
put rights by XL
Vision, Inc.
(note 5)........ 340,000 -- -- 340,000
Net profit
(loss).......... -- (7,832,128) -- (7,832,128)
------------ ------------- ------------ ------------
Balances at
December 31,
1998............ 16,648,286 (16,780,640) -- 2,847
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... 86,407 -- -- 87,280
Issuance of
common stock in
connection with
CIN transaction
at $1.20 per
share (note 12)
(unaudited)..... 714,000 -- -- 720,000
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$2.25 per share
(note 12)
(unaudited)..... 448,000 -- -- 450,000
Issuance of
Series C
preferred stock
at $5.00 per
share (note 12)
(unaudited)..... 5,489,000 -- -- 5,500,000
Exercise of
stock options
for cash at
$1.00 per share
(unaudited)..... 2,351 -- -- 2,375
Issuance of
common stock in
connection with
Turnkey Computer
Systems, Inc at
$8.00 per share
(note 12)
(unaudited)..... 399,500 -- -- 400,000
Reclassification
of common stock
subject to a put
(note 12)
(unaudited)..... (399,500) -- -- (400,000)
Put on Class A
common stock
issued in
connection with
Turnkey Computer
Systems, Inc.
(note 12)
(unaudited)..... 8,300 -- -- 8,300
Net profit
(loss)
(unaudited)..... -- (10,672,185) -- (10,672,185)
Unearned
compensation
(note 8)
(unaudited)..... 72,126 -- (72,126) --
Amortization of
unearned
compensation
(note 8)
(unaudited)..... -- -- 9,017 9,017
------------ ------------- ------------ ------------
Balances at
September 30,
1999
(unaudited)..... $23,468,470 $(27,452,825) $(63,109) $(3,892,366)
============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-108
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net profit (loss)....... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
Adjustments to reconcile
net profit (loss) to
net cash used in
operating activities:
Depreciation and
amortization.......... 1,503 122,486 438,576 230,964 1,380,940
Amortization of
unearned
compensation.......... -- -- -- -- 9,017
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net....... -- -- (368,421) (138,705) (2,733,765)
Inventories............ -- (635,963) (70,594) (30,741) 51,428
Cattle deposits........ -- -- -- -- (489,760)
Prepaid expenses and
other assets.......... (1,304) (32,338) 5,805 (77,079) (75,405)
Net assets of
discontinued
operations............ (96,209) (853,501) (1,140,425) (1,477,150) 2,137,166
Accounts payable....... 5,675 719,694 (301,423) (32,037) 1,209,186
Accrued liabilities.... 75,542 198,759 328,791 151,016 1,741,166
Advance payments from
customers............. -- -- -- -- 619,270
----------- ----------- ----------- ----------- ------------
Net cash used by
operating
activities........... (1,734,285) (5,964,486) (8,939,819) (7,035,475) (6,822,942)
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Purchases of property
and equipment.......... (56,861) (506,540) (460,290) (269,831) (1,767,093)
Purchase of
intangibles............ (100,000) -- (431,923) (431,923) (3,145,297)
Investment in Turnkey
Computer Systems,
Inc.................... -- -- -- -- (22,833)
----------- ----------- ----------- ----------- ------------
Net cash used by
investing
activities........... (156,861) (506,540) (892,213) (701,754) (4,935,223)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Net borrowings from
related parties........ 1,889,101 3,810 9,447,030 7,737,227 8,218,623
Proceeds from capital
lease financing with
related party.......... -- -- 440,832 -- --
Payments on capital
lease obligations...... -- -- (55,962) -- (58,280)
Offering costs.......... -- -- -- -- (341,967)
Sale of preferred
stock.................. -- 6,443,606 -- -- 5,500,000
Sale of common stock.... 3,590 22,465 -- -- 89,655
----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities........... 1,892,691 6,469,881 9,831,900 7,737,227 13,408,031
----------- ----------- ----------- ----------- ------------
Net increase
(decrease) in cash... 1,545 (1,145) (132) (2) 1,649,866
Cash--beginning of
period................. -- 1,545 400 400 268
----------- ----------- ----------- ----------- ------------
Cash--end of period..... $ 1,545 $ 400 $ 268 $ 398 $ 1,650,134
=========== =========== =========== =========== ============
Supplemental
disclosures:
Cash paid for interest.. $ -- $ -- $ 23,594 $ 13,517 $ 20,628
Non-cash investing and
financing activities:
Transfer of technology
by XL Vision, Inc.
(note 9).............. -- 4,400,000 -- -- --
Contribution of debt to
equity by XL Vision,
Inc. (note 9)......... -- -- 7,500,000 -- --
Issuance of preferred
stock in exchange for
contribution of debt
to equity by XL
Vision, Inc. (note
9).................... -- -- 4,800,000 -- --
Non-cash issuance of
Class A common stock
in connection with
Nutri-Charge
transaction (note 5).. -- -- 2,070,000 2,070,000 --
Contribution of put
rights by XL Vision,
Inc. (note 5)......... -- -- 340,000 340,000 --
Issuance of Class A
common stock in
connection with CIN
transaction (note
12)................... -- -- -- -- 720,000
Issuance of Class A
common stock with
Cyberstockyard
transaction (note
12)................... -- -- -- -- 450,000
Issuance of Class A
common stock with
Turnkey Computer
Systems, Inc.
transaction (note
12)................... -- -- -- -- 400,000
Put on Class A common
stock issued in
connection with
Turnkey Computer
Systems, Inc.
transaction (note
12)................... -- -- -- -- 8,300
Issuance of note
payable to Turnkey
Computer Systems, Inc.
(note 12)............. -- -- -- -- 1,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-109
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
(Information insofar as it relates to September 30, 1999 or the nine months
ended
September 30, 1998 and 1999 is unaudited)
(1) Organization
(a) Overview
eMerge Interactive, Inc. (the "Company") is a Delaware corporation that
was incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly
owned subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was
changed to eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge
Interactive, Inc. on June 11, 1999.
The Company was incorporated to develop and commercialize infrared
technology focused on the transportation segment. In 1997, the Company entered
a new business segment, animal sciences, by developing an infrared camera
system for use primarily by veterinarians. The Company further expanded its
operations in 1998 by licensing NutriCharge and infrared technology (see note
5) for commercialization. In December 1998, the Company's Board of Directors
decided to dispose of the transportation segment. The Company's AMIRIS thermal
imaging system, which was the sole product sold by the transportation segment,
was sold on January 15, 1999.
(b) Basis of Presentation
The consolidated financial statements as of December 31, 1998 include
the accounts of eMerge Interactive, Inc. and its wholly-owned subsidiary, STS
Agriventures, Ltd. ("STS"), a Canadian corporation. The consolidated financial
statements as of September 30, 1999 also include another wholly-owned
subsidiary, Cyberstockyard, Inc. ("Cyberstockyard").
All significant intercompany balances and transactions have been
eliminated upon consolidation.
(c) Management's Plans
As of September 30, 1999, the Company had a working capital deficiency
of $12,507,506 and stockholders' deficit of $3,892,366. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts for its products. Subsequent to September 30, 1999,
the Company obtained additional equity financing (see note 12). The Company
anticipates that net proceeds from its planned IPO of common stock will be
sufficient to satisfy its operating cash needs for at least eighteen months
following the IPO. Although management believes that its IPO will be
successful, there can be no assurances that it will be achieved or that the
Company will be successful in raising other financing. If the Company is
unable to obtain sufficient additional funds, the Company may have to delay,
scale back or eliminate some or all of its marketing and development
activities.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenue in accordance with the terms of the sale
or contract, generally as products are shipped or services are provided. The
Company bears inventory risk until the sales of their products and credit risk
until full payment is received from its customers. In cattle sales
transactions, the
F-110
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Company purchases cattle from the seller, takes title at shipment and records
the cattle as inventory until delivered to and accepted by the buyer,
typically a 24 to 48 hour period. In both cattle auction and resale
transactions, the Company acts as a principal in purchasing cattle from
suppliers and sales to customers so that the Company recognizes revenue equal
to the amount paid by customers for the cattle.
(b) Inventories
Inventories are stated at standard cost which approximates the lower of
first-in, first-out cost or market.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Amortization of equipment under capital lease is computed
over the shorter of the lease term or the estimated useful life of the related
assets.
(d) Intangibles
Intangibles are stated at amortized cost. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.
(e) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and 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.
(f) Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
(g) Use of Estimates
The preparation of the Company's consolidated 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, disclosure of contingent Assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
F-111
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(h) Estimated Fair Value of Financial Instruments
The carrying value of cash, trade accounts receivable, accounts payable,
accrued liabilities and amounts due to related parties reflected in the
consolidated financial statements approximates fair value due to the short-term
maturity of these instruments.
(i) Interim Financial Information
The consolidated financial statements as of September 30, 1999, and for
the periods ended September 30, 1998 and 1999, are unaudited but reflect
adjustments which are, in the opinion of management, necessary for the fair
presentation of financial position and results of operations. Operating results
for the nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the full year.
(3) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31, (Unaudited)
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Raw materials............................. $346,335 $424,130 $594,337
Work-in-process........................... 289,628 282,427 60,792
-------- -------- --------
$635,963 $706,557 $655,129
======== ======== ========
</TABLE>
(4) Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31,
----------------- Estimated
1997 1998 useful lives
-------- -------- ------------
<S> <C> <C> <C>
Engineering and manufacturing equipment.. $258,082 $366,150 5 years
Office and computer equipment............ 179,315 259,462 3 years
Furniture and fixtures................... 67,282 104,706 7 years
Leasehold improvements................... 46,865 46,865 7 years
Automobiles.............................. -- -- 5 years
-------- --------
551,544 777,183
Less accumulated depreciation and
amortization............................ 123,404 263,346
-------- --------
Property and equipment, net.............. $428,140 $513,837
======== ========
</TABLE>
Assets under capital lease amounted to $-0- and $440,832 and as of
December 31, 1997 and 1998, respectively. Accumulated amortization for assets
under capital lease totaled approximately $-0- and $152,300 as of December 31,
1997 and 1998, respectively.
F-112
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(5) Intangibles
Intangibles consists of:
<TABLE>
<CAPTION>
December 31,
--------------- Estimated
1997 1998 useful life
---- ---------- -----------
<S> <C> <C> <C>
NutriCharge license........................... $ -- $2,273,538 10 years
Infrared technology license................... -- 568,385 5 years
---- ----------
-- 2,841,923
Less accumulated amortization................. -- 142,095
---- ----------
Intangibles, net.............................. $ -- $2,699,828
==== ==========
</TABLE>
On July 29, 1998, the Company acquired licenses for NutriCharge and
infrared technology. The purchase price of $2,841,923 (consisting of $300,000
in cash, 2,070,000 of the Company's Class A common shares valued at $1 per
share, $131,923 in acquisition costs and the estimated fair value of put rights
granted by XL Vision) was allocated to the acquired NutriCharge and infrared
technology licenses based on estimated fair values determined by estimated cash
flows from the underlying licensed product. In connection with the transaction,
XL Vision granted a put right that allows the sellers to require XL Vision to
purchase up to 1,000,000 shares of the Company's Class A common stock at $3.00
per share in the event certain operating targets related to the licensed
product are not met by years four through seven after the transaction. The put
expires at the end of year seven after the transaction. The fair value of the
put was estimated to be $340,000 and was credited to additional paid-in
capital.
(6) Equity
Common Stock
As of December 31, 1998, the Company had authorized the issuance of
100,000,000 shares of common stock.
Class A--In 1999, the Company designated 92,711,110 as Class A common
stock.
Class B--In 1999, the Company designated 7,288,890 shares as Class B
common stock. Holders of Class B common stock are entitled to two and one-half
votes for each share. The shares of Class A and Class B are identical in all
other respects.
Preferred Stock
As of December 31, 1998, the Company had authorized the issuance of
10,000,000 shares of preferred stock and had designated 6,500,000 as Series A
shares, and 2,400,000 as Series B shares. Each share of preferred stock is
convertible into one share of Class A common stock at the option of the holder
or upon the vote of holders of two-thirds of the respective preferred stock
class outstanding except for Series D shares which is convertible at the
offering price into Class B common stock. Preferred stock is automatically
converted into common stock upon a qualified IPO of at least $10 million with a
Company valuation of at least $30 million or upon a public rights offering of
the Company to shareholders of Safeguard Scientifics, Inc. In 1999, the Company
increased the authorized preferred stock to 15,000,000 shares.
F-113
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Series A--The Series A shares are entitled to a liquidation preference
before any distribution to common stockholders equal to the greater of (a)
$1.00 per share plus an additional $.10 per year (pro rated for partial years)
from July 16, 1997 or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to Class A common stock prior to
liquidation. The holders of Series A preferred stock are entitled to vote as a
separate class to elect two directors to the Board of Directors of the Company.
Series B--Series B shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $2.00 per
share plus an additional $.20 for each year (pro rated for partial years) from
December 31, 1998 or until the date of distribution of available assets or (b)
the amount which would be distributed if all of the preferred stock of the
Company were converted to Class A common stock prior to liquidation. Series B
shares are junior to Series A, C and D shares.
Series C--On April 15, 1999, the Company designated 1,300,000 as Series C
shares. Series C shares are entitled to a liquidation preference before any
distribution to common stockholders equal to the greater of (a) $5.00 per share
plus an additional $.50 for each year (pro rated for partial years) from April
15, 1999 or until the date of distribution of available assets or (b) the
amount which would be distributed if all of the preferred stock of the Company
were converted to Class A common stock prior to liquidation. Series C shares
are on parity with Series A and D shares except as to voting rights.
Series D (Unaudited)--On October 26, 1999, the Company designated
4,555,556 shares as Series D shares. Series D shares are entitled to a
liquidation preference before any distribution to common stockholders equal to
the greater of (a) $10.00 per share plus an additional $1.00 for each year (pro
rated for partial years) from August 24, 1999 or until the date of distribution
of available assets or (b) the amount which would be distributed if all the
preferred stock of the Company were converted to Class B common stock prior to
liquidation. Series D shares are on parity with Series A and C shares except as
to voting rights. Series D stockholders are entitled to two and one-half votes
per share.
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liability are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $3,237,000 $5,967,000
Amortization of acquired technology from XL
Vision (note 9)............................... 1,829,000 1,704,000
Research and experimentation tax credits....... 294,000 448,000
Other.......................................... 125,000 596,000
---------- ----------
5,485,000 8,715,000
Less valuation allowance....................... 5,370,000 8,715,000
---------- ----------
Net deferred tax assets...................... 115,000 --
Deferred tax liability:
Imputed interest............................... (115,000) --
---------- ----------
Net deferred tax assets (liability).......... $ -- $ --
========== ==========
</TABLE>
F-114
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The Company has available at December 31, 1998, unused net operating loss
carryforwards of approximately $15,000,000 which may be applied against future
taxable income and expires in years beginning in 2010. The Company also has
approximately $448,000 in research and experimentation credits carryforwards.
The research and experimentation credits, which begin to expire in 2010, can
also be used to offset future regular tax liabilities. A valuation allowance
for deferred tax assets is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The difference between the "expected" tax benefit (computed by applying
the federal corporate income tax rate of 34% to the loss before income taxes)
and the actual tax benefit is primarily due to the effect of the valuation
allowance.
(8) Stock Plan
In January 1996, the Company adopted an equity compensation plan (the
"1996 Plan") pursuant to which the Company's Board of Directors may grant
shares of common stock or options to acquire common stock to certain directors,
advisors and employees. The Plan authorizes grants of shares or options to
purchase up to 1,735,000 shares of authorized but unissued common stock. Stock
options granted have a maximum term of ten years and have vesting schedules
which are at the discretion of the Compensation Committee of the Board of
Directors and determined on the effective date of the grant.
A summary of option transactions follows:
<TABLE>
<CAPTION>
Weighted
Range of average
exercise Weighted remaining
price per average contractual
Shares share exercise price life (in years)
--------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding,
December 31, 1996...... 2,500 $ 1.00 $1.00 4.85
====
Granted................ 268,000 1.00 1.00
--------- ---------- -----
Balance outstanding,
December 31, 1997....... 270,500 1.00 1.00 9.64
====
Granted................ 1,354,000 1.00-2.00 1.05
Canceled............... (318,500) 1.00 1.00
--------- ---------- -----
Balance outstanding
December 31, 1998....... 1,306,000 $1.00-2.00 $1.05 9.48
========= ========== ===== ====
</TABLE>
At December 31, 1997 and 1998, there were 61,375 and 331,500 shares
exercisable, respectively, at weighted average exercise prices of $1.00 and
$1.02, respectively.
At December 31, 1997 and 1998, 79,500 and 409,000 shares available for
grant, respectively.
F-115
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The per share weighted-average fair value of stock options granted was $0
in 1996, $0 in 1997 and $0.10 in 1998 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Volatility.............................................. 0% 0% 0%
Dividend paid........................................... 0% 0% 0%
Risk-free interest rate................................. 6.35% 6.11% 4.73%
Expected life in years.................................. 5.77 6.75 5.57
</TABLE>
No volatility was assumed due to the use of the Minimum Value Method of
computation for options issued by the Company as a private entity as prescribed
by SFAS No. 123.
All stock options granted, except as noted in the paragraph below, have
been granted to directors or employees with an exercise price equal to the fair
value of the common stock at the date of grant. The Company applies APB Opinion
No. 25 for issuances to directors and employees in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements through December 31, 1998.
On March 19, 1999, the Company granted 288,500 stock options with an
exercise price of $2.00 and a fair value of $2.25. The Company recorded $72,126
of unearned compensation at the date of grant and is amortizing the unearned
compensation over the vesting period. Compensation expense amounted to $9,017
for the nine months ended September 30, 1999.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported............... $(1,719,492) $(5,483,623) $(7,832,128)
=========== =========== ===========
Pro forma net loss................. $(1,719,492) $(5,483,623) $(7,964,078)
=========== =========== ===========
</TABLE>
(9) Related Party Transactions
Direct Charge Fee
Prior to April 1, 1997 personnel, and other services were provided by XL
Vision and the costs were allocated to the Company. Effective April 1, 1997,
the Company entered into a direct charge fee agreement with XL Vision which
allows for cost-based charges based upon actual hours incurred. Costs allocated
to or service fees charged by XL Vision were approximately $468,000 in 1996,
$720,000 in 1997 and $460,000 in 1998. A portion of the fees in 1998 and all of
the costs and fees in 1996 and 1997 were allocated to the discontinued
transportation segment.
Administrative Services Fee
Effective December 15, 1997, the Company entered into an agreement which
requires accrual of an administrative services fee based upon a percentage of
gross revenues. The fee for administrative support
F-116
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
services, including management consultation, investor relations, legal services
and tax planning, is payable monthly to XL Vision and Safeguard Scientifics,
Inc., the largest shareholder of XL Vision, based upon an aggregate of 1.5% of
gross revenues with such service fees to be not more than $300,000 annually.
Effective August 17, 1999, the agreement was amended such that the
administrative services fee is applied to net contribution margin on cattle
sales and gross revenue for all other sales. The fee is accrued monthly but is
only payable in months during which the Company has achieved positive cash flow
from operations. The agreement extends through December 31, 2002 and continues
thereafter unless terminated by any party. Administrative service fees were
approximately $10,300 in 1997 and $37,200 in 1998.
Technology Fee
On July 15, 1997, the Company entered into an agreement with XL Vision
for the transfer of certain technology that is used by the Company in the sale
of its products for a $4,400,000 note payable. The transfer was accounted for
as a distribution to XL Vision as it represented amounts paid for an asset to
an entity under common control in excess of the cost of such asset. The note
payable bears interest at 7% per annum. Interest expense was $141,167 in 1997
and $308,000 in 1998.
Lease
The Company leases equipment under a capital lease, effective April 20,
1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments,
including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000,
$92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was
$23,594 in 1998.
The Company has a verbal lease with XL Vision for its facilities. Rent
expense varies based on space occupied by the Company and includes charges for
base rent, repairs and maintenance, telephone and networking expenses, real
estate taxes and insurance. Rent expense was $68,000 in 1996, $354,000 in 1997,
and $1,129,000 in 1998.
Amounts Due to XL Vision, Inc.
Amounts due to XL Vision consists of:
<TABLE>
<S> <C>
Balance as of December 31, 1996................................... $ 3,636,494
Allocation of costs and funding of working capital to the
Company........................................................ 6,318,405
Technology transfer fee......................................... 4,400,000
Interest charges on technology transferred...................... 141,167
Proceeds from Series A Preferred Stock.......................... (6,443,606)
Issuance of Class A common stock................................ (22,465)
-----------
Balance as of December 31, 1997................................... 8,029,995
Allocation of costs and funding of working capital to the
Company........................................................ 9,120,441
Interest charges on technology transferred...................... 308,000
Contribution of debt to equity.................................. (7,500,000)
Contribution of debt to equity in exchange for Series B
Preferred Stock................................................ (4,800,000)
-----------
Balance as of December 31, 1998................................... $ 5,158,436
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$2,690,900 in 1996, $6,239,600 in 1997 and $12,782,400 in 1998.
F-117
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Amounts Due to Safeguard Scientifics, Inc.
As of December 31, 1997 and December 31, 1998, the Company owed Safeguard
Scientifics, Inc. $10,309 and $28,898.
(10) Segment Information
In 1998, the Company adopted SFAS No. 131, which requires the reporting
of segment information using the "management approach" versus the "industry
approach" previously required. The management approach requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker. The Company's chief
operating decision-maker receives revenue and contribution margin (revenue less
direct costs and excluding overhead) by source, and all other statement of
operations data and balance sheet data on a consolidated basis. The Company's
reportable segments consist of cattle sales and animal sciences products and
services. While the Company operates entirely in the animal science
marketplace, the contribution margin associated with cattle sales and the
related prospects for this portion of the Company's business differ from the
rest of the Company's product offerings.
The following summarizes revenue and contribution margin information
related to the Company's two operating segments:
<TABLE>
<CAPTION>
Nine months Nine months
Year ended ended ended
December 31, September 30, September 30,
1998 1998 1999
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue:
Cattle............................... $ -- $ -- $ 17,022,862
Animal sciences...................... 1,792,471 1,106,452 1,315,783
---------- ----------- ------------
Total................................ $1,792,471 $ 1,106,452 $ 18,338,645
========== =========== ============
Direct costs:
Cattle............................... $ -- $ -- $ 16,860,452
Animal sciences...................... 900,824 603,410 492,115
---------- ----------- ------------
$ 900,824 $ 603,410 $ 17,352,567
========== =========== ============
Contribution margin:
Cattle............................... $ -- $ -- $ 162,410
Animal sciences...................... 891,647 503,042 823,668
---------- ----------- ------------
Total................................ $ 891,647 $ 503,042 $ 986,078
========== =========== ============
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(11) Commitments and Contingencies
Voluntary Employee Savings 401(k) Plan
The Company established a voluntary employee savings 401(k) plan in 1997
which is available to all full time employees 21 years or older. The plan
provides for a matching by the Company of the employee's contribution to the
plan for 50% of the first 6% of the employee's annual compensation. The
Company's matching contributions were $6,300 in 1996, $38,195 in 1997 and
$62,108 in 1998.
F-118
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Royalties
In connection with the NutriCharge license, the Company is obligated to a
royalty of 5% of gross revenues from the sale of NutriCharge products and
infrared technology related to the Company's Canadian license agreement.
The Company is also obligated to a royalty of 6% of net revenues from
product or services related to technology patented by Iowa State University.
(12) Subsequent Events
On January 1, 1999, the Company signed a revolving promissory note with
XL Vision for up to $3,000,000. The revolving promissory note bears interest at
the prime rate plus 1% and is due in full when the Company completes an IPO or
sells all of its assets or stock. The note is included in current liabilities
in the accompanying September 30, 1999 consolidated balance sheet.
Discontinued Operations
In December 1998, the Company's Board of Directors decided to dispose of
its transportation segment. The Company's AMIRIS thermal imaging system, which
was the sole product sold in the transportation segment, was sold on January
15, 1999 to Sperry Marine, Inc. for approximately $1,900,000. The Company
received $200,000 of cash at closing and will receive the balance upon receipt
of the inventory by Sperry Marine, Inc. The Company is entitled to a royalty of
8% of net AMIRIS system sales, up to a maximum royalty of $4.3 million over a
four year period or up to a maximum royalty of $5.0 million, if $4.3 million is
not received within four years.
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Accounts receivable.............................. $ 145,500 $ 381,435
Inventory, net................................... 1,076,043 2,020,625
Property and equipment, net...................... 22,650 134,098
Intangibles, net................................. 94,444 61,108
Accounts payable................................. (271,833) (80,510)
Accrued liabilities including provision for
operating loss during phase out period of
$72,667 in 1998................................. -- (231,415)
---------- ----------
Net assets................................... $1,066,804 $2,285,341
========== ==========
</TABLE>
Note Payable to XL Vision, Inc.
License
In February 1999, the Company signed a license agreement with XL Vision,
granting XL Vision a license to use Company software for the limited purpose of
evaluating whether the software could provide the basis for a new company that
would operate in the agricultural industry. The license agreement terminates on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license
F-119
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
agreement. In addition, XL Vision is obligated to give the Company at least a
25% interest in the new company. The Company is obligated to transfer all
amounts up to 25% of the new company to Lost Pelican, L.L.C.
Acquisitions (Unaudited after April 20, 1999)
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of CIN, LLC d/b/a/ Cattlemen's Information
Network ("CIN"). Immediately after the closing, CIN changed its name to Lost
Pelican, L.L.C. The purchase price for the assets consisted of 600,000 shares
of the Company's Class A common stock valued at $720,000, the assumption of up
to $600,000 of liabilities, a cash payment due in October 1999 of $383,000, and
an agreement to pay the first $350,000 from Internet sales of third party
products over the Company's Web site. In addition, the Company agreed to assume
$177,000 in liabilities related to employee bonuses and an outstanding grant
obligation. CIN is in the business of selling access to its cattle feedlot
performance measurements database.
On March 29, 1999, the Company acquired 100% of the stock of
Cyberstockyard, Inc. The purchase price consisted of 200,000 shares of the
Company's Class A common stock valued at $450,000. Cyberstockyard, Inc. is in
the business of selling cattle through its proprietary auction software over
the Internet.
On May 19, 1999, the Company acquired substantially all of the tangible
and intangible assets of PCC, LLC d/b/a Professional Cattle Consultants, L.L.C.
("PCC") for a cash payment of $1,800,000 and an assumption of approximately
$30,000 of liabilities. PCC is in the business of providing comparative
analysis and market information for the feedlot industry.
The aggregate purchase price of the above acquisitions was approximately
$4,606,600, which included related acquisition costs of approximately $97,000,
and was allocated as follows:
<TABLE>
<S> <C>
Goodwill..................................................... $4,015,300
Non-compete agreements....................................... 300,000
Equipment.................................................... 358,000
Current assets............................................... 28,300
Current liabilities.......................................... (95,000)
----------
$4,606,600
==========
</TABLE>
Goodwill is amortized on a straight-line basis over a period of three to
five years.
Unaudited pro forma information for the Company as if the acquisitions
above had been consummated as of January 1, 1998 and 1999 follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenue......................................... $ 1,687,077 18,560,565
=========== ===========
Net profit (loss)............................... $(4,987,862) (11,097,329)
=========== ===========
</TABLE>
F-120
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Sale of Series C Preferred Stock (Unaudited)
On May 4, 1999, the Company issued 1,100,000 shares of Series C preferred
stock for $5.00 per share.
Stock Plan (Unaudited)
On May 10, 1999, the Company's stockholders approved the 1999 Equity
Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional
1,000,000 shares of authorized, unissued shares of common stock of the Company
are reserved for issuance to employees, advisors and for non-employee members
of the Board of Directors. Option terms under the 1999 Plan may not exceed 10
years.
Note Payable to Safeguard Delaware, Inc.--a Related Party (Unaudited)
On July 21, 1999, the Company obtained a $3,000,000 revolving note
payable from Safeguard Delaware, Inc. ("Safeguard"). The revolving note
payable, as amended in October 1999, bears interest payable monthly at the
prime rate plus 1% and is due November 30, 1999.
In August, September and October 1999, the Company signed demand notes
with interest payable monthly at the prime rate plus 1% with Safeguard for
$2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled
in October 1999, in exchange for a $7,050,000 note due in full on October 25,
2000, the repayment of a promissory note issued concurrently with the sale of
Series D preferred stock or an IPO, whichever is earlier.
Investment in Turnkey Computer Systems, Inc. (Unaudited)
On August 16, 1999, the Company acquired 19% of the common stock of
Turnkey Computer Systems, Inc. ("Turnkey") for 50,000 shares of the Company's
Class A common stock valued at $400,000 and $1,400,000 in cash payable upon the
earlier of the completion of the Company's IPO or $500,000 at December 31,
1999, $500,000 at December 31, 2000 and $400,000 at December 31, 2001. In
addition, the common stock purchase agreement with Turnkey contains a put right
which allows Turnkey to have a one time right to put to the Company its 50,000
common shares with a fixed purchase price of $500,000. The put right can only
be exercised upon a change in control or after December 31, 2001, if the
Company has not completed an IPO. The fair value of the put was estimated to be
$8,300 and was credited to additional paid-in capital.
Sale of Series D Preferred Stock (Unaudited)
On October 26, 1999, the Company agreed to issue 4,555,556 shares of
Series D preferred stock and a warrant to acquire 911,000 shares of Class B
common stock for $38,815,000. Series D preferred shares convert into Class B
common stock at the offering price. The warrants are exercisable at the
Company's IPO price and are valued at $3,325,555. The Company will receive
$18,000,000 in cash in November 1999 and a non-interest bearing, promissory
note in the amount of $23,000,000 due on October 26, 2000. Imputed interest at
9.5% amounts to $2,185,000 over the life of the note.
Registration Statement (Unaudited)
On October 27, 1999, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission to register shares of its
common stock.
F-121
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Onvia.com, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Onvia.com, Inc. and subsidiary (the Company) as of December 31, 1998 and
September 30, 1999, and the related consolidated statements of operations,
changes in shareholders' (deficit) equity, and cash flows for the period from
March 25, 1997 (inception) through December 31, 1997, for the year ended
December 31, 1998, and for the nine months ended September 30, 1999. These
consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and September 30, 1999, and the results of its operations and its cash
flows for the period from March 25, 1997 (inception) through December 31, 1997,
for the year ended December 31, 1998, and for the nine months ended September
30, 1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
November 18, 1999
F-122
<PAGE>
ONVIA.COM, INC.
Consolidated Balance Sheets
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $ 44,659 $26,036,867
Accounts receivable............................... 47,072 192,827
Inventory......................................... 65,204 531,942
Prepaid expenses.................................. 2,212 1,638,946
Stock subscription receivable..................... -- 4,000,000
-------- -----------
Total current assets.............................. 159,147 32,400,582
Property and equipment, net......................... 20,925 4,826,993
Other assets........................................ -- 971,283
-------- -----------
Total assets...................................... $180,072 $38,198,858
======== ===========
Liabilities and Shareholders' (Deficit) Equity
Current Liabilities:
Accounts payable.................................. $219,852 $ 3,137,379
Accrued expenses.................................. 365,820 2,699,175
Unearned revenue.................................. 42,425 253,721
Convertible notes................................. 344,407
Current portion of long-term debt................. -- 3,766,192
-------- -----------
Total current liabilities......................... 972,504 9,856,467
Long-term debt...................................... -- 5,464,670
-------- -----------
Total liabilities................................. 972,504 15,321,137
-------- -----------
Commitments and contingencies (Note 6)
Shareholders' (Deficit) Equity:
Convertible preferred stock; no par value:
Series A; 12,000,000 shares authorized;
10,109,748 shares issued and outstanding;
($11,819,991 liquidation preference)........... -- 12,724,961
Series B; 8,000,000 shares authorized; 7,272,085
shares issued and outstanding; ($25,000,000
liquidation preference)........................ -- 24,969,851
Common stock; no par value: 62,000,000 shares
authorized; 4,000,400 and 12,024,232 shares
issued and outstanding........................... 10,070 5,390,468
Unearned stock compensation....................... -- (3,202,708)
Accumulated deficit............................... (802,502) (17,004,851)
-------- -----------
Total shareholders' (deficit) equity.............. (792,432) 22,877,721
-------- -----------
Total liabilities and shareholders' (deficit)
equity........................................... $180,072 $38,198,858
======== ===========
</TABLE>
See notes to consolidated financial statements.
F-123
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Operations
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
Nine months
March 25, 1997 ended
(inception) to Year ended September
December 31, December 31, 30,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Revenue............................. $ 62,174 $1,037,271 $ 13,168,472
Cost of goods sold.................. 46,894 1,082,448 15,708,812
--------- ---------- ------------
Gross margin.................... 15,280 (45,177) (2,540,340)
Operating expenses:
Sales and marketing............... -- 297,615 7,007,493
Technology and development........ 11,239 114,855 2,899,331
General and administrative........ 134,413 210,875 3,429,813
--------- ---------- ------------
Total operating expenses........ 145,652 623,345 13,336,637
--------- ---------- ------------
Loss from operations................ (130,372) (668,522) (15,876,977)
Other income (expense):
Interest income................... -- -- 182,463
Interest expense.................. -- (3,608) (507,835)
--------- ---------- ------------
Net loss............................ $(130,372) $ (672,130) $(16,202,349)
========= ========== ============
Basic and diluted net loss per
common share....................... $ (0.03) $ (0.17) $ (2.97)
========= ========== ============
Basic and diluted weighted average
shares outstanding................. 4,000,400 4,000,400 5,451,293
========= ========== ============
</TABLE>
See notes to consolidated financial statements.
F-124
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Changes in Shareholders' (Deficit) Equity
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
M-Depot Internet
Series A Series B Onvia.com, Inc. Superstore, Inc.
preferred stock preferred stock common stock common stock
---------------------- --------------------- ---------------------- ------------------- Unearned
Shares Amount Shares Amount Shares Amount Shares Amount compensation
---------- ----------- --------- ----------- ---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 25,
1997
(inception)...... -- $ -- -- $ -- 4,000,000 $ 10,000 -- $ -- $ --
Issuance of
common stock.... -- -- -- -- -- -- 400 70 --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance December
31, 1997......... -- -- -- -- 4,000,000 10,000 400 70 --
Exchange of M-
Depot Internet
Superstore, Inc.
common stock for
Onvia.com, Inc.
common stock.... -- -- -- -- 400 70 (400) (70) --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance December
31, 1998......... -- -- -- -- 4,000,400 10,070 -- -- --
Cancellation of
inception
shares.......... -- -- -- -- (4,000,400) -- -- -- --
Issuance of
nonvested common
stock........... -- -- -- -- 11,992,180 697,569 -- -- (476,144)
Conversion of
notes payable
into Series A
preferred
stock........... 1,129,018 1,319,997 -- -- -- -- -- -- --
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ 8,980,730 10,251,821 -- -- -- -- -- -- --
Issuance of
common stock
warrants........ -- -- -- -- -- 241,853 -- -- --
Issuance of
Series A
preferred
warrants........ -- 1,153,143 -- -- -- -- -- -- --
Exercise of
common stock
warrants........ -- -- -- -- 32,052 160 -- -- --
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- -- 7,272,085 24,969,851 -- -- -- -- --
Unearned
compensation
expense relating
to issuance of
stock options... -- -- -- -- -- 3,569,221 -- -- (3,569,221)
Change in
unearned
compensation for
consultants..... -- -- -- -- -- 871,595 -- -- (871,595)
Amortization of
unearned
compensation on
nonvested common
stock........... -- -- -- -- -- -- -- -- 331,235
Amortization of
unearned
compensation on
stock options... -- -- -- -- -- -- -- -- 1,383,017
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ---------- ---------- -------- ------- -----------
Balance September
30, 1999......... 10,109,748 $12,724,961 7,272,085 $24,969,851 12,024,232 $5,390,468 -- $ -- $(3,202,708)
========== =========== ========= =========== ========== ========== ======== ======= ===========
<CAPTION>
Accumulated
deficit Total
------------- ------------
<S> <C> <C>
Balance March 25,
1997
(inception)...... $ -- $ 10,000
Issuance of
common stock.... -- 70
Net loss........ (130,372) (130,372)
------------- ------------
Balance December
31, 1997......... (130,372) (120,302)
Exchange of M-
Depot Internet
Superstore, Inc.
common stock for
Onvia.com, Inc.
common stock.... -- --
Net loss........ (672,130) (672,130)
------------- ------------
Balance December
31, 1998......... (802,502) (792,432)
Cancellation of
inception
shares.......... -- --
Issuance of
nonvested common
stock........... -- 221,425
Conversion of
notes payable
into Series A
preferred
stock........... -- 1,319,997
Issuance of
Series A
preferred stock,
net of offering
costs of
$232,580........ -- 10,251,821
Issuance of
common stock
warrants........ -- 241,853
Issuance of
Series A
preferred
warrants........ -- 1,153,143
Exercise of
common stock
warrants........ -- 160
Issuance of
Series B
preferred stock,
net of offering
costs of
$30,149......... -- 24,969,851
Unearned
compensation
expense relating
to issuance of
stock options... -- --
Change in
unearned
compensation for
consultants..... -- --
Amortization of
unearned
compensation on
nonvested common
stock........... -- 331,235
Amortization of
unearned
compensation on
stock options... -- 1,383,017
Net loss........ (16,202,349) (16,202,349)
------------- ------------
Balance September
30, 1999......... $(17,004,851) $22,877,721
============= ============
</TABLE>
See notes to consolidated financial statements.
F-125
<PAGE>
ONVIA.COM, INC.
Consolidated Statements of Cash Flows
Period from March 25, 1997 (inception) through December 31, 1997,
year ended December 31, 1998 and nine months ended September 30, 1999
<TABLE>
<CAPTION>
March 25, 1997 Nine months
(inception) to Year ended ended
December 31, December 31, September
1997 1998 30, 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss............................ $(130,372) $(672,130) $(16,202,349)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization..... 10,000 2,158 636,680
Amortization of unearned stock-
based compensation............... -- -- 1,714,252
Amortization of debt discount..... -- -- 70,218
Noncash interest expense related
to issuance of common stock
warrants......................... -- -- 241,853
Change in certain assets and
liabilities
Accounts receivable............... -- (48,268) (142,279)
Inventory......................... (2,873) (64,116) (463,368)
Prepaid expenses.................. (3,631) 1,177 (1,235,845)
Other assets...................... -- -- (1,018,634)
Accounts payable.................. 9,130 216,784 2,901,854
Accrued expenses.................. 121,871 246,798 2,539,667
Unearned revenue.................. 2,148 41,644 208,594
--------- --------- ------------
Net cash provided (used) by
operating activities............. 6,273 (275,953) (10,749,357)
--------- --------- ------------
Cash flows from investing
activities:
Additions to property and
equipment.......................... -- (23,083) (4,133,365)
Cash flows from financing
activities:
Proceeds from convertible debt...... -- 344,407 975,590
Proceeds from issuance of long-term
debt............................... -- -- 9,163,888
Repayments on long-term debt........ -- -- (508,715)
Proceeds from issuance of common
stock.............................. 70 -- 12,828
Proceeds from issuance of Series A
preferred stock, net............... -- -- 10,251,821
Proceeds from issuance of Series B
preferred stock, net............... -- -- 20,969,851
--------- --------- ------------
Net cash provided by financing
activities......................... 70 344,407 40,865,263
--------- --------- ------------
Effect of exchange rate changes on
cash............................... (736) (6,319) 9,667
--------- --------- ------------
Net increase in cash and cash
equivalents........................ 5,607 39,052 25,992,208
Cash and cash equivalents, beginning
of year............................ -- 5,607 44,659
--------- --------- ------------
Cash and cash equivalents, end of
year............................... $ 5,607 $ 44,659 $ 26,036,867
========= ========= ============
</TABLE>
See notes to consolidated financial statements.
F-126
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 1: Summary of Significant Accounting Policies
Description of business
Onvia.com, Inc., formerly known as Megadepot.com, Inc., (the "Company")
was incorporated on March 25, 1997 as MegaDepot, Inc. in the State of
Washington. M-Depot Internet Superstore, Inc., a company owned by the majority
shareholder of the Company, was incorporated in British Columbia, Canada on
June 6, 1997. In June 1998, the Company moved its headquarters from Vancouver,
B.C. to Seattle, Washington. On December 28, 1998, MegaDepot, Inc. exchanged
shares of its common stock for all of the outstanding common stock of M-Depot
Internet Superstore, Inc. (the "Subsidiary"). In February 1999, the Company
changed its name from MegaDepot, Inc. to MegaDepot.com, Inc., and in May 1999,
changed its name from MegaDepot.com, Inc. to Onvia.com, Inc.
The Company is an online supplier of goods and services to the small
business market. Through its web site customers can order a wide variety of
products commonly used by small businesses, such as computer hardware, computer
software, office supplies, office machines, office furniture and phone systems.
In addition, customers can order a variety of services commonly used by small
businesses, such as long distance phone service, cellular phone service, credit
card processing and payroll service.
The Company also provides an online business exchange service that
connects small business buyers and sellers. Small business buyers can specify
their needs across 26 different service categories and receive tailored quotes
from the Company's network of over 2,000 service providers. As a seller, small
businesses can receive qualified leads from buyers in this exchange network.
Basis of consolidation
The financial statements include the accounts of the Company and its
wholly owned Subsidiary. As the companies were under common control from
inception of the Company, the financial statements are presented on a
consolidated or combined basis for all periods presented. All significant
intercompany accounts and transactions have been eliminated.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, prepaid expenses, other assets, accounts payable, accrued
liabilities, convertible notes and long-term debt. Except for long-term debt
and convertible notes, the carrying amounts of financial instruments
approximate fair value due to their short maturities. The fair values of long-
term debt and convertible notes are not materially different from their
carrying amounts, based on interest rates available to the Company for similar
types of arrangements.
Significant vendors
Approximately 78% of inventory purchases were from one supplier in the
nine months ended September 30, 1999. Three suppliers comprised 75%, 13% and
10%, respectively, of total inventory purchases for the year ended December 31,
1998. Two suppliers comprised 76% and 14%, respectively, of total inventory
purchases for the period from March 25, 1997 (inception) to December 31, 1997.
F-127
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Inventory represents
product shipped by the Company's suppliers, which have not been received by
customers. The Company does not stock its own inventory or maintain warehouse
locations, however, the Company does take ownership at the time of shipment
from the supplier until the product is received by the customer.
Property and equipment
Equipment is stated at cost. Depreciation expense is recorded using the
straight-line method over estimated useful lives ranging from three to five
years. Leasehold improvements are depreciated over the lesser of the useful
lives or term of the lease.
Revenue recognition
Revenue from product sales is recognized upon receipt by the customer.
Unearned revenue consists of payments received from customers for product in
transit to the customer. Revenue from services provided to customers was
insignificant for all periods presented.
Income taxes
The Company accounts for income taxes using the asset and liability
method under which deferred tax assets, including the tax benefit from net
operating loss carryforwards and liabilities are determined based on temporary
differences between the book and tax bases of assets and liabilities. A
valuation allowance has been established for the full amount of the deferred
tax assets.
Valuation of long-lived assets
The Company periodically evaluates the carrying value of its long-lived
assets, including, but not limited to, property and equipment and other assets.
The carrying value of a long-lived asset is considered impaired when the
undiscounted net cash flow from such asset is estimated to be less than its
carrying value. Management does not believe that there were any long-lived
assets subject to impairment at September 30, 1999.
F-128
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Detachable stock purchase warrants
Proceeds from debt issued with detachable stock purchase warrants are
allocated between the debt and the warrants based on their relative fair
values. The value ascribed to the warrants is recorded as a debt discount and
amortized to interest expense over the term of the related debt using the
effective interest method.
Stock-based compensation
The Company's stock option plan is subject to the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the provisions of this standard, employee and
director stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), or the fair value
method described in SFAS 123. Companies choosing the intrinsic-value method are
required to disclose the pro forma impact of the fair value method on net
income. The Company has elected to account for its employee and director stock-
based awards under the provisions of APB 25. Under APB 25, compensation cost
for stock options is measured as the excess, if any, of the fair value of the
underlying common stock on the date of grant over the exercise price of the
stock option. The Company is required to implement the provisions of SFAS 123
for stock-based awards to those other than employees and directors. Stock-based
compensation expense for all equity instruments is recognized on an accelerated
basis.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expense,
excluding amounts for co-branding agreements, for the nine months ended
September 30, 1999 and the year ended December 31, 1998 was $3,533,955 and
$22,560, respectively. There was no advertising expense for the period from
March 25, 1997 (inception) to December 31, 1997. At September 30, 1999, prepaid
advertising costs of $1,075,534, which are for future advertising placements,
are included in prepaid expenses.
Comprehensive income
The Company has adopted the provisions of Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130")
effective January 1, 1998. SFAS No. 130 requires the presentation of
comprehensive income and its components. Comprehensive income is the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. For the nine
months ended September 30, 1999 and the year ended December 31, 1998, the
components of other comprehensive income were insignificant.
Foreign currency adjustment
The functional currency of the Subsidiary in Canada is the Canadian
dollar. Realized foreign currency transaction gains and losses are
insignificant and are included in cost of sales. Assets and liabilities of the
Subsidiary in Canada have been translated to U.S. dollars at year-end exchange
rates. Revenues and expenses have been translated at average monthly exchange
rates.
F-129
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Commitments and contingencies
The Company is subject to various legal proceedings that arise in the
ordinary course of business. In the opinion of management, the outcome of these
matters is not expected to have a material effect on the consolidated financial
position or results of operations of the Company.
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period, including
contingently issuable shares for which all necessary conditions have been
satisfied. Diluted net loss per share is computed by dividing net loss by the
weighted average number of common shares and dilutive potential common shares
outstanding during the period. Securities totaling 27,774,279 and 147,288
shares in the nine months ended September 30, 1999 and for the year ended
December 31, 1998, respectively, have been excluded from the computation of
diluted net loss per share as their effects would be antidilutive. There were
no dilutive common stock equivalents for the period from March 25, 1997
(inception) through December 31, 1997.
Internally developed software
Effective for fiscal years beginning after December 15, 1998, the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP 98-1 on
January 1, 1999 and capitalized $198,814 in internally developed software
costs. Capitalized software costs are amortized on a straight-line basis over a
useful life ranging from one to three years. Amortization related to the
capitalized software was $47,381 for the nine months ended September 30, 1999.
Start-up costs
In April 1998, the AICPA issued Statements of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities." This statement requires
companies to expense the costs of start-up activities and organization costs as
incurred. The Company adopted SOP 98-5 on January 1, 1999, and there was no
material impact on the accompanying financial statements.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for the Company for the fiscal year and
quarters beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
expect the potential effect of adopting the provisions of SFAS No. 133 to have
a significant impact on the Company's financial position, results of operations
and cash flows.
F-130
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 2: Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer equipment............................. $17,921 $2,569,830
Software....................................... 558 1,797,337
Furniture and fixtures......................... 4,604 587,091
Leasehold improvements......................... 268,995
------- ----------
23,083 5,223,253
Less: Accumulated depreciation................. (2,158) (396,260)
------- ----------
$20,925 $4,826,993
======= ==========
</TABLE>
Note 3: Convertible Notes
During 1998, the Company issued convertible promissory notes in the
amount of $344,407, which accrued interest at 8% and matured one year from
issuance. In connection with these notes, the Company issued warrants to the
noteholders to purchase up to 416,676 shares of common stock at $0.005 per
share upon the closing of the Company's Series A preferred financing on
February 25, 1999. Interest expense of $241,853 was recorded upon issuance of
the warrants.
In February 1999, the Company issued additional convertible promissory
notes in the amount of $975,590 to new and existing noteholders. The notes bore
interest at 6% and matured one year from issuance.
On February 25, 1999, the outstanding principal on the convertible notes
of $1,319,997 was converted into 1,129,018 shares of the Company's Series A
preferred stock in conjunction with the Series A preferred financing described
in Note 8.
Note 4: Long-Term Debt
In August 1999, the Company obtained financing for the purchase of
software and post-contract software support in the amount of $1,658,614. The
debt bears interest at 13.8% per annum and matures in September 2000. Payments
of $110,278, including principal and interest are to be made monthly through
September 2000.
In August 1999, the Company also entered into a subordinated debt
arrangement with two lenders to provide financing in the amount of $7,000,000.
The obligation bears interest at a coupon interest rate of 13.2% with an
effective rate of 24.2% per annum and matures in February 2002. Monthly
principal payments of $259,259 are scheduled beginning December 1999 through
February 2002. The debt is collateralized by all assets of the Company. In
conjunction with the debt financing, the Company issued warrants to purchase
582,655 shares of Series A preferred stock at $1.80 per share. The exercise
price on these warrants may be reduced based upon certain events to occur in
the future. The debt and warrants were recorded at their fair values of
$5,905,770 and $1,094,230, respectively.
F-131
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
In June 1999, the Company obtained an equipment loan financing in the
aggregate amount of up to $3,000,000 for the acquisition of capital equipment.
The loan bears interest at an average rate of 8.5% with an effective rate of
19.6% per annum and matures on August 1, 2002. The principal amount is payable
in 36 monthly payments; the first 35 payments of $68,514 and the last payment
of $393,097, which is due in August 2002. The loan is secured by the equipment
of the Company. In conjunction with the loan, the Company issued warrants to
purchase 48,664 shares of Series A preferred stock at $2.47 per share. The debt
and warrants were recorded at their fair values of $2,106,045 and $57,843,
respectively. As of September 30, 1999, the Company has $836,112 available to
borrow on the equipment financing agreement.
Debt consists of the following at September 30, 1999:
<TABLE>
<S> <C>
Note payable................................................. $ 1,255,863
Subordinated debt obligation................................. 7,000,000
Equipment term loan.......................................... 2,057,924
-----------
10,313,787
Less: Unamortized debt discount.............................. (1,082,925)
-----------
$ 9,230,862
===========
</TABLE>
Maturities of long-term debt at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000......................................................... $ 4,460,714
2001......................................................... 3,834,893
2002......................................................... 2,018,180
-----------
10,313,787
Less: Unamortized debt discount.............................. (1,082,925)
-----------
9,230,862
Less: Current portion, net of discount....................... (3,766,192)
-----------
$ 5,464,670
===========
</TABLE>
F-132
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 5: Income Taxes
At September 30, 1999, the Company had net operating loss carryforwards
of approximately $16,832,860, which may be used to offset future taxable
income. These carryforwards expire beginning in 2017. Should certain changes
in the Company's ownership occur, there could be a limitation on the
utilization of its net operating losses.
A reconciliation of taxes on net loss at the federal statutory rate to
actual tax expense is as follows:
<TABLE>
<CAPTION>
Period from
March 25, 1997 Nine months
through Year ended ended
December 31, December 31, September 30,
1997 1998 1999
-------------- ------------ -------------
<S> <C> <C> <C>
Tax at statutory rate................ (34.0)% (34.0)% (34.0)%
Stock-based compensation............. 29.4 % 4.4 % 3.6 %
Other................................ 0.6 % 0.2 % 0.1 %
Change in valuation allowance........ 4.0 % 29.4 % 30.3 %
------ ------ ------
0.0 % 0.0 % 0.0 %
====== ====== ======
</TABLE>
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 187,732 $ 5,723,172
Prepaid expenses and other assets.................... -- (596,491)
Other accruals....................................... 484 46,660
Fixed assets......................................... 14,920 (63,137)
--------- -----------
Net deferred tax assets.............................. 203,136 5,110,204
Less: Valuation allowance............................ (203,136) (5,110,204)
--------- -----------
Net deferred tax asset............................... $ -- $ --
========= ===========
</TABLE>
The Company has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
F-133
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 6: Commitments and Contingencies
Operating leases: The Company is committed under non-cancelable operating
leases for its current and former office space. During 1999, the Company
subleased certain office space for amounts equal to the rental obligation,
which expire in 2001. Future receipts under the operating subleases are
approximately $76,000.
Total rent expense was approximately $127,340 and $20,330 for the nine
months ended September 30, 1999 and for the year ended December 31, 1998,
respectively. Future minimum lease payments required on non-cancelable
operating leases are approximately as follows:
<TABLE>
<CAPTION>
For the years ended September 30,
---------------------------------
<S> <C>
2000...................................................... $ 551,256
2001...................................................... 545,510
2002...................................................... 515,769
2003...................................................... 515,769
2004...................................................... 506,352
Thereafter................................................ 852,190
----------
$3,486,846
==========
</TABLE>
Lease deposit: The Company's leasing arrangement for its main corporate
facilities requires a letter of credit of $650,000 to be issued to the
landlord. This letter of credit is secured by a deposit of $650,000, which is
recorded in other assets. The letter of credit expires in May 2000; however,
the letter of credit is required to be renewed for consecutive one-year periods
for the term of the leasing arrangement.
Advertising agreement: In 1998, the Subsidiary entered into an agreement
to pay 4% of its revenues to a third party in exchange for advertising
services. Advertising expenses of $156,775 and $22,560 were incurred under this
agreement for the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively.
Co-branding agreements: During 1999, the Company entered into
approximately 20 co-branding agreements. These agreements require monthly
license fees, and certain agreements require payments of 4% to 5% of sales
generated on the co-branded site. These agreements typically lapse over a
period of three to twelve months or upon 30 days notice by either party to the
agreement. The related co-branding royalties are included in sales and
marketing expenses. The Company recorded $955,736 in co-branding fees in the
nine months ended September 30, 1999.
Note 7: Stock Options
In February 1999, the Company adopted a combined stock option plan (the
"1999 Plan") which provides for the issuance of incentive and nonstatutory
common stock options to employees, directors and consultants of the Company.
The Board of Directors reserved 5,200,000 shares of common stock to be issued
in conjunction with the 1999 Plan. In conjunction with the Series B preferred
financing discussed in Note 8, the Board of Directors reserved an additional
1,454,415 shares of common stock for issuance under the 1999 Plan. Pursuant to
a common stock purchase agreement described in Note 8, 513,112 shares were
issued from the 1999 Plan option pool.
F-134
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Stock options are granted at exercise prices and vesting schedules
determined by the Board of Directors. All options granted to employees have
been approved by the Board of Directors with four year vesting schedules.
Options granted to consultants of the Company have been approved by the Board
of Directors with varying vesting schedules of up to four years. Stock options
expire ten years after the date of grant. The following table summarizes stock
option activity for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Weighted-
average
Options exercise
outstanding price
----------- ---------
<S> <C> <C>
Options granted..................................... 4,572,016 $0.30
Options forfeited................................... (94,000) $0.30
---------
Outstanding at September 30, 1999................... 4,478,016 $0.30
=========
Options exercisable at September 30, 1999........... 1,103,828 $0.17
=========
</TABLE>
There were 1,663,287 shares available for issuance under the 1999 Plan as
of September 30, 1999, and the weighted average fair value of options granted
during this period was $0.84 per share. During the nine months ended September
30, 1999, the Company recorded compensation expense of $172,381 related to the
issuance of stock options for services provided by consultants and $1,210,636
on stock options
issued to employees. The Company did not issue any stock options during the
year ended December 31, 1998 or the period from March 25, 1997 (inception) to
December 31, 1997.
The following table summarizes information about stock options
outstanding and exercisable at September 30, 1999.
<TABLE>
<CAPTION>
Options outstanding
---------------------
Weighted-
average
ange ofR remaining
xercisee Number of contractual Options
prices Options life exercisable
- -------- --------- ----------- -----------
<S> <C> <C> <C>
$0.13............................................... 1,756,956 8.91 742,622
$0.25............................................... 1,836,560 9.08 361,206
$0.50............................................... 69,000 9.71 --
$0.75............................................... 707,000 9.86 --
$1.00............................................... 108,500 9.96 --
--------- ---------
4,478,016 9.17 1,103,828
========= =========
</TABLE>
F-135
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
In accordance with SFAS 123, the fair value of each employee option grant
is estimated on the date of grant using the minimum value option-pricing model
assuming the following weighted average assumptions: risk free interest rate of
5.60%; volatility of 0%; dividends of $0; and an expected life of four years.
Had the Company determined compensation expense based on the fair value of the
option at the grant date for all stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Nine months
ended
September 30,
1999
-------------
<S> <C>
Net loss
As reported.............................................. $(16,202,349)
Pro forma................................................ $(16,307,094)
Net loss per share
As reported-basic and diluted............................ $ (2.97)
Pro forma-basic and diluted.............................. $ (2.99)
</TABLE>
Note 8: Shareholders' (Deficit) Equity
Authorized shares
On September 29, 1999, the Articles of Incorporation were amended to
increase the number of authorized shares of common stock from 50,000,000 to
62,000,000 and increase the number of authorized shares of preferred stock from
12,000,000 to 20,000,000, of which 12,000,000 are designated as Series A
preferred stock and 8,000,000 are designated as Series B preferred stock.
Common stock splits
On February 16, 1999, the Board of Directors amended the Company's
Articles of Incorporation and authorized a two-for-one common stock split. The
number of authorized shares of common stock of the Company was increased from
10,000,000 shares to 20,000,000 shares. In addition, on July 29, 1999, the
Board of Directors approved an additional two-for-one common stock split. The
stock splits were effected in the form of a stock dividend. These stock splits
have been presented retroactively in the accompanying financial statements.
Convertible preferred stock
On February 25, 1999, the Company issued 8,980,730 shares of Series A
convertible voting preferred stock at $1.17 per share resulting in proceeds of
$10,251,821, net of issuance costs of $232,580 and stock subscription
receivables of $15,593. A consulting firm was issued 59,872 shares as a part of
this financing round in consideration for past services provided to the
Company. Expense of $70,050 was recorded in conjunction with this transaction.
The $344,407 of convertible promissory notes outstanding as of December
31, 1998 were converted into 294,576 shares of Series A preferred stock as part
of this transaction. In addition, convertible promissory notes for $975,590
issued in February 1999 were converted into 834,442 shares of Series A
preferred stock.
F-136
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
On September 30, 1999, the Company issued 7,272,085 shares of its Series
B preferred stock at $3.44 per share resulting in proceeds of $24,969,851, net
of issuance costs of $30,149. Proceeds of $4,000,000 were received by the
Company subsequent to period end and are recorded as a stock subscription
receivable within total current assets at September 30, 1999.
Each share of Series A and Series B preferred stock is convertible on a
one for one basis to common stock at the option of the holder, subject to
adjustment in certain instances or automatically upon registration of the
Company's common stock pursuant to a public offering under the Securities Act
of 1933 ("an Offering"). The Series A and Series B preferred stock would be
converted upon an Offering at a price of not less than $6.89 per share with
aggregate proceeds of not less than $30,000,000, or by the written consent of
the holders of seventy-five percent of the outstanding shares of Series B
preferred stock.
The holder of each share of preferred stock has the right to one vote for
each share of common stock into which such preferred stock can be converted.
Preferred shareholders have the same voting rights and powers as common
shareholders. Holders of the Company's preferred stock and warrants have no
registration rights.
Dividends are based on a rate of $.105 and $.31 per share per annum on
each outstanding share of Series A and Series B preferred stock, respectively,
or, if greater, an amount equal to any dividend paid on any other outstanding
shares of the Company. Dividends are not cumulative and are payable when and if
declared by the Board of Directors.
In the event of a liquidation of the Company, the holders of Series B
preferred stock will receive a liquidation preference of up to $3.44 per share
over the holders of Series A preferred and common stock. Upon satisfaction of
Series B preferences, distributions will be made to Series A preferred
shareholders in an amount
up to $1.17 per share. Upon completion of preference distributions to Series A
and Series B preferred shareholders, any remaining amounts will be distributed
among the common shareholders on a pro rata basis.
Issuance and cancellation of common stock
On March 25, 1997, the Company issued 4,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On January 18, 1999, the Company cancelled all 4,000,400 outstanding
shares of the Company's common stock, pursuant to the issuance of 11,479,068
shares of nonvested common stock to employees and other outside parties.
Issuance of nonvested common stock
In January 1999, the Company issued 11,479,068 shares of nonvested common
stock to employees and other outside parties for services performed. These
shares are subject to a repurchase option, which allows the Company the right
to repurchase the shares upon termination of employment. The repurchase option
on the nonvested common stock expires ratably over four years from date of hire
or commencement of services on a monthly basis. The expiration of the
repurchase option may accelerate upon certain change of control transactions.
Expense of $44,994, $86,084 and $122,673 was recognized for the issuance of
these shares during the nine months ended September 30, 1999, the year ended
December 31, 1998 and the period from March 25,
F-137
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
1997 (inception) through December 31, 1997, respectively. Expense relating to
nonvested common stock to third parties was $136,582 for the nine months ended
September 30, 1999.
In April 1999, the Company issued 513,112 shares of nonvested common
stock under the 1999 Plan to the chairman of the Board of Directors in exchange
for $12,828. The issued shares had a fair value of $0.79 per share as of the
grant date. These shares are subject to a repurchase option which allows the
Company the right to repurchase the shares upon termination of employment or
consulting services provided. The repurchase option expires over four years
with a 25% cliff after the first year and ratably thereafter on a monthly
basis, and may accelerate upon certain change of control transactions.
Compensation expense in the amount of $149,659 was recognized for these shares
for the nine months ended September 30, 1999.
Warrants to purchase Series A preferred stock
During 1999, the Company issued warrants to purchase up to 582,655 shares
of its Series A preferred stock at $1.80 per share in conjunction with its
subordinated debt financing. These warrants are exercisable immediately upon
grant and expire through the later of ten years after date of grant or five
years after the closing of an Offering. The exercise price of the warrants is
subject to adjustment upon the occurrence of certain corporate events or the
Company meeting specified operating criteria. The Series A preferred stock
purchase warrants automatically convert into common stock purchase warrants
upon the effectiveness of an Offering.
The Company also issued warrants to purchase up to 48,664 shares of its
Series A preferred stock at $2.47 per share in conjunction with its equipment
line financing. These warrants are exercisable immediately upon grant and
expire through the later of nine years after date of grant or four years after
the closing of an Offering. The warrants automatically convert into common
stock purchase warrants upon the effectiveness of an Offering.
Warrants to purchase common stock
In February 1999, the Company issued warrants to purchase up to 416,676
shares of its common stock in conjunction with its convertible debt financing
in 1998. The warrants are exercisable at $0.005 per share and vest immediately
upon issuance. The warrants expire on the earliest of five years from the date
of issuance; upon a change of control, as defined; or upon the closing of an
initial public offering. In July 1999, a warrant holder exercised warrants to
purchase 32,052 shares of common stock.
Note 9: Related Party Transactions
The Company paid a company owned by the majority shareholder of the
Company $92,808, $83,761 and $17,497 for the nine months ended September 30,
1999, the year ended December 31, 1998 and the period from March 25, 1997
(inception) through December 31, 1997, respectively, for certain services,
including wages, benefits, management fees, office expenses and other
miscellaneous expenses. As of September 30, 1999, and December 31, 1998 and
1997, the Company owed $12,753, $10,880 and $17,497 to this affiliated entity
for services performed during the respective periods. For the nine months ended
September 30, 1999, the year ended December 31, 1998 and the period from March
25, 1997 (inception) through December 31, 1997, respectively, the Company had
sales of $34,916, $0 and $15,132 to this affiliated entity. In February 1999,
the Company entered into an agreement with this affiliated entity to pay $3,300
per month for certain shared costs.
F-138
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
This agreement was terminated in August 1999. In August 1999, the Company
subleased its former office space to this affiliated entity. The lease expires
in May 2001 with monthly payments of $2,279. The Company is a guarantor of the
primary lease in the event that the affiliated entity fails to meet its
obligations under the sublease.
A director and shareholder provided legal and professional services to
the Company in the amount of $247,055 during the nine month period ended
September 30, 1999. Additionally, as of December 31, 1998, the Company owed
certain employees $44,407 under convertible debt agreements.
Subsequent to September 30, 1999, the Company received a promissory note
from its majority shareholder in the amount of $350,000 collateralized by
shares of the Company's common stock. The note bears interest at 6% per annum.
The principal and interest are payable upon demand at the earlier of October
2004 or the expiration of any lock-up period after an Offering. The note also
becomes due if certain change of control events take place.
Note 10: Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131")
"Disclosures about Segments of an Enterprise and Related Information"
establishes reporting and disclosure standards for an enterprise's operating
segments. The Company uses identical principles to account for segment
information as used in the accompanying financial statements. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by management.
Management operates its business based upon geographic area. Operating results
by business segment are as follows:
<TABLE>
<CAPTION>
US Canada Totals
------------ ---------- ------------
<S> <C> <C> <C>
Period from March 25, 1997 (inception)
to December 31, 1997
Net revenue........................... $ -- $ 62,174 $ 62,174
Net loss.............................. $ (112,518) $ (17,854) $ (130,372)
Total assets.......................... $ 193 $ 11,717 $ 11,910
Year ended December 31, 1998
Net revenue........................... $ 153,356 $ 883,915 $ 1,037,271
Net loss.............................. $ (406,795) $ (265,335) $ (672,130)
Total assets.......................... $ 67,402 $ 112,670 $ 180,072
Property and equipment................ $ 17,319 $ 3,606 $ 20,925
Depreciation and amortization......... $ 1,288 $ 870 $ 2,158
Interest expense...................... $ -- $ (3,608) $ (3,608)
Additions to property and equipment... $ 19,477 $ 3,606 $ 23,083
Nine months ended September 30, 1999
Net revenue........................... $ 9,917,034 $3,251,435 $ 13,168,472
Net loss.............................. $(15,215,774) $ (986,575) $(16,202,349)
Total assets.......................... $ 37,481,352 $ 717,506 $ 38,198,858
Property and equipment................ $ 4,605,905 $ 221,088 $ 4,826,993
Other assets.......................... $ 945,602 $ 25,681 $ 971,283
Depreciation and amortization......... $ 614,668 $ 22,012 $ 636,680
Interest income....................... $ 182,463 $ -- $ 182,463
Interest expense...................... $ (507,835) $ -- $ (507,835)
Noncash compensation expense.......... $ 1,628,324 $ 85,928 $ 1,714,252
Additions to property and equipment... $ 5,152,549 $ 236,327 $ 5,388,876
Additions to other assets............. $ 992,953 $ 25,681 $ 1,018,634
</TABLE>
F-139
<PAGE>
ONVIA.COM, INC.
Notes to Consolidated Financial Statements--(Continued)
Nine months ended September 30, 1999, year ended December 31, 1998 and
period from March 25, 1997 (inception) through December 31, 1997
Note 11: Supplemental Cash Flow Information
Noncash investing and financing activities are as follows:
On March 25, 1997, the Company issued 4,000,000 shares of common stock to
the founder in exchange for certain assets with a fair value of $10,000.
On February 25, 1999, the Company issued warrants to purchase its common
stock at $.005 per share. The noncash value allocated to these warrants was
$241,853.
On February 25, 1999, the outstanding convertible debt of the Company in
the amount of $1,319,997 was converted into shares of its Series A preferred
stock.
On June 15, 1999 and August 5, 1999, the Company issued warrants to
purchase its Preferred A stock in conjunction with its debt financings on these
dates. The value allocated to the warrants was $1,153,143.
In conjunction with its Series B preferred stock financing on September
30, 1999, the Company issued a stock subscription receivable for shares with a
value of $4,000,000. The proceeds from this receivable were collected
subsequent to September 30, 1999.
On August 13, 1999, the Company purchased software of $1,255,511 and
post-contract support of $403,103 in exchange for a promissory note.
Supplemental cash flow information:
Cash paid for interest during the nine months ended September 30, 1999
was $320,684. The Company paid no cash for interest in the year ended December
31, 1998 or the period from March 25, 1997 (inception) to December 31, 1997.
F-140
<PAGE>
Independent Auditors' Report
The Board of Directors, Shareholders and Members
Purchasing Group, Inc. and Integrated Sourcing, LLC:
We have audited the accompanying combined balance sheet of Purchasing
Group, Inc. and Integrated Sourcing, LLC (together, the Company) as of
September 30, 1999 and the related combined statements of operations,
stockholder's deficit and members' capital, and cash flows for the nine months
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 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Purchasing Group, Inc. and Integrated Sourcing, LLC as of September 30, 1999,
and the results of their operations and their cash flows for the nine months
ended September 30, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Philadelphia, Pennsylvania
November 17, 1999
F-141
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Balance Sheet
September 30, 1999
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $1,445,550
Accounts receivable, net of allowance for doubtful accounts of
$47,000......................................................... 2,123,958
Other current assets............................................. 12,665
----------
Total current assets............................................. 3,582,173
Deposits......................................................... 5,987
Property and equipment, net...................................... 49,639
----------
Total assets..................................................... $3,637,799
==========
Liabilities, Stockholder's Deficit and Members' Capital
Current liabilities:
Accounts payable................................................. $ 413,844
Accrued expenses................................................. 3,470,371
Unearned revenue................................................. 3,400
Loans from shareholder........................................... 203
----------
Total current liabilities and total liabilities.................. 3,887,818
Stockholder's deficit and members' capital:
Common stock of Purchasing Group, Inc., no par value,
1000 shares authorized, 100 shares issued and outstanding........ 100
Integrated Sourcing, LLC members' capital........................ 72,959
Accumulated deficit.............................................. (323,078)
----------
Total stockholder's deficit and members' capital................. (250,019)
----------
Total liabilities, stockholder's deficit and members' capital...... $3,637,799
==========
</TABLE>
See accompanying notes to combined financial statements.
F-142
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statement of Operations
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Revenues:
Service revenues.................................................. $6,539,109
Product revenues.................................................. 607,580
----------
Total revenue................................................... 7,146,689
Operating expenses:
Project personnel costs........................................... 1,420,944
Product costs..................................................... 551,564
Selling, general and administrative............................... 4,483,660
Depreciation...................................................... 45,507
----------
Total operating expenses........................................ 6,501,675
----------
Income from operations.......................................... 645,014
Other income:
Interest income................................................... 15,348
----------
Net income.......................................................... $ 660,362
==========
</TABLE>
See accompanying notes to combined financial statements.
F-143
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statements of Stockholder's Deficit and Members' Capital
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Retained
Common Stock Earnings/
------------- Members' (Accumulated
Shares Amount Capital Deficit) Total
------ ------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999.. 100 100 56,159 996,481 1,052,740
Net income.................. -- -- 16,800 643,562 660,362
Dividend distribution....... -- -- -- (1,963,121) (1,963,121)
--- ---- ------- ----------- -----------
Balance at September 30,
1999....................... 100 $100 $72,959 $ (323,078) $ (250,019)
=== ==== ======= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-144
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Combined Statement of Cash Flows
For the nine months ended September 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income...................................................... $ 660,362
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 45,507
Changes in operating assets and liabilities:
Accounts receivable......................................... (860,253)
Other current assets........................................ 39,267
Deposits.................................................... (2,857)
Accounts payable............................................ 329,753
Accrued expenses............................................ 1,555,713
Deferred revenue............................................ (35,927)
-----------
Net cash provided by operating activities................... 1,731,565
-----------
Cash flows from investing activities:
Acquisition of property and equipment........................... (34,531)
-----------
Net cash used by investing activities....................... (34,531)
-----------
Cash flows from financing activities:
Repayments to shareholder....................................... (177,100)
Shareholder distributions....................................... (1,963,121)
-----------
Net cash used in financing activities....................... (2,140,221)
-----------
Net increase in cash and cash equivalents................... (443,187)
Cash and cash equivalents:
Beginning of period............................................. 1,888,737
-----------
End of period................................................... $ 1,445,550
===========
</TABLE>
See accompanying notes to combined financial statements.
F-145
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements
(1) Business and Organization
These combined financial statements include the operations of Purchasing
Group, Inc (PGI) and Integrated Sourcing, LLC (ISL), a business related to PGI
through common ownership and management and through business operations that
leverage common expertise in the area of procurement PGI and ISL also share
common facilities. Together these businesses are referred to as the Company.
Both PGI and ISL were involved in the business combination referred to in note
5. PGI was incorporated in the Commonwealth of Pennsylvania in February 1992 to
provide strategic cost reduction consulting services to businesses and
specializes in evaluating and streamlining the purchasing habits of businesses.
ISL was organized as a limited liability company in the Commonwealth of
Pennsylvania in September 1997 to provide integrated buying and purchasing
functions for its customers.
The Company's top five customers accounted for approximately 74% of
revenues for the nine months ended September 30, 1999, and 68% of accounts
receivable at September 30, 1999.
One customer accounted for approximately 51% of revenues for the nine
months ended September 30, 1999, and 51% of accounts receivable at September
30, 1999.
(2) Summary of Significant Accounting Policies
(a) Principles of Combination
The accompanying financial statements include the accounts of PGI and
ISL. ISL is 50% owned by the sole shareholder of PGI. All significant
transactions between the combined entities, which principally involve certain
purchasing services provided by ISL for PGI, have been eliminated in
combination.
(b) Use of Estimates
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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.
(c) Cash and Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less when acquired to be cash equivalents. At
September 30, 1999, cash equivalents consist of money market accounts of
approximately $1,106,000 and a certificate of deposit of approximately $3,000.
(d) Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on long-
lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted
F-146
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
future cash flows estimated to be generated by those assets are less than the
assets' carrying amount. If such assets are impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying value or fair value, less costs to sell.
(e) Revenue Recognition
Service revenues are recognized as work is performed on a contract by
contract basis, adjusted for any anticipated losses in the period in which such
losses are identified. No such losses have been incurred during the nine months
ended September 30, 1999. Certain service contracts provide for contingent
payments to the Company based on an agreed level of savings from services
provided. Contingent revenue is recognized when the related savings have been
identified and agreed with the client. Contingent revenue recognized during the
nine months ended September 30, 1999, are approximately $430,000. Out-of-pocket
expenses are reimbursed by clients and are offset against expenses incurred by
the Company.
Product revenues are recognized upon delivery of product to the customer
based upon specific shipping terms.
(f) Project Personnel Costs
Project personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(g) Income Taxes
PGI has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under the Subchapter S provisions of the Code and
similar state tax provisions, the stockholder includes the Company's corporate
income on his personal income tax returns. Accordingly, the Company was not
subject to Federal and state corporate income taxes.
ISL operates as a Limited Liability Corporation (LLC), and therefore is
exempt from taxation according to the partnership provisions of the Internal
Revenue Code. Under the partnership provisions of the Code, the members of the
LLC include their share of the LLC's income on their personal income tax
returns. Accordingly, the Company was not subject to Federal and state
corporate income taxes during the periods reported herein.
(h) Advertising Costs
The Company expenses the cost of advertising and promoting its services
as incurred. Such costs were approximately $17,000.
(i) Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of September 30, 1999, the Company had concentrations
of credit risk in one financial institution in the form of a money market
account in the
F-147
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
approximate amount of $1,095,000. At September 30, 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
(j) Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. This statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
(3) Balance Sheet Components
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the related
assets, generally ranging from three to five years.
<TABLE>
<S> <C>
Property and equipment, stated at cost:
Computer equipment.......................................... $ 215,162
Furniture and fixtures...................................... 5,372
----------
220,534
Less: accumulated depreciation.............................. 170,895
----------
$ 49,639
==========
Accrued expenses:
Accrued payroll expenses.................................. $3,384,236
Accrued commissions....................................... 65,000
Accrued taxes............................................. 21,135
----------
$3,470,371
==========
</TABLE>
Included in accrued payroll expenses is an accrued bonus payable of
approximately $3,100,000 to the president and sole shareholder of PGI which has
been included in selling, general, and administrative expenses.
F-148
<PAGE>
PURCHASING GROUP, INC.
AND
INTEGRATED SOURCING, LLC
Notes to Combined Financial Statements--(Continued)
(4) Leases
The Company has various non-cancelable operating leases expiring at
various dates through 2001. Future minimum annual lease payments under non-
cancelable operating leases as of September 30, 1999, are as follows:
<TABLE>
<S> <C>
1999............................................................. $24,657
2000............................................................. 12,090
2001............................................................. 5,269
-------
Total minimum payments......................................... $42,016
=======
</TABLE>
(5) Subsequent Event
On October 19, 1999, all outstanding shares and members' interests of PGI
and ISL were acquired by Purchasing Systems, Inc. (PSI), a holding company
established by Internet Capital Group, Inc. and EnerTech Capital Partners II
L.P., in exchange for cash, a note and shares of PSI common stock.
Upon consummation of the sale of shares and members' interests to PSI,
PGI and ISL will be included in the consolidated tax return of PSI which will
be subject to both Federal and state income taxes.
F-149
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Syncra Software, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in redeemable preferred stock and stockholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of Syncra Software, Inc. (a development stage enterprise) at
December 31, 1998 and the results of its operations and its cash flows for the
period from inception (February 11, 1998) through December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 29, 1999
F-150
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Balance Sheet
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
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
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-151
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Operations
<TABLE>
<CAPTION>
For the Period (Unaudited)
from Inception For the Three
(February 11, Months Ended March 31,
1998) through ------------------------
December 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-152
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Changes in Redeemable Preferred Stock and Stockholders' Deficit
<TABLE>
<CAPTION>
Series A Redeemable Series B Redeemable Preferred
Preferred Stock Preferred Stock Stock Warrants
--------------------- --------------------- --------------
Carrying Carrying Subscriptions Carrying
Shares Value Shares Value Receivable Value
--------- ----------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders.......
Issuance of
redeemable non-
voting, non-
convertible
preferred
stock..........
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
Repurchase and
retirement of
common stock...
Redemption of
redeemable non-
voting, non-
convertible
preferred
stock..........
Series A
redeemable
convertible
preferred stock
warrants....... $120,000
Accrual of
cumulative
dividends on
redeemable
preferred
stock.......... 334,652
Net loss........
--------- ----------- --------- ----------- ----------- --------
Balance at
December 31,
1998........... 2,586,207 6,334,651 120,000
Issuance of
Series B
redeemable
convertible
preferred
stock, issuance
costs of
$60,000
(Unaudited).... 3,287,602 $13,150,408 $(9,000,000)
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited).... 119,861
Net loss
(Unaudited)....
--------- ----------- --------- ----------- ----------- --------
Balance at March
31, 1999
(Unaudited).... 2,586,207 $ 6,454,512 3,287,602 $13,150,408 $(9,000,000) $120,000
========= =========== ========= =========== =========== ========
<CAPTION>
Redeemable Non-
voting
Non-convertible Deficit
Preferred Stock Common stock Accumulated
-------------------- --------------------- During
Carrying Development
Shares Value Shares Par Value Stage Total
-------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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.......
Second
closing.......
Third closing.. $ (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.......
Accrual of
cumulative
dividends on
redeemable
preferred
stock.......... 94,135 (428,787) (428,787)
Net loss........ (9,075,215) (9,075,215)
-------- ----------- ----------- --------- ------------- -------------
Balance at
December 31,
1998........... 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).... (60,000) (60,000)
Accrual of
cumulative
dividends on
redeemable
preferred stock
(Unaudited).... 26,533 (146,394) (146,394)
Net loss
(Unaudited).... (1,759,630) (1,759,630)
-------- ----------- ----------- --------- ------------- -------------
Balance at March
31, 1999
(Unaudited).... 130,000 $1,416,001 396,000 $ 396 $(11,889,778) $(11,889,382)
======== =========== =========== ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-153
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Period (Unaudited)
From Inception For the Three Months
(February 11, Ended March 31,
1998) Through ------------------------
December 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-154
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements
1. Nature of the Business
Syncra Software, Inc. ("Syncra" or the "Company") was incorporated in
Delaware on February 11, 1998. Syncra was formed to design, develop, produce
and market supply chain collaboration software and solutions. Since its
inception, Syncra has devoted substantially all of its efforts to business
planning, research and development, recruiting management and technical staff,
acquiring operating assets, raising capital, marketing and business
development. Accordingly, Syncra is considered to be in the development stage
as defined in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises".
Syncra is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological changes, growth and
commercial acceptances of the Internet, dependence on principal products and
third party technology, new product development and performance, new product
introductions and other activities of competitors, dependence on key personnel,
development of a distribution channel, international expansion, lengthy sales
cycles and limited operating history.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Syncra considers all highly liquid instruments with an original maturity
of three months or less at the time of purchase to be cash equivalents.
Included in cash and cash equivalents at December 31, 1998 is approximately
$1.6 million in money market accounts.
Financial Instruments
The carrying amount of Syncra's financial instruments, principally cash,
notes payable, and redeemable preferred stock, approximates their fair values
at December 31, 1998.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repairs and maintenance costs are
expensed as incurred.
Research and Development and Software Development Costs
Costs incurred in the research and development of Syncra's products are
expensed as incurred, except for certain research and development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility, as defined by SFAS No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed." Costs incurred subsequent to the establishment of technological
feasibility and prior to the general release of the products are capitalized.
During the period ended December 31, 1998, costs eligible for capitalization
were immaterial.
Accounting for Impairment of Long Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of", the Company records
impairment of losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
F-155
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Stock-Based Compensation
Syncra accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of Syncra's Common Stock at the date of grant. Syncra has
adopted the provisions of SFAS No. 123, " Accounting for Stock-Based
Compensation", through disclosure only (Note 11). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited. In the opinion of Syncra's
management, the March 31, 1998 and 1999 unaudited interim financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operation for
that period. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 1999.
3. Prepaid Expenses
Prepaid expenses consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Trade shows and other marketing prepayments...................... $135,774
Others........................................................... 49,732
--------
$185,506
========
</TABLE>
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful life December 31,
(years) 1998
----------- ------------
<S> <C> <C>
Computer equipment.................................. 3 $246,631
Office equipment.................................... 5 71,783
Furniture and fixtures.............................. 7 91,875
--------
410,289
Less: accumulated depreciation...................... 58,537
--------
$351,752
========
</TABLE>
F-156
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
5. Impairment of Intangible Assets
In accordance with SFAS No. 121, Syncra reviews for impairment of long-
lived assets when events or changes in circumstances indicate that an asset's
carrying value may not be recoverable. In connection with the organization of
Syncra in February 1998, Syncra purchased the rights to certain software from
Benchmarking Partners, Inc. ("Benchmarking") in exchange for the issuance of
150,000 shares of Syncra's non-voting, non-convertible Redeemable Preferred
Stock (Note 8). Syncra did not obtain an independent valuation of the
technology and the fair value of the Redeemable Preferred Stock was not
objectively determinable. Therefore, Syncra recorded the technology based upon
the amount of the Redeemable Preferred Stock as determined by Syncra's Board of
Directors. Syncra expected to use the acquired software as a core technology in
its product development. In May 1998, management reassessed the status of
Syncra's product development and the additional features and functionality
planned to be included in Syncra's products. As a result of this re-evaluation,
management concluded that the core technology acquired from Benchmarking would
not be able to support Syncra's planned products. Accordingly, management
decided to restart Syncra's product development activities without the use of
the acquired software. An impairment charge of $1,312,500 was recognized in the
December 31, 1998 statement of operations.
6. Notes Payable to Stockholders
During 1998, the Company received aggregate cash proceeds totaling
$4,000,000 pursuant to the issuance of convertible promissory notes (the
"Notes") payable to certain of its stockholders. No repayments of principal or
interest (which accrues at a rate of 9% per annum) were made during the year.
The Note holders were also issued 344,828 warrants to purchase Series A
Preferred Stock ("Preferred Stock Warrants") at $2.32 per share in 1998. The
aggregate value of the Preferred Stock Warrants issued to all Note holders was
estimated to be $120,000, which was accounted for as discount on the Notes and
Preferred Stock Warrants. The discount is being amortized over the term of the
Notes. Upon closing of the Series B Preferred Stock financing, each Note holder
is entitled to a number of warrants equal to 20% of the face value of the Note
held by such holder divided by the price per share of Series B Preferred Stock.
As a result of the Series B Preferred Stock financing in 1999, the Notes were
converted into shares of Series B Preferred Stock. Additionally, the Preferred
Stock Warrants were converted to the equivalent number of warrants for Series B
Preferred Stock totaling 200,000 shares at $4.00 per share (Note 7). The
Preferred Stock Warrants have a term of ten years.
7. Redeemable Convertible Preferred Stock
At December 31, 1998, the Company had authorized preferred stock of
5,000,000 shares, $.001 par value per share, of which 2,941,031 shares were
designated as redeemable convertible Series A Preferred Stock ("Series A
Preferred Stock") and 150,000 shares of which were designated as Redeemable
Preferred Stock (the "Redeemable Preferred Stock").
On March 31, 1999, the Company's authorized Preferred Stock was increased
to 6,453,809 shares with a par value of $.001 per share of which 2,586,207
shares were designated as redeemable convertible Series A Preferred Stock,
3,737,602 shares as redeemable convertible Series B Preferred Stock ("Series B
Preferred Stock") and 130,000 shares as Redeemable Preferred Stock. Of the
designated Series B Preferred Stock, the Company issued 3,287,602 shares on
March 31, 1999 in exchange for net cash proceeds of $9.0 million received on
April 1, 1999 and the conversion of all principal and accrued interest due on
the Notes (Note 6).
F-157
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
The Series A and B Preferred Stock have the following characteristics:
Voting
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.
Dividends
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.
Liquidation
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.
Conversion
Each share of Series A and B Preferred Stock may be converted at any
time, at the option of the stockholder, into one share of Common Stock, subject
to certain anti-dilution adjustments, as defined in the terms of the Series A
and B Preferred Stock.
The Series A and B Preferred Stock will automatically convert into shares
of Common Stock upon (i) a public offering of Syncra's Common Stock which
results in gross proceeds to Syncra of at least $10,000,000, at a price per
share of the Common Stock of at least three times the Series B Preferred Stock
original purchase price per share (as adjusted for stock splits, stock
dividends, combinations, reorganizations, reclassifications or similar events)
or (ii) upon approval of the two-thirds of the outstanding Series A and B
Preferred Stockholders, voting separately, to convert all outstanding shares of
Series A and B Preferred Stock to Common Stock.
Redemption
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.
F-158
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
Accretion
The issuance cost incurred by the Company was accreted in full in 1998
and at March 31, 1999 as an adjustment to the carrying value of redeemable
convertible Series A and B Preferred Stock.
8. Non-voting, Non-convertible Redeemable Preferred Stock
As described in Note 5, Syncra's Redeemable Preferred Stock was issued in
a non-cash exchange with Benchmarking for certain software. Subsequent to the
issuance of the Redeemable Preferred Stock to Benchmarking, Syncra repurchased
20,000 shares of its Redeemable Preferred Stock from Benchmarking at a price
per share of $10.00 plus accrued dividends of $4,667. In a separate
transaction, Benchmarking transferred the remaining 130,000 shares of the
Redeemable Preferred Stock to Internet Capital Group, Inc. ("ICG"), an existing
stockholder of Syncra in exchange for a $1.3 million note, bearing interest at
8% per annum. At December 31, 1998, ICG continued to hold the 130,000 shares of
Redeemable Preferred Stock. ICG is also a stockholder of Benchmarking.
The Redeemable Preferred Stock has the following characteristics:
Voting
Except as required by law, holders of Redeemable Preferred Stock are not
entitled to vote on any matters submitted to a vote of the stockholders of
Syncra, including the election of directors.
Dividends
Holders of Redeemable Preferred Stock are entitled to receive out of
funds legally available, cumulative dividends at the rate of 8% per share per
annum on the Base Amount of each share. 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.
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs
of Syncra, the holders of Redeemable Preferred Stock are entitled to receive,
prior to and in preference to any holders of Common Stock, but after all
distribution or payments required to be made to the holders of Series A 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.
Redemption
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.
F-159
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
At any time, and from time to time, Syncra may elect to redeem all, or
any portion of the outstanding shares of its Redeemable Preferred Stock, at a
redemption price equal to the original issuance price per share ($10.00) plus
all unpaid dividends thereon which have accrued through and including the
redemption date.
Redeemable Preferred Stock is also redeemable by Syncra upon the earlier
of (i) a public offering of Syncra's Common Stock which results in gross
proceeds to Syncra of at least $10,000,000, at a price per share of the Common
Stock of at least three times the Series B Preferred Stock original purchase
price per share (as adjusted for stock splits, stock dividends, combinations,
reclassifications, reorganizations or other similar events); or (ii) the
consummation of a sale of all or substantially all of Syncra's assets or
capital stock, either through a direct sale, merger, reorganization or other
form of business combination in which control of Syncra is transferred and as a
result holders of Series A and B Preferred Stock receive at least three times
the Series B Preferred Stock original purchase price per share (as adjusted for
stock splits, stock dividends, combination, reorganizations, reclassifications
or other similar events).
9. Common Stock
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of Syncra's stockholders. Common stockholders are entitled
to receive dividends, if any, as may be declared by the Board of Directors,
subject to the preferential dividend rights of the holders of the Series A and
B Preferred Stock and the Redeemable Preferred Stock.
Restricted Stock Agreements
Syncra has entered into agreements with certain of its employee
stockholders providing for restrictions on transfers of the shares subject to
such agreement. Each agreement provides Syncra with a right to repurchase the
shares held by such individual, in the event that the Company terminates the
employment of the individual. The number of shares which may be repurchased by
the Company and the price at which such shares may be repurchased differs per
individual and is contingent on whether such individual's termination is for
"cause' (as defined in the agreement) or other than for "cause'. At December
31, 1998, none of the restricted shares were subject to repurchase due to the
restrictions contained in these agreements.
Pursuant to a stockholders' agreement, as amended and restated on March
31, 1999, all of the outstanding capital stock (including the Common Stock,
Series A and B Preferred Stock and Redeemable Preferred Stock) of the Company
is subject to certain restrictions as to sale or transfer of such shares
pursuant to a stockholders' agreement. The Company and its non-founder
stockholders also hold rights of first refusal, under certain circumstances, on
shares offered by a stockholder for sale to third parties, at the price per
share to be paid by such third party.
Reserved Shares
At December 31, 1998, 2,833,857 shares were reserved for issuance upon
conversion of the Series A Preferred Stock and exercise of outstanding options.
F-160
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
10. Repurchase of Common Stock and Redemption of Preferred Stock
On June 5, 1998, the Company repurchased 1,000,000 shares of Common Stock
and redeemed 20,000 shares of its Redeemable Preferred Stock from Benchmarking,
one of the original founders in exchange for $2,250,000. The transaction was
financed through the sale of additional Series A Preferred Stock to certain of
the existing holders of Series A Preferred Stock. Of the 150,000 shares of
Redeemable Preferred Stock originally issued to Benchmarking, the remaining
130,000 shares were transferred by Benchmarking to ICG (see Note 8).
In addition to the shares acquired, the withdrawal of Benchmarking as a
stockholder eliminated a potential conflict of interest for Syncra and its
other stockholders with Benchmarking and its customers. The transaction also
settled potential claims by Benchmarking against Syncra with respect to the
transfer of technical talent from Benchmarking to Syncra and other potential
claims by Benchmarking against the potential future value of Syncra.
The difference between the total amount paid to Benchmarking and the
aggregate of the redemption value of the Redeemable Preferred Stock plus
accrued dividends of $204,667 and the fair value of the Common Stock of
$250,000 was treated as settlement charge in the statement of operations.
11. Stock Option Plan
In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan")
which provides for the grant of incentive stock options and non-qualified stock
options, stock awards and stock purchase rights for the purchase of up to
1,000,000 shares of the Company's Common Stock by officers, employees,
consultants, and directors of the Company. The Board of Directors is
responsible for administration of the 1998 Plan. The Board determines the term
of each option, the option exercise price, the number of shares for which each
option is granted, the rate at which each option is exercisable and the vesting
period (generally ratably over four to five years). Incentive stock options may
be granted to any officer or employee at an exercise price of not less than the
fair value per common share on the date of the grant (not less than 110% of the
fair value in the case of holders of more than 10% of the Company's voting
stock) and with a term not to exceed ten years from the date of the grant (five
years for incentive stock options granted to holders of more than 10% of the
Company's voting stock). Non-qualified stock options may be granted to any
officer, employee, consultant, or director at an exercise price per share of
not less than the book value per share.
During the period from inception (February 11, 1998) through December 31,
1998, Syncra granted options aggregating 803,300 shares with a weighted average
exercise price of $0.87 per share. Of the total options granted, 99,374 shares
were exercisable at December 31, 1998. None of these vested options were
exercised during the period. Options totaling 196,700 were available for future
grant at December 31, 1998. The weighted-average remaining contractual life of
the options outstanding is 9.5 years. No compensation expense has been
recognized for employee stock-based compensation in 1998.
The exercise price of the options is more than the fair market value of
the common stock, therefore, the weighted average grant date fair value per
share of the options granted during the year using the Black-Scholes option-
pricing model is zero at December 31, 1998. As a result, had compensation
expense been determined based on the fair value of the options granted to
employees at the grant date consistent with the provision of SFAS No. 123, the
Company's pro forma net loss would have been the same. The impact on the pro
forma net loss is not necessarily indicative of the effects on future results
of operations because the Company expects to grant options in future years.
F-161
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
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.
12. Income Taxes
Deferred tax assets consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Net operating loss carryforward................................ $2,386,619
Fixed and intangible assets.................................... 482,690
Research and development credit carryforwards.................. 90,891
Accrued vacation............................................... 35,687
----------
Net deferred tax assets........................................ 2,995,887
Deferred tax asset valuation allowance......................... 2,995,887
----------
$ --
==========
</TABLE>
The Company has provided a valuation allowance for the full amount of its
net deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards
cannot be sufficiently assured at December 31, 1998.
At December 31, 1998, the Company has federal and state net operating
loss carryforwards of approximately $5.9 million available to reduce future
taxable income, which will expire in 2019. The Company also has federal and
state research and development tax credit carryforwards of approximately
$72,490 and $27,881, respectively, available to reduce future tax liabilities.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may limit the amount of net operating loss
carryforwards and research and development credit carryforwards which could be
utilized annually to offset future taxable income and taxes payable.
13. 401(K) Savings Plan
The Company has established a retirement savings plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan through December 31, 1998.
F-162
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
14. Commitments
The Company leases its office space and certain office equipment under
noncancelable operating leases. Total rent expense under these operating leases
was approximately $134,000 for the period ended December 31, 1998.
Future minimum lease commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Year ending December 31, ----------------
<S> <C>
1999......................................................... $ 272,328
2000......................................................... 254,728
2001......................................................... 254,728
2002......................................................... 254,728
Thereafter................................................... 127,364
----------
$1,163,876
==========
</TABLE>
15. Related Party Transactions
In the normal course of business, Syncra had transactions with
Benchmarking during the period from inception until May 1998 for certain
operating expenses such as organizational costs, payroll, marketing, legal and
other expenses. The total expenses reimbursed by Syncra to Benchmarking
amounted to $496,344. Furthermore, Syncra also paid Benchmarking a management
fee totaling $80,000 during the same period.
In addition to the above transactions, Syncra also reimbursed ICG
$500,000 related to professional services provided by Benchmarking to Syncra
that originally were funded by ICG.
16. Subsequent Events
In April 1999, Syncra issued 250,000 shares of Series B Preferred Stock
for $1.0 million to a new investor.
F-163
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of traffic.com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of traffic.com, Inc. (a development
stage enterprise) at December 31, 1998, and the results of its operations and
its cash flows for the period from January 8, 1998 (commencement of activities)
to 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
Philadelphia, Pennsylvania
November 17, 1999
F-164
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Balance Sheets
December 31, 1998
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................... $ 84,541 $ 256,600
Accounts receivable (net of allowance of $35,355
as of September 30, 1999)........................ -- 261,587
Unbilled accounts receivable--state contracts..... -- 150,378
Inventoried costs relating to state contracts..... -- 116,553
Notes receivable--employees....................... -- 32,000
Other assets...................................... 35 15,038
--------- -----------
Total current assets............................ 84,576 832,156
Property and equipment, net......................... 2,615 1,036,190
Excess of cost over fair value of net assets
acquired, net.................................... -- 1,125,794
Intangible assets, net............................ -- 117,778
--------- -----------
Total assets.................................... $ 87,191 $ 3,111,918
========= ===========
Liabilities, Redeemable Preferred Stock and
Shareholders' Deficit
Current liabilities
Accounts payable.................................. $ 28,223 $ 1,372,775
Short-term debt................................... -- 144,200
Current maturities of long-term debt.............. -- 64,591
Notes payable--related parties, net............... -- 1,496,875
--------- -----------
Total current liabilities....................... 28,223 3,078,441
Long-term debt.................................... -- 170,434
--------- -----------
Total liabilities............................... 28,223 3,248,875
--------- -----------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock.. 500,000 745,000
Preferred stock warrants............................ -- 75,000
--------- -----------
500,000 820,000
--------- -----------
Shareholders' deficit
Common stock, $.01 par value, 5,000,000 shares
authorized, 3,500,000 shares issued and
outstanding at December 31, 1998 and 4,750,000
shares issued and outstanding at September 30,
1999............................................. 35 12,535
Additional paid-in capital........................ -- 1,237,500
Deficit accumulated during the development stage.. (441,067) (2,206,992)
--------- -----------
Total shareholders' deficit..................... (441,032) (956,957)
--------- -----------
Total liabilities, redeemable preferred stock
and shareholders' deficit...................... $ 87,191 $ 3,111,918
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-165
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
January 8,
1998 (Commencement (Unaudited)
of Activities) For the Nine Months
through Ended September 30,
December 31, ---------------------
1998 1998 1999
------------------ -------- -----------
<S> <C> <C> <C>
Revenues............................. $ -- $ -- $ 878,382
--------- -------- -----------
Operating expenses:
Cost of revenues................... -- -- 973,465
Selling, general and
administrative.................... 432,278 58,541 1,589,054
--------- -------- -----------
Total expense.................... 432,278 58,541 2,562,519
--------- -------- -----------
Loss from operations................. (432,278) (58,541) (1,684,137)
Interest income...................... 4,285 -- 8,529
Interest expense..................... -- -- (87,647)
Other income (expense), net.......... (13,074) -- (2,670)
--------- -------- -----------
Net loss............................. $(441,067) $(58,541) $(1,765,925)
========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-166
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Shareholders' Deficit
<TABLE>
<CAPTION>
Common Stock
----------------------------
Deficit
Accumulated
Additional During the
Par Paid-in Development
Shares Value Capital Stage Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 8,
1998 (commencement of
activities)
Issuance of common
stock.................. 3,500 $ 35 $ -- $ -- $ 35
Stock split (1,000 to 1;
July 1998)............. 3,496,500 -- -- -- --
Net loss................ -- -- -- (441,067) (441,067)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1998................... 3,500,000 35 -- (441,067) (441,032)
Issuance of common stock
for acquisition (March
1999).................. 1,250,000 12,500 1,237,500 -- 1,250,000
Net loss (unaudited).... -- -- -- (1,765,925) (1,765,925)
--------- ------- ---------- ----------- -----------
Balance at September 30,
1999 (unaudited)....... 4,750,000 $12,535 $1,237,500 $(2,206,992) $ (956,957)
========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-167
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
January 8, 1998
(Commencement (Unaudited)
of Activities) For the Nine Months Ended
to September 30,
December 31, ---------------------------
1998 1998 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(441,067) $ (58,541) $ (1,765,925)
Adjustments to reconcile net
loss to cash used in operating
activities:
Depreciation and
amortization................. 654 -- 383,155
Valuation allowance on advance
to target company............ 140,000 -- --
Provision for bad debts....... -- -- 35,355
Loss on disposal of fixed
assets....................... 13,076 -- --
Changes in assets and
liabilities, net of effects
of acquisition:
Accounts receivable......... -- -- 100,496
Unbilled accounts
receivable................. -- -- (150,378)
Inventoried costs........... -- -- (41,553)
Other assets................ (35) (35) 20,071
Accounts payable............ 28,223 -- 1,274,284
--------- ----------- --------------
Net cash used in operating
activities............... (259,149) (58,576) (144,495)
--------- ----------- --------------
Cash flows from investing
activities:
Payment for business acquired,
net of cash acquired ($37,318
at September 30, 1999)......... -- -- 37,318
Capital expenditures............ (16,345) -- (992,320)
Advance to target company....... (140,000) -- --
Acquisition of URL address...... -- -- (132,500)
--------- ----------- --------------
Net cash used in investing
activities............... (156,345) -- (1,087,502)
--------- ----------- --------------
Cash flows from financing
activities:
Net change in line of credit.... -- -- (6,241)
Proceeds from issuance of debt.. -- -- 1,140,297
Payments on notes payable....... -- -- (50,000)
Proceeds from issuance of common
stock.......................... 35 35 --
Proceeds from issuance of
preferred stock warrants....... -- -- 75,000
Proceeds from issuance of
redeemable preferred stock..... 500,000 500,000 245,000
--------- ----------- --------------
Net cash provided by
financing activities..... 500,035 500,035 1,404,056
--------- ----------- --------------
Net increase in cash and cash
equivalents...................... 84,541 441,459 172,059
Cash and cash equivalents,
beginning of period.............. -- -- 84,541
--------- ----------- --------------
Cash and cash equivalents, end of
period........................... $ 84,541 $ 441,459 $256,600
========= =========== ==============
Supplemental disclosure of cash
flow:
Cash paid for interest.......... $ -- $ -- $ 15,772
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-168
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1998
1. Organization and Liquidity
traffic.com, Inc. (the "Company") commenced its current operations on
January 8, 1998. The Company is a development stage company, as defined in
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting By
Development Stage Enterprises." traffic.com is currently developing a
nationwide traffic and logistics data collection network which will provide
real time data to end users. The Company plans to distribute its data products
through several distribution channels, including broadcast media, wireless
communication and the internet, as well as to logistics, fleet and engineering
businesses. The Company has incurred losses since its inception as it has
devoted substantially all of its efforts toward building network infrastructure
and internal staffing, developing systems, expanding into new markets, and
raising capital. The Company has generated no revenue to date from distribution
of data products and is subject to a number of risks similar to those of other
development stage companies, including dependence on key individuals, the
ability to demonstrate technological feasibility, and the need to obtain
adequate additional financing necessary to fund the development and marketing
of its products and services, and customer acceptance. The Company is in
discussions with potential customers regarding its products and services.
See Note 3 for description of business of subsidiary acquired after
December 31, 1998.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Cash and cash equivalents
Cash and cash equivalents represent cash and highly liquid short-term
investments with original maturities of three months or less. Such investments
are carried at amortized cost, which approximates fair value because of the
short maturity of these instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the related
assets.
Under the terms of a government contract, the Company has been engaged to
provide traffic data to various federal and state agencies for research,
planning and congestion management. As part of the contract, the Company will
install digital traffic surveillance systems, the cost of which will be
partially reimbursed by the government. Such reimbursements are billed upon the
achievement of defined milestones and are recorded as a reduction of the
capital expenditures incurred in the installation of the digital system as
shown in Note 4. As part of the terms of the government contract, in the event
the Company terminates the contract, the government has the right to all
equipment acquired with government funds at no cost and a right to purchase all
equipment acquired with private funds at fair value.
F-169
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Intangible asset
The intangible asset represents the Company's purchase of the traffic.com
URL address and is being amortized over a useful life of 3 years. Amortization
expense for the nine months ended September 30, 1999 was $14,722.
Asset valuation
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the carrying value of long-lived assets and
certain identifiable intangible assets will be evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such a review for recoverability, the Company will
compare the expected future cash flows (estimated undiscounted cash flows
associated with such assets) to the carrying value of the long-lived assets and
identifiable intangibles. If the expected future cash flows are less than the
carrying amount of such assets, the Company will recognize an impairment loss
for the difference between the carrying amount of the assets and their
estimated fair value.
Revenue recognition
The Company recognizes revenue and expense relating to government
contracts on the percentage-of-completion method, measured on the basis of
costs incurred as compared to management's estimate of total costs.
Management's estimates of costs are reviewed periodically as the work on
contracts progresses. Provisions for estimated contract losses are recorded
when identified. Unbilled receivables and inventoried costs and estimated
earnings can be invoiced upon attaining certain milestones under fixed-price
contracts and upon completion of construction on certain projects.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the establishment of a deferred tax asset or liability for the
recognition of future deductions or taxable amounts, and operating loss and tax
credit carryforwards. Deferred tax expense or benefit is recognized as a result
of the change in the deferred asset or liability during the year. If necessary,
the Company will establish a valuation allowance to reduce any deferred tax
asset to an amount which will, more likely than not, be realized.
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 amount 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.
F-170
<PAGE>
TRAFFIC.COM, INC
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Stock-based compensation
Stock based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair market
value of the Company's stock at the date of grant over the amount an individual
must pay to acquire the stock and is amortized over the vesting period. All
transactions in which goods and services are the consideration received for the
issuance of equity instruments, such as stock options, are expensed based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The Company has
adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Comprehensive income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes a standard for reporting and
displaying comprehensive income and its components within the financial
statements. Comprehensive income includes charges and credits to equity that
are not the results of transactions with shareholders. Comprehensive income is
comprised of net income and other comprehensive income. There were no
components of other comprehensive income for the period ended December 31, 1998
or for the nine months ended September 30, 1998 and 1999 (unaudited).
Unaudited interim financial statements
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are unaudited. In the opinion of management,
the September 30, 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 operations for those
periods. The results of operations for the nine months ended September 1999 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 1999.
3. Acquisition (Unaudited)
On March 1, 1999, the Company acquired all of the outstanding common
stock of Sensor Management Systems, Inc. (SMS) for a purchase price of
$1,550,000. SMS is a government contractor specializing in installation of
traffic monitoring systems. The purchase consideration consisted of $300,000 in
notes payable and 1,250,000 shares of the Company's Common Stock valued at
$1,250,000. The purchase agreement also includes additional consideration of
$75,000 which is contingent upon certain performance metrics. Such
consideration will be recognized when the contingency is resolved and the
consideration becomes payable. The acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion 16 "Business
Combinations". Goodwill of $1,415,641 related to the acquisition is being
amortized on a straight-line basis over a useful life of three years.
Amortization expense for the nine months ended September 30, 1999 was $289,847.
F-171
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
4. Property and Equipment, Net
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30, Useful
1998 1999 Life
------------ ------------- ---------
<S> <C> <C> <C>
Machinery and equipment............... $ -- $ 87,794 10 years
Office furniture and equipment........ -- 6,738 5 years
Computer hardware and software........ 3,269 39,734 3-5 years
Vehicles.............................. -- 213,442 5 years
Construction in progress.............. -- 869,839
------ ----------
3,269 1,217,547
Accumulated depreciation.............. (654) (7,365)
Construction in progress cost
reimbursement........................ -- (173,992)
------ ----------
$2,615 $1,036,190
====== ==========
</TABLE>
Depreciation expense was $654 and $6,711 for the period ended December
31, 1998 and the nine months ended September 30, 1999.
5. Short-term Debt (Unaudited)
A subsidiary of the Company is a party to a $100,000 revolving credit
facility which bears interest at prime plus 1% and is payable on demand. The
line of credit is collateralized by the assets of the subsidiary. The facility
expires in January 2000. At September 30, 1999, the outstanding balance on this
line of credit was $97,200 at an interest rate of 9.25%.
A subsidiary of the Company is a party to a promissory note which bears
interest at prime plus 1.5% and is payable on demand. The note is
collateralized by the assets of the subsidiary. At September 30, 1999, the
outstanding balance on this note was $47,000 at an interest rate of 9.75%.
6. Notes Payable--Related Parties (Unaudited)
SMS note payable
In connection with the acquisition of SMS (Note 3), the Company entered
into a promissory note in the amount of $375,000 with the sellers of SMS, who
are now shareholders of the Company. The note bears interest at 6% and is
payable in two installments. The first installment of $300,000 is due upon
completion of an equity financing by the Company in excess of $1,000,000. The
remaining $75,000 will be recognized upon resolution of certain purchase price
contingencies. See Note 12 for payment of the first installment subsequent to
September 30, 1999.
Convertible demand note payable
On April 22, 1999, the Company issued a convertible note payable in the
amount of $1,200,000 to certain holders of the Company's Preferred Stock (Note
9). The note bears interest at 9%, is payable on demand and is collateralized
by the assets of the Company. The note may be converted at the option of the
holder into shares of any new class or series of equity securities issued by
the Company within one year from the date of the note or into shares of Series
A Convertible Preferred Stock at a conversion price of $1.00 per share.
F-172
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
In conjunction with issuance of the note, the Company issued warrants to
purchase 600,000 shares of Series A Convertible Preferred Stock at a purchase
price of $1.00 per share, exercisable through April 22, 2009. The aggregate
value of the warrants was estimated at $75,000 and was accounted for as
discount on the note payable. The discount is being amortized over the
estimated period to conversion of the note. At September 30, 1999, the
remaining unamortized discount balance was $3,125. See Note 12 regarding
conversion of the note subsequent to September 30, 1999.
7. Long-term Debt (Unaudited)
As a consequence of the acquisition of SMS, the Company is a party to
various long-term collateralized vehicle and equipment loans. A portion of
these loans bear interest at prime plus .25% while the remainder carry fixed
rates from 8.75% to 9.75%. Monthly payments of principal and interest under
these loans amount to $6,709. The loans mature at various dates, beginning
December 4, 2000 through January 4, 2004.
8. Income Taxes
At December 31, 1998 and September 30, 1999, the Company had net
deductible temporary differences and net operating loss carryforwards of
approximately $441,000 and $2,200,000, respectively. The tax loss carryforwards
expire beginning in 2013. A full valuation allowance has been provided for the
net deductible temporary differences and tax loss carryforwards due to
uncertainty regarding their utilization.
9. Mandatorily Redeemable Convertible Preferred Stock
Fiscal 1998
On September 22, 1998, the Company issued 500,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock"), $0.01 par value, at a
purchase price of $1.00 per share for total proceeds of $500,000. Each share of
Series A Preferred Stock is convertible into one share of Common Stock at the
option of the holder and converts automatically upon an initial public offering
of Common Stock. The conversion ratio is subject to change based on certain
dilution events, as defined in the preferred stock purchase agreement. The
Series A Preferred Stock is entitled to receive any dividends declared on the
Company's Common Stock based on the number of shares into which the Series A
Preferred Stock is convertible. Each holder of the Series A Preferred Stock is
entitled to one vote for each share of Common Stock into which such share of
Series A Preferred Stock is convertible. In addition, the Series A Preferred
Stock holders, voting as a separate class, are entitled to elect two of the
Company's five directors. The Series A Preferred Stock is redeemable by the
holder at any time after the fifth anniversary of the original issuance date in
an amount equal to the original purchase price plus any declared but unpaid
dividends. In the event of liquidation, the Series A Preferred Stock carries a
premium of 8% per year.
Nine months ended September 30, 1999 (unaudited)
On January 27, 1999; May 26, 1999 and August 6, 1999, the Company issued
45,000; 100,000 and 100,000 additional shares of Series A Preferred Stock,
respectively, to new investors at a purchase price of $1.00 per share.
See Note 12 for changes to the terms of the Series A Preferred Stock
subsequent to September 30, 1999.
F-173
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
10. Shareholders' Deficit
Common stock
The Company is authorized to issue 5,000,000 shares of $.01 par value
common stock. Common shareholders have the right to one vote for each share of
Common Stock held. Common shareholders have the right to elect two members of
the Board of Directors, and one additional member to be voted with the
preferred shareholders.
Preferred stock
The Company is authorized to issue 750,000 shares of $.01 par value
preferred stock. The Board of Directors has the authority to issue shares and
to fix voting privileges, dividend rates, conversion privileges and any other
rights of the preferred stock.
See Note 12 for changes to the Company's Articles of Incorporation
subsequent to September 30, 1999.
11. Commitments and Contingencies (Unaudited)
Legal proceedings
During 1998, the Company was engaged in merger negotiations which were
subsequently terminated in February 1999. In July 1999, the former target
company filed a civil suit in connection with the termination of merger
negotiations. The case is in the preliminary stages; however, the Company does
not believe that the suit will result in a material adverse impact on the
financial condition or results of operations of the Company.
Prior to termination of negotiations, the Company advanced $140,000 to
the target company. A valuation allowance has been established related to this
advance based on uncertainty regarding its collection.
12. Subsequent Events (Unaudited)
Amended and Restated Articles of Incorporation
On October 6, 1999, the Company amended and restated its Articles of
Incorporation to increase the number of authorized shares to 45,000,000,
divided into a class of 33,800,000 shares of Common Stock, $0.01 par value per
share, and a class of 11,200,000 shares of Preferred Stock, $0.01 par value per
share. The 11,200,000 shares of Preferred Stock are further designated as
2,600,000 shares of Series A Convertible Preferred Stock (Note 9); 5,000,000
shares of Series B Convertible Preferred Stock and 3,600,000 shares of Series C
Convertible Preferred Stock. In addition, the number of directors was increased
to seven.
The amendment altered the voting rights of the Common Stock such that
holders of Common Stock, voting together with the holders of the Series A,
Series B and Series C Preferred Stock, are entitled to elect three directors of
the Company.
As a result of the amendment, the terms of the Series A Preferred Stock
were changed to reflect a mandatory redemption date of five years from the date
of the first issuance of Series B Preferred Stock for one-
F-174
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
third of the outstanding Series A Preferred Stock. The remaining two-thirds may
be redeemed in equal installments on the sixth and seventh anniversary of the
first issuance of Series B Preferred Stock. The voting rights of the Series A
Preferred Stock were changed to allow the holders of Series A Preferred Stock
to elect one director, voting as a separate class.
The newly authorized Series B Preferred Stock is convertible into one
share of Common Stock at the option of the holder and converts automatically
upon an initial public offering of Common Stock. The conversion ratio is
subject to change based on certain dilution events. The Series B Preferred
Stock is entitled to receive non-cumulative dividends of $0.19 per share as
well as any dividends declared on the Company's Common Stock based on the
number of shares into which the Series B Preferred Stock is convertible. Each
holder of the Series B Preferred Stock is entitled to one and one-half votes
for each share of Common Stock into which such share of Series B Preferred
Stock is convertible. In addition, the Series B Preferred Stock holders, voting
as a separate class, are entitled to elect two directors. The Series B
Preferred Stock is redeemable by the holder in one-third increments on the
fifth, sixth and seventh anniversary of the first issuance of Series B
Preferred Stock. In the event of liquidation, the Series B Preferred Stock
carries a premium of 8% per year.
The newly authorized Series C Preferred Stock is convertible into one
share of Common Stock at the option of the holder and converts automatically
upon an initial public offering of Common Stock. The conversion ratio is
subject to change based on certain dilution events. The Series C Preferred
Stock is entitled to receive non-cumulative dividends of $0.19 per share as
well as any dividends declared on the Company's Common Stock based on the
number of shares into which the Series C Preferred Stock is convertible. Each
holder of the Series C Preferred Stock is entitled to one vote for each share
of Common Stock into which such share of Series C Preferred Stock is
convertible. In addition, the Series C Preferred Stock holders, voting as a
separate class, are entitled to elect one director. The Series C Preferred
Stock is redeemable by the holder in one-third increments on the fifth, sixth
and seventh anniversary of the first issuance of Series B Preferred Stock. In
the event of liquidation, the Series C Preferred Stock carries a premium of 8%
per year.
Sale of Preferred Stock
On October 7, 1999, the Company entered into a preferred stock purchase
agreement with a group of investors. Under the terms of the agreement, the
Company agreed to sell 4,824,563 shares of Series B Convertible Preferred Stock
and 3,508,771 shares of Series C Convertible Preferred Stock. The shares are to
be sold in three separate increments of 2,026, 316 shares of Series B and
1,473,683 shares of Series C; 1,490,852 shares of Series B and 1,084,256 shares
of Series C; and 1,307,395 shares of Series B and 950,832 shares of Series C,
each at a purchase price of $2.00, $2.33 and $2.66 per share, respectively.
The first purchase of shares was completed on October 7, 1999 and
resulted in proceeds to the Company of approximately $7,000,000. The second and
third purchases are subject to the Company's achievement of certain performance
metrics set forth in the agreement no later than September 30, 2000 and
September 30, 2001, respectively.
Conversion of Note Payable
On October 7, 1999, the outstanding convertible demand note in the amount
of $1,200,000 plus accrued interest of $48,378 was converted in accordance with
its terms into 1,248,378 shares of Series A Preferred Stock at a conversion
price of $1 per share. The remaining unamortized discount was recognized as
interest expense at the date of conversion.
F-175
<PAGE>
TRAFFIC.COM, INC.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Stock Option Plans
In October 1999, the Company's Board of Directors and shareholders
approved the 1999 Long-Term Incentive Plan which reserves 1,157,000 shares of
Common Stock for issuance to directors, officers and other key employees. The
plan is administered by the Board and provides for grants of stock options,
stock appreciation rights, restricted stock, deferred stock, stock bonuses,
dividend equivalents and other stock-based awards. Stock options granted under
the plan have an exercise price equal to 100% of fair market value (as
determined by the Board) on the date of grant, expire ten years from the date
of grant and are exercisable as determined by the Board. On October 6, 1999,
456,000 stock options were granted to employees at an exercise price of $0.25
per share.
In October 1999, the Company's Board of Directors and shareholders
approved the 1999 Non-Employees' Stock Plan which reserves 1,200,000 shares of
Common Stock for issuance to non-employee directors, advisors and consultants.
The plan is administered by the Board and provides for grants of stock options
and restricted stock, as well as the payment of directors' fees in the form of
shares or deferred shares of Common Stock. Stock options granted under the plan
have an exercise price equal to 100% of fair market value (as determined by the
Board) on the date of grant, expire ten years from the date of grant and are
exercisable in 25% increments each year following the first anniversary of the
date of grant. On October 6, 1999, 716,000 stock options were granted to non-
employee directors at an exercise price of $0.25 per share.
SMS Note Payable
As a result of the first closing of the Series B and Series C Preferred
Stock, on October 13, 1999, the Company repaid the $300,000 note payable to the
sellers of SMS, in accordance with the terms of the note.
F-176
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Messaging, Inc.:
We have audited the accompanying balance sheet of United Messaging, Inc.
(a development-stage enterprise) (the Company) as of December 31, 1998, and the
related statements of operations, redeemable convertible preferred stock and
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
and 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.
Arthur Andersen LLP
Philadelphia, Pennsylvania,
November 9, 1999
F-177
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
(Audited) (Unaudited)
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash.............................................. $ 613 $ 2,490,333
Accounts receivable............................... -- 94,530
Prepaid expenses.................................. 917 305,091
--------- -----------
Total current assets............................ 1,530 2,889,954
--------- -----------
Property and equipment, net of accumulated
depreciation of $1,572 and $56,617, respectively... 19,192 887,886
--------- -----------
Total assets.................................... $ 20,722 $ 3,777,840
========= ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.................................. $ 6,973 $ 380,279
Accrued expenses.................................. 53,669 493,302
Deferred revenues................................. -- 57,000
Due to employees.................................. 10,882 345
Advances from stockholder......................... 53,197 --
--------- -----------
Total liabilities............................... 124,721 930,926
--------- -----------
Commitments and contingences (note 8)
Redeemable Series A convertible preferred stock..... -- 5,784,041
--------- -----------
Stockholders' deficit:
Preferred stock, $.001 par value, 4,500,000 shares
authorized, none outstanding at December 31,
1998, 4,500,000 Redeemable Series A Convertible
shares issued and outstanding at September 30,
1999............................................. -- --
Common stock, $.001 par value, 9,500,000 shares
authorized, 2,066,677 issued and outstanding at
December 31, 1998, 3,333,350 issued and
outstanding at September 30, 1999................ 2,067 3,333
Additional paid-in capital........................ -- --
Additional paid-in capital--warrants.............. -- 53,727
Deficit accumulated during the development stage.. (106,066) (2,994,187)
--------- -----------
Total stockholders' deficit..................... (103,999) (2,937,127)
--------- -----------
Total liabilities and stockholders' deficit..... $ 20,722 $ 3,777,840
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-178
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
(Audited) (Unaudited) (Unaudited)
Period From Period From Period From
August 25, August 25, (Unaudited) August 25,
1998 1998 Nine 1998
(Inception) (Inception) Months (Inception)
Through Through Ended Through
December 31, September 30, September 30, September 30,
1998 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ 37,530 $ 37,530
Expenses Incurred in the
Development Stage:
Operations............ 20,940 -- 813,809 834,749
Selling and
marketing............ 69,429 -- 727,924 797,353
Administration........ 14,125 255 1,280,452 1,294,577
Depreciation.......... 1,572 -- 55,045 56,617
--------- ----- ----------- -----------
Total expenses...... 106,066 255 2,877,230 2,983,296
--------- ----- ----------- -----------
Operating loss........ (106,066) (255) (2,839,700) (2,945,766)
Interest Income......... -- -- 64,464 64,464
--------- ----- ----------- -----------
Net Loss................ (106,066) (255) (2,775,236) (2,881,302)
Preferred Stock
Dividends.............. -- -- 159,041 159,041
--------- ----- ----------- -----------
Net Loss Applicable to
Common Shareholders.... $(106,066) $(255) $(2,934,277) $(3,040,343)
========= ===== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-179
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
<TABLE>
<CAPTION>
Stockholders' Deficit
-----------------------------------------------------------------
Redeemable Additional Total
Convertible Common Common Additional Paid-in Stock-
Preferred Stock Stock Paid-in Capital- Accumulated holders'
Stock (Shares) (Amount) Capital Warrants Deficit Deficit
----------- --------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
(unaudited)......................... -- 1,266,673 1,266 11,400 -- -- 12,666
Issuance of Preferred stock
(unaudited)......................... 5,625,000 -- -- -- -- -- --
Contribution by stockholder of
advance (Note 4) (unaudited)........ -- -- -- 34,756 -- -- 34,756
Issuance of warrants to bank
(unaudited)......................... -- -- -- -- 53,727 -- 53,727
Preferred stock dividends
(unaudited)......................... 159,041 -- -- (46,156) -- (112,885) (159,041)
Net Loss (unaudited)................. -- -- -- -- -- (2,775,236) (2,775,236)
---------- --------- ------ -------- ------- ----------- -----------
Balance, September 30, 1999
(Unaudited).......................... $5,784,041 3,333,350 $3,333 $ -- $53,727 $(2,994,187) $(2,937,127)
========== ========= ====== ======== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-180
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
(Audited) (Unaudited) (Unaudited)
Period From Period From Period From
August 25, August 25, August 25,
1998 1998 (Unaudited) 1998
(Inception) (Inception) Nine Months (Inception)
Through Through Ended Through
December 31, September 30, September 30, September 30,
1998 1998 1999 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Activities:
Net loss.............. $(106,066) $(393) $(2,775,236) $(2,881,302)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation......... 1,572 -- 55,045 56,617
Increase (decrease)
in cash due to
changes in:
Prepaid expenses... (917) -- (250,447) (251,364)
Accounts
receivable........ -- -- (94,530) (94,530)
Accounts payable... 6,973 393 373,306 380,279
Accrued expenses... 53,669 -- 439,633 493,302
Deferred revenue... -- -- 57,000 57,000
Due to employees... 10,882 -- (10,537) 345
--------- ----- ----------- -----------
Net cash used in
operating
activities...... (33,887) -- (2,205,766) (2,239,653)
--------- ----- ----------- -----------
Investing Activities:
Capital expenditures.. (20,764) -- (923,739) (944,503)
--------- ----- ----------- -----------
Net cash used in
investing
activities...... (20,764) -- (923,739) (944,503)
--------- ----- ----------- -----------
Financing Activities:
Proceeds from issuance
of common stock...... -- -- 12,666 12,666
Proceeds from issuance
of preferred stock... -- -- 5,625,000 5,625,000
Advances from
stockholder.......... 55,264 -- (18,441) 36,823
--------- ----- ----------- -----------
Net cash provided
by financing
activities...... 55,264 -- 5,619,225 5,674,489
--------- ----- ----------- -----------
Net Increase in Cash... 613 -- 2,489,720 2,490,333
Cash, beginning of
period................ -- -- 613 --
--------- ----- ----------- -----------
Cash, End of Period.... $ 613 $ -- $ 2,490,333 $ 2,490,333
========= ===== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-181
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements
(Information as of September 30, 1999 and for the period from inception to
September 30,
1998 and for the nine months ended September 30, 1999 is unaudited)
1. Background:
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 Financial
Accounting Standards (SFAS) No. 7 Accounting and Reporting by Development Stage
Enterprises.
2. Significant Accounting Policies:
Interim Financial Statements
The financial statements for the period from inception to September 30,
1998 and for the nine months ended September 30, 1999 are unaudited, and in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position as of September 30, 1999 and the results of its operations for the
period from inception to September 30, 1998 and the nine months ended September
30, 1999. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the
entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash and
accounts payable. Cash and accounts payable are carried at cost which
approximates fair value because of the short maturity of these instruments.
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:
<TABLE>
<S> <C>
Software........................................................ 3 years
Computer equipment.............................................. 5 years
</TABLE>
F-182
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
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.
Income Taxes
At inception, the Company elected to be an S corporation under the
Internal Revenue Code 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 loss. Therefore, the
Company did not record a provision or benefit for federal income taxes prior to
May 21, 1999. The Company is not an S corporation for state income tax purposes
and, therefore, is responsible for state income taxes and liabilities. On May
21, 1999, in connection with the sale of Series A convertible preferred stock
(see 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. Due to the Company's net
operating loss in the period from May 22, 1999 to September 30, 1999 no
provision for federal or state income taxes has been provided. The Company has
recorded a valuation allowance against its net deferred tax asset.
Recapitalization
On May 10, 1999, the Company increased its authorized shares of common
stock from 1,000,000 to 9,500,000, and authorized 4,500,000 shares of preferred
stock with a par value of $.001 per share. Additionally, the Company effected a
1,000-for-one stock split and changed the par value of its Common stock to
$.001 per share. All references in the financial statements to the number of
shares and to per share amounts have been retroactively restated to reflect
these changes.
3. Property and Equipment:
A summary of property and equipments is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer and software equipment.............. $20,764 $944,503
Less: Accumulated depreciation............. 1,572 56,617
------- --------
Property and equipment, net.................. $19,192 $887,886
======= ========
</TABLE>
4. Advances from Officer:
During 1998 and the nine months ended September 30, 1999 an
employee/officer advanced $74,481 and $51,357, respectively, to the Company.
The Company paid back $21,282 in 1998 and $69,800 in the nine months ended
September 30, 1999. On August 19, 1999 the employee and the Company agreed that
the remaining $34,756 of the advance would be forgiven and contributed to
capital. Such amount has been reflected as an increase to additional paid in
capital in the accompanying financial statements.
F-183
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
5. Accrued Expenses:
Accrued expenses included $40,739 and $282,119 of employee compensation
and related benefits at December 31, 1998 and September 30, 1999.
6. Credit Facility:
On September 30, 1999, the Company obtained a credit facility from a bank
that expires on September 29, 2000 (the "Credit Facility"). The Credit Facility
consists provides for revolving advances (the "Revolving Facility") and
equipment advances (the "Equipment Facility"). The Company may borrow up to
$1,000,000 on the Equipment Facility and $500,000 on the Revolving Facility.
The availability under the Equipment Facility will automatically increase to
$1,500,000 if the Company closes an equity offering which raises at least
$5,000,000. Advances under the Revolving Facility bear interest at prime plus
1.25%, and mature on September 29, 2000. Advances under the Equipment Facility
can not be made after September 29, 2000, are repayable in 36 monthly
installments from the date of the advance and bear interest at the greater of
7.5% or the 36 month treasury rate as of the date of the advance plus 3.25%.
The Credit Facility has no financial covenants.
In connection with the Credit Facility, the Company issued a warrant to
purchase 60,000 shares of its Common stock to the bank (see Note 8). Using the
Black-scholes valuation method, the Company assigned a value of $53,757 to the
warrant. This amount has been recorded as an other asset and will be amortized
as interest expense over the repayment term of the advances under the facility.
7. Debt:
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 8).
8. Redeemable Convertible Preferred Stock and Stockholders' Deficit:
Preferred Stock
On May 21, 1999, the Company sold 4,500,000 shares of Series A redeemable
convertible preferred stock ("Series A Preferred") at a price of $1.25 per
share, resulting in proceeds to the Company of $5,625,000. Each share of Series
A Preferred 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 Preferred are entitled to receive dividends at a rate
of $0.08 per share per year. Such dividends are payable when declared by the
Board of Directors. The Series A convertible preferred stock is redeemable at
the option of its holders at any time after May 21, 2004 at a redemption price
equal to $1.25 per share plus accrued but unpaid dividends.
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 plus
accrued but unpaid dividends (adjusted for stock dividends, combination, or
splits) for each share of Series A preferred prior to and in preference to any
distribution to holders of common stock.
F-184
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
Common Stock
On February 1, 1999, the Company issued 1,266,673 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.
Stock Options
The Company has an option plan which provides for the issuance of up to
1,666,650 shares of Common stock for incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs") and restricted shares. ISOs are granted
with exercise prices at or above fair value as determined by the Board of
Directors. NQSOs are granted with exercise prices determined by the Board of
Directors. During the nine months ended September 30, 1999, the board of
directors granted to certain officers and employees of the Company options to
purchase 827,500 shares of common stock at an exercise price of $.125 per
share. The options vest over a four year period.
The Company applies Accounting Principal Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for options issued under the 1999 Plan. Under APB No. 25,
compensation cost related to stock options granted to employees is computed
based on the intrinsic value of the stock option at the date of grant, which
represents the difference between the exercise price and the fair value of the
Company's Common stock. Under SFAS No. 123, "Accounting for Stock-Based
Compensation," compensation cost related to stock options granted to employees
is computed based on the value of the stock option at the date of grant using
an option valuation methodology, typically the Black-Scholes pricing model.
SFAS No. 123 can be applied either by recording the fair value of the options
or by continuing to record the APB No. 25 value and disclosing the SFAS No. 123
impact on a proforma basis. The Company has elected the disclosure method of
SFAS No. 123.
Warrants
On September 30, 1999 the Company issued to a bank a warrant to purchase
60,000 shares of Common stock at $1.25 per share (see Note 6). The warrant
expires on September 29, 2006.
9. 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 (see Note 4).
The Company's operating facilities are located in Malvern, Pennsylvania.
During the period from inception through December 31, 1998, the Company
occupied an office building partially owned by the sole stockholder. The
Company incurred no rent expense in 1998.
F-185
<PAGE>
UNITED MESSAGING, INC.
(A Development-Stage Enterprise)
Notes to Financial Statements--(Continued)
10. Commitments and Contingencies:
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
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1999............................................................ $115,788
2000............................................................ 135,206
2001............................................................ 110,834
2002............................................................ 116,922
</TABLE>
F-186
<PAGE>
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) equity 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 6, 1999, except as to Note 2,
which is as of September 15, 1999
F-187
<PAGE>
UNIVERSAL ACCESS, INC.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, March 31,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
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)
Equity
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
Unissued redeemable cumulative
convertible Series A Preferred Stock.. -- 1,004,000 --
--------- ----------- -----------
Total current liabilities............ 134,000 2,163,000 1,837,000
Note payable............................ -- 149,000 134,000
--------- ----------- -----------
Total liabilities.................... 134,000 2,312,000 1,971,000
--------- ----------- -----------
Commitments and contingencies (Note 6)
Redeemable cumulative convertible Series
A Preferred Stock, no par value;
1,000,000 shares authorized; 335,334
shares issued and outstanding plus ac-
crued dividends of $20,000 (liquidation
value of $903,000)..................... -- 903,000 --
Redeemable cumulative convertible Series
A Preferred Stock warrants............. -- 36,000 --
Stockholders' (deficit) equity:
Cumulative convertible Series A
Preferred Stock, no par value;
1,000,000 shares authorized; 772,331
shares issued and outstanding plus
accrued dividends of $37,000
(liquidation value of $2,004,000)--
unaudited............................. -- -- 2,004,000
Cumulative convertible Series A
Preferred Stock warrants--unaudited... -- -- 83,000
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
$4,582,000)--unaudited................ -- -- 4,582,000
Cumulative convertible Series B
Preferred Stock warrants--unaudited... -- -- 1,197,000
Common stock, no par value; 300,000,000
shares authorized; 23,799,000 and
30,600,000 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) (2,631,000)
--------- ----------- -----------
Total stockholders' (deficit)
equity.............................. (34,000) (1,282,000) 5,597,000
--------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity.................... $ 100,000 $ 1,969,000 $ 7,568,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-188
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the For the For the
From Year Ended Three Month Three Month
Inception to December Period Ended Period Ended
December 31, 31, March 31, March 31,
1997 1998 1998 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
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) -- (76,000)
--------- ----------- -------- -----------
Net loss applicable to
common stockholders....... $(170,000) $(1,402,000) $(94,000) $(1,059,000)
========= =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-189
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the For the
From For the Three Month Three Month
Inception to Year Ended Period Ended Period Ended
December 31, December 31, March 31, March 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 -- 71,000
Proceeds from Series B
preferred stock......... -- -- -- 4,563,000
Proceeds from common
stock................... 136,000 89,000 79,000 --
Proceeds from redeemable
Series A preferred stock
warrants................ -- 36,000 -- 47,000
Proceeds from 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
========= =========== ========= ===========
</TABLE>
No amounts were paid for income taxes or interest during 1997 and 1998.
The accompanying notes are an integral part of these financial statements.
F-190
<PAGE>
UNIVERSAL ACCESS, INC.
Statements of Stockholders' (Deficit) Equity
December 31, 1997 and 1998 and March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Deferred
------------------- Preferred -------------------- Common Additonal Stock
Stock Shares No Par Stock Paind-in Options Plan Accumulated
Shares Amount Warrants Issued Value Warrants Capital Compensation Deficit Total
------- ----------- ----------- ---------- --------- -------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 2,
1997........... -- $ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- 23,799,000 136,000 -- -- -- -- 136,000
Net loss........ -- -- -- -- -- -- -- -- (170,000) (170,000)
------- ----------- ----------- ---------- --------- -------- --------- ---------- ------------ -----------
Balance at
December 31,
1997........... -- -- -- 23,799,000 136,000 -- -- -- (170,000) (34,000)
Issuance of
common stock... -- -- -- 6,201,000 89,000 -- -- -- -- 89,000
Exercise of
stock options.. -- -- -- 600,000 -- -- -- -- -- --
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........... -- -- -- 30,600,000 225,000 -- 487,000 (422,000) (1,572,000) (1,282,000)
Accretion on
redeemable
Series A
Preferred Stock
(unaudited).... -- -- -- -- -- -- -- -- (9,000) (9,000)
Termination of
mandatory
redemption
feature of
Series A
Preferred Stock
(unaudited).... 335,334 912,000 36,000 -- -- -- -- -- -- 948,000
Issuance of
Series A
Preferred Stock
(unaudited).... 436,997 1,075,000 -- -- -- -- -- -- -- 1,075,000
Issuance of
Series A
Preferred Stock
warrants
(unaudited).... -- -- 47,000 -- -- -- -- -- -- 47,000
Issuance of
Series B
Preferred Stock
(unaudited).... 200,000 4,532,000 -- -- -- -- -- -- -- 4,532,000
Issuance of
Series B
Preferred Stock
warrants
(unaudited).... -- -- 1,197,000 -- -- -- -- -- -- 1,197,000
Dividends on
Series A
Preferred Stock
(unaudited).... -- 17,000 -- -- -- -- -- -- (17,000) --
Dividends on
Series B
Preferred Stock
(unaudited).... -- 50,000 -- -- -- -- -- -- (50,000) --
Issuance of
common stock
warrants
(unaudited).... -- -- -- -- -- 13,000 -- -- -- 13,000
Issuance of
common stock
options by
certain
shareholders
(unaudited).... -- -- -- -- -- -- 31,000 -- -- 31,000
Stock option
plan
compensation
(unaudited).... -- -- -- -- -- -- -- 28,000 -- 28,000
Net loss
(unaudited).... -- -- -- -- -- -- -- -- (983,000) (983,000)
------- ----------- ----------- ---------- --------- -------- --------- ---------- ------------ -----------
Balance at March
31, 1999
(unaudited).... 972,331 $ 6,586,000 $ 1,280,000 30,600,000 $ 225,000 $ 13,000 $ 518,000 $ (394,000) $ (2,631,000) $ 5,597,000
======= =========== =========== ========== ========= ======== ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-191
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 1--Summary of Significant Accounting Policies
The Company
Universal Access, Inc. (the "Company" or "UAI"), an Illinois corporation,
was organized and commenced operations on October 2, 1997 for the purpose of
providing provisioning, co-location and high-capacity bandwidth to "services
providers" that include Internet, Applications, DSL and Telecommunications
providers. The Company operated as a subchapter S-Corporation until September
27, 1998, at which time it converted to a C-Corporation.
Basis of Presentation
The accompanying interim financial statements as of March 31, 1999 and
for the three months ended March 31, 1998 and 1999 and the related notes have
not been audited. However, they have been prepared in conformity with the
accounting principles stated in the audited financial statements for the period
from October 2, 1997 to December 31, 1997 and the year ended December 31, 1998
and include all adjustments, which were of a normal and recurring nature, which
in the opinion of management are necessary to present fairly the financial
position of the Company and results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results expected for the full years.
Revenue Recognition
Access and co-location services are billed a month in advance under long-
term contracts ranging from twelve to sixty months. UAI recognizes revenue in
the month the service is provided. Advance billings are recorded by the Company
as unearned revenue. UAI recognizes revenue from one-time fees for installation
and maintenance when the related services are performed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and
all investments with an initial maturity of three months or less. All cash
equivalents are recorded at cost.
Accounts Receivable
The allowance for doubtful accounts was $4,000, $46,000 and $152,000 at
December 31, 1997 and 1998 and March 31, 1999, respectively.
Financial instruments that could potentially subject UAI to concentration
of credit risk primarily include accounts receivable. Two customers represented
38% of total accounts receivable as of December 31, 1998, and 31% of total
sales during 1998. Three customers represented 94% of total accounts receivable
as of December 31, 1997, and 81% of total sales during 1997. If any of these
individually significant customers are unable to meet their financial
obligations, results of operations of the Company could be adversely affected.
UAI performs ongoing credit evaluations of its customers' financial condition
and to date has not experienced significant losses with respect to revenues
from any of its significant customers.
F-192
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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.
<TABLE>
<S> <C>
Furniture and fixtures............................................. 3 years
Co-location equipment.............................................. 3 years
Equipment.......................................................... 3 years
</TABLE>
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.
F-193
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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 and declared a 1-for-1 stock dividend on September 15, 1999. All
share amounts have been retroactively restated to reflect such splits.
Note 3--Property and Equipment
Property and equipment consists of the following, stated at cost:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
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
====== ========
</TABLE>
Note 4--Notes Payable
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
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
======= ========
</TABLE>
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
F-194
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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.
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:
<TABLE>
<S> <C>
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........................................................... $ --
=========
</TABLE>
At December 31, 1998, the Company had a federal net operating loss
carryforward of $227,000 which will expire in 2018.
F-195
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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:
<TABLE>
<S> <C>
1999............................................................... $ 74,000
2000............................................................... 78,000
2001............................................................... 34,000
2002............................................................... --
--------
Total minimum lease payments..................................... $186,000
========
</TABLE>
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.
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.
During February 1999, UAI paid Broadmark Capital Corporation
("Broadmark"), an entity for which a member of the UAI Board of Directors
serves as Chairman, $200,000 for services provided in connection with placement
of the Series A Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock"). This amount was recorded as an issuance cost, and deducted from the
gross proceeds received on the Series A Preferred Stock. In addition, as
described in Note 11, certain principal shareholders of the Company granted
options to Broadmark to purchase 840,000 of their common stock shares.
F-196
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
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 9,000,000. 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, 4,896,000 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:
<TABLE>
<S> <C>
Pro forma net loss............................................... $1,375,000
Volatility....................................................... 0%
Dividend yield................................................... 0%
Risk-free interest rate.......................................... 5%
Expected life in years........................................... 5
</TABLE>
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.
F-197
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
The following information relates to stock options with an exercise price
which was less than the fair market value of the underlying stock on the date
of grant:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- ---------
<S> <C> <C>
Balance at December 31, 1997.......................... -- --
Granted............................................. 3,450,000 $0.000654
Exercised........................................... 600,000 0.000006
Forfeited........................................... -- --
---------- ---------
Balance at December 31, 1998.......................... 2,850,000 $0.000079
========== =========
Weighted average fair value of options granted during
1998................................................. $ 0.14
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at December 31, 1997............................ -- --
Granted............................................... 654,000 $0.091
Exercised............................................. -- --
Forfeited............................................. 6,000 0.02
-------- ------
Balance at December 31, 1998............................ 327,000 $0.092
======== ======
Weighted average fair value of options granted during
1998................................................... $ 0.02
</TABLE>
The following information relates to stock options as of December 31,
1998:
<TABLE>
<CAPTION>
Exercise Prices
----------------------------------------------------
$0.000003 to $0.0017 $0.67 to $0.11 $0.2533 to $0.27
-------------------- -------------- ----------------
<S> <C> <C> <C>
Stock Options Outstanding
Number ................. 2,850,000 582,000 66,000
Weighted average
exercise price......... $ 0.0007 $ 0.07 $ 0.27
Weighted average
remaining contractual
life (years)........... 4.67 4.51 4.91
</TABLE>
During 1998, 600,000 stock options were issued to non-employees for
services rendered during 1998. These options were issued with an exercise price
of $0.000003, were immediately exercisable, and comprised $40,000 of the
$65,000 stock option plan compensation expense recognized during 1998. During
1998, all options issued to non-employees were exercised.
F-198
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 9--Redeemable Cumulative Convertible Preferred Stock
Series A Redeemable Cumulative Convertible Preferred Stock
During 1998, UAI issued 335,334 shares of Series A Redeemable Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") for gross proceeds of
$1,006,000. Additionally, UAI received cash and accepted subscription documents
for 385,830 shares of Series A Redeemable Cumulative Convertible Preferred
Stock ("Unissued Series A Preferred Stock") for gross proceeds of $1,157,000.
As of December 31, 1998, the Company had authorized 1,000,000 shares of Series
A Preferred Stock. Stock certificates for the Unissued Series A Preferred Stock
were issued as of February 8, 1999.
Holders of the Series A Preferred Stock are entitled to cumulative
dividends at an annual rate of 8%, payable in cash or stock, at the Company's
discretion. The Series A Preferred Stock holders have the right to convert
their shares at any time into shares of UAI Common Stock on a 6-for-1 basis. A
qualified initial public offering of at least $1 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. On February 3, 1999, the Series A
Preferred Stock holders approved an amended Certificate of Designations, Rights
and Preferences whereby this mandatory redemption feature was terminated.
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 33,333 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.
F-199
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
Note 10--Common Stock
At December 31, 1998, UAI had authorized 300,000,000 shares of no par
value Common Stock and 30,600,000 shares were issued and outstanding.
As of February 8, 1999, the Company ratified changes to the composition
of its Board of Directors (the "New Board of Directors"). The New Board of
Directors is composed of seven Directors; three Directors elected by the Common
Stock holders, one Director elected by the Series A Preferred Stock holders,
two Directors elected by the Series B Preferred Stock holders and one Director,
who is to be an industry expert, nominated by the Common Stock holders and
approved by all shareholders jointly.
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:
<TABLE>
<S> <C>
Redeemable Series A Preferred Stock............................. 4,037,988
Employee stock options outstanding.............................. 3,504,000
Series A Warrants............................................... 463,398
---------
Total........................................................... 8,005,386
=========
</TABLE>
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 360,000 shares of Common
Stock at $0.50 per share, and caused options to purchase 840,000 shares of
Common Stock to be granted by certain principal shareholders of the Company's
Common Stock. The 840,000 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 6-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-1 basis.
On May 27, 1999, UAI executed a full-recourse promissory note with the
Company's Chief Operating Officer for a principal amount of $200,000 with a per
annum interest rate of 6%. The promissory note will become immediately due and
payable on April 30, 2004.
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. During July and August 1999, UAI issued an
F-200
<PAGE>
UNIVERSAL ACCESS, INC.
Notes to Financial Statements--(Continued)
(Information Presented for the Three Month
Periods Ended March 31, 1998 and 1999 is Unaudited)
additional 2,118,647 shares of Series D Preferred Stock for gross proceeds of
$9,000,000. Series D Preferred Stock is convertible into Common Stock on a 3-
for-1 basis.
On July 30, 1999, UAI acquired substantially all of the assets and
liabilities of Pacific Crest Networks, Inc. ("PCN") in exchange for $774,000 in
cash, $224,000 in the assumption of debt, and 82,353 shares of Series D
Preferred Stock. Assets purchased included all property and equipment, cash,
accounts receivables, software, customer lists and intellectual property. Also,
as part of purchase, UAI assumed certain liabilities of PCN including $276,000
of accounts payable and obligations under leases and vendor contracts.
On August 4, 1999, the President, Chief Operating Officer and Chief
Financial Officer were granted options to purchase a total of 1,000,000 shares
of common stock at exercise prices from $1.38 to $1.51 per share. These stock
options vested immediately and were exercised on the date of grant. In
connection with the exercise, the UAI board of directors authorized secured
loans to these officers, pursuant to non-recourse promissory notes for a total
amount of $1,485,000 with an annual interest rate of 6%. The promissory notes
will become immediately due and payable on August 4, 2004.
During August 1999, UAI terminated its revolving line of credit
agreement.
On November 1, 1999, UAI acquired substantially all of the assets of
Stuff Software, Inc. ("Stuff Software") in exchange for $930,000 in cash and
50,021 shares of UAI common stock. Assets purchased include accounts
receivable, deferred revenue, customer lists, software and intellectual
property.
On November 10, 1999, UAI issued 1,557,386 shares of Series E Cumulative
Convertible Preferred Stock ("Series E Preferred Stock") for gross proceeds of
$28.5 million. Series E Preferred Stock is convertible into common stock on a
3-for-1 basis. The conversion ratio for the Series E Preferred Stock will be
multiplied by the lesser of 3.75 or the quotient of $750 million divided by the
product of the number of shares of common stock outstanding immediately before
an initial public offering multiplied by the initial public offering per share
price (such quotient is not to be less than 1).
F-201
<PAGE>
Independent Auditors' Report
The Board of Directors
VitalTone Inc.:
We have audited the accompanying balance sheet of VitalTone Inc. (the Company),
a development stage company, as of September 30, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from July 12, 1999 (inception) to September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 VitalTone Inc. (a development
stage company) as of September 30, 1999, and the results of its operations and
its cash flows for the period from July 12, 1999 (inception) to September 30,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
November 11, 1999
F-202
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Balance Sheet
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $1,437
Prepaid expenses............................................... 1
------
Total current assets........................................... 1,438
Property and equipment, net...................................... 197
Other assets..................................................... 93
------
$1,728
======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................... $ 282
Accrued expenses............................................... 81
------
Total liabilities.............................................. 363
Commitments
Stockholders' equity:
Common stock, $0.01 par value; 35,000,000 shares authorized
11,440,000 shares issued and outstanding...................... 114
Preferred stock ............................................... 2,005
Notes receivable from stockholders............................. (19)
Deficit accumulated during the development stage............... (735)
------
Total stockholders' equity..................................... 1,365
------
$1,728
======
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
July 12, 1999 (inception)
September 30, 1999
-------------------------
<S> <C>
Operating expenses:
Research and development............................ $171
Sales and marketing................................. 118
General and administrative.......................... 446
----
Net loss.......................................... $735
====
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Stockholders' Equity
Period from July 12, 1999 (inception) to September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Deficit
Notes Accumulated
Common stock Preferred receivable during the Total
----------------- Stock from development stockholders'
Shares Amount Issuable stockholders Stage equity
---------- ------ --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of July 12,
1999................... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders for notes
receivable............. 1,940,000 19 -- (19) -- --
Issuance of common
stock.................. 9,500,000 95 -- -- -- 95
Stock subscription...... -- -- 2,005 -- -- 2,005
Net loss................ -- -- -- -- (735) (735)
---------- ---- ------ ---- ----- ------
Balances as of September
30, 1999............... 11,440,000 $114 $2,005 $(19) $(735) $1,365
========== ==== ====== ==== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-205
<PAGE>
VITALTONE INC.
(A Development Stage Company)
Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Period from
July 12, 1999
(inception) to
September 30, 1999
------------------
<S> <C>
Cash flows from operating activities:
Net loss................................................. $ (735)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 10
Changes in operating assets and liabilities:
Prepaid expenses and other assets.................... (94)
Accounts payable and accrued expenses................ 363
------
Net cash used for operating activities............. (456)
------
Cash flows used in investing activities--acquisition of
property and equipment.................................... (207)
------
Cash flows provided by financing activities:
Proceeds from issuance of common stock................... 95
Stock subscription....................................... 2,005
------
Net cash provided by financing activities.......... 2,100
------
Net increase in cash and cash equivalents.................. 1,437
Cash and cash equivalents, beginning of period............. --
------
Cash and cash equivalents, end of period................... $1,437
======
Supplemental disclosure of cash flow information:
Noncash financing activities:
Common stock issued for notes receivable............... $ 19
======
</TABLE>
See accompanying notes to financial statements.
F-206
<PAGE>
VITALTONE INC.
Notes to Financial Statements
September 30, 1999
(1) Business of the Company
VitalTone Inc. (the Company) was incorporated in Delaware in July 1999
and commenced operations at that time. The Company provides a highly reliable
source for the procurement, delivery, world-class support, and billing of an
array of key IT services and products. VitalTone enables midsized companies to
focus their internal MIS resources of strategic initiatives while receiving
improved service and tighter control at lower cost.
VitalTone is in the development stage, and its primary activities to date
have included raising capital necessary for infrastructure, hiring key
personnel, and acquiring property and equipment.
(2) Summary of Significant Accounting Policies
(a) 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 expenses during the reporting period.
Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
such as money market funds, with remaining maturities of less than 90 days as
of the date of purchase. The Company is exposed to credit risk in the event of
default by the financial institutions or the issuers of these investments to
the extent of the amounts recorded on the balance sheet.
(c) Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents approximates fair market value. Financial instruments that
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents.
(d) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful lives of the respective assets generally one to seven
years. Leasehold improvements are amortized of the shorter of the estimated
useful lives of the assets or the lease term.
(e) Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value
F-207
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount of the assets or fair value less costs to sell.
(f) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be recovered.
(g) Comprehensive Income
The Company has no material components of other comprehensive income
(loss) for all periods presented.
(h) Segment Reporting
In 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the manner in which public
companies report information about operating segments in annual and interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The method
for determining what information to report is based on the way management
organizes the operating segments within the Company for making operating
decisions and assessing financial performances. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO). The CEO
reviews financial information presented on an entity-level basis for purposes
of making operating decisions and assessing financial performance. The entity-
level financial information is identical to the information presented in the
accompanying statement of operations. Therefore, the Company has determined
that it operates in a single operating segment: enterprise service portal
systems.
(i) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. Because the Company does not currently hold any
derivative instruments and does not engage in hedging activities, the Company
expects that the adoption of SFAS No. 133 will not have a material impact on
its financial position, results of operations, or cash flows. The Company will
be required to adopt SFAS No. 133 in fiscal 2001.
F-208
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(3) Property and Equipment
A summary of property and equipment consisted of the following (in
thousands):
<TABLE>
<S> <C>
Computers and software.............................................. $194
Furniture and fixtures.............................................. 9
Leasehold improvements.............................................. 4
----
207
Less accumulated depreciation and amortization...................... 10
----
$197
====
</TABLE>
(4) Stockholders' Equity
(a) Preferred Stock Issuable
In July 1999, the Company received a cash advance in the amount of
$2,005,000. This advance has been converted into series A preferred stock upon
the completion of the financing described in note 6 (b).
(b) Stock Plan
The Company has reserved 6,500,000 shares of common stock for issuance
under its 1999 equity incentive plan (the Plan). The plan provides for the
issuance of stock purchase rights, incentive stock options, or nonstatutory
stock options.
Under the Plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning less than 10% of the
voting power of all classes of stock.
Under the Plan, options generally expire in 10 years. However, the term
of the options may be limited to 5 years if the optionee owns stock
representing more than 10% of the voting power of all classes of stock. Vesting
periods are determined by the Company's Board of Directors and generally
provide for shares to vest ratably over a three to four year period.
As of September 30, 1999, there were 3,483,800 additional shares
available for grants under the stock plan.
(c) Stock-Based Compensation
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's pro
forma net loss would not have differed materially from those amounts as
reported in the accompanying financial statements.
F-209
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
The Company's computation of the pro forma amounts reflects only options
granted in fiscal 1999. Therefore, the full impact of calculating compensation
cost is reflected over the vesting period of four years.
The fair value of each option was estimated on the date of grant using
the minimum value method with the following weighted-average assumption: no
dividends; risk-free interest rate of 5.8%; and expected life of 4 years.
A summary of the status of the Company's options as of September 30,
1999, is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
average
exercise
Shares price
--------- --------
<S> <C> <C>
Outstanding at beginning of period..................... -- $ --
Granted................................................ 3,016,200 0.01
Exercised.............................................. -- --
Canceled............................................... -- --
---------
Outstanding at end of period........................... 3,016,200
=========
Options exercisable at end of period................... --
=========
</TABLE>
The weighted-average fair value of options granted for the period ended
September 30, 1999, was $0.01.
As of September 30, 1999, the range of exercise prices and weighted-
average remaining contractual life of outstanding options were as follows
(number of options in thousands):
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------
Weighted-
average
remaining Weighted-
Range of Number of contractual average
exercise options life exercise
prices outstanding (years) price
-------- ----------- ----------- ---------
<S> <C> <C> <C>
$0.01 2,816,200 9.91 $0.01
0.08 200,000 10.00 0.08
---------
3,016,200
=========
</TABLE>
F-210
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(5) Income Taxes
The differences between the income tax benefit computed at the federal
statutory rate and the Company's tax provision for all periods presented
primarily relate to net operating losses not benefited.
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities as of September 30, 1999
are as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Deferred tax assets:
Start up costs.................................................... $193
Net operating loss and tax credit carryforwards................... 57
----
Gross deferred tax assets........................................... 250
Less valuation allowance............................................ (250)
----
Total deferred tax assets....................................... --
====
</TABLE>
In light of the Company's recent history of operating losses, the Company
has provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized.
As of September 30, 1999, the Company had approximately $167,000 of
federal and California net operating loss carryforwards. The federal loss
expires primarily in the year 2019, and the California net operating loss
expires in the year 2007.
The difference between the federal loss carryforward and the accumulated
deficit results primarily from start-up costs deferred for tax purposes.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. The Company has not yet determined if an ownership change has
occurred. If such ownership change has occurred, utilization of the net
operating losses will be subject to an annual limitation in future years.
(6) Subsequent Events
(a) Leases
Subsequent to September 30, 1999, the Company entered into a
noncancelable operating lease agreement expiring in the year 2001 for its
facilities.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999............................................................. $ 217
2000............................................................. 870
2001............................................................. 652
------
Future minimum lease payments.................................... $1,739
======
</TABLE>
F-211
<PAGE>
VITALTONE INC.
Notes to Financial Statements--(Continued)
(b) Series A Preferred Stock
During November 1999, the Company issued 9,500,000 shares of Series A
preferred stock for $3.125 per share.
The rights, preferences, and privileges of the holders of Series A
preferred stock are as follows:
. Each share of Series A preferred stock shall be convertible at the
option of the holder, at any time after the date of issuance, into
one fully paid and nonassessable share of common stock, subject to
adjustment for certain dilutive events. Each share has voting
rights equal to the common stock on an "as if converted" basis.
. Conversion into common stock is automatic upon the closing of a
public offering of the Company's common stock at a purchase price
of not less than $9.375 per share and at an aggregate offering
price of not less than $50,000,000 for Series A preferred stock.
. Holders of Series A preferred stock are entitled to noncumulative
dividends when and if declared by the Company's Board of
Directors. As of September 30, 1999, no dividends have been
declared.
. Each share of Series A preferred stock has a liquidation
preference of $3.125, plus all declared but unpaid dividends.
. In the event of liquidation of the Company after payment has been
made to the holders of Series A preferred stock of the full
preferential amounts, any remaining assets would be distributed
ratably among the common and convertible preferred shareholders in
proportion to their common ownership on an "as if converted"
basis.
. Series A preferred stock is redeemable at any time after November
2, 2004, after the receipt by the Company of a written request
from the holders of two-thirds of the then outstanding shares of
Series A preferred stock, at the greater of the original issuance
price or the fair market value on the date of redemption.
The preferred stock investors received warrants to purchase 1,000,000
shares of Series A preferred stock for at an exercise price of $6.25 a share.
The fair market value of the warrants at the date of issuance was $1,500,000
which will be amortized against retained earnings through the redemption date
of the Series A preferred stock.
F-212
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders ofVivant! Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Vivant! Corporation
(a development stage company) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for the year ended December 31, 1998 and the
periods from August 7, 1997 (Inception) through December 31, 1997 and December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 17, 1999, except for Note 10,
which is as of November 18, 1999
F-213
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
---------------------- -------------
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 162,000 $ 978,000 $ 243,000
Short term investments................. -- 2,348,000 716,000
Related party receivable (Note 9)...... 128,000 100,000 --
Other current assets................... 18,000 35,000 40,000
--------- ----------- -----------
Total current assets................. 308,000 3,461,000 999,000
Property and equipment, net.............. 64,000 121,000 229,000
Other assets........................... -- 17,000 20,000
--------- ----------- -----------
$ 372,000 $ 3,599,000 $ 1,248,000
========= =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of long-term
obligations........................... $ -- $ 25,000 $ 76,000
Bank line of credit.................... -- -- 492,000
Accounts payable....................... 8,000 125,000 228,000
Accrued liabilities.................... 17,000 12,000 134,000
Convertible promissory notes payable... 125,000 -- --
Convertible promissory note payable--
related party (Note 9)................ 400,000 -- --
--------- ----------- -----------
Total current liabilities............ 550,000 162,000 930,000
Long-term obligations, less current
portion................................. -- 102,000 162,000
--------- ----------- -----------
550,000 264,000 1,092,000
--------- ----------- -----------
Commitments (Note 5)
Stockholders' equity (deficit):
Convertible Preferred Stock: $0.001 par
value; 10,200,000 shares authorized; no
shares, 4,908,301 and 4,908,301 shares
issued and outstanding in 1997, 1998 and
1999.................................... -- 5,000 5,000
Common Stock: $0.001 par value;
20,000,000 shares authorized;
3,978,220, 3,979,370 and 4,037,480
shares issued and outstanding in 1997,
1998 and 1999, respectively........... 1,000 4,000 4,000
Additional paid-in capital............. -- 4,900,000 4,906,000
Accumulated other comprehensive
income................................ -- 53,000 108,000
Deficit accumulated during the
development stage..................... (179,000) (1,627,000) (4,867,000)
--------- ----------- -----------
Total stockholders' equity
(deficit)........................... (178,000) 3,335,000 156,000
--------- ----------- -----------
$ 372,000 $ 3,599,000 $ 1,248,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-214
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period from Period from
August 7, 1997 August 7, 1997 (unaudited)
(Inception) (Inception) Nine Months Ended
through Year Ended through September 30,
December 31, December December 31, ----------------------
1997 31, 1998 1998 1998 1999
-------------- ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development.......... $ 80,000 $ 795,000 $ 875,000 $ 450,000 $ 1,758,000
Sales and marketing... 5,000 344,000 349,000 143,000 1,023,000
General and
administrative....... 84,000 308,000 392,000 236,000 451,000
--------- ----------- ----------- --------- -----------
Total operating
expenses........... 169,000 1,447,000 1,616,000 829,000 3,232,000
--------- ----------- ----------- --------- -----------
Loss from operations.... (169,000) (1,447,000) (1,616,000) (829,000) (3,232,000)
Interest income......... 3,000 42,000 45,000 7,000 11,000
Interest and other
expense................ (13,000) (43,000) (56,000) (38,000) (19,000)
--------- ----------- ----------- --------- -----------
Net loss................ $(179,000) $(1,448,000) $(1,627,000) $(860,000) $(3,240,000)
========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-215
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated Accumulated Total
Preferred Stock Common Stock Additional Other During the Stockholders'
---------------- ---------------- Paid-In Comprehensive Development Equity
Shares Amount Shares Amount Capital Income Stage (Deficit)
--------- ------ --------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception, August 7,
1997
Issuance of Common Stock
to founder in August
1997................... -- $ -- 3,978,220 $1,000 $ -- $ -- $ -- $ 1,000
Net loss................ -- -- -- -- -- -- (179,000) (179,000)
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at December 31,
1997................... -- -- 3,978,220 1,000 -- -- (179,000) (178,000)
-----------
Unrealized gain on
investments............ -- -- -- -- -- 53,000 -- 53,000
Net loss................ -- -- -- -- -- -- (1,448,000) (1,448,000)
-----------
Comprehensive loss...... -- -- -- -- -- -- -- (1,395,000)
Issuance of Series A
Convertible Preferred
Stock in August 1998... 4,025,000 4,000 -- 3,000 4,018,000 -- -- 4,025,000
Conversion of promissory
notes and accrued
interest into Series A
Convertible Preferred
Stock in August 1998... 883,301 1,000 -- -- 882,000 -- -- 883,000
Exercise of Common Stock
options in October
1998................... -- -- 1,150 -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at December 31,
1998................... 4,908,301 5,000 3,979,370 4,000 4,900,000 53,000 (1,627,000) 3,335,000
-----------
Unrealized gain on
investments
(unaudited)............ -- -- -- -- -- 55,000 -- 55,000
Net loss (unaudited).... -- -- -- -- -- -- (3,240,000) (3,240,000)
-----------
Comprehensive loss
(unaudited)............ -- -- -- -- -- -- -- 3,185,000
Exercise of Common Stock
options in January,
February and May, 1999
(unaudited)............ -- -- 58,210 -- 6,000 -- -- 6,000
--------- ------ --------- ------ ---------- -------- ----------- -----------
Balance at September 30,
1999 (unaudited)....... 4,908,301 $5,000 4,037,580 $4,000 $4,906,000 $108,000 $(4,867,000) $ 156,000
========= ====== ========= ====== ========== ======== =========== ===========
</TABLE>
F-216
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
August 7, 1997 August 7, 1997 (Unaudited)
(Inception) (Inception) Nine Months Ended
through Year Ended through September 30,
December 31, December 31, December 31, -----------------------
1997 1998 1998 1998 1999
-------------- ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(179,000) $(1,448,000) $(1,627,000) $ (860,000) $(3,240,000)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 5,000 26,000 31,000 17,000 52,000
Changes in assets and
liabilities:
Related party
receivable.......... (128,000) 28,000 (100,000) 128,000 100,000
Other assets......... (18,000) (34,000) (52,000) (34,000) (8,000)
Accounts payable.... 8,000 117,000 125,000 47,000 103,000
Accrued
liabilities........ 17,000 43,000 60,000 77,000 122,000
--------- ----------- ----------- ---------- -----------
Net cash used in
operating
activities....... (295,000) (1,268,000) (1,563,000) (625,000) (2,871,000)
--------- ----------- ----------- ---------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (69,000) (83,000) (152,000) (26,000) (160,000)
Purchase of
investments.......... -- (7,367,000) (7,367,000) (7,367,000) --
Sale of investments... -- 5,072,000 5,072,000 3,865,000 1,687,000
--------- ----------- ----------- ---------- -----------
Net cash provided
by (used in)
investing
activities....... (69,000) (2,378,000) (2,447,000) (3,528,000) 1,527,000
--------- ----------- ----------- ---------- -----------
Cash flows from
financing activities:
Proceeds from
convertible
promissory notes
payable.............. 525,000 310,000 835,000 310,000 --
Proceeds from issuance
of Convertible
Preferred Stock...... -- 4,025,000 4,025,000 4,025,000 --
Proceeds from issuance
of Common Stock...... 1,000 -- 1,000 -- 6,000
Proceeds from
equipment lease
line................. -- 127,000 127,000 -- 111,000
Proceeds from bank
line of credit....... -- -- -- -- 492,000
Proceeds from
promissory notes..... -- -- -- -- 90,000
Repayment of
promissory notes..... -- -- -- -- (90,000)
--------- ----------- ----------- ---------- -----------
Net cash provided
by financing
activities....... 526,000 4,462,000 4,988,000 4,335,000 609,000
--------- ----------- ----------- ---------- -----------
Net increase in cash
and cash equivalents.. 162,000 816,000 978,000 182,000 (735,000)
Cash and cash
equivalents at
beginning of period... -- 162,000 -- 162,000 978,000
--------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................ $ 162,000 $ 978,000 $ 978,000 $ 344,000 $ 243,000
========= =========== =========== ========== ===========
Supplemental non-cash
investing and
financing activity:
Conversion of
convertible
promissory notes and
accrued interest into
convertible preferred
stock................ $ -- $ 883,000 $ 883,000 $ 883,000 $ --
========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-217
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Vivant! Corporation (the "Company"), formerly Illuminate Corporation, was
incorporated on August 7, 1997 in Delaware to deliver a web-based Extended
Workforce Management System. The Vivant! Solution will enable organizations to
respond more quickly to changing business requirements and time-to-delivery
demands through faster access to and more cost-effective management of outside
expertise and skills.
Vivant! is focused on Global 2000 organizations that leverage many
Information Technology contractors. The Company's suite of web-based
applications will link together hiring decision-makers with expertise and skill
suppliers, automate the selection and contracting process, and deliver
corporate-wide visibility and management of requirements, rates, service
quality and supplier information.
The Company is in the development stage, devoting substantially all of
its efforts to product development and raising capital financing. Accordingly,
the accompanying financial statements are not indicative of a normal operating
period.
The Company has funded its operating losses since inception through the
issuance of convertible promissory notes payable and the sale of equity
securities. The Company expects to generate revenues beginning in the fourth
fiscal quarter of 1999 through the licensing of its software products. The
Company also expects to continue its research and development activity.
Management's plans for funding continuing research and development efforts
primarily includes the sale of equity securities, software license fees and the
utilization of a credit facility (see Note 4). Operations of the Company beyond
fiscal 1999 are expected to be financed with cash primarily from operations.
The Company's failure to raise sufficient capital or to sell its products would
unfavorably impact the Company's ability to continue as a going concern. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.
Unaudited Interim Results
The accompanying interim financial statements as of September 30, 1999,
and for the nine months ended September 30, 1998 and 1999, are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows as of September 30, 1999 and for the nine months ended September 30, 1998
and 1999. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
Management's estimates and assumptions
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
F-218
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Cash, cash equivalents and short-term investments
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with initial maturity periods of greater than 90 days are classified as short-
term investments. The Company accounts for short-term investments in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." At
December 31, 1998, the Company's short-term investments consisted primarily of
certificates of deposit and commercial paper. The Company has classified its
investments as available-for-sale and carries such investments at fair value,
with unrealized gains and losses reported in stockholders' equity until
disposition.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and short-term
investments. Substantially all the Company's cash, cash equivalents and short-
term investments are held by financial institutions that management believes
are of high credit quality.
Comprehensive income
Effective January 1, 1997, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The difference between net loss and
comprehensive loss for the Company results from unrealized gains on available-
for-sale securities.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization
is computed using the straight-line method over the shorter of the estimated
useful lives of the assets, generally two to five years, or the lease term, if
applicable.
Research and development
Research and development costs include expenses incurred by the Company
to develop and enhance its web-based extended workforce management system.
Research and development costs are expensed as incurred.
Capitalized software development costs
Software development costs are included in research and development and
are expensed as incurred. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost is
then amortized on a straight-line basis over the greater of the estimated
product life, or on the ratio of current revenues to total projected product
revenues. As the Company is in the development stage, technological
feasibility, which the Company has defined as the establishment of a working
model which typically occurs when the beta testing commences, has not been
established. As such, software development costs have not been capitalized as
of December 31, 1998, and still have not been capitalized as of September 30,
1999.
F-219
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of FAS No. 123, "Accounting for Stock-Based
Compensation."
Income taxes
Income taxes are accounted for using an asset and liability approach,
which requires the recognition of taxes payable or refundable for the current
year and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Recent accounting pronouncements
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. As of January 1,
1999, the Company adopted SOP 98-1, which did not have a material impact on its
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 2000 and establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its financial statements.
F-220
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
----------------- -------------
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Property and equipment, net:
Computers and equipment..................... $37,000 $103,000 $228,000
Furniture and fixtures...................... 32,000 49,000 84,000
------- -------- --------
69,000 152,000 312,000
Less: Accumulated depreciation and
amortization............................... (5,000) (31,000) (83,000)
------- -------- --------
$64,000 $121,000 $229,000
======= ======== ========
Accrued liabilities:
Payroll and related expenses................ $ 4,000 $ 12,000 $ 67,000
Interest.................................... 13,000 -- --
Accrued expenses............................ -- -- 67,000
------- -------- --------
$17,000 $ 12,000 $134,000
======= ======== ========
</TABLE>
Note 3--Income Taxes:
No provision for income taxes has been recorded as the Company has
incurred net losses since inception.
The Company was a Subchapter C Corporation from its inception through
December 31, 1997 whereby deferred income taxes were established for the period
ended December 31, 1997. The Company changed its status as a Subchapter S
Corporation from January 1, 1998 through August 6, 1998, whereby the tax
effects of the Company's activities accrued directly to its shareholder.
Effective August 7, 1998 in connection with its issuance of Preferred Stock
(see Note 6), the Company's status terminated as a Subchapter S Corporation to
a Subchapter C Corporation for income tax purposes.
As of December 31, 1998, the Company had deferred tax assets of
approximately $354,000. Deferred tax assets relate primarily to net operating
loss and research and development credit carryforwards. Management believes
that, based on a number of factors, it is more likely than not that the
deferred tax assets will not be utilized, such that a full valuation allowance
has been recorded.
At December 31, 1998, the Company had approximately $350,000 of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2015. Under the Tax Reform
Act of 1986, the amounts of and benefits from net operating loss carryforwards
may be impaired or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
F-221
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 4--Borrowings:
Lines of credit
In October 1998, the Company entered into a Loan and Security Agreement
with a bank which provides for borrowings under (i) a revolving line of credit
up to $500,000 and (ii) an equipment line of credit up to $750,000. The
aggregate outstanding amounts under the revolving line and the equipment line
cannot exceed $750,000, are secured by substantially all of the Company's
assets and accrue interest at the bank's prime rate plus 1% per annum (8.75% as
of December 31, 1998). The revolving line expires on April 22, 2000. The
equipment line expires on November 22, 1999 and provides for the repayment of
any outstanding amounts in equal installments over three years. Purchases under
the equipment line prior to May 23, 1999 will be repaid over three years from
that date, and purchases from May 23, 1999 to November 22, 1999 will also be
repaid over three years, commencing November 22, 1999. At September 30, 1999,
the Company borrowed the maximum amount under the line of credit.
Notes payable
In 1997 and 1998, the Company issued various convertible promissory notes
payable for $525,000 and $310,000, respectively. Certain of the notes were with
related parties (see Note 9). These notes were repayable upon maturity
(generally within one year from date of issuance) and accrued interest at rates
ranging from 8.5% to 9.0% per annum. In August 1998, the principal and accrued
interest were converted into 883,301 shares of Series A Preferred Stock (see
Note 6).
Note 5--Commitments:
Leases
The Company leases office space under a noncancelable operating lease
that expires on December 31, 2000. Rent expense was $77,000 and $14,000 for the
year ended December 31, 1998 and the period from August 7, 1997 (Inception) to
December 31, 1997, respectively. The terms of the lease provide for rental
payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period.
Future minimum lease payments under the noncancelable operating lease at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Operating
December 31, Leases
------------ ---------
<S> <C>
1999............................................................ $150,000
2000............................................................ 198,000
Thereafter...................................................... --
--------
$348,000
========
</TABLE>
F-222
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 6--Convertible Preferred Stock:
In August 1998, the Company issued 4,908,301 shares of Series A
Convertible Preferred Stock ("Preferred Stock") at $1.00 per share.
Convertible Preferred Stock at December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Series Authorized Outstanding Amount
------ ---------- ----------- -----------
<S> <C> <C> <C>
A...................................... 5,100,000 4,908,301 $4,908,000
A-1.................................... 5,100,000 -- --
---------- --------- ----------
10,200,000 4,908,301 $4,908,000
========== ========= ==========
</TABLE>
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Series A and A-1 has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes
together as one class with the Common Stock.
As long as at least 1,500,000 shares of Series A and A-1 Convertible
Preferred Stock remain outstanding, the holders of Series A and A-1 Convertible
Preferred Stock, voting as a separate class, shall be entitled to elect two
directors. The holders of Common Stock, voting as a separate class, shall be
entitled to elect two directors. The holders of Common Stock and the holders of
Preferred Stock, voting as a single class on an as-converted basis, shall be
entitled to elect one director. The Company must obtain approval from a
majority of the holders of Convertible Preferred Stock in order to pay or
declare a dividend on Common Stock or repurchase any shares of Common Stock
other than shares subject to the right of repurchase by the Company, amend or
add a provision to the Company's Articles of Incorporation or Bylaws to
increase or decrease the authorized Preferred or to change the preferences,
rights, privileges or powers of the Preferred, issue shares of any equity
security having any preference superior to or on parity with any Preferred
Stock, or effect a merger, consolidation or sale of assets where the existing
shareholders retain less than 50% of the voting stock of the surviving entity.
Dividends
Holders of Series A and A-1 Convertible Preferred Stock are entitled to
receive noncumulative dividends prior to and in preference to any declaration
of payment of any dividend on Common Stock at the per annum rate of $0.08 per
share, when and if declared by the Board of Directors. No dividends on
Convertible Preferred Stock have been declared by the Board from inception
through December 31, 1998.
Liquidation
In the event of liquidation, dissolution or winding up of the
Corporation, the holders of Series A and A-1 Convertible Preferred Stock are
entitled to receive, prior and in preference to any distribution of any of the
assets of the Company to the holders of Common Stock, an amount of $1.00 per
share for each share of Series A and A-1 plus any declared but unpaid
dividends. Should the Company's legally available assets be
F-223
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
insufficient to satisfy the liquidation preferences, the funds will be
distributed to the holders of Series A and A-1 Convertible Preferred Stock in
proportion to the original issue price of the respective series of Preferred
Stock held by such holders. The remaining assets, if any, shall be distributed
among the holders of Series A and A-1 Convertible Preferred Stock and Common
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion of Series A and Series A-1 Convertible Preferred Stock)
until the holders of Series A and A-1 Convertible Preferred Stock receive an
aggregate of $5.00 per share. Thereafter, any remaining assets of the Company
shall be distributed ratably among the holders of Common Stock.
Conversion
Each share of Series A Convertible Preferred Stock is convertible, at the
option of the holder, according to a conversion ratio, subject to adjustment
for dilution. Each share of Series A and A-1 Convertible Preferred Stock
automatically converts into the number of shares of Common Stock into which
such shares are convertible at the then effective conversion ratio upon: (1)
the closing of a public offering of Common Stock at a per share price of at
least $3.00 per share with gross proceeds of at least $15,000,000, or (2) the
consent of the holders of at least 50% of the shares of Convertible Preferred
Stock.
At December 31, 1998, the Company reserved 4,908,301 shares of Common
Stock for the conversion of Series A Convertible Preferred Stock.
Note 7--Common Stock:
In July 1998, the Company's Board of Directors effected a 3,978.22 for
one stock split of the Company's outstanding shares. Par value remained at
$0.001 per share. All share information included in these financial statements
have been retroactively adjusted to reflect this stock split. After adjusting
for the split, a total of 3,978,220 shares of Common Stock were issued to the
Company's founder in August 1997.
Note 8--Stock Option Plan:
In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the Plan may be either Incentive Stock
Options ("ISO") or Nonqualified Stock Options ("NSO"). Stock Purchase rights
may also be granted under the Plan. Incentive Stock Options may be granted only
to Company employees (including officers and directors who are also employees).
Nonqualified Stock Options may be granted to Company employees and consultants.
The Company has reserved 2,221,178 shares of Common Stock for issuance under
the Plan.
Options under the Plan may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares on the
date of grant as determined by the Board of Directors, provided, however, that
(i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of
the estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall
not be less than 110% of the estimated fair value of the shares on the date of
grant and the term of the option shall be five years from the date of grant,
respectively. Options are exercisable immediately subject to repurchase options
held by the Company which lapse over a maximum period of 5 years at such times
and under such conditions as determined by the Board of Directors. To date,
options granted generally vest over four years.
F-224
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
The following summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Options Outstanding
--------------------
Weighted
Shares Average
Available Number Exercise
for Grant Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1997................. -- -- $ --
Authorized................................. 2,221,178 -- --
Granted.................................... (802,577) 802,577 0.10
Committed for future issuance.............. (47,662) -- --
Exercised.................................. -- (1,150) 0.10
---------- ------- -----
Balance at December 31, 1998................. 1,370,939 801,427 0.10
Granted (unaudited)........................ 223,800 223,800 0.10
Committed for future issuance (unaudited).. (194,450) -- --
Exercised (unaudited)...................... -- 58,210 0.10
Canceled (unaudited)....................... 37,500 (37,500) 0.10
---------- ------- -----
Balance at September 30, 1999 (unaudited).... 990,819 929,517 0.10
========== ======= =====
Options vested at September 30, 1999
(unaudited)................................. 104,482 $0.10
======= =====
</TABLE>
The following table summarizes the information about stock options
outstanding and vested as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable at
at December 31, 1998 December 31, 1998
-------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
-------- ----------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$0.10 801,427 10.0 $0.10 95,288 $ 0.10
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan
been determined based on minimum value at the grant dates for the awards under
a method prescribed by SFAS No. 123, the Company's net loss would not have been
materially different.
The Company calculated the minimum value of each option grant on the date
of grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of four years; risk
free interest rate of 4.56% to 5.47% for the year ended December 31, 1998. The
weighted average fair value of options granted during 1998 was $0.10.
F-225
<PAGE>
VIVANT! CORPORATION
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Note 9--Related Party Transactions:
In September 1997, the Company issued convertible promissory notes
payable to an executive and an external member of the Board of Directors
totaling $400,000 (see Note 4).
In December 1997, the Company agreed to prepay the annual salary of an
executive of the Company totaling approximately $128,000 which was fully
recognized by December 31, 1998.
In March and April 1998, the Company issued additional convertible
promissory notes payable to the same individuals totaling $270,000 (see Note
4). The cumulative debt was converted to Series A Convertible Preferred Stock
in August 1998.
In December 1998, the Company entered into an agreement to prepay the
annual salary of an executive of the Company totaling approximately $100,000
which will be fully recognized by December 31, 1999.
In January 1999, the Company extended a non-interest bearing note payable
to an executive of the Company in the amount of $90,000. Principal payments of
$11,250 shall be made monthly beginning January 31, 1999. The Note was repaid
as of September 30, 1999.
Note 10--Subsequent Events:
In October 1999, the Company launched its web business portal,
vivant.com, for sourcing and managing Information Technology contractors
through an open network of suppliers.
In November 1999, the Company issued an aggregate of 1,804,734 shares of
Series B Convertible Preferred Stock ("Series B") at $3.38 per share, for an
aggregate purchase price of $6,100,000. Series B is convertible into shares of
Common Stock at the rate of one share of Common Stock for each share of Series
B. The terms and conditions for series B are similar to those described in note
6 relating to Series A except that the liquidation amount per share is $3.38
per share and dividend per share of $0.2704 per annum and Series B takes
preference over Series A in a liquidation.
F-226
<PAGE>
Independent Auditors' Report
The Board of Directors
Web Yes, Inc.:
We have audited the accompanying consolidated balance sheets of Web Yes,
Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Web Yes,
Inc. and subsidiary as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-227
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------- (Unaudited)
March 31,
1997 1998 1999
------- -------- -----------
<S> <C> <C> <C>
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
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-228
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months
December 31, Ended March 31,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-229
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Total
-------------- ---------------- Paid-In Accumulated Subscriptions Stockholders'
Shares Amount Shares Amount Capital Deficit Receivable Equity
------- ------ ------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-230
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months
December 31, Ended March 31,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
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 -- --
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-231
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
Web Yes, Inc. (the "Company"), which was incorporated in July 1996,
provides application hosting services. Since inception and through September
1998 the Company operated with no salaried employees. Therefore, recurring
operating expenses such as salaries and benefits are not reflected in the
accompanying financial statements. Financial statements for periods after
September 30, 1998 reflect salaries and fringe benefits.
Web Developers Network, Inc., a wholly owned subsidiary of the Company,
has been inactive since inception.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Web Developers Network, Inc.
All significant intercompany transactions have been eliminated in
consolidation.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(c) Computer Equipment
Computer equipment is recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets (three
to five years). Equipment held under capital leases is stated at the net
present value of minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to operations when incurred.
(d) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, accounts receivable and debt
instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North
America.
The fair market values of cash, accounts receivable and debt instruments
at both December 31, 1997 and 1998 approximate their carrying amounts.
F-232
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
(e) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(f) Revenue Recognition
Revenues pursuant to time and materials contracts are recognized as
services are provided. Revenues from application hosting agreements are
recognized ratably over the terms of the agreements.
(g) Direct Personnel Costs and Other Direct Costs
Direct personnel costs consist of payroll and payroll-related expenses
for personnel dedicated to client assignments. Other direct costs consist of
hardware.
(h) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Net Income (Loss) Per Share
Basic net income (loss) per share was calculated based on weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted earnings per share are the same. As the Company has been in a net loss
position for the years ended December 31, 1997 and 1998, common stock
equivalents of zero and 200,000 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
(j) Reporting Comprehensive Income
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income (loss) be
reported in the consolidated financial statements in the period in which they
are recognized. For each period presented, comprehensive income (loss) under
SFAS 130 was equivalent to the Company's net income (loss) reported in the
accompanying consolidated statements of operations.
(k) Unaudited Interim Financial Information
The consolidated financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 are unaudited; however, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
statements for the interim
F-233
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
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.
(l) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Loans and Advances Payable to Stockholders
The Company has various loans and advances payable to stockholders for
working capital purposes. The loans, which accrue interest at 8%, have no
definitive repayment terms.
(4) Stockholders' Equity
(a) Common Stock
In September 1998, the Company amended its articles of incorporation to
adjust the number of authorized shares of common stock from 20,000 shares to
1,000,000 shares. The Company then issued 621,952 shares of common stock at
$.01 per share to the founders of the Company in order to adjust the equity
ownership to planned percentages. Subsequent to this issuance the founders
began to draw salaries.
During 1998, the Company issued common stock to employees and non-
employees in exchange for services rendered. The Company recorded expense of
$56,550 for the fair value of the stock issued.
(b) Preferred Stock
In September 1998, the Company authorized 200,000 shares of preferred
stock and issued 70,000 shares of preferred stock at $1.00 per share. The
preferred stock is voting and is convertible into one share of common stock
immediately at the option of the holder, and automatically converts into common
stock upon the completion of a qualifying initial public offering. The
preferred stock has a $1 per share liquidation preference.
(5) Capital Leases
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for four years, with
interest rates ranging from 12.9% to 21.6%. The leased equipment secures all
leases.
The following is a schedule by year of future minimum lease payments due
under capital leases, and the net present value of the minimum lease payments
as of December 31, 1998:
<TABLE>
<S> <C>
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
=======
</TABLE>
F-234
<PAGE>
WEB YES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
(6) Significant Customers
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three months
Years ended ended
December 31, March 31,
--------------- ---------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer A............................... 29% 24% 22% 49%
Customer B............................... -- 35 10 22
</TABLE>
(7) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
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................................. $ -- $ --
======= =======
</TABLE>
The Company has recorded a full valuation allowance against its deferred
tax assets since management believes that after considering all the available
objective evidence it is more likely than not that these assets will not be
realized.
(8) Subsequent Event
On June 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding capital stock of the Company in a transaction
accounted for under the purchase method of accounting. The total purchase price
was comprised of 571,135 shares of common stock of Breakaway. Of the shares of
common stock issued to the former Web Yes stockholders, 428,351 are subject to
the Company's right, which lapses incrementally over a four-year period, to
repurchase the shares of the particular stockholder upon the termination of his
employment with Breakaway. The repurchase price shall be either at the share
value at the time of the acquisition if the stockholder terminates employment
or is terminated for cause, or at their fair market value if stockholder's
employment is terminated without cause.
F-235
<PAGE>
Independent Auditors' Report
The Board of Directors
WPL Laboratories, Inc.:
We have audited the accompanying balance sheets of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the related statements of income, stockholders'
equity and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Boston, Massachusetts
June 30, 1999
F-236
<PAGE>
WPL LABORATORIES, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------- March 31,
1997 1998 1999
-------- ---------- -----------
<S> <C> <C> <C>
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
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE>
WPL LABORATORIES, INC.
Statements of Income
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
---------------------- --------------------
1997 1998 1998 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-238
<PAGE>
WPL LABORATORIES, INC.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
-----------------
Additional Total
Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
========= ======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-239
<PAGE>
WPL LABORATORIES, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Years Ended Three Months Ended
December 31, March 31,
------------------- -------------------
1997 1998 1998 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
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 -- -- --
======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-240
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements
December 31, 1997 and 1998
and March 31, 1999 (Unaudited)
(1) The Company
WPL Laboratories, Inc. (the "Company") provides advanced software
development services to businesses. The Company's projects include sales force
automation, distribution, management, personnel management, e-commerce
application development, product analysis and Internet enabling applications.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North
America.
The fair market values of cash and accounts receivable at both December
31, 1997 and 1998 approximate their carrying amounts.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over three years for office and computer equipment and
software and five years for the automobile.
(d) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(e) Stockholders' Equity
On April 1, 1998, the Company amended its articles of incorporation to
change the par value of its common stock from $1.00 to $.01 and adjust the
number of authorized shares. In addition, the Company approved a stock dividend
of 1,248,880 shares. All related share information for all periods presented
has been restated to reflect this amendment.
F-241
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(f) Revenue Recognition
The Company generally recognizes revenue on projects as work is performed
based on hourly billable rates. In addition, a limited number of projects are
performed under fixed-price contracts. Revenue from these contracts is
recognized on the percentage of completion method based on the percentage that
incurred costs to date bear to the most recently estimated total costs.
Anticipated losses on uncompleted contracts, if any, are recognized in full
when determined.
(g) Project Personnel Costs
Project personnel costs consists of payroll and payroll-related expenses
for personnel dedicated to client assignments.
(h) Income Taxes
The Company has elected to be taxed under the provisions of subchapter S
of the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income.
(i) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 ("SFAS" 123"), Accounting for Stock-Based Compensation. As permitted by
SFAS 123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted at fair market
value until they are exercised. Stock options issued to non-employees are
recorded at the fair value of the stock at the date of grant. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations.
(j) Net Income Per Share
The Company adopted the provisions of SFAS No. 128, Earnings Per Share
during 1997. This statement requires the presentation of basic and diluted net
income per share for all periods presented. Under SFAS 128, the Company
presents both basic net income per share and diluted net income per share.
Basic net income per share is calculated based on weighted average common
shares outstanding. Diluted net income per share reflects the per share effect
of dilutive stock options and other dilutive common stock equivalents.
(k) Reporting Comprehensive Income
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 130 ("SFAS 130"), Reporting Comprehensive Income. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. For each
year reported, comprehensive income under SFAS 130 was equivalent to the
Company's net income reported in the accompanying statements of income.
(l) Unaudited Interim Financial Information
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial statements for the interim
periods have been included. Results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected
for the full fiscal year or any future periods.
F-242
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(m) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(3) Related-Party Advance and Accrued Interest
In 1996, the Company received a working capital advance of $20,000, with
no defined terms, from a relative of its major stockholder. The advance has
been accruing interest at 8.3% per year. Interest expense on the advance was
$2,250, and $1,667 for the years ended December 31, 1997 and 1998,
respectively, and $417 and $0 for the three months ended March 31, 1998 and
1999, respectively.
(4) Common Stock
In April 1998, the Company awarded 551,020 shares of common stock to
certain employees for services rendered. Accordingly, the Company recorded
compensation expense of $248,000, which represented the estimated fair value of
the common stock issued. In connection with the award, the Company advanced
$103,300 to the employees to pay certain personal income taxes. These advances
are outstanding as of December 31, 1998.
(5) Employee Benefit Plan
The Company maintains a defined contribution plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers all
full-time employees of the Company. Participants may contribute up to the
greater of 15% of their total compensation or $10,000 to the plan, with the
Company matching on a discretionary basis. For the years ended December 31,
1997 and 1998, the Company did not contribute to the plan.
(6) Significant Customers
The following table summarizes revenues from significant customers
(revenues in excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Years Ended Ended
December 31, March 31,
--------------- ---------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer A............................... 52% 38% 53% 32%
Customer B............................... -- 18 31 --
Customer C............................... -- 15 -- 22
Customer D............................... 25 -- -- --
Customer E............................... -- -- -- 12
Customer F............................... -- -- -- 12
</TABLE>
F-243
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(7) Lease Commitments
The Company has entered into operating leases for its office facility and
equipment that expire through July 2000. Rent expense for the years ended
December 31, 1997 and 1998 was $43,613, and $43,893, respectively. Future
minimum lease payments under the operating leases as of December 31, 1998 are
$119,054 in 1999, $167,064 in 2000, $164,664 in 2001 and $41,166 in 2002.
(8) Subsequent Events
(a) Stock Option Plan
On January 1, 1999, the Company instituted the WPL Laboratories, Inc.
1999 Stock Option Plan (the "Plan") which authorizes the Company to grant
options to purchase common stock, to make awards of restricted common stock,
and to issue certain other equity-related awards to employees and directors of,
and consultants to, the Company. The total number of shares of common stock
which may be issued under the Plan is 200,000 shares. The Plan is administered
by the Board of Directors, which selects the persons to whom stock options and
other awards are granted and determines the number of shares, the exercise or
purchase prices, the vesting terms and the expiration date. Non-qualified stock
options may be granted at exercise prices which are above, equal to, or below
the grant date fair market value of the common stock. The exercise price of
options qualifying as incentive stock options may not be less than the grant
date fair market value of the common stock. Stock options granted under the
Plan are nontransferable, generally become exercisable over a four-year period,
and expire ten years after the date of grant (subject to earlier termination in
the event of the termination of the optionee's employment or other relationship
with the Company). Subsequent to December 31, 1998 and through May 14, 1999,
the Company granted 186,208 options under the Plan to purchase common stock at
$4.00 per share.
(b) Line of Credit
On February 22, 1999, the Company entered into a line of credit agreement
with a commercial bank under which it may borrow up to $750,000 at the bank's
prime rate plus .5%. Borrowings under the line are secured by substantially all
assets of the Company and are subject to certain financial and nonfinancial
covenants which include, among others, maintenance of a ratio of debt to cash
flow, minimum tangible net worth and a ratio of current assets to current
liabilities. The line of credit expires on April 15, 2000. This agreement
terminated upon the purchase of the Company (see note 8d).
(c) Consulting Agreement
On March 17, 1999, the Company signed a consulting agreement with
Plansponsor.com, Inc. ("PlanSponsor"). The agreement calls for the Company to
provide 3,000 hours of services, including work previously performed for
PlanSponsor in exchange for shares of common stock in PlanSponsor. As of
December 31, 1998, the Company had performed $100,875 of services based on the
agreement's contractual rates. This amount is included in other assets on the
accompanying balance sheet and will ultimately be settled by issuance of shares
of PlanSponsor common stock. In May 1999, the Company declared a dividend of
the PlanSponsor stock to the stockholders of the Company.
F-244
<PAGE>
WPL LABORATORIES, INC.
Notes to Financial Statements--(Continued)
(d) Reorganization Agreement
On May 17, 1999, the Company entered into a Reorganization Agreement with
Breakaway Solutions, Inc. ("Breakaway"), a provider of information technology
consulting services. Under the agreement, Breakaway acquired all of the
outstanding stock of the Company in a transaction accounted for under the
purchase method of accounting. The purchase price was comprised of $5 million
in cash, 1,705,175 shares of common stock and the assumption of all outstanding
WPL stock options, which became exercisable for 393,506 shares of the Company's
common stock at an exercise price of $2.38 per share with a four-year vesting
period. The WPL stockholders received one half of their cash consideration at
closing and will receive the remainder incrementally over a four-year period so
long as the stockholder does not voluntarily terminate his employment and is
not terminated for cause. Of the shares of common stock issued to the former
WPL stockholders, approximately fifty-percent are subject to Breakaway's right,
which lapses incrementally over a four-year period, to repurchase the shares of
a particular stockholder at their value at the time of the acquisition upon the
stockholder's resignation or our termination of the stockholder for cause.
F-245
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$250,000,000
[LOGO OF INTERNET CAPITAL GROUP APPEARS HERE]
% Convertible Subordinated Notes due 2004
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by Internet Capital Group in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount (1)
----------
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 239,775
NASD Filing Fee............................................... 30,500
Nasdaq National Market Listing Fee............................ 17,500
Accounting Fees and Expenses.................................. 700,000
Blue Sky Fees and Expenses.................................... 5,000
Legal Fees and Expenses....................................... 200,000
Trustee, Transfer Agent and Registrar Fees and Expenses....... 25,000
Printing and Engraving Expenses............................... 750,000
Miscellaneous Fees and Expenses............................... 32,225
----------
Total....................................................... $2,000,000
==========
</TABLE>
- --------
(1) All amounts are estimates except the SEC filing fee, the NASD filing fee
and the Nasdaq National Market listing fee.
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.
II-1
<PAGE>
Internet Capital Group intends to obtain in conjunction with the
effectiveness of the Registration Statement a policy of directors' and
officers' liability insurance that insures the Company's directors and officers
against the cost of defense, settlement or payment of a judgment under certain
circumstances.
The Underwriting Agreements filed as Exhibit 1.1, 1.2 and 1.3 to this
Registration Statement provide for indemnification by the underwriters of
Internet Capital Group and its officers and directors for certain liabilities
arising under the Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
Since its inception in March 1996, Internet Capital Group (or its
predecessor, Internet Capital Group, L.L.C.) has issued and sold unregistered
securities in the transactions described below.
Shares of Common Stock
(1) In April 1996, Internet Capital Group, L.L.C. issued 525,000 units of
Membership Interests to employees, directors, and consultants in a subscription
offering for an aggregate purchase price of $525,000.
(2) On May 9, 1996, Internet Capital Group, L.L.C. issued 6,139,074 units
of Membership Interests to Safeguard Scientifics (Delaware), Inc. for an
aggregate purchase price of $6,139,074 consisting of the assignment of 182,500
shares of Common Stock, 127,000 shares of Series C Preferred Stock, 855,400
shares of Series D Preferred Stock and 134,375 shares of Series F Preferred
Stock of Sky Alland Marketing, Inc. and related rights and obligations in
respect thereof.
(3) In May 1996, Internet Capital Group, L.L.C. issued 2,925,000 units of
Membership Interests to employees, consultants, and other purchasers in a
subscription offering for an aggregate purchase price of $2,925,000.
(4) In June 1996, Internet Capital Group, L.L.C. issued 2,000,000 units
of Membership Interests to employees, consultants, and other purchasers in a
subscription offering for an aggregate purchase price of $2,000,000
(5) In July 1996, Internet Capital Group, L.L.C. issued an aggregate of
800,000 units of Membership Interests to BancBoston Investments, Inc., The HRG
Corporation, and Mr. Robert S. Adelson in a subscription offering for an
aggregate purchase price of $800,000.
(6) In August 1996, Internet Capital Group, L.L.C. issued 168,750 units
of Membership Interests to S.M.M Internet, M. Reid & Company and Mr. Robert E.
Keith, a director of Internet Capital Group, and Mrs. Margot W. Keith in a
subscription offering for an aggregate purchase price of $168,750.
(7) In September 1996, Internet Capital Group, L.L.C issued 175,000 units
of Membership Interests to Mr. Herbert and Mrs. Karen Lotman, F.B.A. Trust
F/B/O Shelly Lotman Fisher, and F.E.A. Trust F/B/O Jeffrey Lotman in a
subscription offering for an aggregate purchase price of $175,000.
(8) On September 30 1996, Internet Capital Group, L.L.C. issued an
aggregate of 4,968,935 units of Membership Profit Interests to employees,
directors and consultants pursuant to the Membership Profit Interest Plan in
consideration for services rendered to Internet Capital Group, L.L.C.
(9) In October 1996, Internet Capital Group, L.L.C. issued 25,000 units
of Membership Interests to Mrs. Jean C. Tempel in a subscription offering for a
purchase price of $25,000.
II-2
<PAGE>
(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.
II-3
<PAGE>
(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.
II-4
<PAGE>
(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.
(37) On August 5, 1999, Internet Capital Group issued 3,750,000 shares of
Common Stock to International Business Machines Corporation in a private
placement concurrent with Internet Capital Group's initial public offering for
a purchase price of $45,000,000.
(38) In December 1999, each of the above described shares of Common Stock
of Internet Capital Group was converted into two shares of common stock due to
a stock split by way of a 100% stock dividend.
Warrants to Purchase Common Stock
On May 10, 1999, in connection with Internet Capital Group's issuance of
the convertible subordinated notes, Internet Capital Group granted warrants,
exercisable at the initial public offering price, to the holders of the
convertible notes to purchase a number shares of common stock of Internet
Capital Group equal to $18 million divided by the initial public offering
price.
On April 30, 1999, in connection with the Secured Revolving Credit
Facility dated April 30, 1999, between Internet Capital Group, Inc. and certain
lenders and guarantors, Internet Capital Group granted to the lenders warrants
to purchase an aggregate of 400,000 shares of common stock of Internet Capital
Group for a purchase price of $5 per share.
Notes Convertible to Common Stock
On May 10, 1999, Internet Capital Group issued convertible subordinated
notes in an aggregate principal amount of $90 million. Upon consummation of its
initial public offering on August 5, 1999, the convertible notes automatically
converted into shares of common stock of Internet Capital Group at the initial
public offering price.
Options to Purchase Common Stock
Internet Capital Group from time to time has granted stock options to
employees, directors, advisory board members and certain employees of our
partner companies. The following table sets forth certain information regarding
such grants:
<TABLE>
<CAPTION>
No. of Weighted Averge
Shares Exercise Prices
---------- ---------------
<S> <C> <C>
1996............................................ -- N/A
1997............................................ 188,000 $ 0.50
1998............................................ 12,144,000 $ 1.00
Through November 15, 1999....................... 28,654,500 $ 5.74
</TABLE>
The sale and issuance of securities in the transactions described above
were exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act 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.
II-5
<PAGE>
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
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1* Form of U.S. Purchase Agreement for U.S. Offering of Common Stock
1.2* Form of International Purchase Agreement for International Offering
of Common Stock
1.3* Form of Purchase Agreement for Convertible Note Offering
2.1 Agreement of Merger, dated February 2, 1999, between Internet
Capital Group, L.L.C., and Internet Capital Group, Inc.
(incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-1 filed by the Registrant on May 11, 1999
(Registration No. 333-78193) ("IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Registrant on August 4, 1999 (Registration No. 000-26989) ("8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
2.2 to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Registrant on August 2, 1999
(Registration No. 333-78193) ("IPO Amendment No. 3"))
4.2* Form of Indenture between Internet Capital Group, Inc. and the
Trustee for the Convertible Notes
4.3* Form of Internet Capital Group's Convertible Note due December ,
2004 (included in Exhibit 4.2)
5.1* Opinion of Dechert Price & Rhoads as to the legality of the shares
of Common Stock being registered
5.2* Opinion of Dechert Price & Rhoads as to the legality of the
convertible notes being registered
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as
Amended and Restated May 1, 1999 (incorporated by reference to
Exhibit 10.1.2 to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated
by reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO
Registration Statement filed by the Registrant on July 16, 1999
(Registration No. 333-79193) ("IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
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 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain securities holders named therein
(incorporated by reference to Exhibit 10.6 to the IPO Registration
Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the Convertible Note
(incorporated by reference to Exhibit 10.21 to the IPO Registration
Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Registrant on
June 22, 1999 (Registration No. 333-78193) ("IPO Amendment No. 1"))
10.11* Office Lease dated , 1999 between and IBIS (505) Limited for
premises located in London, England
10.12 Office Lease dated September , 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to IPO
Amendment No. 1)
10.14 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. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.16.1 Amendment to Benchmarking Partners Option Agreement dated July 19,
1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forster and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with exercise of
Internet Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to IPO Amendment No. 1)
10.21 Form of Restrictive Covenant Agreement executed in connection with
exercise of Internet Capital Group's stock options (incorporated by
reference to Exhibit 10.34 to IPO Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to Internet Capital Group's
Current Report on Form 8-K filed November 22, 1999 (File No. 0-
26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between
Internet Capital Group, Inc. and Safeguard Securities, Inc.
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Internet Capital Group
23.1 Consent of KPMG LLP regarding Internet Capital Group, Inc.
23.2 Consent of Dechert Price & Rhoads, included in Exhibit 5.1 and
Exhibit 5.2
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 CommerceQuest, 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 Arthur Andersen 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, Inc.
23.12 Consent of PricewaterhouseCoopers LLP regarding Vivant! Corporation
23.13 Consent of KPMG LLP regarding VitalTone Inc.
23.14 Consent of PricewaterhouseCoopers LLP regarding Commerx, Inc.
23.15 Consent of KPMG LLP regarding eMerge Interactive, Inc.
23.16 Consent of Deloitte & Touche LLP regarding Onvia.com, Inc.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
23.17 Consent of KPMG LLP regarding Purchasing Group, Inc. and Integrated
Sourcing, LLC.
23.18 Consent of PricewaterhouseCoopers LLP regarding traffic.com, Inc.
24.1 Power of Attorney, included on the signature page hereof
25.1 Statement on Form T-1 of Eligibility of Trustee
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
None.
Schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Wayne,
County of Chester, Commonwealth of Pennsylvania on the 22nd day of November,
1999.
Internet Capital Group, Inc.
Walter W. Buckley, III
By: _________________________________
Walter W. Buckley, III
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Walter W. Buckley, III, David D. Gathman
and Henry N. Nassau and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and sign any registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing pursuant to Rule 462
promulgated under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Walter W. Buckley, III President, Chief Executive November 22, 1999
______________________________________ Officer and Director
Walter W. Buckley, III (principal executive
officer)
David D. Gathman Chief Financial Officer November 22, 1999
______________________________________ and Treasurer (principal
David D. Gathman financial and accounting
officer)
Julian A. Brodsky Director November 22, 1999
______________________________________
Julian A. Brodsky
E. Michael Forgash Director November 22, 1999
______________________________________
</TABLE> E. Michael Forgash
II-10
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Kenneth A. Fox Director November 22, 2299
______________________________________
Kenneth A. Fox
Dr. Thomas P. Gerrity Director November 22, 2299
______________________________________
Dr. Thomas P. Gerrity
Robert E. Keith, Jr. Director November 22, 2299
______________________________________
Robert E. Keith, Jr.
Peter A. Solvik Director November 22, 2299
______________________________________
Peter A. Solvik
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1* Form of U.S. Purchase Agreement for U.S. Offering of Common Stock
1.2* Form of International Purchase Agreement for International Offering of
Common Stock
1.3* Form of Purchase Agreement for Convertible Note Offering
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and Internet Capital Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form S-1
filed by the Registrant on May 11, 1999 (Registration No. 333-78193)
("IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Registrant on August 4, 1999 (Registration No. 000-26989) ("8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 2.2
to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Registrant on August 2, 1999
(Registration No. 333-78193) ("IPO Amendment No. 3"))
4.2* Form of Indenture between Internet Capital Group, Inc. and the Trustee
for the Convertible Notes
4.3* Form of Internet Capital Group's Convertible Note due December , 2004
(included in Exhibit 4.2)
5.1* Opinion of Dechert Price & Rhoads as to the legality of the shares of
Common Stock being registered
5.2* Opinion of Dechert Price & Rhoads as to the legality of the
convertible notes being registered
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1, 1999 (incorporated by reference to Exhibit 10.1.2
to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated by
reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO Registration
Statement filed by the Registrant on July 16, 1999 (Registration No.
333-79193) ("IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
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 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain securities holders named therein
(incorporated by reference to Exhibit 10.6 to the IPO Registration
Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the Convertible Note
(incorporated by reference to Exhibit 10.21 to the IPO Registration
Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q dated November 15,
1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Registrant on
June 22, 1999 (Registration No. 333-78193) ("IPO Amendment No. 1"))
10.11* Office Lease dated , 1999 between and IBIS (505) Limited for
premises located in London, England
10.12 Office Lease dated September , 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group, Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to IPO
Amendment No. 1)
10.14 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. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
10.16.1 Amendment to Benchmarking Partners Option Agreement dated July 19,
1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forster and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with exercise of Internet
Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to IPO Amendment No. 1)
10.21 Form of Restrictive Covenant Agreement executed in connection with
exercise of Internet Capital Group's stock options (incorporated by
reference to Exhibit 10.34 to IPO Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to Internet Capital Group's
Current Report on Form 8-K filed November 22, 1999 (File No. 0-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between Internet
Capital Group, Inc. and Safeguard Securities, Inc.
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Internet Capital Group
23.1 Consent of KPMG LLP regarding Internet Capital Group, Inc.
23.2 Consent of Dechert Price & Rhoads, included in Exhibit 5.1 and Exhibit
5.2
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 CommerceQuest, 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 Arthur Andersen 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, Inc.
23.12 Consent of PricewaterhouseCoopers LLP regarding Vivant! Corporation
23.13 Consent of KPMG LLP regarding Vital Tone Inc.
23.14 Consent of PricewaterhouseCoopers LLP regarding Commerx, Inc.
23.15 Consent of KPMG LLP regarding eMerge Interactive, Inc.
23.16 Consent of Deloitte & Touche LLP regarding Onvia.com, Inc.
23.17 Consent of KPMG LLP regarding Purchasing Group, Inc. and Integrated
Sourcing, LLC
23.18 Consent of PricewaterhouseCoopers LLP regarding traffic.com, Inc.
24.1 Power of Attorney, included on the signature page hereof
25.1 Statement on Form T-1 of Eligibility of Trustee
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
II-14
<PAGE>
Exhibit 10.12
AGREEMENT OF LEASE
Between
45 MILK STREET, L.P.
as Landlord
and
INTERNET CAPITAL GROUP, INC.,
as Tenant
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. REFERENCE DATA................................................... 1
(A) Subjects Referred To............................................... 1
(B) Exhibits........................................................... 2
SECTION 2. THE PREMISES..................................................... 3
(A) Leased Premises.................................................... 3
(B) Common Areas....................................................... 3
SECTION 3. TERM............................................................. 3
(A) Initial Term....................................................... 3
(B) Commencement Date.................................................. 3
SECTION 4. CONDITION; PREPARATION OF LEASED PREMISES FOR INITIAL
OCCUPANCY........................................................ 3
SECTION 5. ANNUAL RENT...................................................... 4
(A) Annual Rent........................................................ 4
(B) Security Deposit/Letter of Credit.................................. 4
SECTION 6. REIMBURSEMENT FOR INCREASES IN REAL ESTATE TAXES................. 5
(A) Definitions........................................................ 5
(B) Reimbursement of Taxes............................................. 5
SECTION 7. REIMBURSEMENT OF INCREASES IN OPERATING COSTS.................... 7
(A) Definitions........................................................ 7
(B) Reimbursement of Operating Costs................................... 12
(C) Audit Right........................................................ 12
SECTION 8. USE OF LEASED PREMISES........................................... 13
SECTION 9. LANDLORD'S COVENANTS............................................. 13
SECTION 10. TENANT'S COVENANTS............................................... 15
SECTION 11. INDEMNITY AND INSURANCE.......................................... 19
SECTION 12. WAIVER OF SUBROGATION............................................ 21
SECTION 13. ASSIGNMENT AND SUBLETTING........................................ 22
SECTION 14. ALTERATIONS, INSTALLATIONS AND WORK DONE TO LEASED
PREMISES......................................................... 23
SECTION 15. CASUALTY AND TAKING.............................................. 25
(A) Destruction of or Damage to Entire Building or Property............ 25
(B) Destruction of or Damage to Premises Leased to Tenant.............. 26
(C) Partial Taking and Temporary Taking of Leased Premises............. 26
(D) Condemnation Awards................................................ 26
(E) Restoration of Leased Premises..................................... 26
SECTION 16. EVENTS OF DEFAULT................................................ 27
-i-
<PAGE>
SECTION 17. LANDLORD'S REMEDIES.............................................. 28
SECTION 18. CUMULATIVE REMEDIES.............................................. 29
SECTION 19. INTEREST DUE ON TENANT DEFAULTS.................................. 30
SECTION 20. HOLDOVER......................................................... 30
SECTION 21. SUBORDINATION OF LEASE........................................... 30
SECTION 22. COVENANT OF QUIET ENJOYMENT; LANDLORD'S RIGHT TO MAKE
ALTERATIONS...................................................... 32
SECTION 23. ESTOPPEL CERTIFICATE............................................. 32
SECTION 24. NOTICE OF LEASE.................................................. 32
SECTION 25. NOTICES AND APPROVALS............................................ 33
SECTION 26. NON-WAIVER PROVISION............................................. 33
SECTION 27. INABILITY TO PERFORM - EXCULPATORY CLAUSE........................ 33
SECTION 28. LIMITATION OF LANDLORD'S LIABILITY............................... 33
SECTION 29. NOTICE TO MORTGAGEE; OPPORTUNITY TO CURE......................... 34
SECTION 30. ASSIGNMENT OF RENTS.............................................. 34
SECTION 31. NO BROKERAGE..................................................... 35
SECTION 32. SELF-HELP........................................................ 35
SECTION 33. RELIEF LIMITED................................................... 35
SECTION 34. INTERRUPTIONS; LANDLORD'S ACCESS................................. 36
SECTION 35. ENTIRE AGREEMENT................................................. 36
SECTION 36. PARTIAL INVALIDITY............................................... 36
SECTION 37. EXECUTION........................................................ 36
SECTION 38. LANDLORD'S REPRESENTATIONS AND WARRANTIES........................ 37
EXHIBIT A - PLAN OF LEASED PREMISES.......................................... 38
-----------------------
EXHIBIT B - RULES AND REGULATIONS............................................ 39
---------------------
EXHIBIT C - INTENTIONALLY DELETED............................................ 43
---------------------
-ii-
<PAGE>
LEASE
-----
Section 1. Reference Data.
--------------
(A) Subjects Referred To. Each reference in this Lease to any of the
--------------------
following subjects shall be construed to incorporate the data stated for that
subject in this Section 1(A).
Date of this Lease: September , 1999
Landlord: 45 Milk Street, LP.
Original Address of Landlord: c/o LaSalle Investment Management
as agent for 45 Milk Street L.P.
101 East 52nd Street, 19th Floor
New York, New York 10022
Tenant: Internet Capital Group, Inc., a
Massachusetts corporation
Original Address of Tenant: 435 Devon Park Drive
800 Safeguard Building
Wayne, Pennsylvania 19087
Attn: Henry Nassau, Esq.
Building: 45 Milk Street
Boston, Massachusetts
Property: The Building and the land parcel(s) on
which it is located (including adjacent
sidewalks and plazas).
Total Rentable Area: The aggregate number of rentable square
feet in the Building, as the same may be
reduced or enlarged from time to time;
as of the date of this Lease, the Total
Rentable Area is 67,890.
Leased Premises: 6,194 rentable square feet of space,
consisting of a portion of the seventh
(7th) floor of the Building, as
approximately shown on Exhibit A.
Term: Three (3) Lease Years beginning on the
Commencement Date.
Commencement Date: The date upon which Landlord
substantially completes Landlord's Work
(as defined in Section 4).
<PAGE>
Annual Rent: $244,633.00 per year/$20,388.58 per
month
Security Deposit: $20,388.58.
Tenant's Proportionate Share: The ratio that the rentable square
footage of the Leased Premises bears to
the Total Rentable Area; as of the date
of this Lease, Tenant's Proportionate
Share is 9.12%.
Base Taxes: The Taxes for the fiscal tax year ending
June 30, 2000, as they may be reduced by
the amount of any abatement.
Tax Excess: Tenant's Proportionate Share of the
amount by which Taxes for any Tax Year
exceed Base Taxes (See Section 6(B)).
Base Operating Costs: The Operating Costs for the calendar
year 1999.
Operating Cost Excess: Tenant's Proportionate Share of the
amount by which Operating Costs for any
calendar year exceed Base Operating
Costs (See Section 7(B)).
Lease Year: The first Lease Year shall mean the
period of twelve (12) consecutive full
calendar months (plus the initial
partial calendar month, if any)
immediately following the Commencement
Date; thereafter Lease Year shall mean
each succeeding period of twelve (12)
consecutive full calendar months
following the expiration of the first
Lease Year.
Permitted Uses: General office use and uses ancillary
thereto.
Normal Business Hours: Monday through Friday, 8:00 a.m. to
6:00 p.m., and Saturday, 8:00 am. to
1:00 p.m.
Comprehensive General
Liability Insurance Limits: $3,000,000 combined single limit
Landlord's Management Agent: Lincoln Property Company
(B) Exhibits.
--------
The Exhibits listed below in this section are incorporated in this
Lease by reference and are to be construed as a part of this Lease.
EXHIBIT A Plan showing the Leased Premises
-2-
<PAGE>
EXHIBIT B Rules and Regulations
EXHIBIT C Intentionally Deleted
EXHIBIT D Sample Clerk's Certificate
Section 2. The Premises.
------------
(A) Leased Premises. The Landlord hereby lets to the Tenant, and the
---------------
Tenant leases from the Landlord, upon and subject to the terms and provisions of
this Lease, the Leased Premises.
(B) Common Areas. The Leased Premises are leased with the right of
------------
Tenant to use for its customers, employees and visitors, in common with others
entitled thereto, such common areas and facilities in or appurtenant to the
Building (including, without limitation, the elevators, ground floor lobby, and
the restrooms and other common areas on the floor on which the Leased Premises
are located) and such other areas as Landlord may from time to time designate
and provide as common areas.
Section 3. Term.
----
(A) Initial Term. The Leased Premises are leased for a term (the
------------
"initial term" or "Term") beginning on the Commencement Date and continuing for
the Term.
(B) Commencement Date. The Commencement Date shall be the date upon
-----------------
which Landlord substantially completes Landlord's Work as defined in Section 4.
Section 4. Condition; Preparation of Leased Premises for Initial Occupancy.
---------------------------------------------------------------
The Leased Premises are leased in an "as is" condition and, except
as otherwise set forth in this Lease, Landlord has made no representations
regarding the same, it being agreed that Tenant has had opportunity to examine
the Leased Premises that, except as otherwise set forth in this Lease, Landlord
has made no representations or warranties of any kind with respect to such
condition, and that Landlord shall have no obligation to do any work on or make
any improvements to or with respect to the preparation of the Leased Premises,
or the condition thereof, for Tenant's initial occupancy except that Landlord
shall (i) paint the atrium through the seventh floor the currently existing
color (the "Atrium Painting"), (ii) install J&J Industries pattern JJ0311 carpet
C-1, U.N.O. with vinyl base Johnsonite 09 clay, and (iii) paint the walls with
Benjamin Moore #974 accent color #976 ("Landlord's Work"). Tenant hereby accepts
the Leased Premises in its condition existing as of the date this Lease is
executed by Landlord and Tenant, subject to all applicable federal, state and
local laws, ordinances and regulations, and Tenant acknowledges that it has
satisfied itself by its own independent investigation that the Leased Premises
are suitable for its intended use, and that neither Landlord nor Landlord's
agents has made any representation or warranty as to the present or future
suitability of the Premises, or Landlord's Property for the conduct of Tenant's
business. Without limiting the foregoing, Landlord makes no representation or
warranty as to the compliance of the Leased Premises with applicable laws,
including without limitation, the Americans With Disabilities Act of 1990, as
amended ("ADA"). Tenant shall, at Tenant's sole expense, comply with all
-3-
<PAGE>
requirements of the ADA that relate to Tenant's use and occupancy of the
Premises or changes or alterations thereto by Tenant, and all federal, state and
local laws and regulations governing occupational safety and health.
Notwithstanding the foregoing, Landlord shall deliver the Leased
Premises to Tenant in broom-clean condition, with all HVAC, lavatories,
mechanical, electrical and plumbing systems in good working order.
For the purposes hereof, "substantially complete" shall mean that
Landlord's Work is complete except only for minor touch-up or finish work which
will not interfere with the installation and set-up of Tenant's furniture and
equipment, and the Atrium Painting shall not be included in Landlord's Work for
the purpose of determining whether Landlord's Work is substantially complete,
Tenant agreeing that the Atrium Painting may be commenced and completed by
Landlord after the Commencement Date.
Section 5. Annual Rent.
-----------
(A) Annual Rent. Tenant covenants and agrees to pay, commencing on
-----------
the Commencement Date and continuing thereafter during the Term, Annual Rent to
Landlord at the Original Address of Landlord or at such other place or to such
other person or entity as Landlord may by notice in writing to Tenant from time
to time direct, without notice, demand, setoff or deduction, except as otherwise
specifically set forth in this Lease, for the Leased Premises during the term of
this Lease at the Annual Rent Rate, payable in equal monthly installments, in
advance, on the first day of each calendar month included in the Term; and for
any portion of a calendar month at the beginning or end of the Term, a prorated
payment in advance for such portion. The Annual Rent for the first complete
calendar month following the Commencement Date shall be paid upon the execution
hereof by Tenant.
(B) Security Deposit. Upon the execution of this Lease, Tenant shall
----------------
deposit with Landlord the Security Deposit. The Security Deposit shall be held
by Landlord as security for the faithful performance by Tenant of all the terms
of this Lease to be observed and performed by the Tenant. The Security Deposit
shall not be mortgaged, assigned, transferred or encumbered by Tenant and any
such act on the part of Tenant shall be without force and effect and shall not
be binding upon Landlord.
If the Annual Rent, or additional rent or any other charges payable
hereunder shall be overdue and unpaid or should Landlord make payments on behalf
of the Tenant, or Tenant shall fail to perform the terms of this Lease after the
giving of any required notice and the expiration of any applicable cure period,
then Landlord may, at its option and without prejudice to any other remedy which
Landlord may have on account thereof, appropriate and apply the entire Security
Deposit or so much thereof as may be necessary to compensate Landlord toward the
payment of Annual Rent or other sums or loss or damage sustained by Landlord due
to such breach on the part of Tenant; and Tenant shall within five (5) days
after demand restore the Security Deposit to the original sum deposited. Should
Tenant comply with all of such terms and promptly pay all of the rentals as they
fall due and all other sums payable by Tenant to Landlord, the Security Deposit
shall be returned to Tenant within thirty (30) days after the end of the Term.
-4-
<PAGE>
The Landlord shall have no obligation to pay interest on the
Security Deposit and shall have the right to commingle the same with the
Landlord's other funds. If the Landlord conveys the Landlord's interest under
this Lease, the Security Deposit, or any other part thereof not previously
applied, shall be turned over by the Landlord to, or the obligation therefor
assumed by, the Landlord's grantee, and, if so turned over or assumed, the
Tenant agrees to look solely to such grantee for the proper application and
return thereof in accordance with the terms of this Section 5(B). Any mortgagee
or Superior Lessor of the Property shall not be responsible to the Tenant for
the return or application of any such Security Deposit, whether or not it
succeeds to the position of the Landlord hereunder, unless such Security Deposit
shall have been received in hand by such mortgagee or Superior Lessor.
In the event of bankruptcy or other creditor-debtor proceedings
against Tenant, all securities shall be deemed to be applied first to the
payment of rent and other charges due Landlord for all periods prior to the
filing of such proceedings.
Section 6. Reimbursement for Increases in Real Estate Taxes.
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(A) Definitions. For the purpose of this Lease, the following
definitions shall apply:
(1) The term "Tax Year" shall mean each twelve (12) month period
commencing on July 1 during each year of the term hereof.
(2) The term "Taxes" shall mean all ad valorem real estate
taxes, assessments, betterments and other charges and impositions
(including, but not limited to, fire protection service fees and similar
charges) levied, assessed or imposed at any time during the term by any
governmental authority upon or against the Building and land on which the
Building is situated (hereinafter collectively referred to as the
"Property"), or taxes in lieu thereof, and additional types of taxes to
supplement real estate taxes due to legal limits imposed thereon. If, at
any time during the term of this Lease, any tax or excise on rents or other
taxes, however described, are levied or assessed against Landlord with
respect to the rent reserved hereunder, either wholly or partially in
substitution for, or in addition to, real estate taxes assessed or levied
on the Property, such tax or excise on rents shall be included in Taxes;
however, Taxes shall not include franchise, estate, inheritance,
succession, capital levy, transfer, income or excess profits taxes assessed
on Landlord. Taxes shall include any estimated payment, whether voluntary
or required, made by Landlord on account of a fiscal tax period for which
the actual and final amount of taxes for such period has not been
determined by the governmental authority as of the date of any such
estimated payment, as well as the reasonable costs (including, without
limitation, the fees of attorneys, consultants, appraisers and the like) of
any negotiation contest, appeal or the like in an effort to reduce or abate
Taxes, provided, however, the amount of such costs which may be included in
Taxes shall not exceed the actual reduction or abatement in Taxes realized
in any given Tax Year.
(B) Reimbursement of Taxes.
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(1) If Taxes assessed against the Property (or estimated to be due
by governmental authority, or in the absence of a governmental estimate, by
the Landlord in its reasonable judgment) for any Tax Year shall exceed the
Base Taxes, whether due to increase in rate or reassessment of the
Property, or both, Tenant shall reimburse Landlord therefor, as additional
rent, in an amount equal to Tenant's Proportionate Share of any such excess
(the "Tax Excess"), payment of which shall be made to Landlord within ten
(10) days after billing by Landlord, which billing shall set forth the
manner of computation of any Tax Excess due from Tenant and shall include a
copy of the relevant tax bill. With respect to any Tax Year for which the
Tax Excess included an estimated or voluntary payment (the "Estimated Tax
Excess"), at such time as the actual taxes are determined the recomputed
Tax Excess shall be recomputed; if the recomputed Tax Excess is greater
than the Estimated Tax Excess, Tenant shall pay the difference to Landlord
(notice and time of payment to be as provided in the preceding sentence),
and if the recomputed Tax Excess is less than the Estimated Tax Excess,
Landlord shall credit the difference against the next installment of rental
or other charges due to Landlord hereunder (or if such adjustment is at or
after the end of the Term and no other payments are due to Landlord
hereunder, Landlord shall pay Tenant such difference promptly).
(2) At Landlord's election, Tenant shall remit to Landlord, on the
first day of each calendar month, estimated payments on account of Tax
Excess, such monthly amounts to be sufficient to provide Landlord by the
time real estate tax payments are due or are to be made by Landlord (in the
event of voluntary tax payments) a sum equal to the Tax Excess, as
reasonably estimated by Landlord from time to time on the basis of the most
recent tax data available. If the total of such monthly remittances for any
Tax Year is greater than the Tax Excess for such Tax Year, Landlord shall
credit the difference against the next installment of rental or other
charges due to Landlord hereunder; if the total of such remittances is less
than the Tax Excess for such Tax Year, Tenant shall pay the difference to
Landlord at the time any Tax Excess becomes due and payable (or is to be
paid, in the case of a voluntary payment) as hereinabove provided.
(3) If, after Tenant shall have made any reimbursement to Landlord
pursuant to this Section 6, Landlord shall receive a refund of any portion
of Taxes paid by Tenant with respect to any Tax Year during the term hereof
as a result of an abatement of such Taxes by legal proceedings, settlement
or otherwise (without either party having any obligation to undertake any
such proceedings), Landlord shall pay or credit to Tenant the Tenant's
Proportionate Share of the refund (less the proportional, pro rata
expenses, including attorneys' fees and appraisers' fees, incurred in
connection with obtaining any such refund), as relates to Taxes paid by
Tenant to Landlord with respect to any Tax Year for which such refund is
obtained. If a refund is obtained with respect to the Base Taxes Tenant
shall make payment to Landlord within twenty (20) days of written notice to
Tenant of the amount of any adjustment of the Tax Excess for any tax year
due to such reduction in the Base Taxes.
(4) In the event this Lease shall commence, or shall end (by reason
of expiration of the Term or earlier termination pursuant to the provisions
hereof), on any date other than the first or last day of the Tax Year, or
should the Tax Year or period of assessment of real estate taxes be changed
or be more or less than one (1) year, as the
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case may be, then the amount of Tax Excess which may be payable by Tenant
as provided in this Section 6 shall be appropriately apportioned and
adjusted.
Section 7. Reimbursement of Increases in Operating Costs.
---------------------------------------------
(A) Definitions. For the purpose of this Lease, the following
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definitions shall apply:
(1) The term "Operating Costs" shall include all actual and
reasonable costs or expenses incurred for the operation, management,
cleaning, maintenance, repair and upkeep of the Property, including,
without limitation:
(a) all salaries, wages, fringe benefits, payroll taxes,
workmen's compensation insurance premiums related
thereto, and uniforms and working clothes and the
cleaning thereof, with respect to any employees of
Landlord engaged in security, management, operation and
maintenance of the Property [but not above the level of
building manager], reduced, however, by the hourly cost
to Landlord for labor performed during business hours
by Landlord's employees with respect to services billed
directly to any tenant of the Building; provided
further that if any such expenses are incurred by
Landlord for the benefit of any property other than the
Property, such expenses shall be appropriately
prorated;
(b) all utilities, utility taxes and other costs related to
provision of: (i) heat (including oil, electric, steam
and/or gas) and air-conditioning to the Common Areas
and (ii) the base building heating and cooling medium
to the heat pumps that serve premises leased by tenants
of the Building; water (including sewer charges)
provided to the Common Areas and to tenants of the
Building; electricity provided to the Common Areas
(provided, however, that all costs of electricity
furnished directly to tenants of the Building
(including, without limitation, electricity consumed by
the heat pumps installed in such tenants' premises)
shall be excluded from Operating Costs); other
utilities provided to the Common Areas (exclusive of
the amount of reimbursement to Landlord for any of same
received as a result of direct billing to any tenant of
the Building) and costs and expenses incurred in the
rental of music program services and loudspeaker
systems, including furnishing electricity thereof;
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(c) all costs, including materials, tools, supplies and
equipment costs, for providing cleaning and janitorial
services to the Building (including window cleaning of the
Building);
(d) all costs of any reasonable insurance (including, without
limitation, fire, casualty, liability, rent loss and
worker's compensation insurance) carried by Landlord
relating to the Property;
(e) all costs of maintaining and repairing the Property
(including, without limitation, removal of snow, ice, trash
and debris, landscaping, security, pest control, operation
and repair of heating and air-conditioning equipment,
elevators and any other common Building equipment or
systems, and expenses of repair or replacement of paving,
curbs, walkways, landscaping, pipes, ducts, conduits and
similar items), costs and expenses of inspecting and
maintaining machinery and equipment used in the operation
and maintenance of the Property, depreciation of machinery
and equipment used in the operation and maintenance of the
Property, and all costs of all structural repairs and
replacements (other than repairs for which Landlord has
received full reimbursement from contractors, other tenants
of the Building or from others) necessary to keep the
Building and Property in good working order, repair,
appearance and condition;
(f) any expenditures (capital or otherwise) reasonably intended
to reduce Operating Expenses or that are required under any
governmental law, rule, order or regulation;
(g) payments under all service, maintenance or management
contracts, including but not limited to elevator
maintenance, window cleaning, security and energy management
services;
(h) imputed cost equal to the loss of rent by Landlord for
making available to the management agent space for a
Building office;
(i) attorney's fees and disbursements (exclusive of any such
fees and disbursements incurred in tax abatement
proceedings, the preparation of leases or disputes with
other tenants in the Building) and auditing and other
professional fees and expenses;
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(j) with respect to capital expenditures, only an annual
charge-off shall be included in Operating costs; Annual
charge-off is defined as and shall be determined by
amortizing the original cost of a capital item or a capital
expenditure made during the term of this Lease by the number
of years of useful life of the capital item so acquired,
together with interest on the unamortized amount; and the
useful life shall be determined by Landlord's accountants in
accordance with generally accepted accounting principles and
practices in effect at the time of the capital expenditure
or acquisition of the capital item; and
(k) all license fees;
(l) concierge service, if any;
(m) costs of supplies and materials used in connection with the
operation, management, maintenance and repair of the
Building;
(n) any local or state surcharges or special charges;
(o) management fees (but not in excess of those customarily
charged on an arms-length basis for the management of first-
class office buildings in the Boston, Massachusetts
metropolitan area);
(p) telephone, telegraph, postage, stationery supplied and other
materials and expenses required for the routine operation of
the Building;
(q) any other expense or charge of any nature whatsoever,
whether or not herein mentioned, which would be included in
Operating Expenses in accordance with sound accounting and
management principles generally accepted with respect to the
operation of first-class office buildings in the Boston,
Massachusetts metropolitan area.
There shall not be included in such Operating Costs:
(a) capital improvements made to the Land or the Building
(except for Annual Charge-oils related thereto as provided
above);
(b) renovating, painting, redecorating or other work, which
Landlord performs for specific tenants;
(c) original construction costs of the Building;
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(d) capital expenditures for expansion of the Building or for
the remodeling or refurbishment of the Building to a
materially higher standard than existed on the date of this
Lease;
(e) interest and amortization of funds borrowed by Landlord,
whether secured or unsecured (except as specifically
provided above as includable in Operating Expenses);
(f) depreciation of the Building (except for capital
improvements the cost of which are specifically includable
in Operating Expenses);
(g) advertising, legal and space planning expenses and leasing
commissions incurred in procuring tenants for the Building;
(h) salaries, wages, or other compensation paid to officers or
executives of Landlord in their capacities as officers and
executives;
(i) salaries, wages or other compensation paid to employees of
Landlord who are not assigned to the operation, management,
maintenance or repairs of the Building;
(j) costs of Building utilities outside normal business hours
sold to tenants of the Building;
(k) expenses for repairs, replacements or improvements arising
from the initial construction of the Building to the extent
such expenses are reimbursed to Landlord by virtue of
warranties from contractors or suppliers;
(l) legal expenses incurred in the enforcement of leases;
(m) costs of repairs incurred by reason of fire or other
casualty or condemnation to the extent Landlord receives
compensation therefor through proceeds of insurance or
condemnation awards;
(n) costs relating to maintaining Landlord's existence, either
as a corporation, partnership, or other entity;
(o) cost (including in connection therewith all attorneys' fee
and costs of settlement judgments and payments in lieu
thereof) arising from claims, disputes or potential disputes
in connection with potential or actual claims, litigation or
arbitrations pertaining to Landlord and/or the Building;
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(p) costs incurred by Landlord due to the violation by Landlord
or any tenant of the terms and conditions of any lease of
space in the Building;
(q) Penalties or damages incurred due to non-compliance with
ADA.
(r) costs incurred in connection with any environmental cleanup,
response action, or remediation on, in, under or about the
Premises or the Building, including but not limited to,
costs and expenses associated with the defense,
administration, settlement, monitoring or management
thereof;
(s) rentals and other related expenses incurred in leasing HVAC
systems, elevators or other equipment ordinarily considered
to be Capital Improvements, except for (1) expenses in
connection with making minor repairs and (2) costs of
equipment not affixed to the Building which is used in
providing janitorial or similar service;
(t) tax penalties incurred as a result of Landlord's negligence,
inability or unwillingness to make payment and/or to file
any tax or informational returns when due;
(u) service and utilities provided, taxes attributable to, and
costs incurred in connection with the operation of any
retail and restaurant operations in the Building, except to
the extent the square footage of such operations are
included in the rentable square feet of the Building and do
not exceed the services, utility and tax costs which would
have been incurred had the retail and/or restaurant space
been used for general office purposes;
(v) overhead and profit increment paid to Landlord or to
subsidiaries or affiliates of Landlord for goods and/or
services in or to the Building to the extent the same
exceeds the costs of such goods and/or services rendered by
unaffiliated third parties on competitive basis;
(w) costs for which Landlord has been compensated by a
management fee, and any management fees in excess of those
management fees which are normally and customarily charged
by comparable landlords of comparable buildings;
(x) costs arising from Landlord's charitable or political
contributions;
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<PAGE>
(y) costs incurred in the sale or refinancing of the
Building.
(2) Notwithstanding the foregoing, if any tenant of the Building
is excused from contributing to the payment of its share of any of the
items included within the definition of Operating Costs as a result of (a)
such tenant's agreement to pay for such items directly to Landlord
independent of such tenant's contribution to Operating Costs, (b) directly
to any applicable service provider, or (c) otherwise, then the cost of
providing such item or items to the balance of the Building shall be
allocated among the balance of the Building on the basis of (x) the ratio
that the rentable square feet of each rentable space within the Building
contributing to the payment bears to (y) the Total Rentable Area minus the
rentable square feet of the premises excused from participating in such
payment. Similarly, in the case of services that are not rendered to all
areas of the Building on a comparable basis, the proportion allocable to
the Leased Premises shall be the same proportion which the rentable square
footage of the Leased Premises bears to the total rentable area of the
space in the Building to which such service is so rendered.
(3) In any calendar year with respect to which the Building has
less than a 95% average annual occupancy rate, then for the purpose of this
Section 7, the Operating Costs for the Property which vary with occupancy
will be extrapolated as though the Building were 95% occupied. In any
calendar year with respect to which the Building has an average annual
occupancy rate of 95% or more, then the Operating Costs for the Property
shall be the actual Operating Costs for the Property as defined
hereinabove.
(B) Reimbursement of Operating Costs.
--------------------------------
(1) If, during the Term hereof, Operating Costs incurred by
Landlord in any calendar year shall exceed Base Operating Costs, Tenant
shall reimburse Landlord, as additional rent, for Tenant's Proportionate
Share of any such excess (such amount being hereinafter referred to as the
"Operating Cost Excess"). Any such Operating Cost Excess due from Tenant
shall become due and payable within twenty (20) days from the date Landlord
shall furnish to Tenant an itemized statement of Tenant's Operating Cost
Excess, prepared, allocated and computed in accordance with generally
accepted accounting principles and the terms of this Lease.
(2) At Landlord's election, Tenant shall remit to Landlord, on
the first day of each calendar month, estimated payments on account of
Operating Cost Excess, such monthly amounts to be sufficient to provide
Landlord by the end of any given calendar year a sum equal to Tenant's
required payments, as estimated by Landlord in good faith from time to time
during such year. If the total of such monthly remittances for any calendar
year is greater than the Operating Cost Excess for such calendar year,
Landlord shall credit the difference against the next installment of rental
or other charges due to Landlord hereunder (or if such adjustment is at or
after the end of the Term and no other monies are due to Landlord
hereunder, Landlord shall pay Tenant said difference promptly); if the
total of such remittances is less than the Operating Cost Excess for such
calendar year, Tenant shall promptly pay the difference to Landlord.
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(3) Any reimbursement for increases in Operating Costs due and
payable by Tenant with respect to periods of less than twelve (12) months
shall be equitably prorated.
(C) Audit Right. If Tenant disputes the amount set forth in
-----------
Landlord's Operating Expense Statement, Tenant shall have the right, at Tenant's
sole expense, not later than sixty (60) days following receipt of Landlord's
Operating Cost Statement, to cause Landlord's books and records with respect to
the calendar year which is the subject of such Statement to be audited by a
certified public accountant mutually acceptable to Landlord and Tenant. Tenant
may only dispute the amount of the Base Operating Costs once upon receipt of the
first Landlord's Operating Expenses Statement within sixty (60) days following
receipt of the same and in the same manner described herein for dispute of the
Landlord's Operating Expense Statement. The audit shall take place at the
offices of Landlord (or its property manager or representative) where its books
and records are located at a mutually convenient time during Landlord's (or its
property manager's or representative's) regular business hours. Tenant shall
have no right to conduct an audit or to give Landlord notice that it desires to
conduct an audit at any time Tenant is in default under this Lease (after any
applicable notice or grace period). The accountant conducting the audit shall be
compensated on an hourly basis and shall not be compensated based upon a
percentage of overcharges it discovers. No subtenant shall have any right to
conduct an audit, and no assignee shall conduct an audit for any period during
which such assignee was not in possession of the Premises. Tenant's right to
undertake an audit with respect to any calendar year shall expire sixty (60)
days after Tenant's receipt of Landlord's Operating Expense Statement for such
calendar year, and such Statement shall be final and binding upon Tenant and
shall, as between the parties, be conclusively deemed correct, at the end of
such sixty (60) day period, unless prior thereto Tenant shall have given
Landlord written notice of its intention to audit Operating Expenses for the
calendar year which is the subject of the Statement. If Tenant gives Landlord
notice of its intention to audit Operating Expenses, it must commence such audit
within sixty (60) days after such notice is delivered to Landlord, and the audit
must be completed within one hundred twenty (120) days after such notice is
delivered to Landlord. If Tenant does not commence and complete the audit within
such periods, the Landlord's Operating Expense Statement which Tenant elected to
audit shall be deemed final and binding upon Tenant and shall, as between the
parties, be conclusively deemed correct. Tenant agrees that the results of any
Operating Expense audit shall be kept strictly confidential by Tenant and shall
not be disclosed to any other person or entity, except Tenant's accountants,
attorneys or other professionals, or as required by law or a court of competent
jurisdiction.
Section 8. Use of Leased Premises.
----------------------
The Leased Premises are leased, and other rights set forth herein are
granted, subject to easements, ground leases, mortgages and restrictions of
record and are to be used solely for the Permitted Uses and not for any other
purposes and without annoyance to or disruption of other tenants or occupants of
the Building. Tenant shall procure all licenses and permits necessary for its
uses, at Tenant's sole expense, and shall provide Landlord with copies thereof
upon Landlord's written request.
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Section 9. Landlord's Covenants.
--------------------
Landlord covenants with Tenant:
(A) That the Leased Premises shall be served by a separate heat-pump
system that provides heating, ventilating and air-conditioning services within
Tenant's control. Landlord shall during normal business hours (as defined in the
Rules & Regulations), through its base building system, furnish heated and
chilled water or other heating/cooling medium to the Leased Premises (including
supply and return pipes) for a heat pump system installed or to be installed in
the Leased Premises sufficient to maintain the Leased Premises at comfortable
temperatures, comparable to other first- class office buildings within the City
of Boston (subject to all Federal, Massachusetts and Boston regulations relating
to the provision of heat). If Tenant requests base building HVAC services to be
provided outside of Normal Business Hours, Tenant shall notify Landlord
reasonably in advance and shall pay a reasonable fee established by Landlord
from time to time for such HVAC services outside of Normal Business Hours. In
the event Tenant introduces into the Leased Premises personnel or equipment
which overloads the capacity of the Building system or in any other way
interferes with the system's ability to perform adequately its proper functions,
supplementary systems may, if and as needed, at Landlord's option, be provided
by Landlord, at Tenant's expense.
(B) That the Leased Premises shall be separately metered for all
electricity consumed in the Leased Premises, including the electricity consumed
by the heat pumps installed in and serving the Leased Premises and that the
Common Areas shall be separately metered for all electricity consumed in the
Common Areas. Tenant shall pay such charges directly to the utility provider
within ten (10) days after billing therefor. If Tenant shall require electricity
in excess of reasonable quantities for Tenant's Permitted Uses and if(1) in
Landlord's reasonable judgment, Landlord's facilities are inadequate for such
excess requirements, or (2) such excess use shall result in an additional burden
on the Building utilities systems and additional cost to Landlord on account
thereof as the case may be, (x) Tenant shall, upon demand, reimburse Landlord
for such additional cost, as aforesaid, or (y) Landlord, upon written request,
and at the sole cost and expense of Tenant, will furnish and install such
additional wires, conduits, feeders, switchboards and appurtenances as
reasonably may be required to supply such additional requirements of Tenant (if
electricity therefor is then available to Landlord), provided that the same
shall be permitted by applicable laws and insurance regulations and shall not
cause permanent damage or injury to the Building or cause or create a dangerous
or hazardous condition or entail excessive or unreasonable alterations or
repairs. To the best of Landlord's knowledge, the electrical capacity of the
Leased Premises is reasonably adequate for standard office use.
(C) To provide cleaning to the Leased Premises and Common Areas in
accordance with cleaning and janitorial standards generally prevailing
throughout the term hereof in comparable first-class office buildings within the
City of Boston; and to furnish hot and cold water for ordinary drinking,
cleaning, lavatory and toilet facilities.
(D) To furnish elevator service from the lobby to the Leased Premises
(use for freight and use other than ordinary passenger use is governed more
particularly in the Rules and Regulations); to provide adequate lighting to
public and Common Areas of the Building; to
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provide a tenant directory with Tenant's name in the lobby of the Building upon
which Tenant shall receive a pro rata share of name space in the same ratio as
the Leased Premises bears to that of the Building; and to maintain adequate fire
alarm and security systems within the Building, which security systems will be
designed to provide twenty-four hour access to tenants to the Building.
(E) Except as otherwise expressly provided herein, promptly to make
such repairs and replacements to the roof, exterior walls (exclusive of glass),
floor slabs and other structural components of the Building, and to the common
areas and facilities of the Building as may be necessary to keep them in good
repair and condition consistent with a first-class office building in the City
of Boston (exclusive of equipment installed by Tenant and except for those
repairs required to be made by Tenant pursuant to Section 10(I) hereof and
repairs or replacements occasioned by any act or negligence of Tenant, its
servants, agents, customers, contractors, employees, invitees, or licensees) and
to make replacements and repairs to the plumbing, heating, electrical,
ventilating and air-conditioning systems of the Building.
Landlord shall be under no responsibility or liability for failure or
interruption of any of the above described services, repairs or replacements
caused by breakage, accident, strikes, repairs, inability to obtain supplies,
labor or materials, or for any other causes beyond the control of the Landlord
and in no event for any indirect or consequential damages to Tenant; and failure
or omission on the part of the Landlord to furnish any of same for any of the
reasons set forth in this paragraph shall not be construed as an eviction of
Tenant, actual or constructive, nor entitle Tenant to an abatement of rent, nor
render the Landlord liable in damages, nor release Tenant from prompt
fulfillment of any of its covenants under this Lease.
(F) In the event Tenant wishes to provide outside services for the
Leased Premises over and above those services to be provided by Landlord as set
forth herein, Tenant shall first obtain the prior written approval of Landlord
for the installation and/or utilization of such services ("outside services"
shall include, but shall not be limited to, cleaning services, television, so-
called "canned music" services, security services, catering services and the
like). In the event Landlord approves the installation and/or utilization of
such services, such installation and utilization shall be at Tenant's sole cost,
risk and expense.
(G) Tenant shall have access to and use of the Leased Premises
twenty-four (24) hours per day, seven (7) days per week, subject to the
obligation to pay for HVAC services outside of Normal Business Hours. Landlord
shall exercise any and all access rights to the Leased Premises available under
the Lease, in each instance, upon reasonable advance notice to Tenant (except in
cases of emergency when no such notice is required), in a manner consistent with
Tenant's reasonable security requirements, and in a manner which does not
unreasonably interfere with Tenant's business operations.
(H) In addition to the other obligations of Landlord set forth in
this Lease, Landlord shall maintain and operate the Building in a manner that is
consistent with other first-class office buildings within the City of Boston.
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Section 10. Tenant's Covenants.
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Tenant covenants with Landlord, during the term and for such further
time as Tenant or anyone claiming by, through or under Tenant shall hold the
Leased Premises or any part thereof:
(A) To promptly pay the Annual Rent, Tenant's Tax and Operating Cost
Excesses, and any other charges payable by Tenant to Landlord at the address
from time to time designated for the payment of Annual Rent at the times and in
the manner herein set forth;
(B) To pay when due all charges made by public authority or utility
for the cost of electricity furnished or consumed upon the Leased Premises and
all charges for telephone and other utilities and utilities services, and
service inspections made therefor during the term, whether designated as a
charge, tax, assessments, fee or otherwise;
(C) Not to perform any renovation or construction to the Property or
Building or the erection of any signs or other additions or structures on or to
the Property or Building or any other alterations or additions to the Property
or Building (including, without limitation, the installation of any signs or
draperies in any windows of the Building) except as herein expressly set forth;
(D) Not to place any load upon any floor of the Leased Premises
which exceeds the rated capacity of the floor in question, nor to otherwise
overload or deface the Leased Premises or Building, nor permit any use,
alteration or repair contrary to law or lawful ordinance, by-law, regulation or
order of public authority;
(E) Not to abandon the Leased Premises during the term;
(F) Not to permit anything to be done in or upon the Leased Premises
or Property, or to bring or keep anything therein or thereon (including, without
limitation, all furnishings, carpeting and wall coverings), except as now or
hereafter permitted by applicable building, fire, health, sanitary or safety
codes, ordinances or by-laws, or by any public authority (including, without
limitation, the Boston Fire Department, Board of Fire Underwriters, or by any
fire insurance rating organization or other authority having jurisdiction of the
Property). Without limiting the foregoing, Tenant shall not take any actions or
allow any conditions to exist in or upon the Leased Premises or Property which
may constitute a nuisance, or which would invalidate or be in conflict with the
insurance policies covering the Building, and fixtures and property therein, or
which would increase the rate of the fire, casualty or extended coverage
insurance applicable to the Building to an amount higher than it otherwise would
be; and Tenant shall neither do nor permit to be done any act or thing upon or
about the Leased Premises or the Building which shall or might subject Landlord
to any liability or responsibility for injury to any person or persons or to
property. If, by use of the Leased Premises or by reason of failure of Tenant to
comply with the provisions of this Section 10(F), the fire, casualty or extended
coverage insurance rates effective on the Building shall be higher than such
rates otherwise would have been, then Tenant shall, within five (5) days after
demand, reimburse Landlord, as additional rent hereunder, for that part of all
such insurance premiums thereafter paid by Landlord which shall be charged
because of such failure or use by Tenant (a schedule or "make
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up" of rate for the Building or Property issued by the Fire Insurance Exchange,
or any other body making such insurance rates for the Property, being conclusive
evidence of the facts therein stated and of the several items and charges in
such insurance rates then applicable to the Property); but if the use or
occupancy of the Leased Premises by Tenant shall make void or voidable any such
insurance coverage then, at the option of the Landlord, this Lease may be
terminated if Tenant fails to cease such manner of use or occupancy immediately
after notice.
(G) Upon reasonable prior notice (except in the case of
emergencies), to permit the Landlord and its agents or representatives to enter
at reasonable times to view or examine the Leased Premises or any part thereof,
to show the Leased Premises to others to make improvements and to make repairs
and replacements to the Leased Premises and Building provided, however, in
exercising such right of entry, Landlord shall not unreasonably interfere with
Tenant's use and enjoyment of the Leased Premises.
(H) To comply with all reasonable rules and regulations as Landlord
may, from time to time, promulgate in writing and delivered to Tenant to
regulate the conduct of all tenants using the Building, the Property, and all
Common Areas a part thereof, as if all such rules and regulations were set forth
in this Lease at length. A set of such rules and regulations, as currently in
effect, are attached hereto as Exhibit B. Landlord shall, however, have the
right to change such rules and regulations and to waive any one or more of them
in the case of any one or more tenants in such circumstances as shall not be
arbitrary or which would result in unfair applications of the rules and
regulations to other tenants of the Building, and under such circumstances such
waiver as to one tenant shall not constitute a waiver as to any other tenant.
Landlord shall not be responsible to Tenant or to Tenant's agents, employees,
servants, licensees, invitees or visitors for failure to enforce any such rules
and regulations or for the non-observance or violation of any such rules and
regulations by any other tenant or by any other person.
(I) To maintain the Leased Premises in neat order and condition (and
to perform all routine and ordinary repairs to any special and/or supplementary
plumbing, heating, electrical, ventilating and air-conditioning systems located
within the Leased Premises and installed by Tenant after the initial occupancy
thereof by Tenant such as are necessary to keep them in good working order,
appearance and condition, as the case may require), reasonable use and wear
thereof, damage by fire or casualty and repairs which are the responsibility of
Landlord only excepted; to notify Landlord promptly of any repairs required to
any plumbing, heating, electrical, ventilating and air conditioning systems
installed by Landlord; and to make as and when needed as a result of misuse by,
or neglect or improper conduct of Tenant or Tenant's servants, employees,
agents, invitees or licensees or otherwise, all repairs necessary, which repairs
and replacements shall be in quality and class equal to the original work. With
respect to the aforementioned special and/or supplementary systems located
within the Leased Premises Tenant shall inspect, service and operate all such
systems in accordance with manufacturer's requirements and good operating
practice, including, without limitation, keeping in force contracts with
appropriate and reputable service companies providing for the regular inspection
and service of the heating and air-conditioning systems (copies of which
contracts shall be furnished to Landlord). Landlord, upon default of Tenant
hereunder and upon prior notice to Tenant, may elect, at the expense of Tenant,
to perform all such cleaning and maintenance and to make any such repairs or to
repair any damage or injury to the Building or the Leased Premises caused by
moving property of Tenant in or out of the Building or by installation or
removal or
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furniture or other property, or by misuse by, or neglect, or improper conduct
of, Tenant or Tenant's servants, employees, agents, contractors, customers,
patrons, invitees or licensees.
(J) Upon the expiration or earlier termination of the Term of this
Lease, Tenant shall peaceably quit and surrender to Landlord the Leased Premises
in neat and clean condition and in good order, condition and repair, together
with all alterations, additions and improvements which may have been made or
installed in, on or to the Leased Premises prior to or during the Term of this
Lease, excepting only ordinary wear and use and damage by fire or other casualty
for which, under other provisions of this Lease, Tenant has no responsibility of
repair or restoration. Tenant shall remove all of Tenant's signs, goods,
personal property, trade fixtures and equipment used in the conduct of Tenant's
business, not servicing or affixed to the Leased Premises, and, to the extent
specified by Landlord, all alterations, additions and improvements made by
Tenant; and shall repair any damage to the Leased Premises or the Building
caused by such removal and to the extent specified by Landlord, restore the
Leased Premises or any portion thereof to its original condition. Tenant further
agrees that if, on termination of this Lease by expiration or otherwise Tenant
shall fail to remove any of its property from the Leased Premises, Landlord
shall be authorized, at its sole option, and in Tenant's name and on its behalf,
either (1) to cause such property to be removed and placed in storage for the
account of and at the expense of Tenant, or (2) to sell such property at public
or private sale (at which Landlord may be a purchaser), with or without notice,
and to apply the proceeds thereof, after the payment of all expenses of removal,
storage and sale, to the indebtedness, if any, of Tenant to Landlord, the
surplus, if any, to be paid to Tenant.
(K) Tenant shall give Landlord notice in case of fire or accidents
in the Leased Premises promptly after Tenant is aware of such event.
(L) Without limiting the generality of its other covenants
hereunder, Tenant agrees in regard to the use and occupancy of the Leased
Premises to comply with all applicable environmental laws, rules, regulations,
statutes and ordinances, including, without limitation, those applicable to
"hazardous substances." The Tenant unconditionally, absolutely and irrevocably
indemnifies and agrees to defend and hold harmless the Landlord and its
officers, employees, agents, contractors and those claiming by, through or under
Landlord, from and against all loss, cost and expense (including, without
limitation, reasonable attorney's fees) of whatever nature suffered or incurred
by the Landlord on account of the existence on the Leased Premises, or the
release or discharge from the Leased Premises, of "hazardous substances,"
including, without limitation, any claims, costs, losses, liabilities and
expenses arising from the violation (or claimed violation) of any environmental
laws or the institution of any action by any party against the Tenant, the
Landlord or the Property based upon nuisance, negligence or other tort theory
alleging liability due to the improper generation, storage, disposal, removal,
transportation or treatment of hazardous substances or the imposition of a lien
on any part of the Leased Premises or Property under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. Section
9601, et seq., as amended ("CERCLA"), the Massachusetts Hazardous Material
-- ----
Release Prevention and Response Act, M.G.L. c. 21E, as amended ("Chapter 21E"),
or any other laws pursuant to which a lien may be imposed due to the existence
of hazardous substances. The Tenant further unconditionally, absolutely and
irrevocably guarantees the payment of any fees and expenses incurred by the
Landlord in enforcing or seeking enforcement of the liability of the Tenant
under this indemnification.
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Notwithstanding the foregoing, in no event shall Tenant be liable to Landlord on
account of the existence of any "hazardous substances" in the Leased Premises as
of the Commencement Date or because of the release or discharge of "hazardous
substances" by Landlord or its agents or employees.
For the purposes of this Section, "hazardous substances" shall mean
and include, but shall not be limited to, any element, substance, compound or
mixture, including disease-causing agents, which after release into the
environment or work place and upon exposure, ingestion, inhalation or
assimilation into any organism, either directly or indirectly, will or may
reasonably be anticipated to cause death, disease, behavioral abnormalities,
cancer, genetic mutation, physiological malfunctions, including malfunctions in
reproduction or physical deformations in such organisms or their offspring, and
all hazardous and toxic substances, wastes or materials, any pollutants or
contaminants (including, without limitation, asbestos and raw materials which
include hazardous constituents), or any other similar substances, or materials
which are included under or regulated by any local, state or federal law, rule
or regulation pertaining to environmental regulation, contamination, clean-up or
disclosure, including, without limitation, CERCLA and Chapter 21E, and
regulations adopted pursuant to such Acts, the Toxic Substances Control Act of
1976, as heretofore or currently in effect ("TSCA") and the Resource
Conservation and Recovery Act of 1976, as heretofore or currently in effect
("RCRA").
Section 11. Indemnity and Insurance.
-----------------------
(A) Tenant shall pay on behalf of Landlord, save Landlord harmless,
and exonerate and indemnify Landlord from and against any and all claims,
liabilities or penalties asserted by or on behalf of any person, firm,
corporation or public authority on account of injury, death, damage or loss to
person or property in or upon the Property: (1) arising out of any act or
omission of Tenant or by any person claiming by, through or under Tenant
(including, without limitation, all patrons, employees, agents, contractors and
customers of Tenant), or as a result of any use of occupancy of, or passage and
travel over or upon, the Property by the Tenant or by any person claiming by,
through or under Tenant (including, without limitation, all patrons, employees,
agents, contractors and customers of Tenant); (2) arising, directly or
indirectly, out of default by the Tenant under any of the terms or covenants of
this Lease, or in connection with any mechanical, electrical, plumbing, or any
other equipment or installations that are to be maintained or repaired by the
Tenant; or (3) arising out of any delivery to or service supplied to the Leased
Premises, or on account of or based upon anything whatsoever done on the Leased
Premises, except if same was caused by the negligence, fault or misconduct of
Landlord, its agents, servants or employees; and to keep all Tenant's employees
working in or about the Leased Premises covered by Workmen's Compensation
Insurance in form and amounts required by law and upon request of Landlord to
deliver certificates evidencing said coverage. In respect to all of the
foregoing, Tenant shall pay on behalf of and indemnify Landlord from and against
all costs, expenses (including reasonable attorneys' fees), and liabilities
incurred in or in connection with any such claim, action or proceeding brought
thereon; and, in case of any action or proceeding brought against Landlord by
reason of any such claim, Tenant, upon notice from Landlord and at Tenant's
expense, shall resist or defend such action or proceeding and employ counsel
therefor reasonably satisfactory to Landlord. For purposes of this Section
11(A), the
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term "Landlord" shall be deemed to refer to: Landlord, its officers, directors,
partners, agents, attorneys, employees, successors and assigns, and Landlord's
Management Agent.
(B) Tenant shall carry and maintain, throughout the term hereof, at
its own cost and expense, (1) a policy of comprehensive general liability
insurance (the "Liability Policy"), including standard extended coverage
endorsements, so-called, including but not limited to premises operations,
blanket contractual insurance, broad form property damage, independent
contractor's coverage and personal injury coverage covering the Leased Premises
(and the Property insofar as used by customers, employees, servants or invitees
of the Tenant), naming Tenant as insured party, Landlord and Landlord's
Management Agent as additional insureds, protecting Landlord and Landlord's
Management Agent and Tenant against any liability whatsoever, occasioned by any
occurrence on or about the Leased Premises or any appurtenances thereto, (2) a
fire and other casualty policy (a "Fire Policy") insuring the full replacement
value of Tenant's above building standard work and all of the furniture, trade
fixtures and other personal property of Tenant located in the Leased Premises
against loss or damage by fire, theft and such other risks or hazards as are
insurable under present and future forms of "All Risk" insurance policies, and
(3) policy of insurance against loss or damage to the major components of the
air conditioning and/or heating system, flywheels, steam pipes, steam turbines,
steam engines, steam boilers, other pressure vessels, high pressure piping and
machinery, if any, such as are installed by or on behalf of Tenant in the Leased
Premises. Such policies shall also insure against physical damage to the Leased
Premises arising out of an accident covered thereunder; such policies are to be
written by good and solvent insurance companies licensed to do business in the
Commonwealth of Massachusetts satisfactory to Landlord, and shall be in such
limits and with such maximum deductibles as Landlord may reasonably require. As
of the date of this Lease, Landlord reasonably requires limits of liability
under (x) the Liability Policy of not less than the combined single limit per
occurrence specified in Section 1(A) for bodily or personal injury (including
death) and property damage combined; (y) under the Fire Policy equal to the
value of Tenant's above building standard work, furniture, trade fixtures and
other personal property with a deductible of no more than $1,000.00; and (z)
under machinery insurance for full replacement cost of equipment with a
deductible of no more than $1,000.00. Tenant will furnish Landlord with such
information as Landlord may reasonably request from time to time as to the value
of the items specified in clause (y) above within ten (10) days after request
therefor. Such insurance may be carried under a blanket policy covering the
Leased Premises and other locations of Tenant, if any, provided that each such
policy shall in all respects comply with this Section 11 and shall specify that
the portion of the total coverage of such policy that is allocated to the Leased
Premises is in the amounts required pursuant to this Section 11. Prior to the
time such insurance is first required to be carried by Tenant and thereafter, at
least fifteen (15) days prior to the expiration date of any such policy, Tenant
agrees to deliver to Landlord a certificate evidencing such insurance. Such
certificate shall contain an endorsement that such insurance may not be canceled
except upon thirty (30) days' prior written notice to Landlord. Tenant's failure
to provide and keep in force the aforementioned insurance shall be regarded as a
material default hereunder entitling Landlord to exercise any or all of the
remedies provided in this Lease in the event of Tenant's default.
(C) Tenant agrees that any and all property of Tenant (or of any
client or customer of Tenant) of any kind that may be in the Building or on the
Property shall be at the sole risk of Tenant or those claiming through or under
Tenant, and that in no case whatsoever
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shall Landlord (or those having estate in the Leased Premises) be liable to
Tenant, or any other person, for any injury, death, loss or damage to any person
or property on the Property or in the Building or the Leased Premises except if
caused by the gross or willful negligence or misconduct of Landlord or
Landlord's agents or employees.
(D) Tenant agrees that Landlord, Landlord's Management Agent and
their respective agents, servants or employees shall not be liable for any
injury or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, water, rain or snow or leaks from any part of
the Building, or from the pipes, appliances or plumbing works or from the roof,
street or subsurface or from any other place or resulting from dampness or
resulting from any other cause of whatsoever nature. Tenant covenants and agrees
that (1) any rights of Tenant to make a claim against Landlord, Landlord's
Management Agent or their respective agents, servants or employees as
contemplated herein shall be subject to the waiver of subrogation provisions set
forth in Section 12 of this Lease, and (2) in no event shall Tenant be entitled
to make a claim for consequential, indirect or special damages under this Lease.
(E) Tenant agrees that Landlord, Landlord's Management Agent and
their respective agents, servants or employees shall not be liable for any
damage which Tenant may sustain, if at any time any window of the Leased
Premises is broken, or temporarily or permanently closed, darkened or bricked
upon for any reason whatsoever, except only Landlord's arbitrary acts if the
result is permanent, and Tenant shall not be entitled to any compensation
therefor or abatement of rent or to any release from any of Tenant's obligations
under this Lease, nor shall the same constitute an eviction or constructive
eviction.
(F) Tenant shall reimburse Landlord for all expenses, damages or
fines incurred or suffered by Landlord, by reason of any breach, violation or
non-performance by Tenant, or its agents, servants or employees, of any covenant
or provision of this Lease, or by reason of damage to persons or property caused
by moving property of or for Tenant in or out of the Building, or by the
installation or removal of furniture or other property of or for Tenant, or by
reason of or arising out of the negligence or willful misconduct of Tenant, or
its agents, servants or employees, in the use or occupancy of the Leased
Premises. Tenant shall have the right, at Tenant's own cost and expense, to
participate in the defense of any action or proceeding brought against Landlord
or Landlord's Management Agent and in negotiations for settlement thereof if,
pursuant to this Section 11(F), Tenant would be obligated to reimburse Landlord
or Landlord's Management Agent for expenses, damages or fines incurred or
suffered by Landlord or Landlord's Management Agent.
(G) Landlord's Insurance. Landlord shall purchase and keep in full
force during the Term fire, extended coverage and "all risk" insurance covering
the Building in an amount equal to the full replacement value thereof, and
comprehensive general liability insurance coverage in amounts held by reasonably
prudent commercial landlords of comparable first-class office properties in the
City of Boston, Massachusetts.
(H) Indemnity of Tenant. Landlord hereby agrees to indemnify, defend
and hold Tenant, and Tenant's officers, directors, employees, shareholders and
agents, harmless from and against any and all losses, liabilities, claims,
damages or expenses (including, without limitation, reasonable attorney's fees
and costs), arising from or in connection with the
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negligence or misconduct of Landlord or Landlord's agents, or arising from or in
connection with Landlord's breach of its obligations or representations
contained in this Lease. Any provision in this Lease which purports to limit,
waive or release Landlord for its negligence or misconduct (or the negligence or
misconduct of Landlord's agents) shall be of no effect.
Section 12. Waiver of Subrogation.
---------------------
(A) Landlord and Tenant mutually agree that (insofar as and to the
extent that such agreement may be effective without invalidating or making it
impossible to secure insurance coverage obtainable from responsible insurance
companies doing business in the Commonwealth of Massachusetts) with respect to
any loss which is covered by insurance then being carried by Landlord or Tenant,
respectively, the party carrying such insurance and suffering said loss releases
the other of and from any and all claims with respect to such loss; and they
further mutually agree that their respective insurance companies shall have no
right of subrogation against the other on account thereof, even though extra
premium may result therefrom. In the event that extra premium is payable by
either Landlord or Tenant as a result of this provision, neither Landlord nor
Tenant shall be liable for reimbursement to the other for such extra premium.
(B) Landlord for itself and parties claiming by, through or under
Landlord, hereby waives any and all right of recovery which it might otherwise
have against Tenant, its servants, agents and employees, for loss or damage
occurring to the Building and the fixtures, appurtenances and equipment therein,
to the extent the same are covered by Landlord's insurance, notwithstanding that
such loss or damage may result from the negligence or fault of Tenant, its
servants, agents or employees. Tenant for itself and for parties claiming by,
through or under Landlord, hereby waives any and all right of recovery which it
might otherwise have against Landlord, its servants, and employees, and against
every other tenant in the Building who shall have executed a similar waiver as
set forth in Section 12(A) hereof for the loss or damage to, Tenant's furniture,
furnishings, fixtures and other property removable by Tenant under the
provisions hereof notwithstanding that such loss or damage may result from the
negligence or fault of Landlord, its servants, agents or employees, or such
other tenant and the servants, agents or employees thereof.
Section 13. Assignment and Subletting.
-------------------------
(A) Notwithstanding any other provisions of this Lease, the Tenant
shall not assign or otherwise transfer this Lease or any interest herein,
voluntarily or by operation of law, or sublet (which term, without limitation,
shall include granting of concessions, licenses and the like) or allow any other
person to occupy the whole or any part of the Premises, without, in each
instance, the prior written consent of the Landlord (which consent shall not be
unreasonably withheld or delayed), and, in any case, where the Landlord shall
consent to such assignment, other transfer or subletting, the Tenant originally
named herein shall remain fully liable for Tenant obligations hereunder,
including, without limitation, the obligation to pay the rent and other amounts
provided under this Lease and shall pay to the Landlord promptly after billing
therefor all reasonable attorney's fees incurred by the Landlord in connection
with such assignment or subletting. The Tenant shall give written notice to the
Landlord of the terms of any such proposed assignment or sublease and the
Landlord shall have the right to terminate this
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Lease on notice to the Tenant if the rent and other payments from such proposed
assignee or subtenant would exceed that provided hereunder. It shall be a
condition of the validity of any permitted assignment or other transfer or
subletting that the assignee or transferee or sublessee agree directly with the
Landlord, in form satisfactory to the Landlord, to be bound by all Tenant
obligations hereunder, including, without limitation, with respect to an
assignee, the obligation to pay rent and other amounts provided for under this
Lease, and with respect to an assignee, sublessee or transferee, the covenant
against further assignment or other transfer or subletting.
(B) The provisions of Section 13(A) shall apply to a transfer (by
one or more transfers) of a majority of the stock or partnership interests, or
other evidences of ownership of Tenant as if such transfer were an assignment of
this Lease, but such provisions shall not apply to transactions with an entity
into or with which Tenant is merged or consolidated or to which substantially
all of Tenant's assets are transferred or to any entity which controls or is
controlled by Tenant or is under common control with Tenant, provided that in
any of such events (1) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (a) the net worth of Tenant immediately prior to such merger,
consolidation or transfer, or (b) the net worth of Tenant herein named on the
date of this Lease; (2) proof satisfactory to Landlord of such net worth shall
have been delivered to Landlord at least five (5) days prior to the effective
date of any such transaction; and (3) the assignee agrees directly with
Landlord, by written instrument in form satisfactory to Landlord, to be bound by
all the obligations of Tenant hereunder, including, without limitation, the
covenant against further assignment and subletting. Notwithstanding the
foregoing, the restrictions on transfers of stock shall not apply to Tenant, so
long as Tenant's stock is publicly traded on a national stock exchange.
(C) In the event Tenant assigns this Lease or sublets the Leased
Premises and this Lease is not terminated by Landlord as above provided, Tenant
shall pay to Landlord, as additional rent hereunder, as and when received by
Tenant fifty percent (50%) of all amounts received by Tenant from the subtenant
or assignee in excess of the amounts payable by Tenant to Landlord hereunder
(the "Transfer Premium"), after tenant has first recouped therefrom reasonable
costs actually incurred by Tenant in connection with such agreement or
subletting, including, without limitation, brokerage commissions, marketing
costs, and legal fees. "Transfer Premium" shall mean all Annual Rent, additional
rent or other consideration of any type whatsoever payable by the assignee or
subtenant to Tenant under this Lease, including key money and bonus money paid
by the assignee or subtenant to Tenant in connection with such transfer, and any
payment in excess of fair market value for services rendered by Tenant to the
assignee or subtenant or for assets, fixtures, inventory, equipment, of
furniture transferred by Tenant to the assignee or subtenant in connection with
such transfer. If less than all of the Premises is transferred, the Base Rent
and the additional rent shall be determined on a per rentable square foot basis.
Section 14. Alterations, Installations and Work Done to Leased Premises.
-----------------------------------------------------------
(A) Tenant shall make no alterations, renovations, additions
(including, for the purposes hereof, wall-to-wall carpeting), or improvements in
or to the Leased Premises (including any initial improvements necessary for
Tenant's occupancy) without Landlord's prior written consent. Notwithstanding
the foregoing, Tenant has the right to make minor, non-
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structural alterations and decorative changes to the Leased Premises which do
not cost more than $10,000 in the aggregate, without the Landlord's consent. Any
such approved alterations, additions or improvements shall: (1) be in accordance
with complete plans and specifications approved by Landlord; (2) be made by
contractors or mechanics approved by Landlord; (3) be in compliance with all
applicable codes, and rules, regulations and procedures of Landlord; (4) be made
at Tenant's sole expense and at such times and in such manner as Landlord may
from time to time designate; and (5) become part of the Leased Premises and the
property of Landlord. Tenant shall pay to Landlord, as a fee for Landlord's
review of the plans and specifications for such alterations, renovations,
additions or improvements, and the Landlord's general supervision of the
Tenant's construction work, five percent (5%) of the "Tenant's Total Cost" of
its construction work. "Tenant's Total Cost" shall mean Tenant's contract or
purchase price of materials and labor, and services employed by Tenant and its
contractors (including cutting, patching, cleaning up and removal of waste and
debris) plus the fees of the architects and engineers employed by Tenant.
Promptly upon completion of Tenant's construction work, Tenant shall provide
Landlord with evidence (including all construction contracts relating to the
Leased Premises) of the Total Cost of Tenant's construction work. The amount of
Landlord's fee shall then be calculated and shall be payable to Landlord within
thirty (30) days after written request therefor.
(B) All repairs, alterations, additions and restorations required or
permitted hereunder by Tenant or Landlord shall be done in a good and
workmanlike manner and in compliance with all applicable laws and lawful
ordinances permits, by-laws, regulations and orders of governmental authority
and insurers of the Property. All improvements, alterations and additions to the
Property, including the Leased Premises, and to fixtures and equipment serving
it, made or installed at any time by either Landlord or Tenant shall be part of
the Building and the property of Landlord, but not signs, office furnishings,
equipment or trade fixtures installed by Tenant and used in Tenant's business
and not servicing, or not affixed or secured to, the Building, nor any additions
or equipment installed at Tenant's expense which Landlord has agreed in writing
prior to installation may be removed by Tenant.
(C) Notice is hereby given that Landlord shall not be liable for any
labor or materials furnished or to be furnished to Tenant upon credit, and that
no mechanics' or other liens for any such labor or materials shall attach to or
affect the reversion or other estate or interest of Landlord in and to the
Premises. To the maximum extent permitted by law, at such time as any contractor
commences to perform work on behalf of Tenant, such contractor (and any
subcontractors) shall furnish a written statement acknowledging the provisions
set forth in the prior clause. Whenever and as often as any mechanics' lien
shall have been filed against the Property based upon any act or interest of
Tenant or of anyone claiming through Tenant, Tenant shall forthwith take such
action by bonding, deposit or payment as will immediately remove or immediately
satisfy the lien.
(D) In the course of any work being performed by Tenant (including
without limitation, "field installations" of Tenant's personal property and the
moving of personal property and fixtures into or out of the Leased Premises),
Tenant agrees to employ labor compatible with that being employed by Landlord
for work in or to the Building, and not to employ or permit the use of any labor
or otherwise take any action which might result in a labor
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dispute involving personnel providing services in the Building pursuant to
arrangements made by Landlord.
(E) Prior to commencement of any work, Tenant shall furnish to
Landlord certificates of insurance evidencing the existence of:
(1) worker's compensation covering all persons employed for such
work; and
(2) employer's liability including bodily injury caused by
disease with a limit of $100,000 per employee.
(3) comprehensive general liability insurance including but not
limited to completed operations coverage, products liability, contractual
coverage, broad form property damage, independent contractor's coverage and
personal injury coverage naming the Landlord, its officers, agents,
directors, employees, representatives, consultants, and/or partners and
owners, including but not limited to Landlord's Management Agent and the
Tenant as insureds, with coverage of at least the combined single limit
specified in Section 1(A).
Such insurance shall be placed with solvent and responsible
companies satisfactory to the Landlord and licensed to do business in the
Commonwealth of Massachusetts, and the policies shall provide that they may not
be canceled without thirty (30) days prior notice in writing to the Landlord.
(4) Tenant shall require all contractors engaged or employed by
Tenant to indemnify and hold Tenant, Landlord, Landlord's consultants, including
but not limited to Landlord's Management Agent harmless in accordance with the
following clause:
"The contractor hereby agrees to the fullest extent
permitted by law to assume the entire responsibility and liability
for and defense of and to pay and indemnify the Landlord, Tenant and
Landlord's Management Agent against any loss, cost, expense,
liability or damage and will hold each of them harmless from and pay
any loss, cost, expense, liability or damage (including, without
limitation, judgments, attorney's fees, court costs, and the cost of
appellate proceedings), which the Landlord and/or Tenant and/or
Landlord's Management Agent incurs because of injury to or death of
any person or on account of damage to property, including loss of
use thereof, or any claim arising out of, in connection with, or as
a consequence of the performance of the work by the contractor
and/or any acts or omissions of the contractor, any of its officers,
directors, employees, agents, subcontractors or anyone directly or
indirectly employed by the contractor or anyone for whose acts the
contractor may be liable as it relates to the scope of this
Contract, whether such injuries to person or damage to property are
due or claimed to be due to any negligence of the Landlord and/or
Tenant and/or Landlord's Management Agent, its or their employees or
agents or any other person."
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(F) If, as a result of any alteration or improvements made by
Tenant, Landlord is obligated to comply with the ADA or any other law or
regulation and such compliance requires Landlord to make any improvement or
alteration to any portion of the Property, as a condition to Landlord's consent,
Landlord shall have the right to require Tenant to pay to Landlord prior to the
construction of any alteration or improvement by Tenant, the entire cost of any
improvement or alteration Landlord is obligated to complete by such law or
regulation.
(G) Notwithstanding anything to the contrary contained herein, the
provisions of this Section 14 shall not apply to the Initial Tenant Paint and
Carpet.
Section 15. Casualty and Taking.
-------------------
(A) Destruction of or Damage to Entire Building or Property. If the
-------------------------------------------------------
entire Building or Property shall be taken by any exercise of the right of
eminent domain, or if the entire Building shall be destroyed by reason of damage
from fire or other casualty, or by account of any public or quasi-public
authority, then this Lease shall terminate as of the effective date of such
taking or as of the effective date of such damage. If the Building or any part
thereof shall be substantially damaged by reason of fire or other casualty, or
by the action of any public or quasi-public authority, then this Lease may be
terminated by Landlord as of the date of such damage or action by a written
notice to Tenant within sixty (60) days of the date of such damage or action.
(B) Destruction of or Damage to Premises Leased to Tenant. If the
-----------------------------------------------------
entire Leased Premises shall be damaged and rendered untenantable by reason of
damage from fire or casualty, or if a portion thereof is so rendered
untenantable that the undamaged portion is unsuitable for the continued conduct
of Tenant's business, or if Tenant shall permanently be denied access to the
Leased Premises, then this Lease may be terminated by either Landlord or Tenant,
as of the date of such damage, by written notice to the other within thirty (30)
days of the date of such damage; provided, however, Tenant may not so terminate
this Lease if Landlord, within thirty (30) days of the date of damage, gives
Tenant written notice of its intention to promptly and fully restore the Leased
Premises for use and occupancy by Tenant. If the Lease is not so terminated, a
just proportion of the rent due hereunder shall be abated according to the
nature and extent of the damage from the date of such damage until the Leased
Premises shall have been restored to proper condition for use and occupancy. If
a portion of the Leased Premises is so damaged, but the remaining portion is
suitable for the continued conduct of Tenant's business, then Tenant shall have
no right to terminate this Lease, but a just proportion of the rents due
hereunder shall be abated according to the nature and extent of the damage from
the date of such damage until the damaged portion of the Leased Premises shall
have been restored to proper condition for use and occupancy.
(C) Partial Taking and Temporary Taking of Leased Premises. If a
------------------------------------------------------
portion, but not all of the Building or Property shall be taken by any exercise
of the right of eminent domain such partial taking shall be considered to be
damage to a portion of the Leased Premises and treated in accordance with
Section 15(B) hereof. If all of the Building or Property shall be so taken for
temporary purposes, such temporary taking shall be treated in accordance with
Section 15(B) hereof if the taking lasts for three (3) months or less, and in
accordance with Section 15(A) hereof if the taking lasts in excess of three (3)
months.
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(D) Condemnation Awards. In the event of any taking, Landlord shall
-------------------
be entitled to receive the entire award with respect to such taking, and Tenant
hereby waives all rights relating to damages to the Building and the leasehold
hereby created; provided, however, Tenant shall be entitled to and does not
waive its rights with respect to any special damages expressly awarded to Tenant
by the taking authority or to any portion of any such award expressly allocated
to Tenant by the taking authority with respect to Tenant's loss of trade
fixtures installed in the Leased Premises at the Tenant's expense or relocation
expenses, provided that such award does not affect the amount of compensation
otherwise recoverable by Landlord from the taking authority.
(E) Restoration of Leased Premises. In the event of damage to or a
------------------------------
partial taking of the Property, Building or Leased Premises which does not
result in a termination of this Lease as aforesaid, Landlord shall repair and
restore the Leased Premises to the condition thereof prior to such damage or
partial taking, subject to reduction in size caused by any partial taking. Such
repair and restoration shall be promptly commenced and completed by Landlord, as
rapidly as is reasonably practicable, at Landlord's expense (but Landlord shall
not be required to expend for any such repair or restoration an amount in excess
of the net insurance proceeds/condemnation award received by Landlord on account
of such damage or partial taking), subject to reasonable delays which may arise
by reason of adjustment of insurance on the part of Landlord, labor troubles,
shortages of materials or any other cause beyond Landlord's control. Landlord
shall not be liable for any inconvenience or annoyance to Tenant, or for any
injury to the business of Tenant, resulting from delays in repairing such
damage. Upon commencement of such repair and restoration by Landlord, Tenant
shall, at its expense, promptly commence repair and replacement of all of its
trade fixtures, equipment, signs and other property installed in the Leased
Premises by Tenant, or belonging to the Tenant, which shall have been so
damaged, taken or destroyed and shall, subject to causes beyond the control of
Tenant, complete the same as rapidly as is reasonably practicable.
Section 16. Events of Default.
-----------------
The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(A) the failure to pay when due Annual Rent, additional rent or
other charges hereunder, which failure continues for more than five (5) days
after written notice thereof to Tenant from Landlord; or
(B) the failure of Tenant to perform or observe any other term or
condition contained in this Lease within thirty (30) days after written notice
thereof to Tenant from Landlord (unless Tenant has, within such thirty (30) day
period, commenced to cure such default and thereafter prosecutes the curing of
such default to completion with due diligence), unless a shorter grace period is
set forth herein, in which event such shorter grace period shall govern; or
(C) the failure of Tenant to perform or observe any term or
condition of this Lease which, because of its character, would immediately
jeopardize Landlord's interest (such as, but without limitation, failure to
maintain public liability insurance) and such failure continues for twenty-four
(24) hours after notice thereof; or
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(D) if Tenant makes any assignment for the benefit of creditors
or files a petition for relief under any bankruptcy or insolvency law or code;
or
(E) if such a petition filed against Tenant is not dismissed
within ninety (90) days; or
(F) if a custodian or similar agent is authorized or appointed
to take charge of all or substantially all of the assets of Tenant; or
(G) if Tenant's interest in this Lease is taken on execution or
other process of law in any action against Tenant; or
(H) if a default of Tenant of the kind set forth in clauses (A)
or (B) above shall occur and if either (i) Tenant shall cure such default within
the applicable grace period or (ii) if Tenant has not cured such default within
the applicable grace period but Landlord shall, in its sole discretion, permit
Tenant to cure such default after the applicable grace period has expired, and
an event which would constitute a similar default after the applicable grace
period shall occur more than twice within the next 365 days, whether or not such
similar default is cured within the applicable grace period.
Upon the occurrence of an Event of Default by Tenant hereunder,
Landlord may, immediately or at any time thereafter (notwithstanding any
license, consent or waiver of any former breach): (x) and without demand or
notice, in person or by agent or attorney, enter the Leased Premises or any part
thereof and repossess the same as of its former estate; or (y) terminate this
Lease by written notice to Tenant; and in either event, expel Tenant and those
claiming through or under it, and remove their effects, without being deemed
guilty of any manner of trespass and without prejudice to any remedy which
otherwise might be available for arrears of rent or breach of covenant; and upon
entry or notice as aforesaid, this Lease shall terminate and Landlord, in
addition to all other remedies which it may have at law or in equity, shall have
the remedies provided in Section 17 hereof.
Tenant hereby waives and surrenders all rights and privileges
which it might have under or by reason of any present or future law to redeem
the Leased Premises, or to have continuance of this Lease for the term hereby
leased, after being dispossessed or ejected therefrom by process of law or under
the terms of this Lease, or after the termination of this Lease, as herein
provided.
Section 17. Landlord's Remedies.
-------------------
(A) If this Lease shall be terminated as provided in Section 16
hereof, in addition to all sums which were due prior to the date of such
termination, Tenant shall, upon the election of the Landlord, forthwith pay to
Landlord as damages, a sum equal to the then present value of the amount by
which the amount of rent which would have been paid in accordance with this
Lease for the remainder of the term hereof (as set forth in Section 3 hereof)
exceeds the fair market rental value of the Leased Premises for the remainder of
the term, calculated as of the date of termination. In calculating the amount of
rent which would have been paid for the remainder of the Term, there shall be
included in addition to the Annual Rent and additional rent,
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<PAGE>
the value of all other considerations agreed to be paid or performed by Tenant
for the remainder of the Term. If, at the end of the term of this Lease as set
forth in Section 3 hereof, the rent which Landlord has actually received from
the Leased Premises is less than the fair market rent calculated as aforesaid,
Tenant shall thereupon pay to Landlord the amount of such difference. Should
Landlord fail to make such an election, Tenant shall indemnify Landlord for the
loss of rent by a payment at the end of each month for the remainder of the term
originally set forth in Section 3 hereof, representing the difference between
the rent which would have been paid (Annual Rent and additional rents) and the
rent actually derived from the Leased Premises, by Landlord for such month, if
any.
(B) In lieu of any other damages or indemnification and in lieu
of recovery by Landlord of all sums payable under any of the foregoing
provisions of Section 17(A), Landlord may elect to recover, and Tenant shall
forthwith pay, as liquidated damages, an amount equal to the aggregate of the
minimum Annual Rent plus any additional rents (including, without limitation,
amounts for Tax Excess and Operating Cost Excess) due and payable by Tenant for
the twelve months ended immediately prior to such termination (plus the amount
of Annual Rent and additional rents of any kind accrued and unpaid at the time
of termination) and less the amount of any recovery by Landlord under the
foregoing provisions of Section 17(A) up to the time of payment of such
liquidated damages. This Section 17(B) shall be inapplicable in the event
termination pursuant to Section 16 hereof occurs within the last year of the
term hereof.
(C) In addition to the foregoing, Tenant also agrees (1) to
indemnify and save Landlord harmless from and against all reasonable expenses
and attorneys' fees which Landlord may incur in connection with such termination
and the re-letting of the Leased Premises, (2) that Landlord may re-let the
Leased Premises, or any portion thereof, for a period which may, at Landlord's
option, be less than or exceed the period which would otherwise have constituted
the balance of the Term, and may grant concessions or free rent to the extent
appropriate or necessary to re-let, and (3) to reimburse Landlord, upon demand
therefor, for the unamortized portion of (a) the costs incurred by Landlord
(including, without limitation, Building Standard costs, architect's and
engineer's fees, and attorney's fees for preparation and regulation of this
Lease) in connection with the improvement and/or preparation of the Leased
Premises for occupancy by Tenant and (b) the brokerage commission, legal fees
and other costs or expenses paid by Landlord with respect to this Lease (in both
cases, the unamortized portions shall be calculated as of the date of
termination of the Lease and shall include interest thereon at the rate
referenced in Section 19). Any suit brought to collect the amount of deficiency
for any month shall not prejudice in any way the right of Landlord to collect
the deficiency for any subsequent month by a similar proceeding. Landlord may
make such alterations, repairs, replacements and decorations to the Leased
Premises as Landlord, in Landlord's reasonable judgment, considers advisable for
the purpose of re-letting the Leased Premises. Landlord agrees to use reasonable
efforts to re-let the Leased Premises consistent with Landlord's normal leasing
efforts and provided the Leased Premises shall not have priority over other
vacant space in the Building.
(D) In the event of any default by Tenant hereunder, Tenant will
reimburse Landlord for all expenses and reasonable attorneys' fees incurred by
Landlord in collecting any amount due from Tenant, enforcing any obligation of
Tenant hereunder, curing any default of Tenant or in obtaining possession of, or
in re-letting, the Leased Premises; and Tenant shall pay all reasonable
attorneys' fees and expenses arising out of any litigation in which Landlord
shall
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<PAGE>
become involved by reason of any default, act or failure to act, or negligence
of Tenant or anyone acting under Tenant.
(E) In addition to all other remedies provided in this Lease,
Landlord shall be entitled to restrain by injunction any violation, or any
attempted or threatened violation, of any of the covenants, conditions, or
provisions of this Lease.
(F) No act or thing done by Landlord during the term hereof shall
be deemed an acceptance or a surrender of the Leased Premises, and no agreement
to accept such surrender shall be valid, unless in writing, signed by the
Landlord. The delivery of keys to any employee of Landlord, Landlord's
Management Agent or any other of Landlord's agents shall not operate as a
termination of the Lease or a surrender of the Leased Premises.
Section 18. Cumulative Remedies.
-------------------
The specified remedies to which Landlord may resort under the
terms of this Lease are cumulative, are not intended to be exclusive of any
other remedies or means of redress to which Landlord may be lawfully entitled in
case of any breach or threatened breach by Tenant of any provision of this
Lease, and are in addition to any now or hereafter existing in law, in equity,
or by statute.
Section 19. Interest Due on Tenant Defaults.
-------------------------------
If Tenant fails (A) to pay the full amount of any annual or
additional rent or to make any other payment required within five (5) days of
the due date thereof, or (B) to perform any act required of Tenant hereunder
after any applicable grace period, Landlord shall have the right to collect the
amount of such overdue payment or to perform such act on behalf of Tenant and to
collect from Tenant, as additional rent, interest computed on the amount of such
payment from the due date thereof or the cost of such performance on behalf of
Tenant from the date of performance thereof at a rate per annum equal to the
lesser of (1) fourteen percent (14%) or (2) the maximum rate of interest
permitted by law.
Section 20. Holdover.
--------
If the Tenant remains in the Leased Premises beyond the
expiration of this Lease, such holding over shall be without right, Tenant shall
be liable to Landlord for any loss or damage incurred by Landlord as a result
thereof, and such continued occupancy shall not be deemed to create any tenancy,
but the Tenant shall be a tenant at sufferance only and Tenant shall pay to
Landlord a daily fee for use and occupancy of the Leased Premises equal to one
hundred and fifty percent (150%) of the rent and other charges in effect and/or
due from Tenant under this Lease as of the day next prior to the date of
expiration of this Lease.
Section 21. Subordination of Lease.
----------------------
(A) (1) Landlord represents that, as of the date of execution of
this Lease, the Property is not encumbered by any mortgage, security interest in
the nature of a
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mortgage; i.e., as of such date there are no Superior Mortgages (as hereinafter
defined) affecting the Property.
(2) Tenant agrees that upon request of Landlord, Tenant will
subordinate this Lease to the lien of any future ground lease mortgage or
mortgages (including, without limitation, leasehold mortgages) upon the
Building and/or Property, irrespective of the time of execution or time of
recording of any such ground lease, mortgage or mortgages. Tenant agrees
that it will, upon request of Landlord, execute, acknowledge and deliver
any and all instruments deemed necessary or desirable by Landlord to give
effect to, or notice of, such subordination, provided only that with
respect to mortgages or ground leases entered into after the date hereof,
Landlord shall use reasonable efforts (which shall not obligate Landlord to
incur any expenses in connection therewith other than reasonable
administrative expenses) to obtain from the holder of such mortgage or the
lessor under such lease an agreement whereby, so long as no default of
Tenant shall exist, all of Tenant's rights hereunder (subject to the
conditions set forth in Section 21(B) hereof) shall not be disturbed by
such holder or lessor; it being expressly understood that it; despite such
reasonable efforts, Landlord is unable to obtain such agreements, this
Lease shall nonetheless be subordinate to such mortgage or ground lease,
all as herein above provided. This Section 21 shall be self-operative and
no further instrument of subordination shall be required.
(3) In confirmation of such subordination, Tenant shall
promptly execute, acknowledge and deliver any instrument that Landlord, the
lessor under any such lease or the holder of any such mortgage or any of
their respective successors in interest may reasonably request to evidence
such subordination.
(4) Any lease to which this Lease is, at the time referred
to, subject and subordinate is herein called "Superior Lease" and the
lessor of a Superior Lease or its successor in interest, at the time
referred to, is herein called "Superior Lessor"; and any mortgage to which
this lease is, at the time referred to, subject and subordinate, is herein
called "Superior Mortgage" and the holder of a Superior Mortgage is herein
called "Superior Mortgagee".
(B) (1) If any Superior Lessor or Superior Mortgagee or the
nominee or designee of any Superior Lessor or Superior Mortgagee shall succeed
to the rights of Landlord under this Lease, whether through possession or
foreclosure action or delivery of a new lease or deed, or otherwise, then at the
request of such party so succeeding to Landlord's rights (herein called
"Successor Landlord") and upon such Successor Landlord's written agreement to
accept Tenant's attornment, Tenant shall attorn to and recognize such Successor
Landlord as Tenant's landlord under this Lease and shall promptly execute and
deliver any instrument that such Successor Landlord may reasonably request to
evidence such attornment.
(2) Upon such attornment, this Lease shall continue in full
force and effect as a direct lease between the Successor Landlord and
Tenant upon all of the terms, conditions and covenants as are set forth in
this Lease, except that the Successor Landlord (unless formerly the
landlord under this Lease or its nominee or designee) shall not be (a)
liable in any way to Tenant for any act or omission, neglect or default on
the
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<PAGE>
part of Landlord under this Lease, (b) responsible for any monies owing by
or on deposit with Landlord to the credit of Tenant not transferred to the
Successor Landlord, (c) subject to any counterclaim or setoff which
theretofore accrued to Tenant against Landlord, (d) bound by any
modification of this Lease subsequent to such Superior Lease or Superior
Mortgage, or by any previous prepayment of fixed rent for more than one
month which was not approved in writing by the Superior Lessor or the
Superior Mortgagee thereto, (e) liable to the Tenant beyond the Successor
Landlord's interest in the Property and the rents, income, receipts,
revenues, issues and profits issuing from such Property, (f) responsible
for the performance of any work to be done by the Landlord under this Lease
to render the Premises ready for occupancy by the Tenant, or (g) required
to remove any person occupying the Leased Premises or any part thereof,
except if such person claims by, through or under the Successor Landlord.
Section 22. Covenant of Quiet Enjoyment; Landlord's Right to Make Alterations
-----------------------------------------------------------------
or Improvements to the Property.
-------------------------------
Tenant, on payment of the rents and other charges payable
hereunder, and upon performance of the covenants of this Lease on its part to be
performed, shall and may peaceably and quietly have, hold and enjoy the Leased
Premises for the term of this Lease against anyone claiming by through or under
Landlord, subject to the terms hereof and to any instrument having a prior lien
or right on the Property; provided, however, Landlord reserves the right at any
time and from time to time, without the same constituting breach of Landlord's
covenant of quiet enjoyment or an actual or constructive eviction, and without
incurring any liability to Tenant or otherwise affecting Tenant's obligations
under this Lease, to make such changes, alterations, improvements repairs or
replacements in or to the interior and exterior of the Building (including the
Leased Premises) and the fixtures and equipment thereof, and in or to the
Property, or properties adjacent thereto, as Landlord may deem necessary or
desirable, and to change the arrangement and/or location of entrances or
passageways, doors and doorways, corridors, elevators or other public parts of
the Building and Property; provided further, however, that there be no
unreasonable obstruction of the right of access to the Leased Premises by
Tenant. Nothing contained in this Section 22 shall be deemed to relieve Tenant
of any duty, obligation or liability of Tenant with respect to making any
repair, replacement or improvement or complying with any law, order or
requirement of any governmental or other authority. Landlord reserves the right,
at any time, and from time to time, to change the name and address of the
Building. In the event Landlord changes the name or address of the Building,
Landlord will reimburse Tenant for Tenant's reasonable, actual and substantiated
out of pocket costs in connection with such change, including, without
limitation, changes to stationary and business cards.
Section 23. Estoppel Certificate.
--------------------
Landlord and Tenant agree, at any time and from time to time,
upon not less than ten (10) days' prior written request by the other, to
execute, acknowledge and deliver to the requesting party a statement in writing
certifying (if such be the case) that this Lease is unmodified and in full force
and effect (or, if there have been modifications, that the same are in full
force and effect as modified and stating the modifications), that to the
knowledge of such party no uncured defaults exist hereunder (or if any defaults
exist, specifying the same), and the
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dates to which the rent and other charges due hereunder have been paid in
advance if any. If Tenant fails to sign and return any such certificate within
such ten-day period, Tenant shall be deemed to have irrevocably designated and
appointed Landlord as its attorney-in-fact to execute and deliver such
certificate in the name of and on behalf of Tenant.
Section 24. Notice of Lease.
---------------
Tenant agrees that it will not record this Lease. Both parties
shall, upon request of either, execute and deliver a notice of this Lease
reasonably satisfactory to Landlord's attorneys, in such recordable form as may
be permitted by applicable statute. In no event shall such document set forth
the Annual Rental or other charges payable by Tenant under this Lease; and any
such document shall expressly state that it is executed pursuant to the
provisions contained in this Lease, and is not intended to vary the terms and
conditions of this Lease. In the event of termination of this Lease, the Tenant
agrees to execute a recordable instrument setting forth the fact of and date of
such termination and hereby irrevocably designates and appoints the Landlord as
its attorney-in-fact to execute in the name of the Tenant and to record such
instrument.
Section 25. Notices and Approvals.
---------------------
All notices, requests, demands, consents, elections, approvals,
and other communications which may be or are required to be served or given
hereunder (hereinafter collectively called "Notices") shall be in writing and
shall (A) be delivered in hand or (B) sent by registered or certified mail,
postage prepaid, return receipt requested or (C) delivered to an express
delivery service for overnight delivery, addressed if to Landlord, at the
Original Address of Landlord or such other address as Landlord shall have last
designated by notice in writing to Tenant, and if to Tenant, at the Original
Address of Tenant, or such other address as Tenant shall have last designated by
notice in writing to Landlord. Each party agrees upon request of the other to
immediately acknowledge any such hand delivery or delivery by an express
delivery service. Notices shall be deemed given (x) upon deposit with the U.S.
Postal Service if mailed in the manner aforesaid, or (y) upon receipt or refusal
to receive by the addressee if delivered by hand or overnight delivery service.
Section 26. Non-Waiver Provision.
--------------------
No assent, express or implied, by either party to any breach of
any agreement or condition herein contained on the part of the other to be
performed or observed, and no waiver, express or implied, of any such agreement
or condition, shall be deemed to be a waiver of or assent to any succeeding
breach of the same or any other agreement or condition. The acceptance by
Landlord of rent or other payment hereunder, or silence by Landlord as to any
breach shall not be construed as a waiver of any of the Landlord's rights
hereunder unless such waiver shall be in writing.
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Section 27. Inability to Perform - Exculpatory Clause.
-----------------------------------------
Except as otherwise expressly provided herein, the failure of
either party hereto to perform the obligations, covenants and agreements herein
contained shall be excused during such period as the party failing to perform is
unable to so perform by reason of strikes or labor troubles, or any other
similar or dissimilar cause whatsoever beyond such party's control (including,
but not limited to, governmental preemption in connection with a national
emergency or by reason of any rule, order or regulation of any governmental
agency or any department or subdivision thereof); provided, however, Tenant
shall not be excused from its obligations hereunder to pay Annual Rent,
additional rent and other monetary obligations by reason of any of the foregoing
matters contained in this Section 27; and provided further, however, that in
each such instance of inability of either party to perform, the non-performing
party shall exercise due diligence to eliminate the cause of such inability to
perform, to secure alternate sources of supply and the like.
Section 28. Limitation of Landlord's Liability.
----------------------------------
The term "Landlord", as used in this Lease, so far as covenants
or obligations to be performed by Landlord are concerned, shall be limited to
mean and include only the owner or owners at the time in question of the
Landlord's interest in the Building and not the owner or owners from time to
time of any Superior Lease (as defined in Section 21 above), and in the event of
any transfer or transfers of title to the Landlord's interest in the Building,
the Landlord herein named (and in case of any subsequent transfers or
conveyances, the then grantor) shall be automatically freed and relieved from
and after the date of such transfer or conveyance of all liability as respects
the performance of any covenants or obligations on the part of the Landlord
contained in this Lease thereafter to be performed, it being intended hereby
that the covenants and obligations contained in this Lease on the part of
Landlord shall, subject as aforesaid, be binding on the Landlord, its successors
and assigns, only during and in respect of their respective successive periods
of ownership of the Property. Tenant, its successors and assigns, agrees it
shall not assert nor seek to enforce any claim for breach of this Lease against
any of Landlord's assets other than Landlord's interest in the Building and in
the rents, issues and profits thereof, and Tenant agrees to look solely to such
interest for the satisfaction of any liability of or claim against Landlord
under this Lease, it being specifically agreed that in no event whatsoever shall
Landlord (which term shall include, without limitation, any beneficiary of any
trust of which Landlord is a trustee and any of Landlord's officers, directors,
partners, shareholders, agents, attorneys and employees) ever be personally
liable for any such liability. In no event shall Landlord ever be liable to
Tenant for indirect or consequential damages.
Section 29. Notice To Mortgagee; Opportunity to Cure.
----------------------------------------
After receiving notice from any person, firm or other entity that
it is a Superior Mortgagee or Superior Lessor, no notice from Tenant to Landlord
shall be effective unless and until a copy of the same is given to such
mortgagee or lessor, and the curing of any of Landlord's defaults by such
mortgagee or lessor shall be treated as performance by Landlord. Accordingly, no
act or failure to act on the part of Landlord which would entitle Tenant under
the terms of this
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<PAGE>
Lease, or by law, to be relieved of Tenant's obligations hereunder or to
terminate this Lease, shall result in a release or termination of such
obligations or a termination of this Lease unless (A) Tenant shall have first
given written notice of the Landlord's act or failure to act to such Superior
Mortgagee or Superior Lessor specifying the act or failure to act on the part of
the Landlord which could or would give basis to Tenant's rights; and (B) such
Superior Mortgagee or Superior Lessor, after receipt of such notice, has failed
or refused to correct or cure the condition complained of within a reasonable
time thereafter, but nothing contained in this Section 29 shall be deemed to
impose any obligation on any such Superior Mortgagee or Superior Lessor to
correct or cure any such condition. "Reasonable time" as used above means and
includes a reasonable time to obtain possession of the Property if any such
Superior Mortgagee or Superior Lessor elects to do so and a reasonable time to
correct or cure the condition if such condition is determined to exist.
Section 30. Assignment of Rents.
-------------------
With reference to any assignment by Landlord of Landlord's
interest in this Lease, or the rents payable thereunder, conditional in nature
or otherwise, which assignment is made to a Superior Mortgagee or Superior
Lessor, Tenant agrees:
(A) That the execution thereof by Landlord, and the acceptance
thereof by such Superior Mortgagee or Superior Lessor shall never be treated as
an assumption by such Superior Mortgagee or Superior Lessor of any of the
obligations of the Landlord hereunder, unless such Superior Mortgagee or
Superior Lessor shall, by notice sent to the Tenant, specifically make such
election; and
(B) That, except as aforesaid, such Superior Mortgagee or
Superior Lessor shall be treated as having assumed the Landlord's obligations
hereunder only upon foreclosure of such Superior Mortgagee's mortgage and the
taking of possession of the Premises, or, in the case of a Superior Lessor, the
assumption of the Landlord's position hereunder by such Superior Lessor. In no
event shall the acquisition of title to Property by a purchaser which,
simultaneously therewith, leases the entire Property back to the seller thereof
be treated as an assumption by operation of law or otherwise, of Landlord's
obligations hereunder, but Tenant shall look solely to such seller-lessee and
its successors from time to time in title for performance of Landlord's
obligations hereunder. In any such event, this Lease shall be subject and
subordinate to the lease to such purchaser- lessor. For all purposes, such
seller-lessee, and its successors in title, shall be Landlord hereunder unless
and until Landlord's position shall have been assumed by such purchaser-lessor.
Section 31. No Brokerage.
------------
Landlord and Tenant each warrant and represent to the other that
neither Landlord nor Tenant has dealt with any broker other than Insignia/ESG
and Spaulding & Slye Colliers in connection with the consummation of this Lease,
and, in the event of any brokerage claims, other than claims by Insignia/ESG or
Spaulding & Slye Colliers against either party predicated upon prior dealings
with the other named herein, Landlord or Tenant, as applicable, agrees to defend
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<PAGE>
the same and indemnify the other against any such claim. Landlord shall be
responsible for paying any commission due to the brokers in connection with this
Lease.
Section 32. Self-Help.
---------
Landlord shall have the right, but shall not be required, to pay
such sums or do any act which requires the expenditure of moneys which may be
necessary or appropriate by reason of any default by Tenant (after the giving of
any required notice and the expiration of any applicable cure period) and in the
event of the exercise of such right by Landlord, Tenant agrees to pay to
Landlord forthwith upon demand all such sums; and if Tenant shall default in
such payment, Landlord shall have the same rights and remedies as Landlord has
hereunder for the failure of the Tenant to pay the Rental.
Section 33. Relief Limited.
--------------
Whenever Tenant shall claim under any provision of this Lease
that Landlord has unreasonably withheld or delayed its consent or approval to
some request of Tenant, Tenant shall have no claim for damages by reason of such
alleged withholding or delay, and Tenant's sole remedy therefor shall be
declaratory or injunctive relief, but in any event without the recovery of
damages.
Section 34. Interruptions; Landlord's Access.
--------------------------------
(A) Landlord reserves the right to stop or interrupt any service
or utility system, when necessary by reason of accident or emergency or
construction work until the necessity for said interruption or stoppage has
ended; provided, however, that Landlord will use reasonable efforts to avoid
stoppage or interruptions in electric service to the Leased Premises and, when
unavoidable, Landlord will use reasonable efforts to schedule interruptions and
stoppages outside of Normal Business Hours.
(B) Provided Tenant's use and enjoyment of, and access to, the
Leased Premises is not materially adversely affected, Landlord reserves the
right at any time and from time to time to make such changes, alterations,
additions, improvements, repairs or replacements in or to the Building
(including the Leased Premises) and the fixtures and equipment thereof, as well
as in or to the street entrances, halls, passages, elevators, escalators, and
stairways thereof, as it may deem necessary or desirable, and to change the
arrangement and/or location of entrances, passageways, doors and doorways, and
corridors, elevators, stairs, toilets, or other public parts of the Building.
Landlord shall have the right during the progress of any such repairs,
replacements or improvements or while performing work and furnishing materials
in connection with same to take upon or through the Leased Premises all
necessary materials, tools and equipment so long as same does not unreasonably
interfere with Tenant's use and enjoyment of the Leased Premise.
Section 35. Entire Agreement.
----------------
This Lease sets forth the entire agreement between the parties
hereto and cannot be modified or amended except in writing duly executed by both
parties hereto.
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<PAGE>
Section 36. Partial Invalidity.
------------------
The invalidity of one or more of the provisions of this Lease
shall not affect the remaining portions of this Lease; and, if any one or more
of the provisions of this Lease should be declared invalid by final order,
decree or judgment of a court of competent jurisdiction, this Lease shall be
construed as if such invalid provisions had not been included in this Lease.
Section 37. Execution.
---------
The covenants and agreements of this Lease shall, subject to the
terms of this Lease to the contrary, be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns as the case may
be. If there is more than one tenant the obligations imposed by this Lease shall
be joint and several. If the Tenant is a corporation, each of the persons
executing this instrument on behalf of the Tenant, hereby covenant and warrant
that the Tenant is a duly existing and valid corporation, that the Tenant is
qualified to do business in Massachusetts, that Tenant has duly executed and
delivered this Lease, that the execution, delivery and performance by Tenant of
this Lease are within the powers of Tenant and have been duly authorized by all
requisite action, and that the Lease is a valid and binding obligation of Tenant
in accordance with its terms. Further, if the Tenant is a corporation, the
Tenant shall deliver to the Landlord, at the time of execution of this Lease, a
Clerk's or Secretary's Certificate in the form attached hereto as Exhibit D (or
other suitable form satisfactory to counsel for the Landlord), as to the due
authorization of the execution of this Lease and incumbency of the signing
officer. This Lease may be executed in one or more counterparts, all of which
are identical, any one of which is to be deemed to be complete in itself and may
be introduced in evidence or used for any purpose. The headnotes throughout this
Lease are for convenience or reference only, and shall in no way be held or
deemed to define, limit, explain, describe, modify or add to the interpretation,
construction or meaning of any provision of this Lease.
Section 38. Landlord's Representations and Warranties.
-----------------------------------------
Landlord hereby warrants and represents to Tenant to Landlord's
actual knowledge as of the date hereof, that:
(A) That applicable zoning ordinances, laws, regulations, rules
and codes and the Building's Certificate of Occupancy permit the Permitted Uses
at the Leased Premises.
(B) The Leased Premises and Building are structurally sound and
watertight.
(C) The electrical capacity for the Building is sufficient for
normal and customary general office use, of reasonable density and capacity,
including, without limitation, the use of a telephone and paging system,
facsimile equipment, photocopy machines, desk-top computers, word processors,
utility kitchen equipment, and other customary office machines and equipment.
WITNESS the execution hereof as a sealed instrument as of the
date first above written.
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<PAGE>
Landlord: 45 MILK STREET, L.P.
By: 45 Milk Street Corp.,
Its General Partner
By
--------------------------
Its
Hereunto duly authorized
Tenant: INTERNET CAPITAL GROUP, INC.
By /s/ Henry N. Nassau
--------------------------
Its Managing Director
-38-
<PAGE>
EXHIBIT A
[Intentionally Omitted]
-39-
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
---------------------
1. The rights of tenants in the entrances, corridors, elevators and
escalators of the Building are limited to ingress to and egress from the
tenants' premises for the tenants and their employees, licensees and invitees,
and no tenant shall use, or permit the use of, the entrances, corridors,
escalators or elevators for any other purpose. No tenant shall invite to the
tenant's premises, or permit the visit of, persons in such numbers or under such
conditions as to interfere with the use and enjoyment of any of the plazas,
entrances, corridors, escalators, elevators and other facilities of the Building
by other tenants. Fire exits and fire stairways are for emergency use only, and
they shall not be used for any other purposes by the tenants, their employees,
licensees or invitees. No tenant shall encumber or obstruct or permit the
encumbrance or obstruction of any of the sidewalks, plazas, entrances,
corridors, escalators, elevators, fire exits or stairways of the Building.
Landlord reserves the right to control and operate the public portions of the
Building and the public facilities, as well as facilities furnished for the
common use of the tenants, in such manner as it deems best for the benefit of
the tenants generally.
2. The cost of repairing any damage to the public portions of the Building
or the public facilities or to any facilities used in common with other tenants,
caused by a tenant or the employees, licensees or invitees of a tenant, shall be
paid by such tenant.
3. Landlord may refuse admission to the Building outside of ordinary
business hours to any person not known to the watchman in charge or not having a
pass issued by the Landlord or not properly identified, and may require all
persons admitted to or leaving the Building outside of ordinary business hours
to register. Tenant's employees, agents and visitors shall be permitted to enter
and leave the Building whenever appropriate arrangements have been previously
made between Landlord and the Tenant with respect thereto. Each tenant shall be
responsible for all persons for whom he requests such permission and shall be
liable to the Landlord for all acts of such persons. Any person whose presence
in the Building at any time shall, in the judgment of Landlord, be prejudicial
to the safety, character, reputation and interests of the Building or its
tenants may be denied access to the Building or may be ejected therefrom. In
case of invasion, riot, public excitement or other commotion Landlord may
prevent all access to the Building during the continuance of the same, by
closing the doors or otherwise, for the safety of the tenants and protection of
property in the Building. Landlord may require any person leaving the Building
with any package or other object to exhibit a pass from the tenant from whose
premises the package or object is being removed, but the establishment and
enforcement of such requirements shall not impose any responsibility on Landlord
for the protection of any tenant against the removal of property from the
premises of the tenant. Landlord shall, in no way, be liable to any tenant for
damages or loss arising from the admission, exclusion or ejection of any person
to or from the tenant's premises or the Building under the provisions of this
rule.
4. Except as permitted in the Lease, no tenant shall obtain or accept or
use in its premises ice, drinking water, food, beverage, barbering, boot
blacking, floor polishing, lighting maintenance, cleaning or other similar
services from any persons not authorized by Landlord in writing to furnish such
services, provided always that charges for such services by persons authorized
by Landlord are not excessive. Such services shall be furnished only at such
hours, in
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<PAGE>
such places within the tenant's premises and under such regulations as may be
fixed by Landlord.
5. No awnings or other projections over or around the windows shall be
installed by any tenant and only such window blinds as are supplied or permitted
by the Landlord shall be used in a tenant's premises.
6. There shall not be used in any space, or in the public halls of the
Building, either by any tenant or by jobbers or others, in the delivery or
receipt of merchandise or mail any hand trucks, except those equipped with
rubber tires and side guards. All deliveries to tenants, except mail, shall be
made to such place designated by Landlord and shall be distributed to tenants
only during the hours from 8:00 a.m. to 12:00 noon and 2:00 p.m. to 4:00 p.m.,
Monday through Friday.
7. All entrance doors in each tenant's premises shall be left locked when
the tenant's premises are not in use. Entrance doors shall not be left open at
any time. All windows in each tenant's premises shall be kept closed at all
times and all blinds or drapes therein above the ground floor shall be lowered
or closed when and as reasonably required because of the position of the sun,
during the operation of the Building air conditioning system to cool or
ventilate the tenant's premises.
8. No noise, including the playing of any musical instruments, radio or
television, which, in the judgment of the Landlord, might disturb other tenants
in the Building shall be made or permitted by any tenant and no cooking shall be
done in any tenant's premises except as expressly approved by Landlord. Nothing
shall be done or permitted in any tenant's premises, and nothing shall be
brought into or kept in any tenant's premises, which would impair or interfere
with any of the Building services or the proper and economic heating, cleaning
or other servicing of the Building or the premises, or the use or enjoyment by
any other tenant of any other premises, nor shall there be installed by any
tenant any ventilating, air conditioning, electrical or other equipment of any
kind which, in the judgment of the Landlord, might cause any such impairment or
interference. No dangerous, inflammable, combustible or explosive object or
material shall be brought into the Building by any tenant or with the permission
of any tenant.
9. No tenant shall permit any cooking or food odors emanating from the
tenant's premises to seep into other portions of the Building.
10. No acids, vapors or other materials shall be discharged or permitted to
be discharged into the waste lines, vents or flues of the Building which may
damage them. The water and wash closets and other plumbing fixtures in or
serving any tenant's premises shall not be used for any purpose other than the
purpose for which they were designed or constructed and no sweepings, rubbish,
rags, acids or other foreign substances shall be deposited therein. All damages
resulting from any misuses of the fixtures shall be borne by the tenant who, or
whose servants, employees, agents, visitors or licensees, shall have caused the
same.
11. No signs, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any tenant on any part of the outside or inside
of the premises or the
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<PAGE>
Building without the prior written consent of Landlord. In the event of the
violation of the foregoing by any tenant, Landlord may remove the same without
any liability, and may charge the expense incurred by such removal to the tenant
or tenants violating this rule. Interior signs and lettering on doors and
elevators shall be inscribed, painted, or affixed for each tenant by Landlord at
the expense of such tenant, and shall be of a size, color and style acceptable
to Landlord. Landlord shall have the right to prohibit any advertising by any
tenant which impairs the reputation of the Building or its desirability as a
building for offices, and upon written notice from Landlord, such tenant shall
refrain from or discontinue such advertising.
12. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows in any tenant's premises and no lock on any door therein
shall be changed or altered in any respect. Duplicate keys for a tenant's
premises and toilet rooms shall be procured only from the Landlord, which may
make a reasonable charge therefor. Upon the termination of a tenant's lease, all
keys to the tenant's premises and toilet rooms shall be delivered to the
Landlord.
13. Except as provided in Section 10(C) of the Lease, no tenant shall mark,
paint, drill into, or in any way deface any part of the Building or the premises
demised to such tenant. No boring, cutting or stringing of wires shall be
permitted, except with the prior written consent of Landlord, and as Landlord
may direct. No tenant shall install any resilient tile or similar floor covering
in the premises demised to such tenant, except in a manner approved by Landlord.
14. No tenant or occupant shall engage or pay any employees in the
Building, except those actually working for such tenant or occupant in the
Building. No tenant shall advertise for laborers giving an address at the
Building.
15. No premises shall be used, or permitted to be used, at any time as a
store for sale or display of goods or merchandise of any kind, or as a
restaurant, shop, booth, bootblack or other stand, or for the conduct of any
business or occupation which involves direct patronage of the general public in
the premises demised to such tenant, or for manufacturing or for other similar
purposes.
16. The requirements of tenants will be attended to only upon application
at the office of the Building. Employees of Landlord shall not perform any work
or do anything outside of the regular duties, unless under special instructions
from the office of the Landlord.
17. Each tenant shall, at its expense, provide artificial light in the
premises demised to such tenant for Landlord's agents, contractors and employees
while performing janitorial or other cleaning services and making repairs or
alterations in said premises.
18. No tenant shall permit its employees to loiter around the hallways,
stairways, elevators, front, roof or any other part of the Building used in
common by the occupants thereof.
19. Any cuspidors or similar containers or receptacles used in any tenant's
premises shall be cared for and cleaned by and at the expense of the tenant.
20. Tenants shall use only the service elevator for deliveries and only at
hours prescribed by Landlord. Bulky materials, as determined by Landlord, may
not be delivered
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<PAGE>
during usual business hours but only thereafter. Tenants shall pay for use of
the service elevator at rates prescribed by Landlord.
21. Normal business hours shall be 8:00 a.m. to 6:00 p.m., Monday through
Friday, and 8:00 a.m. to 1:00 p.m. on Saturdays. Normal business days shall
include all days except Saturday, Sunday, New Year's Day, Washington's Birthday,
Patriot's Day, Memorial Day, Bunker Hill Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day, Christmas Day (and the following
day when any such day occurs on Sunday) and such other days that tenant's
occupying at least 50% of the Building recognize as holidays for their general
office staff.
-43-
<PAGE>
EXHIBIT C
INTENTIONALLY DELETED
---------------------
-44-
<PAGE>
Exhibit 10.15
AMENDMENT NO. 1
AMENDMENT NO. 1, dated as of October 27, 1999 (this "Amendment"), to the
---------
Credit Agreement, dated as of April 30, 1999 (the "Credit Agreement"), among
----------------
INTERNET CAPITAL GROUP, INC., a Delaware corporation ("ICG"), INTERNET CAPITAL
---
GROUP OPERATIONS, INC., a Delaware corporation ("ICG Operations" and together
--------------
with ICG, each a "Borrower" and collectively the "Borrowers"), the BANKS (as
---------
defined therein) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent
for the Banks (the "Agent").
-----
RECITALS
The Borrowers have advised the Agent and the Banks that they will make an
investment of an aggregate of $50,000,000 (the "eMerge Investment") in eMerge
-----------------
Interactive, Inc., a Delaware corporation ("eMerge"), pursuant to the Stock
------
Purchase Agreement, dated as of October 27, 1999 (the "Securities Purchase
-------------------
Agreement"), by and among ICG, eMerge and J Technologies, LLC, $27,000,000 of
- ---------
which shall be paid in cash and $23,000,000 shall be in the form of a
subordinated note due November __, 2000, payable to eMerge (the "eMerge Note").
-----------
The Borrowers have further advised the Agent and the Banks that in return for
the eMerge Investment, the Borrowers shall receive (i) 4,555,556 shares of
Series D Preferred Stock, par value $.01 per share of eMerge, of which (x)
2,555,556 shares (the "eMerge Preferred Stock") will be pledged to eMerge as
----------------------
collateral security for the eMerge Note and (y) 2,000,000 shares will be pledged
to the Agent on behalf of the Banks in accordance with the terms of the Loan
Documents (the "Bank Preferred Stock") (the Bank Preferred Stock, together with
--------------------
the eMerge Preferred Stock to the extent such eMerge Pledged Stock is, at the
time of determination, then subject to the provisions of Section 6 of this
Amendment, being collectively referred to herein as the "Pledged Preferred
-----------------
Stock"), (ii) one million shares of eMerge Common Stock, par value $.01 per
- -----
share, all of which shares shall be pledged to the Agent on behalf of the Banks
in accordance with the terms of the Loan Documents (the "Bank Pledged Common"
-------------------
and together with the Pledged Preferred Stock, the "eMerge Pledged Collateral"),
-------------------------
and (iii) a warrant (the "eMerge Warrant") entitling ICG to purchase 911,111
--------------
shares of eMerge Common Stock, par value $.01 per share (subject to adjustment
as provided in the eMerge Warrant). In connection with the eMerge Investment,
the Borrowers have requested the Agent and the Banks to agree to amend and waive
certain provisions of the Credit Agreement as set forth in this Amendment. The
Agent and the Banks parties hereto are willing to agree to such amendments and
waivers, but only on the terms and subject to the conditions set forth in this
Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers and the Agent and the Banks parties hereto hereby
agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Credit Agreement are used herein as therein.
<PAGE>
2. Amendments.
----------
(a) Section 1.1 of the Credit Agreement is hereby amended by adding the
following new definitions thereto in the appropriate alphabetical order:
"Amendment No. 1" shall mean Amendment No. 1, dated as of October __,
---------------
1999, to the Credit Agreement.
"Bank Pledged Common" shall have the meaning ascribed thereto in the
-------------------
recitals to Amendment No. 1.
"Bank Preferred Stock" shall have the meaning ascribed thereto in the
--------------------
recitals to Amendment No. 1.
"eMerge" shall mean eMerge Interactive, Inc., a Delaware corporation.
------
"eMerge Investment" shall have the meaning ascribed thereto in the
-----------------
recitals to Amendment No. 1.
"eMerge Note" shall have the meaning ascribed thereto in the recitals
-----------
to Amendment No. 1.
"eMerge Pledged Collateral" shall have the meaning ascribed thereto in
-------------------------
the recitals to Amendment No. 1.
"eMerge Preferred Stock" shall have the meaning ascribed thereto in
----------------------
the recitals to Amendment No. 1.
"eMerge Warrant" shall have the meaning ascribed thereto in the
--------------
recitals to Amendment No. 1.
"Pledged Preferred Stock" shall have the meaning ascribed thereto in
-----------------------
the recitals to Amendment No. 1.
"Stock Purchase Agreement" shall have the meaning ascribed thereto in
------------------------
the recitals to Amendment No. 1.
"Supplemental Closing Date" shall have the meaning ascribed to such
-------------------------
term in Section 3 hereof.
(b) Section 1.1 of the Credit Agreement is hereby amended by amending the
definition of "Borrowing Base" by deleting the last sentence thereof and
--------------
replacing it with the following:
"Notwithstanding anything to the contrary contained herein, when
determining the Borrowing Base, (i) no more than $25,000,000 of the Borrowing
Base shall be attributed to Pledged Collateral issued by any individual
Investment Entity other than eMerge and (ii) no more than $50,000,000 of the
Borrowing Base shall be attributed to eMerge Pledged Collateral issued by
eMerge; provided, however, that in no event shall any advance be made
-------- -------
-2-
<PAGE>
hereunder based on the value of the eMerge Preferred Stock which exceeds the
amount then paid by or on behalf of ICG pursuant to the eMerge Note."
(c) Section 7.1.15 of the Credit Agreement is hereby amended by deleting
such Section in its entirety and substituting in lieu thereof a new Section
7.1.15 to read as follows:
"7.1.15 Investments.
-----------
The Borrowers may make Investments in other Persons in addition
to Investments existing on the Closing Date and disclosed in Schedules 1.1(A-1),
1.1(A-2) and 1.1(A-3) attached hereto; provided, however, that (a) the Borrowers
-------- -------
may only invest a maximum of $25,000,000 in Cash and Cash Equivalents per
calendar year in any Investment Entity other than eMerge, (b) the Borrowers may
only invest a maximum of (x) an aggregate of $75,000,000 in Cash and Cash
Equivalents in eMerge for calendar years 1999 and 2000, and (y) $25,000,000 in
Cash and Cash Equivalents in eMerge in any calendar year subsequent to 2000 and
(c) the Borrowers will promptly, and in any event within five (5) Business Days
of the making of any such Investment provide to the Agent and the Banks an
updated Annex A to the Letter Agreement reflecting any such additional
Investment."
(d) Section 7.2.1 of the Credit Agreement is hereby amended by amending
clause (v) thereof by adding a new sentence at the end thereof as follows:
"For purposes of this clause (v) the aggregate principal amount of
the eMerge Note outstanding shall be considered to be part of the
$100,000,000.00 amount referred to hereinabove; but shall not be
deemed to be Subordinated Debt issued to Persons who are not Company
Insiders."
(e) Section 7.2.3 of the Credit Agreement is hereby amended by deleting
such Section in its entirety and substituting in lieu thereof a new Section
7.2.3 to read as follows:
"7.2.3 Guaranties.
----------
Each of the Loan Parties shall not, and shall not permit any of
its Subsidiaries to, at any time, directly or indirectly, become or be liable in
respect of any Guaranty, or assume, guarantee, become surety for, endorse or
otherwise agree, become or remain directly or contingently liable upon or with
respect to any obligation or liability of any other Person, except for (a)
subject to Section 7.2.3(b) hereof, Guaranties of Indebtedness in existence as
of the date hereof and listed on Schedule 7.2.3, (b) Guaranties of Indebtedness
--------------
incurred after the date hereof (provided, however, that notwithstanding anything
to the contrary contained herein, (x) subject to subparagraph (y) hereof, in no
event shall the aggregate amount of such Guaranties of Indebtedness permitted
under clauses (a) and (b) of this Section 7.2.3 exceed $8,000,000 at any one
time outstanding for the Loan Parties and their respective Subsidiaries and (y)
in no event shall the aggregate amount of any Guaranty of Indebtedness relating
to the eMerge Investment exceed $23,000,000 at any one time outstanding for the
Loan Parties and their respective
-3-
<PAGE>
Subsidiaries) and (c) Guaranties of Indebtedness of the Loan Parties otherwise
permitted hereunder."
(f) The Credit Agreement is hereby amended by deleting Schedules 1.1(P)
and 7.2.1 to the Credit Agreement and substituting in lieu thereof Schedules
1.1(P) and 7.2.1 to this Amendment.
3. Effectiveness. The effectiveness of this Amendment, is subject to the
-------------
satisfaction of the following conditions precedent (the date of such
satisfaction being herein referred to as the "Supplemental Closing Date"):
-------------------------
(a) Amendment Documents. The Agent shall have received:
-------------------
(i) this Amendment, executed and delivered by a duly authorized
officer of each of the Borrowers, with a counterpart for each Bank,
and
(ii) a Common Stock Warrant Power, substantially in the form of
the Warrant Power set forth on Exhibit A to this Amendment (the
"Warrant Power"), executed and delivered by a duly authorized officer
-------------
of each of the Borrowers, with a counterpart or a conformed copy for
each Bank.
Collectively, the documents referenced in clauses (i) through (ii) of
this Section 3(a) are referred to herein as the "Amendment Documents".
-------------------
(b) Related Agreements. The Borrowers shall have delivered to the
------------------
Agent, with a copy for each Bank, true and correct copies, certified as to
authenticity by the Borrowers, of the Stock Purchase Agreement.
(c) Concurrent Transaction. The eMerge Investment shall have been,
----------------------
or concurrently herewith shall be, consummated in accordance with the terms
of the Stock Purchase Agreement and the other Material Contracts relating
to the eMerge Investment, for such total consideration as set forth in the
Material Contracts relating to the eMerge Investment, in each case without
any material amendment, modification or waiver thereof except with the
consent of the Required Banks, which consent shall not be unreasonably
withheld, and the Agent shall have received evidence satisfactory to it to
that effect.
(d) Borrowing Base Certificate. On or prior to the Supplemental
--------------------------
Closing Date, the Agent and the Banks shall have received and the Agent and
the Banks shall be satisfied (both as to form and substance) with a pro
forma Borrowing Base Certificate in the form set forth in Exhibit 1.1(B) to
the Credit Agreement which shall be prepared as of a date prior to the
Supplemental Closing Date.
(e) Collateral Assignment of Contract Rights. The Collateral
----------------------------------------
Assignment of Contract Rights is hereby amended by supplementing Schedule A
thereto by adding to such Schedule A the material set forth on Schedule A
to this Amendment.
-4-
<PAGE>
(f) Proceedings of the Borrower. The Agent shall have received, with
---------------------------
a counterpart for each Bank, a copy of the resolutions, in form and
substance satisfactory to the Agent, of each of the Borrowers authorizing
the execution, delivery and performance of this Amendment and the other
Amendment Documents to which it is a party, certified by the Secretary or
an Assistant Secretary of each of the Borrowers as of the Supplemental
Closing Date, which certificate shall be in form and substance satisfactory
to the Agent and shall state that the resolutions thereby certified have
not been amended, modified, revoked or rescinded.
(g) Borrower Incumbency Certificate. The Agent shall have received,
-------------------------------
with a counterpart for each Bank, a certificate of each of the Borrowers,
dated the Supplemental Closing Date, as to the incumbency and signature of
the officers of each of the Borrowers executing this Amendment or the other
Amendment Documents to which each of the Borrowers is a party, satisfactory
in form and substance to the Agent, executed by an Authorized Officer of
each of the Borrowers.
(h) Representations and Warranties. Each of the representations and
------------------------------
warranties made by each of the Borrowers and the other Loan Parties in or
pursuant to the Loan Documents shall be true and correct in all material
respects on and as of the Supplemental Closing Date as if made on and as of
Supplemental Closing Date (and after giving effect to the amendments
provided for in this Amendment) (or, if any such representation or warranty
is expressly stated to have been made as of a specific date, as of such
specific date).
(i) No Default. No Potential Default or Event of Default shall have
----------
occurred and be continuing on the Supplemental Closing Date or after giving
effect to the amendments provided for in this Amendment.
(j) Additional Matters. All corporate and other proceedings, and all
------------------
documents, instruments and other legal matters in connection with the
transactions contemplated by this Agreement, the other Loan Documents and
the eMerge Documents shall be satisfactory in form and substance to the
Agent, and the Agent shall have received such other documents and legal
opinions in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request.
4. Representations and Warranties. To induce the Agent and the Banks to
------------------------------
enter into this Amendment, the Borrowers hereby represent and warrant to the
Agent and the Banks that, after giving effect to the amendments provided for
herein, the representations and warranties contained in the Credit Agreement and
the other Loan Documents will be true and correct in all material respects as if
made on and as of the date hereof and that no Potential Default or Event of
Default will have occurred and be continuing (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as of such
specific date).
5. Consent and Acknowledgement. The Agent and the Banks hereby consent to
---------------------------
and acknowledge that for purposes of the Credit Agreement the eMerge Investment
when consummated by the Borrowers will (i) not be deemed a transaction with an
Affiliate prohibited
-5-
<PAGE>
under Section 7.2.8 and (ii) not violate Section 7.2.15, in the event that under
the eMerge Note eMerge exercises its option to require prepayment on the eMerge
Note in an amount not to exceed $5,000,000 before May 1, 2000.
6. Covenants and Agreements. The Agent and the Banks agree that the
------------------------
delivery requirements of Sections 7.1.18 and 7.1.19 shall be waived as they
relate to the Borrowers' obligations to deliver Consents, Certificates and
Powers relating to the eMerge Preferred Stock and in lieu thereof the Borrowers
hereby covenant and agree that each Borrower shall cause the Consents,
Certificates and Powers relating to the eMerge Preferred Stock to be delivered
to the Agent promptly (and in any event within sixty (60) days) after the
obligations evidenced by the eMerge Note shall have been satisfied, either in
whole or in part, to such extent.
7. No Other Amendments. Except as expressly amended hereby, the Credit
-------------------
Agreement, the Notes and the other Loan Documents shall remain in full force and
effect in accordance with their respective terms, without any waiver, amendment
or modification of any provision thereof.
8. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
9. Expenses. The Borrowers agree to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees and disbursements of Buchanan Ingersoll
Professional Corporation, counsel to the Agent.
9. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
--------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA.
[SIGNATURE PAGES FOLLOW]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
INTERNET CAPITAL GROUP, INC.
By: /s/ John N. Nickolas
-------------------------------------
Name: John N. Nickolas
Title: Managing Director
INTERNET CAPITAL GROUP OPERATIONS, INC.
By: /s/ John N. Nickolas
-------------------------------------
Name: John N. Nickolas
Title: Managing Director
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By: /s/ John T. Freyhof
-------------------------------------
Name: John T. Freyhof
Title: Vice President
BANK OF AMERICA, N.A., formerly known as
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Jouni Korhonen
-------------------------------------
Name: Jouni Korhonen
Title: Principal
-7-
<PAGE>
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
-------------------------------------
Name: Alan Jepsen
Title: Vice President
IMPERIAL BANK
By: /s/ April L. Young
-------------------------------------
Name:
Title:
PROGRESS BANK
By: /s/ Liz A. Lambert
-------------------------------------
Name: Liz A. Lambert
Title: Vice President
-8-
<PAGE>
SCHEDULE 1.1 (P)
TO AMENDMENT NO. 1
PERMITTED LIENS
Lien securing ICG's obligations to pay eMerge the indebtedness evidenced by the
eMerge Note.
<PAGE>
SCHEDULE 7.2.1
TO AMENDMENT NO. 1
PERMITTED INDEBTEDNESS
PrivaSeek, Inc.
- ---------------
(1) Note secured by Stock Pledge Agreement dated as of December 28, 1998
(the "PrivaSeek Note"), made by Internet Capital Group, Inc.
(successor in interest to Internet Capital Group, LCC) in favor of
PrivaSeek, Inc., in the principal amount of $1,713,364.06. The
PrivaSeek Note was secured by a pledge of 691,244 shares of Series A
Preferred Stock of PrivaSeek, Inc. purchased by ICG as of the closing
date of the Investment Agreement dated as of December 24, 1998 by and
among PrivaSeek, Inc. and the Purchasers named therein and Excite,
Inc. As of the Closing Date of the Agreement, the principal amount
outstanding under the PrivaSeek Note was $856,682.03, of which ICG is
obligated to pay $642,511.53, due and payable in accordance with the
terms of the Note on June 27, 1999. The remainder of the principal
amount outstanding on the note ($214,170.50) is payable by an
affiliate of Comcast Corp.
eMerge Interactive, Inc.
- ------------------------
(1) Note dated as of November __, 1999 (the "eMerge Note"), made by
Internet Capital Group, Inc. in favor of eMerge Interactive, Inc., in
the principal amount of $23,000,000. The eMerge Note is secured by a
pledge of 2,555,556 shares of Series D Preferred Stock of eMerge
Interactive, Inc. purchased by ICG pursuant to the terms of that
certain Stock Purchase Agreement, dated as of October 27, 1999, by and
among eMerge Interactive, Inc. and ICG.
<PAGE>
EXHIBIT A
TO AMENDMENT NO. 1
COMMON STOCK WARRANT
POWER
For Value Received, the undersigned Holder of the attached Warrant
hereby sells, assigns and transfers to the transferee whose name and address are
set forth below all of the rights of the undersigned under the within Warrant
(to the extent of the portion of the within Warrant being transferred hereby,
which portion is __________________).
Name of Transferee: _______________________________________
State of Organization (if applicable):______________________
Federal Tax Identification or
Social Security Number:__________________________________
Address: __________________________________________________
If this transfer is not a transfer of the Warrant in full, then the
undersigned hereby requests that, as provided in the within Warrant, a new
warrant of like tenor respecting the balance of the Exercise Quantity not being
transferred pursuant hereto be issued in the name of and delivered to, the
undersigned. The undersigned does hereby irrevocably constitute and appoint
__________________________________ attorney to register the foregoing transfer
on the books of the Company maintained for that purpose, with full power of
substitution in the premises.
Dated:_______________________ _________________________________________
(Name of Registered Holder - Please Print)
By_______________________________________
(Signature of Registered Holder or
of Duly Authorized Signatory)
Title_______________________________
<PAGE>
SCHEDULE A
TO AMENDMENT NO. 1
MATERIAL CONTRACTS
eMerge Interactive, Inc.
- -----------------------
Securities Purchase Agreement dated as of October 27, 1999 among eMerge
Interactive, Inc., J Technologies, LLC and Internet Capital Group, Inc.
Stockholders Agreement among eMerge Interactive, Inc., Internet Capital Group,
Inc. and the stockholders listed on the signature pages thereto.
Registration Rights Agreement among eMerge Interactive, Inc., Internet Capital
Group, Inc. and the stockholders listed on the signature pages thereto
Pledge Agreement between Internet Capital Group, Inc. and eMerge Interactive,
Inc.
Lockup Agreement between Internet Capital Group and Adams, Harkness & Hill, Inc.
<PAGE>
Exhibit 10.15.1
AMENDMENT NO. 2
AMENDMENT NO. 2, dated as of November 19, 1999 (this "Amendment"), to
---------
the Credit Agreement, dated as of April 30, 1999 (the "Agreement"), among
---------
INTERNET CAPITAL GROUP, INC., a Delaware corporation ("ICG"), INTERNET CAPITAL
---
GROUP OPERATIONS, INC., a Delaware corporation ("ICG Operations" and together
--------------
with ICG, each a "Borrower" and collectively the "Borrowers"), the BANKS (as
-------- ---------
defined therein) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent
for the Banks (the "Agent"), as amended by that certain Amendment No. 1, dated
-----
as of October 27, 1999 ("Amendment No. 1"), among ICG, ICG Operations, the Banks
---------------
and the Agent (the Agreement, as amended by Amendment No. 1, being collectively
referred to herein as the "Credit Agreement").
----------------
RECITALS
The Borrowers have advised the Agent and the Banks that they currently
propose to (i) engage in a $575,000,000 public offering of ICG's common stock,
par value $.001 per share (the "Public Offering"), (ii) a $402,500,000 public
---------------
offering of convertible subordinated debt securities (the "Public Debt
-----------
Offering", and together with the Public Stock Offering, the "Public Offerings")
- -------- ----------------
and (iii) make certain additional Investments. In connection with the proposed
Public Offerings, the issuance of the subordinated debt and the making of
certain additional Investments, the Borrowers have requested the Agent and the
Banks to agree to amend certain provisions of the Credit Agreement as set forth
in this Amendment. The Agent and the Banks parties hereto are willing to agree
to such amendments, but only on the terms and subject to the conditions set
forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers and the Agent and the Banks parties hereto hereby
agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms
-------------
defined in the Credit Agreement are used herein as therein.
2. Amendments.
----------
(a) Section 1.1 of the Credit Agreement is hereby amended by adding
the following new definitions thereto in the appropriate alphabetical order:
"Additional $50,000,000 Investment Entity" shall mean one of
----------------------------------------
up to four (4) Investment Entities of any Borrower in whom such
Borrower has made an Investment permitted in accordance with the
provisions of subclause (c) of Section 7.1.15.
"Additional $50,000,000 Investment Entities" shall mean
------------------------------------------
collectively all Additional $50,000,000 Investment Entities.
<PAGE>
"Additional $75,000,000 Investment Entity" shall mean one, and
----------------------------------------
only one, Investment Entity of any Borrower in whom such Borrower has
made an Investment permitted in accordance with the provisions of
subclause (d) of Section 7.1.15.
"Amendment No. 2" shall mean Amendment No. 2, dated as of
----------------
November __, 1999, to the Credit Agreement.
"1999 Subordinated Debt" shall mean any unsecured Indebtedness
----------------------
of a Borrower, including any 1999 Subordinated Loans, no part of the principal
of which is stated to be payable or is required to be paid (whether by way of
mandatory sinking fund, mandatory redemption, mandatory prepayment or otherwise)
prior to May 1, 2000, and the payment of the principal of and interest on which
and other obligations of any Borrower in respect thereof are subordinated to the
prior payment in full of the principal of and interest (including post-petition
interest) on the Notes and all other obligations and liabilities of such
Borrower to the Agent and the Banks hereunder on terms and conditions
substantially as set forth in Exhibit 1.1(D)(2) attached hereto.
-----------------
"1999 Subordinated Lender" shall mean any Person who makes a
------------------------
loan to any Loan Party to the extent such loan constitutes 1999 Subordinated
Debt hereunder, together with such Person's successors and assigns.
"1999 Subordinated Loans" shall mean up to $402,500,000 of
-----------------------
1999 Subordinated Loans, inclusive of the loans evidenced by the 1999
Subordinated Notes, made by the 1999 Subordinated Lender(s) to ICG pursuant to
the 1999 Subordinated Loan Documents.
"1999 Subordinated Loan Documents" shall mean (a) any and all
--------------------------------
instruments, certificates or documents delivered or contemplated to be delivered
in connection with any 1999 Subordinated Debt and (b) the 1999 Subordinated
Notes and all other instruments, certificates or documents delivered or
contemplated to be delivered thereunder or in connection therewith, as the same
may be supplemented or amended from time to time in accordance herewith.
"1999 Subordinated Note(s)" shall mean the convertible note(s)
-------------------------
of ICG payable to the 1999 Subordinated Lenders, each of which shall be executed
and delivered substantially in the form of Exhibit 1.1(C)(2) hereof.
-----------------
"Public Offerings" shall have the meaning ascribed thereto
-----------------
in the recitals to Amendment No. 2.
"Second Supplemental Closing Date" shall have the meaning
--------------------------------
ascribed to such term in Section 3 hereof.
(b) Section 1.1 of the Credit Agreement is hereby amended by
amending the definition of "Borrowing Base" by deleting the last sentence
--------------
thereof and replacing it with the following:
"Notwithstanding anything to the contrary contained herein,
when determining the Borrowing Base, (i) no more than $25,000,000 of the
Borrowing Base shall be
-2-
<PAGE>
attributed to Pledged Collateral issued by any individual Investment Entity
other than eMerge, any Additional $50,000,000 Investment Entity or the
Additional $75,000,000 Investment Entity, (ii) no more than $50,000,000 of the
Borrowing Base shall be attributed to eMerge Pledged Collateral issued by
eMerge; provided, however, that in no event shall any advance be made hereunder
-------- -------
based on the value of the eMerge Preferred Stock which exceeds the amount then
paid by or on behalf of ICG pursuant to the eMerge Note, (iii) no more than
$50,000,000 of the Borrowing Base shall be attributable to Pledged Collateral
issued by any Additional $50,000,000 Investment Entity and (iv) no more than
$75,000,000 of the Borrowing Base shall be attributable to Pledged Collateral
issued by the Additional $75,000,000 Investment Entity."
(c) A new Section 5.1.29 is hereby added to the Credit Agreement as
follows:
"Validity and Binding Effect of the 1999 Subordinated
----------------------------------------------------
Loan Documents.
- --------------
The 1999 Subordinated Loan Documents have been, or will be,
duly and validly executed and delivered by the parties thereto and constitute,
or will constitute, the legal, valid and binding obligations of the parties
thereto, enforceable against them in accordance with their respective terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforceability of creditors' rights generally or by laws or judicial decisions
limiting the right of specific performance. All representations and warranties
of any Loan Party contained in the 1999 Subordinated Loan Documents will be true
and correct in all material respects as of the date made. There exists no
default, nor any circumstance which, after notice or lapse of time or both would
cause or permit the acceleration of any 1999 Subordinated Debt under any 1999
Subordinated Loan Documents and there exists no lien, set-off, claim or, to the
knowledge of any Loan Party after due inquiry, other impairment of the validity
or enforceability of such documents. The 1999 Subordinated Loan Documents
constitute the entire agreement between each Borrower and the holders of the
1999 Subordinated Debt and there are no other agreements with respect to the
1999 Subordinated Debt."
(d) Section 7.1.15 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting in lieu thereof a new
Section 7.1.15 to read as follows:
"7.1.15 Investments.
-----------
The Borrowers may make Investments in other Persons in
addition to Investments existing on the Closing Date and disclosed in Schedules
1.1(A-1), 1.1(A-2) and 1.1(A-3) attached hereto; provided, however, that (a) the
-------- -------
Borrowers may only invest a maximum of $25,000,000 in Cash and Cash Equivalents
per calendar year in any Investment Entity other than eMerge, the Additional
$50,000,000 Investment Entities and the Additional $75,000,000 Investment
Entity, (b) the Borrowers may only invest a maximum of (x) an aggregate of
$75,000,000 in Cash and Cash Equivalents in eMerge for calendar years 1999 and
2000, and (y) $25,000,000 in Cash and Cash Equivalents in eMerge in any calendar
year subsequent to 2000, (c) the Borrowers may only invest a maximum of
$50,000,000 in Cash and Cash Equivalents per calendar year in any Additional
$50,000,000 Investment Entity, (d) the Borrowers may only invest a maximum of
$75,000,000 in Cash and Cash Equivalents per calendar year in the Additional
$75,000,000
-3-
<PAGE>
Investment Entity and (e) the Borrowers will promptly, and in any event within
five (5) Business Days of the making of any such Investment provide to the Agent
and the Banks an updated Annex A to the Letter Agreement reflecting any such
additional Investment."
(e) A new Section 7.1.23 and 7.1.24 are hereby added to the Credit
Agreement as follows:
"7.1.23 Updated Capitalization and Ownership.
------------------------------------
Immediately prior to or on the effective date of the proposed
Public Offerings, the Borrower shall provide the Agent and the Banks in writing
with such revisions to the representation contained in Section 5.1.2 as may be
necessary to update or correct such representation to reflect changes to the
capitalization and ownership effected by the proposed Public Offerings.
7.1.24 1999 Subordinated Loan Documents.
--------------------------------
The Administrative Borrower shall deliver to the Agent for
delivery to the Banks a true and correct copy of the 1999 Subordinated Loan
Documents and any amendments, waivers and other documents executed in connection
therewith (including all exhibits and schedules to such documents) within sixty
(60) calendar days of the execution thereof by the parties thereto."
(f) Section 7.2.1 of the Credit Agreement is hereby amended by
deleting the word "and" at the subclause (iv), adding the word "and" at the end
of subclause (v) and adding a new subclause (vi) to read as follows:
"(vi) 1999 Subordinated Debt in an aggregate principal amount
not to exceed $402,500,000 at any time outstanding."
(g) Section 7.2.5 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting in lieu thereof a new
Section 7.2.5 to read as follows:
"7.2.5 Dividends and Related Distributions.
-----------------------------------
Each of the Loan Parties shall not, and shall not
permit any of its Subsidiaries to, make or pay, or agree to become or remain
liable to make or pay, any dividend or other distribution of any nature (whether
in cash, property, securities or otherwise) on account of or in respect of its
shares of capital stock, partnership interests or limited liability company
interests on account of the purchase, redemption, retirement or acquisition of
its shares of capital stock (or warrants, options or rights therefor),
partnership interests or limited liability company interests, except (i)
dividends or other distributions payable to another Loan Party and (ii) the
issuance of up to $1,000,000,000 of ICG's common stock in connection with the
proposed Public Offering; provided, however, that notwithstanding anything to
the contrary provided in any Loan Document, in no event shall such proposed
Public Offering be permitted hereunder if (i) after giving effect to such
proposed Public Offering, a Potential Default or Event of Default shall exist
hereunder, (ii) such Public Offering shall violate any Law or (iii) such Public
Offering of ICG's common stock shall exceed $1,000,000,000."
-4-
<PAGE>
(h) Section 7.2.15 of the Credit Agreement is hereby amended by
renumbering such Section as Section 7.2.15(A) and adding thereto a new Section
7.2.15(B) to read as follows:
"7.2.15(B) Amendment or Waiver of 1999 Subordinated Debt;
----------------------------------------------
Payment or Prepayment of 1999 Subordinated Debt.
- -----------------------------------------------
Each of the Loan Parties shall not, and shall not permit any
of its Subsidiaries to:
(i) without the prior written consent of the Required Banks,
agree to any amendment or other change to, or waiver of any of its rights under,
the 1999 Subordinated Debt, the 1999 Subordinated Loan Documents or any other
evidences of such 1999 Subordinated Debt which shall cause:
(A) any payment by any of the Loan Parties to become
due prior to the date such payment is due consistent with the terms and
conditions set forth on Exhibit 1.1(D)(2) hereto;
-----------------
(B) any advancement of the maturity date under any
1999 Subordinated Loan Document;
(C) any increase in the aggregate principal amount
outstanding under the 1999 Subordinated Debt to an amount which exceeds
$402,500,000; or
(D) any increase in the interest rate applicable to
any 1999 Subordinated Debt; or
(ii) amend, change, waive or otherwise modify any of the
terms and provisions set forth in Exhibit 1.1(D)(2) to the extent any such
-----------------
amendment, change or waiver or other modification of any of the terms and
provisions set forth in Exhibit 1.1(D)(2) would result in the terms of the 1999
-----------------
Subordinated Debt being less favorable to the holders of the Senior
Indebtedness; or
(iii) directly or indirectly, by deposit of monies or
otherwise, prepay, purchase, redeem, retire, defease or otherwise acquire, or
make any payment on account of any principal of, premium or interest payable in
connection with the payment, prepayment, redemption, defeasance or retirement of
any 1999 Subordinated Debt."
(i) Section 7.2.17 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting in lieu thereof a new
Section 7.2.17 to read as follows:
"7.2.17 Maximum Leverage Ratio.
----------------------
The Loan Parties shall not at any time permit the
ratio of consolidated total liabilities (excluding Subordinated Debt and the
1999 Subordinated Debt) of the Borrowers and their respective Subsidiaries to
Consolidated Tangible Net Worth to exceed the ratio as set forth below:
-5-
<PAGE>
Period Ratio
------ -----
Closing Date and thereafter .50 to 1.0"
(j) A new Section 8.1.13A is hereby added to the Credit Agreement
as follows:
"8.1.13A. Breach of 1999 Subordination Loan Documents Terms.
-------------------------------------------------
Any agreement to subordinate the right of payment in respect
of the 1999 Subordinated Debt to the Indebtedness arising out of or under the
Loan Documents, at any time and for any reason, ceases to be in full force and
effect or is declared to be null and void; or any holder of such 1999
Subordinated Debt repudiates or disavows such subordination or denies that it
has further liability or obligation under such subordination agreement or gives
notice to such effect; or any default or event of default shall have occurred
and be continuing under the 1999 Subordinated Loan Documents."
3. Effectiveness. The effectiveness of this Amendment, is subject
-------------
to the satisfaction of the following conditions precedent (the date of such
satisfaction being herein referred to as the "Second Supplemental Closing
---------------------------
Date"):
- ----
(a) Amendment; 1999 Subordinated Notes. The Agent shall have
----------------------------------
received this Amendment, executed and delivered by a duly authorized
officer of each of the Borrowers, with a counterpart for each Bank and
a copy of the form of the 1999 Subordinated Note(s), with a copy for
each Bank.
(b) Borrowing Base Certificate. On or prior to the Second
--------------------------
Supplemental Closing Date, the Agent and the Banks shall have received
and the Agent and the Banks shall be satisfied (both as to form and
substance) with a pro forma Borrowing Base Certificate in the form set
forth in Exhibit 1.1(B) to the Credit Agreement which shall be prepared
as of a date prior to the Second Supplemental Closing Date.
(c) Proceedings of the Borrower. The Agent shall have
---------------------------
received, with a counterpart for each Bank, a copy of the resolutions,
in form and substance satisfactory to the Agent, of each of the
Borrowers authorizing the execution, delivery and performance of this
Amendment and the other Amendment Documents to which it is a party,
certified by the Secretary or an Assistant Secretary of each of the
Borrowers as of the Second Supplemental Closing Date, which certificate
shall be in form and substance satisfactory to the Agent and shall
state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded.
(d) Borrower Incumbency Certificate. The Agent shall have
-------------------------------
received, with a counterpart for each Bank, a certificate of each of
the Borrowers, dated the Second Supplemental Closing Date, as to the
incumbency and signature of the officers of each of the Borrowers
executing this Amendment or the other Amendment Documents to which each
of the Borrowers is a party, satisfactory in form and substance to the
Agent, executed by an Authorized Officer of each of the Borrowers.
-6-
<PAGE>
(e) Representations and Warranties. Each of the representations
------------------------------
and warranties made by each of the Borrowers and the other Loan Parties
in or pursuant to the Loan Documents shall be true and correct in all
material respects on and as of the Second Supplemental Closing Date as
if made on and as of such Second Supplemental Closing Date (and after
giving effect to the amendments provided for in this Amendment) (or, if
any such representation or warranty is expressly stated to have been
made as of a specific date, as of such specific date).
(f) No Default. No Potential Default or Event of Default shall
----------
have occurred and be continuing on the Second Supplemental Closing Date
or after giving effect to the amendments provided for in this
Amendment.
(g) Additional Matters. All corporate and other proceedings,
------------------
and all documents, instruments and other legal matters in connection
with the transactions contemplated by this Agreement, the other Loan
Documents and the 1999 Subordinated Loan Documents shall be
satisfactory in form and substance to the Agent, and the Agent shall
have received such other documents and legal opinions in respect of any
aspect or consequence of the transactions contemplated hereby or
thereby as it shall reasonably request.
4. Representations and Warranties. To induce the Agent and the Banks to
------------------------------
enter into this Amendment, the Borrowers hereby represent and warrant to the
Agent and the Banks that, after giving effect to the amendments provided for
herein, the representations and warranties contained in the Credit Agreement and
the other Loan Documents will be true and correct in all material respects as if
made on and as of the date hereof and that no Potential Default or Event of
Default will have occurred and be continuing (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as of such
specific date).
5. No Other Amendments. Except as expressly amended hereby, the Credit
-------------------
Agreement, the Notes and the other Loan Documents shall remain in full force and
effect in accordance with their respective terms, without any waiver, amendment
or modification of any provision thereof.
6. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Expenses. The Borrowers agree to pay and reimburse the Agent for all
--------
of the out-of-pocket costs and expenses incurred by the Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees and disbursements of Buchanan Ingersoll
Professional Corporation, counsel to the Agent.
8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
--------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA.
-7-
<PAGE>
[SIGNATURE PAGES FOLLOW]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
INTERNET CAPITAL GROUP, INC.
By: /s/ John Nickolas
---------------------------------------
Name: John Nickolas
Title: Managing Director and Assistant
Treasurer
INTERNET CAPITAL GROUP OPERATIONS, INC.
By: /s/ John Nickolas
---------------------------------------
Name: John Nickolas
Title: Managing Director and Assistant
Treasurer
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By: /s/ John T. Freyhof
---------------------------------------
Name: John T. Freyhof
Title: Vice President
BANK OF AMERICA, N.A., formerly known as BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
By: /s/ Jouni Korhonen
---------------------------------------
Name: Jouni Korhonen
Title: Principal
-9-
<PAGE>
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
---------------------------------------
Name: Alan Jepsen
Title: Vice President
IMPERIAL BANK
By: /s/ April L. Young
---------------------------------------
Name: April L. Young
Title: SVP
PROGRESS BANK
By: /s/ Liz Lambert
---------------------------------------
Name: Liz Lambert
Title: Vice President
-10-
<PAGE>
EXHIBIT 1.1(C)(2)
TO AMENDMENT NO. 2
FORM OF 1999 SUBORDINATED NOTE
To be provided on or prior to the Second Supplemental Closing Date.
<PAGE>
EXHIBIT 1.1(D)(2)
TO AMENDMENT NO. 2
SUBORDINATION
The notes will be unsecured obligations of Internet Capital Group, Inc. ("ICG")
and will be subordinated in right of payment, as provided in the Indenture, to
the prior payment in full in cash or other payment satisfactory to holders of
Senior Indebtedness, of all ICG's existing and future Senior Indebtedness.
At [ ], ICG had $[ ] million of senior indebtedness outstanding,
and our subsidiary had no indebtedness outstanding. The Indenture does not
restrict the incurrence by ICG or its subsidiaries of indebtedness or other
obligations.
The term "Senior Indebtedness" means:
. the principal, premium, if any, interest and all other amounts owed in
respect of all of ICG's
- indebtedness for money borrowed and
- indebtedness evidenced by securities, debentures, bonds or
other similar instruments
. all of ICG's capital lease obligations
. all obligations issued or assumed by ICG as the deferred purchase
price of property, all of ICG's conditional sale obligations and all
of ICG's obligations under any title retention agreement, but
excluding trade accounts payable arising in the ordinary course of
business
. all of ICG's obligations for the reimbursement of any letter of
credit, banker's acceptance, security purchase facility or similar
credit transaction
. all obligations of the type referred to in each of the above bullet
points of other persons for the payment of which ICG is responsible or
liable as obligor, guarantor or otherwise and
. all obligations of the type referred to in each of the above bullet
points of other persons secured by any lien on any of our properties
or assets, whether or not such obligation is assumed by ICG
except for:
. any such indebtedness that is by its terms subordinated to or pari
passu with the notes and
<PAGE>
. any indebtedness between or among ICG or its affiliates, including all
other debt securities and guarantees in respect of those debt
securities issued to any trust, or trustees of any trust, partnership
or other entity affiliated with ICG that is, directly or indirectly, a
financing vehicle used by ICG in connection with the issuance by that
financing vehicle of preferred securities or other securities that rank
pari passu with, or junior to, the notes
Any Senior Indebtedness will continue to be Senior Indebtedness and will be
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any of its terms.
By reason of the application of the subordination provisions, in the event of
dissolution, insolvency, bankruptcy or other similar proceedings, upon any
distribution of ICG's assets:
. the holders of the notes are required to pay over their share of that
distribution to the trustee in bankruptcy, receiver or other person
distributing ICG's assets for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay all
holders of Senior Indebtedness in full in cash or other payment
satisfactory to the holders of Senior Indebtedness and
. unsecured creditors of ours who are not holders of notes or holders of
Senior Indebtedness of ICG's may recover less, ratably, than holders of
Senior Indebtedness of ICG's, and may recover more, ratably, than the
holders of notes
In addition, ICG may not pay the principal amount, Redemption Price, Change in
Control Purchase Price or interest with respect to any notes, and ICG may not
acquire any notes for cash or property, except as provided in the Indenture, if:
(1) any payment default on any Senior Indebtedness has occurred and is
continuing beyond any applicable grace period or
(2) any default, other than a payment default with respect to Senior
Indebtedness occurs and is continuing that permits the acceleration of
the maturity of that Senior Indebtedness and that default is either the
subject of judicial proceedings or ICG receives a written notice of
that default (a "Senior Indebtedness Default Notice").
Notwithstanding the foregoing, payments with respect to the notes may resume and
ICG may acquire notes for cash when:
(a) the default with respect to the Senior Indebtedness cured or
waived or ceases to exist or
(b) in the case of a default described in (2) above, 179 or more days
pass after notice of the default is received by us, provided that
the terms of the Indenture otherwise permit the payment or
acquisition of the notes at that time.
<PAGE>
If ICG receives a Senior Indebtedness Default Notice, then a similar notice
received within nine months after receiving that Senior Indebtedness Default
Notice relating to the same default on the same issue of Senior Indebtedness
will not be effective to prevent the payment or acquisition of the notes as
provided above. In addition, no payment may be made on the notes if any notes
are declared due and payable prior to their Stated Maturity by reason of the
occurrence of an Event of Default until the earlier of:
. 120 days after the date of acceleration of the maturity of that
Senior Indebtedness or
. the payment in full of all Senior Indebtedness but only if payment
on the notes is then otherwise permitted under the terms of the
Indenture.
Upon any payment or distribution of ICG's assets to creditors upon any
dissolution, winding up, liquidation or reorganization of ICG, whether voluntary
or involuntary, or in bankruptcy, insolvency, receivership or other similar
proceedings, the holders of all the Senior Indebtedness will first be entitled
to receive payment in full, in cash or other payment satisfactory to the holders
of Senior Indebtedness, of all amounts due or to become due on that Senior
Indebtedness, or payment of those amounts must have been provided for, before
the holders of the notes will be entitled to receive any payment or distribution
with respect to any notes.
The notes are effectively subordinated to all existing and future liabilities of
ICG's subsidiaries. Any right of ICG to receive assets of any of ICG's
subsidiaries upon their liquidation or reorganization, and the consequent right
of the holders of the notes to participate in those assets, will be subject to
the claims of that subsidiary's creditors, including trade creditors, except to
the extent that ICG itself is recognized as a creditor of that subsidiary, in
which case ICG's claims would still be subordinate to any security interests in
the assets of that subsidiary and any indebtedness of that subsidiary senior to
that held by ICG.
<PAGE>
Exhibit 10.23
JOINT VENTURE AGREEMENT
This Agreement is made as of October 26, 1999 by and between Internet Capital
Group, Inc. ("ICG") and Safeguard Scientifics, Inc. ("SSI").
WHEREAS, SSI and ICG and certain entities controlled by them own and/or have the
right to acquire substantial numbers of shares of voting capital stock of eMerge
Interactive, Inc. ("eMerge"); and
WHEREAS, SSI and ICG desire to act jointly to exercise a controlling influence
over the management and policies of eMerge.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Election of Directors. Each of SSI and ICG will vote all shares of eMerge
---------------------
that it currently owns or hereafter acquires, and will use reasonable
efforts in good faith to cause all other eMerge shareholders controlled by
it to vote all of their shares of eMerge currently owned or hereafter
acquired, to elect to and maintain on the eMerge Board of Directors, two
designees of ICG and two designees of SSI (one of which shall be
subdesignated by TL Ventures). The designees of ICG and SSI will be advised
of the existence and the purpose of this Agreement, and will be encouraged,
subject to their fiduciary duties, to consult with each other on all key
corporate matters submitted to a vote of the directors of eMerge, including
capital structure, corporate reorganizations, mergers and acquisitions,
sale of substantially all of the corporation's assets, significant loans or
borrowings, significant capital expenditures, budgets, and key management
personnel decisions.
2. Other Votes. The parties will consult with each other with regard to all
-----------
matters submitted to a vote of the shareholders of eMerge, and will attempt
in good faith to agree on a course of action which is in the best interests
of both SSI and ICG, it being acknowledged that this is an obligation to
meet and discuss such matters, but not an obligation to act other than in
each entity's best interest.
3. Right of First Refusal. After the closing of eMerge's initial Public
----------------------
Offering (defined below), if either of SSI or ICG or any of their majority
owned subsidiaries intends to sell to an unaffiliated buyer less than all
of its shares of capital stock of eMerge, it will first offer to sell such
shares to the other party at the fair market price of the shares, based on
the average closing price of the Class A common stock of eMerge as reported
on the principal market or exchange on which such shares trade for the five
trading days immediately preceding the date on which the offer expires.
Such offer will expire at 4:00 eastern time on the first trading day after
the date the offer was made. If the offer is accepted for any or all of the
shares, the parties will each be obligated to complete the transaction at
the offered price within five business days after acceptance. If the offer
is not accepted in whole, then the selling party may sell the remaining
offered shares at any time within one month after the offer was made at the
market price at the time of the sale. For purposes of this Agreement, the
term "Public Offering" means the effectiveness of a
<PAGE>
registration statement filed by eMerge pursuant to the Securities Act of
1933, as amended (other than on Form S-4 or S-8 on any successor forms
thereto), covering the offer and sale of Class A Common Stock in an
underwritten public offering on a firm commitment basis in which the gross
proceeds of the offering will equal or exceed $10,000,000 (calculated
before deducting underwriters' discounts and commissions and other offering
expenses), and in which the public offering price per share of Class A
Common Stock (calculated before deducting underwriters' discounts and
commissions) results in a valuation of the total number of outstanding
shares of capital stock of eMerge immediately prior to the closing of the
public offering of at least $30,000,000.
4. Sale of Entire Interest. After the closing of eMerge's initial Public
-----------------------
Offering, if either of SSI or ICG desires to sell to an unaffiliated buyer
all of the shares of capital stock of eMerge owned by such party and its
majority owned subsidiaries, such party will first discuss such intention
with the other party and will attempt in good faith to provide the other
party to have the opportunity either to purchase all of the shares owned by
the selling party and its subsidiaries or to participate in the sale of
shares to the unaffiliated buyer.
5. Management of the Company. Each of SSI and ICG acknowledges that (i) it
-------------------------
intends to actively participate in discussions with the other party
regarding the business of eMerge and (ii) it has substantial expertise in
the e-commerce industry. The parities will coordinate their public
statements regarding this Agreement and eMerge, including filings on
Schedule 13D.
6. Term and Termination. This Agreement shall continue in effect until the
--------------------
earlier of (a) the date the parties mutually agree in writing to terminate
or amend this Agreement and (b) the date that the aggregate number of
shares of eMerge owned by either ICG or SSI is less than 5% of all of the
outstanding shares of all classes of Common Stock of eMerge on a combined
basis. This Agreement shall terminate automatically if it is determined by
relevant authority not to create a valid joint venture; provided that the
parties will prior to such termination meet to discuss in good faith and to
determine whether this Agreement could be modified to constitute a valid
joint venture so long as such modifications do not materially alter the
respective rights and obligations of the parties.
7. Non-assignable Agreement. This Agreement, and the rights and obligations of
------------------------
the parties hereunder, shall be binding on the parties and their
successors, but may not be otherwise assigned by either party.
8. Governing Law. This Agreement shall be governed in all respects by the laws
-------------
of the State of Delaware as applied to contracts made and to be performed
entirely within that state between residents of that state.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INTERNET CAPITAL GROUP, INC. SAFEGUARD SCIENTIFICS, INC.
By: /s/ Henry N. Nassau By: /s/ Steven Rosard
----------------------- --------------------
Name: Henry N. Nassau Name: Steven Rosard
Title: Managing Director Title: VP
<PAGE>
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
March 4, 1996 Year Ended December 31,
(Inception) to ---------------------------- Nine Months Ended
December 31, 1996 1997 1998 September 30, 1999
----------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Net income (loss)
before income taxes $(2,062,485) $(6,579,628) $13,898,928 $(19,245,283)
Plus fixed charges -
Interest expense including
amortizing of debt issuance
costs 13,931 126,105 381,199 1,770,324
Adjustments (1) 87,355 113 487,247 40,828,065
----------- ----------- ----------- ------------
Adjusted earnings (1,961,199) (6,453,410) 14,767,374 23,353,106
Fixed charges 13,931 126,105 381,199 1,770,324
----------- ----------- ----------- ------------
Deficiency of earnings to
cover fixed charges $(1,975,130) $(6,327,305)
=========== ===========
Ratio of earnings to
fixed charges 38.7 13.2
=========== ============
</TABLE>
(1) Adjusts earnings to include the full amount of losses of majority-owned
subsidiaries and exclude equity losses for partner companies accounted for
under the equity method for which we have not guaranteed or otherwise
undertaken, directly or indirectly, to service the debt of such companies.
<PAGE>
Exhibit 21.1
Subsidiaries of Internet Capital Group, Inc.
-------------------------------------------
Name Jurisdiction of Incorporation
- ---- -----------------------------
Internet Capital Group Operations, Inc. Delaware
IBIS (505) Limited United Kingdom
ICG Holding, Inc. Delaware
AgProducer Network, Inc. Delaware
Animated Images, Inc. Maine
Arbinet Holdings, Inc. Delaware
asseTrade.com, Inc. Delaware
Autovia Corporation Delaware
Benchmarking Partners, Inc. Massachusetts
Bidcom, Inc. California
Blackboard Inc. Delaware
Breakaway Solutions, Inc. Delaware
ClearCommerce Corporation Delaware
Collabria, Inc. Delaware
CommerceQuest, Inc. Florida
Commerx, Inc. Delaware
ComputerJobs.com, Inc. Georgia
Context Integration, Inc. Delaware
Data West Corporation/1/ Delaware
Deja.com, Inc. Texas
e-Chemicals, Inc. Delaware
eMarketWorld, Inc. Delaware
eMerge Interactive, Inc. Delaware
EmployeeLife.com California
Entegrity Solutions Corporation California
Internet Commerce Systems, Inc. Delaware
iParts Inc. Delaware
JusticeLink, Inc. Delaware
LinkShare Corporation Delaware
NetVendor Inc. Delaware
Onvia.com, Inc. Washington
PaperExchange.com LLC Delaware
Plan Sponsor Exchange, Inc. Delaware
PrivaSeek, Inc. Delaware
Purchasing Systems, Inc./2/ Delaware
Residential Delivery Services, Inc. Delaware*
SageMaker, Inc. Delaware
Servicesoft Technologies, Inc. Delaware
Sky Alland Marketing, Inc. Maryland
StarCite, Inc. Delaware
Syncra Software, Inc. Delaware
TRADEX Technologies, Inc. Delaware
traffic.com, Inc. Delaware
/1/ Does business as "CourtLink."
/2/ Does business as "Purchasing Solutions."
<PAGE>
United Messaging, Inc. Delaware
Universal Access, Inc. Illinois
US Interactive, Inc. Delaware
VerticalNet, Inc. Pennsylvania
VitalTone Inc. Delaware
Vivant! Corporation Delaware
Unless otherwise provided, each of the subsidiaries named above do business
under the same name.
<PAGE>
Exhibit 23.1
The Board of Directors
Internet Capital Group, Inc.
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
KPMG LLP
Philadelphia, Pennsylvania
November 22, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Applica Corporation:
We consent to the use of our report on the financial statements of Applica
Corporation as of December 31, 1998 and from September 24, 1998 (inception)
through December 31, 1998 dated June 30, 1999, included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Breakaway Solutions, Inc.:
We consent to the use of our report on the financial statements of Breakaway
Solutions, Inc. as of December 31, 1997 and 1998 and for each of the years in
the three-year period ended December 31, 1998 dated June 30, 1999, except for
note 11 which is as of July 12, 1999 and note 13 which is as of October 5, 1999,
included herein and to the reference to our firm under the heading "Experts" in
the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.5
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 26, 1999, except as to the stock split described in Note
11, for which the date is March 10, 1999, relating to the financial statements
of CommerceQuest, Inc. (formerly MessageQuest, Inc.), which appears in such
Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Tampa, Florida
November 22, 1999
<PAGE>
Exhibit 23.6
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 11, 1999, except Note 1 as to which the date is
April 1, 1999, with respect to the financial statements of ComputerJobs.com,
Inc. included in the Registration Statement (Form S-1) and related Prospectuses
of Internet Capital Group, Inc. for the registration of shares of its common
stock and convertible subordinated notes due 2004.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 17, 1999
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
Internet Capital Group, Inc. of our report dated April 29, 1999, relating to the
financial statements of Syncra Software, Inc., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.8
Consent of Independent Public Accountants
To United Messaging, Inc.
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made part of this
Registration Statement.
Arthur Andersen, LLP
Philadelphia, Pa.,
November 19, 1999
<PAGE>
Exhibit 23.9
Consent of Independent Accountants
We hereby consent to the use in this Internet Capital Group, Inc. Registration
Statement on Form S-1 of our report dated April 6, 1999, except as to Note 2,
which is as of September 15, 1999, relating to the financial statements of
Universal Access, Inc., which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
November 19, 1999
<PAGE>
Exhibit 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Web Yes, Inc.:
We consent to the use of our report on the consolidated financial statements of
Web Yes, Inc. and subsidiary as of December 31, 1997 and 1998 and for each of
the years then ended dated June 30, 1999, included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.11
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
WPL Laboratories, Inc.:
We consent to the use of our report on the financial statements of WPL
Laboratories, Inc. as of December 31, 1997 and 1998 and for each of the years
then ended dated June 30, 1999, included herein and to the reference to our firm
under the heading "Experts" in the prospectus.
/s/KPMG LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.12
Exhibit 23.23
Consent of PricewaterhouseCoopers LLP regarding Vivant!
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on form S-1 of our
report dated June 17, 1999, except as to Note 10 which is as of November 18,
1999, relating to the financial statements of Vivant! Corporation, which appear
in such Registration Statement. We also consent to the references to us under
the headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
November 18, 1999
<PAGE>
Exhibit 23.13
Consent of Independent Accountants
We consent to the use of our report dated November 11, 1999, with respect to the
financial statements of VitalTone, Inc. as of and for the period July 12, 1999
(inception) to September 30, 1999, which is included in this registration
statement on form S-1 of Internet Capital Group, Inc. and to the reference to
our firm under the heading "Experts" in the prospectus in such registration
statement.
KPMG LLP
Mountain View, California
November 17, 1999
<PAGE>
Exhibit 23.14
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of
Internet Capital Group our report dated March 26, 1999, relating to the
financial statements of Commerx, Inc. which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Chicago, IL
November 19, 1999
<PAGE>
Exhibit 23.15
The Board of Directors
eMerge Interactive, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus, which report appears in this
Form S-1 of Internet Capital Group, Inc. dated November 22, 1999.
KPMG LLP
Orlando, Florida
November 22, 1999
<PAGE>
Exhibit 23.16
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement of Internet Capital Group,
Inc. on Form S-1 of our report dated November 18, 1999 on the consolidated
financial statements of Onvia.com, Inc. and subsidiary, appearing in the
Prospectus, which is part of this registration statement. We also consent to the
reference to us under the heading "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
Seattle, Washington
November 19, 1999
<PAGE>
Exhibit 23.17
Consent of Independent Accountants
We consent to the use of our report dated November 17, 1999, with respect to the
combined financial statements of Purchasing Group, Inc. and Integrated Sourcing,
LLC as of and for the nine months ended September 30, 1999, which is included in
this registration statement on form S-1 of Internet Capital Group, Inc. and to
the reference to our firm under the heading "Experts" in the prospectus in such
registration statement.
KPMG LLP
November 17, 1999
<PAGE>
Exhibit 23.18
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
Internet Capital Group, Inc. of our report dated November 17, 1999, relating to
the financial statements of traffic.com, Inc., which appears in such
Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 18, 1999
<PAGE>
-------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) X
---- ----
----------------------------------------
CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
29-2933369
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
One Oxford Center, Suite 1100
301 Grant Street, Pittsburgh, PA 15219
(Address of principal executive offices) (Zip Code)
William H. McDavid
The Chase Manhattan Bank
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
-------------------------------------------------------
Internet Capital Group, Inc.
(Exact name of obligor as specified in its charter)
Delaware 23-2996071
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
435 Devon Park Road, Building 800
Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
------------------------------------------------
[ ]% Convertible Subordinated Notes due 2004
(Title of the indenture securities)
----------------------------------------------------------
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
No responses are included for Items 3-15 of this Form T-1 because the Obligor is
not in default as provided under Item 13.
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect.
2. A copy of the Certificate of Authority of the Trustee (previously known as
New Trust Company, National Association,) to commence business. Also
included in Exhibit 16(2) are letters dated November 24, 1997 from the
Comptroller of the Currency authorizing the exercise of fiduciary powers by
the Trustee and acknowledging the name change of the Trustee.
3. The Authorization of the Trustee to exercise corporate trust is contained
in Exhibit 16(2).
4. A copy of the By-Laws of the Trustee as now in effect.
5. Not applicable
6. The Trustee's consent required by Section 321(b) of the Act.
7. A copy of the latest report of condition of the Trustee, published pursuant
to law or the requirements of its supervising or examining authority.
8. Not applicable
9. Not applicable
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, Chase Manhattan Trust Company, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in The City of
Philadelphia and State of Pennsylvania, on the 19th day of November, 1999.
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION
By \s\ Karen Vera
-------------------------
Karen Vera
Assistant Vice President
<PAGE>
Exhibit 16(1)
[GRAPHIC OMITTED]
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION
CHARTER NO. 23548
ARTICLES OF ASSOCIATION
For the purpose of organizing an Association to perform any lawful activities of
a national bank, the undersigned do enter into the following Articles of
Association:
FIRST. The title of this Association shall be Chase Manhattan Trust Company,
National Association (the "Association").
SECOND. The main office of the Association shall be in the City of Pittsburgh,
County of Allegheny, Commonwealth of Pennsylvania. The business of the
Association shall be limited to the fiduciary powers and the support of
activities incidental to the exercise of those powers. The Association will
obtain the prior written approval of the Office of the Comptroller of the
Currency before amending these Articles of Association to expand the scope of
its activities and services.
THIRD. The board of directors of this Association shall consist of not less than
five nor more than twenty-five persons, the exact number to be fixed and
determined from time to time by resolution of a majority of the full board of
directors or by resolution of a majority of the shareholders at any annual or
special meeting thereof. Each director, during the full term of his
directorship, shall own common or preferred stock of the Association or of a
holding company owning the Association, with an aggregate par, fair market or
equity value of not less than $1,000. Any vacancy in the board of directors may
be filled by action of the shareholders or a majority of the remaining
directors.
Terms of directors, including directors selected to fill vacancies, shall expire
at the next regular meeting of shareholders at which directors are elected,
unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
FOURTH. There shall be an annual meeting of the shareholders to elect directors
and transact whatever other business may be brought before the meeting. It shall
be held at the main office or any other convenient place the board of directors
may designate, on the day of each year specified therefore in the by-laws, or if
that day falls on a legal holiday in the state in which the Association is
located, on the next following banking day. If no election is held on the day
fixed or in event of a legal holiday, on the following banking day, an election
may be held on any subsequent day within 60 days of the day fixed, to be
designated by the board of directors, or, if the directors fail to fix the day,
by shareholders representing two-thirds of the shares issued and outstanding.
Advance notice of the meeting may be duly waived by the sole shareholder in
accordance with 12 C.F.R. S. 7.2001.
A director may resign at any time by delivering written notice to the board of
directors, its Chairperson, or to the Association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by shareholders at a meeting called to remove him or
her, when notice of the meeting stating that the purpose or one of the purposes
is to remove him or her is provided, if there is a failure to fulfill one of the
affirmative requirements for qualification, or for cause.
FIFTH. The authorized amount of capital stock of this Association shall be five
million dollars ($5,000,000), divided into fifty thousand (50,000) shares of
common stock of the par value of one hundred dollars ($100) each; but said
capital stock may be increased or decreased from time to time, according to the
provisions of the laws of the United States.
<PAGE>
No holder of shares of the capital stock of any class of the Association shall
have any preemptive or preferential right of subscription to any shares of any
class of stock of the Association, whether now or hereafter authorized, or to
any obligations convertible into stock of the Association, issued, or sold, nor
any right to subscription to any thereof other than such, if any, as the board
of directors, in its discretion may from time to time determine and at such
price as the board of directors may from time to time fix.
Unless otherwise specified in the Articles of Association or required by law,
(1) all matters requiring shareholder action, including amendments to the
Articles of Association, must be approved by shareholders owning a majority
voting interest in the outstanding voting stock, and (2) each shareholder shall
be entitled to one vote per share.
The Association, at any time and from time to time, may authorize and issue debt
obligations, whether or not subordinated, without the approval of the
shareholders.
SIXTH. The board of directors may appoint one of its members President of this
Association, and one of its members Chairperson of the board or two of its
members as Co-Chairpersons of the board, and shall have the power to appoint one
or more Vice Presidents, a Secretary who shall keep minutes of the directors'
and shareholders' meetings and be responsible for authenticating the records of
the Association, and such other officers and employees as may be required to
transact the business of this Association. A duly appointed officer may appoint
one or more officers or assistant officers if authorized by the board of
directors in accordance with the by-laws.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees, and agents of the
Association.
(2) Delegate the performance of its duties, but not the responsibility for its
duties, to the officers, employees, and agents of the Association.
(3) Fix the compensation and enter into employment contracts with its officers
and employees upon reasonable terms and conditions consistent with
applicable law.
(4) Dismiss officers and employees.
(5) Require bonds from officers and employees and fix the penalty thereof.
(6) Ratify written policies authorized by the Association's management or
committees of the board.
(7) Regulate the manner in which any increase or decrease of the capital of the
Association shall be made, provided that nothing herein shall restrict the
power of shareholders to increase or decrease the capital of the
Association in accordance with law.
(8) Manage and administer the business and affairs of the Association.
(9) Adopt initial by-laws, not inconsistent with law or the Articles of
Association, for managing the business and regulating the affairs of the
Association.
(10) Amend or repeal by-laws, except to the extent that the Articles of
Association reserve this power in whole or in part to shareholders.
(11) Make contracts.
(12) Generally perform all acts that are legal for a board of directors to
perform.
SEVENTH. The board of directors shall have the power to change the location of
the main office to any other location permitted under applicable law, without
the approval of the shareholders, and shall have the power to establish or
change the location of any branch or branches of the Association to any other
location permitted under applicable law, without the approval of the
shareholders subject to approval by the Office of the Comptroller of the
Currency.
EIGHTH. The corporate existence of this Association shall continue until
termination according to the laws of the United States.
NINTH. These Articles of Association may be amended at any regular or special
meeting of the shareholders by the affirmative vote of the holders of a majority
of the stock of this Association, unless the vote of the holders of a greater
amount of stock is required by law, and in that case by the vote of the holders
of such greater amount. The Association's board of directors may propose one or
more amendments to the Articles of Association for submission to the
shareholders.
<PAGE>
Exhibit 16(2)
Comptroller of the Currency
------------------- [PICTURE OF -------------------
TREASURY DEPARTMENT TREASURY DEPARTMENT OF THE UNITED STATES
------------------- APPEARS HERE] -------------------
Washington, D.C.
Whereas, satisfactory evidence has been presented to the Comptroller of the
Currency that NEW TRUST COMPANY, NATIONAL ASSOCIATION located in PITTSBURGH
State of PENNSYLVANIA has complied with all provisions of the statutes of the
United States required to be complied with before being authorized to commence
the business of banking as a National Banking Association;
Now, therefore, I hereby certify that the above named association is
authorized to commence the business of banking as a National Banking
Association.
In testimony whereof, witness my signature and seal of office this 24th day
of NOVEMBER 1997
[SEAL APPEARS HERE] Charter No. 23548 [SIGNATURE APPEARS HERE]
<PAGE>
[LETTERHEAD OF COMPTROLLER OF THE CURRENCY APPEARS HERE]
November 24, 1997
Mr. Daryl J. Zupan
President and CEO New Trust Company, National Association
c/o Mellon Bank, N.A., Corporate Trust
Two Mellon Bank Center, Suite 325
Pittsburgh, Pennsylvania 15259
Re: Charter for a National Trust Bank, New Trust Company, National
Association, Pittsburgh, Pennsylvania
ACN 97 NE 01 0022
Dear Mr. Zupan:
The Comptroller of the Currency (OCC) has found that you have met all conditions
imposed by the OCC and completed all steps necessary to commence the business of
banking. Your charter certificate is enclosed. You are authorized to commence
business on November 24, 1997.
This letter also constitutes OCC authorization to exercise fiduciary powers.
You are reminded that several of the standard conditions contained in the
preliminary approval letter dated October 23, 1997 will continue to apply once
the bank opens and by opening, you agree to subject your association to these
conditions of operation. Some of the conditions bear reiteration here:
1. Regardless of the association's FDIC insurance status, the association is
subject to the Change in Bank Control Act (12 U.S.C. 1817(j)) by virtue of
its national bank charter. Please refer to item 4 in the list of standard
conditions sent with the preliminary approval letter.
2. The board of directors is responsible for regular review and update of
policies and procedures and for assuring ongoing compliance with them. This
includes maintaining an internal control system that ensures compliance
with the currency reporting and record keeping requirements of the Bank
Secrecy Act (BSA). The board is expected to train its personnel in BSA
procedures and designate one person or a group to monitor day-to-day
compliance.
<PAGE>
Mr. Daryl J. Zupan
Page two
3. The bank will not engage in full commercial powers authorized to national
banks without the OCC's prior approval. Following the commencement of
operations, bank management is urged to become familiar with the
requirements of the Securities Exchange Act of 1934 and Part 11 of the
Comptroller's regulations relative to the registration of the bank's equity
securities and related periodic reports. These requirements will be
applicable to your bank when the number of shareholders of record is
maintained at 500 or more. Such registration may be subsequently terminated
pursuant to the Act only when the number of shareholders of record is
reduced to fewer than 300.
Should you have any questions regarding the supervision of your bank, please
contact the portfolio manager who will be responsible for OCC's ongoing
supervisory effort at your institution. You will be notified of the name and
number of the appropriate individual in the near future.
Sincerely,
/s/ Michael G. Tiscia
Michael G. Tiscia
Licensing Manager
Enclosure
cc: Official File
Field File
<PAGE>
[LOGO APPEARS HERE]
- - --------------------------------------------------------------------------
- - Comptroller of the Currency Administrator of National Banks
- - --------------------------------------------------------------------------
Northeastern District
1114 Avenue of the Americas, Suite 3900
New York, New York 10036
November 24, 1997
Joseph R. Bielawa
Vice President and Assistant General Counsel
The Chase Manhattan Bank
270 Park Avenue, 39th Floor
New York, New York 10017
Re: Change in Corporate Title
New Trust Company, National Association (Bank)
Pittsburgh, Pennsylvania
Dear Mr. Bielawa:
The Office of the Comptroller of the Currency (OCC) has received your
submission, concerning the change and amendment to Article First of the
above-referenced Bank's Articles of Association. The OCC has amended its records
to reflect that effective November 24, 1997, the corporate title of New Trust
Company, National Association, Charter Number 23548, was changed to "Chase
Manhattan Trust Company, National Association."
You are reminded that the OCC does not approve national bank name changes nor
does it maintain official titles or the retention of alternate titles. The use
of other titles or the retention of the rights to any previously used title is
the responsibility of the Bank's board of directors. Legal counsel should be
consulted to determine whether or not the new title, or any previously used
title, could be challenged by competing institutions under the provisions of
federal or state law.
A copy of the amended Article as accepted for filing is enclosed for the Bank's
records.
Very truly yours,
/s/ Linda Leickel
Linda Leickel
Senior Licensing Analyst
Charter No.: 23548
Control No.: 97 NE 04 010 w/97 NE 01 022
<PAGE>
Exhibit 16(4)
[CHASE LOGO APPEARS HERE]
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION
BY-LAWS
Article I. Meetings of Shareholders
Section 1.1. Annual Meeting. The regular annual meeting of the shareholders to
elect directors and transact whatever other business may properly come before
the meeting, shall be held at the main office of the Association, or such other
place as the board may designate, and at such time in each year as may be
designated by the board of directors. Unless otherwise provided by law, notice
of the meeting may be waived by the Association's sole shareholder in accordance
with 12 C.F.R. s. 7.2001. If, for any cause, an election of directors is not
made on that date, or in the event of a legal holiday, on the next following
banking day, an election may be held on any subsequent day within 60 days of the
date fixed, to be designated by the board, or, if the directors fail to fix the
date, by shareholders representing two thirds of the shares issued and
outstanding.
Section 1.2. Special Meetings. Except as otherwise specifically provided by
statute, special meetings of the shareholders may be called for any purpose at
any time by a majority of the board of directors or by any one or more
shareholders owning, in the aggregate, not less than twenty-five percent of the
stock of the Association or by the Chairperson of the board of directors or the
President. Unless otherwise provided by law, advance notice of a special meeting
may be waived by the Association's Sole Shareholder in accordance with 12 C.F.R.
s. 7.2001.
Section 1.3. Nominations of Directors. Nominations for election to the board of
directors may be made by the board of directors or by any stockholder of any
outstanding class of capital stock of the Association entitled to vote for the
election of directors. Nominations, other than those made by or on behalf of the
existing management of the Association, shall be made in writing and shall be
delivered or mailed to the President of the Association and to the Comptroller
of the Currency, Washington, D.C., not less than 14 days nor more than 50 days
prior to any meeting of shareholders called for the election of directors,
provided, however, that if less than 21 days' notice of the meeting is given to
shareholders, such nomination shall be mailed or delivered to the President of
the Association and to the Comptroller of the Currency not later than the close
of business on the seventh (7th) day following the day on which the notice of
meeting was mailed. Such notification shall contain the following information to
the extent known to the notifying shareholder.
(1) The name and address of each proposed nominee.
(2) The principal occupation of each proposed nominee.
(3) The total number of shares of capital stock of the Association
that will be voted for each proposed nominee.
(4) The name and residence address of the notifying shareholder.
(5) The number of shares of capital stock of the Association owned
by the notifying shareholder. Nominations not made in accordance herewith may,
in his/her discretion, be disregarded by the Chairperson of the meeting, and
upon his/her instructions, the vote tellers may disregard all votes cast for
each such nominee.
Section 1.4. Proxies. Shareholders may vote at any meeting of the shareholders
by proxies duly authorized in writing, but no officer or employee of this
Association shall act as proxy. Proxies shall be valid only for one meeting to
be specified therein, and any adjournments of such meeting. Proxies shall be
dated and filed with the records of the meeting. Proxies with rubber stamped
facsimile signatures may be used and unexecuted proxies may be counted upon
receipt of a confirming telegram from the shareholder. Proxies meeting above
requirements submitted at any time during a meeting shall be accepted.
Section 1.5 Quorum. A majority of the outstanding capital stock, represented in
person or by proxy, shall constitute a quorum at any meeting of shareholders,
unless otherwise provided by law, or by the shareholders or directors pursuant
to Section 10.2, but less than a quorum may adjourn any meeting, from time to
time, and the meeting may be held, as adjourned, without further notice. A
majority of the votes cast shall decide every question or matter submitted to
the shareholders at any meeting, unless otherwise provided by law or by the
Articles of Association, or by the shareholders or directors pursuant to Section
10.2. Any action required or
<PAGE>
permitted to be taken by the shareholders may be taken without a meeting by
unanimous written consent of the shareholders to a resolution authorizing the
action. The resolution and the written consent shall be filed with the minutes
of the proceedings of the shareholders.
Article II. Directors
Section 2.1. Board of Directors. The board of directors ("board") shall have the
power to manage and administer the business and affairs of the Association.
Except as expressly limited by law, all corporate powers of the Association
shall be vested in and may be exercised by the board.
Section 2.2. Number. The board shall consist of not less than five nor more than
twenty-five persons, the exact number within such minimum and maximum limits to
be fixed and determined from time to time by resolution of a majority of the
full board or by resolution of a majority of the shareholders at any meeting
thereof; provided, however, that a majority of the full board may not increase
-------- -------
the number of directors to a number which: (1) exceeds by more than two the
number of directors last elected by shareholders where such number was 15 or
less; and (2) exceeds by more than four the number of directors last elected by
shareholders where such number was 16 or more, but in no event shall the number
of directors exceed 25.
Section 2.3. Organization Meeting. The Secretary shall notify the
directors-elect of their election and of the time at which they are required to
meet at the main office of the Association to organize the new board and elect
and appoint officers of the Association for the succeeding year. Such meeting
shall be held on the day of the election or as soon thereafter as practicable,
and, in any event, within 30 days thereof. If, at the time fixed for such
meeting, there shall not be a quorum, the directors present may adjourn the
meeting, from time to time, until a quorum is obtained.
Section 2.4. Regular Meetings. The time and location of regular meetings of the
board shall be set by the board. Such meetings may be held without notice. Any
business may be transacted at any regular meeting. The board may adopt any
procedures for the notice and conduct of any meetings as are not prohibited by
law.
Section 2.5. Special Meetings. Special meetings of the board may be called at
the request of the Chairperson or Co-Chairperson of the board, the President, or
three or more directors. Each member of the board shall be given notice stating
the time and place, by telegram, telephone, letter or in person, of each such
special meeting at least one day prior to such meeting. Any business may be
transacted at any special meeting.
Section 2.6. Action by the Board. Except as otherwise provided by law, corporate
action to be taken by the board shall mean such action at a meeting of the
board. Any action required or permitted to be taken by the board or any
committee of the board may be taken without a meeting if all members of the
board or the committee consent in writing to a resolution authorizing the
action. The resolution and the written consents thereto shall be filed with the
minutes of the proceedings of the board or committee. Any one or more members of
the board or any committee may participate in a meeting of the board or
committee by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the same
time. Participation by such means shall constitute presence in person at such
meeting.
Section 2.7. Waiver of Notice. Notice of a special meeting need not be given to
any director who submits a signed waiver of notice, whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to him or her.
Section 2.8. Quorum and Manner of Acting. Except as otherwise required by law,
the Articles of Association or these by-laws, a majority of the directors shall
constitute a quorum for the transaction of any business at any meeting of the
board and the act of a majority of the directors present and voting at a meeting
at which a quorum is present shall be the act of the board. In the absence of a
quorum, a majority of the directors present may adjourn any meeting, from time
to time, until a quorum is present and no notice of any adjourned meeting need
be given. At any such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally called.
Section 2.9. Vacancies. In the event a majority of the full board increases the
number of directors to a number which exceeds the number of directors last
elected by shareholders, as permitted by Section 2.2, directors may be appointed
to fill the resulting vacancies by vote of such majority of the full board. In
the event of a vacancy
<PAGE>
in the board for any other cause, a director may be appointed to fill such
vacancy by vote of a majority of the remaining directors then in office.
Section 2.10. Removal of Directors. The vacancy created by the removal of a
director pursuant to this Section may be filled by the board in accordance with
Section 2.9 of these by-laws or by the shareholders.
Article III. Committees
Section 3.1. Executive Committee. There may be an executive committee consisting
of the Chairperson or Co-Chairperson of the board and not less than two other
directors appointed by the board annually or more often. Subject to the
limitations in Section 3.4(g) of these by-laws, the executive committee shall
have the maximum authority permitted by law.
Section 3.2. Audit Committee. There may be an audit committee composed of not
less than two directors, exclusive of any active officers, appointed by the
board annually or more often, whose duty it shall be to make an examination at
least once during each calendar year and within fifteen months of the last
examination into the affairs of the Association, or cause continuous suitable
examinations to be made, by auditors responsible only to the board, and to
report the results of any such examinations in writing to the board from time to
time. Such examinations shall include audits of the fiduciary business of the
Association as may be required by law or regulation.
Section 3.3. Other Committees. The board may appoint, from time to time, other
committees of one or more persons, for such purposes and with such powers as the
board may determine.
Section 3.4. General. (a) Each committee shall elect a Chairperson from among
the members thereof and shall also designate a Secretary of the committee, who
shall keep a record of its proceedings.
(b) Vacancies occurring from time to time in the membership of any
committee shall be filled by the board for the unexpired term of the member
whose departure causes such vacancy. The board may designate one or more
alternate members of any committee, who may replace any absent member or members
at any meeting of such committee.
(c) Each committee shall adopt its own rules of procedure and shall
meet at such stated times as it may, by resolution, appoint. It shall also meet
whenever called together by its Chairperson or the Chairperson of the board.
(d) No notice of regular meetings of any committee need be given.
Notice of every special meeting shall be given either by mailing such notice to
each member of such committee at his or her address, as the same appears in the
records of the Association, at least two days before the day of such meeting, or
by notifying each member on or before the day of such meeting by telephone or by
personal notice, or by leaving a written notice at his or her residence or place
of business on or before the day of such meeting. Waiver of notice in writing of
any meeting, whether prior or subsequent to such meeting, or attendance at such
meeting, shall be equivalent to notice of such meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at any
special meeting.
(e) All committees shall, with respect to all matters, be subject to
the authority and direction of the board and shall report to it when required.
(f) Unless otherwise required by law, the Articles of Association or
these by-laws, a quorum at any meeting of any committee shall be one-third of
the full membership and present shall be the act of the committee.
(g) No committee shall have authority to take any action which is
expressly required by law or regulation to be taken at a meeting of the board or
by a specified proportion of directors.
Article IV. Officers and Employees
Section 4.1. Chairperson of the Board. The board shall appoint one of its
members to be the Chairperson of the board, or two persons to serve as
Co-Chairperson of the board to serve at its pleasure. Such person shall preside
at all meetings of the board. The Chairperson or Co-Chairpersons of the board
shall supervise the carrying out of the policies adopted or approved by the
board; shall have general executive powers, as well as the specific powers
conferred by these by-laws; and shall also have and may exercise such further
powers and duties as from time to time may be conferred upon, or assigned by the
board.
<PAGE>
Section 4.2. President. The board may appoint one of its members to be the
President of the Association. In the absence of the Chairperson or
Co-Chairpersons, the President shall preside at any meeting of the board. The
President shall have general executive powers, and shall have and may exercise
any and all other powers and duties pertaining by law, regulation, or practice
to the office of President, or imposed by these by-laws. The President shall
also have and may exercise such further powers and duties as from time to time
may be conferred, or assigned by the board.
Section 4.3. Vice President. The board may appoint one or more Vice Presidents.
Each Vice President shall have such powers and duties as may be assigned by the
board.
Section 4.4. Secretary. The board shall appoint a Secretary, Cashier, or other
designated officer who shall be Secretary of the board and of the Association,
and shall keep accurate minutes of all meetings. The Secretary shall attend to
the giving of all notices required by these by-laws; shall be custodian of the
corporate seal, records, documents and papers of the Association; shall provide
for the keeping of proper records of all transactions of the Association; shall
have and may exercise any and all other powers and duties pertaining by law,
regulation or practice, to the office of Cashier, or imposed by these by-laws;
and shall also perform such other duties as may be assigned from time to time,
by the board.
Section 4.5. Other Officers. The board may appoint one or more Assistant Vice
Presidents, one or more Trust Officers, one or more Assistant Secretaries, one
or more Assistant Cashiers, one or more Managers and Assistant Managers of
branches and such other officers and attorneys in fact as from time to time may
appear to the board to be required or desirable to transact the business of the
Association. Such officers shall respectively exercise such powers and perform
such duties as pertain to their several offices, or as may be conferred upon, or
assigned to, them by the board, the Chairperson or Co-Chairpersons of the board,
or the President. The board may authorize an officer to appoint one or more
officers or assistant officers.
Section 4.6. Resignation. An officer may resign at any time by delivering notice
to the Association. A resignation is effective when the notice is given unless
the notice specifies a later effective date.
Article V. Fiduciary Activities
Section 5.1. Trust Committee. There shall be a Trust Committee of this
Association composed of four or more members, who shall be capable and
experienced officers or directors of the Association. The Committee is charged
with the responsibility for the investment, retention, or disposition of assets
held in accounts with respect to which the Association has investment authority;
for the review of the assets of accounts for which the Association has
investment authority promptly after the acceptance of such an account and at
least once during every calendar year thereafter to determine the advisability
of retaining or disposing of such assets; for the determination of the manner in
which proxies received for accounts for which the Association has responsibility
for the voting of proxies shall be voted; for the determination of all
substantial questions involving discretionary authority of the Association of a
non-investment nature, including, but not limited to, distribution of principal
and/or income in respect of any account; for providing advice as to the
investment, retention, or disposition of assets in investment advisory accounts
maintained by the Association; for the making of such reports as this board
shall require; and for such other responsibilities as may be assigned by this
board. The Trust Committee, in discharging its aforementioned responsibilities,
may authorize officers of the Association to exercise such powers and under such
conditions as the Committee may from time to time prescribe.
Section 5.2. Trust Investments. Funds held in a fiduciary capacity shall be
invested according to the instrument establishing the fiduciary relationship and
local law. Where such instrument does not specify the character and class of
investments to be made and does not vest in the Association a discretion in the
matter, funds held pursuant to such instrument shall be invested in investments
in which corporate fiduciaries may invest under applicable law.
Section 5.3. Trust Audit Committee. The board shall appoint a committee of at
least two directors, exclusive of any active officer of the association, which
shall, at least once during each calendar year make suitable audits of the
association's fiduciary activities or cause suitable audits to be made by
auditors responsible only to the board, and at such time shall ascertain whether
fiduciary powers have been administered according to law, Part 9 of the
Regulations of the Comptroller of the Currency, and sound fiduciary principles.
Section 5.4. Fiduciary Files. There shall be maintained by the association all
fiduciary records necessary to assure that its fiduciary responsibilities have
been properly undertaken and discharged.
<PAGE>
Article VI. Stock and Stock Certificates
Section 6.1. Transfers. Shares of stock shall be transferable on the books of
the Association, and a transfer book shall be kept in which all transfers of
stock shall be recorded. Every person becoming a shareholder by such transfer
shall, in proportion to his or her shares, succeed to all rights of the prior
holder of such shares. The board may impose conditions upon the transfer of the
stock reasonably calculated to simplify the work of the Association with respect
to stock transfers, voting at shareholder meetings, and related matters and to
protect it against fraudulent transfers.
Section 6.2. Stock Certificates. Certificates of stock shall bear the signature
of the Chairperson or Co-Chairpersons of the board or President (which may be
engraved, printed or impressed), and shall be signed manually or by facsimile
process by the Secretary, Assistant Secretary, Cashier, Assistant Cashier, or
any other officer appointed by the board for that purpose, to be known as an
authorized officer, and the seal of the Association shall be engraved thereon.
Each certificate shall recite on its face that the stock represented thereby is
transferable only upon the books of the Association properly endorsed. In case
any such officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such before such certificate is
issued, it may be issued by the Association with the same effect as if such
officer had not ceased to be such at the time of its issue. The corporate seal
may be a facsimile, engraved or printed.
Article VII. Corporate Seal
Section 7.1. Corporate Seal. The Chairperson, the President, the Cashier, the
Secretary or any Assistant Cashier or Assistant Secretary, or other officer
thereunto designated by the board, shall have authority to affix the corporate
seal to any document requiring such seal, and to attest the same. Such seal
shall be substantially in the following form: A circle, with the words "Chase
Manhattan Trust Company, National Association" within such circle.
Article VIII. Miscellaneous Provisions
Section 8.1. Fiscal Year. The fiscal year of the Association shall be the
calendar year.
Section 8.2. Execution of Instruments. All agreements, indentures, mortgages,
deeds, conveyances, transfers, certificates, declarations, receipts, discharges,
releases, satisfactions, settlements, petitions, schedules, accounts,
affidavits, bonds, undertakings, proxies and other instruments or documents may
be signed, executed, acknowledged, verified, delivered or accepted on behalf of
the Association by the Chairperson or Co-Chairpersons of the board, or the
President, or any Vice Chairperson, or any Managing Director, or any Vice
President, or any Assistant Vice President, or the Chief Financial Officer, or
the Controller, or the Secretary, or the Cashier, or, if in connection with
exercise of fiduciary powers of the Association, by any of those officers or by
any Trust Officer. Any such instruments may also be executed, acknowledged,
verified, delivered or accepted on behalf of the Association in such other
manner and by such other officers as the board may from time to time direct. The
provisions of this Section 8.2 are supplementary to any other provision of these
by-laws.
Section 8.3. Records. The Articles of Association, the by-laws and the
proceedings of all meetings of the shareholders, the board, and standing
committees of the board, shall be recorded in appropriate minute books provided
for that purpose. The minutes of each meeting shall be signed by the Secretary,
Cashier or other officer appointed to act as Secretary of the meeting.
Section 8.4. Corporate Governance Procedures. To the extent not inconsistent
with applicable Federal banking law, bank safety and soundness or these by-laws,
the corporate governance procedures found in the Delaware General Corporation
Law shall be followed by the Association.
Article IX. Indemnification
<PAGE>
Section 9.1. Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director or an officer of the Association or is or was serving at the request of
the Association as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Association to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Association to provide broader indemnification rights than such law permitted
the Association to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section 9.3 of these by-laws with respect to proceedings
to enforce rights to indemnification, the Association shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by such
indemnitee only if such proceeding (or part thereof) was authorized by the
board.
Section 9.2. Right to Advancement of Expenses. The right to indemnification
conferred in Section 9.1 of these by-laws shall include the right to be paid by
the Association the expenses (including attorney's fees) incurred in defending
any such proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Association of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section 9.2 or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections 9.1 and 9.2 of these by-laws shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
Section 9.3. Right of Indemnitee to Bring Suit. If a claim under Section 9.1 or
9.2 of these by-laws is not paid in full by the Association within sixty (60)
days after a written claim has been received by the Association except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the indemnitee may at any time thereafter
bring suit against the Association to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Association to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (1) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (2) any suit brought by the Association to recover an
advancement of expenses pursuant to the terms of an undertaking, the Association
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Association
(including the board, the Association's independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Association (including the board, the Association's independent legal counsel,
or its shareholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Association to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article IX or otherwise shall be on the Association.
Section 9.4. Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article IX shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Association's Articles of Association, by-laws, agreement, vote of
shareholders or disinterested directors or otherwise.
<PAGE>
Section 9.5. Insurance. The Association may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Association or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Association would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
Section 9.6. Indemnification of Employees and Agents of the Association. The
Association may, to the extent authorized from time to time by the board, grant
rights to indemnification and to the advancement of expenses to any employee or
agent of the Association to the fullest extent of the provisions of this Article
IX with respect to the indemnification and advancement of expenses of directors
and officers of the Association.
Article X. By-laws
Section 10.1. Inspection. A copy of the by-laws, with all amendments, shall at
all times be kept in a convenient place at the main office of the Association,
and shall be open for inspection to all shareholders during banking hours.
Section 10.2. Amendments. The by-laws may be amended, altered or repealed, at
any regular meeting of the board by a vote of a majority of the total number of
the directors except as provided below. The Association's shareholders may amend
or repeal the by-laws even though the by-laws may be amended or repealed by its
board.
<PAGE>
EXHIBIT 16(6)
Consent for Records of Governmental Agencies
to be Made Available to the Commission
--------------------------------------
The undersigned, Chase Manhattan Trust Company, National Association,
pursuant to Section 321(b) of The Trust Indenture Act of 1939, hereby authorizes
the Board of Governors of the Federal Reserve System, the Federal Reserve Banks,
the Treasury Department, the Comptroller of the Currency and the Federal Deposit
Insurance Corporation, under such conditions as they may prescribe, to make
available to the Commission such reports, records or other information as they
may have available with respect to the undersigned as a prospective trustee
under an indenture to be qualified under the aforesaid Trustee Indenture Act of
1939 and to make through their examiners or other employees for the use of the
Commission, examinations of the undersigned prospective Trustee.
The undersigned also, pursuant to Section 321(b) of said Trust
Indenture Act of 1939, consents that reports of examination by the Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Commission upon request therefor.
Dated this 19th day of November, 1999.
Chase Manhattan Trust Company,
National Association
By: \s\ Karen Vera
--------------------------
Karen Vera
Assistant Vice President
<PAGE>
EXHIBIT 16(7)
Chase Manhattan Trust Company, National Association
Statement of Condition
September 30,1999
($000)
------
Assets
Cash and Due From Banks $16,059
Securities Available for Sale 4,857
Premises and Fixed Assets 893
Intangible Assets 153,623
-------------
Total Assets $175,432
=============
Liabilities
Sundry Liabilities and Accrued Expenses $ 4,414
-------------
Stockholder's Equity
Common Stock $ 5,000
Surplus 156,892
Retained Earnings 9,126
-------------
Total Stockholder's Equity $171,018
-------------
Total Liabilities and Stockholder's Equity $175,432
=============
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 AND
THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> USD
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 26,840,904 186,137,151
<SECURITIES> 0 0
<RECEIVABLES> 1,903,174 8,740,524
<ALLOWANCES> (61,037) (208,645)
<INVENTORY> 0 0
<CURRENT-ASSETS> 29,802,103 224,538,195
<PP&E> 1,206,738 7,733,159
<DEPRECIATION> (55,470) (1,563,357)
<TOTAL-ASSETS> 96,785,975 470,227,369
<CURRENT-LIABILITIES> 9,349,665 24,168,451
<BONDS> 351,924 735,885
0 0
0 0
<COMMON> 66,044 126,507
<OTHER-SE> 80,658,334 418,390,090
<TOTAL-LIABILITY-AND-EQUITY> 96,785,975 470,227,369
<SALES> 0 0
<TOTAL-REVENUES> 964,793 14,783,096
<CGS> 0 0
<TOTAL-COSTS> 1,703,235 7,424,594
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 62,206 0
<INTEREST-EXPENSE> (85,265) (1,770,324)
<INCOME-PRETAX> 17,716,640 25,763,621
<INCOME-TAX> 0 (12,840,423)
<INCOME-CONTINUING> 16,012,736 (6,404,860)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,012,736 (6,404,860)
<EPS-BASIC> 0.33 (0.07)
<EPS-DILUTED> 0.33 (0.07)
</TABLE>
