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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TOSECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE
ACT OF 1934
For Fiscal Year Ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from to
Commission File 000-26929
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INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2996071
(IRS EmployerIdentification Number)
(State of other jurisdiction
ofincorporation or organization)
Building 800, 435 Devon Park Drive, 19087
Wayne, PA
(Zip Code)
(Address of principal executive
offices)
(610) 989-0111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of Class Name of Each Exchange on which Registered
-------------- -----------------------------------------
<S> <C>
Common Stock, $0.001 par value Nasdaq Stock Market
</TABLE>
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of Common Stock held by non-
affiliates of the Company was $21.5 billion as of March 1, 2000. (For purposes
of determining this amount only, the Company has defined affiliates as
including (a) the executive officers named in Part I of this 10-K Report, (b)
all directors of the Company and (c) each stockholder that has informed the
Company by March 1, 2000 that it is the beneficial owner of 10% or more of the
outstanding common stock of the Company.
The number of shares of the Company's Common Stock outstanding as of March
1, 2000 was 264,283,685 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative
to the Company's Annual Meeting of Stockholders for the fiscal year ended
December 31, 1999 are incorporated by reference into Part III of this Report.
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INTERNET CAPITAL GROUP, INC.
FORM 10-K/A
December 31, 1999
TABLE OF CONTENTS
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<CAPTION>
Item Page No.
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<S> <C>
PART I
1. Business......................................................... 3
2. Properties....................................................... 17
3. Legal Proceedings................................................ 17
4. Submission of Matters to a Vote of Security Holders.............. 17
4A. Executive Officers of the Registrant............................ 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 19
6. Selected Consolidated Financial Data............................. 21
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 22
7A. Quantitative and Qualitative Disclosures About Market Risk...... 38
8. Financial Statements and Supplementary Data...................... 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................ 73
PART III
10. Directors and Executive Officers of the Registrant.............. 73
11. Executive Compensation.......................................... 73
12. Security Ownership of Certain Beneficial Owners and Management.. 73
13. Certain Relationships and Related Transactions.................. 73
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................. 74
SIGNATURES........................................................... 81
</TABLE>
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This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward- looking statements are subject to known and unknown risks,
uncertainties and assumptions about us and our partner companies, that may
cause our actual results, levels of activity, performance, or achievements to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. 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. Factors that might cause or contribute
to such a discrepancy include, but are not limited to, those discussed
elsewhere in this Report and the risks discussed in our other Securities and
Exchange Commission ("SEC") filings including our Registration on Form S-1
declared effective on August 4, 1999 by the SEC (File No. 333-78193), our
Registration on Form S-1 declared effective on December 15, 1999 by the SEC
(File No. 333-91447), and our Forms 10-Q filed on September 20, 1999 and
November 15, 1999. The following discussion should be read in conjunction with
our audited Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
Although we refer in this Report to the companies in which we have acquired
an equity ownership 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, and we do not have the power
or authority to legally bind any of our partner companies, and we do not have
the types of liabilities in relation to our partner companies that a general
partner of a partnership would have.
PART I
ITEM 1. BUSINESS
Overview
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 December 31, 1999, we owned interests in 49 B2B e-commerce companies that
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' management 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, IBM Corporation,
MasterCard, Merrill Lynch and Microsoft. We believe that building successful
B2B e-commerce companies enhances the ability of our collaborative network to
facilitate innovation and growth among our partner companies.
The substantial growth in B2B e-commerce creates tremendous market
opportunities for new emerging companies. Forrester Research estimates that the
United States B2B e-commerce market, defined as the intercompany trade of hard
goods over the Internet, will grow from $43 billion in 1998 to more than $1.3
trillion by 2003. International Data Corporation, or 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.
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. 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 December 31, 1999 our
partner company network included significant interests in the following
30 market makers: Animated Images, Arbinet Communications, asseTrade,
AUTOVIA, Bidcom, Collabria, Commerx, ComputerJobs.com, CourtLink,
CyberCrop.com., Deja.com, e-Chemicals, eMarketWorld, eMerge Interactive,
EmployeeLife.com, ICG Commerce, Internet Commerce Systems, iParts,
JusticeLink, Metalsite, NetVendor, ONVIA.com, PaperExchange.com, Plan
Sponsor Exchange, Residential Delivery Services, Retail Exchange,
StarCite, Universal Access, USgift.com and VerticalNet.
. 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 December 31, 1999, our partner company network included
significant interests in the following 19 enabling service providers:
Benchmarking Partners, Blackboard, Breakaway Solutions, ClearCommerce,
CommerceQuest, Context Integration, Entegrity Solutions, iSky,
Jamcracker, LinkShare, PrivaSeek, SageMaker, Servicesoft Technologies,
Syncra Software, TRADEX Technologies, traffic.com, United Messaging, US
Interactive, and Vivant!
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. All of our
acquisitions as of December 31, 1999 have been B2B e-commerce companies
headquartered in the United States. We expect to continue to evaluate
additional acquisition opportunities in the United States. In addition, at the
end of 1999 we opened an office in London, England which focuses on European
B2B e-commerce opportunities.
Internet Capital Group, Inc. is a successor to a business originally founded
in March 1996 as a Delaware limited liability company under the name Internet
Capital Group, L.L.C. As a limited liability company, Internet Capital Group,
L.L.C. was treated for income tax purposes as a partnership with taxes on the
income generated by Internet Capital Group, L.L.C. paid by its members.
Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on
February 2, 1999 with Internet Capital Group, Inc. surviving (the
"Reorganization"). In connection with the Reorganization and as required by its
limited liability company agreement to satisfy the members' tax liabilities,
Internet Capital Group, L.L.C. declared a $10.7 million distribution to its
members. Internet Capital Group, Inc. has assumed all liabilities of Internet
Capital Group, L.L.C. including the distribution to members of Internet Capital
Group, L.L.C. 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.
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. 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, 50% of all United States
businesses will be on-line by 2002.
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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 encompassed $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 and communicate real-time, accurate information
regarding requirements, prices and products to a global audience,
including suppliers, customers and business partners. This makes it
easier for businesses to attract new customers and suppliers, improve
service and increase revenue.
. Increased Efficiency and Reduced Cost. Traditional businesses can
utilize the Internet to automate their internal operations, including
manufacturing, finance, sales and purchasing functions. The Internet can
also be used to increase information flow and access throughout an
organization. This increases operational efficiency by reducing the
time, costs and resources required to transact business, lowering
inventory levels and procurement costs, and improving responsiveness to
customers and suppliers.
Market Opportunities for Emerging B2B E-Commerce Companies
We believe that there are significant opportunities for companies that can
assist traditional businesses in using the Internet to create more efficient
markets and enable e-commerce. We call these companies B2B e-commerce
companies. We focus on two types of B2B e-commerce companies: market makers and
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
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. 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.
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 their capabilities to their target industries.
. Building Corporate Infrastructure. Many B2B e-commerce companies have
been recently formed and require sales and marketing, executive
recruiting and human resources, information technology, and finance and
business development assistance. These companies also require capital as
significant resources may be required to build technological
capabilities and internal operations.
. Finding the Best People. Entrants into the B2B e-commerce market require
management with expertise in the applicable market, an understanding of
the Internet's capabilities, the ability to manage rapid growth and the
flexibility to adapt to the changing Internet marketplace. We believe
that very few people have these skills, and those that do are highly
sought after. To be successful, companies must attract and retain highly
qualified personnel.
We believe that the most successful B2B e-commerce companies will rapidly
identify market demands and move quickly to satisfy those demands. B2B e-
commerce companies that accomplish this goal may establish
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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 December 31, 1999, we owned interests in 49 B2B e-commerce
companies that 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 members.
Our strategy is to:
. create or identify companies with the potential to become industry
leaders;
. acquire significant interests in partner companies and incorporate them
into our collaborative network;
. provide strategic guidance and operational support to our partner
companies; and
. promote collaboration among our partner companies.
In implementing our strategy, we leverage the collective knowledge and
experience of our partner companies, strategic investors and Advisory Board
members. Our Advisory Board consists of more than 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 each 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
an office in continental Europe during 2000. We plan to staff our European
offices with personnel that will provide strategic guidance and operational
support to our partner companies operating in Europe.
We plan to acquire interests in European B2B e-commerce companies. If we wish
to enter a European market in which we cannot locate an attractive partner
company candidate, we may create a new company or assist one of our partner
companies located in the United States in expanding 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:
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. 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 on-line and estimate the potential to migrate
transactions on-line. By considering these factors, we can focus on
vertical industries for which the leading market maker can eventually
generate significant transaction activity 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 interaction and
transactions. We generally avoid industries where this information is
not available.
. Enabling Service Provider Profit Potential. When evaluating enabling
service providers, we examine the size of the market opportunity, the
profit potential in serving the target 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.
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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. For example, Advisory Board and management team members who
provide strategic guidance to our partner companies include Todd Hewlin,
a former Partner with McKinsey & Company; Jeff Ballowe, a former
President of Ziff-Davis Inc. and the current Chairman of Deja.com, Inc.;
Alex W. Hart, a former Chief Executive Officer of MasterCard
International; Ron Hovsepian, Vice President of Business Development at
IBM Corporation; and Yossi Sheffi, Ph.D., a co-founder of Syncra
Software, Inc. and e-Chemicals, Inc. and currently a Professor at the
Massachusetts Institute of Technology.
. Operational Support. B2B e-commerce companies often have difficulty
obtaining senior executive level guidance in certain disciplines that
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 challenges. 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.
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Promote Collaboration Among Our Partner Companies
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in shared
knowledge and business contacts among our partner companies and the formation
of numerous strategic alliances. We promote collaboration formally by hosting
regularly scheduled seminars relating to partner company operational and
business issues. At these seminars, the executives of partner companies share
their experiences with each other, our management team and the Advisory Board.
For example, at a seminar in 1999, thirteen chief executive officers of our
market maker and enabling service provider partner companies gathered to
discuss e-commerce strategies and business models. In addition, in the last six
months of 1999 we hosted four conferences for our partner companies on various
operational issues ranging from financing strategies to the use of technology.
On an informal basis, we promote collaboration by making introductions and
introducing partner companies to each other.
Recent examples of collaboration among our partner companies include:
. PaperExchange.com and VerticalNet have developed a strategic alliance
that provides PaperExchange with co-branded access to leading industry
content, including news, feature articles and interviews from
VerticalNet's PulpandPaper On-line property. VerticalNet's members will
get access to PaperExchange's leading pulp and paper exchange, which is
an Internet-based marketplace for buying and selling pulp and paper
products. In addition, the companies are joining forces to create a
comprehensive equipment listing and career site. By linking their sites
together, PaperExchange.com and VerticalNet are seeking to establish a
leading destination for pulp and paper professionals.
. Commerx, 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 cost efficient 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 vertical and horizontal 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
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costs, high administrative costs and inefficient logistics. To solve these
problems, e-Chemicals has developed an Internet-based marketplace through
which it will sell a wide range of industrial chemicals to business
customers. e-Chemicals provides products based on streamlined Web-based
ordering processes, outsourced logistics systems and on-line support.
. Horizontal. One example of our horizontal market maker partner companies
is VerticalNet. As of December 31, 1999, VerticalNet owned and operated
over 50 industry-specific Web sites designed to act as on-line 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 December 31, 1999. Our ownership positions have been calculated based on the
issued and outstanding common stock of each partner company, assuming the
issuance of common stock on the conversion or exercise of preferred stock and
convertible notes, but excluding the effect of unexercised 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 16% 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.
Collabria, Inc. ........ Printing Provides Internet-based 11% 1999
www.collabria.com procurement and production
services for the commercial
printing industry.
Commerx, Inc. .......... Plastics Provides Internet-based 40% 1998
www.commerx.com procurement and sales of raw
materials, tools and maintenance
and repair products for the
plastics industry.
ComputerJobs.com, Technology Provides Internet-based job 33% 1998
Inc. .................. Employment screening and resume posting for
www.computerjobs.com information technology
professionals, corporations and
staffing firms.
CourtLink............... Legal Provides on-line access to court 19% 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 37% 1998
www.e-chemicals.com distribution of industrial
chemicals.
</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>
eMerge Interactive, Inc. .. Livestock Provides Internet-based content, 28% 1999
www.emergeinteractive.com community and transaction
services in an on-line
marketplace for the cattle
industry.
EmployeeLife.com.. Healthcare Provides Internet-based solutions 52% 1999
www.employeelife.com.. for employee health benefits
management across the health care
industry.
Internet Commerce Systems, Food Provides Internet-based product 43% 1999
Inc. ..................... introduction and promotion
www.icsfoodone.com services to wholesale and retail
food distributors.
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, L.P. ........... Metals Provides an Internet-based 44% 1999
www.metalsite.com marketplace to source, buy and
sell metal products and connect
with metal professionals around
the world.
PaperExchange.com LLC...... Paper Provides Internet-based sales and 24% 1999
www.paperexchange.com distribution of all grades of
pulp and paper.
Plan Sponsor Exchange, Asset Provides a Web-based community 49% 1999
Inc. ..................... Management for asset managers to reach fund
www.plansponsorexchange.com sponsors.
Retail Exchange.com, Consumer Goods Provides an online B2B 30% 1999
Inc. ..................... marketplace for the exchange of
www.retailexchange.com excess consumer products.
StarCite! Solutions, Travel Provides Internet-based services 43% 1999
Inc. ..................... for planning and managing
www.starcite.com corporate meetings for event
planners.
Universal Access, Inc. .... Tele- Provides Internet-based ordering 24% 1999
www.universalaccessinc.com communications for provisioning and access and
transportation exchange services
for network service providers
focused on business customers.
USgift.com................. Gift, Garden Provides Internet-based sales and 38% 1999
www.USgift.com and Home Decor distribution of gift, garden and
home decor accessories.
Horizontal:
asseTrade.Com, Inc. ....... Used Capital Provides Internet-based asset and 17% 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.
</TABLE>
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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 infrastructure
that enables e-commerce. Systems integrators also integrate e-commerce
applications with existing enterprise applications. Strategic
consultants and systems integrators typically bill their clients on a
project-by-project basis.
. Software Providers. Software providers design and sell software
applications that support e-commerce and integrate business functions.
Software providers may sell or license their products.
. Outsourced Service Providers. Outsourced service providers offer
software applications, infrastructure and related services designed to
help traditional businesses reduce cost, improve operational efficiency
and decrease time to market. Outsourced service providers may charge
fees on a per-use or periodic basis.
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.
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 following table shows certain
information regarding our enabling service provider partner companies by
category as of December 31, 1999. Our ownership positions have been calculated
based on the issued and outstanding common stock of each partner company,
assuming the issuance of common stock on the conversion or exercise of
preferred stock and convertible notes, but excluding the effect of unexercised
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 13% 1996
Inc ................... research and consulting services to
www.benchmarking.com maximize return on investment from
demand/supply chain and e-business
initiatives.
Context Integration, Provides systems integration services 14% 1997
Inc. .................. focused on customer support, data
www.context.com access and e-commerce.
US Interactive, Inc. ... Provides a range of consulting and 3% 1996
www.usinteractive.com technical services relating to
Internet marketing solutions.
Software Providers:
Blackboard Inc. ........ Provides universities and corporations 29% 1998
www.blackboard.com with applications that enable them to
host classes and training on the
Internet.
ClearCommerce Corp. .... Provides comprehensive e-commerce 15% 1997
www.clearcommerce.com solutions 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
www.entegrity.com between business applications.
</TABLE>
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<TABLE>
<CAPTION>
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
----------------- ----------------------- ---------- -------
<S> <C> <C> <C>
Servicesoft Provides tools and services used by 5% 1998
Technologies, Inc. .... its customers to create Internet
www.servicesoft.com customer service applications
consisting of self-service, e-mail
response and live interaction
products.
Syncra Software, Inc. .. Provides software that improves supply 35% 1998
www.syncra.com chain efficiency through collaboration
of trading partners over the Internet.
TRADEX Technologies, Provides e-commerce application 10% 1999
Inc. .................. software that enables enterprises to
www.tradex.com create on-line marketplaces and
exchanges.
Outsourced Service
Providers:
Breakaway Solutions, Provides application service hosting, 40% 1999
Inc. .................. e-commerce, consulting and systems
www.breakaway.com integration services to growing
companies.
CommerceQuest, Inc. .... Provides a messaging service for data 28% 1998
www.commercequest.com sharing across separate enterprises.
Also provides software, systems
integration services and managed
network services for application
integration within enterprises or with
external trading partners and
customers.
iSky.................... Provides services to improve customer 31% 1996
www.isky.com communications and relationships.
Jamcracker Inc. ........ Provides integrated application 24% 1999
www.jamcracker.com service provider services to middle
market companies.
LinkShare Corporation... Establishes affiliate relationships 34% 1998
www.linkshare.com for on-line merchants with other Web
sites to facilitate e-commerce.
PrivaSeek, Inc. ........ Provides consumers with control of 8% 1998
www.privaseek.com their Web-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.
traffic.com, Inc. ...... Provides real time traffic monitoring 20% 1999
www.traffic.com for logistics and transportation
optimization.
United Messaging, Provides high performance electronic 37% 1999
Inc. .................. messaging services for organizations
www.unitedmessaging.com with mission critical e-mail networks.
Vivant! Corporation..... Provides process automation and 31% 1998
www.vivantcorp.com decision support services that enable
companies to strategically manage
contractors, consultants and temporary
employees.
</TABLE>
Government Regulations and Legal Uncertainties
As of March 1, 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, on-line 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 on-line copyright infringement and the protection of
information collected on-line 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:
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. 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.
. On-line 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 on-line 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 On-line Privacy Protection Act,
which take effect on April 21, 2000. These regulations make it illegal
to collect information on-line from children under the age of 13 without
first obtaining parental consent. These regulations also require Web
site operators to allow parents to inspect and remove their children's
information from any database. Compliance with these regulations could
pose a significant administrative burden for Web site operators whose
products and services are targeted to children or may be attractive to
children. Also, the European Union has directed its member nations to
enact much more stringent privacy protection laws than are generally
found in the United States, and has threatened to prohibit the export of
certain personal data to United States companies if similar measures are
not adopted. Such a prohibition could limit the growth of foreign
markets for United States B2B e-commerce companies. The Department of
Commerce is negotiating with the European Union to provide exemptions
from the European Union regulations, but the outcome of these
negotiations is uncertain.
. Regulation of Communications Facilities. To some extent, the rapid
growth of the Internet in the United States has been due to the relative
lack of government intervention in the marketplace for Internet access.
Lack of intervention may not continue in the future. For example,
several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal
Communications Commission in the same manner as 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 on-line 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.
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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 own 8.1 %
and 13.7 % of our outstanding common stock, respectively, based on the number
of shares held by each of them on March 1, 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, as of
December 31, 1999, we have no current contractual obligations to do so. We do
not have any contracts or other understandings with our shareholders or partner
companies that would govern the resolution of these potential conflicts. Such
competition, and the complications posed by the designated directors, may deter
companies from partnering with us and may limit our business opportunities.
Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market for
B2B e-commerce grows, we expect that competition will intensify. Barriers to
entry are minimal, and competitors can offer products and services at a
relatively low cost. Our partner companies compete for a share of a customer's:
. purchasing budget for services, materials and supplies with other on-
line providers and traditional distribution channels;
. dollars spent on consulting services with many established information
systems and management consulting firms; and
. advertising budget with on-line 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.
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Employees
As of December 31, 1999, excluding our partner companies, we had 70
employees, 69 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 a collective bargaining agreement.
Financial Information About Segments
Segment Information is set forth in Note 10 of the Notes of Consolidated
Financial Statements included in Item 8 below and incorporated herein by
reference.
Financial Information About Geographic Areas
We do not believe that foreign or geographic area revenues are material or
significant to an understanding of our business and operations during the
three-year period ending December 31, 1999. Where appropriate, information
concerning our initiatives in Europe is discussed elsewhere in this Item 1.
ITEM 2. PROPERTIES
The location and general description of our properties by reportable segments
as of March 1, 2000 are as follows:
General ICG Operations
We lease approximately 33,000 square feet of office, administrative,
operations and data center space, principally in Wayne, Pennsylvania, San
Francisco, California, Boston, Massachusetts, Seattle, Washington and London,
England, under leases expiring from 2001 to 2017. Our corporate headquarters
are located at 435 Devon Park Drive, Building 800 in an office facility located
in Wayne, Pennsylvania, where we lease approximately 3,650 square feet. We plan
to move into a larger corporate headquarters in Wayne, Pennsylvania during the
first half of 2000.
Partner Company Operations
We lease approximately 21,000 square feet of office, administrative, sales
and marketing, operations and data center space, principally in Pennsylvania,
California, Illinois, Maine, Colorado and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during 1999.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their ages and their positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Walter W. Buckley, 39 President, Chief Executive Officer and Director
III(1)..................
Douglas A. Alexander(2).. 38 Managing Director, East Coast Operations
Kenneth A. Fox(3)........ 29 Managing Director, West Coast Operations and
Director
David D. Gathman(4)...... 52 Chief Financial Officer and Treasurer
Henry N. Nassau(5)....... 45 Managing Director, General Counsel and Secretary
</TABLE>
- --------
(1) Walter W. Buckley, III, is a co-founder and has served as our President
and Chief Executive Officer and as one of our directors since March 1996.
Prior to co-founding us, Mr. Buckley worked for Safeguard Scientifics,
Inc. as Vice President of Acquisitions from 1991 to February 1996. Mr.
Buckley directed many of Safeguard Scientifics' investments and was
responsible for developing and executing Safeguard Scientifics' multimedia
and Internet investment strategies. Mr. Buckley serves as a director of
Breakaway Solutions, Inc., e-Chemicals, Inc., iSky, Inc., PrivaSeek, Inc.,
Syncra Software, Inc., VerticalNet, Inc. and Who?Vision Systems, Inc.
(2) 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.
(3) Kenneth A. Fox is a co-founder and has served as one of our Managing
Directors since our inception in March 1996. Mr. Fox has also served as
one of our directors since February 1999. Prior to co-founding us, Mr. Fox
served as Director of West Coast Operations for Safeguard Scientifics,
Inc. and Technology Leaders II, L.P., a venture capital partnership, from
1994 to 1996. In this capacity, Mr. Fox led the development of and managed
the West coast operations for these companies. Mr. Fox serves as a
director of AUTOVIA Corporation, Bidcom, Inc., Commerx, Inc., Deja.com,
Inc., Entegrity Solutions Corporation, ONVIA.com, Inc. and Vivant!
Corporation.
(4) 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.
(5) Henry N. Nassau has served as one of our Managing Directors and as our
General Counsel and Secretary since May 1999. Mr. Nassau was a partner in
the law firm of Dechert Price & Rhoads from September 1987 to May 1999 and
was Chair of the Business Department from January 1998 to May 1999. At
Dechert Price & Rhoads, Mr. Nassau engaged in the practice of corporate
law, concentrating on mergers and acquisitions. Mr. Nassau serves as a
director of The Albert Abela Corporation, Bliley Electric Company,
JusticeLink, Inc. and Data West Corporation which does business as
CourtLink.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is traded on the Nasdaq National Market under the symbol
"ICGE." Our initial public offering of stock occurred on August 5, 1999 at
$6.00 per share. The price range per share reflected in the table below is the
highest and lowest sale price for our stock as reported by the Nasdaq National
Market during each quarter our common stock has been publicly traded. The
information provided below has been restated to reflect a two-for-one stock
split, in the form of a 100% stock dividend, to each shareholder of record as
of December 6, 1999.
<TABLE>
<CAPTION>
Three Months Ended
-------------------
Sep. 30, Dec. 31.
1999 1999
--------- ---------
<S> <C> <C>
Price range per share:
Low................................................ $ 7.00 $ 43.00
High............................................... $ 53.75 $ 193.63
</TABLE>
As of March 1, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $110.50 per share.
(b) Holders. As of March 1, 2000, there were approximately 1,392 holders of
record of our common stock.
(c) Dividends. We have never declared or paid cash dividends on our capital
stock, and we do not intend to pay cash dividends in the foreseeable future. We
plan to retain any earnings for use in the operation of our business and to
fund future growth.
(d) Sale of Unregistered Securities.
(1) In January 1999, Internet Capital Group, L.L.C. issued an aggregate
of 158,750 units of Membership Interests to a director of Internet Capital
Group and other purchasers in a private placement subscription offering for
an aggregate purchase price of $317,500.
(2) On February 2, 1999, each unit of the foregoing Membership Interests
was converted into one share of our Common Stock as a result of the merger
of Internet Capital Group, L.L.C. into Internet Capital Group.
(3) In February 1999, we issued an aggregate of 14,706,250 shares of
Common Stock to employees, directors, consultants and other purchasers in a
private placement subscription offering for an aggregate purchase price of
$29,412,500.
(4) In March 1999, we issued an aggregate of 1,125,000 shares of Common
Stock to consultants and other purchasers in a private placement
subscription offering for an aggregate purchase price of $2,250,000.
(5) On August 4, 1999, we issued 254,635 shares of Common Stock to
PaperExchange.com LLC in a private placement, in conjunction with our
previous agreement to acquire PaperExchange.com LLC, for a purchase price
of $2,750,058.
(6) On August 5, 1999, we issued 3,750,000 shares of Common Stock to
International Business Machines Corporation in a private placement
occurring a the same time as our initial public offering for a purchase
price of $45,000,000. Merrill Lynch & Co. acted as the placement agent in
connection with this transaction, and we paid $2,250,000 in placement
agency fees to Merrill Lynch & Co.
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(7) On November 22, 1999, we issued 262,319 shares of Common Stock to
PaperExchange.com LLC in a private placement, in conjunction with our
previous agreement to acquire PaperExchange.com LLC, for a purchase price
of $2,833,045.
(8) In December 1999, each of the above-described shares of Common Stock
of Internet Capital Group was converted into two shares of common stock due
to a stock split by way of a 100% stock dividend.
(9) On December 13, 1999, we issued 609,533 shares of Common Stock of
AT&T Corp. in a private placement for a purchase price of $50,000,000.
(10) On December 15, 1999, we issued 462,962 shares of Common Stock to
Ford Motor Company in a private placement occurring at the same as our
follow-on public offering of Common Stock for a purchase price of
$50,000,000.
(11) On December 15, 1999, we issued 185,185 shares of Common Stock to
Internet Assets, Inc. in a private placement occurring at the same time as
our follow-on public offering of Common Stock for a purchase price of
$20,000,000.
Warrants to Purchase Common Stock
On May 10, 1999, in conjunction with our issuance of convertible subordinated
notes, we granted to the holders of our convertible notes warrants exercisable
at the initial public offering price of $6 per share to purchase approximately
3,000,000 shares of our Common Stock.
On April 30, 1999, in conjunction with our Secured Revolving Credit Facility
dated April 30, 1999, we granted to the lenders warrants exercisable at $5 per
share to purchase an aggregate of 400,000 shares of our Common Stock.
Notes Convertible to Common Stock
On May 10, 1999, we issued convertible subordinated notes in an aggregate
principal amount of $90 million. Upon consummation of our initial public
offering on August 5, 1999, the convertible notes automatically converted into
approximately 15,000,000 shares of our common stock at the initial public
offering price of $6 per share.
On December 15, 1999, we issued $20,000,000 principal amount of our 5 1/2%
Convertible Subordinated Notes due 2004 to Internet Assets, Inc. in a private
placement. The notes are convertible, at the option of the holder, at any time
on or before December 21, 2004 into shares of our Common Stock. The conversion
price is $127.44 per share, which is equal to a conversion rate of 7.8468
shares per $1,000 principal amount of notes, subject to adjustment.
Options to Purchase Common Stock
We have granted from time to time stock options to our employees, directors,
advisory board members and certain employees of our partner companies. For the
12 months ended December 31, 1999, option to purchase 28,995,500 shares of
Common Stock were granted at a weighted average exercise price of $6.82 per
share.
The sale and issuance of securities in the transactions described above were
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering, where the purchasers were sophisticated investors who represented
their intention to acquire securities for investment only and not with a view
to distribution and received or had access to adequate information about the
Company, or in reliance on Rule 701 promulgated under the Securities Act.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected historical financial
information of Internet Capital Group that has been derived from our audited
financial statements from March 4, 1996, the date of our inception, through
December 31, 1996 and for each of the three years ended December 31, 1997, 1998
and 1999, respectively. The financial information may not be indicative of our
future performance. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and Notes
thereto included in this Report.
<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 (expense), 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)
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>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 elsewhere in this Report and the risks discussed in
our other SEC filings. The following discussion should be read in conjunction
with our audited Consolidated Financial Statements and related Notes thereto
included elsewhere in this Report.
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.
22
<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.
23
<PAGE>
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, LLC.............................. 1999 N/A 44%
NetVendor, Inc.............................. 1999 N/A 27%
ONVIA.com, Inc.............................. 1999 N/A 23%
PaperExchange.com LLC....................... 1999 N/A 24%
Plan Sponsor Exchange, Inc.................. 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.
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 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.
24
<PAGE>
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 Corporation................... 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 SFAS 115.
Effect of Various Accounting Methods on the Presentation of our Consolidated
Financial Statements
The presentation of our consolidated financial statements may differ from
period to period primarily due to whether or not we apply the consolidation
method of accounting or the equity method of accounting. For example, since our
inception through December 31, 1998 we consolidated VerticalNet's financial
statements with our own. However, due to VerticalNet's initial public offering
in February 1999, our voting ownership interest in VerticalNet decreased to
below 50%. Therefore, we have applied the equity method of accounting since
February 1999. We also consolidated Breakaway Solutions' financial statements
from the date of acquisition (January 6, 1999) through September 30, 1999.
However, due to Breakaway Solutions' initial public offering in October 1999,
our voting ownership interest in Breakaway Solutions decreased to below 50%.
Therefore, we have applied the equity method of accounting since October 1999.
25
<PAGE>
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.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
<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, 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
------- -------- ---------
(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>
27
<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.
28
<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 $0.8 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 staffing levels, higher facility costs,
professional fees to support the growth of VerticalNet's infrastructure and
goodwill amortization related to VerticalNet's 1998 acquisitions.
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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 totalling $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-busienss 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.
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
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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 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.
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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 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.
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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 results 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 are
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
carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds, proceeds
from the issuance of convertible notes, proceeds from the sales of a portion of
our Excite and Lycos holdings, and borrowings under bank credit facilities.
We received equity commitments of $40 million in 1996, of which $13.7 million
and $20.1 million was received in 1996 and 1997, respectively, and $6.2 million
of which was funded with an in-kind contribution of holdings of a partner
company in 1996. We received additional commitments of $70 million in 1998, of
which $38 million was received in 1998 and $32 million was received during the
year ended December 31, 1999, respectively.
In August 1999, we completed our initial public offering of 30,620,000 shares
of our common stock at $6.00 per share. Concurrently, we completed a private
placement of 7,500,000 shares at the $6.00 initial public offering price. Net
proceeds to us from these transactions aggregated approximately $209.1 million
(net of underwriters' commission and offering expenses of approximately $19.6
million).
In December 1999, we issued 609,533 shares of common stock in a private
placement for $50 million.
In December 1999, we completed a follow-on public offering of 6,900,000
shares of our common stock at $108.00 per share. Concurrently, we completed
private placements for an aggregate of 648,147 shares at the $108.00 offering
price. Net proceeds to us from these transactions aggregated approximately
$781.4 million (net of underwriters' commission and offering expenses of
approximately $33.8 million).
In December 1999, we issued $566.3 million in convertible subordinated notes
due 2004 bearing interest at 5.5%, including a private placement of $20
million. Net proceeds to us from this issuance aggregated approximately $549.9
million (net of underwriters' discount and offering expenses of approximately
$16.4 million).
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
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<PAGE>
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 and US Interactive as of
February 29, 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 February 29, 2000 was $50 million. We are
currently in the process of increasing the amount of our bank credit facility.
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 February 29, 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. We are currently in negotiations to
obtain a new credit facility.
From its inception through its initial public offering, VerticalNet funded
its operations through a combination of equity, investor and bank borrowings,
and leases. These sources included amounts both advanced and guaranteed by us.
VerticalNet raised $58.3 million in its initial public offering in February
1999 and $115 million in a convertible subordinated note offering in October
1999. We have no obligation to provide additional funding to VerticalNet, and
we have no obligations with respect to its outstanding debt arrangements.
Prior to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and leases. In
January 1999, we acquired a majority voting interest in Breakaway Solutions for
$8.3 million, of which Breakaway Solutions used $4.5 million to repurchase a
portion of its outstanding common stock. In July 1999, Breakaway Solutions
completed a private placement of equity securities of about $19.1 million, of
which we contributed $5 million. In October 1999, Breakaway Solutions completed
its initial public offering raising approximately $42 million. We recorded a
non-operating gain during the three months ended December 31, 1999 due to the
increase in our share of Breakaway Solutions' net equity as a result of their
issuance of shares. Our ownership interest in Breakaway Solutions after their
initial public offering is about 40% and will be accounted for under the equity
method. We have no obligation to provide additional funding to Breakaway
Solutions, and we have no obligations with respect to its outstanding debt
arrangements.
Consolidated working capital increased to $1.3 billion at December 31, 1999
from $20.5 million at December 31, 1998 primarily as a result of the equity and
convertible subordinated notes proceeds we raised in
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<PAGE>
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, PlanSponsor Exchange,
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
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 February 29, 2000 we utilized
$220.6 million to acquire interests in or make advances to new and existing
partner companies. These companies included: asseTRADE.com, Arbinet
Communications, AUTOVIA, Benchmarking Partners, Buymedia, Centrimed,
ClearCommerce, Collabria, CourtLink, e-Chemicals, Entegrity Solutions, EU
Medix, EU Supply, FarmingOn-line, FreeBorders, Industrial America LLC, iSky,
LinkShare, Logistics.com, Inc., MetalSite, ServiceSoft Technologies, 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, 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.
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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 Hutchinson 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. 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 and
regulatory approval.
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 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. approximately for 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.
37
<PAGE>
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements to
have a significant impact on our net results of operations, financial position
or cash flows.
ITEM 7A. 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. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, and the related Notes
thereto, of Internet Capital Group, Inc. and the Report of Independent Auditors
are filed as a part of this Form 10-K.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report........................................... 39
Consolidated Balance Sheets as of December 31, 1998 and 1999........... 40
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999................................................... 41
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999...................................... 42
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 1997, 1998 and 1999................................ 43
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999................................................... 44
Notes to Consolidated Financial Statements............................. 44
</TABLE>
38
<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
39
<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.
40
<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.
41
<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 thousnads)
<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.
42
<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.
43
<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.
44
<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
45
<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.
46
<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.
47
<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.
48
<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).
49
<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
50
<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 and 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.
51
<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
52
<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>
53
<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 and wheat
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.
54
<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,
55
<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>
56
<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.
57
<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>
58
<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>
59
<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>
60
<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>
61
<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.
62
<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.
63
<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.
64
<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.
65
<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.
66
<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.
67
<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.
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
68
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Other Income (Continued)
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.
69
<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 agreement 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.
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>
70
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Selected Quarterly Financial Information (Unaudited) (Continued)
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 Applied Intranet Technologies 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%.
During the period from January 1, 2000 through February 29, 2000 we utilized
$220.6 million to acquire interests in or make advances to new and existing
partner companies. These companies included: asseTRADE.com, Arbinet
Communications, AUTOVIA, Benchmarking Partners, Buymedia, Centrimed,
ClearCommerce, Collabria, CourtLink, e-Chemicals, Entegrity Solutions, EU
Medix, EU Supply, FarmingOn-line, FreeBorders, Industrial America LLC, iSky,
LinkShare, Logistics.com, Inc., MetalSite, ServiceSoft Technologies, 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.
71
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 February, 2000, we 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.
In March, 2000, we 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, we 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. 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.
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.
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference the information contained under the captions
"Election of Directors (Item 1 on Proxy Card)" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Definitive Proxy Statement relative to
our annual meeting of shareholders, to be filed within 120 days after the end
of the year covered by this Form 10-K Report pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. We also incorporate by
reference "Executive Officers of the Registrant" as set forth under Item 4A of
this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the captions
"Executive Compensation" and "Other Forms of Compensation" in our Definitive
Proxy Statement relative to its annual meeting of shareholders, to be filed
within 120 days after the end of the year covered by this Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Directors and Officers" in
our Definitive Proxy Statements relative to our annual meeting of shareholders,
to be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Internet Capital Group incorporates by reference the information contained
under the caption "Certain Relationships and Related Transactions" in its
Definitive Proxy Statement relative to its annual meeting of shareholders, to
be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
73
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements and related Notes thereto as set forth
under Item 8 of this Report on Form 10-K are incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES
74
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
Under date of March 8, 2000, we reported on the 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. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
March 8, 2000
75
<PAGE>
The following financial statement schedule of Internet Capital Group, Inc.
for each of the years ended December 31, 1997, 1998 and 1999 should be read in
conjunction with our Consolidated Financial Statements and related Notes
thereto.
INTERNET CAPITAL GROUP
Schedule II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at
the Balance at
Beginning Charged to Costs Write- the End of
of the Year and Expenses offs the Year
----------- ---------------- ------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
December 31, 1997....... $ 19 $ 11 $ -- $ 30
December 31, 1998....... $ 30 $ 62 $ (31) $ 61
December 31, 1999....... $ 61 $ 72(a) $ (66)(b) $ 67
Ownership interests in and
advances to Partner
Companies:
December 31, 1997....... $ -- $ 80 $ -- $ 80
December 31, 1998....... $ 80 $1,820 $(1,880)(c) $ 20
December 31, 1999....... $ 20 $ -- $ (20) $ --
</TABLE>
- --------
(a) Reserve of $72 established from acquisition of Animated Images.
(b) Reserve of $61 was eliminated upon deconsolidation of VeticalNet.
(c) Reserve of $80 was eliminated upon acquiring Informatrix.
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information has otherwise been
included.
(b) REPORT OF FORM 8-K
On November 16, 1999, we filed a Current Report on Form 8-K dated November
19, 1999 to report under Item 2 (Other Events) the execution of the Securities
Purchase Agreement between Internet Capital Group, eMerge Interactive, Inc. and
J Technologies, LLC. The filing included the required financial statements and
pro forma financial information.
On January 11, 2000, we filed a Current Report on Form 8-K dated December 29,
1999 to report under Item 2 the execution of the Securities Purchase Agreement
between Internet Capital Group and Weirton Steel Corporation. The financial
statements required were omitted and will be filed by amendment as soon as
practicable but not later than 60 days after the date that this report must be
filed.
On March 13, 2000, we filed an amended Current Report on Form 8-K/A dated
December 29, 1999 to report under Item 5 (Other Events) the execution of the
Securities Purchase Agreement between Internet Capital Group and Weirton Steel
Corporation. The filing included the required financial statements and pro
forma financial information.
76
<PAGE>
(c) EXHIBITS
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated
in parentheses.
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C. and Internet Capital Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form S-1
filed by the Company on May 11, 1999 (Registration No. 333-78193) (the
"IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Company on August 4, 1999 (Registration No. 000-26989) (the "8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 2.2
to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Company on August 2, 1999
(Registration No. 333-78193) (the "IPO Amendment No. 3"))
4.2 Indenture between Internet Capital Group, Inc. and Chase Manhattan
Trust Company, National Association, as Trustee, for the 5 1/2%
Convertible Subordinated Notes due 2004**
4.3 Form of 5 1/2% Convertible Subordinated Notes due 2004 of Internet
Capital Group (included in Exhibit 4.2)
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1, 1999 (incorporated by reference to Exhibit 10.1.2
to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated by
reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO Registration
Statement filed by the Company on July 16, 1999 (Registration No. 333-
79193) (the "IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
10.4 Form of Internet Capital Group, Inc. Long-Term Incentive Plan**
10.5 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated September 30, 1998 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain holders named therein (incorporated by
reference to Exhibit 10.6 to the IPO Registration Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the May 10, 1999
Convertible Notes (incorporated by reference to Exhibit 10.21 to the
IPO Registration Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to the IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Company on June
22, 1999 (Registration No. 333-78193) (the "IPO Amendment No. 1"))
10.11 Form of Office Lease between Friends' Provident Life Office and IBIS
(505) Limited for premises located in London, England (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Registration
Statement filed by the Company on December 15, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 3"))
10.12 Office Lease dated September, 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts (incorporated by reference to Exhibit 10.12 to
the Registration Statement filed by the Company on November 22, 1999
(Registration No. 333-91447) (the "Follow-on Registration Statement"))
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to the IPO
Amendment No. 1)
10.14 Credit Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet Capital Group Operations, Inc., the
Banks named therein and PNC Bank, N.A. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15 to the Follow-on Registration Statement)
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15.1 to the Follow-on Registration Statement)
10.15.2 Amended and Restated Amendment No. 2 to the Credit Agreement dated
November 19, 1999 by and among Internet Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC Bank,
N.A.**
10.15.3 Amendment No. 3 to the Credit Agreement dated February 25, 2000 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.**
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
10.16.1 Amendment to Benchmarking Partners, Inc. Option Agreement dated July
19, 1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to the IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forester and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to the IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to the IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with the exercise of
Internet Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to the IPO Amendment No. 1)
10.21 Form of Restrictive Covenant Agreement issued in connection with the
exercise of Internet Capital Group's stock options in May, June and
July of 1999 (incorporated by reference to Exhibit 10.34 to the IPO
Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K filed November 22, 1999 (File No. 0-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between Internet
Capital Group, Inc. and Safeguard Scientifics, Inc. (incorporated by
reference to Exhibit 10.23 to the Follow-on Registration Statement)
10.24 Purchase Agreement dated November 5, 1999 between JusticeLink, Inc.
and Internet Capital Group, Inc. (incorporated by reference to Exhibit
10.24 to the Registration Statement filed by the Company on December
6, 1999 (Registration No. 333-91447) (the "Follow-on Amendment No.
1"))
10.25 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and AT&T Corp. (incorporated by reference to Exhibit 10.25
to the Follow-on Amendment No. 1)
10.26 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Internet Assets, Inc. (incorporated by reference to
Exhibit 10.26 to the Follow-on Amendment No. 1)
10.27 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Ford Motor Company (incorporated by reference to
Exhibit 10.27 to the Follow-on Amendment No. 3)
10.28 Securities Purchase Agreement dated December 28, 1999 between Internet
Capital Group, Inc. and Weirton Steel Corporation (incorporated by
reference to the Company's Current Report on Form 8-K filed January
11, 2000 (File No. 0-26929))
10.29 Press Release regarding Acquisition of eCredit.com (incorporated by
reference to the Company's filing on Form 425 filed February 24, 2000
(File No. 132-01812))
10.30 Sublease Agreement dated January 6, 2000 between SP Investments Inc.
and Internet Capital Group, Inc. for premises located in Seattle,
Washington**
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
11.1 Statement Regarding Computation of Per Share Earnings (included herein
at Note 1--"Significant Accounting Policies" in the subsection "Net
Income (Loss) Per Share" to the Consolidated Financial Statements and
Note 3--"Net Income (Loss) Per Share" to the Consolidated Financial
Statements)
13.1 Sections entitled "Election of Directors (Item 1 on Proxy Card),"
"Section 16(a) Beneficial Ownership Reporting Compliance," "Executive
Compensation," "Other Forms of Compensation," "Security Ownership of
Certain Beneficial Owners and Directors and Officers" and "Certain
Relationships and Related Transactions" in the Company's Definitive
Proxy Statement relative to its annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form
10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended
21.1 Subsidiaries of Internet Capital Group**
23.1 Consent of KPMG LLP*
27.1 Financial Data Schedule for the Year ended December 31, 1999**
99.1 Consolidated Financial Statements of VerticalNet, Inc.*
</TABLE>
- --------
* Filed herewith
** Previously filed
80
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Security Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 30, 2000 Internet Capital Group, Inc.
/s/ David D. Gathman
By: _________________________________
Name: David D. Gathman
Title: Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities set forth above.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Walter W. Buckley President, Chief Executive
______________________________________ Officer and Director (Principal
Walter W. Buckley Executive Officer)
/s/ David D. Gathman Chief Financial Officer and
______________________________________ Treasurer (Principal Financial
David D. Gathman and Accounting Officer)
/s/ Kenneth A. Fox Director
______________________________________
Kenneth A. Fox
/s/ Julian A. Brodsky Director
______________________________________
Julian A. Brodsky
/s/ Thomas P. Gerrity Director
______________________________________
Thomas P. Gerrity
/s/ Warren V. Musser Director
______________________________________
Warren V. Musser
/s/ Peter A. Solvik Director
______________________________________
Peter A. Solvik
</TABLE>
81
<PAGE>
Exhibit Index
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated
in parentheses.
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C. and Internet Capital Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form S-1
filed by the Company on May 11, 1999 (Registration No. 333-78193) (the
"IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Company on August 4, 1999 (Registration No. 000-26989) (the "8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 2.2
to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Company on August 2, 1999
(Registration No. 333-78193) (the "IPO Amendment No. 3"))
4.2 Indenture between Internet Capital Group, Inc. and Chase Manhattan
Trust Company, National Association, as Trustee, for the 5 1/2%
Convertible Subordinated Notes due 2004**
4.3 Form of 5 1/2% Convertible Subordinated Notes due 2004 of Internet
Capital Group (included in Exhibit 4.2)
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1, 1999 (incorporated by reference to Exhibit 10.1.2
to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated by
reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO Registration
Statement filed by the Company on July 16, 1999 (Registration No. 333-
79193) (the "IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
10.4 Form of Internet Capital Group, Inc. Long-Term Incentive Plan**
10.5 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated September 30, 1998 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain holders named therein (incorporated by
reference to Exhibit 10.6 to the IPO Registration Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the May 10, 1999
Convertible Notes (incorporated by reference to Exhibit 10.21 to the
IPO Registration Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to the IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Company on June
22, 1999 (Registration No. 333-78193) (the "IPO Amendment No. 1"))
10.11 Form of Office Lease between Friends' Provident Life Office and IBIS
(505) Limited for premises located in London, England (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Registration
Statement filed by the Company on December 15, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 3"))
10.12 Office Lease dated September, 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts (incorporated by reference to Exhibit 10.12 to
the Registration Statement filed by the Company on November 22, 1999
(Registration No. 333-91447) (the "Follow-on Registration Statement"))
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to the IPO
Amendment No. 1)
10.14 Credit Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet Capital Group Operations, Inc., the
Banks named therein and PNC Bank, N.A. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15 to the Follow-on Registration Statement)
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15.1 to the Follow-on Registration Statement)
10.15.2 Amended and Restated Amendment No. 2 to the Credit Agreement dated
November 19, 1999 by and among Internet Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC Bank,
N.A.**
10.15.3 Amendment No. 3 to the Credit Agreement dated February 25, 2000 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.**
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
10.16.1 Amendment to Benchmarking Partners, Inc. Option Agreement dated July
19, 1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to the IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forester and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to the IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to the IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with the exercise of
Internet Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to the IPO Amendment No.
1)
10.21 Form of Restrictive Covenant Agreement issued in connection with the
exercise of Internet Capital Group's stock options in May, June and
July of 1999 (incorporated by reference to Exhibit 10.34 to the IPO
Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K filed November 22, 1999 (File No. 0-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between Internet
Capital Group, Inc. and Safeguard Scientifics, Inc. (incorporated by
reference to Exhibit 10.23 to the Follow-on Registration Statement)
10.24 Purchase Agreement dated November 5, 1999 between JusticeLink, Inc.
and Internet Capital Group, Inc. (incorporated by reference to Exhibit
10.24 to the Registration Statement filed by the Company on December
6, 1999 (Registration No. 333-91447) (the "Follow-on Amendment No.
1"))
10.25 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and AT&T Corp. (incorporated by reference to Exhibit 10.25
to the Follow-on Amendment No. 1)
10.26 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Internet Assets, Inc. (incorporated by reference to
Exhibit 10.26 to the Follow-on Amendment No. 1)
10.27 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Ford Motor Company (incorporated by reference to
Exhibit 10.27 to the Follow-on Amendment No. 3)
10.28 Securities Purchase Agreement dated December 28, 1999 between Internet
Capital Group, Inc. and Weirton Steel Corporation (incorporated by
reference to the Company's Current Report on Form 8-K filed January
11, 2000 (File No. 0-26929))
10.29 Press Release regarding Acquisition of eCredit.com (incorporated by
reference to the Company's filing on Form 425 filed February 24, 2000
(File No. 132-01812))
10.30 Sublease Agreement dated January 6, 2000 between SP Investments Inc.
and Internet Capital Group, Inc. for premises located in Seattle,
Washington**
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
11.1 Statement Regarding Computation of Per Share Earnings (included herein
at Note 1--"Significant Accounting Policies" in the subsection "Net
Income (Loss) Per Share" to the Consolidated Financial Statements and
Note 3--"Net Income (Loss) Per Share" to the Consolidated Financial
Statements)
13.1 Sections entitled "Election of Directors (Item 1 on Proxy Card),"
"Section 16(a) Beneficial Ownership Reporting Compliance," "Executive
Compensation," "Other Forms of Compensation," "Security Ownership of
Certain Beneficial Owners and Directors and Officers" and "Certain
Relationships and Related Transactions" in the Company's Definitive
Proxy Statement relative to its annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form
10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended
21.1 Subsidiaries of Internet Capital Group**
23.1 Consent of KPMG LLP*
27.1 Financial Data Schedule for the Year ended December 31, 1999**
99.1 Consolidated Financial Statements of VerticalNet, Inc.*
</TABLE>
- --------
* Filed herewith
** Previously filed
85
<PAGE>
Exhibit 23.1
Consent of Independent Auditors'
The Board of Directors
VerticalNet, Inc.
We consent to the inclusion of our report dated January 28, 2000, with respect
to the 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,
which report appears in the December 31, 1999 annual report on Form 10-K/A of
Internet Capital Group, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 29, 2000
<PAGE>
Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................ 51
Consolidated Balance Sheets at December 31, 1999 and 1998............... 52
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... 53
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Loss for the years ended December 31, 1999, 1998 and
1997................................................................... 54
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 55
Notes to Consolidated Financial Statements.............................. 56
</TABLE>
50
<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
51
<PAGE>
VERTICAL NET, 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.
52
<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.
53
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
LOSS
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common 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'
Treasury Equity Comprehensive
Stock (Deficit) Income (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.
54
<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.
55
<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.
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,
56
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
57
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
58
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
59
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
60
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
61
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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
62
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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.
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
63
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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.
64
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
65
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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.
66
<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
Cost Gains Losses Market 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
Other Assets
Original at December 31, Ownership
Investment(1) 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
interest in Asia Business Venture using the cost method and believes that
there has been no impairment of its investment at December 31, 1999.
67
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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%.
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
68
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
69
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
(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
70
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
71
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Per share 31, 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>
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.
72
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
exercise
Shares 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>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of 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>
73
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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.
74
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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,
Deferred Tax Assets: 1999 1998
- -------------------- ----------- ------------
<S> <C> <C> <C>
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.
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.
75
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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>
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 Exchange
Transaction Sales 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>
76
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------------------------------------------------------
1999 March 31, June 30, September 30, December 31,
- ---- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
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--ba-
sic and diluted........ (0.14) (0.10) (0.38) (0.21)
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
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--ba-
sic 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.
(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.
77
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
78
