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DIVINE INTERVENTURES INC
S-1/A, 2000-06-05
BUSINESS SERVICES, NEC

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Delaware (State or other jurisdiction of incorporation or organization)

7389 (Primary Standard Industrial Classification Code No.)

36-4301991 (I.R.S. Employer Identification No.)

Matthew S. Brown, Esq. Mark D. Wood, Esq. Katten Muchin Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 (312) 902-5200

Marc M. Rossell, Esq. Shearman & Sterling 599 Lexington Avenue New York, New York 10022 (212) 848-4000

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		Per Share		Total
Public Offering Price		$		$
Underwriting Discounts and Commissions		$		$
Proceeds to divine interVentures, inc.		$		$

Donaldson, Lufkin & Jenrette

Bear, Stearns & Co. Inc.

William Blair & Company

DL Jdirect Inc.

The interwoven strands represent divine’s community of associated companies.

[Bands of yellow, red and grey interwoven strands labeled infrastructure service providers (yellow), market makers (red) and do rights (grey)]

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The following infrastructure service providers offer products or services to assist companies in building and managing the technical infrastructure needed to support business-to-business e-commerce:

Brandango Buzz divine closerlook comScore dotspot Emicom Group eReliable         Commerce eXperience         divine FiNetrics Host divine i-Fulfillment i-Street

Justice divine Knowledge divine LAUNCHworks LiveOnTheNet.com Martin Partners Mercantec mindwrap NetUnlimited OpinionWare.com Outtask.com Parlano Perceptual Robotics

PocketCard salespring Sequoia sho research Talent divine TV House ViaChange.com Web Design Group Westbound          Consulting Xippix Xqsite

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The following market makers bring together buyers and sellers to exchange products and services and share information on the Internet:

Aluminium.com BeautyJungle.com bid4real.com BidBuyBuild CapacityWeb.com Commerx

eFiltration.com Entrepower Farms.com iSalvage.com The National Transportation Exchange

Neoforma.com OfficePlanIt.com OilSpot.com Whiplash

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The following do rights are for-profit businesses that use the Internet to support social, cultural or educational purposes:

iGive.com

Panthera Productions

		Page
Summary		5
Risk Factors		13
Cautionary Note Regarding Forward-Looking Statements		40
Concurrent Private Placements		41
Use of Proceeds		44
Dividend Policy		46
Capitalization		46
Dilution		48
Selected Financial Data		51
Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Business		67
Management		95
Relationships and Related-Party Transactions		111
Principal Stockholders		122
Description of Capital Stock		125
Shares Eligible for Future Sale		128
Underwriting		132
Notice to Canadian Residents		136
Legal Matters		137
Experts		137
Where Can You Find More Information		140
Index to Consolidated Financial Statements		F-1

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Infrastructure Service Providers:

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offer products or services such as consulting, systems integration, web site design, accounting services and marketing and public relations expertise, to assist companies in building and managing the infrastructure needed to support business-to-business e-commerce; and

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generate revenues from sales of products and services, as well as advertising.

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Market Makers:

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create Internet-based markets which bring together buyers and sellers in traditional businesses to exchange products and services and share information; and

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generate revenues from transaction fees, as well as advertising.

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Do Rights:

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use the Internet to operate for-profit businesses with social, cultural or educational purposes; and

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generate revenues from advertising, transaction fees and sales of products and services.

Associated Company		Our Equity Ownership/ Voting Power Percentage
Brandango, inc.*†		65.5%/90.0%
Buzz divine, inc.*†		80.6%/90.0%
closerlook, inc.		42.6%
comScore, Inc.		0.9%
dotspot, Inc.*†		80.6%/90.0%
Emicom Group, Inc.*		33.0%
eReliable Commerce, Inc.*		47.1%
eXperience divine, inc.*†		80.8%/90.0%
FiNetrics, Inc.*†		80.9%/90.0%
Host divine, inc.*†		80.6%/90.0%
i-Fulfillment, Inc.*		48.8%
i-Street, Inc.*		63.8%/89.8%
Justice divine, inc.*†		80.9%/90.0%
Knowledge divine, inc.*†		80.7%/90.0%
LAUNCHworks inc.		39.7%
LiveOnTheNet.com, Inc.		76.9%
Martin Partners, L.L.C.		25.0%
Mercantec, Inc.		40.4%
mindwrap, inc.		97.1%
NetUnlimited, Inc.		61.4%
OpinionWare.com, Inc.*		54.4%
Outtask.com Inc.*		28.9%
Parlano, Inc.*		70.4%/86.9%
Perceptual Robotics, Inc.		33.4%
PocketCard Inc.*		37.5%
salespring, inc.!!*†		80.9%/90.0%
Sequoia Software Corporation		8.8%
sho research, Inc.*†		60.5%/90.0%
Talent divine, inc.*†		80.8%/90.0%
TV House Inc.*		42.0%
ViaChange.com, Inc.*		70.0%
Web Design Group, Inc.		53.7%
Westbound Consulting, Inc.		52.4%
Xippix, Inc.		31.5%
Xqsite, Inc.*†		80.6%/90.0%

Associated Company		Our Equity Ownership/ Voting Power Percentage
Aluminium.com, Inc.*		34.6%
BeautyJungle.com, Inc.*		61.0%
bid4real.com, inc.*		54.3%
BidBuyBuild, Inc.*		35.5%
CapacityWeb.com, Inc.*		44.8%
Commerx, Inc.		1.0%
eFiltration.com, Inc.*		45.2%
Entrepower, Inc.*		43.0%
Farms.com, Ltd.		41.0%
iSalvage.com, Inc.*		36.3%
The National Transportation
Exchange, Inc.		5.3%
Neoforma.com, Inc.*		1.5%
OfficePlanIt.com, Inc.*†		80.6%/90.0%
Oilspot.com, Inc.*		55.6%
Whiplash, Inc.*		26.5%

Associated Company		Our Equity Ownership/ Voting Power Percentage
iGive.com, inc.		32.1%
Panthera Productions, LLC		62.9%

Class A common stock offered		14,285,000 shares
Common stock to be outstanding after this offering      and the concurrent private placements:
Class A common stock		112,590,365 shares
Class C convertible common stock		16,740,896 shares
Total		129,331,261 shares
Use of proceeds of this offering		To repay promissory notes issued in connection with acquisitions of interests in associated companies, purchase the property in Chicago on which our planned 400,000 square foot facility is to be constructed, purchase Microsoft products and services, fund our commitment to Skyscraper Ventures, contribute capital to associated companies that we have established to date and acquire interests in and establish associated companies, and for general corporate and working capital purposes.
Use of proceeds of the concurrent private      placements		To promote Microsoft products and services, open our Seattle office, purchase services from Level 3, purchase products and services from Compaq and acquire interests in and establish associated companies, and for general corporate and working capital purposes.
Proposed Nasdaq National Market symbol		DVIN

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974,852 shares of class A common stock issuable upon the exercise of stock options outstanding on April 30, 2000, with a weighted average exercise price of $8.05 per share;

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3,695,656 shares of class A common stock reserved as of April 30, 2000 for grants that we may make in the future under our stock incentive plan; and

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4,166,666 shares of class A common stock reserved for issuance under our employee stock purchase plan.

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a one-for-six reverse stock split of our class A common stock and class B common stock to be effected before the completion of this offering;

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the conversion of our outstanding convertible preferred stock and class B convertible common stock into 81,357,241 shares of class A common stock and the conversion of our class B convertible common stock into 2,037,496 shares of our class A common stock, each to be effected upon the completion of this offering; and

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no exercise by the underwriters of their over-allotment option.

Purchaser		Class of Common Stock		Number of Shares to be Purchased			Purchase Price
360networks, inc.		class C		4,000,000			$  30,000,000
Aon Corporation		class C		1,785,714			25,000,000
BancBoston Capital, Inc.		class C		955,181			13,372,534
CMGI, Inc.		class A		1,722,262			24,111,668
Compaq Computer Corporation (through its affiliate CPQ Holdings,      Inc.)		class C		3,571,429			50,000,000
Hewlett-Packard Company		class C		1,785,714			25,000,000
Level 3 Communications		class C		3,571,429			50,000,000
marchFIRST, Inc.		class C		1,071,429			15,000,000
Microsoft Corporation		class A		3,571,429			50,000,000
Total				22,034,587			282,484,202
Less: Shares to be Purchased for Non-Cash Consideration				(3,507,976	)		(49,111,668	)
Total Shares to be Purchased For Cash				18,526,611			$233,372,534

		Period from May 7, 1999 (Inception) to December 31, 1999			Three Months Ended March 31, 2000 (unaudited)
		(in thousands, except share and per share data)
Statement of Operations Data:
Revenues		$         1,037			$         5,215
Total operating expenses		10,465			46,119
Net loss		(9,407	)		(44,185	)
Net loss applicable to common stockholders		(12,927	)		(77,416	)
Basic and diluted net loss per share applicable to common stockholders		$         (4.59	)		$         (7.79	)
Shares used in computing basic and diluted net loss per share		2,816,074			9,941,917

		March 31, 2000
		Actual		As Adjusted for this Offering Only
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents		$211,911		$391,202
Working capital		190,349		369,640
Total assets		487,260		666,551
Total stockholders’ equity		190,260		588,059

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acquire interests in and establish new associated companies;

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build the operations of our current and new associated companies;

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hire additional employees;

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expand our information technology systems; and

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lease and purchase more space, including our planned 400,000 square foot facility in Chicago, to accommodate our operations and to sublease to some of our associated companies and other business-to-business e-commerce companies. We have exercised an option to purchase the property on which the Chicago facility is to be constructed for $9,750,000 plus costs and expenses incurred by the current owner. We intend to arrange for the construction of the facility, which we expect to be funded principally through third-party financing.

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our inability to interest companies in joining our collaborative network;

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our inability to agree on the terms of an acquisition or to acquire a controlling interest in the company; and

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incompatibility between us and management of the company.

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limitations on our ability to borrow;

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limitations on our capital structure;

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restrictions on acquisitions of interests in associated companies;

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prohibitions on transactions with affiliates;

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restrictions on specific investments; and

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compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations.

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our ability to sell our interests in associated companies;

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the timing of these sales; and

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the amount of proceeds from these sales.

Year		Unearned Stock-Based Compensation Charge
2000 (nine months ending December 31, 2000)		$31,533,000
2001		33,482,000
2002		32,670,000
2003		30,725,000
2004		1,274,000

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selling goods or rendering services, or assisting another person to sell goods or render services or attempt to sell goods or render services, of the type, or similar to the type, sold or rendered by PLATINUM, as described above; and

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soliciting, or assisting another person to solicit or attempt to solicit, persons or entities that were current customers of PLATINUM or its affiliates before the end of the respective employment periods of Messrs. Filipowski, Cullinane and Humenansky, unless the solicitation of these customers is for goods or services unrelated to any activity which competes with PLATINUM.

We provide our employees with 20% of the initial equity of associated companies that we establish, and we intend to cause these companies to issue options to purchase shares of common stock representing up to 20% of the outstanding equity in these companies to their employees and service providers, including our employees.

Some of our executive officers and directors and their affiliates have management positions with, and economic interests in, several of the associated companies in which we have acquired interests, which may create conflicts with our interests.

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Mr. Filipowski is a director of BeautyJungle.com and beneficially owns approximately 2.1% of BeautyJungle.com. We beneficially own approximately 61.0% of BeautyJungle.com.

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Mr. Filipowski and Scott Hartkopf, our President and a director, are directors of closerlook, inc. We beneficially own approximately 42.6% of closerlook.

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Mr. Filipowski is the chairman of the board of directors of iGive.com and, at the time we acquired an interest in i-Give.com, converted $800,000 of personal loans previously made by him to iGive.com into iGive.com’s common stock. Mr. Filipowski beneficially owns approximately 14.6% of iGive.com. We beneficially own approximately 32.1% of iGive.com.

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Messrs. Filipowski and Humenansky are directors of OpinionWare.com and beneficially own a total of approximately 10.4% of the equity of OpinionWare.com. In addition, Mr. Filipowski’s son beneficially owns less than 1% of its equity. We beneficially own approximately 54.4% of OpinionWare.com.

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Mr. Filipowski is a director of Panthera Productions, beneficially owns, through his shared control over a charitable foundation, 14.9% of Panthera and has personally loaned Panthera approximately $306,000. We beneficially own approximately 62.9% of Panthera.

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Mr. Filipowski is a director of Perceptual Robotics and beneficially owns approximately 2.3% of its equity. We beneficially own approximately 33.4% of Perceptual Robotics. Perceptual Robotics beneficially owns 166,666 shares of our class A common stock.

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Mr. Filipowski is a director of Sequoia and beneficially owns less than 1% of its equity. We beneficially own approximately 8.8% of Sequoia. Mr. Humenansky and an entity controlled by Mr. Freedman participated in the directed share program of the initial public offering of Sequoia. Mr. Humenansky purchased 1,000 shares for $8,000, and the entity controlled by Mr. Freedman purchased 500 shares for $4,000.

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Messrs. Filipowski, Humenansky and Cullinane; and James E. Cowie, Thomas P. Danis, Arthur P. Frigo, Jeffrey D. Jacobs and Lawrence F. Levy, five of our directors, collectively, beneficially own approximately 22.2% of the equity of Platinum Venture Partners II, L.P., which beneficially owns approximately 3.6% of The National Transportation Exchange. Additionally, Messrs. Filipowski, Humenansky and Cullinane, collectively, beneficially own approximately 31.0% of the equity of Platinum Venture Partners, Inc., which owns a 1.0% limited partnership interest in Platinum Venture Partners II. We beneficially own approximately 5.3% of The National Transportation Exchange.

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Gian Fulgoni and George Garrick, two of our directors, are directors of bid4real.com and beneficially own, collectively, a total of approximately 2.3% of bid4real.com. We beneficially own approximately 54.3% of bid4real.com.

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Mr. Fulgoni is the founder and chairman of comScore and beneficially owns approximately 20.7% of comScore. Mr. Garrick beneficially owns 1.2% of comScore. We beneficially own approximately 0.9% of comScore.

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Craig D. Goldman, one of our directors, beneficially owns less than 1% of LAUNCHworks. We beneficially own approximately 39.7% of LAUNCHworks. Giving effect to the exercise of warrants that we hold, we would beneficially own approximately 50.9% of LAUNCHworks.

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Steven Kaplan and Mohanbir Sawhney, two of our directors, are members of CapacityWeb.com’s advisory board. Michigan & Oak, LLC, a venture advisory firm of which Messrs. Kaplan and Sawhney are principals, beneficially owns approximately 3.8% of CapacityWeb.com. We beneficially own approximately 44.8% of CapacityWeb.com. In addition, Michigan & Oak is entitled to a finders fee of approximately $225,000, 5% of the amount paid by us for our interest in CapacityWeb.com. Michigan & Oak will be entitled to similar fees on other transactions which it brings to us.

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Tim Stojka, one of our directors, is the Chief Executive Officer of Commerx and beneficially owns approximately 14.7% of Commerx. We beneficially own approximately 1.0% of Commerx.

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Messrs. Filipowski, Cullinane and Freedman and Scott Hartkopf, our President and a director, are directors and executive officers of mindwrap. Mr. Humenansky and Lynn Wilson, our Executive Vice President and Chief Operating Officer, are also directors of mindwrap. We beneficially own approximately 97.1% of mindwrap.

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Robert Jay Zollars, one of our directors, is the Chairman, President and Chief Executive Officer of Neoforma.com and beneficially owns approximately 7.6% of Neoforma.com. Mr. Filipowski is a director of Neoforma.com and beneficially owns less than 1% of its equity. We beneficially own approximately 1.5% of Neoforma.com. Messrs. Cullinane, Humenansky and Hartkopf and an entity controlled by Mr. Freedman participated in the directed share program of the initial public offering of Neoforma.com. These persons purchased the following number shares at the following total prices: Mr. Cullinane—250 shares, $3,250; Mr. Humenansky—250 shares, $3,250; Mr. Hartkopf—2,500 shares, $32,500; and Mr. Freedman’s entity—250 shares, $3,250.

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Each of Messrs. Filipowski, Cullinane, Humenansky, Hartkopf, Freedman and Wilson is a director and/or executive officer of one or more of the following associated companies that we established: Brandango, Buzz divine, dotspot, eXperience divine, Host divine, Knowledge divine, OfficePlanIt.com, salespring, sho research, Travel divine and Xqsite. We beneficially own approximately 81% of each of these associated companies, with the exception of Brandango, of which we beneficially own approximately 66%, and sho research, of which we beneficially own approximately 60%.

Members of our Board of Directors are executive officers and directors of companies and equity investment firms that may compete with us to acquire interests in, and, in some cases, provide services to, business-to-business e-commerce companies.

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Robert Bernard is the Chairman and Chief Executive Officer of marchFIRST, Inc., an information technology firm, which recently formed a venture capital fund to invest in e-commerce businesses and technologies and established a new practice to help large corporate clients create Internet spin-offs.

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Mr. Cowie is a General Partner of Frontenac Company, a Chicago-based private equity firm.

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Mr. Cullinane is a director of Volatus Technology Group, Inc., an Indiana-based provider of capital and infrastructure services.

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Michael M. Forster is a Senior Partner of Operations of Internet Capital Group, a provider of capital and services to Internet businesses.

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Mr. Goldman is a director of CMGI, a provider of capital and services to Internet businesses.

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Joseph D. Gutman is a Managing Director of Goldman Sachs & Co., an investment banking firm which directly and through affiliates makes private equity investments.

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David Hiller is the Senior Vice President/Development of the Tribune Company, which has a strategic investment unit known as Tribune Ventures, a provider of capital to new media and broadband communications businesses.

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Messrs. Kaplan and Sawhney are principals of Michigan & Oak, LLC, a venture advisory firm.

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Richard P. Kiphart is a General Partner and head of the Corporate Finance Department of William Blair & Company, an investment banking firm which directly and through affiliates makes private equity investments.

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Mr. Kumar is a principal of JK&B Management, L.L.C., a Chicago-based private equity fund.

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Ronald D. Lachman is the co-founder and President of Lachman Goldman Ventures, a company which funds and builds management teams for networking and software related companies.

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Eric C. Larson is the Managing Partner of Bank One Equity Capital, a private equity investment unit of Bank One Corporation.

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William A. Lederer is the founder and President of Minotaur Capital Management, an Illinois-based investment firm.

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Bruce V. Rauner is a principal of GTCR Golder Rauner, L.L.C., a Chicago-based company that manages private equity funds.

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Alex C. Smith is the Vice President of Dell Ventures, a venture capital division of Dell USA L.P., which holds the greatest number of shares of our class A common stock and is a subsidiary of Dell Computer Corporation. Thomas J. Meredith is the Senior Vice President and Chief Financial Officer of Dell Computer Corporation.

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James C. Tyree is the Chairman and Chief Executive Officer of Mesirow Financial, which has a private equity investment unit.

Our executive officers and directors have interests in entities that provide products or services to, or have other economic arrangements with, us or our associated companies, which may result in business being conducted with these entities on terms less favorable to us or our associated companies than could be obtained in transactions with unaffiliated parties.

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Mr. Filipowski is a manager of Blackhawk, LLC. He also owns 33.3% of Blackhawk. From July 1999 through June 2000, we have paid, or are obligated to pay, Blackhawk $50,000 a month for an option to lease a 400,000 square foot facility in Chicago or purchase the property on which the facility is to be constructed. We have exercised our option to purchase the property for $9,750,000 plus all costs and expenses of Blackhawk associated with the property. We can complete this purchase at any time before June 30, 2000 or, if we pay an additional $50,000 to Blackhawk, July 31, 2000. We will arrange for the construction of the facility, which we expect to open by the summer of 2001 and will cost approximately $80,000,000. However, this budget may increase as we finalize plans for the facility. We expect that the majority of the construction and development costs will be funded through third-party financing and that approximately $14,000,000 of this amount will be reimbursed to us through tax-increment financing.

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Mr. Filipowski owns 33.3% and is a manager of Habitat-Kahney, LLC. On January 7, 2000, we entered into a ten year lease with Habitat-Kahney for additional office space in Chicago, Illinois. Our rent under this lease is $730,080 per year, with an increase of 2% for each year of the lease.

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Messrs. Filipowski, Cullinane and Humenansky beneficially own a total of approximately 8.3% of Platinum Entertainment. Additionally, Messrs. Filipowski, Cullinane, Humenansky, Cowie, Danis, Frigo, Fulgoni, Jacobs and Levy have economic interests in Platinum Venture Partners I and/or Platinum Venture Partners II, which, collectively, beneficially own a total of approximately 5.8% of Platinum Entertainment. On December 30, 1999, LiveOnTheNet.com, one of our associated companies, entered into a license agreement with Platinum Entertainment to use Platinum Entertainment’s library of digital music and video, interview and other performance content. LiveOnTheNet.com has paid $2,000,000 to Platinum Entertainment for the initial term of the license, the length of which is based on website use and downloads, and may renew the license for two additional terms at the same license fee.

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Mr. Bernard is the Chairman and Chief Executive Officer of marchFIRST. On January 21, 2000, we entered into a contract under which marchFIRST provides us with information technology consulting services when we need them. We have paid marchFIRST approximately $400,000, and owe them an additional approximately $500,000, for consulting services through April 30, 2000. We expect to incur approximately $2,100,000 of additional expenses for marchFIRST consulting services through September 2000. We have agreed to sell to marchFIRST, concurrent with our completion of this offering, for cash in a private placement, a number of shares of our class C convertible common stock having an aggregate initial public offering value of $15,000,000.

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Peter Bynoe is a partner of Piper Marbury Rudnick & Wolfe, which provides legal services to some of our associated companies under an exclusive agreement with Justice divine, one of our associated companies. Piper Marbury also provides legal services to other companies that are customers of Justice divine but are not part of our network of associated companies. Piper Marbury bills companies directly for these services. The total cost for these services through April 30, 2000 was approximately $263,000, including approximately $226,000 for services for associated companies. Justice divine does not recognize the fees paid to Piper Marbury as revenues, but receives a management fee from each company based on the charges to that company. In addition, partners in Piper Marbury purchased for a total of $700,000, 700,000 shares of our series C preferred stock, which will convert into 116,666 shares of class A common stock in connection with the completion of this offering.

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Mr. Danis is the Managing Director of Aon Risk Services of Southern California and is a Managing Director of Aon Risk Services’ Mergers and Acquisitions Group. Teresa L. Pahl is the Chairman of Aon Enterprise Insurance Services, Inc., an affiliate of Aon Risk Services of Missouri, and an Executive Vice President of Aon Group, Inc., a subsidiary of Aon Corporation. We have paid Aon Risk Services of Missouri approximately $241,000 as broker with respect to our directors and officers liability insurance. We have agreed to sell to Aon Corporation, concurrent with our completion of this offering, for cash in a private placement at the initial public offering price, a number of shares of our class C convertible common stock having an aggregate initial public offering value of $25,000,000. We have also entered into a non-binding memorandum of understanding with Aon to develop an insurance services component of FiNetrics, as well as a reinsurance business, which may include Aon acquiring an ownership interest in FiNetrics.

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Arthur Hahn is a partner of Katten Muchin Zavis, one of our legal counsel. Katten Muchin Zavis has provided us with legal services since our inception. The cost to us for these services from our inception through April 30, 2000 was approximately $5,000,000. We paid $400,000 of this total billed amount by issuing Katten Muchin Zavis 400,000 shares of our series C preferred stock, which will convert into 66,666 shares of our class A common stock in connection with the completion of this offering. Mr. Hahn transferred to Katten Muchin Zavis 20,833 of the shares of our class A common stock acquired by him for $0.006 per share in his capacity as a director and a 50% beneficial interest in the option to purchase 8,333 shares of our class A common stock that was granted by us to him, which option was subsequently exercised by Mr. Hahn on his own behalf and on behalf of Katten Muchin Zavis. As a result, Katten Muchin Zavis will own 91,665 shares of class A common stock upon the completion of this offering. Additionally, KMZ-DI Investors, an entity owned by partners in Katten Muchin Zavis, and partners in Katten Muchin Zavis as individuals, including Mr. Hahn, collectively purchased for a total of $2,350,000, 2,350,000 shares of our series C preferred stock, which will convert into 391,666 shares of class A common stock in connection with the completion of this offering.

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Mr. Kiphart, one of our directors, is a principal of William Blair & Company, one of the underwriters of this offering. William Blair is receiving a fee as agent of Skyscraper Ventures, L.P. in connection with its capital raising efforts. This fee will be equal to 1.75% of the total capital raised for the fund by William Blair.

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Michael Leitner is the Vice President, Corporate Development of 360networks, inc. We have agreed to sell to 360networks, for cash in a private placement concurrent with our completion of this offering, 2,000,000 shares of our class C convertible common stock at a price of $1.00 per share and 2,000,000 shares of our class C convertible common stock at the initial public offering price, for a total purchase price of $30,000,000. Based on the midpoint of the estimate price range of this offering, $14.00, these shares will have a market value of $56,000,000 upon completion of this offering. On April 26, 2000, 360networks sold us 93,545 subordinated voting shares at a price of $5.00 per share and 280,636 subordinated voting shares at a price of $13.23 per share, which represents the 360networks initial public offering price less underwriting discounts, for a total purchase price of $4,180,539. These shares had a market value of approximately $5,239,000 at the time of completion of 360networks’ initial public offering. We have also entered into a non-binding memorandum of understanding with 360networks that provides that 360networks will be a preferred supplier of bandwidth and switched data services to us and our associated companies in markets where 360networks provides competitive service and prices. This memorandum of understanding does not, however, require us to purchase minimum amounts of these services or require 360networks to provide us any discounts on the cost of these services.

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Mr. Leitner also serves as a Senior Director of Corporate Development of Microsoft. On January 28, 2000, we entered into an Alliance Agreement with Microsoft, which was amended on March 29, 2000, under which we agreed to incorporate Microsoft products, technologies and services into our systems and the web application hosting services that we provide to our associated companies. Under this agreement, we are obligated to purchase approximately $15,300,000 of Microsoft software and services over the next four years and have committed to use commercially reasonable efforts to encourage our associated companies to migrate to Microsoft software solutions, including expending $4,000,000 to promote these solutions. In addition, under this agreement, we have agreed to use commercially reasonable efforts to establish and staff an office in Seattle within 60 days after the completion of this offering and to develop a Seattle-based incubator habitat by May 2001, and have committed to contribute at least $50,000,000 in capital for our Seattle operations for projects and acquisitions. We have also agreed to sell to Microsoft, concurrent with our completion of this offering, for cash in a private placement at the initial public offering price, a number of shares of our class A common stock having an aggregate initial public offering value of $50,000,000.

Ÿ

Messrs. Smith and Meredith are affiliated with Dell Computer Corporation. We have paid approximately $4,100,000 to Dell, and additionally owe Dell approximately $1,300,000, for purchases of computers and servers through April 30, 2000. We expect these purchases to continue as we grow.

Ÿ

Aleksander Szlam, one of our directors, is the Chairman and Chief Executive Officer of eShare Technologies, Inc. Brandango, one of our associated companies, has entered into a license agreement with eShare to use eShare’s software programs and receive related support and maintenance services. Brandango has agreed to pay $1,700,000 for the license and support and maintenance through March 1, 2001. Future payments for support and maintenance will be mutually agreed to by the parties.

We manage a venture capital fund which will invest in start-up and early-stage companies, and we may have conflicts in allocating opportunities between us and the fund when acquiring interests in these companies.

Ÿ

The fund must obtain the approval of its advisory board before investing in a company in which we or any of our affiliates have previously acquired an interest.

Ÿ

The fund must obtain the approval of its advisory board before investing jointly with us in a company in which none of the fund, us or any of our affiliates has an interest if the economic terms of the joint investment are not substantially similar, although no approval is required if the fund’s investment is made on the same terms and conditions as any unaffiliated third party participating in the joint investment.

Ÿ

We must provide notice to the fund’s advisory board before acquiring an interest in a company in which the fund has previously invested, although no approval of the fund’s advisory board is required.

Ÿ

We must provide notice to the fund’s advisory board before permitting a company in which we or our affiliates hold 25% or more of the equity interests to acquire 50% or more of the equity interests of a company in which the fund has an interest, although no approval of the fund’s advisory board is required.

We have entered into an agreement with some of our stockholders who have representatives on our Board of Directors that limits the obligations of these stockholders and their representatives to present us with business opportunities.

CMGI, one of our shareholders, may compete with us to acquire interests in, and provide services to, business-to-business e-commerce companies.

We may have conflicts with associated companies with business models similar to our own.

We cannot assure you that our conflicts of interest policy will address all potential conflicts of interest adequately.

Ÿ

difficulties of managing remote offices;

Ÿ

burdens of complying with foreign laws and regulatory requirements;

Ÿ

reduced protection of proprietary rights;

Ÿ

problems in meeting different technology standards;

Ÿ

increased tax burdens; and

Ÿ

exposure to general foreign economic declines, currency fluctuations and political instability.

Ÿ

the unwillingness of companies to shift from traditional business processes, which are not based on the Internet, to e-commerce processes;

Ÿ

a lack of the necessary network infrastructure for substantial growth in the use of e-commerce;

Ÿ

increased government regulation or taxation of e-commerce;

Ÿ

insufficient availability of telecommunication services or changes in telecommunication services, resulting in slower response times for users of e-commerce; and

Ÿ

concern and adverse publicity about the security of e-commerce transactions.

Ÿ

rapidly changing technology;

Ÿ

evolving industry standards;

Ÿ

frequent new product and service introductions;

Ÿ

shifting distribution channels; and

Ÿ

changing customer demands.

Ÿ

rapidly improve, upgrade and expand their business infrastructures;

Ÿ

deliver products and services on a timely basis;

Ÿ

maintain levels of service expected by clients and customers;

Ÿ

maintain adequate levels of liquidity; and

Ÿ

expand and upgrade their technology, transaction processing systems and network hardware or software or find third parties to provide these services.

Ÿ

management of an associated company having economic or business interests or objectives that are different than ours; and

Ÿ

associated companies not taking our advice with respect to the financial or operating difficulties that they encounter.

Ÿ

the classification of our Board of Directors into three classes serving staggered three-year terms;

Ÿ

the ability of our Board of Directors to issue shares of preferred stock with rights as they deem appropriate without stockholder approval;

Ÿ

a requirement that special meetings of our Board of Directors may be called only by our Chairman, President or a majority of our Board of Directors;

Ÿ

a prohibition against action by written consent of our stockholders;

Ÿ

a requirement that our stockholders comply with advance notice provisions to bring director nominations or other matters before meetings of our stockholders; and

Ÿ

adoption of a provision of Delaware law that prohibits us from entering into some business combinations with interested stockholders without the approval of our Board of Directors.

You will suffer immediate dilution in the value of your shares because we recently sold a large number of shares of our capital stock at a price lower than our public offering price.

There are options outstanding to purchase our class A common stock with exercise prices ranging from $4.50 to $13.50 per share, which will cause you to suffer further dilution in the value of your shares in the future.

We may issue shares in connection with our acquisitions of interests in associated companies, which could cause you to suffer further dilution in the value of your shares.

Ÿ

announcements of acquisitions of interests in business-to-business e-commerce companies or strategic relationships by our competitors;

Ÿ

announcements of new services, products, technological innovations, acquisitions or strategic relationships by associated companies that we do not control or other companies;

Ÿ

trends or conditions in the Internet industry;

Ÿ

changes in valuation estimates by securities analysts and in analyst recommendations;

Ÿ

variations in the operating results of our associated companies;

Ÿ

changes in the stock prices of our associated companies that are publicly traded;

Ÿ

changes in market valuations of other capital and service providers for Internet companies;

Ÿ

the receptivity of the capital markets to initial public offerings of Internet companies; and

Ÿ

general political, economic and market conditions.

		Cumulative Number of Shares Freely Tradeable
Date		Assuming Underwriters Waive Lock-Ups		Assuming Underwriters Do Not Waive Lock-Ups
Date of this prospectus		14,285,000		11,285,000
90 days after the date of this prospectus		31,875,953		14,285,000
180 days after the date of this prospectus		67,661,421		67,661,421
270 days after the date of this prospectus		107,213,342		107,213,342
One year after the date of this prospectus		129,331,261		129,331,261

Ÿ

our need to continue to identify and acquire interests in suitable associated companies;

Ÿ

the intense competition among capital providers to acquire interests in business-to-business e-commerce companies;

Ÿ

existing and future regulations affecting our business, the businesses of our associated companies or the Internet generally; and

Ÿ

other factors set forth under “Risk Factors” in this prospectus.

Purchaser		Class of Common Stock		Number of Shares to be Purchased		Purchase Price
360networks, inc.		class C		4,000,000		$  30,000,000
Aon Corporation		class C		1,785,714		25,000,000
BancBoston Capital, Inc.		class C		955,181		13,372,534
CMGI, Inc.		class A		1,722,262		24,111,668
Compaq Computer Corporation		class C		3,571,429		50,000,000
Hewlett-Packard Company		class C		1,785,714		25,000,000
Level 3 Communications		class C		3,571,429		50,000,000
marchFIRST, Inc.		class C		1,071,429		15,000,000
Microsoft Corporation		class A		3,571,429		50,000,000
Total				22,034,587		282,484,202
Less: Shares to be Purchased for Non-cash Consideration				3,507,976		49,111,668
Total Shares to be Purchased for Cash				18,526,611		$233,372,534

Purchaser		Commitment		Amount			Time Period
Compaq		Purchase computer equipment		$    5,000,000			4 years	(1)
Level 3		Purchase co-location and bandwidth services		$100,000,000	(2)		4 years
Microsoft		Purchase software products, consulting services and product support services		$  15,300,000			4 years
		Open Seattle facility		$    1,500,000			Within 60 days from the date of this offering
		Promote Microsoft solutions		$    4,000,000			4 years
		Fund projects and acquisitions for Seattle operations		$  50,000,000			None specified

(1)	$2,500,000 of equipment must be purchased within the first 18 months.

(2)	$25,000,000 of the commitment is to be satisfied by a service credit issued to us by Level 3 in connection with the concurrent private placement.

Ÿ

$65,471,429 to repay promissory notes issued by us in connection with our acquisitions of interests in associated companies, all of which are payable within the next 12 months, and which bear interest at the following rates:

Aggregate Note Amount		Interest Rate
$  7,500,000		Prime Rate
$  5,000,000		6.0%
$18,100,000		8.0%
$34,871,429		8.5%

Ÿ

$9,750,000, plus Blackhawk’s costs and expenses, to purchase the property in Chicago on which our planned 400,000 square foot facility is to be constructed;

Ÿ

approximately $3,825,000 to purchase products and services from Microsoft under our Alliance Agreement over the next 12 months;

Ÿ

up to $10,000,000 to fund our commitment to Skyscraper Ventures; and

Ÿ

up to $79,000,000 to contribute to associated companies that we have established to date to fund our current intended contributions to those companies.

Ÿ

approximately $1,000,000 to promote Microsoft solutions under our Alliance Agreement over the next 12 months;

Ÿ

approximately $1,500,000 to open a Seattle office within 60 days after the completion of this offering, as required by our Alliance Agreement with Microsoft;

Ÿ

approximately $9,375,000 to purchase colocation and bandwidth services from Level 3 over the next 12 months; and

Ÿ

approximately $1,667,000 to purchase computer equipment, storage solutions and professional services from Compaq over the next 12 months.

Ÿ

on an actual basis.

Ÿ

on an as adjusted basis to reflect (1) the conversion of our convertible preferred stock into 81,357,241 shares of our class A common stock and the conversion of our class B convertible common stock into 2,037,496 shares of our class A common stock, each to be effected upon completion of this offering; (2) our issuance and sale in this offering of 14,285,000 shares of our class A common stock at an assumed initial public offering price of $14.00 per share, and our receipt of $179,290,700 of net proceeds from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (3) our issuance of 5,292,945 shares of our class A common stock and 16,740,896 shares of our class C convertible common stock in the concurrent private placements, assuming an initial public offering price of $14.00 per share, and our receipt of the estimated net proceeds from these private placements, as if all these events had occurred on March 31, 2000.

Ÿ

on an as adjusted basis to reflect only (1) the conversion of our convertible preferred stock into 81,357,241 shares of our class A common stock and the conversion of our class B convertible common stock into 2,037,496 shares of our class A common stock, each to be effected upon completion of this offering; and (2) our issuance and sale in this offering of 14,285,000 shares of our class A common stock at an assumed initial public offering price of $14.00 per share, and our receipt of $179,290,700 of net proceeds from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, as if all these events had occurred on March 31, 2000.

		As of March 31, 2000
		Actual			As Adjusted for this Offering and the Concurrent Private Placements			As Adjusted for this Offering but Excluding the Concurrent Private Placements
		(in thousands, except share data)
Cash and cash equivalents		$ 211,911			$    624,400			$ 391,202
Long-term debt		811			811			811
Redeemable preferred stock, $.001 par value, 232,000,000 shares authorized and      215,284,327 shares issued and outstanding, actual; no shares authorized and no      shares issued and outstanding, as adjusted for this offering and the concurrent private      placements and as adjusted only for this offering		218,508			—			—
Stockholders’ equity:
Preferred stock, $.001 par value, 346,000,000 shares authorized, 272,860,725                 shares issued and 271,360,725 shares outstanding, actual; and 50,000,000                 shares authorized and no shares issued and outstanding, as adjusted for this                 offering and the concurrent private placements and as adjusted only for this                 offering		271			—			—
Class A common stock, $.001 par value, 900,000,000 shares authorized and                 9,602,447 shares issued and outstanding, actual; 2,500,000,000 shares                 authorized and 112,325,129 shares issued and outstanding, as adjusted for this                 offering and the concurrent private placements; and 2,500,000,000 shares                 authorized and 107,032,184 shares issued and outstanding, as adjusted only for                 this offering		10			112			107
Class B convertible common stock, $.001 par value, 100,000,000 shares                 authorized and 2,037,496 shares issued and outstanding, actual; and                 100,000,000 shares authorized and no shares issued and outstanding, as                 adjusted for this offering and the concurrent private placements and as                 adjusted only for this offering		2			—			—
Class C convertible common stock, $.001 par value, no shares authorized, issued                 and outstanding, actual; 100,000,000 shares authorized and 16,740,896 shares                 issued and outstanding, as adjusted for this offering and the concurrent private                 placements; and 100,000,000 shares authorized and no shares issued and                 outstanding, as adjusted only for this offering		—			17			—
Additional paid-in capital		419,236			1,099,488			817,211
Unearned stock-based compensation		(123,730	)		(123,730	)		(123,730	)
Accumulated deficit		(82,631	)		(82,631	)		(82,631	)
Accumulated other comprehensive income		6,779			6,779			6,779
Notes receivable from stock option exercises		(29,677	)		(29,677	)		(29,677	)
Total stockholders’ equity		190,260			870,358			588,059
Total capitalization		$  409,579			$    871,169			$  588,870

Ÿ

754,747 shares issuable upon the exercise of stock options outstanding on March 31, 2000 with a weighted average exercise price of $6.90 per share;

Ÿ

3,930,255 shares reserved as of March 31, 2000 for grants that we may make in the future under our stock incentive plan; and

Ÿ

4,166,666 shares reserved for issuance under our employee stock purchase plan; and

Ÿ

250,000 shares issuable upon conversion of preferred stock issued in connection with an interest in an associated company, which shares are being held in escrow and will be released only upon achievement of revenue thresholds by that associated company; these shares are not considered to be outstanding for financial statement purposes but are otherwise considered to be outstanding.

Assumed initial public offering price per share				$14.00
Pro forma net tangible book value per share as of March 31, 2000 without giving      effect to this offering or the concurrent private placements		$3.96
Increase per share attributable to investors in this offering		1.15
Pro forma net tangible book value per share as of March 31, 2000 after giving effect      to this offering				5.11
Dilution in pro forma net tangible book value per share to investors in this offering				$  8.89

Assumed initial public offering price per share				$14.00
Pro forma net tangible book value per share as of March 31, 2000 without giving      effect to this offering or the concurrent private placements		$3.96
Increase per share attributable to investors in this offering and the concurrent private      placements		2.46
Pro forma net tangible book value per share as of March 31, 2000 after giving effect      to this offering and the concurrent private placements				6.42
Dilution in pro forma net tangible book value per share to investors in this offering				$  7.58

Assumed initial public offering price per share				$14.00
Pro forma net tangible book value per share as of March 31, 2000 without giving      effect to this offering or the concurrent private placements		$3.96
Increase per share attributable to investors in this offering and the concurrent private      placements—cash only		2.25
Pro forma net tangible book value per share as of March 31, 2000 after giving effect      to this offering and the concurrent private placements—cash only				6.21
Dilution in pro forma net tangible book value per share to investors in this offering				$  7.79

		Shares Purchased					Total Consideration					Average Price Per Share
		Number		Percent			Amount		Percent
Existing stockholders		93,011,674		71.9	%		$  525,580,985		52.1	%		$  5.65
Investors in the concurrent private      placements		22,034,587		17.0			282,484,202		28.0			12.82
Investors in this offering		14,285,000		11.1			199,990,000		19.9			14.00
Total		129,331,261		100.0	%		$1,008,055,187		100.0	%		$  7.79

Ÿ

974,852 shares of class A common stock issuable upon the exercise of stock options outstanding on April 30, 2000, with a weighted average exercise price of $8.05 per share;

Ÿ

3,695,656 shares of class A common stock reserved as of April 30, 2000 for grants that we may make in the future under our stock incentive plan; and

Ÿ

4,166,666 shares of class A common stock reserved for issuance under our employee stock purchase plan.

		Period from May 7, 1999 (Inception) to December 31, 1999			Three Months Ended March 31, 2000 (unaudited)
		(in thousands, except share and per share data)
Consolidated Statement of Operations Data:
Revenues		$    1,037			$      5,215
Total operating expenses		10,465			46,119
Net loss		(9,407	)		(44,185	)
Net loss applicable to common stockholders		(12,927	)		(77,416	)
Basic and diluted net loss per share applicable to common stockholders		$       (4.59	)		$      (7.79	)
Shares used in computing basic and diluted net loss per share		2,816,074			9,941,917

		December 31, 1999		March 31, 2000 (unaudited)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$162,841		$211,911
Working capital		138,279		190,349
Total assets		238,872		487,260
Total stockholders’ equity		205,234		190,410

Acquired Interests

Associated Company		Date of Acquisition		Cash Consideration			Promissory Notes			Shares of Class A Common Stock		Our Equity Ownership/ Voting Power Percentage			Accounting Method
Aluminium.com, Inc.		3/10/00		$19,250,000			—			—		34.6%			Equity
BeautyJungle.com, Inc.		1/11/00		$18,000,000			—			—		61.0%			Consolidation
bid4real.com, inc.		1/24/00		$ 7,000,000			—			—		54.3%			Consolidation
BidBuyBuild, Inc.		2/11/00		$ 3,000,000			$ 3,000,000	(1)		—		35.5%	(2)		Equity
CapacityWeb.com, Inc.		2/11/00		$ 4,500,000			—			—		44.8%			Equity
closerlook, inc. (3)		2/1/00		$13,000,000			—			333,333		42.6%			Equity
Commerx, Inc.		11/19/99		$ 2,500,000			—			—		1.0%			Cost
comScore, Inc.		10/29/99		$   200,208			—			—		0.9%			Cost
eFiltration.com, Inc.		2/11/00		$ 5,000,000			$ 5,000,000			—		45.2%			Equity
Emicom Group, Inc.		4/3/00		$  2,000,000			$24,871,429			—		33.0%	(4)		Equity
Entrepower, Inc.		11/23/99		$   867,000			—			—		43.0%			Equity
eReliable Commerce, Inc.		3/15/00		$ 4,725,000			—			—		47.1%			Equity
Farms.com, Ltd.		4/28/00		$16,100,000			$16,100,000			—		41.0%	(5)		Equity
i-Fulfillment, Inc.		1/28/00		$ 1,000,000			$ 9,000,000	(1)		—		48.8%			Equity
iGive.com, inc.		2/11/00		$ 4,000,000			—			—		32.1%			Equity
iSalvage.com, Inc.		2/3/00		$ 6,500,000			—			—		36.3%			Equity
i-Street, Inc. (6)		11/23/99		$   500,000			—			—		63.8%/89.8%			Consolidation
LAUNCHworks inc..		2/25/00		$11,428,571			—			—		39.7%	(7)		Equity
LiveOnTheNet.com, Inc. (8)		12/8/99		$ 7,500,000			$ 7,500,000			—		76.9%			Consolidation
Martin Partners, L.L.C.		2/8/00		$  1,670,883			—			—		25.0%			Equity
Mercantec, Inc.		2/11/00		$12,000,000			$11,500,000	(1)		—		40.4%	(9)		Equity
mindwrap, inc.		11/19/99		$ 4,905,000	(10)		—			—		97.1%			Consolidation
The National Transportation      Exchange, Inc.		10/29/99		$ 5,862,665			—			—		5.3%			Cost
Neoforma.com, Inc.		10/14/99		$ 6,000,000			—			—		1.5%			Cost
NetUnlimited, Inc. (11)		3/24/00		$ 5,000,000			—			—		61.4%			Consolidation
Oilspot.com, Inc.		2/10/00		$ 2,500,000			$  2,500,000			—		55.6%			Consolidation
OpinionWare.com, Inc.		12/8/99		$ 7,000,000			—			—		54.4%			Consolidation
Outtask.com Inc.		12/10/99		$ 4,000,000			$ 3,000,000	(1)		—		28.9%	(12)		Equity
Panthera Productions, LLC		3/30/00		$ 2,700,000			—			—		62.9%			Consolidation
Parlano, Inc.		2/11/00		$15,000,000			—			1,666,666		70.4%/86.9%			Consolidation
Perceptual Robotics, Inc.		2/14/00		$10,000,000			—			166,666		33.4%			Equity
PocketCard Inc.		11/23/99		$ 5,000,000			$10,000,000	(1)		—		37.5%			Equity
Sequoia Software Corporation		11/23/99		$ 6,916,648			—			—		8.8%			Cost
TV House, Inc.		3/8/00		$ 2,500,000			$ 2,500,000			—		42.0%			Equity
ViaChange.com, Inc.		1/31/00		$ 3,000,000			$ 2,000,000			—		70.0%			Consolidation
Web Design Group, Inc. (13)		2/11/00		$ 7,000,000			—			—		53.7%			Consolidation
Westbound Consulting, Inc.      (13)		2/11/00		$   500,000			$   500,000	(1)		—		52.4%			Consolidation
Whiplash, Inc.		11/8/99		$ 2,000,000			$ 4,000,000	(1)		—		26.5%			Equity
Xippix, Inc.		2/4/00		$ 6,242,442			$ 4,000,000			—		31.5%			Equity

(1)	We have repaid obligations under promissory notes in the amounts shown to the following associated companies as of May 31, 2000: BidBuyBuild—$3,000,000; i-Fulfillment—$9,000,000; Mercantec—$6,500,000; Outtask.com—$3,000,000; PocketCard—$10,000,000; Whiplash—$4,000,000; and Xippix—$4,000,000.

(2)	We also hold warrants to purchase shares of common stock of BidBuyBuild. Giving effect to the exercise of these warrants, we would hold 37.7% of both the equity and voting power of BidBuyBuild.

(3)

250,000 of the shares of our class A common stock issuable upon conversion of preferred stock issued to closerlook and $1,500,000 in cash are being held in escrow and will be released to closerlook only upon achievement of revenue thresholds. Further, if closerlook achieves an additional revenue threshold, we will be obligated to pay an additional $3,000,000 in cash for our interest in closerlook.

(4)

Our current equity ownership and voting power percentage is 7.6%, which will be increased to 33.0% when Emicom completes the private financing it is currently conducting. The cash consideration and promissory note shown in the table reflect payment for a 33.0% equity interest in Emicom. Beginning March 24, 2002, Emicom will have a right to cause us to purchase all of its outstanding common stock, which right will terminate under certain circumstances, including Emicom’s completion of an initial public offering.

(5)	We also hold warrants to purchase shares of common stock of Farms.com. Giving effect to the exercise of these warrants, we would hold 45.7% of both the equity and the voting power of Farms.com.

(6)	Excludes 500,000 shares of series B-2 preferred stock, which are non-voting, non-convertible and redeemable at i-Street’s option at any time before March 24, 2003, issued to us in exchange for $1,5000,000 in additional financing we provided to i-Street in March 2000.

(7)	We also hold warrants to purchase shares of common stock of LAUNCHworks. Giving effect to the exercise of these warrants, we would hold 50.9% of both the equity and voting power of LAUNCHworks.

(8)

Excludes 5,000 shares of series A preferred stock, which are non-voting, non-convertible and redeemable at LiveOnTheNet’s Option at any time before February 17, 2001 with respect to 4,523 of the shares and April 18, 2001 with respect to 477 of the shares. These shares were issued to us in exchange for $5,000,000 in additional financing we provided to LiveOnTheNet in February and April 2000.

(9)	We also hold warrants to purchase shares of common stock of Mercantec. Giving effect to the exercise of these warrants, we would hold 42.7% of both the equity and voting power of Mercantec.

(10)	Includes $405,000 in brokerage fees paid in connection with the acquisition.

(11)	Our interest in NetUnlimited was acquired by, and is owned through, Host divine.

(12)	Gives effect to Outtask.com’s redemption, on May 19, 2000, of 347,222 of the shares of Outtask.com that we originally acquired for approximately $300,000.

(13)	Our interests in Web Design Group and Westbound Consulting were acquired by, and are owned through, Xqsite. Xqsite has repaid $250,000 under a promissory note issued by it in connection with its acquisition of Westbound.

Companies We Established

Associated Company		Date of Incorporation		Current Maximum Intended Capital Contribution		Our Current Equity Ownership/ Voting Power Percentage		Accounting Method
Brandango, inc.		10/26/99		$10,000,000		65.5%/90.0%		Consolidation
Buzz divine, inc.		10/26/99		$10,000,000		80.6%/90.0%		Consolidation
dotspot, Inc.		10/26/99		$10,000,000		80.6%/90.0%		Consolidation
eXperience divine, inc.		10/26/99		$10,000,000		80.8%/90.0%		Consolidation
FiNetrics, Inc.		11/3/99		$10,000,000		80.9%/90.0%		Consolidation
Host divine, inc.		10/26/99		$10,000,000		80.6%/90.0%		Consolidation
Justice divine, inc.		10/26/99		$10,000,000		80.9%/90.0%		Consolidation
Knowledge divine, inc.		10/26/99		$  3,000,000		80.7%/90.0%		Consolidation
OfficePlanIt.com, Inc.		11/23/99		$10,000,000		80.6%/90.0%		Consolidation
salespring, inc.!!		10/26/99		$10,000,000		80.9%/90.0%		Consolidation
sho research, Inc.		10/26/99		$  3,000,000		60.5%/90.0%		Consolidation
Talent divine, inc.		10/26/99		$10,000,000		80.8%/90.0%		Consolidation
Xqsite, Inc.		10/26/99		$10,000,000		80.6%/90.0%		Consolidation

Three Months Ended March 31, 2000

General

Revenues

Cost of Revenues

Selling, General and Administrative Expenses

Research and Development Expenses

Stock-Based Compensation

Other Income and Expenses

Income Taxes

Minority Interest

Equity in Losses of Associated Companies

Net Loss

Deemed Dividends

Period from May 7, 1999 (Inception) to December 31, 1999

General

Revenues

Cost of Revenues

Selling, General and Administrative Expenses

Research and Development Expenses

Stock-Based Compensation

Other Income and Expenses

Income Taxes

Minority Interest

Equity in Losses of Associated Companies

Net Loss

		Year
Amortization of:		2000 (nine months ending December 31, 2000)		2001		2002		2003		2004
Identifiable Intangible Assets and Goodwill		11,155,000		14,776,000		14,181,000		750,000		—
Our Net Excess Investment		35,377,000		47,813,000		47,072,000		5,815,000		—
Unearned Stock-Based Compensation		31,533,000		33,482,000		32,670,000		30,725,000		1,274,000
Total		78,065,000		96,071,000		93,923,000		37,290,000		1,274,000

(1)

These unearned stock-based compensation charges do not reflect potential additional changes associated with options granted to consultants, as discussed under “—Prospective Stock-based Compensation Charges” above. The future value of these potential charges cannot be estimated at this time because the charges will be based on the future value of our stock.

Commitment to/for		Purpose		Amount			Time Period
Associated companies we acquired		Repay promissory notes		$  65,721,429			Through August 2000
Associated companies we  established		Provide start-up financing		$  85,000,000			3 to 5 years
Blackhawk		Purchase Chicago facility		$    9,375,000			July 2000
Compaq		Purchase computer equipment		$    5,000,000			4 years(1)
Level 3		Purchase colocation and bandwidth services		$100,000,000	(2)		4 years
Microsoft		Open Seattle facility		$    1,500,000			Within 60 days from the date of this offering
Microsoft		Promote Microsoft solutions		$    4,000,000			4 years
Microsoft		Fund Seattle projects and acquisitions		$  50,000,000			None Specified
Microsoft		Purchase software products,		$  15,300,000			4 years
		consulting services and product support services
Skyscraper Ventures		Fund acquisitions		$  10,000,000			4 years

(1)	$2,500,000 of equipment must be purchased within the first 18 months.

(2)	$25,000,000 of the commitment will be satisfied by a service credit issued to us by Level 3 in connection with the concurrent private placement.

The Growth of Business-to-Business E-Commerce

Infrastructure Service Providers: Infrastructure service providers assist companies in building and managing the infrastructure needed to support business-to-business e-commerce. Their goal is to maintain and extend their clients’ competitive advantage by allowing companies to focus on their core competencies, thereby improving operating efficiencies and decreasing time-to-market. They accomplish these goals by offering systems integration, web site design and hosting, as well as software and other products and services, such as legal and accounting services and marketing and public relations expertise.

Market Makers: Market makers enable commerce to be conducted more efficiently and at lower costs by bringing together large numbers of buyers and sellers in traditional businesses on Internet-based markets where they can exchange products and services. They also provide web-based community forums which allow businesses and professionals to share information. Market makers usually operate in specific industries, capitalizing on inherently inefficient distribution channels and business processes.

Do Rights: Do rights use the Internet to operate for-profit businesses with social, cultural or educational purposes. Do rights generally either conduct philanthropic activities themselves or provide opportunities for their customers to provide financial support to philanthropic entities.

Operating Challenges Facing Emerging Business-to-Business E-Commerce Companies

Ÿ

identify e-commerce needs and opportunities within targeted industries;

Ÿ

rapidly develop and effectively market solutions that satisfy specific industry demands;

Ÿ

quickly build brand recognition and an online presence to establish market leadership; and

Ÿ

secure valuable strategic partnerships.

Ÿ

industry experts who can help define and refine their business plans;

Ÿ

management teams experienced in the day-to-day operations of business-to-business e-commerce companies;

Ÿ

infrastructure services that can reduce costs and time-to-market; and

Ÿ

a variety of service professionals.

Geographic Concentration of Capital and Services in the U.S.

Growth in International Markets

Exploit Our Resources to Identify Potential Business-to-Business Associated Companies

Focus on Associating with Companies that can Become Market Leaders

Provide Valuable Infrastructure and Support Services

Ÿ Brandango—customer service Ÿ Buzz divine—marketing services, including branding, advertising and public relations Ÿ dotspot—facilities leasing and other real estate services Ÿ eXperience divine—e-commerce consulting services Ÿ FiNetrics—accounting and financial services Ÿ Host divine—core information technology services, including hosting, customer service and infrastructure implementation

Ÿ Justice divine—management of legal service relationships Ÿ Knowledge divine—knowledge applications and consulting services Ÿ OfficePlanIt.com—office furniture and supplies Ÿ salespring—sales strategy and support Ÿ sho research—market and opportunity assessment Ÿ Talent divine—recruiting and human resources Ÿ Xqsite—web site design and deployment

Promote Collaboration among our Associated Companies and Strategic Relationships

Target Underserved Markets

Expand into International Markets

Associated Company Criteria

Ÿ

Compelling Concept. We seek associated companies with compelling, unique concepts that we believe allow them to address unmet market needs or establish new market opportunities. We also look for companies that offer products and services which are sufficiently developed with respect to design, features, functions and pilot operations to begin large-scale implementation and execution.

Ÿ

Technical Expertise. We look for companies with a technological advantage which prevents competitors from easily entering their market. In addition, we look for companies with accomplished technical teams that have the skills to bring their concept to commercial readiness.

Ÿ

Early Stage of Development. We focus on acquiring interests in early-stage companies that we believe have the greatest potential for growth and which can most benefit from the services provided by us and the associated companies that we control. We also believe that our focus on early-stage companies allows us more flexibility to structure our interests in companies in a manner consistent with our goal of avoiding regulation under the Investment Company Act.

Ÿ

Large Target Market. We seek companies that target large and rapidly growing markets. The size of the target market and an associated company’s share of that market allow us to determine the potential future value of that company.

Ÿ

Favorable Competitive Landscape. We favor companies with strong competitive positions, as well as industries in which there is no dominant business-to-business e-commerce participant. As part of our assessment of associated companies, we evaluate current competitors and potential market entrants.

Ÿ

Strong Management Team. We target companies with highly-qualified management that possess significant e-commerce or specific industry experience and demonstrate the leadership skills critical to guiding the strategy and development of an early-stage company.

Ÿ

Potential for Public Capital. We favor companies which can rapidly reach the stage of development necessary to complete an initial public offering.

Screening Process

Initial Screening. We have recently implemented a web-based initial screening stage. In this initial stage of our screening process, a potential associated company is required to complete an on-line questionnaire for review by our associated company development group, which consists of individuals with experience in finance, acquisitions and technology. This questionnaire, which provides us with

general information about the potential associated company’s business, state of development, market opportunity, competitive situation, marketing plan, technical team and capital and infrastructure service needs, allows us to efficiently identify opportunities that fit our business strategy. Suitable opportunities are passed on to the due diligence phase of the screening process described below. We anticipate that only a small percentage of the potential associated companies that we review will successfully pass through this stage of our screening process. All of the companies in which we have acquired interests to date have come to our attention through referrals or other direct sources, and none of them have participated in this initial screening process.

Due Diligence. The next step of our screening process involves a comprehensive due diligence investigation. A due diligence team with transactional and industry expertise is assigned to each potential associated company. This team assesses the overall business opportunity by performing a financial review and valuation of the potential associated company, reviewing its technical capability and conducting more specialized reviews of areas critical to its success. We have completed a comprehensive due diligence assessment for all of our acquisitions of interests in associated companies to date.

Associated Company Development Group Approval. Following the completion of due diligence, our associated company development group makes a determination as to whether we will pursue acquiring an interest in a potential associated company. All of our acquisitions of interests in associated companies to date have received the approval of the associated company development group.

Associated Company		Market		Date Formed		Associated Company Since		Our Current Equity Ownership/ Voting Power Percentage
Brandango, Inc.*†		Customer Service		10/26/99		10/26/99		65.5%/90.0%
Buzz divine, inc.*†		Marketing/Public Relations		10/26/99		10/26/99		80.6%/90.0%
closerlook, inc.		Digital Strategy and Design		12/1/94		2/1/00		42.6%
comScore, Inc.		Online Tracking Tools and Services		8/18/99		9/27/99		0.9%
dotspot, Inc.*†		Facilities Management and Leasing		10/26/99		10/26/99		80.6%/90.0%
Emicom Group, Inc.*		Incubation Services		3/23/00		3/24/00		33.0%	(1)
eReliable Commerce, Inc.*		Transaction Services		8/2/99		3/15/00		47.1%
eXperience divine, inc.*†		Internet Consulting		10/26/99		10/26/99		80.8%/90.0%
FiNetrics, Inc.*†		Accounting and Finance Services		11/3/99		11/3/99		80.9%/90.0%
Host divine inc.*†		Information Technology Services		10/26/99		10/26/99		80.6%/90.0%
i-Fulfillment, Inc.*		Inventory Management Services		10/6/98		1/28/00		48.8%
i-Street, Inc.*		Media/Business Services		9/15/98		11/23/99		63.8%/89.8%	(2)
Justice divine, inc.*†		Legal Services		10/26/99		10/26/99		80.9%/90.0%
Knowledge divine, inc.*†		Consulting Services		10/26/99		10/26/99		80.7%/90.0%
LAUNCHworks inc.		Incubation Services		2/1/99		2/25/00		39.7%	(3)
LiveOnTheNet.com, Inc.		Web Broadcasting/Online Advertising		9/13/85		12/8/99		76.9%	(4)
Martin Partners, L.L.C.		Executive Recruiting		1/10/96		2/8/00		25.0%
Mercantec, Inc.		E-commerce Software		2/13/97		2/11/00		40.4%(5)
mindwrap, inc.		Knowledge Management Software		1/12/88		11/19/99		97.1%
NetUnlimited, Inc.(6)		Hosting and Web Applications		3/22/96		3/24/00		61.4%
OpinionWare.com, Inc.*		Online Surveys		11/16/99		12/8/99		54.4%
Outtask.com, Inc.*		Business Services		4/6/99		12/10/99		28.9%
Parlano, Inc.*		Collaboration Software		1/26/00		2/11/00		70.4%/86.9%
Perceptual Robotics, Inc.		Internet-Based Video Software		7/27/95		2/14/00		33.4%
PocketCard Inc.*		Business and Consumer Debit Cards		11/2/99		11/23/99		37.5%
salespring, inc.!!*†		Sales Services		10/26/99		10/26/99		80.9%/90.0%
Sequoia Software Corporation		Internet Infrastructure Software		10/15/92		11/23/99		8.8%
sho research, Inc.*†		Market Research		10/26/99		10/26/99		60.5%/90.0%
Talent divine, inc.*†		Human Resources		10/26/99		10/26/99		80.8%/90.0%
TV House Inc.		Financial News		2/11/00		3/8/00		42.0%
ViaChange.com, Inc.*		Mortgages		6/28/99		1/31/00		70.0%
Web Design Group, Inc.(7)		Web Design		6/9/93		2/11/00		53.7%
Westbound Consulting, Inc.(7)		Internet Consulting Services		8/25/97		2/11/00		52.4%
Xippix, Inc.		E-Commerce Imaging		4/14/99		2/4/00		31.5%
Xqsite, Inc.*†		Web Design		10/26/99		10/26/99		80.6%/90.0%

(1)

Our current equity ownership and voting power percentage is 7.6%, which will be increased to 33.0% when Emicom completes the private financing it is currently conducting. Beginning March 24, 2002, Emicom will have a right to cause us to purchase all of its outstanding common stock, which right will terminate under certain circumstances, including Emicom’s completion of an initial public offering.

(2)	Excludes 500,000 shares of series B-2 preferred stock, which are non-voting, non-convertible and redeemable at i-Street’s option at any time before March 24, 2003. These shares were issued to us in exchange for $1,500,000 in additional financing we provided to i-Street in March 2000.

(3)	We also hold warrants to purchase shares of common stock of LAUNCHworks. Giving effect to the exercise of these warrants, we would hold 50.9% of both the equity and voting power of LAUNCHworks.

(4)

Excludes 5,000 shares of series A preferred stock, which are non-voting, non-convertible and redeemable at LiveOnTheNet’s option at any time before February 17, 2001 with respect to 4,523 of these shares and April 18, 2001 with respect to 477 of these shares. These shares were issued to us in exchange for $5,000,000 in additional financing we provided to LiveOnTheNet in February and April 2000.

(5)	We also hold warrants to purchase shares of common stock of Mercantec. Giving effect to the exercise of these warrants, we would hold 42.7% of both the equity and voting power of Mercantec.

(6)	We own our interest in NetUnlimited through Host divine.

(7)	We own our interest in Web Design Group and Westbound Consulting through Xqsite.

Brandango, Inc provides outsourced customer acquisition and customer care for business-to-business e-commerce companies and other Internet companies. Its agents communicate with customers and potential customers by telephone, e-mail, mail and fax. Brandango uses data modeling to identify and execute targeted sales and marketing campaigns. Brandango also plans to provide specialized customer service and community building programs. Brandango generates revenues from retainer and usage fees. Brandango is headquartered in Lisle, Illinois and had 11 full-time employees as of March 31, 2000.

Buzz divine, inc. is an integrated marketing firm specializing in servicing business-to-business Internet companies. Buzz divine offers a variety of services, including strategic planning, branding, advertising, direct mail, online marketing, event marketing, graphic design and public relations. It also provides research services that are designed to monitor the progress and effectiveness of corporate marketing efforts. Buzz divine generates revenues primarily from service fees. Buzz divine is headquartered in Lisle, Illinois and had 67 full-time employees as of March 31, 2000.

closerlook, inc. (www.closerlook.com) specializes in digital strategy, web site design, e-commerce solutions and hands-on interactive learning initiatives. closerlook primarily serves small and mid-sized companies, working with senior and executive management in industries such as technology, pharmaceuticals, financial services and professional services. closerlook designers, strategists and programmers work with clients to understand their business goals and develop effective digital designs. closerlook generates revenues from the sale of Internet strategy and development services. closerlook is headquartered in Chicago, Illinois and had 69 full-time employees as of March 31, 2000.

comScore, Inc. (www.comScore.com) provides online consumer behavior data and related consulting services. It uses its proprietary research software technology to track consumers’ online behavior by monitoring web use activities, online purchasing habits and responses to online advertisements. comScore’s customers can obtain market intelligence to assist them in resource investment and marketing decisions. comScore generates revenues primarily from its syndicated, subscription-based online information services. comScore maintains headquarters in Reston, Virginia and regional offices in Chicago, Illinois and Palo Alto, California and had 37 full-time employees as of March 31, 2000.

dotspot, inc. develops and leases facilities and provides real estate services for our associated companies, as well as unaffiliated Internet start-up companies. dotspot intends to work closely with city governments, architecture firms, office supply vendors and information technology providers to create alliances to provide real estate, operations and technical infrastructure support. It generates revenues primarily from fees associated with developing, managing and leasing facilities, as well as from consulting services. dotspot is headquartered in Lisle, Illinois and had 33 full-time employees as of March 31, 2000.

Emicom Group, Inc. (www.emicomgroup.com) is a technology holding company that provides capital and advisory services to early-stage technology companies located in the Middle East. Emicom expects to generate revenues primarily from fees associated with providing infrastructure services and from gains on securities owned by Emicom. Emicom is headquartered in Ramat Gan, Israel and had 14 full-time employees as of March 31, 2000.

eReliable Commerce, Inc. is developing technology to provide business-to-business e-commerce web sites with customized guaranteed transaction services, including electronic checking, insurance, credit card processing, financing and logistics services, under their own brand name. This technology will be designed to enable businesses to conduct all necessary steps of acquiring goods, simplify the registration and order process, increase customer satisfaction and reduce the level of fraudulent transactions. eReliable Commerce intends to generate revenues through licensing and transaction fees. eReliable Commerce is headquartered in the Chicago metropolitan area and had four full-time employees as of March 31, 2000.

eXperience divine, inc. provides business-to-business e-commerce consulting services to traditional and web-based companies. eXperience divine integrates management and systems consulting to provide a range of consulting services for clients that are establishing and building e-commerce businesses. eXperience divine delivers its services through a series of executive workshops, which cover innovative business plan creation, alliance formation, strategy and the planning of an initial public offering. eXperience divine generates revenues primarily from fixed fee contracts. eXperience divine is headquartered in Lisle, Illinois and had four full-time employees as of March 31, 2000.

FiNetrics, Inc. (www.finetrics.com) offers a suite of integrated accounting and financial services designed to help small and mid-sized companies get their products and services to market quickly. FiNetrics includes accounts payable, billing and collections, payroll, project accounting, general ledger, cash management, stock administration and purchasing in its service offerings. In addition, FiNetrics will assist customers with SEC reporting, tax matters, financial reporting and strategic planning and analysis. FiNetrics generates revenues primarily from customer fees. FiNetrics is headquartered in Lisle, Illinois and had 48 full-time employees as of March 31, 2000.

Host divine, inc. provides information technology services for business-to-business e-commerce companies, including hosting, customer service and infrastructure implementation, such as phone and e-mail systems and Internet connectivity. Its products and services are designed to reduce the time required to identify, develop and implement critical operating technology and improve the quality, reliability and service levels of technology-based operations. Host divine intends to expand its range of information technology offerings to include other services, such as knowledge management applications and database design, management and consulting services. Host divine generates revenues primarily from customer fees. Host divine is headquartered in Lisle, Illinois and had 30 full-time employees as of March 31, 2000.

i-Fulfillment.com, Inc. (www.i-fulfillment.com) plans to provide standardized, complete fulfillment and inventory management services to businesses selling products over the Internet. i-Fulfillment.com intends to provide this service by integrating its supply chain systems and operating automated fulfillment centers from which clients’ inventory may be shipped. Its service will help businesses bring their products to market quickly without undertaking proprietary systems integration and infrastructure development. i-Fulfillment.com plans to generate revenues primarily through activity- and resource-based fees. i-Fulfillment.com is headquartered in Chicago, Illinois and had 16 full-time employees as of March 31, 2000.

i-Street, Inc. (www.i-streetcentral.com) is a business-to-business media company and news portal focused on the Internet and technology businesses in Chicago and elsewhere in the midwest. i-Street’s products include i-StreetCentral.com, a web community which supports entrepreneurs who are establishing and growing start-up business-to-business companies by providing an Internet who’s who, a newsletter covering Internet issues, discussion networks and interviews and web broadcasts featuring Internet entrepreneurs. i-Street also offers The Chicago Software News, a subscription newspaper, and Chisoft.com its related web site, which offers its articles online, as well as job postings and software directories. i-Street currently generates revenues from advertising, sponsorships and content licensing fees. i-Street is headquartered in Chicago, Illinois and had three full-time employees as of March 31, 2000.

Justice divine, inc. facilitates the provision of legal services at cost-effective prices for associated companies and other customers and intends to develop a web portal which aggregates tools for corporate legal departments to manage and communicate with their external legal counsel. Justice divine meets the demands of its customers through a program with Piper Marbury Rudnick & Wolfe, a national law firm. Justice divine manages the relationships between the law firm and its customers and generates revenues from fees charged by it to its customers for these management services. Justice divine is headquartered in Lisle, Illinois and had no full-time employees as of March 31, 2000; however, two of our employees devote a portion of their time to Justice divine.

Knowledge divine, inc. offers a combination of focused knowledge applications and consulting services. Knowledge divine intends to help organizations identify, capture, manage and share their intellectual capital. Knowledge divine generates revenues primarily from consulting fees and the sales of application systems. Knowledge divine is headquartered in Lisle, Illinois and had 26 full-time employees as of March 31, 2000.

LAUNCHworks inc. (www.launchworks.com) is a provider of capital and strategic services to business-to-business e-commerce companies. LAUNCHworks works closely with its associated companies to foster their business goals and participates in that success as a shareholder. LAUNCHworks generates revenues primarily from consulting services. LAUNCHworks is headquartered in Calgary, Alberta, Canada and had six full-time employees as of March 31, 2000.

LiveOnTheNet.com (www.liveonthenet.com) provides video content through its web site as a vehicle to showcase local and national advertisers. LiveOnTheNet.com acquires and distributes live events, such as concerts, sports and educational programming online. It partners with content providers, including music and film festivals, professional sports leagues and record labels. National advertisers and thousands of small business customers have used Cornerpost, LiveOnTheNet.com’s online promotion and advertising platform for small businesses. LiveOnTheNet.com generates revenues from advertising fees. LiveOnTheNet.com is headquartered in Lisle, Illinois, with production studios and operational centers in Nashville, Tennessee, Atlanta, Georgia and Huntsville, Alabama, and had 59 full-time employees as of March 31, 2000.

Martin Partners, L.L.C. (www.martinptrs.com) is an executive search firm which focuses on e-commerce and technology. Martin Partners’ clients include start-ups, companies preparing to go public

and large public companies. Martin Partners generates revenues from client fees paid in exchange for providing search services. Martin Partners is headquartered in Chicago, Illinois and had 14 full-time employees as of March 31, 2000.

Mercantec, Inc. (www.mercantec.com) produces software that allows merchants to integrate e-commerce capabilities into their existing web sites. Mercantec has licensed its software to more than 160 Internet service providers and entered into licensing agreements with original equipment manufacturers and web hosting providers in 13 countries. Through these licensed users over 10,000 merchants use Mercantec software to sell their products. Mercantec generates revenues primarily from monthly license fees. Mercantec is headquartered in Naperville, Illinois and had 76 full-time employees as of March 31, 2000.

mindwrap, inc. (www.mindwrap.com) offers a knowledge management software product, OPTIX, that provides workflow, document imaging, text retrieval, document management and control, optical character recognition and computer output to laser disk technology. mindwrap generates revenues primarily from product licensing fees. mindwrap is currently located in Flint Hill, Virginia and is moving its headquarters to Chicago, Illinois and had 37 employees as of March 31, 2000.

NetUnlimited, Inc. (www.netunlimited.com) markets various Internet technology infrastructure services. NetUnlimited generates revenues primarily from fees associated with Internet connectivity and hosting services, as well as web application services. NetUnlimited is headquartered in Winston-Salem, North Carolina and had 58 full-time employees as of March 31, 2000. We own our interest in NetUnlimited through Host divine.

OpinionWare.com, Inc. (www.opinionware.com) has developed technology to allow businesses to gather and analyze the opinions of large public and private online communities. OpinionWare.com’s solution is designed to help businesses develop and manage compelling content and enhance the attractiveness of their web sites by generating information that enables them to build closer relationships with their customers. Customers are able to use OpinionWare.com to build public opinion-based online communities, create additional page impressions, continuously monitor customer satisfaction, create opinion-driven e-commerce applications, develop targeted marketing programs and add opinion information to business decision-making applications. OpinionWare.com expects to generate revenues primarily from product license fees, product rental fees from web-hosting businesses and advertising revenue-sharing arrangements. OpinionWare.com is headquartered in Chicago, Illinois and had 16 full-time employees as of March 31, 2000.

Outtask.com Inc. (www.outtask.com) provides business-to-business e-commerce applications and services to technology and Internet companies. Outtask.com provides its customers with a full range of supported, hosted e-commerce applications. Outtask.com’s primary applications include budgeting and sales, customer resource and time and expense report management. Its integrated services include employee travel, payroll, personal computer acquisition, telecommunications and e-mail. Outtask.com generates revenues primarily from annual subscription fees and transaction fees for integrated services and on-site implementation consulting support. Outtask.com is headquartered in Arlington, Virginia and had 60 full-time employees as of March 31, 2000.

Parlano, Inc. (www.parlano.com) intends to develop, market, license and manage text-based collaboration and communication software. This software is intended to allow information to be captured, filtered and stored in corporate databases and used in knowledge management applications. Parlano intends to generate revenues primarily from software licenses, as well as from consulting and other services. Parlano is headquartered in Chicago, Illinois and had 19 full-time employee as of March 31, 2000.

Perceptual Robotics (www.perceptualrobotics.com) offers a software system called iCam that allows Internet users to control a robotic camera and immediately capture still images from remote locations. Users of this system can control both the size and quality or the image to adjust to their own modem or network speed. Peceptual Robotics’ system includes software, an integrated video subsystem and a server computer. Perceptual Robotics currently generates revenues primarily from sales and maintenance of its hardware and software. Perceptual Robotics plans eventually to charge customers monthly fees. Perceptual Robotics is headquartered in Evanston, Illinois and had 30 full-time employees as of March 31, 2000.

PocketCard Inc. (www.pocketcard.com) provides businesses and individuals with debit cards that allow real-time funding, control and reporting over the Internet. PocketCard’s product and services offer versatile payment solutions to meet the day-to-day spending and financial management needs of businesses and families. PocketCard uses web-based technology which allows for secure on-line transactions and reporting. PocketCard is an approved Independent Service Organization of Visa and also plans to co-brand its cards with other recognized companies. PocketCard also provides funding, spending and risk management expertise. PocketCard generates revenues through annual membership and transaction fees, as well as online advertising. PocketCard is headquartered in Gurnee, Illinois and had 41 full-time employees as of March 31, 2000.

salespring, inc.!! provides experienced sales personnel to help improve the sales performance, and accelerate sales results, of its customers. salespring services include sales strategy development, sales deployment modeling, hiring/placement, quota distribution/allocation, sales plan management, contract management, pipeline/forecast management and sales training. salespring generates revenues primarily from customer commission fees and other revenue goal-based incentives. salespring is headquartered in Lisle, Illinois and had 33 full-time employees as of March 31, 2000.

Sequoia Software Corporation (www.sequoiasw.com) provides Internet infrastructure software, based on the XML programming language for web applications, to help shorten the cost and time necessary to deploy corporate portals. Corporate portals are proprietary web sites designed to facilitate the sharing of information and the conduct of business among companies and their customers and partners. Sequoia offers two XML-based products: Sequoia XML Portal Server, a software application for deploying corporate portals, and Xdex, an XML indexing application for organizing XML-based data. Sequoia’s primary source of revenue is license and transaction fees from the use of its software. Sequoia is headquartered in Columbia, Maryland, with offices in Santa Clara, California and Dublin, Ireland, and had 173 full-time employees as of March 31, 2000. Sequoia is a public company listed on the Nasdaq National Market under the symbol SQSW.

sho research, Inc. is a market research company providing information about how businesses use, and can be expected to use, the Internet. sho research uses the Internet to collect and distribute information. sho research generates revenues through consulting fees. sho research is headquartered in Lisle, Illinois and had eight full-time employees as of March 31, 2000.

Talent divine, inc. provides recruiting, human resources and benefits services for our associated companies by identifying and satisfying recruitment needs. Talent divine also manages benefits and employee human resource requirements and negotiate relationships with employee benefit plan carriers and payroll information services. Talent divine generates revenues through recruiting and outsourcing fees. Talent divine is headquartered in Lisle, Illinois and had 19 full-time employees as of March 31, 2000.

TV House, Inc. plans to produce and syndicate Internet video financial news updates designed for individual investors. These news updates will be licensed to companies for use on their web sites.

Additionally, TV House intends to provide a variety of Internet video content to e-commerce and other companies. TV House intends to generate revenues from product licensing fees, contracts and advertising. TV House is headquartered in Chicago, Illinois and had three full-time employees as of March 31, 2000.

ViaChange.com, Inc. (www.viachange.com) has developed technology to conduct auctions in capital market products. ViaChange.com’s solution has been initially developed for the secondary mortgage market, by providing online auctioning, valuation and transfer of whole loans and loan servicing rights. The secondary mortgage market involves the purchasing and selling of mortgage loans between banks, pension funds, government agencies, insurance companies and investment banks. Other potential products that Viachange.com may auction in the future include student loans, consumer loans, automobile leases, credit card debt, commercial loans and equipment leases. The exchange will also offer online computational models for portfolio trading. ViaChange.com intends to generate revenues from transaction fees. ViaChange.com is headquartered in Chicago, Illinois and had nine full-time employees as of March 31, 2000.

Web Design Group, Inc. (www.webdesigngroup.com) provides web development and electronic business services to companies seeking to develop and implement effective web solutions for their operations. Web Design Group has developed over 185 internet, intranet and extranet web applications. Web Design Group coordinates strategic consulting, project management, creative technology, online marketing and systems administration services. Web Design Group generates revenues primarily through web technology consulting services, online marketing services and development and production services, as well as hosting and maintenance services. Web Design Group is headquartered in Chicago, Illinois and had 35 full-time employees as of March 31, 2000. We own our interest in Web Design Group through Xqsite.

Westbound Consulting, Inc. (www.westbound.com) delivers customized Internet solutions. Westbound generates revenues through web consulting, marketing, development and hosting services. Westbound is headquartered in Chicago, Illinois and has established its overseas development center in Hyderabad, India. Westbound had 40 full-time employees as of March 31, 2000. We own our interest in Westbound through Xqsite.

Xippix, Inc. (www.xippix.com) has developed technology that enables e-commerce businesses to incorporate a large number of large, high-resolution images into their web sites. Its high-speed image server, ImagePump, allows viewers to zoom, pan and spin images on the web. Xippix generates revenues primarily from sales of ImagePump servers. Xippix is headquartered in Larkspur, California and had 37 full-time employees as of March 31, 2000.

Xqsite, Inc. provides web site design, deployment and implementation solutions designed to help business-to-business e-commerce companies use the Internet to gain competitive advantages. Xqsite uses its expertise in system and asset integration to provide customized, technologically sophisticated e-commerce solutions and internet applications. It uses integrated strategy, design and technology to deliver e-commerce solutions. Xqsite’s primary source of revenues is expected to be contract service fees. Xqsite is headquartered in Lisle, Illinois and had 90 full-time employees as of March 31, 2000.

Associated Company		Market		Date Formed		Associated Company Since		Our Current Equity Ownership/ Voting Power Percentage
Aluminium.com, Inc.*		Aluminum		11/1/99		3/10/00		34.6%
BeautyJungle.com, Inc.*		Beauty Products		5/11/99		1/11/00		61.0%
bid4real.com, inc.*		Real Estate		12/13/99		1/24/00		54.3%
BidBuyBuild, Inc.*		Construction		11/9/99		2/11/00		35.5%(1)
CapacityWeb.com, Inc.*		Manufacturing		1/11/00		2/11/00		44.8%
Commerx, Inc.		Plastics		12/14/98		11/19/99		1.0%
eFiltration.com, Inc.*		Filtration		9/7/99		2/11/00		45.2%
Entrepower, Inc.*		Executive Recruiting		10/14/99		11/23/99		43.0%
Farms.com, Ltd.		Agriculture		3/2/00		4/28/00		41.0%(2)
iSalvage.com, Inc.*		Automotive Parts		7/20/99		2/3/00		36.3%
The National Transportation Exchange, Inc.		Freight Transportation		4/30/99		10/29/99		5.3%
Neoforma.com, Inc.*		Medical Products		8/18/98		10/14/99		1.5%
OfficePlanIt.com, Inc.*†		Office Furniture and Supplies		11/23/99		11/23/99		80.6%/90.0%
Oilspot.com, Inc.*		Petroleum		10/21/99		2/10/00		55.6%
Whiplash, Inc.*		Travel		3/7/96		11/8/99		26.5%

(1)	We also hold warrants to purchase shares of common stock of BidBuyBuild. Giving effect to the exercise of these warrants, we would hold 37.7% of both the equity and voting power of BidBuyBuild.

(2)	We also hold warrants to purchase shares of common stock of Farms.com. Giving effect to the exercise of these warrants, we would hold 45.7% of both the equity and voting power of Farms.com.

Aluminium.com, Inc. (www.aluminium.com) provides a business-to-business online exchange for buying and selling all grades of aluminum raw materials. Participants in the aluminum market are able to interact on the Aluminium.com exchange without purchasing departments, brokers or middlemen. Aluminium.com generates revenues from transaction-based fees. Aluminium.com is headquartered in New York, New York and had 17 full-time employees as of March 31, 2000.

BeautyJungle.com, Inc. (www.beautyjungle.com) offers an electronic marketplace for beauty products buyers and sellers to reduce the transaction costs of manufacturers and retailers, including drugstores, salons, and spas. BeautyJungle.com is also expanding its e-commerce service provider business which will enable content and portal sites, manufacturers and brick-and-mortar retailers to sell beauty products online at reduced costs, with accelerated time to market and greater operating efficiencies. BeautyJungle.com also maintains a consumer online retailing site that offers a wide selection of beauty products. BeautyJungle.com generates revenues from transaction fees and enablement services. BeautyJungle.com is headquartered in Chicago, Illinois and had 89 full-time employees as of March 31, 2000.

bid4real.com, inc. (www.bid4real.com) provides online business-to-business real estate auctions. bid4real.com focuses on the auction of commercial, industrial and government-owned properties, initially in the Chicago area, and plans to expand across the United States. bid4real.com expedites the exchange of information and improve the due diligence process in real estate purchases through the use of virtual tours and electronic information dissemination. Sellers using bid4real.com’s services are able to offer properties via the auction process, either with or without a broker. bid4real.com generates revenues from transaction-based fees and advertising. bid4real.com is headquartered in Chicago, Illinois and had six full-time employees as of March 31, 2000.

BidBuyBuild, Inc. (www.bidbuybuild.com) is creating an electronic marketplace in the commercial and industrial construction supply industry, initially focusing on the heating, ventilation and air conditioning markets. BidBuyBuild intends to serve contractors and subcontractors and manufacturers. It plans to allow contractors and subcontractors to obtain bids from various suppliers of building equipment and materials quickly and cost-effectively. It intends to allow manufacturers to reduce their dependence on field sales offices, third party distributors and other sales organizations. BidBuyBuild expects to generate revenues primarily through commissions and membership fees. BidBuyBuild is headquartered in Chicago, Illinois and had 23 full-time employees as of March 31, 2000.

CapacityWeb.com, Inc. (www.capacityweb.com) is creating an electronic marketplace for custom manufactured parts. Starting with fabricated metal manufacturing, CapacityWeb.com’s site will be marketed as an exchange for industrial manufacturing capacity across a variety of industries. CapacityWeb.com intends to generate revenues through annual membership fees, sales commissions and transaction fees. CapacityWeb.com is headquartered in Evanston, Illinois and had eight full-time employees as of March 31, 2000.

Commerx, Inc. (www.commerx.com) creates electronic marketplaces that enable buyers and sellers in industrial processing markets to transact business on the Internet. Its first marketplace, PlasticsNet, is designed for plastics processors and suppliers. It launched its “PlasticsNet Marketplace” in May 1999 to streamline the sourcing and procurement process for plastics products and services. PlasticsNet offers procurement tools, auction exchange capabilities and information on products. Commerx generates revenues through e-commerce transaction fees. Commerx is headquartered in Chicago, Illinois and had 156 full-time employees as of March 31, 2000. On January 26, 2000 Commerx filed a registration statement with the SEC for an initial public offering of its common stock.

eFiltration.com, Inc. (www.efiltration.com) offers an electronic marketplace for the filtration industry. eFiltration.com brings together a wide array of filtration equipment manufacturers in one online destination, allowing users to compare products, seek technical support, contact customer service, participate in auctions, track orders and obtain financing. Customers include consumers, resellers and manufacturers of filtration products. eFiltration.com generates revenues primarily from transaction fees. eFiltration.com is headquartered in Chicago, Illinois and had three full-time employees as of March 31, 2000.

Entrepower, Inc. (www.entrepower.com) is developing web database and proprietary profile matching technologies to allow businesses, recruiters and experienced professionals to locate, learn about and contact one another easily and confidentially through its web site. Entrepower’s software will screen individuals and identify matching job opportunities and board and advisory panel positions, based on advanced search criteria and personality profiles. This technology will be coupled with confidential mailboxes, optional networking features and a referral network. Entrepower intends to generate revenues primarily from registration and advertising fees. Entrepower is headquartered in Chicago, Illinois and had one full-time employee as of March 31, 2000.

Farms.com (www.farms.com), which recently combined with eHarvest.com, provides an electronic marketplace for the livestock and grain industries and provides both producers and processors in these industries with an assortment of risk management and decision support tools. Farms.com generates revenues from the sale of livestock and transaction fees. Farms.com is headquartered in Memphis, Tennessee and had 55 full-time employees as of March 31, 2000.

iSalvage.com, Inc. (www.isalvage.com) offers an electronic marketplace for recycled and rebuilt automotive parts. Buyers will be able to use iSalvage.com to search for parts quickly and efficiently based on both quantitative and qualitative criteria, compare their prices and purchase them through iSalvage.com. iSalvage.com will also enable sellers of recycled parts to make price specifications available on the Internet and offer their inventories outside their local trading areas. iSalvage.com has completed its three month pilot program, which ran in the mid-Atlantic and the Southeastern United States. The iSalvage.com marketplace was activated on June 2, 2000 with coverage on the East Coast. iSalvage.com expects to have national coverage by October 2000. iSalvage.com intends to generate revenues primarily through transaction fees it charges to suppliers and through auctions, subscription fees and advertising. iSalvage.com is headquartered in New York City and had 19 full-time employees as of March 31, 2000.

The National Transportation Exchange, Inc. (www.nte.net) offers an electronic marketplace that aggregates suppliers and buyers of freight transportation capacity. Its electronic marketplace is designed to allow suppliers of freight capacity to sell available unused capacity efficiently and effectively and to improve yields and reduce buyer costs. NTE currently has over 100 shipper members and 250 member carriers, which operate a total of 200,000 trucks, participating in its marketplace. It generates revenues from transaction and placement fees. NTE is headquartered in Downers Grove, Illinois and had 81 full-time employees as of March 31, 2000.

Neoforma.com, Inc. (www.neoforma.com) provides business-to-business e-commerce services in the medical products market. Neoforma.com uses the Internet to address inefficiencies in the market for medical products, offering three primary services on its web site:

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The Shop service, which provides a marketplace for new medical products;

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The Auction service, which provides a marketplace for used or surplus products; and

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The Plan service, which allows hospital planners to view and manipulate diagrams and photographs of leading medical facilities worldwide.

Neoforma.com’s principal source of revenue is transaction fees paid by the sellers of medical products that use the Shop and Auction services. Neoforma.com is headquartered in Santa Clara, California and had 326 full-time employees as of March 31, 2000. Neoforma.com is a public company listed on the Nasdaq National Market under the symbol NEOF.

OfficePlanIt.com, Inc. develops Internet technologies and establishes electronic marketplaces to allow businesses to research, procure and manage office products and services from a single source. OfficePlanIt.com expects to generate revenues principally from transaction and subscription fees and technology license fees. OfficePlanIt.com is headquartered in Lisle, Illinois and had 26 full-time employees as of March 31, 2000.

Oilspot.com, Inc. (www.oilspot.com) provides an electronic marketplace that aggregates suppliers and buyers of petroleum products and services. It serves as an Internet clearinghouse for the petroleum industry’s information, product availability and purchases through online exchanges, auctions and buying groups. Oilspot.com intends to generate revenues primarily through transaction fees and service fees. Oilspot.com is headquartered in Chicago, Illinois and had two full-time employees as of March 31, 2000.

Whiplash, Inc. (www.whiplashnow.com) is a web-based distribution system that allows travel providers to market and produce complex leisure travel reservations. Whiplash’s electronic marketplace allows travel providers and travel agents to negotiate deals for product representation and distribution. This marketplace provides these travel providers and travel agents with workflow and product aggregation and is intended to enable them to achieve operational efficiencies. Whiplash software integrates reservations and combines disparate products from various sources on one itinerary and in real time. Whiplash’s primary source of revenue is transaction fees paid by travel providers. Whiplash is headquartered in Lisle, Illinois and had 38 full-time employees as of March 31, 2000.

Associated Company		Market		Date Formed		Associated Company Since		Our Current Equity Ownership/ Voting Power Percentage
iGive.com, inc.		Charitable Assistance Services		9/21/95		2/11/00		32.1%
Panthera Productions, LLC		Wildlife Film Production		10/13/93		3/30/00		62.9%

iGive.com, inc (www.igive.com) provides technology and services to a network of merchants, non-profit organizations and consumers which enable retail purchasers to assist non-profit organizations. Members of iGive.com’s network may currently shop at over 190 online vendors, serving over 8,000 non-profit organizations. iGive.com generates revenues through merchant fees, online advertising and sponsorship fees. iGive.com is headquartered in Evanston, Illinois and had 31 full-time employees as of March 31, 2000.

Panthera Productions, LLC is developing a web channel for entertainment and education that will provide users a virtual experience with animals throughout Africa. The company will use its traditional film production company to generate traffic to its web site. Panthera Productions films are broadcast internationally in over 40 countries and are distributed worldwide on videotape. Panthera generates revenue through film sales, sponsorship fees and the sale of retail products. Panthera Productions is headquartered in Dallas, Texas and had four full-time employees as of March 31, 2000.

Associated Companies in Which We Acquire Interests

Associated Company		Current Voting Power Percentage			Stock Type		Voting Rights		Board Seats
Aluminium.com, Inc.		34.6%			Series B-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 5% equity interest and continue to exercise our right of first refusal		2 of 7 directors designated by us and 3 directors designated jointly by management representatives and us
BeautyJungle.com, Inc.		61.0%			Series B-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 5% equity interest		2 of 7 directors designated by us, 1 additional director designated by us, subject to management shareholders approval, 1 director designated jointly by management shareholders and us and 1 director designated by management shareholders subject to our approval
bid4real.com, inc.		54.3%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		3 of 7 directors designated by us and 1 additional director designated jointly with the holders of a majority of the common shares
BidBuyBuild, Inc.		35.5%	(1)		Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director designated jointly by management representatives and us
CapacityWeb.com, Inc.		44.8%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 6 directors designated by us and 1 additional director designated jointly by us and the management representative director
closerlook, inc.		42.6%			Class B Common and Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 10% equity interest		2 of 5 directors designated by us
Commerx, Inc.		1.0%			Series B Preferred		1 vote per share		None
comScore, Inc.		0.9%			Series A Preferred		1 vote per share		None
eFiltration.com, Inc.		45.2%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director mutually approved by us and the management representatives
Emicom Group, Inc.		33.0%	(2)		Series A Preferred		1 vote per share		3 of 7 directors designated by us
Entrepower, Inc.		43.0%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director who must be acceptable to us
eReliable Commerce, Inc.		47.1%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 7 directors designated by us and 3 additional directors mutually approved by us and the management representatives
Farms.com, Ltd.		41.0%	(3)		Series E-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 7 directors designated by us and 1 additional director designated jointly by us and the management director
i-Fulfillment, Inc.		48.8%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director mutually agreed to by us and a majority of the holders of common stock
iGive.com, inc.		32.1%			Series B-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director mutually approved by us and the management representatives
iSalvage.com, Inc.		36.3%			Series B-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us
i-Street, Inc.		89.8%			Series A-2 Preferred		5 votes per share		3 of 5 directors designated by us
LAUNCHworks inc.		39.7%	(4)		Class A Special Shares		1 vote per share		2 of 7 directors designated by us and 1 director designated jointly by us and the management representatives

Associated Company		Current Voting Power Percentage			Stock Type		Voting Rights		Board Seats
LiveOnTheNet.com, Inc.		76.9%			Common		1 vote per share		Total control of board
Martin Partners, L.L.C.		25.0%			L.L.C. interest		25% voting interest		We must approve replacement of manager
Mercantec, Inc.		40.4%	(5)		Series D-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 8% equity interest		1 director designated by us, 1 outside director designated jointly by us and the management representatives and 1 additional director designated jointly by us and the management representatives
mindwrap, inc.		97.1%			Class A Common		1 vote per share		Total control of board
The National Transportation     Exchange, Inc		5.3%			Series C-2 Preferred		1 vote per share		1 of 6 directors designated by us
Neoforma.com, Inc.		1.5%			Series E Preferred		1 vote per share		None
NetUnlimited, Inc.		61.4%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		4 of 7 directors designated by us and 1 additional director mutually approved by us and the management shareholders
Oilspot.com, Inc.		55.6%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director designated by us and approved by holders of a majority of founders’ securities
OpinionWare.com, Inc.		54.4%			Series A-2 Preferred and Series B-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director designated jointly with the holders of a majority of the common shares
Outtask.com Inc.		28.9%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 10% equity interest		2 of 5 directors designated by us
Panthera Productions, LLC.		62.9%			LLC Interest		62.9% voting interest		3 of 5 managers designated by us
Parlano, Inc..		86.9%			Series A-2 Preferred and Class B Common		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		6 of 7 directors designated by us
Perceptual Robotics, Inc.		33.4%			Series C-2  Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 10% equity interest		2 of 7 directors designated by us and 3 additional directors designated jointly by us and the management representatives
PocketCard Inc.		37.5%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 director designated jointly by us and management representatives
Sequoia Software     Corporation		8.8%			Common Stock		1 vote per share		1 of 7 directors designated by us
TV House, Inc.		42.0%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 5% equity interest		2 of 5 directors designated by us and 1 additional director designated jointly with the holders of a majority of the common shares
ViaChange.com, Inc.		70.0%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		5 of 8 directors designated by us
Web Design Group, Inc.		53.7%			Series A Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we hold at least 5% equity interest		3 of 5 directors designated by us
Westbound Consulting, Inc.		52.4%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		2 of 3 directors designated by us
Whiplash, Inc.		26.5%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power as long as we continue to exercise our right of first refusal		1 of 5 directors designated by us
Xippix, Inc.		31.5%			Series A-2 Preferred		Greater of one vote per share or 25.1% of the total voting power so long as we hold at least 5% equity interest		3 of 7 directors designated by us, and 1 additional director designated jointly by us and management representatives

(1)	We also hold warrants to purchase shares of common stock of BidBuyBuild. Giving effect to the exercise of these warrants, we would hold 37.7% of both the equity and the voting power of BidBuyBuild.

(2)

Our current equity ownership and voting power percentage is 7.6%, which will be increased to 33.0% when Emicom completes the private financing it is currently conducting. The cash consideration and promissory note shown in the table reflect payment for a 33.0% equity interest in Emicom. Beginning March 24, 2002, Emicom will have a right to cause us to purchase all of its outstanding common stock, which right will terminate under certain circumstances, including Emicom’s completion of an initial public offering.

(3)	We also hold warrants to purchase shares of common stock of Farms.com. Giving effect to the exercise of these warrants, we would hold 45.7% of both the equity and the voting power of Farms.com.

(4)	We also hold warrants to purchase shares of common stock of LAUNCHworks. Giving effect to the exercise of these warrants, we would hold 50.9% of both equity and voting power of LAUNCHworks.

(5)	We also hold warrants to purchase shares of common stock of Mercantec. Giving effect to the exercise of these warrants, we would hold 42.7% of both the equity and voting power of Mercantec.

Associated Companies We Establish

Maximizing Stockholder Value

Competition for Associated Companies

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publicly-traded Internet companies;

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traditional venture capital firms, including those that have invested in us and those that we manage;

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large corporations, including those that have invested in us;

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other capital providers that also offer support services to companies; and

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our associated companies.

Competition Facing our Associated Companies

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purchasing budget for services, materials and supplies with other online providers and traditional distribution channels;

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dollars spent on consulting services with many established information systems and management consulting firms; and

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advertising budget with online services and traditional off-line media, such as print and trade associations.

Investment Company Act of 1940

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limitations on our ability to borrow;

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limitations on our capital structure;

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restrictions on acquisitions of interests in associated companies;

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prohibitions on transactions with affiliates;

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restrictions on specific investments; and

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compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations.

Other Regulations and Legal Uncertainties

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Taxes. Congress has enacted a three-year moratorium, ending on October 21, 2001, on the application of discriminatory, multiple or special taxes by the states on Internet access or on products and services delivered over the Internet. Additionally, the moratorium prevents the states from creating new collection obligations with respect to otherwise valid taxes in the context of e-commerce. 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 some state taxes that were in place before the moratorium was enacted. The moratorium also does not affect federal and state income taxes on the taxable income of e-commerce businesses.

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Online Privacy. Both Congress and the Federal Trade Commission are considering regulating the extent to which companies should be able to use and disclose information they obtain online. If any regulations are enacted, business-to-business e-commerce companies may find their marketing activities restricted. In addition, the European Union has directed its member nations to enact much more stringent privacy protection laws than are generally found in the United States. The Department of Commerce has reached a safe harbor agreement with the European Union, subject to approval by national governments, to allow U.S. corporations to conduct e-commerce in the European Union if they agree to abide by European privacy laws, or equivalent measures, when dealing with European consumers. Private industry initiatives and standards may also develop concerning privacy issues. In addition to compliance with governmental regulation, we and our associated companies may decide that it is in our best interest to comply with industry standards or public opinion regarding privacy issues voluntarily.

Ÿ

Regulation of Communications Facilities. To some extent, the rapid growth of the Internet in the United States has been due to the relative lack of government intervention in the marketplace for Internet access. This 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 the 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, slowing the rapid expansion of the medium and its availability to new users.

Ÿ

Domain Names. The acquisition and maintenance of web site addresses generally is regulated by governmental agencies and their designees. The regulation of web site addresses in the United States and in foreign countries is subject to change. As a result, our associated companies may not be able to acquire or maintain relevant web site addresses in all countries where they conduct business. In 1999, Congress enacted legislation to address the practice of domain name piracy, often referred to as cybersquatting, the practice of registering an Internet address of an established trademark with the hopes of selling the Internet address to the affected company. The legislation also includes a

prohibition on the registration of a domain name that is the name of another living person or a name that is confusingly similar to that name. The scope of this legislation has not been precisely defined. As a result of this legislation and trademark laws generally, we or our associated companies may be subject to liability based on use of domain names or trademarks that allegedly infringe the rights of third parties.

Name		Age		Position with Company		Director Class
Andrew J. Filipowski		49		Chairman of the Board and Chief Executive Officer		Class I
Scott A. Hartkopf		42		President and Director		Class I
Michael P. Cullinane		50		Executive Vice President, Chief Financial Officer, Treasurer and Director		Class II
Paul L. Humenansky		43		Executive Vice President and Director		Class II
Larry S. Freedman		37		Executive Vice President, General Counsel and Secretary
Lynn S. Wilson		55		Executive Vice President and Chief Operating Officer
Robert Bernard		39		Director		Class II
Michael J. Birck		62		Director		Class III
Peter C.B. Bynoe		49		Director		Class III
James E. Cowie		45		Director		Class I
Andrea Lee Cunningham		43		Director		Class II
Thomas P. Danis		53		Director		Class III
Michael H. Forster		57		Director		Class III
Arthur P. Frigo		59		Director		Class I
Gian M. Fulgoni		52		Director		Class II
George Garrick		47		Director		Class I
Craig D. Goldman		56		Director		Class III
Joseph D. Gutman		43		Director		Class I
Arthur W. Hahn		55		Director		Class II
David D. Hiller		46		Director		Class III
Jeffrey D. Jacobs		50		Director		Class I
Gregory K. Jones		39		Director		Class II
Michael J. Jordan		37		Director		Class III
Steven Neil Kaplan		40		Director		Class III
Richard P. Kiphart		58		Director		Class II
Sanjay Kumar		38		Director		Class II
Ronald D. Lachman		42		Director		Class III
Eric C. Larson		45		Director		Class I
William A. Lederer		38		Director		Class I

Name		Age		Position with Company		Director Class
Michael E. Leitner		32		Director		Class I
Lawrence F. Levy		56		Director		Class II
Thomas J. Meredith		49		Director		Class III
Teresa L. Pahl		40		Director		Class II
John Rau		51		Director		Class III
Bruce V. Rauner		44		Director		Class I
Andre Rice		42		Director		Class I
Mohanbir S. Sawhney		36		Director		Class III
Alex C. Smith		40		Director		Class II
Timothy Stojka		34		Director		Class I
Aleksander Szlam		48		Director		Class II
Mark A. Tebbe		38		Director		Class III
David Tolmie		44		Director		Class I
James C. Tyree		42		Director		Class I
William Wrigley, Jr.		36		Director		Class I
Robert Jay Zollars		42		Director		Class III

Ÿ

one member of our Board of Directors can be designated by each of the following holders of our series D and D-1 preferred stock: (1) CBW/SK divine Investments, (2) First Chicago Investment Corporation and Cross Creek Capital Partners X, LLC, which we together refer to as First Chicago Equity Capital, (3) Frontenac VII Limited Partnership and Frontenac Masters VII Limited Partnership, which we together refer to as Frontenac and (4) Microsoft Corporation; and

Ÿ

Dell USA L.P., which also holds our series D preferred stock, can designate two members of our Board of Directors.

Name and Principal Positions		Annual Compensation								Long Term Compensation Awards
		Salary($)			Bonus($)		Other Annual Compensation($)			Securities Underlying Options(#)
Andrew J. Filipowski      Chairman and Chief Executive Officer (1)		$    —			$      —		$15,300	(2)		229,166
Scott A. Hartkopf,      President		41,500	(3)		200,000		—			125,000

(1)	Mr. Filipowski has agreed to waive his base salary through June 15, 2004.

(2)	Represents personal travel for family members of Mr. Filipowski.

(3)	Based on an annual rate of $239,778.

Name		Individual Grants								Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (3)
		Number of Shares Underlying Options Granted (#) (1)		Percentage of Total Options Granted to Employees in Fiscal 1999		Exercise Price ($/Sh)(2)		Expiration Date
										0% ($)		5% ($)		10% ($)
Andrew J. Filipowski		229,166		5.1%		$4.50		11/5/2009		$343,749		$1,208,477		$2,535,139
Scott A. Hartkopf		125,000		2.8%		$4.50		11/5/2009		187,500		659,171		1,382,807

(1)

These options are immediately exercisable, but vest in equal annual installments on the first four anniversaries of the grant date if the executive continues to be employed by us on each of these anniversaries. The shares of our class A common stock issuable upon exercise of these options are subject to restrictions on transfer and a right of repurchase by us at a price per share equal to the lower of the option exercise price and the fair market value per share of our class A common stock. These restrictions and repurchase right expire based on the option vesting schedule.

(2)

The exercise price of each of these options equalled the fair market value per share of our class A common stock on the grant date, as determined by the compensation committee of our Board of Directors, based upon the most recent price at which we sold our senior convertible preferred stock before the grant date in capital raising transactions. However, for financial statement purposes, the deemed fair market value of our class A common stock on the grant date was $6.00 per share.

(3)

Potential realizable value is presented net of the option exercise price, but before any federal or state income taxes associated with exercise. It is calculated assuming that the deemed fair market value of our class A common stock on the date of grant for financial statement purposes appreciates at the indicated annual rates, compounded annually, for the term of the option. The 0%, 5% and 10% assumed rates of appreciation are mandated by the rules of the SEC and do not represent our estimate or projection of future increases in the price of our class A common stock. Using the assumed initial public offering price of $14.00 for purposes of these calculations, the potential realizable values of these options at the assumed annual rates of stock price appreciation, would be as follows: Mr. Filipowski—$2,177,077 at 0%, $4,194,775 at 5% and $7,290,319 at 10%; and Mr. Hartkopf—$1,187,500 at 0%, $2,288,066 at 5% and $3,976,549 at 10%. Actual gains will be dependent on the future performance of our class A common stock and the option holder’s continued employment through the vesting periods.

		Number of Shares Underlying Unexercised Options at December 31, 1999		Value of Unexercised In-the-Money Options at December 31, 1999($)
Name		Exercisable		Exercisable
Andrew J. Filipowski		229,166		$5,568,734
Scott A. Hartkopf		125,000		3,037,500

Committee Member		Class A Common Shares		Series C Preferred Shares
Gian M. Fulgoni		41,666		1,100,000
Lawrence F. Levy		—		2,741,000
Teresa L. Pahl		41,666		100,000
Andre Rice		41,666		200,000
Aleksander Szlam		—		1,000,000	(1)
James C. Tyree		—		—
Robert J. Zollars		41,666		350,000

(1)

Represents shares purchased by a family partnership controlled by Mr. Szlam.

Ÿ

Mr. Fulgoni is the founder and chairman of comScore. On October 29, 1999, we acquired approximately 0.9% of comScore for $200,208.

Ÿ

Ms. Pahl is the Vice President of Aon Group, Inc., a subsidiary of Aon Corporation and Chairman of Aon Enterprise Insurance Services, Inc., an affiliate of Aon Risk Services of Missouri. We have paid Aon Risk Services of Missouri approximately $241,000 as broker with respect to our directors and officers liability insurance. We have agreed to sell to Aon Corporation, concurrent with our completion of this offering, for cash in a private placement, a number of shares of our class C common stock having an aggregate initial public offering value of $25,000,000. We have also entered into a non-binding memorandum of understanding with Aon Corporation to collaborate toward the development and operation of an insurance services component of FiNetrics, as well as a reinsurance business, which may include Aon Corporation acquiring an ownership interest in FiNetrics.

Ÿ

James C. Tyree is the Chairman and Chief Executive Officer of Mesirow Financial. An affiliate of Mesirow has committed to invest $4,000,000 in the Skyscraper Ventures, L.P.

Ÿ

Robert Jay Zollars is the Chairman, President and Chief Executive Officer of Neoforma.com and beneficially owns approximately 7.6% of Neoforma.com. On October 14, 1999, we acquired approximately 2.1% of Neoforma.com. Following Neoforma.com’s initial public offering, as of May 31, 2000, our interest is approximately 1.5%.

Ÿ

selling goods or rendering services, or assisting another person to sell goods or render services or attempt to sell goods or render services, of the type, or similar to the type, sold or rendered by PLATINUM; and

Ÿ

soliciting or assisting another person to solicit or attempt to solicit persons or entities that were customers as of March 29, 1999 or in the three years before that date or are or were prospective customers of PLATINUM or its affiliates before the end of the respective employment periods of Messrs. Filipowski, Cullinane and Humenansky, unless the solicitation of these customers is for goods or services unrelated to any activity which competes with PLATINUM.

Ÿ

non-qualified and incentive stock options;

Ÿ

stock appreciation rights; and

Ÿ

other stock-based awards.

Ÿ

any breach of the director’s duty of loyalty to us or our stockholders;

Ÿ

acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

Ÿ

unlawful dividends or unlawful stock purchases or redemptions; or

Ÿ

any transaction from which the director derives an improper personal benefit.

Common Stock Financing

Directors, Executive Officers and 5% Stockholders		Class A Shares		Class B Shares
Andrew J. Filipowski		—		5,500,000
Michael P. Cullinane		—		2,500,000
Larry S. Freedman		—		1,250,000
Scott A. Hartkopf		1,500,000		—
Paul L. Humenansky		—		1,000,000
Lynn S. Wilson		750,000		—
Michael J. Birck		250,000		—
James E. Cowie		250,000		—
Andrea Lee Cunningham		250,000		—
Michael H. Forster		250,000		—
Arthur P. Frigo		250,000		—
Gian M. Fulgoni		250,000		—
George Garrick		250,000		—
Craig D. Goldman		250,000		—
Arthur W. Hahn		250,000		—
Jeffrey D. Jacobs		250,000		—
Gregory K. Jones		250,000		—
Bryan Kennedy		1,000,000		—
Teresa L. Pahl		250,000		—

Directors, Executive Officers and 5% Stockholders		Class A Shares		Class B Shares
John Rau		250,000		—
Andre Rice		250,000		—
Michael Santer		1,000,000		—
Paul Tatro		—		1,000,000
William Wrigley, Jr.		250,000		—
Robert Jay Zollars		250,000		—

Series A Preferred Financing

Directors, Executive Officers and 5% Stockholders		Series A-1 Preferred Shares		Series A-2 Preferred Shares
Andrew J. Filipowski(1)		—		19,950,000
Michael P. Cullinane		—		3,000,000
Larry S. Freedman(2)		—		400,000
Scott A. Hartkopf		200,000		—
Paul L. Humenansky		—		3,000,000
Paul A. Tatro		—		10,000,000

(1)	Includes 320,000 shares purchased by a trust for the benefit of Mr. Filipowski’s children.

(2)	Represents shares purchased by Marsh Flower Investments I, a partnership that Mr. Freedman controls.

Series B Preferred Financing

Directors, Executive Officers and 5% Stockholders		Series B-2 Preferred Shares
Andrew J. Filipowski		20,000,000

Series C Financing

Directors, Executive Officers and 5% Stockholders		Series C Preferred Shares
Andrew J. Filipowski (1)		1,220,000
Michael P. Cullinane (2)		275,000
Robert A. Bernard (3)		2,000,000
Michael J. Birck (4)		5,000,000
Peter C.B. Bynoe (5)		600,000
Thomas P. Danis (6)		850,000
Arthur Frigo, Sr. (7)		5,000,000
Gian M. Fulgoni		1,100,000
George Garrick		100,000
Craig D. Goldman		200,000
Joseph D. Gutman		200,000
Arthur W. Hahn (8)		910,000
Jeffrey D. Jacobs		1,000,000
Richard P. Kiphart (9)		2,000,000
Ronald D. Lachman (10)		510,000
William A. Lederer (11)		300,000
Michael Leitner		100,000
Lawrence F. Levy		2,741,000
Teresa L. Pahl		100,000
John Rau		1,000,000
Bruce V. Rauner		550,000
Andre Rice (12)		200,000
Tim J. Stojka (13)		1,000,000
Aleksander Szlam (14)		1,000,000
Paul A. Tatro (15)		205,000
Mark A. Tebbe		250,000
David Tolmie		50,000
William J. Wrigley, Jr.		17,000,000
Robert Jay Zollars		350,000

(1)	Represents 200,000 shares purchased by Platinum Construction Corp., a corporation controlled by Mr. Filipowski, and 1,020,000 shares purchased by Mr. Filipowski’s brother-in-law.

(2)	Represents 200,000 shares purchased by Mr. Cullinane’s brother, 15,000 purchased by Mr. Cullinane’s father and his wife and 60,000 shares held by Mr. Cullinane’s father- and mother-in-law.

(3)	Represents shares purchased by marchFIRST, Inc. Mr. Bernard is the Chairman of the Board and Chief Executive Officer of marchFIRST.

(4)	Represents shares purchased by Tellabs, Inc. Mr. Birck is the President and Chief Executive Officer and a director of Tellabs.

(5)	Includes 600,000 shares purchased by R&W Ventures, a partnership owned 33.3% by Mr. Bynoe.

(6)	Includes 500,000 shares purchased by SINAD II, a partnership controlled by Mr. Danis and his two brothers.

(7)	Includes a total of 100,000 shares purchased by Mr. Frigo’s son and 200,000 shares purchased by Mr. Frigo’s two daughters.

(8)	Includes 400,000 shares issued to Katten Muchin Zavis as payment for legal services.

(9)	Includes 1,000,000 shares purchased by Wilblairco Associates. Mr. Kiphart is affiliated with Wilblairco Associates.

(10)	Includes a total of 450,000 shares purchased by three trusts for the benefit of Mr. Lachman’s children.

(11)	Represents 300,000 shares purchased by Minotaur Partners, a partnership controlled by Mr. Lederer.

(12)	Represents shares purchased by Rice Group, Ltd., a company controlled by Mr. Rice.

(13)	Represents shares purchased by Stojka Brothers Partnership, a partnership owned 25% by Mr. Stojka and 25% by each of three of Mr. Stojka’s brothers.

(14)	Represents 1,000,000 shares purchased by Szlam Partners, L.P., a limited partnership controlled by Mr. Szlam.

(15)	Represents 35,000 shares purchased by Mr. Tatro’s father, a total of 75,000 shares purchased by Mr. Tatro’s two brothers, and a total of 95,000 shares purchased by Mr. Tatro’s three brothers and sisters-in-law.

Series D Preferred Financing

5% Stockholder		Series D Preferred Shares
James E. Cowie(1)		14,975,000
Dell USA L.P.		100,000,000
Sanjay Kumar(2)		25,000,000

(1)	Represents shares purchased by Frontenac VII Limited Partnership and Frontenac Masters VII Limited Partnership.

(2)	Represents shares purchased by CBW/SK divine investments, a partnership of which Mr. Kumar is a general partner.

Beneficial Ownership and Voting Power

		Common Stock Financing						Series A Financing						Series B Financing						Series C Financing						Series D Financing
Directors, Executive Officers and 1% Stockholders		Beneficial Ownership			Voting Power			Beneficial Ownership			Voting Power			Beneficial Ownership			Voting Power			Beneficial Ownership			Voting Power			Beneficial Ownership			Voting Power
Andrew J. Filipowski		16.7	%		38.4	%		31.8	%		48.0	%		44.2	%		62.0	%		15.6	%		49.2	%		9.3	%		40.6	%
Michael P. Cullinane		7.6			17.5			6.9			10.4			5.4			7.5			1.9			6.0			1.1			4.9
Paul Humenansky		3.0			7.0			5.0			7.5			3.9			5.5			1.4			4.3			*			3.6
Larry S. Freedman		3.8			8.7			2.1			3.1			1.6			2.2			*			1.8			*			1.5
James E. Cowie		—			—			—			—			—			—			—			—			3.1			1.3
Dell USA L.P.		—			—			—			—			—			—			—			—			20.4			8.9
Sanjay Kumar		—			—			—			—			—			—			—			—			5.1			2.2
Paul A. Tatro		3.0			7.0			13.8			20.8			10.7			15.0			3.8			11.9			2.2			9.8
William Wrigley, Jr.		*			*			*			*			*			*			5.8			1.8			3.5			1.5

*	Less than 1%.

Executive Officer/Director		Amount of Indebtedness		Interest Rate
Andrew J. Filipowski		$1,031,250		6.21	%
Scott A. Hartkopf		$    562,500		6.21	%
Michael P. Cullinane		$    468,750		6.21	%
Paul L. Humenansky		$    750,000		6.21	%
Larry S. Freedman		$    234,375		6.21	%
Michael J. Jordan		$1,000,000		6.80	%
Ronald D. Lachman		$    225,000		6.21	%
Mohanbir S. Sawhney		$    225,000		6.21	%
Timothy Stojka		$    225,000		6.21	%

Ÿ

each of the following purchasers of our series D and D-1 preferred stock can designate one member of our Board of Directors: (1) CBW/SK divine Investments, (2) First Chicago Investment Corporation and Cross Creek Capital Partners X, LLC, (3) Frontenac VII Limited Partnership and Frontenac Masters VII Limited Partnership, which we together refer to as Frontenac, and (4) Microsoft Corporation has the right to designate one member of our Board of Directors; and

Ÿ

Dell USA L.P., which also purchased our series D preferred stock, can designate two members of our Board of Directors.

Investor		Shares of class A common stock		Designated board members
CBW/SK divine Investments		4,166,666		Sanjay Kumar
Dell		16,666,666		Alex C. Smith, Thomas J. Meredith
First Chicago Equity Capital		2,474,998		Eric C. Larson
Frontenac		2,495,832		James E. Cowie
Microsoft		4,166,666		Michael E. Leitner

Ÿ

Mr. Filipowski, our Chairman and Chief Executive Officer, converted $800,000 of personal loans previously made by him to iGive.com into iGive.com’s common stock at the time we acquired an interest in iGive.com. Mr. Filipowski beneficially owns approximately 14.6% of iGive.com. On February 11, 2000, we acquired approximately 32.1% of iGive.com for $4,000,000.

Ÿ

Messrs. Filipowski and Humenansky are directors of OpinionWare and beneficially own a total of approximately 10.4% of the equity of OpinionWare. In addition, Mr. Filipowski’s son beneficially owns less than 1% of its equity. On December 8, 1999 and April 28, 2000, we acquired a combined total of approximately 54.4% of OpinionWare for a total of $7,000,000.

Ÿ

Mr. Fulgoni, one of our directors, is the founder and chairman of comScore and beneficially owns approximately 20.7% of comScore. Mr. Garrick, one of our directors, beneficially owns approximately 1.2% of comScore. On October 29, 1999 we acquired approximately 0.9% of comScore for $200,208. Mr. Fulgoni became a member of our Board of Directors before this transaction.

Ÿ

Mr. Goldman, one of our directors, beneficially owns less than 1% of LAUNCHworks. We beneficially own approximately 39.7% of LAUNCHworks. Giving effect to the exercise of warrants that we hold, we would beneficially own approximately 50.9% of LAUNCHworks.

Ÿ

Mr. Filipowski is a director of Panthera Productions, beneficially owns 14.9% of Panthera, through his shared control over a charitable foundation, and has personally loaned Panthera approximately $306,000. We beneficially own 62.9% of Panthera.

Ÿ

Messrs. Kaplan and Sawhney, two of our directors, are members of CapacityWeb.com’s Advisory Board. Michigan & Oak, LLC, a venture advisory firm of which Messrs. Kaplan and Sawhney are principals, beneficially owns approximately 3.8% of CapacityWeb.com. On February 11, 2000, we acquired approximately 44.8% of CapacityWeb.com for $4,500,000. In addition, Michigan & Oak is entitled to a finders fee of approximately $225,000, 5% of the amount paid by us for our interest in CapacityWeb.com. Michigan & Oak will be entitled to similar fees on other transactions which it brings to us. Messrs. Kaplan and Sawhney became members of our Board of Directors before this transaction.

Ÿ

Mr. Stojka, one of our directors, is the Chief Executive Officer of Commerx and beneficially owns approximately 14.7% of Commerx. On November 19, 1999, we acquired approximately 1.0% of Commerx for $2,500,000 . Mr. Stojka became a member of our Board of Directors after this transaction.

Ÿ

Mr. Zollars, one of our directors, is the Chairman, President and Chief Executive Officer of Neoforma.com and beneficially owns approximately 7.6% of Neoforma.com. On October 14, 1999, we acquired approximately 2.1% of Neoforma.com. As a result of Neoforma.com’s initial public offering, our interest has been reduced to approximately 1.5%. Mr. Filipowski is a director of Neoforma and beneficially owns less than 1% of its equity. Mr. Zollars became a member of our Board of Directors before this transaction. Messrs. Cullinane, Humenansky and Hartkopf and an entity controlled by Mr. Freedman participated in the directed share program of the initial public offering of Neoforma.com. These persons purchased the following number of shares with the following market values (based on Neoforma.com’s initial public offering price): Mr. Cullinane—250 shares, $3,250; Mr. Humenansky—250 shares, $3,250; Mr. Hartkopf—2,500 shares, $32,500; and Mr. Freedman’s entity—250 shares, $3,250.

Ÿ

each person or group of affiliated persons known by us to beneficially own more than 5% of the outstanding shares of our class A common stock;

Ÿ

each of our directors and executive officers;

Ÿ

the nominee to our Board of Directors; and

Ÿ

all of our directors and executive officers as a group.

Name of Beneficial Owner				Percent of Class
		Number of Shares of Class A Common Stock		Before the Offering and the Concurrent Private Placements			After the Offering and the Concurrent Private Placements
Executive Officers and Directors
Andrew J. Filipowski(1)		7,784,163		8.4	%		6.9	%
Michael P. Cullinane(2)		1,024,998		1.1			*
Scott A. Hartkopf		408,333		*			*
Paul L. Humenansky		833,331		*			*
Larry S. Freedman(3)		322,915		*			*
Lynn S. Wilson		233,332		*			*
Robert Bernard(4)		1,454,761		*			1.3
Michael J. Birck(5)		49,999		*			*
Peter C.B. Bynoe(6)		141,666		*			*
James E. Cowie(7)		2,545,831		2.7			2.3
Andrea Lee Cunningham		49,999		*			*
Thomas P. Danis(8)		191,665		*			*
Michael H. Forster		49,999		*			*
Arthur P. Frigo		766,665		*			*
Gian M. Fulgoni		233,332		*			*
George Garrick		66,665		*			*
Craig D. Goldman		83,332		*			*
Joseph D. Gutman		74,999		*			*
Arthur W. Hahn(9)		229,997		*			*
David D. Hiller(10)		41,666		*			*
Jeffrey D. Jacobs		216,665		*			*
Gregory K. Jones		49,999		*			*
Michael J. Jordan		166,666		*			*
Steven Neil Kaplan(11)		49,999		*			*
Richard P. Kiphart(12)		383,331		*			*
Sanjay Kumar(13)		4,208,332		4.5			3.7
Ronald D. Lachman		59,999		*			*

Name of Beneficial Owner				Percent of Class
		Number of Shares of Class A Common Stock		Before the Offering and the Concurrent Private Placements		After the Offering and the Concurrent Private Placements
Executive Officers and Directors (cont’d)
Eric C. Larson(11)		49,999		*		*
William A. Lederer(14)		99,999		*		*
Michael Leitner		66,665		*		*
Lawrence F. Levy		506,832		*		*
Thomas J. Meredith(11)		49,999		*		*
Teresa L. Pahl		66,665		*		*
John Rau		216,665		*		*
Bruce V. Rauner(15)		358,331		*		*
Andre Rice(16)		89,998		*		*
Mohanbir S. Sawhney		49,999		*		*
Alex C. Smith(11)		49,999		*		*
Tim J. Stojka		91,665		*		*
Aleksander Szlam(17)		216,665		*		*
Mark A. Tebbe		91,665		*		*
David M. Tolmie(10)		49,999		*		*
James C. Tyree(11)		49,999		*		*
William Wrigley, Jr.(18)		2,883,332		3.1		2.6
Robert Jay Zollars		108,332		*		*
Our executive officers and directors as a      group (45 persons)(19)		27,543,732		28.5		24.2
Nominee for Director
Harold F. (Bud) Enright, Jr.		—		—		—
Other 5% Stockholders
Dell USA L.P.(20)		16,666,666		17.9		14.8
Microsoft Corporation(21)		7,738,095		4.5		6.9

(1)	The shares of class A common stock include 33,333 shares held by Platinum Construction Corp., a corporation controlled by Mr. Filipowski.

(2)	Excludes 38,333 shares of class A common stock held by trusts for the benefit of Mr. Freedman’s children of which Mr. Cullinane is a trustee. Includes 4,160 shares of class A common stock held by trusts for the benefit of Mr. Freedman’s relatives of which Mr. Cullinane is a trustee.

(3)	The class A common stock held by Mr. Freedman includes 66,666 shares held by Marsh Flower Investments I, a partnership controlled by Mr. Freedman.

(4)

Includes 333,333 shares of class A common stock held by marchFIRST, Inc. and 1,071,429 shares of class A common stock issuable to marchFIRST upon conversion of 1,071,429 shares of class C convertible common stock to be purchased by marchFIRST in a concurrent private placement. However, the percent of class before the offering and the concurrent private placements does not reflect the 1,071,429 shares of class A common stock issuable to marchFIRST upon conversion of class C convertible common stock to be purchased by marchFIRST in a concurrent private placement.

(5)	Includes 8,333 shares of class A common stock issuable upon exercise of currently exercisable stock options.

(6)	Includes 100,000 shares of class A common stock held by R&W Venture Fund and 41,666 shares of class A common stock issuable upon exercise of currently exercisable stock options.

(7)	Includes 2,376,785 shares of class A common stock held by Frontenac VII Limited Partnership and 119,047 shares of class A common stock held by Frontenac VII Masters Limited Partnership.

(8)	Includes 83,333 shares of class A common stock held by SINAD II, a partnership controlled by Mr. Danis and his two brothers.

(9)	Includes 91,665 shares of class A common stock held by Katten Muchin Zavis and 53,333 shares of class B convertible common stock held in a trust for the benefit of Mr. Filipowski’s children, of which Mr. Hahn is the trustee.

(10)	Includes 41,666 shares of class A common stock issuable upon exercise of currently exercisable stock options.

(11)	Includes 49,999 shares of class A common stock issuable upon exercise of currently exercisable stock options.

(12)	Includes 75,757 shares of class A common stock held by WB Internet Fund 2000, LLC and 90,909 shares of class A common stock held by WB Internet Fund 2000, QP, LLC. Mr. Kiphart is affiliated with both of these entities.

(13)	Includes 4,166,666 shares of class A common stock held by CBW/SK divine investments, a general partnership of which Mr. Kumar is a general partner.

(14)	Includes 50,000 shares of class A common stock held by Minotaur Partners, a partnership controlled by Mr. Lederer.

(15)	Includes 216,666 shares of class A common stock held by GTCR Investment Partners, LLC.

(16)	Includes 33,333 shares of class A common stock held by Rice Group, Ltd., a company controlled by Mr. Rice.

(17)	Includes 166,666 shares of class A common stock held by Szlam Partners, L.P., a partnership controlled by Mr. Szlam.

(18)	Includes 2,833,333 shares of class A common stock held in a trust for the benefit of Mr. Wrigley.

(19)	Includes 383,331 shares of class A common stock issuable upon exercise of currently exercisable stock options.

(20)	The address of Dell USA L.P. is 1 Dell Way, Round Rock, TX 78682.

(21)

Includes 3,571,429 shares of class A common stock to be purchased by Microsoft in a private placement concurrent with this offering. However, the percent of class before the offering and the concurrent private placements does not reflect the 3,571,429 shares of class A common stock to be purchased by Microsoft in a concurrent private placement. The address of Microsoft is One Microsoft Way, Building 8, Redmond, WA 98052.

Ÿ

112,590,365 shares of our class A common stock will be issued and outstanding;

Ÿ

16,740,896 shares of our non-voting convertible class C convertible common stock will be issued and outstanding;

Ÿ

974,852 shares of our class A common stock will be reserved for issuance upon exercise of currently outstanding options under our 1999 Stock Incentive Plan;

Ÿ

3,695,656 shares of our class A common stock will be reserved for future awards under our 1999 Stock Incentive Plan; and

Ÿ

4,166,666 shares of our class A common stock will be reserved for issuance under our 2000 Employee Stock Purchase Plan.

Voting

Conversion

Dividends

Liquidation

Other Terms

Section 203 of Delaware General Corporate Law

Classified Board of Directors

No Stockholder Action by Written Consent; Special Meetings

Ÿ

1% of the number of shares of our class A common stock then outstanding, which will equal approximately 1,259,000 shares immediately after this offering; or

Ÿ

the average weekly trading volume of our class A common stock on the Nasdaq National Market during the four calendar weeks before the filing of a notice on Form 144 relating to the sale.

		Cumulative Number of Shares Freely Tradeable
Date		Assuming Underwriters Waive Lock-Ups		Assuming Underwriters Do not Waive Lock-Ups
Date of this prospectus		14,285,000		11,285,000
90 days after the date of this prospectus		31,875,953		14,285,000
180 days after the date of this prospectus		67,661,421		67,661,421
270 days after the date of this prospectus		107,213,342		107,213,342
One year after the date of this prospectus		129,331,261		129,331,261

Ÿ

974,852 shares of class A common stock issuable upon exercise of outstanding options under our 1999 stock incentive plan;

Ÿ

3,695,656 shares of class A common stock reserved for future grants under our 1999 stock incentive plan; and

Ÿ

4,166,666 shares of class A common stock issuable under our 2000 employee stock purchase plan.

Underwriters		Number of Shares
FleetBoston Robertson Stephens Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Bear, Stearns & Co. Inc.
William Blair & Company, L.L.C.
DLJdirect Inc.
Total		14,285,000

		Per Share				Total
		Without Over-allotment		With Over-allotment		Without Over-allotment		With Over-allotment
Underwriting discounts and      commissions paid by us		$		$		$		$
Expenses payable by us		$		$		$		$

Ÿ

the information set forth in this prospectus and otherwise available to the representatives;

Ÿ

the history of, and the prospects for, us and the industry in which we compete;

Ÿ

an assessment of our management;

Ÿ

the prospects for, and the timing of, our future earnings;

Ÿ

the present state of our development and our current financial condition;

Ÿ

the general condition of the securities markets at the time of this offering;

Ÿ

the recent market prices of, and the demand for, publicly-traded common stock of generally comparable companies; and

Ÿ

market conditions for initial public offerings.

Ÿ

Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position.

Ÿ

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

Ÿ

Syndicate covering transactions involve purchases of the class A common stock in the open market after the distribution has been completed in order to cover syndicate short positions.

Ÿ

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the class A common stock originally sold by that syndicate member is purchased in a stabilizing transaction or in a syndicate covering transaction to cover syndicate short positions.

450 Fifth Street, N.W. Judiciary Plaza Room 1024 Washington, D.C. 20549

Seven World Trade Center Suite 1300 New York, New York 10048

Citicorp Center 500 West Madison Street Suite 1400 Chicago, Illinois 60661

		Page
DIVINE INTERVENTURES, INC.
Independent Auditors’ Report		F-5
Consolidated Balance Sheet s		F-6
Consolidated Statements of Operations		F-7
Consolidated Statements of Stockholders’ Equity		F-8
Consolidated Statements of Cash Flows		F-9
Notes to Consolidated Financial Statements		F-10
DIVINE INTERVENTURES, INC. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Financial Information—Basis of Presentation		F-29
Unaudited Pro Forma Condensed Combined Statement of Operations		F-30
Notes to Unaudited Pro Forma Condensed Combined Financial Statements		F-33
MINDWRAP, INC.
Independent Auditors’ Report		F-36
Balance Sheets		F-37
Statements of Operations		F-38
Statements of Net Investment by Parent		F-39
Statements of Cash Flows		F-40
Notes to Financial Statements		F-41
BEAUTYJUNGLE.COM, INC.
Independent Auditors’ Report		F-47
Balance Sheet		F-48
Statement of Operations		F-49
Statement of Stockholders’ Equity (Deficit)		F-50
Statement of Cash Flows		F-51
Notes to Financial Statements		F-52
BID4REAL.COM, INC. AND BID4REAL.COM LLC
Independent Auditors’ Report		F-58
Balance Sheets		F-59
Statements of Operations		F-60
Statement of Stockholder’s Deficit		F-61
Statement of Members’ Deficit		F-62
Statement of Cash Flows		F-63
Statement of Cash Flows		F-64
Notes to Financial Statements		F-65
BIDBUYBUILD, INC.
Report of Independent Certified Public Accountants		F-70
Balance Sheet		F-71
Statement of Operations		F-72
Statement of Shareholders’ Deficit		F-73
Statement of Cash Flows		F-74
Notes to Financial Statements		F-75
CLOSERLOOK, INC.
Independent Auditors’ Report		F-78
Consolidated Balance Sheets		F-79
Consolidated Statements of Operations		F-80
Consolidated Statements of Stockholders’ Equity (Deficit)		F-81
Consolidated Statements of Cash Flows		F-82
Notes to Consolidated Financial Statements		F-83

		Page
EFILTRATION.COM, INC.
Independent Auditors’ Report		F-91
Balance Sheet		F-92
Statement of Operations		F-93
Statement of Stockholders’ Deficit		F-94
Statement of Cash Flows		F-95
Notes to Financial Statements		F-96
I-FULFILLMENT, INC.
Report of Independent Public Accountants		F-100
Balance Sheets		F-101
Statements of Operations		F-102
Statements of Shareholders’ (Deficit) Equity		F-103
Statements of Cash Flows		F-104
Notes to Financial Statements		F-105
IGIVE.COM, INC.
Independent Auditors’ Report		F-108
Balance Sheets		F-109
Statements of Operations		F-110
Statement of Unitholders’ Deficit and Statement of Stockholders’ Deficit		F-111
Statements of Cash Flows		F-112
Notes to Financial Statements		F-113
ISALVAGE.COM, INC.
Independent Auditors’ Report		F-121
Balance Sheet		F-122
Statement of Operations		F-123
Statement of Stockholders’ Equity		F-124
Statement of Cash Flows		F-125
Notes to Financial Statements		F-126
I-STREET, INC.
Independent Auditors’ Report		F-131
Balance Sheets		F-132
Statements of Operations		F-133
Statements of Stockholder’s Equity (Deficit)		F-134
Statements of Cash Flows		F-135
Notes to Financial Statements		F-136
LIVEONTHENET.COM, INC.
Report of Independent Public Accountants		F-141
Balance Sheets		F-142
Statements of Operations		F-143
Statements of Shareholders’ Investment		F-144
Statements of Cash Flows		F-145
Notes to Financial Statements		F-146
MARTIN PARTNERS, L.L.C.
Independent Auditors’ Report		F-152
Balance Sheets		F-153
Statements of Operations		F-154
Statements of Members’ Equity		F-155
Statements of Cash Flows		F-156
Notes to Financial Statements		F-157

		Page
MERCANTEC, INC.
Independent Auditors’ Report		F-159
Balance Sheets		F-160
Statements of Operations		F-161
Statements of Stockholders’ Equity (Deficit)		F-162
Statements of Cash Flows		F-163
Notes to Financial Statements		F-164
THE OILSPOT.COM LLC
Independent Auditors’ Report		F-170
Balance Sheet		F-171
Statement of Operations		F-172
Statement of Members’ Deficit		F-173
Statement of Cash Flows		F-174
Notes to Financial Statements		F-175
OPINIONWARE.COM, INC.
Independent Auditors’ Report		F-179
Balance Sheet		F-180
Statement of Operations		F-181
Statement of Shareholders’ Deficit		F-182
Statement of Cash Flows		F-183
Notes to Financial Statements		F-184
OUTTASK.COM INC.
Independent Auditors’ Report		F-190
Balance Sheet		F-191
Statement of Operations		F-192
Statement of Stockholders’ Deficit		F-193
Statement of Cash Flows		F-194
Notes to Financial Statements		F-195
PERCEPTUAL ROBOTICS, INC.
Independent Auditors’ Report		F-200
Balance Sheets		F-201
Statements of Operations		F-202
Statements of Stockholders’ Equity (Deficit)		F-203
Statements of Cash Flows		F-204
Notes to Financial Statements		F-205
POCKETCARD INC.
Independent Auditors’ Report		F-210
Balance Sheets		F-211
Statements of Operations		F-212
Statements of Stockholders’ Deficit		F-213
Statements of Cash Flows		F-214
Notes to Financial Statements		F-215
VIACHANGE.COM, INC.
Independent Auditors’ Report		F-221
Balance Sheet		F-222
Statement of Operations		F-223
Statement of Shareholders’ Deficit		F-224
Statement of Cash Flows		F-225
Notes to Financial Statements		F-226

		Page
WEB DESIGN GROUP, INC.
Independent Auditors’ Report		F-229
Balance Sheets		F-230
Statements of Operations		F-231
Statements of Stockholders’ Equity (Deficit)		F-232
Statements of Cash Flows		F-233
Notes to Financial Statements		F-234
WESTBOUND CONSULTING, INC.
Independent Auditors’ Report		F-237
Consolidated Balance Sheets		F-238
Consolidated Statements of Operations		F-239
Consolidated Statements of Equity (Deficit)		F-240
Consolidated Statements of Cash Flows		F-241
Notes to Consolidated Financial Statements		F-242
WHIPLASH, INC.
Independent Auditors’ Report		F-248
Balance Sheets		F-249
Statements of Operations		F-250
Statements of Stockholders’ Equity (Deficit)		F-251
Statements of Cash Flows		F-252
Notes to Financial Statements		F-253
XIPPIX, INC.
Independent Auditors’ Report		F-259
Balance Sheet		F-260
Statement of Operations		F-261
Statement of Stockholders’ Deficit		F-262
Statement of Cash Flows		F-263
Notes to Financial Statements		F-264

/S /    KPMG LLP

Assets		December 31, 1999			(Unaudited) March 31, 2000			(Unaudited) Pro Forma March 31, 2000
Current assets:
Cash and cash equivalents		$162,840,846			$211,911,423
Restricted cash		—			1,500,000
Accounts receivable, less allowance for doubtful accounts of $586,511 and $263,935		2,628,718			5,556,325
Available-for-sale securities		—			17,297,535
Notes receivable		4,075,000			115,099
Prepaid expenses and other current assets		1,391,100			6,097,027
Total current assets		170,935,664			242,477,409
Property and equipment, net of accumulated depreciation		3,926,816			23,858,489
Goodwill and other intangible assets, net of accumulated amortization of $594,992 and $4,009,710		17,839,757			40,359,186
Ownership interests in associated companies		44,455,409			177,549,521
Deferred offering costs		1,612,500			2,032,568
Other noncurrent assets		101,894			983,064
Total assets		$238,872,040			$487,260,237
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$    3,523,756			$    6,116,748
Accrued expenses and other current liabilities		6,096,355			6,718,903
Notes payable to associated companies		22,500,000			38,660,949
Deferred revenue		536,217			631,761
Total current liabilities		32,656,328			52,128,361
Long-term debt		—			810,552
Other noncurrent liabilities		281,118			4,862,320
Minority interest		700,430			20,690,867
Redeemable preferred stock:
Series D senior participating convertible redeemable preferred stock, $.001 par value;                 197,000,000 shares authorized; 0, 191,980,300 and 0 shares issued and outstanding                 (liquidation preference of $195,051,985)		—			195,051,985			—
Series D-1 senior participating convertible redeemable preferred stock, $.001 par value;                 15,000,000 shares authorized; 0, 5,019,700 and 0 shares issued and outstanding (liquidation                 preference of $5,100,015)		—			5,100,015			—
Series E senior participating convertible redeemable preferred stock, $.001 par value; 20,000,000                 shares authorized; 0, 18,284,327 and 0 shares issued and outstanding (liquidation preference                 of $18,356,462)		—			18,356,462			—
Stockholders’ equity:
Series F senior convertible preferred stock, $.001 par value; 13,000,000 shares authorized; 0,                 13,000,000 and 0 shares issued and 0, 11,500,000 and 0 shares outstanding		—			11,500			—
Series C senior convertible preferred stock, $.001 par value; 200,000,000 shares authorized;                 190,062,125, 190,062,125, and 0 shares issued and outstanding		190,062			190,062			—
Series B-1 junior convertible preferred stock, $.001 par value; 25,000,000 shares authorized;                 2,712,000, 2,712,000 and 0 shares issued and outstanding		2,712			2,712			—
Series B-2 junior convertible preferred stock, $.001 par value; 21,000,000 shares authorized;                 20,100,000, 20,100,000, and 0 shares issued and outstanding		20,100			20,100			—
Series A-1 junior convertible preferred stock, $.001 par value; 48,000,000 shares authorized;                 9,236,600, 9,236,000, and 0 shares issued and outstanding		9,237			9,237			—
Series A-2 junior convertible preferred stock, $.001 par value; 39,000,000 shares authorized;                 37,750,000, 37,750,000, and 0 shares issued and outstanding		37,750			37,750			—
Class A common stock, $.001 par value; 900,000,000 shares authorized; 3,791,614, 9,602,447,                 and 92,747,184 shares issued and outstanding		3,792			9,602			92,747
Class B common stock, $.001 par value; 100,000,000 shares authorized; 2,041,662, 2,037,496,                 and 0 shares issued and outstanding		2,042			2,038			—
Additional paid-in capital		241,036,506			419,235,690			637,934,406
Notes receivable from exercise of stock options		—			(29,676,990	)		(29,676,990	)
Unearned stock-based compensation		(26,660,788	)		(123,729,632	)		(123,729,632	)
Accumulated other comprehensive income		—			6,778,521			6,778,521
Accumulated deficit		(9,407,249	)		(82,630,915	)		(82,630,915	)
Total stockholders’ equity		205,234,164			190,259,675			408,768,137
Total liabilities and stockholders’ equity		$238,872,040			$487,260,237

		May 7, 1999 (inception) through December 31, 1999			(Unaudited) Three months ended March 31, 2000
Revenues:
Products		$      312,742			$    777,230
Services		723,877			4,437,739
		1,036,619			5,214,969
Operating expenses:
Cost of revenues:
Products (exclusive of $0 and $61,915 of amortization of stock- based compensation)		233,778			527,537
Services (exclusive of $4,746 and $422,888 of amortization of                            stock-based compensation)		793,637			3,879,717
		1,027,415			4,407,254
Selling, general and administrative (exclusive of $740,831 and                 $8,106,950 of amortization of stock-based compensation)		8,557,198			31,451,265
Research and development (exclusive of $1,833 and $72,710 of                 amortization of stock-based compensation)		133,452			1,595,665
Amortization of stock-based compensation		747,410			8,664,463
Total operating expenses		10,465,475			46,118,647
Operating loss		(9,428,856	)		(40,903,678	)
Other income (expense):
Interest income		1,588,863			3,713,452
Interest expense		(204,817	)		(302,064	)
Other loss, net		—			(2,461	)
Total other income (expense)		1,384,046			3,408,927
Loss before minority interest and equity in losses of associated                            companies		(8,044,810	)		(37,494,751	)
Minority interest		51,277			4,187,298
Equity in losses of associated companies		(1,413,716	)		(10,877,751	)
Net loss		(9,407,249	)		(44,185,204	)
Accretion of redeemable preferred stock dividends		—			(3,224,135	)
Accretion of preferred stock dividends		(3,520,052	)		(4,192,236	)
Deemed dividends related to beneficial conversion feature in Series E and F      preferred stock		—			(25,814,327	)
Net loss applicable to common stockholders		$(12,927,301	)		$  (77,415,902	)
Basic and diluted net loss per share applicable to common                             stockholders		$           (4.59	)		$             (7.79	)
Shares used in computing basic and diluted net loss per share		2,816,074			9,941,917

		Preferred stock				Common stock						Additional paid-in capital			Notes receivable from exercise of stock options			Unearned stock-based compensation			Accumulated deficit			Accumulated other comprehensive income		Total stockholders’ equity
		Shares		Amount		Shares			Amount
Balance at May 7, 1999 (inception)		—		$      —		—			$    —			$               —			$             —			$               —			$             —			$           —		$               —
Comprehensive loss:
Net loss		—		—		—			—			—			—			—			(9,407,249	)		—		(9,407,249	)
Total comprehensive loss		—		—		—			—			—			—			—			(9,407,249	)		—		(9,407,249	)
Issuance of Class A common stock		—		—		3,449,956			3,450			17,250			—			—			—			—		20,700
Issuance of Class B common stock		—		—		2,041,662			2,042			10,208			—			—			—			—		12,250
Issuance of Series A-1 preferred stock		9,236,600		9,237		—			—			2,287,413			—			—			—			—		2,296,650
Issuance of Series A-2 preferred stock		37,750,000		37,750		—			—			9,387,250			—			—			—			—		9,425,000
Issuance of Series B-1 preferred stock		2,712,000		2,712		—			—			1,340,788			—			—			—			—		1,343,500
Issuance of Series B-2 preferred stock		20,100,000		20,100		—			—			10,017,400			—			—			—			—		10,037,500
Issuance of Series C preferred stock		190,062,125		190,062		—			—			189,030,841			—			—			—			—		189,220,903
Exercise of stock options—Class A     common stock		—		—		341,658			342			1,537,158			—			—			—			—		1,537,500
Unearned stock-based compensation		—		—		—			—			27,408,198			—			(27,408,198	)		—			—		—
Amortization of stock-based compensation		—		—		—			—			—			—			747,410			—			—		747,410
Balance at December 31, 1999		259,860,725		259,861		5,833,276			5,834			241,036,506			—			(26,660,788	)		(9,407,249	)		—		205,234,164
Comprehensive loss:
Net loss		—		—		—			—			—			—			—			(44,185,204	)		—		(44,185,204	)
Other comprehensive income,                       net of tax:
Unrealized appreciation on                                available-for-sale securities		—		—		—			—			—			—			—			—			6,778,521		6,778,521
Total comprehensive loss                       (unaudited)		—		—		—			—			—			—			—			(44,185,204	)		6,778,521		(37,406,683	)
Issuance of Series F preferred stock (unaudited)		11,500,000		11,500		—			—			14,718,500			—			—			—			—		14,730,000
Issuance of Class A common stock (unaudited)		—		—		116,665			116			524,884			—			—			—			—		525,000
Exercise of stock options—Class A     common stock (unaudited)		—		—		5,690,008			5,690			31,808,189			—			—			—			—		31,813,879
Conversion from Class B common stock to Class     A common stock (unaudited)		—		—		(4,166	)		(4	)		(20	)		—			—			—			—		(24	)
Conversion to Class A common stock from Class     B common stock, net of fractional shares     (unaudited)		—		—		4,160			4			20			—			—			—			—		24
Notes receivable from exercise of stock options      (unaudited)		—		—		—			—			—			(29,676,990	)		—			—			—		(29,676,990	)
Unearned stock-based compensation (unaudited)		—		—		—			—			105,733,307			—			(105,733,307	)		—			—		—
Amortization of stock-based compensation      (unaudited)		—		—		—			—			—			—			8,664,463			—			—		8,664,463
Accretion of redeemable preferred stock      dividends (unaudited)		—		—		—			—			—			—			—			(3,224,135	)		—		(3,224,135	)
Deemed dividends related to beneficial      conversion feature of preferred stock      (unaudited)		—		—		—			—			25,814,327			—			—			(25,814,327	)		—		—
Redeemable preferred stock offering costs		—		—		—			—			(150,000	)		—			—			—			—		(150,000	)
Capital raising costs of subsidiaries		—		—		—			—			(250,023	)		—			—			—			—		(250,023	)
Balance at March 31, 2000 (unaudited)		271,360,725		$271,361		11,639,943			$11,640			$419,235,690			$(29,676,990	)		$(123,729,632	)		$(82,630,915	)		$6,778,521		$190,259,675

		May 7, 1999 (inception) through December 31, 1999			(Unaudited) Three months ended March 31, 2000
Cash flows from operating activities:
Net loss		$   (9,407,249	)		$ (44,185,204	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		693,113			3,943,093
Amortization of stock-based compensation		747,410			8,664,463
Equity in losses of associated companies		1,413,716			10,877,751
Minority interest		(51,277	)		(4,187,298	)
Changes in assets and liabilities, excluding effects from acquisitions:
Restricted cash		—			(1,500,000	)
Accounts receivable, net		(577,266	)		(1,678,500	)
Deferred offering costs		(1,612,500	)		(365,046	)
Prepaid expenses and other assets		(488,550	)		(3,249,382	)
Accounts payable		2,640,822			(2,813,772	)
Accrued expenses and other liabilities		5,816,420			(478,752	)
Deferred revenue		121,753			87,349
Net cash used in operating activities		(703,608	)		(34,885,298	)
Cash flows from investing activities:
Additions to property and equipment		(2,636,365	)		(3,751,824	)
Acquisitions of ownership interests in associated companies, net of cash                 acquired		(43,238,184	)		(128,230,828	)
Net repayments on (issuances of) notes receivable		(4,075,000	)		4,000,000
Net cash used in investing activities		(49,949,549	)		(127,982,652	)
Cash flows from financing activities:
Proceeds from the issuance of common stock		32,950			—
Proceeds from the exercise of stock options		1,537,500			2,661,889
Proceeds from the issuance of preferred stock, net of issuance costs		211,923,553			229,864,327
Net proceeds from (repayments on) notes payable to associated                 companies		—			(20,826,005	)
Issuance of long-term debt		—			488,339
Capital raising costs of subsidiaries		—			(250,023	)
Net cash provided by financing activities		213,494,003			211,938,527
Net increase in cash and cash equivalents		162,840,846			49,070,577
Cash and cash equivalents at beginning of period		—			162,840,846
Cash and cash equivalents at end of period		$162,840,846			$211,911,423
Supplemental disclosures:
Interest paid		$           26,543			$         341,109
Noncash financing activities:
Issuance of preferred stock in exchange for professional services		400,000			—
Issuance of notes payable for ownership interests in associated                            companies		22,500,000			35,000,000
Issuance of notes receivable from exercise of stock options		—			29,676,990

(a) Description of Business

(b) Principles of Consolidation

(c) Cash Equivalents

(d) Concentration of Credit Risk

(e) Financial Instruments

(f) Property and Equipment

(g) Software Development Costs

(h) Revenue Recognition

(i) Goodwill and Other Intangible Assets

(j) Income Taxes

(k) Stock Options

(l) Net Loss Per Share

(m) Comprehensive Income

(n) Use of Estimates

(o) Recent Accounting Pronouncements

(a) Interim Financial Information (Unaudited)

(b) Pro Forma Financial Information (Unaudited)

Computer equipment and software		$3,739,362
Office equipment and furniture		194,054
Construction in progress		32,564
Leasehold improvements		62,922
		4,028,902
Less accumulated depreciation and amortization		(102,086	)
		$3,926,816

Goodwill		$12,222,072
Developed technology		3,893,971
Customer lists		1,502,685
Workforce in place		573,273
Other intangible assets		242,748
		18,434,749
Less accumulated amortization		(594,992	)
		$17,839,757

Revenues		$  3,908,000
Net loss applicable to common stockholders		(16,100,000	)
Basic and diluted net loss per share applicable to common stockholders		(5.72	)

		December 31, 1999
		Carrying value		Cost basis
Equity method		$30,003,284		$31,417,000
Cost method		14,452,125		14,452,125
		$44,455,409		$45,869,125

		December 31, 1999
Current assets		$25,012,095
Noncurrent assets		1,327,778
Total assets		$26,339,873
Current liabilities		$  1,713,148
Non-current liabilities		375,000
Stockholders’ equity and redeemable preferred stock		24,251,725
Total liabilities and stockholders’ equity		$26,339,873

		May 7, 1999 (inception) through December 31, 1999
Revenues		$      34,092
Net loss		$(4,784,780	)

Three of the companies in which the Company acquired an interest in 1999 have been accounted for using the consolidation method. The purchase prices have been allocated to the identifiable net assets based upon their book values, which approximate fair values, at the dates of acquisition. The portions of the purchase prices allocated to identifiable intangible assets and goodwill are being amortized on a straight-line basis over two to three years. These companies are included in the Company’s consolidated financial statements from the dates of acquisition. The purchase prices for 1999 acquisitions were allocated as follows:

		mindwrap, inc.			LiveOnTheNet.com, Inc.		i-Street, Inc.
Identifiable net assets (liabilities      assumed)		$    (26,843	)		$  1,941,063		$299,054
Developed technology		3,893,971			—		—
Customer lists		751,803			750,882		—
Workforce in place		286,344			286,929		—
Goodwill		—			12,021,126		200,946
Purchase price		$4,905,275			$15,000,000		$500,000

2000		$1,010,059
2001		1,157,606
2002		776,677
2003		613,329
2004		631,657
Thereafter		1,209,267
Total minimum lease payments		$5,398,595

Federal income tax benefit at the statutory rate		$(3,198,465	)
State income tax benefit, net		(329,274	)
Equity in losses of associated companies		480,663
Minority interest		(17,434	)
Amortization of stock-based compensation		254,119
Nondeductible intangible asset amortization		201,686
Nondeductible meals and entertainment		40,365
		(2,568,340	)
Effect of change in valuation allowance		2,568,340
		$           —

Deferred tax assets:
Depreciation		$         3,171
State taxes		40,767
Accrued expenses		274,041
Net operating loss carryforward		2,250,361
Total gross deferred tax assets		2,568,340
Less valuation allowance		(2,568,340	)
Net deferred tax asset		$           —

Net loss:
As reported		$9,407,249
Pro forma		9,557,116
Net loss per share applicable to common stockholders:
As reported		$         (4.59	)
Pro forma		(4.64	)

		May 7, 1999 (inception) through December 31, 1999					(Unaudited) Three months ended March 31, 2000
		Shares			Weighted average exercise price		Shares			Weighted average exercise price
Outstanding at beginning of period		—					3,192,246			$4.50
Granted		3,533,904			$4.50		3,254,849			6.89
Exercised		(341,658	)		4.50		(5,690,008	)		5.78
Forfeited		—			—		(2,340	)		4.50
Outstanding at end of period		3,192,246			4.50		754,747			6.90
Options exercisable at end of period		3,192,246					754,747
Weighted-average fair value of options granted during the period					$1.02					$1.52

		Options outstanding						Options exercisable
Exercise price		Number of Shares		Weighted-avg. remaining contractual life		Weighted-avg. exercise price		Number of shares		Weighted-avg. exercise price
$4.50		3,192,246		9.8 years		$4.50		3,192,246		$4.50

Ownership Interests in Associated Companies

Company		Acquisition Date		Purchase Price		Equity Interest
BeautyJungle.com, Inc.		1/11/00		$10,000,000		51.3%
bid4real.com, inc.		1/24/00		7,000,000		54.3%
BidBuyBuild, Inc.		2/11/00		6,000,000		35.5%
CapacityWeb.com, Inc.		2/11/00		4,500,000		44.5%
closerlook, inc.		2/1/00		22,600,000		42.7%
eFiltration.com, Inc.		2/11/00		10,000,000		45.2%
i-Fulfillment, Inc.		1/28/00		10,000,000		48.8%
iGive.com, inc.†		2/11/00		4,000,000		32.1%
iSalvage.com, Inc.		2/3/00		6,500,000		36.3%
Martin Partners, L.L.C.		2/8/00		1,670,883		25.0%
Mercantec, Inc.		2/11/00		23,500,000		40.4%
The National Transportation Exchange, Inc.		1/5/00		5,112,665		5.3%	*
Oilspot.com, Inc.		2/10/00		5,000,000		55.6%
Perceptual Robotics, Inc.		2/14/00		14,800,000		33.4%
ViaChange.com, Inc.		1/31/00		5,000,000		70.0%
Web Design Group, Inc.		2/11/00		7,000,000		53.7%
Westbound Consulting, Inc.		2/11/00		1,000,000		52.4%
Xippix, Inc.		2/4/00		9,000,000		32.3%

*Ownership percentage includes the effect of the Company’s initial acquisition of $750,000 on October 29, 1999.

†The Company’s Chairman of the Board of Directors is also Chairman of the Board of Directors of iGive.com and beneficially owns approximately 14.2% of iGive.com.

Sale of Series D Preferred Stock

Authorization of Preferred Shares

Microsoft Alliance Agreement

CMGI Purchase Agreement

Ÿ

In March 2000, CMGI will purchase 18,284,327 shares of the preferred stock for $18,284,327.

Ÿ

Upon the consummation of a qualified initial public offering (IPO) of the Company, CMGI will purchase the number of shares of class A common stock necessary to make CMGI the beneficial owner of 4.9% of the class A common stock of the Company. These shares will be purchased at the qualified IPO price, and will be paid by the issuance to the Company of shares of CMGI common stock.

Scheduled Redemption Date		Specified Cumulative Percentage
January 1, 2005		25%
July 1, 2005		33%
January 1, 2006		50%
July 1, 2006		100%

2000 Employee Stock Purchase Plan

Issuance of Shares in Associated Companies to Employees

Big Shoulders InterTech Fund

		(a) divine interVentures, inc.			mindwrap, inc.			LiveOnTheNet.com, Inc.			i- Street, Inc.			ViaChange.com, Inc.
Revenues		$      626,406			3,430,638			3,146,889			—			—
Operating expenses:
Cost of revenues (exclusive of $4,746 of amortization of              stock-based compensation)		540,231			1,353,235			3,668,222			—			—
Selling, general and administrative (exclusive of              $742,664 of amortization of stock-based              compensation)		8,207,643			2,387,846			1,480,133			29,175			95,729
Amortization of stock-based compensation		747,410			—			—			—			—
Total operating expenses		9,495,284			3,741,081			5,148,355			29,175			95,729
Operating income (loss)		(8,868,878	)		(310,443	)		(2,001,466	)		(29,175	)		(95,729	)
Other income (expense)
Interest income		1,588,863			1,311			6,044			—			—
Interest expense		204,816			9,562			12,089			—			—
Total other income (expense)		1,384,047			(8,251	)		(6,045	)		—			—
Income (loss) before taxes, minority interest and equity in     losses of associated companies		(7,484,831	)		(318,694	)		(2,007,511	)		(29,175	)		(95,729	)
Income tax expense (benefit)		—			91,839			—			—			—
Minority interest		—			—			—			—			—
Equity in losses of associated companies		—			—			—			—			—
Net income (loss)		(7,484,831	)		(410,533	)		(2,007,511	)		(29,175	)		(95,729	)
Accretion of preferred stock dividends and deemed dividends     related to beneficial conversion feature in Series E and F     preferred stock		(3,520,052	)		—			—			—			—
Net loss applicable to common stockholders		$(11,004,883	)		(410,533	)		(2,007,511	)		(29,175	)		(95,729	)
Basic and diluted net loss per share applicable to              common stockholders		$(4.59	)
Shares used to compute basic and diluted net loss per              share		2,816,074

BeautyJungle.com, Inc.			bid4real.com, inc.			Westbound Consulting, Inc.			Oilspot.com, Inc.			Web Design Group, Inc.		Pro forma adjustments		Pro forma balances
196,730			—			226,313			—			1,902,311				9,529,287
108,712			—			5,610			—			832,047				6,508,057
9,327,102			259,600			420,769			49,201			499,842		7,893,905 (b)		30,650,945
—			—			—			—			—				747,410
9,435,814			259,600			426,379			49,201			1,331,889		7,893,905		37,906,412
(9,239,084	)		(259,600	)		(200,066	)		(49,201	)		570,422		(7,893,905)		(28,377,125	)
3,189			—			—			—			3,140				1,602,547
46,643			5,424			6,296			—			—		(21,651)(e)		263,179
(43,454	)		(5,424	)		(6,296	)		—			3,140		21,651		1,339,368
(9,282,538	)		(265,024	)		(206,362	)		(49,201	)		573,562		(7,872,254)		(27,037,757	)
—			—			—			—			—		—		91,839
—			—			45,355			—			—		2,836,045 (c)		2,881,400
—			—			—			—			—		(21,365,772)(d)		(21,365,772	)
(9,282,538	)		(265,024	)		(161,007	)		(49,201	)		573,562		(26,401,981)		(45,613,968	)
—			—			—			—			—		(25,814,327) (3)		(29,334,379	)
(9,282,538	)		(265,024	)		(161,007	)		(49,201	)		573,562		(52,216,308)		(74,948,347	)
																$(26.61	)
																2,816,074

		divine interVentures, inc.			Pro forma adjustments			Pro forma balances
Revenues		$ 5,214,969			$    450,869	(g)		$  5,665,838
Operating expenses:
Cost of revenues (exclusive of $484,803 of amortization of                 stock-based compensation)		4,407,254			275,071	(g)		4,682,325
Selling, general and administrative (exclusive of                 $8,106,950 of amortization of stock-based                 compensation)		31,451,265			570,883	(g)
					338,625	(i)		32,360,773
Research and development (exclusive of $72,710 of                 amortization of stock-based compensation)		1,595,665			117,296	(g)		1,712,961
Amortization of stock-based compensation		8,664,463			—			8,664,463
Total operating expenses		46,118,647			1,301,875			47,420,522
Operating loss		(40,903,678	)		(851,006	)		(41,754,684	)
Other income (expense):
Interest income		3,713,452			—			3,713,452
Interest expense		(302,064	)		—			(302,064	)
Other loss, net		(2,461	)		—			(2,461	)
Total other income (expense)		3,408,927			—			3,408,927
Loss before minority interest and equity in losses of associated      companies		(37,494,751	)		(851,006	)		(38,345,757	)
Minority interest		4,187,298			240,391	(h)		4,427,689
Equity in losses of associated companies		(10,877,751	)		(2,569,791	)(j)		(13,447,542	)
Net loss		(44,185,204	)		(3,180,406	)		(47,365,610	)
Accretion of preferred stock dividends and deemed dividends      related to beneficial conversion feature in Series E and F      preferred stock		(33,230,698	)		—			(33,230,698	)
Net loss applicable to common stockholders		$(77,415,902	)		$(3,180,406	)		$(80,596,308	)
Basic and diluted net loss per share applicable to common                 stockholders		$           (7.79	)					$           (8.11	)
Shares used to compute basic and diluted net loss per                 share		9,941,917						9,941,917

		Purchase price		Fair value of tangible net assets acquired		Goodwill and other intangible assets
1999 acquisitions		$20,405,275		2,213,274		18,192,001
2000 acquisitions		35,000,000		14,733,447		20,266,553

December 31, 1999

(a) The divine interVentures, inc. column has been adjusted to exclude all operating activity from acquisitions which occurred through December 31, 1999 for LiveOntheNet.com, Inc., i-Street, Inc., OpinionWare.com, Inc., Outtask.com Inc., PocketCard Inc., Entrepower, Inc. and mindwrap, inc.

(b) Selling, general and administrative expenses have been adjusted to reflect the amortization of goodwill and other intangible assets associated with acquisitions of mindwrap, inc., LiveOntheNet.com, Inc., i-Street, Inc., ViaChange.com, Inc., BeautyJungle.com, Inc., bid4real.com, Inc., Westbound Consulting, Inc., Oilspot.com, Inc. and Web Design Group, Inc. over a useful life of two to three years. The acquisitions are reflected as the later of either May 7, 1999 (Company’s inception) or each respective company’s inception date.

(c) Minority interest has been adjusted to reflect the minority interest portion of the operating loss in LiveOntheNet.com, Inc., i-Street, Inc., mindwrap, inc., ViaChange.com, Inc., BeautyJungle.com, Inc., bid4real.com, Inc., Westbound Consulting, Inc., Oilspot.com, Inc. and Web Design Group, Inc. The following table reflects the calculation of minority interest for each of these associated companies.

Associated company		Net income (loss)			Minority interest percentage			Minority interest
BeautyJungle.com, Inc.		$(6,124,581	)		39.0	%		$2,388,588
bid4real.com, inc.		(265,024	)		45.7	%		121,116
i-Street, Inc.		(29,175	)		36.2	%		10,561
LiveOnTheNet.com, Inc.		(2,007,511	)		23.1	%		463,735
mindwrap, inc.		(410,533	)		2.9	%		11,905
Oilspot.com, Inc.		(49,201	)		44.4	%		21,845
ViaChange.com, Inc.		(27,638	)		30.0	%		8,291
Web Design Group, Inc.		573,562			46.6	%		(267,280	)
Westbound Consulting, Inc.		(161,007	)		48.0	%		77,284
								$2,836,045

(d) Equity in losses of associated companies has been adjusted to reflect the Company’s ownership interest in the income (loss) of the equity method associated companies and the amortization of the difference in the Company’s carrying value in the associated company and the Company’s ownership interest in the underlying net equity of the associated company over an estimated useful life of three years. The Company’s equity income (loss) in each equity method associated company is as follows:

Associated company		Equity income (loss)
BidBuyBuild, Inc.		$     (323,178	)
CapacityWeb.com, Inc.		(555,000	)
closerlook, inc.		(2,901,569	)
eFiltration.com, inc.		(629,490	)
i-Fullfillment, Inc.		(1,158,677	)
iGive.com, inc.		(1,027,958	)
iSalvage.com, Inc.		(1,108,869	)
Martin Partners, L.L.C.		183,809
Mercantec, Inc.		(4,607,913	)
OpinionWare.com, inc.		(608,746	)
Outtask.com Inc.		(1,147,052	)
Perceptual Robotics, Inc.		(2,304,369	)
PocketCard Inc.		(2,290,284	)
Entrepower, Inc.		(113,682	)
Whiplash, Inc.		(1,265,016	)
Xippix, Inc.		(1,507,778	)
		$(21,365,772	)

(e) Reflects the reduction in interest expense of mindwrap, inc. and LiveOnTheNet.com, Inc. as a result of the forgiveness of debt by their former Parent companies, assuming that the forgiveness occurred on May 7, 1999.

(f) Shares used to compute basic and diluted net loss per share are based upon the weighted average number of common shares outstanding by the Company for the period from May 7, 1999 (inception) through December 31, 1999.

Based on the short period of time elapsed between the issuance of the Series E Preferred Stock on February 3, 2000 and the filing of the Company’s Registration Statement on Form S-1 on February 14, 2000, the Company has recorded a non-cash preferred stock dividend of $18,284,327 which relates to the beneficial conversion feature associated with that preferred stock. Additionally, based on the short period of time elapsed between the issuance of the Series F Preferred Stock for collaboration and communication software on February 11, 2000 and the filing of the Company’s Registration Statement on February 14, 2000, the Company has recorded a non-cash preferred stock dividend of $7,530,000 which relates to the beneficial conversion feature associated with that preferred stock. These deemed dividends have been included for purposes of determining basic and diluted net loss per common share.

Net loss per share is computed using the weighted average number of common shares outstanding during the period and the net loss available to common stockholders of $74,948,347, which includes preferred stock dividends of $29,334,379.

March 31, 2000

(g) Revenues, cost of revenues, selling, general, and administrative expenses, and research and development expenses have been adjusted to include the amounts recognized by the consolidated companies in the first quarter but not recorded in the Company’s consolidated statement of operations for the three months ended March 31, 2000.

(h) Minority interest has been adjusted to reflect the minority interest portion of the additional operating loss. The following table reflects the minority interest adjustment by associated company.

Associated company		Additional minority interest
bid4real.com, inc.		$127,279
Oilspot.com, Inc.		9,162
ViaChange.com, Inc.		300
Web Design Group, Inc.		33,973
Westbound Consulting, Inc.		69,677
		$240,391

(i) Selling, general and administrative expenses have been adjusted to reflect additional amortization of goodwill and other intangible assets, as follows:

Associated company		Additional amortization
bid4real.com, inc.		$  99,363
Oilspot.com, Inc.		64,261
ViaChange.com, Inc.		64,425
Web Design Group, Inc.		100,353
Westbound Consulting, Inc.		10,223
		$338,625

(j) Equity in losses of associated companies has been adjusted to reflect the Company’s ownership interest in the additional income (loss) of the equity method associated companies and the additional amortization of the excess investment over the Company’s share of the equity in net assets of the equity method associated companies, as follows:

Associated company		Equity income (loss)
BidBuyBuild, Inc.		$  (252,045	)
CapacityWeb.com, Inc.		(53,621	)
closerlook, inc.		(514,302	)
eFiltration.com, inc.		(163,101	)
i-Fulfillment, Inc.		(153,584	)
iGive.com, inc.		(176,203	)
iSalvage.com, Inc.		(193,881	)
Martin Partners, L.L.C.		81,088
Mercantec, Inc.		(643,372	)
Perceptual Robotics, Inc.		(244,761	)
Xippix, Inc.		(256,009	)
		$(2,569,791	)

/S /    KPMG LLP

which is as of February 18, 2000

		March 31,				November 19, 1999
ASSETS		1998		1999
		Current assets:
Cash		$                  111,244		60,942		34,900
Accounts receivable		955,863		542,545		628,773
Inventory		380,318		29,251		13,200
Deposits and prepaid expenses		4,083		56,464		45,352
Total current assets		1,451,508		689,202		722,225
Property and equipment, net		155,238		219,439		197,874
Goodwill, net of accumulated amortization of $726,818, $1,114,454,      and $1,331,947, respectively		1,211,343		823,707		469,934
Total assets		$             2,818,089		1,732,348		1,390,033
LIABILITIES AND NET INVESTMENT BY PARENT
Current liabilities:
Accounts payable		$                  326,648		201,851		230,606
Accrued expenses		241,934		258,003		234,188
Deferred revenue		1,169,054		795,090		414,465
Current maturities of obligations under capital leases		34,002		44,790		51,872
Deferred taxes		38,000		—		—
Due to Parent		203,146		414,582		402,000
Total current liabilities		2,012,784		1,714,316		1,333,131
Obligations under capital leases, net of current portion		66,470		762		21,257
Total liabilities		2,079,254		1,715,078		1,354,388
Net investment by Parent		738,835		17,270		35,645
Total liabilities and net investment by Parent		$2,818,089		1,732,348		1,390,033

		Years ended March 31,						Period from April 1, 1999 through November 19, 1999
		1998			1999
Revenue		$4,943,641			4,519,945			2,301,990
Operating expenses:
Costs of revenue		1,789,021			1,782,918			820,769
Selling, general and administrative		2,358,437			3,113,163			1,062,292
Research and development		390,063			32,879			356,453
Operating income (loss)		406,120			(409,015	)		62,476
Other income (expense):
Interest expense		(21,296	)		(12,598	)		(5,907	)
Interest income		2,801			1,727			—
Total other income (expense)		(18,495	)		(10,871	)		(5,907	)
Income (loss) before income taxes		387,625			(419,886	)		56,569
Provision for income taxes		(197,000	)		(121,000	)		(7,000	)
Net income (loss)		$    190,625			(540,886	)		49,569

		Capital contributed by Parent		Distributions to Parent			Retained earnings (deficit)			Net investment by Parent
Balance at March 31, 1997		$2,389,925		—			(1,310,699	)		1,079,226
Distribution to Parent		—		(531,016	)		—			(531,016	)
Net income		—		—			190,625			190,625
Balance at March 31, 1998		2,389,925		(531,016	)		(1,120,074	)		738,835
Distribution to Parent		—		(180,679	)		—			(180,679	)
Net loss		—		—			(540,886	)		(540,886	)
Balance at March 31, 1999		2,389,925		(711,695	)		(1,660,960	)		17,270
Distribution to Parent		—		(31,194	)		—			(31,194	)
Net income		—		—			49,569			49,569
Balance at November 19, 1999		$2,389,925		(742,889	)		(1,611,391	)		35,645

		Years ended March 31,						Period from April 1, 1999 through November 19, 1999
		1998			1999
Cash flows from operating activities:
Net income (loss)		$  190,625			(540,886	)		49,569
Adjustments to reconcile net income (loss) to net cash provided by                 (used in) operating activities:
Depreciation and amortization		461,156			483,984			280,933
Deferred taxes		38,000			(38,000	)		—
Changes in assets and liabilities:
Accounts receivable		(711,384	)		413,318			(86,228	)
Inventory		(379,343	)		351,067			16,051
Deposits and prepaid expenses		45,458			(52,381	)		11,112
Accounts payable		241,602			(124,797	)		28,755
Accrued expenses		88,817			16,069			(23,815	)
Deferred revenue		859,893			(373,964	)		(380,625	)
Due to Parent		10,146			211,436			(12,582	)
Net cash provided by (used in) operating activities		844,970			345,846			(116,830	)
Cash flows from investing activities:
Purchases of equipment		(53,618	)		160,549			—
Income tax refunds reducing goodwill		—			—			136,280
Net cash provided by (used in) investing activities		(53,618	)		(160,549	)		136,280
Cash flows from financing activities:
Payments under capital lease obligations		(45,287	)		(54,920	)		(14,298	)
Distributions to Parent		(531,016	)		(180,679	)		(31,194	)
Proceeds from line of credit		175,000			—			—
Repayments on line of credit		(375,000	)		—			—
Net cash used in financing activities		(776,303	)		(235,599	)		(45,492	)
Net increase (decrease) in cash		15,049			(50,302	)		(26,042	)
Cash, beginning of period		96,195			111,244			60,942
Cash, end of period		$  111,244			60,942			34,900
Supplemental disclosure of cash flow information—
cash paid for interest		$    20,222			13,672			4,882
Supplemental disclosure of noncash investing activities—
capital lease obligations		$  145,759			—			41,875

(a) Basis of Presentation

(b) Preparation of Financial Statements

(c) Revenue Recognition

(d) Inventories

(e) Property and Equipment

Computer equipment		3 to 5 years
Furniture and fixtures		5 years
Capital leases		Shorter of estimated life or lease term

(f) Cash Equivalents

(g) Software Development Costs

(h) Goodwill

(i) Income Taxes

(j) Comprehensive Income (Loss)

(k) Services Provided by the Parent

		March 31,						November 19, 1999
		1998			1999
Computer equipment		$499,149			659,698			701,573
Furniture and fixtures		3,862			3,862			3,862
		503,011			663,560			705,435
Less accumulated depreciation and amortization		(347,773	)		(444,121	)		(507,561	)
		$155,238			219,439			197,874

Year ending March 31,		Operating		Capital
2000		$13,644		57,159
2001		—		22,710
2002		—		1,856
Total minimum lease payments		$13,644		81,725
Less amount representing interest				(8,596	)
Present value of minimum lease payments				73,129
Less current maturities of obligations under capital leases				(51,872	)
Obligations under capital leases, net of current maturities				$21,257

		March 31,				November 19, 1999
		1998		1999
Billed		$621,760		534,229		628,773
Unbilled		334,103		8,316		—
		$955,863		542,545		628,773

		March 31,				November 19, 1999
		1998		1999
Accrued compensation and benefits		$166,802		185,751		228,478
Other		75,132		72,252		5,710
		$241,934		258,003		234,188

		Years ended March 31,				Period from April 1, 1999 through November 19, 1999
		1998		1999
Current:
Federal		$135,150		102,850		5,950
State		23,850		18,150		1,050
		159,000		121,000		7,000
Deferred:
Federal		32,300		—		—
State		5,700		—		—
		38,000		—		—
		$197,000		121,000		7,000

		Years ended March 31,						Period from April 1, 1999 through November 19, 1999
		1998			1999
Computed “expected” tax provision (benefit)		$131,793			(142,761	)		19,233
Increase (reduction) in income taxes resulting      from:
Increase (decrease) in the beginning of the                 period valuation allowance		(89,848	)		95,723			(36,723	)
Amortization of goodwill		151,308			151,308			74,510
Income tax refunds received		—			—			(77,000	)
Other, net		3,747			16,730			26,980
		$197,000			121,000			7,000

		March 31,					November 19, 1999
		1998		1999
Deferred tax assets:
Book depreciation in excess of tax depreciation		$56,881		54,649			22,500
Other accruals		38,760		44,400			36,500
Total deferred tax assets		95,641		99,049			59,000
Deferred tax liabilities:
Unbilled accounts receivable		133,641		3,326			—
Total deferred tax liabilities		133,641		3,326			—
Valuation allowance		—		(95,723	)		(59,000	)
Net deferred tax liability		$38,000		—			—

/S /    KPMG LLP

Current assets:
Cash and cash equivalents		$   188,779
Accounts receivable		10,729
Inventory		1,146,888
Prepaid expenses		146,874
Other current assets		136,125
Total current assets		1,629,395
Property and equipment, net		1,202,368
Other assets		254,900
Total assets		$  3,086,663
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Accounts payable		$  4,717,452
Accrued expenses		414,316
Deferred rent		16,350
Capital lease obligation		30,255
Notes payable to related parties		3,500,000
Total current liabilities		8,678,373
Deferred rent, less current portion		70,744
Capital lease obligation, less current portion		115,820
Total liabilities		8,864,937
Stockholders equity/(deficit):
Common stock, $.001 par value. 47,000,000 shares authorized; 17,217,632 shares issued and                 outstanding		17,218
Series A preferred stock, $.001 par value. 18,137,500 shares authorized; 18,137,500 shares                 issued and outstanding		18,137
Additional paid-in capital		3,472,299
Subscription receivable		(3,390	)
Deficit accumulated during the development stage		(9,282,538	)
Total stockholders’ equity/(deficit)		(5,778,274	)
Total liabilities and stockholders’ equity/(deficit)		$ 3,086,663

Net revenue		$    196,730
Operating expenses:
Cost of sales		108,712
General and administrative		5,216,074
Sales and marketing		4,065,678
Depreciation and amortization		45,350
Total operating expenses		9,435,814
Operating loss		(9,239,084	)
Other income (expense):
Interest income		3,189
Interest expense		(46,643	)
Total other income (expense)		(43,454	)
Net loss		$(9,282,538	)

		Common stock				Preferred stock				Additional paid-in capital			Subscription receivable			Deficit accumulated during the development stage			Total stockholders’ equity/(deficit)
		Shares		Amount		Shares		Amount
Balance as of May 11, 1999 (inception)		—		$    —		—		$    —		—			—			—			—
Issuance of common stock in formation of the                 Company, adjusted for stock split		16,950,000		16,950		—		—		(13,560	)		(3,390	)		—			—
Exercise of stock options		267,632		268		—		—		26,496			—			—			26,764
Issuance of Series A preferred stock		—		—		18,137,500		18,137		3,609,363			—			—			3,627,500
Costs related to the issuance of Series A                 preferred stock		—		—		—		—		(150,000	)		—			—			(150,000	)
Net loss		—		—		—		—		—			—			(9,282,538	)		(9,282,538	)
Balance as of December 31, 1999		17,217,632		$17,218		18,137,500		$18,137		3,472,299			(3,390	)		(9,282,538	)		(5,778,274	)

Cash flows from operating activities:
Net loss		$(9,282,538	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		45,350
Changes in assets and liabilities:
Accounts receivable		(10,729	)
Inventory		(1,146,888	)
Prepaid expenses		(146,874	)
Other current assets		(136,125	)
Other assets		(254,900	)
Accounts payable		4,717,452
Accrued expenses		414,316
Deferred rent		87,094
Net cash used in operating activities		(5,713,842	)
Cash flows from investing activities—additions to property and equipment		(1,034,108	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		3,477,500
Proceeds from notes payable to related parties		3,500,000
Proceeds from issuance of common stock		26,764
Payments on capital lease obligation		(67,535	)
Net cash provided by financing activities		6,936,729
Net increase in cash and cash equivalents		188,779
Cash and cash equivalents at beginning of period		—
Cash and cash equivalents at end of period		$    188,779
Supplemental disclosure of cash flow information—interest paid		$         1,736
Supplemental disclosure of noncash financing activity—equipment under capital lease		$    213,610

(a) Use of Estimates

(b) Cash Equivalents

(c) Restricted Cash

(d) Accounts Receivable

(e) Impairment of Long-Lived Assets

(f) Property and Equipment

(g) Financial Instruments

(h) Revenue Recognition

(i) Inventory

(j) Computer Software/Website Development

(k) Income Taxes

(l) Option Plan

(m) Advertising Expenses

(n) Concentration of Credit Risk

		December 31, 1999
Furniture and fixtures		$    194,272
Equipment		664,799
Computers		208,734
Software		5,969
Leasehold improvements		173,944
		1,247,718
Less accumulated depreciation and amortization		(45,350	)
Property and equipment, net		$1,202,368

Expected income tax benefit		$(3,156,063	)
State income tax benefit, net of Federal taxes		(556,952	)
Permanent differences		8,596
Effect of change in valuation allowance		3,704,419
		$           —

Deferred tax assets:
Net operating losses		$2,502,817
Start-up costs		1,185,398
Deferred rent		34,838
Total deferred tax assets		3,723,053
Deferred tax liabilities—depreciation		(18,634	)
Net deferred tax assets		3,704,419
Valuation allowance		(3,704,419	)
Net deferred tax assets		$           —

Effective date		Aggregate amount
October 1, 2000		$174,480
October 1, 2001		139,585
October 1, 2002		104,690

Operating Lease Agreements

2000		$    679,570
2001		897,888
2002		923,822
2003		817,002
2004		780,022
Thereafter		2,517,469
Total		$6,615,773

Capital Leases

2000		$  38,356
2001		43,917
2002		43,917
2003		25,381
2004		17,012
		168,583
Less amounts representing interest		(22,508	)
Present value of minimum lease payments		146,075
Less current maturities		(30,255	)
		$115,820

Other Commitments

2000		$339,216
2001		226,144
Total		$565,360

Net loss:
As reported		$(9,282,538	)
Pro forma		(9,358,994	)

		Number of options			Weighted average exercise price
Options outstanding as of May 11, 1999 (inception)		—			$—
Granted		5,267,868			0.10
Exercised		(267,632	)		0.10
Forfeited		(10,000	)		0.10
Options outstanding as of December 31, 1999		4,990,236			$0.10

Exercise price		Options outstanding						Options exercisable
		Number		Weighted average remaining contractual life		Weighted average exercise price		Number		Weighted average exercise price
$0.10		4,990,236		9.7 years		$0.10		1,029,243		$0.10

/s/ KPMG LLP

/s/ KPMG LLP

		bid4real.com, inc.			Bid4Real.com LLC			bid4real.com, inc. Pro forma
								(unaudited)
Assets
Current assets:
Cash		$390,607			75			390,682
Due from Bid4Real.com LLC		109,393			—			—
Other current assets		—			57,498			57,498
Total current assets		500,000			57,573			448,180
Web site development, at cost		—			48,862			48,862
Property and equipment, at cost		—			35,323			35,323
Total assets		$500,000			141,758			532,365
Liabilities and Deficit
Current liabilities:
Accounts payable		$      —			88,513			88,513
Accrued expenses		1,747			80,228			81,975
Convertible note payable		500,000			—			500,000
Due to bid4real.com, inc.		—			109,393			—
Related party promissory notes payable		—			114,796			114,796
Total current liabilities		501,747			392,930			785,284
Series A-1 redeemable convertible preferred stock, $.001 par      value; 7,000,000 shares authorized; none issued and      outstanding		—			—			—
Series A-2 redeemable convertible preferred stock, $.001 par      value; 7,000,000 shares authorized; none issued and      outstanding		—			—			—
Equity (deficit):
Members’ equity:
Member contributions		—			14,000			—
less: member contributions receivable		—			(1,895	)		—
Stockholder’s equity:
Class A common stock, $.001 par value; 15,031,842                       shares authorized; none issued and outstanding at                       December 31, 1999; 5,879,999 issued in merger		—			—			5,880
Class B common stock, $.001 par value; 7,000,000 shares                       authorized; none issued and outstanding		—			—			—
Common stock, $.001 par value; 2,000 shares authorized;                       1 share issued and outstanding; cancelled in merger		—			—			—
Additional paid-in capital		—			—			6,225
Deficit accumulated during the development stage		(1,747	)		(263,277	)		(265,024	)
Total deficit		(1,747	)		(251,172	)		(252,919	)
Total liabilities and deficit		$500,000			141,758			532,365

		Period from December 13, 1999 (inception) through December 31, 1999 bid4real.com, inc.			Period from July 15, 1999 (inception) through December 31, 1999 Bid4Real.com LLC			bid4real.com, inc. Pro forma
								(unaudited)
Revenues		$    —			—			—
Operating expenses:
Payroll related expenses		—			151,016			151,016
General and administrative		—			108,584			108,584
Total operating expenses		—			259,600			259,600
Interest expense		1,747			3,677			5,424
Net loss		$(1,747	)		(263,277	)		(265,024	)

		Common stock				Additional paid-in capital		Deficit accumulated during the development stage			Total stockholder’s deficit
		Shares		Amount
Balance at December 13, 1999 (inception)		—		$—		—		—			—
Issuance of common stock in formation of the      Company		1		—		—		—			—
Net loss		—		—		—		(1,747	)		(1,747	)
Balance at December 31, 1999		1		$—		—		(1,747	)		(1,747	)

		Members’ deficit Bid4Real.com LLC
Balance at July 15, 1999 (inception)		$         —
Contributed capital		14,000
Member contributions receivable		(1,895	)
Net loss		(263,277	)
Balance at December 31, 1999		$(251,172	)

		bid4real.com, inc.
Cash flows from operating activities:
Net loss		$  (1,747	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities—
Accrued expenses		1,747
Net cash used in operating activities		—
Cash flows from financing activities:
Issuance of convertible note payable		500,000
Advance to Bid4Real.com LLC		(109,393	)
Net cash provided by financing activities		390,607
Net increase in cash		390,607
Cash at beginning of period		—
Cash at end of period		$390,607

		Bid4Real.com LLC
Cash flows from operating activities:
Net loss		$(263,277	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Other assets		(57,498	)
Accounts payable		88,513
Accrued expenses		80,228
Net cash used in operating activities		(152,034	)
Cash flows from investing activities:
Web site development costs		(48,862	)
Purchases of property and equipment		(35,323	)
Net cash used in investing activities		(84,185	)
Cash flows from financing activities:
Proceeds from member contributions		12,105
Advance from bid4real.com, inc.		109,393
Issuance of promissory notes to members		114,796
Net cash provided by financing activities		236,294
Net increase in cash		75
Cash at beginning of period		—
Cash at end of period		$           75

(a) Use of Estimates

(b)Property and Equipment

(c) Computer Software

(d) Deferred Private Placement Costs

(e) Income Taxes

(f) Recent Accounting Pronouncements

Promissory notes

Rental expense

Equity Transactions

Line of Credit

Stock Options (unaudited)

/S /    GRANT THORNTON LLP

Assets
Current assets:
Cash and cash equivalents		$  249,393
Advances to founders		24,800
Prepaid expenses		1,400
Total current assets		275,593
Computer equipment		13,152
Total assets		$  288,745
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable		$    10,448
Accrued expenses		270,209
Convertible debt		150,000
Total current liabilities		430,657
Shareholders’ Deficit:
Common stock, authorized 5,000,000 shares, $.001 par value; 4,962,500 issued and                             outstanding.		4,962
Additional paid-in capital		149,888
Deficit accumulated during development stage		(296,762	)
Total shareholders’ deficit		(141,912	)
Total liabilities and shareholders’ deficit		$  288,745

Revenues		$      —
Operating expenses:
Product development costs		250,000
General and administrative		46,762
Total operating expenses		296,762
Operating loss		296,762
Income taxes		—
Net loss		$296,762

		Common stock				Additional paid-in capital		Deficit accumulated during the development stage			Shareholders’ deficit
		Shares		Amount
Balance November 1, 1999 (inception)		—		$  —		$      —		$         —			$         —
Issuance of shares		4,962,500		4,962		149,888		—			154,850
Net Loss		—		—		—		(296,762	)		(296,762	)
Balance December 31, 1999		4,962,500		$4,962		$149,888		$(296,762	)		$(141,912	)

Cash flows from operating activities:
Net loss		$(296,762	)
Adjustments to reconcile net income to net cash used in operating activities:
Increase in advanced receivables		(24,800	)
Increase in prepaid assets		(1,400	)
Increase in accounts payable		10,448
Increase in accrued expenses		270,209
Net cash used in operating activities		(42,305	)
Cash flows from investing activities:
Capital expenditures		(13,152	)
Net cash used in investing activities		(13,152	)
Cash flows from financing activities:
Convertible debt		150,000
Stock issuance		154,850
Net cash provided by financing activities		304,850
Net increase in cash and cash equivalents		249,393
Cash and cash equivalents at beginning of year		—
Cash and cash equivalents at end of year		$  249,393

Development Stage

Use of Estimates

Cash and Cash Equivalents

Computer Equipment

Product Development Costs

Income Taxes

Comprehensive Income

Computer equipment		$13,152

Expected income tax benefit at the statutory rate		$(100,900)
(Increase) reduction in tax benefit resulting from:
Increase in the beginning valuation allowance		118,706
State income tax benefit		(17,806)
		$         —

Deferred tax assets:
Net operating loss carryforward		$      3,958
Start-up and organizational costs		114,748
Total deferred tax assets		118,706
Valuation allowance		$(118,706	)
Net deferred tax asset		$         —

/s/    KPMG LLP

		1998			1999
Assets
Current assets:
Cash and cash equivalents		$         5,102			154,935
Accounts receivable, net of allowance for doubtful accounts of $8,000 and                 $10,250 in 1998 and 1999, respectively		1,313,931			1,127,020
Other current assets		—			9,813
Total current assets		1,319,033			1,291,768
Property and equipment, net		331,835			693,303
Other assets		34,089			89,089
Total assets		$1,684,957			2,074,160
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Line of credit		$           —			1,050,000
Current portion of capital lease obligations		40,760			40,255
Accounts payable		333,671			1,104,039
Accrued vacation		146,061			211,212
Accrued wages and bonuses		215,608			15,000
Accrued contract costs		67,554			—
Other accrued expenses		16,534			—
Deferred revenue		283,408			179,306
Due to officer		—			150,000
Dividends payable		24,104			—
Total current liabilities		1,127,700			2,749,812
Deferred rent		89,380			100,127
Deposits		10,955			10,955
Line of credit		400,000			—
Capital lease obligations, less current portion		43,021			16,144
Total liabilities		1,671,056			2,877,038
Stockholders’ equity (deficit):
Class A common stock, no par; 1,800,000 shares                 authorized in 1998; 852,000 shares issued and                 outstanding in 1998		947			—
Class B common stock, no par; 200,000 shares                 authorized in 1998; 48,000 shares issued and                 outstanding in 1998		53			—
Common stock, $0.001 par value; 2,000,000 shares                 authorized in 1999; 900,000 shares issued and                 outstanding in 1999		—			900
Paid-in capital		—			100
Subscription receivable		(1,000	)		(1,000	)
Retained earnings (accumulated deficit)		13,901			(802,878	)
Total stockholders’ equity (deficit)		13,901			(802,878	)
Total liabilities and stockholders’ equity (deficit)		$1,684,957			2,074,160

		1998			1999
Revenues		$4,785,569			7,386,314
Cost of services		2,362,311			3,641,835
Gross profit		2,423,258			3,744,479
Operating expenses:
Salaries and benefits		1,325,952			2,276,939
General and administrative		880,333			1,801,878
Sales and marketing		142,933			400,689
Loss on disposal of property and equipment		—			71,877
Total operating expenses		2,349,218			4,551,383
Operating income (loss)		74,040			(806,904	)
Other income (expense):
Rental income		10,798			41,424
Loss on investment		(47	)		—
Interest income		765			5,735
Interest expense		(37,950	)		(57,034	)
Net income (loss)		$      47,606			(816,779	)

		Class A Common Stock						Class B Common Stock						Common Stock				Paid-in capital		Subscription receivable			Retained earnings (accumulated deficit)			Total stockholders’ equity (deficit)
		Shares			Amount			Shares			Amount			Shares		Amount
Balance at     December 31,     1997		900,000			$1,000			—			$—			—		$—		—		(1,000	)		(33,705	)		(33,705	)
Issuance of Class     B Common     Stock in     exchange for     Class A     Common Stock     retired		(48,000	)		(53	)		48,000			53			—		—		—		—			—			—
Net income		—			—			—			—			—		—		—		—			47,606			47,606
Balance at     December 31,     1998		852,000			947			48,000			53			—		—		—		(1,000	)		13,901			13,901
Exchange of stock     in connection     with     recapitalization		(852,000	)		(947	)		(48,000	)		(53	)		900,000		900		100		—			—			—
Net loss		—			—			—			—			—		—		—		—			(816,779	)		(816,779	)
Balance at     December 31,     1999		—			$  —			—			$—			900,000		$900		100		(1,000	)		(802,878	)		(802,878	)

		1998			1999
Cash flows from operating activities:
Net income (loss)		$    47,606			(816,779	)
Adjustments to reconcile net income (loss) to net cash                 provided by (used in) operating activities
Depreciation and amortization		83,784			125,850
Loss on disposal of property and equipment		—			71,877
Change in assets and liabilities:
Accounts receivable, net		(674,029	)		186,911
Other assets		(1,472	)		(64,813	)
Accounts payable		213,686			770,368
Accrued vacation		24,284			65,151
Accrued wages and bonuses		74,565			(200,608	)
Accrued contract costs		(37,032	)		(67,554	)
Other accrued expenses		(6,122	)		(16,534	)
Deferred rent		32,638			10,747
Deferred revenue		283,408			(104,102	)
Deposits		10,955			—
Net cash provided by (used in) operating activities		52,271			(39,486	)
Cash flows from investing activities—purchases of property and equipment		(69,878	)		(543,000	)
Net cash used in investing activities		(69,878	)		(543,000	)
Cash flows from financing activities:
Principal payments on capital leases		(29,936	)		(43,577	)
Net borrowings on line of credit		18,000			650,000
Net borrowings from officer		—			150,000
Dividends paid		(3,350	)		(24,104	)
Net cash provided by (used in) financing activities		(15,286	)		732,319
Net (decrease) increase in cash and cash equivalents		(32,893	)		149,833
Cash and cash equivalents at beginning of year		37,995			5,102
Cash and cash equivalents at end of year		$      5,102			154,935
Supplemental disclosure of cash flow information—
interest paid		$    37,950			57,034
Supplemental disclosure of non-cash investing and financing activities—
assets acquired through capital leases		87,516			16,195

(a) Use of Estimates

(b) Basis of Consolidation

(c) Cash Equivalents

(d)Property and Equipment

(e) Revenue Recognition

(f) Income Taxes

(g) Advertising Expenses

(h) Stock Options

		December 31,
		1998		1999
Editing equipment		$    10,367		10,367
Graphics tools		848		848
Leasehold improvements		3,775		245,914
Office equipment		112,778		330,567
Office furniture		—		29,141
Computer equipment		378,335		268,766
		506,103		885,603
Less: accumulated depreciation and amortization		(174,268)		(192,300)
		$  331,835		693,303

		1998		1999
Net income (loss):
As reported		$47,606		(816,779	)
Pro forma		47,379		(864,153	)

		Number of shares		Weighted- average exercise price		Weighted- average minimum value of options granted
Options outstanding at December 31, 1997		—		$ —
Options granted		4,000		0.54		$0.23
Options outstanding at December 31, 1998		4,000		0.54
Options granted		182,900		2.11		$0.88
Options outstanding at December 31, 1999		186,900		$  2.07

		Outstanding						Exercisable
Exercise price		Stock options outstanding		Weighted- average exercise price		Weighted- average remaining contractual life (years)		Stock options exercisable		Weighted- average exercise price		Weighted- average remaining contractual life (years)
$0.54		4,000		$0.54		8.0		1,000		$0.54		8.0
$1.35		145,000		$1.35		9.0		53,000		$1.35		9.0
$5.00		37,900		$5.00		9.5		—		$5.00		9.5
		186,900		$2.07		9.1		54,000		$1.34		9.1

		1998			1999
Expected life in years		10.00			10.00
Interest rate		5.5	%		5.1	%
Volatility		0	%		0	%
Dividend yield		0	%		0	%

Year		Capital leases		Operating leases
2000		$43,641		$    415,353
2001		14,251		417,189
2002		2,575		241,878
Total minimum payments		60,467		$1,074,420
Less amount representing interest		4,068
Present value of net minimum lease payments		56,399
Less current portion		40,255
		$16,144

		December 31,
		1998			1999
Office equipment		$  46,022			62,217
Computer equipment		78,774			78,774
		124,796			140,991
Less: accumulated amortization		(35,354	)		(62,297	)
Total		$  89,442			78,694

(a) Sale of nMinds

		1998		1999
Revenues:
As reported		$4,785,569		7,386,314
Pro forma		4,785,569		7,237,449
Net income (loss):
As reported		47,606		(816,779	)
Pro forma		47,606		(153,427	)

(b) Equity Offering

(a) 150,000 shares of Series A-1 preferred stock, par value $0.001 per share,

(b) 150,000 shares of Series A-2 preferred stock, par value $0.001 per share,

(c) 2,000,000 shares of Class A common stock, par value $0.001 per share, and

(d) 450,000 shares of Class B common stock, par value $0.001 per share.

(a) 605,000 fully paid and non-assessable shares of Class A common stock, duly issued and outstanding, 150,000 shares of Class A common stock reserved for issuance upon conversion of the Series A-1 preferred shares, and 450,000 shares of Class A common stock reserved for issuance upon conversion of the Class B common shares;

(b) 300,000 fully paid and non-assessable shares of Class B common stock, duly issued and outstanding and 150,000 shares of Class B common stock reserved for issuance upon conversion of the Preferred Shares;

(c) 150,000 shares of Series A-1 preferred stock, reserved for issuance upon conversion of the Preferred Shares; and

(d) 263,750 shares of Class A common stock reserved for issuance under the Amended and Restated closerlook, inc. Employee Stock Option Plan.

/S /    KPMG LLP

Current assets:
Prepaid expenses		$    160
Total assets		$    160
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Due to affiliate		$37,670
Accounts payable and accrued liabilities		3,509
Total current liabilities		41,179
Stockholders’ deficit:

Common stock, no par value, 1,000 shares authorized, 100 shares issued and outstanding		1,000
Due from shareholders		(1,000	)
Deficit accumulated during the development stage		(41,019	)
Total stockholders’ deficit		(41,019	)
Total liabilities and stockholders’ deficit		$      160

Revenues		$      —
Selling, general and administrative expenses		41,019
Net loss		$(41,019	)

		Common stock				Due from shareholders			Deficit accumulated during the development stage			Total stockholders’ deficit
		Shares		Amount
Balance at September 7, 1999 (inception)		—		$  —		—			—			—
Issuance of common stock in formation of the      Company		100		1,000		(1,000	)		—			—
Net loss		—		—		—			(41,019	)		(41,019	)
Balance at December 31, 1999		100		$1,000		(1,000	)		(41,019	)		(41,019	)

Cash flows from operating activities:
Net loss		$(41,019	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Prepaid expenses		(160	)
Accounts payable and accrued expenses		41,179
Net cash used in operating activities		—
Net increase in cash		—
Cash at beginning of period		—
Cash at end of period		$      —
Supplemental disclosure of noncash financing activities—issuance of common stock for amounts           due from shareholders		$    1,000

(a) Use of Estimates

(b) Website Development and Advertising Costs

(c) Income Taxes

Expected income tax benefit from continuing operations		$(13,946	)
State income tax benefit, net of Federal taxes		(2,461	)
Permanent differences		55
Effect of change in valuation allowance		16,352
		$      —

Deferred tax assets:
Start-up costs		$  14,378
Net operating loss carryforward		1,974
Total gross deferred tax assets		16,352
Valuation allowance		(16,352	)
Net deferred taxes		$      —

/S /    ARTHUR ANDERSEN LLP

Assets		June 30, 1999			December 31, 1999
					(Unaudited)
Current Assets:
Cash		$    —			$  1,000
Intangible Asset		—			6,207
Total assets		$         —			$    7,207
Liabilities and Shareholders’ (Deficit) Equity
Current Liabilities:
Accrued expenses		$      1,000			$    4,000
Commitments and Contingencies
Shareholders’ (Deficit) Equity:
Common stock, $0.01 par value; 10,000,000 shares authorized; 100 shares and                 5,000,000 issued and outstanding as of June 30, 1999, and December 31, 1999,                 respectively		1			50,000
Additional paid-in capital		13,138			—
Deficit accumulated during the development stage		(14,139	)		(46,793	)
Total shareholders’ (deficit) equity		(1,000	)		3,207
Total liabilities and shareholders’ equity		$         —			$    7,207

		Period From October 6, 1998 (Inception), Through June 30, 1999			Six Months Ended December 31, 1999			Period From October 6, 1998 (Inception), Through December 31, 1999
					(Unaudited)			(Unaudited)
Operating Expenses:
General and administrative expenses		$(14,139	)		$(32,654	)		$(46,793	)
Net Loss		$(14,139	)		$(32,654	)		$(46,793	)

		Common Stock, Par Value $.01, 10,000,000 Shares Authorized						Additional Paid-in Capital			Deficit Accumulated During the Development Stage			Total
		Shares			Amount
Balance, October 6, 1998 (inception)		—			$    —			$      —			$     —			$      —
Issuance of common stock		100			1			—			—			1
Operating costs funded by shareholder		—			—			13,138			—			13,138
Net loss for the period		—			—			—			(14,139	)		(14,139	)
Balance, June 30, 1999		100			1			13,138			(14,139	)		(1,000	)
Cancellation of common stock (unaudited)		(100	)		(1	)		—			—			(1	)
Issuance of common stock (unaudited)		1,100,000			11,000			—			—			11,000
Issuance of common stock in exchange for                 operating costs funded by shareholder                 (unaudited)		3,900,000			39,000			(13,138	)		—			25,862
Net loss for the period (unaudited)		—			—			—			(32,654	)		(32,654	)
Balance, December 31, 1999 (unaudited)		5,000,000			$50,000			$     —			$(46,793	)		$    3,207

		Period From October 6, 1998 (Inception), Through June 30, 1999			Six Months Ended December 31, 1999			Period From October 6, 1998 (Inception), Through December 31, 1999
					(Unaudited)			(Unaudited)
Cash Flows from Operating Activities:
Net loss		$(14,139	)		$(32,654	)		$(46,793	)
Adjustments to reconcile net loss to net cash used in                 operating activities—
Accrued expenses		1,000			3,000			4,000
Net cash used in operating activities		(13,139	)		(29,654	)		(42,793	)
Cash Flows from Investing Activities:
Payment for patent		—			(6,207	)		(6,207	)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock		1			11,000			11,001
Operating costs funded by shareholder		13,138			25,861			38,999
Net cash provided by financing activities		13,139			36,861			50,000
Net Increase in cash		—			1,000			1,000
Cash, beginning of period		—			—			—
Cash, end of period		$      —			$    1,000			$    1,000

Interim Financial Statements (Unaudited)

Use of Estimates

Start-up Costs

Intangible Asset

Income Taxes

Common Stock

/S /    KPMG LLP

		December 31,
Assets		1998			1999
Current assets:
Cash		$      7,337			—
Trade accounts receivable, net of allowance of $0 and $6,810 at December 31,                 1998 and 1999, respectively		11,539			99,537
Prepaid expenses and other current assets		60,470			38,347
Total current assets		79,346			137,884
Computer equipment, at cost		39,927			129,581
Less accumulated depreciation		(11,818	)		(40,063	)
Computer equipment, net		28,109			89,518
Other assets		—			16,512
		$  107,455			243,914
Liabilities and Unitholders’ and Stockholders’ Deficit
Current liabilities:
Bank overdraft		$         —			153,407
Line of credit		—			100,000
Accounts payable and accrued expenses		256,371			196,679
Member designated contributions payable		112,400			4,301
Convertible notes and accrued interest		400,000			1,346,097
Convertible notes held by shareholders and accrued interest		—			152,547
Due to officer		118,254			100,210
Deposits on Series A preferred stock		33,000			—
Total current liabilities		920,025			2,053,241
Line of credit		100,000			—
Total liabilities		1,020,025			2,053,241
Unitholders’ and stockholders’ deficit:
Class A membership units: 4,286,781 units issued and outstanding in 1998		741,185			—
Common membership units: 20,856,026 units issued and outstanding in 1998		55,000			—
Series A preferred stock, $0.0001 par: 25,421,284 shares authorized;                  18,033,498 shares issued and outstanding in 1999		—			1,803
Common stock, $0.0001 par: 60,000,000 shares authorized; 20,856,026 shares                 issued and outstanding in 1999		—			2,086
Additional paid-in capital		—			977,804
Accumulated deficit		(1,708,755	)		(2,791,020	)
Total unitholders’ and stockholders’ deficit		(912,570	)		(1,809,327	)
Total liabilities and unitholders’ and stockholders’ deficit		$  107,455			243,914

		Years ended December 31,
		1998			1999
Net revenue		$      18,321			182,533
Operating expenses:
Sales and marketing		283,308			503,522
Member designated contributions		158,297			325,201
Employee compensation		480,205			826,932
Website development and maintenance		251,710			75,590
General and administrative		212,834			270,495
Total operating  expenses		1,386,354			2,001,740
Loss from operations		(1,368,033	)		(1,819,207	)
Interest expense, net		5,449			56,406
Net loss		$(1,373,482	)		(1,875,613	)

		Class A membership units (# of units)			Common membership units (# of units)			Series A preferred stock (# of shares)		Common stock (# of shares)		Class A membership units			Common membership units			Series A preferred stock, $0.0001 par value		Common stock, $0.0001 par value		Additional paid-in capital		Accumulated deficit			Total
Balance at December     31, 1997		—			20,490,951			—		—		$      —			20,000			—		—		—		(335,273	)		(315,273	)
Issuance of     membership units		4,286,781			365,075			—		—		741,185			35,000			—		—		—		—			776,185
Net loss		—			—			—		—		—			—			—		—		—		(1,373,482	)		(1,373,482	)
Balance at December     31, 1998		4,286,781			20,856,026			—		—		741,185			55,000			—		—		—		(1,708,755	)		(912,570	)
Exchange of     membership units for     stock		(4,286,781	)		(20,856,026	)		7,512,515		20,856,026		(741,185	)		(55,000	)		751		2,086		—		793,348			—
Issuance of stock		—			—			10,520,983		—		—			—			1,052		—		977,804		—			978,856
Net loss		—			—			—		—		—			—			—		—		—		(1,875,613	)		(1,875,613	)
Balance at December     31, 1999		—			—			18,033,498		20,856,026		$      —			—			1,803		2,086		977,804		(2,791,020	)		(1,809,327	)

		Year ended December 31,
		1998			1999
Cash flows from operating activities:
Net loss		$(1,373,482	)		(1,875,613	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		9,236			28,245
Noncash expenses		80,000			—
Change in assets and liabilities:
Trade accounts receivable, net		(11,539	)		(87,998	)
Prepaid expenses and other current assets		(60,470	)		22,123
Other assets					(16,512	)
Accounts payable and accrued expenses		246,361			(59,692	)
Member designated contributions payable		110,195			(108,099	)
Net cash used  in operating activities		(999,699	)		(2,097,546	)
Cash flows from investing activities—capital expenditures		(24,437	)		(89,654	)
Cash flows from financing activities:
Net increase in bank overdraft		—			153,407
Net borrowings on line of credit		75,000			—
Net repayments of loans from officer		(77,328	)		(18,044	)
Proceeds from issuance of convertible notes		400,000			1,498,644
Deposit on Series A preferred stock		3,000			—
Proceeds from issuance of Class A membership units		626,185			—
Proceeds from issuance of Series A preferred stock		—			545,856
Net cash provided  by financing activities		1,026,857			2,179,863
Net increase (decrease) in cash		2,721			(7,337	)
Cash at beginning of year		4,616			7,337
Cash at end of year		$       7,337			—
Supplemental disclosure of cash flow information—interest paid		$         3,804			8,225
Supplemental disclosure of noncash financing activities:
Common membership units issued in exchange for professional services		$      35,000			—
Class A membership units issued in exchange for professional services		15,000			—
Deposit on Series A preferred stock provided in exchange                 for professional  services		30,000			—
Satisfaction of shareholder loans through issuance                 of Class A  membership units		100,000			—
Exchange of convertible notes for Series A preferred stock		—			400,000

(2)	Summary of Significant Accounting Policies

(a) Use of Estimates

(b) Revenue Recognition

(c) Member Designated Charitable Contributions

(d) Computer Equipment

(e) Income Taxes

(f) Website Costs

(g) Stock Option Plan

(g) Deferred Costs

		1999
Net loss:
As reported		$ 1,875,613
Pro forma		$  1,879,432

		Options outstanding		Weighted- average exercise price
Outstanding at December 31, 1998		—		—
Granted		275,000		$0.25
Outstanding at December 31, 1999		275,000		$0.25
Options exercisable at December 31, 1999		—
Weighted-average minimum value of options granted		$0.11

				Options outstanding				Options exercisable
Exercise price		Number of shares		Weighted- average remaining contractual life		Weighted- average Exercise price		Number of shares		Weighted- average exercise price
$0.25		275,000		9.75 years		$0.25		—		—

Federal income tax benefit at statutory rate		$(637,708	)
Increase (decrease) in taxes resulting from:
State income tax benefit		(112,537	)
Establishment of deferred tax liability upon conversion to                 C-corporation		11,243
Permanent differences		2,118
Increase in valuation allowance		736,884
Income tax provision		$         —

Deferred tax assets:
Allowance for doubtful accounts receivable		2,724
Deferred rent		1,020
Net operating loss carryforward		738,683
Gross deferred tax assets		742,427
Less valuation allowance		(736,884	)
Net deferred tax assets		5,543
Deferred tax liability—
Depreciation on computer equipment		(5,543	)
Net deferred income taxes		$         —

/S /    KPMG LLP

Current assets:
Cash		$    298,474
Prepaid expenses		13,718
Total current assets		312,192
Property and equipment, net		757,113
Other assets		27,510
Total assets		$1,096,815
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$      90,606
Accrued liabilities		678,294
Total current liabilities		768,900
Commitments
Series B-1 Redeemable Convertible Preferred Stock, $.001 par value. Authorized 4,986,559      shares; issued and outstanding none		—
Series B-2 Redeemable Convertible Preferred Stock, $.001 par value. Authorized 4,293,064      shares; issued and outstanding none		—
Stockholders’ equity:
Series A Convertible Preferred Stock, $.001 par value. Authorized 2,200,000 shares; issued                 and outstanding 2,200,000 shares (liquidation value of $880,000)		2,200
Class A Common Stock, $.001 par value. Authorized 13,512,696 shares; issued and                 outstanding 4,625,000 shares		4,625
Class B Common Stock, $.001 par value. Authorized 4,293,064 shares; issued and                 outstanding none		—
Subscription receivable		(4,625	)
Additional paid-in capital		992,301
Deferred stock compensation		(102,907	)
Deficit accumulated during the development stage		(563,679	)
Total stockholders’ equity		327,915
Total liabilities and stockholders’ equity		$1,096,815

Operating expenses:
Product development		$305,788
General and administrative		255,567
Depreciation		2,324
Total operating expenses		563,679
Net loss		$563,679

		Series A convertible preferred stock				Class A Common Stock				Subscription receivable			Additional paid-in capital		Deferred stock compensation			Deficit accumulated during the development stage			Total stockholders’ equity
		Shares		Amount		Shares		Amount
Balance at July 20, 1999 (inception)		—		$  —		—		$  —		$    —			$      —		$         —			$         —			$         —
Issuance of Class A Common Stock		—		—		4,625,000		4,625		—			—		—			—			4,625
Receivable from stockholders		—		—		—		—		(4,625	)		—		—			—			(4,625	)
Issuance of Series A Convertible Preferred Stock		2,200,000		2,200		—		—		—			877,800		—			—			880,000
Issuance of stock options to employees		—		—		—		—		—			104,430		(104,430	)		—			—
Amortization of deferred compensation		—		—		—		—		—			—		1,523			—			1,523
Issuance of stock options to consultants		—		—		—		—		—			10,071		—			—			10,071
Net loss and comprehensive loss		—		—		—		—		—			—		—			(563,679	)		(563,679	)
Balance at December 31, 1999		2,200,000		$2,200		4,625,000		$4,625		$(4,625	)		$992,301		$(102,907	)		$(563,679	)		$  327,915

Cash flows from operating activities:
Net loss		$(563,679	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash advisory expense		10,071
Depreciation and amortization		3,847
Changes in assets and liabilities:
Prepaid expenses		(13,718	)
Other assets		(27,510	)
Accounts payable and accrued liabilities		768,900
Net cash provided by operating activities		177,911
Cash flows from investing activities:
Property and equipment		(759,437	)
Net cash used in investing activities		(759,437	)
Cash flows from financing activities:
Issuance of preferred stock		880,000
Net cash provided by financing activities		880,000
Net increase in cash		298,474
Cash at beginning of period		—
Cash at end of period		$  298,474

(a) Use of Estimates

(b) Property and Equipment

(c) Impairment of Long-Lived Assets

(d) Product Development Costs

(e) Other Assets

(f) Stock-Based Compensation

(g) Income Taxes

(h) Recent Accounting Pronouncements

Computer hardware/software		$751,288
Furniture and fixtures		5,259
Leasehold improvements		2,890
		759,437
Less accumulated depreciation and amortization		(2,324	)
Property and equipment, net		$757,113

Year ended December 31		Amount
2000		$  81,540
2001		85,434
2002		89,522
		$256,496

Computed “expected” tax benefit		$(191,700	)
State tax benefit, net of Federal income tax benefit		(33,800	)
Nondeductible expenses		500
Increase in valuation allowance		225,000
		$         —

Net operating loss carryforward		$  121,800
Fixed assets, principally due to differences in depreciation		900
Expenses not currently deductible for tax purposes		102,300
Gross deferred tax assets		225,000
Less valuation allowance		(225,000	)
Net deferred income taxes		$         —

Ÿ

2,200,000 Series A Convertible Preferred Stock, all issued and outstanding,

Ÿ

4,986,559 shares of Series B-1 Redeemable Convertible Preferred Stock,

Ÿ

4,293,064 shares of Series B-2 Redeemable Convertible Preferred Stock,

Ÿ

13,512,696 shares of Class A Common Stock, of which 4,625,000 are issued and

Ÿ

4,293,064 shares of Class B Common Stock.

		Shares		Weighted- average exercise price
Outstanding on July 20, 1999 (inception)		—		$—
Granted		772,950		0.21
Outstanding on December 31, 1999		772,950		$0.21

Range of exercise price		Options outstanding				Weighted-average exercise price
		Shares		Weighted-average remaining contractual life (years)
$0.10		275,000		6.92		$0.10
$0.25		427,000		6.92		$0.25
$0.40		70,950		6.67		$0.40
		772,950

/S /    KPMG LLP

ASSETS		December 31, 1998			September 30, 1999
Current assets:
Prepaid expenses		$             45			88
Other current assets, net		—			25
Total current assets		45			113
Property and equipment, net of accumulated depreciation		1,820			1,331
Other assets, net		51			318
Total assets		$  1,916			1,762
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$             29			238
Accrued liabilities		—			3,719
Amounts payable to sole shareholder		—			7,083
Total current liabilities		29			11,040
Series A-1 redeemable convertible preferred stock, $.001 par value; 574,000 shares      authorized; none issued and outstanding		—			—
Series A-2 redeemable convertible preferred stock, $.001 par value; 574,000 shares      authorized; none issued and outstanding		—			—
Stockholder’s equity (deficit) (see note 6):
Class A common stock, $.001 par value; 1,500,000 shares authorized; 326,000                 issued and outstanding		326			326
Class B common stock, $.001 par value; 1,500,000 shares authorized; none                 issued and outstanding		—			—
Additional paid-in capital		3,990			37,029
Deficit accumulated during the development stage		(2,429	)		(46,633	)
Total stockholder’s equity (deficit)		1,887			(9,278	)
Total liabilities and stockholder’s equity (deficit)		$ 1,916			1,762

		Period from September 15, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999			Period from September 15, 1998 (inception) through September 30, 1999
Revenues		$    —			—			—
Operating expenses:
Organizational costs		178			150			328
Operations		869			26,737			27,606
Payroll expense for sole shareholder		—			7,083			7,083
Administration		1,079			9,617			10,696
Depreciation and amortization		303			617			920
Total operating expenses		2,429			44,204			46,633
Net loss		$(2,429	)		(44,204	)		(46,633	)

		Class A common stock				Additional paid-in capital		Deficit accumulated during the development stage			Total stockholder’s equity (deficit)
		Shares		Amount
Balance at September 15, 1998 (inception)		—		$ —		—		—			—
Issuance of common stock in formation of the      Company		326,000		326		—		—			326
Contributed capital		—		—		3,990		—			3,990
Net loss		—		—		—		(2,429	)		(2,429	)
Balance at December 31, 1998		326,000		326		3,990		(2,429	)		1,887
Contributed capital		—		—		33,039		—			33,039
Net loss		—		—		—		(44,204	)		(44,204	)
Balance at September 30, 1999		326,000		$326		37,029		(46,633	)		(9,278	)

		Period from September 15, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999			Period from September 15, 1998 (inception) through September 30, 1999
Cash flows from operating activities:
Net loss		$(2,429	)		(44,204	)		(46,633	)
Adjustments to reconcile net loss to net cash used                 in operating activities:
Depreciation		284			489			773
Amortization		19			128			147
Changes in assets and liabilities:
Prepaid expenses		(45	)		(43	)		(88	)
Other assets		(70	)		(420	)		(490	)
Accounts payable and accrued                                        expenses		29			11,011			11,040
Net cash used in operating                                                   activities		(2,212	)		(33,039	)		(35,251	)
Cash flow from investing activities—additions to      property and equipment		(2,104	)		—			(2,104	)
Cash flows from financing activities:
Proceeds from issuance of common stock		326			—			326
Capital contributions from sole shareholder		3,990			33,039			37,029
Net cash provided by financing                                                   activities		4,316			33,039			37,355
Net increase in cash		—			—			—
Cash at beginning of period		—			—			—
Cash at end of period		$    —			—			—

(a) Use of Estimates

(b) Impairment of Long-lived Assets

(c) Property and Equipment

(d) Computer Software

(e) Other Assets

(f) Income Taxes

(g) Revenue Share Agreements

(h) Recent Accounting Pronouncements

		December 31, 1998			September 30, 1999
Property and equipment:
Office equipment		$  526			526
Computer equipment		1,578			1,578
		2,104			2,104
Less accumulated depreciation		(284	)		(773	)
Property and equipment, net		$1,820			1,331

The reconciliation of income tax expense (benefit) computed using the Federal statutory rate of 34% to the Company’s income tax expense (benefit) is as follows:

		Period from September 15, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999
Expected income tax benefit from continuing      operations		$ (826	)		(15,030	)
State income tax benefit, net of Federal taxes		(146	)		(2,652	)
Permanent differences		160			226
Effect of change in valuation allowance		812			17,456
		$  —			—

		December 31, 1998			September 30, 1999
Deferred tax assets—start-up costs		$ 870			18,286
Deferred tax liabilities—depreciation		(58	)		(18	)
Net deferred tax assets		812			18,268
Valuation allowance		(812	)		(18,268	)
Net deferred taxes		$  —			—

/S /    ARTHUR ANDERSEN LLP

ASSETS		January 3, 1998			January 2, 1999			October 2, 1999
								(unaudited)
Current assets:
Cash and cash equivalents		$  141			1,440			28
Accounts receivable, less allowances of $21, $177, and $666		1,079			3,219			1,803
Prepaid income taxes (note 5)		235			558			640
Prepaid expenses and other current assets		22			228			1,073
		1,477			5,445			3,544
Property and equipment, at cost, net		612			953			1,212
Other assets		265			302			278
		$2,354			6,700			5,034
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Current maturities of long-term capital lease obligations (note 7)		$    20			147			130
Accounts payable		261			472			332
Accrued income taxes		—			487			—
Deferred revenue		—			113			—
Other accrued expenses		102			404			273
Due to parent company (note 6)		290			2,630			4,514
		673			4,253			5,249
Long-term capital lease obligations (note 7)		—			150			145
Deferred income taxes		—			162			162
Commitments (note 8)
Shareholders’ investment (note 4):
Common stock, $.01 par value, 1,000,000 shares authorized at                 January 3, 1998 and January 2, 1999 and 1,100,000 shares                 authorized at October 2, 1999; 929,861 shares issued		9			9			9
Capital in excess of par value		2,193			2,193			2,193
Treasury stock at cost, 2,600 shares		(23	)		(23	)		(23	)
Accumulated deficit		(498	)		(44	)		(2,701	)
		1,681			2,135			(522	)
		$2,354			6,700			5,034

		Year ended January 3, 1998			Year ended January 2, 1999			Period from January 4, 1998 through October 3, 1998			Period from January 3, 1999 through October 2, 1999
								(unaudited)			(unaudited)
Revenues		$3,231			6,237			5,347			4,165
Costs and operating expenses:
Cost of revenues		2,087			5,391			4,422			4,855
Selling, general and administrative expenses (note 6)		1,416			1,506			1,024			1,959
Gain on sale of business (note 2)		—			(1,427	)		—			—
		3,503			5,470			5,446			6,814
Operating income (loss)		(272	)		767			(99	)		(2,649	)
Interest income		17			—			—			8
Interest expense		—			(63	)		(12	)		(16	)
Income (loss) before income taxes		(255	)		704			(111	)		(2,657	)
Income tax (provision) benefit (note 5)		96			(250	)		39			—
Net income (loss)		$  (159	)		454			(72	)		(2,657	)

		Common stock, $.01 par value		Capital in excess of par value		Treasury stock			Accumulated deficit
Balance at December 28, 1996		$         9		2,193		(23	)		(339	)
Net loss		—		—		—			(159	)
Balance at January 3, 1998		9		2,193		(23	)		(498	)
Net income		—		—		—			454
Balance at January 2, 1999		9		2,193		(23	)		(44	)
Net loss (unaudited)		—		—		—			(2,657	)
Balance at October 2, 1999 (unaudited)		$    9		2,193		(23	)		(2,701	)

		Year ended January 3, 1998			Year ended January 2, 1999			Period from January 4, 1998 through October 3, 1998			Period from January 3, 1999 through October 2, 1999
								(unaudited)			(unaudited)
Operating activities:
Net income (loss)		$(159	)		454			(72	)		(2,657	)
Adjustments to reconcile net income (loss) to net cash used                 in operating activities:
Depreciation and amortization		230			364			134			374
Provision for losses on accounts receivable		—			787			66			622
Deferred income tax expense (benefit) (note 5)		(109	)		(169	)		14			(569	)
Gain on sale of business (note 2)		—			(1,427	)		—			—
Changes in current accounts:
Accounts receivable		(744	)		(2,927	)		(2,381	)		794
Other current assets		117			29			52			(845	)
Accounts payable		19			211			254			(140	)
Other current liabilities		88			701			490			(244	)
Net cash used in operating activities		(558	)		(1,977	)		(1,443	)		(2,665	)
Investing activities:
Proceeds from sale of business (note 2)		—			1,478			—			—
Purchases of property and equipment		(405	)		(252	)		(154	)		(578	)
Other		(98	)		(57	)		54			(23	)
Net cash provided by (used in) investing                                                   activities		(503	)		1,169			(100	)		(601	)
Financing activities:
Advances from parent company		279			2,221			1,512			1,884
Payments under capital lease obligations		(34	)		(114	)		(76	)		(30	)
Net cash provided by financing activities		245			2,107			1,436			1,854
Increase (decrease) in cash and cash                                                   equivalents		(816	)		1,299			(107	)		(1,412	)
Cash and cash equivalents at beginning of year		957			141			141			1,440
Cash and cash equivalents at end of year		$141			1,440			34			28
Cash paid for:
Interest		$—			63			12			16
Income taxes		—			—			—			473
Noncash activities—
Acquisition of property and equipment under capital lease		$—			391			362			8

Nature of Operations

Relationship with Thermo Information Solutions Inc., Thermo Coleman Corporation and Thermo Electron Corporation

Fiscal Year

Unaudited Interim Financial Information

Revenue Recognition

Stock-based Compensation Plans

Income Taxes

Cash and Cash Equivalents

Property and Equipment

		1997		1998
		(In thousands)
Machinery and equipment		$925		1,447
Leasehold improvements		52		55
		977		1,502
Less accumulated depreciation and amortization		365		549
		$612		953

Other Assets

Comprehensive Income

Fair Value of Financial Instruments

Use of Estimates

Stock-based Compensation Plans

		1997				1998
		Number of shares		Weighted average exercise price		Number of shares		Weighted average exercise price
		(Shares in thousands)
Options outstanding, at beginning and end of      year		24		$3.00		24		$3.00
Options exercisable		24		$3.00		24		$3.00
Options available for grant		—				—

Pro Forma Stock-based Compensation Expense

		1997			1998
		(In thousands)
Net income (loss):
As reported		$(159	)		454
Pro forma		(169	)		446

Defined Contribution Pension Plan

		1997		1998
		(In thousands)
Currently payable:
Federal		$—		(370	)
State		—		(41	)
		—		(411	)
Prepaid (deferred), net:
Federal		83		135
State		13		26
		96		161
		$  96		(250	)

		1997			1998
		(In thousands)
(Provision) benefit for income taxes at statutory rate		$87			(239	)
Increases (decreases) resulting from:
State income taxes, net of federal		9			(10	)
Nondeductible expenses		(1	)		(12	)
Other		1			11
		$96			(250	)

		1997			1998
		(In thousands)
Prepaid income taxes:
Net operating loss carryforward		$260			—
Depreciation		(31	)		(162	)
Reserves and accruals		6			558
		$235			396

Corporate Services

Other Related-party Transactions

Due to Parent Company

1999		$163
2000		111
2001		47
		321
Less amount representing interest		24
Present value of minimum lease payments		297
Less current portion		147
Long-term capital lease obligations		$150

/S /    KPMG LLP

Assets		1998			1999
Current assets:
Cash and cash equivalents		$385,136			590,420
Accounts receivable, less allowance for doubtful accounts of $25,000 and $80,750                 at December 31, 1998 and 1999, respectively		312,607			1,001,425
Total current assets		697,743			1,591,845
Property and equipment:
Computer equipment		78,175			93,404
Furniture and fixtures		65,626			65,626
Leasehold improvements		6,800			6,800
Total property and equipment		150,601			165,830
Less accumulated depreciation and amortization		(50,195	)		(78,412	)
Net property and equipment		100,406			87,418
Other assets		14,184			9,376
Total assets		$812,333			1,688,639
Liabilities and Members’ Equity
Current liabilities:
Accounts payable		$    1,174			5,545
Accrued expenses		911			10,412
Deferred revenue		31,776			266,600
Total current liabilities		33,861			282,557
Members’ equity		778,472			1,406,082
Total liabilities and members’ equity		$812,333			1,688,639

		1998			1999
Revenue		$3,194,660			4,455,688
Operating expenses:
Salaries		1,229,802			1,448,595
General and administrative expenses		771,573			709,661
Total operating expenses		2,001,375			2,158,256
Operating income		1,193,285			2,297,432
Other income (expense):
Interest expense		(1,506	)		—
Interest income		20,843			30,892
Other, net		6,538			—
Total other income		25,875			30,892
Net income		$1,219,160			2,328,324

		Members’ Equity
Balance at December 31, 1997		$    731,717
Net income		1,219,160
Capital withdrawal		(1,172,405	)
Balance at December 31, 1998		778,472
Net income		2,328,324
Capital withdrawal		(1,700,714	)
Balance at December 31, 1999		$1,406,082

		1998			1999
Cash flows from operating activities:
Net income		$1,219,160			2,328,324
Adjustments to reconcile net income to net cash provided by operating                 activities:
Depreciation and amortization		26,383			28,217
Changes in current assets and liabilities:
Accounts receivable		85,715			(688,818	)
Accounts payable		(25,342	)		4,371
Accrued expenses		(296	)		9,501
Deferred revenue		(79,657	)		234,824
Other assets		1,251			4,808
Net cash provided by operating activities		1,227,214			1,921,227
Cash flows from investing activities—
property and equipment expenditures		(22,812	)		(15,229	)
Net cash used in investing activities		(22,812	)		(15,229	)
Cash flows from financing activities:
Members’ capital withdrawn		(1,172,405	)		(1,700,714	)
Principal borrowings on notes payable		39,123			—
Principal payments on notes payable		(57,873	)		—
Net cash used in financing activities		(1,191,155	)		(1,700,714	)
Net increase in cash and cash equivalents		13,247			205,284
Cash and cash equivalents at beginning of year		371,889			385,136
Cash and cash equivalents at end of year		$    385,136			590,420
Supplemental disclosure of cash flow information—cash paid for interest		$         1,507			—

Nature of Business

Income Tax Status

Basis of Accounting

Revenue Recognition

Cash Equivalents

Property and Equipment

Use of Estimates

Year ending December 31, 1999		Amount
2000		$  63,048
2001		64,626
2002		63,608
2003		64,002
2004		29,226
Total future minimum payments		$284,510

Profit Sharing Plan

Long-term Incentive Plan

/S /    KPMG LLP

ASSETS		1998			1999
Current assets:
Cash and cash equivalents		$5,427,024			2,513,428
Accounts receivable, net of allowance for doubtful accounts of $25,000 in                 1999		39,936			432,837
Prepaid expenses and other current assets		57,501			172,955
Total current assets		5,524,461			3,119,220
Property and equipment, at cost:
Furniture and fixtures		127,272			156,152
Office equipment		78,880			174,769
Computer equipment		187,465			534,707
Computer software		75,148			369,725
Leasehold improvements		9,982			29,897
		478,747			1,265,250
Less accumulated depreciation and amortization		146,621			372,065
Property and equipment, net		332,126			893,185
Other assets		59,839			60,524
		$5,916,426			4,072,929
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses		$    575,014			898,472
Capital lease obligation, current portion		17,766			17,766
Convertible note payable		—			3,000,000
Deferred revenue		251,975			363,937
Accrued payroll		—			47,000
Total current liabilities		844,755			4,327,175
Capital lease obligation, less current portion		88,630			70,864
Note payable		166,500			191,500
Total liabilities		1,099,885			4,589,539
Stockholders’ equity (deficit):
Preferred Stock, $.01 par value, authorized 15,000,000 shares:
Series A Convertible Preferred Stock, 2,432,434 shares issued and                       outstanding		24,324			24,324
Series B Convertible Preferred Stock, 2,250,000 shares issued and                       outstanding		22,500			22,500
Series C Convertible Preferred Stock, 6,980,000 shares issued and                       outstanding		69,800			69,800
Common stock, $.001 par value, 55,000,000 shares authorized; 14,518,431 and                 14,878,806 shares issued in 1998 and 1999		14,518			14,878
Additional paid in capital		8,559,804			8,685,919
Accumulated deficit		(3,698,860	)		(9,158,486	)
Treasury stock, at cost, 2,632,500 common shares		(175,545	)		(175,545	)
Total stockholders’ equity (deficit)		4,816,541			(516,610	)
		$5,916,426			4,072,929

		1998			1999
Net revenue		$1,015,416			1,469,245
Operating expenses:
Sales and marketing		1,440,470			3,039,784
Research and development		928,151			1,839,904
General and administrative		738,026			2,124,562
Total operating expenses		3,106,647			7,004,250
Loss from operations		(2,091,231	)		(5,535,005	)
Other income (expense):
Interest income		46,233			132,226
Interest expense		(1,382	)		(59,501	)
Miscellaneous income (expense)		(11,466	)		2,654
Total other income (expense)		33,385			75,379
Loss before income taxes		(2,057,846	)		(5,459,626	)
Income taxes		—			—
Net loss		$(2,057,846	)		(5,459,626	)

		Preferred Stock												Common stock				Additional paid in capital			Accumulated deficit			Treasury stock			Total stockholders’ equity (deficit)
		Series A				Series B				Series C
		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount
Balance at December 31, 1997		2,432,434		$24,324		—		$    —		—		$    —		14,484,375		$14,484		$1,771,100			$(1,641,014	)		$(175,545	)		$    (6,651	)
Net loss		—		—		—		—		—		—		—		—		—			(2,057,846	)		—			(2,057,846	)
Issuance of common stock in lieu of     deferred payroll		—		—		—		—		—		—		30,681		31		30,653			—			—			30,684
Exercise of stock options		—		—		—		—		—		—		3,375		3		297			—			—			300
Issuance of Series B Convertible     Preferred Stock		—		—		2,250,000		22,500		—		—		—		—		977,500			—			—			1,000,000
Issuance of Series C Convertible     Preferred Stock, net of issuance     costs		—		—		—		—		6,980,000		69,800		—		—		5,780,254			—			—			5,850,054
Balance at December 31, 1998		2,432,434		24,324		2,250,000		22,500		6,980,000		69,800		14,518,431		14,518		8,559,804			(3,698,860	)		(175,545	)		4,816,541
Net loss		—		—		—		—		—		—		—		—		—			(5,459,626	)		—			(5,459,626	)
Settlement of issuance costs for     Series A Preferred Stock		—		—		—		—		—		—		—		—		135,000			—			—			135,000
Issuance costs for Series C     Preferred Stock		—		—		—		—		—		—		—		—		(50,000	)		—			—			(50,000	)
Exercise of stock options		—		—		—		—		—		—		360,375		360		41,115			—			—			41,475
Balance at December 31, 1999		2,432,434		$24,324		2,250,000		$22,500		6,980,000		$69,800		14,878,806		$14,878		$8,685,919			$(9,158,486	)		$(175,545	)		$(516,610	)

				1998			1999
Cash flows from operating activities:
Net loss				$(2,057,846	)		(5,459,626	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on sale of equipment				1,101			—
Depreciation and amortization				86,255			225,444
Provision for doubtful accounts				—			25,000
Change in assets and liabilities:
Accounts receivable				483,613			(417,901	)
Prepaid expenses and other current assets				(35,822	)		(115,454	)
Accounts payable and accrued expenses				217,991			483,458
Deferred revenue				(434,449	)		111,962
Accrued payroll				(106,562	)		47,000
Other assets				(54,801	)		(685	)
Net cash used in operating activities				(1,900,520	)		(5,100,802	)
Cash flows from investing activities:
Proceeds from sale of furniture				645			—
Capital expenditures				(115,927	)		(786,503	)
Net cash used in investing activities				(115,282	)		(786,503	)
Cash flows from financing activities:
Net proceeds (repayments) on convertible note payable				(1,258	)		3,000,000
Payments on capital leases				(2,272	)		(17,766	)
Proceeds from issuance of preferred stock—Series B				1,000,000			—
Proceeds from issuance of preferred stock—Series C				5,850,054			(50,000	)
Proceeds from exercise of common stock options				300			41,475
Net cash provided by financing activities				6,846,824			2,973,709
Net increase in cash and cash equivalents				4,831,022			(2,913,596	)
Cash and cash equivalents at beginning of period				596,002			5,427,024
Cash and cash equivalents at end of period				$5,427,024			2,513,428
Supplemental disclosure of cash flow information—interest paid				$         1,390			9,501
Supplemental disclosure of noncash financing activities:
Reduction of deferred payroll resulting from issuance of common stock				30,684			—
Capital lease obligation assumed				108,668			—
Settlement of issuance costs for Series A preferred stock				—			135,000

(a)    Cash and Cash Equivalents

(b)    Revenue Recognition

(c) Software Development

(d)Property and Equipment

Furniture and fixtures		7 years
Office equipment		7 years
Computer equipment		3 years
Computer software		3 years
Leasehold improvements		Over the lease term

(e)Income Taxes

(f)Use of Estimates in the Preparation of Financial Statements

(g) Fair Value of Financial Instruments

(h) Advertising Expenses

(i) Stock Option Plans

		1998			1999
Net loss:
As reported		$(2,057,846	)		$ (5,459,626	)
Pro forma		$(2,368,445	)		$  (5,758,294	)

		Options outstanding			Weighted- average exercise price
Outstanding at December 31, 1997		1,998,000			$      0.80
Granted		1,444,138			$      0.82
Canceled		(502,875	)		$      0.09
Outstanding at December 31, 1998		2,939,263			$      0.82
Granted		1,464,032			$      1.00
Canceled		(1,222,932	)		$      1.00
Outstanding at December 31, 1999		3,180,363			$      0.96
		1998			1999
Options exercisable at December 31		752,013			858,190
Weighted-average exercise price of options exercisable		$           0.86			$      0.88
Weighted-average minimum value of options granted		$           0.41			$      0.43

Office equipment		$108,668
Less accumulated amortization		16,818
		$  91,850

		Capitalized lease			Operating leases
2000		$  27,267			105,700
2001		27,267			110,100
2002		27,267			114,400
2003		24,995			98,400
Total minimum lease payments		106,796			428,600
Less amount representing interest		18,166
Present value of minimum lease payments		88,630
Less current portion of capital lease obligation		(17,766	)
Noncurrent portion of capital lease obligation		$  70,864

/S /    KPMG LLP

Assets		$    —
Liabilities and Members’ Deficit
Current liabilities:
Accounts payable		$    12,145
Due to related parties		37,056
Total current liabilities		49,201
Members’ deficit		(49,201	)
Total liabilities and members’ deficit		$         —

Revenues		$      —
Operating expenses:
General and administrative expenses		44,444
Sales and marketing expenses		4,757
Total operating expenses		49,201
Net loss		$(49,201	)

		Number of Units		Members’ deficit
Balance at October 21, 1999 (inception)		—		$      —
Issuance of units in formation of the limited liability company		444,400		—
Net loss		—		(49,201	)
Balance at December 31, 1999		444,400		$(49,201	)

Cash flows from operating activities:
Net loss		$(49,201	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in liabilities:
Accounts payable		12,145
Due to related parties		37,056
Net cash used in operating activities		—
Net increase in cash		—
Cash at beginning of period		—
Cash at end of period		$      —

(a) Use of Estimates

(b) Web Site Development

(c) Income Taxes

(a) Equity Transactions

(b) Service Agreements

(c) Stock Options

/s/    KPMG LLP

Current assets:
Cash		$    47,092
Property and equipment		37,054
Less accumulated depreciation		(5,260	)
		31,794
Other assets, net		60,720
Total assets		$  139,606
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Line of credit		$  135,000
Accrued expenses		36,074
Note payable		10,000
Total current liabilities		181,074
Advance from investor		375,000
Total liabilities		556,074
Shareholders’ deficit:
Common stock, authorized 10,000,000 shares, no par; issued and outstanding 2,400,000                 shares		40,000
Additional paid-in capital		87,120
Deficit accumulated during the development stage		(543,588	)
Total shareholders’ deficit		(416,468	)
Total liabilities and shareholders’ deficit		$  139,606

Revenues		$      —
Operating expenses:
Research and development		242,325
General and administrative		272,668
Total operating expenses		514,993
Interest expense		28,595
Net loss		$543,588

		Common Stock				Additional paid-in capital		Deficit accumulated during the development stage			Total shareholders’ deficit
		Shares		Amount
Balance at April 1, 1999 (inception)		—		$   —		—		—			—
Issuance of common stock at May 26, 1999      (date of incorporation)		2,400,000		40,000		—		—			40,000
Options issued in connection with advance      from investor		—		—		87,120		—			87,120
Net loss		—		—		—		(543,588	)		(543,588	)
Balance at September 30, 1999		2,400,000		$  40,000		87,120		(543,588	)		(416,468	)

Cash flows from operating activities:
Net loss		$(543,588	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,260
Interest expense related to the issuance of options		26,400
Increase in accrued expenses		36,074
Net cash used in operating activities		(475,854	)
Cash flows from investing activities—purchases of property and equipment		(27,054	)
Net cash used in investing activities		(27,054	)
Cash flows from financing activities:
Net proceeds from line of credit		135,000
Proceeds from issuance of note payable		10,000
Advance from investor		375,000
Proceeds from issuance of common stock		30,000
Net cash provided by financing activities		550,000
Net increase in cash		47,092
Cash, beginning of period		—
Cash, end of period		$    47,092
Supplemental disclosure of noncash financing and investing activities:
Common stock issued in exchange for fixed assets		$    10,000
Cash paid for interest		2,195

(a) Development Stage

(b) Cash Equivalents

(c) Property and Equipment

(d) Research and Development

(e) Use of Estimates

(f) Stock-based Compensation

(g) Income Taxes

		Options		Weighted average exercise price per share
Outstanding at May 26, 1999 (date of incorporation)		—		—
Granted		1,220,000		$0.05
Outstanding at September 30, 1999		1,220,000		$0.05

Exercise prices		Options Outstanding						Options exercisable
		Number outstanding September 30, 1999		Weighted average remaining contractual life		Exercise price		Number exercisable September 30, 1999		Exercise price
$0.05		1,220,000		9.1		$0.05		100,000		$0.05

Expected life in years		9.33
Risk-free interest rates		5.5 to 6.4	%
Expected volatility		0	%

Net loss:
As reported		$543,588
Fair value of stock-based compensation		1,990
Pro forma net loss		$545,578

(a) Lease Agreements

(b) Employment Contracts

(c) Options to be Granted

/S /    KPMG LLP

Current assets:
Cash		$  190,747
Prepaid rent		2,909
Total current assets		193,656
Property and equipment, net		72,506
Deposit		5,816
Total assets		$  271,978
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$    55,425
Accrued vacation		2,300
Advance from founder		234,750
Total current liabilities		292,475
Stockholders’ deficit:
Common stock, $.01 par value; 30,000,000 shares authorized; 11,775,000 shares issued and                 outstanding		117,750
Deficit accumulated during the development stage		(138,247	)
Total stockholders’ deficit		(20,497	)
Total liabilities and stockholders’ deficit		$  271,978

Revenue		$      —
Operating expenses:
Research and development		59,187
Marketing		42,849
General and administrative		36,211
Total operating expenses		138,247
Income taxes		—
Net loss		$138,247

		Common Stock				Deficit accumulated during the development stage			Total stockholders’ deficit
		Shares		Amount
Balance at April 6, 1999 (inception)		—		$      —		—			—
Issuance of common stock		11,775,000		117,750		—			117,750
Net loss		—		—		(138,247	)		(138,247	)
Balance at September 30, 1999		11,775,000		$117,750		(138,247	)		(20,497	)

Cash flows from operating activities:
Net loss		$(138,247	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		978
Changes in assets and liabilities:
Prepaid rent		(2,909	)
Accounts payable		55,425
Accrued vacation		2,300
Net cash used in operating activities		(82,453	)
Cash flows from investing activities:
Purchases of property and equipment		(73,484	)
Deposit		(5,816	)
Net cash used in investing activities		(79,300	)
Cash flows from financing activities:
Proceeds from issuance of common stock		117,750
Advance from founder		234,750
Net cash provided by financing activities		352,500
Net increase in cash		190,747
Cash, beginning of period		—
Cash, end of period		$  190,747

(a) Preparation of Financial Statements

(b) Property and equipment

Computer hardware		3 years
Video hardware		3 years
Furniture and fixtures		5 years

(c) Cash and Cash Equivalents

(d) Research and Development

(e) Income Taxes

(f) Comprehensive Income

Computer hardware		$51,920
Video hardware		13,995
Furniture and fixtures		7,569
		73,484
Less accumulated depreciation		(978	)
		$72,506

Computed “expected” tax benefit		$(47,004	)
(Increase) reduction in tax benefit resulting from:
Increase in the beginning of the year valuation allowance		55,299
State income tax benefit		(8,295	)
		$      —

Deferred tax assets:
Net operating loss carryforward		$  23,675
Start-up and organizational costs		31,624
Total deferred tax assets		55,299
Valuation allowance		(55,299	)
Net deferred tax asset		$      —

/S /    KPMG LLP

Assets		1998			1999
Current assets:
Cash and cash equivalents		$    33,893			577,358
Accounts receivable, net of allowance for doubtful accounts of $10,000 in 1998 and $20,000 in 1999		302,953			535,378
Inventory		23,674			151,323
Prepaid expenses		47,809			108,398
Total current assets		408,329			1,372,457
Property and equipment:
Equipment and furnishings		81,129			130,961
Less accumulated depreciation		(35,846	)		(64,918	)
Net property and equipment		45,283			66,043
Other assets:
Incorporation costs		689			689
Patents		—			36,571
Less accumulated amortization		(413	)		(1,312	)
Net other assets		276			35,948
Total assets		$  453,888			1,474,448
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Note payable—bank		$  100,000			—
Notes payable—stockholders		100,000			—
Accounts payable		129,336			221,215
Due to stockholders and employees		33,562			—
Customer deposits		34,756			41,080
Accrued expenses		68,149			133,411
Accrued payroll taxes		15,679			800
Warranty reserve		10,048			24,976
Deferred revenues		107,000			143,106
Total current liabilities		598,530			564,588
Redeemable convertible preferred stock:
Series A—8% cumulative; stated value $3.00 per share; 175,000 shares authorized; 169,591 shares issued              and outstanding, with a $3.00 per share redemption value plus accrued 8% annual cumulative dividends		553,931			598,245
Series B—8% cumulative; stated value $5.00 per share; 400,000 shares authorized in 1999; 361,125 shares              issued and outstanding in 1999, with a $5.00 per share redemption value plus accrued 8% annual              cumulative dividends		—			1,853,756
Stockholders’ equity (deficit):
Convertible preferred stock:
Junior Series One—non-cumulative; stated value $0.47 per share; 63,830 shares authorized; 63,830                       shares issued and outstanding		30,000			30,000
Junior Series Two—non-cumulative; stated value $0.8225 per share; 30,396 shares authorized; 30,396                       shares issued and outstanding		25,001			25,001
Common stock:
Voting—no par value; 100,000,000 shares authorized; 1,000,000 shares issued and outstanding in                       1998; 1,121,584 shares issued and outstanding in 1999		2,800			102,803
Nonvoting—no par value; 100,000,000 shares authorized, no shares issued and outstanding		—			—
Accumulated deficit		(756,374	)		(1,699,945	)
Total stockholders’ equity (deficit)		(698,573	)		(1,542,141	)
Total liabilities and stockholders’ equity (deficit)		$  453,888			1,474,448

		1998			1999
Net revenues		$1,011,152			1,732,734
Cost of revenues		336,866			688,972
Gross profit		674,286			1,043,762
Operating expenses:
General and administrative		253,781			565,663
Selling		413,678			839,441
Research and development		321,714			476,836
Total operating expenses		989,173			1,881,940
Loss from operations		(314,887	)		(838,178	)
Other income (expense):
Interest income		1,694			25,154
Interest expense		(9,835	)		(10,331	)
Other income (expense), net		(8,141	)		14,823
Loss before income taxes		(323,028	)		(823,355	)
Income taxes		—			—
Net loss		$  (323,028	)		(823,355	)

		Preferred stock								Common stock				Accumulated deficit			Total stockholders’ equity (deficit)
		Junior Series One				Junior Series Two
		Amount		Shares		Amount		Shares		Amount		Shares
Balance at December 31, 1997		$30,000		63,830		$25,001		30,396		$    2,800		1,000,000		$  (392,314	)		$    334,513
Accrued dividends on redeemable convertible preferred stock		—		—		—		—		—		—		(41,032	)		(41,032	)
Net loss		—		—		—		—		—		—		(323,028	)		(323,028	)
Balance at December 31, 1998		30,000		63,830		25,001		30,396		2,800		1,000,000		(756,374	)		(698,573	)
Issuance of common stock		—		—		—		—		100,003		121,584		—			100,003
Issuance of warrants		—		—		—		—		—		—		12,381			12,381
Accrued dividends on redeemable convertible preferred stock		—		—		—		—		—		—		(132,597	)		(132,597	)
Net loss		—		—		—		—		—		—		(823,355	)		(823,355	)
Balance at December 31, 1999		$30,000		63,830		$25,001		30,396		$102,803		1,121,584		$(1,699,945	)		$(1,542,141	)

		1998			1999
Cash flows from operating activities:
Net loss		$(323,028	)		(823,355	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		24,065			29,971
Provision for doubtful accounts		10,000			10,000
Issuance of warrants		—			12,381
Changes in operating assets and liabilities:
Accounts receivable		(243,660	)		(252,425	)
Inventory		(4,564	)		(127,650	)
Prepaid expenses		(6,113	)		(60,589	)
Accounts payable		66,700			91,879
Accrued liabilities		141,542			101,417
Due to stockholders and employees		26,479			—
Customer deposits		34,756			6,324
Net cash used in operating activities		(273,823	)		(1,012,047	)
Cash flows from investing activities:
Payments of patent costs		—			(36,571	)
Purchases of property and equipment		(16,310	)		(39,832	)
Net cash used in investing activities		(16,310	)		(76,403	)
Cash flows from financing activities:
Proceeds from sale of common stock		—			100,003
Net proceeds from sale of preferred stock		—			1,631,912
Proceeds from notes payable		200,000			—
Payments on notes payable		—			(100,000	)
Net cash provided by financing activities		200,000			1,631,915
Increase (decrease) in cash and cash equivalents		(90,133	)		543,465
Cash and cash equivalents, beginning of year		124,026			33,893
Cash and cash equivalents, end of year		$    33,893			577,358
Supplemental disclosure:
Interest paid		$      5,653			12,703
Noncash financing activity:
Conversion of note payable-stockholders and due to stockholders to Series B                 redeemable convertible preferred stock		$         —			133,561

(a) Cash and cash equivalents

(b) Inventory

(c) Property and Equipment

(d) Revenue Recognition

(e) Warranty Reserve

(f) Software Development

(g) Fair Value of Financial Instruments

(h) Advertising Expenses

(i) Stock Options Plan

(j) Use of Estimates

(k) Impairment of Long-lived Assets

		1998			1999
Deferred tax assets:
Net operating loss carryforwards		$174,000			504,000
Depreciation		11,000			14,000
Legal expenses		13,000			12,000
Other		2,000			—
Total deferred tax assets		200,000			530,000
Valuation allowance		(200,000	)		(530,000	)
Net deferred tax assets		—			—
Deferred tax liabilities		—			—
Net deferred taxes		$      —			—

		Number			Weighted average exercise price
Options outstanding at December 31, 1997		201,006			$0.36
Options granted to employees and directors during 1998		144,532			0.30
Options forfeited		(107,548	)		0.94
Options outstanding at December 31, 1998		237,990			$0.61
Options granted to employees and directors during 1999		141,125			0.50
Options exercised		(121,584	)		0.82
Options outstanding at December 31, 1999		257,531			$0.45

/S /    KPMG LLP

ASSETS		December 31, 1998			September 30, 1999
Current assets:
Cash		$         900			6,793
Restricted cash		—			6,175
Stock subscriptions receivable		9,000			52,083
Total current assets		9,900			65,051
Property and equipment, net of accumulated depreciation		—			25,344
Other assets		—			395
Total assets		$      9,900			90,790
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Due to affiliates		$  306,620			602,622
Accrued expenses		—			16,313
Customer deposits		—			8,642
Deferred revenue		—			1,925
Total current liabilities		306,620			629,502
Series A-1 redeemable convertible preferred stock, $.0000001 par value;      16,863,905 shares authorized; none issued and outstanding		—			—
Series A-2 redeemable convertible preferred stock, $.0000001 par value;      14,792,899 shares authorized; none issued and outstanding		—			—
Stockholders’ deficit (see notes 3 and 7):
Class A common stock, $.0000001 par value; 90,000,000 shares authorized;                 20,000,000 and 24,629,629 shares issued and outstanding at December 31,                 1998 and September 30, 1999		2			2
Class B common stock, $.0000001 par value; 14,792,899 shares authorized;                 none issued and outstanding		—			—
Additional paid-in capital		9,998			62,081
Deficit accumulated during the development stage		(306,720	)		(600,795	)
Total stockholders’ deficit		(296,720	)		(538,712	)
Total liabilities and stockholders’ deficit		$      9,900			90,790

		Period from September 3, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999			Period from September 3, 1998 (inception) through September 30, 1999
Revenues		$         —			4,020			4,020
Operating expenses:
Product development primarily to related parties (note 6)		291,920			220,818			512,738
Selling and marketing primarily to related parties (note 6)		8,250			23,850			32,100
General and administrative primarily to related parties (note 6)		6,550			50,653			57,203
Depreciation		—			2,774			2,774
Total operating expenses		306,720			298,095			604,815
Net loss		$(306,720	)		(294,075	)		(600,795	)

		Class A common stock				Additional paid-in capital		Deficit accumulated during the development stage			Total stockholders’ deficit
		Shares		Amount
Balance at September 3, 1998 (inception)		—		$—		—		—			—
Issuance of common stock		20,000,000		2		9,998		—			10,000
Net loss		—		—		—		(306,720	)		(306,720	)
Balance at December 31, 1998		20,000,000		2		9,998		(306,720	)		(296,720	)
Exercise of employee stock options		4,629,629		—		52,083		—			52,083
Net loss		—		—		—		(294,075	)		(294,075	)
Balance at September 30, 1999		24,629,629		$    2		62,081		(600,795	)		(538,712	)

		Period from September 3, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999			Period from September 3, 1998 (inception) through September 30, 1999
Cash flows from operating activities:
Net loss		$(306,720	)		(294,075	)		(600,795	)
Adjustments to reconcile net loss to net cash provided by (used                 in) operating activities:
Depreciation		—			2,774			2,774
Changes in assets and liabilities:
Restricted cash		—			(6,175	)		(6,175	)
Other assets		—			(395	)		(395	)
Accrued expenses		—			16,313			16,313
Customer deposits		—			8,642			8,642
Deferred revenue		—			1,925			1,925
Due to affiliate		306,620			296,002			602,622
Net cash provided by (used in) operating                                                   activities		(100	)		25,011			24,911
Cash flows from investing activities—capital expenditures		—			(28,118	)		(28,118	)
Net cash used in investing activities		—			(28,118	)		(28,118	)
Cash flows from financing activities—proceeds from issuance of      common stock		1,000			9,000			10,000
Net cash provided by financing activities		1,000			9,000			10,000
Net increase in cash		900			5,893			6,793
Cash at beginning of period		—			900			—
Cash at end of period		$         900			6,793			6,793

(a) Description of Business

(b) Revenue Recognition

(c) Property and Equipment

(d) Customer Deposits

(e) Product Development Costs

(f) Stock-based Compensation

(g) Income Taxes

(h) Use of Estimates

Computer equipment		$20,376
Software		7,742
		28,118
Less accumulated depreciation		(2,774	)
		$25,344

		Period from September 3, 1998 (inception) through December 31, 1998		Nine months ended September 30, 1999
Net loss:
As reported		$306,720		294,075
Pro forma		306,720		303,603

		Shares			Weighted-average exercise price
Outstanding on January 1, 1998		—			$ —
Granted		4,652,590			.01
Exercised		(4,629,629	)		.01
Outstanding on September 30, 1999		22,961			$    .02

Range of exercise prices		Options outstanding				Options exercisable
		Shares		Weighted-average exercise price		Shares		Weighted-average exercise price
$0.01 to $0.025		22,961		$.02		5,841		$.01

		Period from September 3, 1998 (inception) through December 31, 1998			Nine months ended September 30, 1999
Expected income tax benefit		$(104,285	)		(99,985	)
State income tax benefit		(18,403	)		(17,644	)
Effect of change in valuation allowance		122,688			117,629
		$         —			—

		December 31, 1998			September 30, 1999
Deferred tax assets:
Net operating loss carryforward		$      —			51,715
Start-up costs		122,688			189,720
Total gross deferred tax assets		122,688			241,435
Deferred tax liabilities—depreciation		—			(1,118	)
Total gross deferred tax liabilities		—			(1,118	)
Net deferred tax assets		122,688			240,317
Valuation allowance		(122,688	)		(240,317	)
Net deferred taxes		$      —			—

		Period from September 3, 1998 (inception) through December 31, 1998		Nine months ended September 30, 1999
Product development		$291,920		220,818
Selling and marketing		8,250		16,886
General and administrative		6,450		27,150
Total		$306,620		264,854

/S /    KPMG LLP

Total assets		$      —
Liabilities and Shareholders’ Deficit
Current liabilities—due to related party		$  42,207
Shareholders’ deficit:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; issued and outstanding none		—
Common stock, $0.001 par value. Authorized 15,000,000 shares; issued and outstanding                 1,000,000 shares		1,000
Less receivable for common stock		(1,000	)
Additional paid-in capital		53,522
Deficit accumulated during the development stage		(95,729	)
Total shareholders’ deficit		(42,207	)
Total liabilities and shareholders’ deficit		$      —

Revenues		$      —
Operating expenses:
General and administrative		79,729
Research and development		16,000
Total operating expenses		95,729
Net loss		$(95,729	)

		Common stock				Receivable for common stock			Additional paid-in capital		Deficit accumulated during the development stage			Total shareholders’ deficit
		Shares		Amount
Balance at June 28, 1999 (inception)		—		$  —		—			—		—			—
Issuance of common stock at September      10, 1999		1,000,000		1,000		—			—		—			1,000
Receivable for common stock		—		—		(1,000	)		—		—			(1,000	)
Nonreimbursable expenses paid by      ViaSpace.com LLC		—		—		—			53,522		—			53,522
Net loss		—		—		—			—		(95,729	)		(95,729	)
Balance at December 31, 1999		1,000,000		$1,000		(1,000	)		53,522		(95,729	)		(42,207	)

Cash flows from operating activities:
Net loss		$(95,729	)
Adjustments to reconcile net loss to net cash used in operating activities
Increase in due to related party		42,207
Operating expense paid by ViaSpace.com LLC on behalf of ViaChange.com, Inc.		53,522
Net cash used in operating activities		—
Cash flows from investing activities		—
Cash flows from financing activities		—
Net increase in cash		—
Cash, beginning of period		—
Cash, end of period		$      —
Supplemental disclosure of noncash financing activities—nonreimbursable operating expenses paid      by ViaSpace.com LLC on behalf of ViaChange.com, Inc.		$  53,522

(a)  Development Stage

Ÿ

State-of-the-art e-commerce tools to list auctions

Ÿ

Automation of trading of secondary mortgage loans

Ÿ

Valuation and arbitrage services online

Ÿ

Bulk loans for sale

Ÿ

Deal flow services

Ÿ

Multiple pricing alternatives

Ÿ

Qualification of buyers and sellers.

(b)  Research and Development

(c)  Use of Estimates

(d)  Stock-Based Compensation

(e)  Income Taxes

Computed “expected” tax benefit		$(32,548	)
State income taxes		(5,564	)
Increase in the beginning of the period valuation allowance		38,112
		$      —

Deferred tax assets:
Start-up and organizational costs		$31,712
Net operating loss carryforward		6,400
Total deferred tax assets		38,112
Valuation allowance		38,112
Net deferred tax asset		$    —

Ÿ

2,333,333 shares of Series A-1 Preferred Stock, $.001 par value per share

Ÿ

2,333,333 shares of Series A-2 Preferred Stock, $.001 par value per share

Ÿ

10,000,000 shares of Class A Common Stock, $.001 par value per share

Ÿ

2,333,333 shares of Class A Common Stock, $.001 par value per share.

/S /    KPMG LLP

		1998			1999
Assets
Current assets:
Cash and cash equivalents		$    67,230			96,721
Accounts receivable		43,731			254,546
Revenue earned on contracts in progress in excess of billings		82,108			207,469
Total current assets		193,069			558,736
Property and equipment, at cost:
Office equipment		129,706			215,582
Furniture and fixtures		12,039			98,171
Vehicles		—			22,870
Total property and equipment		141,745			336,623
Less accumulated depreciation and amortization		(126,095	)		(166,411	)
Property and equipment, net		15,650			170,212
Total assets		$  208,719			728,948
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accrued expenses		$    34,796			96,567
Billings in excess of revenues earned on contracts in progress		—			12,500
Due to former shareholder		250,000			250,000
Current portion of note payable		—			3,780
Line of credit		59,500			—
Current maturities of obligations under capital leases		1,008			34,235
Total current liabilities		345,304			397,082
Capital lease obligations, less current portion		2,723			90,647
Note payable, less current portion		—			8,066
Total liabilities		348,027			495,795
Stockholders’ equity (deficit):
Class B common stock, $.001 par; 14,000,000 shares authorized, 12,142,860                 shares issued and outstanding in 1998 and 1999		12,143			12,143
Retained earnings (accumulated deficit)		(151,451	)		221,010
Total stockholders’ equity (deficit)		(139,308	)		233,153
Total liabilities and stockholders’ equity (deficit)		$  208,719			728,948

		1998			1999
Revenues		$  927,237			2,470,834
Cost of revenues		458,512			1,150,523
Gross margin		468,725			1,320,311
Operating expenses:
Sales and marketing		6,446			44,470
Compensation and benefits		322,115			185,341
General and administrative		259,785			660,055
Total operating expenses		588,346			889,866
Operating income (loss)		(119,621	)		430,445
Other income (expense):
Interest income		—			4,758
Interest expense		(3,235	)		(7,766	)
Total other expense		(3,235	)		(3,008	)
Net income (loss)		$(122,856	)		427,437

		Class B Common Stock				Retained earnings (accumulated deficit)			Total stockholders’ equity (deficit)
		Shares		Amount
Balance at December 31, 1997		12,142,860		$12,143		(28,595	)		(16,452	)
Net income		—		—		(122,856	)		(122,856	)
Balance at December 31, 1998		12,142,860		12,143		(151,451	)		(139,308	)
Distribution to shareholders		—		—		(54,976	)		(54,976	)
Net income		—		—		427,437			427,437
Balance at December 31, 1999		12,142,860		$12,143		221,010			233,153

		1998			1999
Cash flows from operating activities:
Net income (loss)		$(122,856	)		427,437
Adjustments to reconcile net income (loss) to net cash provided by operating                 activities:
Depreciation and amortization		31,606			31,629
Change in assets and liabilities:
Accounts receivable		(15,352)			(210,815	)
Billings less than revenues earned on contracts in progress		(66,151	)		(112,861	)
Accrued expenses		267,109			61,771
Net cash provided by operating activities		94,356			197,161
Cash flows from investing activities—purchases of property and equipment		(4,239	)		(52,168	)
Net cash used in investing activities		(4,239	)		(52,168	)
Cash flows from financing activities:
Net repayments on line of credit		(40,500	)		(59,500	)
Issuance of note payable		—			11,846
Payments under capital lease obligations		(3,584	)		(12,872	)
Distribution to shareholders		—			(54,976	)
Net cash used in financing activities		(44,084	)		(115,502	)
Net increase in cash and cash equivalents		46,033			29,491
Cash and cash equivalents at beginning of year		21,197			67,230
Cash and cash equivalents at end of year		$    67,230			96,721
Supplemental disclosure of cash flow information—interest paid		$      3,235			7,766
Supplemental disclosure of noncash investing activity—capital lease obligations      assumed		$         —			134,023

(a)  Use of Estimates

(b)  Cash Equivalents

(c)  Revenue Recognition

(d)  Property and Equipment

(e)  Income Taxes

(f)  Fair Value of Financial Instruments

(g)  Advertising Expenses

(h)  Cost of Revenues

		Capital leases			Operating leases
2000		$43,657			108,140
2001		42,432			108,140
2002		34,771			105,589
2003		23,158			103,037
2004		—			103,037
Thereafter		—			206,074
Total minimum lease payments		144,018			$734,017
Less amount representing interest		(19,136	)
Present value of minimum lease payments		124,882
Less current portion		(34,235	)
Noncurrent portion of capital lease obligations		$90,647

/S /    KPMG LLP

		1998			1999
Assets
Current assets:
Cash		$  63,089			—
Accounts receivable, net of allowance of $0 and $7,700 in 1998 and 1999,                 respectively		8,040			117,174
Deferred offering costs		—			20,310
Member contributions receivable		12,200			1,434
Total current assets		83,329			138,918
Property and equipment, at cost:
Computers and equipment		3,061			78,697
Software		515			1,249
Furniture and fixtures		—			91,696
		3,576			171,642
Less accumulated depreciation and amortization		(716	)		(30,808	)
Property and equipment, net		2,860			140,834
Goodwill, net of accumulated amortization of $669 in 1999		—			39,444
Deposit on investment in affiliate		140,000			—
Other assets		—			10,594
Total assets		$226,189			329,790
Liabilities and Equity
Current liabilities:
Bank overdraft		$      —			9,160
Accounts payable		—			44,255
Accrued expenses		7,445			24,914
Current portion of loan payable		—			5,683
Current portion of note payable to related party		34,671			37,999
Note payable to related party and accrued interest		—			30,988
Due to officers		9,532			61,439
Due to related parties		—			17,237
Deposit on membership interest		130,000			—
Deferred income and other current liabilities		—			8,194
Total current liabilities		181,648			239,869
Note payable to related party, less current portion		40,329			12,221
Loan payable, less current portion		—			28,326
Total liabilities		221,977			280,416
Minority interest		—			1,440
Equity:
Common stock, no par value: 1,000 and 100,000,000 shares authorized, issued,                 and outstanding in 1998 and 1999, respectively		1			186,009
Members’ interests		11,146			—
Accumulated other comprehensive income		—			(2,580	)
Accumulated deficit		(6,935	)		(135,495	)
Total equity		4,212			47,934
Total liabilities and equity		$226,189			329,790

		1998			1999
Revenue		$  52,006			338,844
Operating expenses:
Compensation		39,657			222,847
Development		—			155,211
General and administrative		71,202			191,918
Total operating expenses		110,859			569,976
Loss from operations		(58,853	)		(231,132	)
Interest expense, net		5,000			10,216
Foreign currency gains		—			(90	)
Net loss before minority interest		(63,853	)		(241,258	)
Minority interest		—			1,440
Net loss		$(63,853	)		(242,698	)

		Westbound Consulting, Inc. Common Stock				Westbound Consulting, L.L.C.			Westbound Consulting, Inc.						Total equity (deficit)
		Shares		Amount		Members’ interests			Accumulated other comprehensive loss			Accumulated deficit
Balance at December 31, 1997		1,000		$           1		—			—			(6,935	)		(6,934	)
Issuance of membership     interests		—		—		74,999			—			—			74,999
Net loss		—		—		(63,853	)		—			—			(63,853	)
Balance at December 31, 1998		1,000		1		11,146			—			(6,935	)		4,212
Issuance of membership     interests		—		—		130,000			—			—			130,000
Net loss for the period from     January 1, 1999 through June 7,     1999		—		—		(114,138	)		—			—			(114,138	)
Exchange of membership interests     for common stock		84,999,000		27,008		(27,008	)		—			—			—
Issuance of common stock		15,000,000		159,000		—			—			—			159,000
Net loss for the period from     June 8, 1999 through December     31, 1999		—		—		—			—			(128,560	)		(128,560	)
Foreign currency translation     adjustment		—		—		—			(2,580	)		—			(2,580	)
Comprehensive loss		—		—		—			(2,580	)		(128,560	)		(131,140	)
Balance at December 31, 1999		100,000,000		$186,009		—			(2,580	)		(135,495	)		47,934

		1998			1999
Cash flows from operating activities:
Net loss		$(63,853	)		(242,698	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		716			4,359
Provision for bad debt		—			9,495
Minority interest		—			1,440
Foreign exchange gain		—			(90	)
Membership interest issued as expense reimbursement to officer		3,249			—
Changes in assets and liabilities, net of acquisition:
Accounts receivable		(8,040	)		(115,216	)
Other assets		—			(2,320	)
Accounts payable		—			44,255
Accrued expenses		7,445			11,108
Accrued interest		5,000			(1,155	)
Net cash used in operating activities		(55,483	)		(290,822	)
Cash flows from investing activities:
Investment in affiliate, net of cash acquired		(140,000	)		(18,543	)
Purchases of property and equipment		(3,035	)		(10,949	)
Net cash used in investing activities		(143,035	)		(29,492	)
Cash flows from financing activities:
Increase in bank overdraft		—			9,160
Issuance of loan payable		—			35,000
Issuance of notes payable to related parties		70,000			40,000
Principal repayments of notes payable to related parties and loan payable		—			(33,632	)
Net increase in due to officers		7,451			35,497
Deposits on membership interests		130,000			—
Issuance of membership interests		52,990			12,200
Issuance of common stock		—			159,000
Net cash provided by financing activities		260,441			257,225
Net increase (decrease) in cash		61,923			(63,089	)
Cash at beginning of year		1,166			63,089
Cash at end of year		$  63,089			—
Supplemental disclosure of cash flow information—
cash paid during the year for interest		$         —			11,546
Supplemental disclosure of noncash financing activities:
Membership interest issued as expense reimbursement to officer		$    3,249			—
Membership interest issued as reduction of amounts due to officers		6,560			—
Member contributions receivable		12,200			—
Offering costs accrued but not paid		—			20,310
Membership interest issued for which refundable deposit was received in prior                 year		—			130,000

(a)  Principles of Consolidation

(b)  Use of Estimates

(c)  Revenue Recognition

(d)  Property and Equipment

(e)  Income Taxes

(f)  Goodwill

		1998			1999
Domestic		$(63,853	)		(224,057	)
Foreign		—			(18,641	)
		$(63,853	)		(242,698	)

Expected income tax benefit at statutory rate		$(82,517	)
State income tax benefit, net of Federal taxes		(6,082	)
Permanent differences		571
Loss prior to conversion to C-Corporation		40,172
Establishment of deferred tax balances upon C-Corporation conversion		11,720
Foreign income not subject to tax		(1,142	)
Increase in valuation allowance		37,278
Income tax provision		$      —

Deferred tax assets:
Intangible assets		$      731
Net operating loss carryforward		54,895
Gross deferred tax assets		55,626
Less valuation allowance		(37,278	)
Net deferred tax assets		18,348
Deferred tax liabilities:
Cash to accrual adjustment		(18,348	)
Total deferred tax liabilities		(18,348	)
Net deferred income taxes		$      —

/S /    KPMG LLP

ASSETS		December 31,						September 30, 1999
		1997			1998
								(unaudited)
Current assets:
Cash and cash equivalents		$    102,035			69,751			98,211
Accounts receivable		52,163			56,209			817
Common stock subscription receivable		67,500			67,500			—
Total current assets		221,698			193,460			99,028
Property and equipment, net of accumulated depreciation and      amortization		55,227			42,406			26,541
Other assets		5,000			5,982			9,605
Total assets		$    281,925			241,848			135,174
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$      75,144			171,134			62,576
Accrued expenses		10,689			74,140			107,127
Current portion of notes payable to stockholders		—			200,000			1,100,000
Total current liabilities		85,833			445,274			1,269,703
Notes payable to stockholders, less current portion		140,000			650,000			495,000
Total liabilities		225,833			1,095,274			1,764,703
Stockholders’ equity (deficit):
Common stock, $.0001 par value; 25,000,000 shares authorized;                 9,250,000 shares issued and outstanding at December 31,                 1997 and 1998 and 9,306,664 shares issued and outstanding at                 September 30, 1999 (unaudited)		925			925			931
Additional paid-in capital		1,383,739			1,383,739			1,383,733
Deficit accumulated during the development stage		(1,328,572	)		(2,238,090	)		(3,014,193	)
Total stockholders’ equity (deficit)		56,092			(853,426	)		(1,629,529	)
Total liabilities and stockholders’ (equity) (deficit)		$    281,925			241,848			135,174

		Years ended December 31,						Period from March 7, 1996 (inception) through December 31, 1998			Nine months ended September 30,
		1997			1998						1998			1999
											(unaudited)			(unaudited)
Revenues		$    52,163			3,390			55,553			3,390			600
Operating expenses:
Product development		578,290			738,161			1,714,026			529,097			585,245
General and administrative		298,566			116,239			485,653			99,497			110,926
Depreciation and amortization		25,436			29,265			66,876			21,949			23,267
Total operating expenses		902,292			883,665			2,266,555			650,543			719,438
Other income (expense):
Interest income		1,439			188			2,343			167			443
Interest expense		—			(29,431	)		(29,431	)		(17,570	)		(57,708	)
Total other income (expense)		1,439			(29,243	)		(27,088	)		(17,403	)		(57,265	)
Net loss		$(848,690	)		(909,518	)		(2,238,090	)		(664,556	)		(776,103	)

		Common Stock				Additional paid-in capital			Deficit accumulated during the development stage			Total stockholders’ equity (deficit)
		Shares		Amount
Balance at March 7, 1996 (inception)		—		$—		—			—			—
Issuance of common stock		9,250,000		925		1,327,075			—			1,328,000
Net loss		—		—		—			(479,882	)		(479,882	)
Balance at December 31, 1996		9,250,000		925		1,327,075			(479,882	)		848,118
Common stock subscribed for services		—		—		56,664			—			56,664
Net loss		—		—		—			(848,690	)		(848,690	)
Balance at December 31, 1997		9,250,000		925		1,383,739			(1,328,572	)		56,092
Net loss		—		—		—			(909,518	)		(909,518	)
Balance at December 31, 1998		9,250,000		925		1,383,739			(2,238,090	)		(853,426	)
Issuance of common stock subscribed                 (unaudited)		56,664		6		(6	)		—			—
Net loss (unaudited)		—		—		—			(776,103	)		(776,103	)
Balance at September 30, 1999 (unaudited)		9,306,664		$931		1,383,733			(3,014,193	)		(1,629,529	)

		Years ended December 31,						Period from March 7, 1996 (inception) through December 31, 1998			Nine months ended September 30,
		1997			1998						1998			1999
											(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss		$(848,690	)		(909,518	)		(2,238,090	)		(664,556	)		(776,103	)
Adjustments to reconcile net loss to net                 cash used in operating activities:
Depreciation and amortization		25,436			29,265			66,876			21,949			23,267
Changes in assets and liabilities:
Accounts receivable		(52,163	)		(4,046	)		(56,209	)		(3,859	)		55,392
Other assets		—			(982	)		(5,982	)		(982	)		(3,623	)
Accounts payable		18,493			95,990			171,134			70,206			(108,558	)
Accrued expenses		2,347			63,451			74,140			16,497			32,987
Net cash used in operating                                                   activities		(854,577	)		(725,840	)		(1,988,131	)		(560,745	)		(776,638	)
Cash flows from investing activities—purchase      of property and equipment		(6,526	)		(16,444	)		(109,282	)		(16,444	)		(7,402	)
Net cash used in investing                                                   activities		(6,526	)		(16,444	)		(109,282	)		(16,444	)		(7,402	)
Cash flows from financing activities:
Payments on common stock subscriptions		590,000			—			1,260,500			—			67,500
Common stock subscribed for services		56,664			—			56,664			—			—
Proceeds from notes payable to                 stockholders		140,000			710,000			850,000			490,000			745,000
Net cash provided by                                                   financing activities		786,664			710,000			2,167,164			490,000			812,500
Net increase (decrease) in                                                   cash		(74,439	)		(32,284	)		69,751			(87,189	)		28,460
Cash and cash equivalents at beginning of      period		176,474			102,035			—			102,035			69,751
Cash and cash equivalents at end of period		$  102,035			69,751			69,751			14,846			98,211

(a) Description of Business

(b) Unaudited Interim Financial Information

(c) Cash Equivalents

(d) Property and Equipment

(e) Revenue Recognition

(f) Product Development Costs

(g) Stock-based Compensation

 

(h) Income Taxes

 

           Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

(i) Use of Estimates

 

           The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(2) Property and Equipment

 

           Property and equipment, at cost, less accumulated depreciation and amortization, are summarized as follows at December 31, 1997 and 1998:

		December 31,
		1997			1998
Computer hardware and software		$ 66,362			82,806
Office furniture and equipment		26,476			26,476
		92,838			109,282
Less accumulated depreciation and amortization		(37,611	)		(66,876	)
		$ 55,227			42,406

 

(3) Stock Option Plan

 

           In 1996, the Company adopted a stock option plan under which certain employees may be granted the right to purchase shares of common stock at or above the fair value on the date of grant. The Company has reserved an aggregate of 790,000 shares of common stock for issuance under the plan. Stock options may be exercised only to the extent they have vested in accordance with provisions determined by the Board of Directors.

 

           The per share weighted-average fair value of stock options granted during 1998 was $0.03 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 0%, expected volatility of 0%, risk-free interest rate of 5.6% and an expected life of 3 years. There were no stock option grants in 1997.

WHIPLASH, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

            The Company applies APB No. 25 in accounting for its plan and accordingly, no compensation expense has been recognized in the financial statements for its stock options. Had the Company determined compensation expense based on the fair value at the grant date for its stock-based compensation plans under SFAS No. 123, the Company’s net loss would have been the pro forma amounts indicated below:

 

		December 31,
		1997			1998
Net loss:
As reported		$(848,690	)		(909,518	)
Pro forma		(854,046	)		(915,669	)

           Stock option activity for the periods indicated is as follows:

 

		Shares		Weighted- Average Exercise Price
Outstanding on December 31, 1996 and 1997		640,000		$0.20
Granted during 1998		150,000		0.20
Outstanding on December 31, 1998		790,000		$0.20

 

           The following table summarizes information about stock options outstanding at December 31, 1998:

 

Exercise price		Options outstanding						Options exercisable
		Shares		Weighted- average remaining contractual life		Weighted- average exercise price		Shares		Weighted- average exercise price
$0.20		790,000		7.8 years		$0.20		320,000		$0.20

 

(4) Notes Payable to Stockholders

 

           During 1997 and 1998, the Company issued various unsecured promissory notes to certain stockholders. These promissory notes bear interest at rates ranging from 5.58% to 7.28% and are generally due two years from the issuance date. The total principal balance outstanding on the notes at December 31, 1998 was $850,000, of which $200,000 has been classified as a current liability. The outstanding principal balance and related accrued interest shall be automatically converted into shares of the Company’s Series A preferred stock upon the closing of an external financing in which the Company receives at least $5.0 million from the sale of equity securities (see note 6).

 

(5) Income Taxes

 

           The reconciliation of income tax expense (benefit) computed using the Federal statutory rate of 34% to the Company’s income tax expense (benefit) is as follows:

 

		1997			1998
Expected income tax benefit at the statutory rate		$(269,289	)		(309,236	)
State income tax benefit		(47,522	)		(54,571	)
Permanent differences		55			650
Effect of change in valuation allowance		316,756			363,157
		$         —			—

WHIPLASH, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

            The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and December 31, 1998 are as follows:

 

		1997			1998
Deferred tax assets:
Capitalized start-up costs		$ 509,935			858,618
Accrued expenses		—			11,772
Property and equipment—depreciation and amortization		—			894
Other		547			547
Total gross deferred tax assets		510,482			871,831
Less valuation allowance		(508,401	)		(871,558	)
Net deferred tax assets		2,081			273
Deferred tax liabilities:
Property and equipment—depreciation and amortization		1,917			—
Other		164			273
Total gross deferred tax liabilities		2,081			273
Net deferred tax asset (liability)		$         —			—

 

           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 asset 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 become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are available to reduce income taxes payable, management has established a valuation allowance for the full amount of the net deferred tax assets.

 

(6) Subsequent Events

 

           On October 27, 1999, the Company amended and restated its certificate of incorporation thereby authorizing 20,000,000 shares of $.001 par value Class A common stock, 3,726,708 shares of $.001 par value Class B common stock, 4,751,553 shares of $.001 par value Series A-1 redeemable convertible preferred stock, and 3,726,708 shares of $.001 par value Series A-2 redeemable convertible preferred stock. Upon liquidation, each holder of Series A-1 and Series A-2 preferred shares (collectively, “Series A preferred shares”) shall be entitled to receive an amount equal to the greater of (i) $1.61, subject to adjustment in the event such shares are subdivided through a stock split, stock dividend, or otherwise (“the Series A liquidation value”), plus all accrued and unpaid dividends, and (ii) the amount such holder would receive if all holders of Series A preferred shares had converted their Series A preferred shares into common stock immediately prior to liquidation.

 

           Upon liquidation, and after payment of preferential amounts to holders of Series A preferred shares, the remaining assets of the Company shall be distributed to the holders of common shares. The Company shall pay preferential dividends to the holders of Series A preferred shares, when and if declared by the board of directors, at an annual rate of $0.13 per share (as adjusted for any stock splits and like events). In the event any dividend or other distribution payable in cash, stock, or other property is declared on the common stock, each holder of Series A preferred shares on the record date for such dividend or distribution shall be entitled to receive the same cash, stock or other property which such holder would have received if on such record date such holder was the holder of record of the number of common shares into which such Series A preferred shares then held by such holder are then convertible.

 

           Series A-1 preferred shares may be converted at any time, at the election of the holder, into the number of shares of Class A common stock determined by (i) multiplying the number of Series A-1 preferred shares to be converted by $1.61 and (ii) dividing the resulting product by the Series A conversion price ($1.61 initially, subject to adjustment upon certain dilutive events) then in effect. If the holders of more than two-thirds of the Series A-1 preferred shares then outstanding shall so elect, by vote or written consent, all of the outstanding Series A-1 preferred shares shall automatically convert into shares of Class A common stock.

 

           Series A-2 preferred shares may be converted at any time, at the election of the holder, into the number of shares of Class B common stock determined by (i) multiplying the number of Series A-2 preferred shares to be converted by $1.61 and (ii) dividing the resulting product by the Series A conversion price then if effect. If the holders of more than two-thirds of the Series A-2 preferred shares then outstanding shall so elect, by vote or written consent, all of the outstanding Series A-2 preferred shares shall automatically convert into shares of Series A-1 preferred stock or Class B common stock.

 

           Series A-2 preferred shares may be converted at any time, at the election of the holder, into an equal number of shares of Series A-1 preferred stock. Each Series A-2 preferred share shall automatically convert into one Series A-1 preferred share if the aggregate number of Series A-2 preferred shares and Class B common shares then outstanding is less than five percent of the aggregate number of common shares outstanding, assuming conversion or exercise of all outstanding convertible securities and options.

 

           Class B common shares may be converted at any time, at the election of the holder, into an equal number of Class A common shares. Each Class B common share shall automatically convert into one Class A common share if the aggregate number of Series A-2 preferred shares and Class B common shares then outstanding is less than five percent of the aggregate number of common shares then outstanding, assuming conversion or exercise of all outstanding convertible securities and options.

 

           If a firm commitment underwritten public offering of shares of common stock is effected in which (a) the aggregate price paid by the public for the shares is at least $20,000,000 and (b) the price per share paid by the public for such shares is at least 300% of the Series A conversion price in effect immediately prior to such offering, then all of the outstanding Series A preferred shares shall be automatically converted into shares of common stock upon the closing of the public offering.

 

           The Series A preferred shares have certain redemption rights. If a fundamental change or change in ownership occurs, the holder or holders of at least two-thirds of the Series A preferred shares then outstanding may require the Company to redeem all the Series A preferred shares then outstanding at the Series A redemption price. The Series A redemption price per share equals the sum of the Series A liquidation value plus all declared but unpaid dividends on such Series A preferred shares through the applicable redemption date.

 

           At any time or times on or after the fifth anniversary of issuance, the holder or holders of two-thirds of the outstanding Series A preferred shares may elect to require the Company to redeem all or any portion of such holders’ Series A preferred shares.

 

           Holders of Class A common stock, Class B common stock, Series A-1 preferred stock, and Series A-2 preferred stock vote together as a single class on all matters submitted to a vote before the stockholders of the Company. Holders of Class A and Class B common stock are entitled to one vote per share. Holders of Series A-1 preferred stock are entitled to the number of votes of Class A common shares such holders would have been entitled to had they converted all of their Series A-1 preferred shares to Class A common shares. Holders of Series A-2 preferred stock are entitled to the number of votes of Class B common shares such holders would have been entitled to had they converted all of their Series A-2 preferred shares to Class B common shares.

WHIPLASH, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

            On November 8, 1999, the Company entered into a Series A Preferred Stock Purchase Agreement (the Agreement) with a third party. Under the terms of the Agreement, the Company issued 3,726,708 shares of Series A-2 preferred stock.

 

           During the period from January 1, 1999 through November 8, 1999, the Company issued $800,000 of additional unsecured promissory notes to certain stockholders. These promissory notes bear interest at a rate of 5.58%. The total principal balance outstanding of all unsecured promissory notes at November 8, 1999 was $1,650,000. In conjunction with the Agreement, the $1,650,000 of principal outstanding on the notes plus accrued interest was converted into 1,024,845 shares of Series A-1 preferred stock. The Series A-1 preferred stock is ultimately convertible into shares of common stock of the Company in accordance with the terms of the Agreement.

 

           On November 8, 1999, the Company increased the number of shares of Class A common stock reserved for issuance under its stock option plan to 2,290,000.

 

INDEPENDENT AUDITORS’ REPORT

 

The Board of Directors

Xippix, Inc.:

 

           We have audited the accompanying balance sheet of Xippix, Inc. as of December 31, 1999, and the related statements of operations, stockholders’ deficit, and cash flows for the period from April 14, 1999 (inception) through December 31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

           We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

           In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xippix, Inc. as of December 31, 1999, and the results of its operations and its cash flows for the period from April 14, 1999 (inception) through December 31, 1999, in conformity with generally accepted accounting principles.

 

/S /    KPMG LLP

 

Chicago, Illinois

March 14, 2000

 

XIPPIX, INC.

 

BALANCE SHEET

 

December 31, 1999

 

Assets

 

Current assets:
Cash		$  175,327
Accounts receivable		60,804
Security deposits		23,505
Prepaid expenses and other current assets		27,566
Total current assets		287,202
Property and equipment, net		261,747
Total assets		$  548,949
Liabilities and Stockholders’ Deficit
Current liabilities:
Capital lease obligation		$  153,274
Accounts payable		69,321
Accrued expenses		149,503
Due to shareholders		68,444
Deferred revenue		766,611
Total current liabilities		1,207,153
Stockholders’ deficit:
Common stock, no par value. 100,000,000 shares authorized; 55,277,778 shares issued and                 outstanding		1,106
Due from shareholders		(1,050	)
Accumulated deficit		(658,260	)
Total stockholders’ deficit		(658,204	)
Total liabilities and stockholders’ deficit		$  548,949

 

See accompanying notes to financial statements.

 

XIPPIX, INC.

 

STATEMENT OF OPERATIONS

 

Period from April 14, 1999 (inception) through December 31, 1999

 

Revenues		$1,726,250
Cost of revenues		953,600
Gross profit		772,650
Operating expenses:
Product development		104,275
Selling, general and administrative		1,377,062
Total operating expenses		1,481,337
Loss from operations		(708,687	)
Other income:
Interest income		2,927
Other		47,500
Total other income		50,427
Net loss		$  (658,260	)

 

See accompanying notes to financial statements.

 

XIPPIX, INC.

 

STATEMENT OF STOCKHOLDERS’ DEFICIT

 

Period from April 14, 1999 (inception) through December 31, 1999

 

		Common stock				Due from shareholders			Accumulated deficit			Total stockholders’ deficit
		Shares		Amount
Balance at April 14, 1999 (inception)		—		$  —		—			—			—
Issuance of common stock		55,277,778		1,106		(1,050	)		—			56
Net loss		—		—		—			(658,260	)		(658,260	)
Balance at December 31, 1999		55,277,778		$1,106		(1,050	)		(658,260	)		(658,204	)

 

See accompanying notes to financial statements.

 

XIPPIX, INC.

 

STATEMENT OF CASH FLOWS

 

Period from April 14, 1999 (inception) through December 31, 1999

 

Cash flows from operating activities:
Net loss		$(658,260	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		92,566
Changes in assets and liabilities:
Accounts receivable		(60,804	)
Security deposits		(23,505	)
Prepaid expenses and other current assets		(27,566	)
Accounts payable		69,321
Accrued expenses		149,503
Due to shareholders		68,444
Deferred revenue		766,611
Net cash provided by operating activities		376,310
Cash flows from investing activities—
Purchases of property and equipment		(51,043	)
Net cash used in investing activities		(51,043	)
Cash flows from financing activities:
Payment of obligation under capital lease		(149,996	)
Proceeds from issuance of common stock		56
Net cash used in financing activities		(149,940	)
Net increase in cash		175,327
Cash at beginning of period		—
Cash at end of period		$  175,327
Supplemental disclosure of non cash investing and financing activities:
Equipment acquired through capital lease		$  303,270
Issuance of common stock for amounts due from shareholders		$      1,050

 

See accompanying notes to financial statements.

 

XIPPIX, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

(1)    Organization and Business

 

           Xippix, Inc. (the Company) was incorporated as a C-corporation in the state of California on April 14, 1999. The Company specializes in the design and development of Internet imaging and services for e-commerce websites. The Company’s product under development is intended to enable users to view images on Internet websites with greater resolution.

 

           The Company has adopted a March 31 fiscal year end.

 

(2)    Summary of Significant Accounting Policies and Practices

 

(a)  Property and Equipment

 

           Property and equipment are carried at cost and depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to five years.

 

           Property and equipment under capital leases are stated at the fair value of the leased item at the inception of the lease. Property and equipment held under capital leases are amortized using the straight-line method over the estimated useful life of the related asset.

 

(b)  Deferred Revenue

 

           Deferred revenue consists of $266,667 in billings for services that have not yet been rendered and a $499,944 prepayment by a third party for future purchases of the Company’s software products. The $266,667 of deferred revenue for services that have not yet been rendered will be recognized as revenue as the services are performed. The $499,944 prepayment from a third party will be recognized as revenue as the third party purchases software products from the Company at a discount of 40% from the Company’s standard list prices then in effect. The third party may purchase software products for sale to end users or for its own use and is not required to make any cash payments to the Company for purchases of software products until after the entire $499,944 prepayment has been utilized.

 

(c)  Revenue Recognition

 

           The Company’s revenues since inception consist primarily of contracted software development services provided to third parties. Service revenues are recognized as services are rendered. Revenue from product and software sales are recognized upon product delivery and customer acceptance, when all significant contractual obligations are satisfied and the collection of the resulting receivables is reasonably assured. Revenue from royalties is recognized based upon sales of the Company’s products at agreed upon royalty rates.

 

(d)  Product Development

 

           Software development costs are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs associated with the planning and designing phase of software development, including coding and testing activities necessary to establish technological feasibility, are classified as product development and expensed as incurred. Once technological feasibility has been established, additional costs incurred in development, including coding, testing, and documentation writing, are capitalized until the software’s general release. Capitalized costs are evaluated for net realizability by estimating the future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including costs of performing maintenance and customer support required to satisfy the Company’s responsibility set forth at the time of sale. During the period from April 14, 1999 (inception) through December 31, 1999 all development costs were expensed due to the uncertainty of realizability.

 

(e)  Income Taxes

 

           Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

(f)  Stock Option Plan

 

           The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the fair value of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123.

 

(g)  Impairment of Long-lived Assets

 

           In accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of, the Company records impairment of losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.

 

(h)  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 these estimates.

 

(3)    Property and Equipment

 

           Property and equipment, at cost, less accumulated depreciation and amortization, are summarized as follows at December 31, 1999:

 

Equipment under capital lease		$303,270
Equipment and purchased software		51,043
		354,313
Less accumulated depreciation and amortization		(92,566	)
		$261,747

 

(4)    Leases

 

           The Company is obligated under a capital lease for equipment that expires on May 30, 2000. At December 31, 1999, the gross amount of equipment and related accumulated amortization recorded under this lease was $303,270 and $88,452, respectively.

 

           The Company also has several operating leases, primarily for office facilities and storage, that expire in 2000. Rental expense, including common area maintenance expense, was $183,739 for the period from April 14, 1999 (inception) through December 31, 1999.

 

           Future minimum lease payments under noncancelable operating leases as of December 31, 1999 are $228,629 for 2000. Future minimum capital lease payments as of December 31, 1999 are $153,274 for 2000.

 

XIPPIX, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

(5)    Income Taxes

 

           The reconciliation of income tax expense (benefit) computed using the Federal statutory rate of 34% to the Company’s income tax expense (benefit) is as follows:

 

Expected income tax benefit		$(223,808	)
State income tax benefit, net of Federal taxes		(39,496	)
Other		1,461
Effect of change in valuation allowance		261,843
		$         —

 

           The tax effects of temporary differences that give rise to significant portions of deferred taxes at December 31, 1999 is presented below.

 

Deferred tax assets:
Property and equipment		$    27,855
Net operating loss carryforward		233,988
Total gross deferred tax assets		261,843
Valuation allowance		(261,843	)
Net deferred tax asset		$         —

 

           The Company incurred a net operating loss from April 14, 1999 (inception) through December 31, 1999, which can potentially be carried forward twenty years and will expire in 2020.

 

           The Company has recorded a full valuation allowance against its deferred tax assets since management believes that, after considering all the available objective evidence, it is more likely than not that these assets will not be realized.

 

(6)    Capital Stock

 

           In May 1999, the Company issued an aggregate of 42,500,000 shares of common stock to the Company’s founders at a price of $0.00002 per share.

 

           In July 1999, the Company received $500,000 from a third party representing a $499,944 prepayment toward future purchases of the Company’s software products and $56 for the purchase of 2,777,778 shares of common stock of the Company. The Company has recorded the $56 fair value of the shares of common stock as equity and the $499,944 prepayment as deferred revenue in the accompanying financial statements. The deferred revenue will be recognized as the third party purchases software products from the Company for sale to end users or for its own use, which is anticipated to occur over the next 12 to 24 months.

 

           In October 1999, the Company issued 10,000,000 shares of common stock to an officer of the Company at a price of $0.00002 per share.

 

(7)    Stock Option Plan

 

           In 1999, the Company adopted a stock option plan (the Plan) pursuant to which the Company’s Board of Directors may grant stock options to employees. The Plan authorizes grants of options to purchase up to 15,000,000 shares of authorized but unissued common stock. Stock options granted can have a maximum term of 10 years and a maximum vesting period of 20% per year over the five-year period commencing on the date of grant. Terms for specific stock option grants are to be determined by the Board of Directors within the above guidelines.

 

           At December 31, 1999, there were 10,557,500 additional shares available for grant under the Plan. The per share weighted-average minimum value of stock options granted during 1999 was de minimus on the date of grant using the Black Scholes option-pricing model (excluding a volatility assumption) with the following weighted-average assumptions: 1999—expected dividend yield 0%, risk-free interest rate of 5.72%, and an expected life of 4.28 years.

 

           The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized in the financial statements for its stock options grants.

 

           Stock option activity during the period indicated is as follows:

 

		Number of shares		Weighted-average exercise price
Outstanding at April 14, 1999 (inception)		—		$    —
Granted		4,442,500		.00002
Outstanding at December 31, 1999		4,442,500		.00002

 

           At December 31, 1999, all options outstanding are exercisable. Shares received through the exercise of options are subject to repurchase at the option exercise price. The repurchase right lapses on shares acquired through option exercise over a period of up to 48 months. All options have an exercise price of $.00002 and a weighted-average remaining life of 9.5 years.

 

(8)    Employee Benefits

 

           The Company has a 401(k) retirement plan covering substantially all of its employees. The participants may contribute up to 15% of their salary, subject to Federal tax limitations. The Company matches 50% of the employees’ contribution up to 6% of the employee’s contribution rate. During 1999, the Company contributed $33,765 in matching contributions.

 

(9)    Related-party Transactions

 

           In the ordinary course of its business, the Company conducted certain transactions with one of its shareholders, principally software development services, which resulted in revenues of $41,250 for the period from April 14, 1999 (inception) through December 31, 1999.

 

           At December 31, 1999, the Company accrued $68,444 related to certain significant shareholders of the Company for employee services performed for the period from October 15, 1999 through December 31, 1999.

 

(10)    Significant Customers

 

           During the period from April 14, 1999 (inception) through December 31, 1999, two customers accounted for 45% and 41% of the Company’s revenues. At December 31, 1999, one customer accounted for 99% of the Company’s accounts receivable.

XIPPIX, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(11)    Subsequent Events

 

(a)  Debt Transactions

 

           The Company entered into a short term promissory note in the amount of $400,000 with a third party on January 7, 2000. The principal amount and all the accrued but unpaid interest were due on February 8, 2000. The Company satisfied its principal and interest obligation under the promissory note on February 4, 2000 through the issuance of stock as described below.

 

(b)  Equity Transactions

 

           Effective February 3, 2000, the Company amended and restated its articles of incorporation to authorize 27,000,000 shares of $0.001 par value Series A Preferred Stock and 200,000,000 shares of $0.00001 par value Common Stock.

 

           Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, each shareholder of Series A Preferred Shares is entitled to receive a cash distribution prior to any distribution to a shareholder of Common Stock. The cash distribution is equal to the greater of (i) $0.3343925 per Series A Preferred Share (Series A Purchase Price or Series A Conversion Price) plus all accrued and unpaid dividends and (ii) the amount such shareholder would receive if all shareholders of Series A Preferred Shares had converted their shares into Common Stock immediately prior to such liquidation, dissolution or winding up (the Series A Liquidation Value). The remaining assets available for distribution are distributed to the shareholders of Common Stock ratably in proportion to the number of shares of Common Stock held.

 

           At any time, a holder of Series A Preferred Shares may convert all or any portion of the Series A preferred shares held by such holder into the number of shares of Common Stock computed by multiplying the number of Series A Preferred Shares to be converted by the Series A Liquidation Value and dividing the resulting product by the Series A Conversion Price then in effect. No accrued and unpaid dividends may be included in the Series A Liquidation Value or converted into Common Stock in conjunction with the conversion of the Series A Preferred Shares.

 

           The Series A Conversion Prices will be adjusted for events such as the issuance of rights, options, and convertible securities, dilutive events and stock splits. Each share of Series A Preferred Shares accrues dividends on a daily basis from the date of issuance at a rate of 8% per annum of the Series A Purchase Price. The board of directors may declare a dividend on the Common Stock only when all accrued and unpaid dividends on the Series A Preferred Shares have been paid. Then, in the event any dividend or other distribution payable in cash, stock or other property is declared on the Common Stock, each holder of Series A Preferred Shares on the record date for such dividend or distribution shall be entitled to receive such dividend or distribution such holder would have received if on such record date such holder was the holder of the number of shares of Common Stock into which such Series A Preferred Shares then held by such holder are convertible.

 

           If an underwritten public offering of shares of Common Stock is effected in which (a) the aggregate price paid by the public for the shares is at least $25,000,000 and (b) the price per share paid by the public for such shares is at least 300% of the Series A Conversion Price in effect immediately prior to such offering, then all of the outstanding Series A Preferred Shares shall be automatically converted into shares of Common Stock upon the closing of the public offering.

 

           The Series A Preferred Shares have certain redemption rights. If a fundamental change or change in ownership occurs, the holder or holders of at least two-thirds of the Series A Preferred Shares then outstanding may require the Company to redeem all the Series A Preferred Shares then outstanding at the Series A Redemption Price. The Series A Redemption Price equals the Series A Liquidation Value as of the redemption date.

 

           The holder or holders of two-thirds of the outstanding Series A Preferred Shares may elect, on the fifth anniversary of issuance, to require the Company to redeem all Series A Preferred Shares then outstanding at the Series A Redemption Price.

 

           Holders of Common Stock and Series A Preferred Stock vote together as a single class on all matters submitted to a vote before the stockholders of the Company. Holders of Common Stock are entitled one vote per share. Holders of Series A Preferred Stock are entitled to the number of votes of Common Shares such holders would have been entitled to had they converted all of their Series A Preferred Shares to Common Shares.

 

           On February 4, 2000, the Company entered into a Series A Preferred Stock Purchase Agreement (the Agreement) with a third party. Under the terms of the Agreement, the Company issued 26,914,481 shares of Series A preferred stock for proceeds of $9,000,000. The proceeds from the transaction include cash of $4,598,556, satisfaction of the principal and interest due under the promissory note issued on January 7, 2000 and a promissory note in the amount of $4,000,000 due May 1, 2000 and bearing interest at the rate of 8% per annum.

 

           In conjunction with the agreement, the Company has reserved 55,000,000 shares of Common Stock for issuance upon conversion of the Series A Preferred Shares.

 

(c) Lease Agreement

 

           On February 15, 2000, the Company entered into a facility operating lease that commences on March 1, 2000 and extends through November 30, 2003. The Company’s future minimum lease payments under the lease are as follows:

 

2000		$    254,079
2001		316,329
2002		330,564
2003		316,443
Total		$1,217,415

[Inside Back Cover]

 

The triple helix graphic represents the interwoven relationships of divine interVentures’ associated companies

[A triple helix type design running the length of the right hand side of the inside back cover with dots indicating each of the associated companies and lines to the associated company names below]   Aluminium.com BeautyJungle.com bid4real.com BidBuyBuild Brandango Buzz divine CapacityWeb.com closerlook Commerx comScore dotspot Farms.com eFiltration.com Emicom Group Entrepower eReliable Commerce eXperience divine FiNetrics Host divine i-Fullfillment iGive.com iSalvage.com i-Street Justice divine Knowledge divine LAUNCHworks LiveOnTheNet.com Martin Partners Mercantec mindwrap The National Transportation Exchange Neoforma.com NetUnlimited OfficePlanIt.com Oilspot.com OpinionWare.com Outtask.com Panthera Productions Parlano Perceptual Robotics PocketCard salespring Sequoia sho research Talent divine TV House ViaChange.com Web Design Group Westbound Consulting Whiplash Xippix Xqsite

 

[OUTSIDE BACK COVER]

           

[LOGO]

 

PART II

 

INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

 

           Set forth below is an estimate of the approximate amount of fees and expenses, other than underwriting commissions and discounts, payable by the Registrant in connection with the issuance and distribution of our common stock pursuant to the Prospectus contained in this Registration Statement. The Registrant will pay all of these expenses.

 

		Approximate Amount
SEC registration fee		$  121,440
NASD filing fee		30,500
Nasdaq National Market listing fee		90,000
Accountants’ fees and expenses		3,000,000
Legal fees and expenses		1,000,000
Transfer agent and registrar fees and expenses		20,000
Printing and engraving		2,200,000
Miscellaneous expenses		238,060
Total		$6,700,000

 

           All expenses other than the SEC registration fee, NASD filing fee and Nasdaq National Market listing fee are estimated.

 

Item 14. Indemnification of Directors and Officers

 

           The Registrant’s certificate of incorporation provides that the Registrant shall indemnify its directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify its officers and employees to such extent, except that the Registrant shall not be obligated to indemnify any such person (1) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, without the Registrant’s prior written consent, or (2) for any amounts paid in settlement of an action indemnified against by the Registrant without the prior written consent of the Registrant. The Registrant has entered into indemnity agreements with each of its directors. These agreements may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors’ liability insurance.

 

           In addition, the Registrant’s certificate of incorporation provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to the Registrant or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (4) for any transaction from which the director derives an improper personal benefit.

 

           Reference is made to Section 145 of the General Corporation Law of the State of Delaware which provides for indemnification of directors and officers in certain circumstances.

 

           The Registrant has obtained directors’ and officers’ liability insurance.

 

            Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Registrant within the meaning of the Securities Act of 1933.

 

Item 15. Recent Sales of Unregistered Securities

 

           The following information does not reflect (1) a one-for-six reverse stock split of the Registrant’s class A common stock and class B convertible common stock or (2) the conversion of the Registrant’s (a) series A-1, series B-1, series C, series D, series D-1, series E and series F preferred stock and class B convertible common stock into class A common stock, each to be effected upon consummation of this offering.

 

           (1) In June 1999, the Registrant issued 1,000 shares of common stock to Mr. Filipowski for cash in the amount of $10. The Registrant sold these shares in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act (“Section 4(2)”), as a transaction not involving a public offering. In August 1999, the Registrant converted these shares into 10,000 shares of class B convertible common stock.

 

           (2) From August 25 until October 19, 1999, the Registrant issued (a) an aggregate of 20,700,000 shares of class A common stock to 77 officers, directors and employees (including persons who had accepted offers of employment) (collectively, “Employees”) for cash in the aggregate amount of $20,700 and (b) an aggregate of 12,250,000 shares of class B convertible common stock to Messrs. Filipowski, Cullinane, Humenansky, Freedman, Slowey and Tatro, for cash in the aggregate amount of $12,250. The aggregate proceeds to the Registrant from these sales were $32,950. The Registrant sold these shares pursuant to its 1999 Stock Purchase Plan (the “Stock Purchase Plan”) in transactions exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under Section 3(b) of the Securities Act (“Rule 701”).

 

           (3) From September 15 until September 30, 1999, the Registrant issued (a) an aggregate of 9,236,600 shares of series A-1 convertible preferred stock to 50 Employees and to a family member of Mr. Filipowski, for cash in the aggregate amount of $2,309,150 and (b) an aggregate of 37,350,000 shares of series A-2 preferred stock, par value $.001 per share, to Messrs. Filipowski, Cullinane, Humenansky, Slowey and Tatro and to a partnership owned by Mr. Freedman and the Registrant’s assistant general counsel and controlled by Mr. Freedman, for cash in the aggregate amount of $9,437,500. The aggregate proceeds to the Registrant from these sales were $11,721,650. Except as set forth in the following sentence, the Registrant sold these shares pursuant to its Stock Purchase Plan in transactions exempt from registration under the Securities Act in reliance upon Section 4(2), as transactions not involving a public offering. In the case of the sales to the family member of Mr. Filipowski and the partnership controlled by Mr. Freedman, the Registrant sold the shares in transactions exempt from registration under the Securities Act in reliance upon Rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act (“Rule 506”), as transactions not involving a public offering. Both the family member of Mr. Filipowski and the partnership controlled by Mr. Freedman represented in writing to the Registrant that they were “accredited investors,” as defined in Rule 501(a) of Regulation D under the Securities Act (“accredited investors”).

 

           (4) From September 28 until October 7, 1999, the Registrant issued (a) an aggregate of 2,712,000 shares of series B-1 convertible preferred stock to 35 Employees for cash in the aggregate amount of $1,356,000 and (b) 20,100,000 shares of series B-2 convertible preferred stock to Messrs. Filipowski and Slowey for cash in the aggregate amount of $10,050,000. The aggregate proceeds to the Registrant from these sales was $11,381,000. The Registrant sold these shares pursuant to its Stock Purchase Plan in transactions exempt from registration under the Securities Act in reliance upon Section 4(2), as transactions not involving a public offering.

 

           (5) From September 30 through December 14, 1999, the Registrant issued an aggregate of 190,062,125 shares of series C convertible preferred stock to 474 investors, for cash in the aggregate amount of $189,662,125 and legal services having a value of $400,000. The aggregate proceeds to the Registrant from these sales were $188,820,903. Of the shares of series C convertible preferred stock issued by the Registrant, an aggregate of 43,616,000 were sold to 27 executive officers and directors (including, for each such person, parties related to that person) and 400,000 were issued to Katten Muchin Zavis, legal counsel to the Registrant, in exchange for legal services having a value of $400,000. The Registrant sold the shares of series C convertible preferred stock in transactions exempt from registration under the Securities Act in reliance upon Rule 506, as transactions not involving a public offering. Each of the purchasers of series C preferred stock represented in writing to the Registrant that such purchaser was an accredited investor.

 

           (6) From October 1999 through April 30, 2000, the Registrant granted options (the “701 Options”) to purchase an aggregate of 31,349,456 shares of its class A common stock to 980 Employees (including one non-employee director) and 93 consultants. From January 1, 2000 through April 30, 2000, 835 of the Employees exercised 701 Options and purchased an aggregate of 27,751,720 shares of class A common stock for consideration (cash and notes) in the aggregate amount of $27,478,353. The Registrant granted the 701 Options and sold the underlying shares pursuant to its 1999 Stock Incentive Plan (the “Stock Incentive Plan”) in transactions exempt from registration under the Securities Act in reliance upon Rule 701.

 

           (7) From October 1999 through April 30, 2000, the Registrant granted options (the “Accredited Investor Options”) to purchase an aggregate of 10,962,500 shares of its class A common stock to 44 executive officers and directors of the Registrant. From December 21, 1999 through April 30, 2000, 35 of these executive officers and directors exercised Accredited Investor Options and purchased an aggregate of 8,527,440 shares of class A common stock for consideration (cash and notes) in the aggregate amount of $6,645,580. The Registrant granted the Accredited Investor Options and sold the underlying shares pursuant to its Stock Incentive Plan in transactions exempt from registration under the Securities Act in reliance upon Section 4(2), as transactions not involving a public offering. Each of these Employees represented in writing to the Registrant that such person was an accredited investor.

 

           (8) On December 7, 1999, the Registrant agreed to issue, and on January 19, 2000 issued, an aggregate of 197,000,000 shares of series D convertible preferred stock and series D-1 convertible preferred stock to Frontenac VII Limited Partnership, Frontenac Masters VII Limited, First Chicago Investment Corporation, Cross Creek Partners X, LLC, Mesirow Capital Partners VII, Sumitomo Corporation, Sumitomo Corporation of America, Dell USA L.P., CBW/SK divine Investments and Microsoft Corporation, for cash in the aggregate amount of $197,000,000. The aggregate net proceeds to the Registrant from these sales were $196,900,000. The Registrant sold these shares in a transaction exempt from registration under the Securities Act in reliance upon Rule 506, as a transaction not involving a public offering. Each of the purchasers of series D preferred stock represented in writing to the Registrant that such purchaser was an accredited investor.

 

           (9) On January 17, the Registrant issued an aggregate of 700,000 shares of class A common stock (the “701 Stock”) to two Employees for cash in the aggregate amount of $525,000. The Registrant sold the 701 Stock pursuant to the Stock Incentive Plan in transactions exempt from registration under the Securities Act in reliance upon Rule 701.

 

           (10) On February 1, 2000, the Registrant issued an aggregate of 2,000,000 shares of its series F convertible preferred stock, with a deemed value for financial statement purposes at $4.80 per share, to two stockholders of closerlook, inc. in exchange for preferred stock of closerlook, inc. The Registrant issued these shares in reliance upon Rule 506, as a transaction not involving a public offering. Each of these stockholders represented in writing to the Registrant that such purchaser was an accredited investor.

 

           (11) On February 3, 2000, the Registrant agreed to issue, and on March 14, 2000, issued 18,284,327 shares of series E convertible preferred stock to CMGI, Inc. (“CMGI”) for cash in the aggregate amount of $18,284,327. The aggregate net proceeds to the Registrant from this sale were $18,234,327. The Registrant has sold these shares in a transaction exempt from registration under the Securities Act in reliance upon Rule 506, as a transaction not involving a public offering. CMGI represented in writing to the Registrant that it was an accredited investor and a “qualified institutional buyer,” as defined in Rule 144A promulgated under Section 4(1) of the Securities Act (“QIB”).

 

            (12) On February 11, 2000, the Registrant agreed to issue, and on March 14, 2000, the Registrant issued, 10,000,000 shares of its series F convertible preferred stock, with a deemed value for financial statement purposes at $4.80 per share, to UBS AG, Chicago Branch (“UBS”) in exchange for preferred stock of Parlano, Inc. (f/k/a divine interChange, inc.). The Registrant issued these shares in reliance upon Rule 506, as a transaction not involving a public offering. UBS represented in writing to the Registrant that it was an accredited investor and a QIB.

 

           (13) On February 11, 2000, the Registrant issued 1,000,000 shares of its series F convertible preferred stock, with a deemed value for financial statement purposes at $4.80 per share, to Perceptual Robotics, Inc. (“PRI”) in exchange for preferred stock of PRI. The Registrant issued these shares in reliance upon Rule 506, as a transaction not involving a public offering. PRI represented in writing to the Registrant that it was an accredited investor.

 

           No underwriters were involved in any of the transactions described above. Each recipient of securities in each of the transactions described above represented the recipient’s intention to acquire the securities for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof.

 

Item 16. Exhibits and Financial Statement Schedules

 

           (a) Exhibits.

1		Form of Underwriting Agreement.
3.1†		Form of Third Amended and Restated Certificate of Incorporation of the Registrant.
3.2*		Amended and Restated By-laws of the Registrant.
4.1*		Form of specimen stock certificate representing common stock.
5		Opinion of Katten Muchin Zavis as to the legality of the securities being registered (including consent).
10.1*		divine interVentures, inc. 1999 Stock Incentive Plan.
10.2*		Form of Option Agreement under the divine interVentures, inc. 1999 Stock Incentive Plan.
10.3*		Form of Indemnification Agreement for Directors and Executive Officers.
10.4*		Agreement of Sublease between Budget Rent A Car Corporation and divine interVentures, inc. dated as of August 25, 1999.
10.5*		Letter Agreement, dated July 1, 1999, among divine interVentures, inc., Blackhawk LLC and Andrew J. Filipowski, as amended on February 28, 2000.
10.6*		Purchase Agreement, dated as of December 7, 1999, between divine interVentures, inc. and the purchasers named therein.
10.7*		Series D Stockholders Agreement, dated as of December 7, 1999, among divine interVentures, inc., the Management Stockholders (as defined therein) and the Purchasers (as defined therein).
10.8*		Founders Shares Registration Rights Agreement, dated as of August 18, 1999, among divine interVentures, inc. and the Purchasers (as defined therein).
10.9*		Series A Registration Rights Agreement, dated as of September 3, 1999, among divine interVentures, inc. and the Purchasers (as defined therein).
10.10*		Series B Registration Rights Agreement, dated as of September 17, 1999, among divine interVentures, inc. and the Purchasers (as defined therein).
10.11*		Series C Registration Rights Agreement, dated as of September 30, 1999, among divine interVentures, inc. and the Purchasers (as defined therein).
10.12*		Series D Registration Rights Agreement, dated as of December 7, 1999, among divine interVentures, inc. and the Purchasers (as defined therein).

10.13*		Consulting and Non-Compete Agreement, dated as of March 29, 1999, between PLATINUM technology International, inc. and Andrew J. Filipowski.
10.14*		Consulting and Non-Compete Agreement, dated as of March 29, 1999, between PLATINUM technology International, inc. and Michael P. Cullinane.
10.15*		Consulting and Non-Compete Agreement, dated as of March 29, 1999 between PLATINUM technology International, inc. and Paul L. Humenansky.
10.16*		Consulting and Non-Compete Agreement, dated as of June 1, 1999, between Computer Associates, Inc. and Larry S. Freedman.
10.17*		Business Opportunities Agreement, dated as of December 7, 1999, by and among divine interVentures, inc. and Dell USA L.P., Microsoft Corporation, CBW/SK divine Investments, Frontenac VII Limited Partnership, Frontenac Masters VII Limited Partnership, First Chicago Investment Corporation, Cross Creek X, LLC and Mesirow Capital Partners VII.
10.18		Skyscraper Ventures, L.P. Amended and Restated Limited Partnership Agreement, dated as of May 5, 2000.
10.19*		Series E Registration Rights Agreement, dated as of February 3, 2000.
10.20*		Purchase Agreement, dated February 3, 2000, between divine interVentures, inc. and CMGI, Inc.
10.21*		Alliance Agreement, dated as of January 28, 2000, between divine interVentures, inc. and Microsoft Corporation.
10.22*		Lease, dated January 7, 2000, by and between Habitat-Kahny, LLC and dotspot, inc.
10.23*		Consulting Agreement, dated as of March 9, 2000 by and between divine interVentures, inc. and Michael J. Jordan.
10.24		Memorandum of Understanding, dated as of March 29, 2000, between divine interVentures, inc. and Aon Corporation.
10.25*		Amendment No. 1 to Alliance Agreement, dated as of March 29, 2000, by and between Microsoft Corporation and divine interVentures, inc.
10.26*		Term Sheet, dated March 29, 2000, by and between Level 3 Communications, LLC, divine interVentures, inc. and Host divine, inc.
10.27*		Series E Stockholders Agreement, dated as of February 3, 2000.
10.28*		Agreement of Limited Partnership for Platinum Venture Partners I L.P., dated as of July 1992, by and among Platinum Group Ventures Inc. and the Limited Partners (as defined therein), and amendment thereto effective as of August 4, 1999.
10.29*		Agreement of Limited Partnership for Platinum Venture Partners II L.P., dated as of September 1994, by and among Platinum Venture Partners, Inc. and the Limited Partners (as defined therein), and amendment thereto effective as of August 4, 1999.
10.30		Letter Agreement, dated May 26, 2000, among divine interVentures, inc., Blackhawk LLC and Andrew J. Filipowski.
21		Subsidiaries of the Registrant.
23.1		Consent of KPMG LLP with respect to consolidated financial statements of divine interVentures, inc.
23.2		Consent of KPMG LLP with respect to financial statements of mindwrap, inc.
23.3		Consent of KPMG LLP with respect to financial statements of BeautyJungle.com, Inc.
23.4		Consent of KPMG LLP with respect to financial statements of bid4real.com, inc.

 

23.5		Consent of KPMG LLP with respect to financial statements of Bid4Real.com LLC
23.6		Consent of Grant Thornton LLP with respect to financial statements of BidBuyBuild, Inc.
23.7		Consent of KPMG LLP with respect to consolidated financial statements of closerlook, inc.
23.8		Consent of KPMG LLP with respect to financial statements of eFiltration, Inc.
23.9		Consent of Arthur Andersen LLP with respect to financial statements of i-Fulfillment, Inc.
23.10		Consent of KPMG LLP with respect to financial statements of iGive.com, inc.
23.11		Consent of KPMG LLP with respect to financial statements of iSalvage.com, Inc.
23.12		Consent of KPMG LLP with respect to financial statements of i-Street, Inc.
23.13		Consent of Arthur Andersen LLP with respect to financial statements of LiveOnTheNet.com, Inc.
23.14		Consent of KPMG LLP with respect to financial statements of Martin Partners, L.L.C.
23.15		Consent of KPMG LLP with respect to financial statements of Mercantec, Inc.
23.16		Consent of KPMG LLP with respect to financial statements of The Oilspot.com LLC.
23.17		Consent of KPMG LLP with respect to financial statements of OpinionWare.com, Inc.
23.18		Consent of KPMG LLP with respect to financial statements of Outtask.com Inc.
23.19		Consent of KPMG LLP with respect to financial statements of Perceptual Robotics, Inc.
23.20		Consent of KPMG LLP with respect to financial statements of PocketCard Inc.
23.21		Consent of KPMG LLP with respect to financial statements of ViaChange.com, Inc.
23.22		Consent of KPMG LLP with respect to financial statements of Web Design Group, Inc.
23.23		Consent of KPMG LLP with respect to consolidated financial statements of Westbound Consulting, Inc.
23.24		Consent of KPMG LLP with respect to financial statements of Whiplash, Inc.
23.25		Consent of KPMG LLP with respect to financial statements of Xippix, Inc.
23.26		Consent of Katten Muchin Zavis (contained in its opinion to be filed as Exhibit 5 hereto).
24.1*		Power of Attorney (previously included on signature page hereto).
24.2*		Power of Attorney of David D. Hiller
24.3*		Power of Attorney of Thomas J. Meredith
24.4*		Power of Attorney of Joseph D. Gutman
24.5*		Power of Attorney of Michael J. Jordan
24.6*		Power of Attorney of Peter C. B. Bynoe
24.7*		Power of Attorney of Sanjay Kumar
24.8*		Power of Attorney of David M. Tolmie
24.9*		Consent of Harold F. Enright to be named as a nominee to the Board of Directors
27		Financial Data Schedule

---

 

†	To be filed by amendment

 

*	Previously filed

 

           (b) Financial Statement Schedules

 

No financial statement schedules are required to be filed with this Registration Statement.

 

Item 17. Undertakings

 

           The Registrant hereby undertakes:

 

           (1) To provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.

 

           (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

           (3) For purposes of determining any liability under the Securities Act, (a) the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective and (b) each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

SIGNATURES

 

           Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on the 5th day of June, 2000.

 

divine interVentures, inc.

 

/S /    MICHAEL P. CULLINANE

By:

Michael P. Cullinane

Executive Vice President, Chief Financial Officer and Treasurer

 

           Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on June 5, 2000.

 

Signature		Title
*                                                                                                                                  Andrew J. Filipowski		Chairman of the Board and Chief Executive Officer (principal executive officer)
/S /    MICHAEL P. CULLINANE                                                                                                                                 Michael P. Cullinane		Executive Vice President, Chief Financial Officer, Treasurer (principal financial and accounting officer) and Director
*                                                                                                                                  Scott Hartkopf		President and Director
*                                                                                                                                  Paul L. Humenansky		Executive Vice President and Director
*                                                                                                                                  Robert Bernard		Director
*                                                                                                                                  Michael J. Birck		Director
*                                                                                                                                   Peter C.B. Bynoe		Director
*                                                                                                                                  James E. Cowie		Director
*                                                                                                                                  Andrea Cunningham		Director
*                                                                                                                                  Thomas Danis		Director
*                                                                                                                                  Michael H. Forster		Director

Signature		Title
*                                                                                                                                  Arthur P. Frigo		Director
*                                                                                                                                  Gian Fulgoni		Director
*                                                                                                                                  George Garrick		Director
*                                                                                                                                  Craig D. Goldman		Director
*                                                                                                                                  Joseph D. Gutman		Director
*                                                                                                                                  Arthur W. Hahn		Director
*                                                                                                                                  David D. Hiller		Director
*                                                                                                                                  Jeffrey D. Jacobs		Director
*                                                                                                                                  Gregory K. Jones		Director
*                                                                                                                                  Michael J. Jordan		Director
*                                                                                                                                  Steven Neil Kaplan		Director
*                                                                                                                                  Richard P. Kiphart		Director
*                                                                                                                               Sanjay Kumar		Director
*                                                                                                                                  Ronald D. Lachman		Director
*                                                                                                                                  Eric Larson		Director
*                                                                                                                                  William Lederer		Director
*                                                                                                                                  Michael Leitner		Director

 

Signature		Title
*                                                                                                                                  Lawrence F. Levy		Director
*                                                                                                                                  Thomas J. Meredith		Director
*                                                                                                                                  Teresa L. Pahl		Director
*                                                                                                                                  John Rau		Director
*                                                                                                                                  Bruce Rauner		Director
*                                                                                                                                  Andre Rice		Director
*                                                                                                                                  Mohanbir S. Sawhney		Director
*                                                                                                                                  Alex C. Smith		Director
*                                                                                                                                  Timothy Stojka		Director
*                                                                                                                                  Aleksander Szlam		Director
*                                                                                                                                  Mark Tebbe		Director
*                                                                                                                                  David M. Tolmie		Director
*                                                                                                                                  James C. Tyree		Director
*                                                                                                                                  William Wrigley, Jr.		Director
*                                                                                                                                  Robert J. Zollars		Director

 

/S /    MICHAEL P. CULLINANE

By: 

---

Michael P. Cullinane

Attorney-in-Fact