<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration Number 333-34722
PROSPECTUS
OFFER TO EXCHANGE
up to 6,471,251 Shares
of Common Stock of Internet Capital Group, Inc.
for Series B Preferred Shares of RightWorks Corporation
THE EXCHANGE OFFER AND
WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME ON JUNE 8, 2000, UNLESS EXTENDED.
---------------
Terms of the exchange offer:
--We will exchange shares of our common stock for shares of Series B
Preferred Stock of RightWorks Corporation that are properly tendered
and not withdrawn prior to the exchange offer's expiration.
--As a condition to this offer prior to closing, RightWorks
Corporation will amend its articles of incorporation to reclassify
all outstanding shares of preferred stock of RightWorks Corporation
into shares of Series B Preferred Stock of RightWorks Corporation.
--Unless you already agreed with us in writing not to withdraw your
shares of Series B Preferred Stock of RightWorks Corporation, you
may withdraw tenders of those shares at any time prior to the
expiration of the exchange offer.
--We believe the exchange should not be a taxable event for U.S.
federal income tax purposes.
--We will not receive any proceeds from the exchange offer, but we
will receive at least a 50% equity ownership interest in RightWorks
Corporation. No underwriter is being used for the exchange offer.
INTERNET CAPITAL GROUP, INC., a Delaware corporation, offers to exchange
a number of shares of Internet Capital Group's common stock, par value $.001
per share, for properly tendered shares of common stock, par value $.001 per
share, of RightWorks Corporation, a California corporation, equal to an
exchange ratio. The exchange ratio will be calculated at the time of the
exchange offer as set forth in this Prospectus and the related Letter of
Transmittal based on the number of shares of RightWorks common stock
immediately prior to the consummation of the exchange offer.
Our common stock is listed and principally traded on the Nasdaq National
Market under the symbol "ICGE". The common stock to be issued pursuant to the
exchange offer has been registered under the Securities Act of 1933, as
amended.
Investing in our Common Stock involves risks. See "Risk Factors" starting
on Page 10.
In those jurisdictions where securities, blue sky or other laws require
the exchange offer to be made by a licensed broker or dealer, the exchange
offer shall be deemed to be made on behalf of Internet Capital Group by one or
more registered brokers or dealers licensed under the laws of such
jurisdiction.
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 May 10, 2000
<PAGE>
GLOSSARY OF TERMS
"Common Stock"................... Internet Capital Group's common stock, par
value $.001 per share
"Exchange Offer".................
Internet Capital Group Inc. Prospectus and
Letter of Transmittal
"Exchange Ratio"................. exchange ratio set forth in the Prospectus
and Letter of Transmittal
"Expiration Date"................
date upon which the Exchange Offer expires
"Internet Capital Group" or the Internet Capital Group, Inc.
"Company".......................
"Letter of Transmittal".......... related letter of transmittal for this
Prospectus
"Prospectus"..................... the prospectus for this offer
"Registration Statement".........
registration statement of which the
Prospectus is a part
"RightWorks"..................... RightWorks Corporation
"RightWorks Series B Preferred RightWorks Series B Preferred Stock, par
Shares"......................... value $.001 per share
"Securities Act".................
Securities Act of 1933, as amended
<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............................................................. 10
Forward-Looking Statements............................................... 25
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Comparative Per Share Data............................................... 26
Price Range of Common Stock.............................................. 27
Capitalization........................................................... 28
Internet Capital Group, Inc. Unaudited Pro Forma Information............. 31
Selected Consolidated Financial Data..................................... 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Internet Capital Group................................................. 39
eCredit.com............................................................ 57
RightWorks............................................................. 64
Internet Capital Group's Business........................................ 70
eCredit.com's Business................................................... 92
RightWorks' Business..................................................... 93
Management............................................................... 94
Certain Transactions..................................................... 112
Principal Shareholders of Internet Capital Group......................... 117
Security Ownership of eCredit.com Principal Stockholders and eCredit.com
Management.............................................................. 119
Security Ownership of RightWorks Principal Stockholders and RightWorks
Management.............................................................. 123
Description of Internet Capital Group Capital Stock...................... 125
Comparison of Stockholder Rights......................................... 129
The Exchange Offer....................................................... 135
Shares Eligible for Future Sale.......................................... 152
United States Federal Income Tax Considerations.......................... 153
Legal Matters............................................................ 157
Experts.................................................................. 157
Where You Can Find More Information...................................... 158
Index to Financial Statements............................................ F-1
</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 24, 2000, we owned interests in 61 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 24, 2000, our partner company network
included significant interests in the following 41 market makers:
Animated Images, Arbinet Communications, asseTrade, AUTOVIA,
Bidcom, BuyMedia, 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
and VerticalNet. In addition, we have agreed to acquire a
significant interest in the following subject to customary closing
conditions:
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CapSpan, eColony, eCredit.com, enel, ICG Asia Works Limited, and
VerticalNet Europe. We expect these transactions to close, subject
to the completion of due diligence in certain instances, in the
quarter ending June 30, 2000. The ICG Asia Works Limited
transaction closed on May 4, 2000.
. 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 24, 2000, our partner company
network included significant interests in the following 20 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, US Interactive, and Vivant!
In addition, we have agreed to acquire a majority interest in
RightWorks, and we expect this transaction to close in the quarter
ending June 30, 2000.
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 24, 2000, we added 13 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 March 2000, we announced an agreement to acquire an
interest in Harbour Ring International Holdings to facilitate our entrance
into the Asian e-commerce markets. Also in March 2000, we announced the
formation of eColony, a new incubator network that will provide B2B Internet
startups with financing, infrastructure technology and corporate counsel. At
the end of 1999 we opened an office in London, England that focuses on
European B2B e-commerce opportunities and we intend to open offices in Munich
and Paris during 2000.
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; and London, England.
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.
eCredit.com
eCredit.com is a provider of credit management and financing solutions
for business-to-business and business-to-consumer commerce. eCredit.com's
products allow businesses and lenders to automate and manage credit and
financing decisions in real time.
eCredit.com's systems and services consist of the eCredit.com Enterprise
Credit Management System, the eCredit.com Enterprise Lending System and the
Global Financing Network. The eCredit.com systems are network applications
used to automate and streamline the credit management and financing process.
The eCredit.com Enterprise Credit Management System is designed to enable
businesses to reduce bad debts and operating costs, improve productivity and
increase revenues by automating the credit and collections cycle. The
eCredit.com Enterprise Lending System is a standardized credit-processing
platform that enables lenders to automate and manage the credit approval
process in real time for both consumer and business credit.
2
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eCredit.com's Global Financing Network is an Internet-based, real time global
network for credit approval and financing. Through a common electronic network
on which multiple lenders participate, each business customer of the Global
Financing Network is able to create a private network with selected lenders to
provide financing to buyers of products from that business customer.
As of March 31, 2000, eCredit.com had a total of 279 employees, 83 of
whom were in research and development, 11 were in business development, 90 were
in sales and marketing, 64 were in implementation and consulting services, 13
were in customer support and training, and 18 were in administration and
finance. Of these employees, 201 were located in the United States, 70 were
located in Bangalore, India and eight were located in Europe.
eCredit.com is a Delaware corporation. Its principal executive office is
located at 20 CareMatrix Drive, Dedham, MA 02026-6149 and its telephone number
is (781) 752-1200. eCredit.com maintains a site on the World Wide Web at
www.ecredit.com. The information contained on its Web site is not part of this
Prospectus.
eCredit.com, the eCredit.com logo, eCredit.com Enterprise Credit
Management System, eCredit.com Enterprise Lending System, and Global Financing
Network are trademarks of eCredit.com.
RightWorks
RightWorks provides Internet-based exchange software for powering B2B
digital marketplaces. These marketplaces, also known as online trading
exchanges or communities, serve as comprehensive online sources of information,
interaction and electronic commerce for the businesses that participate in them
as buyers or sellers. RightWorks' software, RightWorks 5.0, is a software
platform that manages the complex business transactions that take place on
digital marketplaces.
RightWorks' customers are companies that create and operate digital
marketplaces, including vertical--or industry-specific--marketplaces as well as
corporate marketplaces. By using RightWorks 5.0, customers can create
sophisticated digital marketplaces that allow large numbers of buyers and
sellers using standard computers and Web browsers to exchange information and
conduct electronic commerce transactions in a stable and secure environment.
RightWorks' current customers include Agilera, Applied Materials, BANK ONE,
Computer Sciences Corporation, ICG Commerce, Norwest Services and VerticalNet.
RightWorks offers its software to customers using two different models.
In the first model, the customer licenses the software for its own use and pays
a one-time licensing fee, annual maintenance fees, and per-transaction fees
based on the number of transactions executed on each digital marketplace using
the licensed software. In the second model, which currently is used by
approximately 20% of customers, the customer uses software hosted by RightWorks
and pays a one-time fee for the right to access the software, a monthly fee for
maintenance and hosting services, and per-transaction fees based on the number
of transactions executed on each digital marketplace using the hosted software.
To date, per-transaction and hosting fees have not represented a material
portion of RightWorks' total revenues. RightWorks also provides training and
customization services on a consulting basis.
RightWorks was founded in September 1994. Its principal executive office
is located at 31 North Second Street, Suite 400, San Jose, California 95113,
and its telephone number is (408) 882-0350. RightWorks maintains a site on the
World Wide Web at www.rightworks.com. The information contained on its Web site
is not part of this Prospectus.
3
<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange
Offer..................... We are offering to exchange shares of our Common
Stock for each properly tendered and not withdrawn
RightWorks Series B Preferred Share. See "The
Exchange Offer--Terms of the Exchange Offer."
The Exchange Ratio........ For each RightWorks Share accepted in the Exchange
Offer, the holder will receive 0.303774 shares of
Common Stock. This Exchange Ratio equals the
quotient of the Per Share Value divided by $111.48.
The Per Share Value equals the quotient of $1.25
billion divided by 36,911,598 (the number of shares
of RightWorks Common Stock issued and outstanding
on a fully diluted basis).
Purpose of the Exchange
Offer..................... As a result of the Exchange Offer, we will acquire
an equity ownership interest in RightWorks equal to
at least 50% of the capital stock of RightWorks, on
a fully diluted basis.
Expiration Date;
Withdrawal of Tender...... The Exchange Offer expires at 12:00 Midnight, New
York city time, on June 8, 2000, unless we extend
the expiration date. You must tender your
RightWorks Series B Preferred Shares prior to the
Expiration Date if you wish to participate. You may
withdraw your tender of RightWorks Series B
Preferred Shares under the Exchange Offer at any
time prior to the Expiration Date unless you have
already agreed with us in writing not to withdraw
your shares. Any RightWorks Series B Preferred
Shares not accepted for exchange for any reason
will be returned without expense to its tendering
holder as promptly as practicable after the
Expiration Date.
Conditions to the
Exchange Offer............ Our obligation to accept for exchange, or to issue
Common Stock in exchange for, any tendered
RightWorks Series B Preferred Shares is subject to
the satisfaction or waiver of conditions, including
the condition that we will own at least 50% of
RightWorks' capital stock, on a fully diluted
basis, at the closing of the Exchange Offer, and
other customary conditions relating to the receipt
of any applicable governmental or third party
approvals and the absence of any actions or
proceedings of any governmental agency or court
which could materially impair our ability to
consummate the Exchange Offer. We currently expect
that each of the conditions will be satisfied and
that no waivers will be necessary. See "The
Exchange Offer--Conditions to the Exchange Offer."
Procedures for Tendering
RightWorks Series B
Preferred Shares.......... If you wish to accept the Exchange Offer and tender
your RightWorks Series B Preferred Shares, you must
tender them, complete, sign and date the Letter of
Transmittal, or a facsimile of the Letter of
Transmittal, in accordance with its instructions
and the instructions in this Prospectus, and mail
or otherwise deliver the Letter of Transmittal, or
the facsimile, together with certificates(s) for
your RightWorks Series B Preferred Shares, and any
other required documentation to the exchange agent,
at the address noted below. See "The Exchange
Offer--Procedures for Tendering RightWorks Series B
Preferred Shares." To be eligible to receive Common
Stock under the Exchange Offer, you must properly
tender and not withdraw
4
<PAGE>
your RightWorks Series B Preferred Shares on or
prior to the expiration date.
Acceptance of the
RightWorks Series B
Preferred Shares.......... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, we will accept
for exchange any and all RightWorks Series B
Preferred Shares that are properly tendered and not
withdrawn in the Exchange Offer prior to the
Expiration Date.
Delivery of Common
Stock..................... The exchange agent will deliver shares of our
Common Stock and cash in lieu of fractional shares
as soon as practicable after acceptance of
RightWorks Series B Preferred Shares for exchange.
See "The Exchange Offer--Procedures for Tendering
RightWorks Series B Preferred Shares."
Additional Exchange of
Stock by Ms. Kola......... If less than 50% of the capital stock of
RightWorks, on a fully diluted basis, has been
properly tendered and not withdrawn on or prior to
the Expiration Date, Ms. Kola will be required to
exchange a sufficient number of shares to us to
provide us with 50% of the capital stock of
RightWorks, on a fully diluted basis.
Withdrawal Rights......... Subject to the conditions listed in this
Prospectus, you may withdraw tendered RightWorks
Series B Preferred Shares at any time on or before
the Expiration Date, unless you have already agreed
in writing with us not to withdraw your RightWorks
Series B Preferred Shares. See "The Exchange
Offer--Withdrawal Rights."
Governmental and
Regulatory Approvals...... We are required to comply with the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as
amended, and make all filings, submissions and
notifications thereunder.
Appraisal or Dissenters'
Rights.................... Holders of RightWorks Series B Preferred Shares do
not have any appraisal or dissenters' rights under
the California General Corporation Law in
connection with the Exchange Offer.
No Fractional Shares...... We will not distribute fractional shares of our
Common Stock. Instead, holders of RightWorks Series
B Preferred Shares who would otherwise be entitled
to receive a fractional share of our Common Stock
will be paid in cash in lieu of the fractional
share. See "The Exchange Offer--Terms of the
Exchange Offer."
Federal Income Tax
Consequences.............. The RightWorks Exchange Offer is intended to
qualify for U.S. federal income tax purposes as a
reorganization within the meaning of section 368(a)
of the Internal Revenue Code of 1986, as amended
(the "Code"). Assuming the RightWorks Exchange
Offer so qualifies, in general, no gain or loss
will be recognized by holders of RightWorks Series
B Preferred Shares with respect to the exchange for
Internet Capital Group Common Stock, except with
respect to cash received in lieu of fractional
shares, and no gain or loss will be recognized by
Internet Capital Group or RightWorks. No ruling has
been requested from the Internal Revenue Service
regarding the federal income tax consequences of
the RightWorks Exchange Offer. It is a condition to
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<PAGE>
RightWorks' and Internet Capital Group's respective
obligations to consummate the RightWorks Exchange
Offer that they receive, from their respective
legal counsel, tax opinions to the effect that the
RightWorks Exchange Offer should constitute a
reorganization under the Code. All shareholders of
RightWorks are urged to consult their own tax
advisors as to the specific tax consequences to
them of the Exchange Offer. For a discussion of
federal income tax considerations relating to the
exchange of our Common Stock for the RightWorks
Series B Preferred Shares, see "United States
Federal Income Tax Considerations of the Exchange
Offer."
Exchange Agent............ ChaseMellon Shareholder Services is serving as the
Exchange Agent for the Exchange Offer. Its
telephone number is (800) 777-3674.
Failure to Exchange
RightWorks Series B
Preferred Shares.......... We will issue the Common Stock in exchange for
RightWorks Series B Preferred Shares only after
timely receipt by the exchange agent of the
RightWorks Series B Preferred Shares
certificate(s), a properly completed and duly
executed Letter of Transmittal and all other
required documents. Therefore, if you desire to
tender your RightWorks Series B Preferred Shares in
exchange for our Common Stock, you should allow
sufficient time to ensure timely delivery. Neither
the exchange agent nor we are under any duty to
notify you of defects or irregularities with
respect to tenders of RightWorks Series B Preferred
Shares for exchange.
Lock-Up Restriction....... Each share of our Common Stock issued to you in
exchange for your RightWorks Series B Preferred
Shares is subject to a lock-up restriction.
Pursuant to this lock-up restriction, as a
condition to the receipt of our Common Stock, 50%
of the shares of our Common Stock that you receive
in the Exchange Offer may not be sold, transferred,
hypothecated, pledged, be the subject of an equity
swap or similar agreement or otherwise be
transferred without our prior written consent for a
period of 90 days after the closing of the Exchange
Offer. The remaining 50% of the shares of our
Common Stock that you receive in the Exchange Offer
may be sold or otherwise transferred 180 days after
the closing of the Exchange Offer.
Any questions regarding the Exchange Offer, including the procedure for
tendering shares in the Exchange Offer and/or the surrender of stock
certificates should be directed to the exchange agent as follows:
ChaseMellon Shareholder Services
P.O. Box 3301
South Hackensack, NJ 07606
Call Toll Free:
(800) 777-3674
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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 audited 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 column included in the Consolidated Statements of Operations Data
for the year ended December 31, 1999, 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, 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 December 31, 1999, derived from elsewhere in this
Prospectus, reflect the effect of our acquisitions subsequent to December 31,
1999 as if they had occurred on December 31, 1999.
<TABLE>
<CAPTION>
March 4, 1996 Year Ended December 31,
(Inception) to ------------------------------------------
December 31, 1997 1998 1999 1999
1996 Actual Actual Actual Pro Forma
-------------- ------- -------- ---------- -----------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ 285 $ 792 $ 3,135 $ 16,536 $ 11,886
Operating Expenses...... 2,348 7,510 20,157 57,080 347,084
------- ------- -------- ---------- ---------
(2,063) (6,718) (17,022) (40,544) (335,198)
Other income, net....... -- -- 30,483 67,384 67,755
Interest income, net.... 88 138 925 5,734 5,729
------- ------- -------- ---------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... (1,975) (6,580) 14,386 32,574 (261,714)
Income taxes............ -- -- -- 23,722 274,524
Minority interest....... 427 (106) 5,382 6,026 6,222
Equity income (loss).... (514) 106 (5,869) (92,099) (516,938)
------- ------- -------- ---------- ---------
Net Income (Loss)....... $(2,062) $(6,580) $ 13,899 $ (29,777) $(497,906)
======= ======= ======== ========== =========
Net income (loss) per
share--diluted......... $ (0.05) $ (0.10) $ 0.12 $ (0.15) $ (2.34)
Weighted average shares
outstanding--diluted... 40,792 68,198 112,299 201,851 213,199
Pro forma net income
(loss) (unaudited)..... $ 8,756 $ (37,449)
Pro forma net income
(loss) per share--
diluted (unaudited).... $ 0.08 $ (0.19)
<CAPTION>
December 31, 1999
-----------------------
Actual Pro Forma
---------- -----------
(Unaudited)
(In Thousands except per
share data)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $1,343,459 $ 956,490
Short-term investments.................................. 3,359 3,359
Working capital......................................... 1,305,380 917,744
Total assets............................................ 2,050,384 3,402,388
Long-term debt.......................................... 3,185 5,641
Convertible subordinated notes.......................... 566,250 566,250
Total shareholders' equity.............................. 1,420,221 2,531,818
Book value per share.................................... 5.39 9.61
</TABLE>
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eCredit.com Summary Historical and Pro Forma Consolidated Financial Data
(in thousands, except per share data)
The following summary historical and pro forma consolidated financial
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
eCredit.com" and eCredit.com's audited Consolidated Financial Statements and
related Notes included elsewhere in this Prospectus. The summary pro forma data
does not purport to represent what eCredit.com's results would have been if the
events described below had occurred at the dates indicated. The summary pro
forma consolidated statement of operations and balance sheet data reflects
ICG's acquisition of eCredit.com as if it had occurred on January 1, 1999 and
December 31, 1999, respectively. The pro forma consolidated data gives effect
to the conversion of all outstanding shares of preferred stock of eCredit.com
into a total of 15,568,622 shares of common stock of eCredit.com immediately
prior to the closing of the Exchange Offer; the acceleration and exercise of
1,579,853 common stock options at a weighted average exercise price of $2.32;
and the issuance of a common stock warrant to Internet Capital Group.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999
1995 1996 1997 1998 1999 Pro Forma
------ ------ ------- ------- --------- -----------
(In thousands Except Per Share Data) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $3,134 $3,270 $ 3,943 $ 4,824 $ 8,401 $ 8,401
Gross profit............ 1,912 1,214 1,350 2,129 1,976 1,976
Loss from operations.... (298) (588) (1,818) (2,407) (16,517) (127,366)
Net loss................ (389) (675) (1,946) (2,527) (16,373) (127,222)
Net loss attributable to
common stockholders.... (389) (675) (1,946) (7,608) (328,552) (127,222)
Basic and diluted net
loss per common share.. (0.16) (0.32) (0.93) (3.62) (110.02) (5.48)
Basic and diluted
weighted average
shares................. 2,363 2,100 2,100 2,100 2,986 23,212
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1999
1999 Pro Forma
--------- -----------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................ $ 35,210 $38,870
Working capital.......................................... 31,963 35,623
Total assets............................................. 45,814 49,474
Redeemable preferred stock............................... 373,652 --
Total stockholders' equity (deficit)..................... (337,517) 39,795
</TABLE>
8
<PAGE>
RightWorks Summary Historical Financial Data
(in thousands, except per share data)
The following summary historical financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of RightWorks Corporation" and RightWorks
Corporation's audited Financial Statements and related Notes included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1996 1997 1998 1999
----- ------ ------- ------- -------
(In thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues...................... $ -- $ 223 $ 19 $ 75 $ 2,152
Gross profit........................ -- 164 19 75 1,722
Loss from operations................ (97) (351) (2,046) (5,486) (9,379)
Net loss............................ (96) (342) (2,017) (5,622) (9,309)
Basic and diluted net loss per
common share....................... $(.12) $ (.28) $ (1.44) (3.48) (5.05)
Basic and diluted weighted average
shares............................. 801 1,210 1,402 1,615 1,845
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1999
------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.......................................... $11,922
Working capital.................................................... 10,720
Total assets....................................................... 15,769
Total shareholders' equity......................................... 8,604
</TABLE>
9
<PAGE>
RISK FACTORS
The Exchange Offer 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 $2,050.4 million in total assets as of December 31, 1999, $547.3
million, or 26.7%, consisted of ownership interests in and advances to our
partner companies. On a pro forma basis, adjusted for our acquisitions
subsequent to December 31, 1999 as if they had occurred on December 31, 1999,
our assets on December 31, 1999 were $3,402.4 million, of which $1,400.8
million, or 41.2%, 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
10
<PAGE>
partner companies and on March 24, 2000 our holdings in VerticalNet, Breakaway
Solutions, Universal Access, ONVIA.com and eMerge Interactive had respective
market values of approximately $2.3 billion, $818 million, $1.2 billion, $536
million and $381 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. On April 10, 2000, our
ownership in VerticalNet, Breakaway Solutions, ONVIA.com, eMerge Interactive,
and Universal Access had market values of approximately $1.3 billion, $556
million, $266 million, $154 million, and $713 million, respectively.
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
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<PAGE>
Advisory Board members, some of whom may from time to time leave our Advisory
Board. If one or more members of our senior management, our partner companies'
senior management or our Advisory Board were unable or unwilling to continue in
their present positions, our business and operations could be disrupted.
As of March 24, 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 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 increased by $468.1 million. 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.
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
12
<PAGE>
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 24, 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 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.
13
<PAGE>
. 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 December 31, 1999, we had $569.4 million in long term debt,
including $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.
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;
14
<PAGE>
. 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 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
15
<PAGE>
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 $8.00 per share
and its common stock has since traded as high as $296.75 per share, adjusted
for a two for one stock split. On October 6, 1999, Breakaway Solutions
completed its initial public offering at a price of $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 $70.50 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 $54.63 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 March 24, 2000 of $183.88,
our holdings in VerticalNet had a market value of approximately $2.3 billion.
Based on the closing price of Breakaway Solutions' common stock on March 24,
2000 of $58.56, our holdings in Breakaway Solutions had a market value of
approximately $818 million. Based on the closing price of eMerge Interactive's
common stock on March 24, 2000 of $47.19, our holdings in eMerge Interactive
had a market value of approximately $381 million. Based on the closing price on
ONVIA.com's common stock on March 24, 2000 of $31.19, our holdings in ONVIA.com
had a market value of approximately $536 million. Based on the closing price of
Universal Access' common stock on March 24, 2000 of $54.63, our holdings in
Universal Access had a market value of approximately $1.2 billion. 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. On April 10,
2000, our ownership in VerticalNet, Breakaway Solutions, ONVIA.com, eMerge
Interactive, and Universal Access had market values of approximately $1.3
billion, $556 million, $266 million, $154 million, and $713 million,
respectively.
VerticalNet's results of operations, and accordingly the price of its
common stock, may be adversely affected by the following factors:
. lack of acceptance of the Internet as an advertising medium;
. inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
. inability to generate significant e-commerce transaction revenues
from its communities;
. lower advertising rates; and
. loss of key content providers.
Breakaway Solutions' results of operations, and accordingly the price of
its common stock, may be adversely affected by the following factors:
. growing enterprises' failure to accept e-commerce solutions;
. inability to open new regional offices;
16
<PAGE>
. 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 December 31, 1999,
were approximately $2,050 million, of which $128.3 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.
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;
17
<PAGE>
. 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.
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,
18
<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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 24, 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.
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.
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<PAGE>
RISKS RELATING TO THE EXCHANGE OFFER
Dilution of Common Stock--We may issue securities which may dilute your
ownership interest in the Common Stock.
In the future, we may issue securities to raise cash for acquisitions,
and we may also pay for interests in additional partner companies by using a
combination of cash and our Common Stock, or just our Common Stock. Any of
these events may dilute your ownership interest in us and have an adverse
impact on the price of our Common Stock. In addition, if we issue securities
convertible into our Common Stock, the conversion of these securities may
dilute your ownership interest and have an adverse impact on the price of our
Common Stock.
Future Sales of Shares--Shares eligible for future sale by our current
shareholders may decrease the price of our Common Stock.
If our shareholders sell substantial amounts of our Common Stock,
including shares issued upon the exercise of outstanding options, in the public
market following this Exchange Offer then the market price of our Common Stock
could fall. Restrictions under the securities laws and certain repurchase and
lock-up agreements limit the number of shares of Common Stock available for
sale in the public market. Prior to this offering, the holders of 131,872,442
shares of our Common Stock and warrants exercisable for 569,451 shares of our
Common Stock agreed not to sell any of these securities until June 13, 2000
without the prior written consent of Merrill Lynch. However, Merrill Lynch may,
in its sole discretion, release all or any portion of the securities subject to
these lock-up agreements.
The holders of 169,683,868 shares of Common Stock and the holders of
warrants to purchase 2,160,817 shares of Common Stock have demand or piggy-back
registration rights. Prior to this Exchange Offer, the holders of 58,507,579
shares of our Common Stock and warrants exercisable for 351,860 shares of our
Common Stock that have demand registration rights have agreed not to demand
that their securities be registered until June 13, 2000 without the prior
written consent of Merrill Lynch. Common Stock issued upon exercise of stock
options under our benefit plans are eligible for resale in the public market
without restriction. In addition, we may issue and register securities in
connection with acquisitions or other business combinations.
Interests of Significant Shareholders--The interests of certain of our
significant shareholders may conflict with our interests and the interests of
our other shareholders.
As a result of its ownership of our Common Stock, Safeguard Scientifics
will be in a position to affect significantly our corporate actions such as
mergers or takeover attempts in a manner that could conflict with the interests
of our public shareholders. After these Exchange Offers, Safeguard Scientifics
will beneficially own about 13.2% of our Common Stock.
Anti-Takeover Protections--Anti-takeover provisions and our right to issue
preferred stock could make a third-party acquisition of us difficult.
Our certificate of incorporation provides that our board of directors may
issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a three-year
term. The issuance of preferred stock and the existence of a classified board
could make it more difficult for a third-party to acquire us without the
approval of our board.
Price Volatility--Our Common Stock price is highly volatile.
The market price for our Common Stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been
22
<PAGE>
unrelated or disproportionate to the operating performance of these companies.
The trading price of our Common Stock has increased significantly from our
initial public offering price of $6.00 per share, as adjusted for our 2 for 1
stock split. Any negative change in the public's perception of the prospects of
Internet or e-commerce companies could depress our stock price regardless of
our results.
The following factors will add to our Common Stock price's volatility:
.actual or anticipated variations in our quarterly results and those
of our partner companies;
. new sales formats or new products or services offered by us, our
partner companies and their competitors;
.changes in our financial estimates and those of our partner
companies by securities analysts;
.changes in the size, form or rate of our acquisitions;
. conditions or trends in the Internet industry in general and the
B2B e-commerce industry in particular;
. announcements by our partner companies and their competitors of
technological innovations;
. announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
. changes in the market valuations of our partner companies and other
Internet companies;
. our capital commitments;
. negative changes in the public's perception of the prospects of e-
commerce companies;
. general economic conditions such as a recession, or interest rate
or currency rate fluctuations;
. additions or departures of our key personnel and key personnel of
our partner companies; and
. additional sales of our securities.
Many of these factors are beyond our control. These factors may decrease
the market price of our Common Stock, regardless of our operating performance.
In the past, securities class action litigation has often been brought against
a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on our
business, operating results and financial condition.
23
<PAGE>
Government Regulation--Our need for governmental approvals may delay
consummation of the Exchange Offer
The consummation of the Exchange Offer is conditioned upon the expiration
or termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. In addition, other filings with
notifications to and authorizations and approvals of various governmental
agencies with respect to the Exchange Offer and the other transactions
contemplated by the Recapitalization and Exchange Offer Agreement relating
primarily to antitrust issues, must be made and received prior to the
consummation of the Exchange Offer. ICG and RightWorks are seeking to obtain
all required regulatory approvals prior to the scheduled completion of the
Exchange Offer.
You should be aware that:
.all required regulatory approvals may not be obtained on that
timetable;
. restrictions on the operations of ICG and RightWorks may be sought
by governmental agencies as a condition to obtaining such
approvals; and
.operating restrictions imposed could adversely affect the value of
ICG and RightWorks.
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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 10 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 the proposed acquisitions.
DIVIDEND POLICY
Neither we, nor eCredit.com nor RightWorks have ever declared or paid
cash dividends on our capital stock, and none of us intend to pay cash
dividends in the foreseeable future. We, eCredit.com and RightWorks plan to
retain any earnings for use in the operation of our business and to fund future
growth.
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<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents our historical and pro forma per share data
and historical and pro forma per share data of eCredit.com and RightWorks. You
should read this information together with the historical financial statements
in this document. While the pro forma information is helpful in showing our
financial characteristics after the completion of our exchange offer, it does
not attempt to predict or suggest future results.
The information in the following table is based on the historical
financial information that we, eCredit.com and RightWorks have presented in
this Prospectus.
<TABLE>
<CAPTION>
Internet Capital Group eCredit.com RightWorks
------------------------ ------------------------ ----------------------
Equivalent Equivalent
Historical Pro Forma (1) Historical Pro Forma(2) Historical Pro Forma
---------- ------------- ---------- ------------ ---------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations
before extraordinary
items attributable to
common Shareholders:... $(29,777) $(497,906) $(328,552) $(127,222) $(9,309) $(9,309)
Income (loss) per
share--basic:
For the year ended
December 31, 1999.... (0.15) (2.34) (110.02) (5.48) (5.05) (5.05)
Income (loss) from
continuing operations
before extraordinary
items:................. (29,777) (497,906) (328,552) (127,222) (9,309) (9,309)
Income (loss) per
share--diluted:
For the year ended
December 31, 1999.... (0.15) (2.34) (110.02) (5.48) (5.05) (5.05)
Cash dividends declared
per share:
For the year ended
December 31, 1999.... -- -- -- -- -- --
Book value per share:(3)
December 31, 1999..... $ 5.39 $ 9.61 $ (55.66) $ 1.71 $ 1.95 $ 1.95
</TABLE>
- --------
(1) Pro forma information gives effect to the exchange as of and for the
periods beginning on the dates indicated.
(2) The pro forma per share data for eCredit.com reflects Internet Capital
Group's acquisition of eCredit.com as if it had occurred on January 1,
1999 for the statement of operations data and December 31, 1999 for the
balance sheet data. The pro forma adjustments include: (i) conversion
of all of eCredit.com's outstanding shares of preferred stock into a
total of 15,568,622 shares of common stock, (ii) acceleration and
exercise of 1,579,853 common stock options at a weighted average
exercise price of $2.32 (this acceleration and exercise, in conjunction
with the issuance of a warrant (discussed below), results in a stock
compensation charge of $62 million and an acceleration of deferred
compensation of $8.8 million) and (iii) issuance of a warrant to
Internet Capital Group, valued at approximately $40 million, in
connection with the Exchange Offer, which warrant is exercisable upon
an initial public offering. This assumes an implied price per
eCredit.com share of $48.68. The pro forma per share data excludes
5,283,177 shares of common stock of eCredit.com issuable upon exercise
of outstanding options as of December 31, 1999 at a weighted average
exercise price of $2.35 per share and 191,378 shares of common stock of
eCredit.com issuable upon exercise of warrants outstanding as of
December 31, 1999 at an exercise price of $25.08 per share.
(3) Book value per share is computed by dividing total shareholders' equity
by the aggregate number of common shares outstanding as of the balance
sheet date.
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<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......................................... $193.63 $43.00
March 31, 2000............................................ $200.94 $80.00
Through May 8, 2000....................................... $ 89.00 $37.19
</TABLE>
On May 8, 2000, the last reported sale price of the common stock as
quoted on the Nasdaq National Market was $37.19. As of March 31, 2000, there
were approximately 1,392 holders of record of Common Stock.
eCredit.com and RightWorks capital stock is not listed for trading on any
exchange or automated quotation service.
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<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 4,726,891 shares of our Common Stock in the
eCredit.com exchange offer;
. the issuance of 6,471,251 shares of our Common Stock in the
RightWorks Corporation offer; and
. the acquisition in January 2000 of a new significant minority
ownership interest in an equity method partner company for 150,000
shares of our Common Stock.
Common stock data is as of March 24, 2000 and excludes:
. the conversion of the Convertible subordinated notes into
4,443,266 shares of Common Stock;
. options to purchase 11,394,000 shares of Common Stock under our
equity plans at a weighted average exercise price of $71.59 per
share;
. 13,042,699 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 December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------
Actual Pro Forma
---------- -----------
(unaudited)
-----------
(In thousands)
<S> <C> <C>
Long-term debt......................................... $ 3,185 $ 5,641
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; 300,000 shares
authorized; 263,579 shares issued and outstanding-
actual; 274,927 shares issued and outstanding pro
forma............................................... 264 275
Additional paid-in capital............................. 1,513,615 2,625,201
Accumulated deficit.................................... (26,539) (26,539)
Unamortized deferred compensation...................... (11,846) (11,846)
Notes receivable--shareholders......................... (79,790) (79,790)
Accumulated other comprehensive income................. 24,517 24,517
---------- ----------
Total shareholders' equity......................... 1,420,221 2,531,818
---------- ----------
Total capitalization............................. $1,989,656 $3,103,709
========== ==========
</TABLE>
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<PAGE>
eCredit.com
The following table sets forth eCredit.com's actual and pro forma
capitalization as of December 31, 1999. This table should be read in
conjunction with eCredit.com's consolidated financial statements and notes
appearing elsewhere in this Prospectus. The pro forma capitalization reflects
ICG's acquisition of eCredit.com as if it occurred on December 31, 1999. The
pro forma basis reflects the following:
. Conversion of all of its outstanding shares of preferred stock into a
total of 15,568,622 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 a warrant (see below),
results in a stock compensation charge of $62 million and
acceleration of deferred compensation of $8.8 million. This assumes
an implied price per eCredit.com share of $48.68.
. Issuance of warrants to Internet Capital Group, valued at
approximately $40 million, in connection with the purchase of
eCredit.com shares. Such warrants are exercisable upon an initial
public offering of common stock of eCredit.com.
This information excludes 5,283,177 shares of common stock issuable upon
exercise of outstanding options as of December 31, 1999 at a weighted average
exercise price of $2.35 per share and 191,378 shares of common stock issuable
upon exercise of warrants outstanding as of December 31, 1999 at an exercise
price of $25.08 per share.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------
Actual Pro Forma
---------------- ------------------
(unaudited)
(In thousands, except share data)
<S> <C> <C>
Capital lease obligations, net of
current portion...................... $ 69 $ 69
Notes payable, net of current
portion.............................. 1,172 1,172
Convertible preferred stock, par value
$.001:
11,037,987 shares authorized,
10,019,549 issued and outstanding,
actual; 11,037,987 shares authorized,
no shares issued or outstanding, pro
forma................................ 373,652 --
Stockholders' equity (deficit):
Common stock, par value $.001;
33,962,013 shares authorized,
6,513,648 shares issued and 6,063,648
shares outstanding, actual;
33,962,013 shares authorized,
23,212,123 shares issued and
outstanding, pro forma............... 7 31
Additional paid-in capital........... 41,844 905,390
Deferred stock compensation.......... (35,006) (26,181)
Accumulated deficit.................. (341,042) (836,125)
Notes receivable..................... (3,095) (3,095)
Treasury stock, 450,000 shares at
cost................................ (225) (225)
---------------- ----------------
Total stockholders' equity
(deficit)........................ (337,517) 39,795
---------------- ----------------
Total capitalization............ $ 37,376 $ 41,036
================ ================
</TABLE>
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<PAGE>
RightWorks
The following table sets forth RightWorks' actual and pro forma
capitalization as of December 31, 1999. This table should be read in
conjunction with RightWorks' financial statements and notes appearing elsewhere
in this Prospectus. The pro forma capitalization reflects Internet Capital
Group's acquisition of a majority interest in RightWorks' as if it occurred on
December 31, 1999. The pro forma basis reflects the following:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------
Actual Pro Forma
---------------- ------------------
(unaudited)
(In thousands, except share data)
<S> <C> <C>
Capital lease obligations, net of
current portion...................... $ 206 $ 206
Notes payable, net of current
portion.............................. 2,423 2,423
Convertible preferred stock, par value
$.001:
87,276,219 shares authorized,
79,248,953 issued and outstanding,
actual; 87,276,219 shares authorized,
79,248,953 shares issued or
outstanding, pro forma............... 79 79
Stockholders' equity (deficit):
Common stock, par value $.001;
100,000,000 shares authorized,
4,409,885 shares issued and
outstanding, actual; 100,000,000
shares authorized, 4,409,885 shares
issued and outstanding, pro forma.... 5 5
Warrants.............................. 567 567
Additional paid-in capital............ 28,946 28,946
Notes receivable from shareholders.... (368) (368)
Deferred compensation................. (3,239) (3,239)
Accumulated deficit................... (17,386) (17,386)
---------------- ----------------
Total stockholders' equity
(deficit)........................ 8,604 8,604
---------------- ----------------
Total capitalization............ $ 11,233 $ 11,233
================ ================
</TABLE>
30
<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 38 partner companies accounted for under the
equity method of accounting. In February 2000, we agreed to acquire a
significant minority ownership interest in eCredit.com for total purchase
consideration of approximately $450 million in stock. In March 2000, we agreed
to acquire a majority ownership interest in RightWorks for approximately $635
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 statement of operations for
the year ended December 31, 1999 gives 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 38 equity method 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. 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 December
31, 1999 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 during the period from January 1, 2000 through
March 24, 2000 of significant minority ownership interests in 13 new and 13
existing equity method partner companies as if the transactions had occurred on
December 31, 1999.
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 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 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 costs (if any). We have not 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.
31
<PAGE>
INTERNET CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet December 31, 1999
(In thousands)
<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>
Assets
Current Assets
Cash and cash
equivalents........... $1,343,459 $(376,891) c $ 966,568 -- $(10,078)b $ 956,490
Short-term
investments........... 3,359 -- 3,359 -- -- 3,359
Accounts receivable,
less allowance for
doubtful accounts..... 1,207 -- 1,207 -- 3,163 b 4,370
Prepaid expenses and
other current assets.. 6,347 -- 6,347 -- 129 b 6,476
---------- --------- ---------- -------- -------- ----------
Total current assets... 1,354,372 (376,891) 977,481 -- (6,786) 970,695
Fixed assets, net...... 4,015 4,015 -- 413 b 4,428
Ownership interests in
and advances to
Partner Companies..... 547,339 403,488 c,d 950,827 $450,000 a -- 1,400,827
Available-for-sale
securities............ 46,767 -- 46,767 -- -- 46,767
Intangible assets,
net................... 23,649 -- 23,649 -- 881,780 b 905,429
Deferred taxes......... 34,388 -- 34,388 -- -- 34,388
Other.................. 39,854 -- 39,854 -- -- 39,854
---------- --------- ---------- -------- -------- ----------
Total Assets............ $2,050,384 $ 26,597 $2,076,981 $450,000 $875,407 $3,402,388
========== ========= ========== ======== ======== ==========
Liabilities and
Shareholders' Equity
Current Liabilities
Current maturities of
long-term debt........ $ 3,000 -- $ 3,000 -- -- $ 3,000
Accounts payable....... 6,750 -- 6,750 -- $ 3,959 b 10,709
Accrued expenses....... 4,205 -- 4,205 -- -- 4,205
Notes payable to
Partner Company....... 34,134 -- 34,134 -- -- 34,134
Other.................. 903 -- 903 -- -- 903
---------- --------- ---------- -------- -------- ----------
Total current
liabilities........... 48,992 -- 48,992 -- 3,959 52,951
Long-term debt......... 3,185 -- 3,185 -- 2,456 b 5,641
Subordinated debt...... 566,250 -- 566,250 -- -- 566,250
Other liability........ 4,255 -- 4,255 -- -- 4,255
Deferred taxes......... -- -- -- -- 229,950 b 229,950
Minority interest...... 7,481 -- 7,481 -- 4,042 b 11,523
Shareholders' Equity
Total shareholders'
equity................ 1,420,221 $ 26,597 d 1,446,818 $450,000 a 635,000 b 2,531,818
---------- --------- ---------- -------- -------- ----------
Total Liabilities and
Shareholders' Equity... $2,050,384 $ 26,597 $2,076,981 $450,000 $875,407 $3,402,388
========== ========= ========== ======== ======== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
32
<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, Breakaway Pro Forma eCredit.com RightWorks Pro Forma
Inc. Deconsolidation Adjustments Sub-Total Acquisition Acquisition Combined
-------- --------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 16,536 $(14,743) $ 7,941 f $ 9,734 -- $ 2,152 h $ 11,886
-------- -------- --------- --------- --------- --------- ---------
Operating Expenses
Cost of revenue........ 8,156 (7,038) -- 1,118 -- 430 h 1,548
Selling, general and
administrative........ 48,924 (14,722) 6,234 f,j 40,436 -- 305,100 h 345,536
-------- -------- --------- --------- --------- --------- ---------
Total operating
expenses.............. 57,080 (21,760) 6,234 41,554 -- 305,530 347,084
-------- -------- --------- --------- --------- --------- ---------
(40,544) 7,017 1,707 (31,820) -- (303,378) (335,198)
Other income, net....... 67,384 (28) 329 f 67,685 -- 70 h 67,755
Interest income......... 9,631 (59) -- 9,572 -- -- 9,572
Interest expense........ (3,897) 54 -- (3,843) -- -- (3,843)
-------- -------- --------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes, Minority
Interest and Equity
Income (Loss).......... 32,574 6,984 2,036 41,594 -- (303,308)h (261,714)
Income taxes............ 23,722 -- 93,550 i 117,272 $ 54,352 102,900 h 274,524
Minority interest....... 6,026 -- (3,993)f,j 2,033 -- 4,189 h 6,222
Equity income (loss).... (92,099) -- (269,547)g,j (361,646) (155,292) -- (516,938)
-------- -------- --------- --------- --------- --------- ---------
Net Income (Loss)....... $(29,777) $ 6,984 $(177,954) $(200,747) $(100,940) $(196,219) $(497,906)
======== ======== ========= ========= ========= ========= =========
Net Income (Loss) per
Share
Basic.................. $ (0.15) $ (2.34)
Diluted................ $ (0.15) $ (2.34)
Weighted Average Shares
Outstanding
Basic.................. 201,851 213,199 k
Diluted................ 201,851 213,199 k
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
33
<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 December
31, 1999 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 acquisition of significant minority ownership interests in
13 new and 13 existing equity method partner companies as if the transactions
had occurred on December 31, 1999.
The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1999 gives effect to the acquisition of a
significant minority ownership interest in eCredit.com, the acquisition of a
majority ownership interest in RightWorks, the deconsolidation of Breakaway
Solutions, Inc., the 1999 and 2000 acquisitions of significant minority
ownership interests in 38 equity method 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 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 December 31, 1999 reflect:
(a) The acquisition of a significant minority ownership interest in
eCredit.com for approximately $450 million in our common stock.
(b) The acquisition of a majority ownership interest in RightWorks for
approximately $635 million in our common stock and $22 million in
cash. The total RightWorks purchase price of approximately $657
million was allocated as follows: cash -- $11.9 million, net
receivables -- $3.2 million, fixed and other assets -- $0.6 million,
accounts payable and accruals -- $4.0 million, long-term debt --
$2.5 million, minority interest -- $4.0 million, $230.0 million
deferred tax liability and goodwill and intangibles -- $881.8
million.
(c) The acquisition during the period from January 1, 2000 through March
24, 2000 of new and additional significant minority ownership
interests in equity method partner companies for aggregate cash
consideration of $377 million.
(d) The acquisition in January 2000 of a new significant minority
ownership interest in an equity method partner company for
approximately $26.6 million in our common stock.
34
<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 $155.3 million includes $5.3 million of equity income
(loss), and $150 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 $54.3 million to reflect the tax
effect of the eCredit.com pro forma adjustments.
(f) Reflects additional revenue of $7.9 million, general and
administrative expenses of $8.4 million, other income of $0.3
million, and minority interest of $0.5 million related to the
acquisitions of Animated Images, Purchasing Group, Inc. and
Integrated Sourcing, LLC. Included in general and administrative
expenses is approximately $2.4 million of goodwill amortization
during the year ended December 31, 1999, relating to these
acquisitions.
(g) Equity income (loss) has been adjusted by $267.3 million to reflect
our ownership interests in the income (loss) of the 38 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 $25.5 million
of equity income (loss) and $241.7 million in amortization of the
difference between cost and equity in net assets.
(h) Reflects additional revenue of $2.2 million, cost of revenue of $0.4
million, general and administrative expenses of $305.1 million, other
income of approximately $.1 million, income tax benefit of $102.9
million related to the amortization of goodwill, and minority
interest of $4.2 million related to the acquisition of a majority
interest in RightWorks. Included in general and administrative
expenses is approximately $294 million of goodwill amortization
during the year ended December 31, 1999, relating to this
acquisition.
(i) Income tax benefit has been adjusted $93.6 million for the year ended
December 31, 1999 to reflect the tax effect of the pro forma
adjustments.
(j) Reflects elimination of $3.4 million for the year ended December 31,
1999 related to Breakaway Solutions, Inc. upon its deconsolidation,
and the reclass of $2.2 million of amortization of goodwill related
to our acquisition of Breakaway Solutions, Inc. from selling, general
and administrative expense to equity income (loss) upon its
deconsolidation.
(k) Reflects the issuance of 150,000 shares related to the acquisition of
e-Chemicals, Inc. in January 2000, and the issuance of 6.5 million
shares related to the RightWorks acquisition and 4.7 million shares
related to the eCredit.com acquisition as if the issuances occurred
on January 1, 1999.
35
<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 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 and net income per
share information included in the Consolidated Statements of Operations Data
for the years ended December 31, 1998 and 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
(Inception) to Year Ended December 31,
December 31, -----------------------------
1996 1997 1998 1999
-------------- ------- -------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue......................... $ 285 $ 792 $ 3,135 $ 16,536
Operating Expenses
Cost of revenue................ 427 1,767 4,643 8,156
Selling, general and
administrative................ 1,921 5,743 15,514 48,924
------- ------- -------- ----------
Total operating expenses....... 2,348 7,510 20,157 57,080
------- ------- -------- ----------
(2,063) (6,718) (17,022) (40,544)
Other income, net............... -- -- 30,483 67,384
Interest income, net............ 88 138 925 5,734
------- ------- -------- ----------
Income (Loss) Before Income
Taxes, Minority Interest and
Equity Income (Loss)........... (1,975) (6,580) 14,386 32,574
Income taxes.................... -- -- -- 23,722
Minority interest............... 427 (106) 5,382 6,026
Equity income (loss)............ (514) 106 (5,869) (92,099)
------- ------- -------- ----------
Net Income (Loss)............... $(2,062) $(6,580) $ 13,899 $ (29,777)
======= ======= ======== ==========
Net Income (loss) per share--
diluted........................ $ (0.05) $ (0.10) $ 0.12 $ (0.15)
Weighted average shares
outstanding--diluted........... 40,792 68,198 112,299 201,851
Pro forma net income (loss)
(unaudited).................... $ 8,756 $ (37,449)
Pro forma net income (loss) per
share--diluted (unaudited)..... $ 0.08 $ (0.19)
<CAPTION>
December 31,
--------------------------------------------
1996 1997 1998 1999
-------------- ------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 3,215 $ 5,967 $ 26,841 $1,343,459
Working capital................. 4,883 2,391 20,453 1,305,380
Total assets.................... 13,629 31,481 96,785 2,050,384
Long-term debt.................. 167 400 352 3,185
Convertible subordinated notes.. -- -- -- 566,250
Total shareholders' equity...... 12,859 26,635 80,724 1,420,221
</TABLE>
36
<PAGE>
eCREDIT.COM SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations--eCredit.com" and eCredit.com's Consolidated Financial Statements
and Notes to those statements and other financial information included
elsewhere in this Prospectus. The selected Consolidated Statements of
Operations data for the years ended December 31, 1997, 1998 and 1999 and the
selected Consolidated Balance Sheet data as of December 31, 1998 and 1999 are
derived from eCredit.com's audited Consolidated Financial Statements included
in this Prospectus. The selected Consolidated Statement of Operations data for
the years ended December 31, 1995 and 1996 and selected Consolidated Balance
Sheet data as of December 31, 1995, 1996 and 1997 are derived from audited
financial statements not included in this Prospectus. The pro forma selected
Consolidated Statement of Operations data and pro forma selected Consolidated
Balance Sheet data reflects ICG's acquisition of eCredit.com Shares as if it
occurred on January 1, 1999 and December 31, 1999, respectively. Pro forma
consolidated data gives effect to the (i) conversion of all of eCredit.com's
outstanding shares of preferred stock into a total of 15,568,622 shares of
common stock, (ii) acceleration and exercise of 1,579,853 common stock options
at a weighted average exercise price of $2.32 which, in conjunction with the
issuance of a warrant (discussed below), results in a stock compensation charge
of $62 million and an acceleration of deferred compensation of $8.8 million
(this assumes an implied price per eCredit.com share of $48.68), and (iii)
issuance of a warrant to Internet Capital Group, valued at approximately $40
million, in connection with the Exchange Offer, which warrant is exercisable
upon an initial public offering of eCredit.com's common stock. The pro forma
share data excludes 5,283,177 shares of common stock issuable upon exercise of
outstanding options as of December 31, 1999 at a weighted average exercise
price of $2.35 per share and 191,378 shares of common stock issuable upon
exercise of warrants outstanding as of December 31, 1999 at an exercise price
of $25.08 per share. The historical and pro forma results presented here are
not necessarily indicative of results to be expected in any future period.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 1999
------- ------- ------- -------- --------- -----------
Pro Forma
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data: (In thousands except per share amounts)
Revenues:
License and related
implementation........ $ 3,032 $ 3,131 $ 3,358 $ 3,763 $ 6,702 $ 6,702
Services............... 102 139 585 1,061 1,699 1,699
------- ------- ------- -------- --------- ---------
Total revenues....... 3,134 3,270 3,943 4,824 8,401 8,401
------- ------- ------- -------- --------- ---------
Cost of revenues:
License and related
implementation........ 1,122 1,885 2,153 1,987 5,230 5,230
Services............... 100 171 440 708 1,195 1,195
------- ------- ------- -------- --------- ---------
Total cost of
revenues............ 1,222 2,056 2,593 2,695 6,425 6,425
------- ------- ------- -------- --------- ---------
Gross profit............ 1,912 1,214 1,350 2,129 1,976 1,976
------- ------- ------- -------- --------- ---------
Operating expenses:
Sales and marketing.... 666 494 1,151 2,262 11,225 11,225
Research and
development........... 657 30 419 472 823 823
General and
administrative........ 887 1,278 1,598 1,802 4,159 4,159
Stock compensation..... -- -- -- -- 2,286 113,135
------- ------- ------- -------- --------- ---------
Total operating
expenses............ 2,210 1,802 3,168 4,536 18,493 129,342
------- ------- ------- -------- --------- ---------
Loss from operations.... (298) (588) (1,818) (2,407) (16,517) (127,366)
Interest and other
income (expense), net.. (91) (87) (128) (120) 144 144
------- ------- ------- -------- --------- ---------
Net loss................ (389) (675) (1,946) (2,527) (16,373) (127,222)
Accretion of preferred
stock.................. -- -- -- (5,081) (312,179) --
------- ------- ------- -------- --------- ---------
Net loss attributable to
common stockholders.... $ (389) $ (675) $(1,946) $ (7,608) $(328,552) $(127,222)
======= ======= ======= ======== ========= =========
Basic and diluted net
loss per common share.. $ (0.16) $ (0.32) $ (0.93) $ (3.62) $ (110.02) $ (5.48)
Shares used to compute
basic and diluted net
loss per common share.. 2,363 2,100 2,100 2,100 2,986 23,212
<CAPTION>
December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 1999
------- ------- ------- -------- --------- -----------
Pro Forma
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 211 $ 46 $ 10 $ 2,312 $ 35,210 $ 38,870
Working capital
(deficit).............. (475) (1,184) (1,580) 1,761 31,963 35,623
Total assets............ 1,427 1,438 1,448 4,196 45,814 49,474
Capital lease
obligations, net of
current portion........ 123 67 129 99 69 69
Total redeemable
preferred stock........ 2,225 2,225 3,765 14,657 373,652 --
Total stockholders'
equity (deficit)....... (2,483) (3,158) (5,104) (12,318) (337,517) 39,795
</TABLE>
37
<PAGE>
RIGHTWORKS' SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of RightWorks"and RightWorks' financial statements and notes to
those statements and other financial information included elsewhere in this
Prospectus. The selected statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the selected balance sheet data as of
December 31, 1998 and 1999 are derived from RightWorks' audited financial
statements included in this Prospectus. The selected statement of operations
data for the years ended December 31, 1995 and 1996 and selected balance sheet
data as of December 31, 1995, 1996 and 1997 are derived from audited financial
statements not included in this Prospectus. The historical results presented
here are not necessarily indicative of results to be expected in any future
period.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997 1998 1999
----- ----- ------- ------- -------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue:
Product license................ $ -- $ 223 $ -- $ -- $ 2,150
Services....................... -- -- -- -- 274
Discount related to warrant.... -- -- -- -- (272)
----- ----- ------- ------- -------
Total revenue.................. -- 223 19 75 2,152
----- ----- ------- ------- -------
Cost of revenue.................. -- 59 -- -- 430
----- ----- ------- ------- -------
Gross Profit..................... -- 164 19 75 1,722
----- ----- ------- ------- -------
Operating Expenses:
Research and development....... 88 424 1,201 2,263 3,345
Sales and marketing............ -- 13 312 2,262 6,062
General and administrative..... 9 78 552 1,036 1,544
Amortization of deferred
compensation.................. -- -- -- -- 150
----- ----- ------- ------- -------
Total operating expenses....... 97 515 2,065 5,561 11,101
----- ----- ------- ------- -------
Loss from operations............. (97) (351) (2,046) (5,486) (9,379)
Interest and Other Income
(Expense), net.................. 1 9 29 (136) 70
----- ----- ------- ------- -------
Net Loss and Comprehensive Loss.. $ (96) $(342) $(2,017) $(5,622) $(9,309)
===== ===== ======= ======= =======
Basic and diluted net loss per
share........................... $(.12) $(.28) $ (1.44) $ (3.48) $ (5.05)
===== ===== ======= ======= =======
Shares used in computing basic
and diluted net loss per share.. 801 1,210 1,402 1,615 1,845
===== ===== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 72 $169 $688 $3,949 $11,922
Working capital (deficit)....................... 72 182 (22) 3,539 10,720
Total assets.................................... 81 288 871 4,256 15,769
Capital leases, less current portion............ -- -- -- -- 206
Notes payable, less current portion............. -- -- -- -- 2,423
Total shareholders' equity...................... 81 259 161 3,742 8,604
</TABLE>
38
<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 December 31, 1999, we
owned interests in 49 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.
39
<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 December 31, 1999, 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.
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Our partner companies accounted for under the equity method of accounting
at December 31, 1998 and 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner -------------------------
Company December 31, December 31,
Since 1998 1999
------- ------------ ------------
<S> <C> <C> <C>
EQUITY METHOD:
AsseTRADE.com, Inc. ...................... 1999 N/A 17%
Bidcom, Inc. ............................. 1999 N/A 35%
Blackboard Inc. .......................... 1998 35% 29%
Breakaway Solutions, Inc. ................ 1999 N/A 40%
CommerceQuest, Inc. ...................... 1998 N/A 28%
CommerX, Inc. ............................ 1998 34% 40%
ComputerJobs.com, Inc. ................... 1998 33% 33%
CourtLink, Inc. .......................... 1999 N/A 19%
eMarketWorld, Inc. ....................... 1999 N/A 42%
eMerge Interactive, Inc. ................. 1999 N/A 45%
Internet Commerce Systems, Inc. .......... 1999 N/A 43%
iSky, Inc. ............................... 1996 31% 31%
Jamcracker, Inc. ......................... 1999 N/A 24%
JusticeLink, Inc. ........................ 1999 N/A 37%
LinkShare Corporation..................... 1998 34% 34%
MetalSite General Partner, LLC............ 1999 N/A 47%
NetVendor, Inc. .......................... 1999 N/A 27%
ONVIA.com, Inc. .......................... 1999 N/A 23%
PaperExchange.com, Inc. .................. 1999 N/A 24%
InvestorForce.com ........................ 1999 N/A 49%
Residential Delivery Services, Inc. ...... 1999 N/A 38%
RetailExchange, Inc. ..................... 1999 N/A 30%
SageMaker, Inc. .......................... 1998 22% 21%
StarCite, Inc. ........................... 1999 N/A 43%
Syncra Software, Inc. .................... 1998 53% 35%
traffic.com, Inc. ........................ 1999 N/A 20%
United Messaging, Inc. ................... 1999 N/A 37%
Universal Access, Inc. ................... 1999 N/A 24%
USgift.com, Inc. ......................... 1999 N/A 38%
VerticalNet, Inc. ........................ 1996 N/A 34%
Vivant! Corporation....................... 1998 23% 31%
</TABLE>
As of December 31, 1999, we owned voting convertible preferred stock in
all companies listed except Breakaway Solutions and VerticalNet. In addition,
we also owned common stock in CommerceQuest, iSky, SageMaker, and Universal
Access. Our voting ownership in Breakaway Solutions and VerticalNet consisted
only of common stock at December 31, 1999. VerticalNet was consolidated at
December 31, 1998. CommerceQuest and Universal Access were accounted for under
the cost method of accounting at December 31, 1998. We have representation on
the board of directors of all of the above partner companies. During the year
ended December 31, 1999, Sky Alland Marketing changed its name to iSky.
Subsequent to December 31, 1999, Plan Sponsor Exchange, Inc. changed its name
to InvestorForce.com.
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. One equity
method partner company at December 31, 1998 generated a net profit of less than
$1 million in 1998; however, this partner
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<PAGE>
company did not generate a profit in 1999. 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 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner -------------------------
Company December 31, December 31,
Since 1998 1999
------- ------------ ------------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc......... 1999 N/A 8%
AUTOVIA Corporation................. 1998 15% 16%
Benchmarking Partners, Inc.......... 1996 13% 12%
ClearCommerce Corp.................. 1997 17% 15%
Collabria, Inc...................... 1999 N/A 11%
CommerceQuest, Inc.................. 1998 0% N/A
Context Integration, Inc............ 1997 18% 14%
Deja.com, Inc....................... 1997 0% 2%
e-Chemicals, Inc.................... 1998 0% 0%
Entegrity Solutions Corporation..... 1996 12% 11%
PrivaSeek, Inc...................... 1998 16% 8%
Servicesoft Technologies, Inc....... 1998 12% 5%
TRADEX Technologies, Inc............ 1999 N/A 10%
US Interactive, Inc................. 1996 4% 3%
</TABLE>
In most cases, we have representation on the board of directors of the
above companies, including those in which we hold non-voting securities. As of
December 31, 1999, we owned voting convertible preferred stock in all companies
listed except Deja.com, in which we owned non-voting convertible preferred
stock, and e-Chemicals, in which we owned non-voting convertible debentures. In
addition, we also owned common stock in Deja.com. We record our ownership in
debt securities at cost as we have the ability and intent to hold these
securities until maturity. In addition to our investments in voting and non-
voting equity and debt securities, we also periodically make advances to our
partner companies in the form of promissory notes. There were advances to cost
method partner companies totaling $2.1 million at December 31, 1999. During the
year ended December 31, 1999, RapidAutoNet Corporation changed its name to
AUTOVIA Corporation.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1998 and 1999 and are
expected to continue to incur substantial losses in 2000. Two cost method
partner companies were profitable in 1998, one of which was not profitable in
1999. None of our cost method partner companies have paid dividends during our
period of ownership and they generally do not intend to pay dividends in the
foreseeable future. US Interactive is accounted for under Statement of
Financial and Accounting Standards 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
42
<PAGE>
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
compared to 1998 as a result of consolidating Animated Images, Breakaway
Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts and no
longer consolidating VerticalNet 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.
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 Animated Images, Breakaway Solutions,
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.
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<PAGE>
Our consolidated net results of operations consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Summary of Consolidated Net Income (Loss)
Partner Company Operations...................... $(4,779) $(14,081) $(103,418)
General ICG Operations.......................... (1,801) 27,980 73,641
------- -------- ---------
Net income (loss) -- Consolidated Total......... $(6,580) $ 13,899 $ (29,777)
======= ======== =========
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) from Partner Company Operations
before income taxes, 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
(2,054) (3,513) (23,389)
Other income (expense), 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
======= ======== =========
Consolidated Total
Revenue......................................... $ 792 $ 3,135 $ 16,536
Operating expenses
Cost of revenue................................. 1,767 4,643 8,156
Selling, general and administrative............. 5,743 15,514 48,924
------- -------- ---------
Total operating expenses........................ 7,510 20,157 57,080
------- -------- ---------
(6,718) (17,022) (40,544)
Other income (expense), net..................... -- 30,483 67,384
Interest income................................. 264 1,306 9,631
Interest expense................................ (126) (381) (3,897)
------- -------- ---------
Income (loss) before income taxes, minority
interest and equity income (loss).............. (6,580) 14,386 32,574
Income taxes.................................... -- -- 23,722
Minority interest............................... (106) 5,382 6,026
Equity income (loss)............................ 106 (5,869) (92,099)
------- -------- ---------
Net income (loss) -- Consolidated Total......... $(6,580) $ 13,899 $ (29,777)
======= ======== =========
Pretax income (loss)............................ $ 13,899 $ (53,499)
Pro forma income taxes.......................... (5,143) 16,050
-------- ---------
Pro forma net income (loss)..................... $ 8,756 $ (37,449)
======== =========
</TABLE>
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<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. Breakaway Solutions was accounted for
under the equity method of accounting for the three months ended December 31,
1999.
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 of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
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.
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
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.
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<PAGE>
Other Consolidated Companies--Analysis of the Year Ended December 31, 1999
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 of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
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 during the year ended December 31, 1999.
Animated Images and ICG Commerce generated aggregate revenues of approximately
$1.8 million during the period from acquisition in 1999 through December 31,
1999 and incurred aggregate operating expenses of $4.3 million during the same
period, primarily general and administrative expenses as they deploy their
business models. Also included in selling, general and administrative expenses
for the year ended December 31, 1999 was $.8 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 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
46
<PAGE>
staffing levels, higher facility costs, professional fees to support the growth
of VerticalNet's infrastructure and goodwill amortization related to
VerticalNet's 1998 acquisitions.
Equity Income (Loss)
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity
income (loss) fluctuates with the number of companies accounted for under the
equity method, our voting ownership percentage in these companies, the
amortization of goodwill related to newly acquired ownership interests in
equity method companies, and the net results of operations of these companies.
During the years ended December 31, 1998 and 1999 we utilized cash, stock, or
notes payable totaling $23.7 million and $495.6 million, respectively, to
acquire partner company interests accounted for under the equity method of
accounting which resulted in goodwill of $15.1 million and $293.7 million,
respectively, which is being amortized over 3 years. Without giving effect to
additional acquisitions in equity method companies subsequent to December 31,
1999, we expect goodwill amortization related to equity method companies to
approximate $102 million in 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.
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 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 23%
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.
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 of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
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.
47
<PAGE>
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.
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
566% for the year ended December 31, 1999 compared to 1998. 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 include $5.7 million of amortization expense related to
stock option grants. Without giving effect to any unearned compensation expense
related to equity granted subsequent to December 31, 1999, we expect to
recognize amortization of deferred compensation expense of $5.6 million in
2000, $3.4 million in 2001, $1.9 million in 2002, $.9 million in 2003 and $.2
million in 2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the issuances of stock by our partner companies to reflect the change in our
share of the net equity of these companies, and impairment charges related to
our ownership interests in and advances to partner companies.
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General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1999
----------- -----------
(In thousands)
<S> <C> <C>
Issuance of stock by VerticalNet................... $ -- $ 50,717
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
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)
Other.............................................. -- 6
----------- -----------
$ 30,483 $ 67,642
=========== ===========
</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 $50.7 million. This increase adjusted
our carrying value in VerticalNet and resulted 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, 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. 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.
In February 1998, we exchanged all of our holdings of Matchlogic, Inc.
for 763,820 shares of Excite, Inc. The $14.3 million market value of the Excite
shares received on the date of exchange was used to determine the gain of $12.8
million. Throughout the remainder of 1998, we sold 716,082 shares of Excite
which resulted in $30.2 million of proceeds and $16.8 million of gains. During
the three month period ended March 31, 1999, we sold 23,738 shares of Excite
which resulted in $2.5 million of proceeds and $2.1 million of gains.
In May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in
a non-operating gain before taxes of $2.7 million.
In April 1998, we exchanged all of our holdings of WiseWire for 191,922
shares of Lycos, Inc. The $5.3 million market value of the Lycos shares
received on the date of exchange was used to determine the gain
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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, we 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 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.
Interest Income
Our cash, cash equivalents and short-term investments are invested
primarily in money market accounts and highly liquid, high quality debt
instruments. During 1998, we received $38.2 million of proceeds from the sale
of our common stock and $36.4 million of proceeds from the sales of a portion
of our holdings in Excite and Lycos. During the 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 and 1999 was primarily due to the significant increase
in our cash and cash equivalents throughout 1998 and 1999 as a result of these
transactions.
Interest Expense
During 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 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
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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.
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 December 31, 1999, our only publicly traded partner
companies were VerticalNet, Breakaway Solutions and US Interactive. As a
result, there is significant risk that we may not be able to realize the
benefits of expiring carry forwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of a
portion of our Excite and Lycos holdings, and borrowings under bank credit
facilities.
We received equity commitments of $40 million in 1996, of which $13.7
million and $20.1 million was received in 1996 and 1997, respectively, and
$6.2 million of which was funded with an in-kind contribution of holdings of a
partner company in 1996. We received additional commitments of $70 million in
1998, of which $38 million was received in 1998 and $32 million was received
during the 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).
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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).
In May 1999, we issued $90 million of convertible subordinated notes
which converted to 14,999,732 shares of our common stock upon the completion of
our initial public offering in August 1999. Upon the conversion of these notes,
we issued 3,000,000 warrants to purchase our common stock at $6.00 per share
through May 2002. In accordance with the terms of the notes, all accrued
interest was waived upon conversion.
Sales of Excite and Lycos stock generated proceeds of $36.4 million in
1998 and sales of Excite stock generated proceeds of $2.5 million 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 matures in April 2000,
is subject to a .25% unused commitment fee, bears interest, at our option, at
prime and/or LIBOR plus 2.5%, and is secured by substantially all of our assets
(including all of our holdings in VerticalNet). Borrowing availability under
the facility is based on the fair market value of our holdings of publicly-
traded partner companies (VerticalNet, Breakaway Solutions, eMerge Interactive,
ONVIA.com, Universal Access and US Interactive as of March 24, 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. Based
on the provisions of the borrowing base, borrowing availability at December 31,
1999 and March 24, 2000 was $50 million.
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 March 24, 2000, we were contingently
obligated for approximately $5.5 million of guarantee commitments and $93.7
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. Our revolving bank credit
facility matures in April 2000, at which time we may not be able to renew the
facility or obtain additional bank financing, or may only be able to do so on
terms not favorable or acceptable to us. In March 2000, we entered into an
agreement to increase the amount available under our bank credit facility to
$250 million.
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
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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.
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 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.
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 December 31, 1999,
$5.6 million of the obligation has been converted into 1,033,908 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.
During the period from January 1, 2000 through March 24, 2000 we utilized
$387.6 million to acquire interests in or make advances to new and existing
partner companies. These companies included: Arbinet
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Communications, AsseTRADE.com, AUTOVIA, Benchmarking Partners, BuyMedia,
Centrimed, ClearCommerce, Collabria, Commerce Quest, ComputerJobs.com,
CourtLink, e-Chemicals, Entegrity Solutions, eumediX, Eu Supply, FarmingOnLine,
FreeBorders, Industrial America, Internet Healthcare Group, iSky, LinkShare,
Logistics.com, Inc., eMetra, NetVendor, ONVIA.com, Servicesoft Technologies,
Simplexis, StarCite!, TALPX, TeamOn, Universal Access, and Vivant!
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 acquire a significant
interest in eCredit.com, Inc., a leading provider of Internet-based credit,
financing and related services. We will issue common stock worth approximately
$450 million to eCredit.com shareholders, which is subject to customary closing
conditions and regulatory approval. We expect the transaction to close in the
quarter ending June 30, 2000.
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 March 2000, we entered into an agreement to acquire a majority
interest in RightWorks, a leading provider of e-procurement software that
powers B2B exchanges. We will issue approximately $635 million of our common
stock (valued at $111.48 per share) to tendering RightWorks' preferred
shareholders (subject to adjustment based on the number of RightWorks' shares
tendered) and also will purchase newly issued RightWorks' shares for $22
million in cash. The transaction is subject to customary closing conditions and
regulatory approval. We expect the transaction to close in the quarter ending
June 30, 2000.
In March 2000, we entered into an agreement with Hutchison Whampoa Ltd.,
a Hong Kong based multi-national conglomerate, to acquire a majority interest
in Harbour Ring International Holdings, which will be renamed ICG AsiaWorks
Limited, with Hutchison Whampoa Ltd. Upon completion of the acquisition, and
under the terms of a separate agreement, a third party affiliated with
Hutchison Whampoa Ltd. would, at the request of ICG and subject to the approval
by the Stock Exchange of Hong Kong Limited and the Securities & Futures
Commission, be required to purchase the operating subsidiaries of ICG AsiaWorks
Limited at a fixed price for a two-year period from the closing date of the
acquisition, including assets and liabilities arising subsequent to the closing
date of the acquisition. We will expend approximately $117 million upon the
closing of this transaction which is expected to take place in the quarter
ending June 30, 2000, subject to customary closing conditions, regulatory
approval and completion of due diligence.
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 $320.88 on March 9, 2000, we will
record 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.
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. Upon conversion of the $70 million in convertible notes
(expected in the first quarter of 2000), our voting ownership in VerticalNet
will decrease from 35% to approximately 34%. In addition, we expect to record a
non-operating gain due to the increase in our share of VerticalNet's net equity
as a result of their issuance of shares.
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In January 2000, Breakaway Solutions announced it had signed a definitive
agreement to acquire EggRock Partners for 3,636,000 shares of its common stock
valued at $250 million at the date of signing the definitive agreement.
Consummation of the transaction is subject to customary closing conditions and
is expected to close in the quarter ending June 30, 2000. Upon closing, 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.
In March 2000, VerticalNet announced it had signed a definitive agreement
to acquire 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. Consummation of the transaction is subject to customary
closing conditions and is expected to close in the second quarter of 2000. Upon
closing, our voting ownership of VerticalNet will decrease from 33% to
approximately 31%. In addition, we expect to record a non-operating gain due to
the increase in our share of VerticalNet's net equity as a result of their
issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We 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 March 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
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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 December 31, 1999 include equity
positions in companies in the Internet industry sector, including Excite@Home;
Breakaway Solutions, Inc.; i2 Technologies, Inc.; Lycos, Inc.; US Interactive,
Inc.; and VerticalNet, Inc., many of 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. As of December 31,
1999, a 20% adverse change in equity prices, based on a sensitivity analysis of
our public holdings as of December 31, 1999, would result in an approximate
$522.4 million decrease in the fair value of our public holdings. A significant
portion of the value of the potential decrease in equity securities, or $411.1
million, consisted of our holdings in VerticalNet.
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 $835.2 million
versus a carrying value of $556.3 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 December 31, 1999, 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 December 31, 1999, 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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eCREDIT.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Consolidated Financial Data--eCredit.com" and eCredit.com's
consolidated financial statements and the notes to those statements included
elsewhere in this Prospectus. The following discussion contains forward-looking
statements based on eCredit.com's current expectations, assumptions, estimates
and projections about eCredit.com and its industry that involve risks and
uncertainties. eCredit.com's actual results could differ materially from those
indicated in these forward looking statements as a result of certain important
factors, as more fully described in the "Risk Factors" section and elsewhere in
this Prospectus.
General
eCredit.com is a provider of credit management and financing solutions
for business-to-business and business-to-consumer commerce. From inception
through February 2000, its activities consisted primarily of the development
and licensing of eCredit.com software systems which automate and manage credit
and financing decisions. In the fourth quarter of 1999, it introduced the
Global Financing Network, an Internet-based product, which enables real-time
credit evaluation and financing of commerce. As of December 31, 1999,
eCredit.com had recognized no transaction revenues from the Global Financing
Network. eCredit.com's future success will depend in large part upon widespread
customer and lender acceptance of its Global Financing Network, and there can
be no assurance that eCredit.com can achieve this acceptance.
Prior to February 2000, eCredit.com's revenues consisted principally of
license and related implementation revenues, which included license fees
derived from licensing the eCredit.com systems to business customers and
lenders and the related fees from customization, modification, integration and
installation services, which are referred to as related implementation
services. eCredit.com's systems have historically been licensed, and the
eCredit.com Enterprise Credit Management System continues to be licensed, for a
one-time perpetual license fee. When the software system does not require
significant implementation services, the license fees are recognized upon
delivery of the software and fees for service 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, the license fee and fees for these services are
recognized as the implementation 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 delivery of systems and revenues from software support
contracts. Revenues from 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.
In November 1999, eCredit.com began to license the eCredit.com Enterprise
Lending System to lenders for transaction-based fees on the Global Financing
Network in addition to the practice of a one-time perpetual license fee. Under
this new model, lenders will pay a transaction processing fee each time they
use the eCredit.com Enterprise Lending System to process a request for credit.
Business customers will typically pay a transaction fee to eCredit.com
for each credit or financing request sent to the Global Financing Network.
Lenders on the Global Financing Network will typically pay a transaction fee to
eCredit.com when the end-user customer accepts an offer for financing by the
lender; the fee amount depends on the size of the amount financed. If lenders
use the eCredit.com Enterprise Lending System, they will also pay a transaction
processing fee to eCredit.com each time they use the system to process a
request for credit on the Global Financing Network.
Commencing with the roll out of the Global Financing Network in 2000,
eCredit.com's consolidated statement of operations will include a new revenue
line called "Transaction Fees and Related Implementation
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Revenues." Transaction fees and related implementation revenues consist of
revenues derived from transaction fees paid by lenders who use the eCredit.com
Enterprise Lending System on a transaction fee basis and by business customers
and lenders who process transactions on the Global Financing Network.
eCredit.com recognizes transaction fee revenues when the transaction has been
completed, provided that the related contract is executed, fees are fixed and
determinable and collection is probable. Implementation revenues arising from
the Global Financing customers are recorded as services are performed.
Commencing in the fourth quarter of 1999 and continuing into 2000,
eCredit.com expects to incur significantly increased operating expenses in
connection with the introduction and marketing of the Global Financing Network,
as well as the expansion of its sales force. As a result, eCredit.com expects
its net loss in 2000 will exceed its net loss in 1999. In view of eCredit.com's
future dependence on the Global Financing Network for growth in revenues, its
transition to a business model that relies on transaction-based fees rather
than one-time license fees and the increased operating expenses needed to
support the introduction of the network, eCredit.com's historical financial
results are not a meaningful indication of its future financial performance.
Since its inception, eCredit.com has provided its employees, directors
and consultants with equity-based compensation. Stock compensation expenses
represent noncash charges related to stock options given to employees,
directors and consultants. For employee and director grants, the compensation
charge reflects the difference between the exercise price of the options and
the fair value of the underlying common stock on the date of the grant. This
compensation charge is deferred initially and amortized to expense over the
vesting period of the applicable options. For non-employee grants, the
compensation charge reflects the fair value of the options on the initial
measurement date (typically the date of grant for those exercisable immediately
or with fixed vesting periods, or the date when vesting becomes fixed for those
with variable vesting periods), as well as subsequent remeasurements of fair
value until such non-employee options vest. Accordingly, eCredit.com cannot
currently estimate the additional charges of 81,666 non-employee stock options
outstanding of December 31, 1999, related to future remeasurements of fair
value until the respective options vest. As of December 31, 1999, $35,006,000
of deferred stock compensation remained to be amortized to expense in future
periods for stock options granted to employees, directors and consultants
through December 31, 1999.
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Results of Operations
The following table sets forth, for the periods presented, selected
consolidated financial data as a percentage of total revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
License and related implementation....... 85% 78% 80%
Services................................. 15 22 20
------- ------- --------
Total revenues........................... 100 100 100
======= ======= ========
Cost of revenues:
License and related implementation....... 55% 41% 63%
Services................................. 11 15 14
------- ------- --------
Total cost of revenues................... 66 56 77
------- ------- --------
Gross profit............................... 34 44 23
------- ------- --------
Operating expenses:
Sales and marketing...................... 29% 47% 134%
Research and development................. 11 10 10
General and administrative............... 40 37 49
Stock compensation....................... -- -- 27
------- ------- --------
Total operating expenses................. 80 94 220
------- ------- --------
Loss from operations....................... (46) (50) (197)
Interest and other income (expense), net... (3) (2) 2
------- ------- --------
Net loss................................... (49)% (52)% (195)%
======= ======= ========
</TABLE>
Comparison of Years Ended December 31, 1997, 1998 and 1999
Revenues. Total revenues increased 22% from $3.9 million in 1997 to $4.8
million in 1998, and 74% to $8.4 million in 1999. These increases resulted
primarily from licenses and related implementations of the eCredit.com systems
to new business customers and expanded services for existing business
customers.
Cost of revenues. Costs of revenues have historically consisted primarily
of payroll and related costs for personnel involved in developing and
implementing eCredit.com's software systems, consulting and maintenance. Cost
of revenues increased 4% from $2.6 million in 1997 to $2.7 million in 1998, and
138% to $6.4 million in 1999. These increases were primarily attributable to
additional costs associated with the increased revenues. eCredit.com's gross
profit increased from 34% of total revenues in 1997 to 44% in 1998, and
decreased to 23% in 1999. This gross profit improvement in 1998 reflected the
increase in revenues, improved utilization of project engineers and lower
implementation costs which resulted from the use of process automation tools
and improved business procedures developed over time. During 1999 eCredit.com
made a strategic decision to discount the implementation fees related to
migrating its customers with customized solutions to a standard platform. The
investment in this program resulted in the decrease in 1999 gross margin.
eCredit.com believes this will enable it to more efficiently service its
customers in the future.
Sales and marketing. Sales and marketing expenses increased from $1.2
million in 1997 to $2.3 million in 1998, and $11.2 million in 1999. These
increases were primarily attributable to the initiation of
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advertising campaigns and promotional activities related to introducing the
Global Financing Network, as well as to the hiring of additional employees,
opening new offices and related expenses required to introduce the Global
Financing Network. eCredit.com expects sales and marketing expenses to increase
as it continues to expand the sales force and increase marketing activity.
Research and development. Research and development expenses increased
from $419,000 in 1997 to $472,000 in 1998, and $823,000 in 1999. The increases
in 1998 were attributable to increased headcount and additional costs
associated with development of and improvements to the eCredit.com systems. The
increases in 1999 were primarily attributable to the hiring of additional
research and development personnel and costs related to enhancing the features,
content and functionality of the eCredit.com systems and Global Financing
Network. eCredit.com expects research and development expenses to increase as
it continues to add new features to the Global Financing Network.
General and administrative. General and administrative expenses increased
13% from $1.6 million in 1997 to $1.8 million in 1998, and 131% to $4.2 million
in 1999. These increases were primarily attributable to increased headcount in
an effort to expand operations and the infrastructure to support future growth,
as well as increased legal and accounting expenses. eCredit.com expects general
and administrative expenses to increase as it expands its operations and
infrastructure to support future growth.
Stock compensation. eCredit.com recorded deferred stock compensation of
$37.2 million and amortized $2.2 million to stock compensation expense in 1999
related to restricted stock awards and stock options granted to employees,
directors and advisors. The remaining total deferred stock compensation is
being amortized over the vesting period of the individual options. No stock
compensation was recorded in 1997 and 1998.
Interest and other income (expense), net. Interest and other income
(expense), net consists primarily of interest expense related to short-term
notes payable and lease obligations, offset partially by interest earned on the
short-term investment of cash. Interest and other income (expense), net
decreased from a net expense of $128,000 in 1997 to a net expense of $120,000
in 1998. This decrease was primarily attributable to the offsetting effect of
$27,000 of interest income resulting from increased cash available for
investment. Interest and other income (expense), net increased from a net
expense of $120,000 in 1998 to a net income of $144,000 in 1999. This increase
was primarily attributable to a decrease in interest expense resulting from
decreased outstanding borrowings, an increase in interest income resulting from
increased cash available for investment from fourth quarter financings and
$31,000 of other income in the 1999 period.
Liquidity and Capital Resources
Since inception, eCredit.com has incurred significant losses. It has met
its cash requirements primarily through the sale of preferred stock and the use
of notes payable and capital leases. eCredit.com has received capital from
investors in five private financings totaling $57.7 million through December
31, 1999.
Net cash used in operating activities was $11.9 million in 1999 as
compared to $2.4 million in 1998. This increase in cash used in operating
activities was primarily attributable to increased expenses associated with the
development and marketing launch of the Global Financing Network and expansion
of the sales force. Net cash used in operating activities was $2.4 million in
1998 as compared to $1.3 million in 1997. In each of these periods,
eCredit.com's principal operating cash requirements were to fund its working
capital needs. In future periods, eCredit.com expects that operating cash
requirements will increase and that a significant portion of its cash used in
operating activities will be attributable to the expansion of the Global
Financing Network and international operations.
Net cash used in investing activities was $3.3 million in 1999 as
compared to $369,000 in 1998. The increase in cash used in investing activities
was primarily attributable to increased purchases of equipment to
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support eCredit.com's expanding organization and to investment in capitalized
costs incurred in the development of the Company's internet-based technology,
the Global Financing Network. Net cash used in investing activities was
$369,000 in 1998 and $157,000 in 1997, primarily attributable to purchases of
equipment.
Net cash provided by financing activities was $48.1 million in 1999 as
compared to $5.1 million in 1998. In 1999, net cash provided by financing
activities consisted primarily of proceeds from bank borrowings of $1.7 million
under the credit facility with Silicon Valley Bank, $3 million in bridge loans
which were converted into preferred stock in October 1999, and net cash
proceeds of $44.8 million from the issuance of preferred stock. In conjunction
with the issuance of restricted common stock, eCredit.com received full
recourse notes receivable from officers of the Company in the amount of $4.2
million. The notes bear interest at 6.02% and are payable in full by October
2005. Net cash provided by financing activities was $5.1 million in 1998 as
compared to $1.4 million in 1997. Net cash provided by financing activities in
1998 consisted primarily of net proceeds of $4.9 million from the issuance of
preferred stock. In addition, bridge loans issued during 1998 totaling $1.3
million were converted into shares of preferred stock. In 1997, net cash
provided by financing activities consisted primarily of proceeds of $1.5
million derived from the issuance of preferred stock.
As of December 31, 1999, eCredit.com had $35.2 million of cash and cash
equivalents and accounts receivable of $4.2 million. As of that date, its
principal commitments consisted of obligations outstanding under capital leases
in the amount of $145,000, accounts payable of $3.0 million and total notes
payable of $1.6 million. eCredit.com currently has commitments for capital
expenditures of approximately $1.1 million for furniture and equipment for its
new operating facility in Dedham, Massachusetts and for computer and network
systems for the Global Financing Network and for the infrastructure to support
its expanding operations. eCredit.com further anticipates that with the
expansion of the Global Financing Network it will need to commit significant
resources to promote its brand, expand its product and service offerings,
increase its staff and enhance its infrastructure. In August 1999, eCredit.com
leased 38,300 square feet of office space that will become the principal
facility for its sales, marketing, consulting services, research and
development and administrative offices. The lease expires in December 2007 and
provides for future minimum lease payments of $4.4 million as of December 31,
1999. In addition, the lease obligations are secured by standby letters of
credit amounting to $780,000 on December 31, 1999.
In May 1998, eCredit.com entered into a credit facility with Silicon
Valley Bank, which was amended and restated in July 1999 and amended in
November 1999 following the closing of an equity financing. The facility
provides eCredit.com with a $3.0 million revolving line of credit and an
aggregate of $2.0 million for two equipment lines of credit. The revolving line
expires in July 2000 and the equipment lines expire in March 2003. As of
December 31, 1999, no amounts were outstanding under the revolving line of
credit and $1.6 million was outstanding under the equipment lines of credit.
Interest on borrowings under the facility are payable monthly at the prime rate
plus .75% for extensions under the revolving line of credit and at the prime
rate plus 1% for extensions under the equipment lines of credit. Borrowings are
secured by substantially all of the assets of eCredit.com. Under the terms of
the credit facility, without the bank's approval eCredit.com may not have a
material change in ownership or management of greater than 25%, may not incur
or assume other indebtedness, and may not declare or pay any dividends, or
redeem, retire or purchase any of its capital stock. eCredit.com will seek to
obtain the bank's approval of the Exchange Offer prior to the expiration of the
Exchange Offer.
eCredit.com expects to seek additional financing through additional
rounds of private equity financing or an initial public offering. In the event
that the Company was unable to raise further financing to meet its anticipated
cash needs for working capital and capital expenditures, eCredit.com 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. eCredit.com cannot be certain that
additional financing will be available to it on favorable terms when required,
if at all. If eCredit.com raises additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of its
stockholders may be reduced, and these newly-issued securities may have rights,
preferences or privileges senior to those of existing stockholders.
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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, AcSEC issued SOP No. 98-9, "Modification of SOP No. 97-
2, Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-
9 amends SOP 97-2 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. 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. eCredit.com 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 SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", 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.
eCredit.com, to date, has not engaged in derivative and hedging activities, and
accordingly does not believe that the adoption of SFAS No. 133 will have a
material impact on its financial reporting and related disclosures. eCredit.com
will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the Effective
Date of the FASB Statement No. 133", in 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB101), "Revenue Recognition in Financial
Statements." SAB101 summarizes the application of generally accepted accounting
principles to revenue recognition in financial statements. On March 24, 2000,
the SEC issued an amendment to SAB101 delaying the effective date for certain
companies. eCredit.com will adopt SAB101 in the second quarter of fiscal 2000
and is presently analyzing the impact that SAB101 will have on its financial
statements. Based on the eCredit.com's review to date, SAB101 is not expected
to materially impact eCredit.com's financial position or operating results.
Year 2000 Compliance
The failure of eCredit.com, or the failure of its key business partners,
service vendors, suppliers, manufacturers or customers, to be Year 2000
compliant could have material adverse consequences on eCredit.com's business
and results of operations. Such consequences could include difficulties in
operating the Global Financing Network effectively and conducting other
essential and fundamental business operations. As of the date of this
Prospectus, eCredit.com has not experienced problems related to the Year 2000
computer issue.
Product Testing. eCredit.com has tested its software products for Year
2000 compliance. eCredit.com derived its testing method from its review and
analysis of the Year 2000 testing practices of other software vendors, relevant
industry Year 2000 compliance standards and the specific functions and
operating environments of its products. The tests were run on all supported
platforms for each current release of the eCredit.com products and included
testing for date calculations with test numbers starting in 1999 and going
beyond the year 2000. Based on these tests, eCredit.com believes its current
software products to be Year 2000 compliant with respect to date calculations.
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External Vendors and Third-Party Supplied Software. The systems and
software of third parties on which eCredit.com relies may contain errors or
faults with respect to the Year 2000. For example, eCredit.com depends on
telecommunications vendors to maintain its network, hosting vendors to host
eCredit.com's Web site, and software, hardware and systems for use in its
administrative, communications, accounting, database, security, network,
electronic mail, product development, Web site operations, telephone and other
systems. All third parties, whose systems are material to the operations of
eCredit.com, have posted their Year 2000 compliance statements on their Web
sites where they have made assurances that their systems are Year 2000
compliant. As part of eCredit.com's continuing Year 2000 plan, it will pursue
Year 2000 related corrections or updates offered by vendors.
The failure of software and computer systems from other third-party
suppliers to be Year 2000 compliant could have a material adverse effect on
eCredit.com. Known or unknown errors or defects that affect the operation of
eCredit.coms software and systems and those of third parties could result in
delay or loss of revenue, interruption of services, cancellation of customer
orders, diversion of development resources, damage to eCredit.com's reputation,
increased service and warranty costs and litigation costs.
Internal Systems. eCredit.com has reviewed its internally developed
management information and other systems to identify any products, services or
systems that may not be Year 2000 compliant. eCredit.com did not identify any
material Year 2000 problems with its internally developed computer systems.
Costs of Addressing Year 2000 Compliance. Based on its experiences,
eCredit.com does not believe it incurred, or will incur, significant expenses
or be required to invest heavily in computer system improvements to be Year
2000 compliant. As of March 31, 2000, eCredit.com had spent approximately
$100,000 and approximately 160 person-hours on Year 2000 issues. However,
significant uncertainty exists concerning the potential costs and effects
associated with Year 2000 compliance. Any Year 2000 compliance problems
experienced by customers, its vendors or eCredit.com could reduce demand for
its products, which could have a material adverse effect on eCredit.com's
business.
Customer Claims. eCredit.com may be subject to customer claims to the
extent its software products or the software products of others that it sells
fail to operate properly as a result of the occurrence of the Year 2000 dates.
Liability may result to the extent eCredit.com's products are not able to
store, display, calculate, compute and otherwise process date-related data. It
could also be subject to claims based on the failure of eCredit.com software
products or the software products of others that it sells to work with software
or hardware from other vendors.
Contingency Planning. eCredit.com's contingency plan focuses on those
activities and functions specifically related to processing customer orders. It
addresses only those types of failures for which contingency operations are
possible. The contingency plan does not address any types of failures for which
contingency operations would be impossible, such as any significant disruption
in the Internet which would prevent customers from processing transactions via
the Internet.
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RIGHTWORKS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Financial Data--RightWorks Corporation" and RightWorks' financial
statements and the notes to those statements included elsewhere in this
Prospectus. The following discussion and analysis contains forward-looking
statements based on RightWorks' current expectations, assumptions, estimates
and projections about RightWorks and its industry that involve risks and
uncertainties. RightWorks' actual results could differ materially from those
indicated in these forward-looking statements as a result of certain important
factors, as more fully described in the "Risks Factors" section and elsewhere
in this Prospectus.
Overview
RightWorks provides Internet-based exchange software for powering B2B
digital marketplaces. RightWorks' software, RightWorks 5.0, allows companies to
exchange goods and services online by managing the complex business
transactions that take place on online trading exchanges.
RightWorks was founded in September 1994 under the name of Media Kola,
Inc. In June 1998 RightWorks changed its name to RightWorks Corporation. Until
such time it was primarily developing its Internet-based software product,
RightWorks. In February 1999 it released and began selling RightWorks and
related services. Since then it has released subsequent versions of RightWorks
e-procurement software, and most recently released RightWorks 5.0 in January
2000. RightWorks currently markets the product in the United States and Canada
and primarily sells its product through its direct sales force and to a lesser
extent through indirect sales channels.
Source of Revenues and Revenue Recognition Policy
RightWorks primarily generates revenues from license fees, hosting fees,
transaction-based fees and service fees. RightWorks currently sells its
software to customers via two different models. Customers may either pay a fee
to license the software or they may pay a one-time fee together with a monthly
recurring hosting fee to access the software that is hosted for them at its
hosting provider. In addition to a license fee or hosting fees, each customer
who uses its software to host a B2B digital marketplace also pays transaction
based fees that are based upon the volume of transactions generated as a result
of the customer's digital marketplace. To date, hosting fees and transaction-
based fees have not represented a material portion of its revenues. Finally,
RightWorks generates service fees by providing maintenance, consulting and
training services. Customers who license its software generally purchase
maintenance contracts which provide software upgrades and technical support
over a stated term, typically twelve months. Additionally, customers may
purchase implementation consulting services from RightWorks, but it expects
consulting services to decrease as a percentage of revenues as it expects to
increasingly rely on third-party consulting organizations to deliver its
services directly to its customers. RightWorks also offers fee-based training
services to its customers. In the future, its revenue growth will depend upon
significantly increasing its licensing of its product and from realizing
significant transaction based fees.
Revenue Recognition. RightWorks has adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-4 ("SOP 98-4") which were issued by the American Institute of
Certified Public Accountants or "AICPA". RightWorks believes its current
revenue recognition policies and practices are consistent with SOP 97-2 and SOP
98-4. Additionally, the AICPA issued SOP 98-9 in December 1998, which provides
certain amendments to SOP 97-2, and is effective for transactions entered into
beginning January 1, 2000.
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RightWorks recognizes revenues from licenses upon delivery and acceptance
of the software if there is persuasive evidence of an arrangement or agreement,
the collection is probable, the fee is fixed or determinable, and there is
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of multiple-element arrangements. If an acceptance period
is required, license revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. RightWorks recognizes
transaction-based fees each month upon receipt of a report from the customer
indicating those fees are owed. Revenue from hosting arrangements is recognized
pro rata over the period of the hosting arrangement. RightWorks recognizes
revenues from consulting and training services as the services are provided but
recognizes maintenance service fees ratably over the term of the service
contract, typically twelve months. If a transaction includes both license and
service elements, the license fee is recognized on delivery and acceptance of
the software, provided the related services do not include significant
customization or modification of its base product and the payment terms for
licenses are not dependent on additional acceptance criteria. In cases where
license fee payments are contingent on the acceptance of services, recognition
of revenues is deferred for both the license and the service fees until the
acceptance criteria are met.
Results of Operations
The following table sets forth, for the periods presented, selected financial
data:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product license...................... $ 2,149,757 $ -- $ --
Services............................. 273,667 75,000 19,160
Discount related to warrant.......... (271,887) -- --
----------- ----------- -----------
Total revenue........................ 2,151,537 75,000 19,160
Cost of Revenue........................ 429,960 -- --
----------- ----------- -----------
Gross Profit........................... 1,721,577 75,000 19,160
----------- ----------- -----------
Operating Expenses:
Research and development............. 3,344,721 2,262,607 1,200,707
Sales and marketing.................. 6,061,872 2,261,838 312,691
General and administrative........... 1,543,769 1,036,573 551,936
Amortization of deferred
compensation........................ 150,578 -- --
----------- ----------- -----------
Total operating expenses............. 11,100,940 5,561,018 2,065,334
----------- ----------- -----------
Loss from operations................... (9,379,363) (5,486,018) (2,046,174)
Interest and Other Income (Expense),
net................................... 70,364 (135,547) 29,337
----------- ----------- -----------
Net Loss and Comprehensive Loss........ $(9,308,999) $(5,621,565) $(2,016,837)
=========== =========== ===========
Basic and diluted net loss per common
share................................. $ (5.05) $ (3.48) $ (1.44)
=========== =========== ===========
Shares used in computing basic and
diluted net loss per common share..... 1,845,000 1,615,000 1,402,000
=========== =========== ===========
</TABLE>
Comparison of Fiscal Years Ended December 31, 1999 and 1998
Revenues
Total revenues for the year ended December 31, 1999, after an adjustment
of $272,000 for discounts related to warrants, were $2.2 million. Total
revenues for the year ended December 31, 1998 were $75,000. In the year ended
December 31, 1999, gross revenues from Computer Sciences Corporation ("CSC")
represented approximately 86% of total revenues.
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License Revenues. License revenues for the year ended December 31, 1999,
before the deduction of the discount related to warrants described above, were
$2.1 million. RightWorks did not complete development of its principal product
until February 1999 and, accordingly, had no product revenue in 1998. After
deducting the warrant-related charge described above, net license revenues for
the year ended December 31, 1999 were $1.9 million, which related principally
to the arrangements with CSC.
Services Revenues. Services revenues include revenue from professional
services, maintenance fees, hosting fees and transaction fees. To date, hosting
and transaction fees have been immaterial. Services revenues for the year ended
December 31, 1999 were $274,000 compared to services revenues of $75,000 for
1998. The increase was primarily attributable to the increased software
licensing activity described above, which has resulted in increased revenues
from customer implementations and maintenance contracts.
In general, RightWorks expects that total revenues will fluctuate in
future periods depending on the timing and acceptance of new product and
service introductions, customer buying patterns, pricing actions taken by it,
competition and other factors.
Cost of Revenues
RightWorks delivers all of its software and documentation electronically
to its customers. Accordingly, it does not incur costs related to software
media, duplication or shipping or software documentation costs. Total cost of
revenues consists primarily of consulting, customer support and training costs.
Cost of revenues for the year ended December 31, 1999 were $430,000, or 20% of
total gross revenues. There were no costs of revenues for the period ended
December 31, 1998.
The increase resulted primarily from an increase in personnel-related
expenses due to the hiring and training of additional consulting, support and
training personnel.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses primarily
consist of employee salaries, benefits and commissions, and the costs of
seminars, promotional materials, trade shows and other sales and marketing
programs. Sales and marketing expenses for the year ended December 31, 1999
were $6.1 million, compared to sales and marketing expenses of $2.3 million for
the year ended December 31, 1998. The increase was attributable primarily to an
overall increase in the number of sales and marketing personnel as well as
increased commission expense and travel related expense resulting from
increased sales activity. The number of employees engaged in sales and
marketing increased to 31 at December 31, 1999 from 16 at December 31, 1998. In
addition, an increase in marketing-related expenses and allocated overhead
expenses contributed to the overall increase. RightWorks expects that the
dollar amount of sales and marketing expenses will continue to increase due to
the planned growth of its sales force, including the establishment of sales
offices in additional domestic and international locations.
Product Development Expenses. Product development expenses consist
primarily of personnel and related costs associated with its product
development efforts. Product development expenses for the year ended December
31, 1999 were $3.3 million, compared to product development expenses of $2.3
million for the year ended December 31, 1998. The increase was due primarily to
an increase in personnel-related expenses attributable to an increase in the
number of employees involved in its product development activities. It believes
that continued investment in product development is important to its future and
expects that the dollar amount of product development expenses will increase in
future periods.
General and Administrative Expenses. General and administrative expenses
primarily consist of employee salaries and related expenses for executive,
administrative and finance personnel. General and administrative expenses for
the year ended December 31, 1999 were $1.5 million, compared to product
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development expenses of $1.0 million for the year ended December 31, 1998. The
increase is attributable primarily to an increase in personnel-related expenses
and legal and consulting expenses. It expects general and administrative
expenses to increase in future periods as it adds additional personnel to
support its growth.
Amortization of Deferred Stock Compensation. During the year ended
December 31, 1999, amortization of deferred stock compensation was $151,000.
The deferred stock compensation is being amortized over the vesting periods of
the related options, generally four years.
Other Income, Net
Other income, net, consists of interest income, interest expense and
other non-operating expenses. Other income, net, for the year ended December
31, 1999 was net income of $70,000, compared to a net loss of $136,000 for the
year ended December 31, 1998. The increase is primarily attributable to
interest income resulting from higher average cash balances during the year
ended December 31, 1999.
Provision for Income Taxes
RightWorks incurred operating losses for all periods from inception
through December 31, 1999. It has recorded a valuation allowance for the full
amount of its net deferred tax assets, as the future realization of the tax
benefit is not currently likely. As of December 31, 1999, it had net operating
loss carryforwards of approximately $9,954,000 for federal and state income tax
purposes. These federal and state tax loss carryforwards are available to
reduce future taxable income and expire at various dates into fiscal 2019.
Under the provisions of the Internal Revenue Code, certain substantial changes
in its ownership may limit the amount of net operating loss carry-forwards that
could be utilized annually in the future to offset taxable income.
Comparison of Fiscal Years Ended December 31, 1998 and 1997
Revenues
Total revenues for the year ended December 31, 1998 were $75,000,
compared to total revenues of $19,000 for the year ended December 31, 1997.
Total revenues for both years consisted exclusively of revenues related to
royalties and services.
Cost of Revenues
Cost of revenues for the years ended December 31, 1998 and 1997 were not
material.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses for the year
ended December 31, 1998 were $2.3 million, compared to sales and marketing
expenses of $313,000 for the year ended December 31, 1997. The increase was
attributable primarily to an overall increase in the number of sales and
marketing personnel as well as increased commission expense and travel related
expense resulting from increased sales activity.
Product Development Expenses. Product development expenses for the year
ended December 31, 1998 were $2.3 million, compared to product development
expenses of $1.2 million for the year ended December 31, 1997. The increase was
primarily due to an increase in personnel-related expenses.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 were $1.0 million, compared to general and
administrative expenses of $552,000 for the
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year ended December 31, 1997. This increase was primarily attributable to an
increase in personnel-related expenses.
Other Income, Net
Other income, net, for the year ended December 31, 1998 was a net loss of
$136,000, compared to net income of $29,000 for the year ended December 31,
1997. This decrease is primarily attributable to lower average cash balances.
Liquidity and Capital Resources
RightWorks financed its operations through private sales of preferred
stock, with net proceeds of $20.0 million, and through bank loans and equipment
leases. As of December 31, 1999, it had outstanding lease liabilities of
$313,000 and a subordinated loan of $3.0 million. The subordinated loan
agreement
allows the lender to purchase shares of RightWork's Preferred Stock in an
amount equal to up to 30% of the $3.0 million loan amount at a price based on a
$20 million valuation of RightWorks, subject to increase pursuant to certain
anti-dilution rights. As confirmed in a Shareholder Agreement executed by the
lender in March 2000, the purchase right set forth in the subordinated loan
agreement represents the right to purchase 863,498 shares of Series B Preferred
Stock at $1.04 per share. As of December 31, 1999, it had $11.9 million in cash
and cash equivalents, and $10.7 million in working capital.
Net cash used in operating activities was $8.4 million, $5.1 million and
$1.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash flows used in operating activities in each period
reflect increasing net losses and, to a lesser extent, increases in accounts
receivable.
Net cash used in investing activities was approximately $61,000, $121,000
and $142,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash used in investing activities in each period primarily
reflects purchases of property and equipment.
Net cash provided by financing activities was $16.5 million, $8.5 million
and $2.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash provided by financing activities in 1999 primarily
reflects net proceeds of its sale of preferred stock, proceeds from the
issuance of a note payable and exercises of employee stock options, offset by
payments on capital lease obligations. Net cash provided by financing
activities in 1998 and 1997 primarily reflects net proceeds of its sale of
preferred stock and exercises of employee stock options, offset by payments on
capital lease obligations.
Capital expenditures, including capital leases, were $393,000, $121,000
and $142,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Its capital expenditures consisted of purchases of operating
resources to manage its operations, including computer hardware and software,
office furniture and equipment. RightWorks expects that its capital
expenditures will continue to increase in the future. Since inception,
RightWorks has generally funded capital expenditures either through the use of
working capital or with capital leases. RightWorks will be relocating its
headquarters in April 2000 and expects to spend from $2,000,000 to $3,000,000
in fiscal 2000 for computer and office equipment, furniture and fixtures and
leasehold improvements. It will also need to purchase additional operating
resources. It expects to fund these commitments from its existing cash and cash
equivalents.
RightWorks expects to experience significant growth in its operating
expenses, particularly sales and marketing expenses and research and
development expenses, for the foreseeable future in order to execute its
business plan. As a result, it anticipates that such operating expenses, as
well as planned capital expenditures, will constitute a material use of its
cash resources. RightWorks believes that the net proceeds from the sale of its
preferred stock will be sufficient to meet its working capital and operating
resource expenditure requirements for at least the next twelve months.
Thereafter, it may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, it may not be able to
raise it on acceptable terms or at all.
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Year 2000 Issues
RightWorks has tested its products and believes that it is able to
properly recognize date-sensitive information in the year 2000 and beyond. It
has also inquired of significant vendors of its internal business systems as to
their Year 2000 readiness and has tested its material internal systems. It
believes that, based on these tests and the assurances of its vendors, it will
not incur material costs to resolve Year 2000 issues for its products and
internal business systems. Furthermore, to date it has not experienced any Year
2000 problems and its customers or vendors have not informed it of any
significant Year 2000 problems. It could be exposed to a loss of revenues and
its operating expenses could increase if its products or material internal
business systems have Year 2000 problems. If it comes to its attention that
there are any Year 2000 problems with its products or that some of its third-
party hardware and software used in its internal systems are not Year 2000
compliant, then, as applicable, it will endeavor to make modifications to its
products or internal business systems, or purchase new internal business
systems, to quickly respond to the problem. The reasonably likely worst case
scenario for Year 2000 problems would be if a significant defect exists in its
product or in key internal business systems and a solution for such a problem
were not readily available. The direct costs already incurred by RightWorks to
date related to Year 2000 compliance are not material and it does not
anticipate incurring additional direct costs related to Year 2000 compliance.
Market Risk
RightWorks' exposure to market risk is limited to interest income
sensitivity, which is affected by changes in the general level of U.S. interest
rates, particularly because the majority of its investments are in short-term
debt securities issued by banks and other financial institutions. RightWorks
places its investments with high-quality issuers and limits the amount of
credit exposure to any one issuer. Due to the nature of its short-term
investments, RightWorks believes that it is not subject to any material market
risk exposure. RightWorks does not have any foreign currency or other
derivative financial instruments.
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. On March
24, 2000, the SEC issued an amendment to SAB 101 delaying the effective date
for certain companies. RightWorks will adopt SAB 101 in the second quarter of
fiscal 2000 and is presently analyzing the impact that SAB 101 will have on its
financial statements. Based on the RightWorks' review to date, SAB 101 is not
expected to materially impact Right Works' financial position or operating
results.
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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 24, 2000, we owned interests in 61 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 opened an office in London in late 1999 that
focuses on European B2B opportunities. We have staffed our London office with
two executives from one of Europe's leading private equity firms. These two
executives worked together on Internet acquisitions in Europe and cultivated a
broad network of technology and vertical market contacts. We anticipate opening
offices in continental Europe, Asia and Latin America during 2000. We plan to
staff these offices with personnel who will provide strategic guidance and
operational support to our partner companies operating in Europe, Asia and
Latin America.
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.
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. 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 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.
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. Operational Support. B2B e-commerce companies often have
difficulty obtaining senior executive level guidance in the many
areas of expertise successful companies need. We assist our
partner companies by providing access to skilled managers who
guide our partner companies in the following functional areas:
. Sales and Marketing. Several members of our Advisory Board and
management team provide guidance to our partner companies'
sales, marketing, product positioning and advertising efforts.
These individuals include Michael H. Forster, a former Senior
Vice President of Worldwide Field Operations at Sybase, Inc.
and currently one of our Senior Partners, Christopher H.
Greendale, a former Executive Vice President at Cambridge
Technology Partners and currently one of our Managing
Directors, Rowland Hanson, a former Vice President of Corporate
Communications at Microsoft Corporation and currently founder
of C. Rowland Hanson & Associates, Charles W. Stryker, Ph.D.,
President, Marketing Information Solutions, at IntelliQuest,
Inc., and Sergio Zyman, a former Vice President and Chief
Marketing Officer of the Coca-Cola Company.
. Executive Recruiting and Human Resources. Members of our
management team assist our partner companies in recruiting key
executive talent. These individuals include Rick Devine, one of
our Managing Directors and a former partner at Heidrick &
Struggles, Inc., an executive recruiting firm. In providing
this assistance, we leverage the contacts developed by our
network of partner companies, management and Advisory Board. We
believe that this is one of the most important functions that
we perform on behalf of our partner companies. B2B e-commerce
companies must locate executives with both industry and
Internet expertise. The market for these professionals is
highly competitive since few persons possess the necessary mix
of skills and experience.
. Information Technology. Our Chief Technology Officer, Richard
G. Bunker, is dedicated to helping our partner companies with
their information systems strategies and solving problems
relating to their current information technology. Members of
our Board of Directors and Advisory Board who provide guidance
in this area include K.B. Chandrasekhar, Chairman of the Board
of Directors of Exodus Communications, and Peter A. Solvik, the
Chief Information Officer of Cisco Systems, Inc.
. Finance. One of our Managing Directors, John N. Nickolas, an
experienced finance executive, is dedicated to providing
financial guidance to our partner companies in areas such as
corporate finance, financial reporting, accounting and treasury
operations. In providing these services, Mr. Nickolas leverages
the skills and experience of our internal finance and
accounting group, our partner company network and outside
consultants.
. Business Development. B2B e-commerce companies may be involved
in evaluating, structuring and negotiating joint ventures,
strategic alliances, joint marketing agreements, acquisitions
or other transactions. We provide assistance to our partner
companies in all these areas. Our management team, Advisory
Board, strategic investors and partner companies all assist in
this function.
Promote Collaboration Among Our Partner Companies
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in shared
knowledge and business contacts among our partner companies and the formation
of numerous strategic alliances. We promote collaboration formally by hosting
regularly scheduled seminars relating to partner company operational and
business issues. At these seminars, the executives of partner companies share
their experiences with each other, our management team and the Advisory Board.
For example, at a seminar 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
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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. 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
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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.
. Horizontal. One example of our horizontal market maker partner
companies is VerticalNet. As of March 24, 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 24, 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 design, 50% 1999
www.appliedintranet.com communication, and procurement
services for the apparel and sewn
goods industries.
Arbinet Communications, Telecommunications Provides an Internet-based 8% 1999
Inc. trading floor and clearinghouse
www.arbinet.com for telecommunications carriers
to purchase bandwidth.
AUTOVIA Corporation Auto Parts Developing a system to provide 20% 1998
www.autovia.net Internet-based auto parts
procurement for professional
automotive and truck repair
shops.
Bidcom, Inc. Construction Provides Internet-based project 35% 1999
www.bidcom.com planning and management services
for the construction industry.
BuyMedia.com, Inc. Advertising Provides B2B e-commerce solutions 36% 2000
www.buymedia.com for the buying and selling of
broadcast advertising.
CentriMed Healthcare Provides e-marketplace solutions 47% 2000
www.centrimed.com 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.
</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>
Commerx, Inc. Plastics Provides Internet-based 40% 1998
www.commerx.com procurement and sales of raw
materials, tools and maintenance
and repair products for the
plastics industry.
ComputerJobs.com, Inc. Technology Provides Internet-based job 33% 1998
www.computerjobs.com Employment screening and resume posting for
information technology
professionals, corporations and
staffing firms.
CourtLink Legal Provides online access to court 33% 1999
www.courtlink.com documents.
CyberCrop.com, Inc. Agriculture Developing a system to provide an 80% 1999
www.cybercrop.com 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 community 31% 1997
www.deja.com for potential purchasers to
access user comments on a variety
of products and services.
e-Chemicals, Inc. Chemicals Provides Internet-based sales and 48% 1998
www.e-chemicals.com distribution of industrial
chemicals.
eMerge Interactive, Inc. Livestock Provides Internet-based content, 22% 1999
www.emergeinteractive community and transaction
.com services in an online marketplace
for the cattle industry.
eMetra Ltd. Metals Developing a system to provide an 30% 2000
Internet-based exchange for
trading non-ferrous metals
EmployeeLife.com Healthcare Provides Internet-based solutions 52% 1999
www.employeelife.com for employee health benefits
management across the health care
industry.
eumediX Healthcare Developing a system to provide an 37% 2000
www.eumediX.com Internet-based content and
transaction service for European
hospitals to purchase goods and
services.
EuSupply Construction Provides online B2B market making 29% 2000
www.eu-supply.com services in Europe tailored to
meet the needs of the
construction industry and supply
chain.
FarmingOnLine Ltd. Agriculture Provides Internet-based content, 30% 2000
www.farmline.com 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 marketplace 36% 2000
Components and for the sale and procurement of
Supplies all major 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 Systems, Food Provides Internet-based product 43% 1999
Inc. introduction and promotion
www.icsfoodone.com services to wholesale and retail
food distributors.
Internet Healthcare Group Healthcare Provides an online marketplace 30% 2000
www.internethealthcare.com that facilitates B2B e-commerce
in the healthcare industry.
InvestorForce.com Asset Provides a Web-based community 49% 1999
www.investorforce.com Management for asset managers to reach fund
sponsors.
iParts Electronic Provides Internet-based sales and 66% 1999
www.ipartsupply.com Components 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 Partner, Metals Provides an Internet-based 47% 1999
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 sales and 24% 1999
www.paperexchange distribution of all grades of
.com pulp and paper.
Retail Exchange.com, Inc. Consumer Provides an online B2B 30% 1999
www.retailexchange.com Goods marketplace for the exchange of
excess consumer products.
Simplexis Education Provides value by helping school 33% 2000
www.simplexis.com 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 services 43% 1999
www.starcite.com for planning and managing
corporate meetings for event
planners.
TALPX Lumber Provides Internet-based 28% 2000
www.talpx.com electronic trading to the North
American lumber and panel
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>
Universal Access, Inc. Tele- Provides Internet-based ordering 25% 1999
www.universal communications for provisioning and access and
accessinc.com transportation exchange services
for network service providers
focused on business customers.
USgift.com Corporation Gift, Garden and Provides Internet-based sales and 38% 1999
www.USgift.com Home Decor distribution of gift, garden and
home decor accessories.
Horizontal:
asseTrade.Com, Inc. Used Capital Provides Internet-based asset and 30% 1999
www.assetrade.com Equipment inventory recovery, disposal and
management solutions.
eMarketWorld, Inc. Special Event Provides industry-specific Web- 42% 1999
www.emarketworld.com Services based conferences and expositions
that help businesses understand
the Internet.
ICG Commerce, Inc. Sourcing Provides strategic sourcing 60% 1999
www.icgcommerce.com consulting and on-line Internet
purchasing.
NetVendor, Inc. Asset Provides B2B, industry-specific 27% 1999
www.netvendor.com Disposition Internet commerce solutions for
mid-size manufacturers and
distributors of automotive,
industrial and electronic
products.
ONVIA.com, Inc. Small Business Provides small businesses with a 23% 1999
www.onvia.com Services wide breadth of tailored products
and services over the Internet.
Residential Delivery Logistics Provides home delivery services 38% 1999
Services, Inc. to e-commerce companies,
www.rdshome.com retailers, and catalog companies
through a branded network of
local agents.
VerticalNet, Inc. Industrial Provides industry-specific Web- 34% 1996
www.verticalnet.com Services based trade communities for
businesses and professionals.
Vivant! Corporation Consulting Provides process automation and 39% 1998
www.vivantcorp.com 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 24,
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 24, 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, Provides e-commerce best practices research 18% 1996
Inc. and consulting services to maximize return on
www.benchmarking.com investment from demand/supply chain and e-
business initiatives.
Context Integration, Provides systems integration services focused 14% 1997
Inc. on customer support, data access and e-
www.context.com 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 29% 1998
www.blackboard.com applications that enable them to host classes
and training on the Internet.
ClearCommerce Corp. Provides comprehensive e-commerce solutions 15% 1997
www.clearcommerce.com including transaction and payment processing,
credit card authorization, fraud tracking and
reporting functions.
Entegrity Solutions Provides encryption software to secure 11% 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 Provides tools and services used by its 5% 1998
Technologies, 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, Provides application service hosting, e- 40% 1999
Inc. commerce, consulting and systems integration
www.breakaway.com services to growing companies.
</TABLE>
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<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 26% 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- 8% 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 36% 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 20% 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
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for their products; and management consultants and systems integrators seeking
to refine their ability to effectively support their clients.
We were introduced to Benchmarking Partners through a member of our Board
of Directors. We have helped Benchmarking Partners recruit key managers and are
currently helping it build and position its best practice e-commerce Web site.
Benchmarking Partners assisted us in assessing enterprise software markets and
provides information technology advice to other partner companies. Benchmarking
Partners is also working with 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.
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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 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 24, 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
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markets for United States B2B e-commerce companies. The Department
of Commerce is negotiating with the European Union to provide
exemptions from the European Union regulations, but the outcome of
these negotiations is uncertain.
. Regulation of Communications Facilities. To some extent, the rapid
growth of the Internet in the United States has been due to the
relative lack of government intervention in the marketplace for
Internet access. Lack of intervention may not continue in the
future. For example, several telecommunications carriers are
seeking to have telecommunications over the Internet regulated by
the Federal Communications Commission in the same manner as 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 24, 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; and London, England.
Employees
As of March 24, 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 company, Internet Capital
Group, L.L.C. was treated for income tax purposes as a partnership with taxes
on the
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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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eCREDIT.COM'S BUSINESS
eCredit.com is a provider of credit management and financing solutions
for business-to-business and business-to-consumer commerce. eCredit.com's
products allow businesses and lenders to automate and manage credit and
financing decisions in real time.
eCredit.com's systems and services consist of the eCredit.com Enterprise
Credit Management System, the eCredit.com Enterprise Lending System, and the
Global Financing Network. The eCredit.com systems are network applications used
to automate and streamline the credit management and financing process. The
eCredit.com Enterprise Credit Management System is designed to enable
businesses to reduce bad debts and operating costs, improve productivity and
increase revenues by automating the credit and collections cycle. The
eCredit.com Enterprise Lending System is a standardized credit-processing
platform that enables lenders to automate and manage the credit approval
process in real time for both consumer and business credit. eCredit.com's
Global Financing Network is an Internet-based, real time global network for
credit approval and financing. Through a common electronic network on which
multiple lenders participate, each business customer of the Global Financing
Network is able to create a private network with selected lenders to provide
financing to buyers of products from that business customer.
As of March 31, 2000, eCredit.com had a total of 279 employees. Of that
total, 83 were in research and development, 11 were in business development, 90
were in sales and marketing, 64 were in implementation and consulting services,
13 were in customer support and training, and 18 were in administration and
finance. Of these employees, 201 were located in the United States, 70 were
located in Bangalore, India and eight were located in Europe.
eCredit.com is a Delaware corporation. Its principal executive office is
located at 20 CareMatrix Drive, Dedham, MA 02026-6149 and its telephone number
is (781) 752-1200. eCredit.com maintains a site on the World Wide Web at
www.ecredit.com. The information contained on its Web site is not part of this
Prospectus.
eCredit.com, the eCredit.com logo, eCredit.com Enterprise Credit
Management System, eCredit.com Enterprise Lending System, and Global Financing
Network are trademarks of eCredit.com.
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RIGHTWORKS' BUSINESS
RightWorks provides Internet-based exchange software for powering B2B
digital marketplaces. These marketplaces, also known as online trading
exchanges or communities, serve as comprehensive online sources of information,
interaction and electronic commerce for the businesses that participate in them
as buyers or sellers. RightWorks' software, RightWorks 5.0, is a software
platform that manages the complex business transactions that take place on
digital marketplaces.
RightWorks' customers are companies that create and operate digital
marketplaces, including vertical--or industry-specific--marketplaces as well as
corporate marketplaces. By using RightWorks 5.0, customers can create
sophisticated digital marketplaces that allow large numbers of buyers and
sellers using standard computers and Web browsers to exchange information and
conduct electronic commerce transactions in a stable and secure environment.
RightWorks' current customers include Agilera, Applied Materials, BANK ONE,
Computer Sciences Corporation, ICG Commerce, Norwest Services and VerticalNet.
RightWorks offers its software to customers using two different models.
In the first model, the customer licenses the software for its own use and pays
a one-time licensing fee, annual maintenance fees, and per-transaction fees
based on the number of transactions executed on each digital marketplace using
the licensed software. In the second model, which currently is used by
approximately 20% of customers, the customer uses software hosted by RightWorks
and pays a one-time fee for the right to access the software, a monthly fee for
maintenance and hosting services, and per-transaction fees based on the number
of transactions executed on each digital marketplace using the hosted software.
To date, per-transaction and hosting fees have not represented a material
portion of RightWorks' total revenues. RightWorks also provides training and
customization services on a consulting basis.
RightWorks was founded in September 1994. Its principal executive office
is located at 31 North Second Street, Suite 400, San Jose, California 95113,
and its telephone number is (408) 882-0350. RightWorks maintains a site on the
World Wide Web at www.rightworks.com. The information contained on its Web site
is not part of this Prospectus.
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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
Richard G. Bunker, Jr. 38 Managing Director and Chief Technology
Officer
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
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
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 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 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.
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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.
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.
Richard G. Bunker, Jr. has served as one of our Managing Directors and
has been our Chief Technology Officer since April 1999. Prior to joining us,
Mr. Bunker was President and Chief Executive Officer of Reality Online, a
Reuters company, from September 1997 to April 1999. Before becoming President
and Chief Executive Officer, Mr. Bunker served in various senior management
positions at Reality Online. While President and Chief Executive Officer of
Reality Online, Mr. Bunker built the firm into a market leading builder and
host of online securities trading and account inquiry Web sites, and provider
of market data to the online securities industry. He also served as Senior Vice
President and Chief Information Officer of SEI Investments from January 1994 to
March 1996, and Vice President of the investment management and trading
technology group at State Street Global Advisors from October 1992 to January
1994.
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.
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,
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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.
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.
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,
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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.
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
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including corporate finance, financial reporting, accounting and treasury
operations. Before joining Safeguard Scientifics, Inc., Mr. Nickolas was Audit
Manager and held various other positions at KPMG LLP from July 1990 to October
1994.
Robert A. Pollan has served as one of our Managing Directors of
Operations since June 1998. Prior to joining us, Mr. Pollan served as a Chief
Technology Officer and Vice President of Business Development at General
Electric Capital Corporation from August 1995 to June 1998. During his tenure
at General Electric Capital Corporation, Mr. Pollan co-founded and served as
President of two supply chain ventures focused on remote telemetry and third-
party logistics, returnable packaging leasing and logistics. He led several
acquisitions in Europe, Asia and the United States. Mr. Pollan was co-founder
and, from September 1991 to July 1995, Managing Director of OFR, Ltd., an
advisory firm focused on the organizational and financial restructuring of
industrial enterprises in Central Europe. While in Central Europe, Mr. Pollan
founded the first Polish industrial group and advised the World Bank and a
number of Eastern European governments. Mr. Pollan serves as a director of
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.
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,
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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
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 drkoop.com, Inc., GiveMeTalk.com, Inc.,
Jupiter Communications, Inc., SuperGroups, Inc., VerticalNet, Inc. and ZDTV,
Inc.
Alex W. "Pete" Hart has served on our Advisory Board since March 1998.
Mr. Hart is a consultant in consumer financial services specializing in
emerging payment and distribution systems. Mr. Hart has served in numerous
positions, including Chief Executive Officer, of Advanta Corporation from March
1994 to October 1997. Prior to joining Advanta Corporation, Mr. Hart served as
President and Chief Executive Officer of MasterCard International. Mr. Hart
serves as a director of Sanchez Computer Associates, Who?Vision Systems,
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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 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
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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.
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.
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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.
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.
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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.
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
Name and Principal Other Underlying
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, East 1998 $225,000 $100,000 -- 2,500,000
Coast
Operations
Kenneth A. Fox........... 1999 $225,000 $112,500 -- 1,800,000
Managing Director, West 1998 $119,538 $ 75,000 -- 2,500,000
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, 1998 -- -- -- --
General 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) 1998 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 December 31, 1999 a total of
13,567,250 shares of Common Stock have been issued under the Membership Profit
Interest Plan, all of which were outstanding, leaving no shares available for
grant at a later date. Our board of directors has the power, subject to the
limitations contained in the Membership Profit Interest Plan, to prescribe the
terms and conditions of any award granted under the Membership Profit Interest
Plan, including the total number of shares awarded to each grantee and any
applicable vesting schedule.
Internet Capital Group, Inc. 1999 Equity Compensation Plan
Our 1998 Equity Compensation Plan and our Managers' Option Plan were
approved by the board of managers of Internet Capital Group, L.L.C. on October
13, 1998. The 1998 Equity Compensation Plan and Managers' Option Plan provided
for the grant of non-qualified options for membership interests in Internet
Capital Group, L.L.C., restricted stock, stock appreciation rights ("SARs"),
and performance awards. After the 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 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 may be
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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 24,
2000, 11,394,000 options were outstanding under the plan.
Options. Incentive stock options may be granted only to employees. The
maximum number of shares that may be subject to incentive stock options over
the life of the 1999 Equity Compensation Plan is 6,000,000. Non-qualified stock
options may be granted to employees, key advisors and non-employee directors.
The 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
determined by the compensation committee. The compensation committee shall
determine all other terms applicable to dividend equivalent rights.
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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 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
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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 24, 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 24, 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.
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
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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 December 31, 1999, 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
Richard G. Bunker................. officer 1,350,000
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>
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In January 2000, Dr. Gerrity repaid the Company $80,000, leaving a
principal amount of $320,000 owed under the above-listed promissory note.
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 G. Bunker................. officer $1,358,000
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
Richard G. Bunker................. officer 272,835
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>
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.
115
<PAGE>
<TABLE>
<CAPTION>
Relationship to Amount Paid
Name of Recipient Internet Capital Group to Recipient
- ----------------------------------- ---------------------------- ------------
<S> <C> <C>
Douglas A. Alexander............... executive officer $ 249,702
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 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.
116
<PAGE>
PRINCIPAL SHAREHOLDERS OF INTERNET CAPITAL GROUP
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of March 24, 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 24, 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>
Percent of
Options, Number of Shares Shares Outstanding
Warrants and Beneficially Owned -------------------------
5% Beneficial Owners, Convertible Notes Including Options and Before After
Directors, Named Exercisable Warrants Exercisable the Exchange the Exchange
Officers Within 60 Days Within 60 Days Offer Offer
- --------------------- ----------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Comcast ICG, Inc. (1)... 633,998 22,008,996 8.3% 8.0%
c/o Comcast Corporation
1500 Market Street
Philadelphia,
Pennsylvania 19102
Safeguard Scientifics, -- 36,289,456 13.7 13.2
Inc. (2)...............
435 Devon Park Drive
Wayne, Pennsylvania
19087
Douglas A. Alexander -- 6,132,748 2.3 2.2
(3)....................
Julian A. Brodsky (4)... 784 10,784 * *
Walter W. Buckley, III 21,833 11,963,999 4.5 4.3
(5)....................
Kenneth A. Fox (6)...... 37,146 11,878,066 4.5 4.3
David D. Gathman (6).... 200,000 1,524,999 * *
Dr. Thomas P. Gerrity 2,566 935,247 * *
(7)....................
Robert E. Keith, Jr. 1,533 298,941 * *
(8)....................
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 13.0
</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.
117
<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. Slovik Annuity Trust u/i dtd. July 30, 1999 and by the trusts for the
benefit of his relatives.
118
<PAGE>
SECURITY OWNERSHIP OF eCREDIT.COM PRINCIPAL STOCKHOLDERS
AND eCREDIT.COM MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of eCredit.com common stock as of March 31, 2000, and as adjusted to
reflect the acceptance by ICG on the closing date of the tender of eCredit.com
Shares in this Exchange Offer, by:
. each person or entity we know to own beneficially more than 5% of
eCredit.com common stock;
. each of the eCredit.com directors;
. each of the eCredit.com executive officers; and
. all directors and executive officers as a group.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power, or shares such power with his or her
spouse, with respect to all shares of capital stock listed as owned by such
person or entity.
As of March 31, 2000, there were 21,648,020 shares of common stock
outstanding, not giving effect to eCredit.com Shares authorized under the stock
incentive plans or eCredit.com Shares issuable under outstanding warrants. The
number of shares beneficially owned by each stockholder is determined under
rules promulgated by the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the
stockholder has sole or shared voting power or investment power and any shares
as to which the stockholder has the right to acquire beneficial ownership
within 60 days after March 31, 2000 through the exercise of any stock option,
warrant or other right, such as the acceleration of certain options pursuant to
the Exchange Offer Agreement. The inclusion in the following table of those
shares, however, does not constitute an admission that the named stockholder is
a direct or indirect beneficial owner of those shares. These options, warrants
and other rights are deemed to be outstanding 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.
The information provided below assumes that, pursuant to the terms of the
Exchange Offer, each of the stockholders of eCredit.com validly tenders and
does not withdraw exactly 30% of its shares of eCredit.com, on a fully diluted
basis. Under the terms of the Exchange Offer Agreement, non-employee
stockholders of eCredit.com may tender more than 30% of their shares of
eCredit.com.
119
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially Shares Beneficially
Owned Prior Owned After
to the Offering the Offering
------------------ -----------------------
Number
Name of Beneficial Owner Number Percent (16) Percent (17)
- ------------------------ ---------- ------- ---------- ------------
<S> <C> <C> <C> <C>
5% Stockholders
Bain Capital Funds (1)................... 3,864,650 17.48% 2,705,255 11.27%
Two Copley Place
Boston, MA 02116
Battery Ventures (2)..................... 5,783,578 24.5 4,048,505 15.88
20 Williams Street
Wellesley, MA 02481
Draper Funds (3)......................... 1,301,839 5.95 911,287 3.84
50 California Street
Suite 2925
San Francisco, CA 94111
Internet Capital Group................... 0 0 9,239,559 39.27
435 Devon Park Drive, 600 Building
Wayne, PA 19087
J.P. Morgan Investment Corporation (4)... 1,394,921 6.44 976,444 4.15
60 Wall Street
New York, NY 10260-0060
Venkat Srinivasan (5).................... 3,703,996 17 2,527,172 10.68
c/o eCredit.com, Inc.
20 CareMatrix Drive
Dedham, MA 02026
Other Directors and Executive Officers
Oliver D. Curme (6)...................... 5,848,957 24.77 4,094,269 16.06
William H. Draper (7).................... 1,367,218 6.25 957,052 4.03
John B. Fullerton (8).................... 1,414,534 6.5 976,444 4.15
Venetia Kontogouris (9).................. 1,540,630 7.12 1,078,441 4.58
Mark E. Nunnelly (10).................... 3,930,029 17.77 2,751,020 11.47
Mahantesh S. Kothiwale (11).............. 78,000 * 0 0
Peter McKay (12)......................... 1,016,879 4.7 711,815 3.03
Louis J. Paglia (13)..................... 127,500 * 0 0
Deepak Verma (14)........................ 376,532 1.73 222,622 *
All current executive officers and
directors as a group (10 persons) (15).. 19,404,278 78.46 13,318,835 50.47
</TABLE>
- --------
* Less than 1%
(1) Includes 192,189 shares held by BCIP Associates, a Delaware general
partnership of which W. Mitt Romney is a general partner and member of the
Management Committee, 55,149 shares held by BCIP Trust Associates, L.P., a
Delaware limited partnership of which W. Mitt Romney is a general partner
and member of the Management Committee and 3,153,363 shares held by
Information Partners Capital Fund, L.P., whose general partner is
Information Partners, a Massachusetts general partnership, and whose
managing general partner is Bain Capital Partners IV, L.P., the sole
general partner of which is Bain Capital Investors, Inc., a Delaware
corporation wholly owned by W. Mitt Romney. Also includes 430,545 shares
subject to presently exercisable warrants held by Information Partners
Capital Fund and 33,404 shares subject to presently exercisable warrants
held by BCIP Associates. Mark E. Nunnelly, a member of the eCredit.com
board of directors, is a general partner of BCIP Associates and of BCIP
Trust Associates, L.P. Mr. Nunnelly is a general partner of Information
Partners, which is the general partner of Information Partners Capital
Fund, L.P. Mr. Nunnelly disclaims beneficial ownership of all shares and
120
<PAGE>
shares subject to presently exercisable warrants held by BCIP Associates,
BCIP Trust Associates, L.P. and Information Partners Capital Fund, L.P.
(2) Comprised of 57,241 shares held by Battery Investment Partners IV LLC and
3,758,947 shares held by Battery Ventures IV, L.P. Also includes 29,509
shares subject to presently exercisable warrants held by Battery
Investment Partners IV LLC and 1,937,881 shares subject to presently
exercisable warrants held by Battery Ventures IV, L.P. Oliver D. Curme, a
member of the eCredit.com board of directors, is a general partner of
Battery Ventures, which is the general partner of these entities. Mr.
Curme disclaims beneficial ownership of all shares held by Battery
Investment Partners IV LLC and Battery Ventures IV, LP. Excludes 65,379
shares held by Mr. Curme as described in note 6 below.
(3) Comprised of 976,340 shares held by Draper International India, L.P.,
1,395 shares held by Draper Richards Management Company and 92,065 shares
held by the William Draper Revocable Trust. William H. Draper, a member
of the eCredit.com board of directors, is managing director of Draper
International India, L.P. and President of Draper Richards Management
Company. Also includes 232,039 shares subject to presently exercisable
warrants held by Draper International India. Mr. Draper disclaims
beneficial ownership of all shares held by Draper International India,
L.P. and Draper Richards Management Company. Excludes 65,379 shares held
by Mr. Draper as described in note 7 below.
(4) Comprised of 1,255,429 shares held by J.P. Morgan Investment Corporation
and 139,492 shares held by Sixty Wall Street SBIC Fund, L.P. John B.
Fullerton, a member of the eCredit.com board of directors, is a managing
director of J.P. Morgan, which is an affiliate of J.P. Morgan Investment
Corporation and a managing director of Sixty Wall Street SBIC
Corporation, the general partner of Sixty Wall Street SBIC Fund, L.P. Mr.
Fullerton disclaims beneficial ownership of all shares held by J.P.
Morgan Investment Corporation and Sixty Wall Street SBIC Fund L.P.
(5) Includes 137,650 shares subject to outstanding stock options held by Dr.
Srinivasan that are exercisable within the 60-day period following March
31, 2000. Also includes 292,000 shares held in certain trusts for the
benefit of members of Dr. Srinivasan's family. Dr. Srinivasan disclaims
beneficial ownership of all such trusts.
(6) Includes shares held or subject to warrants held by Battery Investment
Partners IV LLC and Battery Ventures IV, L.P. as described in note 2
above.
(7) Includes shares held or subject to warrants held by Draper International
India, L.P, Draper Richards L.P. and the William Draper Revocable Trust
as described in note 3 above.
(8) Comprised of 19,613 shares subject to outstanding stock options held by
Mr. Fullerton that are exercisable within the 60-day period following
March 31, 2000 and shares held by J.P. Morgan Investment Corporation and
Sixty Wall Street SBIC Fund L.P. as described in note 4 above.
(9) Includes 638,298 shares held by Enterprise Associates, Inc. and 836,953
shares held by Trident Capital Fund-IV, L.P. Ms. Kontogouris is an
advisor of Enterprise Associates Inc. and a managing director of Trident
Capital, which is the general partner of Trident Capital Fund-IV, L.P.
Ms. Kontagouris disclaims beneficial ownership of all shares held by
Enterprise Associates Inc. and Trident Capital Fund-IV, L.P.
(10) Includes shares held or subject to warrants held by BCIP Associates, a
Delaware general partnership of which Mr. Nunnelly is a general partner,
BCIP Trust Associates, L.P., a Delaware limited partnership of which Mr.
Nunnelly is a general partner and Information Partners Capital Fund, L.P.
whose general partner is Information Partners, a Massachusetts General
Partnership, of which Mr. Nunnelly is a general partner, as described in
note 1 above. Mr. Nunnelly disclaims beneficial ownership of all such
shares except to the extent of his pecuniary interest therein.
(11) Includes 78,000 shares subject to outstanding stock options held by Mr.
Kothiwale that are exercisable within the 60-day period following March
31, 2000.
121
<PAGE>
(12) Includes 22,840 shares held by family members or in trust for a family
member. Mr. McKay disclaims beneficial ownership of all such shares.
(13) Includes 127,500 shares subject to outstanding stock options held by Mr.
Paglia that are exercisable within the 60-day period following March 31,
2000.
(14) Includes 58,500 shares subject to outstanding stock options held by Mr.
Verma that are exercisable within the 60-day period following March 31,
2000.
(15) Includes 421,263 shares of eCredit.com subject to outstanding stock
options held by eCredit.com current executive officers and directors that
are exercisable within the 60-day period following March 31, 2000. Also
includes shares owned by entities affiliated with certain of eCredit.com
directors as described in the notes above.
(16) The outstanding eCredit.com Shares are deemed to have been increased by
the exercise of 30% of the aggregate number of shares subject to exercise
under the eCredit.com option plans in connection with the Exchange Offer.
(17) The percentage assumes that each stockholder of eCredit.com duly tenders
and does not withdraw 30% of the shares it holds, calculated on a fully
diluted basis, in the Exchange Offer and that eCredit.com has not been
required to issue additional shares to Internet Capital Group pursuant to
the terms of the Exchange Offer.
122
<PAGE>
SECURITY OWNERSHIP OF RIGHTWORKS PRINCIPAL STOCKHOLDERS
AND RIGHTWORKS MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of April 1, 2000:
. 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 a warrant to purchase an additional
197,683 shares at a weighted average exercise price of $.72085 per share and
shares of common stock issuable upon the exercise of other options or warrants
exercisable within 60 days of April 1, 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. The following assumptions were made to arrive at
the post-offering numbers: (i) all warrants were exercised by all except
strategic investors, and (ii) Internet Capital Group purchased $22 million of
Series B Preferred Shares and preferred shares are tendered to Internet Capital
Group.
<TABLE>
<CAPTION>
Number of Shares Percent of Shares
Beneficially Owned Outstanding
Options and Including Options -------------------------
5% Beneficial Owners, Warrants and Warrants Before After
Directors, Named Exercisable Exercisable the Exchange the Exchange
Officers Within 60 Days Within 60 Days Offer Offer
- --------------------- -------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Lehman Brothers......... -- 3,125,000 10.34% *
Sequoia Capital......... -- 6,677,023 22.09% 11.65%
Internet Capital Group,
Inc. .................. -- 19,549,000 -- 60.7%
Suhas Patil(1).......... 231,266 3,584,269 11.86% *
Vani Kola(2)............ 3,090,931 3,102,092 10.26% 9.56%
Elizabeth Gasper(3)..... 300,000 311,161 1.03% *
Rich Gerould(4)......... 350,000 350,000 1.16% 1.09%
Bob McDonald(5)......... 437,500 437,500 1.45% 1.36%
Ramesh Patil(6)......... 197,600 304,194 1.01% *
Mark Diamond(7)......... 300,000 300,000 * *
John West(8)............ 400,000 411,161 1.36% 1.24%
Ian Williams(9)......... 400,000 411,161 1.36% 1.24%
Bob Jurkowski(10)....... 550,000 550,000 1.82% 1.71%
David Furth(11)......... 250,000 250,500 * *
Douglas M. Leone(12).... -- 6,677,023 22.09% 11.65%
Joe Prang(13)........... 125,000 157,435 * *
Jeff Carr(14)........... 900,000 900,000 2.98% 2.72%
</TABLE>
- --------
* Less than 1%.
(1) Shares beneficially owned includes 167,913 shares issuable pursuant to the
early exercise of options within 60 days of April 1, 2000 and the exercise
of warrants to purchase 197,683 shares of preferred stock within 60 days
of April 1, 2000.
123
<PAGE>
(2) Shares beneficially owned includes 2,991,331 shares issued pursuant to the
early exercise of options.
(3) Shares beneficially owned includes 300,000 shares issued pursuant to the
early exercise of options.
(4) Shares beneficially owned includes 350,000 shares issued pursuant to the
early exercise of options.
(5) Shares beneficially owned includes 437,500 shares issued pursuant to the
early exercise of options.
(6) Shares beneficially owned includes 197,600 shares issued pursuant to the
early exercise of options.
(7) Shares beneficially owned includes 300,000 shares issued pursuant to the
early exercise of options.
(8) Shares beneficially owned includes 400,000 shares issued pursuant to the
early exercise of options.
(9) Shares beneficially owned includes 400,000 shares issued pursuant to the
early exercise of options.
(10) Shares beneficially owned includes 550,000 shares issued pursuant to the
early exercise of options.
(11) Shares beneficially owned includes 250,000 shares issued pursuant to the
early exercise of options.
(12) Shares beneficially owned includes 6,677,023 shares held by entities
associated with Sequoia Capital. Mr. Leone, a director of the Company, is
a general partner of Sequoia Capital. Mr. Leone may be deemed to have
voting and investment power over the shares held by the entities
associated with Sequoia Capital. He disclaims such beneficial ownership
except to the extent of his pecuniary interest therein.
(13) Shares beneficially owned includes 125,000 shares issued pursuant to the
early exercise of options.
(14) Shares beneficially owned includes 900,000 shares issuable pursuant to the
early exercise of options.
124
<PAGE>
DESCRIPTION OF INTERNET CAPITAL GROUP CAPITAL STOCK
General
Our authorized capital stock consists of 300,000,000 shares of Common
Stock, and 10,000,000 shares of preferred stock, par value $.01 per share. Upon
completion of these Exchange Offers, we will have approximately 275,547,968
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 24, 2000, there were 264,349,826 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. Upon completion of these Exchange Offers there will be
275,547,968 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 under the Securities Act. In connection with our
follow-on offering in December, 1999, the holders of 58,507,579 shares of our
Common Stock and warrants exercisable for 351,860 shares of our common stock
have further agreed not to demand registration of these securities until June
13, 2000 without the prior written consent of Merrill Lynch, lead underwriter
for the follow-on offering. After this 180-day period, any one of these holders
may require us, on not more than two occasions, to file a registration
statement under the Securities Act with respect to at least 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 180 days after the date of this offering, we prepare to register
any of our securities under the Securities Act, for our own account or the
account of our other holders, we will send notice of this registration to
holders of the shares eligible for demand 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.
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Classified Board of Directors
Our certificate of incorporation provides for our Board of Directors to
be divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms (other than directors
who may be elected by holders of preferred stock). As a result, approximately
one-third of our Board of Directors will be elected each year. The classified
board provision will help to assure the continuity and stability of our Board
of Directors and our business strategies and policies as determined by our
Board of Directors. The classified board provision could have the effect of
discouraging a third party from making an unsolicited tender offer or otherwise
attempting to obtain control of us without the approval of our Board of
Directors. In addition, the classified board provision could delay shareholders
who do not like the policies of our Board of Directors from electing a majority
of our Board of Directors for two years.
No Shareholder Action by Written Consent; Special Meetings
Our certificate of incorporation 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
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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 is to preclude a shareholder from removing incumbent directors
without cause and simultaneously gaining control of our Board of Directors by
filling the vacancies created by such removal with its own nominees.
Indemnification
We have included in our certificate of incorporation and bylaws
provisions to eliminate the personal liability of our directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware General Corporation Law, and to indemnify our directors and
officers to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
Certificate of Incorporation
The provisions of our certificate of incorporation that could have anti-
takeover effects as described above are subject to amendment, alteration,
repeal, or rescission by the affirmative vote of the holder of not less than
two-thirds (66 2/3%) of the outstanding shares of voting securities. This
requirement makes it more difficult for shareholders to make changes to the
provisions in our certificate of incorporation which could have anti-takeover
effects by allowing the holders of a minority of the voting securities to
prevent the holders of a majority of voting securities from amending these
provisions of our certificate of incorporation.
Bylaws
Our certificate of incorporation provides that our bylaws are subject to
adoption, amendment, alteration, repeal or rescission either by our Board of
Directors without the assent or vote of our shareholders, or by the affirmative
vote of the holders of not less than two-thirds (66 2/3%) of the outstanding
shares of voting securities. This provision makes it more difficult for
shareholders to make changes in our bylaws by allowing the holders of a
minority of the voting securities to prevent the holders of a majority of
voting securities from amending our bylaws.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is ChaseMellon
Shareholder Services. The Transfer Agent's address is P.O. Box 3301, South
Hackensack, NJ, and its telephone number is (800) 777-3674.
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COMPARISON OF STOCKHOLDER RIGHTS
Internet Capital Group is a corporation organized under the laws of the
State of Delaware. RightWorks Corporation is a corporation organized under the
laws of the State of California.
The following summary sets forth certain material differences between the
rights of Internet Capital Group stockholders and the rights of RightWorks
stockholders and is qualified in its entirety by reference to Internet Capital
Group's Certificate of Incorporation and Bylaws and RightWorks' Eleventh
Amended and Restated Articles of Incorporation and Bylaws, which are expected
to be amended immediately prior to the consummation of the transaction
contemplated by the Exchange Offer. The RightWorks' Amended Articles will
convert all issued and outstanding shares of RightWorks' several series of
Preferred Stock into RightWorks Series B Preferred Stock. Upon consummation of
the transaction contemplated by the Exchange Offer, the RightWorks Series B
Preferred shareholders that elect to tender their shares to Internet Capital
Group will become stockholders of Internet Capital Group, and these RightWorks
shareholders' rights will cease to be defined and governed by the California
General Corporation Law, and will instead be defined and governed by the
Delaware General Corporation Law.
Authorized Capital Stock
Our authorized capital stock currently consists of 300,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock.
The authorized capital stock of RightWorks consists of 100,000,000 shares
of Common Stock and 87,276,219 shares of Preferred Stock.
Voting Rights
Our holders of Common Stock have one vote per share. The Certificate of
Incorporation provides that each class of Common Stock is entitled to vote as a
class with respect to amendments to the Certificate of Incorporation that
adversely alter or change the powers, preferences or special rights of that
class of stock and with respect to other matters require class votes under
Delaware Law.
The RightWorks Articles of Incorporation provide that the holders of
RightWorks Class A Common Stock and Series A Preferred Stock have one vote per
share. The holders of RightWorks Series B Preferred Stock have that number of
votes as could be cast by the share(s) of Class B Common Stock into which
Series B Preferred Stock is convertible, provided that upon the consummation of
the exchange offer, the number of shares of Series B Preferred Stock tendered
and not withdrawn must constitute at least 80% of the total voting power of
RightWorks on a fully-diluted basis.
Preemptive Rights; Cumulative Voting
Our Certificate of Incorporation does not grant preemptive rights or
cumulative voting rights to its stockholders.
The RightWorks Articles of Incorporation do not grant preemptive rights.
The RightWorks Bylaws do grant cumulative voting rights to its stockholders.
Action by Written Consent of Stockholders
Our Certificate of Incorporation and Bylaws provide that shareholder
action can only be taken at an annual or special meeting of shareholders and
prohibits action by written consent in lieu of a meeting.
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The RightWorks Bylaws provide that shareholder action can be taken at an
annual or special meeting of shareholders or by written consent in lieu of a
meeting.
Special Meetings of Stockholders
Our Bylaws provide that special meetings of stockholders may be called
only by our Chief Executive Officer or by 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.
The RightWorks Bylaws provide that special meetings of stockholders may
be called by RightWorks' Chairman of the Board, by the President, by the Board
of Directors, or at the request in writing of the holders of not less than ten
percent of the shares of Common Stock of RightWorks issued and outstanding and
entitled to vote at the meeting.
Quorum and Voting Requirements for Stockholder Meetings
Our Bylaws state that a majority of the issued and outstanding stock of
Internet Capital Group entitled to vote at a meeting constitutes a quorum for
the transaction of business at the meeting. Where, under the Internet Capital
Group Bylaws, a quorum is present, the affirmative vote of a majority of shares
entitled to vote at the meeting on the subject matter is required to take
action on all matters other than the election of directors, who must be elected
by a plurality of shares entitled to vote at the meeting on the election of
directors.
The RightWorks Bylaws state that a majority of the shares entitled to
vote at a meeting shall constitute a quorum for the transaction of business at
the meeting. Where, under the RightWorks Bylaws, a quorum is present, the
affirmative vote of a majority of shares entitled to vote at the meeting on the
subject matter is required to take action in all matters.
Stockholder Proposals
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 the
shareholder's intention to bring such business before the 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, under the advance notice procedure, a
shareholder's notice to Internet Capital Group proposing to nominate a person
for election as a director or relating to the conduct of business other than
the nomination of directors must contain 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, that business shall not be
discussed or transacted.
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The RightWorks Bylaws do not provide an advance notice procedure for the
purpose of making nominations of candidates for election of directors or to
bring other business before an annual meeting of its shareholders.
Board of Directors
The Internet Capital Group Board of Directors currently consists of six
directors who serve for three year terms. The number of directors on the
Internet Capital Group Board is subject to change by action of the Internet
Capital Group Board, but cannot be less than five nor more than nine (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.
The RightWorks Board of Directors currently consists of five directors.
An amendment to the Bylaws reducing the minimum number of directors to a number
less than five cannot be adopted if the votes cast against its adoption at a
meeting or the shares not consenting in the case of action by written consent
are equal to more than 16 2/3% of the outstanding shares entitled to vote.
Vacancies and Newly Created Directorships
Under the Internet Capital Group Bylaws, any vacancy or newly-created
directorship may be filled by the affirmative vote of a majority of the
remaining directors then in office, although less than a quorum, or by the sole
remaining director.
Under the RightWorks Bylaws, any vacancy, except for a vacancy caused by
the removal of a director, may be filled by the affirmative vote of a majority
of the remaining directors then in office, although less than a quorum, or by
the sole remaining director. Vacancies occurring in the Board of Directors by
reason of the removal of directors may be filled only by approval of the
shareholders. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors. Any election by written consent other than
to fill a vacancy created by removal shall require the consent of a majority of
the outstanding shares entitled to vote.
Limitation on Director's Liability
The Internet Capital Group Certificate of Incorporation provides that a
director's liability to the corporation is limited to the fullest extent of
Delaware General Corporation Law. A director shall not be personally liable for
monetary damages for his acts or omissions unless the director breached or
failed to perform his duties and the breach or failure constituted
recklessness, self-dealing or willful misconduct.
The RightWorks Articles of Incorporation provide that, to the fullest
extent permitted by the California General Corporation Law, a director shall
not be personally liable for monetary damages for a breach of fiduciary duty as
a director. California law does not permit the elimination of monetary
liability based on:
. intentional misconduct or knowing and culpable violation of law;
. acts or omissions that a director believes to be contrary to the
best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director;
. receipt of an improper personal benefit;
. acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in
the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its
shareholders;
. acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty
to the corporation and its shareholders;
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. transactions between the corporation and a director who has a
material financial interest in the transaction; and
. liability for improper distributions, loans or guarantees.
Removal of Directors
The Internet Capital Group Certificate of Incorporation and its Bylaws
provide for the removal of directors for cause upon the approval of a majority
of the then outstanding stock entitled to vote generally in the election of
Directors.
Neither the RightWorks Articles of Incorporation nor the RightWorks
Bylaws contain provisions relating to the removal of directors. Under
California law, any director may be removed by declaration of the Board upon
conviction of a felony or declaration of unsound mind by an order of court. Any
or all of the directors of a California corporation may be removed without
cause if such removal is approved by the affirmative vote of a majority of the
outstanding shares; provided, however, that no director of such corporation may
be removed, unless the entire board of directors of such corporation is
removed, when the votes cast against removal, or not consenting in writing to
the removal, would be sufficient to elect the director if voted cumulatively at
an election at which the same total number of votes were cast, or, if the
action is taken by written consent, all shares entitled to vote were voted.
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.
The RightWorks Bylaws provide that, to the fullest extent permitted by
the California General Corporation Law, each director or officer who is made a
party or is threatened to be made a party to or is involved in any action by
reason of the fact of his office with RightWorks or another entity on behalf of
RightWorks, shall be indemnified and held harmless by RightWorks to the fullest
extent permitted by the California General Corporation Law against all expense,
liability and loss. Under California law, a director or officer of the
corporation may only be indemnified if the director or officer is successful on
the merits in defense of any proceeding or in defense of any claim, issue or
matter therein. RightWorks believes that this level of indemnification is
necessary to attract and retain qualified persons as directors and officers.
Stockholder Approval of Business Combinations with Interested Stockholders
Under Section 203 of the Delaware General Corporation Law, we are
prohibited from engaging in a business combination, such as a merger or
takeover, with one of our interested stockholders for three years following the
date that the person becomes an interested stockholder. With some exceptions,
an interested stockholder is generally a person or group who or which owns 15%
or more of the corporation's outstanding voting stock, including any rights to
acquire stock pursuant to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only, or is an affiliate or
associate of the corporation and was the owner of 15% or more of such voting
stock at any time within the previous three years.
Under Section 1203 of the California General Corporation Law, RightWorks
is subject to specified conditions if it were to attempt a business combination
with a majority shareholder, but there is no
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equivalent provision to Section 203 of the Delaware General Corporation Law,
which addresses business combinations with a significant, but not majority
shareholder.
Stockholder Derivative Suits
Under Delaware law, a holder of Internet Capital Group stock may bring a
derivative action on behalf of the corporation only if the stockholder was a
stockholder of the corporation at the time of the transaction in question or
his or her stock thereafter devolved upon him or her by operation of law.
Delaware does not require a plaintiff shareholder to furnish a security bond
upon motion of the defendant in a stockholder derivative suit.
Under California law, a holder of RightWorks stock may bring a derivative
action on behalf of a corporation without having been a shareholder at the time
of the transaction in question, provided that certain requirements are
fulfilled. California law also provides that the corporation or the defendant
in a derivative suit may make a motion to the court for an order requiring the
plaintiff shareholder to furnish a security bond.
Appraisal/Dissenters' Rights
Under Delaware law, our stockholders are not entitled to appraisal or
dissenters' rights in the event of a merger or consolidation as we are listed
on a national securities exchange.
Under California law, RightWorks' shareholders are not entitled to
appraisal or dissenters' rights in the event of a merger or consolidation if
RightWorks is listed on a national securities exchange or on a list of over-
the-counter margin stocks issued by the Board of Governors of the Federal
Reserve System. An exception to this is if the holders of at least five percent
of the class of outstanding shares claim the right of appraisal or dissent.
Inspection of Stockholders/Shareholders List Rights
Under Delaware law, an Internet Capital Group stockholder may inspect our
stock ledger, list of stockholders and other books and records during regular
business hours, upon a written demand under oath stating the purpose of the
inspection. If we refuse the request, or fail to respond within five business
days after the demand has been made, the stockholder may petition the court for
an order to compel the inspection.
California law permits any RightWorks shareholder to inspect and copy a
RightWorks' shareholder list for any purpose reasonably related to the person's
interest as a shareholder. California law also provides for an absolute right
to inspect and copy the shareholder list by persons holding an aggregate of
five percent or more of RightWorks' voting shares, or shareholders holding an
aggregate of one percent or more who have filed a proxy statement with the
Securities and Exchange Commission.
Amendments to Certificate/Articles of Incorporation and Bylaws
The provisions of our Certificate of Incorporation that pertain to
authorized capital, powers of the Board of Directors, the inability of
stockholders to take action without a meeting, rights of classes of stock, and
amendments to the Certificate of Incorporation and Bylaws 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. Internet Capital Group may amend, alter or repeal all other
sections of the Certificate of Incorporation in the manner prescribed by the
Delaware General Corporation Law. 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 (662/3%) of the outstanding shares of voting securities.
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RightWorks may amend, alter or repeal all sections of its Articles of
Incorporation in the manner prescribed by the California General Corporation
Law. The RightWorks Bylaws provide that the stockholders of RightWorks are
expressly authorized to make, alter or repeal the RightWorks Bylaws, except
that a Bylaw reducing the minimum number of directors to a number less than
five cannot be adopted if the votes cast against its adoption at a meeting or
the shares not consenting in the case of action by written consent are equal to
more than 16 2/3% of the outstanding shares entitled to vote. Subject to the
right of the shareholders to adopt, amend or repeal the Bylaws, the Bylaws may
be adopted amended, or repealed by the affirmative vote of a majority of the
directors.
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THE RIGHTWORKS EXCHANGE OFFER
Terms of the RightWorks Exchange Offer
We are offering to exchange, upon the terms and subject to the conditions
of the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization, any or all of the RightWorks Series B Preferred Shares, after
the completion of the recapitalization of RightWorks under that agreement, for
a number of shares of our Common Stock equal to the RightWorks Exchange Ratio.
The RightWorks Exchange Ratio has not been fixed in the Recapitalization and
Exchange Offer Agreement and Plan of Reorganization, but will be calculated at
the closing of the RightWorks Exchange Offer according to the formula contained
in the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization. The formula provides that the RightWorks Exchange Ratio equals
the quotient of the Per Share Value divided by $111.48. The Per Share Value
equals the quotient of (A) $1.25 billion divided by (B) the number of shares of
RightWorks Common Stock on a fully diluted basis immediately prior to
consummation of the RightWorks Exchange Offer. The RightWorks Exchange Ratio
will be 0.303774 based on 36,911,598 shares of RightWorks Common Stock
outstanding on a fully diluted basis.
Only whole shares of Common Stock will be issued under the RightWorks
Exchange Offer. Instead of fractional shares to which a holder of RightWorks
Series B Preferred Shares otherwise would be entitled, we will pay the holder
of RightWorks Series B Preferred Shares cash based on a per share price of
$111.48.
Under the terms of a letter agreement dated March 7, 2000 between Ms.
Kola and us, if RightWorks Series B Preferred Shares constituting less than 50%
of the shares of RightWorks Common Stock (on an as-converted basis) on a fully-
diluted basis are properly tendered and not withdrawn, Ms. Kola will exchange
for shares of our Common Stock a number of shares of RightWorks common stock
sufficient to provide us with 50% of the shares of RightWorks common stock on a
fully diluted basis.
Reasons for the RightWorks Exchange Offer
Internet Capital Group's Reasons for the RightWorks Exchange Offer:
Internet Capital Group's Board of Directors and management believe that
the RightWorks Exchange Offer will benefit Internet Capital Group and its
shareholders for the following reasons:
. it will help Internet Capital Group reach its goal of building
digital marketplaces across the top 50 global markets;
. it will aid Internet Capital Group's strategy to enable online
trading communities;
. it will accelerate Internet Capital Group's strategy of bringing
buyers and sellers together in open, efficient digital
marketplaces; and
. it will enable Internet Capital Group to partner with a company
whose technology provides open architecture, scalability and ease
of deployment.
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RightWorks' Reasons for the RightWorks Exchange Offer
The RightWorks Board of Directors identified several potential benefits
for the RightWorks shareholders, employees and customers that it believes would
result from the RightWorks Exchange Offer. These potential benefits include:
. enabling RightWorks shareholders to receive publicly traded
Internet Capital Group Common Stock in a tax-free exchange for
their non-publicly traded RightWorks preferred stock at a
substantial premium over the prices previously paid for RightWorks
preferred stock;
. enabling RightWorks shareholders who exchange their shares to
retain an indirect participation in the performance of RightWorks'
stock through their ownership of Internet Capital Group Common
Stock;
. providing RightWorks enhanced access to Internet Capital Group's
partner companies, many of which represent attractive potential
customers, distribution partners or product development
collaborators;
. increasing the attractiveness of RightWorks' digital exchange
technology platform to customers by enabling them to leverage
Internet Capital Group's large network of market makers; and
. enabling RightWorks to benefit from Internet Capital Group's
presence in Europe and Asia as RightWorks executes its global
expansion strategy.
In the course of its deliberations regarding the RightWorks Exchange
Offer, the RightWorks Board of Directors reviewed with RightWorks' management
and outside advisors a number of factors relevant to the RightWorks Exchange
Offer, including RightWorks' market position, strategy and prospects. The
RightWorks Board of Directors also considered the following positive factors,
among others, in connection with its consideration of the RightWorks Exchange
Offer:
. historical information concerning Internet Capital Group's and
RightWorks' respective businesses, financial performance and
condition, operations, technology, management and market position;
. prevailing stock market conditions and historical market prices,
volatility and trading information with respect to Internet
Capital Group Common Stock;
. the belief that the terms of the Recapitalization and Exchange
Offer Agreement and Plan of Reorganization, including the parties'
representations, warranties and covenants, and the conditions to
the parties' respective obligations, are reasonable;
. financial analysis and pro forma and other information with
respect to Internet Capital Group and RightWorks prepared by
Broadview Associates LLC; and
. the impact of the RightWorks Exchange Offer on RightWorks'
customers and employees.
The RightWorks Board of Directors' conclusions with respect to each of
the foregoing factors supported its determination that the Recapitalization and
Exchange Offer Agreement and Plan of Reorganization and the consummation of the
RightWorks Exchange Offer were fair to, and in the best interests of,
RightWorks and its shareholders.
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The RightWorks Board of Directors also considered a number of potentially
negative factors in its deliberations concerning the RightWorks Exchange Offer.
The negative factors considered by the RightWorks Board of Directors included:
. the risk that, because the value per share to be attributed to the
Internet Capital Group Common Stock in the RightWorks Exchange
Offer is fixed at $111.48, a decline in the per-share market value
of Internet Capital Group Common Stock below $111.48 would cause
the market value of the consideration to be received by the
exchanging RightWorks shareholders to be less than the per-share
value implied by the $1.25 billion total equity valuation used in
the RightWorks Exchange Offer;
. the risk that Internet Capital Group could use its controlling
interest in RightWorks to cause RightWorks to take actions that
are in the best interests of Internet Capital Group or its other
partner companies but not in the best interests of the other
RightWorks shareholders;
. the challenges relating to RightWorks' establishment of successful
commercial relationships with other Internet Capital Group partner
companies;
. the risk that the RightWorks Exchange Offer might not be completed
in a timely manner or at all;
. the negative impact of any customer or supplier confusion after
announcement of the proposed RightWorks Exchange Offer;
. the possibility of management and employee disruption associated
with the RightWorks Exchange Offer and the risk that key
management, marketing, technical and administrative personnel of
RightWorks might not continue with RightWorks after the RightWorks
Exchange Offer;
. certain terms of the Recapitalization and Exchange Offer Agreement
and Plan of Reorganization and related agreements that prohibit
RightWorks and its representatives from soliciting third party
bids and from accepting, approving or recommending unsolicited
third party bids except in very limited circumstances, which terms
would reduce the likelihood that a third party would make a bid
for RightWorks;
. the risks relating to Internet Capital Group's business and how
they could affect RightWorks' operations; and
. the other risks described above under "Risk Factors."
RightWorks' Board of Directors believed that these risks were outweighed
by the potential benefits of the RightWorks Exchange Offer.
The foregoing discussion of information and factors considered by the
RightWorks Board of Directors is not intended to be exhaustive but is believed
to include all material factors considered by the RightWorks Board of
Directors. In view of the wide variety of factors considered by the RightWorks
Board of Directors, the RightWorks Board of Directors did not find it
practicable to quantify or otherwise assign relative weight to the specific
factors considered. In addition, the RightWorks board did not reach any
specific conclusion on each factor considered, or any RightWorks of any
particular factor, but conducted an overall analysis of these factors.
Individual members of the RightWorks board may have given different weight to
different factors. However, after taking into account all of the factors set
forth above, the RightWorks Board of Directors unanimously agreed that the
Recapitalization and Exchange Offer Agreement and Plan of Reorganization and
the RightWorks Exchange Offer were fair to, and in the best interests of,
RightWorks and its shareholders and that RightWorks should proceed with the
RightWorks Exchange Offer.
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As a result of the closing of the RightWorks Exchange Offer, Internet
Capital Group will acquire an equity ownership in RightWorks, of between 50%
and approximately 58% of the capital stock of RightWorks, on a fully diluted
basis.
Conditions to the RightWorks Exchange Offer
Our obligations to effect the RightWorks Exchange Offer are subject to
the satisfaction or waiver of the following conditions:
. the total number of RightWorks Series B Preferred Shares properly
tendered and not withdrawn must equal at least 50% of the shares
of RightWorks Common Stock (on an as-converted basis) on a fully
diluted basis and must constitute at least 80% of the voting power
of RightWorks;
. RightWorks must have performed in all material respects its
agreements and covenants under the Recapitalization and Exchange
Offer Agreement and Plan of Reorganization required to be
performed by it prior to the Expiration Date;
. the representations and warranties of RightWorks must be true and
correct as of the closing date and as of the date of the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization except for such inaccuracies that do not constitute
in the aggregate a material adverse effect (as defined in the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization) on RightWorks;
. RightWorks must amend its certificate of incorporation to provide
for the reclassification of all shares of all series of its
preferred stock into RightWorks Series B Preferred Shares and must
amend its bylaws in accordance with the Recapitalization and
Exchange Offer Agreement and Plan of Reorganization;
. RightWorks and its subsidiaries must obtain all material consents,
waivers, approvals and authorizations;
. the Registration Statement must be declared effective by the staff
of the Securities and Exchange Commission and there must be no
stop order in respect of the Registration Statement;
. the shares of Common Stock issuable pursuant to the RightWorks
Exchange Offer must be approved for listing on the Nasdaq National
Market;
. RightWorks must deliver legal opinions and other documentation
required by the Recapitalization and Exchange Offer Agreement and
Plan of Reorganization;
. three representatives of Internet Capital Group must be elected as
members of RightWorks' Board of Directors;
. Internet Capital Group and RightWorks must receive all applicable
government approvals for the RightWorks Exchange Offer;
. Internet Capital Group and RightWorks must each have received
written opinions from counsel that the RightWorks Exchange Offer
should constitute a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
. RightWorks must have obtained and delivered to Internet Capital
Group a confirmation letter from each employee reasonably
requested by Internet Capital Group, acknowledging and agreeing
that the change in control resulting from the RightWorks Exchange
Offer, whether or not followed by a change in or termination of
the employee's employment relationship with RightWorks, will not
cause an acceleration of vesting of any options or restricted
shares subject to repurchase held by such employee; and
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. no actions or proceedings of any governmental agency or court with
jurisdiction over the Exchange Offer can exist that materially
could impair our ability to consummate the RightWorks Exchange
Offer.
The obligation of RightWorks to effect the RightWorks Exchange Offer are
subject to the satisfaction or waiver of the following conditions:
. Internet Capital Group must have performed in all material
respects its agreements and covenants under the Recapitalization
and Exchange Offer Agreement and Plan of Reorganization required
to be performed by them prior to the Expiration Date;
. Internet Capital Group's representations and warranties must be
true and correct as of the closing date and as of the date of the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization except for such inaccuracies that do not constitute
in the aggregate a material adverse effect (as defined in the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization) on Internet Capital Group;
. the Registration Statement must be declared effective by the staff
of the Securities and Exchange Commission and there must be no
stop order in respect of the Registration Statement;
. the shares of Common Stock issuable under the RightWorks Exchange
Offer must be approved for listing on the Nasdaq National Market
System;
. Internet Capital Group must deliver legal opinions required by the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization;
. RightWorks and Internet Capital Group must receive all applicable
governmental approvals;
. Internet Capital Group and RightWorks must each have received
written opinions from counsel that the RightWorks Exchange Offer
should constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code; and
. no actions or proceedings of any governmental agency or court with
jurisdiction over the Exchange Offer can exist which could
materially impair our ability to consummate the Exchange Offer.
The conditions to the RightWorks Exchange Offer are for the benefit of
Internet Capital Group and may be waived by Internet Capital Group, in whole or
in part at any time and from time to time, in its sole discretion.
Representations and Warranties
The Recapitalization and Exchange Offer Agreement and Plan of
Reorganization contains various representations and warranties of RightWorks in
favor of us, relating to, among other things, the following:
. RightWorks' due organization, qualification to do business and
good standing and similar corporate matters;
. RightWorks' authorization, execution and delivery and the
enforceability of the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization and the other documents
contemplated by the Recapitalization and Exchange Offer Agreement
and Plan of Reorganization;
. the absence of conflicts with and the compliance with corporate
governance documents, agreements, laws, statutes and regulations;
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. RightWorks' capitalization;
. RightWorks' financial statements;
. pending or threatened investigations or litigation;
. the payment of fees to brokers or advisors;
. tax matters;
. the absence of undisclosed or contingent liabilities;
. RightWorks' real property;
. RightWorks' intellectual property;
. RightWorks' insurance policies;
. environmental matters;
. RightWorks' permits;
. RightWorks' employee benefit plans and labor relations;
. the absence of material changes or events;
. RightWorks' transactions with interested parties;
. RightWorks' material contracts and commitments;
. the accuracy of RightWorks' books and records;
. the accuracy of disclosures made by RightWorks; and
. approval of the Recapitalization and Exchange Offer Agreement and
Plan of Reorganization and the transactions contemplated by the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization by RightWorks' Board of Directors.
The Recapitalization and Exchange Offer Agreement and Plan of
Reorganization contains various representations and warranties made by us in
favor of RightWorks, relating to, among other things, the following:
. Internet Capital Group's due organization, qualification to do
business and good standing and similar corporate matters;
. Internet Capital Group's authorization, execution and delivery and
the enforceability of the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization and the other documents
contemplated by the Recapitalization and Exchange Offer Agreement
and Plan of Reorganization;
. the availability to RightWorks and legal compliance of Internet
Capital Group's filings made with the Securities and Exchange
Commission; and
. Internet Capital Group's financial statements.
Subject to limited exceptions for fraud and knowing misrepresentations,
RightWorks' representations and warranties terminate on the one-year
anniversary of the RightWorks Exchange Offer Expiration Date.
Conduct of Business of RightWorks Pending Closing of the RightWorks Exchange
Offer
The Recapitalization and Exchange Offer Agreement and Plan of
Reorganization requires that until the closing contemplated by the
Recapitalization and Exchange Offer Agreement and Plan of Reorganization,
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RightWorks will conduct its business in the ordinary course and consistent with
past practice. RightWorks is required to use reasonable efforts consistent with
past practice and policies to preserve intact its current business
organization, keep available the services of its present officers and employees
and maintain satisfactory relationships with suppliers, contractors,
distributors, customers and others having business relationships with it.
RightWorks has also agreed that, prior to the closing, without Internet Capital
Group's written consent, it would not do the following:
. make any expenditures or enter into any commitment or transaction
exceeding $100,000 individually;
. with certain exceptions, sell, license or transfer to any person
or entity any rights to any RightWorks intellectual property,
enter into any agreement with respect to any intellectual property
of any person or entity, enter into any agreement with respect to
the development of any intellectual property with a third party
unless the agreement provides for exclusive ownership by
RightWorks of any intellectual property developed under the
agreement or change pricing or royalties charged by RightWorks to
its customers or licensees, or the pricing or royalties set or
charged by persons who have licensed intellectual property to
RightWorks;
. enter into or amend any material contract which grants to any
other party marketing, distribution, development or similar rights
of any type or scope with respect to any products or technology of
RightWorks;
. amend or otherwise modify, or violate the terms of, any of
RightWorks' material contracts;
. commence or settle any litigation;
. with certain exceptions, declare, set aside or pay any dividends
on or make any other distributions in respect of any RightWorks
capital stock, or split, combine or reclassify any RightWorks
capital stock, or repurchase, redeem or otherwise acquire any
shares of RightWorks capital stock;
. with certain exceptions, issue, grant, deliver or sell or
authorize or propose the issuance, grant, delivery or sale of, or
purchase or propose the purchase of, any shares of capital stock
of RightWorks, or other agreements or commitments of any character
obligating it to issue or purchase any such shares or share
equivalents;
. cause or permit any amendments to its articles of organization,
bylaws or other organizational documents of RightWorks;
. acquire or agree to acquire any business, or otherwise acquire or
agree to acquire any assets which are material, individually or in
the aggregate, to RightWorks' business;
. with certain exceptions, sell, lease, license or otherwise dispose
of any of its properties or assets;
. incur any indebtedness or guarantee any indebtedness or issue or
sell any debt securities or guarantee any debt securities of
others;
. with certain exceptions, grant any loans to others or purchase
debt securities of others or amend the terms of any outstanding
loan agreement;
. with certain exceptions, grant any severance or termination pay to
any director or officer or to any other employee or contract
worker;
. with certain exceptions, adopt or amend any employee benefit plan,
or enter into any employment contract, pay or agree to pay any
special bonus or special remuneration to any director, employee or
contract worker, or increase the salaries or wage rates of its
employees or contract workers;
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. revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business;
. with certain exceptions, pay, discharge or satisfy, in an amount
in excess of $100,000 in any one case, any claim, liability or
obligation;
. make or change any material election in respect of taxes, adopt or
change any material accounting method in respect of taxes, enter
into any material closing agreement, settle any material claim or
assessment in respect of taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or
assessment in respect of taxes;
. enter into any strategic alliance or joint marketing arrangement
or agreement;
. with certain exceptions, take any action to accelerate the vesting
schedule of any of the outstanding RightWorks options or stock
subject to rights of repurchase;
. engage in any action that could reasonably be expected to cause
the RightWorks Exchange Offer to fail to qualify as a
"reorganization" under Section 368(a) of the Internal Revenue
Code; or
. agree, whether in writing or otherwise, to take any action
described above.
Notices
RightWorks and Internet Capital Group have agreed to give the other party
prompt notice of the following:
. the occurrence or non-occurrence of any event, the occurrence or
non-occurrence of which is likely to cause any representation or
warranty made by it in the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization to be materially untrue or
inaccurate at or prior to the closing date; and
. any failure by it to materially comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied
by it hereunder.
Access to Information; Confidentiality
Prior to the closing contemplated by the Recapitalization and Exchange
Offer Agreement and Plan of Reorganization, RightWorks will give Internet
Capital Group and its representatives access to its facilities and to inspect
all of its contracts, agreements, commitments, books and records, as well as
access to RightWorks' personnel and auditors at all reasonable times and upon
reasonable notice by Internet Capital Group. Internet Capital Group has agreed
to keep the information provided to it by RightWorks confidential in accordance
with the terms of the Nondisclosure Agreement, dated as of February 1, 2000,
between RightWorks and Internet Capital Group.
Filings; Other Actions
Before we can complete the RightWorks Exchange Offer, Internet Capital
Group and RightWorks must satisfy all regulatory requirements and obtain the
approval of all regulatory agencies having jurisdiction over the RightWorks
Exchange Offer. To facilitate the regulatory review and approval process,
Internet Capital Group and RightWorks have agreed to promptly make all
necessary filings, seek all required approvals of relevant regulatory agencies
and use reasonable efforts to take all actions necessary to complete the
RightWorks Exchange Offer. Accordingly, we must make filings and other required
submissions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. We will also make any other filings or submissions and seek the
approval of all other applicable regulatory agencies. This includes our prompt
compliance with
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requests by these agencies for additional information or documentation
following our initial filings or submissions.
Amendment to Certificate of Incorporation and Bylaws
RightWorks will, no later than the date of closing of the RightWorks
Exchange Offer, amend its Certificate of Incorporation and Bylaws as specified
in the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization.
No Solicitation
Until the closing contemplated by the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization, RightWorks will not solicit, initiate,
knowingly encourage, agree to, approve or recommend, engage in negotiations or
discussions concerning, provide any non-public information to any person or
entity relating to, any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of all or a material portion of the
assets, sale of shares of capital stock or any similar transaction involving
RightWorks or its business, other than the transactions contemplated by the
Recapitalization and Exchange Offer Agreement and Plan of Reorganization.
RightWorks has agreed to notify Internet Capital Group immediately if they, or
their representatives, receive any such proposal.
Additional Covenants
RightWorks also has agreed that:
. its Board of Directors would, in accordance with Rule 14e-2 of the
Securities Exchange Act of 1934, as amended, issue a statement
recommending acceptance of the Exchange Offer.
Indemnification and Escrow
Subject to monetary and other limitations, the holders of RightWorks
Series B Shares that tender shares in the RightWorks Exchange Offer shall
severally indemnify Internet Capital Group and its officers, directors and
affiliates and hold RightWorks harmless for losses caused by:
. RightWorks' misrepresentation or breach of warranty;
. RightWorks' breach of covenant or other agreement contained in the
Recapitalization and Exchange Offer Agreement and Plan of
Reorganization; and
. RightWorks' third party expenses exceeding the estimate provided
by RightWorks to Internet Capital Group.
As partial security for such indemnification, 10% of the RightWorks
Exchange Offer consideration for each tendering RightWorks' holder will be
deposited with Chase Manhattan Trust Company, National Association, as escrow
agent. Any amount in escrow remaining unclaimed and undisputed after the
earlier to occur of (i) one year or (ii) the closing of RightWorks initial
public offering of common stock, will be returned to the tendering holders. The
escrow period shall terminate at the earlier of the closing of the first sale
of shares of RightWorks common stock in its initial public offering or the one
year anniversary of the Expiration Date. The holders of RightWorks Series B
Shares who tender shares in the RightWorks Exchange Offer will not have any
right of contribution from RightWorks with respect to any loss claimed under
this provision.
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Termination
The Recapitalization and Exchange Offer Agreement and Plan of
Reorganization may be terminated at any time prior to the closing of the
RightWorks Exchange Offer:
. by mutual agreement of Internet Capital Group and RightWorks;
. by either Internet Capital Group or RightWorks, if the closing
contemplated by the Recapitalization and Exchange Offer Agreement
and Plan of Reorganization has not occurred by August 31, 2000,
and a breach of the Recapitalization and Exchange Offer Agreement
and Plan of Reorganization by the terminating party is not the
principal cause of the failure to close by such date;
. by either Internet Capital Group or RightWorks, by written notice
to the other party, if any of the representations and warranties
of RightWorks or Internet Capital Group were incorrect when made,
or at any time thereafter, to an extent that would cause the
related condition to closing not to be satisfied or if RightWorks
or Internet Capital Group is in material breach of any of its
covenants or agreements in the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization and the breach continues
uncured for 30 calendar days after written notice of the breach;
. by either Internet Capital Group or RightWorks, by written notice
to the other party, if a court of competent jurisdiction or a
governmental agency issues an order, decree or ruling or takes any
other action which permanently restrains, enjoins or otherwise
prohibits the RightWorks Exchange Offer, and the action shall have
become final and non-appealable;
If any party to the Recapitalization and Exchange Offer Agreement and
Plan of Reorganization terminates the agreement for of any of the reasons
above, all obligations of the parties will terminate and there will be no
liability, except for liability for breaches of the Recapitalization and
Exchange Offer Agreement and Plan of Reorganization, by any party. Some of the
representations and warranties made by the parties will survive any termination
of the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization.
Expiration Date; Extension; Amendments
The RightWorks Exchange Offer expires at 12:00 Midnight, New York city
time, on June 8, 2000, or the Expiration Date unless we decide to extend the
RightWorks Exchange Offer in the event that our closing conditions have not
been satisfied or waived, or if required by the securities laws.
Under the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization, Internet Capital Group has the right, in its sole discretion,
to modify and make changes to the terms and conditions of the RightWorks
Exchange Offer. Internet Capital Group must, however, obtain the prior consent
of RightWorks, to make modifications or changes which:
. decrease the consideration payable in the RightWorks Exchange
Offer (except as permitted by the Recapitalization and Exchange
Offer Agreement and Plan of Reorganization);
. change the form of consideration payable in the RightWorks
Exchange Offer (other than by adding consideration);
. change the minimum number of RightWorks Series B Preferred Shares
the holders must tender;
. impose additional material conditions to the RightWorks Exchange
Offer; or
. is otherwise inconsistent with the terms of the Recapitalization
and Exchange Offer Agreement and Plan of Reorganization.
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Internet Capital Group may, without the consent of RightWorks:
. extend the RightWorks Exchange Offer at any time or from time to
time as Internet Capital Group may determine in its sole
discretion if at the then scheduled Expiration Date any of the
conditions to Internet Capital Group's obligations to accept have
not been satisfied or waived (Internet Capital Group may set the
time period for each extension, but no extension will exceed 10
business days); and
. extend the RightWorks Exchange Offer for any period of time
required by any rule, regulation, interpretation or position of
the Securities and Exchange Commission or its staff applicable to
the RightWorks Exchange Offer (including any extension necessary
to permit this Registration Statement to become effective).
Any extension, delay, waiver, amendment or termination of the RightWorks
Exchange Offer will be promptly followed by a public announcement. The
announcement of an extension will be issued no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date in accordance with Rule 14e-1(d) under the Securities and Exchange Act of
1934 as amended, or the Exchange Act, which requires that material changes be
promptly communicated to holders of securities. Subject to applicable law and
without limiting Internet Capital Group's obligation under the Rule or the way
in which Internet Capital Group may choose to make any public announcement,
Internet Capital Group will communicate the extension by making a press release
to an appropriate news agency.
If Internet Capital Group extends the RightWorks Exchange Offer, or if
Internet Capital Group (whether before or after its acceptance for exchange of
RightWorks Series B Preferred Shares) is delayed in its exchange or is unable
to exchange Common Stock for RightWorks Series B Preferred Shares for any
reason, then, without prejudice to Internet Capital Group's rights under the
RightWorks Exchange Offer, the exchange agent may retain tendered RightWorks
Series B Preferred Shares on behalf of Internet Capital Group, and holders of
those shares may not withdraw them except in accordance with the procedures in
"The RightWorks Exchange Offer--Withdrawal Rights." The ability of Internet
Capital Group to delay the exchange is limited by Rule 14e-1(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by, or on behalf of, holders of securities
promptly after the termination or withdrawal of the RightWorks Exchange Offer.
If Internet Capital Group makes a material change in the terms of the
RightWorks Exchange Offer or the information concerning the RightWorks Exchange
Offer or waives a material condition of the RightWorks Exchange Offer, Internet
Capital Group will disseminate additional tender RightWorks Exchange Offer
materials and extend the RightWorks Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act. The minimum period during which the
RightWorks Exchange Offer must remain open following material changes in the
terms of the RightWorks Exchange Offer or information concerning the RightWorks
Exchange Offer, other than a change in price or a change in percentage of
securities sought, will depend upon the facts and circumstances then existing,
including the relative materiality of the changed terms or information. In a
public release, the Commission has stated its view that an exchange offer must
remain open for a minimum period of time following a material change in the
terms of the exchange offer and that waiver of a material condition, such as
the minimum number of RightWorks Series B Preferred Shares the holders must
tender, is a material change in the terms of such exchange offer. The release
states that an exchange offer should remain open for a minimum of five business
days from the date a material change is first published, or sent or given to
securityholders and that, if material changes are made with respect to
information not materially less significant than the exchange offer price and
the number of shares being sought, a minimum of ten business days may be
required to allow adequate dissemination and investor response. The requirement
to extend the exchange offer does not apply if the number of business days
remaining between the occurrence of the change and the then scheduled
expiration date equals or exceeds the minimum extension period that would be
required because of the change. If, prior to the Expiration Date, Internet
Capital Group increases the consideration offered to
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holders of RightWorks Series B Preferred Shares under the RightWorks Exchange
Offer, the increased consideration will be paid to all holders whose RightWorks
Series B Preferred Shares are accepted in the RightWorks Exchange Offer whether
or not they were tendered prior to the announced increase.
RightWorks has provided Internet Capital Group with RightWorks'
securityholder lists and security position listings for the purpose of
disseminating the RightWorks Exchange Offer to securityholders. This RightWorks
Exchange Offer, the related Letter of Transmittal and other relevant documents
will be mailed to record holders of RightWorks whose names appear on
RightWorks' securityholder lists.
Period for Tendering RightWorks Series B Preferred Shares
Upon the terms and subject to the conditions in this Prospectus and in
the accompanying Letter of Transmittal (which together constitute the
RightWorks Exchange Offer), we will accept for exchange RightWorks Series B
Preferred Shares which are properly tendered and not withdrawn as permitted
below on or prior to the Expiration Date.
This Prospectus, together with the Letter of Transmittal, is first being
sent on or about May 10, 2000 to all holders of RightWorks Series B Preferred
Shares known to us. Our obligation to accept RightWorks Series B Preferred
Shares for exchange under the RightWorks Exchange Offer is subject to
conditions as set forth under "Conditions to RightWorks Exchange Offer" above.
If there is an extension of the RightWorks Exchange Offer, during such
extension all RightWorks Series B Preferred Shares previously tendered will
remain subject to the RightWorks Exchange Offer and may be accepted for
exchange by us. Any RightWorks Series B Preferred Shares not accepted for
exchange for any reason will be returned without expense to the tendering
holder as promptly as practicable after the expiration or termination of the
RightWorks Exchange Offer.
Holders of RightWorks Series B Preferred Shares do not have any appraisal
or dissenter's rights under the California Corporations Code in connection with
the RightWorks Exchange Offer.
Procedures for Tendering RightWorks Series B Preferred Shares
The tender to us of RightWorks Series B Preferred Shares by a holder of
RightWorks Series B Preferred Shares as set forth below and the acceptance of
the tender by us will constitute a binding agreement between the tendering
holder and us upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal. Except as set forth
below, a holder who wishes to tender RightWorks Series B Preferred Shares for
exchange under the RightWorks Exchange Offer must transmit a properly completed
and duly executed Letter of Transmittal, including all other documents required
by the Letter of Transmittal, to the exchange agent on or prior to the
Expiration Date. In addition, the exchange agent must receive certificates for
the RightWorks Series B Preferred Shares, or other RightWorks Preferred Shares
which will be converted into RightWorks Series B Preferred Shares under the
terms of the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization, along with the Letter of Transmittal.
The method of delivery of the RightWorks Series B Preferred Shares, the
Letter of Transmittal and all other required documents is at your election and
risk. If the delivery is by mail, we recommend that you use registered mail,
properly insured, with return receipt requested. In all cases, you should allow
sufficient time to assure timely delivery. You should not send Letters of
Transmittal or RightWorks Series B Preferred Shares to us.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the RightWorks Series B Preferred Shares
surrendered for exchange are tendered:
. by a registered holder of the RightWorks Series B Preferred Shares
who has not completed the box entitled "Special Issuance
Instruction" or "Special Delivery Instruction" on the Letter of
Transmittal; or
. for the account of a firm which is a member of a registered
national securities exchange or a member of the National
Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United
States.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantees
must be by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
by a commercial bank or trust company having an office or correspondent in the
United States. If the RightWorks Series B Preferred Shares are registered in
the name of a person other than a signer of the Letter of Transmittal, the
RightWorks Series B Preferred Shares surrendered for exchange must be endorsed
by, or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by us in our sole discretion, duly
executed by the registered holder with the signature on the RightWorks Series B
Preferred Shares guaranteed by a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States unless the holder is a firm which is a
member of a registered national securities exchange or a member of the National
association of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States. We shall be deemed to
have accepted properly tendered RightWorks Series B Preferred Shares for
exchange when, as and if we have given oral and written notice to the exchange
agent.
In all cases, issuance of shares of Common Stock for RightWorks Series B
Preferred Shares that are accepted for exchange under the RightWorks Exchange
Offer will be made only after timely receipt by the exchange agent of:
. certificates for the RightWorks Series B Preferred Shares;
. a properly completed and duly executed Letter of Transmittal; and
. all other required documents.
If any tendered RightWorks Series B Preferred Shares are not accepted for
any reason set forth in the terms and conditions of the RightWorks Exchange
Offer or if RightWorks Series B Preferred Shares are submitted for a greater
amount than the holder desires to exchange, the unaccepted or non-exchanged
RightWorks Series B Preferred Shares will be returned without expense to the
tendering holder of the RightWorks Series B Preferred Shares as promptly as
practicable after the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the RightWorks Series B Preferred Shares tendered
for exchange will be determined by us in our sole discretion. This
determination shall be final and binding. We reserve the absolute right to
reject any and all tenders of any particular RightWorks Series B Preferred
Shares not properly tendered or to not accept any particular RightWorks Series
B Preferred Shares which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the absolute right to waive any defects
or irregularities or conditions of the RightWorks Exchange Offer as to any
particular RightWorks Series B Preferred Shares either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender RightWorks Series B Preferred Shares in the RightWorks
Exchange Offer). The interpretation of the terms and conditions of the
RightWorks Exchange Offer as to any particular RightWorks Series B Preferred
Shares either before or
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after the Expiration Date (including the Letter of Transmittal and the
instructions to the letter of Transmittal) by us shall be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of RightWorks Series B Preferred Shares for exchange must be cured
within a reasonable period of time as we shall determine. Neither we, the
exchange agent nor any other person shall be under any duty to give
notification of any defect or irregularity regarding any tendered RightWorks
Series B Preferred Shares for exchange, nor shall any of them incur any
liability for failure to give notification.
If the Letter of Transmittal or any RightWorks Series B Preferred Shares
or powers of attorney are signed by trustees, executors, administrators,
guardians, attorney-in-fact, officers of corporations or others acting in
fiduciary or representative capacity, these persons should so indicate when
signing, and, unless waived by us, proper evidence satisfactory to us of their
authority to so act must be submitted.
By tendering, each holder of RightWorks Series B Preferred Shares will
represent to us in writing that, among other things:
. the Common Stock acquired under the RightWorks Exchange Offer is
being obtained in the ordinary course of business of the holder
and any beneficial holder;
. neither the holder nor any beneficial holder has an arrangement or
understanding with any person to participate in the distribution
of the Common Stock; and
. neither the holder, nor any beneficial holder is an "affiliate,"
as defined under Rule 405 of the Securities Act, of our company.
If the holder is not a broker-dealer, the holder must represent
that it is not engaged in nor does it intend to engage in
distribution of the Common Stock.
If any holder or any beneficial holder is an "affiliate," as defined
under Rule 405 of the Securities Act, of ours, or is engaged in, or intends to
engage in, or has an arrangement or understanding with any person to
participate in, a distribution of the shares of Common Stock to be acquired
under the RightWorks Exchange Offer, the holder or any other person (1) may not
rely on the applicable interpretation of the staff of the Securities and
Exchange Commission and (2) must comply with the registration and Prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Procedures for Distributing Internet Capital Group Common Stock
The exchange agent will send certificates representing the shares of
Common Stock via a reputable overnight courier within five to seven business
days of the closing contemplated by the Exchange Offer Agreement.
Return of RightWorks Series B Preferred Shares
If any tendered RightWorks Series B Preferred Shares are not accepted for
any reason set forth in the terms and conditions of the RightWorks Exchange
Offer, the tendered RightWorks Series B Preferred Shares will be returned
without expense to the tendering holder of the shares.
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Withdrawal Rights
Tenders of RightWorks Series B Preferred Shares may be withdrawn at any
time prior to the closing of the RightWorks Exchange Offer unless you are a
holder of RightWorks Series B Preferred Shares that has already agreed with us
in writing not to withdraw your RightWorks Series B Preferred Shares. For a
withdrawal to be effective, a written notice of withdrawal must be received by
the exchange agent at one of the addresses set forth below under "Exchange
Agent." Any such notice of withdrawal must:
. specify the name of the person having tendered the RightWorks
Series B Preferred Shares to be withdrawn;
. identify the RightWorks Series B Preferred Shares to be withdrawn
(including the certificate number of RightWorks Series B Preferred
Shares); and
. where certificates for RightWorks Series B Preferred Shares have
been transmitted specify the name in which the RightWorks Series B
Preferred Shares are registered, if different from that of the
withdrawing holder.
If certificates for RightWorks Series B Preferred Shares have been delivered or
otherwise identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States unless the holder is a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States.
Acceptance of Company Shares and Delivery of Common Stock
Upon satisfaction or waiver of all of the conditions to the RightWorks
Exchange Offer, we will accept, promptly after the Expiration Date, all
RightWorks Series B Preferred Shares properly tendered and not withdrawn, and
will issue the Common Stock promptly after acceptance of the RightWorks Series
B Preferred Shares. See "Conditions to RightWorks Exchange Offer" above. For
purposes of the RightWorks Exchange Offer, we shall be deemed to have accepted
properly tendered RightWorks Series B Preferred Shares for exchange when, as
and if we have given oral and written notice to the exchange agent.
Exchange Agent
ChaseMellon Shareholder Services has been appointed as exchange agent for
the RightWorks Exchange Offer. Questions and requests for assistance and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the exchange agent addressed as follows:
Attn: Reorganization Department
P.O. Box 3301
South Hackensack, NJ 07606
Call Toll Free:
(800) 777-3674
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Fees and Expenses
Each party to the Recapitalization and Exchange Offer Agreement and Plan
of Reorganization will bear its own expenses incurred in connection with the
RightWorks Exchange Offer. Internet Capital Group and RightWorks, however, will
share equally any filing fees under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
The exchange agent will receive reasonable and customary compensation for
its services and will be indemnified against certain liabilities and expenses
in connection with the performance of its services, including certain
liabilities under the federal securities laws. We will not pay any fees or
commissions to any broker or dealer or other persons for soliciting tenders of
RightWorks Series B Preferred Shares pursuant to the RightWorks Exchange Offer.
We will reimburse brokers, dealers, commercial banks and trust companies for
reasonable expenses incurred by them in forwarding material to their customers.
We will pay the cash expenses to be incurred in connection with the
Registration Statement and both Exchange Offers being done as part of the
Registration Statement, which are estimated in the aggregate to be
approximately $1,250,000. These expenses include registration fees, fees and
expenses of the exchange agent, accounting and legal fees and printing costs,
among others.
Participation in the RightWorks Exchange Offer is voluntary. Holders of
the RightWorks Series B Preferred Shares are urged to consult their financial
and tax advisors in making their own decisions on what action to take.
Accounting Treatment
We will account for the RightWorks Series B Preferred Shares that we
acquire pursuant to our RightWorks Exchange Offer under the purchase method of
accounting.
Consequences Of Failure To Exchange; Resales Of Common Stock
Holders of RightWorks Series B Preferred Shares who do not exchange their
RightWorks Series B Preferred Shares for Common Stock in the RightWorks
Exchange Offer will continue to be subject to the restrictions on transfer as a
consequence of the issuance of the RightWorks Series B Preferred Shares in
accordance with exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. Holders of RightWorks Series B Preferred Shares do not have any appraisal
or dissenters' rights under the California Corporations Code in connection with
the RightWorks Exchange Offer. In general, the RightWorks Series B Preferred
Shares may not be offered or sold unless registered under the Securities Act,
except in accordance with an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws.
Shareholder Agreements
As an inducement for Internet Capital Group to enter into the
Recapitalization and Exchange Offer Agreement and Plan of Reorganization,
certain holders of RightWorks Preferred Stock entered into shareholder
agreements. By entering into the shareholder agreements, each of these
RightWorks shareholders has agreed and irrevocably appointed representatives of
Internet Capital Group as his lawful attorneys-in-fact and proxies with the
limited right to vote the shares of RightWorks Preferred Stock beneficially
owned by such shareholder, including any additional shares of RightWorks
capital stock acquired after the date of the shareholder agreements, in favor
of the approval of the Recapitalization, in favor of any matter that could
reasonably be expected to facilitate the Recapitalization and against any
matter that could reasonably be expected to delay or hinder the RightWorks
Exchange Offer.
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By entering into the shareholder agreements, each of these RightWorks
shareholders also agreed to tender any post-recapitalization RightWorks Series
B Preferred Shares owned by such shareholder. Entities associated with Sequoia
Capital and certain strategic investors of RightWorks agreed with respect to
some or all of their shares to instead convert their RightWorks Series B
Preferred Shares into RightWorks Series A Preferred Shares. All the RightWorks
shareholders party to the shareholder agreement who intend to retain shares of
RightWorks capital stock after the RightWorks Exchange Offer agreed to provide
to Internet Capital Group a right of first refusal with respect to such shares,
such right to expire upon completion of RightWorks' initial public offering.
Finally, the RightWorks shareholders party to the shareholder agreements also
agreed to a 90 day lock-up restriction with respect to all of the Internet
Capital Group common stock received by such holders in the RightWorks Exchange
Offer and a 180 day lock-up with respect to 50% of such shares.
As of the record date, these shareholders collectively beneficially owned
RightWorks securities that, after the recapitalization of RightWorks, will
represent approximately 22,202,000 RightWorks Series B Preferred Shares. None
of the RightWorks shareholders that are parties to the shareholder agreements
were paid additional consideration in connection with the shareholder
agreements.
Under the shareholder agreements, each of these RightWorks shareholders
agrees not to sell the RightWorks capital stock and options owned, controlled
or acquired, either directly or indirectly, by that person until the earlier of
the termination of the Recapitalization and Exchange Offer Agreement and Plan
of Reorganization or the completion of the RightWorks Exchange Offer, unless
the transfer is in accordance with the shareholder agreement and each person to
whom any shares or any interest in any shares is transferred agrees to be bound
by the terms and provisions of the shareholder agreement. The shareholder
agreements will terminate upon the earlier to occur of the termination of the
Recapitalization and Exchange Offer Agreement and Plan of Reorganization and
the completion of the RightWorks Exchange Offer.
Concurrent Financing
Pursuant to a Stock Purchase Agreement between RightWorks and Rain
Acquisition Corp., Rain Acquisition Corp. agreed to purchase for $22 million in
cash that number of RightWorks Series B Preferred Shares equal to the quotient
of $22 million and the per share value attributed to RightWorks Series B
Preferred Shares in the Recapitalization and Exchange Offer Agreement and Plan
of Reorganization. The obligation to issue and purchase the shares of
RightWorks Series B Preferred Shares pursuant to the Stock Purchase Agreement
is conditioned upon the consummation of the RightWorks Exchange Offer.
Kola Stock Exchange Agreement
Pursuant to a Stock Exchange Agreement between Ms. Kola and Rain
Acquisition Corp., Rain Acquisition Corp. has the right, but not the
obligation, to acquire that number of shares of RightWorks common stock
necessary for the minimum condition to the RightWorks Exchange Offer to be
satisfied at a price equal to 80% of the price paid for RightWorks Series B
Preferred Shares in the concurrent financing. The consideration to be received
by to Ms. Kola pursuant to this agreement consists of shares of Internet
Capital Group Common Stock valued at $111.48 per share.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our Common Stock, including our
Common Stock issued upon exercise of outstanding options and warrants, in the
public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through the sale of equity securities.
Upon completion of both exchange offers covered by the registration
statement of which this Prospectus forms a part, there will be 275,547,968
shares of our Common Stock outstanding. This calculation assumes that the
Exchange Ratio for the eCredit.com Exchange Offer is .51, that the shareholders
of eCredit.com, Inc. will tender an aggregate of 30% of the outstanding shares
of eCredit.com on a fully diluted basis, and that all RightWorks Series B
Preferred Shares are properly tendered and not withdrawn. Of these shares,
122,204,543 shares are freely transferable without restriction or further
registration under the Securities Act, except for any shares held by an
existing "affiliate" of Internet Capital Group, as that term is defined by the
Securities Act, which shares will be subject to the resale limitations of Rule
144 adopted under the Securities Act. The shares of common stock issuable upon
conversion of the convertible notes sold in the concurrent note offering will
be fully tradeable in a similar manner.
Upon completion of both exchange offers covered by the registration
statement of which this Prospectus is a part, approximately 27,199,275
"restricted shares" as defined in Rule 144 will be outstanding. None of these
shares will be eligible for sale in the public market as of the date of this
Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased from us (or
any affiliate) at least one year previously, including a person who may be
deemed our affiliate, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock
(approximately 2,755,480 shares immediately after the offering)
or;
. the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities
and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. Any person (or persons whose shares are aggregated) who
is not deemed to have been our affiliate at any time during the 90 days
preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us
(or any affiliate) at least two years previously, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Prior to this Exchange Offer, the holders of 131,872,442 shares of our
Common Stock and warrants exercisable for 569,451 shares of our Common Stock
have agreed not to sell any of these securities until June 13, 2000 without the
prior written consent of Merrill Lynch.
The holders of 58,507,579 shares of our common stock and warrants
exercisable for 351,860 shares of our common stock that have demand rights have
further agreed not to demand registration of these securities until June 13,
2000 without the prior written consent of Merrill Lynch. After this period, if
any of these holders cause a large number of shares to be registered and sold
in the public market, or if any shares of our common stock are issued pursuant
to any registration statement on Forms S-4 or S-8 that have become effective in
connection with acquisitions of interests in any entity or business or other
business combinations or stock option or employee benefit plans, those sales
could have an adverse effect on the market price for the common stock.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Material U.S. Federal Income Tax Consequences of the RightWorks Exchange Offer
The following discussion summarizes the material federal income tax
consequences of the RightWorks Exchange Offer that are generally applicable to
holders of RightWorks Series B Preferred Shares exchanging their RightWorks
Series B Preferred Shares for Internet Capital Group Common Stock. Shareholders
of RightWorks should be aware that the following discussion does not deal with
all federal income tax considerations that may be relevant to RightWorks
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, foreign persons, tax-exempt entities, banks or
other financial institutions, shareholders who do not hold their RightWorks
Series B Preferred Shares as capital assets within the meaning of Section 1221
of the Code, shareholders who are subject to the alternative minimum tax
provisions of the Code, shareholders who hold their RightWorks Series B
Preferred Shares as "qualified small business stock" within the meaning of
Sections 1202 and 1045 of the Code, shareholders who acquired their RightWorks
Series B Preferred Shares as part of an integrated investment such as a hedge,
straddle, conversion or other risk reduction transaction, or shareholders who
acquired their RightWorks capital stock through stock option or stock purchase
programs or in other compensatory transactions. In addition, the following
discussion does not address the tax consequences of the RightWorks Exchange
Offer under foreign, state or local tax laws. Finally, the following discussion
does not address the tax consequences of transactions occurring prior to or
after the RightWorks Exchange Offer (whether or not such transactions are in
connection with the RightWorks Exchange Offer) including, without limitation,
the Recapitalization, the exercise of options or rights to purchase RightWorks
Series B Preferred Shares in anticipation of the RightWorks Exchange Offer.
Accordingly, RightWorks shareholders are urged to consult their own tax
advisors as to the specific tax consequences to them of the RightWorks Exchange
Offer, including the applicable federal, state, local and foreign tax
consequences to them of the RightWorks Exchange Offer.
The following discussion is based on the Code applicable Treasury
Regulations, judicial authority and administrative rulings and practice, all as
of the date hereof. However, the IRS could adopt a contrary position. Neither
Internet Capital Group nor RightWorks has requested or will request a ruling
from the IRS in connection with the RightWorks Exchange Offer. In addition,
future legislative, judicial or administrative changes or interpretations could
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the RightWorks Exchange Offer to
RightWorks' shareholders.
The Recapitalization and Exchange Offer Agreement and Agreement and Plan
of Reorganization contemplates that a Recapitalization will occur immediately
prior to the Exchange Offer, and that the RightWorks Series B Preferred Shares
issued in the Recapitalization will possess at least 80% of the total voting
power of all RightWorks stock issued and outstanding as of the Closing Date.
The parties intend that the Recapitalization enable Rain Acquisition Corp. to
acquire "control" of RightWorks, as such term is defined by Section 368(c) of
the Code, without the necessity of acquiring at least 80% of each class of
RightWorks voting stock. The analysis contained in IRS Revenue Ruling 76-223,
1976-1 C.B. 104, and IRS Private Letter Rulings 9547049 and 9802048 support
this position. However, there is no statutory authority directly on point.
Nonetheless, it is the belief of Cooley Godward LLP and Wilson Sonsini Goodrich
& Rosati P.C., tax counsel to RightWorks and Internet Capital Group,
respectively, and, it is a condition to the consummation of the RightWorks
Exchange Offer that such counsel render tax opinions to their respective
clients stating that the RightWorks Exchange Offer should constitute a
reorganization under Section 368(a) of the Code. The Tax Opinions will be
subject to certain assumptions, limitations and qualifications and will be
based on the truth and accuracy of certain representations of Internet Capital
Group, Rain Acquisition Corp. and RightWorks.
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The tax discussion in this section assumes and is conditioned upon the
following:
. that the RightWorks Exchange Offer will be consummated in the
manner contemplated herein and in accordance with the provisions
of the Recapitalization and Exchange Offer Agreement and Agreement
and Plan of Reorganization and, if applicable, the Stock Exchange
Agreement between Rain Acquisition Corp. and Vani Kola dated March
7, 2000;
. that all representations, warranties and statements made or agreed
to by Internet Capital Group, Rain Acquisition Corp. and
RightWorks, their respective management, employees, officers,
directors and shareholders in connection with the RightWorks
Exchange Offer, including, but not limited to, those set forth in
the Recapitalization and Exchange Offer Agreement and Plan of
Reorganization (including the exhibits thereto) and the tax
representation letters delivered to such counsel by Internet
Capital Group, Rain Acquisition Corp. and RightWorks are true and
accurate at all relevant times;
. that original documents submitted to such counsel (including
signatures thereto) are authentic, documents submitted to such
counsel as copies conform to the original documents, and that all
of these documents have been (or will be by the effective time of
the RightWorks Exchange Offer) duly and validly executed and
delivered where due execution and delivery are a prerequisite to
the effectiveness of these documents;
. that all covenants contained in the Recapitalization and Exchange
Offer Agreement and Plan of Reorganization (including exhibits
thereto) and the tax representation letters, described above, are
performed without waiver or breach of any material provision of
these covenants;
. that the RightWorks Exchange Offer will be reported by Internet
Capital Group and RightWorks on their respective U.S. federal
income tax returns in a manner consistent with the opinions
rendered by such counsel; and
. that any representation or statement made "to the best of
knowledge" or similarly qualified is correct without that
qualification.
Assuming the RightWorks Exchange Offer does qualify as a reorganization,
then, subject to the assumptions, limitations and qualifications referred to
herein and in the Tax Opinions, the RightWorks Exchange Offer should result in
the following federal income tax consequences:
. The holders of RightWorks Series B Preferred Shares will recognize
no gain or loss upon the receipt of Internet Capital Group Common
Stock solely in exchange for their RightWorks Series B Preferred
Shares in the RightWorks Exchange Offer, except with respect to
cash received in lieu of fractional shares of Internet Capital
Group Common Stock.
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. The aggregate tax basis of the Internet Capital Group Common Stock
received by the RightWorks shareholders in the RightWorks Exchange
Offer will be the same as the aggregate tax basis of the
RightWorks Series B Preferred Shares surrendered in exchange
therefor (reduced by any basis allocable to fractional shares for
which cash is received).
. The holding period of the Internet Capital Group Common Stock
received by each RightWorks shareholder in the RightWorks Exchange
Offer will include the holding period of the RightWorks Series B
Preferred Shares surrendered in exchange therefor, provided that
the RightWorks Series B Preferred Shares surrendered are held as
capital assets at the time of the RightWorks Exchange Offer.
. A holder of RightWorks Series B Preferred Shares receiving cash in
the RightWorks Exchange Offer in lieu of a fractional interest in
Internet Capital Group Common Stock will be treated as if such
holder actually received such fractional share interest which was
subsequently redeemed by Internet Capital Group. A RightWorks
shareholder should recognize gain or loss with respect to a cash
payment in lieu of a fractional share measured by the difference,
if any, between the amount of cash received and the basis in such
fractional share.
. Neither Internet Capital Group nor RightWorks will recognize gain
or loss solely as a result of the RightWorks Exchange Offer.
For federal income tax purposes, holders of RightWorks Series B Preferred
Shares will be treated as having received the escrow shares upon the
consummation of the RightWorks Exchange Offer. Accordingly, until the escrow
shares are released, the interim basis of the Internet Capital Group Common
Stock received by holders of RightWorks Series B Preferred Shares will be
determined as though the maximum number of shares of Internet Capital Group
Common Stock were received by RightWorks shareholders. RightWorks shareholders
should not recognize gain or loss upon the release of escrow shares to satisfy
indemnity claims. The basis of such released shares, if any, will be added to
the adjusted basis of the remaining shares of Internet Capital Group Common
Stock received in the Exchange Offer by the RightWorks shareholders. No gain or
loss will be recognized and no amount will be included in the income of the
RightWorks shareholders by reason of the release of escrow shares to the
RightWorks shareholders.
A successful IRS challenge to the reorganization status of the RightWorks
Exchange Offer would result in RightWorks shareholders recognizing gain or
loss. The amount of gain or loss for each share of RightWorks Series B
Preferred Shares surrendered would equal the difference between the
shareholder's basis in each share and the fair market value, as of the time of
the RightWorks Exchange Offer, of the Internet Capital Group Common Stock and
any other consideration received in exchange. RightWorks shareholders'
aggregate basis in the Internet Capital Group Common Stock so received would
equal its fair market value, and the shareholders' holding period for such
stock would begin the day after the RightWorks Exchange Offer. However, even in
that event, neither Internet Capital Group, Rain Acquisition Corp. nor
RightWorks would recognize gain or loss solely as a result of the RightWorks
Exchange Offer.
Even if the RightWorks Exchange Offer qualifies as a reorganization,
RightWorks shareholders receiving shares of Internet Capital Group Common Stock
will recognize gain to the extent that such shares were received in exchange
for services or property (other than solely RightWorks Series B Preferred
Shares). All or a portion of such gain may be taxable as ordinary income. Gain
would also have to be recognized to the extent that an RightWorks shareholder
was treated as receiving consideration other than Internet Capital Group Common
Stock in exchange for RightWorks Series B Preferred Shares.
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There are other tax-related issues that you should be aware of such as:
. Reporting Requirements. Each RightWorks shareholder that receives
Internet Capital Group Common Stock in the RightWorks Exchange Offer will be
required to file a statement with his or her federal income tax return
providing his or her basis in the RightWorks Series B Preferred Shares
surrendered and the fair market value of the Internet Capital Group Common
Stock and any cash received in the RightWorks Exchange Offer, and to retain
permanent records of these facts relating to the RightWorks Exchange Offer.
. Backup Withholding. Unless an exemption applies under applicable law
and regulations, the exchange agent is required to withhold, and will withhold,
31% of any cash payments to a RightWorks shareholder in the RightWorks Exchange
Offer unless the shareholder provides the appropriate form as described below.
Each RightWorks shareholder should complete and sign the Substitute Form W-9
included as part of the letter of transmittal to be sent to each RightWorks
shareholder, so as to provide the information, including the shareholder's
taxpayer identification number, and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to Internet Capital Group and the exchange agent.
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LEGAL MATTERS
The validity of the Common Stock offered by us hereby will be passed upon
for us by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Dechert Price &
Rhoads beneficially owns 41,666 shares of our common stock and warrants
exercisable at $6.00 per share to purchase 8,333 shares of our common stock.
Members of and attorneys associated with Dechert Price & Rhoads beneficially
own an aggregate of 12,554 shares of our common stock and warrants exercisable
at $6.00 per share to purchase 1,111 shares of our common stock.
Cooley Godward LLP, RightWorks' counsel, will issue an opinion regarding
the tax-free status of the Exchange Offer. An investment partnership affiliated
with Cooley Godward LLP owns 32,435 shares of RightWorks Series B Preferred
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
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<PAGE>
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 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.
158
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNET CAPITAL GROUP, INC.
Report of Independent Auditors........................................... F-4
Consolidated Balance Sheets.............................................. F-5
Consolidated Statements of Operations.................................... F-6
Consolidated Statements of Shareholders' Equity.......................... F-7
Consolidated Statements of Comprehensive Income (Loss)................... F-8
Consolidated Statements of Cash Flows.................................... F-9
Notes to Consolidated Financial Statements............................... F-10
eCREDIT.COM, INC.
Reports of Independent Accountants....................................... F-39
Consolidated Balance Sheets.............................................. F-41
Consolidated Statements of Operations.................................... F-42
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit................................................... F-43
Consolidated Statements of Cash Flows.................................... F-44
Notes to Consolidated Financial Statements............................... F-46
RIGHTWORKS CORPORATION
Report of Independent Public Accountants................................. F-60
Balance Sheets........................................................... F-61
Statements of Operations and Comprehensive Loss.......................... F-62
Statement of Shareholders' Equity........................................ F-63
Statements of Cash Flows................................................. F-64
Notes to Financial Statements............................................ F-65
EMERGE INTERACTIVE, INC.
Independent Auditors' Report............................................. F-76
Consolidated Balance Sheets.............................................. F-77
Consolidated Statements of Operations.................................... F-78
Consolidated Statements of Stockholders' Equity (Deficit)................ F-79
Consolidated Statements of Cash Flows.................................... F-80
Notes to Consolidated Financial Statements............................... F-81
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
JUSTICELINK, INC.
Report of Independent Auditors.......................................... F-95
Balance Sheets.......................................................... F-96
Statements of Operations................................................ F-97
Statements of Mandatory Redeemable Convertible Stock and Other Capital.. F-98
Statements of Cash Flows................................................ F-99
Notes to Financial Statements........................................... F-100
METALSITE GENERAL PARTNER LLC
Report of Independent Public Accountants................................ F-114
Consolidated Balance Sheets............................................. F-115
Consolidated Statement of Operations.................................... F-116
Consolidated Statement of Changes in Partners' Capital (Deficit)........ F-117
Consolidated Statement of Cash Flows.................................... F-118
Notes to Consolidated Financial Statements.............................. F-119
METALSITE AS A COMPONENT OF WEIRTON STEEL CORPORATION
Report of Independent Public Accountants................................ F-129
Statements of Costs and Expenses........................................ F-130
Notes to Financial Statements........................................... F-131
SYNCRA SOFTWARE, INC.
Report of Independent Accountants....................................... F-132
Balance Sheet........................................................... F-133
Statement of Operations................................................. F-134
Statement of Changes in Redeemable Preferred Stock and Stockholders'
Deficit................................................................ F-135
Statement of Cash Flows................................................. F-136
Notes to Financial Statements........................................... F-137
USGIFT, INC.
Report of Independent Public Accountants................................ F-146
Balance Sheet........................................................... F-147
Statement of Operations and Accumulated Deficit......................... F-148
Statement of Cash Flows................................................. F-149
Notes to Financial Statements........................................... F-150
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VERTICALNET, INC.
Independent Auditors' Report............................................ F-155
Consolidated Balance Sheets............................................. F-156
Consolidated Statements of Operations................................... F-157
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Loss..................................................... F-158
Consolidated Statements of Cash Flows................................... F-159
Notes to Consolidated Financial Statements.............................. F-160
</TABLE>
F-3
<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-4
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
As of December 31,
-------------------
1998 1999
------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents............................... $26,841 $1,343,459
Short-term investments.................................. -- 3,359
Accounts receivable, less allowances for doubtful
accounts ($61--1998; $67--1999)........................ 1,842 1,207
Prepaid expenses and other current assets............... 1,119 6,347
------- ----------
Total current assets.................................... 29,802 1,354,372
Fixed assets, net....................................... 1,151 4,015
Ownership interests in and advances to Partner
Companies.............................................. 59,492 547,339
Available-for-sale securities........................... 3,251 46,767
Intangible assets, net.................................. 2,476 23,649
Deferred taxes.......................................... -- 34,388
Other................................................... 613 39,854
------- ----------
Total Assets.............................................. $96,785 $2,050,384
======= ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt.................... $ 288 $ 3,000
Line of credit.......................................... 2,000 --
Accounts payable........................................ 1,348 6,750
Accrued expenses........................................ 1,823 4,205
Notes payable to Partner Companies...................... 1,713 34,134
Deferred revenue........................................ 2,177 --
Other................................................... -- 903
------- ----------
Total current liabilities............................... 9,349 48,992
Long-term debt.......................................... 352 3,185
Other liability (Note 8)................................ -- 4,255
Minority interest....................................... 6,360 7,481
Convertible subordinated notes (Note 7)................. -- 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) and 263,579 (1999) issued
and outstanding........................................ 132 264
Additional paid-in capital.............................. 74,932 1,513,615
Retained earnings (accumulated deficit)................. 5,257 (26,539)
Unamortized deferred compensation....................... (1,330) (11,846)
Notes receivable-shareholders........................... -- (79,790)
Accumulated other comprehensive income.................. 1,733 24,517
------- ----------
Total shareholders' equity.............................. 80,724 1,420,221
------- ----------
Total Liabilities and Shareholders' Equity................ $96,785 $2,050,384
======= ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands except per
share data)
<S> <C> <C> <C>
Revenue.......................................... $ 792 $ 3,135 $ 16,536
Operating Expenses
Cost of revenue................................ 1,767 4,643 8,156
Selling, general and administrative............ 5,743 15,514 48,924
------- -------- --------
Total operating expenses....................... 7,510 20,157 57,080
------- -------- --------
(6,718) (17,022) (40,544)
------- -------- --------
Other income, net (Note 18)...................... -- 30,483 67,384
Interest income.................................. 264 1,306 9,631
Interest expense................................. (126) (381) (3,897)
------- -------- --------
Income (Loss) Before Income Taxes, Minority
Interest and Equity Income (Loss)............... (6,580) 14,386 32,574
Income taxes..................................... -- -- 23,722
Minority interest................................ (106) 5,382 6,026
Equity income (loss)............................. 106 (5,869) (92,099)
------- -------- --------
Net Income (Loss)................................ $(6,580) $ 13,899 $(29,777)
======= ======== ========
Net Income (Loss) Per Share
Basic.......................................... $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Diluted........................................ $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Weighted Average Shares Outstanding
Basic.......................................... 68,198 112,205 201,851
======= ======== ========
Diluted........................................ 68,198 112,299 201,851
======= ======== ========
Pro Forma Information (Unaudited) (Note 2):
Pro forma net income (loss)......................
Pretax income (loss)........................... $ 13,899 $(53,499)
Pro forma income taxes......................... (5,143) 16,050
-------- --------
Pro forma net income (loss).................... $ 8,756 $(37,449)
======== ========
Pro forma net income (loss) per share
Basic.......................................... $ 0.08 $ (0.19)
======== ========
Diluted........................................ $ 0.08 $ (0.19)
======== ========
Pro forma weighted average shares outstanding
Basic.......................................... 112,205 201,851
======== ========
Diluted........................................ 112,299 201,851
======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<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
======= ===== ========== ======== ========= ========= ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Net Income (Loss)................................... $(6,580) $13,899 $(29,777)
------- ------- --------
Other Comprehensive Income (Loss) Before Tax
Unrealized holding gains in available-for-sale
securities....................................... -- 1,733 38,039
Foreign currency translation adjustment........... -- -- (1)
Reclassification adjustments...................... -- -- (2,051)
Tax Related to Comprehensive Income (Loss)
Unrealized holding gains in available-for-sale
securities....................................... -- -- (13,920)
Reclassification adjustments...................... -- -- 717
------- ------- --------
Other Comprehensive Income.......................... -- 1,733 22,784
------- ------- --------
Comprehensive Income (Loss)......................... $(6,580) $15,632 $ (6,993)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
-------- -------- ----------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss)............................. $ (6,580) $ 13,899 $ (29,777)
Adjustments to reconcile to net cash used in
operating activities:
Other income................................ -- (30,483) (67,636)
Depreciation and amortization............... 446 1,135 12,742
Equity (income) loss........................ (106) 5,869 92,099
Minority interest........................... 106 (5,382) (6,026)
Deferred taxes.............................. -- -- (23,722)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net.................... 1,574 (1,183) (4,278)
Prepaid expenses and other assets........... (142) (1,347) (28,603)
Accounts payable............................ 566 620 7,194
Deferred revenue............................ 494 1,250 (49)
Accrued expenses............................ 205 1,415 6,700
-------- -------- ----------
Net cash used in operating activities..... (3,437) (14,207) (41,356)
Investing Activities
Capital expenditures........................ (272) (545) (7,120)
Proceeds from sales of available-for-sale
securities................................. -- 36,431 2,496
Proceeds from sales of Partner Company
ownership interests........................ -- 300 3,506
Advances to Partner Companies............... (2,800) (12,779) (9,679)
Repayment of advances to Partner Companies.. 950 677 4,581
Acquisitions of ownership interests in
Partner Companies.......................... (14,466) (35,822) (329,161)
Other acquisitions (Note 5)................. -- (1,858) (9,732)
Other advances.............................. -- -- (12,850)
Purchase of short-term investments.......... -- -- (22,279)
Proceeds from maturities of short-term
investments................................ -- -- 18,920
Reduction in cash due to deconsolidation of
Partner Companies.......................... -- -- (13,393)
-------- -------- ----------
Net cash used in investing activities..... (16,588) (13,596) (374,711)
Financing Activities
Issuance of common stock, net............... 20,138 38,205 1,077,405
Long-term debt and capital lease
repayments................................. (58) (322) (448)
Proceeds from convertible subordinated
notes...................................... -- -- 656,250
Line of credit borrowings................... 2,500 2,000 25,000
Line of credit repayments................... (2) (2,500) (25,281)
Distribution to former LLC members.......... -- -- (10,676)
Advances to employees....................... -- -- (8,765)
Treasury stock purchase by subsidiary....... -- -- (4,469)
Issuance of stock by subsidiary............. 200 11,293 23,669
-------- -------- ----------
Net cash provided by financing
activities............................... 22,778 48,676 1,732,685
-------- -------- ----------
Net Increase in Cash and Cash Equivalents..... 2,753 20,873 1,316,618
Cash and cash equivalents at beginning of
period....................................... 3,215 5,968 26,841
-------- -------- ----------
Cash and Cash Equivalents at End of Period.... $ 5,968 $ 26,841 $1,343,459
======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-9
<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 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
F-10
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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
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.
F-11
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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 provides information
on an advertiser's products, links a visitor to the advertiser's Web site and
generates sales inquiries from interested visitors. The advertising contracts
generally do not extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred revenue of $2.2
million at December 31, 1998 represents the unearned portion of advertising
contracts for which revenue will be recognized over the remaining period of the
advertising contract.
VerticalNet also generates revenue through providing educational courses
and selling books. Revenue from educational courses is recognized in the period
in which the course is completed and revenue from the sale of books is
recognized in the period in which the books are shipped.
F-12
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
Barter transactions are recorded at the lower of estimated fair value of
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the VerticalNet advertising
impressions (VNAI) are delivered to the customer and advertising expense is
recorded when the customer advertising impressions (CAI) are received from the
customer. If the CAI are received from the customer prior to VerticalNet
delivering the VNAI, a liability is recorded, and if VerticalNet delivers the
VNAI to the customer prior to receiving the CAI, a prepaid expense is recorded.
For the period March 4, 1996 (inception) through December 31, 1997, VerticalNet
barter transactions were immaterial. For the year ended December 31, 1998,
VerticalNet recognized approximately $.6 million and $.5 million of advertising
revenues and expenses, respectively, from barter transactions. Included in
prepaid expenses and other current assets at December 31, 1998 is approximately
$.2 million relating to barter transactions.
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.
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.
F-13
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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.
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).
F-14
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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).
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
F-15
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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.
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.
F-16
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
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.
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
F-17
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
4. Ownership Interests in and Advances to Partner Companies (Continued)
"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.
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
---------------------------
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>
F-18
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
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.
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>
These pro forma amounts exclude the impact of 12 acquisitions of equity
method Partner Companies consummated or announced through March 8, 2000.
F-19
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Fixed Assets
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>
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,
F-20
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
7. Debt (Continued)
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 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.
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>
F-21
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Other Liability
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.
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-22
<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-23
<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>
As of December 31,
------------------
1998 1999
------- ----------
(in thousands)
<S> <C> <C>
Assets
Current assets............................................. $21,597 $1,332,803
Ownership interests in and advances to Partner Companies... 59,492 571,706
Other...................................................... 3,354 125,166
------- ----------
Total assets............................................. $84,443 $2,029,675
======= ==========
Liabilities and shareholders' equity
Current liabilities........................................ 2,082 43,204
Non-current liabilities.................................... 1,637 566,250
Shareholders' equity....................................... 80,724 1,420,221
------- ----------
Total liabilities and shareholders' equity............... $84,443 $2,029,675
======= ==========
</TABLE>
F-24
<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>
Year ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Revenue......................................... $ -- $ -- $ --
Operating expenses
General and administrative.................... 2,054 3,513 23,389
------- -------- ---------
Total operating expenses.................... 2,054 3,513 23,389
------- -------- ---------
(2,054) (3,513) (23,389)
Other income, net............................... -- 30,483 67,642
Interest income, net............................ 253 1,010 5,666
------- -------- ---------
Income (loss) before income taxes and equity
income (loss).................................. (1,801) 27,980 49,919
Income taxes.................................... -- -- 23,722
Equity income (loss)............................ (4,779) (14,081) (103,418)
------- -------- ---------
Net income (loss)............................... $(6,580) $ 13,899 $ (29,777)
======= ======== =========
</TABLE>
F-25
<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>
Year Ended December 31,
------------------------------
1997 1998 1999
-------- -------- ----------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss)............................. $ (6,580) $ 13,899 $ (29,777)
Adjustments to reconcile to net cash used in
operating activities:
Gains included in other income............... -- (32,552) (67,636)
Depreciation and amortization................ 55 298 6,558
Equity (income) loss......................... 4,779 16,150 103,418
Deferred taxes............................... -- -- (23,722)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net.................... 2,003 (125) --
Prepaid expenses and other assets........... 1 (262) (23,382)
Accounts payable............................ 56 39 5,344
Accrued expenses............................ 70 12 3,844
-------- -------- ----------
Net cash provided by (used in) operating
activities................................ 384 (2,541) (25,353)
Investing Activities
Capital expenditures.......................... (37) (61) (3,558)
Proceeds from sales of available-for-sale
securities................................... -- 36,431 2,496
Proceeds from sales of Partner Company
ownership interests and advances to
shareholders................................. -- 300 3,506
Advances to Partner Companies................. (2,640) (12,224) (10,079)
Repayment of advances to Partner Companies.... 950 677 4,581
Acquisitions of ownership interests in Partner
Companies.................................... (16,466) (44,822) (368,159)
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)
Financing Activities
Issuance of common stock, net................. 20,138 38,205 1,077,405
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)
Advances to employees......................... -- -- (8,181)
-------- -------- ----------
Net cash provided by financing activities.. 20,136 38,205 1,714,798
-------- -------- ----------
Net Increase in Cash and Cash Equivalents...... 2,327 15,965 1,305,382
Cash and cash equivalents at beginning of
period........................................ 2,886 5,213 21,178
-------- -------- ----------
Cash and Cash Equivalents at End of Period..... $ 5,213 $ 21,178 $1,326,560
======== ======== ==========
</TABLE>
F-26
<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).
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.
F-27
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
12. Shareholders' Equity (Continued)
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.
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.
F-28
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
13. Stock Option Plans (Continued)
The following table summarizes the activity of the Company's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
----------- --------------
<S> <C> <C>
Outstanding at January 1, 1997................... -- $ --
Options granted.................................. 188,000 0.50
-----------
Options canceled/forfeited....................... -- --
Outstanding at December 31, 1997................. 188,000 0.50
Options granted.................................. 12,144,000 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
Number Average Number Average Number Average
Outstanding Remaining Outstanding Remaining Outstanding Remaining
at Contractual at Contractual at Contractual
Exercise Price 1997 Life (in Years) 1998 Life (in Years) 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%.
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.
F-29
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
13. Stock Option Plans (Continued)
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%.
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.
F-30
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
14. Income Taxes (Continued)
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.
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.
F-31
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
15. Related Parties (Continued)
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.
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.
F-32
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
18. Other Income
Other income consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Issuance of stock by VerticalNet......................... $ -- $50,717
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
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)
Other.................................................... -- (252)
------- -------
$30,483 $67,384
======= =======
</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 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.
F-33
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
18. Other Income (Continued)
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.
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.
F-34
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
19. Commitments and Contingencies (Continued)
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-35
<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. Fiscal 2000 Events (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-36
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
21. Fiscal 2000 Events (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%.
During the period from January 1, 2000 through March 24, 2000 we utilized
$387.6 million to acquire interests in or make advances to new and existing
partner companies. These companies included: Arbinet Communications,
AsseTRADE.com, AUTOVIA, Benchmarking Partners, BuyMedia, Centrimed,
ClearCommerce, Collabria, Commerce Quest, ComputerJobs.com, CourtLink, e-
Chemicals, Entegrity Solutions, eumediX, Eu Supply, FarmingOnLine, FreeBorders,
Industrial America, Internet Healthcare Group, iSky, LinkShare, Logistics.com,
Inc., eMetra, NetVendor, ONVIA.com, Servicesoft Technologies, Simplexis,
StarCite!, TALPX, TeamOn, Universal Access, and Vivant!
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.
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 $320.88 on March 9, 2000, we will
record 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.
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. Upon conversion of the $70 million in convertible notes
(expected in the first quarter of 2000), our voting ownership in VerticalNet
will decrease from 35% to approximately 34%. In addition, we expect to record a
non-operating gain due to the increase in our share of VerticalNet's net equity
as a result of their issuance of shares.
In January, 2000, Breakaway Solutions announced it had signed a
definitive agreement to acquire EggRock Partners for 3,636,000 shares of
Breakaway Solutions common stock valued at $250 million at the date of signing
of the definitive agreement. Consummation of the transaction is subject to
customary closing conditions and is expected to close in April 2000. Upon
closing, 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.
In February 2000, the Company 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 February, 2000, the Company entered into an agreement to acquire a
significant interest in eCredit.com, a leading provider of Internet based
financing. We will issue common stock worth approximately $450 million to
eCredit.com shareholders. We expect the transaction to close in the quarter
ending June 30, 2000.
F-37
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements--(Continued)
21. Fiscal 2000 Events (Unaudited) (Continued)
In March, 2000, the Company entered into an agreement to acquire a
majority interest in RightWorks, a leading provider of e-procurement software
for B2B exchanges. We will issue approximately $635 million in Internet Capital
Group common stock (valued at $111.48 per share) to tendering RightWorks'
preferred shareholders (subject to adjustment based on the number of
RightWorks' shares tendered) and also will purchase newly issued RightWorks
shares for $22 million in cash. We expect the transaction to close in the
quarter ending June 30, 2000.
In March 2000, the Company entered into an agreement to acquire a
majority interest in Harbour Ring International Holdings, which will be renamed
ICG AsiaWorks Limited, with Hutchison Whampoa Ltd., a Hong Kong based multi-
national conglomerate, to facilitate our entrance into the Asian e-commerce
markets. Under the terms of a separate agreement, a third party affiliated with
Hutchison Whampoa Ltd. will, at the request of ICG and subject to the approval
by the Stock Exchange of Hong Kong Limited and the Securities & Futures
Commission, be required to purchase the operating subsidiaries of ICG AsiaWorks
Limited at a fixed price for a two-year period from the closing date of the
acquisition, including assets and liabilities arising subsequent to the closing
date of the acquisition. The Company expended approximately $117 million upon
the closing of this transaction which occured on May 4, 2000.
In March 2000, VerticalNet acquired Tradeum, Inc. for approximately
4,000,000 shares of VerticalNet common stock. Upon closing, our voting
ownership of VerticalNet decreased from 33% to approximately 31%. In addition,
we expect to record a non-operating gain due to the increase in our share of
VerticalNet's net equity as a result of their issuance of shares.
In March, 2000, the Company entered into an agreement to increase the
amount available under our bank credit facility to $250 million.
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.
F-38
<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-39
<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-40
<PAGE>
eCredit.com, Inc.
Consolidated Balance Sheets
(In Thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31 December 31
1998 1999 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 2,312 $ 35,210 $ 38,870
Accounts receivable, net of allowance for
doubtful accounts of $36 at December 31, 1998
and 1999...................................... 1,154 4,196 4,196
Prepaid expenses............................... 16 55 55
Other current assets........................... 37 940 940
------- -------- --------
Total current assets............................ 3,519 40,401 44,061
Fixed assets, net............................... 581 2,762 2,762
Capitalized software costs...................... -- 681 681
Notes receivable from officers.................. -- 1,302 1,302
Other assets.................................... 96 668 668
------- -------- --------
Total assets.................................... $ 4,196 $ 45,814 $ 49,474
======= ======== ========
Liabilities, redeemable preferred stock and
stockholders' deficit
Current liabilities:
Current portion of note payable................ -- $ 461 $ 461
Current portion of capital lease............... $ 112 76 76
Accounts payable............................... 192 3,008 3,008
Accrued expenses............................... 661 3,199 3,199
Deferred revenue............................... 442 907 907
Billings in excess of cost and estimated
earnings on uncompleted contracts............. 351 787 787
------- -------- --------
Total current liabilities....................... 1,758 8,438 8,438
Capital lease obligations, net of current por-
tion........................................... 99 69 69
Notes payable, net of current portion........... -- 1,172 1,172
------- -------- --------
Total liabilities............................... 1,857 9,679 9,679
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 --
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 --
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 --
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 --
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 --
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
Additional paid-in capital..................... 394 41,844 905,390
Accumulated deficit............................ (12,490) (341,042) (836,125)
Notes receivable............................... -- (3,095) (3,095)
Deferred compensation.......................... -- (35,006) (26,181)
Common stock held in treasury, 450,000 shares
at cost....................................... (225) (225) (225)
------- -------- --------
Total stockholders' equity (deficit)............ (12,318) (337,517) 39,795
------- -------- --------
Total liabilities, redeemable preferred stock
and stockholders' equity (deficit)............. $ 4,196 $ 45,814 $ 49,474
======= ======== ========
</TABLE>
See accompanying notes.
F-41
<PAGE>
eCredit.com, Inc.
Consolidated Statements of Operations
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
December 31 December 31
------------------------------- -----------
1997 1998 1999 1999
--------- --------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
Software licenses and related
implementation................. $ 3,358 $ 3,763 $ 6,702 $ 6,702
Services and software support... 585 1,061 1,699 1,699
--------- --------- --------- ----------
Total revenues................... 3,943 4,824 8,401 8,401
--------- --------- --------- ----------
Cost of revenues
License and related
implementation (1999 and Pro
Forma excludes $351 and $17,371
stock compensation,
respectively).................. 2,153 1,987 5,230 5,230
Services (1999 and Pro Forma
excludes $72 and $3,563 stock
compensation, respectively).... 440 708 1,195 1,195
--------- --------- --------- ----------
Total cost of revenues........... 2,593 2,695 6,425 6,425
--------- --------- --------- ----------
Gross profit..................... 1,350 2,129 1,976 1,976
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
Research and development (1999
and Pro Forma excludes $23 and
$1,138 stock compensation,
respectively).................. 419 472 823 823
General and administrative (1999
and Pro Forma excludes $1,227
and $60,724 stock compensation,
respectively).................. 1,598 1,802 4,159 4,159
Stock compensation.............. -- -- 2,286 113,135
--------- --------- --------- ----------
Total operating expenses......... 3,168 4,536 18,493 129,342
--------- --------- --------- ----------
Loss from operations............. (1,818) (2,407) (16,517) (127,366)
Interest income.................. -- 27 185 185
Interest expense................. (128) (147) (72) (72)
Other income..................... -- -- 31 31
--------- --------- --------- ----------
Net loss......................... (1,946) (2,527) (16,373) (127,222)
Accretion of preferred stock..... -- (5,081) (312,179) --
--------- --------- --------- ----------
Net loss attributable to common
stockholders.................... $ (1,946) $ (7,608) $(328,552) $ (127,222)
========= ========= ========= ==========
Basic and diluted net loss per
share........................... $ (0.93) $ (3.62) $ (110.02) $ (5.48)
========= ========= ========= ==========
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
========= ========= ========= ==========
</TABLE>
See accompanying notes.
F-42
<PAGE>
F-43
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 Series E
Redeemable Redeemable Redeemable Redeemable Redeemable
Convertible Convertible Convertible Convertible Convertible
Preferred Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Stock Common Additional
--------------- --------------- --------------- ------------------ ----------------- Stock Par Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares value capital
------- ------- ------- ------- ------- ------- --------- -------- --------- ------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 946,808 $ 2,225 2,550,000 $ 3
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 2,550,000 3
Issuance of
Series C
convertible
preferred stock
with warrants,
net of issuance
costs of $117.. 757,156 $ 5,811
Issuance of
warrants....... $ 394
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 2,550,000 3 394
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.. 1,435,535 $22,940
Issuance of
warrants....... 959
Issuance of
restricted
stock to
officers and
directors...... 3,924,273 4 3,152
Issuance of
common stock in
connection with
the exercise of
stock options.. 39,375 47
Expenses
associated with
remeasurement
of employee
stock option... 111
Deferred
compensation
related to
stock awards
and option
grants......... 37,181
Amortization of
deferred
compensation...
Repayment of
officers
notes..........
Accretion of
redeemable
preferred stock
to redemption
value.......... 62,574 18,284 82,989 136,819 11,513
Net loss........
------- ------- ------- ------- ------- ------- --------- -------- --------- ------- --------- --- -------
Balance,
December 31,
1999 946,808 $68,171 184,432 $19,923 757,156 $90,410 6,695,618 $160,695 1,435,535 $34,453 6,513,648 $ 7 $41,844
======= ======= ======= ======= ======= ======= ========= ======== ========= ======= ========= === =======
<CAPTION>
Total
Accumulated Notes Deferred Treasury Stockholders'
deficit receivable compensation stock deficit
----------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 $ (2,936) $(225) $ (3,158)
Issuance of
Series B
redeemable
convertible
preferred
stock..........
Net loss........ (1,946) (1,946)
Balance,
December 31,
1997 (4,882) (225) (5,104)
Issuance of
Series C
convertible
preferred stock
with warrants,
net of issuance
costs of $117..
Issuance of
warrants....... 394
Accretion of
redeemable
preferred stock
to redemption
value.......... (5,081) (5,081)
Net loss........ (2,527) (2,527)
Balance,
December 31,
1998 (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..
Issuance of
warrants....... 959
Issuance of
restricted
stock to
officers and
directors...... $(3,104) 52
Issuance of
common stock in
connection with
the exercise of
stock options.. 47
Expenses
associated with
remeasurement
of employee
stock option... 111
Deferred
compensation
related to
stock awards
and option
grants......... $(37,181) -
Amortization of
deferred
compensation... 2,175 2,175
Repayment of
officers
notes.......... 9 9
Accretion of
redeemable
preferred stock
to redemption
value.......... (312,179) (312,179)
Net loss........ (16,373) (16,373)
----------- ---------- ------------ -------- -------------
Balance,
December 31,
1999 $(341,042) $ (3,095) $(35,006) $(225) $(337,517)
=========== ========== ============ ======== =============
</TABLE>
See accompanying notes.
<PAGE>
eCredit.com, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activi-
ties
Net loss........................................... $(1,946) $(2,527) $(16,373)
Depreciation and amortization...................... 173 221 479
Amortization of stock compensation................. -- -- 2,286
Loss on disposal of fixed assets................... 10 -- 4
Changes in assets and liabilities
Accounts receivable............................... 13 (135) (3,042)
Prepaid expenses and other current assets......... 129 (4) (942)
Other assets...................................... -- (64) (572)
Accounts payable.................................. 382 (306) 2,816
Accrued expenses.................................. 344 (192) 2,538
Deferred revenue.................................. 6 263 465
Billings in excess of cost and estimated earnings
on uncompleted contracts......................... (413) 324 436
------- ------- --------
Net cash used in operating activities.............. (1,302) (2,420) (11,905)
------- ------- --------
Cash flows used in investing activities
Purchases of fixed assets.......................... (157) (369) (2,601)
Capitalized software additions..................... -- -- (681)
------- ------- --------
Net cash used in investing activities.............. (157) (369) (3,282)
------- ------- --------
Cash flows provided by (used in) financing activi-
ties
Borrowings under bridge financing arrangement from
stockholders...................................... -- 1,300 3,000
Proceeds received from note payable................ -- -- 1,655
Principal payments made on note payable............ (13) (974) (22)
Notes receivable from officers..................... -- -- (1,302)
Proceeds on repayment of officer notes receivable.. -- -- 9
Payments on capital lease obligations.............. (104) (140) (129)
Proceeds from issuance of Series B redeemable con-
vertible preferred stock, net of issuance costs... 1,540 -- --
Proceeds from issuance of Series C redeemable con-
vertible preferred stock and preferred stock war-
rants, net of issuance costs...................... -- 4,905 --
Proceeds from issuance of Series D redeemable con-
vertible preferred stock, net of issuance costs... -- -- 20,876
Proceeds from issuance of Series E redeemable con-
vertible preferred stock and common stock war-
rants, net of issuance costs...................... -- -- 23,899
Proceeds from exercise of stock options............ -- -- 47
Proceeds from issuance of restricted stock......... -- -- 52
------- ------- --------
Net cash provided by financing activities.......... 1,423 5,091 48,085
------- ------- --------
</TABLE>
See accompanying notes.
F-44
<PAGE>
eCredit.com, Inc.
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1997 1998 1999
-------------- --------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents... $ (36) $ 2,302 $ 32,898
Cash and cash equivalents, beginning of period......... 46 10 2,312
----- ------- --------
Cash and cash equivalents, end of period............... $ 10 $ 2,312 $ 35,210
===== ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 128 $ 147 $ 72
Supplemental disclosure of non-cash investing and fi-
nancing 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-45
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
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.
F-46
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
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 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
F-47
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
2. Summary of Significant Accounting Policies--(continued)
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, 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-48
<PAGE>
eCredit.com, Inc.
Notes to 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-49
<PAGE>
eCredit.com, Inc.
Notes to 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-50
<PAGE>
eCredit.com, Inc.
Notes to 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 (SAB101), "Revenue Recognition in Financial
Statements." SAB101 summarizes the application of generally accepted accounting
principles to revenue recognition in financial statements. On March 24, 2000,
the SEC issued an amendment to SAB101 delaying the effective date for certain
companies. The Company will adopt SAB101 in the second quarter of fiscal 2000
and is presently analyzing the impact that SAB101 will have on its financial
statements. Based on the Company's review to date, SAB101 is not expected to
materially impact the Company's financial position or operating results.
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
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>
F-51
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
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>
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
F-52
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
6. Redeemable Convertible Preferred Stock--(continued)
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.
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,
F-53
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
6. Redeemable Convertible Preferred Stock--(continued)
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 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
F-54
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
8. Stock Option Plan--(continued)
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>
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
Options contractual Options
outstanding life in years exercisable
Exercise price ----------- ------------- -----------
<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
F-55
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
8. Stock Option Plan--(continued)
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):
<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>
F-56
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
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.
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.
F-57
<PAGE>
eCredit.com, Inc.
Notes to Consolidated Financial Statements--(Continued)
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
Year ending December 31: --------- -------
(in thousands)
<S> <C> <C>
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-58
<PAGE>
eCredit.com, Inc.
Notes to 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
15,568,622 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
connection with the purchase of eCredit's shares. Such warrants are
exercisable upon an initial public offering of shares of eCredit.
F-59
<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-60
<PAGE>
RIGHTWORKS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents........................... $11,921,721 $3,948,840
Accounts receivable, net of allowance for doubtful
accounts of $30,000 and $0, respectively........... 3,162,920 58,500
Prepaid expenses and other current assets........... 128,960 44,930
Deferred debt costs, current portion................ 41,779 --
----------- ----------
Total current assets............................... 15,255,380 4,052,270
Property and Equipment, net......................... 412,683 175,515
Other Assets........................................ 24,432 27,825
Deferred debt costs, less current portion........... 76,596 --
----------- ----------
Total assets....................................... $15,769,091 $4,255,610
=========== ==========
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts payable.................................... $ 634,518 $ 204,196
Accrued payroll..................................... 866,094 250,682
Accrued professional services....................... 317,155 --
Deferred revenue.................................... 1,760,583 58,500
Other current liabilities........................... 273,780 --
Capital leases, current portion..................... 106,471 --
Notes payable, current portion...................... 576,706 --
----------- ----------
Total current liabilities.......................... 4,535,307 513,378
Capital leases, less current portion................. 206,111 --
Notes payable, less current portion.................. 2,423,294 --
----------- ----------
Total liabilities.................................. 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 in 1999 and 1998;
liquidation preference of $150,000................ 3,000 3,000
Series B:
Authorized--4,946,000 shares
Outstanding--4,946,000 shares in 1999 and 1998;
liquidation preference of $525,018................ 4,946 4,946
Series C:
Authorized--9,139,485 shares
Outstanding--9,139,485 shares in 1999 and 1998;
liquidation preference of $1,902,110.............. 9,139 9,139
Series D:
Authorized--7,838,085 shares
Outstanding--7,838,085 shares in 1999 and 1998;
liquidation preference of $2,250,000.............. 7,838 7,838
Series E:
Authorized--14,417,093 shares
Outstanding--12,700,370 shares in 1999 and 1998;
liquidation preference of $1,831,012.............. 12,701 12,701
Series F:
Authorized--35,000,000 shares
Outstanding--34,681,280 shares in 1999 and 1998;
liquidation preference of $5,000,000.............. 34,681 34,681
Series G:
Authorized--1,000,000 shares
Outstanding--935,616 shares in 1999 and no shares
in 1998; liquidation preference of $748,493....... 936 --
Series H:
Authorized--8,428,935 shares
Outstanding--5,845,938 shares in 1999 and no shares
in 1998; liquidation preference of $13,094,901.... 5,846 --
Series H-1:
Authorized--6,621 shares
Outstanding--no shares in 1999 and 1998; liquida-
tion preference of $0............................. -- --
Series I:
Authorized--3,500,000 shares
Outstanding--162,179 shares in 1999 and no shares
in 1998; liquidation preference of $501,663....... 162 --
Common stock, $0.001 par value:
Authorized--100,000,000 shares
Outstanding--4,409,885 shares in 1999 and 1,855,152
shares in 1998.................................... 4,410 1,855
Warrants............................................. 567,495 161,293
Additional paid-in capital........................... 28,946,240 11,583,708
Notes receivable from shareholders................... (367,667) --
Deferred compensation................................ (3,239,420) --
Accumulated deficit.................................. (17,385,928) (8,076,929)
----------- ----------
Total shareholders' equity........................... 8,604,379 3,742,232
----------- ----------
Total liabilities and shareholders' equity........... $15,769,091 $4,255,610
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
RIGHTWORKS CORPORATION
Statements Of Operations And Comprehensive Loss
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product license...................... $ 2,149,757 $ -- $ --
Services............................. 273,667 75,000 19,160
Discount related to warrant.......... (271,887) -- --
----------- ----------- -----------
Total revenue...................... 2,151,537 75,000 19,160
Cost of Revenue........................ 429,960 -- --
----------- ----------- -----------
Gross Profit....................... 1,721,577 75,000 19,160
----------- ----------- -----------
Operating Expenses:
Research and development............. 3,344,721 2,262,607 1,200,707
Sales and marketing.................. 6,061,872 2,261,838 312,691
General and administrative........... 1,543,769 1,036,573 551,936
Amortization of deferred compensa-
tion................................ 150,578 -- --
----------- ----------- -----------
Total operating expenses........... 11,100,940 5,561,018 2,065,334
----------- ----------- -----------
Loss from operations................... (9,379,363) (5,486,018) (2,046,174)
Interest and Other Income (Expense),
net................................... 70,364 (135,547) 29,337
----------- ----------- -----------
Net Loss and Comprehensive Loss........ $(9,308,999) $(5,621,565) $(2,016,837)
=========== =========== ===========
Basic and diluted net loss per common
share................................. $ (5.05) $ (3.48) $ (1.44)
=========== =========== ===========
Shares used in computing basic and di-
luted net loss per common share....... 1,845,000 1,615,000 1,402,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
RIGHTWORKS CORPORATION
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------ -----------------
Notes
Additional Receivable
Paid-In From Deferred Accumulated
Shares Amount Shares Amount Warrants Capital Shareholders Compensationt Deficit Total
- ---------------- ---------- ------- --------- ------ -------- ----------- ------------ ------------- ------------ ----------
<S> <C> <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) $ 259,357
Issuance of
Series C
convertible
preferred,
net............ 9,139,485 9,139 -- -- -- 1,892,161 -- -- -- 1,901,300
Exercise of
stock options.. -- -- 226,555 227 -- 9,192 -- -- -- 9,418
Exercise of
options issued
in conjunction
with bridge
financing...... -- -- 152,000 152 -- 7,448 -- -- -- 7,600
Net loss........ -- -- -- -- -- -- -- -- (2,016,837) (2,016,837)
---------- ------- --------- ------ -------- ----------- --------- ----------- ------------ ----------
Balances at
December 31,
1997........... 17,085,485 17,085 1,668,388 1,668 -- 2,597,449 -- -- (2,455,364) 160,838
Issuance of
Series D
convertible
preferred
stock, net..... 7,838,085 7,838 -- -- -- 2,225,559 -- -- -- 2,233,437
Issuance of
Series E
convertible
preferred,
net............ 12,700,370 12,701 -- -- -- 1,802,423 -- -- -- 1,815,124
Issuance of
Series F
convertible
preferred,
net............ 34,681,280 34,681 -- -- -- 4,926,529 -- -- -- 4,961,210
Issuance of
warrants to
purchase Series
E convertible
preferred
stock.......... -- -- -- -- 161,293 -- -- -- -- 161,293
Exercise of
stock options.. -- -- 263,564 264 -- 35,471 -- -- -- 35,735
Repurchase of
common stock... -- -- (76,800) (77) -- (3,763) -- -- -- (3,840)
Net loss........ -- -- -- -- -- -- -- -- (5,621,565) (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) 3,742,232
Issuance of
Series G
convertible
preferred stock
in exchange for
technology..... 935,616 936 -- -- -- 133,952 -- -- -- 134,888
Issuance of
Series H
convertible
preferred
stock, net..... 5,845,938 5,846 -- -- -- 13,018,440 (16,667) -- -- 13,007,619
Issuance of
Series I
convertible
preferred
stock, net..... 162,179 162 -- -- -- 432,163 -- -- -- 432,325
Issuance of
warrants to
purchase
convertible
preferred
stock.......... -- -- -- -- 406,202 -- -- -- -- 406,202
Exercise of
stock options.. -- -- 254,907 255 -- 43,758 -- -- -- 44,013
Repurchase of
common stock... -- -- (40,174) (40) -- (4,439) -- -- -- (4,479)
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 -- 150,578
Net loss........ -- -- -- -- -- -- -- -- (9,308,999) (9,308,999)
---------- ------- --------- ------ -------- ----------- --------- ----------- ------------ ----------
Balances at
December 31,
1999........... 79,248,953 $79,249 4,409,885 $4,410 $567,495 $28,946,240 $(367,667) $(3,239,420) $(17,385,928) $8,604,379
========== ======= ========= ====== ======== =========== ========= =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
RIGHTWORKS CORPORATION
Statements Of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................... $(9,308,999) $(5,621,565) $(2,016,837)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for bad debt................ 30,000 -- --
Depreciation and amortization......... 306,048 100,490 59,948
Conversion of accrued interest to pre-
ferred 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 lia-
bilities:
Accounts receivable.................. (3,134,420) (58,500) 34,457
Prepaid expenses and other current
assets.............................. (84,030) (44,689) 6,825
Other assets......................... 3,393 -- (23,623)
Deferred debt costs.................. (118,325) -- --
Accounts payable and accrued liabili-
ties................................ 1,636,669 244,565 192,089
Deferred revenue..................... 1,702,083 58,500 (10,000)
----------- ----------- -----------
Net cash used in operating activi-
ties............................... (8,426,541) (5,133,894) (1,757,141)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment..... (60,817) (120,550) (142,246)
----------- ----------- -----------
Net cash used in investing activi-
ties............................... (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................................. 44,013 35,735 17,018
Repurchase of common stock............. (4,479) (3,840) --
Proceeds from issuance of preferred
stock, net............................ 13,439,944 6,833,759 1,901,300
Repayments of capital lease obliga-
tions................................. (19,239) -- --
Proceeds from issuance of note pay-
able.................................. 3,000,000 -- --
----------- ----------- -----------
Net cash provided by financing ac-
tivities........................... 16,460,239 8,515,654 2,418,318
----------- ----------- -----------
Net Increase In Cash and Cash Equiva-
lents.................................. 7,972,881 3,261,210 518,931
Cash and Cash Equivalents, Beginning of
Period................................. 3,948,840 687,630 168,699
----------- ----------- -----------
Cash and Cash Equivalents, End of Peri-
od..................................... $11,921,721 $ 3,948,840 $ 687,630
=========== =========== ===========
Supplemental Schedule of Noncash Financ-
ing Activities:
Warrants issued in conjunction with
bridge financing...................... $ -- $ 161,293 $ --
=========== =========== ===========
Write off of abandoned technology ex-
changed for preferred stock........... $ 134,888 $ -- $ --
=========== =========== ===========
Notes receivable from officer in ex-
change for preferred stock............ $ 16,667 $ -- $ --
=========== =========== ===========
Notes receivable from officers for
exercise of common stock options...... $ 351,000 $ -- $ --
=========== =========== ===========
Equipment purchased under capital
leases................................ $ 331,821 $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<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.
Receivables due from significant customers as a percentage of total
accounts receivable were as follows:
<TABLE>
<CAPTION>
As of
December 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Customer A................................................ * 100%
Customer B................................................ 56% *
Customer C................................................ 13% *
</TABLE>
* Represents less than 10% for the indicated period.
F-65
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer B.................................................. 86% * *
Customer D.................................................. * * 49%
Customer E.................................................. * * 51%
Customer F.................................................. * 67% *
Customer G.................................................. * 33% *
</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>
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
F-66
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
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 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.
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, RightWorks'
comprehensive loss was equal to net loss.
F-67
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
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>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss......................................... $ (9,309) $ (5,622) $ (2,017)
-------- -------- --------
Basic and diluted:
Weighted average shares of common stock out-
standing...................................... 2,511 1,852 1,534
Less: Weighted average shares subject to repur-
chase........................................... (666) (224) (133)
-------- -------- --------
Weighted average shares used in computing basic
and diluted net loss per common share......... 1,845 1,615 1,402
-------- -------- --------
Basic and diluted net loss per common share...... $ (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. 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
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, Rightworks did
not generate revenues in foreign countries and had no assets in foreign
countries.
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.
F-68
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
In December 1998, the AICPA issued Statement of Position ("SOP") 98-9,
"Modification of SOP97-2, 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. On March
24, 2000, the SEC issued an amendment to SAB 101 delaying the effective date
for certain companies. The Company will adopt SAB 101 in the second 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.
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 lease................... 312,582
Less: Current portion........................................... (106,471)
---------
Long-term capital lease obligations............................. $ 206,111
=========
</TABLE>
F-69
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
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.
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 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 December 31, 1999.
. 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-70
<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 $134,888,
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 in the accompanying statements of
operations.
Series I Preferred Stock
In 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 $7,100,000.
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.
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
F-71
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
determined to be approximately $125,000 and was estimated using the Black-
Scholes option pricing model 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, the Company recorded deferred compensation of
$3,389,998, 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. Approximately $150,578 was expensed during the year ended
December 31, 1999. 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-72
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 887,763 $0.25 300,865 $0.05 116,459 $0.05
Granted............... 5,710,835 $0.17 917,287 $0.25 381,006 $0.10
Exercised............. (2,594,907) $0.15 (263,564) $0.15 (126,555) $0.05
Cancelled............. (1,291,348) $0.21 (66,825) $0.30 (70,045) $0.05
---------- -------- --------
Outstanding at end of
year................... 2,712,343 $0.18 887,763 $0.25 300,865 $0.05
========== ======== ========
Exercisable at end of
year................... 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,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported............................. $ (9,309) $ (5,622) $ (2,017)
Net loss pro forma............................... $ (9,378) $ (5,626) $ (2,082)
Net loss per common share as reported............ $ (5.05) $ (3.48) $ (1.44)
Net loss per common share pro forma.............. $ (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 5.99%; 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.
The following table summarizes the stock options outstanding and
exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Options Vested
Options Outstanding And Exercisable
---------------------------- ----------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Years Price Number Price
-------- --------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.05........................ 61,671 6.9 $0.05 54,658 $0.05
$0.10........................ 98,003 7.6 $0.10 82,837 $0.10
$0.15........................ 1,342,412 5.9 $0.15 75,879 $0.15
$0.22........................ 1,175,435 9.8 $0.22 36,393 $0.22
$0.50........................ 34,822 7.9 $0.50 10,390 $0.50
--------- -------
2,712,343 260,157
========= =======
</TABLE>
F-73
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
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 as of December 31, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards........................ $4,057,314 $2,101,786
Temporary differences................................... 646,679 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>
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.
F-74
<PAGE>
RIGHTWORKS CORPORATION
Notes to Financial Statements--(Continued)
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.
F-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<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-182
<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-183
<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-184
<PAGE>
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6,471,251 Shares
[LOGO OF INTERNET CAPITAL GROUP]
Common Stock
-----------------
P R O S P E C T U S
-----------------
May 10, 2000
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