<PAGE>
As filed with the Securities and Exchange Commission on July 28, 2000.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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INTERNET CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its Charter)
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435 Devon Park Drive
600 Building
Wayne, Pennsylvania 19087
(610) 989-0111
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Henry N. Nassau, Esq.
Managing Director, General Counsel and Secretary
Internet Capital Group, Inc.
435 Devon Park Drive
600 Building
Wayne, Pennsylvania 19087
(610) 989-0111
(Name, address including zip code, and telephone number, including area code,
of agent for service)
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With copies to:
Christopher G. Karras, Esq.
Dechert
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
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Approximate date of commencement of proposed sale to the public: From time
to time 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. [X]
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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(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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed maximum
Title of each class of Amount maximum aggregate Amount of
securities to be to be offering price offering registration
registered registered(1) per share(2) price(2) fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 15,000,000 $34.00 $510,000,000 $134,640
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</TABLE>
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(1) 8,345,115 shares are being carried forward and $116,369 was paid with
respect to such securities.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, based on the
average of the high and low selling prices of the Common Stock on July 27,
2000.
(3) $134,640.00 previously paid.
----------------
Pursuant to Rule 429(b), the combined prospectus included herein relates
to the earlier registration statement on Form S-4 filed by the registrant
(Registration No. 333-34722), which was declared effective on May 10, 2000 and
the shares issued thereunder.
----------------
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 the 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
The prospectus contained in this registration statement will be used in
connection with future exchange offers, business combination transactions or
acquisitions in amounts, at prices and on terms as we may determine at the time
of the future offering.
<PAGE>
PROSPECTUS
23,345,115 Shares
[LOGO OF INTERNET CAPITAL GROUP]
Common Stock
---------------
This prospectus (the "Prospectus") relates to 23,345,115 shares of our
common stock, par value $.001 per share (the "Common Stock") that we may issue
and offer for sale from time to time in connection with business combination
transactions or acquisitions in amounts, at prices and on terms as we may
determine at the time of offering. We have not fixed a period of time during
which the Common Stock offered by this Prospectus may be offered or sold.
We will pay all expenses of this offering. No underwriting discounts or
commissions will be paid in connection with the issuance of Common Stock in
business combination transactions or acquisitions, although finder's fees may
be paid with respect to specific acquisitions. Any person receiving a finder's
fee may be deemed to be an underwriter within the meaning of Section 2(11) of
the Securities Act of 1933.
Our Common Stock is listed on The NASDAQ National Market under the symbol
"ICGE." The last reported sale price of our Common Stock on July 27, 2000 was
$33.38 per share.
Investing in our Common Stock involves risks. See "Risk Factors" starting
on page 4.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized by Internet Capital Group or any other person. This Prospectus
does not constitute an offer to sell or the solicitation of an offer to buy the
Common Stock of Internet Capital Group in any circumstances in which such offer
or solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of Internet Capital Group since the
date hereof or that the information contained herein is correct as of any time
subsequent to its date.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
---------------
The date of this Prospectus is July 28, 2000
<PAGE>
---------------
ABOUT THIS PROSPECTUS
The terms "Internet Capital Group," the "Company," "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.,
Internet Capital Group (Europe) Limited, Satori Inc., ICG Holdings, Inc., Rain
Acquisition Corp. and ICG Holdings, 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 "Internet Capital Group's Business--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 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 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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 4
Recent Developments...................................................... 16
Forward-Looking Statements............................................... 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Price Range of Common Stock.............................................. 19
Capitalization........................................................... 20
Internet Capital Group, Inc. Unaudited Pro Forma Information............. 21
Selected Consolidated Financial Data..................................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Internet Capital Group's Business........................................ 51
Management............................................................... 73
Certain Transactions..................................................... 92
Principal Shareholders of Internet Capital Group......................... 98
Description of Internet Capital Group Capital Stock...................... 100
Shares Eligible for Future Sale.......................................... 104
Legal Matters............................................................ 105
Experts.................................................................. 105
Where You Can Find More Information...................................... 106
Index to Financial Statements............................................ F-i
</TABLE>
<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.
Internet Capital Group
Internet Capital Group is an Internet 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 March 31, 2000, we owned interests in 63 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 leading companies
such as Coca-Cola Company, Exodus Communications, 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 enabling
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. At March 31, 2000, our partner company network
included significant interests in the following 44 market makers:
Animated Images, Arbinet Communications, AssetTrade, AUTOVIA,
Bidcom, Blackbird, BuyMedia, CapSpan, CentriMed, Collabria,
Commerx, ComputerJobs.com, CourtLink, CyberCrop.com, Deja.com, e-
Chemicals, eMarketWorld, eMerge Interactive, eMetra,
EmployeeLife.com, eumediX, EuSupply, FarmingOnline,
Freeborders.com, ICG Commerce, Industrial America, Internet
Commerce Systems, Internet Healthcare Group, InvestorForce.com,
iParts, JusticeLink, MetalSite, NetVendor, ONVIA.com,
PaperExchange.com, Residential Delivery Services, Retail Exchange,
Simplexis, StarCite, TALPX, Universal Access, USgift.com,
VerticalNet and Vivant! In addition, subsequent to March 31, 2000,
we acquired a significant interest in the following market makers:
Buy.com, CargoBiz, CreditTrade, eCatalog, eColony, Enel,
GoIndustry, ICG Asia Works Limited, ICG Patents, Ivows, Print
Mountain, Tibersoft and VerticalNet Europe. Also subsequent to
March 31, 2000, CourtLink and JusticeLink merged.
<PAGE>
. Enabling 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. At March 31, 2000, our partner company
network included significant interests in the following 19 enabling
service providers: Benchmarking Partners, Blackboard, Breakaway
Solutions, ClearCommerce, CommerceQuest, Context Integration,
Entegrity Solutions, iSky, Jamcracker, LinkShare, Logistics.com,
PrivaSeek, SageMaker, Servicesoft Technologies, Syncra Software,
Team On, traffic.com, United Messaging and US Interactive.
Subsequent to March 31, 2000, we acquired a significant interest in
the following enabling service providers: eCredit, Emptoris and
RightWorks.
We have grown rapidly since our inception in 1996. In 1998 and 1999, we
added 12 and 29 B2B e-commerce companies, respectively, to our network. From
the beginning of 2000 to March 31, 2000, we added 15 B2B e-commerce companies
to our network. Most of our partner companies acquired to date have been B2B e-
commerce companies headquartered in the United States; four of our partner
companies acquired (EuSupply, eumediX, FarmingOnLine and eMetra) are
headquartered in Europe. We expect to continue to evaluate additional partner
company opportunities in the United States, Europe and Asia. In February 2000,
we announced the formation of VerticalNet Europe, a joint venture with British
Telecommunications, plc and VerticalNet, and in March 2000, we announced a
strategic alliance to form a B2B e-commerce joint venture with Enel, which will
facilitate our position in the B2B e-commerce markets in Europe and Italy,
respectively. In May 2000, we acquired an interest in Harbour Ring
International Holdings, which was renamed ICG AsiaWorks, to facilitate our
entrance into the Asian e-commerce markets. At the end of 1999 we opened an
office in London, England. And in 2000, we opened offices in Munich, Paris and
Tokyo.
We are a Delaware corporation. Our principal executive office is located
at 435 Devon Park Drive, 600 Building, Wayne, Pennsylvania 19087 and our
telephone number is (610) 989-0111. We also maintain offices in San Francisco,
California; Boston, Massachusetts; Seattle, Washington; London, England;
Munich, Germany; Paris, France; and Tokyo, Japan. We maintain sites on the
World Wide Web at www.icge.com. and www.internetcapital.com. The information on
our Web site is not part of this Prospectus.
The Offering
<TABLE>
<C> <S>
Common Stock offered.......................... 23,345,115 shares to be issued
in connection with future
exchange offers, business
combination transactions or
acquisitions.
Common Stock outstanding ..................... 264,293,380
Voting Rights ................................ The holders of the Common
Stock have one vote per share
Use of Proceeds............................... We will not receive any cash
proceeds from this offering.
See "Use of Proceeds".
NASDAQ symbol................................. ICGE
</TABLE>
2
<PAGE>
Our Summary Historical, Pro Forma Consolidated Financial and Other 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 Consolidated
Financial Statements and related Notes 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, 1999 and the three months ended March 31,
2000, derived from elsewhere in this Prospectus, reflects the effect of our
1999 and 2000 acquisitions of companies accounted for under the consolidation
and equity methods, the deconsolidation of Breakaway Solutions Inc., the
acquisition of our ownership interest in eCredit.com, Inc. as a company
accounted for under the equity method and the acquisition of a majority
ownership interest in RightWorks as if they had occurred on January 1, 1999.
The Pro Forma Consolidated Statements of Operations Data for the years ended
December 31, 1998 and 1999 and the three months ended March 31, 1999, included
under the actual results for each of those periods, reflect our taxation as a
corporation since January 1, 1998 and 1999, respectively, although we have been
taxed as a corporation only since February 2, 1999. The Pro Forma Consolidated
Balance Sheet Data as of March 31, 2000, derived from elsewhere in this
Prospectus, reflect the effect of our acquisitions from April 1 to June 30,
2000.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
March 4, 1996
(Inception)
to December 1997 1998 1999 1999 1999 2000 2000
31, 1996 Actual Actual Actual Pro Forma Actual Actual Pro Forma
------------- ------- -------- -------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenue................. $ 285 $ 792 $ 3,135 $ 16,536 $ 18,688 $ 3,111 $ 1,830 $ 4,729
Operating Expenses...... 2,348 7,510 20,157 57,080 508,503 5,401 33,352 155,498
------- ------- -------- -------- --------- -------- --------- ---------
(2,063) (6,718) (17,022) (40,544) (489,815) (2,290) (31,522) (150,769)
Other income, net....... -- -- 30,483 67,384 67,455 28,677 657,686 657,930
Interest income, net.... 88 138 925 5,734 5,734 296 9,460 9,460
------- ------- -------- -------- --------- -------- --------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975) (6,580) 14,386 32,574 (416,626) 26,683 635,624 516,621
Income taxes............ -- -- -- 23,722 267,382 663 (209,499) (156,337)
Minority interest....... 427 (106) 5,382 6,026 10,459 146 5,901 11,573
Equity income (loss).... (514) 106 (5,869) (92,099) (495,108) (7,413) (80,051) (151,460)
------- ------- -------- -------- --------- -------- --------- ---------
Net Income (Loss)....... $(2,062) $(6,580) $ 13,899 $(29,777) $(633,893) $ 20,079 $ 351,975 $ 220,397
======= ======= ======== ======== ========= ======== ========= =========
Net income (loss) per
share-diluted.......... $ (0.05) $ (0.10) $ 0.12 $ (0.15) $ (2.93) $ 0.14 $ 1.30 $ 0.77
Weighted average shares
outstanding-diluted.... 40,792 68,198 112,299 201,851 216,197 147,400 270,132 284,878
Pro forma net income
(loss) (unaudited)..... $ 8,756 $(37,449) 12,233
Pro forma net income
(loss) per share-
diluted (unaudited).... $ 0.08 $ (0.19) $ 0.08
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
----------------------
Actual Pro Forma
---------- -----------
(unaudited)
(In Thousands except
per share data)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................ $ 858,567 $ 514,702
Working capital.......................................... 844,578 495,703
Total assets............................................. 2,471,057 4,374,746
Long-term debt, net of current portion................... 2,690 5,276
Convertible subordinated notes........................... 566,250 566,250
Total shareholders' equity............................... 1,749,063 3,149,163
Book value per share..................................... 6.62 11.30
</TABLE>
3
<PAGE>
RISK FACTORS
Ownership of 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
Limited Operating History--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 business-to-business, or 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.
Dependence on 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, Breakaway Solutions, eMerge Interactive, ONVIA.com
and Universal Access, five 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 $2,471.1 million in total assets as of March 31, 2000, $1,157.6
million, or 46.8% consisted of ownership interests in and advances to our
partner companies. On a pro forma basis, adjusted for our acquisitions during
the period April 1, 2000 through June 30, 2000 as if they had occurred on March
31, 2000, our assets on March 31, 2000 were $4,374.7 million, of which $2,036.8
million, or 46.6%, 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, this
decline would likely affect the price of our Common Stock. For example,
VerticalNet, Breakaway Solutions, eMerge Interactive, ONVIA.com and Universal
Access are five of our publicly traded
4
<PAGE>
partner companies and on June 30, 2000 our holdings in VerticalNet, Breakaway
Solutions, Universal Access, ONVIA.com and eMerge Interactive had respective
market values of approximately $926 million, $420 million, $518 million, $148
million and $145 million. A decline in the market value of VerticalNet,
Breakaway Solutions, Universal Access, ONVIA.com and eMerge Interactive will
likely cause a decline in the price of our Common Stock.
Other material risks relating to our partner companies are more fully
described below under "Risks Particular to Our Partner Companies."
Unproven Business Model--Our business model is unproven, which could limit our
ability to attract new companies and could adversely affect our business
strategy.
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 Quarterly Results--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.
Dependence on Personnel--Our success is dependent on our key personnel and the
key personnel of our partner companies and our business and operations could be
disrupted if they do not continue in their present positions.
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
5
<PAGE>
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 March 31, 2000, 15 of our 24 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.
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.
Historical and Future Losses--We have had a history of losses and expect
continued losses in the foreseeable future.
Our net income for the three months ended March 31, 2000 of $352 million
includes non-operating gains of $113.6, net of deferred taxes, related to the
issuance of stock by VerticalNet and Universal Access. Also included are non-
operating gains of $300 million, net of deferred taxes, related to sales of
certain minority interests and marketable securities. Without the $413.6
million effect of these items on our results, we would have had a net loss of
$61.6 million.
Our net loss for the year ended December 31, 1999 of $29.8 million
includes gains of $44.2 million, net of deferred taxes, related to the issuance
of stock by VerticalNet and Breakaway Solutions and a $7.7 million deferred tax
benefit related to our conversion from a limited liability company to a taxable
corporation. Without the $51.9 million effect of these items on our net
results, we would have had a net loss of $81.7 million. For the year ended
December 31, 1998, we realized net income of $13.9 million primarily due to
$34.4 million of non-operating 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 1999 and 2000
as if they had occurred on January 1, 1999, pro forma net loss for the year
ended December 31, 1999 would have been $633.9 million and the net income for
the three months ended March 31, 2000 would have been $220.4 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 year ending December 31, 2000, 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 will also increase due to the 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.
6
<PAGE>
Ability to Manage Partner Company Growth--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.
Shareholder and Partner Competition--We may compete with some of our
shareholders and partner companies, and our partner companies may compete with
each other which could deter companies from partnering with us and may limit
future business opportunities.
We may compete with some of our shareholders and partner companies for
Internet-related opportunities. As of March 31, 2000, Comcast Corporation and
Safeguard Scientifics, Inc. own 8.3% and 13.7% of our outstanding Common Stock,
respectively. 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 and AT&T Corp. each have 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.
Capital Provider Competition--We face competition from other potential
acquirors of B2B e-commerce companies which could affect our ability to build
successful 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 on reasonable terms, our strategy to build a collaborative
network of partner companies may not succeed.
Global Expansion--Our global expansion exposes us to less developed markets,
currency fluctuations and political instability which could adversely impact
our financial results and our partner companies' ability to conduct business.
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
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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.
Substantial Leverage--Our outstanding indebtedness may increase substantially
which would negatively impact our future prospects.
As of March 31, 2000, we had $571.6 million in long term debt, including
the current portion thereof and $566.3 million in outstanding convertible
subordinated notes. This indebtedness will impact us in a number of ways:
. significantly increase our interest expense and related debt
service costs;
. make it more difficult to obtain additional financing; and
. constrain our ability to react quickly in an unfavorable economic
climate.
If we are unable to satisfy our debt service requirements, substantial
liquidity problems could result, which would negatively impact our future
prospects.
Access to Capital Markets--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 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.
Divestiture of Partner Company Interests--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.
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Lack of Opportunities for Future Acquisitions--We may not have opportunities to
acquire interests in additional companies, which would affect our growth
strategy.
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.
Limitation of Resources for Future Acquisitions--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.
. To fund future acquisitions we may be required to incur debt or
issue equity securities, which may be dilutive to existing
shareholders.
Registration Under the Investment Company Act of 1940--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 which would impact our
investment strategy.
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
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<PAGE>
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.
RISKS PARTICULAR TO OUR PARTNER COMPANIES
Common Stock Price Fluctuations--Fluctuation in the price of the common stock
of our publicly-traded partner companies may affect the price of our common
stock.
VerticalNet, Breakaway Solutions, eMerge Interactive, ONVIA.com and
Universal Access are five 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 $4.00 per share
and its common stock has since traded as high as $148.375 per share, adjusted
for two subsequent two for one stock splits. On October 6, 1999, Breakaway
Solutions completed its initial public offering at a price of $7.00 per share
and its common stock has since traded as high as $85.50 per share, adjusted for
a two for one stock split. On February 8, 2000, eMerge Interactive completed
its initial public offering at a price of $15.00 per share and its common stock
has traded as high as $68.00 per share. On March 1, 2000, ONVIA.com completed
its initial public offering at a price of $21.00 per share and its common stock
has traded as high as $78.00 per share. On March 17, 2000, Universal Access,
Inc. completed its initial public offering at a price of $14.00 per share and
its common stock has traded as high as $63.00 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 June 30, 2000 of $36.94,
our holdings in VerticalNet had a market value of approximately $926 million.
Based on the closing price of Breakaway Solutions' common stock on June 30,
2000 of $27.00, our holdings in Breakaway Solutions had a market value of
approximately $420 million. Based on the closing price of eMerge Interactive's
common stock on June 30, 2000 of $17.94, our holdings in eMerge Interactive had
a market value of approximately $145 million. Based on the closing price on
ONVIA.com's common stock on June 30, 2000 of $8.63, our holdings in ONVIA.com
had a market value of approximately $148 million. Based on the closing price of
Universal Access' common stock on June 30, 2000 of $24.50, our holdings in
Universal Access had a market value of approximately $518 million. Fluctuations
in the price of VerticalNet's, Breakaway Solutions', eMerge Interactive's,
ONVIA.com's and Universal Access' 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;
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. 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.
eMerge Interactive's results of operations, and accordingly the price of
its common stock, may be adversely affected by the following factors:
. lack of commercial acceptance of online cattle sales and services;
. failure to expand the number of livestock industry participants in
its network;
. failure to obtain access to data from feedlots to adequately meet
information needs of its customers;
. inability to respond to competitive developments; and
. failure to achieve brand recognition.
Onvia.com's results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. small businesses' unwillingness to purchase their business
services and products online;
. a significant number of small businesses' and small business
service providers' unwillingness to use its emarketplace to buy
and sell services and products; and
. failure of small business customers to provide it data about
themselves.
Universal Access' results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. failure of its services to be sufficiently rapid, reliable and
cost-effective;
. unwillingness of clients to outsource the obtaining of circuits;
. inability to market its services effectively; and
. slow growth of the Internet.
Our assets as reflected in our balance sheet, dated March 31, 2000, were
approximately $2,471 million, of which $403 million related to VerticalNet,
Breakaway Solutions, eMerge Interactive, ONVIA.com and Universal Access.
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.
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Dependence on B2B Market--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.
Our long-term success depends on widespread market-acceptance of B2B e-
commerce. A number of factors could prevent this acceptance, including the
following:
. the unwillingness of businesses to shift from traditional
processes to B2B e-commerce processes;
. the network necessary for enabling substantial growth in usage of
B2B e-commerce may not be adequately developed;
. increased government regulation or taxation which may adversely
affect the viability of B2B e-commerce;
. insufficient availability of telecommunication services or changes
in telecommunication services which 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.
Competitors of Partner Companies--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.
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Infringement on Proprietary Rights--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 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.
Liabilities from Internet Publications or Distributions--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.
Failure of Systems--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.
Inability to Upgrade Systems--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
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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.
Dependence on Loyal Users of Web Sites--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 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.
Maintenance of Website Addresses--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.
Dependence on Barter Transactions--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 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 year ended December 31, 1999,
approximately 18% of VerticalNet's revenue was attributable to barter
transactions.
RISKS RELATING TO THE INTERNET INDUSTRY
Confidentiality and Security--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
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on these types of transactions do not add sufficient security features to their
future product releases, our partner companies' products may not gain market
acceptance or our partner companies may incur additional legal exposure.
Despite the measures some of our partner companies have taken, their web
sites remain potentially vulnerable to physical or electronic break-ins,
viruses or similar problems. If a person circumvents the security measures
imposed by any one of our partner companies, he or she could misappropriate
proprietary information or cause interruption in operations of the partner
company. Security breaches that result in access to confidential information
could damage the reputation of any one of our partner companies and expose the
partner company affected to a risk of loss or liability. Some of our partner
companies may be required to make significant investments and efforts to
protect against or remedy security breaches. Additionally, as e-commerce
becomes more widespread, our partner companies' customers will become more
concerned about security. If our partner companies are unable to adequately
address these concerns, they may be unable to sell their goods and services.
Rapid Technological Changes--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.
Effect of Government Regulations--Government regulations and legal
uncertainties may place financial burdens on our business and the businesses of
our partner companies.
As of March 31, 2000, there were few laws or regulations, at either the
state or federal level, directed specifically at e-commerce. Despite the
scarcity of laws targeted at e-commerce, courts and administrative agencies
have shown an increased willingness to apply traditional legal doctrines to
cyberspace in areas including libel, wire fraud, copyright, trade secrets,
unfair competition, consumer protection, monopolies, and unfair trade
practices, creating an aura of uncertainty regarding the legality of certain
widespread practices. It is possible that court decisions on issues such as
deep-linking, protection of databases, and privacy rights may affect the
valuation of our business and the businesses of our partner companies, call
into question the viability of current business practices, and require the
revision of certain business models.
Because of the Internet's popularity and increasing use, as well as the
sometimes imperfect fit of traditional legal doctrines to Internet-related
issues, 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, spam, 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.
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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 and
other laws may not have a direct adverse effect on our business or those of our
partner companies, they add to the legal and regulatory uncertainty faced by
B2B e-commerce companies.
Importantly, the current moratorium on certain Internet taxes expires in
October 2001, and there is some chance that it will not be extended. If not, e-
commerce businesses could be faced with an array of state and local taxes that
could impede the growth prospects of our partner companies.
RECENT DEVELOPMENTS
We filed a Registration Statement on Form S-4 (the "Registration
Statement") on April 13, 2000, to register 23,000,000 shares of our Common
Stock, par value $.001 per share, for issuance in exchange offers with
eCredit.com, Inc. ("eCredit.com") and RightWorks Corporation ("RightWorks") and
other future business combination transactions or acquisitions.
On June 9, 2000, we acquired 9,239,557 shares of common stock of
eCredit.com and a warrant to purchase 1,563,491 shares of common stock of
eCredit.com in exchange for 4,655,558 shares of our Common Stock. We now own a
33% interest in eCredit.com on a fully-diluted basis.
eCredit.com provides credit management and financing solutions for
business-to-business and business-to-consumer commerce. Its systems are network
applications used to automate and streamline the credit management and
financing process. We believe that our ownership in eCredit.com will benefit us
in numerous ways. eCredit.com enhances our strategy to provide collaborative
platforms for our partner companies, provides an infrastructure solution for
our partner companies, and better permits us to reach our goal of building the
dominant business-to-business e-commerce network of companies across the top 50
global markets.
On June 15, 2000, we acquired 19,021,378 shares of Series B Preferred
Stock of RightWorks in exchange for 5,778,133 shares of our Common Stock. We
also acquired 649,644 shares of Series B Preferred Stock of RightWorks for $22
million in cash. In addition, we acquired 375,000 shares of common stock of
RightWorks directly from the founder and CEO of RightWorks, Vani Kola, in
exchange for 113,915 shares of Common Stock. We now own a 50% interest in
RightWorks on a fully-diluted basis.
RightWorks is a leading provider of e-procurement software for business-
to-business exchanges. RightWorks' software, RightWorks 5.0, facilitates these
business-to-business exchanges by providing a software platform that manages
the complex business transactions that take place on digital marketplaces. We
believe that our ownership in RightWorks will benefit us in numerous ways.
RightWorks aids our strategy to enable online trading communities, provides
valuable technology that consists of an open architecture and easy deployment,
and better permits us to reach our goal of building the dominant business-to-
business e-commerce network of companies across the top 50 global markets.
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In recent months, we completed several additional transactions in which
we issued shares that are registered on the Registration Statement in exchange
for securities in the following companies:
<TABLE>
<CAPTION>
Shares of ICG
Name of Company Company Business Common Stock Issued Date
--------------- ---------------- ------------------- ----
<C> <S> <C> <C>
ComputerJobs.com, Inc. Provides Internet- 126,483 May 17, 2000
based job-screening
and resume posting
CommerceQuest, Inc. Provides messaging 2,653,283 May 24, 2000
services for data
sharing
Emptoris, Inc. Provides software 676,977 June 6, 2000
and consulting
assistance to
businesses
developing their e-
markets
</TABLE>
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<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements based 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 4 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.
USE OF PROCEEDS
We will not receive any proceeds from any offerings of our Common Stock
registered under this registration statement other than the value of the
businesses or properties we acquire in future acquisitions.
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.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the Nasdaq National Market under the symbol
"ICGE". The following table shows, for the periods indicated, the range of high
and low reported sales prices per share for the Common Stock as quoted on the
Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Quarter ended:
September 30, 1999........................................ $ 53.75 $ 7.00
December 31, 1999......................................... $212.00 $43.00
March 31, 2000............................................ $200.94 $80.00
June 30, 2000............................................. $ 89.00 $23.13
Through July 26, 2000..................................... $ 45.19 $29.00
</TABLE>
On July 27, 2000, the last reported sale price of the Common Stock as
quoted on the Nasdaq National Market was $33.38. As of March 31, 2000, there
were approximately 1,392 holders of record of Common Stock.
19
<PAGE>
CAPITALIZATION
Internet Capital Group
You should read this capitalization table together with "Selected
Consolidated Financial Data," "Pro Forma Consolidated Financial Information"
and our consolidated financial statements and notes included elsewhere in this
Prospectus.
The pro forma basis reflects the following:
. the issuance of 4,655,558 shares of our Common Stock in the
eCredit.com exchange offer;
. the issuance of 5,892,048 shares of our Common Stock in the
RightWorks Corporation offer; and the assumption of approximately
$2,586,000 of debt in connection with the acquisition and
. the acquisition of new and additional minority ownership interests
in four partner companies for 3,797,955 shares of our Common Stock.
Common stock data is as of March 31, 2000 and excludes:
. the conversion of the Convertible subordinated notes into 4,443,266
shares of Common Stock;
. options to purchase 10,625,500 shares of Common Stock under our
equity plans at a weighted average exercise price of $70.16 per
share;
. 13,811,199 shares of Common Stock issuable upon exercise of options
reserved for grant;
. warrants outstanding to purchase 2,475,817 shares at a weighted
average price of $5.87 per share; and
. 599,426 shares of our Common Stock issuable upon exercise of an
ownership interest option under an agreement related to the
acquisition of a partner company ownership interest.
The following table sets forth our capitalization on an actual and pro
forma basis as of March 31, 2000.
<TABLE>
<CAPTION>
March 31, 2000
-----------------------
Actual Pro Forma
---------- -----------
(unaudited)
(In thousands)
<S> <C> <C>
Long-term debt, net of current portion................. $ 2,690 $ 5,276
Convertible subordinated notes......................... 566,250 566,250
Shareholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized; none issued and outstanding-actual, and
pro forma........................................... -- --
Common stock, $.001 par value; 2,000,000 shares
authorized; 264,293 shares issued and outstanding-
actual; 278,639 shares issued and outstanding pro
forma............................................... 264 279
Additional paid-in capital............................. 1,583,022 2,983,107
Retained earnings (accumulated deficit)................ 325,436 325,436
Unamortized deferred compensation...................... (11,720) (11,720)
Notes receivable--shareholders......................... (79,396) (79,396)
Accumulated other comprehensive income................. (68,543) (68,543)
---------- ----------
Total shareholders' equity......................... 1,749,063 3,149,163
---------- ----------
Total capitalization............................. $2,318,003 $3,720,689
========== ==========
</TABLE>
20
<PAGE>
INTERNET CAPITAL GROUP, INC.
Pro Forma Condensed Combined Financial Statements
Basis of Presentation
(Unaudited)
During 1999 and 2000, Internet Capital Group, Inc. acquired significant
minority ownership interests in 63 partner companies accounted for under the
equity method of accounting or the consolidation method of accounting. In June
2000, we acquired a significant minority ownership interest in eCredit.com for
total purchase consideration of approximately $429.4 million in stock. In June
2000, we also acquired a majority ownership interest in RightWorks for
approximately $830.2 million in stock and $22 million in cash. In addition, we
deconsolidated Breakaway Solutions, Inc. subsequent to September 30, 1999 due
to the decrease in our voting ownership percentage in the company from above to
below 50%.
The unaudited pro forma condensed combined statements of operations for
the year ended December 31, 1999 and the three months ended March 31, 2000 give
effect to the acquisition of a significant minority ownership interest in
eCredit.com, the acquisition of a majority ownership interest in RightWorks,
the 1999 and 2000 acquisitions of significant minority ownership interests in
50 equity method partner companies, majority ownership interests in 9 new
consolidated partner companies, the effect of 2 consolidated companies
previously accounted for under the equity method and the acquisition of our
ownership interest in Breakaway Solutions, Inc. as a company accounted for
under the equity method as if the transactions had occurred on January 1, 1999.
As VerticalNet, Inc. was deconsolidated in the first quarter of 1999, no pro
forma adjustments to the consolidated statement of operations for the year
ended December 31, 1999 are necessary to reflect its deconsolidation.
The unaudited pro forma condensed combined balance sheet as of March 31,
2000 gives effect to the acquisition of a significant minority ownership
interest in eCredit.com, the acquisition of a majority ownership interest in
RightWorks, and the acquisitions subsequent to March 31, 2000 of significant
minority ownership interests in 7 new and 12 existing equity method partner
companies and 3 new consolidated partner companies and the effect of
consolidating 2 partner companies previously accounted for under the equity
method as if the transactions had occurred on March 31, 2000.
The unaudited pro forma condensed combined financial statements have been
prepared by the management of Internet Capital Group, Inc. and should be read
in conjunction with our historical consolidated financial statements contained
elsewhere herein, and the historical consolidated financial statements of
eCredit.com and RightWorks which are included elsewhere herein. Since the
unaudited pro forma financial statements which follow are based upon the
financial condition and operating results of eCredit.com, RightWorks and the
equity method partner companies acquired during periods when they were not
under the control or management of Internet Capital Group, Inc., 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 Internet Capital Group,
Inc. with eCredit.com, RightWorks, and the other equity method and consolidated
partner companies.
The effects of the acquisitions have been presented using the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based upon management's best
preliminary estimate of fair value with any excess purchase price being
allocated to goodwill. We have not yet determined the amount of any in-process
research and development costs associated with the eCredit.com and RightWorks
acquisitions. The preliminary allocation of the purchase price will be subject
to further adjustments as we finalize our allocation of purchase price in
accordance with generally accepted accounting principles.
21
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Internet
Capital Pro
Group, Pro Forma Sub- eCredit.com RightWorks Forma
Inc. Adjustments Total Acquisition Acquisition Combined
---------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash
equivalents.......... $ 858,567 $(360,940)c $ 497,627 -- $ 17,075b $ 514,702
Accounts receivable,
less allowance for
doubtful accounts.... 3,403 1,553d 4,956 -- 4,160b 9,116
Prepaid expenses and
other current
assets............... 41,544 744d 42,288 -- 188b 42,476
---------- --------- ---------- -------- ---------- ----------
Total current assets.. 903,514 (358,643) 544,871 -- 21,423 566,294
Fixed assets, net..... 9,459 312d 9,771 -- 1,837b 11,608
Ownership interests in
and advances to
Partner Companies.... 1,157,635 449,752c,d 1,607,387 $429,410a -- 2,036,797
Available-for-sale
securities........... 350,596 -- 350,596 -- -- 350,596
Intangible assets,
net.................. 21,477 199,586d 221,063 -- 1,128,406b 1,349,469
Deferred taxes........ -- 78d 78 -- -- 78
Other................. 28,376 30,986d 59,362 -- 542b 59,904
---------- --------- ---------- -------- ---------- ----------
Total Assets............ $2,471,057 $ 322,071 $2,793,128 $429,410a $1,152,208 $4,374,746
========== ========= ========== ======== ========== ==========
Liabilities and
Shareholders' Equity
Current Liabilities
Current maturities of
long-term debt....... $ 2,612 $ -- $ 2,612 -- $ 861b $3,473
Line of credit........ 754 -- 754 -- -- 754
Accounts payable...... 8,170 1,013d 9,183 -- 1,716b 10,899
Accrued expenses...... 21,348 225d 21,573 -- 1,388b 22,961
Notes payable to
Partner Company...... 24,704 -- 24,704 -- -- 24,704
Other................. 1,348 2,335d 3,683 -- 4,117b 1,828
---------- --------- ---------- -------- ---------- ----------
Total current
liabilities.......... 58,936 3,573 62,509 -- 8,082 70,591
Long-term debt........ 2,690 -- 2,690 -- 2,586b 5,276
Subordinated debt..... 566,250 -- 566,250 -- -- 566,250
Other liability....... 4,880 11,500d 16,380 -- -- 16,380
Deferred taxes........ 84,685 -- 84,685 -- 297,942b 382,627
Minority interest..... 4,553 166,556 171,109 -- 13,350b 184,459
Shareholders' Equity
Total shareholders'
equity............... 1,749,063 140,442c 1,889,505 $429,410a 830,248b 3,149,163
---------- --------- ---------- -------- ---------- ----------
Total Liabilities and
Shareholders' Equity... $2,471,057 $ 322,071 $2,793,128 $429,410 $1,152,208 $4,374,746
========== ========= ========== ======== ========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
22
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Internet
Capital
Group, Pro Forma Sub- eCredit.com RightWorks Pro Forma
Inc. Adjustments Total Acquisition Acquisition Combined
-------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 16,536 -- $ 16,536 -- $ 2,152 h $ 18,688
-------- --------- --------- --------- --------- ---------
Operating Expenses
Cost of revenue....... 8,156 -- 8,156 -- 430 h 8,586
Selling, general and
administrative....... 48,924 $ 63,757 f 112,681 -- 387,236 h 499,917
-------- --------- --------- --------- --------- ---------
Total operating
expenses............. 57,080 63,757 120,837 -- 387,666 508,503
-------- --------- --------- --------- --------- ---------
(40,544) (63,757) (104,301) -- (385,514) (489,815)
Other income, net....... 67,384 1 67,385 -- 70 h 67,455
Interest income......... 9,631 -- 9,631 -- -- 9,631
Interest expense........ (3,897) -- (3,897) -- -- (3,897)
-------- --------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 32,574 (63,756) (31,182) -- (385,444) (416,626)
Income taxes............ 23,722 89,780 i 113,503 $ 51,273 e 102,607 h 267,382
Minority interest....... 6,026 894 f 6,921 -- 3,537 h 10,459
Equity income (loss).... (92,099) (256,516)g (348,615) (146,493)e -- (495,108)
-------- --------- --------- --------- --------- ---------
Net Income (Loss)....... $(29,777) $(229,596) $(259,373) $ (95,220) $(279,300) $(633,893)
======== ========= ========= ========= ========= =========
Net Income (Loss) per
Share
Basic................. $ (0.15) $ (2.93)
Diluted............... $ (0.15) $ (2.93)
Weighted Average Shares
Outstanding
Basic................. 201,851 216,197 k
Diluted............... 201,851 216,197 k
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
23
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the three months ended March 31, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
Internet
Capital
Group, Pro Forma Sub- eCredit.com RightWorks Pro Forma
Inc. Adjustments Total Acquisition Acquisition Combined
--------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,830 -- $ 1,830 -- $ 2,899o $ 4,729
--------- -------- --------- -------- -------- ---------
Operating Expenses
Cost of revenue....... 689 -- 689 -- 937o 1,626
Selling, general and
administrative....... 32,663 $ 21,295m 53,958 -- 99,914o 153,872
--------- -------- --------- -------- -------- ---------
Total operating
expenses............. 33,352 21,295 54,647 -- 100,851 155,498
--------- -------- --------- -------- -------- ---------
(31,522) (21,295) (52,817) (97,952) (150,769)
Other income, net....... 657,686 149m 657,835 -- 95o 657,930
Interest income......... 18,800 -- 18,800 -- -- 18,800
Interest expense........ (9,340) -- (9,340) -- -- (9,340)
--------- -------- --------- -------- -------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 635,624 (21,146) 614,478 -- (97,857) 516,621
Income taxes............ (209,499) 10,740p (198,759) $ 15,682 l 26,740o (156,337)
Minority interest....... 5,901 4,469m 10,371 -- 1,203o 11,573
Equity income (loss).... (80,051) (29,026)n (109,077) (42,383)l -- (151,460)
--------- -------- --------- -------- -------- ---------
Net Income (Loss)....... $ 351,975 $(34,963) $ 317,012 $(26,701) $(69,914) $ 220,397
========= ======== ========= ======== ======== =========
Net Income (Loss) per
Share
Basic................. $ 1.33 $0.79
Diluted............... $ 1.30 $0.77
Weighted Average Shares
Outstanding
Basic................. 264,191 278,537q
Diluted............... 270,132 284,478q
</TABLE>
24
<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 March 31,
2000 gives effect to the acquisition of a significant minority ownership
interest in eCredit.com, the acquisition of a majority ownership interest in
RightWorks, and the acquisitions subsequent to March 31, 2000 of significant
minority ownership interests in 7 new and 12 existing equity method partner
companies and 3 new and 2 existing consolidated partner companies and the
effect of converting two equity method partner companies to consolidated
partner companies as if the transactions had occurred on March 31, 2000.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1999 and the three months ended March 31, 2000 give
effect to the acquisition of a significant minority ownership interest in
eCredit.com, the acquisition of a majority ownership interest in RightWorks,
the 1999 and 2000 acquisitions of significant minority ownership interests in
51 equity method partner companies, majority ownership interests in 9
consolidated partner companies and the acquisition of our ownership interest in
Breakaway Solutions, Inc. as a company accounted for under the equity method as
if the transactions had occurred on January 1, 1999.
The effects of the acquisitions have been presented using the purchase
method of accounting and accordingly, the aggregate purchase price of these
acquisitions 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, other identifiable intangibles and in-
process research and development (if any). We have not yet determined the
amount of any in-process research and development costs associated with the
eCredit.com and RightWorks' acquisitions. The preliminary allocation of the
purchase price will be subject to further adjustments as we finalize our
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 March 31, 2000 reflect:
(a) The acquisition of a significant minority ownership interest in
eCredit.com for approximately $429.4 million in our common stock.
(b) The acquisition of a majority ownership interest in RightWorks for
approximately $830.2 million in our common stock and $22 million in
cash. The total RightWorks purchase price of approximately $852.2
million was allocated as follows: cash -- $17.1 million, net
receivables --$4.2 million, fixed and other assets -- $2.6 million,
accounts payable and accruals -- $3.1 million, other current
liabilities -- $4.1 million, debt -- $3.4 million, minority
interest -- $13.4 million, deferred tax liability -- $297.9 million
and goodwill and intangibles -- $1.1 billion.
(c) The acquisitions subsequent to March 31, 2000 of new and additional
significant minority and majority ownership interests in partner
companies for aggregate cash consideration of $360.9 million and
3,797,955 shares of our common stock valued at $140.4.
(d) Reflects additional net receivables of $1.6 million, fixed and other
assets of $1.1 million, other assets of $31.0 million, accounts
payable and accruals of $1.2 million, other liabilities of $13.8
million, minority interest of $166.5 million, and $199.6 million of
goodwill and intangibles related to the acquisitions of three new
consolidated partner companies, the effect of converting two equity
method partner companies to consolidated partner companies and the
acquisitions of additional ownership interests in two previously
consolidated partner companies.
25
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
3. Pro Forma Statement of Operations Adjustments
The pro forma statement of operations adjustments for the year ended
December 31, 1999 consist of:
(e) Equity income (loss) has been adjusted to reflect our acquisition of
a significant minority ownership interest in eCredit.com and the
related interest in the income (loss) and amortization of the
difference in our carrying value and ownership interest in the
underlying net equity of eCredit.com over an estimated useful life of
three years. For the year ended December 31, 1999 equity income
(loss) of $146.5 million includes $6.5 million of equity income
(loss), and $140.0 million in amortization of the difference between
cost and equity in net assets. For the year ended December 31, 1999,
income tax benefit has been adjusted $51.3 million to reflect the tax
effect of the eCredit.com pro forma adjustments.
(f) Reflects general and administrative expenses of $63.8 million, and
minority interest of $.9 million related to the acquisitions of ICG
AsiaWorks, ICG Patent, Emptoris, and Industrial America, and the
acquisitions of additional significant ownership interests in ICG
Commerce and AssetTrade. Included in general and administrative
expenses is approximately $61.9 million of goodwill amortization
during the year ended December 31, 1999, relating to these
acquisitions.
(g) Equity income (loss) has been adjusted by $256.5 million to reflect
our proportionate share of the income (loss) of the 53 equity method
partner company acquisitions in 1999 and 2000 and the amortization of
the difference in our carrying value in the partner companies and our
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, 1999, equity income (loss) includes $17.7 million
of equity income (loss) and $238.8 million in amortization of the
difference between cost and equity in net assets based on an
estimated useful life of three years.
(h) Reflects additional revenue of $2.2 million, cost of revenue of $0.4
million, general and administrative expenses of $387.2 million, other
income of approximately $.1 million, income tax benefit of $102.6
million related to the amortization of goodwill, and minority
interest of $3.5 million related to the acquisition of a majority
interest in RightWorks. Included in general and administrative
expenses is approximately $376.1 million of goodwill amortization
during the year ended December 31, 1999, relating to this
acquisition.
(i) Income tax benefit has been adjusted $89.8 million for the year ended
December 31, 1999 to reflect the tax effect of the pro forma
adjustments.
(k) Reflects the issuance of 3.798 million shares related to the
acquisitions subsequent to December 31, 1999 and the issuance of
5.892 million shares related to the RightWorks acquisition and 4.656
million shares related to the eCredit.com acquisition as if the
issuances occurred on January 1, 1999.
26
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Pro Forma Condensed Combined Financial Statements--(Continued)
(Unaudited)
The pro forma statement of operations adjustments for March 31, 2000
consist of:
(l) Equity income (loss) has been adjusted to reflect our acquisition of
a significant minority ownership interest in eCredit.com and the
related interest in the income (loss) and amortization of the
difference in our carrying value and ownership interest in the
underlying net equity of eCredit.com over an estimated useful life
of three years. For the three months ended March 31, 2000 equity
income (loss) of $42.4 million includes $7.4 million of equity
income (loss), and $35.0 million in amortization of the difference
between cost and equity in net assets. For the three months ended
March 31, 2000, income tax benefit has been adjusted $15.7 million
to reflect the tax effect of the eCredit.com pro forma adjustments.
(m) Reflects general and administrative expenses of $21.3 million, other
income of $.2 million, and minority interest of $4.5 million related
to the acquisitions of ICG AsiaWorks, ICG Patent, Emptoris, and
Industrial America, and the acquisitions of additional significant
minority ownership interests in ICG Commerce and AssetTrade.
Included in general and administrative expenses is approximately
$15.4 million of goodwill amortization during the three months ended
March 31, 2000, relating to these acquisitions.
(n) Equity income (loss) has been adjusted by $29.0 million to reflect
our ownership interests in the income (loss) of the equity method
partner company acquisitions in 2000 and the amortization of the
difference in our carrying value in the partner companies and our
ownership interest in the underlying net equity of the partner
companies over an estimated useful life of three years. For the
three months ended March 31, 2000, equity income (loss) includes
$1.8 million of equity income (loss) and $27.2 million in
amortization of the difference between cost and equity in net
assets.
(o) Reflects additional revenue of $2.9 million, cost of revenue of $.9
million, general and administrative expenses of $99.9 million, other
income of approximately $.1 million, income tax benefit of $26.7
million related to the amortization of goodwill, and minority
interest of $1.2 million related to the acquisition of a majority
interest in RightWorks. Included in general and administrative
expenses is approximately $94.0 million of goodwill amortization
during the three months ended March 31, 2000, relating to this
acquisition.
(p) Income tax benefit has been adjusted $10.7 million for the three
months ended March 31, 2000 to reflect the tax effect of the pro
forma adjustments.
(q) Reflects the issuance of 3.798 million shares related to the
acquisitions subsequent to December 31, 1999 and the issuance of
5.892 million shares related to the RightWorks acquisition and 4.656
million shares related to the eCredit.com acquisition as if the
issuances occurred on January 1, 1999.
27
<PAGE>
INTERNET CAPITAL GROUP 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 for the three months ended March 31, 1999 and
March 31, 2000 and the Consolidated Balance Sheet Data at March 31, 2000 is
unaudited data derived from the Consolidated Financial Statements included
elsewhere in this Prospectus. The Consolidated Statements of Operations Data
for the years ended December 31, 1997, 1998 and 1999, and Consolidated Balance
Sheet Data at December 31, 1998 and 1999 have been derived from the
Consolidated Financial Statements, that have been audited by KPMG LLP,
independent auditors, 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 the Consolidated Balance Sheet Data at December
31, 1996 and 1997 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 pro forma net income (loss) and net income
(loss) per share information included in the Consolidated Statements of
Operations Data for the years ended December 31, 1998 and 1999 and the three
months ended March 31 , 1999 is unaudited data derived from the Consolidated
Financial Statements included elsewhere in this Prospectus and reflect our
taxation as a corporation since January 1, 1998 and 1999, respectively,
although we have been taxed as a corporation only since February 2, 1999.
<TABLE>
<CAPTION>
March 4, 1996 Three Months
(Inception) Year Ended December 31, Ended March 31,
to December --------------------------- ------------------
31, 1996 1997 1998 1999 1999 2000
------------- ------- -------- -------- ------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ 285 $ 792 $ 3,135 $ 16,536 $ 3,111 $ 1,830
Operating Expenses
Cost of revenue........ 427 1,767 4,643 8,156 1,553 689
Selling, general and
administrative........ 1,921 5,743 15,514 48,924 3,848 32,663
------- ------- -------- -------- ------- ---------
Total operating
expenses.............. 2,348 7,510 20,157 57,080 5,401 33,352
------- ------- -------- -------- ------- ---------
(2,063) (6,718) (17,022) (40,544) (2,290) (31,522)
Other income, net....... -- -- 30,483 67,384 28,677 657,686
Interest income, net.... 88 138 925 5,734 296 9,460
------- ------- -------- -------- ------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975) (6,580) 14,386 32,574 26,683 635,624
Income taxes............ -- -- -- 23,722 663 (209,499)
Minority interest....... 427 (106) 5,382 6,026 146 5,901
Equity income (loss).... (514) 106 (5,869) (92,099) (7,413) (80,051)
------- ------- -------- -------- ------- ---------
Net Income (Loss)....... $(2,062) $(6,580) $ 13,899 $(29,777) $20,079 $ 351,975
======= ======= ======== ======== ======= =========
Net Income (loss) per
share--diluted......... $ (0.05) $ (0.10) $ 0.12 $ (0.15) $ 0.14 $ 1.30
Weighted average shares
outstanding--diluted... 40,792 68,198 112,299 201,851 147,400 270,132
Pro forma net income
(loss) (unaudited)..... $ 8,756 $(37,449) 12,233
Pro forma net income
(loss) per share--
diluted (unaudited).... $ 0.08 $ (0.19) $ 0.08
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------- March 31,
1996 1997 1998 1999 2000
------- ------- ------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 3,215 $ 5,967 $26,841 $1,343,459 $ 858,567
Working capital................. 4,883 2,391 20,452 1,305,380 844,578
Total assets.................... 13,629 31,481 96,786 2,050,384 2,471,057
Long-term debt, net of current
portion........................ 167 400 352 3,185 2,690
Convertible subordinated notes.. -- -- -- 566,250 566,250
Total shareholders' equity...... 12,859 26,635 80,724 1,420,221 1,749,063
</TABLE>
28
<PAGE>
INTERNET CAPITAL GROUP 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 company actively engaged in B2B e-
commerce through a network of partner companies. As of March 31, 2000 we owned
interests in 63 B2B e-commerce companies that we refer to as our partner
companies. We focus on two types of B2B e-commerce companies, which we call
market makers and enabling 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 consolidated 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.
29
<PAGE>
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a partner
company's results of operations are reflected within our Consolidated
Statements of Operations. Participation of other partner company shareholders
in the earnings or losses of a consolidated partner company is reflected in the
caption "Minority interest" in our Consolidated Statements of Operations.
Minority interest adjusts our consolidated 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% and we have
accounted for VerticalNet under 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, CyberCrop.com (previously
AgProducer Network) during the three months ended September 30, 1999 and
Animated Images and ICG Commerce during the three months ended December 31,
1999, each of which was consolidated from the date of its acquisition. Due to
Breakaway Solutions' initial public offering in October 1999, our voting
ownership interest in Breakaway Solutions decreased below 50% and we have
accounted for Breakaway Solutions under the equity method of accounting since
October 1999. As of March 31, 2000, Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, 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 December 31, 1999, we accounted for 31 of our partner
companies using this method. As of March 31, 2000, we accounted for 48 of our
partner companies under this method.
30
<PAGE>
Our partner companies accounted for under the equity method of accounting
at December 31, 1998 and 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner ----------------------
Company December 31, March 31,
Since 1999 2000
------- ------------ ---------
<S> <C> <C> <C>
EQUITY METHOD:
AsseTRADE.com, Inc. ........................ 1999 17% 30%
AUTOVIA Corporation......................... 1998 N/A 20%
Bidcom, Inc. ............................... 1999 35% 30%
Blackbird................................... 2000 N/A 32%
Blackboard Inc. ............................ 1998 29% 28%
Breakaway Solutions, Inc. .................. 1999 40% 40%
BuyMedia, Inc. ............................. 2000 N/A 34%
CapSpan LLC................................. 2000 N/A 33%
CentriMed.com, Inc. ........................ 2000 N/A 47%
CommerceQuest, Inc. ........................ 1998 28% 28%
CommerX, Inc. .............................. 1998 40% 39%
ComputerJobs.com, Inc. ..................... 1998 33% 33%
CourtLink, Inc. ............................ 1999 19% 34%
e-Chemicals, Inc. .......................... 1998 N/A 20%
eMarketWorld, Inc. ......................... 1999 42% 42%
eMerge Interactive, Inc. ................... 1999 45% 39%
eMetra Ltd. ................................ 2000 N/A 45%
eumedix..................................... 2000 N/A 31%
Eu-supply.com............................... 2000 N/A 29%
FarmingOnline Limited....................... 2000 N/A 32%
Freeborders.com, Inc. ...................... 2000 N/A 46%
Industrial America, Inc. ................... 2000 N/A 50%
Internet Commerce Systems, Inc. ............ 1999 43% 43%
Internet Healthcare Group................... 2000 N/A 30%
InvestorForce.com........................... 1999 49% 43%
iSky, Inc. ................................. 1996 31% 34%
Jamcracker, Inc. ........................... 1999 24% 24%
JusticeLink, Inc. .......................... 1999 37% 37%
LinkShare Corporation....................... 1998 34% 39%
Logistics.com, Inc. ........................ 2000 N/A 36%
MetalSite General Partner, LLC.............. 1999 44% 39%
NationStreet, Inc. ......................... 1999 38% 38%
NetVendor, Inc. ............................ 1999 27% 26%
ONVIA.com, Inc. ............................ 1999 23% 23%
PaperExchange.com, Inc. .................... 1999 24% 23%
RetailExchange, Inc. ....................... 1999 30% 32%
SageMaker, Inc. ............................ 1998 21% 21%
Simplexis.com Corporation................... 2000 N/A 47%
StarCite, Inc. ............................. 1999 43% 40%
Syncra Software, Inc. ...................... 1998 35% 35%
TALPX, Inc. ................................ 2000 N/A 28%
TeamOn.com, Inc. ........................... 2000 N/A 34%
traffic.com, Inc. .......................... 1999 20% 32%
United Messaging, Inc. ..................... 1999 37% 37%
Universal Access, Inc. ..................... 1999 24% 25%
USgift.com, Inc. ........................... 1999 38% 38%
VerticalNet, Inc. .......................... 1996 34% 32%
Vivant! Corporation......................... 1998 31% 39%
</TABLE>
31
<PAGE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Breakaway Solutions, eMerge Interactive, ONVIA.com,
Universal Access and VerticalNet, in which we owned voting common stock and e-
Chemicals, in which we owned non-voting convertible debentures. We also owned
voting common stock in a number of these partner companies and have
representation on the board of directors of all of the above partner companies.
VerticalNet was consolidated at December 31, 1998. CommerceQuest and Universal
Access were accounted for under the cost method of accounting at December 31,
1998. During the year ended December 31, 1999, Sky Alland Marketing changed its
name to iSky. During the period ended March 31, 2000 Plan Sponsor Exchange,
Inc. changed its name to InvestorForce.com. Subsequent to March 31, 2000
CourtLink, Inc. merged with JusticeLink, Inc., and Residential Delivery
Services, Inc. changed its name to NationStreet, Inc.
Those Partner Companies listed with a voting ownership of "N/A" at
December 31, 1999 and March 31, 2000 reflects that either these companies were
accounted for under a different method at that time (AUTOVIA Corporation and e-
Chemicals changed from cost method companies at December 31, 1999 to equity
method companies at March 31, 2000).
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 1999
and are expected to continue to incur substantial losses in 2000. Additionally,
we recognize goodwill amortization expense related to the "excess basis" of our
equity method partner companies.
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.
Our partner companies accounted for under the cost method of accounting
at December 31, 1998 and 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner ----------------------
Company December 31, March 31,
Since 1999 2000
------- ------------ ---------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc ................ 1999 8% 8%
AUTOVIA Corporation......................... 1998 16% N/A
Benchmarking Partners, Inc. ................ 1996 12% 13%
ClearCommerce Corp. ........................ 1997 15% 11%
Collabria, Inc. ............................ 1999 11% 11%
Context Integration, Inc. .................. 1997 14% 12%
Deja.com, Inc. ............................. 1997 2% 2%
e-Chemicals, Inc. .......................... 1998 0% N/A
Entegrity Solutions Corporation............. 1996 11% 9%
PrivaSeek, Inc. ............................ 1998 8% 7%
Servicesoft Technologies, Inc. ............. 1998 5% 5%
TRADEX Technologies, Inc. .................. 1999 10% N/A
US Interactive, Inc. ....................... 1996 3% 3%
</TABLE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Deja.com, in which we owned non-voting convertible
preferred stock and voting common stock, and US Interactive, Inc., in which we
owned voting common stock. We also owned voting common stock in a number of
these partner companies and in most cases have representation on the board of
directors of the above partner companies. We record our ownership in debt
securities at cost as we have the ability and intent to hold these
32
<PAGE>
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 $2.1 million and $1.1 million at December 31,
1999 and March 31, 2000, respectively. During the year ended December 31, 1999,
RapidAutoNet Corporation changed its name to AUTOVIA Corporation.
Those Partner Companies listed with a voting ownership of "N/A" at
December 31, 1999 and March 31, 2000 reflects that either these companies were
accounted for under a different method at that time (AUTOVIA Corporation and e-
Chemicals changed from cost method companies at December 31, 1999 to equity
method companies at March 31, 2000) or, in the case of TRADEX, we sold our
ownership interest during the period ended March 31, 2000.
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 1999 and are
expected to continue to incur substantial losses in 2000. 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. US
Interactive is accounted for under Statement of Financial Accounting Standards
No. 115.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our consolidated 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 also consolidated Breakaway Solutions' financial statements
from the date of acquisition (January 6, 1999) through September 30, 1999.
However, due to Breakaway Solutions' initial public offering in October 1999,
our voting ownership interest in Breakaway Solutions decreased to below 50%.
Therefore, we have applied the equity method of accounting since October 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, CyberCrop.com during the three
months ended September 30, 1999, and Animated Images and ICG Commerce during
the three months ended December 31, 1999, each of which was consolidated from
the date of its acquisition. The presentation of our consolidated financial
statements looks substantially different for the year ended December 31, 1999
and the three months ended March 31, 2000 versus comparable periods in the
prior year as a result of consolidating Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts and no longer consolidating
VerticalNet and Breakaway Solutions in our consolidated financial statements.
To understand our net results of operations and financial position
without the effect of consolidating our majority owned subsidiaries, Note 11 to
our Consolidated Financial Statements summarizes our Parent Company Statements
of Operations and Balance Sheets which treat VerticalNet, Animated Images,
Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, 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, Animated Images,
Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, 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, Animated Images, Breakaway Solutions,
CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts as of December 31,
1999 are included in "Ownership interests in and advances to Partner Companies"
in the Parent Company Balance Sheets.
33
<PAGE>
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 Breakaway Solutions from the date of acquisition
through September 1999 and Animated Images, CyberCrop.com, EmployeeLife.com,
ICG Commerce, 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.
34
<PAGE>
Our consolidated net results of operations consisted of the following:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Summary of Consolidated Net
Income (Loss)
Partner Company
Operations................. $(4,779) $(14,081) $(103,418) $ (7,813) $(88,010)
General ICG Operations...... (1,801) 27,980 73,641 27,892 439,985
------- -------- --------- -------- --------
Net income (loss) --
Consolidated Total......... $(6,580) $ 13,899 $ (29,777) 20,079 351,975
======= ======== ========= ======== ========
Partner Company Operations
Revenue..................... $ 792 $ 3,135 $ 16,536 $ 3,111 $ 1,830
Operating expenses
Cost of revenue............. 1,767 4,643 8,156 1,553 689
Selling, general and
administrative............. 3,689 12,001 25,535 2,115 15,774
------- -------- --------- -------- --------
Total operating expenses.... 5,456 16,644 33,691 3,668 16,463
------- -------- --------- -------- --------
(4,664) (13,509) (17,155) (557) (14,633)
Other income (expense),
net........................ -- -- (258) (7) --
Interest income............. 11 212 243 32 129
Interest expense............ (126) (297) (175) (14) (127)
------- -------- --------- -------- --------
Income (loss) from Partner
Company Operations before
income taxes, interest and
equity income (loss)....... (4,779) (13,594) (17,345) (546) (14,631)
Income taxes................ -- -- -- -- 771
Minority interest........... (106) 5,382 6,026 146 5,901
Equity income (loss)........ 106 (5,869) (92,099) (7,413) (80,051)
------- -------- --------- -------- --------
Loss from Partner Company
Operations................. $(4,779) $(14,081) $(103,418) $ (7,813) $(88,010)
======= ======== ========= ======== ========
General ICG Operations
General and administrative.. $ 2,054 $ 3,513 $ 23,389 $ 1,733 $ 16,889
------- -------- --------- -------- --------
(2,054) (3,513) (23,389) (1,733) (16,889)
Other income (expense),
net........................ -- 30,483 67,642 28,684 657,686
Interest income............. 253 1,094 9,388 278 18,671
Interest expense............ -- (84) (3,722) -- (9,213)
------- -------- --------- -------- --------
Income (loss) from General
ICG Operations before
income taxes............... (1,801) 27,980 49,919 27,229 650,255
Income taxes................ -- -- 23,722 663 (210,270)
------- -------- --------- -------- --------
Income (loss) from General
ICG Operations............. $(1,801) $ 27,980 $ 73,641 27,892 439,985
======= ======== ========= ======== ========
Consolidated Total
Revenue..................... $ 792 $ 3,135 $ 16,536 $ 3,111 $ 1,830
Operating expenses
Cost of revenue............. 1,767 4,643 8,156 1,553 689
Selling, general and
administrative............. 5,743 15,514 48,924 3,848 32,663
------- -------- --------- -------- --------
Total operating expenses.... 7,510 20,157 57,080 5,401 33,352
------- -------- --------- -------- --------
(6,718) (17,022) (40,544) (2,290) (31,522)
Other income (expense),
net........................ -- 30,483 67,384 28,677 657,686
Interest income............. 264 1,306 9,631 310 18,800
Interest expense............ (126) (381) (3,897) (14) (9,340)
------- -------- --------- -------- --------
Income (loss) before income
taxes, minority interest
and equity income (loss)... (6,580) 14,386 32,574 26,683 635,624
Income taxes................ -- -- 23,722 663 (209,499)
Minority interest........... (106) 5,382 6,026 146 5,901
Equity income (loss)........ 106 (5,869) (92,099) (7,413) (80,051)
------- -------- --------- -------- --------
Net income (loss) --
Consolidated Total......... $(6,580) $ 13,899 $ (29,777) $ 20,079 $351,975
======= ======== ========= ======== ========
Pretax income (loss)........ $ 13,899 $ (53,499) $ 19,417
Pro forma income taxes...... (5,143) 16,050 (7,184)
-------- --------- --------
Pro forma net income
(loss)..................... $ 8,756 $ (37,449) $ 12,233
======== ========= ========
</TABLE>
35
<PAGE>
Net Results of Operations-Partner Company Operations
Breakaway Solutions was consolidated from its acquisition in January 1999
through September 30, 1999 and accounted for $14.7 million and $24.2 million of
our Partner Company Operations' revenue and operating expenses, respectively,
for the year ended December 31, 1999. For the three months ended March 31,
1999, Breakaway Solutions accounted for nearly all of our consolidated revenue
and a significant portion of our consolidated operating expenses. Breakaway
Solutions has been accounted for under the equity method since October 1999 and
discussion related to Breakaway Solutions' results of operations since that
time can be found under the heading "Equity Income (Loss)".
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated from their dates of acquisition in 1999 and accounted for
$1.8 million and $9.5 million and $1.8 million and $16.5 million of our Partner
Company Operations' revenue and operating expenses, respectively, for the year
ended December 31, 1999 and the three months ended March 31, 2000,
respectively.
For the years ended December 31, 1997 and 1998 VerticalNet was our only
consolidated partner company and accounted for all of the revenue and operating
expenses of our Partner Company Operations' segment. VerticalNet was accounted
for under the equity method of accounting in 1999 and the three months ended
March 31, 2000.
Breakaway Solutions-Analysis of the Nine Months Ended September 30, 1999
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,
the company's operating activities primarily consisted of providing strategy
consulting and systems integration services. Prior to its acquisition of
Applica in 1999, Breakaway Solutions derived no revenues from application
hosting. The company believes, however, that application hosting will account
for a significantly greater portion of revenues in the future. Breakaway
Solutions generated $6.1 million, $10 million, and $25.4 million of revenue in
1997, l998 and 1999, respectively, resulting in net income in 1997 of $1.1
million and net losses in 1998 and 1999 of $.6 million and $10.4 million,
respectively.
The following is a discussion of Breakaway Solutions' net results of
operations for the portion of the year ended December 31, 1999 that it was
consolidated, which was from the date of acquisition in January 1999 through
September 30, 1999. Breakaway Solutions' comparative results of operations for
the comparable 1998 period 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 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
36
<PAGE>
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.
Other Consolidated Companies--Analysis of the Year Ended December 31, 1999 and
the three months ended March 31, 2000
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated from their dates of acquisition in 1999 and accounted for
$1.8 million and $8.6 million and $1.8 million and $15.5 million of our Partner
Company Operations' revenue and operating expenses, respectively, for the year
ended December 31, 1999 and the three months ended March 31, 2000,
respectively. CyberCrop.com, EmployeeLife.com and iParts are development stage
companies, have generated negligible revenue since their inception, and
incurred aggregate operating expenses of $4.3 million and $3.6 million during
the year ended December 31, 1999 and the three months ended March 31, 2000,
respectively. Animated Images and ICG Commerce generated aggregate revenues of
approximately $1.8 million and $1.8 million and incurred aggregate operating
expenses of $4.3 million and $11.9 million, during the year ended December 31,
1999 and the three months ended March 31, 2000, respectively. Operating
expenses primarily represented selling, general and administrative expenses of
the companies as they deploy their business models. Also included in selling,
general and administrative expenses during the year ended December 31, 1999 and
the three months ended March 31, 2000, respectively was $.8 million and $1
million of goodwill amortization related to our acquisitions of these partner
companies.
VerticalNet--Analysis of the Two-Year Period Ended December 31, 1998
VerticalNet owns and operates industry-specific websites designed as
online business-to-business communities, known as vertical trade communities.
These vertical trade communities act as comprehensive sources of information,
interaction and electronic commerce.
During the periods ended 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.
For the periods ended December 31, 1997 and 1998, VerticalNet was our
only consolidated partner company. The following is a discussion of
VerticalNet's net results of operations for the two-year period ended December
31, 1998:
Revenue. Revenue was $.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. Advertising revenue and Web site development fees represented all of
VerticalNet's revenue in 1997. In 1998, most of VerticalNet's revenue was
generated from selling advertisements to industry suppliers in its trade
communities. 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.
Cost of Revenue. Cost of revenue was $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
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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 $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 $1.4
million for the year ended December 31, 1997 and $4.1 million for the year
ended December 31, 1998. The increase in general and administrative expenses
was due primarily to increased staffing levels, higher facility costs,
professional fees to support the growth of VerticalNet's infrastructure and
goodwill amortization related to VerticalNet's 1998 acquisitions.
Equity Income (Loss)
A significant portion of our 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 ownership interests in
equity method companies, and the net results of operations of these companies.
During the years ended December 31, 1998 and 1999 and the three months ended
March 31, 2000 we utilized cash, stock, or notes payable totaling $23.7 million
$495.6 million and $486.9 million, respectively, to acquire partner company
interests accounted for under the equity method of accounting which resulted in
goodwill of $15.1 million, $293.7 million and $241.7 million, respectively,
which is being amortized over 3 years. Without giving effect to additional
acquisitions in equity method companies subsequent to March 31, 2000, we expect
goodwill amortization related to equity method companies to approximate $140
million through the remainder of 2000. The extent to which actual goodwill
amortization in 2000 related to equity method companies exceeds this estimate
will depend primarily upon the amount of capital we deploy in 2000 for the
acquisition of additional ownership interests in equity method companies.
Due to the early stage of development of the companies in which we
acquire interests, existing and new partner companies accounted for under the
equity method are expected to incur substantial losses. Our share of these
losses is expected to be significant.
While most of the companies accounted for under the equity method of
accounting have generated losses to date, 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.
Equity Method Companies--Analysis of the years ended December 31, 1998 vs.
December 31, 1999
During the year ended December 31, 1999, we accounted for 31 companies
under the equity method of accounting, including VerticalNet, compared to eight
companies during 1998. All 31 of the companies incurred losses in the year
ended December 31, 1999. Our equity loss of $92.1 million for the year ended
December 31, 1999 consisted of $72.3 million related to our share of the equity
method companies' losses and $19.8 million of amortization of the goodwill of
these companies. Of the $72.3 million equity loss related to our share of the
losses of companies accounted for under the equity method for the year ended
December 31, 1999, $19.2 million and $9.3 million, respectively, were
attributable to VerticalNet and ONVIA.com, while the other 29 companies
accounted for the remaining equity losses ranging from less than $0.1 million
to $6.2 million.
For the year ended December 31, 1999, VerticalNet had revenue of $20.8
million and a net loss of $53.5 million compared to revenue of $3.1 million and
a net loss of $13.6 million for the comparable period in 1998. VerticalNet's
revenue increased period to period primarily due to a significant increase in
the number of
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storefronts as it grew the number of its vertical trade communities from 29 as
of December 31, 1998 to 55 as of December 31, 1999. In addition, barter
transactions, in which VerticalNet received advertising or other services in
exchange for advertising on its Web sites, accounted for 18% of revenues for
the year ended December 31, 1999 compared to 19% 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, increased amortization of goodwill associated
with acquisitions and a $13.6 million charge for in-process research and
development expensed in August 1999 relating to VerticalNet's acquisition of
Isadra.
For the year ended December 31, 1999, ONVIA.com had revenue of $27.2
million and a net loss of $43.4 million compared to revenue of $1.0 million and
a net loss of $.7 million for the comparable period in 1998. ONVIA.com is a
business-to-business emarketplace for small business buyers and sellers. The
company generated substantially all of its revenue in 1999 from product sales.
ONVIA.com's revenue increased period to period due to increased product
sales to new and existing customers. ONVIA.com's losses increased period to
period as a result of its increased operating expenses related to marketing and
advertising programs designed to build its brand and drive customer
acquisition, increases in administrative personnel and non-cash equity
compensation charges of $10.5 million.
VerticalNet expects to incur significant net losses for the foreseeable
future because of its aggressive expansion plans. ONVIA.com expects increasing
losses for at least the next twelve months as a result of increased sales and
marketing expenses, expanded service and product offerings, and its investment
in technology and development. 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
2000.
While VerticalNet, ONVIA.com and most of the companies accounted for
under the equity method of accounting have generated losses in each of 1998 and
1999, and therefore in most cases did not incur income tax liabilities, these
companies may generate taxable income in the future. Our share of these
companies' net income, if generated, would be reduced to the extent of our
share of these companies' tax expense.
The significant change in equity income (loss) from 1997 to 1998 reflects
a decrease in the net results of operations at iSky and the effect of equity
method partner companies in which we acquired an interest during 1998. One of
these companies, Syncra Software, 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 were in a very early stage of development and incurred
substantial losses in 1998, and our share of these losses was substantial.
Equity Method Companies--Analysis of the three months ended March 31, 1999 vs.
March 31, 2000
During the period ended March 31, 2000 we accounted for 48 companies
under the equity method of accounting, compared to 13 for the period ended
March 31, 1999. All of the companies, with the exception of VerticalNet,
incurred losses in the period ended March 31, 2000. VerticalNet recorded net
income as the result of a one-time gain from the sale of its interest in Tradex
Technologies, Inc. Our equity loss of $80.1 million for the period ended March
31, 2000 consisted of $42.6 million related to our share of the equity method
companies' income and losses and $37.5 million of amortization of the goodwill
of these companies. Of the $42.6 million equity loss related to our share of
the income and losses of companies accounted for under the equity method for
the period ended March 31, 2000, $13.4 million in
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income was attributable to VerticalNet and $5.6 million, $2.1 million, $1.3
million and 1.2 million, respectively, were attributable to ONVIA.com's,
Universal Access', Breakaway Solutions' and eMerge Interactive's net losses,
while the other 43 companies accounted for the remaining equity losses ranging
from less than $0.1 million to $4.3 million.
For the period ended March 31, 2000, VerticalNet had revenues of $27.5
million and net income of $42.1 million, compared to revenue of $1.9 million
and a net loss of $5.6 million in the comparable period in 1999. 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 35 as of March 31, 1999 to 55 as of March 31, 2000. In
addition, transaction revenues from one of VerticalNet's subsidiaries acquired
after March 31, 1999 reached $14.6 million and represented 53 percent of the
total revenues for the quarter. Advertising revenues accounted for $11.9
million, or 43 percent of the total. E-commerce revenues (including slotting
fees, product sales, commissions, education, training and auction listing fees)
increased to $1.0 million. Advertising revenue accounted for the majority of
revenues in the period ended March 31, 1999. VerticalNet recorded net income of
$42.1 million, net of tax, primarily related to the sale of its interest in
Tradex Technologies to Ariba, Inc., resulting in a one time pre-tax gain of
$79.9 million. Excluding this gain, 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,
increased amortization of goodwill associated with acquisitions and a $10
million charge for in-process research and development expensed during the
period relating to VerticalNet's acquisition of Tradeum.
For the period ended March 31, 2000, Onvia.com had revenue of $21.5
million and a net loss of $26.1 million compared to revenue of $1.5 million and
a net loss of $1.6 million for the comparable period in 1999. The company has
generated substantially all of its revenue from product sales. Onvia.com's
revenue increased period to period due to increased product sales to new and
existing customers. Onvia.com's losses increased period to period as a result
of negative gross margins as it builds its customer base, its increased
operating expenses related to marketing and advertising programs designed to
build its brand and drive customer acquisition, increases in personnel and non-
cash equity compensation charges.
For the period ended March 31, 2000, Universal Access had revenue of $7.3
million and a net loss of $9 million compared to revenue of $1.5 million and a
net loss of $1 million for the comparable period in 1999. The company has
generated substantially all of its revenue from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client
contracts with terms ranging from 12 to 60 months. The increase in revenues was
attributable to an increase in the volume of circuits sold, some of which were
higher capacity and, therefore, generated greater revenues per circuit. In
addition, there was an increase in the number of clients and additional sales
to existing clients. Universal Access' losses increased period to period as a
result of its increased costs to provide circuit access and increased operating
expenses as the result of increases in personnel, depreciation, amortization
and marketing expenses and non-cash equity compensation charges.
For the period ended March 31, 2000, Breakaway Solutions had revenue of
$18.1 million and a net loss of $3.2 million compared to revenue of $3.1
million and a net loss of $.2 million for the comparable period in 1999.
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. The increase in revenues was attributable to an
increase in billable consultants and billing rates as well as $2.8 million in
application hosting revenues which did not exist at March 31, 1999. Breakaway
Solutions' losses increased period to period as a result of increases in
personnel, marketing, increased depreciation and amortization expenses.
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For the period ended March 31, 2000, eMerge Interactive, Inc. had revenue
of $38.6 million and a net loss of $5.5 million compared to revenue of $.6
million and a net loss of $2 million for the comparable period in 1999.
Substantially all revenue for the period was derived from cattle sales and
comparisons to the comparable period in 1999 are not meaningful. Gross margins
were less than 1% during the quarter and significant sales and marketing and
research and development costs have contributed to eMerge Interactive's net
loss.
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, 1997, 1998 and 1999 of
$.2 million, $.3 million and $.2 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
London, England and we significantly increased the number of our employees. As
a result of these initiatives, our general and administrative costs increased
$19.9 million for the year ended December 31, 1999 and $15.2 million for the
three months ended March 31, 2000 compared to the comparable prior periods. We
plan to continue to hire new employees, open new offices, and build our overall
infrastructure, therefore we expect these costs to continue to be substantially
higher compared to historical periods.
During the years ended December 31, 1998 and 1999, we recorded aggregate
unearned compensation expense of $.7 million and $16.4 million respectively, in
connection with the grant of stock options to non-employees and the grant of
employee stock options with exercise prices less than the deemed fair value on
the respective dates of grant. General and administrative costs for the year
ended December 31, 1999 and the three months ended March 31, 2000 include $5.7
million and $1.8 million of amortization expense related to stock option
grants. Without giving effect to any unearned compensation expense related to
equity granted subsequent to March 31, 2000, we expect to recognize
amortization of deferred compensation expense of $5.6 million in 2000 and $3.4
million in 2001, $1.9 million in 2002, $0.9 million in 2003 and $0.2 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.
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General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
---------------- -----------------
1998 1999 1999 2000
------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Issuance of stock by VerticalNet..... $ -- $50,717 $28,254 $176,794
Issuance of stock by Breakaway
Solutions........................... -- 17,304 -- --
Issuance of stock by Universal
Access.............................. -- -- -- 4,641
Sale of SMART Technologies to i2
Technologies........................ -- 2,942 -- --
Sale of i2 Technologies Holdings..... -- -- -- 26,967
Sale of Matchlogic to Excite......... 12,822 -- -- --
Sales of Excite holdings............. 16,814 2,051 2,051 --
Sale of Excite to @Home Corporation.. -- 2,719 -- --
Sale of WiseWire to Lycos............ 3,324 -- -- --
Sales of Lycos holdings.............. 1,472 -- -- --
Partner company impairment charges... (3,949) (8,097) (1,620) --
Tradex Sale to Ariba................. -- -- -- 449,284
Other................................ -- (252) -- --
------- ------- ------- --------
$30,483 $67,384 $28,685 $657,686
======= ======= ======= ========
</TABLE>
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for acquisitions in 1999, our share
of VerticalNet's net equity increased by $28.3 million for the three months
ended March 31, 1999 and $50.7 million for the year ended December 31, 1999.
This increase adjusted our carrying value in VerticalNet and resulted in a non-
operating gain of $28.3 and $50.7 million, before deferred taxes of $10.5 and
$17.7 million, in the three months ended March 31, 1999 and the year ended
December 31, 1999, respectively. As a result of Breakaway Solutions completing
its initial public offering in October 1999, our share of Breakaway Solutions'
net equity increased by $17.3 million. This increase adjusted our carrying
value in Breakaway Solutions and resulted in a non-operating gain of $17.3
million, before deferred taxes of $6.1 million, in the year ended December 31,
1999. As a result of VerticalNet issuing additional shares for acquisitions and
Universal Access completing its initial public offering during the period ended
March 31, 2000, our share of VerticalNet's and Universal Access' net equity
increased by approximately $176.8 million and $4.6 million respectively. These
increases adjust our carrying value in VerticalNet and Universal Access and
result in non-operating gains of $176.8 million and $4.6 million, before
deferred taxes of $66.1 million and $1.7 million, respectively, for the period
ended March 31, 2000. These gains were 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 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. During the period ended March 31,
2000 we sold 180,176 shares of i2 Technologies which resulted in $30 million in
proceeds received in April 2000 and a $27 million gain.
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
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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.
Our remaining holdings of @Home Corporation, Lycos, and i2 Technologies
at December 31, 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.
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 years ended December 31, 1998 and 1999 and the three months ended
March 30, 2000, we recorded impairment charges of $2 million, $8.1 million and
$1.6 million, respectively, for the other than temporary decline in the fair
value of a cost method partner company. From the date we initially acquired an
ownership interest in this partner company through December 31, 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 year ended December 31, 1999 we fully guaranteed the partner
company's new bank loan and agreed to provide additional funding. We acquired
additional non-voting convertible debentures of this partner company for $8
million in 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.
In March 2000 we exchanged all of our interest in Tradex Technologies,
Inc. for approximately 2.9 million shares of Ariba Inc. common stock. Based on
Ariba's closing price on March 9, 2000, the closing date of the transaction, we
recorded a pre-tax gain of $449.3 million. Our holdings of Ariba are accounted
for as available-for-sale securities and will be 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.
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
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Excite and Lycos. During the year ended December 31, 1999, we received (net of
related costs) $32 million of proceeds from the sale of shares of our common
stock prior to our public offering, $90 million in convertible notes,
approximately $209.1 million in our initial public offering, approximately $831
million in our follow-on stock offering and approximately $549.9 million from
the sale of convertible subordinated notes. The increase in interest income in
1998, 1999 and the period ended March 31, 2000 was primarily due to the
significant increase in our cash and cash equivalents as a result of these
transactions.
Interest Expense
During May 1999, we issued $90 million in convertible notes bearing
interest at 4.99%. 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. During
December 1999 we issued approximately $566.3 million in convertible
subordinated notes due 2004 bearing interest at 5.5%. The increase in interest
expense in the year ended December 31, 1999 and the three months ended March
31, 2000 was a result of these transactions.
Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were
organized as a limited liability company and were treated as a partnership for
income tax purposes. As a result of our Reorganization as a corporation, we are
subject to corporate federal and state income taxes. For informational
purposes, the Consolidated Statement of Operations for the years ended December
31, 1998 and 1999 reflect 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 December 31, 1999, we recorded an
additional tax benefit of $16.0 million related to our consolidated result of
operations for that period, net of deferred tax expense of $23.8 million
relating to our gain on VerticalNet's and Breakaway Solutions' common stock
issuances. The Company's net deferred tax liability of $84.7 million at March
31, 2000 consists of deferred tax liabilities of $166.2 million relating
primarily to the gain on the sale of a partner company for marketable
securities, offset by net deferred tax assets of $81.5 million relating
primarily to the excess of tax carrying values over book carrying values of our
partner companies and net unrealized depreciation in available-for-sale
securities.
We have not recorded a valuation allowance related to our gross deferred
tax assets because we believe it is more likely than not that we will realize
the benefits of these assets. The assets relate primarily to the excess of tax
basis over book basis of our partner companies. These differences in basis
represent capital losses for tax purposes which, if recognized, can only be
deducted to the extent of capital gains. Additionally, these losses may be
carried back three years and carried forward five years from the year in which
they occur. While selling any portion of our ownership interests in partner
companies is something we will not do in the ordinary course of business, we
would consider pursuing such a sale at the minimum amount necessary to prevent
any capital losses from expiring unutilized. If we do not believe such a
strategy, or an alternative strategy, will be available in the time periods
allowed for carrying back and carrying forward losses, we will establish a
valuation allowance at that time. Most of our partner companies are in an early
stage of development, currently generate significant losses and are expected to
generate significant losses in the future. The marketability of the securities
we own of our partner companies is generally limited as they primarily
represent ownership interests in companies whose stock is not publicly traded.
As of March 31, 2000, our only
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publicly traded partner companies are VerticalNet, Breakaway Solutions, eMerge
Interactive, ONVIA.com, Universal Access, and US Interactive. As a result,
there is 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
marketable securities, 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 year ended December 31, 1999.
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 December 1999, we issued 609,533 shares of common stock in a private
placement for $50 million.
In December 1999, we completed a follow-on public offering of 6,900,000
shares of our common stock at $108.00 per share. Concurrently, we completed
private placements for an aggregate of 648,147 shares at the $108.00 offering
price. Net proceeds to us from these transactions aggregated approximately
$781.4 million (net of underwriters' commission and offering expenses of
approximately $33.8 million).
In December 1999, we issued $566.3 million in convertible subordinated
notes due 2004 bearing interest at 5.5%, including a private placement of $20
million. Net proceeds to us from this issuance aggregated approximately $549.9
million (net of underwriters' discount and offering expenses of approximately
$16.4 million).
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 in 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
accounted for them as debt issuance costs. The facility 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).
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.
In March 2000, our revolving bank credit facility was amended to, among
other things, increase our credit facility to provide for borrowings up to
$250 million, including the issuance of letters of credit up to $125 million.
The agreement includes a $125 million 364-day secured line of credit and a
$125 million two-year secured revolving credit facility. The revolving
facility and line of credit are subject to .375% and .25% unused commitment
fees respectively, bear interest, at our option at LIBOR plus 2.0% or the
lenders' Base
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Rate (the lenders' Base Rate being the greater of (i) the prime rate or (ii)
the Federal Funds Rate plus .5%) and are secured by substantially all of our
assets (including our holdings in partner companies). Borrowing availability
under the facility is based on the fair market value of our holdings of
publicly traded Partner Companies and the value, as defined in the facility, of
our private partner companies. As of June 30, 2000 no amounts were outstanding.
Letters of credit of $6.0 million have been issued as of June 30, 2000 and have
reduced our availability under the facility by such amounts.
Borrowing availability under the facility is based on the fair market
value of our holdings of publicly-traded partner companies (VerticalNet,
Breakaway Solutions, eMerge Interactive, ONVIA.com, Universal Access and US
Interactive as of June 30, 2000) 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. At June 30, 2000, based on the provisions of
the borrowing base, the full borrowing base was available less outstanding
letters of credit.
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 June 30, 2000, we were contingently
obligated for approximately $28.5 million of guarantee commitments and $61.6
million of funding commitments to new and existing partner companies. 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 make it necessary for us to raise additional funds. If additional
funds are raised through the issuance of equity securities, our existing
shareholders may experience significant dilution.
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 and $115 million in a convertible subordinated note
offering in October 1999. 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 a
portion of its outstanding common 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 $42 million. We recorded a
non-operating gain during the three months ended December 31, 1999 due to the
increase in our share of Breakaway Solutions' net equity as a result of their
issuance of shares. Our ownership interest in Breakaway Solutions after their
initial public offering is about 40% and will be accounted for under the equity
method. 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 $1.3 billion at December 31,
1999 from $20.5 million at December 31, 1998 primarily as a result of the
equity and convertible subordinated notes proceeds we raised in 1999 more than
offsetting the cost of ownership interests we acquired and other net cash
outflows during the year ended December 31, 1999. Consolidated working capital
decreased to $844.6 million at March 31, 2000, compared to $1.3 billion at
December 31, 1999 primarily as a result of the cost of ownership interests we
acquired and other net cash outflows during the three months ended March 31,
2000
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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 year ended December
31, 1999 increased compared to 1998 due to the increased cost of General ICG
Operations general and administrative expenses. Cash used in operating
activities in the three months ended March 31, 2000 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 year ended December 31, 1999 by the proceeds of $36.4
million and $2.5 million, respectively, from the sales of a portion of our
available-for-sale securities, Excite and Lycos. Cash used in investing
activities during the three months ended March 31, 2000 primarily reflects the
acquisition of ownership interests in and advances to new and existing partner
companies.
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 $380.5 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 $30.1 million in the aggregate to acquire
our majority ownership interests in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts, to acquire interests in or make
advances to new and existing partner companies during the year ended December
31, 1999. These companies included: Arbinet Communications, asseTrade.com,
AUTOVIA, Benchmarking Partners, Bidcom, Blackboard, ClearCommerce, Collabria,
CommerceQuest, Commerx, CourtLink, Deja.com, e-Chemicals, eMarketWorld, eMerge
Interactive, Entegrity Solutions, Internet Commerce Systems, Jamcracker,
LinkShare, NetVendor, ONVIA.com, PaperExchange.com, InvestorForce.com,
PrivaSeek, Residential Delivery Services, RetailExchange, SageMaker,
Servicesoft Technologies, StarCite, SMART Technologies, Syncra Software, TRADEX
Technologies, traffic.com, United Messaging, Universal Access, USgift.com,
VerticalNet and Vivant!.
During the year ended December 31, 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 March 31, 2000,
$8.0 million of the obligation has been converted into 1,483,907 shares of our
common stock.
During the year ended December 31, 1999, we acquired an interest in
MetalSite General Partner, LLC and Metalsite L.P. for a combination of cash of
$30 million and 852,631 shares of our common stock valued at $150.2 million.
We utilized $494.5 million in the aggregate to acquire interests in or
make advances to new and existing partner companies during the three months
ended March 31, 2000. These companies included: Arbinet Communications,
AssetTRADE.com, AUTOVIA, Blackboard, Benchmarking Partners, BuyMedia,
Centrimed, ClearCommerce, Collabria, CommerceQuest, ComputerJobs.com,
CourtLink, e-Chemicals, Entegrity Solutions, eumediX, eu-supply, FarmingOnLine,
Freeborders, ICG Commerce, Industrial America, Internet Healthcare Group, iSky,
LinkShare, Logistics.com, MetalSite, NetVendor, ONVIA.com, PaperExchange,
Servicesoft Technologies, Simplexis.com, StarCite, TALPX, TeamOn.com,
Traffic.com, Universal Access, and Vivant!.
During the period from April 1, 2000 through June 30, 2000 we utilized
$219.5 million to acquire interests in or make advances to new and existing
partner companies. These companies included: Arbinet Communications,
AssetTRADE.com, Breakaway Solutions, Buy.com, CourtLink/Justicelink, CargoBiz,
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ComputerJobs.com, CreditTrade, Cybercrop.com, Deja.com, eCatalog, eColony,
Emptoris, Enertech, GoIndustry ICG AsiaWorks, ICG Commerce, ICG Patents, ICS
FoodOne, IVOWS, Logistics.com, MetalSite, NationStreet, NetVendor, Print
Mountain, Retail Exchange, StarCite, Syncra, Tibersoft and VerticalNet.
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
In February 2000, we entered into an agreement to form a joint venture
with DuPont named CapSpan. CapSpan will provide management, growth capital,
financial, technical and infrastructure capabilities designed to accelerate the
development of B2B e-commerce.
In May 2000, we acquired a majority interest in Harbour Ring
International Holdings, which was renamed ICG AsiaWorks Limited for
approximately $116.5 million.
During the three months ended June 30, 2000, we acquired an interest in
new and existing partner companies for 3,797,955 shares in the aggregate of our
common stock valued at approximately $140.4 million. These companies included:
Breakaway Solutions, CommerceQuest, ComputerJobs.com and Emptoris.
In June 2000, we acquired a significant interest in eCredit.com, Inc., a
leading provider of Internet-based credit, financing and related services in
exchange for approximately $440.7 million of our common stock (valued at $94.67
per share). We also acquired a majority interest in RightWorks, a leading
provider of e-procurement software that powers B2B exchanges in exchange for
approximately $830.2 million of our common stock (valued at $140.98 per share)
and $22 million in cash.
During the year ended December 31, 1999, Ariba, Inc. announced its
intention to acquire all of the outstanding stock of one of our partner
companies, TRADEX Technologies, in exchange for approximately $2.0 billion in
Ariba stock. Ariba closed its acquisition of TRADEX Technologies on March 9,
2000. Based on Ariba's closing price of $160.4375 on March 9, 2000, we recorded
a non-operating gain of approximately $290 million during the quarter ended
March 31, 2000. Our holdings of Ariba after the transaction will be accounted
for as available-for-sale securities and will be 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. We entered into cashless collar
agreements with respect to 2.2 million shares of our holdings of Ariba's common
stock accounted for at fair value of $230.6 million at March 31, 2000. During
the quarter ended June 30, 2000, we sold approximately 631,530 shares of Ariba
common stock at an average price of $78.57 and recorded a loss of $51.7
million.
In April 2000, Breakaway Solutions acquired EggRock Partners for
3,636,000 shares of its common stock valued at $250 million at the date of
signing the definitive agreement. As a result, our voting ownership in
Breakaway Solutions will decrease from 40% to approximately 33%. In addition,
we expect to record a non-operating gain due to the increase in our share of
Breakaway Solutions' net equity as a result of their issuance of shares.
During the year ended December 31, 1999, VerticalNet acquired all of the
outstanding stock of NECX Exchange LLC in exchange for $70 million in
convertible notes, $10 million in cash and the assumption of debt and certain
other liabilities. 1,768,034 shares were issued in connection with conversion
of these notes in April 2000. Also in March 2000, VerticalNet acquired Tradeum,
Inc. for approximately 2,000,000 shares of VerticalNet common stock valued at
approximately $500 million at the date of signing of the definitive agreement.
Also in March 2000, VerticalNet acquired R.W. Electronics for approximately 1
million shares of common stock valued at approximately $73 million. In May 2000
$93.2 million of VerticalNet's convertible debt was converted into 4,665,750
shares of common stock. Upon closing of these transactions, our voting
ownership of VerticalNet will decrease from 33% to approximately 29%. As a
result, we expect to record a non-operating gain in the second quarter in
connection with these acquisition transactions.
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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 committed funds in 1999 and expect to commit funds in 2000 to the
buildout of our larger new corporate headquarters in Wayne, Pennsylvania, our
international expansion, and the development of our information technology
infrastructure. There were no material capital asset purchase commitments as of
December 31, 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We are currently
analyzing the potential impact of SFAS No. 133 on our results of operations,
financial position and cash flows upon the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission required that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses. The Securities and Exchange
Commission identified twenty issues for which they believed some form of
standard setting or guidance may be appropriate either because (i) there
appeared to be diversity in practice or (ii) the issues are not specifically
addressed in current accounting literature or (iii) the Securities and Exchange
Commission staff is concerned that developing practice may be inappropriate
under generally accepted accounting principles. Many of the issues identified
by the Securities and Exchange Commission, including those which address barter
and revenue recognition, are potentially applicable to us. Although the EITF
has begun to deliberate these issues, formal guidance has not been issued to
date for the majority of them. In addition, in December 1999, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements, which is required to be
implemented in the quarter ended December 31, 2000. Although we believe our
historical accounting policies and practices conform with generally accepted
accounting principles, there can be no assurance that final consensus reached
by the EITF on the Internet issues referred to above, or other actions by
standard setting bodies, will not result in changes to our historical
accounting policies and practices or to the manner in which certain
transactions are presented and disclosed in our consolidated financial
statements. We do not expect the adoption of SAB No. 101 to have a significant
impact on our net results of operations, financial position or cash flows.
Year 2000 Compliance
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates. Most reports to date, however, have indicated that computer
systems are functioning normally and the compliance and remediation work
accomplished leading up to 2000 was effective to prevent any problems. However,
computer experts have warned that there may still be residual consequences of
the change in centuries. It is also possible that errors or defects may remain
undetected, or that dates other than January 1, such as February 29, 2000, may
trigger Year 2000 type problems. As a result, although we have not experienced
any significant Year 2000 problems to date, it is possible that we could face
problems or disruptions during 2000.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to equity price risks on the marketable portion of our
equity securities. Our public holdings at March 31, 2000 include equity
positions in companies in the Internet industry sector, including Ariba, Inc.,
Excite@Home; Breakaway Solutions, Inc.; i2 Technologies, Inc.; eMerge
Interactive, Inc.; Universal Access, Inc.; ONVIA. com, Inc.; Lycos, Inc.; US
Interactive, Inc.; and VerticalNet, Inc., many of
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which have experienced significant historical volatility in their stock prices.
We typically do not attempt to reduce or eliminate our market exposure on these
securities, particularly with respect to securities of our partner companies. A
20% adverse change in equity prices, based on a sensitivity analysis of our
public holdings as of March 31, 2000, would result in an approximate $937
million decrease in the fair value of our public holdings. A significant
portion of the value of the potential decrease in equity securities, or $340.1
million, consisted of our holdings in VerticalNet.
Based on the closing price of VerticalNet's common stock on June 30, 2000
of $36.94, our holdings in VerticalNet had a market value of approximately $926
million. Based on the closing price of Breakaway Solutions' common stock on
June 30, 2000 of $27.00, our holdings in Breakaway Solutions had a market value
of approximately $420 million. Based on the closing price of eMerge
Interactive's common stock on June 30, 2000 of $17.94, our holdings in eMerge
Interactive had a market value of approximately $145 million. Based on the
closing price on ONVIA.com's common stock on June 30, 2000 of $8.63, our
holdings in ONVIA.com had a market value of approximately $148 million. Based
on the closing price of Universal Access' common stock on June 30, 2000 of
$24.50, our holdings in Universal Access had a market value of approximately
$518 million. Fluctuations in the price of VerticalNet's, Breakaway Solutions',
eMerge Interactive's, ONVIA.com's and Universal Access' and other publicly-
traded partner companies' common stock are likely to affect the price of our
Common Stock.
We entered into cashless collar agreements with respect to 2.2 million
shares of our holdings of Ariba's common stock accounted for at fair value of
$230.6 million at March 31, 2000. The collar arrangements limit our exposure to
and benefits from price fluctuations in the underlying equity securities. The
collar arrangements mature between 2001 and 2003. We account for the collar
arrangements as a hedge, and changes in the value of the collar arrangements
are substantially offset by changes in the value of the underlying investment
securities which are both marked-to-market through accumulated other
comprehensive income (loss) in our consolidated balance sheet in accordance
with Statement of Financial Accounting Standards No. 115. The combined value of
the collars and the underlying hedged securities at March 31, 2000 was $259.3
million. We may enter into similar collar arrangements in the future,
particularly with respect to available for sale securities which do not
constitute ownership interests in our partner companies.
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
fair value of convertible subordinated notes is approximately $502.5 million
versus a carrying value of $566.3 million. The carrying value of other long-
term debt approximates its fair value, as estimated by using discounted future
cash flows based on our current incremental borrowing rates for similar types
of borrowing arrangements.
Availability under our credit facility is determined by the market value
of the publicly traded and privately held securities pledged as collateral. As
of March 31, 2000, we had sufficient collateral to enable us to fully utilize
this facility. Additionally, we are exposed to interest rate risk primarily
through our bank credit facility. At March 31, 2000, there were no borrowings
outstanding.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may dramatically increase.
Therefore, in the future, we may consider utilizing derivative instruments to
mitigate such risks.
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INTERNET CAPITAL GROUP'S 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, or IDC, 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,
93% of all United States businesses expect some of their business trade to flow
over the Internet and 22% expect to do more than half of their business online
in 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
enabling 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.
. Enabling Service Providers. Enabling 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.
Enabling 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 and significant resources and 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 March 31, 2000, we owned interests in 63 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 have opened offices in London, Munich, Paris
and Tokyo that focus on B2B opportunities in their regions. We plan to fully
staff these offices with personnel who will provide strategic guidance and
operational support to our partner companies operating in these regions.
We plan to acquire interests in European, Asian and Latin American B2B e-
commerce companies. If we wish to enter a 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.
. Enabling Service Provider Profit Potential. When evaluating
enabling service providers, we examine the size of the market
opportunity, the profit potential in serving the target
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market and whether the enabling 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, and
Yossi Sheffi, Ph.D., a co-founder of Syncra Software, Inc., e-
Chemicals, Inc., and Logistics.com and currently a Professor at
the Massachusetts Institute of Technology.
. Operational Support. B2B e-commerce companies often have
difficulty obtaining senior executive level guidance in the many
areas of expertise successful companies need. We assist our
partner companies by providing access to skilled managers who
guide our partner companies in the following functional areas:
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. 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. Members of our management team are
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 in 1999, thirteen chief executive officers of our
market maker and enabling service provider partner companies gathered to
discuss e-commerce strategies and business models. In addition, we regularly
host conferences for the senior executives of partner companies to accelerate
their learning around topics such as new technologies, financing issues, major
operational issues, and aggressive growth strategies. In March 2000, we hosted
our first investor conference on B2B e-commerce during which 18 of our partner
companies made presentations to more than 350 leading investors, analysts and
entrepreneurs.
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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.com 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.com'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, a provider of e-commerce solutions for the industrial
processing market, has formed a strategic alliance with
CommerceQuest 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 enabling 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 March 31, 2000, VerticalNet owned
and operated 55 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 March 31, 2000. Our ownership positions have been calculated based on the
issued and outstanding common stock of each partner company, assuming the
issuance of common stock on the conversion or exercise of preferred stock and
convertible notes, but excluding the effect of options and warrants.
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
----------------------- ------------------ -------------------------- ---------- -------
<S> <C> <C> <C> <C>
Vertical:
Animated Images, Inc. Apparel Provides Internet-based 50% 1999
www.appliedintranet.com design, communication, and
procurement services for
the apparel and sewn goods
industries.
Arbinet Communications, Telecommunications Provides an Internet-based 8% 1999
Inc. trading floor and
www.arbinet.com clearinghouse for
telecommunications
carriers to purchase
bandwidth.
AUTOVIA Corporation Auto Parts Developing a system to 20% 1998
www.autovia.net provide Internet-based
auto parts procurement for
professional automotive
and truck repair shops.
Bidcom, Inc. Construction Provides Internet-based 30% 1999
www.bidcom.com project planning and
management services for
the construction industry.
Blackbird (dba DNI Financial Provides over the counter 19% 2000
Holdings, Inc.) derivatives trading
www.blackbird.net platform for the inter-
dealer market.
BuyMedia.com, Inc. Advertising Provides B2B e-commerce 34% 2000
www.buymedia.com solutions for the buying
and selling of broadcast
advertising.
CentriMed Healthcare Provides e-marketplace 47% 2000
www.centrimed.com solutions to physicians,
hospitals and medical
device manufacturers.
Collabria, Inc. Printing Provides Internet-based 11% 1999
www.collabria.com procurement and production
services for the
commercial printing
industry.
Commerx, Inc. Plastics Provides Internet-based 39% 1998
www.commerx.com procurement and sales of
raw materials, tools and
maintenance and repair
products for the plastics
industry.
</TABLE>
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
-------------------------- ------------ ------------------------ ---------- -------
<S> <C> <C> <C> <C>
ComputerJobs.com, Inc. Technology Provides Internet-based 33% 1998
www.computerjobs.com Employment job screening and resume
posting for information
technology
professionals,
corporations and
staffing firms.
CourtLink Legal Provides online access 34% 1999
www.courtlink.com to court documents.
CyberCrop.com, Inc. Agriculture Developing a system to 75% 1999
www.cybercrop.com 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.
Deja.com, Inc. Media Provides a Web-based 30% 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 20% 1998
www.e-chemicals.com sales and distribution
of industrial chemicals.
eMerge Interactive, Inc. Livestock Provides Internet-based 22% 1999
www.emergeinteractive.com content, community and
transaction services in
an online marketplace
for the cattle industry.
eMetra Ltd. Metals Developing a system to 45% 2000
provide an Internet-
based exchange for
trading non-ferrous
metals
EmployeeLife.com Healthcare Provides Internet-based 52% 1999
www.employeelife.com solutions for employee
health benefits
management across the
health care industry.
eumediX Healthcare Developing a system to 31% 2000
www.eumediX.com provide an Internet-
based content and
transaction service for
European hospitals to
purchase goods and
services.
EuSupply Construction Provides online B2B 29% 2000
www.eu-supply.com market making services
in Europe tailored to
meet the needs of the
construction industry
and supply chain.
FarmingOnLine Ltd. Agriculture Provides Internet-based 32% 2000
www.farmline.com content, community and
transaction services in
an online marketplace
for the European
agricultural inputs and
outputs market.
</TABLE>
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
-------------------------- ---------- ---------------------------- ---------- -------
<S> <C> <C> <C> <C>
Freeborders.com Trade Provides cross-borders trade 46% 2000
between suppliers of goods
in China and match them with
U.S.-based suppliers.
Industrial America Industrial Provides an online 36% 2000
Components marketplace for the sale and
and procurement of all major
Supplies classes of industrial
components and supplies,
including electrical and
electronic components;
pipes, valves and fittings;
power transmission
components; and metalworking
tools and supplies.
Internet Commerce Food Provides Internet-based 43% 1999
Systems, Inc. product introduction and
www.icsfoodone.com promotion services to
wholesale and retail food
distributors.
Internet Healthcare Group Healthcare Provides an online 30% 2000
www.internethealthcare.com marketplace that facilitates
B2B e-commerce in the
healthcare industry.
InvestorForce.com Asset Provides a Web-based 43% 1999
www.investorforce.com Management community for asset managers
to reach fund sponsors.
iParts Electronic Provides Internet-based 66% 1999
www.ipartsupply.com Components sales and distribution of
electronic components.
JusticeLink, Inc. Legal Provides electronic filing, 37% 1999
www.justicelink.com service and retrieval of
legal documents and
information among courts,
attorneys, their clients and
other interested parties.
MetalSite General Metals Provides an Internet-based 39% 1999
Partner, LLC marketplace that enables
www.metalsite.net particpants in the metals
industry supply chain to
efficiently buy and sell
metal products using
multiple transaction
methods.
PaperExchange, Inc. Paper Provides Internet-based 23% 1999
www.paperexchange.com sales and distribution of
all grades of pulp and
paper.
Retail Exchange.com, Inc. Consumer Provides an online B2B 32% 1999
www.retailexchange.com Goods marketplace for the exchange
of excess consumer products.
Simplexis Education Provides value by helping 47% 2000
www.simplexis.com school business officials
save money and time when
they buy goods and services
and offers related content
and information for school
business operations.
StarCite!, Inc. Travel Provides Internet-based 40% 1999
www.starcite.com services for planning and
managing corporate meetings
for event planners.
</TABLE>
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
--------------------------- ------------------ -------------------------- ---------- -------
<S> <C> <C> <C> <C>
TALPX Lumber Provides Internet-based 28% 2000
www.talpx.com electronic trading to the
North American lumber and
panel industry.
Universal Access, Inc. Telecommunications Provides Internet-based 25% 1999
www.universalaccessinc.com ordering for provisioning
and access and
transportation exchange
services for network
service providers focused
on business customers.
USgift.com Corporation Gift, Garden and Provides Internet-based 38% 1999
www.USgift.com Home Decor sales and distribution of
gift, garden and home
decor accessories.
Horizontal:
asseTrade.Com, Inc. Used Capital Provides Internet-based 30% 1999
www.assetrade.com Equipment asset and inventory
recovery, disposal and
management solutions.
CapSpan Industrial Provides Internet-based 33% 2000
Products distribution and
purchasing for industrial
products.
eMarketWorld, Inc. Special Event Provides industry-specific 42% 1999
www.emarketworld.com Services Web-based conferences and
expositions that help
businesses understand the
Internet.
ICG Commerce, Inc. Sourcing Provides strategic 50% 1999
www.icgcommerce.com sourcing consulting and
on-line Internet
purchasing.
NetVendor, Inc. Asset Disposition 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 businesses 23% 1999
www.onvia.com Services 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 Provides industry-specific 34% 1996
www.verticalnet.com Services Web-based trade
communities for businesses
and professionals.
Vivant! Corporation Consulting Provides process 39% 1998
www.vivantcorp.com automation and decision
support services that
enable companies to
strategically manage
contractors, consultants
and temporary employees.
</TABLE>
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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 $.4 million and for 1999, revenue of $3.0 million.
ComputerJobs.com, Inc. ComputerJobs.com is a leading skill-based
employment Web site and career content provider 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 may visit
ComputerJobs.com's regional and skill-specific Web sites to submit their resume
and pursue job opportunities free of charge. ComputerJobs.com allows job
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
19 major metropolitan markets throughout the United States and recently
launched five vertically focused job sites. These vertical career portals
address the needs of high demand skill sets such as e-commerce, enterprise
resource planning, networking, project management and windows developer. 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 and Gregory
W. Haskell, two of our Managing Directors, are members 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 1999, revenue of $9.1
million.
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
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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 1999, revenue of $9.3 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. Anthony Ibarguen and Douglas Alexander, two of our Managing
Directors, are members of eMerge Interactive's Board of Directors. In February
2000, eMerge Interactive became a public company, trading on the Nasdaq
National Market under the symbol "EMRG." For 1998, eMerge Interactive had
revenue of $1.8 million, and for 1999, revenue of $43.8 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 businesses succeed. ONVIA.com
provides small businesses with business products, direct purchase and request
for quote services, customer lead generation and expert advice.
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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. In March 2000, ONVIA.com became a public company,
trading on the Nasdaq National Market under the symbol "ONVI." For 1998,
ONVIA.com had revenue of $1 million, and for 1999, revenue of $27.2 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. In March 2000, Universal
Access became a public company, trading on the Nasdaq National Market under the
symbol "UAXS." For 1998, Universal Access had revenue of $1.6 million, and for
1999, revenue of $14.3 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 [55] industry-specific Web sites as of March 31,
2000 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.
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
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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, enabling 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 one of the members of its Board of Directors, 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. In 1999, 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 1999,
revenue of $20.8 million.
Enabling Service Provider Categories
Enabling 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 enabling 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, enabling 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.
Our current enabling service provider partner companies furnish a variety
of technology-based solutions to their customers. In the future, we may acquire
interests in enabling service providers that focus on two specific types of
solutions: physical fulfillment and financial fulfillment. Physical fulfillment
involves the movement of goods on behalf of market makers or traditional
businesses. Financial fulfillment includes a wide variety of financial services
such as the management of accounts receivable risk and commercial loans.
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Enabling Service Provider Profiles
Table of Enabling 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 enabling
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 enabling service provider partner companies by
category as of March 31, 2000. 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
--------------------------- --------------------------------------------- ---------- -------
<S> <C> <C> <C>
Strategic Consulting and
Systems Integration:
Benchmarking Partners, Inc. Provides e-commerce best practices research 20% 1996
www.benchmarking.com and consulting services to maximize return on
investment from demand/supply chain and e-
business initiatives.
Context Integration, Inc. Provides systems integration services focused 12% 1997
www.context.com on customer support, data access and e-
commerce.
US Interactive, Inc. Provides a range of consulting and technical 3% 1996
www.usinteractive.com services relating to Internet marketing
solutions.
Software Providers:
Blackboard Inc. Provides universities and corporations with 28% 1998
www.blackboard.com applications that enable them to host classes
and training on the Internet.
ClearCommerce Corp. Provides comprehensive e-commerce solutions 11% 1997
www.clearcommerce.com including transaction and payment processing,
credit card authorization, fraud tracking and
reporting functions.
Entegrity Solutions Provides encryption software to secure 9% 1996
Corporation transactions and communications between
www.entegrity.com business applications.
Logistics.com, Inc. Provides Internet-based transportation 36% 2000
www.logistics.com solutions for shippers, carriers, and third
parties.
Servicesoft Technologies, Provides tools and services used by its 5% 1998
Inc. customers to create Internet customer service
www.servicesoft.com applications consisting of self-service, e-
mail response and live interaction products.
Syncra Software, Inc. Provides software that improves supply chain 35% 1998
www.syncra.com efficiency through collaboration of trading
partners over the Internet.
Outsourced Service
Providers:
Breakaway Solutions, Inc. Provides application service hosting, e- 40% 1999
www.breakaway.com commerce, consulting and systems integration
services to growing companies.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
--------------------------- --------------------------------------------- ---------- -------
<S> <C> <C> <C>
CommerceQuest, Inc. Provides a messaging service for data sharing 28% 1998
www.commercequest.com 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.
iSky, Inc. Provides services to improve customer 34% 1996
www.isky.com communications and relationships.
Jamcracker, Inc. Provides integrated application service 24% 1999
www.jamcracker.com provider services to middle market companies.
LinkShare Corporation Establishes affiliate relationships for 39% 1998
www.linkshare.com online merchants with other Web sites to
facilitate e-commerce.
PrivaSeek, Inc. Provides consumers with control of their Web- 7% 1998
www.privaseek.com based personal profiles, allowing merchants
to offer consumers incentives for selective
disclosure.
SageMaker, Inc. Provides services that combine an 21% 1998
www.sagemaker.com enterprise's external and internal
information assets into a single, Web-based
knowledge management platform.
TeamOn.com, Inc. Provides small businesses, groups and 34% 2000
www.teamon.com individuals with access-anywhere, Web-based,
professional e-mail solutions and customer-
interaction management capabilities.
traffic.com, Inc. Provides real time traffic monitoring for 32% 1999
www.traffic.com logistics and transportation optimization.
United Messaging, Inc. Provides high performance electronic 37% 1999
www.unitedmessaging.com messaging services for organizations with
mission critical e-mail networks.
</TABLE>
Set forth below is a more detailed summary of some of our enabling
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.
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.
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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 iSky and US Interactive to develop Internet
business application opportunities. For 1998, Benchmarking Partners had revenue
of $15.9 million, and for 1999, revenue of $20.3 million.
Breakaway Solutions, Inc. Breakaway Solutions is an outsourced service
provider enabling 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. In 1999, Breakaway
Solutions became a public company, trading on the Nasdaq National Market under
the symbol "BWAY." For 1998, Breakaway Solutions had revenue of $10 million,
and for 1999, revenue of $25.4 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 over 275 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 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 1999 revenue of $23.8
million.
CommerceQuest implemented significant business model transitions during
1999, including a de-emphasis of reselling and a shift from indirect to direct
license sales. As a result, CommerceQuest changed
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its infrastructure to support the hiring and administration of a direct sales
force. During this transition, CommerceQuest also moved personnel from the
professional services area to development to enhance CommerceQuest's
proprietary products and service offerings. As a result, professional service
sales have decreased.
CommerceQuest's revenues have decreased compared with the same periods in
1998. This decrease reflects the strategic decision to de-emphasize reselling
and to sell proprietary software and expertise directly. For 1999, reselling
accounted for only about 10% percent of total revenues compared to almost 60%
percent for 1998. As CommerceQuest has built its direct sales force and moved
away from third party marketing, the royalties previously earned on those sales
have decreased without any offset by direct sales.
Government Regulations and Legal Uncertainties
As of March 31, 2000, 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 takes 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.
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. Regulation of Communications Facilities. To some extent, the rapid
growth of the Internet in the United States has been due to the
relative lack of government intervention in the marketplace for
Internet access. Lack of intervention may not continue in the
future. For example, several telecommunications carriers are
seeking to have telecommunications over the Internet regulated by
the Federal Communications Commission in the same manner as other
telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to
regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much the
same manner as telephone services, which could slow the deployment
of broadband Internet access services. Because of these
proceedings or others, new laws or regulations could be enacted
which could burden the companies that provide the infrastructure
on which the Internet is based, thereby slowing the rapid
expansion of the medium and its availability to new users.
. Other Regulations. The growth of the Internet and e-commerce may
lead to the enactment of more stringent consumer protection laws.
The Federal Trade Commission may use its existing jurisdiction to
police e-commerce activities, and it is possible that the Federal
Trade Commission will seek authority from Congress to regulate
certain online activities.
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. Comcast Corporation, and Safeguard Scientifics, Inc. own
8.3% and 13.7% of our outstanding common stock, respectively, based on the
number of shares held by each of them on March 31, 2000. These shareholders may
compete with us to acquire interests in B2B e-commerce companies. Comcast
Corporation and Safeguard Scientifics currently each has a designee as a member
of our board of directors and IBM Corporation and AT&T Corp. each 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.
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Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, we expect that competition will intensify. Barriers
to entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain
a critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our partner companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail.
Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives.
Competition for Partner Companies
We face competition from other capital providers including publicly-
traded Internet companies, venture capital companies and large corporations.
Many of these competitors have greater financial resources and brand name
recognition than we do. These competitors may limit our opportunity to acquire
interests in new partner companies. If we cannot acquire interests in
attractive companies, our strategy to build a collaborative network of partner
companies may not succeed.
Facilities
Our corporate headquarters are located at 435 Devon Park Drive, 600
Building, in an office facility located in Wayne, Pennsylvania, where we lease
approximately 14,800 square feet. We also maintain offices in San Francisco,
California; Boston, Massachusetts; Seattle, Washington; London, England;
Munich, Germany; Paris, France; and Tokyo, Japan.
Employees
As of March 31, 2000 excluding our partner companies, we had 120
employees, 119 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.
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
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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.
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 40 President, Chief Executive Officer and
Director
Douglas A. Alexander 38 Managing Director, East Coast Operations
Matthias Allgaier 33 Managing Director, European Operations
Nigel Andrews 53 Managing Director, Office of the President
Mary Coleman 45 Managing Directors, Operations
Richard S. Devine 42 Managing Director, Executive Recruiting
Stephen Duckett 32 Managing Director, European Operations
Kenneth A. Fox 29 Managing Director, West Coast Operations and
Director
Karen C. Francis 37 Managing Director, Chief Marketing Officer
David D. Gathman 52 Chief Financial Officer and Treasurer
Christopher H. Greendale 48 Managing Director, Operations
John Hamm 40 Managing Director, Operations
Gregory W. Haskell 43 Managing Director, Operations
Todd G. Hewlin 33 Managing Director, Strategy
Victor S. Hwang 31 Managing Director, Acquisitions
Anthony Ibarguen 40 Managing Director, Operations, and President
of Professional Services
Sam Jadallah 35 Managing Director, Operations
Beth Kaplan 42 Managing Director, Operations
Chris Klein 36 Managing Director, Financial Services
Mark J. Lotke 32 Managing Director, Acquisitions
Walter P. Maner 32 Managing Director, Acquisitions
Henry N. Nassau 45 Managing Director, General Counsel and
Secretary
John N. Nickolas 33 Managing Director, Finance and Assistant
Treasurer
Robert A. Pollan 39 Managing Director, Operations
John P. Shoemaker 35 Managing Director, Acquisitions
Paul Slaats 37 Managing Director, Acquisitions
Sherri L. Wolf 32 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
Thomas P. Gerrity (1) 58 Director
Warren V. Musser (2) 73 Director
Peter A. Solvik (1) 41 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, including Multigen, XL
Vision, Inc., ChromoVision, and Video Server, and was responsible for
developing and executing Safeguard Scientifics' multimedia and Internet
investment
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strategies. Mr. Buckley serves as a director of Breakaway Solutions, Inc., e-
Chemicals, Inc., eColony, iSky, Inc., Inc., Metal Site, L.P., Paper
Exchange.com, Inc., PrivaSeek, Inc., Safeguard Scientifics, Inc., Syncra
Software, Inc., VerticalNet, Inc., Who?Vision Systems, Inc., and XLVision.
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. Mr. Alexander has recently been appointed to become the Chief Executive
Officer of ICG Europe.
Matthias Allgaier has served as one of our Managing Directors, 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, and was
associated with General Atlantic Partners. Mr. Allgaier received a Masters of
Business Administration from the University of Mannheim and later earned a
doctorate degree with distinction in Business Administration from the same
university. Mr. Allgaier serves as a director of eumediX, VerticalNet Europe,
and enel.
Nigel Andrews has served as one of our Managing Directors and a member of
the Office of the President since June 2000. Prior to joining us, Mr. Andrews
was with GE Capital, where he was most recently a member of the Office of the
CEO and since 1993 was responsible for the equipment management businesses and
GE Equity. Prior to joining GE Capital, Mr. Andrews held various business
leader positions with GE plastics and was Vice President of Corporate Business
Development for GE. From 1978 to 1987, Mr. Andrews was a partner at Booz-Allen
& Hamilton, an international consulting firm in New York. He began his career
in business management at Shell International Chemical Company in London. He
holds an MBA from London Business School and a BSc in Chemical Engineering from
Sheffield University, England.
Mary Coleman has served as one of our Managing Directors since January
2000. Prior to joining us, Ms. Coleman was Chief Executive Officer at Baan
Company, Europe's second largest software company. Prior to her tenure at Baan,
Ms. Coleman was Chief Executive Officer at Aurum Software, Inc. Prior to
joining Aurum, Ms. Coleman held several senior marketing and technical
positions in high technology companies including Radius Inc., McDATA
Corporation, and Selbourne Computer, Inc. Ms. Coleman brings to us more than 25
years of high technology experience.
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, 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. Mr.
Duckett received a Masters of Business Administration from Harvard Business
School, where he was a Fulbright Scholar. Mr. Duckett serves as a director of
EuSupply, eMetra Ltd., FarmingOnline, and enel.
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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, Commerx, Inc., Deja.com, Inc., Entegrity Solutions Corporation,
Internet Commerce Systems, Inc., ONVIA.com, Inc. and Vivant! Corporation.
Karen C. Francis has served as one of our Managing Directors and has been
our Chief Marketing Officer since April 2000. Prior to joining us, Ms. Francis
was General Manager at Oldsmobile, a division of General Motors (GM)
Corporation. She first joined GM as brand manager and later as Chevrolet's
regional sales and service manager in the Rocky Mountain region. Prior to GM,
Ms. Francis was the Vice President of Marketing at Empire-Berol USA, a
Nashville, Tennessee company that manufactures writing instruments. Prior to
joining Empire-Berol USA, she served as a consultant with Bain & Company, an
international consulting firm in San Francisco, California. Ms. Francis began
her career in brand management at Procter & Gamble in Cincinnati, Ohio. Ms.
Francis received her BA in Economics from Dartmouth College and currently
serves as a member of the Board of Trustees at Dartmouth. Ms. Francis received
her Masters of Business Administration from Harvard University.
David D. Gathman has served as our Chief Financial Officer and Treasurer
since January 1999. Prior to joining us, Mr. Gathman was Chief Financial
Officer and Executive Vice President, Finance and Administration of Integrated
Systems Consulting Group, Inc. from January 1997 through its merger with First
Consulting Group, Inc. in December 1998. He also served as Chief Operating
Officer, Vice President, Secretary and Assistant Treasurer of Integrated
Systems Consulting Group, Inc. from April 1994 to December 1998 and as a
director of the company. Mr. Gathman brings to us over 30 years of finance-
related experience, the last 16 of which were focused in the information
technology industry.
Christopher H. Greendale has served as one of our Managing Directors
since July 1999 and was one of our Senior Partners of Operations from January
1999 to July 1999. Prior to joining us, Mr. Greendale served as an independent
management consultant from January 1998 to December 1998. Prior to becoming a
consultant, Mr. Greendale served as Executive Vice President of Cambridge
Technology Partners, a company he co-founded in 1991. Cambridge Technology
Partners is a systems integrator that initiated fixed price, fixed time, rapid
systems development. Mr. Greendale has extensive experience in sales and
marketing, and general management in the information technology industry. Mr.
Greendale is Chairman of the Board of Breakaway Solutions, Inc. and serves as a
director of Benchmarking Partners, Inc., Context Integration, Inc., Servicesoft
Technologies, Inc., Vivant! Corporation and MediaBridge.
John Hamm has served as one of our Managing Directors of Operations since
March 2000. Prior to joining us, Mr. Hamm served as President and Chief
Executive Officer of Whistle Communications, which was acquired by IBM
Corporation in June 1999. From 1990 to 1996, Mr. Hamm was Vice President and
General Manager of the Enterprise Computing Business Unit at Adaptec. Mr. Hamm
serves or has served as a director of Brocade Communications, Sylantro Systems,
Cybrant and ConvergeNet and attended the University of California--Irvine
executive masters of business administration program.
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 asseTrade.com, Inc., Axcess, Inc.,
ComputerJobs.com, Inc., CyberCrop.com, Inc., e-Chemicals, Inc., Internet
Healthcare Group, Logistics.com, PaperExchange.com LLC, Presidio and XL Vision,
Inc.
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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, a fund
focused on late-stage private equity investments in 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 more than 25 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
and graduated as an Arjay Miller Scholar.
Anthony Ibarguen has served as our Managing Director, Operations and
President of Professional Services since December 1999. Prior to joining us,
Mr. Ibarguen served as President and Chief Operating Officer of Tech Data
Corporation from March 1997 to December 1999 and as their President of the
Americas since September 1996. He was elected to Tech Data's Board of Directors
in June 1997. Tech Data is a Fortune 150 global information technology
distribution and logistics services provider. Prior to this, Mr. Ibarguen
served as Executive Vice President of Sales and Marketing of ENTEX Information
Services, Inc., a systems intergrator he co-founded in 1993. Mr. Ibarguen
earned his Masters of Business Administration from Harvard University and
serves as a director of Smartdisk Inc., eMerge Interactive, Inc. and Commerce
Quest, Inc.
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. Mr. Jadallah serves as
a director of JusticeLink, Inc.
Beth Kaplan has served as our Managing Director of Operations since June
2000. Prior to joining us, Ms. Kaplan was Senior Executive Vice President at
Rite Aid, where she helped to transform the company from a regional player to a
nationally recognized leader in its industry. She also spearheaded Rite Aid's
Internet strategy and helped coordinate its investment in drugstore.com. Before
joining Rite Aid, Ms. Kaplan served as a Vice President at Procter & Gamble.
While at Procter & Gamble, she led more than 2000 people as president of its
Noxell Division and was responsible for the overall strategic direction and
business leadership of the large U.S. cosmetics and fragrance business unit.
She was also General Manager of Procter & Gamble's Food Division, providing
overall leadership for the business unit. Ms. Kaplan received a Masters of
Business Administration from the Wharton Graduate School of Business.
Chris Klein has served as one of our Managing Directors of Financial
Services since January 2000. He directs a team of professionals that identify
promising areas in the financial services arena and assist ICG's partner
companies with strategic direction to establish themselves as leaders within
their market space. Prior to joining us, Mr. Klein was a principal in the
financial institutions group of McKinsey & Co., assisting banks, security
firms, and insurance companies with strategy and distribution. Mr. Klein was
co-leader of McKinsey's North American asset management and FIG e-commerce
practices. His clients included leading U.S. and
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Canadian banks, mutual fund companies, life and P&C insurance companies,
mortgage banks, and brokerage firms. Mr. Klein also served as Assistant Vice
President at First Chicago Bank, where he developed new capital market products
and supported the bank's corporate strategy program. Mr. Klein received a
Masters degree in management from the J.L. Kellogg Graduate School of Business.
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., 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., Logistics.com, Inc., Residential Delivery Services, Inc., Retail
Exchange.com, Inc. and TALPX, Inc.
Walter P. Maner has served as one of our Managing Directors of
Acquisitons since March 2000 and as a Vice President of Acquisitions from April
1999 to March 2000. Prior to joining us, Mr. Maner was employed by Technology
Leaders, where he focused on e-commerce, customer-relationship management and
supply-chain-oriented investments. Prior to joining Technology Leaders, Mr.
Maner worked as a Senior Associate at Safeguard Scientifics. Mr. Maner obtained
a Masters of Business Administration from The Wharton School of the University
of Pennsylvania.
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.
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. Mr. Nickolas has recently
been appointed to become the Chief Financial Officer of ICG Europe.
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
CapSpan, CommerceQuest, Inc., Commerx, Inc., Internet Commerce Systems, Inc.,
Logistics.com, TALPX, United Messaging, Inc. and Universal Access, Inc. Mr.
Pollan earned a Masters of Business Administration with distinction from
Harvard Business School.
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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.
John P. Shoemaker is one of our Managing Directors of Acquisitions since
March 2000. Prior to joining us, Mr. Shoemaker was a Managing Director and head
of the Philadelphia office of Mellon Ventures, Inc. Before Mellon Ventures, Mr.
Shoemaker was Vice President of RAF Industries, Inc. Prior to RAF Industries,
Mr. Shoemaker worked as a corporate lawyer in Philadelphia and as an investment
banker with Morgan Stanley, Inc. in New York.
Paul Slaats has served as one of our Managing Directors of Acquisitions
since March 2000 and as a Vice President of Acquisitions from January 1997 to
March 2000. Prior to joining us, Mr. Slaats was an associate with Safeguard
Scientifics, Inc. Mr. Slaats has more than 12 years of experience in
information technology companies including manufacturing, sales management and
senior marketing positions with IBM, and channel development, product
management, and market development experience with Marcam Corporation and SAP
America.
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. NDS Group pls and is
Chief Executive Officer of Comcast Interactive Capital Group L.P.
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, ICG Commerce,
Inc., Knight-Ridder, Inc., Reliance Group Holdings, Inc., Sunoco, Inc. and a
trustee of MAS Funds.
Warren V. Musser has served as one of our directors since March 2000. Mr.
Musser is currently Chairman and Chief Executive Officer of Safeguard
Scientifics, Inc., a position he has held since 1953. Mr. Musser is Chairman of
the Board of Cambridge Technology Partners (Massachusetts), Inc. and CompuCom
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Systems, Inc. He is also a Director of DocuCorp International, Inc. and Sanchez
Computer Associates, Inc. and a trustee of Brandywine Realty Trust. Mr. Musser
serves on a variety of civic, educational and charitable boards of directors,
and serves as Vice President/Development, Cradle of Liberty Council, Boy Scouts
of America, Vice Chairman of The Eastern Technology Council, and Chairman of
the Pennsylvania Partnership on Economic Education.
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 1993 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 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.
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.
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., in 1998, he
co-founded e-Chemicals, Inc., and in 1999, he co-founded Logistics.com.
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
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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 since 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 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.
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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 iSky, 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 Jamcracker, 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
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.
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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 Musser
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 Musser.
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. In connection with our private placement to AT&T Corp., AT&T Corp.
is entitled to designate 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, 1999 and
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------------------------- ------------
Securities
Other Underlying
Name and Principal Position Year Salary Bonus Compensation (1) Options
--------------------------- ---- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Walter W. Buckley, III..... 1999 $250,000 $125,000 -- 2,000,000
President and Chief 1998 $159,769 $ 96,000 -- 2,600,000
Executive Officer
Douglas A. Alexander....... 1999 $225,000 $112,500 -- 1,000,000
Managing Director, 1998 $225,000 $100,000 -- 2,500,000
East Coast Operations
Kenneth A. Fox............. 1999 $225,000 $112,500 -- 1,800,000
Managing Director, 1998 $119,538 $ 75,000 -- 2,500,000
West Coast Operations
David D. Gathman........... 1999 $192,308 $100,000 -- 1,500,000
Chief Financial Officer 1998 -- -- -- --
and Treasurer
Henry N. Nassau............ 1999 $171,924 $200,000 -- 1,500,000
Managing Director, General 1998 -- -- -- --
Counsel
and Secretary
</TABLE>
--------
(1) The value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for any
officer in the table above the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for such officer.
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The following tables set forth certain information concerning grants to
purchase shares of our common stock of each of the officers named in the
summary compensation table above during the year ended December 31, 1999.
Option Grants During the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term (3)
Options Employees in Price per Expiration ----------------------------
Name Granted (1) 1999 Share (2) Date 5% 10%
---- ----------- ------------- --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. 2,000,000 6.9% $3.40 May 20, 2009 $ 11,825,939 $ 21,505,372
Douglas A. Alexander.... 1,000,000 3.4% 3.40 May 20, 2009 5,912,969 10,752,686
Kenneth A. Fox.......... 1,800,000 6.2% 3.40 May 20, 2009 10,643,345 19,354,835
David D. Gathman........ 1,300,000 4.5% 1.00 Jan. 10, 2009 10,800,360 17,091,992
David D. Gathman........ 200,000 0.7% 3.40 May 20, 2009 1,182,594 2,150,537
Henry N. Nassau......... 1,500,000 5.2% 2.44 May 2, 2009 10,301,954 17,561,529
</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.
(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
$6.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
The following table sets forth certain information concerning option
exercises by each of the officers named in the above summary compensation
table.
Year-End December 31, 1999 Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying in-the-Money
Unexercised Options at Fiscal Options at Fiscal
Shares Year-End Year-End (1)
Acquired on Value ------------------------------------ -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Buckley, III.. 4,600,000 5,054,000 -- -- $ -- --
Douglas A. Alexander.... 3,500,000 4,255,000 -- -- -- --
Kenneth A. Fox.......... 4,300,000 4,779,000 -- -- -- --
David D. Gathman........ 1,300,000 1,872,000 200,000 -- 33,321,000 --
Henry N. Nassau......... 1,500,000 -- -- -- -- --
</TABLE>
--------
(1) These year-end values represent the difference between the fair market
value of the Common Stock subject to options (based on the stock's closing
price on the Nasdaq Stock Market on December 31, 1999) and the exercise
price of the options.
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Employee Benefit Plans
Membership Profit Interest Plan
In 1996, the board of managers of Internet Capital Group, L.L.C. approved
the Membership Profit 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 March 31, 2000 a total of
13,089,051 shares of Common Stock have been issued, and 478,199 shares of
Common Stock are available to issue. 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 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 60,000,000 shares of our Common Stock. This
includes 18,000,000 shares which were authorized by the board of directors in
March of 2000. No more than 60,000,000 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
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<PAGE>
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 March 31,
2000, 10,625,500 options were outstanding under the plan.
Options. Incentive stock options may be granted only to employees. The
maximum number of shares that may be subject to incentive stock options over
the life of the 1999 Equity Compensation Plan is 6,000,000. Non-qualified stock
options may be granted to employees, key advisors and non-employee directors.
The exercise price of Common Stock underlying an option shall be determined by
the compensation committee at the time the option is granted, and may be equal
to, greater than, or less than the fair market value of such stock on the date
the option is granted; provided that the exercise price of an incentive stock
option shall be equal to or greater than the fair market value of a share of
Common Stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of such fair market
value.
Unless the applicable option agreement provides otherwise, a participant
can exercise an option award at any time, before or after the option has fully
vested, by paying the applicable exercise price in cash, or, with the approval
of the compensation committee, by delivering shares of Common Stock owned by
the grantee and having a fair market value on the date of exercise equal to the
exercise price of the grants, or by such other method as the compensation
committee shall approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. In addition,
the plan provides that we may make loans to participants or guarantee loans
made by third parties to the participant for the purpose of assisting
participants to exercise their options. The compensation committee has the
authority to set the terms and conditions that will apply to any loan or
guarantee.
Options vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument. In general, the
options that have already been granted under the plan are subject to a five
year vesting schedule with twenty percent of each grant vesting on each
anniversary of the grant date. The compensation committee will determine the
term of each option up to a maximum of ten years from the date of grant except
that the term of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the date of grant.
The compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason.
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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 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
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<PAGE>
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;
. 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
. terminate any or all unexercised options and stock appreciation
rights after giving grantees an opportunity to exercise their
outstanding 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
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<PAGE>
option. In addition, the option holder must be an employee of Internet Capital
Group or one of its subsidiaries at all times between the date of grant and the
date three months, or one year in the case of disability, before the exercise
of the option. Special rules apply in the case of the death of the option
holder. Incentive stock option treatment under the Internal Revenue Code
generally allows the sale of our common stock received upon the exercise of an
incentive stock option to result in any gain being treated as a capital gain to
the option holder, but we will not be entitled to a tax deduction. However, the
exercise of an incentive stock option, if the holding period rules described
above are satisfied, will give rise to income includable by the option holder
in his or her alternative minimum tax in an amount equal to the excess of the
fair market value of the stock acquired on the date of the exercise of the
option over the exercise price.
If the holding rules described above are not satisfied, gain recognized
on the disposition of the shares acquired upon the exercise of an incentive
stock option will be characterized as ordinary income. Such gain will be equal
to the difference between the exercise price and the fair market value of the
shares at the time of exercise. Special rules may apply to disqualifying
dispositions where the amount realized is less than the value at exercise. We
will generally be entitled to a deduction equal to the amount of such gain
included by an option holder as ordinary income. Any excess of the amount
realized upon such disposition over the fair market value at exercise will
generally be long-term or short-term capital gain depending on the holding
period involved. Notwithstanding the foregoing, in the event that the exercise
of the option is permitted other than by cash payment of the exercise price,
various special tax rules may apply.
No income will be recognized by an option holder at the time a non-
qualified stock option is granted. Generally, ordinary income will, however, be
recognized by an option holder at the time a vested non-qualified stock option
is exercised in an amount equal to the excess of the fair market value of the
underlying common stock on the exercise date over the exercise price. We will
generally be entitled to a deduction for federal income tax purposes in the
same amount as the amount included in ordinary income by the option holder with
respect to his or her non-qualified stock option. Gain or loss on a subsequent
sale or other disposition of the shares acquired upon the exercise of a vested
non-qualified stock option will be measured by the difference between the
amount realized on the disposition and the tax basis of such shares, and will
generally be long-term capital gain depending on the holding period involved.
The tax basis of the shares acquired upon the exercise of any non-qualified
stock option will be equal to the sum of the exercise price of such non-
qualified stock option and the amount included in income with respect to such
option. Notwithstanding the foregoing, in the event that exercise of the option
is permitted other than by cash payment of the exercise price, various special
tax rules apply.
Unless the holder of an unvested non-qualified stock option makes an
83(b) election as described below, there generally will be no tax consequences
as a result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will recognize
ordinary income, and we will be entitled to a deduction, equal to the
difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-term
capital gain or loss, depending on the length of time the shares were held
prior to disposition of such shares. In general terms, if a holder were to make
an 83(b) election under Section 83(b) of the Internal Revenue Code upon the
exercise of the unvested option, the holder would recognize ordinary income on
the date of the exercise of such option, and we would be entitled to a
deduction, equal to:
. 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.
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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 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 the termination. Also, if we
determine that a grantee breaches any of the terms of the restrictive
covenants, the 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
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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 December 31,
1999, our monthly lease payments to Safeguard Scientifics totaled approximately
$70,200. From January 1, 2000 to March 31, 2000, our payments to Safeguard
Scientifics for lease payments totaled approximately $6,200. Prior to this
offering, Safeguard Scientifics, beneficially owned about 13.7% 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.
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 December 31, 1999, our payments to Safeguard
Scientifics totaled approximately $269,000 for these services. From January 1,
2000 to March 31, 2000, our payments to Safeguard Scientifics for these
services totaled approximately $86,000. 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
Inc., 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.
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 was secured by 200,000 shares of our common stock. On November
30, 1999, Mr. Greendale paid us $608,677, representing the outstanding
principal amount of the loan plus interest.
In October 1998, we sold our 100,000 shares of Series B Preferred Stock
of Who?Vision Systems, Inc. for $300,000 to Comcast.
In January 1999, we sold our convertible notes of VerticalNet for
$2,083,221 to Comcast Corporation. At the time of this sale to Comcast, the
outstanding principal amount of these convertible notes was $2,083,221.
In March 1999, we sold our convertible notes of PrivaSeek for $571,659 to
Comcast and the assumption by Comcast of one of our notes payable in the
outstanding principal amount of $428,341. At the time of this sale to Comcast,
the outstanding principal amount of these convertible notes was $1 million.
In April 1999, in connection with our obtaining a bank credit facility,
Safeguard Scientifics, Inc. delivered a letter to the agent for the banks
stating that it intends to take any action that may in the future be necessary
to promptly cure certain defaults that could occur under our bank credit
facility.
In May 1999, we issued $90 million principal amount of three-year
convertible notes to our largest shareholders, directors, executive officers,
certain members of the immediate families of our executive officers and others
in a round of financing led by Comcast ICG. 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 March 31, 2000, these warrant holders are entitled to
purchase 2,215,717 shares of our common stock. The warrants expire in May 2002.
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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......... former 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
</TABLE>
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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
---------------------------------- ---------------------------- ---------------
<S> <C> <C>
Douglas A. Alexander.............. officer $2,500,000
executive officer and
Walter W. Buckley, III............ director 2,600,000
executive officer and
Kenneth A. Fox.................... director 2,500,000
David D. Gathman.................. executive officer 1,300,000
Thomas P. Gerrity................. director 400,000
Christopher H. Greendale.......... officer 300,000
Victor S. Hwang................... officer 4,005,000
Henry N. Nassau................... officer 3,660,000
John N. Nickolas.................. officer 800,000
Robert A. Pollan.................. officer 2,650,000
</TABLE>
In January 2000, Dr. Gerrity repaid the Company $80,000, leaving a
principal amount of $320,000 owed under the above-listed promissory note.
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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.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
---------------------------------- ---------------------------- ---------------
<S> <C> <C>
Richard S. Devine................. officer 7,114,223
Gregory W. Haskell................ officer 6,311,000
</TABLE>
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
executive officer and
Walter W. Buckley, III........... director 6,790,000
executive officer and
Kenneth A. Fox................... director 6,111,000
Todd G. Hewlin................... officer 2,430,000
Sam Jadallah..................... officer 10,125,000
Mark J. Lotke.................... officer 7,058,000
Robert A. Pollan................. officer 3,395,000
</TABLE>
In May 1999, some of our officers and directors incurred tax liabilities
as a result of exercising their options to purchase our common stock. These
directors and officers borrowed money from us to pay these tax liabilities. The
loans are evidenced by promissory notes delivered by these officers and
directors to us in the aggregate principal amount of $7,463,307. The promissory
notes bear interest at a rate of 5.22% and mature on May 5, 2004. The following
table sets forth the names of the makers of the promissory notes, their
relationship to us and the amounts owed to us by each of these makers.
<TABLE>
<CAPTION>
Relationship to Amount of
Name of Maker Internet Capital Group Promissory Note
---------------------------------- ---------------------------- ---------------
<S> <C> <C>
Douglas A. Alexander.............. executive officer $1,161,000
executive officer and
Walter W. Buckley, III............ director 1,207,440
executive officer and
Kenneth A. Fox.................... director 1,395,000
David D. Gathman.................. executive officer 603,720
Christopher H. Greendale.......... officer 66,552
Victor S. Hwang................... officer 973,092
John N. Nickolas.................. officer 371,520
Robert A. Pollan.................. officer 1,478,700
</TABLE>
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<PAGE>
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.
<TABLE>
<CAPTION>
Relationship to Amount Paid
Name of Recipient Internet Capital Group to Recipient
----------------------------------- ---------------------------- ------------
<S> <C> <C>
Douglas A. Alexander............... executive officer $ 49,702
executive officer and
Walter W. Buckley, III............. director 685,092
executive officer and
Kenneth A. Fox..................... 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>
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.
Each share of eMerge Interactive series D preferred stock converted into
one share of eMerge Interactive class B common stock upon completion of an
initial public offering of eMerge Interactive's common 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 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 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 on February 8, 2000. The exercise price is $15.00 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
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<PAGE>
are also parties to a Registration Rights Agreement in which eMerge Interactive
granted us certain demand and piggyback registration rights.
Douglas A. Alexander and Anthony Ibarguen, two of our Managing Directors
are members of the Board of Directors of eMerge Interactive.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF INTERNET CAPITAL GROUP
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of March 31, 2000, and as adjusted to reflect
the issuance 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, shares of our Common Stock
issuable upon the conversion of Convertible Notes and shares of Common Stock
issuable upon the exercise of other options or warrants exercisable within 60
days of March 31, 2000. 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>
Options, Number of Shares Percent of
Warrants and Beneficially Owned Shares
Convertible Notes Including Options and Outstanding
5% Beneficial Owners, Directors, Named Exercisable Warrants Exercisable at March 31,
Officers Within 60 Days Within 60 Days 2000
-------------------------------------- ----------------- --------------------- ------------
<S> <C> <C> <C>
Comcast ICG, Inc. (1)................... 633,998 22,008,996 8.3%
c/o Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Safeguard Scientifics, Inc. (2)......... -- 36,289,456 13.7
435 Devon Park Drive
Wayne, Pennsylvania 19087
Douglas A. Alexander (3)................ -- 6,132,748 2.3
Julian A. Brodsky (4)................... 784 10,784 *
Walter W. Buckley, III (5).............. 21,833 11,963,999 4.5
Kenneth A. Fox (6)...................... 37,146 11,878,066 4.5
David D. Gathman (6).................... 200,000 1,524,999 *
Dr. Thomas P. Gerrity (7)............... 2,566 935,247 *
Robert E. Keith, Jr. (8)................ 1,533 298,941* *
Warren V. Musser........................ 2,033 413,040* *
Henry N. Nassau (9)..................... 1,200 1,550,500 *
Peter A. Solvik (10).................... 35,600 1,056,672 *
All executive officers and directors as
a group
(10 persons) (3)(4)(5)(6)(7)(8)(9)(10).. 302,695 35,764,996 13.5
</TABLE>
--------
* Represents 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.
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<PAGE>
(2) Private equity funds affiliated with Safeguard Scientifics, Inc. own an
additional 5,026,667 shares of Common Stock and warrants to purchase
45,333 shares of Common Stock.
(3) Includes shares of restricted Common Stock that 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 8,000 shares of Common Stock
held by two trusts for the benefit of certain of Mr. Alexander's
relatives, each trust holding 4,000 shares of Common Stock. Mr. Alexander
disclaims beneficial ownership of shares held by the trusts for the
benefit of his 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 two
trusts for the benefit of certain of Mr. Buckley's relatives, each trust
holding 125,000 shares of Common Stock, of which Mr. Buckley disclaims
beneficial ownership.
(6) Includes shares of restricted Common Stock that have not vested pursuant
to the Membership Profit Interest Plan and the 1999 Equity Compensation
Plan.
(7) Includes shares of restricted Common Stock that have not vested pursuant
to the 1999 Equity Compensation Plan. Also includes 80,000 shares of
Common Stock held by the Thomas P. Gerrity Generation Skipping Trust U/A
3/17/92. Also, includes 12,018 shares of Common Stock held by Technology
Leaders Advisers IV, Inc., of which Dr. Gerrity is the sole shareholder.
(8) Includes 2,000 shares of Common Stock held by Susan Keith, 8,500 shares
held by the Keith 1999 Irrevocable Trust and 20,000 shares held by Leslie
Hulsizer of which Mr. Keith disclaims beneficial ownership. Also includes
10,000 shares of Common Stock held by Robert E. Keith, III, of which Mr.
Keith disclaims beneficial ownership.
(9) Includes shares of Restricted Common Stock that have not vested pursuant
to the 1999 Equity Compensation Plan. Also includes 300,000 shares of
Common Stock held by a trust for the benefit of certain of Mr. Nassau's
relatives. Mr. Nassau disclaims beneficial ownership of the shares held
by the trust. Also includes 20,000 shares of Common Stock held by
Catharine Nassau, wife of Henry N. Nassau, of which Mr. Nassau disclaims
beneficial ownership.
(10) 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 3,000
shares of Common Stock held by two trusts for the benefit of certain of
Mr. Solvik's relatives, each trust holding 1,500 shares of Common Stock.
Mr. Solvik disclaims beneficial ownership of shares held by the Patricia
A. Solvik Annuity Trust u/i dtd. July 30, 1999 and by the trusts for the
benefit of his relatives.
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<PAGE>
DESCRIPTION OF INTERNET CAPITAL GROUP CAPITAL STOCK
General
Our authorized capital stock consists of 2,000,000,000 shares of Common
Stock, and 10,000,000 shares of preferred stock, par value $.01 per share. As
of the date of filing of this registration statement, we will have
approximately 278,762,313 shares of Common Stock issued and outstanding and no
shares of preferred 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 March 31, 2000, there were 264,293,380 shares of our Common Stock
outstanding and 24,436,699 shares of our Common Stock were reserved for
issuance under our 1999 Equity Compensation Plan and our Membership Profit
Interest Plan. As of the filing date of this registration statement, there will
be approximately 278,762,313 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, 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
No shares of our preferred stock will be outstanding. Our certificate of
incorporation provides that our board of directors may by resolution establish
one or more classes or series of preferred stock having such number of shares
and relative voting rights, designation, dividend rates, liquidation, and other
rights, preferences, and limitations as may be fixed by them without further
shareholder approval. The holders of our preferred stock may be entitled to
preferences over common shareholders with respect to dividends, liquidation,
dissolution, or our winding up in such amounts as are established by our board
of directors resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of Internet Capital Group without
further action by the shareholders and may adversely affect voting and other
rights of holders of our Common Stock. In addition, issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the outstanding shares of voting stock. At
present, we have no plans to issue any shares of preferred stock.
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Registration Rights
The holders of 101,879,300 shares of our Common Stock and warrants
exercisable for 586,433 shares of our Common Stock are entitled to demand
registration of their shares. 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 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; 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 you. 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 some types of
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.
Some provisions of our certificate of incorporation and bylaws could have
anti-takeover effects. These provisions are intended to enhance the likelihood
of continuity and stability in the composition of our corporate policies
formulated by our Board of Directors. In addition, these provisions also are
intended to ensure that our Board of Directors will have sufficient time to act
in what the Board of Directors believes to be in the best interests of us and
our shareholders. These provisions also are designed to reduce our
vulnerability to an unsolicited proposal for our takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the restructuring or sale of all or part of Internet Capital
Group. The provisions are also intended to discourage certain tactics that may
be used in proxy fights. However, these provisions could delay or frustrate the
removal of incumbent directors or the assumption of control of us by the holder
of a large block of Common Stock, and could also discourage or make more
difficult a merger, tender offer, or proxy contest, even if such event would be
favorable to the interest of our shareholders.
Classified Board of Directors
Our certificate of incorporation provides for our Board of Directors to
be divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms (other than directors
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
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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 and bylaws provide 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
Chief Executive Officer or the Chairman or Vice Chairman of the Board of
Directors upon vote by a majority of the members of the Board. 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 advance 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 advance 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 that
shareholder's intention to bring such business before such meeting. Under the
advance 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, 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
specified information. In the event that the number of directors to be elected
is increased and there is no public announcement naming all of the nominees or
specifying the size of the increase at least 100 days before the first
anniversary of the preceding year's annual meeting, the notice as it relates to
nominees will be considered timely if it is delivered on the tenth day
following the day on which the public announcement is first made by Internet
Capital Group. If the chairman of a meeting determines that business was not
properly brought before the meeting, in accordance with the advance 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 the director has been chosen and until
his successor is elected and qualified. Subject to the rights of the holders of
our preferred stock, if any, our certificate of incorporation and bylaws also
provide that directors may be removed only for cause and only by the
affirmative vote of holders of a majority of the combined voting power of the
then outstanding stock of Internet Capital Group. The effect of these
provisions
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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.
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SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 2000, there were 264,293,380 shares of our Common Stock
outstanding. Of these shares, 237,200,551 shares were freely transferable or
transferable in the open market under Rule 144 of the Securities Act.
Additional shares may become available for sale upon option or warrant
exercises, upon the conversion of the 5.5% Convertible Notes due December 21,
2004, or upon the issuance of shares under this Registration Statement. The
future exercise or conversion and sales of any of these securities could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through the sale of equity securities.
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 2,787,623 shares upon the date of filing this post-
effective amendment) 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.
104
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered by us hereby will be passed upon
for us by Dechert, Philadelphia, Pennsylvania. Dechert 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 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.
EXPERTS
The consolidated financial statements of Internet Capital Group, Inc. as
of December 31, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 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 the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of eCredit.com, Inc. as of December
31, 1998 and 1999 and for the two years ended December 31, 1999 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 consolidated statements of operations, of redeemable convertible
preferred stock and stockholders' deficit and of cash flows of eCredit.com,
Inc. for the year ended December 31, 1997 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 RightWorks Corporation as of December 31,
1998 and 1999 and for the three years then ended included in this prospectus
and elsewhere in this registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included in this prospectus in reliance upon the
authority of said firm as experts in given said reports.
The consolidated financial statements of eMerge Interactive, Inc. as of
December 31, 1997 and 1998 and September 30, 1999 and for each of the years in
the three-year period ended December 31, 1998 and the nine months ended
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 the authority of said firm as
experts in auditing and accounting.
The financial statements of JusticeLink, Inc. (formerly LAWPlus, Inc.) as
of December 31, 1998 and 1999, and for the two years ended December 31, 1999
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in 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 consolidated financial statements of MetalSite General Partner, LLC
as of December 31, 1998 and for the period from Inception (November 15, 1998)
through December 31, 1998 included in this 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 upon the
authority of said firm as experts in giving said report. Reference is made to
said report which includes an explanatory paragraph with respect to
105
<PAGE>
the uncertainty regarding MetalSite General Partner, LLC's ability to continue
as a going concern as discussed in Note 2 to the consolidated financial
statements.
The financial statement of MetalSite as Component of Weirton Steel
Corporation for the period from January 1, 1998 to November 15, 1998 and for
the year ended December 31, 1997 included in this registration statement has
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
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 USgift.com Corporation as of September 30,
1999 and for the period from inception (April 27, 1999) to September 30, 1999
included herein and 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 upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of VerticalNet, Inc. as of December
31, 1998 and 1999 and for each of the years in the three-year period ended
December 31, 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 the 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-4
under the Securities Act with respect to the Common Stock to be exchanged 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.
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Operations.................................... F-3
Consolidated Statements of Shareholders' Equity.......................... F-4
Consolidated Statements of Comprehensive Income (Loss)................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
eCREDIT.COM, INC.
Reports of Independent Accountants....................................... F-38
Consolidated Balance Sheets.............................................. F-40
Consolidated Statements of Operations.................................... F-41
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit................................................... F-42
Consolidated Statements of Cash Flows.................................... F-43
Notes to Consolidated Financial Statements............................... F-44
RIGHTWORKS CORPORATION
Report of Independent Public Accountants................................. F-58
Balance Sheets........................................................... F-59
Statements of Operations and Comprehensive Loss.......................... F-60
Statement of Shareholders' Equity........................................ F-61
Statements of Cash Flows................................................. F-62
Notes to Financial Statements............................................ F-63
EMERGE INTERACTIVE, INC.
Independent Auditors' Report............................................. F-75
Consolidated Balance Sheets.............................................. F-76
Consolidated Statements of Operations.................................... F-77
Consolidated Statements of Stockholders' Equity (Deficit)................ F-78
Consolidated Statements of Cash Flows.................................... F-79
Notes to Consolidated Financial Statements............................... F-80
JUSTICELINK, INC.
Report of Independent Auditors........................................... F-94
Balance Sheets........................................................... F-95
Statements of Operations................................................. F-96
Statements of Mandatory Redeemable Convertible Stock and Other Capital... F-97
Statements of Cash Flows................................................. F-98
Notes to Financial Statements............................................ F-99
</TABLE>
F-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
METALSITE GENERAL PARTNER LLC
Report of Independent Public Accountants................................ F-113
Consolidated Balance Sheets............................................. F-114
Consolidated Statement of Operations.................................... F-115
Consolidated Statement of Changes in Partners' Capital (Deficit)........ F-116
Consolidated Statement of Cash Flows.................................... F-117
Notes to Consolidated Financial Statements.............................. F-118
METALSITE AS A COMPONENT OF WEIRTON STEEL CORPORATION
Report of Independent Public Accountants................................ F-128
Statements of Costs and Expenses........................................ F-129
Notes to Financial Statements........................................... F-130
SYNCRA SOFTWARE, INC.
Report of Independent Accountants....................................... F-131
Balance Sheet........................................................... F-132
Statement of Operations................................................. F-133
Statement of Changes in Redeemable Preferred Stock and Stockholders'
Deficit................................................................ F-134
Statement of Cash Flows................................................. F-135
Notes to Financial Statements........................................... F-136
USGIFT, INC.
Report of Independent Public Accountants................................ F-145
Balance Sheet........................................................... F-146
Statement of Operations and Accumulated Deficit......................... F-147
Statement of Cash Flows................................................. F-148
Notes to Financial Statements........................................... F-149
VERTICALNET, INC.
Independent Auditors' Report............................................ F-154
Consolidated Balance Sheets............................................. F-155
Consolidated Statements of Operations................................... F-156
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Loss..................................................... F-157
Consolidated Statements of Cash Flows................................... F-158
Notes to Consolidated Financial Statements.............................. F-159
</TABLE>
F-ii
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
We have audited the accompanying consolidated balance sheets of Internet
Capital Group, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, shareholders' equity,
comprehensive income (loss) and cash flows for each of the years in the three-
year period ended December 31, 1999. 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 (ComputerJobs.com, Inc. and Syncra Software, Inc.) as of and
for the year ended December 31, 1998, 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. We also did not audit the financial statements of a nonsubsidiary
investee company (Onvia.com, Inc.) as of and for the year ended December 31,
1999. The Company's ownership interest and advances to this nonsubsidiary
investee company at December 31, 1999 were $8,753,597 and its equity in net
loss of the nonsubsidiary investee was $9,327,340. 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 as of and for
the years ended December 31, 1998 and 1999, 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Philadelphia, Pennsylvania
March 8, 2000
F-1
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
As of December 31,
------------------- March 31,
1998 1999 2000
------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents................... $26,841 $1,343,459 $ 858,567
Short-term investments...................... -- 3,359 --
Accounts receivable, less allowances for
doubtful accounts ($61--1998; $67--1999)... 1,842 1,207 3,403
Prepaid expenses and other current assets... 1,119 6,347 41,544
------- ---------- ----------
Total current assets........................ 29,802 1,354,372 903,514
Fixed assets, net........................... 1,151 4,015 9,459
Ownership interests in and advances to
Partner Companies.......................... 59,492 547,339 1,157,635
Available-for-sale securities............... 3,251 46,767 350,596
Intangible assets, net...................... 2,476 23,649 21,477
Deferred taxes.............................. -- 34,388 --
Other....................................... 613 39,854 28,376
------- ---------- ----------
Total Assets.................................. $96,785 $2,050,384 $2,471,057
======= ========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt........ $ 288 $ 3,000 $ 2,612
Line of credit.............................. 2,000 -- 754
Accounts payable............................ 1,348 6,750 8,170
Accrued expenses............................ 1,823 4,205 21,348
Notes payable to Partner Companies.......... 1,713 34,134 24,704
Deferred revenue............................ 2,177 -- --
Other....................................... -- 903 1,348
------- ---------- ----------
Total current liabilities................... 9,349 48,992 58,936
Long-term debt.............................. 352 3,185 2,690
Other liability (Note 8).................... -- 4,255 4,880
Deferred taxes.............................. -- -- 84,685
Minority interest........................... 6,360 7,481 4,553
Convertible subordinated notes (Note 7)..... -- 566,250 566,250
Commitments and contingencies (Note 19)
Shareholders' Equity
Preferred stock, $.01 par value; 10,000
shares authorized; none issued............. -- -- --
Common stock, $.001 par value; 300,000
shares authorized; 132,087 (1998), 263,579
(1999), and 264,294 (2000) issued and
outstanding................................ 132 264 264
Additional paid-in capital.................. 74,932 1,513,615 1,583,022
Retained earnings (accumulated deficit)..... 5,257 (26,539) 325,436
Unamortized deferred compensation........... (1,330) (11,846) (11,720)
Notes receivable-shareholders............... -- (79,790) (79,396)
Accumulated other comprehensive income...... 1,733 24,517 (68,543)
------- ---------- ----------
Total shareholders' equity.................. 80,724 1,420,221 1,749,063
------- ---------- ----------
Total Liabilities and Shareholders' Equity.... $96,785 $2,050,384 $2,471,057
======= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- ------- ---------
(in thousands except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 792 $ 3,135 $ 16,536 $ 3,111 $ 1,830
Operating Expenses
Cost of revenue............. 1,767 4,643 8,156 1,553 689
Selling, general and
administrative............. 5,743 15,514 48,924 3,848 32,663
------- -------- -------- ------- ---------
Total operating expenses.... 7,510 20,157 57,080 5,401 33,352
------- -------- -------- ------- ---------
(6,718) (17,022) (40,544) (2,290) (31,522)
------- -------- -------- ------- ---------
Other income, net (Note 18)... -- 30,483 67,384 28,677 657,686
Interest income............... 264 1,306 9,631 310 18,800
Interest expense.............. (126) (381) (3,897) (14) (9,340)
------- -------- -------- ------- ---------
Income (Loss) Before Income
Taxes, Minority Interest and
Equity Income (Loss)......... (6,580) 14,386 32,574 26,683 635,624
Income taxes.................. -- -- 23,722 663 (209,499)
Minority interest............. (106) 5,382 6,026 146 5,901
Equity income (loss).......... 106 (5,869) (92,099) (7,413) (80,051)
------- -------- -------- ------- ---------
Net Income (Loss)............. $(6,580) $ 13,899 $(29,777) $20,079 351,975
======= ======== ======== ======= =========
Net Income (Loss) Per Share
Basic....................... $ (0.10) $ 0.12 $ (0.15) $ 0.14 $ 1.33
======= ======== ======== ======= =========
Diluted..................... $ (0.10) $ 0.12 $ (0.15) $ 0.14 $ 1.30
======= ======== ======== ======= =========
Weighted Average Shares
Outstanding
Basic....................... 68,198 112,205 201,851 145,292 264,191
======= ======== ======== ======= =========
Diluted..................... 68,198 112,299 201,851 147,400 270,132
======= ======== ======== ======= =========
Pro Forma Information
(Unaudited) (Note 2):
Pro forma net income (loss)
Pretax income (loss)........ $ 13,899 $(53,499) $19,417
Pro forma income taxes...... (5,143) 16,050 (7,184)
-------- -------- -------
Pro forma net income
(loss)..................... $ 8,756 $(37,449) $12,233
======== ======== =======
Pro forma net income (loss)
per share
Basic....................... $ 0.08 $ (0.19) $ 0.08
======== ======== =======
Diluted..................... $ 0.08 $ (0.19) $ 0.08
======== ======== =======
Pro forma weighted average
shares outstanding
Basic....................... 112,205 201,851 145,292
======== ======== =======
Diluted..................... 112,299 201,851 147,400
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Unamortized Notes Other
--------------- Paid-In (Accumulated Deferred Receivable-- Comprehensive
Shares Amount Capital Deficit) Compensation Shareholders Income Total
------- ------ ---------- ------------ ------------ ------------ ------------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1996............... 51,779 $ 52 $ 15,762 $ (2,062) $ (893) $ -- $ -- $ 12,859
Issuance of common
stock.................. 40,275 40 20,097 -- -- -- -- 20,137
Issuance of restricted
stock.................. 3,546 4 414 -- (418) -- -- --
Forfeitures of
restricted stock....... (2,033) (2) (176) -- 178 -- -- --
Amortization of deferred
compensation........... -- -- -- -- 218 -- -- 218
Net loss................ -- -- -- (6,580) -- -- -- (6,580)
------- ---- ---------- -------- -------- -------- -------- ----------
Balance as of December
31, 1997............... 93,567 94 36,097 (8,642) (915) -- -- 26,634
Issuance of common
stock, net............. 38,520 38 38,167 -- -- -- -- 38,205
Issuance of stock
options to non-
employees.............. -- -- 668 -- (668) -- -- --
Net unrealized
appreciation in
available-for-sale
securities............. -- -- -- -- -- -- 1,733 1,733
Amortization of deferred
compensation........... -- -- -- -- 253 -- -- 253
Net income.............. -- -- -- 13,899 -- -- -- 13,899
------- ---- ---------- -------- -------- -------- -------- ----------
Balance as of December
31, 1998............... 132,087 132 74,932 5,257 (1,330) -- 1,733 80,724
Issuance of common
stock, net............. 78,258 78 1,072,494 -- -- -- -- 1,072,572
Issuance of common stock
and income tax benefit
upon exercise of
options................ 35,992 36 90,512 -- -- (81,148) -- 9,400
Shareholder loans
principal payments..... -- -- -- -- -- 1,358 -- 1,358
Issuance of common stock
for acquisitions....... 1,887 2 172,001 -- -- -- -- 172,003
Issuance of common stock
and waiving of accrued
interest upon
conversion of
convertible notes...... 15,000 15 91,070 -- -- -- -- 91,085
Issuance of common stock
upon exercise
of Warrants............ 784 1 3,968 -- -- -- -- 3,969
Issuance of warrants in
connection with line of
credit................. 1,030 -- -- -- -- 1,030
Issuance of stock
options to employees
below estimated fair
value on date of
grant.................. -- -- 12,731 -- (12,731) -- -- --
Amortization of deferred
compensation........... -- -- -- -- 5,699 -- -- 5,699
Issuance of stock
options to non-
employees.............. -- -- 3,691 -- (3,691) -- -- --
Foreign currency
adjustment............. -- -- -- -- -- -- (1) (1)
Net unrealized
appreciation in
available-for-sale
securities............. -- -- -- -- -- -- 22,785 22,785
LLC termination (Note
2)..................... -- -- (8,657) 8,657 -- -- -- --
Distribution to former
LLC members............ -- -- -- (10,676) -- -- -- (10,676)
Other................... (429) -- (157) -- 207 -- -- 50
Net loss................ -- -- -- (29,777) -- -- -- (29,777)
------- ---- ---------- -------- -------- -------- -------- ----------
Balance as of December
31, 1999............... 263,579 264 1,513,615 (26,539) (11,846) (79,790) 24,517 1,420,221
Issuance of common stock
and income tax benefit
upon exercise of
options................ 50 -- 50 -- -- -- -- 50
Issuance of common stock
for acquisitions,
including value of tax
basis increase......... 600 -- 65,998 -- -- -- -- 65,998
Issuance of common stock
upon exercise
of Warrants............ 65 -- 600 -- -- -- -- 600
Issuance of stock
options to non-
employees.............. -- -- 1,727 -- (1,727) -- -- --
Shareholder loans
principal payments..... -- -- -- -- -- 394 -- 394
Amortization of deferred
compensation........... -- -- -- -- 1,853 -- -- 1,853
Impact of issuance of
stock by a
subsidiarty or equity
method partner company,
excluding, recognition
of any gains........... -- -- 1,032 -- -- -- -- 1,032
Foreign currency
adjustment............. -- -- -- -- -- -- (38) (38)
Net unrealized
depreciation available-
for-sale securities.... -- -- -- -- -- -- (93,022) (93,022)
Net income.............. -- -- -- 351,975 -- -- -- 351,975
------- ---- ---------- -------- -------- -------- -------- ----------
Balance as of March 31,
2000 (unaudited)....... 264,294 $264 $1,583,022 $325,436 $(11,720) $(79,396) $(68,543) $1,749,063
======= ==== ========== ======== ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Three Months
ended
Year Ended December 31, March 31,
------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Income (Loss)................ $(6,580) $13,899 $(29,777) $20,079 $351,975
------- ------- -------- ------- --------
Other Comprehensive Income (Loss)
Before Tax
Unrealized holding gains in
available-for-sale
securities.................... -- 1,733 38,039 4,530 (119,489)
Foreign currency translation
adjustment.................... -- -- (1) -- (60)
Reclassification adjustments... -- -- (2,051) (2,050) (26,967)
Tax Related to Comprehensive
Income (Loss)
Unrealized holding gains in
available-for-sale
securities.................... -- -- (13,920) (1,585) 43,349
Foreign currency transaction
adjustment.................... -- -- -- -- 20
Reclassification adjustments... -- -- 717 111 10,085
------- ------- -------- ------- --------
Other Comprehensive Income....... -- 1,733 22,784 1,006 93,062
------- ------- -------- ------- --------
Comprehensive Income (Loss)...... $(6,580) $15,632 $ (6,993) $21,085 $258,913
======= ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Year Ended December 31, (Unaudited)
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)....... $ (6,580) $ 13,899 $ (29,777) $ 20,079 $ 351,975
Adjustments to reconcile
to net cash used in
operating activities:
Other income.......... -- (30,483) (67,636) (28,685) (657,686)
Depreciation and
amortization......... 446 1,135 12,742 551 5,691
Equity (income) loss.. (106) 5,869 92,099 7,413 80,051
Minority interest..... 106 (5,382) (6,026) (146) (5,901)
Deferred taxes........ -- -- (23,722) (914) 209,499
Changes in assets and
liabilities, net of
effect of acquisitions:
Accounts receivable,
net.................. 1,574 (1,183) (4,278) (674) (2,132)
Prepaid expenses and
other assets......... (142) (1,347) (28,603) 70 (4,620)
Accounts payable...... 566 620 7,194 (332) 1,119
Deferred revenue...... 494 1,250 (49) (97) 498
Accrued expenses...... 205 1,415 6,700 903 17,812
-------- -------- ---------- -------- ----------
Net cash used in
operating
activities......... (3,437) (14,207) (41,356) (1,832) (3,694)
Investing Activities
Capital expenditures.. (272) (545) (7,120) (156) (6,212)
Proceeds from sales of
available-for-sale
securities........... -- 36,431 2,496 2,574 --
Proceeds from sales of
Partner Company
ownership interests.. -- 300 3,506 2,655 --
Advances to Partner
Companies............ (2,800) (12,779) (9,679) (1,892) (6,092)
Repayment of advances
to Partner
Companies............ 950 677 4,581 1,913 2,809
Acquisitions of
ownership interests
in Partner
Companies............ (14,466) (35,822) (329,161) (22,481) (477,202)
Other acquisitions
(Note 5)............. -- (1,858) (9,732) -- --
Other advances........ -- -- (12,850) (62) --
Purchase of short-term
investments.......... -- -- (22,279) -- --
Proceeds from
maturities of short-
term investments..... -- -- 18,920 -- 3,362
Reduction in cash due
to deconsolidation Of
Partner Companies.... -- -- (13,393) (5,646) --
-------- -------- ---------- -------- ----------
Net cash used in
investing
activities......... (16,588) (13,596) (374,711) (23,095) (483,335)
Financing Activities
Issuance of common
stock, net........... 20,138 38,205 1,077,405 31,980 650
Long-term debt and
capital lease
repayments........... (58) (322) (448) (59) (746)
Proceeds from
convertible
subordinated notes... -- -- 656,250 -- 1,926
Line of credit
borrowings........... 2,500 2,000 25,000 576 --
Line of credit
repayments........... (2) (2,500) (25,281) -- --
Distribution to former
LLC members.......... -- -- (10,676) (10,676) --
Advances to
employees............ -- -- (8,765) -- --
Repayment of advances
to employees......... -- -- -- -- 46
Treasury stock
purchase by
subsidiary........... -- -- (4,469) (4,463) --
Issuance of stock by
subsidiary........... 200 11,293 23,669 100 261
-------- -------- ---------- -------- ----------
Net cash provided by
financing
activities......... 22,778 48,676 1,732,685 17,458 2,137
-------- -------- ---------- -------- ----------
Net Increase in Cash and
Cash Equivalents....... 2,753 20,873 1,316,618 (7,469) (484,892)
Cash and cash
equivalents at
beginning of period.... 3,215 5,968 26,841 26,841 1,343,459
-------- -------- ---------- -------- ----------
Cash and Cash
Equivalents at End of
Period................. $ 5,968 $ 26,841 $1,343,459 $ 19,372 858,567
======== ======== ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements
1. Significant Accounting Policies
Internet Capital Group, Inc. (or the "Company") was formed on March 4,
1996. The Company is an Internet 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, 1999, the Company owned interests in 49 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.
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have the power or
authority to legally bind any of its Partner Companies, and it does not have
the types of liabilities in relation to its Partner Companies that a general
partner of a partnership would have.
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.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, Internet Capital Group Operations, Inc.
(the "Operations Company") and Internet Capital Group (Europe) Limited, and its
majority owned subsidiaries, VerticalNet, Inc. ("VerticalNet") for the years
ended December 31, 1997 and 1998 and Animated Images, Inc., ("Animated
Images"), CyberCrop.com, Inc., ("CyberCrop.com"), EmployeeLife.com, ICG
Commerce, Inc. ("ICG Commerce") and iParts for portions of the year ended
December 31, 1999.
Additionally, the consolidated financial statements for the year ended
December 31, 1999 reflect Breakaway Solutions' results of operations and cash
flows as a consolidated company from the date of acquisition through September
1999 and accounted for under the equity method for the remainder of the year
due to the decrease in the Company's direct and indirect voting ownership
interest to below 50% in October 1999 as a result of Breakaway Solutions'
initial public offering.
In December 1999, the Company recorded a two for one stock split effected
as a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
Principles of Accounting for Ownership Interests in Partner Companies
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 are eliminated. Participation
F-7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
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. The
results of operations and cash flows of a Consolidated Partner Company are
included through the latest interim period in which the Company owned a greater
than 50% direct or indirect voting ownership for the entire interim period.
Upon dilution of control below 50%, the accounting method is adjusted to the
equity or cost method of accounting, as appropriate, for subsequent periods.
In 1999, the Company acquired a controlling majority interest in
Breakaway Solutions, Inc. for $17.2 million and in Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts ("Other Majority Owned
Subsidiaries") for $29.8 million in the aggregate. Breakaway Solutions'
operations have historically consisted primarily of implementation of customer
relational management systems and custom integration to other related
applications. In 1999, Breakaway Solutions 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. ICG Commerce provides strategic
sourcing consulting and on-line internet purchasing. The Other Majority Owned
Subsidiaries, excluding ICG Commerce, 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 $13.0 million and $11.8 million, respectively, as goodwill
which is being amortized over three years. Breakaway Solutions had revenue of
$10.0 million and $25.4 million for the years ended December 31, 1998 and 1999,
respectively. ICG Commerce had revenue of $1.3 million for the year ended
December 31, 1999.
Direct and indirect voting interest in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts at December 31, 1999 was 50.1%, 80%,
52%, 60%, and 67%, respectively.
During the periods ended 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 of 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 year ended December 31, 1999. The Company's direct and
indirect voting interest in VerticalNet at December 31, 1997 and 1998 was 63%
and 52%, respectively. The consolidated financial statements for the year ended
December 31, 1999, reflect VerticalNet accounted for on the equity method of
accounting due to the decrease in the Company's ownership interest to below 50%
in February 1999 as a result of VerticalNet's initial public offering.
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
F-8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
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 methods 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. Goodwill amortization of consolidated companies
is included in selling, general, and administrative, while goodwill
amortization of equity method companies is included in equity income (loss).
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 Partner Company 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, Accounting for Certain
Investments in Debt and Equity Securities. 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, Accounting by
Creditors for Impairment of a Loan.
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.
Revenue Recognition
All of the Company's revenue during 1997 and 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
F-9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
provides information on an advertiser's products, links a visitor to the
advertiser's Web site and generates sales inquiries from interested visitors.
The advertising contracts generally do not extend beyond one year. Advertising
revenue is recognized ratably over the period of the advertising contract.
Deferred revenue of $2.2 million at December 31, 1998 represents the unearned
portion of advertising contracts for which revenue will be recognized over the
remaining period of the advertising contract.
VerticalNet also generates revenue through providing educational courses
and selling books. Revenue from educational courses is recognized in the period
in which the course is completed and revenue from the sale of books is
recognized in the period in which the books are shipped.
Barter transactions are recorded at the lower of estimated fair value of
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the VerticalNet advertising
impressions (VNAI) are delivered to the customer and advertising expense is
recorded when the customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to VerticalNet
delivering the VNAI, a liability is recorded, and if VerticalNet delivers the
VNAI to the customer prior to receiving the CAI, a prepaid expense is recorded.
For the period March 4, 1996 (inception) through December 31, 1997, VerticalNet
barter transactions were immaterial. For the year ended December 31, 1998,
VerticalNet recognized approximately $.6 million and $.5 million of advertising
revenues and expenses, respectively, from barter transactions. Included in
prepaid expenses and other current assets at December 31, 1998 is approximately
$.2 million relating to barter transactions.
The Company's 1999 revenue was attributable to its consolidated
subsidiaries, including Animated Images, Breakaway Solutions, and ICG Commerce.
Due to Breakaway Solutions' initial public offering in October 1999, our voting
ownership interest in Breakaway Solutions decreased below 50%, therefore, we
apply the equity method of accounting beginning in October 1999. The Company's
other consolidated entities, CyberCrop.com, EmployeeLife.com, and iParts, have
generated negligible revenue since their inception.
Animated Images, Breakaway Solutions and ICG Commerce's revenues are
generally recognized as services are rendered.
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. Certain
amounts recorded to reflect our share of losses of partner companies accounted
for under the equity method are based on unaudited results of operations of
those partner companies and may require adjustments in the future when audits
of these entities are made final.
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 and 1999 are invested
principally in money market accounts and commercial paper.
F-10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
Short-term Investments
Short-term investments are debt securities maturing in less than one year
and are carried at amortized cost, which approximates fair value.
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. The Company's interests in public
Partner Companies accounted for under the equity method of accounting had a
fair value of $2.6 billion as of December 31, 1999 compared to a carrying value
of $42.6 million. Available-for-sale securities are carried at fair value.
Long-term debt is carried at cost which approximates fair value as the debt
bears interest at rates approximating current market rates. The Company's
convertible subordinated notes had a fair value of $835.2 million as of
December 31, 1999 versus a carrying value of $566.3 million.
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 are
recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis over three to
five years. Goodwill at December 31, 1998 of $2.5 million, net of accumulated
amortization of $.3 million, was attributable to acquisitions by VerticalNet.
Goodwill and other intangible assets at December 31, 1999 of $23.6 million, net
of accumulated amortization of $1.1 million, is attributable to the Company's
acquisitions of ownership interests in Animated Images, Inc. ($6.6 million),
CyberCrop.com ($0.8 million), EmployeeLife.com ($1.1 million), ICG Commerce
($2.2 million) and iParts ($0.1 million) and ICG Commerce's acquisitions of
Purchasing Group, Inc and Integrated Sourcing, LLC ($12.8 million). Goodwill
related to the acquisition of Breakaway during 1999 was reclassified as of
December 31, 1999 in connection with the deconsolidation of Breakaway. The
carrying value of goodwill is evaluated for possible impairment based on
achievement of business plan objectives and milestones, the fair value of each
ownership interest in and advances to the partner company relative to carrying
value, the financial condition and prospects of the partner company, and other
relevant factors. If impairment exists, the carrying amount of the goodwill
will be reduced by the estimated shortfall of discounted cash flows.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation, which is
based on the estimated useful lives of the assets computed using the straight-
line method. Computer equipment and software, and office equipment have an
estimated useful life of three years, and furniture has an estimated useful
life of seven years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the lease
term.
F-11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
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.
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 (Note 2).
Net Income (Loss) Per Share
Net income (loss) per share (EPS) is computed using the weighted average
number of common shares outstanding during each year. Diluted 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 and for the effect on net income (loss) of the Company's share of
dilution related to Partner Companies which are consolidated or accounted under
the equity method of accounting.
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
issues 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.
Foreign Currency Translation
The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenue,
expenses, gains and losses are translated at the average exchange rate in the
month those elements are recognized. Translation adjustments, which have not
been material to date, are included in other comprehensive income (loss).
F-12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
1. Significant Accounting Policies (Continued)
Stock Based Compensation
The Company has adopted Statement of Financial Accounting No. 123,
Accounting for Stock Based Compensation (SFAS 123). 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. Fair value is determined using the Black-Scholes
method and the expense is amortized over the vesting period. Upon exercise, net
proceeds, including tax benefits realized, are credited to equity.
Comprehensive Income (Loss)
The Company reports and displays comprehensive income (loss) and its
components in the Consolidated Statements of Comprehensive Income (Loss).
Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. Excluding net income (loss), the Company's sources of
comprehensive income (loss) is from net unrealized appreciation on its
available-for-sale securities and foreign currency translation adjustments;
such translation adjustments have been negligible through December 31, 1999.
Reclassification adjustments result from the recognition in net income of gains
or losses that were included in comprehensive income (loss) in prior periods.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation. The impact of these changes is not material and did
not affect net income (loss).
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
2. Pro Forma Information (Unaudited)
On February 2, 1999, the Company converted from an LLC to a C
Corporation. The Company became subject to corporate federal and state income
taxes concurrent with the conversion to a C corporation. The accompanying
Consolidated Statement of Operations for the years ended December 31, 1998 and
1999 include pro forma information with respect to income taxes, net income
(loss) and net income (loss) 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 (loss) and
net income (loss) 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 and 1999 pro forma effective tax rate of 37% and 30%,
respectively, differed from the federal statutory rate of 35% principally due
to non-deductible permanent differences.
F-13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Pro Forma Information (Unaudited) (Continued)
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 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.
In 1998, the difference between basic and diluted weighted average shares
outstanding of 94,000 was due to the dilutive effect of stock options.
3. Net Income (Loss) per Share
The calculations of Net Income (Loss) per Share were:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- --------
(in thousands
except per share
amounts)
<S> <C> <C> <C>
Basic
Net Income (loss).............................. $(6,580) $13,899 $(29,777)
------- ------- --------
Average common shares outstanding.............. 68,198 112,205 201,851
======= ======= ========
Basic.......................................... $ (0.10) $ 0.12 $ (0.15)
======= ======= ========
Diluted
Net Income (loss).............................. $(6,580) $13,899 $(29,777)
------- ------- --------
Average common shares outstanding.............. 68,198 112,205 201,851
Effect of dilutive securities.................. -- 94 --
------- ------- --------
Average common shares assuming dilution........ 68,198 112,299 201,851
======= ======= ========
Diluted........................................ $ (0.10) $ 0.12 $ (0.15)
======= ======= ========
</TABLE>
Options to purchase 188,000 and 5,173,000 shares of common stock at
average prices of $0.50 and $23.74, respectively, were outstanding as of
December 31, 1997 and 1999, but were not included in the computation of diluted
EPS. Warrants to purchase 2,215,717 shares of common stock at $6.00 per share
were outstanding as of December 31, 1999, but were not included in the
computation of diluted EPS. Convertible subordinated notes convertible into
4,443,267 shares of common stock were outstanding as of December 31, 1999, but
were not included in the computation of diluted EPS. An option to convert a
Note Payable into 1,049,426 shares of common stock was outstanding as of
December 31, 1999, but was not included in the computation of diluted EPS.
These options and warrants are not included in diluted EPS as their effect
would have been anti-dilutive.
F-14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
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, 1998 and 1999. Cost basis
represents the Company's original acquisition cost less any impairment charges
in such companies.
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1999
------------------------- -------------------------
Carrying Value Cost Basis Carrying Value Cost Basis
-------------- ---------- -------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Equity Method............ $21,311 $27,588 $491,977 $578,922
Cost Method.............. 38,181 38,181 55,362 55,362
------- --------
$59,492 $547,339
======= ========
</TABLE>
At December 31, 1999 the Company's carrying value in its Partner
Companies accounted for under the equity method of accounting exceeded its
share of the underlying equity in the net assets of such companies by $293.7
million. This excess relates to ownership interests acquired through December
31, 1999 and is being amortized over a three year period. Amortization expense
of $.4 million and $19.8 million is included in "Equity income (loss)" in the
accompanying Consolidated Statements of Operations for the years ended December
31, 1998 and 1999, respectively.
During the year ended December 31, 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 2,083,334 shares of the Company's common stock. As of
December 31, 1999, $5.6 million of the obligation has been converted into
1,033,908 shares of the Company's common stock.
During the year ended December 31, 1999 the Company acquired an interest
in a new Partner Company from shareholders of the Partner Company by exchanging
852,631 shares of the Company's common stock, valued at $150.2 million, as
consideration, in addition to cash.
During the year ended December 31, 1999 the Company acquired an interest
in a new Partner Company by issuing a short-term note payable for $21.2
million, net of imputed interest of $1.8 million, in addition to cash.
During the year ended December 31, 1999 the Company acquired an interest
in a new Partner Company by committing $7 million in cash consideration to be
paid in 2000, in addition to cash consideration paid in 1999.
As of December 31, 1999, the Company had $9.6 million in advances to
Partner Companies which mature on various dates through 2004 and bear interest
rates between 5.25% and 12.50% and are convertible into the Partner Companies'
equity.
F-15
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
4. Ownership Interests in and Advances to Partner Companies (Continued)
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at December 31,
1998 and 1999 and for each of the years in the three-year period ending
December 31, 1999 has been compiled from the financial statements of the
respective Partner Companies.
Balance Sheets
<TABLE>
<CAPTION>
As of December
31,
----------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Current assets................................................ $33,645 $494,745
Non-current assets............................................ 7,148 329,133
------- --------
Total assets................................................ $40,793 $823,878
------- --------
Current liabilities........................................... 11,712 149,799
Non-current liabilities....................................... 759 268,197
Shareholder's equity.......................................... 28,322 405,882
------- --------
Total liabilities and Shareholders' equity.................. $40,793 $823,878
======= ========
</TABLE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Revenue............................................ $18,912 $ 21,496 $ 192,759
Net income (loss).................................. $ 255 $(14,969) $(254,027)
</TABLE>
5. Other Acquisitions
During 1999, the Company expended approximately $29.8 million to acquire
interests in five companies that it owns a direct or indirect interest of more
than 50% of the outstanding voting securities as of December 31, 1999. The
Company accounts for these Partner Companies under the consolidation method of
accounting, and accordingly, the purchase price of these acquisitions has been
allocated to the assets purchased and liabilities assumed based upon their fair
values at the dates of acquisition. The consolidated financial statements
reflect the operations and cash flows of the acquired interests since the
respective acquisition dates. The excess of the purchase price over the fair
value of the net assets acquired of approximately $11.8 million was recorded as
goodwill and is being amortized over three years. Accumulated amortization
relating to this goodwill totaled $1.1 million at December 31, 1999.
In May 1999, the Company expended approximately $3.9 million in the
acquisition of its interest in EmployeeLife.com, which provides Internet-based
solutions that enable the online procurement and management of employee health
and welfare benefits.
In June 1999, the Company expended approximately $.8 million in the
acquisition of its interest in iParts, which provides Internet-based sales and
distribution of electronic components.
F-16
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
5. Other Acquisitions (Continued)
In September 1999, the Company expended approximately $3.9 million and
$9.2 million in its acquisitions of its interests in CyberCrop.com and Animated
Images, respectively. Cybercrop.com is developing a system to provide an
Internet-based service for agriculture producers to purchase services and
inputs, as well as market their grain crops that include corn, wheat and
soybeans. Animated Images provides Internet-based design, communication, and
procurement services for the apparel and sewn goods industries.
In October 1999, the Company expended $12 million in its acquisition of
its interest in ICG Commerce which provides strategic sourcing consulting and
on-line Internet purchasing. In 1999, ICG Commerce acquired all of the
outstanding capital stock of Purchasing Group, Inc. (PGI) and Integrated
Sourcing, LLC (ISL) from two of ICG Commerce's founders for $14.9 million in
cash and notes payable to these founders. These acquisitions were accounted for
using the purchase method of accounting. The excess of purchase price over the
fair value of the net assets acquired of approximately $12.9 million was
recorded as goodwill and is being amortized over 5 years. Accumulated
amortization relating to this goodwill totaled $0.8 million at December 31,
1999.
The following unaudited pro forma financial information presents the
combined results of operations as if the Company had owned EmployeeLife.com,
iParts, CyberCrop.com, Animated Images, and ICG Commerce since January 1, 1998;
and is if ICG Commerce had owned PGI and ISL since January 1, 1998, after
giving effect to certain adjustments including goodwill and income taxes. The
unaudited pro forma financial information is provided for informational
purposes only and should not be construed to be indicative of the Company's
consolidated results of operations had the acquisitions been consummated on the
dates assumed and do not project the Company's results of operations for any
future period:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1999
----------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
Revenue............................................. $ 11,441 $ 24,477
Pro forma net income (loss)......................... $ 9,788 $ (32,486)
Pro forma net income (loss) per share............... $ (0.09) $ (0.16)
</TABLE>
6. Fixed Assets
These pro forma amounts exclude the impact of 12 acquisitions of equity
method Partner Companies consummated or announced through March 8, 2000.
Fixed assets consists of the following:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
Computer equipment and software, office equipment and
furniture.............................................. $ 1,877 $ 2,855
Construction in progress................................ -- 1,483
Leasehold improvements.................................. 46 354
--------- ---------
1,923 4,692
Less: accumulated depreciation and amortization......... (772) (677)
--------- ---------
$ 1,151 $ 4,015
========= =========
</TABLE>
F-17
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
7. Debt
Convertible Subordinated Notes
In May, 1999, the Company issued $90 million of convertible subordinated
notes which converted to 14,999,732 shares of the Company's common stock upon
the completion of the Company's initial public offering in August 1999. The
notes bore interest at an annual rate of 4.99% during the first year and at the
prime rate for the remaining two years. In connection with the conversion of
these notes, all accrued interest was waived and reclassed to additional paid-
in-capital and the Company issued 3,000,000 warrants to purchase the Company's
common stock at $6 per share (the IPO price) through May 2002 which will
increase additional paid-in capital upon exercise. The warrants may also be
exercised by a cashless exercise or net issue, whereby a portion of the
warrants are forfeited based upon an average fair market price in place of
cash. During 1999, 661,434 and 122,849 shares of the Company's common stock
were issued in connection with cash and net issue warrant exercises,
respectively.
In December, 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and
mature in December, 2004. The notes are convertible at the option of the
holder, at any time on or before maturity into shares of the Company's common
stock at a conversion price of $127.44 per share, which is equal to a
conversion rate of 7.8468 shares per $1,000 principal of notes. Additionally,
the notes may be redeemed by the Company if the Company's closing stock price
exceeds 150% of the conversion price then in effect for at least 20 trading
days within a period of 30 consecutive trading days. The conversion rate is
subject to adjustment. The Company recorded interest expense of $1.0 million
relating to these notes during 1999 with the first interest payment due June
21, 2000 and subsequent interest payments due each six months following through
December 21, 2004. Issuance costs of $18.3 million were recorded in other
assets and are being amortized as interest expense over the term of the notes
using the effective interest method.
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 warrants, valued at
$1.0 million, were recorded as debt issuance costs in other assets and
additional paid-in-capital and are being amortized to interest expense over the
one year term of the credit facility.
The facility expires 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.
Borrowing availability under the facility is based on the fair market value of
the Company's holdings of publicly traded Partner Companies and the value, as
defined in the facility, of the Company's private Partner Companies. During
year ended December 31, 1999, the Company borrowed and repaid $25 million under
the facility. The Company is currently in negotiations to replace this line of
credit on or before its expiration date.
EmployeeLife.com has a $1,000,000 revolving credit facility and a
$500,000 equipment line of credit at December 31, 1999. Borrowings under the
credit facility accrue interest at a rate of prime plus .75% and the
F-18
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
7. Debt (Continued)
equipment line of credit accrues interest at the two year treasury rate plus
1.75%. No amounts were outstanding at December 31, 1999. The revolving credit
facility expires in March 2001 and the equipment line expires in June 2000.
Long-Term Debt
The Company's long-term debt relates to its Consolidated Partner
Companies, is non-recourse to the Company, and consists of the following:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
--------- ----------
(In thousands)
<S> <C> <C>
Term notes with related parties........................... $ -- $ 6,136
Capital leases............................................ 640 49
-------- ----------
640 6,185
Less: current portion..................................... (288) (3,000)
-------- ----------
Long-term debt............................................ $ 352 $ 3,185
======== ==========
</TABLE>
The term notes with related parties of ICG Commerce and EmployeeLife.com
relate to a secured notes due to shareholders with interest rates ranging from
8.0% to 9.25% at December 31, 1999. These notes will mature through 2001.
CyberCrop.com has capital leases on its equipment with a lease term of
five years. The interest rate implicit in the leases is 11.0%. At December 31,
1999, the book value of assets held under capital leases was approximately
equal to the principal balance due.
8. Other Liability
At December 31, 1999, long-term debt, including capital leases, is
scheduled to mature as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
2000..................................................... $3,000
2001..................................................... 3,158
2002..................................................... 18
2003..................................................... 6
2004..................................................... 3
------
Total.................................................. $6,185
======
</TABLE>
In October 1999, ICG Commerce sold shares of redeemable convertible
preferred stock that are convertible, at the option of the holder, into common
stock. The $4.3 million balance as of December 31, 1999 represents those
shares sold to a holder other than the Company and the related accrued
dividend payable. Upon conversion of this other liability balance by the
holder, minority interest will be increased.
F-19
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
9. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
As of December 31,
-------------------
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
Accrued compensation and benefits.......................... $ 454 $ 868
Accrued interest........................................... -- 952
Accrued marketing costs.................................... 446 --
Other...................................................... 923 2,385
--------- ---------
$ 1,823 $ 4,205
========= =========
</TABLE>
10. Segment Information
The Company's reportable segments, using the "management approach",
consist of Partner Company Operations and General ICG Operations. Partner
Company Operations includes the effect of consolidating VerticalNet for the
year ended December 31, 1997 and December 31, 1998 and Animated Images,
Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts
for the period from acquisition in 1999 through December 31, 1999, excluding
results of operations subsequent to de-consolidation, if applicable, and
recording the Company's share of earnings and losses of Partner Companies
accounted for under the equity method of accounting. VerticalNet's operations
include creating and operating industry-specific trade communities on the
Internet. Breakaway Solutions' operations include implementation of various
computer applications. Animated Images' operations include software development
and consulting services and ICG Commerce's operations include purchasing
services and consulting services. CyberCrop.com, 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. 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 1997, 1998 and 1999.
F-20
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
10. Segment Information (Continued)
The following summarizes the information related to the Company's
segments. All significant intersegment activity has been eliminated. Assets are
owned or allocated assets used by each operating segment.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Partner Company Operations
Revenue........................................ $ 792 $ 3,135 $ 16,536
------- -------- ---------
Operating expenses
Cost of revenue................................ 1,767 4,643 8,156
Selling, general and administrative............ 3,689 12,001 25,535
------- -------- ---------
Total operating expenses....................... 5,456 16,644 33,691
------- -------- ---------
(4,664) (13,509) (17,155)
Other income (expense), net.................... -- -- (258)
Interest income................................ 11 212 243
Interest expense............................... (126) (297) (175)
------- -------- ---------
Income (loss) before income taxes, minority
interest and equity income (loss)............. (4,779) (13,594) (17,345)
Income taxes................................... -- -- --
Minority interest.............................. (106) 5,382 6,026
Equity income (loss)........................... 106 (5,869) (92,099)
------- -------- ---------
Loss from Partner Company Operations............. $(4,779) $(14,081) $(103,418)
======= ======== =========
General ICG Operations
General and administrative..................... $ 2,054 $ 3,513 $ 23,389
------- -------- ---------
Other income, net.............................. -- 30,483 67,642
Interest income................................ 253 1,094 9,388
Interest expense............................... -- (84) (3,722)
------- -------- ---------
Income (loss) from General ICG Operations
before income taxes........................... (1,801) 27,980 49,919
Income taxes................................... -- -- 23,722
------- -------- ---------
Income (loss) from General ICG Operations........ $(1,801) $ 27,980 $ 73,641
======= ======== =========
</TABLE>
F-21
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
10. Segment Information (Continued)
<TABLE>
<CAPTION>
As of December 31,
------------------
1998 1999
------- ----------
(in thousands)
<S> <C> <C>
Assets
Partner Company Operations
Carrying value of equity method Partner Companies......... $21,311 $ 491,977
Other..................................................... 12,343 45,075
------- ----------
33,654 537,052
General ICG Operations
Cash and cash equivalents................................. 21,178 1,326,560
Carrying value of cost method Partner Companies........... 38,181 55,362
Other..................................................... 3,772 131,410
------- ----------
63,131 1,513,332
------- ----------
$96,785 $2,050,384
======= ==========
</TABLE>
11. Parent Company Financial Information
Parent Company financial information is provided to present the financial
position and results of operations of the Company as if VerticalNet, Animated
Images, Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce and
iParts ("consolidated companies") were accounted for under the equity method of
accounting for all periods presented. The Company's share of 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, 1998 are included in "Non-current
liabilities" and the carrying value of the consolidated companies as of
December 31, 1999 are included in "Ownership interests in and advances to
Partner Companies" in the Parent Company Balance Sheets.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
Three Months
As of December 31, Ended
------------------ March 31,
1998 1999 2000
------- ---------- ------------
(in thousands)
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets............................... $21,597 $1,332,803 $ 876,672
Ownership interests in and advances to
Partner Companies........................... 59,492 571,706 1,187,596
Other........................................ 3,354 125,166 382,955
------- ---------- ----------
Total assets............................... $84,443 $2,029,675 $2,447,223
======= ========== ==========
Liabilities and shareholders' equity
Current liabilities.......................... 2,082 43,204 47,224
Non-current liabilities...................... 1,637 566,250 650,935
Shareholders' equity......................... 80,724 1,420,221 1,749,064
------- ---------- ----------
Total liabilities and shareholders'
equity.................................... $84,443 $2,029,675 $2,447,223
======= ========== ==========
</TABLE>
F-22
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
11. Parent Company Financial Information (Continued)
Parent Company Statements of Operations
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- --------- ------- ---------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue..................... $ -- $ -- $ -- $ -- $ --
Operating expenses
General and
administrative........... 2,054 3,513 23,389 1,733 16,889
------- -------- --------- ------- ---------
Total operating
expenses............... 2,054 3,513 23,389 1,733 16,889
------- -------- --------- ------- ---------
(2,054) (3,513) (23,389) (1,733) (16,889)
Other income, net........... -- 30,483 67,642 28,684 657,686
Interest income, net........ 253 1,010 5,666 278 9,458
------- -------- --------- ------- ---------
Income (loss) before income
taxes and equity income
(loss)..................... (1,801) 27,980 49,919 27,229 650,255
Income taxes................ -- -- 23,722 663 (210,270)
Equity income (loss)........ (4,779) (14,081) (103,418) (7,813) (88,010)
------- -------- --------- ------- ---------
Net income (loss)........... $(6,580) $ 13,899 $ (29,777) $20,079 $ 351,975
======= ======== ========= ======= =========
</TABLE>
F-23
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
11. Parent Company Financial Information (Continued)
Parent Company Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $ (6,580) $ 13,899 $ (29,777) $ 20,079 $ 351,975
Adjustments to
reconcile to net cash
used in operating
activities:
Gains included in
other income......... -- (32,552) (67,636) (28,684) (657,686)
Depreciation and
amortization......... 55 298 6,558 135 3,454
Equity (income) loss.. 4,779 16,150 103,418 7,813 88,010
Deferred taxes........ -- -- (23,722) (914) 210,270
Changes in assets and
liabilities, net of
effect of
acquisitions:
Accounts receivable,
net................. 2,003 (125) -- (1,570)
Prepaid expenses and
other assets........ 1 (262) (23,382) 75 (4,717)
Accounts payable..... 56 39 5,344 334 331
Accrued expenses..... 70 12 3,844 451 13,656
-------- -------- ---------- -------- ----------
Net cash provided by
(used in) operating
activities......... 384 (2,541) (25,353) (711) 3,723
Investing Activities
Capital expenditures... (37) (61) (3,558) (84) (3,159)
Proceeds from sales of
available-for-sale
securities............ -- 36,431 2,496 2,574 --
Proceeds from sales of
Partner Company
ownership interests
and advances to
shareholders.......... -- 300 3,506 2,655 --
Advances to Partner
Companies............. (2,640) (12,224) (10,079) (1,893) (19,592)
Repayment of advances
to Partner Companies.. 950 677 4,581 1,914 2,808
Acquisitions of
ownership interests in
Partner Companies..... (16,466) (44,822) (368,159) (30,771) (477,202)
Other advances......... -- -- (12,850) -- --
Purchase of short-term
investments........... -- -- (18,920) -- --
Proceeds from
maturities of short-
term investments...... -- -- 18,920 -- --
-------- -------- ---------- -------- ----------
Net cash provided by
(used in) investing
activities......... (18,193) (19,699) (384,063) (25,605) (497,145)
Financing Activities
Issuance of common
stock, net............ 20,138 38,205 1,077,405 31,980 650
Proceeds from
convertible
subordinated notes.... -- -- 656,250 -- --
Line of credit
borrowings............ -- -- 25,000 -- --
Line of credit
repayments............ -- -- (25,000) -- --
Distribution to former
LLC members........... (2) -- (10,676) (10,676) --
Advances to employees.. -- -- (8,181) -- --
Repayments of Advances
to Employees.......... -- -- -- -- 394
-------- -------- ---------- -------- ----------
Net cash provided by
financing
activities......... 20,136 38,205 1,714,798 21,304 1,044
-------- -------- ---------- -------- ----------
Net Increase in Cash and
Cash Equivalents....... 2,327 15,965 1,305,382 (5,012) (492,378)
Cash and cash
equivalents at
beginning of period.... 2,886 5,213 21,178 21,178 1,326,560
-------- -------- ---------- -------- ----------
Cash and Cash
Equivalents at End of
Period................. $ 5,213 $ 21,178 $1,326,560 $ 16,166 $ 834,182
======== ======== ========== ======== ==========
</TABLE>
F-24
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
12. Shareholders' Equity
During 1999, the Company increased it's authorized capital stock to
300,000,000 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. No
cash dividends have been declared to date and may not be declared for the
foreseeable future. As of December 31, 1999, the Company's bank line of credit
agreement precludes dividends.
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. At December 31, 1999, 10,000,000 shares of preferred stock
were authorized.
Certain shareholders were granted registration rights and piggy-back
rights which were effective after completion of the Company's public offering
in August 1999.
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 at December 31, 1998.
Initial Public Offering
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 $6.00 per share. Net proceeds to the Company from these transactions
aggregated approximately $209.5 million (net of underwriters' commission and
offering expenses of approximately $19.2 million).
Stock Dividend
In December 1999, the Company recorded a one hundred percent (100%) stock
dividend effected in the form of a 2 for 1 stock split. The common stock and
additional paid-in capital accounts and all share and per share amounts have
been retroactively restated in these financial statements to reflect this stock
dividend.
Secondary Offering
In December 1999, the Company completed its secondary offering of common
stock and convertible subordinated notes (Note 7). The Company sold 6,900,000
shares of its common stock at $108.00 per share. Just prior to and concurrent
with the secondary offering, the Company completed private placements of
609,533 shares and 648,147 shares of its common stock at $82.02 and $108.00 per
share, respectively. Net proceeds to the Company from these transactions
aggregated approximately $831.0 million (net of underwriters' commission and
offering expenses of approximately $34.2 million).
F-25
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
12. Shareholders' Equity (Continued)
Issuance of Common Stock Under Equity Compensation Plans
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 under
the Membership Profit Interest Plan. 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
has 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. Through 1999, 486,532 shares were forfeited and were available
for grant in the form of restricted stock or stock options. These forfeitures
reduced additional paid-in capital by $0.1 million. Compensation expense
related to the restricted stock totaling $0.2 million, $0.3 million and $0.2
million was recorded in 1997, 1998 and 1999, respectively.
In April through July 1999 the Company's Board of Directors authorized
the acceptance of full recourse promissory notes totaling $79.8 million from
its employees and a director as consideration for exercising all or a portion
of their vested and unvested stock options issued under the 1999 Equity
Compensation Plan (a total of 35,991,500 shares of common stock were issued in
connection with these exercises). The $79.8 million notes receivable from
employees is recorded as a reduction of Shareholders' Equity at December 31,
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. The Company recorded 1999 interest income of $3.3
million related to these loans of which $2.3 million is included in other
current assets as a receivable at December 31, 1999.
Through December 31, 1999, the Company recorded aggregate unearned
compensation expense of $17.1 million, net of $5.5 million in accumulated
amortization, in connection with the grant of stock options to non-employees
and the grant of stock options to employees, under the 1999 Equity Compensation
Plan, where it was determined that the exercise prices was less than the deemed
fair value on the respective dates of grant.
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.
F-26
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
13. Stock Option Plans
Incentive or non-qualified stock options may be granted to Company
employees, directors and consultants under the Membership Profit Interest Plan
("MPI") or the 1999 Equity Compensation Plan ("1999 Plan") (together the
"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, 1999, the
Company reserved 6,008,500 and 486,532 shares of common stock under the 1999
Plan and MPI Plan, respectively, for possible future issuance. Most Partner
Companies also maintain their own stock option plans.
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.................................. 12,144,000 1.00
Options canceled/forfeited....................... (94,000) (0.50)
----------- ------
Outstanding at December 31, 1998................. 12,238,000 1.00
Options granted.................................. 28,995,500 6.82
Options exercised................................ (35,991,500) 2.26
Options canceled/forfeited....................... (69,000) 2.44
----------- ------
Outstanding at December 31, 1999................. 5,173,000 $23.74
=========== ======
</TABLE>
At December 31, 1997, 1998 and 1999 there were 188,000, 12,238,000 and
4,688,000 options exercisable at $0.50, $1.00 and $24.62 per share under the
plans, respectively.
The following table summarizes information about stock options
outstanding at December 31:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Number Remaining Number Remaining Number Remaining
Outstanding Contractual Outstanding Contractual Outstanding Contractual
Exercise Price at 1997 Life (in Years) at 1998 Life (in Years) at 1999 Life (in Years)
--------------- ----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.50--$ 4.00 188,000 9.0 12,238,000 10.0 2,771,000 9.2
$ 4.01--$ 50.00 -- -- -- -- 606,000 9.6
$50.01--$ 60.00 -- -- -- -- 1,450,000 9.8
$60.01--$108.13 -- -- -- -- 346,000 9.9
------- --- ---------- ---- --------- ---
188,000 9.0 12,238,000 10.0 5,173,000 9.5
======= === ========== ==== ========= ===
</TABLE>
Included in the 1998 option grants are 94,000 stock options to non-
employees. The fair value of these options of $.4 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%.
F-27
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
13. Stock Option Plans (Continued)
Included in the 1999 option grants are 1,636,000 stock options to non-
employees. The fair value of these options of $3.7 million was recorded as
deferred compensation in 1999 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%.
Included in the 1999 option grants are 23,047,500 stock options to
employees issued below market value on the date of grant. The aggregate
difference between the strike price and market value on the date of grant, for
these options granted, of $12.7 million was recorded as deferred compensation
in 1999 and is being amortized over the five year vesting period.
The Company applies APB 25 and related interpretations to account for its
stock options 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 1999
------------- --------------------------
(in thousands except per share amounts)
<S> <C> <C> <C>
Net income (loss)
As reported..................... $ (6,580) $ 13,899 $ (29,777)
SFAS 123 pro forma.............. $ (6,649) $ 13,437 $ (41,499)
Net income (loss) per share
As reported..................... $ (.10) $ .12 $ (.15)
SFAS 123 pro forma.............. $ (.10) $ .12 $ (.21)
</TABLE>
The per share weighted-average fair value of options issued by the
Company during 1997, 1998 and 1999 was approximately $0.11, $0.22 and $3.94,
respectively.
Prior to its initial public offering, the Company used the minimum value
method to value option grants using a 5.2% to 5.5% risk-free interest rate, an
expected life of 5 years, and no dividend yield. The following assumptions were
used to determine the fair value of stock options granted to employees by the
Company following its initial public offering through December 31, 1999:
<TABLE>
<S> <C>
Volatility........................................................... 101.5%
Average expected option life......................................... 5 years
Risk-free interest rate.............................................. 5.5%
Dividend yield....................................................... 0.0%
</TABLE>
The Company also includes its shares of its Partner Companies SFAS 123
pro forma expense in the Company's SFAS 123 pro forma expense. The methods used
by the Partner Companies included the minimum value method for private Partner
Companies and the Black-Scholes method for public Partner Companies with
assumptions between 2 to 6 years for average expected option life, 5.0% to 5.5%
for risk-free interest rate, no dividend yield, and volatility up to 100%.
F-28
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
14. Income Taxes
At December 31, 1999, the Company had a net operating loss carry forward
of approximately $6.0 million which may be used to offset future taxable
income. These carry forwards expire beginning in 2019 and may be limited should
certain changes in the Company's ownership occur.
Income taxes for the year ended December 31, 1999 comprise a $23.7
million deferred tax benefit relating primarily to differences in the book and
tax basis of ownership interests in Partner Companies.
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
As of
December 31, 1999
-----------------
(in thousands)
<S> <C>
Net operating loss carryforward.......................... $ 2,065
Partner Company basis difference......................... 37,695
Stock compensation....................................... 8,283
Other, net............................................... (466)
Other comprehensive income............................... (13,189)
--------
Net deferred tax asset................................... $ 34,388
========
</TABLE>
The Company's deferred tax asset includes approximately $15.0 million of
additional Partner Company basis difference generated from the conversion of
1,033,908 shares of the Company's common stock (Note 4).
The effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Tax benefit at statutory rate............................ (35.0)%
Change in tax status..................................... (14.5)%
Stock-based compensation................................. 3.0%
Non-deductible expenses and other........................ 2.2%
-----
(44.3)%
=====
</TABLE>
15. 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 cost of outside consultants are generally paid directly
by the Partner Company.
F-29
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
15. Related Parties (Continued)
The Company entered into various cost sharing arrangements with the same
principal shareholder during 1997, 1998 and 1999, whereby the Company
reimbursed, under fair market terms, this shareholder for certain operational
expenses. The amounts incurred for such items were $0.1 million, $0.2 million
and $0.3 million in 1997, and 1998 and 1999, 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 Sheet.
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. These rights terminated upon our initial public offering in August 1999.
The Company loaned an officer $0.6 million during 1999, evidenced by a
term note with an interest rate of 4.98% to purchase the Company's stock in the
initial public offering. This note was repaid in 1999.
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.
16. Other supplemental non-cash financing and investing activities
During the years ended December 31, 1997, 1998 and 1999, the Company
converted $1.4 million, $1.8 million and $2.8 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 18).
Interest paid in the periods ended December 31, 1998 and 1999 was $0.2
million and $0.1 million, respectively.
The Company paid no income taxes in 1997 and 1998 due to its tax status
as an LLC. No income taxes were paid in 1999 as the Company had a net operating
loss.
In 1998, the Company acquired an ownership interest in a Partner Company
in exchange for a $1.7 million note payable. The note was payable in two equal
installments through June 1999, did not bear interest and was secured with the
acquired stock of the Partner Company. In March 1999, a shareholder of the
Company assumed $.4 million of this note. This note was paid in 1999.
F-30
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
17. 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.
18. Other Income
Other income consists of the following:
<TABLE>
<CAPTION>
Year Ended Quarter Ended
December 31, March 31,
---------------- -----------------------
1999 2000
1998 1999 (unaudited) (unaudited)
------- ------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Issuance of stock by
VerticalNet................... $ -- $50,717 $28,254 $176,794
Issuance of stock by Breakaway
Solutions..................... -- 17,304 -- --
Sale of SMART Technologies to
i2 Technologies............... -- 2,942 -- --
Sale of Matchlogic to Excite... 12,822 -- -- --
Sales of Excite holdings....... 16,814 2,051 2,051 --
Sale of Excite to @Home
Corporation................... -- 2,719 -- --
Sale of WiseWire to Lycos...... 3,324 -- -- --
Sales of Lycos holdings........ 1,472 -- -- --
Partner company impairment
charges....................... (3,949) (8,097) (1,620) --
Other.......................... -- (252) -- --
Issuance of stock by Universal
Access........................ -- -- -- 4,641
Sale of i2 Technologies
holdings...................... -- -- -- 26,967
Tradex sale to Ariba........... -- -- -- 449,284
------- ------- ------- --------
$30,483 $67,384 $28,685 $657,686
======= ======= ======= ========
</TABLE>
Gains on sales of Partner Companies' and available-for-sale securities
are determined using average cost.
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for acquisitions in 1999, the
Company's share of VerticalNet's net equity increased by $50.7 million. This
increase adjusts the Company's carrying value in VerticalNet and results in a
non-operating gain of $50.7 million, before deferred taxes of $17.7 million, in
the year ended December 31, 1999. As a result of Breakaway Solutions completing
its initial public offering in October 1999, the Company's share of Breakaway
Solutions' net equity increased by $17.3 million. This increase adjusts the
Company's carrying value in Breakaway Solutions and results in a non-operating
gain of $17.3 million, before deferred taxes of $6.1 million, in the year ended
December 31, 1999. These gains were recorded in accordance with SEC Staff
Accounting Bulletin No. 84 and the Company's accounting policy with respect to
such transactions.
In August 1999, the Company divested its ownership interest in SMART
Technologies, Inc. due to the agreement of merger of SMART Technologies, Inc.
and i2 Technologies, Inc. Upon completion of this merger, during the three
months ended September 30, 1999, the Company's 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. The Company's non-
operating gain before taxes from this transaction was $2.9 million.
In February 1998, the Company exchanged all of its 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
F-31
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
18. Other Income (Continued)
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. During 1999, the Company 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, the Company
received shares of @Home Corporation in exchange for its shares in Excite,
resulting in a non-operating gain before taxes of $2.7 million.
In April 1998, the Company exchanged all of its 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, the Company sold 169,548 shares of
Lycos which resulted in $6.2 million of proceeds and $1.5 million of gains.
The Company's remaining holdings of @Home Corporation, Lycos, and i2
Technologies at December 31, 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 its Consolidated
Balance Sheets in accordance with Statement of Financial Accounting Standards
No. 115.
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 it recorded
was determined by calculating the difference between the proceeds it received
from the sale and its carrying value.
For the years ended December 31, 1998 and 1999, the Company recorded
impairment charges of $2 million and $8.1 million, respectively, for the other
than temporary decline in the fair value of a cost method partner company. From
the date the Company initially acquired an ownership interest in this partner
company through December 31, 1999, its 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 year ended December 31,
1999 the Company fully guaranteed the partner company's new bank loan and
agreed to provide additional funding. The Company acquired additional non-
voting convertible debentures of this partner company for $8 million in 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.
19. Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the amount of the ultimate liability with respect to these actions
will not materially affect the financial position, results of operations or
cash flows of the Company and its subsidiaries.
F-32
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
19. Commitments and Contingencies (Continued)
In connection with its ownership interests in certain Partner Companies
as of December 31, 1999, the Company guaranteed $5.5 million of bank loan and
other commitments and has committed capital of $9.2 million to existing Partner
Companies to be funded in 2000.
The Company and its consolidated subsidiaries, Animated Images,
CyberCrop.com, Breakaway Solutions, EmployeeLife.com, ICG Commerce and iParts,
lease their facilities under operating lease agreements expiring through 2004.
Future minimum lease payments as of December 31, 1999 under the leases are as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2000.......................... $ 1,640
2001.......................... 1,641
2002.......................... 1,531
2003.......................... 1,329
2004.......................... 1,161
Thereafter.................... 10,205
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$.1 million in 1997, $.3 million in 1998 and $.4 million in 1999.
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.
Animated Images, CyberCrop.com, EmployeeLife.com, and ICG Commerce have
entered into employment agreements with certain employees. The agreements are
cancelable, but require severance upon termination. As of December 31, 1999,
Animated Images, CyberCrop.com, EmployeeLife.com, and ICG Commerce would be
required to pay up to $1.3 million in aggregate severance in the event that
these employment agreements are cancelled.
F-33
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
20. Selected Quarterly Financial Information (Unaudited)
The following table sets forth selected quarterly financial and stock
price information for the years ended December 31, 1998 and 1999. The operating
results for any given quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Fiscal 1998 Quarter Ended Fiscal 1999 Quarter Ended
---------------------------------- -------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31
------- ------- ------- ------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 377 $ 587 $ 897 $ 1,273 $ 3,111 $ 4,480 $ 7,192 $ 1,753
Cost of revenue......... 628 1,075 1,195 1,744 1,553 2,450 3,421 731
Selling, general and
administrative......... 2,459 3,220 4,151 5,684 3,848 9,428 17,727 17,922
------- ------- ------- ------- ------- -------- -------- --------
(2,710) (3,708) (4,449) (6,155) (2,290) (7,398) (13,956) (16,900)
Other income, net....... 12,322 11,727 (534) 6,969 28,677 2,397 15,927 20,382
Interest income......... 56 247 443 559 310 975 2,892 5,454
Interest expense........ (110) (108) (15) (148) (14) (953) (803) (2,125)
------- ------- ------- ------- ------- -------- -------- --------
9,558 8,158 (4,555) 1,225 26,683 (4,979) 4,060 6,811
Income taxes............ -- -- -- -- 663 5,134 7,044 10,882
Minority interest....... -- 976 1,723 2,682 146 1,302 2,685 1,893
Equity income (loss).... (290) (2,390) (1,289) (1,899) (7,413) (12,667) (29,063) (42,958)
------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)....... $ 9,268 $ 6,744 $(4,121) $ 2,008 $20,079 $(11,210) $(15,274) $(23,372)
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
The selected quarterly financial information includes the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group Operations, Inc.
and its majority owned subsidiaries, VerticalNet, for each of the quarters in
the year ended December 31, 1998; Breakaway Solutions for the period from
January 1, 1999 through October 4, 1999 (the date of Breakaway's initial public
offering); EmployeeLife.com and iParts for each of the quarters in the year
ended December 31, 1999; CyberCrop.com for the quarters ended September 30,
1999 and December 31, 1999; and Animated Images, Inc. and ICG Commerce for the
quarter ended December 31, 1999, all of which were consolidated from their date
of acquisition.
During the period January 1 through March 8, 2000, the Company has issued
150,000 shares of common stock for an acquisition, is contingently obligated to
issue up to 11,197,238 shares of common stock for acquisitions, and has granted
options to purchase 6,766,000 shares of common stock at an average exercise
price of $110.50 per share.
21. Interim Financial Information (Unaudited)
In February 2000, eMerge Interactive completed its initial public
offering (IPO), selling 7,200,000 newly issued shares of its common stock at
$15 per share. The Company's ownership following the offering was approximately
22%.
In March 2000, Onvia.com, Inc. completed its IPO, selling 8,000,000 newly
issued shares of its common stock at $21 per share, including 2,666,666 shares
sold to the Company at the IPO price in a concurrent private placement. The
Company's ownership following the offering was approximately 22%.
F-34
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
21. Interim Financial Information (Unaudited) (Continued)
In March, 2000, Universal Access completed its initial public offering
(IPO), selling 11,000,000 newly issued shares of its common stock at $14 per
share. The Company's ownership following the offering was approximately 25%.
The interim consolidated financial statements of the Company for the
three months ended March 31, 1999 and 2000, included herein, have been prepared
by the Company, without audit, pursuant to the interim financial statements
rules and regulations of the SEC. In the opinion of management, the
accompanying unaudited consolidated interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended March 31, 1999 and 2000 and are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000 or for any other interim period. 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 such rules and regulations relating to interim financial
statements.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group Operations, Inc.
(the "Operations Company") and its majority owned subsidiary Breakaway
Solutions, Inc. ("Breakaway Solutions") for the three months ended March 31,
1999. For the three months ended March 31, 2000, the consolidated financial
statements include the accounts of the Company, its wholly owned subsidiaries,
the Operations Company and Internet Capital Group (Europe) Limited, and its
majority owned subsidiaries, Animated Images, Inc. ("Animated Images"),
CyberCrop.com, Inc. ("CyberCrop.com"), EmployeeLife.com, ICG Commerce, Inc.
("ICG Commerce") and iParts, each of which was consolidated since its date of
acquisition.
Goodwill and other intangible assets at March 31, 2000 of $21.5 million,
net of accumulated amortization of $2.2 million, is attributable to the
Company's acquisitions of ownership interests in Animated Images ($5.9
million), CyberCrop.com ($.7 million), EmployeeLife.com ($1.0 million), ICG
Commerce ($2.0 million), and iParts ($0.1 million) and ICG Commerce's
acquisitions of Purchasing Group, Inc. and Integrated Sourcing, LLC ($11.8
million). The Company's direct and indirect voting interest in Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts at March 31, 2000 was
50.1%, 75%, 52%, 50.2% and 67%, respectively.
The Company's carrying value and cost basis of Partner Companies
accounted for under the equity method of accounting at March 31, 2000 was $1.1
billion and $971.2 million, respectively. The Company's carrying value and cost
basis of Partner Companies accounted for under the cost method of accounting at
March 31, 2000 was $64.1 million. At March 31, 2000, 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
$503.5 million.
The Company's Partner Companies accounted for under the equity method of
accounting had total revenues of $10.9 million and $151 million and total net
loss of $17.9 million and $140.7 million during the three months ended March
31, 1999 and 2000, respectively.
Basic and diluted net income per share for the three months ended March
31, 1999 of $0.14 were calculated based on net income of $20,079 and basic and
diluted weighted average shares outstanding of 145,292 and 147,400,
respectively. The difference between basic and diluted weighted average shares
F-35
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
21. Interim Financial Information (Unaudited)
outstanding of 2,108 was due to the dilutive effect of stock options. Basic and
diluted net income per share for the three months ended March 31, 2000 of $1.33
and $1.30, respectively, were calculated based on net income and adjusted net
income of $351,975 and $350,637, respectively, and basic and diluted weighted
average shares outstanding of 264,191 and 270,132, respectively. Of the
difference between basic and diluted weighted average shares outstanding 2,976
was due to the dilutive effect of stock options and 2,965 was due to the
dilutive effect of other securities. The adjustment to net income of $1,338 was
due to the impact of a partner company's dilutive securities. The impact of the
conversion of the Company's convertible subordinated notes has not been
included as its impact would be anti-dilutive.
The Company's effective tax rate for the three months ended March 31,
1999 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. The Company's effective tax rate
for the three months ended March 31, 2000 differed from the federal statutory
rate of 35% principally due to the impact of state taxes and certain
nondeductible expenses.
The Company's net deferred tax liability of $84.7 million at March 31,
2000 consists of deferred tax liabilities of $166.2 million relating primarily
to the gain on the sale of a Partner Company for marketable securities, offset
by net deferred tax assets of $81.5 million relating primarily to the excess of
tax carrying values over book carrying values of its Partner Companies and net
unrealized depreciation in available-for-sale securities.
The Company's revenue and loss from the Partner Company Operations
segment for the three months ended March 31, 1999 and 2000 was $3,111 and
$7,813 and $1,830 and $88,010, respectively. The Company's income before tax
from the General ICG Operations segment for the three months ended March 31,
1999 and 2000 was $27,229 and $650,255, respectively, primarily due to other
income of $28,684 and $657,686, respectively.
Partner Company Operations' assets were $1.1 billion at March 31, 2000,
including $1 billion of carrying value of Partner Companies accounted for under
the equity method of accounting. General ICG Operations' assets were $1.3
billion at March 31, 1999, including $834.1 million, $64.1 million and $425.4
million of cash and cash equivalents, carrying value of Partner Companies
accounted for under the cost method, and other, respectively.
In March 2000, the Company's revolving bank credit facility was amended
to, among other things, increase the Company's credit facility to provide for
borrowings up to $250 million, including the issuance of letters of credit up
to $125 million. The agreement includes a $125 million 364-day secured line of
credit and a $125 million two-year secured revolving credit facility. Prior to
this amendment, the credit facility was structured as a $50 million term
revolving credit facility bearing interest at the Company's option at prime or
LIBOR plus 2.5%.
The revolving facility and line of credit are subject to .375% and .25%
unused commitment fees, respectively, bear interest, at the Company's option at
LIBOR plus 2.0% or the lenders' Base Rate (the lenders' Base Rate being the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and are
secured by substantially all of the Company's assets (including the Company's
holdings in Partner Companies). Borrowing availability under the facility is
based on the fair market value of the Company's holdings of publicly traded
Partner Companies and the value, as defined in the facility, of the Company's
private Partner Companies. The
F-36
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
21. Interim Financial Information (Unaudited)
credit facility contains certain financial covenants which include restrictions
on, among other things, dispositions, certain other indebtedness and payment of
dividends and similar distributions. No amounts were outstanding on these
facilities as of March 31, 2000.
In March 2000, the Company entered into cashless collar agreements (the
"Equity Collars") to hedge 2.2 million shares of its holdings of Ariba, Inc.
accounted for at fair value. The Equity Collars limit the Company's exposure to
and benefits from price fluctuations in the underlying equity securities. The
Equity Collars mature between 2001 and 2003. As the Company accounts for the
Equity Collars as a hedge, changes in the value of the Equity Collars are
substantially offset by changes in the value of the underlying investment
securities. Each of these changes are marked-to-market through accumulated
other comprehensive income (loss) in the Company's Consolidated Balance Sheets.
F-37
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of eCredit.com, Inc.
We have audited the accompanying consolidated balance sheets of eCredit.com,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' deficit and cash flows for 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 auditing standards generally
accepted in the United States. 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 eCredit.com, Inc.
and subsidiaries at December 31, 1998 and 1999 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
March 6, 2000
Boston, Massachusetts
F-38
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of eCredit.com, Inc.
In our opinion, the accompanying consolidated statements of operations, of
redeemable convertible preferred stock and stockholders' deficit and of cash
flows present fairly, in all material respects, the results of operations and
cash flows of eCredit.com, Inc. and its subsidiary for the year ended December
31, 1997, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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. We have
not audited the consolidated financial statements of eCredit.com, Inc. for any
period subsequent to December 31, 1997.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 30, 1998
F-39
<PAGE>
eCREDIT.COM, INC.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31 -----------
------------------- December 31 March 31
1998 1999 1999 2000
-------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $ 2,312 $ 35,210 $ 38,870 $ 20,605
Accounts receivable, net of
allowance for doubtful accounts
of $36 at December 31, 1998 and
1999............................. 1,154 4,196 4,196 2,849
Prepaid expenses.................. 16 55 55 357
Other current assets.............. 37 940 940 650
-------- --------- --------- ---------
Total current assets.............. 3,519 40,401 44,061 24,461
Fixed assets, net.................. 581 2,762 2,762 4,210
Capitalized software costs......... -- 681 681 875
Notes receivable from officers..... -- 1,302 1,302 1,302
Other assets....................... 96 668 668 668
-------- --------- --------- ---------
Total assets...................... $ 4,196 $ 45,814 $ 49,474 $ 31,516
======== ========= ========= =========
Liabilities, redeemable preferred
stock and stockholders' deficit
Current liabilities:
Current portion of note payable... -- $ 461 $ 461 $ 528
Current portion of capital lease.. $ 112 76 76 65
Accounts payable.................. 192 3,008 3,008 3,158
Accrued expenses.................. 661 3,199 3,199 4,157
Deferred revenue.................. 442 907 907 884
Billings in excess of cost and
estimated earnings on uncompleted
contracts, net................... 351 787 787 959
-------- --------- --------- ---------
Total current liabilities......... 1,758 8,438 8,438 9,751
Capital lease obligations, net of
current portion................... 99 69 69 58
Notes payable, net of current
portion........................... -- 1,172 1,172 1,092
-------- --------- --------- ---------
Total liabilities................. 1,857 9,679 9,679 10,901
Commitments and contingencies
Redeemable convertible preferred
stock:
Series A Redeemable convertible
preferred stock, $.001 par value;
946,808 shares authorized, issued
and outstanding at December 31,
1998 and 1999 issued for $2,225.. 5,597 68,171 -- 138,272
Series B Redeemable convertible
preferred stock, $.001 par value;
184,432 shares authorized, issued
and outstanding at December 31,
1998 and 1999 issued for $1,540.. 1,639 19,923 -- 40,401
Series C Redeemable convertible
preferred stock, $.001 par value;
1,297,076 shares authorized,
757,156 issued and outstanding at
December 31, 1998 and 1999 issued
for $6,205....................... 7,421 90,410 -- 183,383
Series D Redeemable convertible
preferred stock, $.001 par value;
6,695,618 shares authorized,
issued and outstanding at
December 31,
1999 issued for $23,876.......... -- 160,695 -- 325,942
Series E Redeemable convertible
preferred stock, $.001 par value;
1,914,053 shares authorized,
1,435,535 issued and outstanding
at December 31, 1999 issued for
$23,899.......................... -- 34,453 -- 69,882
Common stock, $.001 par value;
16,935,842 and 33,962,013 shares
authorized at December 31, 1998
and 1999, respectively, 2,550,000
and 6,513,648 shares issued at
December 31, 1998 and 1999,
respectively, 2,100,000,
6,063,648 and 23,212,123 shares
outstanding at December 31 1998,
1999
and 1999 Pro Forma, respectively.. 3 7 31 7
Additional paid-in capital........ 394 41,844 905,390 51,780
Accumulated deficit............... (12,490) (341,042) (836,125) (743,981)
Notes receivable.................. -- (3,095) (3,095) (2,863)
Deferred compensation............. -- (35,006) (26,181) (41,983)
Common stock held in treasury,
450,000 shares at cost........... (225) (225) (225) (225)
-------- --------- --------- ---------
Total stockholders' equity
(deficit)........................ (12,318) (337,517) 39,795 (737,265)
-------- --------- --------- ---------
Total liabilities, redeemable
preferred stock and
stockholders' equity (deficit)... $ 4,196 $ 45,814 $ 49,474 $ 31,516
======== ========= ========= =========
</TABLE>
See accompanying notes.
F-40
<PAGE>
eCREDIT.COM, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months
December 31 Pro Forma Ended March 31
---------------------------------- ----------- ------------------------
December 31
1997 1998 1999 1999 1999 2000
---------- ---------- ---------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Transaction & related
implementation....... -- -- -- -- $ 79
Software licenses and
related
implementation....... $ 3,358 $ 3,763 $ 6,702 $ 6,702 $ 992 870
Services and software
support.............. 585 1,061 1,699 1,699 564 819
---------- ---------- ---------- ----------- ---------- ----------
Total revenues........ 3,943 4,824 8,401 8,401 1,556 1,768
Cost of revenues
Transaction and
related
implementation....... -- -- -- -- -- 385
License and related
implementation (1999
and Pro Forma
excludes $351 and
$17,371 stock
compensation,
respectively)........ 2,153 1,987 5,230 5,230 741 1,616
Services (1999 and Pro
Forma excludes $72
and $3,563 stock
compensation,
respectively) ....... 440 708 1,195 1,195 166 830
---------- ---------- ---------- ----------- ---------- ----------
Total cost of
revenues............. 2,593 2,695 6,425 6,425 907 2,831
---------- ---------- ---------- ----------- ---------- ----------
Gross profit (loss) 1,350 2,129 1,976 1,976 649 (1,063)
Operating expenses
Selling and marketing
(1999 and Pro Forma
excludes $613 and
$30,339 stock
compensation,
respectively)........ 1,151 2,262 11,225 11,225 980 7,434
Research and
development (1999 and
Pro Forma excludes
$23 and $1,138 stock
compensation,
respectively)........ 419 472 823 823 116 2,731
General and
administrative (1999
and Pro Forma
excludes $1,227 and
$60,724 stock
compensation,
respectively)........ 1,598 1,802 4,159 4,159 499 4,863
Stock compensation.... -- -- 2,286 113,135 44 2,938
---------- ---------- ---------- ----------- ---------- ----------
Total operating
expenses............... 3,168 4,536 18,493 129,342 1,639 17,966
---------- ---------- ---------- ----------- ---------- ----------
Loss from operations.... (1,818) (2,407) (16,517) (127,366) (990) (19,029)
Interest income......... -- 27 185 185 12 374
Interest expense........ (128) (147) (72) (72) (8) (56)
Other income............ -- -- 31 31 -- --
---------- ---------- ---------- ----------- ---------- ----------
Net loss................ (1,946) (2,527) (16,373) (127,222) (986) (18,711)
Accretion of preferred
stock................ -- (5,081) (312,179) -- 4,016 384,228
---------- ---------- ---------- ----------- ---------- ----------
Net loss attributable
to common
stockholders......... $ (1,946) $ (7,608) $ (328,552) $ (127,222) $ (5,002) $ (402,939)
========== ========== ========== =========== ========== ==========
Basic and diluted net
loss per share....... $ (0.93) $ (3.62) $ (110.02) $ (5.48) $ (2.38) $ (66.35)
========== ========== ========== =========== ========== ==========
Weighted average
shares used in
computing basic and
diluted net loss per
common share......... 2,100,000 2,100,000 2,986,305 23,212,123 2,100,000 6,073,167
========== ========== ========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE>
eCREDIT.COM, INC.
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Redeemable Redeemable Redeemable Redeemable
Convertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- --------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------- ------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996........... 946,808 $ 2,225
Issuance of
Series B
redeemable
convertible
preferred
stock.......... 184,432 $ 1,540
Net loss........
Balance,
December 31,
1997........... 946,808 2,225 184,432 1,540
Issuance of
Series C
convertible
preferred stock
with warrants,
net of issuance
costs of $117.. 757,156 $ 5,811
Issuance of
warrants.......
Accretion of
redeemable
preferred stock
to redemption
value.......... 3,372 99 1,610
Net loss........
Balance,
December 31,
1998........... 946,808 5,597 184,432 1,639 757,156 7,421
Issuance of
Series D
convertible
preferred
stock, net of
issuance costs
of $124........ 6,695,618 $ 23,876
Issuance of
Series E
convertible
preferred stock
with warrants,
net of issuance
costs of $102
...............
Issuance of
warrants.......
Issuance of
restricted
stock to
officers and
directors......
Issuance of
common stock in
connection with
the exercise of
stock options..
Expenses
associated with
remeasurement
of employee
stock option...
Deferred
compensation
related to
stock awards
and option
grants.........
Amortization of
deferred
compensation...
Repayment of
officers
notes..........
Accretion of
redeemable
preferred stock
to redemption
value.......... 62,574 18,284 82,989 136,819
Net loss........
------- ------- ------- ------- ------- ------- --------- --------
Balance,
December 31,
1999........... 946,808 $68,171 184,432 $19,923 757,156 $90,410 6,695,618 $160,695
======= ======= ======= ======= ======= ======= ========= ========
<CAPTION>
Series E
Redeemable
Convertible
Preferred Stock Common Additional Total
----------------- Stock Par Paid-in Accumulated Notes Deferred Treasury Stockholders'
Shares Amount Shares value capital deficit receivable compensation stock deficit
--------- ------- --------- ----- ---------- ----------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996........... 2,550,000 $ 3 $ (2,936) $(225) $ (3,158)
Issuance of
Series B
redeemable
convertible
preferred
stock..........
Net loss........ (1,946) (1,946)
Balance,
December 31,
1997........... 2,550,000 3 (4,882) (225) (5,104)
Issuance of
Series C
convertible
preferred stock
with warrants,
net of issuance
costs of $117..
Issuance of
warrants....... $ 394 394
Accretion of
redeemable
preferred stock
to redemption
value.......... (5,081) (5,081)
Net loss........ (2,527) (2,527)
Balance,
December 31,
1998........... 2,550,000 3 394 (12,490) (225) (12,318)
Issuance of
Series D
convertible
preferred
stock, net of
issuance costs
of $124........
Issuance of
Series E
convertible
preferred stock
with warrants,
net of issuance
costs of $102
............... 1,435,535 $22,940
Issuance of
warrants....... 959 959
Issuance of
restricted
stock to
officers and
directors...... 3,924,273 4 3,152 $(3,104) 52
Issuance of
common stock in
connection with
the exercise of
stock options.. 39,375 47 47
Expenses
associated with
remeasurement
of employee
stock option... 111 111
Deferred
compensation
related to
stock awards
and option
grants......... 37,181 $(37,181)
Amortization of
deferred
compensation... 2,175 2,175
Repayment of
officers
notes.......... 9 9
Accretion of
redeemable
preferred stock
to redemption
value.......... 11,513 (312,179) (312,179)
Net loss........ (16,373) (16,373)
--------- ------- --------- ----- ---------- ----------- ---------- ------------ -------- -------------
Balance,
December 31,
1999........... 1,435,535 $34,453 6,513,648 $ 7 $41,844 $(341,042) $(3,095) $(35,006) $(225) $(337,517)
========= ======= ========= ===== ========== =========== ========== ============ ======== =============
</TABLE>
See accompanying notes.
F-42
<PAGE>
eCREDIT.COM, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year ended December 31 Ended March 31
-------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows provided by
(used in) operating
activities
Net loss................... $(1,946) $(2,527) $(16,373) $ (986) $(18,711)
Depreciation and
amortization.............. 173 221 479 52 374
Amortization of stock
compensation.............. -- -- 2,286 44 2,938
Loss on disposal of fixed
assets.................... 10 -- 4 -- --
Changes in assets and
liabilities
Accounts receivable....... 13 (135) (3,042) (184) 1,347
Prepaid expenses and
other current assets..... 129 (4) (942) (159) (12)
Other assets.............. -- (64) (572) 1 --
Accounts payable.......... 382 (306) 2,816 189 150
Accrued expenses.......... 344 (192) 2,538 29 958
Deferred revenue.......... 6 263 465 103 (23)
Billings in excess of
cost and estimated
earnings on uncompleted
contracts, net........... (413) 324 436 (4) 172
------- ------- -------- ------ --------
Net cash used in
operating activities... (1,302) (2,420) (11,905) (915) (12,807)
Cash flows used in
investing activities
Purchases of fixed assets.. (157) (369) (2,601) (55) (1,711)
Capitalized software
additions................. -- -- (681) -- (245)
------- ------- -------- ------ --------
Net cash used in investing
activities................ (157) (369) (3,282) (55) (2,016)
Cash flows provided by
(used in) financing
activities
Borrowings under bridge
financing arrangement from
stockholders.............. -- 1,300 3,000 -- --
Proceeds received from note
payable................... -- -- 1,655 110 --
Principal payments made on
note payable.............. (13) (974) (22) -- (13)
Notes receivable from
officers.................. -- -- (1,302) -- --
Proceeds on repayment of
officers and directors
notes receivable.......... -- -- 9 -- 232
Payments on capital lease
obligations............... (104) (140) (129) (26) (22)
Proceeds from issuance of
Series B redeemable
convertible preferred
stock, net of issuance
costs..................... 1,540 -- -- -- --
Proceeds from issuance of
Series C redeemable
convertible preferred
stock and preferred stock
warrants, net of issuance
costs..................... -- 4,905 -- -- --
Proceeds from issuance of
Series D redeemable
convertible preferred
stock, net of issuance
costs..................... -- -- 20,876 -- --
Proceeds from issuance of
Series E redeemable
convertible preferred
stock and common stock
warrants, net of issuance
costs..................... -- -- 23,899 -- --
Proceeds from exercise of
stock options............. -- -- 47 -- 21
Proceeds from issuance of
restricted stock.......... -- -- 52 -- --
------- ------- -------- ------ --------
Net cash provided by
financing activities...... 1,423 5,091 48,085 84 218
------- ------- -------- ------ --------
Net increase (decrease) in
cash and cash
equivalents............... (36) 2,302 32,898 (886) (14,605)
Cash and cash equivalents,
beginning of period....... 46 10 2,312 2,312 35,210
------- ------- -------- ------ --------
Cash and cash equivalents,
end of period............. $ 10 $2,312 $ 35,210 $1,426 $ 20,605
======= ======= ======== ====== ========
Supplemental disclosure of
cash flow information:
Cash paid for interest.... $ 128 $ 147 $ 72 $ 8 $ 56
Supplemental disclosure of
non-cash investing and
financing activities:
Additions to capital
lease obligations for
purchases of fixed
assets................... 214 96 63
Conversion of note
payable to stockholders
into redeemable
convertible preferred
stock.................... -- 1,300 3,000
</TABLE>
See accompanying notes.
F-43
<PAGE>
eCREDIT.COM, INC.
Notes to Consolidated Financial Statements
December 31, 1999; Three Months Ended March 31, 2000 (Unaudited)
1. Nature of Business
eCredit.com, Inc. (the "Company" or "eCredit") is a provider of Internet
and client server-based credit management and financing solutions for business-
to-business and business-to-consumer commerce. The Company's principal market
is the United States. The Company manages its business as a single segment.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, and dependence on key personnel.
The Company has experienced operating losses since inception and through
December 31, 1999. Such losses resulted from the Company's lack of substantial
revenue in addition to costs incurred in the development of the Company's
services and in the establishment of the Company's market presence. For the
foreseeable future the Company expects to continue to experience significant
growth in its operating expenses in order to execute its business plan,
particularly engineering and development, and sales and general and
administrative expenses.
eCredit expects to seek additional financing through further rounds of
private equity financing or an initial public offering. In the event that the
Company were to be unable to raise further financing to meet its anticipated
cash needs for working capital and capital expenditures, eCredit would reduce
its current growth plans. Management believes, if required, it is able to
reduce its cost structure and therefore meet its working capital requirements
for the next 12 months.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, SRR Solutions (India) Private Limited, a
company incorporated under the laws of India and eCredit.com Limited, a company
incorporated in the United Kingdom. At December 31, 1999, the Company owned 99%
and 100% of the subsidiaries, respectively; amounts pertaining to the minority
interest are insignificant. All intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include money market funds at December 31, 1998 and 1999. The
carrying value of these instruments approximates their fair values.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising costs
were approximately $82,000, $92,000 and $2,940,000 for the years ended December
31, 1997, 1998 and 1999, respectively.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets. Equipment held
under capital lease is stated at the lower of the fair value of
F-44
<PAGE>
eCREDIT.COM. INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on a straight-line basis over the
shorter of the estimated lives of the related assets or the lease term.
Stock Split
On October 1, 1999, the Company authorized a three-for-one stock split of
its common stock. As a result, all common stock share data included in the
accompanying consolidated financial statements and notes have been
retroactively restated for this split.
Research and Development
The Company's products are highly technical in nature and require a large
and continuing research and development effort. All research and development
costs are expensed as incurred.
Costs associated with the development of computer software that is to be
sold to customers are accounted for in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" (FAS 86) and are expensed as incurred
prior to establishing technological feasibility. Technological feasibility is
demonstrated by a working model. Software development costs are capitalized
thereafter until the product is available for general release. Software
development costs qualifying for capitalization under FAS 86 were not
significant during the years ended December 31, 1997, 1998, and 1999.
Capitalized Software Development Costs
Capitalized software costs consist of costs incurred in the development
of the Company's internet-based technology. Such costs consist of salaries and
personnel costs for the design, deployment and enhancement of the Company's
technology. The Company capitalizes such costs under Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). Under SOP 98-1, costs of internal use software are
expensed during the preliminary project and post-implementation stages. Costs
are capitalized during the application development stage. Capitalization ends
when the project is substantially complete and the software is ready for its
intended use. The Company adopted SOP 98-1 on January 1, 1999. There has been
no amortization of cost to date.
The carrying value of the Company's software costs are reviewed on a
quarterly basis for the existence of facts and circumstances both internally
and externally that may suggest impairment. If an impairment is indicated, the
Company will adjust the carrying value of its capitalized software costs,
accordingly.
Revenue Recognition
The Company's software systems are sold for a one-time perpetual license
fee. The license fee is recognized upon the delivery of the software when the
system does not require significant customization, modification, integration or
installation services (collectively, "related implementation services"), and
fees for services are recognized as the services are performed provided that
the related contract is executed, fees are fixed and determinable and
collection is probable. When significant implementation services are required,
F-45
<PAGE>
eCREDIT.COM. INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
the license fee and fees for these services are recognized as the services are
performed utilizing the percentage of completion method based on cost incurred
in relation to expected total cost upon completion. Service revenues consist of
consulting fees not related to initial deliveries of systems and revenues for
software support contracts. Consulting fees are recognized as the services are
performed. Revenues from software support contracts are deferred and recognized
on a straight-line basis over the contract period, which is typically one year.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations. Accordingly, compensation
expense is recorded for stock options awarded to employees and directors to the
extent that the option exercise prices are less than the common stock's fair
market value on the date of grant, where the number of shares and exercise
price are fixed. The difference between the fair value of the Company's common
stock and the exercise price of the stock option, if any, is recorded as
deferred compensation and is amortized to compensation expense over the vesting
period of the underlying stock option. The Company follows the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123). All stock-based awards to
non-employees are accounted for at their fair value in accordance with FAS 123.
Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128
requires the calculation and presentation of basic and diluted earnings per
share. Basic earnings per share is calculated based on the weighted-average
number of common shares outstanding, and excludes any dilutive effects of
warrants, stock options, or other types of securities. Diluted earnings per
share is calculated based on the weighted-average number of common shares
outstanding and the dilutive effect of stock options, warrants, and related
securities. Dilutive securities are excluded from the diluted earnings per
share calculation if their effect is antidilutive.
Concentration of Credit Risk and Major Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash, cash equivalents and accounts
receivable. The Company invests its excess cash in money market funds of major
financial institutions that, in management's opinion, are subject to minimal
credit and market risk.
The Company sells its products primarily to Fortune 500 corporate
customers located domestically. Concentrations of credit risk with respect to
trade receivables are limited due to the stability of the customers comprising
the Company's customer base. The Company performs ongoing evaluations of its
customers' financial condition and, consistent with industry practice, does not
generally require collateral. The Company monitors its accounts receivable
credit risk as a matter of policy, and losses on accounts receivable have
historically been within the Company's estimates. At December 31, 1998, three
customers accounted for 14%, 13%, and 12% of the Company's accounts receivable.
At December 31, 1999, one customer accounted for 63% of the Company's accounts
receivable.
F-46
<PAGE>
eCREDIT.COM. INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
For the year ended December 31, 1997, two customers accounted for 25% and
15% of the Company's total revenue. For the year ended December 31, 1998, one
customer accounted for 11% of the Company's total revenue. For the year ended
December 31, 1999, one customer accounted for 45% of the Company's total
revenue.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the U.S.
dollar. Assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the balance
sheet date and nonmonetary assets and liabilities are translated at historical
exchange rates. Results of operations are translated at the average exchange
rates for the period. Foreign exchange gains and losses, which are
insignificant, are included in the Company's results of operations.
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. Components particularly subject to
estimation include revenue recognized under the percentage-of-completion method
and the corresponding deferred revenue amount. Actual results could differ from
these estimates.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, which include
cash and cash equivalents accounts receivable, notes receivable, accounts
payable, accrued expenses and notes payable approximate their fair values at
December 31, 1998 and 1999.
Accounts Receivable
At December 31, 1998 and 1999, accounts receivable included unbilled
amount of approximately $79,000 and $477,000, respectively.
Notes Receivable from Officers
Notes receivable from officers are full-recourse notes with certain of
the Company's executive officers. The notes bear interest at market rates and
are due on December 30, 2005.
Income Taxes
Deferred taxes are determined based on the difference between financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided, if, based upon the weight of available evidence, it is
more likely than not some or all of the deferred tax assets will not be
realized.
F-47
<PAGE>
eCREDIT.COM. INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131). This statement requires
companies to report information about operating segments consistent with
management's internal view of the Company. The Company adopted FAS 131
effective for its fiscal year ended December 31, 1998. The Company operates in
a single segment: retail domestic sales and related services. As of December
31, 1999, the Company has no organizational structure dictated by product
lines, geography or customer type.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in financial statements. The adoption of FAS 130 did not impact the
Company's financial statements as the Company had no items of other
comprehensive income during the years ended December 31, 1997, 1998 and 1999.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
98-1 is effective for fiscal years beginning after December 15, 1998.
eCredit.com adopted SOP 98-1 on January 1, 1999, resulting in capitalization of
$681,000 through December 31, 1999 related to the Global Financing Network.
In December 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position 98-9 (SOP 98-9), "Modification of SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 (as amended by SOP 98-4) to require recognition of revenue
using the "residual method" in circumstances outlined in SOP 98-9. Under the
residual method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections
of SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related
to the delivered elements. SOP 98-9 is effective for transactions entered into
in fiscal years beginning after March 15, 1999 (calendar 2000 for the Company).
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will
continue to be deferred until the date SOP 98-9 becomes effective. The Company
does not expect that the adoption of SOP 98-9 will have a significant impact on
its results of operations or financial position.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS
133) which establishes accounting and reporting standards for derivative
instruments and hedging activities. It 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, to date, has
not engaged in derivative and hedging activities, and accordingly does not
believe that
F-48
<PAGE>
eCREDIT.COM. INC.
Notes to the Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
the adoption of FAS 133 will have a material impact on its financial reporting
and related disclosures. The Company will adopt FAS 133 as required by FAS 137,
"Deferral of the Effective Date of the FASB Statement No. 133," in fiscal year
2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the application of generally accepted
accounting principles to revenue recognition in financial statements. The
Company will adopt SAB 101 in the fourth quarter of fiscal 2000 and is
presently analyzing the impact that SAB 101 will have on its financial
statements. Based on the Company's review to date, SAB 101 is not expected to
materially impact the Company's financial position or operating results.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation-an Interpretation of APB Opinion No. 25". FIN 44
is generally effective for transactions occurring after July 1, 2000 but
applies to repricings and some other transactions after December 15, 1998. The
Company does not believe that this interpretation will have a material impact
on its financial position or operating results.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals and adjustments) considered necessary for a fair presentation of the
interim financial information have been included. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated December 31
useful life -------------
(years) 1998 1999
------------- ------ ------
(in
thousands)
<S> <C> <C> <C>
Furniture and fixtures............................. 5-7 $ 166 $ 607
Computer equipment................................. 3-5 1,096 2,971
Leasehold improvements............................. Term of lease 87 427
------ ------
1,349 4,005
Less accumulated depreciation and amortization..... 768 1,243
------ ------
$ 581 $2,762
====== ======
</TABLE>
At December 31, 1998 and 1999, assets held under capital lease totaled
approximately $626,000 and $677,000, respectively. Amortization expense of
equipment held under capital lease approximated $97,000, $120,000 and $112,000
for the years ended December 31, 1997, 1998, and 1999 respectively. Related
F-49
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
3. Fixed Assets--(continued)
accumulated amortization of assets held under capital lease totaled
approximately $427,000 and $538,000 at December 31, 1998 and 1999,
respectively.
4. Accrued Expenses
Accrued liabilities consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---- ------
(in
thousands)
<S> <C> <C>
Consulting and professional........................................ $110 $1,225
Legal.............................................................. 33 549
Vacation........................................................... 246 458
Bonus.............................................................. 162 443
Other.............................................................. 110 524
---- ------
Total............................................................ $661 $3,199
==== ======
</TABLE>
5. Note Payable and Lines-of-Credit
On October 31, 1997 borrowings under a prior line-of-credit were replaced
by a $1,000,000 demand note payable (the "Note") secured by the Company's
accounts receivable and intangible assets. The Note originally expired on
December 31, 1997 and was extended to June 30, 1998. In May 1998, the Company
entered into a line-of-credit agreement (the "Line") with another bank to
provide maximum borrowings of $1,500,000; borrowings under the Line were used
to repay the Note in the amount of $973,800. The Line was scheduled to expire
in January 2000. At December 31, 1998, there were no borrowings outstanding
under the Line. In July 1999 the Company amended and restated its Line entered
into in May 1998. The amended facility provides for maximum borrowings of
$2,500,000 under a revolving line and $500,000 under an equipment line of
credit, subject to a limit of $1,500,000 until the Company closes equity
financing. In November 1999, as a result of equity financing, the Company
amended its line-of-credit entered into in July 1999. The amended facility
provides maximum borrowings of $3,000,000 under a revolving line and $2,000,000
under an equipment line. The ability to draw on the revolving line and the
equipment line expires in July 2000 and September 2000, respectively. Repayment
of amounts drawn on the lines occurs based on the maturity schedule as defined
in the agreement, through 2003. Interest is payable monthly at the prime rate
plus 0.75% for the revolving line and at the prime rate plus 1.0% for the
equipment line. The Company is required to comply with certain financial
covenants including maintaining certain financial statement ratios. At December
31 1999, there were no borrowings outstanding under the revolving line-of-
credit and $1,633,000 outstanding under the equipment line. Borrowing under the
revolving line-of-credit and equipment line are secured by substantially all
business assets.
Scheduled principal repayments on long-term debt are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Year end December 31:
2000.......................................................... $ 461
2001.......................................................... 568
2002.......................................................... 531
2003.......................................................... 73
-------
$ 1,633
=======
</TABLE>
F-50
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
6. Redeemable Convertible Preferred Stock
In September 1993, the Company issued 425,532 shares of Series A
redeemable convertible preferred stock (the "Series A preferred stock") at a
price of $2.35 per share for total cash proceeds of $1,000,000. In June 1995,
bridge loans totaling $650,000 were converted into 276,595 shares of Series A
preferred stock, and 244,681 shares of Series A preferred stock were sold for
total cash proceeds of $575,000.
In May 1997, the Company issued 184,432 shares of Series B redeemable
convertible preferred stock (the "Series B preferred stock") at a price of
$8.35 per share for total cash proceeds of $1,540,000.
In September 1998, the Company issued 598,802 shares of Series C
redeemable convertible preferred stock (the "Series C preferred stock") at a
price of $8.35 per share for total cash proceeds of $4,905,000. In addition,
bridge loans issued during 1998 totaling $1,300,000 were converted into 158,354
shares of Series C preferred stock at a price of $8.35 per share. In
conjunction with the issuance of Series C preferred stock, the Company issued
warrants for the purchase of 539,920 additional shares of Series C preferred
stock at a price of $8.35 per share. The Company ascribed a value of $394,000
to these warrants which is included in additional paid in capital at December
31, 1999. The warrants expire on the earlier of September 21, 2003 or the date
on which the Company completes a qualifying public offering of its common
stock, as defined in the agreement.
On October 22, 1999 and November 12, 1999, the Company issued 3,989,473
and 1,869,192 shares, respectively, of Series D redeemable convertible
preferred stock (the "Series D preferred stock") at a price of $3.58 per share
for net proceeds of $20,876,000. Also, on October 22, 1999, the Company issued
836,953 shares of Series D preferred in exchange for the conversion of a
$3,000,000 bridge note payable.
On December 22, 1999, the Company issued 1,435,535 shares of Series E
Redeemable convertible preferred stock (the "Series E preferred stock") at a
price of $16.72 per share for net proceeds of $23,899,000. In conjunction with
the Series E preferred stock issuance, the Company issued warrants for the
purchase of 191,378 shares of its common stock at a price of $25.08 per share.
The Company ascribed a value of $959,000 to these warrants, which is included
in additional paid in capital at December 31, 1999. These warrants expire on
the earlier of December 22, 2001 or the sale of the Company. In conjunction
with the issuance of Series C preferred stock, certain rights of the Series A
and Series B preferred stock were conformed with the Series C preferred stock.
The Series A, Series B, Series C, Series D and Series E preferred stock have
the following characteristics:
Conversion Rights
The Series A, Series B, Series C, Series D and Series E preferred stock
is convertible into the Company's common stock, at any time, at the rate of
3.0, 4.5, 5.0, 1.0 and 1.0 shares of common stock, respectively, for each share
of preferred stock, adjustable for certain dilutive events, as defined by the
agreement.
The Series A, Series B, Series C, Series D and Series E preferred stock
is automatically converted into 3.0, 4.5, 5.0, 1.0 and 1.0 shares of common
stock, respectively, upon the closing of an initial public offering in which
proceeds to the Company equal or exceed $20,000,000 and in which the price to
the public is at least $8.35 per common share.
F-51
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
6. Redeemable Convertible Preferred Stock--(continued)
Liquidation Preference
Upon liquidation of the Company, the Series E preferred stockholders
shall first be entitled to $16.72 per share. The Series D preferred
stockholders, which as a shareholder class are subordinate to the Series E
preferred stockholders, are entitled to $3.58 per share. The Series A, Series
B, and Series C preferred stockholders, which as a class are subordinate to
the Series D and Series E preferred stockholders, are entitled to $2.35,
$8.35, and $8.35, respectively, per share. If any net assets are remaining
after the preferred stock payments, they shall be distributed pro-rata among
preferred and common stockholders.
Voting Rights
The holders of the preferred stock are entitled to the number of votes
equal to the number of shares of common stock into which the shares of
preferred stock could be converted at the time the vote is taken.
Protective Provisions
As long as at least 50% of the collective initially issued shares of
Series A, Series B, Series C, Series D and Series E preferred stock remain
outstanding, consent of the holders of at least two-thirds of the Series A,
Series B, Series C, Series D and Series E preferred stock, voting together as
a single class, will be required for the approval of certain events relating
to the sale, merger, liquidation or winding up of the Company, the issuance of
additional preferred stock or significant borrowings, as defined by the
agreement.
Dividend Rights
No dividend will accrue or be paid on preferred stock unless declared by
the Board of Directors.
Redemption
Two-thirds of the Series A, Series B, Series C, Series D and Series E
preferred stock, voting together as a single class, may require the Company to
redeem the Series A, Series B Series C, Series D and Series E preferred stock
in two equal annual installments commencing on December 22, 2004, at a
redemption price equal to the greater of the fair market value or the original
purchase price per share of each Series plus any accrued and unpaid dividends.
7. Common Stock
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders. As long as the
preferred stock is outstanding, no dividends shall be paid on the common
stock.
At December 31, 1999, the Company had 24,573,132 shares of its common
stock reserved for issuance upon conversion of preferred stock and exercise of
warrants and options.
In conjunction with the issuance of restricted common stock, the Company
received full recourse notes receivable from officers of the Company in the
amount of $2,841,000, from Advisory Directors in the amount
F-52
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
7. Common Stock--(continued)
of $100,000, and made advances to Directors in the amount of $154,000. The
notes bear interest at 6.02% and are payable in full by October 19, 2005.
8. Stock Option Plan
In September 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan"). The 1993 Plan provides for issuance of nonqualified stock
options, awards of restricted stock, and direct stock purchase opportunities to
directors, officers, employees and consultants of the Company. At December 31,
1999 the total number of shares which could be issued under the 1993 Plan was
712,941. As of December 31, 1999 no options were available for future grant
under the 1993 Plan. Nonqualified options may be granted at an exercise price
less than, equal to or greater than the fair market value on the date of grant,
as determined by the Board of Directors. Vesting of the options is over a four
year period.
In September 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan"). The 1998 Plan provides for issuance of incentive stock options to
employees of the Company and non-qualified stock options, awards of restricted
stock, and direct stock purchase opportunities to directors, officers,
employees and consultants of the Company. The total number of shares which may
be issued under the 1998 Plan is 9,338,184. At December 31, 1999, there were
4,570,236 options outstanding under the 1998 Plan and 843,675 available for
future grant. Incentive stock options may not be granted at less than the fair
market value of the Company's common stock at the date of grant and for a term
not to exceed ten years. For holders of 10% or more of the Company's
outstanding common stock, options may not be granted at less than 110% of the
fair market value of the common stock at the date of grant and the option term
may not exceed five years. Incentive stock options and nonqualified stock
options vest over a four year period.
A restricted stock award, as allowed by the 1993 Plan and 1998 Plan,
provides for the issuance of common stock to directors, officers, consultants
and other key personnel at prices determined by the Board of Directors.
Participants unvested shares are subject to repurchase by the Company at the
original purchase price plus interest accrued for up to four years.
A summary of the activity under the Company's 1993 Plan and 1998 Plan as
of December 31, 1999, and changes during the three years then ended is
presented below:
<TABLE>
<CAPTION>
Weighted-
Number of average
Shares exercise price
---------- --------------
<S> <C> <C>
Outstanding--December 31, 1996 439,800 $0.78
Granted (exercise price equal to fair value)..... 375,870 1.18
Canceled......................................... (11,400) 0.78
---------- -----
Outstanding--December 31, 1997................... 804,270 0.97
Granted (exercise price equal to fair value)..... 338,250 1.19
Granted (exercise price below fair value)........ 141,000 .78
Canceled......................................... (64,500) 0.97
---------- -----
Outstanding--December 31, 1998................... 1,219,020 1.01
Granted (exercise price below fair value)........ 8,473,509 1.77
Exercised........................................ (3,963,648) 0.81
Canceled......................................... (445,704) 0.84
---------- -----
Outstanding--December 31, 1999................... 5,283,177 $2.35
========== =====
</TABLE>
F-53
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
8. Stock Option Plan--(continued)
There were 327,450, 458,961 and 624,100 stock options that were
exercisable at December 31, 1997, 1998 and 1999, respectively.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-average
remaining contractual
Exercise price Options outstanding life in years Options exercisable
-------------- ------------------- --------------------- -------------------
<S> <C> <C> <C>
$0.78 3,307,680 9.0 534,663
1.19 235,875 8.2 89,437
5.50 1,739,622 9.9 --
--------- -------
5,283,177 624,100
========= =======
</TABLE>
FAS 123 encourages but does not require companies to record compensation
cost for stock-based employee compensation at fair value. The Company has
chosen to account for stock-based compensation granted to employees using the
intrinsic value method prescribed in APB 25 and related interpretations.
Accordingly, deferred compensation cost for restricted stock awards and stock
options granted to employees is measured as the excess, if any, of the fair
value of the Company's stock at the date of the grant over the amount that must
be paid to acquire the stock. From January 1, 1999 through December 31, 1999,
the Company recorded approximately $37,181,000 in deferred compensation for
restricted stock awards and options to purchase common stock granted at
exercise prices subsequently determined to be below the fair value of the
common stock on the date of grant. Compensation expense of approximately
$2,175,000 was recognized during 1999.
Option valuation models have been developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Such models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The fair value
of each option grant is estimated on the date of grant using the minimum value
method. The following assumptions were made for grants in 1997, 1998, and 1999,
respectively:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----------- -----------
<S> <C> <C> <C>
Dividend yield.................................. 0% 0% 0%
Expected lives of options (years)............... 5 5 5
Risk-free interest rate......................... 6.2% 4.41%-5.46% 5.25%-6.24%
Volatility...................................... -- -- --
</TABLE>
The fair value of the options granted during 1997 is estimated to be
$0.22. The fair value of the options granted during 1998 is estimated to be
$0.28 for options granted with exercise prices equal to the common stock fair
value and $1.10 for options granted with exercise prices below the common stock
fair value. The fair value of the options granted during 1999 is estimated to
be $4.73. Had the Company accounted for stock options to employees under the
fair value method prescribed under FAS 123, pro forma net losses attributable
to common stockholders, and basic diluted net loss per share would have been as
follows (the effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts):
F-54
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
8. Stock Option Plan--(continued)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------
(in thousands except per
share data)
<S> <C> <C> <C>
Net loss attributable to common stockholders (as
reported)....................................... $(1,946) $(7,608) $(328,552)
Stock compensation............................... (18) (114) (2,583)
------- ------- ---------
Pro forma net loss attributable to common
stockholders.................................... $(1,964) $(7,722) $(331,135)
======= ======= =========
Pro forma basic and diluted net loss per share... $ (0.94) $ (3.68) $ (110.88)
</TABLE>
9. Income Taxes
A reconciliation of the Company's income tax provision to the statutory
federal provision is as follows:
<TABLE>
<CAPTION>
Year ended December
31
---------------------
1997 1998 1999
----- ----- -------
(in thousands)
<S> <C> <C> <C>
Statutory federal income tax provision.................. $(662) $(860) $(5,567)
State income taxes net of federal tax benefit........... (121) (157) (1,136)
Change in deferred tax asset valuation allowance........ 778 1,010 7,617
Stock compensation expense.............................. -- -- (970)
Other................................................... 5 7 56
----- ----- -------
Income tax provision.................................... $ -- $ -- $ --
===== ===== =======
</TABLE>
At December 31, 1999, the Company had unused net operating loss
carryforwards of approximately $24,956,000 available to reduce federal and
state taxable income, these loss carryforwards expire through 2019. Due to the
degree of uncertainty related to the use of the loss carryforwards, the Company
has fully reserved this tax benefit. Additionally, the future utilization of
the net operating loss carryforwards may be subject to limitations under the
change in stock ownership rules of the Internal Revenue Service.
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
1998 1999
------ -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $2,670 $ 9,975
Other........................................................ 7 338
Tax credit carryforwards..................................... 153 134
------ -------
Total deferred tax assets...................................... 2,830 10,447
Valuation allowance............................................ (2,830) (10,447)
------ -------
Net deferred tax assets........................................ $ -- $ --
====== =======
</TABLE>
The valuation allowance increased by $1,010,000 and $7,617,000 during
1998 and 1999, respectively, due primarily to the increase in net operating
loss carryforwards.
F-55
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
10. Employee Benefit Plan
In 1995, the Company established a savings plan for its employees which
is designed to be qualified under Section 401(k) of the Internal Revenue Code.
Eligible employees are permitted to contribute to the 401(k) plan within
statutory and plan limits. The Company has not contributed to the savings plan
to date.
11. Commitments
Leases
The Company leases its operating facilities and certain computer
equipment and furniture and fixtures under noncancelable operating and capital
lease agreements. Rent expense for the years ended December 31 1997, 1998 and
1999 was $137,000, $311,000, and $505,000, respectively. Future minimum lease
commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Lease Leases
--------- -------
(in thousands)
<S> <C> <C>
Year ending December 31:
2000.......................................................... $1,111 $ 97
2001.......................................................... 559 39
2002.......................................................... 556 21
2003.......................................................... 556 21
2004.......................................................... 555 11
Thereafter.................................................... 1,657 --
------ ----
Total minimum lease payments.................................. $4,994 189
======
Less amount represent interest................................ (44)
----
Present value of minimum lease payments....................... $145
====
</TABLE>
The Company's obligations on one of its operating leases is
collateralized by a $780,000 letter-of-credit with a commercial bank. The
letter of credit is collateralized by a $520,000 certificate of deposit held by
eCredit. The certificate of deposit has been classified as a component of Other
Assets at December 31, 1999.
Employment Agreements
During 1994, the Company entered into a separation agreement with an
officer and stockholder. Pursuant to the terms of the separation agreement, the
Company repurchased 450,000 shares of common stock for $225,000 and entered
into a stock call option agreement. Pursuant to the stock call option, the
Company may purchase an additional 300,000 shares held by the former officer at
fair market value on the date of exercise. The call option terminates upon the
earlier of June 26, 2000 or immediately subsequent to a public offering of
common stock, or a sale, liquidation or merger of the Company, as defined by
the agreement.
In April 1999, the Company entered into a separation agreement with an
officer of the Company. Pursuant to the terms of the separation agreement, the
Company repriced the then vested options to allow the officer to acquire 81,666
shares of common stock at $0.78 per share. Accordingly, under the Proposed
Interpretation of APB 25, the Company will be required to recognize
compensation expense on July 1, 2000 for the effect of the repricing.
F-56
<PAGE>
eCREDIT.COM, INC.
Notes to the Consolidated Financial Statements--(Continued)
12. Subsequent Events--Pro Forma Balance Sheet, Statement of Operations and Net
Loss Per Share (Unaudited)
On February 24, 2000 the Company signed a definitive exchange offer
agreement with Internet Capital Group, Inc. ("ICG"). ICG will offer to purchase
from existing stockholders 30% of eCredit common stock, including authorized
but unallocated options, on a fully diluted basis. Upon the closing of the
exchange offer, ICG will exchange that number of shares of ICG common stock
equal to $450,000,000 divided by the average closing share price of ICG common
stock on the three consecutive days preceding the second trading day preceding
the close of the transaction. The implied price per eCredit common share is
$48.68. Prior to the expiration of the exchange offer, eCredit preferred stock
will convert into common stock.
eCredit will grant ICG a warrant to purchase up to 5% of eCredit common
stock on a fully-diluted basis, which is exercisable over a period of 48 months
following an initial public offering at an aggregate price of $300,000,000
during the first 18 months and $400,000,000 thereafter until expiration. The
value of the warrant approximates $40,000,000.
The unaudited pro forma balance sheet is stated as if the transaction
occurred at December 31, 1999, the unaudited pro forma statement of operations
is stated as if the transaction occurred at January 1, 1999. The pro forma
balance sheet and statement of operations reflect the following:
. Conversion of all its outstanding shares of preferred stock into a
total of 15,568,618 shares of common stock.
. Acceleration and exercise of 1,579,853 common stock options at a
weighted average exercise price of $2.32. Such acceleration and
exercise, in conjunction with the issuance of the warrant results in
a stock compensation charge of $62,000,000, and acceleration of
deferred compensation of $8,800,000. This assumes an implied price
per eCredit common share of $48.68.
. Issuance of warrants to ICG, valued at approximately $40,000,000, in
conjunction with the purchase of eCredit's shares. Such warrants are
exercisable upon an initial public offering of shares of eCredit.
On June 9, 2000, the Company completed its exchange of common stock with
ICG. The implied price per eCredit common share was $19.81 on the date of
conversion. As part of the exchange, the Company accelerated the vesting of
1,730,011 common stock options and restricted common shares and converted all
outstanding shares of preferred stock into a total of 15,568,618 shares of
common stock. Shareholders exchanged 8,768,268 shares of eCredit.com, Inc.
common stock for shares of ICG while the Company directly issued 471,289 shares
to ICG.
F-57
<PAGE>
Report of Independent Public Accountants
To RightWorks Corporation:
We have audited the accompanying balance sheets of RightWorks Corporation (a
California corporation) as of December 31, 1999 and 1998, and the related
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 RightWorks Corporation as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
San Jose, California
April 11, 2000
F-58
<PAGE>
RIGHTWORKS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------
2000 1999 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............ $ 15,993,463 $ 11,921,721 $ 3,948,840
Accounts receivable, net of allowance
for doubtful accounts of 138,347,
$30,000 and $0, respectively........ 4,160,476 3,162,920 58,500
Prepaid expenses and other current
assets.............................. 157,339 128,960 44,930
Deferred debt costs, current
portion............................. 31,333 41,779 --
------------ ------------ -----------
Total current assets................. 20,342,611 15,255,380 4,052,270
Property and Equipment, net........... 1,836,515 412,683 175,515
Restricted cash....................... 1,081,885 -- --
Other assets.......................... 455,937 24,432 27,825
Deferred debt costs, less current
portion.............................. 85,574 76,596 --
------------ ------------ -----------
Total assets....................... $ 23,802,522 $ 15,769,091 $ 4,255,610
============ ============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable..................... $ 1,716,138 $ 634,518 $ 204,196
Accrued payroll...................... 1,388,043 866,094 250,682
Accrued professional services........ -- 317,155 --
Deferred revenue..................... 2,896,068 1,760,583 58,500
Other current liabilities............ 1,220,573 273,780 --
Capital leases, current portion...... 110,748 106,471 --
Notes payable, current portion....... 750,000 576,706 --
------------ ------------ -----------
Total current liabilities............ 8,081,570 4,535,307 513,378
Capital leases, less current portion.. 335,757 206,111 --
Notes payable, less current portion... 2,250,000 2,423,294 --
------------ ------------ -----------
Total liabilities.................. 10,667,327 7,164,712 513,378
------------ ------------ -----------
Commitments (Note 4)
Shareholders' equity:
Convertible preferred stock, $0.001
par value;
Series A: Authorized--3,000,000
shares
Outstanding--3,000,000 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $150,000........................ 3,000 3,000 3,000
Series B: Authorized--4,946,000
shares
Outstanding--4,946,000 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $525,018........................ 4,946 4,946 4,946
Series C: Authorized--9,139,485
shares
Outstanding--9,139,485 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $1,902,110...................... 9,139 9,139 9,139
Series D: Authorized--7,838,085
shares
Outstanding--7,838,085 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $2,250,000...................... 7,838 7,838 7,838
Series E: Authorized--14,417,093
shares
Outstanding--12,700,370 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $1,831,012...................... 12,701 12,701 12,701
Series F: Authorized--35,000,000
shares
Outstanding--34,681,280 shares at
March 31, 2000, December 31, 1999
and 1998; liquidation preference
of $5,000,000...................... 34,681 34,681 34,681
Series G: Authorized--1,000,000
shares
Outstanding--935,616 shares at
March 31, 2000 and December 31,
1999 and no shares in at December
31, 1998; liquidation preference
of $748,493........................ 936 936 --
Series H: Authorized--8,428,935
shares
Outstanding--5,845,938 shares at
March 31, 2000 and December 31,
1999, and no shares at December
31, 1998; liquidation preference
of $13,094,901..................... 5,846 5,846 --
Series H-1: Authorized--6,621
Outstanding--no shares at March 31,
2000, December 31, 1999 and 1998;
no liquidation preference.......... -- -- --
Series I: Authorized--3,500,000
shares
Outstanding--2,449,407, 162,179 and
0 shares at March 31, 2000,
December 31, 1999 and 1998,
respectively; liquidation
preference of $501,663............. 2,449 162 --
Common stock, $0.001 par value:
Authorized--100,000,000 shares
Outstanding--7,211,485, 4,409,885
and 1,855,152 shares at March 31,
2000, December 31, 1999 and 1998,
respectively........................ 7,211 4,410 1,855
Warrants............................. 567,495 567,495 161,293
Additional paid-in capital........... 67,733,954 28,946,240 11,583,708
Notes receivable from shareholders... (1,404,934) (367,667) --
Deferred compensation................ (33,299,191) (3,239,420) --
Accumulated deficit.................. (20,550,876) (17,385,928) (8,076,929)
------------ ------------ -----------
Total shareholders' equity......... 13,135,195 8,604,379 3,742,232
------------ ------------ -----------
Total liabilities and shareholders'
equity............................ $ 23,802,522 $ 15,769,091 $ 4,255,610
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
RIGHTWORKS CORPORATION
Statements of Operations and Comprehensive Loss
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ -------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product license....... $ 4,122,032 $ 50,000 $ 2,149,757 $ -- $ --
Services.............. 777,188 2,124 273,667 75,000 19,160
Discount related to
warrant.............. -- -- (271,887) -- --
----------- ----------- ----------- ----------- -----------
Total revenue....... 4,899,220 52,124 2,151,537 75,000 19,160
Cost of Revenue....... 936,683 -- 429,960 -- --
----------- ----------- ----------- ----------- -----------
Gross profit........ 3,962,537 52,124 1,721,577 75,000 19,160
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Research and
development.......... 1,265,061 806,173 3,344,721 2,262,607 1,200,707
Sales and marketing... 3,986,912 596,135 6,061,872 2,261,838 312,691
General and
administrative....... 1,304,988 253,088 1,543,769 1,036,573 551,936
Amortization of
deferred
compensation......... 665,510 -- 150,578 -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 7,222,471 1,655,396 11,100,940 5,561,018 2,065,334
----------- ----------- ----------- ----------- -----------
Loss from
operations......... (3,259,934) (1,603,272) (9,379,363) (5,486,018) (2,046,174)
Interest and Other
Income (Expense), net.. 94,986 29,315 70,364 (135,547) 29,337
----------- ----------- ----------- ----------- -----------
Net Loss and
Comprehensive Loss..... $(3,164,948) $(1,573,957) $(9,308,999) $(5,621,565) $(2,016,837)
=========== =========== =========== =========== ===========
Basic and diluted net
loss per common share.. $ (0.82) $ (0.97) $ (5.05) $ (3.48) $ (1.44)
=========== =========== =========== =========== ===========
Shares used in computing
basic and diluted net
loss per common share.. 3,863,000 1,630,000 1,845,000 1,615,000 1,402,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
RIGHTWORKS CORPORATION
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable
------------------ ----------------- Paid-In From Deferred Accumulated
Shares Amount Shares Amount Warrants Capital Shareholders Compensation Deficit
---------- ------- --------- ------ -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1996............ 7,946,000 $ 7,946 1,289,833 $1,290 $ -- $ 688,648 $ -- $ -- $ (438,527)
Issuance of
Series C
convertible
preferred stock,
net............. 9,139,485 9,139 -- -- -- 1,892,161 -- -- --
Exercise of
stock options... -- -- 226,555 227 -- 9,192 -- -- --
Exercise of
options issued
in conjunction
with bridge
financing....... -- -- 152,000 152 -- 7,448 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (2,016,837)
---------- ------- --------- ------ -------- ----------- ----------- ------------ ------------
Balances at
December 31,
1997............ 17,085,485 17,085 1,668,388 1,668 -- 2,597,449 -- -- (2,455,364)
Issuance of
Series D
convertible
preferred stock,
net............. 7,838,085 7,838 -- -- -- 2,225,559 -- -- --
Issuance of
Series E
convertible
preferred stock,
net............. 12,700,370 12,701 -- -- -- 1,802,423 -- -- --
Issuance of
Series F
convertible
preferred stock,
net............. 34,681,280 34,681 -- -- -- 4,926,529 -- -- --
Issuance of
warrants to
purchase Series
E convertible
preferred
stock........... -- -- -- -- 161,293 -- -- -- --
Exercise of
stock options... -- -- 263,564 264 -- 35,471 -- -- --
Repurchase of
common stock.... -- -- (76,800) (77) -- (3,763) -- -- --
Net loss........ -- -- -- -- -- -- -- -- (5,621,565)
---------- ------- --------- ------ -------- ----------- ----------- ------------ ------------
Balances at
December 31,
1998............ 72,305,220 72,305 1,855,152 1,855 161,293 11,583,708 -- -- (8,076,929)
Issuance of
Series G
convertible
preferred stock
in exchange for
technology...... 935,616 936 -- -- -- 133,952 -- -- --
Issuance of
Series H
convertible
preferred stock,
net............. 5,845,938 5,846 -- -- -- 13,018,440 (16,667) -- --
Issuance of
Series I
convertible
preferred stock,
net............. 162,179 162 -- -- -- 432,163 -- -- --
Issuance of
warrants to
purchase
convertible
preferred
stock........... -- -- -- -- 406,202 -- -- -- --
Exercise of
stock options... -- -- 254,907 255 -- 43,758 -- -- --
Repurchase of
common stock.... -- -- (40,174) (40) -- (4,439) -- -- --
Exercise of
options via
promissory
note............ -- -- 2,340,000 2,340 -- 348,660 (351,000) -- --
Deferred
Compensation.... -- -- -- -- -- 3,389,998 -- (3,389,998) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 150,578 --
Net loss........ -- -- -- -- -- -- -- -- (9,308,999)
---------- ------- --------- ------ -------- ----------- ----------- ------------ ------------
Balances at
December 31,
1999
(unaudited)..... 79,248,953 79,249 4,409,885 4,410 567,495 $28,946,240 (367,667) (3,239,420) (17,385,928)
Issuance of
Series I
convertible
preferred stock,
net
(unaudited)..... 2,287,228 2,287 -- -- -- 6,964,000 -- -- --
Exercise of
stock options
(unaudited)..... -- -- 190,348 190 -- 75,584 -- -- --
Repurchase of
common stock
(unaudited)..... -- -- (4,960) (5) -- (11,802) -- -- --
Exercise of
options via
promissory note
(unaudited)..... -- -- 2,616,212 2,589 -- 1,034,651 (1,037,267) -- --
Deferred
compensation
(unaudited)..... -- -- -- -- -- 30,725,281 -- (30,725,281) --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- 665,510 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (3,164,948)
---------- ------- --------- ------ -------- ----------- ----------- ------------ ------------
Balances at
March 31, 2000
(unaudited)..... 81,536,181 $81,536 7,211,485 $7,211 $567,495 $67,733,954 $(1,574,610) $(33,299,191) $(20,550,876)
========== ======= ========= ====== ======== =========== =========== ============ ============
<CAPTION>
Total
------------
<S> <C>
Balances at
December 31,
1996............ $ 259,357
Issuance of
Series C
convertible
preferred stock,
net............. 1,901,300
Exercise of
stock options... 9,418
Exercise of
options issued
in conjunction
with bridge
financing....... 7,600
Net loss........ (2,016,837)
------------
Balances at
December 31,
1997............ 160,838
Issuance of
Series D
convertible
preferred stock,
net............. 2,233,437
Issuance of
Series E
convertible
preferred stock,
net............. 1,815,124
Issuance of
Series F
convertible
preferred stock,
net............. 4,961,210
Issuance of
warrants to
purchase Series
E convertible
preferred
stock........... 161,293
Exercise of
stock options... 35,735
Repurchase of
common stock.... (3,840)
Net loss........ (5,621,565)
------------
Balances at
December 31,
1998............ 3,742,232
Issuance of
Series G
convertible
preferred stock
in exchange for
technology...... 134,888
Issuance of
Series H
convertible
preferred stock,
net............. 13,007,619
Issuance of
Series I
convertible
preferred stock,
net............. 432,325
Issuance of
warrants to
purchase
convertible
preferred
stock........... 406,202
Exercise of
stock options... 44,013
Repurchase of
common stock.... (4,479)
Exercise of
options via
promissory
note............ --
Deferred
Compensation.... --
Amortization of
deferred
compensation.... 150,578
Net loss........ (9,308,999)
------------
Balances at
December 31,
1999
(unaudited)..... 8,604,379
Issuance of
Series I
convertible
preferred stock,
net
(unaudited)..... 6,966,287
Exercise of
stock options
(unaudited)..... 75,774
Repurchase of
common stock
(unaudited)..... (11,807)
Exercise of
options via
promissory note
(unaudited)..... --
Deferred
compensation
(unaudited)..... --
Amortization of
deferred
compensation
(unaudited)..... 665,510
Net loss
(unaudited)..... (3,164,948)
------------
Balances at
March 31, 2000
(unaudited)..... $13,135,195
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
RIGHTWORKS CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ -------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(3,164,948) $(1,573,957) $(9,308,999) $(5,621,565) $(2,016,837)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Restricted cash....... (1,081,885) --
Provision for bad
debt................. 108,347 -- 30,000 -- --
Depreciation and
amortization......... 768,424 30,607 306,048 100,490 59,948
Conversion of accrued
interest to preferred
stock................ -- -- -- 26,012 --
Warrants issued in
conjunction with
bridge financing..... -- -- -- 161,293 --
Valuation of warrants
issued in connection
with revenue
contracts and lease
lines................ -- -- 406,202 -- --
Write off of abandoned
technology exchanged
for preferred stock.. -- -- 134,888 -- --
Changes in operating
assets and
liabilities:
Accounts receivable... (1,106,403) 58,500 (3,134,420) (58,500) 34,457
Prepaid expenses and
other current
assets............... (28,379) (40,000) (84,030) (44,689) 6,825
Other assets.......... (431,505) -- 3,393 -- (23,623)
Deferred debt costs... 1,469 -- (118,375) -- --
Accounts payable and
accrued liabilities.. 2,233,707 (13,873) 1,636,669 244,565 192,089
Deferred revenue...... 1,135,485 (52,126) 1,702,083 58,500 (10,000)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities.......... (1,565,688) (1,590,849) (8,426,541) (5,133,894) (1,757,141)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment......... (1,359,051) (19,464) (60,817) (120,550) (142,246)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... (1,359,051) (19,464) (60,817) (120,550) (142,246)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Advances from related
party................. -- -- -- -- 500,000
Proceeds from bridge
financing............. -- -- -- 1,650,000 --
Proceeds from issuance
of common stock....... 75,773 250 44,013 35,735 17,018
Repurchase of common
stock................. (11,807) -- (4,479) (3,840) --
Proceeds from issuance
of preferred stock,
net................... 6,966,287 -- 13,439,944 6,833,759 1,901,300
Additions (repayments)
of capital lease
obligations........... (34,772) -- (19,239) -- --
Proceeds from issuance
of note payable....... -- 250 3,000,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities.......... 6,995,481 250 16,460,239 8,515,654 2,418,318
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents........... 4,071,742 (1,610,063) 7,972,881 3,261,210 518,931
Cash and Cash
Equivalents, Beginning
of Period............. 11,921,721 3,948,840 3,948,840 687,630 168,699
----------- ----------- ----------- ----------- -----------
Cash and Cash
Equivalents, End of
Period................ $15,993,463 $ 2,338,777 $11,921,721 $ 3,948,840 $ 687,630
=========== =========== =========== =========== ===========
Supplemental schedule
of noncash financing
activities:
Warrants issued in
conjunction with
bridge financing...... $ -- $ -- $ -- $ 161,293 $ --
=========== =========== =========== =========== ===========
Write off of abandoned
technology exchanged
for preferred stock... $ -- $ -- $ 134,888 $ -- $ --
=========== =========== =========== =========== ===========
Note receivable from
officer in exchange
for preferred stock... $ -- $ -- $ 16,667 $ -- $ --
=========== =========== =========== =========== ===========
Notes receivable from
officers for exercise
of common stock
options............... $ 1,037,267 $ -- $ 351,000 $ -- $ --
=========== =========== =========== =========== ===========
Equipment purchased
under capital leases.. $ 168,695 $ -- $ 331,821 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements
1. Organization
RightWorks Corporation (the "Company" or "RightWorks") was incorporated
in California in September 1994 to develop and market Web-based enterprise-
class electronic procurement solutions.
The Company has financed its operations primarily through the sale of
convertible preferred stock. In February 1999, the Company released and shipped
the production version of its initial product and emerged from the development
stage. However, the Company continues to be subject to the risks and challenges
associated with companies in a comparable stage of development, including:
dependence on key employees for technology development and support, dependence
on a limited number of customers, rapidly changing technology, potential
competition from larger, more established companies, the successful development
and marketing of its products and the ability to obtain adequate financing to
support its growth.
The Company incurred a net loss of $9.3 million for the year ended
December 31, 1999 and, as of December 31, 1999, has an accumulated deficit of
$17.4 million. During January and February 2000, the Company raised
approximately $7.1 million in gross proceeds from the sale of its Series I
preferred stock. In March 2000, Internet Capital Group entered into an
agreement, with tendering preferred shareholders of the Company, to acquire a
majority interest in the Company. The Company expects to incur additional
losses in the future. Management anticipates funding future operations through
additional equity financing, as required, and successful operations; however,
there is no assurance that such efforts will be successful.
2. Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
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.
Statements of Cash Flows
For purposes of the statements of cash flows, RightWorks considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of amounts on deposit at
a commercial bank.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, to date, have not been material.
F-63
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
Receivables due from significant customers as a percentage of total
accounts receivable were as follows:
<TABLE>
<CAPTION>
As of As of December 31,
March 31, ------------------
2000 1999 1998
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Customer A............................. * * 100%
Customer B............................. * 56% *
Customer C............................. * 13% *
Customer D............................. 23% * *
Customer E............................. 20% * *
Customer F............................. 17% * *
</TABLE>
* Represents less than 10% for the indicated period.
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Years Ended
As of December 31,
March 31, ----------------
2000 1999 1998 1997
----------- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Customer B..................................... * 86% * *
Customer D..................................... * * * 49%
Customer E..................................... * * * 51%
Customer F..................................... * * 67% *
Customer G..................................... * * 33% *
Customer H..................................... 23% * * *
Customer I..................................... 19% * * *
Customer J..................................... 19% * * *
Customer K..................................... 14% * * *
</TABLE>
* Represents less than 10% for the indicated period.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives of the assets, which
is generally three years. Depreciation expense is included in operating
expenses.
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Computer equipment.................................. $ 592,240 $ 279,062
Furniture and fixtures.............................. 136,933 69,370
Purchased software.................................. 24,397 12,500
--------- ---------
753,570 360,932
Accumulated depreciation and amortization........... (340,887) (185,417)
--------- ---------
Property and equipment, net......................... $ 412,683 $ 175,515
========= =========
</TABLE>
F-64
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," capitalization of software development
costs begins upon the establishment of technological feasibility of the
product, which the Company defines as establishment of a working model and is
further defined as a beta version of the software. The period of time
commencing when a product achieves beta status and ending when a product is
offered for sale is typically very short. Accordingly, amounts that could have
been capitalized under SFAS No. 86 after consideration of the above factors and
overall recoverability of capitalizable amounts were immaterial and, therefore,
no software development costs have been capitalized by the Company to date.
Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," in October 1995. This accounting
standard permits the use of either a fair value-based method of accounting or
the method defined in Accounting Principles Board Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees" to account for stock-based
compensation arrangements. Companies that elect to employ the method prescribed
by APB 25 are required to disclose the pro forma net income (loss) that would
have resulted from the use of the fair value-based method. RightWorks has
elected to continue to account for its stock-based compensation arrangements
under the provisions of APB 25 and, accordingly, has included in Note 6 the pro
forma disclosures required under SFAS No. 123.
Revenue Recognition
The Company did not complete development of its principal product until
February 1999 and, accordingly, had no product revenue in 1998. Revenue
recognized in the years ended December 31, 1998 and 1997 related to royalties
and services.
RightWorks' revenues for 1999 and 2000 are derived from two sources;
license fees and services. Services include software maintenance and support,
training and system implementation consulting.
Fees from licenses are recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or
determinable, collection is probable, and vendor-specific objective evidence
exists to allocate the total fee between all elements of the arrangement. If an
acceptance period is required, revenue is recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.
Maintenance revenue is recognized ratably over the term of the
maintenance contract, which is typically twelve months. If maintenance is
included in an arrangement which includes a license agreement, amounts related
to maintenance are unbundled from the license fee based on vendor-specific
objective evidence. Consulting and training revenue is recognized when the
services are performed.
Cost of revenue consists of compensation and related overhead costs for
persons engaged in consulting, training and maintenance for our customers.
Advertising Costs
The Company expenses all advertising costs as incurred. The Company does
not incur any direct-response advertising costs.
F-65
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which RightWorks adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with shareholders ("comprehensive income").
Comprehensive income is the total of net income and all other non-owner changes
in equity. For each of the three years ended December 31, 1999 and the quarter
ended March 31, 2000, RightWorks' comprehensive loss was equal to net loss.
Computation of Basic and Diluted Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings Per Share," for all periods presented. In
accordance with SFAS No. 128, basic net loss per common share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Three Months
Ended Years Ended December
March 31, 31,
---------------- -------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss.................... $(3,165) $(1,574) $(9,309) $(5,622) $(2,017)
======= ======= ======= ======= =======
Basic and diluted:
Weighted average shares of
common stock
outstanding.............. 6,586 1,854 2,511 1,852 1,534
Less: Weighted average
shares subject to
repurchase............... (2,723) (224) (666) (224) (133)
Weighted average shares
used in computing basic
and diluted net loss per
common share............. 3,863 1,630 1,845 1,615 1,402
======= ======= ======= ======= =======
Basic and diluted net loss
per common share........... $ (0.82) $ (0.97) $ (5.05) $ (3.48) $ (1.44)
======= ======= ======= ======= =======
</TABLE>
RightWorks has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because
all such securities are antidilutive for all periods presented. The total
number of shares excluded from the calculations of diluted net loss per share
were approximately 84,500,000, 75,100,000 and 17,500,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and 89,000,000 and 75,500,000
for the three months ended March 31, 2000 and 1999, respectively. See Notes 5
and 6 for further information on these securities.
Segment Reporting
During 1998, RightWorks adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to
F-66
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
assess performance and manage company resources be the source for segment
information disclosure. On this basis, RightWorks is organized and operates as
one business segment; the design, development, and marketing of software
solutions.
During the years ended December 31, 1999, 1998 and 1997, and the three
months ended March 31, 2000 and 1999 (unaudited), respectively, RightWorks did
not generate revenues in foreign countries and had no assets in foreign
countries.
Interim Financial Information
The financial information as of March 31, 2000 and for the three months
ended March 31, 2000 and 1999 is unaudited and includes all adjustments,
consisting only of normal and recurring accruals, that management considers
necessary for a fair presentation of its consolidated financial position,
operating results and cash flows. Results for the three months ended March 31,
2000 are not necessarily indicative of results to be expected for the full
fiscal year 2000 or for any future period.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting For Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for RightWorks). Management
believes that this statement will not have a material impact on the financial
condition or results of the operations of RightWorks.
In December 1998, the AICPA issued Statement of Position ("SOP") 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the
deferral of the application of certain provisions of SOP 97-2 amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. RightWorks does not anticipate that this
statement will have a material impact on its statement of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the application of generally accepted
accounting principles to revenue recognition in financial statements. The SEC
issued an amendment to SAB 101 delaying the effective date for certain
companies. The Company will adopt SAB 101 in the fourth quarter of fiscal 2000
and is presently analyzing the impact that SAB 101 will have on its financial
statements. Based on the Company's review to date, SAB 101 is not expected to
materially impact the Company's financial position or operating results.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (an interpretation of APB
Opinion No. 25). This Interpretation provides guidance regarding the
application of APB Opinion No. 25 to stock compensation involving employees.
This interpretation is effective July 1, 2000 and is not expected to have a
material effect on the Company's financial statements.
F-67
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
3. Borrowings
In June 1999, the Company entered into a convertible subordinated note
agreement with a financing company totaling $3,000,000, secured by the assets
of the Company. The note bears interest at 10%, is payable initially, in
twelve monthly installments of interest only. Beginning July 2000, principal
and interest is payable in twenty-four equal monthly installments. The Company
is required to maintain compliance with certain financial covenants, including
minimum tangible net worth and liquidity coverage. Until 45 days prior to an
initial public offering of the Company's common stock, 30% of the note is
convertible into preferred stock of the Company at a conversion rate equal to
the lower of the price per share of preferred stock representing a $20 million
valuation or the price per share of preferred stock at the next financing
round. None of the note was converted during the year ended December 31, 1999.
In conjunction with the agreement, the Company issued a warrant to purchase
143,916 shares of Series H preferred stock at an exercise price of $2.24 per
share (see note 5).
Future maturities of principal on these note agreements as of December
31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................... $ 576,706
2001........................................................... 1,485,761
2002........................................................... 937,533
----------
$3,000,000
==========
</TABLE>
In June 1999, the Company entered into a note payable agreement with a
leasing company. The note accrues interest monthly at 3.09% and matures in
June 2002. The note is secured by the equipment acquired with the proceeds
from this note. The principal amount outstanding at December 31, 1999 under
this note is $312,582. In conjunction with the agreement, the Company issued a
warrant to purchase 23,986 shares of Series H preferred stock at an exercise
price of $2.24 per share (see Note 5).
Included in property and equipment are assets acquired under capital
leases. Future minimum lease payments on capital leases are as follows at
December 31, 1999:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
2000......................................................... $ 139,088
2001......................................................... 139,088
2002......................................................... 119,877
---------
Total minimum lease payments................................. 398,053
Less: Imputed interest (7.0%)................................ (85,471)
---------
Present value of payments under capital leases............... 312,582
Less: Current portion........................................ (106,471)
---------
Long-term capital lease obligations.......................... $ 206,111
=========
</TABLE>
4. Commitments
RightWorks leases its facilities under operating lease agreements. The
facility leases expire at various dates in 2000. As of December 31, 1999,
future minimum payments required under RightWorks' operating leases in 2000
were $130,810.
F-68
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
In April 2000, RightWorks entered into an operating lease agreement for a
new office facility. The term of the lease is eight years and expires in March
2008. Future minimum lease payments under the lease are as follows:
<TABLE>
<S> <C>
2000......................................................... $ 914,359
2001......................................................... 1,044,732
2002......................................................... 1,044,732
2003......................................................... 1,044,732
2004......................................................... 1,044,732
Thereafter................................................... 3,395,379
----------
$8,488,666
==========
</TABLE>
Rent expense was $240,898, $197,470 and $112,030 for the years ended
December 31, 1999, 1998 and 1997, respectively.
5. Preferred Stock
At December 31, 1999, the Company has authorized 87,276,219 shares of
preferred stock, of which 3,000,000 shares have been designated as Series A
Preferred Stock ("Series A"); 4,946,000 shares have been designated as Series B
Preferred Stock ("Series B"); 9,139,485 shares have been designated as Series C
Preferred Stock ("Series C"); 7,838,085 shares have been designated as Series D
Preferred Stock ("Series D"); 14,417,093 shares have been designated as Series
E Preferred Stock ("Series E"); 35,000,000 shares have been designated as
Series F Preferred Stock ("Series F"); 1,000,000 shares have been designated as
Series G Preferred Stock ("Series G"); 8,435,556 shares have been designated as
Series H Preferred Stock ("Series H"); and 3,500,000 shares have been
designated as Series I Preferred Stock ("Series I"). Significant rights,
restrictions and preferences of the preferred stock are as follows:
. Each share of preferred stock is entitled to receive dividends at
a rate of $0.005 to $0.3083 per share, payable in preference and
priority to payment of any dividend on common stock, when, and if,
declared by the board of directors of the Company. The right to
dividends on the preferred stock shall not be cumulative. No
dividends have been declared as of March 31, 2000.
. In the event of liquidation, dissolution, or winding up of the
Company, either voluntary or involuntary, the holders of preferred
stock shall be entitled to receive, pari passu with each other and
in preference to any distribution to holders of common stock, an
amount per share ranging from $0.05 to $3.083. If the assets and
funds are not sufficient to permit the payment of these amounts,
then the entire assets and funds of the corporation shall be
distributed ratably among the holders of preferred stock in
proportion to the number of shares of each series of preferred
stock held by each such holder. Any remaining assets will be
distributed proportionally among the holders of common stock and
preferred stock on an as-converted basis.
. Each share of preferred stock is convertible at the option of the
holder into one share of common stock (subject to adjustments for
events of dilution). The shares will be converted into common
shares immediately prior to the closing of a public stock offering
which meets certain criteria. The shares will also be
automatically converted into common shares upon written consent of
the holders of not less than 66.67% of the then outstanding
preferred shares.
F-69
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
. Each share of preferred stock is entitled to vote in an amount
equivalent to the number of common shares into which it is
convertible.
Series G Preferred Stock
In 1999, the Company entered into an agreement with another company to
exchange certain technology for Series G. In conjunction with this agreement,
the Company agreed to issue 935,616 shares of Series G, valued at approximately
$135,000, which has similar rights and preferences as other series of preferred
stock as noted above. The Company anticipated using the technology to
incorporate into their product to sell to companies desiring to purchase an
internal procurement software product. During 1999, the Company abandoned the
use of the technology as it re-focused its efforts on selling software to
companies establishing digital marketplaces on the internet. The write-off of
the technology is included in research and development expense in the
accompanying statements of operations.
Series I Preferred Stock
During January and February 2000, the Company issued an additional
2,287,228 shares of Series I at $3.083 per share. Total proceeds from the
additional issuance amounted to approximately $7.1 million.
Warrants
In August and October 1998, the Company issued $1,150,000 and $500,000,
respectively, of Convertible Promissory Notes (the "Notes") pursuant to Note
and Warrant Purchase Agreements. The Notes bore interest at 8.5%, and the
principal of $1,650,000 and accrued interest of $26,012 were converted into
Series E Preferred Stock at a conversion price of $0.14417.
In conjunction with this bridge financing, the Company issued warrants to
purchase 1,716,723 shares of Series E Preferred Stock at an exercise price of
$0.14417. The warrants were exercisable after the closing of the Series E
financing and expire in August 2003. The fair value of the warrants on the date
of grant was estimated using the Black-Scholes model using the following
assumptions: risk-free interest rate of 5.46%, expected life of 5 years, and
expected volatility of 75%, and was determined to be $161,293. This amount has
been recognized as additional interest expense in the accompanying statement of
operations.
In conjunction with four software and value added reseller arrangements,
the Company issued warrants to purchase 2,400,536 shares of the Company's
preferred stock at exercise prices ranging from $2.24 to $3.083 per share, the
fair value of the underlying preferred stock on the dates of the agreements.
The warrants have terms ranging from December 31, 2002 to December 31, 2004 and
will be earned over their terms as certain performance milestones are achieved.
Warrants for 150,000 shares were earned during 1999 and the fair value of these
warrants was determined to be approximately $281,000 and was estimated using
the Black-Scholes option pricing model with the following assumptions: risk-
free interest rate of 6%; expected lives of three to five years; and expected
volatility of 70%. This amount was recognized as a reduction of revenue on the
accompanying statements of operations and comprehensive loss. The residual
2,250,536 warrants were unearned at December 31, 1999 and March 31, 2000
(unaudited).
In conjunction with the note agreements (see note 3), the Company issued
167,902 warrants to purchase Series H preferred stock at exercise prices of
$2.24 per share which are exercisable until either June 25, 2006 or three years
from the Company's initial public offering. The fair value of these warrants
was determined to be approximately $125,000 and was estimated using the Black-
Scholes option pricing model
F-70
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
with the following assumptions: risk-free interest rate of 6%; expected life of
seven years; and expected volatility of 70%. This amount, net of amortization
for 1999, was recorded as debt issuance costs in other assets and is being
amortized to interest expense over the one-year term of the agreement.
6. Common Stock
Reserved for Future Issuance
As of December 31, 1999, the Company has reserved the following shares of
authorized but unissued common stock:
<TABLE>
<S> <C>
Series A....................................................... 3,000,000
Series B....................................................... 4,946,000
Series C....................................................... 9,139,485
Series D....................................................... 7,838,085
Series E....................................................... 12,700,370
Series F....................................................... 34,681,280
Series G....................................................... 935,616
Series H....................................................... 5,845,938
Series I....................................................... 162,179
Warrants to purchase preferred stock........................... 4,285,160
Stock options.................................................. 4,372,667
----------
87,906,780
==========
</TABLE>
Stock-Based Compensation
In connection with the grant of certain stock options to employees during
the year ended December 31, 1999 and for the three months ended March 31, 2000,
the Company recorded deferred compensation of $3,389,998, and $30,725,281
(unaudited), respectively, representing the difference between the deemed value
of the common stock for accounting purposes and the option exercise price or
stock sale price at the date of the option grant or stock sale. Such amount is
presented as a reduction of shareholders' equity and amortized over the vesting
period of the applicable options. $150,578 and $665,510 (unaudited) was
expensed during the year ended December 31, 1999 and for the three months ended
March 31, 2000, respectively. Compensation expense is decreased in the period
of forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services.
1996 Stock Option Plan
In August 1996, the board of directors approved the 1996 Stock Option
Plan (the "Plan"). Under the Plan, incentive and nonqualified stock options to
purchase up to 7,258,093 shares of common stock may be granted to employees,
directors, and consultants to the Company. The option price per share shall not
be less than the fair value, as determined by the board of directors, for
incentive stock option grants or not less than 85% of the fair value for
nonqualified stock options. Any options granted to a shareholder with more than
10% of the voting power (a "ten-percent owner") shall not have an option price
of less than 110% of the fair value. Options become exercisable as determined
by the board of directors, which is generally over four years. Options
generally expire ten years after the date of grant, or five years for greater
than ten-percent owners.
F-71
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Three Months Ended Year Ended Year Ended Year Ended
March 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
-------------------- -------------------- ------------------ ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------- -------- ---------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning outstanding
balance................ 2,712,343 $0.18 887,763 $0.25 300,865 $0.05 116,459 $0.05
Granted............... 3,555,677 $5.34 5,710,835 $0.17 917,287 $0.25 381,006 $0.10
Exercised............. (2,806,560) $0.40 (2,594,907) $0.15 (263,564) $0.15 (126,555) $0.05
Cancelled............. (624,755) $0.05 (1,291,348) $0.21 (66,825) $0.30 (70,045) $0.05
---------- ---------- -------- --------
Ending outstanding
balance................ 2,836,705 $6.46 2,712,343 $0.18 887,763 $0.25 300,865 $0.05
========== ========== ===== ======== ===== ======== =====
Options exercisable..... 1,074,226 $0.10 260,157 $0.13 275,830 $0.10 205,828 $0.05
========== ========== ===== ======== ===== ======== =====
</TABLE>
RightWorks accounts for its stock option plans pursuant to APB 25 whereby
the difference between the exercise price and the fair value at the date of
grant is recognized as compensation expense. Had compensation expense for stock
option plans been determined consistent with SFAS No. 123, net losses would
have increased to the following pro forma amounts (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Years Ended December
31,
Three Months Ended -------------------------
March 31, 2000 1999 1998 1997
------------------ ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Net loss as reported......... $(3,165) $(9,309) $(5,622) $(2,017)
Net loss pro forma........... $(5,066) $(9,378) $(5,626) $(2,082)
Net loss per share as
reported.................... $ (0.82) $ (5.05) $ (3.48) $ (1.44)
Net loss per share pro
forma....................... $ (1.31) $ (5.08) $ (3.48) $ (1.49)
</TABLE>
The weighted average fair value of options granted during the years ended
1999, 1998, and 1997 was $0.05, $0.05 and $0.02, respectively. The fair value
of each option grant was estimated on the date of grant using the Black-Scholes
option pricing model using the following assumptions: risk-free interest rates
ranging from 4.22% to 6.63%; expected dividend yield of zero percent for all
three periods; an average expected life of 2.5 years; and expected volatility
of 0.001% for all periods.
F-72
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
The following table summarizes the stock options outstanding and
exercisable:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000 (unaudited)
--------------------------------------------- ----------------------------------------------
Options Vested Options Vested
Options Outstanding and Exercisable Options Outstanding and Exercisable
---------------------------- ---------------- --------------------------- ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Range of Average Average Average Average Average Average
Exercise Remaining Exercise Exercise Number Exercise Exercise
Prices Number Years Price Number Price Number Years Price Number Price
-------- --------- --------- -------- ------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0.05 61,671 6.9 $0.05 54,658 $0.05 9,162 6.7 $ 0.05 8,475 $0.05
$0.10 98,003 7.6 $0.10 82,837 $0.10 22,817 7.4 $ 0.10 16,781 $0.10
$0.15 1,342,412 5.9 $0.15 75,879 $0.15 720,756 5.7 $ 0.15 720,806 $0.15
$0.22 1,175,435 9,8 $0.22 36,393 $0.22 238,250 9.6 $ 0.22 -- $0.22
$0.50 34,822 7.9 $0.50 10,390 $0.50 570,720 7.7 $ 0.50 328,164 $0.50
1,275,000 10.0 $14.00
--------- ------- --------- ---------
2,712,343 260,157 2,836,705 1,074,226
========= ======= ========= =========
</TABLE>
Non-Plan Stock Options
In October 1995, non-qualified stock options for a total of 99,600 shares
of common stock were granted to an employee at an exercise price of $0.025 per
share. These options are fully vested and expire ten years from the date of
grant.
Stock Split
On June 2, 1999, RightWorks' board of directors approved a 5-for-1
reverse stock split of RightWorks' outstanding common stock. All share and per
share information relating to common stock included in these financial
statements has been retroactively adjusted to reflect this reverse stock split.
7. Income Taxes
The Company accounts for income taxes pursuant to the provisions of SFAS
No. 109, "Accounting for Income Taxes," which provides for an asset and
liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes become
payable. The Company has not had any taxable income or related tax liabilities
for any period. A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding realization of the assets
based upon the limited operating history of the Company, the lack of
profitability to date, and the uncertainty of future profitability.
The components of the deferred income tax asset are as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.................. $4,057,314 $2,101,786
Temporary differences............................. 648,679 46,586
Capitalized start up costs........................ 2,217,234 1,888,655
Research and development credits.................. 321,239 210,324
---------- ----------
7,244,466 4,247,351
Valuation allowance............................... (7,244,466) (4,247,351)
---------- ----------
Net deferred income tax asset..................... $ -- $ --
========== ==========
</TABLE>
F-73
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
As of December 31, 1999, the Company has Federal and State net deferred
tax assets of approximately $7,244,000 consisting primarily of net operating
loss carryforwards. The Company has established a valuation allowance equal to
this net deferred tax asset. The Company has research and development credits
of approximately $287,000 and $34,000 to offset future Federal and State
taxable income, respectively. Additionally, the Company has capitalized start-
up costs of approximately $5,430,000 and has net operating loss carryforwards
of approximately $9,954,000 to offset future Federal and State taxable income.
The net operating loss carryforwards expire at various dates through the year
2019. The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and credit carryforwards to be used in any given year upon the
occurrence of certain events, including a significant change in ownership
interest.
8. Related Party Transactions
On December 31, 1997, the Company received a $500,000 advance payment
from a shareholder in conjunction with the Series D financing which closed in
January 1998. Upon closure of the financing, the advance was converted into
1,741,796 shares of Series D.
During 1999, an officer of the Company was given a loan to purchase
11,121 shares of Series H at $2.24 per share and certain other officers were
given loans, with full-recourse, to exercise 2,340,000 common stock options at
$0.15 per share. In April 2000, the loan for Series H was paid-in-full. The
loans for the option exercises bear interest at 6% and are due in four years.
9. Subsequent Events
In March 2000, the Company entered into an agreement to sell a majority
interest of the Company to Internet Capital Group, Inc. The transaction closed
in June 2000.
Included in revenue for the quarter ended March 31, 2000 is $1.0 million
and $1.0 million from ICG commerce and Emerge Interactive, respectively,
affiliates of Internet Capital Group, Inc.
At March 31, 2000, the number of shares reserved for the 1996 option plan
totaled 9,046,452.
F-74
<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 September 30, 1999 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, 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 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 September 30, 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, and for the nine months ended September 30,
1999 in conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
December 6, 1999
F-75
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Proforma
September 30,
December 31, December 31, September 30, 1999
1997 1998 1999 (note 1(b))
------------ ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash...................... $ 400 $ 268 $ 1,650,134 $ 1,650,134
Trade accounts
receivable............... -- 368,421 2,790,427 2,790,427
Inventories (note 3)...... 635,963 706,557 655,129 655,129
Cattle deposits........... -- -- 489,760 489,760
Prepaid expenses.......... 33,642 27,837 103,242 103,242
Net assets of discontinued
operations (note 12)..... 1,066,804 2,285,341 390,336 390,336
----------- ----------- ----------- -----------
Total current assets...... 1,736,809 3,388,424 6,079,028 6,079,028
Property and equipment, net
(note 4).................. 428,140 513,837 1,711,404 1,711,404
Capitalized offering
costs..................... -- -- 341,967 341,967
Investment in Turnkey
Computer Systems, Inc.
(note 5).................. -- -- 1,822,833 1,822,833
Intangibles, net (note 6).. -- 2,699,828 6,273,309 6,273,309
----------- ----------- ----------- -----------
Total assets............ $ 2,164,949 $ 6,602,089 $16,228,541 $16,228,541
=========== =========== =========== ===========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Current installments of
capital lease obligation
with related party (note
10)...................... $ -- $ 79,852 $ 83,917 $ 83,917
Note payable (note 5)..... -- -- 500,000 500,000
Accounts payable.......... 725,369 423,946 1,633,132 1,633,132
Accrued liabilities:
Salaries and benefits..... 175,597 283,103 908,271 908,271
Other..................... 98,704 319,989 1,435,987 1,435,987
Advanced payments from
customers................ -- -- 619,270 619,270
Due to related parties
(note 10)................ 8,040,304 5,187,334 13,405,957 13,405,957
----------- ----------- ----------- -----------
Total current
liabilities.............. 9,039,974 6,294,224 18,586,534 18,586,534
Capital lease obligation
with related party,
excluding current
installments (note 10).... -- 305,018 242,673 242,673
Note payable (note 5)...... -- -- 900,000 900,000
----------- ----------- ----------- -----------
Total liabilities......... 9,039,974 6,599,242 19,729,207 19,729,207
----------- ----------- ----------- -----------
Commitments and
contingencies (notes 6, 10
and 13)
Redeemable Class A common
stock, issued and
outstanding. No shares
issued and outstanding in
1997 and 1998, 62,500
shares issued and
outstanding in 1999. No
shares issued and
outstanding pro forma
(note 5)..................... -- -- 406,000 --
----------- ----------- ----------- -----------
Stockholders' equity
(deficit) (notes 7, 9 and
14):
Preferred stock, $.01 par
value, authorized
15,000,000 shares:
Series A preferred stock,
(aggregate involuntary
liquidation preference
of $6,741,954 in 1997,
$7,386,314 in 1998 and
$7,545,198 in 1999),
designated 6,500,000
shares, issued and
outstanding 6,443,606
shares in 1997, 1998 and
1999. No shares
designated, issued and
outstanding pro forma.... 64,436 64,436 64,436 --
Series B junior preferred
stock, (aggregate
involuntary liquidation
preference of $-0- in
1997, $4,801,315 in 1998
and $4,919,671 in 1999),
designated 2,400,000
shares, issued and
outstanding -0- shares
in 1997, 2,400,000
shares in 1998 and 1999.
No shares designated,
issued and outstanding
pro forma................ -- 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. No shares
designated, issued and
outstanding pro forma.... -- -- 11,000 --
Series D preferred stock,
designated 4,555,556
shares, no shares issued
and outstanding in 1997,
1998 and 1999. No shares
designated, issued and
outstanding pro forma.... -- -- -- --
Common stock, $.008 par
value, authorized
100,000,000 shares:
Class A common stock,
designated 92,711,110
shares, issued and
outstanding 3,258,125
shares in 1997,
5,845,625 shares in 1998
and 6,957,694 shares in
1999 and 19,449,702
shares pro forma......... 26,065 46,765 55,662 155,723
Class B common stock,
designated 7,288,890
shares; no shares issued
and outstanding in 1997,
1998, 1999 or pro
forma.................... -- -- -- --
Additional paid-in
capital.................. 1,982,986 16,648,286 23,454,170 23,859,545
Accumulated deficit....... (8,948,512) (16,780,640) (27,452,825) (27,452,825)
Unearned compensation..... -- -- (63,109) (63,109)
----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)....... (6,875,025) 2,847 (3,906,666) (3,500,666)
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit).............. $ 2,164,949 $ 6,602,089 $16,228,541 $16,228,541
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-76
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ 1,792,471 $ 1,106,452 $ 18,338,645
Cost of revenue
(including $0, $0,
$511,000, $388,000 and
$255,000 to related
parties--note 10)...... -- -- 2,623,447 1,628,757 18,282,330
----------- ----------- ----------- ----------- ------------
Gross profit
(loss)............. -- -- (830,976) (522,305) 56,315
----------- ----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative
(including $0,
$219,000, $627,000,
$507,000, and
$600,000 to related
parties--note 10).... -- 627,606 3,659,810 2,427,944 7,539,689
Research and
development
(including $0,
$51,000, $119,000,
$95,000 and $171,000
to related parties--
note 10)............. -- 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)
Related party interest
expense (note 10)...... -- (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 8)..... -- -- -- -- --
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 (including
$468,000, $814,000,
$370,000, $287,000,
and $171,000 to
related parties--note
10).................. (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)
=========== =========== =========== =========== ============
Profit (loss) from
continuing operations
per common share--basic
and diluted............ $ -- $ (3.91) $ (1.36) $ (0.67) $ (1.59)
=========== =========== =========== =========== ============
Net profit (loss) per
common share--basic and
diluted................ $ (9.24) $ (14.34) $ (1.80) $ (0.97) $ (1.59)
=========== =========== =========== =========== ============
Weighted average number
of common shares
outstanding--basic and
diluted................ 186,096 382,273 4,356,926 5,845,625 6,709,854
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-77
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock Preferred 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............ -- $ -- -- $ -- -- $ -- -- $ -- 1,250 $ 10 -- $--
Issuance of
common stock to
XL Vision, Inc.,
for cash at
$.008 per
share........... -- -- -- -- -- -- -- -- 248,750 1,990 -- --
Issuance of
common stock for
cash at $.008
per share....... -- -- -- -- -- -- -- -- 175,000 1,400 -- --
Exercise of
stock options
for cash at
$.008 per
share........... -- -- -- -- -- -- -- -- 25,000 200 -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------- --------- ------- --- ---
Balances at
December 31,
1996............ -- -- -- -- -- -- -- -- 450,000 3,600 -- --
Issuance of
common stock to
XL Vision, Inc.,
for cash at
$.008 per
share........... -- -- -- -- -- -- -- -- 2,808,125 22,465 -- --
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 7)........ 6,443,606 64,436 -- -- -- -- -- -- -- -- -- --
Transfer of
technology by XL
Vision, Inc.
(note 10)....... -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------- --------- ------- --- ---
Balances at
December 31,
1997............ 6,443,606 64,436 -- -- -- -- -- -- 3,258,125 26,065 -- --
Contribution of
debt to equity
by XL Vision,
Inc. (note 10).. -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock
in exchange for
contribution of
debt to equity
by XL Vision,
Inc. at $2.00
per share (notes
7 and 10)....... -- -- 2,400,000 24,000 -- -- -- -- -- -- -- --
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$0.80 per share
(note 6)........ -- -- -- -- -- -- -- -- 2,587,500 20,700 -- --
Contribution of
put rights by XL
Vision, Inc.
(note 6)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------- --------- ------- --- ---
Balances at
December 31,
1998............ 6,443,606 64,436 2,400,000 24,000 -- -- -- -- 5,845,625 46,765 -- --
Exercise of
stock options
for cash at
$0.80 per
share........... -- -- -- -- -- -- -- -- 112,069 897 -- --
Issuance of
common stock in
connection with
CIN transaction
at $0.96 per
share (note 6).. -- -- -- -- -- -- -- -- 750,000 6,000 -- --
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$1.80 per share
(note 6)........ -- -- -- -- -- -- -- -- 250,000 2,000 -- --
Issuance of
Series C
preferred stock
at $5.00 per
share (note 7).. -- -- -- -- 1,100,000 11,000 -- -- -- -- -- --
Accretion to
redemption value
of Class A
common stock
issued in
connection with
the Turnkey
Computer
Systems, Inc.
(note 5)........ -- -- -- -- -- -- -- -- -- -- -- --
Net profit
(loss).......... -- -- -- -- -- -- -- -- -- -- -- --
Unearned
compensation
(note 9)........ -- -- -- -- -- -- -- -- -- -- -- --
Amortization of
unearned
compensation
(note 9)........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------- --------- ------- --- ---
Balances at
September 30,
1999............ 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 -- $ -- 6,957,694 $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
$.008 per
share........... -- -- -- 1,990
Issuance of
common stock for
cash at $.008
per share....... -- -- -- 1,400
Exercise of
stock options
for cash at
$.008 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
$.008 per
share........... -- -- -- 22,465
Sale of Series A
preferred stock
for cash at
$1.00 per share
(note 7)........ 6,379,170 -- -- 6,443,606
Transfer of
technology by XL
Vision, Inc.
(note 10)....... (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 10).. 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
7 and 10)....... 4,776,000 -- -- 4,800,000
Issuance of
common stock in
connection with
Nutri-Charge
transaction at
$0.80 per share
(note 6)........ 2,049,300 -- -- 2,070,000
Contribution of
put rights by XL
Vision, Inc.
(note 6)........ 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
$0.80 per
share........... 88,758 -- -- 89,655
Issuance of
common stock in
connection with
CIN transaction
at $0.96 per
share (note 6).. 714,000 -- -- 720,000
Issuance of
common stock in
connection with
Cyberstockyard
transaction at
$1.80 per share
(note 6)........ 448,000 -- -- 450,000
Issuance of
Series C
preferred stock
at $5.00 per
share (note 7).. 5,489,000 -- -- 5,500,000
Accretion to
redemption value
of Class A
common stock
issued in
connection with
the Turnkey
Computer
Systems, Inc.
(note 5)........ (6,000) -- -- (6,000)
Net profit
(loss).......... -- (10,672,185) -- (10,672,185)
Unearned
compensation
(note 9)........ 72,126 -- (72,126) --
Amortization of
unearned
compensation
(note 9)........ -- -- 9,017 9,017
------------ ------------- ------------ ------------
Balances at
September 30,
1999............ $23,454,170 $(27,452,825) $(63,109) $(3,906,666)
============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-78
<PAGE>
EMERGE INTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months ended
Years ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(Unaudited)
<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 1,176,431
Amortization of
unearned
compensation.......... -- -- -- -- 9,017
Changes in operating
assets and
liabilities:
Trade accounts
receivable, net....... -- -- (368,421) (138,705) (2,405,456)
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) --
Accounts payable....... 5,675 719,694 (301,423) (32,037) 1,038,877
Accrued liabilities.... 75,542 198,759 328,791 151,016 214,739
Advanced payments from
customers............. -- -- -- -- 619,270
----------- ----------- ----------- ----------- ------------
Net cash used by
operating
activities........... (1,734,285) (5,964,486) (8,939,819) (7,035,475) (10,533,044)
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Business combinations,
net of cash acquired of
$737................... -- -- -- -- (1,799,263)
Purchases of property
and equipment.......... (56,861) (506,540) (460,290) (269,831) (1,228,432)
Purchase of
intangibles............ (100,000) -- (431,923) (431,923) --
Proceeds from
discontinued
operations............. -- -- -- -- 1,825,407
Investment in Turnkey
Computer Systems, Inc.. -- -- -- -- (22,833)
----------- ----------- ----------- ----------- ------------
Net cash used by
investing
activities........... (156,861) (506,540) (892,213) (701,754) (1,225,121)
----------- ----------- ----------- ----------- ------------
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 10)............. -- 4,400,000 -- -- --
Contribution of debt to
equity by XL Vision,
Inc. (note 10)........ -- -- 7,500,000 -- --
Issuance of preferred
stock in exchange for
contribution of debt
to equity by XL
Vision, Inc. (note
10)................... -- -- 4,800,000 -- --
Non-cash issuance of
Class A common stock
in connection with
Nutri-Charge
transaction (note 6).. -- -- 2,070,000 2,070,000 --
Contribution of put
rights by XL Vision,
Inc. (note 6)......... -- -- 340,000 340,000 --
Issuance of Class A
common stock in
connection with CIN
transaction (note 6).. -- -- -- -- 720,000
Issuance of Class A
common stock with
Cyberstockyard
transaction (note 6).. -- -- -- -- 450,000
Issuance of redeemable
Class A common stock
with Turnkey Computer
Systems, Inc.
transaction (note 5).. -- -- -- -- 400,000
Issuance of note
payable to Turnkey
Computer Systems, Inc.
(note 5).............. -- -- -- -- 1,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-79
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements
(Information insofar as it relates to September 30, 1998 or the nine months
ended
September 30, 1998 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 include the accounts of eMerge
Interactive, Inc. and its wholly-owned subsidiaries, STS Agriventures, Ltd.
("STS"), a Canadian corporation and Cyberstockyard, Inc. ("Cyberstockyard").
All significant intercompany balances and transactions have been
eliminated upon consolidation.
The pro forma balance sheet as of September 30, 1999 assumes the
conversion of all preferred stock to Class A common stock upon the Company's
planned initial public offering ("IPO").
(c) Management's Plans
As of September 30, 1999, the Company had a working capital deficiency
of $12,507,506 and stockholders' deficit of $3,906,666. 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 equity financing (see note 14). The Company also plans an
IPO. Although management believes that its IPO will be successful, there can
be no assurances that it will be completed.
(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 both the inventory and credit risk with respect to sales of all
of its products. In cattle sales transactions, the 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.
F-80
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(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) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of". This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed 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 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 exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of their carrying amount or fair value less costs to sell.
(f) 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.
(g) 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.
F-81
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(h) 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.
(i) Net Profit (Loss) Per Share
Net profit (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," by dividing the net profit (loss) allocable to common
stockholders (net profit (loss) less accretion related to redeemable Class A
common stock) by the weighted average number of shares of common stock
outstanding less the 62,500 shares of redeemable Class A common stock. The
Company's stock options (338,125 at December 31, 1997, 1,632,500 at December
31, 1998 and 2,488,494 at September 30, 1999) and convertible preferred stock
(6,443,606 at December 31, 1997, 8,843,606 at December 31, 1998 and 9,943,606
at September 30, 1999), have not been used in the calculation of diluted net
profit (loss) per share because to do so would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic and diluted net
profit (loss) per share allocable to common stockholders are equal.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 and SEC staff policy, all common stock and common stock
equivalents issued for nominal consideration during the periods presented
herein and through the filing of the registration statement for the IPO are to
be reflected in a manner similar to a stock split or stock dividend for which
retroactive treatment is required in the calculation of net profit (loss) per
share; the Company did not have any such issuances.
(j) 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.
(k) Interim Financial Information
The consolidated financial statements for the period ended September 30,
1998 are unaudited but reflect only normal and recurring 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 and 1998 are not necessarily indicative of the results that
may be expected for the full year.
(3) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
----------------- 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>
F-82
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(4) Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31,
----------------- September 30, Estimated
1997 1998 1999 useful lives
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Engineering and
manufacturing equipment.... $258,082 $366,150 $ 634,625 5 years
Office and computer
equipment.................. 179,315 259,462 1,532,298 3 years
Furniture and fixtures...... 67,282 104,706 112,122 7 years
Leasehold improvements...... 46,865 46,865 80,430 7 years
Automobiles................. -- -- 54,717 5 years
-------- -------- ----------
551,544 777,183 2,414,192
Less accumulated
depreciation and
amortization............... 123,404 263,346 702,788
-------- -------- ----------
Property and equipment,
net........................ $428,140 $513,837 $1,711,404
======== ======== ==========
</TABLE>
Assets under capital lease amounted to $-0-, $440,832 and $440,832 as of
December 31, 1997, 1998 and September 30, 1999, respectively. Accumulated
amortization for assets under capital lease totaled approximately $-0-,
$152,300 and $217,500 as of December 31, 1997, 1998 and September 30, 1999,
respectively.
(5) Investment in Turnkey Computer Systems, Inc.
On August 16, 1999, the Company acquired 19% of the common stock of
Turnkey Computer Systems, Inc. ("Turnkey") for $1,822,833. The purchase price
consisted of 62,500 shares of the Company's redeemable Class A common stock
valued at $400,000, $1,400,000 in cash and $22,833 of transaction costs. The
$1,400,000 is 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. This investment is carried on the cost method since the
Company does not have significant influence over Turnkey. 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 62,500 redeemable Class A
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. This redeemable Class A common stock is
classified outside of stockholders' equity (deficit). The difference between
the carrying amount and the redemption amount of $500,000 is being accreted to
redeemable Class A common stock as a charge to additional paid-in capital from
issuance to December 31, 2001 using the effective interest method.
F-83
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(6) Intangibles
Intangibles consists of:
<TABLE>
<CAPTION>
December 31, Estimated
----------------- September 30, useful
1997 1998 1999 life
------ ---------- ------------- ---------
<S> <C> <C> <C> <C>
NutriCharge license............ $ -- $2,273,538 $2,273,538 10 years
Infrared technology license.... -- 568,385 568,385 5 years
Goodwill--CIN.................. -- -- 2,076,368 5 years
Non-compete agreement--CIN..... -- -- 100,000 5 years
Goodwill--Cyberstockyard....... -- -- 427,274 3 years
Non-compete agreement--
Cyberstockyard................ -- -- 100,000 3 years
Goodwill--PCC.................. -- -- 1,487,791 5 years
Non-compete agreement--PCC..... -- -- 100,000 4 years
------ ---------- ---------- --------
-- 2,841,923 7,133,356
Less accumulated amortization.. -- 142,095 860,047
------ ---------- ----------
Intangibles, net............... $ -- $2,699,828 $6,273,309
====== ========== ==========
</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, 2,587,500 of the Company's Class A common shares valued at $0.80 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 1,250,000 shares of the Company's Class A common stock at $3.00
per share. The fair value of the put was estimated to be $340,000 and was
credited to additional paid-in capital. The put right may only be exercised
thirty days prior to or after the fourth anniversary of the agreement. The
ultimate amount payable under the put agreement is reduced by the amount, if
any, of indemnification obligations related to the transaction. The estimated
fair value of the put was determined with the assistance of an independent,
third party valuation expert by calculating the net present value (at 10%
interest) of the product of the $2,000,000 intrinsic value of the put adjusted
for the 25% probability that the put would be exercised.
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") for $2,296,610. The purchase price for the assets consisted of
750,000 shares of the Company's Class A common stock valued at $720,000, the
assumption of $812,021 of liabilities, a cash payment due in October 1999 of
$357,816, and an agreement to pay the first $350,000 from Internet sales of
third party products over the Company's Web site and transaction costs of
$56,773. CIN is in the business of selling access to its cattle feedlot
performance measurements database. Immediately after the closing, CIN changed
its name to Lost Pelican, L.L.C.
On March 29, 1999, the Company acquired 100% of the stock of
Cyberstockyard, Inc. for $542,265. The purchase price consisted of 250,000
shares of the Company's Class A common stock valued at $450,000, the assumption
of $89,972 of liabilities and transaction costs of $2,293. 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 $1,827,861. The purchase price consists of a
F-84
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
cash payment of $1,800,000 and an assumption of $2,861 of liabilities and
transaction costs of $25,000. PCC is in the business of providing comparative
analysis and market information for the feedlot industry. Immediately after the
closing, PCC changed its name to QDD Investment Company, L.L.C.
Each acquisition was accounted for as a purchase and the results of
operations of the acquired companies is included in the statement of operations
since the respective date of acquisition.
The aggregate purchase price of the above acquisitions was approximately
$4,666,736, which included related acquisition costs of approximately $84,000
and was allocated as follows:
<TABLE>
<S> <C>
Goodwill...................................................... $3,991,433
Non-compete agreements........................................ 300,000
Equipment..................................................... 358,016
Current assets, including cash acquired of $737............... 17,287
----------
$4,666,736
==========
</TABLE>
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)
=============== ================
Net profit (loss) per common share.... $ (0.97) $ (1.61)
=============== ================
</TABLE>
(7) Equity
Common Stock
As of September 30, 1999, the Company had authorized the issuance of
100,000,000 shares of common stock.
Class A--In 1999, the Company designated 92,711,110 shares 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 September 30, 1999, the Company had authorized the issuance of
15,000,000 shares of preferred stock and had designated 6,500,000 as Series A
shares, and 2,400,000 as Series B shares, 1,300,000 as Series C shares and
4,555,556 as Series D shares. Each share of preferred stock is convertible into
1.25 shares 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 1.25 shares Class B common stock. Preferred stock is automatically
converted into common stock upon a qualified
F-85
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
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.
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--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--Series D shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $9.00 per
share plus an additional $1.00 for each year (pro rated for partial years) from
October 27, 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.
(8) 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,
---------------------- September 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.. $3,237,000 $5,967,000 $ 8,057,000
Amortization of acquired
technology from XL Vision (note
10).............................. 1,829,000 1,704,000 1,704,000
Research and experimentation tax
credits.......................... 294,000 448,000 718,000
Other............................. 125,000 596,000 1,524,000
---------- ---------- -----------
5,485,000 8,715,000 12,003,000
Less valuation allowance.......... 5,370,000 8,715,000 12,003,000
---------- ---------- -----------
Net deferred tax assets......... 115,000 -- --
Deferred tax liability:
Imputed interest.................. (115,000) -- --
---------- ---------- -----------
Net deferred tax asset
(liability).................... $ -- $ -- $ --
========== ========== ===========
</TABLE>
F-86
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The Company has available at September 30, 1999 for federal income tax
purposes, unused net operating loss carryforwards of approximately $21,000,000
which may be applied against future taxable income and expires in years
beginning in 2010. The Company also has approximately $718,000 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.
(9) 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 2,168,750 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.
In May 1999, the Company's stockholders approved the 1999 Equity
Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional
1,250,000 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.
A summary of option transactions follows:
<TABLE>
<CAPTION>
Weighted
Range of average
exercise Weighted remaining
prices per average contractual
Shares share exercise price life (in years)
--------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding, De-
cember 31, 1996......... 3,125 $ 0.80 $0.80 4.85
====
Granted................ 335,000 0.80 0.80
--------- ---------- -----
Balance outstanding, De-
cember 31, 1997......... 338,125 0.80 0.80 9.64
====
Granted................ 1,692,500 0.80-1.60 0.84
Canceled............... (398,125) 0.80 0.80
--------- ---------- -----
Balance outstanding, De-
cember 31, 1998......... 1,632,500 0.80-1.60 .84 9.48
====
Granted................ 1,010,250 1.60-7.20 2.58
Exercised.............. (112,069) 0.80 0.80
Canceled............... (42,187) 0.80-1.60 1.04
--------- ---------- -----
Balance outstanding,
September 30, 1999...... 2,488,494 $0.80-7.20 $1.54 9.08
========= ========== ===== ====
</TABLE>
At December 31, 1997, 1998 and September 30, 1999, there were 76,719,
414,375 and 716,369 shares exercisable, respectively at weighted average
exercise prices of $0.80, $0.82 and $1.06, respectively.
At December 31, 1997 and 1998 and September 30, 1999, 99,375, 511,250 and
747,250 shares were available for grant, respectively.
F-87
<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, $0.08 in 1998 and $0.84 in 1999 on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Volatility........................................ 0% 0% 0% 0%
Dividend paid..................................... 0% 0% 0% 0%
Risk-free interest rate........................... 6.35% 6.11% 4.73% 4.99%
Expected life in years............................ 5.77 6.75 5.57 6.75
</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 360,625 stock options with an
exercise price of $1.60 and a fair value of $1.80. 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 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss as reported.... $(1,719,492) $(5,483,623) $(7,832,128) $(10,672,185)
=========== =========== =========== ============
Pro forma net loss...... $(1,719,492) $(5,483,623) $(7,865,031) $(10,887,665)
=========== =========== =========== ============
Net loss per share, as
reported:
Basic and diluted..... $ (9.24) $ (14.34) $ (1.80) $ (1.59)
=========== =========== =========== ============
Pro forma net loss per
share:
Basic and diluted..... $ (9.24) $ (14.34) $ (1.81) $ (1.62)
=========== =========== =========== ============
</TABLE>
(10) Related Party Transactions
Due to Related Parties
Due to related parties consist of:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
XL Vision........................... $8,029,995 $5,158,436 $ 6,057,978
Safeguard Scientifics, Inc. and
Safeguard Delaware, Inc............ 10,309 28,898 7,347,979
---------- ---------- -----------
$8,040,304 $5,187,334 $13,405,957
========== ========== ===========
</TABLE>
F-88
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Amounts Due to XL Vision
Amounts due to XL Vision consist 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
Allocation of costs and funding of working capital to the
Company................................................. 668,542
Interest charges on technology transferred............... 231,000
-----------
Balance as of September 30, 1999........................... $ 6,057,978
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$2,690,900 in 1996, $6,239,600 in 1997, $12,782,400 in 1998 and $7,342,435 in
1999.
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.
Note Payable to Safeguard Delaware, Inc.
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, bears interest payable monthly at the prime rate plus 1% and is due
December 31, 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.
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,
$308,000 in 1998 and $231,000 in 1999.
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. The Company believes that
the allocation method used by XL Vision was
F-89
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
reasonable. 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 by or service fees charged by XL Vision
were approximately $468,000 in 1996, $720,000 in 1997, $460,000 in 1998 and
$390,000 in 1999. A portion of the fees in 1998 and 1999 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 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, $37,200 in 1998 and $43,500 in 1999.
Leases
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 and $20,627 in 1999.
The Company rents its facility from XL Vision. 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 is approximately $68,000 in 1996, $354,000 in 1997,
$1,129,000 in 1998, and $528,000 in 1999.
License Agreement with XL Vision, Inc.
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 terminated on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license agreement. In addition, XL Vision is obligated to give the
Company at least 25% of the new company. The Company is obligated to transfer
all amounts up to 25% of the company to Lost Pelican, LLC.
(11) 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 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.
F-90
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
The following summarizes revenue, cost of revenue and gross profit and
contribution margin information related to the Company's two operating
segments:
<TABLE>
<CAPTION>
Nine months ended
-------------------------
Year ended September 30, September
December 31, 1998 1998 30, 1999
----------------- ------------- -----------
(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
=========== =========== ===========
Cost of revenue:
Direct costs:
Cattle......................... $ -- $ -- $16,860,452
Animal sciences................ 900,824 603,410 492,115
----------- ----------- -----------
Total direct costs............. 900,824 603,410 17,352,567
Unallocated overhead............. 1,722,623 1,025,347 929,763
----------- ----------- -----------
Total............................ $ 2,623,447 $ 1,628,757 $18,282,330
=========== =========== ===========
Gross profit (loss):
Contribution margin:
Cattle......................... $ -- $ -- $ 162,410
Animal sciences................ 891,647 503,042 823,668
----------- ----------- -----------
Total.......................... 891,647 503,042 986,078
Unallocated overhead............. (1,722,623) (1,025,347) (929,763)
----------- ----------- -----------
Gross profit (loss).............. $ (830,976) $ (522,305) $ 56,315
=========== =========== ===========
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(12) 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 collected an additional $1,388,000
through September 30, 1999. The remaining balance of approximately $312,000 is
expected to be collected by December 31, 1999. 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,
---------------------- September 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Accounts receivable...................... $ 145,500 $ 381,435 $ 419,784
Inventory, net........................... 1,076,043 2,020,625 123,093
Property and equipment, net.............. 22,650 134,098 --
Intangibles, net......................... 94,444 61,108 36,106
Accounts payable......................... (271,833) (80,510) (63,647)
Accrued liabilities including provision
for operating loss during phase out
period of $72,667 in 1998 and $18,748 in
1999.................................... -- (231,415) (125,000)
---------- ---------- ---------
Net assets........................... $1,066,804 $2,285,341 $ 390,336
========== ========== =========
</TABLE>
F-91
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
(13) 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, $62,108
in 1998 and $54,229 in 1999.
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.
(14) Subsequent Events
Sale of Series D Preferred Stock
On October 27, 1999, the Company agreed to issue 4,555,556 shares of
Series D preferred stock and a warrant to acquire 1,138,889 shares of Class B
common stock. Each share of Series D preferred stock is convertible into 1.25
shares of Class B common stock at any time at the option of the holder or
immediately upon an IPO. The warrant is exercisable at the Company's IPO price.
In the event the Company does not complete an IPO, the warrant is exercisable
at $9.00 after November 16, 2000 or earlier if the Company has an equity
financing of not less that $20,000,000 from private investors. The warrant
expires on November 16, 2002. In return for these instruments, the Company
received $18,000,000 of cash in November 1999 and a $23,000,000 non-interest,
bearing note receivable due on October 27, 2000. Imputed interest at 9.5%
amounts to $2,185,000 over the life of the note.
The net consideration of $38,815,000 was allocated to the warrant and
preferred stock as follows. The warrant was valued at $3,325,553 using the
Black-Scholes method and assuming a strike price of $11.20, expiration of three
years, 90% volatility, and 5.8% interest. The remaining proceeds were allocated
to preferred stock and amounted to $7.79 per preferred share ($6.23 per common
share). The beneficial conversion feature was calculated as the difference
between the conversion price ($6.23) and the fair value of the common stock
($7.20) multiplied by the number of Class B common shares into which the
preferred stock is convertible (5,694,445) and amounts to $5,523,612.
The note receivable will be shown as a reduction of stockholders' equity,
net of imputed interest. Interest income will be accreted over the life of the
note using the effective interest method. The value of the warrant will be
credited to additional paid-in capital. The beneficial conversion feature will
be credited to preferred stock with a corresponding charge to additional paid-
in capital at issuance. The beneficial conversion feature will reduce net
income available to common shareholders.
Stock Split
On December 6, 1999, the Board of Directors of the Company authorized a
five-for-four stock split. The stock split has been reflected in these
financial statements as if it had occurred on the first day of the first period
presented.
F-92
<PAGE>
EMERGE INTERACTIVE, INC.
Notes to Consolidated Financial Statements--(Continued)
Legal Proceeding (Unaudited)
The Company has been named as a defendant in a lawsuit filed by Central
Biotech, Inc. on January 12, 2000 in the Queen's Bench Judicial Centre of
Regina, Providence of Saskatchewan, Canada. The complaint alleges that eMerge
and E-Y laboratories, Inc. were each subject to confidentiality agreements with
the plaintiff, and subsequently engaged in discussions concerning a potential
business arrangement in violation of such agreements. The complaint asserts
damages, including punitive damages, from the defendants in the aggregate
amount of $18,000,000 (Canadian dollars), as well as injunctive relief.
Although the Company has not yet completed its assessment of these claims, the
Company believes that there are a number of substantive and procedural defenses
that exist and intends to defend these claims vigorously.
Initial Public Offering (Unaudited)
On February 17, 2000, the Company closed on its IPO and a concurrent
private placement of common stock and raised net proceeds of approximately
$107,400,000. Approximately $12,800,000 of the proceeds were used to pay
amounts due to related parties and $900,000 was paid to Turnkey.
Acquisitions (Unaudited)
Agreement for the Purchase of Assets from Eastern Livestock Co., Inc.
On April 20, 2000 eMerge Interactive, Inc. entered into an Agreement for
the Purchase and Sale of Assets with Eastern Livestock Co., and its
shareholders, which closed on May 1, 2000. eMerge purchased Eastern's rollover
business which engages in buying cattle for immediate or short-term resale. The
purchase of the rollover business includes acquisition of all tangible and
intangible systems used in the conduct or operation of the business, all
furniture and/or equipment and systems associated with the business, and any
presence on the World Wide Web, including email addresses, maintained by or on
behalf of Eastern in connection with the rollover business. The purchase price
for these assets consisted of (i) $17,000,000 in cash, (ii) 1,215,913 shares of
eMerge common stock and (iii) $4,500,000 in cash to be paid one year after the
closing date or earlier upon certain events occurring.
Agreement for the Purchase of Assets from W.P. Land and Livestock, Inc.
On April 21, 2000 eMerge Interactive entered into an Agreement for the
Purchase and Sale of Assets with W.P. Land and Livestock, Inc., and its
shareholders, which purchase is expected to close on or before May 15, 2000.
Upon the closing of this purchase, eMerge will purchase all of the tangible and
intangible property of W.P. Land and Livestock relating to its business of
purchasing and reselling of cattle through auction as well as any presence on
the World Wide Web maintained by or on behalf of W.P. Land and Livestock,
including the page located at URL http://www.jordancattle.com and any email
addresses used in connection with the business. The purchase price for these
assets will be $2,784,595 in cash plus the value of certain inventory.
On April 21, 2000 eMerge entered into a Contract for Sale and Purchase of
Real Estate with shareholders of W.P. Land and Livestock to purchase three
parcels of land used in the above described business of W.P. Land and Livestock
for a purchase price of $3,472,000 in cash. This sale will close at the time of
the closing of the above described purchase of assets.
F-93
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
JusticeLink, Inc.
(formerly LAWPlus, Inc.)
We have audited the balance sheets of JusticeLink, Inc. (formerly LAWPlus,
Inc.) as of December 31, 1999 and 1998, and the related statements of
operations, mandatory redeemable convertible stock and other capital
(deficiency) and cash flows for 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 auditing standards generally
accepted in the United States. 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 JusticeLink, Inc. (formerly
LAWPlus, Inc.) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Ernst & Young
Dallas, Texas
February 18, 2000, except for the second and third
sections of Note 10, for which is May 5, 2000
F-94
<PAGE>
JusticeLink, Inc.
(formerly LAWPlus, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $12,163 $ 14
Accounts receivable--trade................................. 68 74
Prepaids................................................... 29 27
------- -------
Total current assets....................................... 12,260 115
Property and equipment, net.................................. 2,218 747
Notes receivable, affiliates................................. -- 135
Deposits..................................................... 49 106
Debt issuance cost, net...................................... -- 91
Goodwill and other intangible assets, net of accumulated
amortization of $844........................................ 5,547 --
Other........................................................ -- 4
------- -------
Total assets................................................. $20,074 $ 1,198
======= =======
Liabilities, Mandatory Redeemable Convertible Stock and Other
Capital (Deficiency)
Current liabilities:
Accounts payable trade..................................... $ 463 $ 763
Accrued liabilities........................................ 669 401
Accrued lease cancellation fees............................ -- 161
Deferred compensation...................................... 80 546
Current portion of capital lease obligations............... 592 375
Notes payable and current portion of long-term debt........ 4,992 243
------- -------
Total current liabilities.................................... 6,796 2,489
Capital lease obligations, less current portion.............. 406 125
Long-term debt, less current portion......................... 1,000 4,927
Notes payable, long-term debt and accrued interest converted
to Series B mandatory redeemable convertible preferred stock
during 1999................................................. -- 7,563
Commitments and contingencies
Mandatory Redeemable Convertible Stock
Series B mandatory redeemable convertible preferred stock,
par value $.01 per share, 10,000,000 shares authorized,
9,461,468 shares issued and outstanding................... 19,353 --
Series C mandatory redeemable convertible preferred stock,
par value $.01 per share, 7,200,000 shares authorized,
7,108,707 shares issued and outstanding................... 14,337 --
Other Capital (Deficiency)
Series A convertible preferred stock, $.01 par value,
15,000,000 shares authorized, 3,200,000 shares issued and
outstanding ($3,809,536 aggregate liquidation value)...... -- 32
Common stock, $.05 par value, 25,000,000 shares authorized,
10,000 shares in 1999 and 683,242 shares in 1998 issued
and outstanding........................................... 1 34
Additional capital......................................... 7,942 6,157
Accumulated deficit........................................ (29,761) (20,129)
------- -------
Total other capital (deficiency)............................. (21,818) (13,906)
------- -------
Total liabilities, mandatory redeemable convertible stock and
other capital............................................... $20,074 $ 1,198
======= =======
</TABLE>
See accompanying notes.
F-95
<PAGE>
JusticeLink, Inc.
(formerly LAWPlus, Inc.)
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998
----------- ------------
(in thousands)
<S> <C> <C>
Revenue............................................. $ 277 $ 272
Operating expenses:
Selling and customer support...................... 2,875 2,179
Product development............................... 909 2,004
Operations........................................ 1,613 1,824
General and administrative........................ 1,726 2,249
Depreciation and amortization..................... 1,744 693
----------- ------------
8,867 8,949
----------- ------------
Loss from operations................................ (8,590) (8,677)
Interest income..................................... 71 --
Interest expense.................................... (1,113) (1,578)
----------- ------------
Net loss............................................ $ (9,632) $ (10,255)
=========== ============
</TABLE>
See accompanying notes.
F-96
<PAGE>
JusticeLink, Inc.
(formerly LAWPlus, Inc.)
Statements of Mandatory Redeemable Convertible Stock and Other Capital
(Deficiency)
<TABLE>
<CAPTION>
Mandatory Redeemable
Convertible Stock Other Capital
----------------------------- -----------------------------------------------------------------
Series B Series C Series A
Preferred Preferred Convertible Common
Stock Stock Preferred Stock Stock
-------------- -------------- ----------------- -------------- Additional Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------- ------ ------- -------- ------- ------ ------ ---------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 3,200 $ 32 687 $ 34 $5,744 $ (9,874) $ (4,064)
Issuance of warrants
attached to Revolving
Note guarantee and 1998
Bridge Loans........... -- -- -- -- 503 -- 503
Other................... -- -- (4) -- (90) -- (90)
Net loss and
comprehensive loss..... -- -- -- -- -- (10,255) (10,255)
-------- ------ ------ ---- ------ -------- --------
Balance at December 31,
1998................... 3,200 32 683 34 6,157 (20,129) (13,906)
Exercise of warrants
issued in connection
with the 1998 and 1999
Bridge Loans........... -- -- 7,754 388 -- -- 388
Recapitalization of
LAWPlus, Inc........... 3,462 $ 6,925 (3,200) (32) (8,437) (422) 2,994 -- 2,540
Series B mandatory
redeemable preferred
stock issued in
connection with the
acquisition of
JusticeLink, Inc....... 1,187 2,375 -- -- -- -- -- -- --
Series B mandatory
redeemable preferred
stock issued in
exchange for 1999
Bridge Loans and
accrued interest....... 1,114 2,228 -- -- -- -- -- -- --
Sale of Series B
mandatory redeemable
preferred stock, net... 2,398 4,795 -- -- -- -- (583) -- (583)
Issuance of Series B
mandatory redeemable
preferred stock in
connection with Lexis-
Nexis agreement........ 1,300 2,600 -- -- -- -- -- -- --
Sale of Series C
mandatory redeemable
preferred stock, net... -- -- 7,109 $14,217 -- -- -- -- (80) -- (80)
Accrued dividends on
Series B and C
mandatory redeemable
preferred stock........ -- 430 -- 120 -- -- -- -- (550) -- (550)
Exercise of employee
stock options.......... -- -- -- -- 10 1 4 -- 5
Net loss and
comprehensive loss..... -- -- -- -- -- -- -- -- -- (9,632) (9,632)
----- ------- ----- ------- -------- ------ ------ ---- ------ -------- --------
Balance at December 31,
1999................... 9,461 $19,353 7,109 $14,337 -- $ -- 10 $ 1 $7,942 $(29,761) $(21,818)
===== ======= ===== ======= ======== ====== ====== ==== ====== ======== ========
</TABLE>
See accompanying notes.
F-97
<PAGE>
JusticeLink, Inc.
(formerly LAWPlus, Inc.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
1999 1998
------- --------
(in thousands)
<S> <C> <C>
Operating Activities
Net loss.................................................... $(9,632) $(10,255)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,744 693
Amortization of debt issuance costs....................... 91 26
Loss on disposal of property and equipment................ -- 434
Interest related to warrants attached to debt............. -- 503
Non-cash interest expense................................. -- 563
Bad debt expense.......................................... 5 --
Write-off of note receivable--affiliates.................. 135 --
Changes in operating assets and liabilities, net of
effects of an acquired business in 1999:
Accounts receivable trade............................... 1 (52)
Prepaids, deposits and other............................ 53 (57)
Notes receivable, affiliates............................ -- 115
Accounts payable and accrued liabilities................ (294) 489
------- --------
Net cash used in operating activities................. (7,897) (7,541)
Investing Activities
Cash acquired from merger with JusticeLink, Inc........... 1 --
Merger costs.............................................. (474) --
Purchases of property and equipment....................... (1,269) (154)
------- --------
Net cash used in investing activities................... (1,742) (154)
Financing Activities
Proceeds from the exercise of warrants for LAWPlus, Inc.
common stock............................................. 388 --
Proceeds from the exercise of stock options............... 5 --
Net proceeds from sale of Series B and Series C preferred
stock.................................................... 18,349 --
Proceeds from issuance of notes payable and long-term
debt..................................................... 3,762 6,375
Payments on notes payable and long-term debt.............. (250) (591)
Payments on capital lease obligations..................... (466) (361)
Other..................................................... -- (90)
------- --------
Net cash provided by financing activities............... 21,788 5,333
------- --------
Increase (decrease) in cash and cash equivalents............ 12,149 (2,362)
Cash and cash equivalents at beginning of year.............. 14 2,376
------- --------
Cash and cash equivalents at end of year.................... $12,163 $ 14
======= ========
Supplemental Cash Flow Information
Cash paid for interest...................................... $ 1,581 $ 527
Significant Noncash Investing and Financing Activities
Common stock, Series A preferred stock and debt converted to
Series B preferred stock (including accrued interest of
$928,000).................................................. $11,693 $ --
Series B preferred stock issued in connection with the
merger with JusticeLink, Inc............................... $ 2,375 $ --
Series B preferred stock issued in connection with the
Lexis-Nexis agreement...................................... $ 2,600 $ --
Property and equipment acquired with capital leases......... $ 967 $ --
Additional capital allocated to Series B and C preferred
stock for dividends........................................ $ 550 $ --
</TABLE>
See accompanying notes.
F-98
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements
December 31, 1999
1. Organization and Description of Business
LAWPlus, LLC, a Texas limited liability corporation was formed on April
20, 1995 (inception) and was 94% owned by COREPlus LLC. At the commencement of
operations on July 16, 1997, the members of LAWPlus, LLC exchanged their
membership units for shares of common stock of LAWPlus, Inc., a Delaware
corporation incorporated on July 9, 1997, and COREPlus, LLC transferred assets
of $25,000 and liabilities of $2,701,000, recorded at their historical basis,
to LAWPlus, Inc.
On May 25, 1999, LAWPlus, Inc. acquired all of the outstanding common
stock of JusticeLink, Inc. in exchange for 1,187,495 shares of Series B
Preferred Stock. Additionally, LAWPlus, Inc. acquired assets of $180,000 and
assumed a note payable of $1,072,000. Effective with the merger, the Company
changed its name to JusticeLink, Inc. The merger has been accounted for using
the purchase method of accounting and, accordingly, results of the acquired
operations of JusticeLink, Inc. are included in the Company's statements of
operations from the date of its acquisition. The pro forma effects on the
Company's operations for the years ended December 31, 1999 and 1998, assuming
that JusticeLink was acquired as of September 1, 1998 (its inception), would be
to increase the net loss by $1,456,000 and $1,843,000, respectively.
JusticeLink had no net revenues during either period.
The Company provides electronic document transmission and storage
services to court systems, attorneys and litigants accessed via the Internet.
The Company has executed service agreements with court systems and law firms
participating within certain court systems in the states of Texas, California,
Colorado, Alabama, and Georgia. The Company continues to pursue opportunities
to expand its services throughout the United States.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue as services are provided.
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.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful lives of
the related assets which range from three to five years. Leasehold improvements
and assets under capital leases are amortized over the lesser of the base lease
term or estimated useful life of the respective asset and included in
depreciation expense.
Product Development Costs
In 1998, the Company expensed all product development costs as incurred.
Product development costs represent the internal and external costs associated
with developing the Company's electronic internet applications.
F-99
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP is effective for all
fiscal years beginning after December 15, 1998 and requires the capitalization
of certain costs incurred in connection with developing or obtaining internal
use software. SOP 98-1 does not require restatement of prior year financial
statements upon adoption. As of December 31, 1999, the Company has capitalized
$1,311,000 in connection with developing internal use software of which
$754,000 has been placed in service as of December 31, 1999. Amortization
expense for internally developed software was $84,000 for the year ended
December 31, 1999.
Intangibles
Intangible assets consist of goodwill, trademarks, customer lists,
technological capabilities and strategic relationships and are amortized using
the straight-line method over the estimated useful lives of three years.
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.
Debt Issuance Costs
Debt issuance costs were carried at cost of $130,000 less accumulated
amortization of $39,000 as of December 31, 1998 which was calculated using the
interest method over the term of the debt, and are included in other assets.
During 1999, the remaining unamortized balance of $33,000 was written off in
connection with the Company's recapitalization (see Note 7).
Income Taxes
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. Valuation allowances are provided against deferred
tax assets when the realization of the assets is not reasonably assured.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held primarily with one financial
institution and exceed federally insured amounts. The Company has not incurred
any losses relating to such concentration and none are expected. The Company's
accounts receivable are comprised of small balances due from a large number of
customers for which collateral is generally not required. The allowance for
doubtful
F-100
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
accounts as of December 31, 1999 was $5,000 and no allowance was necessary as
of December 31, 1998. Losses on accounts receivable have historically been
within management's expectation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The Company has not completed a thorough review of all
its contracts for embedded derivatives and, accordingly, the effects, if any,
upon adoption of SFAS 133 on its financial position or results of operations
have not been determined.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Computer and data network equipment...................... $ 2,313 $ 1,513
Software................................................. 1,783 261
Office and other equipment............................... 197 154
------- -------
4,293 1,928
Less accumulated depreciation............................ (2,075) (1,181)
------- -------
Property and equipment, net.............................. $ 2,218 $ 747
======= =======
</TABLE>
Included within property and equipment are assets under capital leases of
$998,000 and $1,250,000 and related accumulated amortization of $261,000 and
$556,000 at December 31, 1999 and 1998, respectively.
F-101
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
4. Notes Payable and Long-Term Debt
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Note payable................................................. $ 1,072 $ --
Revolving Note............................................... 3,500 3,500
Senior Note.................................................. 84 334
12% Subordinated Notes....................................... -- 3,440
1998 Bridge Loans ........................................... -- 2,500
12% Senior Subordinated Notes ............................... -- 1,060
Subordinated Note ........................................... 1,000 1,000
8% Senior Subordinated Note.................................. 336 336
------- -------
5,992 12,170
Less current portion not converted to Series B mandatory
redeemable convertible preferred stock ..................... (4,992) (243)
Less, in 1998, notes payable and long-term debt converted to
Series B mandatory redeemable convertible preferred stock
during 1999................................................. -- (7,000)
------- -------
Long-term debt, less current portion......................... $ 1,000 $ 4,927
======= =======
</TABLE>
In connection with the recapitalization of LAWPlus, Inc. and the merger
with JusticeLink, Inc. in May 1999, the Company's outstanding 12% Senior
Subordinated Notes, 12% Subordinated Notes and the 1998 Bridge Loans were
converted to Series B Convertible Preferred Stock (See Note 7). These amounts
totaling $7,000,000 plus accrued interest of $563,000 at December 31, 1998 are
shown separately on the balance sheet at December 31, 1998 as Notes payable,
long-term debt and accrued interest converted to Series B mandatory redeemable
convertible preferred stock during 1999.
In July 1997, the Company assumed 12% Senior Subordinated Notes totaling
$1,060,000, a Subordinated Note of $1,000,000, and an 8% Senior Subordinated
Note of $450,000 from COREP1us, LLC.
The 12% Senior Subordinated Notes of $1,060,000 bore interest at 12%
which was payable quarterly. The principal of the notes was originally due and
payable on July 1, 2001, however, in conjunction with the 1999 recapitalization
of LAWPlus, Inc. and the merger with JusticeLink, Inc., the Senior Subordinated
Notes of $1,060,000 were converted to Series B Preferred Stock (see Note 7).
The $1,000,000 Subordinated Note is unsecured and due on March 31, 2001.
Interest accrues at prime plus 1% (9.50% at December 31, 1999) and is payable
quarterly.
The 8% Senior Subordinated Note between the Company and Southeast Texas
NETPlus, Inc. (an entity owned by stockholders who were former directors or
officers of the Company) accrues interest at 8% with principal and interest
payable quarterly. On November 20, 1997 and May 4, 1998, the terms of the 8%
Senior Subordinated Note for the then remaining principal of $436,000 and
$386,000, respectively were
F-102
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
amended to provide that interest will accrue at 8% per annum. Payment of such
interest is deferred until the closing of a private placement equity financing
at which time all such deferred interest payments shall be paid and interest
would then be paid monthly. All deferred interest was paid in connection with
the equity financing on July 1, 1999 described in Note 7. In addition, the
Company made a required principal payment of $50,000 in connection with the May
4, 1998 amendment. As of December 31, 1999 and 1998, $336,000 principal was
outstanding which is due on October 16, 2000.
In July and November 1997, the Company issued 12% Subordinated Notes to
venture capitalists for $3,440,476. The notes were originally due on June 30,
2002 with interest payable quarterly. However, in conjunction with the 1999
recapitalization of LAWPlus, Inc. and the merger with JusticeLink, Inc. (see
Note 7) the Subordinated Notes were converted to Series B Preferred Stock. As
permitted by the terms of the 12% Subordinated Notes, accrued interest was
added to the unpaid principal balance of the notes prior to the conversion.
In May 1998, the Company entered into a Substitute Revolving Note (the
"Revolving Note") with a bank under which it has borrowed $3,500,000 bearing
interest at the bank's prime rate (8.50% at December 31, 1999). Interest is
payable monthly with all outstanding principal due July 31, 2000. The
borrowings under the Revolving Note are collateralized by substantially all the
assets of the Company. In addition, the Revolving Note is guaranteed by two
investment fund limited partnerships, which held all of the Company's Series A
Preferred Stock, $5,940,000 in debt and had representatives on the Board of
Directors of the Company at December 31, 1998, in return for 435,000 warrants
to purchase an equal number of shares of common stock with an exercise price of
$.05 per share through May 4, 2008. The fair value of the warrants at the date
of grant, as determined by management, of $218,000 was recorded as additional
capital and amortized to interest expense over the period to the original
maturity date of the Revolving Note on August 31, 1998. The guarantee by the
two investment fund limited partnerships may be reduced to $1,000,000 upon
meeting conditions as to the size and valuation of an initial public offering.
In December 1997, the Company entered into a term note (the "Senior
Note") agreement with a commercial bank for $500,000 due on December 5, 2000.
Interest accrues at prime plus 2% (10.50% at December 31, 1999). Principal
payments, beginning January 5, 1998, were due in equal monthly installments of
approximately $14,000 plus interest. The Senior Note agreement contains a
penalty for prepayments and restricts the Company's ability to declare or pay
any dividends during the term of the loan. A provision of the Senior Note
required the Company to raise $10,000,000 in junior capital by March 31, 1998,
The March 31, 1998 deadline was subsequently extended to September 30, 1998. In
November 1998, the Company and the commercial bank agreed to renegotiate the
terms of the agreement which resulted in a requirement for monthly payments of
approximately $14,000 until March 5, 1999 (subsequently extended to August 5,
1999), at which time all unpaid principal and interest was due and payable. In
September 1999, the Company and the commercial bank renegotiated the Senior
Note as a six-month installment note, with monthly payments including principal
and interest of approximately $46,000, maturing on February 5, 2000. The Senior
Note is collateralized by specific equipment. This note was paid in full on
February 1, 2000.
To fund operations in 1998, the Company entered into a series of bridge
loans (the "1998 Bridge Loans") aggregating $2,500,000 at December 31, 1998.
The 1998 Bridge Loans bore interest at 9% per annum with all principal and
interest due at maturity of November 30, 1998 or March 15, 1999. In addition,
the Company issued to the lenders 3,812,160 warrants expiring May 4, 2008 for
an equal number of shares of common stock with an exercise price of $0.05 per
share. Warrants for 641,180 shares were immediately exercisable. Warrants for
1,000,000 shares became exercisable on each of December 15, 1998, January 15,
F-103
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
1999 and February 15, 1999 and 171,080 became exercisable on January 12, 1999.
If the 1998 Bridge Loans had been repaid by each of these dates or had the
Company obtained third party financing, some or all of the warrants would have
been voided. The fair value of the warrants at the date of grant, as
determined by management, of $285,000, was recorded as additional capital and
amortized to interest expense over the period from issue to the original
maturity date of the 1998 Bridge Loans.
To fund operations during 1999, the Company entered into additional
bridge loans (the "1999 Bridge Loans") for an aggregate of $3,762,000 of
borrowings, under substantially the same terms as the 1998 Bridge Loans
including immediately exercisable warrants expiring on May 4, 2008 for an
aggregate of 10,342,160 shares of common stock at an exercise price of $0.05
per share. The value of the warrants was determined by management to be
nominal.
In connection with the 1999 recapitalization of LAWPlus, Inc. and the
merger with JusticeLink, Inc. the $2,500,000 of 1998 Bridge Loans and
$1,862,000 of 1999 Bridge Loans were converted to Series B Preferred Stock
(see Note 7). Additionally, on July 1, 1999, $1,900,000 of 1999 Bridge Loans
were converted to Series B Preferred Stock at a ratio of $2.00 per share (see
Note 7).
On May 25, 1999 in connection with the merger with JusticeLink, the
Company assumed a $1,072,000 note payable to an entity which became a Series B
Preferred stockholder in the Company. The note payable bore interest at 8% per
annum. Principal and interest was due at maturity on March 12, 2000. At
December 31, 1999, $1,072,000 was outstanding with accrued interest payable of
$51,691. On February 11, 2000, the note payable was settled for $850,000 in
cash plus certain equipment and software (see Note 10).
Maturities of notes payable and long-term debt at December 31, 1999, are
as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................ $4,992
2001................................................................ 1,000
------
Total........................................................... $5,992
======
</TABLE>
5. Income Taxes
No provision for income taxes has been provided for the years ended
December 31, 1999 and 1998 due to the Company's operating losses.
The differences between the actual income tax benefit and the amount
computed by applying the statutory federal tax rate to the loss before income
taxes are as follows:
<TABLE>
<CAPTION>
December 31
----------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Benefit computed at federal statutory rate............. $(3,275) $(3,487)
Permanent differences.................................. 260 9
State income tax benefit, net of federal tax effect at
state statutory rate.................................. (263) (304)
Increase in valuation reserve.......................... 3,278 3,782
------- -------
Total.............................................. $ -- $ --
======= =======
</TABLE>
F-104
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31
---------------
1999 1998
------ -------
(In thousands)
<S> <C> <C>
Deferred tax assets--net operating loss carryforwards.......... $9,444 $ 5,714
Valuation allowance for deferred tax assets.................... (8,959) (5,681)
------ -------
Deferred tax assets, net of valuation allowance................ 485 33
Deferred tax liabilities
Software development costs................................... (454) --
Other, net................................................... (31) (33)
------ -------
Total deferred tax liabilities................................. (485) (33)
------ -------
Deferred income taxes, net..................................... $ -- $ --
====== =======
</TABLE>
At December 31, 1999, the Company has approximately $25.6 million of
federal net operating loss carryforwards which begin to expire in 2012. The
Company has approximately $25.6 million of state net operating losses as of
December 31, 1999.
At December 31, 1999 and 1998, the Company has recorded a valuation
allowance against its net deferred tax assets because management believes that,
after considering all the available objective evidence, the realization of the
assets is not reasonably assured.
6. Commitments and Contingencies
Leases
The Company has operating and capital lease commitments for office space
and equipment with lease terms ranging from three to five years. The office
space lease agreement includes an escalation clause and renewal option to
extended the term by three years.
Capital leases require monthly payments over periods ranging from 18 to
36 months with implicit interest rates ranging from 8% to 25%.
F-105
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
Future minimum lease payments under noncancelable capital and operating
leases at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(in thousands)
<S> <C> <C>
2000........................................................ $ 592 $649
2001........................................................ 424 172
2002........................................................ 198 18
2003........................................................ -- 8
----- ----
Total minimum lease payments.............................. 1,214 $847
====
Less amount representing interest............................. 216
-----
Present value of minimum capital lease payments............... 998
Less current portion.......................................... 592
-----
Capital lease obligations, less current portion............... $ 406
=====
</TABLE>
Rent expense for noncancelable operating leases was approximately
$542,000 and $317,000 for the years ended December 31, 1999 and 1998,
respectively.
In February 1998, the Company entered into an outsourcing agreement with
a third party to provide data processing and related information technology
services for the Company's production operating system. Amounts paid to the
third party in 1998 were approximately $322,000. The agreement was terminated
in December 1998 and termination costs of approximately $161,000 were accrued.
Legal
From time to time, the Company is a party to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these claims, legal actions and
complaints will not have a material effect on the Company's financial position
or result of operations.
7. Recapitalization of LAWPlus, Inc.
Effective May 25, 1999, LAWPlus, Inc. recapitalized as a condition of
closing the merger with JusticeLink, Inc. In the recapitalization, LAWPlus,
Inc. issued 3,462,461 shares of Series B Preferred Stock in exchange for all of
the 12% Senior Subordinated Notes, the 12% Subordinated Notes, the 1998 Bridge
Loans, $1,862,000 of 1999 Bridge Loans, accrued interest of $600,000 on the
1998 and 1999 Bridge Loans, and all of the outstanding shares of Series A
Preferred Stock and common stock at conversion rates negotiated by the
stockholders.
The recapitalization resulted in approximately $6,925,000 being allocated
to Series B Preferred Stock at $2.00 per share and the remainder as an increase
to additional capital.
Additionally, outstanding stock options as of December 31, 1998 covering
593,068 shares were converted to options to purchase 226,223 shares of common
stock at $1.3108 per share. These options were rescinded by the board of
directors and were replaced by the June 8, 1999 stock option grant for shares
in the merged Company, described in Note 8 under "Stock Options."
F-106
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
8. Capital Stock
Reverse Stock Split
On October 29, 1998, LAWPlus, Inc. amended its Articles of Incorporation
to convert each share of its $.01 par value common stock into one-fifth of one
share of common stock, $.05 par value (reverse split). All common stock,
options and warrants to purchase common shares outstanding on October 29, 1998
were adjusted to reflect the reverse split. The impact of the reverse split has
been retroactively reflected in the accompanying financial statements.
Series A Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") was convertible into one share of common stock. The Series A
Preferred Stock would automatically convert to common stock upon closing of an
initial public offering of common stock in which aggregate proceeds received by
the Company would have been at least $25 million and which represented a
valuation of the total common equity of the Company of at least $60 million.
Holders of Series A Preferred Stock were not entitled to receive dividends
prior, or in preference, to common shareholders. Holders of Series A Preferred
Stock were to receive dividends upon declaration or payment of any dividend or
distribution to common shareholders. Holders of Series A Preferred Stock had
the right to vote with common shareholders on the basis of one vote per share
of Series A Preferred Stock held. The liquidation preference of the Series A
Preferred Stock was $1.19048 per share.
In connection with the recapitalization of LAWPlus, Inc. and merger with
JusticeLink, Inc., all of the issued and outstanding Series A Preferred Stock
was exchanged for Series B Preferred Stock (see below).
Series B Mandatory Redeemable Convertible Preferred Stock
On July 1, 1999, the Company completed a sale of 2,397,500 shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") at $2.00
per share. The Company received proceeds of $4,212,000, net of $583,000 of
offering costs. Offering costs of $583,000 have been recorded against
additional capital. In connection with arranging the offering, 234,250
immediately exercisable 10 year warrants to purchase common stock were issued
to the underwriter with a $2.00 per share exercise price.
Concurrently, on July 1, 1999, $1,900,000 of the 1999 Bridge Loans plus
accrued interest of approximately $328,000 were converted to 1,114,017 shares
of Series B Preferred Stock at $2.00 per share.
Each share of Series B Preferred Stock is convertible into the number of
shares of common stock that results from dividing the liquidation value
(initially $2.00 per share) of the Series B Preferred Stock by the conversion
price (initially $2.00 per share) for Series B Preferred Stock plus the number
of shares that results from dividing the amount of any accrued and unpaid
dividends divided by the amount equal to the fair value of the common stock.
The holders of Series B Preferred Stock will be entitled to receive cumulative
dividends at the rate of 5.0% of the original purchase price, which will be
converted into common shares upon conversion of the Series B Preferred Stock at
a conversion price equal to the fair market value of the common stock at the
time of conversion. The Series B Preferred Stock automatically converts to
common stock upon 1) the election of the holders of at least two-thirds of the
issued and outstanding Series B and Series C Preferred Stocks or 2) the closing
of an initial public offering of common stock in which aggregate proceeds are
at least $20,000,000.
F-107
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
Holders of Series B Preferred Stock vote with common shareholders on the basis
of one vote per share of Series B Preferred Stock held. In the event of
liquidation, dissolution or winding up of the Company, either voluntarily or
involuntarily, the holders of the Series B Preferred Stock have a liquidation
preference in an amount equal to three times the liquidation value of $2.00 per
share or their pro rata share if the assets of the Company are insufficient to
pay in full the respective preferential amounts (see adjustment to liquidation
preference upon issuance of Series C Preferred Stock described below).
On October 28, 1999, the Company amended the Certificate of Designation
for the Series B Preferred Stock making the Series B Preferred Stock
mandatorily redeemable upon the vote of two thirds of the combined holders of
Series B and Series C (see below) Preferred Stock. The redemption would be one
third of the shares on each of July 1, 2004, 2005 and 2006 at liquidation value
plus accrued unpaid dividends.
As of December 31, 1999, $429,776 representing the pro-rata portion of
the cumulative 5% dividend has been recorded to Series B Preferred Stock and
charged to additional capital in the absence of positive retained earnings.
Series C Mandatory Redeemable Preferred Stock
On October 28, 1999, the Company's Board of Directors authorized
7,200,000 shares of Series C Preferred Stock (the "Series C Preferred Stock")
with a par value of $0.01. The Series C Preferred Stock has essentially the
same rights and preferences as the amended Series B Preferred Stock, except in
the event of a liquidation. In the event of a liquidation where the assets
available are insufficient for payment of the entire preferred liquidation
preference, plus any cumulative but unpaid dividends, first, until the holders
of the Series C Preferred Stock have received an amount per share equal to the
liquidation value ($2.00 per share), plus any accrued dividends, sixty percent
of such assets will be allocated ratably to Series C Preferred Stock holders
and forty percent of such assets will be allocated ratably among the holders of
Series B Preferred Stock. The holders of the Series B and C Preferred Stocks
then share ratably until the holders have received an amount of three times the
liquidation value, plus any cumulative but unpaid dividends.
The Series C Preferred Stock is mandatorily redeemable upon the vote of
two-thirds of the combined holders of Series B and C Preferred Stocks. The
redemption would be one-third of the shares on each of July 1, 2004, 2005 and
2006 at liquidation value plus accrued unpaid dividends.
In November 1999, the Company sold 6,415,422 shares of Series C Preferred
Stock at $2.00 per share to Internet Capital Group, Inc. and a private
investment banking firm. The Company received gross proceeds of $12,831,000
from these offerings. The terms of the Series C Preferred Stock offering
restricted the use of the proceeds from paying debt and allowed existing
stockholders of the Company to acquire up to 750,000 shares at $2.00 per share
of which 693,285 shares have been sold as of December 31, 1999. As of December
31, 1999, the Company paid $80,000 of offering costs, which have been recorded
against additional capital.
As of December 31, 1999, $119,422 representing the pro-rata portion of
the cumulative 5% dividend has been recorded to Series C Preferred Stock and
charged to additional capital in the absence of positive retained earnings.
F-108
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
Agreement with Lexis-Nexis
On November 1, 1999, the Company and Lexis-Nexis Group, a division of
Reed Elsevier Inc. (Lexis) entered into a strategic alliance whereby the
Company will become the exclusive court electronic filing solutions partner of
Lexis. In the agreement the Company issued 1,300,000 shares of Series B
Preferred Stock in exchange for the right to pursue certain Lexis customers for
e-filing services and entering into a joint marketing agreement. The joint
marketing agreement relates to co-branding and promoting each Company's
services and listing the Company as Lexis' exclusive e-filing services
provider. Lexis will use its best efforts to transition the specified customers
to the Company's system. The shares issued are not contingent upon future
performance or services. The Company agreed to issue additional common stock to
Lexis contingent upon the level of revenue generated from these specified Lexis
former customers, if they are converted to be Company customers, for a thirty-
month period beginning after the transition period, which is expected to occur
no earlier than March 31, 2000.
Additionally, in connection with the agreement with Lexis, the Company
issued immediately exercisable 10 year warrants for 150,000 shares of common
stock at an exercise price of $2.50 per share to certain shareholders for
services performed during the transaction. The value assigned to the warrants
was nominal. The Company has recorded the $2.6 million of consideration to
intangible assets at December 31, 1999. Any additional consideration given to
Lexis related to future revenues will be charged to expense based on the fair
value of the stock to be given as of the date of the resolution of the
contingency.
Stock Warrants
As of December 31, 1999 and 1998, warrants to purchase 393,875 and
4,247,160 shares of common stock with an exercise price of $2.50 and $0.05,
respectively, were outstanding. All of the warrants outstanding at December 31,
1999 were exercisable. The warrants expire from May 4, 2008 through November 1,
2009.
In March 1999, 7,753,979 warrants of the 14,589,320 warrants issued in
connection with the 1998 and 1999 Bridge Loans were exercised as a part of the
recapitalization of LAWPlus, Inc. (see Note 7). Proceeds from the exercise
approximated $388,000. The remaining warrants issued in connection with the
1998 and 1999 Bridge Loans were voided as a condition of the merger with
JusticeLink, Inc.
Employee Stock Options
As of December 31, 1998, fully vested options granted prior to the
incorporation of LAWPlus, Inc. to purchase 15,000 shares of common stock were
outstanding with an exercise price of $0.0165 per share, exercisable through
December 31, 2010. Subsequently, with the 1999 recapitalization of LAWPlus,
Inc. and the merger with JusticeLink, Inc., these options were converted to
options to purchase 9,246 shares of common stock with an exercise price of
$0.0268 with the original expiration date.
In October 1998, the stockholders of the Company approved an Employee
Stock Option Plan authorizing 1,000,000 shares of the Company's common stock to
be reserved for the granting of incentive stock options. Stock option grants
for 593,068 shares with an exercise price of $0.50, representing the estimated
fair value at the date of grant were awarded during 1998 and subsequently
rescinded by the board of directors in December 1999. Generally, the options
vested at six to twelve months from the date of grant at a rate of 25% of the
initial grant and then pro rata each month thereafter until all options vest
four years from the date of grant. As of December 31, 1998, 66,261 options were
exercisable.
F-109
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
In October 1998 and June 1999, the Company increased the number of
shares available for grant under its Employee Stock Option Plan to 1,700,000
shares. During 1999, stock option grants covering 1,722,000 shares at an
exercise price of $0.50 per share were awarded by the Company, with terms
similar to the existing options with the vesting beginning from either their
original hire date or October 28, 1998. As of December 31, 1999, 180,797
shares are available for grant under the plan.
Data with respect to stock options of the Company are as follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
------------------------- ----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------- -------------- ------- --------------
<S> <C> <C> <C> <C>
January 1, 1998................ 9,246 $.03 9,246 $ .03
Granted........................ 593,068 .50
--------- ----
December 31, 1998.............. 602,314 .49 66,261 $(.43)
Granted........................ 1,722,000 .50
Exercised...................... (10,000) .50
Rescinded...................... (593,068) .50
Forfeitures.................... (212,043) .50
--------- ----
December 31, 1999.............. 1,509,203 $.50 331,354 $ .49
========= ====
</TABLE>
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, requires pro forma information regarding the
Company's net loss determined as if the Company has accounted for its employee
stock options under the fair value method. The fair value of the Company's
options estimated at the dates of grant during 1999 and 1998 using a "minimum
value" option pricing model was insignificant. Accordingly, the fair value
method results in substantially the same net loss for the years ended December
31, 1999 and 1998 as that shown in the statements of operations.
Reserved Shares
Shares of common stock reserved for future issuance as of December 31,
1999 were as follows:
<TABLE>
<S> <C>
Conversion of Series B Mandatory Redeemable Preferred Stock...... 9,461,468
Conversion of Series C Mandatory Redeemable Preferred Stock...... 7,108,707
Warrants......................................................... 393,875
Employee Stock Option Plan....................................... 1,700,000
----------
18,664,050
==========
</TABLE>
9. Related Party Transactions
On October 28, 1999, the Company's Board of Directors approved a
settlement agreement (the "Agreement") between the Company and a former
officer and shareholder, whereby the Company agreed to pay the former officer
deferred compensation of $118,000, which is included in the deferred
compensation liability at December 31, 1998. The amount will be payable in ten
monthly installments of $10,000 and twelve monthly installments of $1,500
beginning November 1, 1999. As part of this Agreement, the Company wrote off
the $135,000 note receivable from this former officer and shareholder.
F-110
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
An officer and director of the Company owns a facility from which the
Company relocated effective December 1998. The Company incurred approximately
$67,000 in rental expense related to this facility during the year ended
December 31, 1998.
Equipment is leased from a company in which a director of the Company has
an ownership interest. During the year ended December 31, 1999 and 1998, the
Company made approximately $397,000 and $266,000 in capital lease payments to
this company.
A partner of the Company's former outside legal counsel is also an equity
owner in the Company. The Company incurred approximately $18,000 in legal
expenses with the law firm during the year ended December 31, 1998.
In February 1998, the Company entered into a third-party development
contract for the design, engineering and development of a significant portion
of the Company's electronic filing application. Certain shareholders and
directors of the Company hold equity interests in the third party and serve on
its board of directors. For the year ended December 31, 1999 and 1998, the
Company made contract payments to this entity of approximately $816,000 and
$515,000, respectively. This agreement expired in September of 1999.
10. Subsequent Events
Note Payable Agreement
On February 11, 2000, the Company reached an agreement with Series B
Preferred stockholder which held the Note Payable in the amount of $1,072,000
(plus accrued interest of $62,000 as of February 11, 2000). Under the terms of
the agreement, the Company will pay $850,000 and transfer certain tangible and
intangible assets acquired in the merger with JusticeLink on May 25, 1999 to
the stockholder by March 10, 2000 in full settlement of the note. As of
December 31, 1999, the net book value of the tangible asset included in
property and equipment was $97,721. As a result of the agreement goodwill and
accrued interest will be reduced by $145,000 and $51,000, respectively.
Asset Purchase Agreement
On March 30, 2000, the Company entered into an asset purchase agreement
with a software development company whereby the Company will purchase certain
assets, including software for $4.0 million and a 1.5% common stock interest in
the newly formed entity resulting from the merger with CourtLink. The Company
must pay $2.0 million within thirty days of closing and $2.0 million on or
before November 15, 2000.
Also the Company entered into a cooperative marketing and limited grant
license agreement with the software development company.
Merger Agreement
Effective May 1, 2000, the Company entered into an Agreement and Plan of
Merger (the Agreement) with Data West Corporation, d.b.a CourtLink in a stock
for stock transaction to be accounted for under the purchase method. Pursuant
to the terms of the Agreement, the Company will exchange all of its outstanding
Series B Preferred and Series C Preferred stocks into CourtLink Series B
Preferred Stock at a defined rate of exchange. All of the Company's common
stock will also be converted into CourtLink's common stock at a defined rate of
exchange. The Company's outstanding warrants and options will be exchanged into
options for CourtLink common stock at a rate consistent with the common stock
exchange rate. The surviving company of the merger is CourtLink, however, the
Company's operation will remain in Dallas with certain corporate functions
being relocated to Seattle, Washington. The effects of the merger have not been
reflected in the accompanying financial statements.
F-111
<PAGE>
JUSTICELINK, INC.
(Formerly LAWPlus, Inc.)
Notes to Financial Statements--(Continued)
11. Year 2000 (Unaudited)
The Company, in conjunction with its third-party technology developers
and other third parties and key suppliers, completed an assessment of its
internal information systems and the electronic filing application and has
developed or modified portions of these information systems so that they would
function properly with respect to dates in the Year 2000 and thereafter. The
Company also modified the internet application underlying its electronic filing
service so that the occurrence of the date January 1, 2000, would not, by
itself, cause the current version of the JusticeLink system, owned and
developed by the Company and licensed for use by the Company to its customers
in the regular course of business, to materially fail to operate in accordance
with published specifications.
The Company did not experience any significant failures as a direct
result of Year 2000, and management does not believe that there is any
remaining exposure related to the Year 2000. Additionally, the Company
continuously monitors the activity of the internet application and has standing
operating procedures to address Year 2000 related failures should they occur.
The Company has expensed a nominal amount in 1999 related to Year 2000
compliance, which was included in product development expense.
F-112
<PAGE>
Report of Independent Public Accountants
To the Partners of
MetalSite General Partner, LLC:
We have audited the accompanying consolidated balance sheet of MetalSite
General Partner, LLC (a Delaware limited liability company) as of December 31,
1998 and the related consolidated statements of operations, partners' capital
and cash flows for the period from Inception (November 15, 1998) through
December 31, 1998. These financial statements are the responsibility of
MetalSite General Partner, LLC's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
MetalSite General Partner, LLC as of December 31, 1998, and the consolidated
results of its operations and its cash flows for the period from Inception
(November 15, 1998) through December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that MetalSite General Partner, LLC will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, it is
uncertain as to whether the Partnership will generate sufficient cash flows
from operations. This factor raises substantial doubt about the Partnership's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
January 12, 2000
F-113
<PAGE>
METALSITE GENERAL PARTNER, LLC
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $1,196,301 $1,129,323
Trade accounts receivable......................... 395,894 789
Other receivables................................. 5,516 --
Prepaid service arrangement, net of accumulated
amortization of $41,667 and $0, respectively..... 458,333 --
Prepaid expenses.................................. 47,427 2,194
---------- ----------
Total current assets............................ 2,103,471 1,132,306
Fixed Assets:
Furniture and fixtures............................ 2,000 1,967
Computer equipment and hardware................... 759,495 428,553
Accumulated depreciation.......................... (276,193) (30,293)
---------- ----------
Total fixed assets, net......................... 485,302 400,227
========== ==========
Other Assets:
Notes receivable from employees................... 113,323 --
Deposits.......................................... 18,669 25,100
Software and development costs, net of accumulated
amortization of $1,141,668 and $65,400,
respectively..................................... 564,306 1,189,965
---------- ----------
Total other assets.............................. 696,298 1,215,065
---------- ----------
Total Assets........................................ $3,285,071 $2,747,598
========== ==========
Liabilities And Partners' Capital (Deficit)
Current Liabilities:
Current portion of capital lease obligation....... $ 118,589 $ --
Accounts payable.................................. 67,295 594,502
Accrued incentives................................ 271,876 --
Accrued interest.................................. 222,548 4,652
Other accrued liabilities......................... 709,161 345,041
Deferred revenue.................................. 450 --
---------- ----------
Total current liabilities....................... 1,389,919 944,195
Long-term Liabilities:
Long-term portion of capital lease obligation..... 130,282 --
Loans from partners............................... 4,826,566 1,826,566
---------- ----------
Total long-term liabilities..................... 4,956,848 1,826,566
---------- ----------
Minority Interest in Limited Partnership............ 1,115,794 --
Partners' Capital (Deficit)......................... (4,177,490) (23,163)
---------- ----------
Total Liabilities and Partners' Capital (Deficit)... $3,285,071 $2,747,598
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-114
<PAGE>
METALSITE GENERAL PARTNER, LLC
Consolidated Statements Of Operations
For the Nine Months Ended September 30, 1999 and for the Period from
inception (November 15, 1998) through December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
Nine Months From Inception
Ended (November 15, 1998)
September 30, through December 31,
1999 1998
------------- --------------------
<S> <C> <C>
Revenues................................... $ 1,022,216 $ 789
Cost of revenues......................... 442,728 121,250
----------- ---------
Gross profit (loss)...................... 579,488 (120,461)
----------- ---------
Operating Expenses:
Product development...................... 1,785,115 456,079
Sales and marketing...................... 1,369,137 255,000
General and administrative............... 2,264,400 168,103
Partnership interest based compensation.. 65,200 --
----------- ---------
Total operating expenses................. 5,483,852 879,182
----------- ---------
Loss from operations..................... (4,904,364) (999,643)
----------- ---------
Interest expense, net...................... 213,537 4,652
----------- ---------
Minority interest in loss of limited
partnership............................... (949,406) (930,913)
----------- ---------
Net Loss................................... $(4,168,495) $ (73,382)
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-115
<PAGE>
METALSITE GENERAL PARTNER, LLC
Consolidated Statements of Partners' Capital (Deficit)
For the Nine Months Ended September 30, 1999 (Unaudited) and for the
Period from inception (November 15, 1998) through December 31, 1998
<TABLE>
<S> <C>
Partners' Capital (Deficit),
beginning balance at Inception (November 15, 1998)............... $ --
Contributions................................................... 50,219
Net loss........................................................ (73,382)
-----------
Partners' Capital (Deficit),
December 31, 1998................................................ (23,163)
-----------
Contributions................................................... 14,168
Net loss........................................................ (4,168,495)
-----------
Partners' Capital (Deficit),
September 30, 1999............................................... $(4,177,490)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-116
<PAGE>
METALSITE GENERAL PARTNER, LLC
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and for the Period from
inception (November 15, 1998) through December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
Nine Months From Inception
Ended (November 15, 1998)
September 30, through
1999 December 31, 1998
------------- -------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................... $(4,168,495) $ (73,382)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities--
Depreciation and amortization............. 1,284,401 95,693
Minority interest in loss of Limited
Partnership.............................. (949,406) (930,913)
Amortization of deferred compensation..... 65,200 --
Changes in assets and liabilities--
Accounts receivable....................... (395,105) (789)
Other receivables......................... (5,516) --
Prepaid expenses.......................... (45,233) (2,194)
Other assets.............................. (106,892) --
Accounts payable.......................... (527,207) 594,502
Accrued expenses.......................... 853,892 349,693
Deferred revenue.......................... 450 --
----------- -----------
Net cash (used) provided by operating
activities............................. (3,993,911) 32,610
----------- -----------
Cash Flows From Investing Activities:
Additions to fixed assets, software, and
development costs........................ 453,279 1,685,885
Deposits.................................. -- 25,100
----------- -----------
Cash used in investing activities....... (453,279) (1,710,985)
----------- -----------
Cash Flows From Financing Activities:
General Partners' cash contributions...... 14,168 50,219
Limited Partners' cash contributions...... 1,500,000 930,913
Loans from partners....................... 3,000,000 1,826,566
----------- -----------
Cash provided by financing activities....... 4,514,168 2,807,698
----------- -----------
Net increase in cash.................... 66,978 1,129,323
----------- -----------
Cash and cash equivalents, beginning of
period..................................... 1,129,323 --
----------- -----------
Cash and cash equivalents, end of period.... $ 1,196,301 $ 1,129,323
=========== ===========
Non-Cash Transactions:
Purchase of equipment through capital
lease.................................... $ 248,871 $ --
Contribution of prepaid service
arrangement for Limited Partnership
Interest................................. $ 500,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-117
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 1999 (Unaudited) and for the
Period from Inception (November 15, 1998) through December 31, 1998
1. Organization and Partnership Agreement:
MetalSite General Partner, LLC ("MGP" or the "general partner") a
Delaware limited liability company owns a 1% interest in MetalSite, L.P. (the
"Partnership" or "MetalSite") a Delaware Limited Partnership and through the
provisions of the Third Amended and Restated Operating Agreement of MGP (the
"Agreement") controls MetalSite. MetalSite is a leading provider of business-
to- business electronic commerce solutions to the metals industry. MetalSite's
Internet-based marketplace permits raw material suppliers, integrated and mini-
mill producers, service centers, distributors, toll processors, brokers,
fabricators and original equipment manufacturers to efficiently buy and sell
metals products. The Partnership was in the development stage for the period
from Inception (November 15, 1998) through the first half of 1999.
Weirton Steel Corporation ("WSC"), LTV Steel Company ("LTV") and Steel
Dynamics, Inc. ("SDI") purchased their respective general partner and
Partnership interests on November 15, 1998. LTV and SDI were also granted
warrants allowing them to purchase additional limited partnership interests
under specified terms (see Note 8). As the period from the time of respective
Partnership interest purchase to December 31, 1998 is one and a half months,
comparison to the nine-month period ending September 30, 1999 is not
meaningful.
For purposes of determining the ownership percentage of the Partnership,
the cost incurred by WSC prior to the initial capitalization of the
Partnership, for early development of the technology and intellectual property
that supports the Partnership's business, was included as a component of WSC
("Predecessor") and was credited towards WSC's initial Partnership interest. To
the extent that the expenditures composing this investment included assets
contributed to the Partnership, these assets were accounted for using the net
book value of the assets transferred from WSC's books. For financial reporting
purposes, however, the amount contained in WSC's capital account excludes those
costs that WSC expensed prior to the initial capitalization of the Partnership.
On September 1, 1999, Ryerson Tull, Inc. ("RTI") purchased its respective
general partner and Partnership interests in exchange for cash and intellectual
property (see Note 2). Additionally on September 1, 1999, Bethlehem Steel
Corporation ("BSC") purchased its respective general partner and Partnership
interests in exchange for cash.
As of December 31, 1998, WSC, LTV and SDI were collectively the limited
partners of MetalSite. As of September 30, 1999, WSC, LTV, SDI, RTI, and BSC
were collectively the limited partners of MetalSite (the "Limited Partners").
The Limited Partnership Agreement provides, among other things, for the
following:
Management
The affairs of the Partnership are managed by MGP, its general partner.
F-118
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
Right of First Refusal
Pursuant to the Limited Partnership Agreement of MetalSite L.P., a Class
A Partner (the "Selling Partner") shall have the right to sell all (but not
less than all) of its Class A interest in MetalSite ("Offered Interest") to a
bonafide third party provided that the Selling Partner first gives the
Partnership and the other Class A Partners (the "Non-Selling Partners") the
opportunity to purchase the Offered Interest. The Selling Partner shall give
written notice of any bona fide offer (the "Offer Notice") to MGP and each of
the Non-Selling Partners. Within 60 days following receipt of the Offer Notice,
the Partnership shall have the right to elect to purchase, at the same price
and on the same terms and conditions specified in the Offer Notice, the Offered
Interest.
Term and Dissolution
Pursuant to the Agreement of MGP, the Limited Partners shall not take
part in the control, direction or operation of the affairs of MGP other than to
exercise rights specifically provided in the Agreement, nor may the limited
partners act for or bind the MGP. At all times the sole control of the
Partnership shall rest exclusively with the general partner. Additionally, no
prior consent or approval of a limited partner is required for any act or
transaction to be taken by the general partner.
The term of the Partnership will continue until there is either (a) a
sale or distribution of all of MetalSite's assets, (b) a superceding of the
original partnership agreement or (c) a termination by dissolution.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements are those of the
general partner and include the accounts of MGP and the Partnership. All
significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation and Management's Plans
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and
settlement of liabilities in the ordinary course of business. Through September
30, 1999, MGP has incurred a cumulative net loss of $4,241,877 and has yet to
generate significant revenues. Management anticipates that additional losses
will be incurred while MetalSite's website aggregates sufficient commercial
activity to cover its operating costs. Any substantial delay in the
implementation of management's plans or substantial unanticipated costs
associated with its plans (including delays in achieving sufficient commercial
activity) could have an adverse effect on MGP's financial condition. As such,
it is uncertain as to whether MetalSite will generate sufficient cash flows
from operations. These factors raise substantial doubt about MGP's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management's plans include achieving sufficient commercial activity to
cover its operating costs. Until this is achieved, the Partnership is dependent
on the continued funding of its Limited Partners. On September 1, 1999,
management obtained a Partnership Loan Facility from the Limited Partners to
provide up to a maximum of $6,000,000 to fund Partnership operations (see Note
4).
F-119
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
Minority Interest
Minority interest includes the Limited Partner's Class A partnership
interests in MetalSite, the value of warrants issued to two of the Limited
Partners (see Note 8) and deferred compensation associated with the Class B
partnership interests that were issued to certain members of the Partnership's
management under a Restricted Partnership Interest Plan (the "RPIP"). Losses
are allocated pro-rata to the Limited Partners until the minority interest
balance is reduced to zero. At that time, all remaining losses are allocated
to the general partner.
Below is a reconciliation of the minority interest in the Limited
Partnership at September 30, 1999:
<TABLE>
<S> <C>
Minority interest in Limited Partnership--December 31, 1998......... $ --
Limited Partners' cash contributions................................ 1,500,000
Contribution of prepaid service arrangement for capital............. 500,000
Amortization of deferred compensation............................... 65,200
Minority interest in loss of Limited Partnership.................... (949,406)
----------
Minority interest in Limited Partnership--September 30, 1999........ $1,115,794
==========
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and money market funds.
All cash equivalents are recorded at cost, which approximates fair value.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight- line method to charge the cost of significant assets to income over
their useful lives. For purposes of this computation, the useful lives are
assumed to be as follows:
<TABLE>
<CAPTION>
From Inception
(November 15, 1998)
to December 31, 1998
--------------------
<S> <C>
Hardware and Software..................................... 3-5 years
Furniture and Fixtures.................................... 5 years
</TABLE>
Based upon the Partnership reassessment of hardware and software's
useful life, effective August 1, 1999, the Partnership changed the depreciable
life of the above assets as follows:
<TABLE>
<S> <C>
Internally Developed or Capitalized Software Costs.................... 1.5 years
Externally Developed or Acquired Software and Hardware................ 2 years
</TABLE>
The effect of the change in depreciable lives was an additional charge
of $399,660 to the statement of operations during the nine months ended
September 30, 1999.
Capitalized Software Costs
The Partnership capitalizes in accordance with SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use",
certain internal and external development costs that relate
F-120
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
to the development of internal use software that will provide benefits to
future periods. These costs are amortized over the shorter of their estimated
useful life or 1.5 years.
Prepaid Service Agreement
In connection with the sale of Class A partnership interest to RTI, MGP,
RTI and MetalSite have agreed that RTI shall provide certain of its consultants
to MetalSite to perform analysis, design, consulting, and/or support for one-
year from the date of RTI's investment. The consultants, in performing
services, provide MetalSite with their knowledge, experiences, expertise,
ideas, know-how, concepts and understandings, whether written or oral, to
assist MetalSite with the further development of its catalog technology. The
fair value of this prepaid service agreement ($500,000) is being amortized over
the life of the agreement (one-year).
Revenue Recognition
MetalSite recognizes revenue from three types of occurrences conducted on
or over its website: (1) fixed transaction fees for items with a set selling
price at the time the seller accepts the buyer's order, (2) auction transaction
fees derived from the highest bid received above seller specific reserve prices
at the time an auction is closed and (3) advertising fees for posted customer
advertisements at the time the service is performed. The specific reserve price
in (2) above is defined as the bid price that must be received from the buyer
before MetalSite is entitled to revenue. The seller, prior to placing a product
for auction on the site, sets the reserve price.
Cost of Revenues
Cost of revenues consist primarily of the costs for hosting services
provided by MetalSite's internet service provider for daily use of its server
and employee costs.
Income Taxes
No provision for income taxes has been made in the financial statements
as MGP is not subject to income tax. The tax effects of MGP and the
Partnership's operations accrue to its Partners.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
3. Notes Receivable from Employees:
In connection with the Class B partnership interests that were issued at
a discount to certain members of the Partnership's management under the RPIP,
the Partnership recorded $113,323 in nonrecourse loans to these employees for
tax payments the Partnership remitted to the government upon Class B
partnership interest grant. The interest on these loans is recourse. These
loans bear interest at 5% and are due in four equal annual installments
beginning April 17, 2000 (see Note 10).
F-121
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
4. Related Party Transactions:
Revenues
As of December 31, 1998, the Partnership's exclusive revenue provider was
WSC, a Limited Partner. As a result, the trade receivable recorded as of
December 31, 1998 was solely from WSC. Subsequent to December 31, 1998, the
Partnership began facilitating the sale of metal for other Limited Partners and
new sellers recording transaction fee revenue and the resultant trade
receivables from these sellers.
Note Payable to WSC
The Partnership received $1,826,566 in loans from WSC during the period
from Inception (November 15, 1998) through December 31, 1998. The loans bear
interest at an 8% fixed rate per annum and provide for the liquidation of
principal balances on December 31, 2001. These loans are secured by a lien on
the assets of the Partnership and are subordinated to the Partnership Loan
Facility discussed below. Among other restrictions, the Partnership will be
deemed to be in an "Event of Default" under the agreement if principal,
interest, or other indebtedness under the note payable agreement with WSC is
not paid when due. Included in the accompanying consolidated balance sheets
related to the WSC loans is accrued interest of $113,947 and $4,652 as of
September 30, 1999 and December 31, 1998, respectively. Interest expense for
the nine months ended September 30, 1999 and the period from Inception
(November 15, 1998) through December 31, 1998, was $109,295 and $4,652,
respectively.
Partnership Loan Facility
On September 1, 1999, the Limited Partners established a Partnership Loan
Facility (the "Facility") to provide working capital to fund the Partnership's
operations. Under the terms of this Facility, the Partnership can borrow up to
a maximum of $6,000,000. The Facility provides that upon the request of the
Partnership, each Limited Partner will make loans to the Partnership in
proportion to their respective ownership interests. These loans bear interest
at the PNC Bank prime interest rate plus 1%. Accrued interest and principal
balances are payable at maturity, which is March 26, 2001. Loans made under
this facility are secured by a lien on accounts receivable and fixed assets of
the Partnership and are subordinated to future bank borrowings. The amount
outstanding under the facility at September 30, 1999 was $3,000,000. Among
other restrictions, the Partnership will be deemed to be in an "Event of
Default" under the Facility if principal, interest, or other indebtedness under
the agreement is not paid when due. Additionally, the accompanying September
30, 1999 consolidated balance sheet includes accrued interest of $108,601 for
outstanding amounts due under the Facility. This also represents the amount of
interest expense incurred for the nine months ended September 30, 1999.
Warrants
Upon the earlier of (1) the date by which both LTV and SDI shall have
exercised their warrants to purchase Partnership interest or (2) April 1, 2001,
if a warrant in the Partnership previously expires without being exercised, WSC
shall be required to make an additional capital contribution equal to the
appraised value of the Partnership as of December 31, 1998, minus any capital
contributions made by any of the Limited Partners through such date to the
extent such appraised value of the Partnership exceeds the aggregate capital
contributions made to the Partnership. As of September 30, 1999 and December
31, 1998, no additional capital contributions were required.
F-122
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
Leases
From its Inception (November 15, 1998) through September 30, 1999, the
Partnership occupied facilities which were leased by WSC. WSC's monthly lease
payment was recorded as a payable to WSC on the Partnership's balance sheet. On
July 12, 1999, this lease was assigned to the Partnership and the Partnership
began making payments directly to the lessor (see Note 7). WSC has remained a
guarantor of this lease agreement.
WSC has guaranteed a lease facility that the Partnership has used to
purchase furniture for its offices. The maximum credit that will be extended
under this facility is $175,000. As of September 30, 1999 and December 31,
1998, the Partnership had leased office furniture under this facility totaling
approximately $175,000 and $83,000, respectively. This lease facility is
accounted for as an operating lease by the Partnership.
5. Technology License Agreement:
WSC developed the intellectual property and business processes
("Intellectual Property") that support the MetalSite website. Because this
information is critical to the Partnership's operation, WSC has entered into a
technology licensing agreement with the Partnership. This license allows the
Partnership worldwide, royalty free and irrevocable usage of WSC's Intellectual
Property in the metals industry. Upon a Transfer Event, as defined, WSC shall
automatically assign all right, title and interest in and to the Intellectual
Property to the Partnership free and clear of any claim, suit, proceedings,
security interest, pledge or lien or encumbrance of any kind or nature. A
Transfer Event, as defined by the technology licensing agreement is the earlier
of (1) an initial public offering of securities by MetalSite; or (2) two years
from the effective date of the agreement which is August 27, 1999.
6. Employee Benefit and Incentive Plans:
The Partnership has established a 401(K) retirement program to provide
the opportunity for substantially all employees to invest pretax earnings
towards their retirement. The Partnership's program provides for the
possibility of matching contributions up to a specified limit based on the
extent to which the Partnership achieves financial and operating goals. No
matching contributions were made to this Program during the nine months ended
September 30, 1999 or the period from Inception (November 15, 1998) through
December 31, 1998.
The Partnership has also established various incentive bonus plans for
its employees during 1999. No payments were made under these plans during the
nine months ended September 30, 1999. MetalSite accrued $271,876 for these
plans at September 30, 1999.
F-123
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
7. Leases:
The Partnership leases certain office space and office furniture under
operating leases. The following is a schedule of future minimum rental payments
required under non-cancelable operating leases:
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
1999........................................................... $115,000
2000........................................................... 510,000
2001........................................................... 226,000
2002........................................................... 19,000
--------
Total........................................................ $870,000
========
</TABLE>
Rental expense for all operating leases was approximately $237,000 and
$33,000 for the nine months ended September 30, 1999 and the period from
Inception (November 15, 1998) through December 31, 1998, respectively. Future
minimum lease payments include facility lease payments for office space
subleased from WSC subsequent to December 31, 1998 (see Note 4).
In August 1999, MetalSite entered into a capital lease with Exodus, an
internet service provider, for a website server and related hardware. Under the
terms of the lease, MetalSite is required to make twenty-four monthly payments
of $14,364 through October 31, 2001. An asset and corresponding obligation were
recorded for an amount equal to the present value of minimum lease payments at
the beginning of the lease term, excluding that portion of the payments
representing executory costs to be paid by the lessor. Payments were discounted
using a 9% interest rate, which approximated MetalSite's incremental borrowing
rate at the time the lease was executed. The principal balance outstanding
under this lease agreement was $248,871 at September 30, 1999.
Future minimum payments by year and in the aggregate, under capital
leases consist of the following at September 30, 1999:
<TABLE>
<S> <C>
1999.............................................................. $ 28,728
2000.............................................................. 172,368
2001.............................................................. 143,640
---------
Total minimum lease payments.................................... 344,736
Less--Amounts for executory costs................................. (51,110)
Less--Amounts representing interest............................... (44,755)
---------
Present value of net minimum lease payments....................... 248,871
Less--Amounts due within one year................................. (118,589)
---------
Long-term capital lease obligations............................... $ 130,282
=========
</TABLE>
8. Warrants Outstanding:
In connection with their purchase of an initial Partnership interest, two
of the Partnership's limited partners, LTV and SDI obtained nontransferable
warrants to purchase additional partnership interests. These warrants allow LTV
and SDI to acquire additional partnership interests sufficient to double their
initial Partnership interests. These warrants may be exercised at any time
between January 1, 1999 and March 31,
F-124
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
2001 and allow the additional interests to be purchased for a price based upon
a valuation of the Partnership as of December 31, 1998. The warrants entitle
the holder to a discount on their exercise price ("Discount") based on tonnage
the holder sells over the MetalSite website during the twelve months preceding
the exercise. As of September 30, 1999 and December 31, 1998, these warrants
remain unexercised. Additionally, as of December 31, 1998, neither LTV nor SDI
met the tonnage requirements to receive a Discount. At the point in time that
it becomes probable that LTV and SDI will achieve the tonnage targets,
MetalSite will begin to accrete the Discount with a charge to transaction fee
discount expense and a corresponding credit to warrants outstanding. At
September 30, 1999 and December 31, 1998, warrants outstanding totaled $74,250.
9. Fair Value of Financial Instruments and Market Risks:
Statement of Financial Accounting Standards No. 107 "Fair Value of
Financial Instruments" requires disclosures about fair value for all financial
statements. The $1,826,566 in loans from WSC bears interest at an 8% fixed rate
per annum, with principal paid at maturity. The $3,000,000 outstanding from the
Partnership Loan Facility bears interest at the PNC Bank prime rate plus 1%,
with principal paid at maturity. The variable rate debt approximates current
rates available to MetalSite for such debt, and accordingly the fair value of
such floating rate debt approximates the current carrying amount. At September
30, 1999 and December 31, 1998, it is not practicable to determine the fair
value of the fixed rate debt.
10. Management Ownership Plan:
During 1999, the Partnership established a Management Ownership Plan
("MOP") to provide incentive to key employees of the Partnership to (i) achieve
high levels of performance, and (ii) increase earnings and value of the
Partnership. The MOP seeks to accomplish these goals by providing a means
whereby such employees may acquire Class B interests in the Partnership through
the grant of Class B interests or the exercise of Class B options.
The grant of a Class B interest by the Partnership or the purchase of a
Class B interest pursuant to the exercise of a Class B option under the MOP
shall cause WSC's percentage interest in MetalSite (and a proportionate amount
of their capital account) to decrease by the same amount as the grant or
purchase of such Class B interest.
To the extent that the Limited Partners are allowed to sell any Class A
interests in MetalSite, or other securities into which the Class A interests
may convert in a registered offering, the Class B Partners shall have the right
to convert their respective Class B interest, or other securities into which
the Class B interest may convert, into Class A securities and sell in the same
registered offering, on the same terms as the Limited Partners. Each Class B
Partner's right to sell pursuant to the foregoing shall be in proportion to the
percentage of all Class A securities held by all Class B Partners that such
Class B Partner holds. If the Partnership engages in an initial public offering
("IPO") of securities other than the Class B interests, the Class B Interests
shall convert into the security being offered in the IPO immediately prior to
the IPO.
Under the provisions of the MOP, ownership interests totaling up to 10%
will be transferred to employees. On April 17, 1999 the Class B partnership
interests totaling 5% were issued to certain members of the Partnership's
management under the RPIP, which is a component of the MOP. The RPIP provides
for ownership of the Partnership interests to vest over a four-year period,
with the potential for accelerated vesting under certain circumstances. The
Class B partnership interests were recorded as deferred compensation at the
appraised value on the date of grant ($250,000) in the accompanying
consolidated statements of partners' capital (deficit). The deferred
compensation is being amortized over the four-year vesting period. The total
F-125
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
compensation cost recognized in the accompanying consolidated statement of
operations for the nine months ended September 30, 1999 was $65,200.
Under the Class B Option Award Plan (the "Plan"), which is a component of
the MOP, the Partnership may grant options for up to 1,000,000 units. The
Partnership's Board of Directors or its designee determines the option price
and vesting requirements. During the nine months ended September 30, 1999, the
Partnership granted 374,500 options at a price of $0.50 per unit. Under the
Plan, the option exercise price equals the unit's appraised value on the date
of grant. The Class B option granted under the Plan may only be exercised in
its entirety and only after the end of the applicable Plan Period, as defined
in each Class B Option Award Agreement, while the recipient is employed by the
Partnership, but in no event greater than 10 years from the award date.
1999 activity under the Class B Option Award Plan is summarized below:
<TABLE>
<CAPTION>
Weighted Average
Units Exercise Price
------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1999................. -- $ --
Granted--Class B Option Award Plan..................... 374,500 0.50
Forfeited.............................................. -- --
Exercised.............................................. -- --
------- -----
Outstanding at September 30, 1999...................... 374,500 $0.50
Exercisable at September 30, 1999...................... -- --
Weighted Average fair vale of option granted........... -- $0.13
</TABLE>
The Partnership accounts for the Class B Option Award Plan by application
of APB No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. Had compensation cost for the Class B Option Plan been
determined based upon the fair value at the grant dates consistent with SFAS
No. 123, "Accounting for Stock Based Compensation", the Partnership would have
recorded additional compensation expense in the amount of $50,322.
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 1999:
<TABLE>
<CAPTION>
9/29/99 9/27/99 9/15/99 9/2/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Risk free interest rate..................... 5.68% 5.62% 5.67% 5.74%
Expected dividend yield..................... 0% 0% 0% 0%
Expected life of options.................... 2 years 2 years 2 years 2 years
Expected volatility rate.................... 40% 40% 40% 40%
</TABLE>
11. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Statement 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133", which amends Statement 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
F-126
<PAGE>
METALSITE GENERAL PARTNER, LLC
Notes to Consolidated Financial Statements--(Continued)
Management does not believe that the adoption of Statement 133 will have a
material impact on MGP's financial position or its results of operations.
On December 3, 1999 the SEC staff released Staff Accounting Bulletin No.
101, "Revenue Recognition" ("SAB No. 101"), to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 explains the SEC staff's general framework for revenue recognition,
stating that four criteria need to be met in order to recognize revenue. The
four criteria, all of which must be met, are:
. There must be persuasive evidence of an arrangement;
. Delivery must have occurred or services must have been rendered;
. The selling price must be fixed or determinable; and
. Collectibility must be reasonably assured.
SAB No. 101 does not change existing literature on revenue recognition.
SAB No. 101 states that changes in accounting to apply the guidance contained
therein may be accounted for as a change in accounting principle under APB
Opinion No. 20, "Accounting Changes". The new standard did not require
management to change existing revenue recognition policies and therefore had no
impact on reported financial position and results of operations.
12. Subsequent Events:
On December 29, 1999, Internet Capital Group, Inc. ("ICG") purchased its
respective general partner and Partnership interests from WSC, pursuant to a
Securities Purchase Agreement (the "Purchase Agreement") between ICG and WSC.
Pursuant to the Purchase Agreement, ICG acquired a Class A limited partner
interest in MetalSite representing a 44.42% interest on a basic per unit basis
and a 35.35% interest on a diluted per unit basis. ICG also acquired a
Membership Interest in the general partner representing a 47.26% interest on a
basic per unit basis and a 39.72% interest on a diluted per unit basis.
In addition, pursuant to the Purchase Agreement, ICG has been granted
options to purchase additional interests in MetalSite and the general partner
from WSC upon the occurrence of certain events, as defined in the Purchase
Agreement. Further, ICG will have the right to appoint two voting members of
the Board of Directors of the general partner.
F-127
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
Weirton Steel Corporation:
We have audited the accompanying statements of costs and expenses of
MetalSite as a Component of Weirton Steel Corporation for the period from
January 1, 1998 to November 15, 1998 and for the year ended December 31, 1997.
These financial statements are the responsibility of Weirton Steel
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 statements of costs and expenses referred to above
present fairly, in all material respects, the costs and expenses of MetalSite
as a Component of Weirton Steel Corporation for the period from January 1, 1998
to November 15, 1998 and for the year ended December 31, 1997, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
January 12, 2000
F-128
<PAGE>
METALSITE AS A COMPONENT OF
WEIRTON STEEL CORPORATION
Statements of Costs and Expenses
For the Period from January 1, 1998 to November 15, 1998 and
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Period From
January 1, 1998
To November 15, December 31,
1998 1997
--------------- ------------
<S> <C> <C>
Costs And Expenses:
Product Development.............................. $2,110,563 $805,111
Sales and Marketing.............................. 324,753 80,053
General and Administrative....................... 655,918 109,475
---------- --------
Total Costs and Expenses....................... $3,091,234 $994,639
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
METALSITE AS A COMPONENT OF
WEIRTON STEEL CORPORATION
Notes to Financial Statements
For the Period From January 1, 1998 to November 15, 1998 and
For the Year Ended December 31, 1997
1. Basis of Presentation:
The accompanying financial statements represent the financial information
of MetalSite as a Component of Weirton Steel Corporation (the "Component"). The
costs and expenses of the Component were funded by Weirton Steel Corporation
and accordingly, no balance sheets or statements of cash flows are presented
for the Component. The statements of costs and expenses represent the
Component's share of total spending by Weirton Steel Corporation on behalf of
the Component for the respective periods presented. There was no activity
related to the Component prior to January 1, 1997.
On November 15, 1998, Weirton Steel Corporation, LTV Steel Company and
Steel Dynamics, Inc. purchased their respective interests in MetalSite General
Partner, LLC and MetalSite, L.P., at which time, the Component ceased to exist.
2. Research and Development:
The costs incurred for the Component primarily represent research and
development type expenditures related to the creation of the infrastructure of
the Component and were incurred prior to the establishment of technical
feasibility and were therefore expensed as incurred.
F-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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.
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
F-141
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
$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.
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.
F-142
<PAGE>
SYNCRA SOFTWARE, INC.
(a development stage enterprise)
Notes to Financial Statements--(Continued)
12. Income Taxes
Deferred tax assets consist of the following at December 31, 1998:
<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-143
<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-144
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To USgift.com Corporation:
We have audited the accompanying balance sheet of USgift.com Corporation (a
Georgia corporation and wholly owned subsidiary of OneCoast Network Corporation
in the development stage) as of September 30, 1999 and the related statements
of operations and accumulated deficit and cash flows for the period from
inception (April 27, 1999) 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 USgift.com Corporation as of
September 30, 1999 and the results of its operations and its cash flows for the
period from inception (April 27, 1999) to September 30, 1999 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
December 3, 1999
F-145
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
BALANCE SHEET
SEPTEMBER 30, 1999
Assets
<TABLE>
<S> <C>
Cash................................................................... $ 204
Property and equipment, net............................................ 154,922
-------
</TABLE>
<TABLE>
<S> <C>
$155,126
========
Liabilities and Stockholders' Deficit
Current Liabilities:
Due to OneCoast...................................................... $645,774
Accounts payable and accrued liabilities............................. 147,529
--------
Total current liabilities.......................................... 793,303
--------
Contingencies (Note 4)
Stockholders' Deficit:
</TABLE>
<TABLE>
<S> <C>
Common stock, no par value; 100,000,000 shares authorized, 0 shares
issued and outstanding............................................. 0
Deficit accumulated during the development stage.................... (638,177)
--------
Total stockholders' deficit....................................... (638,177)
--------
$155,126
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-146
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Statement of Operations and Accumulated Deficit
For the Period from Inception
(April 27, 1999) to September 30, 1999
<TABLE>
<S> <C>
Sales............................................................... $ 0
---------
Costs and expenses:
General and administrative......................................... 636,609
Depreciation and amortization...................................... 1,568
---------
Total costs and expenses......................................... 638,177
---------
Net loss............................................................ (638,177)
Accumulated Deficit:
Beginning of period................................................ 0
---------
End of period...................................................... $(638,177)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-147
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Statement of Cash Flows
For the Period from Inception
(April 27, 1999) to September 30, 1999
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $(638,177)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization..................................... 1,568
Changes in operating assets and liabilities:
Due to OneCoast.................................................. 645,774
Accounts payable and accrued liabilities......................... 147,529
---------
Net cash provided by operating activities....................... 156,694
---------
Cash Flows from Investing Activities:
Purchases of property and equipment................................ (156,490)
---------
Change in Cash and Cash Equivalents................................. 204
Cash and Cash Equivalents, beginning of period...................... 0
---------
Cash and Cash Equivalents, end of period............................ $ 204
=========
Supplemental Disclosures of Cash Flow Information:
Interest paid...................................................... $ 0
=========
Taxes paid......................................................... $ 0
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-148
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Notes to Financial Statements
September 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
USgift.com Corporation ("USgift" or the "Company") is a development stage
enterprise organized by OneCoast Network Corporation ("OneCoast") under the
laws of the state of Georgia on April 27, 1999. The Company did not issue any
stock until November 10, 1999, and accordingly, has no outstanding capital
stock at September 30, 1999. The Company was formed for the purpose of pursuing
business to business e-Commerce solutions related to the ongoing business of
OneCoast. OneCoast is a manufacturers' representative agency which solicits
sales of home and gift accessories through various methods of retail
distribution, including gift shops, merchandise marts, and catalogs throughout
the United States.
The Company's absence of operating history makes it difficult to predict
future operating results. The Company's budgeted expense levels are based, in
part, on its expectations of future growth. If revenue levels are below
expectations or if the Company is unable to reduce expenses proportionately,
operating results will be adversely affected. There is no assurance that the
Company will be profitable. The Company's prospects must be considered in light
of the risks, expenses, and difficulties frequently encountered by companies in
their early stages of development. While the Company believes that their
business to business e-Commerce solutions will become a viable commercial
operation, there can be no assurance in that regard. Accordingly, their
business processes may not work as the Company expects, and to the extent that
the Company is unable to make necessary adjustments to the business processes,
the operating results of the Company may be adversely affected.
History of Operating Losses
The Company has incurred net losses since its formation. The Company will
need to generate significant revenues to achieve and maintain profitability
which cannot be assured. The Company plans to significantly increase its sales
and marketing, research and development, and general and administrative
expenses throughout the remainder of calendar year 1999. Advances from OneCoast
as of September 30, 1999 were approximately $646,000. Subsequent to September
30, 1999, USgift became further indebted to OneCoast in the form of a
promissory note totaling approximately $10.3 million (Note 5). This note
matures upon the earlier of demand by OneCoast or proceeds from a qualified
debt or equity financing. OneCoast has represented they will not demand payment
of the note prior to the Company receiving adequate financing.
Use of Estimates
The preparation of the accompanying 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 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
From inception (April 27, 1999) through September 30, 1999, OneCoast
maintained a centralized cash management function; accordingly, the Company did
not maintain a separate operating cash account, and its cash disbursements were
settled by OneCoast. The cash balance at September 30, 1999 relates to petty
cash.
F-149
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Notes to Financial Statements--(Continued)
Fair Value of Financial Instruments
The book values of trade accounts payable approximate its fair value
principally because of the short-term maturities of this instrument.
Property and Equipment
Property and equipment are stated at cost and are depreciated and
amortized using the straight-line method over the estimated useful lives of
three years.
<TABLE>
<S> <C>
Computer software and equipment................................... $129,091
Machinery and equipment........................................... 27,399
--------
156,490
Less accumulated depreciation..................................... (1,568)
--------
$154,922
========
</TABLE>
The Company records impairment losses on property and equipment 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.
Comprehensive Income
The Company currently has no other comprehensive income items as defined
by Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income."
Segment Information
USgift operates solely in one operating segment, business to business e-
Commerce solutions for the gift and home accessories wholesale industry.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
USgift will be required to adopt for the year ending December 31, 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. Because USgift currently holds no derivative
financial instruments and does not currently engage in hedging activities, the
adoption of SFAS No. 133 is expected to have no material impact on USgift's
financial condition or results of operations.
2. PAYABLE TO ONECOAST
The payable to OneCoast consists primarily of expenses incurred by
OneCoast on behalf of USgift. These expenses include allocations of amounts
estimated by management and the actual operating expenses of USgift. Advances
through September 30, 1999 of $645,774 plus additional advances of $182,630 are
included in the $10.3 million note payable discussed in Note 5.
F-150
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Notes to Financial Statements--(Continued)
Allocations of certain corporate expenses primarily relating to officer
and corporate administration salaries and benefits and occupancy expense for
corporate headquarters has been included as a component of general and
administrative expense. Because specific identification of such expense was not
practicable, a proportionate cost allocation was utilized to allocate these
expenses to USgift based on management's estimate of officer and corporate
administration's time incurred or total square footage utilized in relation to
OneCoast's total corporate headquarters' square footage. Allocated expenses
totaled approximately $208,000 for the period from inception (April 27, 1999)
to September 30, 1999. Management has determined that such allocations are a
practical and reasonable method of allocation. However, these financial
statements are not necessarily indicative of the financial position that would
have occurred if the Company had been an independent company. The amounts that
would have been incurred on a stand-alone basis could differ significantly from
the allocated amounts due to economies of scale, differences in management and
operational practices, or other factors.
3. INCOME TAXES
For the period from inception (April 27, 1999) to September 30, 1999, the
Company's results were included in the federal and state income tax returns of
OneCoast. For the purpose of these financial statements, the income tax
provision has been determined on a basis as if the Company were a separate
taxpayer. Due to the history of losses incurred by the Company, the net
deferred tax asset resulting from temporary differences is not considered
probable of realization and therefore is offset in all periods presented by a
valuation allowance. Net operating loss carryforwards generated by USgift
through November 10, 1999 will not be available to offset income taxes
subsequent to the spin-off. A reconciliation of the provision of income taxes
to the amount computed by applying the statutory federal income tax rate to
income before income taxes is as follows for the period from inception (April
27, 1999) to September 30, 1999:
<TABLE>
<S> <C>
Statutory federal tax rate........................................... 34.0%
State tax rate, net of federal tax benefit........................... 4.0
Valuation allowance.................................................. (38.0)
-----
0.0%
=====
</TABLE>
4. CONTINGENCIES
For the period from inception (April 27, 1999) to August 31, 1999, the
Company shared office space with OneCoast and was allocated total rent expense
of $4,348. Commencing September 1, 1999, the Company entered into a lease
agreement for separate office space with an obligation of $5,986 per month and
is cancelable upon 30 days notice.
5. SUBSEQUENT EVENTS
Agreement and Plan of Reorganization and Corporate Separation
On April 27, 1999, the Company was organized under the laws of the state
of Georgia. On September 9, 1999, OneCoast notified its shareholders of a spin-
off of USgift whereby one share of USgift common stock would be distributed to
each holder of (or the right to hold) one share of OneCoast common stock. On
November 10, 1999, OneCoast subscribed to 1,634,096 shares of common stock of
USgift, all the then outstanding shares of USgift common stock, for $16,341 for
purposes of effecting the spin-off. Also on
F-151
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Notes to Financial Statements--(Continued)
November 10, 1999, pursuant to an agreement and plan of reorganization and
corporate separation, OneCoast and USgift effected the following:
Transfer of Assets
OneCoast transferred certain assets with a nominal net book value to
USgift in exchange for 10,178,152 shares of USgift common stock.
Distribution of USgift Stock to OneCoast Shareholders
OneCoast distributed all 10,178,152 shares of USgift common stock
acquired above to each holder of OneCoast stock of any class, subject to the
receipt by USgift of such shareholder's signature to the USgift shareholders
agreement.
Distribution of USgift Stock to OneCoast Warrant Holders
At the direction of OneCoast, USgift reserved 2,081,428 shares of common
stock for future issuance to holders of OneCoast warrants to purchase common
stock.
Purchase and Sale of OneCoast Assets
USgift purchased certain tangible assets from OneCoast for an estimated
net book value of $160,000.
Reimbursement of Start-up and Transaction Costs; Loan to USgift
In consideration of certain prior services provided by OneCoast, advances
of $828,404 through October 31, 1999, an anticipated loan of approximately
$1.6 million and tangible assets with a net book value of $160,000, USgift
promised to pay OneCoast approximately $10.3 million in the form of a
promissory note. The note bears interest at 13.33% per annum, payable
quarterly. Principal is payable on demand or from any proceeds from any debt
or equity financing. The note is secured by substantially all of the assets of
USgift. The Company will account for monies due under the note in excess of
assets received as a capital transaction.
Shareholders Agreement and Registration Rights Agreement
All recipients of USgift common stock and equivalents were required to
sign the USgift shareholders agreement. The shareholders agreement, as
amended, provides for the appointment of seven board members, one of which
will be independent. The agreement requires any shareholder wishing to sell
common stock to first offer the shares to the Company and existing
shareholders prior to any sales to third parties. The agreement also grants
certain investors rights to co-sale in the event of a sale to a third party.
A significant portion of shareholders are also party to a registration
rights agreement which requires the Company to effect a registration of common
stock upon the earlier of October 8, 2000 or 180 days after the effective date
of an initial public offering, as defined.
License Agreement
On November 10, 1999, One Coast and USgift entered into a 20-year license
agreement. Pursuant to the agreement, OneCoast licensed certain technology and
derivative works, including an electronic catalog and
F-152
<PAGE>
USGIFT.COM CORPORATION
(A Wholly Owned Subsidiary of OneCoast Network Corporation in the Development
Stage)
Notes to Financial Statements--(Continued)
electronic order processing system and certain data about OneCoast
manufacturers and their products and OneCoast retailers, to USgift on a royalty
free basis. USgift is required to share all derivative works with OneCoast for
a period of four years.
Strategic Alliance Agreement
On November 10, 1999, OneCoast and USgift entered into a strategic
alliance agreement. Pursuant to the agreement, OneCoast will use its best
efforts to encourage OneCoast manufacturers and retailers to conduct business
with and through USgift. In return, USgift agrees to pay OneCoast a percentage
of its revenues through 2004. The percentage is 1.5% of revenues for calendar
year 2000 and decreases .3% each year through 2004.
Stock Option Plans
On November 10, 1999, the board of directors of USgift approved the
adoption of the 1999 USgift Stock Option and Incentive Plan (the "1999 Plan")
and the 2000 USgift Stock Option and Incentive Plan (the "2000 Plan"). USgift
reserved 2,447,286 shares of common stock for issuance under the 1999 Plan and
6,573,105 shares of common stock for issuance under the 2000 Plan
(collectively, the "Plans"). The Plans provide for the granting of either
incentive or nonqualified stock options to purchase shares of common stock and
for other stock-based awards to employees, directors, consultants, and
independent contractors.
On November 10, 1999, the Company issued options to purchase 2,447,286
shares of common stock under the 1999 Plan, all with an exercise price of $.01
per share. The vesting of the options was immediate for 1,933,120 options and
ratable over four years for the remaining 514,166 options. Certain of the
options which vested immediately may be repurchased for $.01 by the Company if
employment is terminated prior to December 1, 2000. The Company anticipates
recording a compensation charge related to the issuance of these options.
On November 10, 1999, the Company entered into agreements to issue
options to purchase 2,592,378 shares of common stock under the 2000 Plan. The
options were issued in connection with the preferred stock offering discussed
below. The exercise price of the options is $2.21 per share and vest upon the
attainment of certain goals, including effecting an exit transaction, as
defined, or obtaining certain revenue goals for USgift. The Company anticipates
recording a compensation charge related to the issuance of these options.
Preferred Stock Offering
On November 19, 1999, the Company amended its articles of incorporation
whereby the authorized capital stock was increased to 113,000,000 shares of
which 13,000,000 shares were designated as Series A Preferred Stock. Dividends
are payable annually in cash or securities at a rate of 8% per annum. The
preferred shares, together with any accrued and unpaid dividends, are
convertible into an equal number of common shares and automatically convert
upon the earlier of a public offering, as defined, or at the election of a two-
thirds majority of the preferred shareholders. The shares are mandatorily
redeemable five years from issuance at the greater of $2.21 per share or fair
market value. The shares have a liquidation preference of $2.21 per share.
On November 24, 1999, the Company sold 12,265,198 shares of Series A
Preferred for consideration of $27.1 million, plus an earnout. A portion, $7
million, of the consideration is not payable until March 31, 2000.
Additionally, an earnout of $7 million is payable if the Company's revenues for
its fiscal year ended December 31, 2000 are not less than $25 million or the
Company effects a public offering of its common stock, as defined, prior to
December 31, 2000.
A portion of the proceeds from the offering were used to repay the note
payable to OneCoast.
F-153
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Shareholders of VerticalNet, Inc.:
We have audited the accompanying consolidated balance sheets of
VerticalNet, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity (deficit)
and comprehensive loss and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion 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
VerticalNet, Inc. and subsidiaries as a December 31, 1999 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, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
January 28, 2000
Philadelphia, Pennsylvania
F-154
<PAGE>
VERTICALNET, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 14,253,828 $ 5,662,849
Short-term investments........................... 44,131,135 --
Accounts receivable, net of allowance for
doubtful accounts of $2,084,573 in 1999 and
$61,037 in 1998................................. 45,776,520 1,794,728
Inventory........................................ 5,509,525 --
Prepaid expenses and other assets................ 5,964,422 747,951
------------ ------------
Total current assets........................... 115,635,430 8,205,528
------------ ------------
Cash-restricted.................................... 4,789,261 --
Property and equipment, net........................ 13,147,628 1,072,063
Goodwill, net of accumulated amortization of
$7,322,829 in 1999 and $282,990 in 1998........... 159,253,441 2,451,991
Other intangibles, net of accumulated amortization
of $779,513 in 1999............................... 18,670,487 --
Long-term investments.............................. 16,885,183 --
Other investments (Note 7)......................... 6,700,000 --
Other assets....................................... 5,823,062 613,393
------------ ------------
Total assets................................... $340,904,492 $ 12,342,975
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt................ $ 1,372,255 $ 288,016
Line of credit................................... -- 2,000,000
Accounts payable................................. 14,515,309 1,220,562
Accrued expenses................................. 20,101,348 1,582,038
Deferred revenues................................ 9,768,394 2,176,585
------------ ------------
Total current liabilities...................... 45,757,306 7,267,201
------------ ------------
Long-term debt, net of current portion............. 1,749,935 351,924
------------ ------------
Convertible notes (Note 10)........................ 115,000,000 5,000,000
Commitments and contingencies (Note 11)
Shareholders' Equity (Deficit):
Preferred stock $.01 par value, 10,000,000 shares
authorized, 7,805,667 shares issued and
outstanding in 1998............................. -- 78,057
Common stock $.01 par value, 90,000,000 shares
authorized, 72,120,866 shares issued in 1999 and
10,537,516 shares issued in 1998................ 721,208 105,374
Common stock to be issued (Note 2)............... 99,545,663 --
Additional paid-in capital....................... 151,874,747 19,487,338
Deferred compensation............................ (600,942) (594,033)
Accumulated other comprehensive loss............. (218,671) --
Accumulated deficit.............................. (72,772,767) (19,292,886)
------------ ------------
178,549,238 (216,150)
Treasury stock at cost, 649,936 shares in 1999
and 645,156 shares in 1998...................... (151,987) (60,000)
------------ ------------
Total shareholders' equity (deficit)........... 178,397,251 (276,150)
------------ ------------
Total liabilities and shareholders' equity..... $340,904,492 $ 12,342,975
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-155
<PAGE>
VERTICALNET, INC.
Consolidated Statements Of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Exchange transaction sales.......... $ 16,500,781 $ -- $ --
Cost of exchange transaction sales.. 14,171,345 -- --
------------ ------------ -----------
Net exchange revenues............. 2,329,436 -- --
Advertising and e-commerce
revenues........................... 18,428,485 3,134,769 791,822
------------ ------------ -----------
Combined revenues................. 20,757,921 3,134,769 791,822
Costs and Expenses:
Editorial and operational........... 8,611,317 3,237,971 1,055,725
Product development................. 7,396,316 1,404,557 711,292
Sales and marketing................. 26,268,370 7,894,662 2,300,365
General and administrative.......... 11,886,681 3,823,593 1,388,123
Amortization expense................ 7,819,351 282,990 --
In-process research and development
charge (Note 3).................... 13,600,000 -- --
------------ ------------ -----------
Operating loss.................... (54,824,114) (13,509,004) (4,663,683)
------------ ------------ -----------
Interest and dividend income.......... 3,448,034 212,130 10,999
Interest expense...................... (2,103,801) (297,401) (126,105)
------------ ------------ -----------
Interest, net......................... 1,344,233 (85,271) (115,106)
------------ ------------ -----------
Net loss.............................. $(53,479,881) $(13,594,275) $(4,778,789)
============ ============ ===========
Basic and diluted net loss per share.. $ (0.86) $ (1.32) $ (0.47)
============ ============ ===========
Weighted average shares outstanding
used in basic and diluted per-share
calculation.......................... 62,391,416 10,282,200 10,107,460
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-156
<PAGE>
VERTICALNET, INC.
Consolidated Statement of Shareholders' Equity (Deficit) and Comprehensive
Loss
<TABLE>
<CAPTION>
Preferred Common Accumulated
Stock Stock Common Additional Other
------------------- ------------------- Stock to be Paid-In Deferred Comprehensive Accumulated
Shares Amount Shares Amount Issued Capital Compensation Loss Deficit
---------- ------- ---------- -------- ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1997......... 512,821 $ 5,128 10,107,460 $101,074 $ -- $ 978,884 $ -- $ -- $ (919,822)
Issuance of
Series B
preferred
stock........... 2,579,580 25,796 -- -- -- 1,974,204 -- -- --
Issuance of
Series C
preferred
stock........... 154,861 1,549 -- -- -- 198,451 -- -- --
Issuance of
warrants in
connection with
debt financing.. -- -- -- -- -- 50,000 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (4,778,789)
---------- ------- ---------- -------- ----------- ------------ --------- --------- ------------
Balance,
December 31,
1997............ 3,247,262 32,473 10,107,460 101,074 -- 3,201,539 -- -- (5,698,611)
---------- ------- ---------- -------- ----------- ------------ --------- --------- ------------
Issuance of
Series D
preferred stock,
net of issuance
costs........... 4,558,405 45,584 -- -- -- 15,089,770 -- -- --
Issuance of
common stock as
consideration
for private
placement fees.. -- -- 227,920 2,280 -- 147,720 -- -- --
Issuance of
fully vested
options to non
employees....... -- -- -- -- -- 19,096 -- -- --
Shares issued as
consideration
for
acquisitions.... -- -- 193,416 1,932 -- 158,362 -- -- --
Exercise of
employee stock
options......... -- -- 8,720 88 -- 1,311 -- -- --
Unearned
compensation.... -- -- -- -- -- 669,540 (669,540) -- --
Amortization of
unearned
compensation.... -- -- -- -- -- -- 75,507 -- --
Issuance of
warrants in
connection with
debt financing.. -- -- -- -- -- 200,000 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (13,594,275)
---------- ------- ---------- -------- ----------- ------------ --------- --------- ------------
Balance,
December 31,
1998............ 7,805,667 78,057 10,537,516 105,374 -- 19,487,338 (594,033) -- (19,292,886)
---------- ------- ---------- -------- ----------- ------------ --------- --------- ------------
Comprehensive
loss:
Conversion to
common stock.... (7,805,667) (78,057) 38,939,384 389,396 -- (311,339) -- -- --
Sale of common
stock in initial
public offering
(Note 1)........ -- -- 16,100,000 161,000 -- 58,126,314 -- -- --
Common stock to
be issued (Note
2).............. -- -- -- -- 99,545,663 -- -- -- --
Notes converted
to common
stock........... -- -- 1,250,000 12,500 -- 4,987,500 -- -- --
Exercise of
options......... -- -- 2,214,908 22,148 -- 1,358,259 -- -- --
Shares issued
through employee
stock purchase
plan............ -- -- 143,122 1,430 -- 571,068 -- -- --
Shares issued as
consideration
for
acquisitions.... -- -- 2,787,640 27,876 -- 67,127,029 -- -- --
Exercise of
warrants........ -- -- 148,296 1,484 -- 90,503 -- -- --
Unearned
compensation.... -- -- -- -- -- 438,075 (494,855) -- --
Amortization of
unearned
compensation.... -- -- -- -- -- -- 487,946 -- --
Net loss........ -- -- -- -- -- -- -- -- (53,479,881)
Unrealized loss
on securities... -- -- -- -- -- -- -- (218,671) --
Comprehensive
loss............
---------- ------- ---------- -------- ----------- ------------ --------- --------- ------------
Balance,
December 31,
1999............ -- $ -- 72,120,866 $721,208 $99,545,663 $151,874,747 $(600,942) $(218,671) $(72,772,767)
========== ======= ========== ======== =========== ============ ========= ========= ============
<CAPTION>
Total
Shareholders' Comprehensive
Treasury Equity Income
Stock (Deficit) (Loss)
---------- -------------- --------------
<S> <C> <C> <C>
Balance, January
1, 1997......... $ (60,000) $ 105,264
Issuance of
Series B
preferred
stock........... -- 2,000,000
Issuance of
Series C
preferred
stock........... -- 200,000
Issuance of
warrants in
connection with
debt financing.. -- 50,000
Net loss........ -- (4,778,789)
---------- -------------- --------------
Balance,
December 31,
1997............ (60,000) (2,423,525)
---------- -------------- --------------
Issuance of
Series D
preferred stock,
net of issuance
costs........... -- 15,135,354
Issuance of
common stock as
consideration
for private
placement fees.. -- 150,000
Issuance of
fully vested
options to non
employees....... -- 19,096
Shares issued as
consideration
for
acquisitions.... -- 160,294
Exercise of
employee stock
options......... -- 1,399
Unearned
compensation.... -- --
Amortization of
unearned
compensation.... -- 75,507
Issuance of
warrants in
connection with
debt financing.. -- 200,000
Net loss........ -- (13,594,275)
---------- -------------- --------------
Balance,
December 31,
1998............ (60,000) (276,150)
---------- -------------- --------------
Comprehensive
loss:
Conversion to
common stock.... -- --
Sale of common
stock in initial
public offering
(Note 1)........ -- 58,287,314
Common stock to
be issued (Note
2).............. -- 99,545,663
Notes converted
to common
stock........... -- 5,000,000
Exercise of
options......... -- 1,380,407
Shares issued
through employee
stock purchase
plan............ -- 572,498
Shares issued as
consideration
for
acquisitions.... -- 67,154,905
Exercise of
warrants........ (91,987) --
Unearned
compensation.... -- (56,780)
Amortization of
unearned
compensation.... -- 487,946
Net loss........ -- (53,479,881)
Unrealized loss
on securities... -- (218,671) $(53,479,881)
Comprehensive
loss............ (218,671)
---------- -------------- --------------
Balance,
December 31,
1999............ $(151,987) $178,397,251 $(53,698,552)
========== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-157
<PAGE>
VERTICALNET, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Net loss............................ $ (53,479,881) $(13,594,275) $(4,778,789)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Loss from disposal of fixed
assets............................ 30,912 -- 3,278
Depreciation, amortization and
other noncash charges............. 9,790,278 837,724 388,058
In-process research and
development charge................ 13,600,000 -- --
Change in assets net of effect of
acquisitions:
Accounts receivable................ (8,031,734) (1,058,461) (428,669)
Inventory.......................... 1,894,778 -- --
Prepaid expenses and other
assets............................ (1,944,568) (1,085,213) (143,420)
Change in liabilities net of
effect of acquisitions:
Accounts payable................... 1,818,386 581,536 509,434
Accrued expenses................... 12,486,254 1,403,491 135,057
Deferred revenues.................. 7,032,955 1,249,624 493,960
------------- ------------ -----------
Net cash used in operating
activities...................... (16,802,620) (11,665,574) (3,821,091)
------------- ------------ -----------
Cash flows from investing
activities:
Acquisitions, net of cash
acquired.......................... (64,334,532) (1,858,389) --
Loan to Informatrix prior to
acquisition....................... -- (550,914) --
Purchase of investments............ (195,042,538) -- --
Proceeds from sale and redemption
of investments.................... 133,782,760 -- --
Restricted cash.................... (3,719,097) -- --
Loan receivable.................... -- (4,086) (160,000)
Bridge financing to Isadra prior
to acquisition.................... (965,319) -- --
Purchase of equity investments..... (6,700,000)
Capital expenditures............... (5,403,196) (484,408) (235,671)
------------- ------------ -----------
Net cash used investing
activities...................... (142,381,922) (2,897,797) (395,671)
------------- ------------ -----------
Cash flows from financing
activities:
Borrowings under line of credit.... -- 2,000,000 2,500,000
Repayment of line of credit........ (2,000,000) (2,500,000) --
Loans from ICG..................... -- 6,550,000 1,600,000
Repayment of loans from ICG........ -- -- (950,000)
Repayment of loans from related
parties........................... -- (100,000) --
Principal payments on obligations
under capital leases.............. (903,428) (189,005) (48,834)
Repayment of long-term debt........ (603,261) (32,852) (9,139)
Net proceeds from issuance of
preferred stock................... -- 13,741,962 1,550,000
Net proceeds from issuance of
common stock in initial public
offering.......................... 58,459,305 -- --
Net proceeds from convertible debt
issuance.......................... 110,870,000 -- --
Proceeds from exercise of stock
options and employee stock
purchase plan..................... 1,952,905 1,399 --
------------- ------------ -----------
Net cash provided by financing
activities...................... 167,775,521 19,471,504 4,642,027
------------- ------------ -----------
Net increase in cash................ 8,590,979 4,908,133 425,265
Cash and cash equivalents--beginning
of period.......................... 5,662,849 754,716 329,451
------------- ------------ -----------
Cash and cash equivalents--end of
period............................. $ 14,253,828 $ 5,662,849 $ 754,716
============= ============ ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest........................... $ 300,806 $ 199,016 $ 52,925
============= ============ ===========
Supplemental schedule of noncash
investing and financing activities:
Equipment acquired under capital
leases............................ $ 3,120,292 $ 383,816 $ 415,195
Issuance of common stock as
consideration for acquisitions.... $ 67,154,905 $ 160,294 $ --
Common stock to be issued as
consideration for acquisitions.... $ 99,545,663 $ -- $ --
Issuance of common stock as
consideration for private
placement fees.................... $ -- $ 150,000 $ --
Issuance of warrants in connection
with debt financing............... $ -- $ 200,000 $ 50,000
Warrant exercises.................. $ 91,987 $ -- $ --
Liabilities assumed in conjunction
with acquisitions................. $ 18,671,532 $ -- $ --
Loans from ICG converted to
preferred stock................... $ -- $ 1,550,000 $ 650,000
Notes converted to common stock.... $ 5,000,000 $ -- $ --
Financing agreement for directors
and officers liability
insurance......................... $ 235,214 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-158
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Company
VerticalNet, Inc. ("VerticalNet" or the "Company") owns and operates
vertical trade communities, which are targeted business-to-business communities
of commerce on the Internet. The Company's vertical trade communities are Web
sites that act as industry-specific comprehensive sources of information,
interaction and electronic commerce. Vertical trade communities combine product
information; industry news; requests for proposals; directories; classifieds;
job listings; discussion forums; a variety of electronic commerce opportunities
for buyers and sellers; and other services, such as online professional
education courses and virtual trade shows. Each trade community is individually
branded, focuses on one business sector and caters to individuals with similar
professional interests. The virtual trade communities are designed to attract
technical and purchasing professionals with highly specialized product and
specification requirements and purchasing authority or influence. The Company
was founded on July 28, 1995 and as of March 15, 2000 operates 55 vertical
trade communities in eleven major industry groups: advanced technologies;
communications; environmental; food and packaging; food service/hospitality;
healthcare and science; manufacturing and metals; process; public sector;
service; textiles and apparel.
Through the December 16, 1999 acquisition of NECX.com LLC ("NECX"), a
business-to-business market maker for the electronic components and hardware
market, the Company is also engaged in the sale of electronic hardware and
components. NECX acts as a third party intermediary, purchasing electronic
hardware and components from various vendors for resale to foreign and domestic
companies. NECX also has overseas subsidiaries in Sweden and Ireland that serve
as sales offices to European exchange customers. NECX's functional currency is
US dollars.
On February 17, 1999, the Company completed its initial public offering
(the "IPO") of 16,100,000 shares of its common stock at $4.00 per share (on a
post-split basis). Net proceeds to the Company were approximately $58.3 million
(net of underwriters' commission and offering expenses of $6.1 million).
On July 21, 1999, the Board of Directors of the Company approved a two-
for-one stock split of the Company's common stock. Shares resulting from the
split were distributed on August 20, 1999 to shareholders of record at the
close of business on August 9, 1999.
On January 20, 2000, the Board of Directors of the Company approved a
two-for-one stock split of the Company's common stock to be distributed in the
form of a stock dividend, payable on or about March 31, 2000 for shareholders
of record at the close of business on March 17, 2000.
All references in the consolidated financial statements to shares, share
prices and per share amounts have been adjusted retroactively for these splits.
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
F-159
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Revenue and Editorial and Operational Expenses
Prior to the acquisition of NECX, the Company generated substantially all
of its revenue from Internet advertising including the development of
"storefronts" (Web pages that focus on advertisers' products and provide a link
to the advertisers' Web sites). The advertising contracts generally do not
extend beyond one year, although certain contracts are for multiple years.
Advertising revenues are recognized ratably over the period of the advertising
contract. In 1999, we also entered into a number of strategic co-marketing
agreements where the Company is responsible for creating co-branded sites.
Revenues from the development of these sites are recognized as earned.
Additional revenues from advertising and maintenance services are recognized as
earned over the term of the contract. Revenues from educational courses are
recognized in the period in which the course is completed and revenues from the
sale of books are recognized in the period in which the books are shipped.
Auction revenues related to transaction fees are recognized at the time that
the auction is successfully concluded. Web hosting revenues are recognized
ratably over the period of service and web development fees are recognized as
earned. All e-commerce revenues, whether transaction fees, a percentage of sale
fee or a minimum guaranteed fee, are recognized when earned. Approximately $3.0
million and $1.0 million at December 31, 1999 and 1998, respectively, included
in the accounts receivable balance, is unbilled due to customer payment terms.
Gross exchange transaction sales are comprised of product sales, net of
returns and allowances. Product sales typically involve electronic components,
computer products and connectivity equipment. Revenue is recognized when the
products are shipped to customers. The Company reflects the gross revenue and
related product costs of exchange transactions in its consolidated financial
statements since it takes title to the products exchanged in such transactions
and is exposed to both inventory and credit risk related to the execution of
the transactions. However, management believes that the amount of net revenue,
resulting from exchange transactions is an important performance measure for
the exchange business and has presented this amount as a subtotal in the
consolidated statements of operations. Net exchange revenues as shown in the
Company's consolidated financial statements are gross exchange transaction
sales less exchange transaction costs primarily consisting of resale inventory
purchases and freight charges. The Company records a reserve for exchange sales
returns at the time of shipment, based on estimated return rates.
Barter transactions are recorded at the lower of estimated fair value of
the goods or services received or the estimated fair value of the
advertisements given based on historical cash transactions. Barter revenue is
recognized when the advertising impressions are delivered to the customer and
advertising expense is recorded when the advertising impressions or other
advertising services are received from the customer. If the advertising
impressions are received from the customer prior to the Company delivering the
advertising impressions a liability is recorded, and if the Company delivers
the advertising impressions to the customer prior to receiving the advertising
impressions or other advertising a prepaid expense is recorded. For the year
ended December 31, 1999 and 1998, the Company recognized approximately $3.8
million and $650,000 of advertising revenues and $3.0 million and $498,000 of
advertising expenses from barter transactions, respectively. For the year ended
December 31, 1997, barter transactions were immaterial. The Company has
recorded approximately $968,000 and $175,000 in prepaid expenses related to
barter transactions as of December 31, 1999 and 1998, respectively.
Editorial and operational expenses primarily consist of Internet
connection charges, depreciation, purchased content, salaries and benefits of
operating and editorial personnel and other related operating costs and are
recorded as incurred.
F-160
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Product Development
Product development costs consist principally of salaries and related
costs, which are charged to expense as incurred.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense, exclusive of barter advertising discussed above, was approximately
$4.3 million, $1.9 million and $198,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market investments and
other highly liquid investments with original maturities of three months or
less.
Restricted Cash
Restricted cash represents certificates of deposit held pursuant to a
building lease agreement and standby letters of credit.
Investments
The Company accounts for investments in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company's marketable investments
are classified as available-for-sale as of the balance sheet date and are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in shareholders' equity (deficit). Realized gains or losses and permanent
declines in value, if any, on available-for-sale securities will be reported in
other income or expense, as incurred.
The Company holds equity instruments of privately held companies for
business and strategic purposes. These investments are included in other
investments and are accounted for under the cost method since ownership is less
than 20% and the Company does not have the ability to exercise significant
influence over the investees. For these non-quoted investments, the Company's
policy is to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying values. The
Company identifies and records impairment losses on long-lived assets when
events and circumstances indicate that such assets might be impaired. To date,
no such impairment has been recorded.
The Company has investments in companies whose results are not
consolidated, but over whom the Company exercises significant influence, these
investments are accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to an investment
depends on an evaluation of several factors including, among others,
representation on the investee's board of directors and ownership level, which
is generally a 20% to 50% interest in the voting securities of the investee,
including voting rights associated with the Company's holdings in common,
preferred and other convertible instruments in the investee. Under the equity
method of accounting, the Company's share of the earnings or losses of the
investee is reflected in the Company's consolidated statements of operations.
F-161
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Inventory
Inventory consists of NECX merchandise purchased for resale and is
recorded at the lower of cost or market with the cost determined on the first-
in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
amortization and depreciation. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset
or the lease term. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software....................... 3-5 years
Office equipment and furniture.................................. 5-7 years
Trade show equipment............................................ 7 years
Leasehold improvements.......................................... 3 years
</TABLE>
Internal Use Software
Under the provisions of Statement of Position ("SOP") 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, the
Company capitalizes costs associated with internally developed and/or purchased
software systems for new products and enhancements to existing products that
have reached the application stage and meet recoverability tests. Capitalized
costs include external direct costs of materials and services utilized in
developing or obtaining internal-use software, payroll and payroll related
expenses for employees who are directly associated with and devote time to the
internal-use software project and interest costs incurred, if material, while
developing internal-use software. Capitalization of such costs begins when the
preliminary project stage is complete and ceases no later than the point at
which the project is substantially complete and ready for its intended purpose.
The carrying value of the software is regularly reviewed and a loss is
recognized if the value of estimated undiscounted cash flow benefit related to
the asset falls below the unamortized cost. As of December 31, 1999,
capitalized costs are not yet being amortized since projects are still in
process.
Goodwill and Intangible Assets
Goodwill is amortized using the straight-line method from the date of
acquisition over the period of the expected benefits, which ranges from three
to five years. Other intangible assets resulting from the Company's
acquisitions, including covenants not-to-compete, acquired technology,
strategic relationships and acquired workforce, are also amortized using the
straight-line method from the date of acquisition over the period of the
expected benefits, ranging from at two to four years. The Company periodically
assesses the recoverability of goodwill, as well as other long-lived assets,
based upon expectations of future undiscounted cash flows.
Debt Issuance Costs
Specific costs related to the convertible debt offering were capitalized
upon issuance and are being amortized to interest expense using the effective
interest rate method over five years. As of December 31, 1999, the remaining
debt issuance costs are $3.7 million, classified in other assets on the balance
sheet.
F-162
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
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 tax
bases and the tax effect of net operating loss 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. A valuation allowance is recorded against deferred
tax assets if it is more likely than not that such assets will 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 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.
Accounting for Impairment of Long-Lived Assets
The Company assesses impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
future cash flows estimated to be generated by those assets are less than the
assets' carrying amount. The amount of the impairment, if any, is measured
based on projected discounted future cash flows.
Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosure about
Fair Value of Financial Instruments, the Company has determined the estimated
fair value of its financial instruments using available market information and
valuation methodologies. The Company's financial instruments consist of cash,
accounts receivable, accounts payable, capital leases and convertible notes.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates are not necessarily indicative of the amounts that could be
realized in a current market exchange. However, the Company believes the
carrying values of these assets and liabilities, with the exception of the
convertible notes, is a reasonable estimate of their fair market values at
December 31, 1999 and 1998 due to the short maturities of such items. Based on
their quoted market value as of December 31, 1999, the convertible notes are
estimated to have an aggregate fair market value of approximately $487.6
million.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents in
bank deposits accounts, marketable securities and trade receivables. The
Company has not experienced significant losses related to cash and cash
equivalents and marketable securities and does not believe it is exposed to any
significant credit risks relating to its cash and cash equivalents. The
Company's trade receivables from exchange sales are derived primarily from
sales of electronic hardware products to a large number of customers worldwide.
The Company establishes the allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical
F-163
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
trends and other information. At December 31, 1999 less than 1% of receivables
(denominated in U.S. dollars) is due from exchange customers whose economies
are considered highly inflationary. The Company does not anticipate any losses
from these receivables in excess of the provided allowances. No single customer
accounted for greater than 10% of total revenues during the years ended
December 31, 1999, 1998 and 1997.
Self Insurance
The Company is self-insured for certain losses related to employee
medical benefits as of December 1999. The Company has purchased stop-loss
coverage in order to limit its exposure. Self insurance losses are accrued
based upon the Company's estimates of the aggregate liability for uninsured
claims incurred using certain actuarial assumptions followed in the insurance
industry. At December 31, 1999, the accrued liability for self-insured losses
included in other accrued expenses is $171,000.
Stock Options
Stock-based compensation is recognized using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"). For disclosure purposes, pro forma
net loss and loss per share data are provided in accordance with SFAS 123,
Accounting for Stock-Based Compensation as if the fair value method had been
applied.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per
Share
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net loss per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
potentially could include the incremental common shares issuable upon the
exercise of stock options and warrants (using the treasury stock method) and
the incremental common shares issuable upon the conversion of the convertible
preferred stock (using the if-converted method) and the Company's convertible
debt. Common equivalent shares are excluded from the calculation if their
effect is anti-dilutive. Common stock to be issued upon the conversion of the
convertible note given as consideration for the purchase of NECX was included
in the calculation from the date of acquisition in December 1999 since the
related securities were accounted for as equity.
Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding, including common equivalent
shares from the convertible preferred stock (using the if-converted method),
which automatically converted into common stock upon the completion of the IPO
as if converted at the original date of issuance, for both basic and diluted
net loss per share, even though inclusion is anti-dilutive.
The following table sets forth the reconciliation between the weighted
average shares outstanding for basic and diluted and pro forma net loss per
share computations:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding basic and
diluted..................................... 62,391,416 10,282,200 10,107,460
Effect of convertible preferred stock........ 4,267,326 32,259,756 14,629,844
---------- ---------- ----------
Pro forma weighted average shares
outstanding................................. 66,658,742 42,541,956 24,737,304
========== ========== ==========
</TABLE>
F-164
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
The following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Basic and diluted net loss per share
Numerator: Net loss.................... $(53,479,881) $(13,594,275) $(4,778,789)
Denominator:
Weighted average shares outstanding
basic and diluted................... 62,391,416 10,282,200 10,107,460
Basic and diluted net loss per share... $ (0.86) $ (1.32) $ (0.47)
============ ============ ===========
Pro forma net loss per share
Numerator: Net loss.................... $(53,479,881) $(13,594,275) $(4,778,789)
Denominator:
Pro forma weighted average shares
outstanding basic and diluted....... 66,658,742 42,541,956 24,737,304
Basic and diluted net loss per share... $ (0.80) $ (0.32) $ (0.19)
============ ============ ===========
</TABLE>
The conversion of outstanding options, warrants and subordinated
convertible debt resulting in 17,583,787, 2,704,474 and 1,464,292 common stock
equivalents would have been anti-dilutive and were excluded from the
calculations for the years ended December 31, 1999, 1998 and 1997,
respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivatives and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. As we do not currently engage or plan to engage
in derivative or hedging activities, it is not anticipated that there will be
any impact on our results of operations, financial position or cash flows upon
the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission (the "SEC") requested that the Financial Accounting Standards Board
Emerging Issues Task Force (the "EITF") address a number of accounting and
financial reporting issues that the SEC believes had developed with respect to
Internet businesses. The SEC identified twenty issues for which they believed
some form of standard setting or guidance may be appropriate either because (1)
there appeared to be diversity in practice or (2) the issues are not
specifically addressed in current accounting literature or (3) the SEC Staff is
concerned that developing practice may be inappropriate under generally
accepted accounting principles. Many of the issues identified by the SEC,
including those which address barter and revenue recognition, are potentially
applicable to the Company. Although the EITF has begun to deliberate these
issues, formal guidance has not been issued to date for the majority of them.
In addition, in December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No. 101, Revenue Recognition in Financial Statements, which is required to be
implemented in the quarter ended March 31, 2000. The Company is currently
analyzing the potential impact of SAB No. 101 on its revenue recognition
policies. Although the Company believes its historical accounting policies and
practices conform with generally accepted accounting principles, there can be
no assurance that final consensuses reached by the EITF on the Internet issues
referred to above, or other actions by standard setting bodies, or the
Company's formal implementation of SAB No. 101, will not result in changes to
the Company's historical accounting policies and practices or to the manner in
which certain transactions are presented and disclosed in the Company's
consolidated financial statements.
F-165
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
(2) Acquisitions
In September 1998, the Company acquired all of the outstanding capital
stock of Boulder Interactive Technology Services Company ("BITC") for $1.8
million in cash. BITC operates a vertical trade community for professionals in
the radio frequency and wireless communications industry. The acquisition was
accounted for as a purchase and the excess of the purchase price over the fair
value of the net assets acquired of approximately $1.9 million was recorded as
goodwill and is being amortized over 36 months.
In September 1998, the Company acquired all of the outstanding capital
stock of Informatrix Worldwide, Inc. ("Informatrix") for 184,616 shares of the
Company's common stock valued at $153,000. The acquisition was accounted for as
a purchase and the excess of the purchase price over the fair value of the net
assets acquired of approximately $903,000 was recorded as goodwill and is being
amortized over 36 months. The purchase agreement also provided for the Company
to issue up to 46,152 additional shares of the Company's common stock to the
Informatrix shareholders in the event that Informatrix achieved certain sales
targets through December 1998. Through December 31, 1998, the former
shareholders of Informatrix earned, and the Company recorded, the issuance of
14,952 shares of common stock which was valued at $32,000. The additional
consideration was accounted for as additional goodwill. Informatrix operates a
vertical community in the property and casualty insurance industry that caters
to risk managers, agents, brokers and other professionals in the insurance
industry.
In January 1999, the Company acquired certain assets, including the
Safety Online Web site, and assumed certain liabilities from Coastal Video
Communications ("Coastal"). The Company paid $260,000 in cash, issued a $50,000
note, to be paid within 90 days of the closing of the purchase, and provided
the seller an advertising commitment on the Company's Web site valued at
$160,000. As of December 31, 1999, the Company has paid the note to Coastal and
has fulfilled approximately $104,000 of its advertising commitment to the
seller. The acquisition was accounted for as a purchase and the estimated
excess of the purchase price over the fair value of the net assets acquired of
approximately $550,000 was recorded as goodwill and is being amortized over 36
months. The results of operations from Safety Online are not material to the
Company's consolidated financial position or results of operations. Safety
Online is a vertical trade community serving professionals in the occupational
and safety industry.
In June 1999, the Company acquired certain assets, including the Oillink
Web site, and assumed certain liabilities of a sole proprietor. The Company
paid $225,000 in cash and issued 11,684 shares of its common stock valued at
$250,000. The acquisition was accounted for as a purchase and the estimated
excess of the purchase price over the fair value of the net assets acquired of
approximately $504,000 was recorded as goodwill and is being amortized over 36
months. The results of operations from Oillink are not material to the
Company's consolidated financial position or results of operations. Oillink is
a vertical trade community for professionals in the global oil and gas
community, offering industry news, information and a number of on-line
services.
In June 1999, the Company acquired certain assets, including the
ElectricNet Web site, and assumed certain liabilities of a sole proprietor. The
Company paid $975,000 in cash and issued 42,252 shares of its common stock
valued at $825,000. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of the net assets
acquired of approximately $1.9 million was recorded as goodwill and is being
amortized over 36 months. The results of operations from ElectricNet are not
material to the Company's consolidated financial position or results of
operations. ElectricNet is a leading destination for electrical power industry
professionals, offering information for the power transmission and distribution
industry.
F-166
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
In June 1999, the Company acquired all of the outstanding capital stock
of Techspex, Inc. ("Techspex") for $211,000 in cash and 179,988 shares of
common stock valued at $3.0 million. The acquisition was accounted for as a
purchase and the estimated excess of the purchase price over the fair value of
the net assets acquired of approximately $3.3 million was recorded as goodwill
and is being amortized over 36 months. Techspex was the owner and operator of a
vertical trade community in the machine tools industry. The Web site acts as a
comprehensive source of information, interaction and electronic commerce for
the machine tool industry providing a searchable database of machine tools,
dealers and tooling and accessory suppliers.
In July 1999, the Company acquired all of the outstanding capital stock
of LabX Technologies Inc. ("LabX") for $1.6 million in cash and 139,588 shares
of common stock valued at $2.8 million. The common stock given as consideration
was reduced by an illiquidity discount of 10% based on restrictions detailed in
the lock up agreements signed by the individuals receiving the stock. The
acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$4.6 million was allocated to a covenant not-to-compete, existing technology
and goodwill of approximately $350,000, $500,000 and $3.75 million,
respectively. The covenant not-to-compete is being amortized on a straight-line
basis over 24 months, the term of the covenant, while the existing technology
and goodwill are being amortized on a straight-line basis over 36 months. LabX
was the owner and operator of an Internet trading community focused on
facilitating electronic commerce of scientific equipment on the Internet.
LabX's Web site community allows participants to communicate their buying and
selling requirements for laboratory equipment.
In August 1999, the Company acquired all of the outstanding capital stock
of CertiSource Inc. ("CertiSource") for $476,000 in cash and 167,424 shares of
common stock valued at $2.7 million. The acquisition was accounted for as a
purchase and the estimated excess of the purchase price over the fair value of
the net assets acquired of approximately $3.4 million was allocated to a
covenant not-to-compete and goodwill of approximately $500,000 and $2.9
million, respectively. Both the covenant not-to-compete and goodwill are being
amortized on a straight-line basis over 36 months. CertiSource provides
registration services for technical and educational training courses, as well
as related training products, consulting services and software. CertiSource
also uses an Internet Web site to provide large corporations training
management services including reporting and the coordination of private
training events.
In August 1999, the Company acquired certain assets, including the
Surface Finishing Web site, and assumed certain liabilities from Industry On
Line, Inc. ("Industry On Line"). The Company paid $150,000 in cash and issued
13,592 shares of its common stock valued at approximately $251,000. The Company
has also agreed to provide the seller an advertising commitment on the
Company's Web site valued at $140,000. As of December 31, 1999, the Company has
fulfilled approximately $67,000 of its advertising commitment to the seller.
The acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$604,000 was recorded as goodwill and is being amortized over 36 months. The
results of operations from Industry On Line are not material to the Company's
consolidated financial position or results of operations. Industry On Line is
the owner and operator of a vertical trade community in the metal finishing
industry.
In August 1999, the Company acquired all of the outstanding capital stock
of Isadra, Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common
stock valued at $37.8 million and 81,526 options to purchase VerticalNet common
stock valued at $1.5 million at the date of acquisition using the Black-Sholes
model. The common stock given as consideration was reduced by an illiquidity
discount ranging from 5% to 20% based on restrictions detailed in the lock up
agreements signed by the individuals receiving the stock. In
F-167
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
connection with this transaction, the Company agreed to lend up to $1.0 million
to Isadra prior to the closing of this transaction. As of the acquisition date,
the Company had advanced Isadra $965,000. The acquisition was accounted for as
a purchase and the estimated excess of the purchase price over the fair value
of the net assets acquired of approximately $43.9 million was allocated to in-
process research and development, existing technology, assembled work force and
goodwill of approximately $13.6 million, $2.1 million, $500,000 and $27.7
million, respectively. The $13.6 million was charged to expense as a non-
recurring charge upon consummation of the acquisition since the in-process
research and development has not yet reached feasibility and had no alternative
future use (see Note 3). The existing technology and assembled work force are
being amortized on a straight-line basis over 24 months, while goodwill is
being amortized on a straight-line basis over 36 months. Isadra has developed
e-commerce software for vertical industries.
In December 1999, the Company acquired substantially all of the assets
and liabilities of NECX for approximately $14.1 million cash and $70.0 million
of notes convertible into common stock. The notes were valued at the estimated
fair value of the shares into which they are convertible, based on the average
of the stock price for a few days before and after the transaction was
announced on November 16, 1999. On the date of the definitive agreement,
November 16, 1999, the notes were convertible into 2,008,738 shares of
VerticalNet common stock valued at $99.5 million. Since the notes are required
to be paid in common stock and it is the Company's intention to convert the
notes once a registration statement is declared effective, the notes have been
accounted for as common stock to be issued. Additionally, the Company assumed
certain liabilities including, $10.0 million in debt and a $22.0 million line
of credit which were paid in cash upon the transaction closing.
NECX was a privately held leader in buying and selling semiconductors,
electronic components, computer products and networking equipment. The
acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$120.0 million was allocated to strategic relationships, including customer and
vendor lists, assembled workforce and goodwill in the amounts of approximately
$13.0 million, $2.5 million and $104.5 million respectively. The assembled
workforce is being amortized on a straight-line basis over 48 months, while
strategic relationships and goodwill are being amortized on a straight-line
basis over 60 months.
In December 1999, the Company acquired certain assets, including the
GovCon Web site, and assumed certain liabilities from GovCon, Inc. ("GovCon").
The Company issued 150,000 shares of its common stock valued at approximately
$12.0 million. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of the net assets
acquired of approximately $12.0 million was recorded as goodwill and is being
amortized over 36 months. The results of operations from GovCon are not
material to the Company's consolidated financial position or results of
operations. GovCon is a Web site community for bidders on federal government
contracts.
In December 1999, the Company acquired certain assets, including the
TextileWeb Web site, and assumed certain liabilities from TextileWeb, Inc.
("TextileWeb"). The Company issued 76,600 shares of its common stock valued at
approximately $6.1 million. The acquisition was accounted for as a purchase and
the estimated excess of the purchase price over the fair value of the net
assets acquired of approximately $6.3 million was recorded as goodwill and is
being amortized over 36 months. The results of operations from TextileWeb are
not material to the Company's consolidated financial position or results of
operations. TextileWeb is a vertical trade community in the textile industry.
F-168
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
The following unaudited pro forma financial information presents the
combined results of operations of VerticalNet, BITC, Informatrix, Techspex,
LabX, CertiSource, Isadra and NECX as if the acquisitions occurred on January
1, 1998, after giving effect to certain adjustments including amortization of
goodwill. The unaudited pro forma financial information does not necessarily
reflect the results of operations that would have occurred had VerticalNet,
BITC, Informatrix, Techspex, LabX, CertiSource, Isadra and NECX constituted a
single entity during such periods.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Combined revenues................................... $ 55,349,732 $ 42,625,594
Net loss............................................ (89,180,374) (47,005,966)
Net loss per share.................................. (1.35) (3.15)
</TABLE>
(3) In-Process Research and Development
The write-off of in-process research and development ("IPR&D") related to
the acquisition of Isadra (discussed in Note 2) totaled $13.6 million which was
expensed as a one time non recurring charge. The allocation of $13.6 million
represents the estimated fair value related to incomplete projects based on
risk-adjusted cash flows. At the date of the acquisition, the projects
associated with the IPR&D efforts had not yet reached technological feasibility
and had no alternative future uses. Accordingly, these costs were expensed. At
the acquisition date, Isadra was conducting development, engineering and
testing activities associated with the completion of the following next
generation technologies: i) CatSmart Business; ii) Business Publisher; and iii)
C2 Hub/Server. The projects under development, at the valuation date, are
expected to address emerging market demands for business-to-business e-
commerce.
At the acquisition date, the technologies under development were between
70 and 80 percent complete, based on project man-months and costs. Isadra had
spent approximately $3.0 million on the IPR&D and expected to spend
approximately $1.0 million to complete the IPR&D projects. Isadra anticipated
that research and development related to these projects would be completed by
early to mid-2000, after which time Isadra is expected to begin generating
economic benefits from the value of the completed IPR&D.
In allocating the purchase price, the Company considered present value
calculations of income, an analysis of project accomplishments and completion
costs, an assessment of overall contributions, as well as project risks.
The values assigned to IPR&D were determined by estimating the costs to
develop the purchased technology into commercially viable products, estimating
the resulting net cash flows from each project, excluding the cash flows
related to the portion of each project that was incomplete at the acquisition
date, and discounting the resulting net cash flows to their present value. Each
of the project forecasts were based upon future discounted cash flows, taking
into account the state of development of each in-process project, the cost to
complete that project, the expected income stream, the life cycle of the
product ultimately developed and the associated risks.
Aggregate revenue attributable to the IPR&D projects was estimated to
peak, as a percentage of total revenue, in 2000 and decline thereafter through
2003, the end of the estimated life of the IPR&D, as new product technologies
are expected to be introduced by Isadra. For the projects under development,
risk-adjusted discount rates of 50 percent were utilized to discount projected
cash flows.
F-169
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
(4) Property and Equipment
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Computer equipment and purchased software.............. $10,295,624 $1,475,773
Office equipment and furniture......................... 2,695,007 225,658
Trade show equipment................................... 40,587 40,587
Leasehold improvements................................. 2,147,368 45,864
----------- ----------
15,178,586 1,787,882
Less: accumulated depreciation and amortization........ (2,030,958) (715,819)
----------- ----------
Property and equipment, net............................ $13,147,628 $1,072,063
=========== ==========
</TABLE>
Amortization applicable to property and equipment under capital leases is
included in depreciation expense.
(5) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
Goodwill.............................................. $166,576,270 $2,734,981
Covenant not-to-compete............................... 850,000 --
Existing technology................................... 2,600,000 --
Assembled workforce................................... 3,000,000 --
Strategic relationships............................... 13,000,000 --
------------ ----------
186,026,270 2,734,981
Less: accumulated amortization........................ (8,102,342) (282,990)
------------ ----------
Intangible assets, net................................ $177,923,928 $2,451,991
============ ==========
</TABLE>
Amortization expense was $7.8 million and $282,990 for the year ended
December 31, 1999 and 1998, respectively.
F-170
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
(6) Investments
Investments are categorized as available-for-sale securities and
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holding Holding Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate Debt Obligations--
maturity less than 1 year..... $23,221,249 $-- $ (30,694) $23,190,555
Corporate Debt Obligations--
maturity between 1 and 5
years......................... 10,004,764 -- (64,131) 9,940,633
U.S. Government & Government
Agency Obligations--maturity
less than 1 year.............. 21,008,976 -- (68,396) 20,940,580
U.S. Government & Government
Agency Obligations--maturity
between 1 and 5 years......... 7,000,000 -- (55,450) 6,944,550
----------- --- --------- -----------
$61,234,989 $-- $(218,671) $61,016,318
=========== === ========= ===========
</TABLE>
Investments are classified on the balance sheet as current assets of
$44,131,135 and non-current assets of $16,885,183.
There were no investments held at December 31, 1998.
Proceeds from sales of securities available for sale were approximately
$133.8 million for the year ended December 31, 1999. Gross losses were
approximately $25,000 for the year ended December 31, 1999. Realized gains and
losses are computed on a specific identification basis.
(7) Joint Ventures & Equity Investments
Joint Ventures
With the acquisition of NECX, the Company acquired an ownership interest
in Electronic Commodity Exchange Asia Pte., Ltd. ("NECX Asia") and Asia
Business Venture Holdings Pte., Ltd. ("Asia Business Venture"), both of which
are joint ventures engaged in the distribution of electronic hardware. The
following is a summary of the joint ventures:
<TABLE>
<CAPTION>
Balance in
Original Other Assets at Ownership
Investment(1) December 31, 1999 Percentage
------------- ----------------- ----------
<S> <C> <C> <C>
NECX Asia............................ $542,610 $542,610 50%
Asia Business Venture................ 937,592 937,592 6
</TABLE>
--------
(1) Original investment is based on fair value assumed on the date of the
acquisition of NECX on December 16, 1999.
The Company accounts for its ownership in NECX Asia under the equity
method. NECX Asia's total assets are approximately 2% of the Company's total
assets at December 31, 1999 and its net loss is less than 2% of the Company's
net loss for year ended December 31, 1999. The Company accounts for its
minority
F-171
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
interest in Asia Business Venture using the cost method and believes that there
has been no impairment of its investment at December 31, 1999.
Equity Investments
In July 1999, the Company acquired 414,233 shares of the Series C
preferred stock of Tradex Technologies, Inc. ("Tradex") at a cost of $1.0
million. In December 1999, Tradex entered into an Agreement and Plan of
Reorganization with Ariba, Inc. On March 10, 2000, Ariba announced that it had
completed the acquisition of Tradex. Pursuant to the terms of the Agreement and
Plan of Reorganization, the Company's investment in Tradex will be exchanged
into approximately 283,153 shares of Ariba's common stock (unaudited).
In October 1999, the Company acquired 352,112 shares of Neoforma's
("Neoforma") Series E preferred stock at a cost of $2.0 million. Additionally
the Company entered into a co-marketing strategic alliance with Neoforma which
includes a $2.0 million payment to the Company over the term of the agreement.
In January 2000, Neoforma successfully consummated an initial public offering
of its common stock, at which time our preferred stock holdings were converted
to common stock on a one-for-one basis. The Company executed a six month lock
up agreement in connection with Neoforma's IPO.
In November 1999, the Company acquired 630 shares of Zillacast Series A
preferred stock at a cost of $1.5 million. Additionally the Company entered
into a co-marketing strategic alliance with ZillaCast which includes a $750,000
payment to the Company over the term of the agreement.
In December 1999, the Company invested $1.4 million in BioSupplies.com
("BioSupplies"). The investment is held in escrow and will convert into equity
of BioSupplies upon the terms defined in the agreement. Additionally the
Company entered into a co-marketing strategic alliance with BioSupplies which
includes a $890,000 payment to the Company over the term of the agreement.
In December 1999, the Company acquired 177,778 shares of Community of
Science ("COS") Series A convertible preferred stock at a cost of $800,000.
Additionally, the Company entered into a co-marketing strategic alliance with
COS which includes a $725,000 payment to the Company over the term of the
agreement. The Company has also purchased advertising services from COS for
$200,000.
These investments are included in other investments in the accompanying
financial statements and are accounted for under the cost method since the
Company's ownership is less than 20% and the Company does not have the ability
to exercise significant influence over the investee.
(8) Line of Credit
As of June 1998, the Company reduced its line of credit with the bank
from $2.5 million to $500,000. On November 25, 1998, the agreement was
additionally amended allowing the Company to execute a $2.0 million note with
the bank. The note had an interest rate of prime plus 1.5% and matured at the
earlier of March 31, 1999 or the completion of the Company's next financing. In
connection with the loan, the Company issued warrants to purchase 82,052 shares
of the Company's common stock at an exercise price of $4 per share with an
estimated fair value of $40,000 based on the Black-Scholes model. As of
December 31, 1998, the outstanding balance for borrowings under this facility
was $2,000,000 and the weighted average interest rate for the year ended
December 31, 1998 was 10%.
F-172
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Upon the completion of the IPO in February 1999, the line of credit was
reduced back to $500,000 and subsequently expired on June 30, 1999.
In February 2000, NECX entered into a $33.0 million revolving line of
credit. Under the terms of the loan agreement, NECX is required to satisfy
certain financial covenants, which include: minimum tangible net worth, limits
on capital expenditures and the maintenance of a minimum cash or short term
investment balance of $20.0 million required by the Company. The line of credit
is guaranteed by the Company and is secured by a pledge of the Company's
ownership in NECX and a security interest in the assets of NECX. Interest on
any outstanding balances will be paid monthly at an annual rate equal to the
prime rate, which, as of March 15, 2000, was 8.75%. The commitment fee to
originate the loan was $165,000. NECX must pay an additional fee of .375% per
annum on any unused portion of the line (unaudited).
(9) Accrued Expenses
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Accrued compensation and related costs................. $ 5,775,700 $ 454,230
Accrued professional fees.............................. 950,042 269,500
Accrued marketing costs................................ -- 446,334
Accrued acquisition and debt offering costs............ 7,692,824 --
Accrued payable to training suppliers.................. 767,889 --
Accrued interest payable on convertible notes.......... 1,587,945 --
Accrued withholding on employee exercise of non
qualified stock options............................... 1,010,171 --
Other.................................................. 2,316,777 411,974
----------- ----------
$20,101,348 $1,582,038
=========== ==========
</TABLE>
(10) Long-term Debt and Convertible Notes
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
Capital leases........................................ $ 3,122,190 $ 639,940
Convertible notes..................................... 115,000,000 5,000,000
------------ ----------
118,122,190 5,639,940
Less: current portion................................. (1,372,255) (288,016)
------------ ----------
Long-term debt........................................ $116,749,935 $5,351,924
============ ==========
</TABLE>
On September 27, 1999, the Company completed the sale of $100.0 million
of 5 1/4% convertible subordinated debentures in a private placement
transaction pursuant to Section 4(2) of the Securities Act of 1933, resulting
in net proceeds of $96.3 million. Additionally, on October 12, 1999, the over-
allotment option on the convertible debt offering was exercised in full,
resulting in additional convertible debt of $15.0 million and net proceeds of
$14.6 million to the Company. The debentures have a maturity date of September
27, 2004 with semi-annual interest payments due on March 27 and September 27 of
each year beginning March 27, 2000. The debentures are convertible into shares
of the Company's common stock at an initial conversion price of $20 per share,
subject to adjustment under certain circumstances. On February 11, 2000, the
Company filed a registration statement with the Securities and Exchange
Commission covering the convertible subordinated debentures and the shares of
its common stock underlying the debentures. Once the registration statement is
F-173
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
declared effective, the Company may redeem the debentures if the price of the
Company's common stock is above $34 per share for at least 20 trading days
during the 30-day trading period ending on the trading day before the Company
mails notice that the Company intends to redeem the debentures. If the Company
redeems the debentures, the Company must redeem at a price equal to 101.3125%
of the principal amount, pay any accrued but unpaid interest and make an
interest make-whole payment equal to the present value of the interest that
would have accrued from the redemption date through September 26, 2002.
If the Company were to redeem the debentures on March 31, 2000, the
Company would be required to make an aggregate payment of $13.7 million,
excluding the semi-annual interest payment of $3.0 million the Company made on
March 27, 2000.
In addition, the Company would write off the debt issuance costs carried
on the balance sheet as a loss on the date of redemption. This amount
approximated $3.7 million at December 31, 1999.
In February, March and April 1998, Internet Capital Group lent an
aggregate of $1,550,000 to the Company, also at a rate of 9.5%. These amounts
were converted to Series D preferred stock in May 1998 (Note 12).
In May 1998, the Company repaid their outstanding term note with the bank
and three unsecured term notes due to shareholders.
On November 25, 1998, Internet Capital Group lent and certain holders of
the Series D preferred stock (the note holders) lent the Company $5.0 million
in the form of convertible notes. The note holders converted the $5.0 million
in convertible notes at the initial public offering into 1,250,000 shares of
common stock. In connection with the notes, the Company issued warrants to
purchase 328,204 shares of the Company's common stock with an estimated fair
value of $160,000 based on the Black-Scholes model at an exercise price of
$4.00 per share.
The Company has several capital leases with various financial
institutions for computer and communications equipment used in operations with
lease terms ranging from three to five years. Additionally, the Company has an
insurance premium financing agreement for directors and officers liability
insurance. The interest rates under the leases and insurance premium financing
agreement range from 8% to 20%. At December 31, 1999 and 1998, the book value
of assets held under capital leases were approximately $2.8 million and
$518,000, respectively, and the aggregate remaining minimum lease and financing
agreement payments at December 31, 1999 were approximately $3.5 million
including interest of approximately $417,000.
At December 31, 1999, long-term debt will mature as follows:
<TABLE>
<S> <C>
2000......................................................... $ 1,372,255
2001......................................................... 1,145,113
2002......................................................... 588,952
2003......................................................... 5,898
2004......................................................... 115,006,760
2005......................................................... 3,212
------------
Total...................................................... $118,122,190
============
</TABLE>
F-174
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
(11) Commitments and Contingencies
In January 1999, the Company entered into a one-year agreement with
Compaq Computer Corporation ("Compaq") and its Internet Web site known as
AltaVista. The agreement provides for the Company and AltaVista to sponsor and
promote 31 co-branded Web pages. The agreement requires the Company 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
AltaVista provides the advertising impressions. As of December 31, 1999, no
payments have been made to AltaVista. In addition, each company will provide
the other with $300,000 in barter advertising during the term of the agreement.
Both parties have satisfied their barter advertising obligation under this
agreement. In October 1999, the agreement with AltaVista was terminated and the
Company was relieved of further obligations.
In August 1999, the Company entered into a one-year agreement with Lycos.
The agreement provides for the Company and Lycos to sponsor and promote co-
branded sites. The agreement requires the Company to pay Lycos $1.0 million
over the term of the agreement based on agreed upon dates and impressions
delivered. As of December 31, 1999, the Company has made a payment of $500,000
to Lycos. In addition, each company committed to provide the other with $1.0
million in barter advertising during the term of the agreement. With the
exception of approximately $17,000 in services due to Lycos, both parties have
satisfied their barter advertising obligation under this agreement as of
December 31, 1999. In January 2000, the contract was modified to increase the
barter advertising during the term of the agreement to $3.0 million.
In November 1999, the Company entered into a marketing contract with
RealNames Corporation ("RealNames") which requires the Company to pay a $10
million platform license fee in equal quarterly payments over a two year
contact period. An additional fee of $.10 per visit is also required if
aggregate visits reach specified levels. In November 1999 RealNames also
entered into a two-year contract with the Company for $8 million in newsletter
advertising. RealNames will pay the contracted amount in equal monthly payments
over the contract life. For the year ended December 31, 1999, the Company
recognized $333,000 of revenue and $513,000 of expense related to the RealNames
contracts.
The Company has entered into non-cancelable obligations with several
content service providers and Internet search engines. Under these agreements,
exclusive of the Lycos and RealNames agreements discussed above, the Company's
commitments are as follows:
<TABLE>
<S> <C>
2000............................................................. $560,500
2001............................................................. 123,500
2002............................................................. 50,000
</TABLE>
In April 1999, the Company entered into a 10 year lease for its
headquarters commencing in July 1999. According to the terms of the lease
agreement, the Company is required to maintain certificates of deposit for an
agreed upon amount in an escrow account. The certificates of deposit with an
aggregate balance of $1,220,261 were issued in June 1999 and will mature in
five equal installments of $244,052 on August 1, 2000 and the four subsequent
years thereafter. The certificates of deposit are classified as a long-term
asset included in cash restricted on the accompanying consolidated balance
sheet.
F-175
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Future minimum lease payments as of December 31, 1999 for the Company's
facility leases are as follows:
<TABLE>
<S> <C>
2000........................................................... $2,700,000
2001........................................................... 2,700,000
2002........................................................... 2,300,000
2003........................................................... 2,100,000
2004........................................................... 2,100,000
Thereafter..................................................... 4,300,000
</TABLE>
Rent expense under noncancelable operating leases was approximately $1.3
million, $336,000 and $81,000, for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company is a party to various legal proceedings and claims, which
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash flows
of the Company.
(12) Capital Stock
At December 31, 1999, the Company's restated Articles of Incorporation
provides the Company with the authority to issue 90,000,000 shares of common
stock and 10,000,000 shares of blank check preferred stock.
Preferred Stock
In September 1996, the Company sold 512,821 shares of Series A preferred
stock (Series A) for $1.0 million. In July 1997, the Company sold 2,579,580
shares of Series B preferred stock (Series B) for $2.0 million. In October
1997, the Company sold 154,861 shares of Series C preferred stock (Series C)
for $200,000.
On May 11, 1998 and June 10, 1998, the Company sold 3,988,604 and 569,801
shares of Series D preferred stock (Series D), respectively, for an aggregate
amount of approximately $15.2 million.
Holders of preferred stock had the option to convert such shares into
shares of common stock on a 1:1 ratio, except for the Series A preferred stock
which converted on a ratio of 4.7619:1. Mandatory conversion occurred upon the
closing of the Company's IPO. The preferred stock voted on an as if converted
basis. The Series A, Series B and Series C, together had the right to elect two
directors of the Company and the Series D holders have the right to elect two
directors of the Company. The holders of preferred stock had no right to elect
or appoint directors after the shares convert into common stock upon the
closing of an IPO.
Preferred stock consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
December 31,
Per share 1998
liquidation Issued and
Preferred Class value Authorized Outstanding
--------------- ----------- ---------- ------------
<S> <C> <C> <C>
Series A.................................... $1.95 512,821 512,821
Series B.................................... .78 2,615,385 2,579,580
Series C.................................... 1.31 205,128 154,861
Series D.................................... 3.51 4,615,385 4,558,405
--------- ---------
7,948,719 7,805,667
========= =========
</TABLE>
F-176
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
On February 17, 1999, in connection with the closing of the Company's
IPO, all of the preferred stock converted into 38,939,384 shares of common
stock.
Warrants
Outstanding warrants as of December 31, 1999 were:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Date Granted Warrants Price Date
------------ --------- -------- -------------
<S> <C> <C> <C>
April 1997..................................... 15,480 $0.19 April 2007
November 1998.................................. 364,672 0.88 November 2008
November 1998.................................. 410,264 4.00 November 2008
</TABLE>
Stock Option Plans
In December 1996, the Company's Board of Directors adopted the 1996
Equity Compensation Plan (the "Plan"). Employees, key advisors and non-employee
directors of the Company are eligible to receive awards under the Plan. As of
January 1999, a total of 14.4 million shares of common stock were reserved for
issuance under this Plan.
In August 1999, the Company's Board of Directors adopted the 1999 Equity
Compensation Plan. A total of 1.2 million shares of common stock were reserved
for issuance to employees of the Company and its subsidiaries.
In October 1999, the Company's Board of Directors adopted the Equity
Compensation Plan for Employees (1999). A total of 2.8 million shares of common
stock were reserved for issuance to employees of VerticalNet and its
subsidiaries. The plan was amended and restated in November 1999 to increase
the shares of common stock authorized for issuance to 5.8 million.
The exercise price for the options is determined by the Board of
Directors, but shall not be less than 100% of the fair market value of the
common stock on the date the option is granted. Generally, the options vest
over a four-year period after the date of grant and expire ten years after the
date of grant. Option holders that terminate their employment with the Company
generally forfeit all non-vested options.
The following table summarizes the activity for the Company's stock
option plans:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997..................... -- $ --
Options granted.................................... 2,220,852 0.16
Options cancelled.................................. -- --
---------- ------
Outstanding at December 31, 1997................... 2,220,852 0.16
Options granted.................................... 6,655,608 0.83
Options exercised.................................. (8,720) 0.05
Options cancelled.................................. (532,296) 0.53
---------- ------
Outstanding at December 31, 1998................... 8,335,444 0.67
Options granted.................................... 9,928,620 30.46
Options exercised.................................. (2,214,908) 0.63
Options cancelled.................................. (544,140) 4.35
---------- ------
Outstanding at December 31, 1999................... 15,505,016 $19.58
========== ======
</TABLE>
F-177
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07 - 0.08 248,460 7.3 $ 0.07 65,190 $ 0.07
$ 0.20 - 0.25 2,698,220 7.9 $ 0.20 1,488,542 $ 0.20
$ 0.66 - 0.83 2,376,604 8.5 $ 0.69 598,130 $ 0.68
$ 1.42 - 1.42 42,430 9.0 $ 1.42 3,302 $ 1.42
$ 4.00 - 4.00 1,272,602 9.0 $ 4.00 147,464 $ 4.00
$14.17 - 20.00 4,938,700 9.6 $18.18 15,000 $15.58
$22.38 - 25.88 900,600 9.7 $24.09 -- --
$34.57 - 48.00 189,800 9.9 $41.05 10,000 $47.32
$58.00 - 82.82 2,837,600 10.0 $62.33 -- --
---------- --------- ------
15,505,016 2,327,628 $ 0.87
========== ========= ======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plan. Had compensation cost been recognized pursuant to
SFAS No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net loss:
As reported.......................... $(53,479,881) $(13,594,275) $(4,778,789)
Pro forma............................ $(54,926,120) $(13,776,554) $(4,785,358)
Pro forma loss per share:
As reported.......................... $ (0.86) $ (1.32) $ (0.47)
Pro forma............................ $ (0.88) $ (1.34) $ (0.47)
</TABLE>
The per share weighted-average fair value of options issued by the
Company during 1999, 1998 and 1997 was $30.46, $0.26 and $0.05, respectively.
The following range of assumptions were used by the Company to determine
the fair value of stock options granted (the minimum value method was used for
1998 and 1997):
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Dividend yield.................................... 0% 0% 0%
Expected volatility............................... 100% 0% 0%
Average expected option life...................... 4.09 years 5 years 5 years
Risk-free interest rate........................... 5.7% 5.3% 5.9%
</TABLE>
Employee Stock Purchase Plan
In January 1999, the Board adopted an Employee Stock Purchase Plan for
all employees meeting eligibility criteria. Under the Plan, eligible employees
may purchase shares of the Company's common stock,
F-178
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
subject to certain limitations, at 85 percent of the market value. Purchases
are limited to 10 percent of an employee's eligible compensation, up to a
maximum of 4,000 shares per purchase period. At December 31, 1999 approximately
1,056,878 remain available under the Plan. During the year ended 1999, 143,122
shares were issued to or purchased on the open market for employees at the IPO
price of $4 per share since the plan was effective on the date of the IPO.
Subsequent plan periods are for six months, the first of which began on October
31, 1999.
(13) Defined Contribution Plan
In 1997, the Company established a defined contribution plan for
qualified employees as defined under the plan. Participants may contribute 1%
to 15% of pre-tax compensation, as defined. Under the plan, the Company can
make discretionary contributions. To date, the Company has not made any
contributions to the plan.
(14) Income Taxes
The components of the net deferred tax assets as of December 31, 1998 and
1999 consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Net operating losses................................. 33,567,221 6,730,622
Reserves............................................. 1,245,503 27,398
Depreciation & amortization.......................... 141,773 26,588
Deferred revenue and other........................... 4,284,956 881,682
----------- ----------
39,239,453 7,666,290
Valuation allowance.................................. (39,239,453) (7,666,290)
=========== ==========
Net deferred tax asset............................... -- --
=========== ==========
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty on the Company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1999 and 1998. The net change in the valuation
allowance for deferred tax assets at December 31, 1999 and 1998 was an increase
of $31.6 million and $5.6 million, respectively.
As of December 31, 1999, the Company has approximately $76.0 million of
net operating loss carryforwards for federal income tax purposes. These
carryforwards will begin expiring in 2011 if not utilized. In addition, the
Company has net operating loss carryforwards of approximately $76.0 million in
certain states with various expiration periods beginning in 2002. The majority
of state net operating losses are subject to a $2.0 million annual limitation
and begin expiring in 2006.
F-179
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership within a three year period. Due to the Company's prior and current
equity transactions, a portion of the company's net operating loss
carryforwards are subject to an annual limitation. At December 31, 1999, the
Company had consolidated pre-limitation net operating loss carryforwards
available for future use of approximately $23.9 million. This amount is subject
to an annual limitation of approximately $20.9 million.
Included in the pre-limitation net operating loss carryforwards are
losses that were generated by companies acquired in 1999. The losses generated
by acquired companies prior to their acquisition generally are available to
offset future taxable income of the acquiring company. However, upon the
acquisition of these companies in 1999, their net operating losses of
approximately $3.5 million became subject to an annual limitation of
approximately $1.0 million.
Additionally, at December 31, 1999, approximately $14.0 million of the
net deferred tax asset will reduce equity and approximately $1.8 million of the
deferred tax asset will reduce goodwill to the extent such assets are reduced
and reduce future taxable income.
(15) Segment Information
Based on the manner in which the Company is managed and its resources are
allocated by management, the Company operates in two segments which are
vertical trade communities and exchange operations. The vertical trade
communities operating segment includes all revenue generating activities
associated with the vertical sites, such as advertising, e-commerce, auctions
and education. Exchange operations include market making activities for
computer and electronic equipment resulting from the acquisition of NECX in mid
December 1999.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies. Management primarily evaluates the segments'
performance based upon the operating income (loss) before interest,
amortization and other non-cash charges. The exchange segment performance is
additionally evaluated on gross profit margin of sales which in the table is
reflected as net revenues under the exchange segment.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------
Vertical Trade
Communities Exchange Totals
-------------- ------------ ------------
<S> <C> <C> <C>
Exchange transactions sales......... $ -- $ 16,500,781 $ 16,500,781
Cost of exchange transaction sales.. -- 14,171,345 14,171,345
Net revenues........................ 18,428,485 2,329,436 20,757,921
Operating income (loss) before
interest, amortization and
in-process research & development
charge............................. (33,518,667) 113,904 (33,404,763)
Interest and dividend income........ 3,447,665 369 3,448,034
Interest expense.................... (2,103,801) (2,103,801)
Amortization expense................ 6,814,547 1,004,804 7,819,351
In-process research & development
charge............................. 13,600,000 -- 13,600,000
Net loss............................ (52,589,350) (890,531) (53,479,881)
Capital expenditures................ 5,052,066 351,130 5,403,196
Segment assets...................... 161,889,953 179,014,539 340,904,492
Equity investments.................. -- 542,610 542,610
</TABLE>
F-180
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
Prior to the acquisition of NECX, the Company's operations were conducted
solely in the vertical trade communities segment. Accordingly, no segment
information has been presented for 1998 or 1997.
Approximate exchange sales by country, denominated in U.S. dollars were
as follows, based on the location to which the products were shipped (in
thousands):
<TABLE>
<CAPTION>
Ended December 31, 1999
-----------------------------------
Exchange Net
Transaction Sales Exchange Revenues
----------------- -----------------
<S> <C> <C>
United States............................... $12,425 $1,770
Hong Kong................................... 768 43
Germany..................................... 523 94
Russia...................................... 427 54
Singapore................................... 316 8
United Kingdom.............................. 257 51
Sweden...................................... 244 69
Canada...................................... 193 32
Other....................................... 1,348 208
------- ------
Total....................................... $16,501 $2,329
======= ======
</TABLE>
The only significant foreign sales made by the Company other than the
exchange operations was approximately $581,000 to South Africa in relation to
the Metropolis agreement. This transaction related to the vertical trade
communities segment.
(16) Summarized Quarterly Data (Unaudited)
Following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
September
March 31, June 30, 30, December 31,
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Combined net revenues... $ 1,933,779 $ 3,551,180 $ 5,182,495 $ 10,090,467
Loss from operations.... (5,756,404) (7,475,444) (26,296,357) (15,295,909)
Net loss................ (5,608,758) (6,760,711) (25,826,811)* (15,283,601)
Net loss per share--
basic and diluted...... (0.14) (0.10) (0.38) (0.21)
1998
Combined net revenues... $ 377,371 $ 587,422 $ 897,006 $ 1,272,970
Loss from operations.... (2,008,935) (2,885,803) (3,454,845) (5,159,421)
Net loss................ (2,084,869) (2,871,512) (3,378,036) (5,259,858)
Net loss per share--
basic and diluted...... (0.21) (0.28) (0.33) (0.50)
</TABLE>
--------
* Includes $13.6 million in-process research and development charge resulting
from the Isadra acquisition.
F-181
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
(17) Subsequent Events (Unaudited)
In January 2000, the Company announced plans to form a joint venture with
Softbank Commerce Corp. ("Softbank"), a wholly-owned subsidiary of Softbank
Corporation. The goal of the new company, to be called VerticalNet Japan, is to
develop, maintain and operate Japanese language vertical trade communities in
Japan.
On January 17, 2000, the Company entered into a binding letter agreement
with Microsoft Corporation with respect to a strategic relationship. Under the
terms of the letter agreement, the Company agreed with Microsoft to a three-
year commercial relationship and an equity investment by Microsoft in
VerticalNet.
On March 29, 2000, the Company entered into a definitive agreement with
Microsoft with respect to the commercial relationship. The commercial
relationship with Microsoft has a three-year term during which Microsoft will
purchase from the Company and then distribute to third party businesses at
least 80,000 of the Company's storefronts and e-commerce centers. The Company
will assist Microsoft in distributing 30,000 of these storefronts and e-
commerce centers. Microsoft will pay the Company a minimum of approximately
$161.9 million in the aggregate over the term for the storefronts and e-
commerce centers. Microsoft will provide the storefronts and e-commerce centers
it purchases from the Company to business customers for the 12 month
subscription period. For each customer, the Company will build the storefront
or e-commerce center on one of the Company's vertical trade communities. The
Company will pay Microsoft an aggregate of $60 million during the term for
advertising and promotional placements in The Microsoft Network and on
Microsoft's bCentral website and, if the pace of Microsoft's distribution of
storefronts and e-commerce centers does not meet agreed upon goals, additional
amounts for advertising and promotional placements not to exceed $15 million in
the aggregate.
Microsoft will pay the Company an aggregate of $60 million during the
term for advertising and promotional placements in our vertical trade
communities. The Company will pay Microsoft an aggregate of $18.5 million over
the term to be directed toward the development and enhancement of products and
services relating to the business-to-business marketplace and database software
technology.
The Company will use commercially reasonably efforts during the term to
adopt and use Microsoft products to operate the Company's vertical trade
communities when appropriate and feasible. The Company will pay Microsoft an
aggregate of $56.5 million over the term towards the licensing of Microsoft
products and provision of Microsoft services.
In connection with the strategic relationship, and in accordance with the
letter agreement dated January 17, 2000, Microsoft will make an initial $100
million equity investment in VerticalNet through the purchase of shares of the
Company's Series A 6% convertible redeemable preferred stock, which would be
convertible into 1,151,080 shares of the Company's common stock. Microsoft will
be entitled to registration rights and will receive the right to nominate one
member of VerticalNet's board of directors. In addition, Microsoft will receive
warrants entitling Microsoft to purchase 1,500,000 shares of the Company's
common stock at an exercise price of $69.50 per share. The share numbers and
the exercise price mentioned in this paragraph (along with other information in
these notes) are adjusted to reflect the split of our common stock to be
effected on or about March 31, 2000. The Company expects that the equity
investment by Microsoft in the Company will close in late March or April of
2000.
In February 2000, the Company announced the formation of VerticalNet
Europe, a joint venture with British Telecommunications, plc ("BT") and ICG.
The Company will be the majority shareholder in the joint
F-182
<PAGE>
VERTICALNET, INC.
Notes to Consolidated Financial Statements--(Continued)
venture which has been funded with $107 million in cash from the three
partners. The Company is contributing to the joint venture $7 million in cash
and intellectual property for the operations of vertical trade communities
within Europe. Additionally VerticalNet Europe and BT have agreed to create
VerticalNet UK Ltd. as part of the joint venture.
In February 2000, the Company signed an agreement to acquire RW
Electronics for $10.0 million of cash and 720,642 shares of the Company common
stock. Based on the average closing price of the Company's common stock between
February 16, 2000 and the day immediately preceding the date that a
registration statement covering the common stock is declared effective by the
Securities and Exchange Commission, the Company may be required to issue up to
366,702 additional shares of its common stock. The Company also agreed to
assume indebtedness of RW Electronics, including a line of credit estimated as
of March 15, 2000 to be approximately $21.0 million. RW Electronics operates an
exchange in the electronic hardware market. The consummation of this
transaction is subject to certain closing conditions. The acquisition will be
accounted for as a purchase and the estimated excess of the purchase price over
the fair value of the net assets acquired will be allocated to strategic
relationships, including customer and vendor lists, assembled workforce and
goodwill.
In March 2000, the Company acquired Tradeum, Inc. through a merger of
VERT Acquisition Corp., a wholly-owned subsidiary of the Company, with and into
Tradeum. In connection with the merger, the Company issued approximately 4.0
million shares of its common stock for all of the outstanding shares and
options in Tradeum. The merger will be accounted for as a purchase transaction.
Tradeum is a development-stage company located in San Francisco, California and
is engaged principally in the development of information technology designed to
enable the building and hosting of business-to-business exchanges, auctions and
sourcing activities.
In March 2000, the Company announced the formation of
PaintandCoatings.com Inc., a joint venture with Eastman Chemical Company, to
transform the Company's Paint and Coatings vertical trade community into a one-
stop, independent Internet marketplace for the paint and coatings industry. The
Company will be the minority shareholder in the joint venture, which was funded
with $1.5 million from the two partners. In addition to the Company's $600,000
cash contribution, the Company will provide administrative and other support
services and will license intellectual property related to the maintenance and
operation of the Web site.
To accommodate the Company's split of its common stock to be effected on
or about March 31, 2000, the Company filed, on March 29, 2000, an amendment to
its restated Articles of Incorporation to increase the number of shares of its
authorized common stock by 36,787,533 to 126,787,533 shares. The amendment was
filed to increase the number of authorized shares of common stock by the number
of outstanding shares of common stock as of March 17, 2000, the record date for
the Company's split of its common stock.
F-183
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
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.
Item 21. Exhibits and Financial Statement Schedules
(a)Exhibits
Incorporated by reference to the Exhibit Index following page II-4
hereof.
(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 22. Undertakings
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.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the
II-1
<PAGE>
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<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 day of , 2000.
Internet Capital Group, Inc.
Walter W. Buckley, III
By: _________________________________
Walter W. Buckley, III
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Walter W. Buckley, III, his attorney-in-
fact, with full power substitution and resubstitution, for him in any and all
capacities, to sign any or all amendments or post-effective amendments to this
Registration Statement or any Registration for the same offering that is
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same with exhibits thereto and other documents in
connection therewith or in connection with the registration of common stock
under the Securities Exchange Act of 1934, as amended, with the Securities and
Exchange Commission, granting unto the attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
all that each the attorney-in-fact, or his agent or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
President, Chief
Walter W. Buckley, III Executive Officer July 28, 2000
------------------------------------- and Director
Walter W. Buckley, III Attorney-in- (principal
Fact executive officer)
Chief Financial
David D. Gathman Officer and July 28, 2000
------------------------------------- Treasurer
David D. Gathman (principal
financial and
accounting officer)
Director
Julian A. Brodsky July 28, 2000
-------------------------------------
Julian A. Brodsky
Director
, 2000
-------------------------------------
Warren V. Musser
II-3
<PAGE>
Signature Title Date
Director , 2000
-------------------------------------
Kenneth A. Fox
Dr. Thomas P. Gerrity Director July 28, 2000
-------------------------------------
Dr. Thomas P. Gerrity
Robert E. Keith, Jr. Director July 28, 2000
-------------------------------------
Robert E. Keith, Jr.
Director , 2000
-------------------------------------
Peter A. Solvik
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C., and InternetCapital 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"))
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 Chase
Manhattan Trust Company, National Association, as Trustee, for the
Convertible Subordinated Notes (incorporated by reference to Exhibit
4.2 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 (Registration No. 000-26929) ("10-K"))
4.3 Form of Internet Capital Group's Convertible Subordinated Note due
December, 2004 (incorporated by reference to Exhibit 4.2 to 10-K)
5.1 Opinion of Dechert Price & Rhoads
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 Form of Internet Capital Group, Inc. Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.4 to the 10-K)
10.4.1 Internet Capital Group, Inc. Long Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 (Registration No. 000-
26929))
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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 May 10, 1999
Convertible Notes (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 Form of Office Lease between Friends' Provident Life Office and IBIS
(505) Limited for premises located in London, England (incorporated
by reference to Exhibit 10.11 to Amendment No. 3 to the Registration
Statement on Form S-1 filed by the Registrant on December 15, 1999
(Registration No. 333-91447) ("Follow-on Amendment No. 3"))
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 (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 filed by the Registrant on
November 22, 1999 (Registration No. 333-91447) ("Follow-on
Registration Statement"))
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.
(incorporated by reference to Exhibit 10.15 to the Follow-on
Registration Statement)
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.
(incorporated by reference to Exhibit 10.15.1 to the Follow-on
Registration Statement)
10.15.2 Form of Amended and Restated Amendment No. 2 to the Credit Agreement
dated December 10, 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 10.15.2 to the
10-K)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.15.3 Amendment No. 3 to the 1999 Credit Agreement dated February 25, 2000
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 10.15.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999
(Registration No. 000-26929) (the "10-K")
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)
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 issued in connection with
exercise of Internet Capital Group's stock options in May, June and
July of 1999 (incorporated by reference to Exhibit 10.34 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 (Registration No.
000-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between
Internet Capital Group, Inc. and Safeguard Securities, Inc.
(incorporated by reference to Exhibit 10.23 to the Follow-on
Registration Statement)
10.24 Purchase Agreement dated November 5, 1999 between JusticeLink, Inc.
and Internet Capital Group, Inc. (incorporated by reference to
Exhibit 10.24 to the Registration Statement filed by the Registrant
on December 6, 1999 (Registration No. 333-91447) ("Follow-on
Amendment No. 1"))
10.25 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and AT&T Corp. (incorporated by reference to Exhibit
10.25 to the Follow-on Amendment No. 1)
10.26 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Internet Assets, Inc. (incorporated by reference to
Exhibit 10.26 to the Follow-on Amendment No. 1)
10.27 Purchase Agreement dated December 14, 1999 between Internet Capital
Group, Inc. and Ford Motor Company (incorporated by reference to
Exhibit 10.27 to the Follow-on Amendment No. 3)
10.28 Securities Purchase Agreement dated December 28, 1999 between
Internet Capital Group, Inc. and Weirton Steel Corporation
(incorporated by reference to the Registrant's Current Report on Form
8-K filed January 11, 2000 (Registration No. 000-26929))
10.29 Press Release regarding Acquisition of eCredit.com (incorporated by
reference to the Registrant's filing on Form 425 filed February 24,
2000 (Registration No. 132-01812))
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.30 Sublease Agreement dated January 6, 2000 between SP Investments Inc.
and Internet Capital Group, Inc. for premises located in Seattle,
Washington (incorporated by reference to Exhibit 10.30 to the 10-K)
10.31 Amended and Restated Credit Agreement by and among Internet Capital
Group, Inc., ICG Holdings, Inc., The Banks Party Thereto, PNC Bank,
National Association, as Administrative Agent, Bank of America, N.A.,
and Deutsche Bank AG New York Branch/Cayman Island Branch, as Co-
Syndication Agents and PNC Capital Markets, Inc., as Lead Arranger
(incorporated by reference to Exhibit 10.31 to the Registration
Statement on Form S-4 filed by the Registrant on April 13, 2000
(Registration No. 333-34722) ("Original S-4 Registration Statement"))
10.32 Press Release (incorporated by reference to Registrant's filing on
Form 425 filed April 3, 2000 (File No. 132-01830))
10.33 Press Release regarding Acquisition of RightWorks (incorporated by
reference to Registrant's filing on Form 425 filed March 31, 2000
(File No. 132-01830))
10.34 Exchange Offer Agreement dated as of February 24, 2000 by and among
eCredit.com, Inc., Internet Capital Group, Inc. and ICG Holdings, Inc.
(incorporated by reference to Exhibit 2.2 of the Original Registration
Statement)
10.35 Recapitalization and Exchange Offer Agreement and Plan of
Reorganization by and among Internet Capital Group, Inc., Rain
Acquisition Corp., RightWorks Corporation, and with respect to
Article VII, VIII and IX only Suhas Patil, as Shareholder
Representative, and Chase Manhattan Trust Company, National
Association, as Escrow Agent, dated as of March 7, 2000 (incorporated
by reference to Exhibit 2.3 of the Original S-4 Registration
Statement)
10.36 Stock Purchase Agreement dated as of March 7, 2000 between Rain and
RightWorks (incorporated by reference to Exhibit 2.2 of the 8-K filed
by the Registrant on June 29, 2000)
10.37 Stock Exchange Agreement dated as of March 7, 2000 between Rain and
Vani Kola (incorporated by reference to Exhibit 2.3 of the 8-K filed
by the Registrant on June 29, 2000)
11.1 Statement Regarding Computation of Per Share Earnings (included herein
at Note 1--"Significant Accounting Policies" in the subsection "Net
Income (Loss) Per Share" to the Consolidated Financial Statements and
Note 3--"Net Income (Loss) Per Share" to the Consolidated Financial
Statements)
23.1 Consent of KPMG LLP regarding Internet Capital Group, Inc.
23.2 Consent of Ernst & Young LLP regarding eCredit.com, Inc.
23.3 Consent of PricewaterhouseCoopers LLP regarding eCredit.com, Inc.
23.4 Consent of KPMG LLP regarding eMerge Interactive, Inc.
23.5 Consent of Ernst & Young LLP regarding JusticeLink, Inc.
23.6 Consent of Arthur Andersen LLP regarding MetalSite as Component of
Weirton Steel Corporation
23.7 Consent of Arthur Andersen LLP regarding MetalSite General Partner,
LLC
23.8 Consent of Arthur Andersen LLP, independent public accountants,
regarding RightWorks Corporation
23.9 Consent of PricewaterhouseCoopers LLP regarding Syncra Software, Inc.
23.10 Consent of Arthur Andersen LLP regarding USgift.com
23.11 Consent of KPMG LLP regarding VerticalNet, Inc.
23.12 Consent of Dechert Price & Rhoads (included in the opinion filed as
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
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