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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-25269
VERTICALNET, INC.
PENNSYLVANIA 23-281834
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(STATE OF INCORPORATION) (I.R.S. ID)
700 DRESHER ROAD, HORSHAM, PENNSYLVANIA 19044
(215) 328-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 16, 2001 was approximately $182,891,000.
The number of shares outstanding of the registrant's common stock as of
March 16, 2001 was 97,421,062.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set
forth herein, is incorporated by reference from the registrant's definitive
proxy statement relating to the annual meeting of shareholders to be held in May
2001, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this report relates.
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VERTICALNET, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
INDEX
PAGE
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Cautionary Statement Regarding Forward-Looking Statements.................. ii
Informational Note Regarding Prior Stock Splits............................ ii
PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 19
ITEM 3. Legal Proceedings........................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
ITEM 6. Selected Financial Data..................................... 21
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Factors Affecting our Business Condition.................... 35
ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk... 47
ITEM 8. Financial Statements and Supplementary Data................. 49
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 84
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 84
ITEM 11. Executive Compensation...................................... 84
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 84
ITEM 13. Certain Relationships and Related Transactions.............. 84
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 85
Signatures................................................................. 88
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Words such as "may," "might," "will,"
"would," "should," "could," "project," "estimate," "pro forma," "predict,"
"potential," "strategy," "anticipate," "plan to," "believe," "continue,"
"intend," "expect" and words of similar expression (including the negative of
any of the foregoing) are intended to identify forward-looking statements.
Additionally, forward-looking statements in this report include statements
relating to trends in Internet usage, business-to-business e-commerce and
software and related services; the design, development and implementation of our
products; the strategies underlying our business objectives; the completion of
pending transactions; our anticipated performance of our obligations or the
anticipated performance of the obligations of those parties with which we have
contractual relationships; our sales and marketing strategies and efforts; the
value of our investments in other companies; our liquidity and capital
resources; and the impact of our acquisitions and investments on our business,
financial condition and operating results.
Our forward-looking statements are not meant to predict future events or
circumstances and may not be realized because they are based upon current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ materially from those currently expected as a
result of these risks and uncertainties. Factors that may cause or contribute to
a difference between the expected or desired results and actual results include,
but are not limited to, changes in our evolving business strategies and model;
our ability to eliminate redundancies between our two business units and to
control expenses; the availability of and terms of equity and debt financing to
fund our business; competition in our target markets; changes in prevailing
interest rates; inflation; changes in costs of goods and services; economic
conditions in general and in our specific target markets; changes in preferences
and tastes of users, buyers and suppliers; demographic changes; changes in, or
failure to comply with, federal, state, local or foreign laws and regulations;
our ability to use and protect our intellectual property; and our ability to
attract and retain qualified personnel, as well as the risks discussed in the
section of this report entitled "Factors Affecting our Business Condition."
Given these uncertainties, investors are cautioned not to place undue reliance
on our forward-looking statements. We disclaim any obligation to update these
factors or to announce publicly the results of any revisions to any of the
forward-looking statements contained in this report to reflect future events or
developments.
INFORMATIONAL NOTE REGARDING PRIOR STOCK SPLITS
Information in this report has been adjusted to reflect two separate
two-for-one splits of our common stock, the first of which was effected on
August 20, 1999 and the second of which was effected on March 31, 2000.
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PART I
ITEM 1. BUSINESS
VerticalNet, Inc., which was incorporated on July 28, 1995 under the laws
of Pennsylvania, is referred to throughout this report as "VerticalNet," "the
registrant," "we," "us" or through similar expressions. For financial
information about our reportable business segments, we refer you to our
consolidated financial statements and the related notes thereto found in Item 8
of this report.
COMPANY OVERVIEW
VerticalNet, through its wholly owned subsidiaries, provides end-to-end
e-commerce solutions targeted at distinct business segments through two
strategic business units: VerticalNet Markets and VerticalNet Solutions.
VerticalNet Markets operates 59 industry-specific e-marketplaces through
which we provide hosted e-commerce and community capabilities for corporate
divisions and small and medium sized businesses. These e-marketplaces act as
industry-specific comprehensive sources of information, interaction and
electronic commerce, and are expected to focus increasingly on offering supplier
enablement products and channel management solutions for public and private
e-marketplaces. Each e-marketplace focuses on a single business sector and
caters to individuals with similar professional interests. We have designed our
e-marketplaces to attract technical and purchasing professionals with
specialized product requirements and purchasing authority or influence.
VerticalNet Solutions offers software solutions to industry alliances,
independent net market makers and global 2000 enterprises. VerticalNet
Solutions' e-marketplace solutions offer a comprehensive and innovative open
platform, multiple market mechanisms and transaction types, multi-party system
interaction and a broad range of buy- and sell-side services, integrated with
tools for community and content development and market design. In addition,
VerticalNet Solutions is developing and offering software solutions that focus
on direct materials procurement targeted towards discrete manufacturing
processes within large enterprises. As part of this offering, VerticalNet
Solutions expects to deliver a supplier relationship management application
suite to automate (and better enable) supplier sourcing decision analysis,
provide for collaborative execution of contract fulfillment and monitor supplier
performance. VerticalNet Solutions' product offerings are complemented by a
complete set of professional service offerings.
On December 19, 2000, we entered into a definitive agreement to sell our
VerticalNet Exchanges business unit, which focused on trading electronic
components and hardware in open and spot markets, to Converge, Inc., an
independent marketplace that serves the high-tech supply-chain community.
VerticalNet Exchanges was comprised of NECX.com LLC, a business we purchased in
December 1999, and the businesses of RW Electronics and American IC Exchange,
which NECX acquired in March 2000 and July 2000, respectively. We completed the
sale of our VerticalNet Exchanges business on January 31, 2001. As a result of
this transaction, we became Converge's largest stockholder, with 10,371,319
shares of Series B preferred stock and 1,094,751 shares of non-voting common
stock, representing approximately 18.0% and 1.9% of Converge's equity,
respectively. Under separate agreements, Converge entered into a three-year
software licensing and professional services relationship with VerticalNet
Solutions, whereby VerticalNet Solutions' platform will serve as part of the
technical foundation for Converge's trading operations. We have also agreed to
link each of VerticalNet Markets' 14 technology focused e-marketplaces to
Converge's online marketplace.
Following our acquisition of NECX in December 1999, management segmented
our business into two operating segments consisting of vertical trade
communities (currently referred to as e-marketplaces) and the electronics
exchange business. Although in September 2000 we announced plans to organize our
business into three strategic business units (VerticalNet Markets, VerticalNet
Solutions and VerticalNet Exchanges), management continued to operate
VerticalNet Markets and VerticalNet Solutions as one unit for the remainder of
fiscal 2000. Management expects to have the ability to begin evaluating
VerticalNet Solutions as a separate segment during the first quarter of 2001.
The sale of our VerticalNet Exchanges business unit represents the disposal of a
business segment under applicable accounting standards, so the results of this
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segment are shown separately in our consolidated financial statements (see Item
8) as a discontinued operation. Note 18 to the consolidated financial statements
provides additional disclosure on segment information, while Note 4 to the
consolidated financial statements provides additional disclosure on discontinued
operations.
INDUSTRY TRENDS
The Internet has enabled millions of people worldwide to share information,
create communities across similar industries and conduct business
electronically. Usage of the Internet as a means of communication and conducting
business is expected to grow. According to International Data Corporation, the
number of global Internet users is projected to grow from 338.0 million in 2000
to 726.1 million in 2004, while global Internet commerce is projected to grow
from $271.9 billion in 2000 to $2.6 trillion in 2004.
Business-to-business usage of the Internet has also grown, and is expected
to continue to grow rapidly. According to Forrester Research,
business-to-business e-commerce is projected to grow from $406.2 billion in 2000
to $2.7 trillion in 2004. Increasingly, businesses are leveraging the Internet's
ability to reach customers globally, deliver personalized content and open new
distribution channels. We believe that widespread adoption of intranets and the
acceptance of the Internet as a business communications platform has created a
foundation for business-to-business e-commerce that offers the potential to
address structural inefficiencies of the traditional marketplace by streamlining
complex processes, lowering costs and improving productivity, as well as
providing new opportunities to increase seller reach and buyer access, eliminate
intermediaries and provide previously unavailable information.
As the Internet continues to evolve, new business models have emerged to
replace or supplement traditional ways in which buyers and sellers have
exchanged information and conducted business with one another. These models have
included electronic marketplaces, auctions and exchanges, each of which have
tried to improve on current market inefficiencies. We believe that the growing
sophistication of buyers, suppliers and users will continue to fuel this
evolution as they increasingly seek online products and services designed to
meet their specific needs. We also believe that, despite this growing
sophistication, there is an ongoing need for supplier enablement products that
allow suppliers to bring their offline relationships online in a non-intrusive,
easy-to-use fashion.
Along with the growth of business-to-business usage of the Internet, there
is evidence of increasing demand for business-to-business software solutions.
International Data Corporation projects that business-to-business software
license revenue will grow from $2.7 billion in 2000 to $13.8 billion in 2004,
while e-procurement license revenue will grow from $1.7 billion in 2000 to $9.0
billion by 2004. In particular, there is increasing demand for strategic
sourcing applications -- applications that enable companies not only to analyze
and select suppliers based on their strategic impact on the company's overall
business or supply chain, but also to allocate contracts and volume among
suppliers, manage supply risk and optimize supplier performance. Goldman Sachs
estimates that the market for strategic sourcing software will grow from $300
million in 2000 to $2.4 billion in 2005. This trend is the result of several
factors, including the following:
- Companies can decrease their cost of goods sold, and thereby maximize
cost leadership and competitive advantage, through sound supplier
analysis, selection and optimization decisions.
- The ability to identify, qualify, evaluate and select suppliers quickly
reduces the time it takes companies to bring products to market, which
improves competitive advantage and extends the life cycle of new
products.
- Existing sourcing processes, which are predominantly manual and require
human decision analysis with minimal data access and organization, are
inadequate, expensive and neither repeatable nor scalable.
Thus, the use of strategic sourcing applications enables companies to streamline
and enhance the purchasing process.
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OUR SOLUTION
Through VerticalNet Markets, we offer a new and evolving medium of
information, interaction, e-commerce and supplier enablement for the
business-to-business market. Our portfolio of 59 e-marketplaces targets separate
industrial sectors to provide businesses and professionals with the following:
- Comprehensive content, services and features: Our e-marketplaces provide
valuable information on products, technology, industry regulations, news
and management. We archive historical content, enabling users to research
through large databases of information. We also operate requests for
proposals, requests for quotes and related posting and response areas.
- Active community participation: We provide features and services
discussion forums, chat rooms, bulletin boards and career development
services, all of which foster active community participation among our
users. We believe active community participation creates loyalty and
affinity among our users.
- Electronic marketplaces that connect buyers and sellers globally: Our
e-marketplaces allow buyers and sellers worldwide to exchange
information, source products and buy and sell products and services.
- High quality sales leads: Our e-marketplaces generate high quality sales
leads that are timely and effective and contain detailed buyer
information. Robust sales leads left by potential buyers allow sellers to
respond more effectively.
- Targeted cost-effective medium for business-to-business advertising and
sponsorships: The narrow focus of each of our e-marketplaces and the
attractive demographics of our audiences permit us to offer premium
advertising and sponsorship opportunities to our customers at competitive
rates.
We believe that targeted content, focused audiences and robust sales leads,
combined with our existing and planned interactive platforms, create premier
marketplaces for enabling e-commerce. As we increase our focus on providing
supplier enablement solutions, we expect to expand our offerings of hosted and
premise-based solutions that enable suppliers to interact and communicate with
their selling partners using online tools and, when appropriate, to participate
in public and private marketplaces of their choosing.
Through VerticalNet Solutions, we offer software applications and related
professional services to industry alliances, global 2000 enterprises and
independent net market makers. Our products and services include the following:
- eMarketplace Suite: eMarketplace Suite is a comprehensive end-to-end
solution for building, growing and maintaining business-to-business
e-marketplaces. It includes multiple market mechanisms and transaction
types, multi-party system interaction and a broad range of buy- and
sell-side services, as well as tools for community and content
development and market design.
- VerticalNet Professional Services: Our professional services
organization is comprised of e-commerce and supply-chain experts. They
assess business purchasing return on investment criteria to define
project parameters, develop and manage implementation schedules, install,
setup and configure products and provide integration with backend
systems. They help to identify and analyze business rules and logic,
create and populate data stores and perform technology design and
implementation activities.
Additionally, we are in the process of developing and offering supplier
relationship management products to help direct purchasing organizations
determine what is needed, from which suppliers and under what conditions. This
offering is expected to combine collaboration applications and negotiation tools
for complex direct materials transactions, distributed data management
technology that would allow consolidation of information from multiple sources
without requiring a company to change or adapt its system and workflow
technology that would allow business purchasing processes to be built and
extended to multiple business processes, which could result in combined and
leveraged sourcing contracts and a significant overall decrease in cost of goods
sold.
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OUR STRATEGIES
Our objectives are to continue being a leading owner and operator of
industry-specific e-marketplaces and to establish ourselves as a leading
provider of business-to-business software applications. Key strategies to
achieve our objectives include:
Maintain Multiple Revenue Streams While Streamlining Efficiencies Between
Business Units
- Software licensing and related services: For the year ended December 31,
2000, approximately $7.9 million, or 7.0%, of our overall revenues were
from software licensing, related professional services and other business
operations services. As our VerticalNet Solutions and VerticalNet Markets
units continue to grow, we expect revenues generated from software
licensing, as well as professional service offerings such as front-end
design, implementation and integration and back-end market hosting, to
increase as a percentage of our overall revenues.
- E-enablement and e-commerce: For the year ended December 31, 2000, we
generated approximately $47.1 million, or 41.9%, of our revenues from
e-enablement and e-commerce, which included storefront and e-commerce
center fees, Web site development fees, fees from books and educational
courses, fees from product sales and auction fees. As we continue to
focus on supplier enablement, we expect that suppliers will continue to
migrate their existing offline relationships online, thereby increasing
participation by these suppliers and their partners in our e-marketplaces
and private marketplaces.
- Advertising and services: Historically, a significant portion of our
revenues have been derived from banner and button advertisements,
newsletter sponsorships and other advertising and co-marketing
arrangements with suppliers in our e-marketplaces. For the year ended
December 31, 2000, approximately $57.5 million, or 51.1%, of our overall
revenues were advertising and services revenues. We do not expect that
revenues from advertising will grow or even remain at historical levels
due to worsening economic conditions in general and in the market for
online advertising, as well as our increased focus on supplier enablement
and supplier relationship management products and services. Nonetheless,
we believe that the industry-specific focus of each of our e-marketplaces
will allow us to remain competitive in the market for online advertising.
- Streamlining efficiencies: By restructuring our businesses into separate
business units, we believe we can more effectively gauge their financial
performance and implement changes rapidly to improve their performance.
We expect to evaluate the cost structure of each of our business units
with the goal of eliminating redundancies between VerticalNet Markets and
VerticalNet Solutions and streamlining our overall operations wherever
possible.
Leverage Supplier Base To Provide Supplier Focused Enablement Products
We intend to deepen VerticalNet Market's relationships with our suppliers
and users through the delivery of innovative enablement products. Through these
products, we expect to provide the common features and functions required for
supplier enablement solutions, which will enable suppliers to interact and
communicate with their selling partners. These products include robust catalogs,
online tools for content, order and contract management and connectivity.
Pursue Partnerships and Strategic Relationships
We intend to develop and maintain partner programs. Our initial focus for
VerticalNet Markets is expected to be on partnering with content providers and
application providers who can assist us with enhancing the experience of our
users in our e-marketplaces. Additionally, we intend to seek out key technology
partners to enhance our time-to-market and competitive positioning of
VerticalNet Markets' anticipated solutions. Likewise, we intend to enter into
strategic relationships with customers, systems integrators, OEM partners and
resellers to expand, promote, sell and support the products and services that
VerticalNet Solutions provides.
Strengthen Our Global Presence
The anticipated continued growth of Internet usage and business-to-business
e-commerce worldwide presents significant opportunities to extend the global
reach of our e-marketplaces, software products and
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related services. We are committed to serving a global commerce community and
intend to extend our business model and software sales internationally in a way
that complements our overall strategic initiatives.
Pursue Strategic Acquisitions
We intend to continue to pursue acquisitions that complement our existing
products and services. We evaluate prospective acquisitions by assessing whether
the business or asset broadens the scope of services we offer, enhances our
presence in existing or new markets, offers technology that would allow us to
better serve our clients or offers the opportunity to enhance revenues as well
as profitability.
OUR PRODUCTS AND SERVICES
Our e-Marketplaces and Their Features
As of March 15, 2001, we owned and operated 59 e-marketplaces, which are
organized into 14 sectors:
Communications
- - Digital Broadcasting.com (digitalbroadcasting.com)
- - Fiber Optics Online (fiberopticsonline.com)
- - Photonics Online (photonicsonline.com)
- - Premises Networks.com (premisesnetworks.com)
- - RF Globalnet (rfglobalnet.com)
- - Wireless Design Online (wirelessdesignonline.com)
- - Wireless Networks Online (wirelessnetworksonline.com)
Manufacturing/Discrete
- - Aerospace Online (aerospaceonline.com)
- - Auto Central.com (autocentral.com)
- - Machine Tools Online (machinetoolsonline.com)
- - Metrology World.com (metrologyworld.com)
- - Plant Automation.com (plantautomation.com)
- - Surface Finishing.com (surfacefinishing.com)
- - Tooling Online (toolingonline.com)
Manufacturing/Process
- - Adhesives and Sealants.com (adhesivesandsealants.com)
- - Chemical Online.com (chemicalonline.com)
- - Pharmaceutical Online (pharmaceuticalonline.com)
- - Pulp & Paper Online (pulpandpaperonline.com)
- - Textileweb.com (textileweb.com)
High Tech
- - ElectronicsWeb (electronicsweb.com)
- - Embedded Technology.com (embeddedtechnology.com)
- - Semiconductor Online (semiconductoronline.com)
- - Test and Measurement.com (testandmeasurement.com)
Energy
- - ElectricNet (electricnet.com)
- - Hydrocarbon Online (hydrocarbononline.com)
- - Oil and Gas Online (oilandgasonline.com)
- - Power Online (poweronline.com)
Services
- - HR Hub.com (hrhub.com)
- - Logistics Online (logisticsonline.com)
- - Purchasing Network.com (purchasingnetwork.com)
Financial Service
- - Property and Casualty.com (propertyandcasualty.com)
Food/Packaging
- - Bakery Online (bakeryonline.com)
- - Beverage Online (beverageonline.com)
- - Dairy Network.com (dairynetwork.com)
- - Food Ingredients Online (foodingredientsonline.com)
- - Food Online (foodonline.com)
- - Meat and Poultry Online (meatandpoultryonline.com)
- - Packaging Network.com (packagingnetwork.com)
Healthcare/Science Group
- - E-Dental.com (e-dental.com)
- - Home Health Provider.com (homehealthprovider.com)
- - Hospital Network.com (hospitalnetwork.com)
- - Long Term Care Provider.com (longtermcareprovider.com)
- - Medical Design Online (medicaldesignonline.com)
- - Nurses.com (nurses.com)
Environment/Utilities
- - Pollution Online (pollutiononline.com)
- - Public Works.com (publicworks.com)
- - Safety Online (safetyonline.com)
- - Solid Waste.com (solidwaste.com)
- - Water Online (wateronline.com)
Foodservice/Hospitality
- - E-Hospitality.com (e-hospitality.com)
- - Foodservice Central.com (foodservicecentral.com)
- - Grocery Central.com (grocerycentral.com)
- - Grocery Retail Online (groceryretailonline.com)
Science
- - Bioresearch Online (bioresearchonline.com)
- - Drug Discovery Online (drugdiscoveryonline.com)
- - Laboratory Network.com (laboratorynetwork.com)
Public Sector
- - Government Contracting (govcon.com)
- - School Buyers Online (schoolbuyersonline.com)
Industrial
- - EC Online (econline.com)
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Our e-marketplaces offer the following features through a new user
interface that either has been or will soon be introduced in each of our
e-marketplaces:
Buy Online: Through this feature, users have access to the following
resources:
- The Buyer's Guide permits users to search for products, services and
suppliers using a key word or advanced search tool. This resource also
provides links to pavilions, e-commerce centers and storefronts, which
allow users to research suppliers' products and services, and send direct
inquiries to suppliers about pricing, delivery and product specifications
(i.e., generate sales leads).
- The Product Showcase is a resource for industry professionals that
provides information on the latest products in the industry.
- Through the Bookstore, professionals are able to purchase
industry-specific books, software, video products, periodicals and
research materials over the Internet.
- The RFP and RFQ resource (i.e., Requests for Proposals or Requests for
Quotes) allows users to seek out competitive bids and request quotes from
our participating suppliers, as well as facilitates communications
between users and suppliers during the process.
Sell Online: This feature offers suppliers the opportunity to move online
to one or more of our e-marketplaces. It also provides access to our Virtual
Office tool, which offers suppliers the ability to monitor and evaluate
storefront and e-commerce center activity. Through Virtual Office, suppliers can
track the number of visitors and leads generated from a storefront or banner
advertisement, while e-commerce center owners can track orders, billing,
shipping data, customer profiles and demographics. Virtual Office also serves as
an inquiry management tool for suppliers.
Services: This feature provides access to business services from suppliers
and advertisers. Additionally, the Career Development resource offers resume
postings for job seekers, help-wanted listings, employer descriptions,
recruiters centers and career support material.
News & Community: Users can find current news and commentary, as well as
feature articles and product case studies, an editorial archive and a "month in
review" resource. This feature also includes "freeware" and demo-software
download library, industry association guides, real-time discussion forums for
industry professionals, bulletin boards, trade show information and other useful
industry events.
Tools: Users can sign up to receive e-mail-based newsletters with specific
content focus. We also offer, through a third-party provider, free e-mail
accounts to users/registrants in each e-marketplace. The addresses are
indicative of the e-marketplace (e.g., mark@poweronline.com).
VerticalNet Markets' Products and Services
VerticalNet Markets offers a suite of supplier enablement solutions that
allow suppliers to enhance their online presence and brand, generate new leads,
transact business in public marketplaces, create private marketplaces, manage
their existing channel partner relationships and create private extranets and
resource hubs. As of March 15, 2001, key components of these solutions include
the following:
Storefront: A supplier branded storefront provides information on the
supplier and its products, as well as articles and case studies about the
supplier, new product announcements, supplier-issued press releases and contact
information. Through the catalog feature of the storefront, a supplier can place
products for sale through a self-managed product catalog. Additionally, the
storefront also provides a hyperlinked gateway into the supplier's Web site.
E-Commerce Center: The e-commerce center provides enhanced
information-based features of a storefront with a full product catalog that
users may access from the e-commerce center's home page and from the
e-marketplace's home page.
Pavilion: The pavilion, which allows a large supplier to aggregate
distributors or partners to create a unified Internet presence and transact
online, offers several key features. Partner Aggregation allows the
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pavilion owner to include multiple storefronts or e-commerce centers, one for
each partner, in the pavilion. Pavilion Search allows the buyer to search across
all content within a pavilion. Pavilion Buyer's Guide allows the pavilion owner
to offer a Buyer's Guide with product categories and suppliers unique to the
pavilion. Pavilion Master Catalog allows the pavilion owner to aggregate product
data from e-commerce center catalogs into one aggregated catalog. Like our
storefronts and e-commerce centers, the pavilion also allows a large supplier to
provide information about the supplier and its offerings.
Catalog: Our catalog offers suppliers a flexible solution for managing and
displaying structured product data and associated content for hundreds of
products, and for selling those products online through a catalog in their own
private marketplace. We provide product administration tools that give the
supplier the ability to dictate how information is presented to buyers in the
catalog and to maintain product data online. Enhancements to our catalog include
Gated Catalog, which allows the supplier to place the catalog behind a secure
log-in for access only to authorized buyers, and Aggregated Catalog, which
allows some or all of a supplier's products to co-exist in a standard industry
catalog with products from other catalogs. Additionally, a supplier may choose
to activate the My Price feature on a catalog, which allows the supplier to
extend personalized, contracted pricing to each of its buyers.
Order Management and Fulfillment Services: Order management and
fulfillment services allow the buyer to place purchase orders online for a
supplier's products or services displayed on the supplier's catalog and allow
the supplier to service the entire order management life-cycle online. Through
this feature, the supplier can offer flexible payment and freight options,
accommodate special delivery instructions and enable a buyer to work on more
than one order at a time or to purchase from more than one supplier in the same
order.
Distributor Locator Service: The distributor locator service allows
manufacturers to service existing and new customer relationships online without
creating channel conflicts with their existing relationships. The distributor
locator allows a manufacturer to enable the appropriate channel partner to
accept the buyer's order and fulfill the transaction. When servicing a
customer's order, each channel partner has password protected access to order
management and fulfillment services to facilitate the transaction. Additionally,
each channel partner may choose to activate the My Price feature in the
supplier's catalog. My Price allows the supplier's channel partners to extend
personalized, contracted pricing to its existing customer base or newly acquired
customers.
Advertising and Sponsorship Products: Strategic placement of supplier
branded advertising banners on our e-marketplaces increase brand awareness and
new customer inquiries for supplier's products and services. Newsletter
sponsorships allow the supplier to promote its products and services and reach
thousands of registered users at one time.
Private Extranets and Resource Hubs: We also offer suppliers a
comprehensive suite of content management tools that allow them to manage an
effective and timely flow of information to employees, suppliers, customers and
partners through a private resource hub. Flexible content types allow our
customers to determine which information is valuable to manage. Interactive
features, such as discussion groups, polling, ratings and surveys, allow the
user to provide feedback on content and other topics in a real-time environment.
Multi-step workflow allows content authors to enter or modify content, and
automatically route the changes through an approval process before publication.
Version control allows one version of a content record to be displayed to end
users, while an updated version is working its way through the approval process.
Publishing schedules allow the site administrator to define the time period
during which a specific content record will be available for viewing. Role-based
security allows the site administrator to control access to content by user
group and security level. Administration tools allow the site administrator to
maintain content, add and modify user profiles, and define and generate site
activity reports.
Other Commerce Services: We have partnered with vendors of freight
management, logistics (both domestic and international), credit, payment and
finance and other key services to support online transaction processing.
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VerticalNet Solutions' Products and Services
eMarketplace Suite: The eMarketplace Suite includes the following modules:
- Market Modeler provides product mapping tools for defining product
offerings to be traded in the market, describing the desired marketplace
transaction types, and allowing the market operator to assign defined
roles to participants.
- With VerticalNet Commerce Solutions, participants can search for, buy and
sell goods and services in a dynamic trading environment. Multiple
buyers, suppliers and third parties can participate in real-time
transactions. Participants can specify multiple product specifications to
discover the best matches based on variables beyond price, including
delivery dates, credit terms, quantity and quality.
- Trade Server is a scalable transaction platform for building and managing
successful digital marketplaces.
- Content Builder provides the necessary tools to create editorial
workflow, manage the document approval process and integrate style sheets
and templates to author, format and generate HTML content files.
- Content Syndicator collects and displays premium content from third-party
providers. It also includes, via a third-party relationship, the ability
to collect and add specific content like news, sports and stock tracking.
- Content Manager provides a suite of tools to track calendars, refresh
links and deliver personalized information.
- Community Builder and Manager combines content with management
techniques, editorials, best practices and market analysis tools to
provide participants with the information they need to make informed
decisions.
Supplier Relationship Management Applications: We are developing the
following supplier relationship management applications:
- demand aggregation, which is expected to permit real-time querying of
spend history and vendor performance information across complex
enterprise topographies, as well as management of complex bills of
materials and approved parts list;
- sourcing execution suite, which is expected to offer: RFQ, reverse
auction and structured negotiation mechanisms; support for SKU-based
materials, complex materials and complex transaction terms;
multi-parametric matching and ranking of supplier quotations; sourcing
lifecycle automation workflow and integrated approved vendor source list
management; and
- contract negotiation, which is expected to provide a collaborative
contract negotiation environment, track negotiation history and capture
decisions.
Professional Services: We have set up our professional services
organization to assist our customers in assessing business purchasing return on
investment criteria to define project parameters, developing and managing
implementation schedules, installing, setting up, and configuring products and
providing integration with backend systems. We also help our customers with
identifying and analyzing business rules and logic, creating and populating data
stores and performing technology design and implementation activities.
MARKETING, DISTRIBUTION AND OTHER ALLIANCES
Microsoft Corporation
On March 29, 2000, we entered into a definitive agreement with Microsoft
with respect to a commercial relationship. Our commercial relationship with
Microsoft has a three-year term during which Microsoft will purchase from us,
and then distribute to third party businesses, at least 80,000 of our
storefronts and e-commerce centers. We will assist Microsoft in distributing
30,000 of these storefronts and e-commerce
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centers. Microsoft will pay us a minimum of approximately $161.9 million in the
aggregate over the term for the storefronts and e-commerce centers. Microsoft
will provide the storefronts and e-commerce centers it purchases from us to
business customers for a 12 month subscription period. We will build the
storefront or e-commerce center for each customer, which will be placed on one
of our e-marketplaces. Our intent is that customers would purchase renewals of
the storefront or e-commerce center and additional storefronts or e-commerce
centers on our other e-marketplaces. If a customer renews its storefront or
e-commerce center beyond the initial 12 month period, we will pay an amount to
Microsoft based on the aggregate amount of such renewals. We will also pay an
amount to Microsoft based on the amount of sales of additional storefronts and
e-commerce centers on other e-marketplaces. We are also obligated to pay to
Microsoft an amount based on the amount of the revenues we receive from
transactions that take place on the e-commerce centers distributed under the
agreement. We will pay Microsoft an aggregate of $60.0 million during the term
for advertising and promotional placements in The Microsoft Network and on
Microsoft's bCentral Web site and, if the pace of Microsoft's distribution of
storefronts and e-commerce centers does not meet agreed upon goals, additional
amounts for advertising and promotional placements not to exceed $15.0 million
in the aggregate.
Microsoft will pay to us a portion of revenues from transactions that occur
in The Microsoft Network and on Microsoft's bCentral Web site and originate via
a link from our e-marketplaces or the VerticalNet home page. Microsoft will pay
us an aggregate of $60.0 million during the term for advertising and promotional
placements in our e-marketplaces. We will pay Microsoft an aggregate of $18.5
million over the term to be directed toward the development and enhancement of
products and services relating to the business-to-business marketplace and
database software technology.
We will use commercially reasonable efforts during the term to adopt and
use Microsoft products to operate our e-marketplaces when appropriate and
feasible. We will pay Microsoft an aggregate of $56.5 million over the term
towards the licensing of Microsoft products and the provision of Microsoft
services.
In April 2000, Microsoft made a $100.0 million equity investment in
VerticalNet through the purchase of 100,000 shares of our Series A 6.00%
convertible redeemable preferred stock, which are initially convertible into
1,151,080 shares of our common stock, and the warrants described below. On April
1, 2010, at the election of the holder of the Series A preferred stock, we shall
be required to redeem all outstanding shares of Series A preferred stock at a
specified price. In addition, at our option, each share of Series A preferred
stock will be subject to redemption at a calculated price if certain conditions
are met. Microsoft is entitled to registration rights and has the right to
nominate one member of our board of directors, which it has done. The warrants
Microsoft received entitle Microsoft to purchase 1,500,000 shares of our common
stock at an exercise price of $69.50 per share, subject to adjustment under
certain circumstances.
Converge, Inc.
On December 19, 2000, we entered into a definitive agreement to sell NECX,
which comprised our VerticalNet Exchanges business unit, to Converge, Inc., an
independent marketplace that serves the high-tech supply-chain community. We
completed the sale on January 31, 2001. As a result of this transaction, we
became Converge's largest stockholder, with 10,371,319 shares of Series B
preferred stock and 1,094,751 shares of non-voting common stock, representing
approximately 18.0% and 1.9% of Converge's equity, respectively. We were also
entitled to receive $60.0 million of cash at closing, subject to adjustment
based on a comparison of NECX's net worth and working capital as of October 31,
2000 and as of the closing date. Based on a preliminary calculation performed on
January 31, 2001, we paid $6.5 million to Converge. This cash payment is subject
to further adjustment based on a final calculation of NECX's closing date net
worth and working capital following a post-closing audit. We expect to pay
Converge an additional $6.0 million based on the final net worth and working
capital adjustment calculation.
Converge has agreed to increase the size of its board of directors to at
least seven members by June 19, 2001, after which time we shall have the right
to nominate our chief executive officer (or another executive officer reasonably
satisfactory to Converge) to serve as a director of Converge.
In December 2000, we entered into a three-year software licensing and
professional services contract with Converge, valued at approximately $108.0
million, whereby VerticalNet Solutions' platform will serve as part
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of the technical foundation for Converge's trading operations. The agreement
provides for aggregate cash payments to us of $43.0 million, $35.0 million and
$30.0 million during the years ending December 31, 2001, 2002 and 2003,
respectively. The agreement also includes a commitment to link each of our 14
technology focused e-marketplaces with Converge's online marketplace.
Channel (or Distribution) Partnerships
As a part of our previously announced strategic alliance with Microsoft, we
have formed strategic alliances with channel partners to assist in distributing
storefronts to business customers. As of March 15, 2001, we had entered into
channel partner relationships with ADP, Inc., Air Products and Chemicals, Inc.,
Dell Computer Corporation, GiftBasketProducts.com, Inc. and SolidWorks
Corporation. These channel partners have agreed to use commercially reasonable
efforts to distribute approximately 37,000 storefronts to business customers. To
date, only approximately 130 storefronts have been distributed through these
relationships.
Partnerships Around New and Existing e-Marketplaces
We have entered into strategic relationships with traditional industrial
entities and other strategic partners to create new e-marketplaces with industry
experts, as well as to leverage the reach of existing e-marketplaces. We are
currently participating in the following strategic relationships:
- In March 2000, we announced the formation of PaintandCoatings.com Inc., a
joint venture with Eastman Chemical Company, to transform our Paint and
Coatings e-marketplace into an independent Internet marketplace for the
paint and coatings industry. We hold a 40% equity stake in
PaintandCoatings.com, which has been funded with an aggregate of $4.7
million from the two partners.
- In August 2000, we announced the formation of e-Catalysts, Inc., a joint
venture with W.R. Grace & Co. and Aspen Technology, to create a leading
provider of Internet commerce solutions for the catalysts industry that
would enable companies to automate their business processes and optimize
interaction with their trading partners. We hold a 33% equity stake in
e-Catalysts, which has been funded with an aggregate of $9.0 million from
the three partners.
- In August 2000, ElastomerSolutions.com, a neutral marketplace and online
community for the elastomers industry, announced that it had selected
VerticalNet and Computer Sciences Corporation to develop, build and
implement a new net market, as well as to provide supporting business
services. In February 2001, we amended our agreement with
ElastomerSolutions.com to provide for enhanced licensed technology and
additional business and support services. We are not an equity holder of
ElastomerSolutions.com.
International Strategic Relationships
To date, we have undertaken the following global strategic initiatives:
- In June 2000, we formed VerticalNet Europe B.V. ("VerticalNet Europe"), a
joint venture with British Telecommunications, plc ("BT") and Internet
Capital Group, Inc. ("ICG"), to establish online marketplaces targeted at
the European market. We were originally a 56% shareholder in the joint
venture, which was funded with approximately $114.7 million in cash from
the three partners. We initially contributed to the joint venture
approximately $6.8 million in cash and intellectual property for the
operations of e-marketplaces within Europe. VerticalNet Europe and BT
also created VerticalNet UK Ltd. as part of the joint venture. In
December 2000, our ownership percentage in VerticalNet Europe increased
from 56% to 72% and VerticalNet Europe obtained full ownership of
VerticalNet UK. In March 2001, we continued to consolidate our
operational control over this venture when our ownership percentage
increased to 90%. In a separate agreement, a BT affiliate agreed to
license VerticalNet Solutions' products for distribution in selected
regions worldwide. As of March 15, 2001 VerticalNet Europe had launched
four e-marketplaces.
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- In July 2000, we formed a joint venture with SOFTBANK E-COMMERCE CORP., a
wholly-owned subsidiary of Softbank Corporation. To date, we have
contributed $3.6 million of cash and hold a 40% ownership in the joint
venture. The goal of the joint venture, called VerticalNet Kabushiki
Kaisha ("VerticalNet Japan"), is to develop, maintain and operate
Japanese language e-marketplaces in Japan. As of March 15, 2001, we
remain obligated to contribute a maximum of 400.0 million Yen
(approximately $3.3 million) to the joint venture through its first two
years of operations. Currently, VerticalNet Japan employs 60 people and
operates seven e-marketplaces in Japanese.
- In September 2000, we solidified our control over our strategy in Africa
by acquiring e-marketplaces from Metropolis Transactive Holdings Ltd.
upon the South African company's closure of its business-to-business
division. These e-marketplaces, which focus on the African market, were
created under VerticalNet's previously existing co-branding relationship
with Metropolis.
- In January 2001, Sumitomo Corporation purchased $15.0 million of our
common stock. In the purchase agreement, we agreed to cooperate with
Sumitomo on a variety of joint initiatives, including Sumitomo's
participation as an equity partner in our international endeavors, and
Sumitomo's licensing or distributing of technology products or services
for VerticalNet Markets or VerticalNet Solutions. However, we have not
reached, and may never enter into, any definitive agreement with Sumitomo
concerning any additional commercial relationship.
CUSTOMERS
VerticalNet Markets
As of December 31, 2000, over 17,100 companies were online in one or more
of our e-marketplaces through over 18,700 storefronts, including approximately
15,870 storefronts paid for by Microsoft. Additionally, as of December 31, 2000,
over 80 transactable storefronts and 430 e-commerce centers were live on our
e-marketplaces.
For the year ended December 31, 2000, Microsoft accounted for approximately
27% of our revenues. For the years ended December 31, 1999 and 1998, no single
customer accounted for more than 10% of our revenues.
VerticalNet Solutions
During fiscal 2000, VerticalNet Solutions had over 10 customers, with
Converge becoming its primary customer as of January 2001. Our agreement with
Converge provides for aggregate cash payments to us of $43.0 million, $35.0
million and $30.0 million during the years ending December 31, 2001, 2002 and
2003, respectively. Our backlog as of March 15, 2001, exclusive of the Converge
contracts, was immaterial.
SALES AND MARKETING
VerticalNet Markets
We use a variety of programs to stimulate demand for our products,
including field sales and an inside sales force.
- Field Sales: Our field sales force is focused on selling our solutions
for public marketplace participation, as well as our proposed channel
management offerings, to targeted high and mid-tier suppliers. In the
past, we employed individuals with a background in advertising sales with
trade publishing companies. As we begin to shift our product offerings to
supplier enablement, we have begun to employ individuals with
business-to-business and software experience. We also have a dedicated
team in our field sales force that focuses on storefront deployment,
primarily by participating in trade shows where many potential suppliers
are found.
- Inside Sales: We currently have an inside sales team focused on selling
our solutions for public marketplace participation to mid-tier suppliers.
The inside sales force is also responsible for renewals of our existing
storefront customers and enhancing the value of their experience in our
public marketplaces.
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Our marketing goals are to raise awareness of the VerticalNet brand and
what it stands for, and to communicate that through every point of contact with
our prospects, users, buyers and suppliers. We also seek to drive visitors to
our Web site and our e-marketplaces. We do this through an integrated mix of
marketing tools, including general business media and vertical trade media,
online advertising and use of keyword buys, direct marketing programs and trade
show participation. We also participate in industry specific events, industry
association activities and partnerships with interactive services companies.
VerticalNet Solutions
We use a variety of programs to stimulate demand for VerticalNet Solutions'
products and services including direct sales and an inside sales force.
- Direct Sales: VerticalNet Solutions' direct sales force targets the
direct materials procurement divisions of global 2000 enterprises. The
target market focus revolves around the strategic sourcing requirements
of those companies involved in discrete manufacturing with an emphasis on
the high technology sector. The direct sales force is divided into two
groups: account executives and strategic sales. The account executives
are ultimately responsible for customer care. The strategic sales group
are paired one-to-one with the account executives to provide technical
and product support during the sales process.
- Inside Sales: The direct sales force is supported by the inside sales
team. The focus of inside sales is to provide qualification and
validation of sales prospects through telemarketing, initial fact finding
meetings and corporate marketing events. The inside sales team is
distributed geographically in order to provide adequate regional
coverage. The inside sales team is also responsible for the maintenance
of the sales force automation tool, which provides client and prospect
visibility to the entire VerticalNet Solutions business unit.
VerticalNet Solutions' marketing division is comprised of two main efforts:
corporate marketing and product marketing. The corporate marketing group
provides the positioning of the organization by increasing industry awareness,
also known as branding. The VerticalNet Solutions brand allows for immediate
recognition by the market via trade shows, trade magazines, collateral and
inside sales initiatives. The product marketing group provides analyses of our
products, strategies, positioning, internal and external messaging, partnerships
and competition to insure the quality, effectiveness and validity of product and
solution communication between our sales and product management organizations,
on the one hand, and our customers, partners, resellers, industry analysts and
systems integration partners, on the other. Additional activities include
various market research, target market strategy, market segmentation, product
pricing and distribution strategies.
TECHNOLOGY DEVELOPMENT AND INFRASTRUCTURE
We have developed and implemented a broad array of technologies, using a
combination of our own proprietary technologies and commercially available,
licensed technologies. We spent approximately $39.3 million in 2000, $8.5
million in 1999 and $1.4 million in 1998 on product development. The amount for
2000 and 1999 also includes internal software costs that were capitalized in
accordance with Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (see Note 1 to our consolidated
financial statements).
We have engineered the production environment for our e-marketplaces to
provide high availability through the use of redundant hardware and software
where prudent. A load-balancer distributes the incoming Web traffic among the
multiple servers. Additionally, we use firewall software to protect our Web
servers from unauthorized access and an intrusion detection system to detect
intrusion attempts and alert us to successful intrusions. Until January 2001,
our production machines were located at Exodus Communications Inc., after which
time we transferred our hosted environment to Meridian Telesis, which provides
professional data center hosting facilities and redundant high-speed Internet
connectivity. Our Web sites are monitored around-the-clock through the use of a
combination of software based alerts and human intervention. This monitoring
encompasses the availability of our Web sites, as well as their quality.
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We are currently in the process of establishing connectivity with increased
bandwidth among our corporate headquarters, West Coast operations and hosting
facility. In December 2000, we engaged Yipes Communications, Inc. to establish a
Metropolitan Area Network that connects our Horsham, Pennsylvania facilities
with each other and the Meridian Telesis hosting facility with broadband fibers.
We have also selected Yipes to establish broadband connections between our
facilities in San Francisco and Palo Alto, California and a hosting facility in
San Jose, California. We are also upgrading the frame wide area network that
currently connects our East Coast and West Coast operations to an asynchronous
transfer mode WAN. We expect this work to be completed by July 2001.
PROPRIETARY RIGHTS
Proprietary rights are important to our success and our competitive
position. To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws, confidentiality agreements with employees and
third parties and license agreements with consultants, vendors and customers.
Despite such protections, a third party could, without authorization, copy or
otherwise appropriate information from our e-marketplaces. Our agreements with
employees, consultants and others who participate in development activities
could be breached. If so, we may not have adequate remedies for any breach, and
our trade secrets may otherwise become known or independently developed by
competitors.
In many instances, we rely upon license agreements for our content and
technology. Such license agreements may not continue to be available to us on
acceptable terms, or at all. We do not, however, believe that we are dependent
upon any single licensor of technology or content.
As of March 23, 2001, we own and use 16 trademarks registered with the
United States Patent and Trademark Office ("PTO"). Additionally, we have 34
applications for registration of various trademarks pending with the PTO.
Outside of the United States, as of March 23, 2001, we own and use 4 trademarks
registered with various foreign patent and trademark offices and have 3
applications pending with foreign patent and trademark offices. Likewise, as of
March 15, 2001, we have 11 patent applications with the PTO and we own 2,260
domain names. Generally, we cannot protect our Web addresses for our
e-marketplaces as trademarks because they are considered "generic" under
applicable law. The laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective copyright, trademark and trade secret protection may not be available
in such jurisdictions.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property assets. Third parties may claim infringement by
us with respect to current and future products, trademarks or other proprietary
rights, or we may counterclaim against such parties in such actions. Any such
claims or counterclaims could be time-consuming, result in costly litigation,
diversion of management's attention, cause product release delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our business,
financial condition and operating results. Such royalty and licensing
agreements, if required, may not be available on terms acceptable to us, or at
all.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
We are subject to various laws and regulations relating to our business.
Few laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations are being considered and in some cases adopted (at the
state and federal level) regarding:
- user privacy;
- freedom of expression;
- pricing;
- content;
- characteristics and quality of products and services;
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- taxation;
- advertising;
- intellectual property rights, including domain name policies;
- access charges; and
- information security.
In addition, the growth of the Internet and e-commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional consumer protection laws or
regulations may impede the growth of the Internet, which could decrease our
potential revenues from e-commerce or otherwise adversely affect our business,
financial condition and operating results.
Congress has recently enacted Internet laws regarding online copyright
infringement, restrictions on access to materials deemed obscene or harmful to
minors, and limitations on the online collection of personal information from
children under 13. Congress has also recently introduced a number of bills
regarding Internet commerce, content and access, including the Internet Growth
and Development Act, the Online Privacy Protection Act, the Electronic Privacy
Bill of Rights Act, the Secure Online Communications Enforcement Act of 2000,
the Internet Integrity and Critical Infrastructure Protection Act of 2000, the
Consumer Privacy Protection Act of 2000 and the Consumer Internet Privacy
Enhancement Act. Congress has not enacted any of these bills into law. It is
expected that similar bills will be considered this year.
The European Union enacted new privacy regulations in October 1998. In May
2000, the European Union member states approved a safe harbor arrangement that
will be administered by the U.S. Department of Commerce and will enable U.S.
organizations to comply with European privacy regulations. Nevertheless, there
is uncertainty regarding the marketplace impact of these recent enactments. In
addition, various jurisdictions already have enacted laws that are not
specifically directed to e-commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
negatively impact our business.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could materially
adversely affect us. If we were alleged to violate federal, state or foreign,
civil or criminal law, even if we could successfully defend such claims, it
could materially adversely affect us.
The United States Federal Trade Commission ("FTC") has taken recent action
to address the treatment of data and information collected by commercial Web
site operators. These actions include a recently concluded informal inquiry into
whether Doubleclick, Inc. had engaged in unfair or deceptive practices as a
result of Doubleclick's collection and retention of information concerning
Internet users, and a recently settled direct suit against Toysmart.com for
sharing user information with third parties as part of the sale of assets. We
are not subject to any FTC inquiry or direct action. We do, however, collect and
retain some information from users and visitors to our sites. Accordingly,
depending on how the FTC proceeds with the enforcement of privacy issues, our
future business practices may be materially affected, as will those of many
other commercial Web site operators.
We believe that our use of third party material on our e-marketplaces is
permitted under current provisions of copyright law. However, because legal
rights to certain aspects of Internet content and commerce are not clearly
settled, our ability to rely upon exemptions or defenses under copyright law is
uncertain. In addition, the laws relevant to "scraping" or aggregating data from
a site such as ours to create a competitor site are still evolving. Until these
laws are more firmly established, we could be adversely affected by such
activities.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission ("FCC") in
the same manner as other telecommunications services. Additionally, local
telephone carriers have petitioned the FCC to regulate Internet service
providers
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and online service providers in a manner similar to long distance telephone
carriers and to impose access fees on such providers. In May 1997, however, the
FCC confirmed that Internet service providers will continue to be exempt from
interstate access charges. In August 1998, the Eighth Circuit Court of Appeals
upheld the FCC's authority to maintain the exemption. If the FCC were to
withdraw the exemption or take other action responding to telecommunications
carrier concerns, the costs of communicating on the Internet could increase
substantially. This, in turn, could slow the growth in the use of the Internet.
Any such legislation or regulation could materially adversely affect our
business, financial condition and operating results.
COMPETITION
Both the supplier relationship management and online-enabled supplier
network industries are new and rapidly evolving.
We believe that the principal competitive factors for companies seeking to
create a strategic sourcing solution include: parametric demand aggregation;
vendor spend analysis and rationalization; RFQ creation and response management;
and quotation analysis, contract negotiation, and award. VerticalNet Solutions
will likely face intensified competition in the future from various sources,
including:
- Sourcing focused vendors -- B2Emarkets, eBreviate, Emptoris, Frictionless
Commerce, Perfect
- Supply chain management vendors -- i2
- eProcurement vendors -- Ariba, Clarus, CommerceOne, ICG Commerce
- ERP vendors -- SAP and Oracle
- Product data management vendors -- Enovia, Matrix One, Metaphase, PTC,
UGS
- Product life-cycle management vendors -- CoCreate, EAI, Enovia, NexPrise
- Systems integration companies -- Big Five consulting companies,
e-commerce consultancies
We believe that the principal competitive factors for companies seeking to
create a networked community of suppliers includes: supplier aggregation;
content mapping of structured content; content management, search, and
cleansing; supplier ratings and performance data; and credit, logistics, and
other commerce services such as customer resource management.
Few companies are focused on providing solutions for enabling suppliers and
thereafter offering them participation in marketplaces. Therefore, most existing
competition is ancillary. VerticalNet Markets will likely face intensified
competition in the future from various sources, including:
- Enterprise software providers -- Ariba, CommerceOne, i2, Oracle,
PurchasePro
- Private trading exchange vendors -- Asera
- CRM and sell-side vendors -- Siebel, BroadVision, Art Technology,
Vignette
- Industry-specific independent and consortia-led marketplaces
- Independent, hosted storefronts -- Digital Storefront, Intershop,
ShopBuilder
- Systems integration companies -- Big Five consulting companies,
e-commerce consultancies
- Horizontal communities -- Thomas Register
Further, our potential competitors may develop enabled supplier networks
that are equal or superior to ours. We also compete with traditional forms of
business-to-business advertising and commerce, such as trade magazines, trade
shows, and trade associations for advertisers and advertising revenue.
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EMPLOYEES
As of March 15, 2001, we had approximately 1,170 employees, of which
approximately 1,070 were located in the United States and approximately 100 were
located outside of the United States. These numbers take into account the
following events:
- In January 2001, we completed our sale of NECX to Converge. NECX employed
approximately 450 people on the closing date.
- In January 2001, we announced a staff reduction that resulted in a
further decrease of approximately 150 employees.
We consider our relationships with our employees to be good. None of our
employees are covered by collective bargaining agreements.
EXECUTIVE AND SENIOR OFFICERS
The following table sets forth the name, age and position of each person
who was serving as an executive or senior officer as of March 15, 2001.
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
- -------------------------------------
Michael J. Hagan..................... 38 President, Chief Executive Officer and Director
Gene S. Godick....................... 35 Executive Vice President and Chief Financial Officer
David Kostman........................ 35 President, VerticalNet International, and Chief
Operating Officer, VerticalNet Markets
James W. McKenzie, Jr................ 41 Executive Vice President, General Counsel and Secretary
Mark Walsh........................... 46 Chairman
SENIOR OFFICERS
- -------------------------------------
Hugo M. Daley........................ 47 Vice President, Advanced Technology, VerticalNet
Solutions
Michael W. Farrell................... 48 Senior Vice President, Professional Services,
VerticalNet Solutions
Monica D. Haley...................... 51 Vice President, Human Resources
Patricia R. Hume..................... 44 President, VerticalNet Markets
Zev Laderman......................... 40 President, VerticalNet Solutions
Nathanael V. Lentz................... 38 Senior Vice President, Strategy
James A. Mirage...................... 33 Senior Vice President, Mergers and Acquisitions and
Corporate Development
Venkat Raju.......................... 40 Senior Vice President, Product Development,
VerticalNet Solutions
David Ritter......................... 41 Senior Vice President and Chief Technology Officer,
VerticalNet Solutions
Preetinder (Ruby) Sahiwal............ 34 Chief Operating Officer, VerticalNet Solutions
Dwayne H. Spradlin................... 34 Senior Vice President, Strategic Alliances and Corporate
Development
Nyssa L. Tussing..................... 32 Vice President, Corporate Communications
Jeff R.C. Zimmerman.................. 48 Senior Vice President and Chief Customer Advocate,
VerticalNet Markets
Set forth below is biographical information about each of our executive and
senior officers.
MICHAEL J. HAGAN co-founded VerticalNet in 1995 and has served as our
President and Chief Executive Officer since January 2001. He also serves as one
of our directors. Since our founding, Mr. Hagan has held various executive
positions with us, including Executive Vice President and Chief Operating
Officer
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immediately before becoming President and Chief Executive Officer. Prior to our
founding, Mr. Hagan was Vice President and Senior Manager at Merrill Lynch Asset
Management from 1990 to 1995. He served at Merrill Lynch in the areas of
finance, technology and accounting. Prior to that time, Mr. Hagan worked for
Bristol Myers Squibb from 1988 to 1990. Mr. Hagan received a B.S. from St.
Joseph's University and is a Certified Public Accountant.
GENE S. GODICK has served as our Chief Financial Officer since June 1998
and as an Executive Vice President since July 2000. Mr. Godick served as a
Senior Vice President from October 1999 to July 2000. Before joining us, he
worked from 1997 until 1998 as a senior manager at KPMG LLP, where he worked in
their information, communications and entertainment practice, with a focus on
high technology companies. During 1997, prior to joining KPMG LLP, Mr. Godick
provided consulting services, advising companies on financing and turnaround
strategies. In early 1994, Mr. Godick was hired as Chief Financial Officer of
Industrial Construction, Inc., a privately owned environmental remediation firm,
to help that firm remedy its financial problems. Industrial Construction began
experiencing financial difficulty in late 1993 due to poor project management
and a slowdown in the environmental remediation industry as a whole. Mr. Godick
was President and Chief Financial Officer of Industrial Construction from 1996
until 1997. Industrial Construction filed for Chapter 7 bankruptcy in May 1997
after failing to achieve profitability or generate enough cash to continue
operations. From 1987 until 1994, Mr. Godick was an accountant and manager for
Arthur Andersen LLP's Enterprise Group, which provided services to emerging
growth companies in high technology, biotechnology and software. Mr. Godick
received a B.S. from Villanova University and is a Certified Public Accountant.
DAVID KOSTMAN has served as our President, VerticalNet International, since
July 2000 and Chief Operating Officer, VerticalNet Markets, since March 2001.
From 1994 to July 2000, Mr. Kostman worked in Lehman Brothers' Investment
Banking Division. At Lehman Brothers, Mr. Kostman was a Managing Director, head
of the Internet B2B Group and responsible for coverage of Israeli technology
companies. From 1992 to 1994, Mr. Kostman was an investment banker at N M
Rothschild & Sons in London, focusing on Latin American mergers and acquisitions
and privatizations. He has a law degree from Tel Aviv University and an MBA from
INSEAD, Fontainebleau.
JAMES W. MCKENZIE, JR. has served as an Executive Vice President since
March 2001 and as our General Counsel and Secretary since January 2000. Mr.
McKenzie was Senior Vice President from January 2000 to March 2001. From October
1995 to January 2000, Mr. McKenzie was a partner at Morgan, Lewis & Bockius LLP,
where he worked in their business and finance practice, with a focus on
securities law and mergers and acquisitions. Between October 1987 and September
1995, Mr. McKenzie was an associate at Morgan, Lewis & Bockius LLP. He received
an A.B. from Dartmouth College, an MBA from The Wharton School at the University
of Pennsylvania and a JD from the University of Pennsylvania Law School.
MARK WALSH has served as Chairman of the board of directors since July
2000. Mr. Walsh has served as a director since August 1997 and had served as
President and Chief Executive Officer from August 1997 to July 2000. Prior to
joining VerticalNet, he was a Senior Vice President and corporate officer at
America Online, Inc. from 1995 to 1997. He founded and managed AOL Enterprise,
the business-to-business division of AOL. Prior to his position with AOL, Mr.
Walsh was the President of GEnie, General Electric's online service from 1994 to
1995. He also was the President of Information Kinetics, Inc., a venture capital
backed interactive information company focusing on the recruitment and
classified advertising market from 1993 to 1994. He received his MBA from
Harvard Business School and B.A. from Union College.
HUGO M. DALEY has served as our Vice President, Advanced Technology,
VerticalNet Solutions since September 2000 and as Vice President for Commerce
Strategy of Isadra, Inc. since VerticalNet's acquisition of Isadra, Inc. in
August, 1999. Before the acquisition, he had been the Chief Executive Officer
and Co-Founder of Isadra, Inc. since 1996. Prior to his employment at Isadra,
Inc., Mr. Daley was Technology Director at North American Integration and
Development Center (NAID), UCLA from 1995 to 1996. From 1991 to 1996 Mr. Daley
maintained an independent software consulting practice. He attended the Doctoral
studies program in Information Science and Statistical Computing at Stanford
University from 1981 to 1987. He received his M.S. from Syracuse University.
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MICHAEL W. FARRELL has served as our Senior Vice President, Professional
Services, VerticalNet Solutions since September 2000 and as Senior Vice
President of Tradeum, Inc. since VerticalNet's acquisition of Tradeum, Inc. in
March 2000. He had served in the same role at Tradeum, Inc. prior to the
acquisition since January 2000. Prior to joining Tradeum, Inc., Mr. Farrell was
a partner at Deloitte Consulting from 1989 to 2000. From 1979 to 1989, he held
various positions at Deloitte Consulting, from Junior Consultant to Senior
Manager. He received his MBA, M.S. and B.S. from Kansas State University.
MONICA D. HALEY has served as our Vice President, Human Resources since
March 2000. Prior to joining us, Ms. Haley was a Corporate Vice President of
Human Resources at Ametek, Inc. where she was employed from 1997 to 2000. Prior
to her employment at Ametek, Inc. she was a Vice President of Human Resources at
Subaru of America from 1992 to 1997. She held various positions at Subaru from
1984 to 1997. She received her M.S. from University of Pennsylvania and B.A.
from Temple University.
PATRICIA R. HUME has served as our President of VerticalNet Markets since
November 2000. She had previously served as our Senior Vice President, Microsoft
Alliance from September 2000 to November 2000. Prior to joining us, Ms. Hume was
Vice President of Worldwide Indirect Sales and Marketing at the Lotus
Development Corporation division of IBM where she held various executive level
positions and was employed from 1980 to 2000. She received her B.S. from
University of Scranton.
ZEV LADERMAN has served as our President of VerticalNet Solutions since
September 2000 and as President of Tradeum, Inc. since VerticalNet's acquisition
of Tradeum, Inc. in March 2000. He had served in the same role at Tradeum, Inc.
prior to the acquisition since 1999. Prior to joining us, Mr. Laderman was
Executive Vice President of Global Sales & Marketing at RTS Software from 1998
to 1999. Prior to joining RTS Software, Mr. Laderman held a number of executive
positions at Oracle Corporation between 1995 until 1998. His last position at
Oracle was Vice President of the Industrial Sector global business unit. He
holds an LLB and LLM degree in law and an MBA from the Stanford University
Graduate School of Business.
NATHANAEL V. LENTZ has served as our Senior Vice President of Strategy
since August 2000. Prior to joining us, Mr. Lentz was a Vice President and
Partner of Mercer Management Consulting where he was employed from 1991 to 2000.
While at Mercer, Mr. Lentz was a consultant for VerticalNet. He received his MBA
from Stanford University and a B.A. from Brown University.
JAMES A. MIRAGE has served as our Senior Vice President, Mergers and
Acquisitions and Corporate Development since March 2001. Between January 2000
and March 2001, Mr. Mirage served as our Vice President, Mergers and
Acquisitions. Between May 1999 and January 2000 and between February 1996 and
August 1998, Mr. Mirage was an associate at Morgan, Lewis & Bockius LLP, where
he worked in the business and finance section, focusing on mergers and
acquisitions and securities law. Between August 1998 and May 1999, he was an
Associate at Berwind Financial Group, a private equity firm focused on leveraged
acquisitions. He received a JD and MBA from Georgetown University and a B.A.
from the University of Kansas.
VENKAT RAJU has served as our Senior Vice President of Product Development,
VerticalNet Solutions since February 2001. Prior to joining us, Mr. Raju was the
Chief Technology Officer at BrightSage (a spin-off from EthnicGrocer.com) and
the Chief Technology Officer of EthnicGrocer.com where he was employed from
April 2000 to February 2001. Prior to joining EthnicGrocer.com, Mr. Raju was a
Director & Head of E-Commerce Architecture and Development at Merrill Lynch
where he was employed from May 1999 to April 2000. Prior to joining Merrill
Lynch, Mr. Raju was a Vice President of Securities Processing Reengineering for
E-Business at Morgan Stanley Dean Witter from June 1996 to April 1999 and also
held the position of Vice President of Enterprise Application Integration. Prior
to joining Morgan Stanley Dean Witter, Mr. Raju was a Group Manager at Bankers
Trust where he was employed from March 1990 to May 1996. He attended the
Post-Graduate program in Management & Business Administration, Boston
University. He received a Bachelor of Electrical Engineering, Electronics and
Computer Science from the Indian Institute of Science and a B.S. from Madras
University.
DAVID RITTER has served as our Senior Vice President and Chief Technology
Officer, VerticalNet Solutions since September 2000. He had previously served as
Senior Vice President and Chief Technology
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Officer of VerticalNet, Inc. since January 2000. Prior to joining us, Mr. Ritter
was a Senior IT Specialist at Boston Consulting Group where he was employed from
April 1998 to January 2000. Prior to joining Boston Consulting Group, Mr. Ritter
was a Vice President of Engineering at Firefly Networks, Inc. where he was
employed from March 1996 until Firefly was acquired by Microsoft in March 1998.
He attended Georgia Institute of Technology.
PREETINDER (RUBY) SAHIWAL has served as our Chief Operating Officer of
VerticalNet Solutions since September 2000 and as Chief Operating Officer of
Tradeum, Inc. since VerticalNet's acquisition of that company in March 2000.
Prior to joining Tradeum, Inc., Mr. Sahiwal was the Vice President of eBusiness
Services for i2 Technologies where he was employed from July 1998 to December
1999. Mr. Sahiwal joined i2 Technologies from McKinsey & Company, where he was a
Management Consultant from July 1996 to June 1998. He received his MBA from
University of Chicago and dual B.S. in Aerospace and Mechanical Engineering from
SUNY at Buffalo.
DWAYNE SPRADLIN has served as our Senior Vice President, Strategic
Alliances and Corporate Development since March 2001. He had previously served
as our Vice President of Corporate Development from March 2000 to March 2001.
Prior to joining us, he was a Director with PricewaterhouseCoopers from 1990 to
2000 where he worked in their eBusiness consulting practice. He received his MBA
and B.A. from the University of Chicago.
NYSSA L. TUSSING has served as our Vice President of Corporate
Communications since November 2000. Prior to joining us, Ms. Tussing was the
Director of Communications at Fortune where she was employed from 1999 to 2000.
Prior to joining Fortune, Ms. Tussing was a Public Relations Director at CNN
Financial News where she was employed from 1997 to 1999. Prior to joining CNN
Financial News, Ms. Tussing was a Senior Associate at Burson-Marsteller Public
Relations where she was employed from 1995 to 1997. She received her B.A. from
Duke University.
JEFF R.C. ZIMMERMAN has served as our Senior Vice President and Chief
Customer Advocate, VerticalNet Markets since March 2000. Prior to joining us,
Mr. Zimmerman was a Senior Vice President of Americas Customer Support Services
at SAP America, Inc. where he was employed from November 1996 to March 2000.
Prior to joining SAP America, Inc., Mr. Zimmerman was a Director of Business
Critical Support Services from 1993 to 1996 at AT&T Global Information Solutions
(formerly Teredata and NCR) and held various management positions during his
employment at AT&T from 1990 to 1996. He received his Executive MBA from AT&T
School of Business, BBA from Strayer University, and a B.S. in Electronic
Technology from DeVry Technical Institute.
ITEM 2. PROPERTIES
Our corporate headquarters consists of three office facilities in Horsham,
Pennsylvania. The primary facility is located at 700 Dresher Road, where we
lease approximately 83,860 square feet for a monthly fee of approximately
$98,000 under a lease that expires in August 2009. The second facility, which we
opened in November 2000, is located at 507 Prudential Road, where we currently
lease approximately 55,000 square feet for a monthly fee of approximately
$75,000 under a lease that expires in July 2009. We ultimately expect to lease
approximately 83,150 square feet for a monthly fee of approximately $115,000
under this lease. The third facility is located at 650 Dresher Road, where we
sublease approximately 30,130 square feet from GMAC Commercial Mortgage
Corporation for a monthly fee of approximately $45,000. The sublease expires in
May 2003, and we are currently in the process of closing that office and
assigning employees in that space to the 700 Dresher Road and 507 Prudential
Road facilities. Other material offices we leased as of March 15, 2001 are
located in Greensboro, North Carolina; London, England; Palo Alto, California;
San Francisco, California; Jerusalem, Israel; Sandton, South Africa and
Washington, D.C.
We maintain most of our computer systems in a leased Web-hosting facility
in Philadelphia, Pennsylvania. We entered into a one year services agreement
relating to the facility that expires on or about December 31, 2001. The monthly
fee under that agreement is $61,870.
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"VERT." The following table sets forth, for the periods indicated, the range of
the high and low closing sales prices of our common stock as reported on the
Nasdaq National Market.
HIGH LOW
------- ------
FISCAL YEAR 1999
First Quarter (from February 11, 1999).................... $ 27.13 $ 8.75
Second Quarter............................................ 35.00 14.17
Third Quarter............................................. 28.77 14.63
Fourth Quarter............................................ 86.00 19.86
FISCAL YEAR 2000
First Quarter............................................. $138.88 $67.50
Second Quarter............................................ 59.75 28.00
Third Quarter............................................. 62.05 30.25
Fourth Quarter............................................ 32.63 4.53
The share price data set forth above reflect two separate two-for-one stock
splits, each effected in the form of a stock dividend. The record dates for the
stock splits were August 9, 1999 and March 17, 2000.
At March 16, 2001, we had 685 shareholders of record.
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance our operations
and expand our business. Any future determination to pay cash dividends will be
at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant. Additionally, under the terms of our
Series A preferred stock, we may not declare or pay, or set aside funds to pay,
any dividend or other distribution to the holders of our common stock or any
other security ranking junior to our Series A preferred stock unless we have
previously declared or paid, or set aside funds to pay, all dividends for
preceding dividend periods to which the holders of our Series A preferred stock
are entitled.
On October 25, 2000, we issued 122,250 shares of our common stock valued at
approximately $3,125,000 upon the achievement of earnout targets related to our
acquisition of American IC Exchange. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended. The
transaction was privately negotiated and did not include any general
solicitation or advertising. Each purchaser represented that he, she or it was
acquiring the shares without a view to distribution and was afforded an
opportunity to review all of our publicly filed documents and to ask questions
and receive answers from our officers.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
thereto (see Item 8), as well as Management's Discussion and Analysis of
Financial Condition and Results of Operations (see Item 7).
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues.................................. $ 112,454 $ 18,428 $ 3,135 $ 792 $ 285
Net loss from continuing operations....... (202,330) (52,589) (13,594) (4,779) (709)
Basic and diluted net loss per common
share from continuing operations....... $ (2.50) $ (0.84) $ (1.32) $ (0.47) $(0.07)
Pro forma basic and diluted net loss per
common share from continuing
operations(1).......................... $ (2.50) $ (0.79) $ (0.32) $ (0.19) $(0.05)
AS OF DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------ ----
(IN THOUSANDS)
Balance Sheet Data:
Total assets................................... $923,284 $318,981 $12,343 $2,104 $637
Long-term debt................................. 45,287 116,750 5,352 400 167
Redeemable preferred stock..................... 94,760 -- -- -- --
- ---------------
(1) Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares
from convertible preferred stock issued prior to our initial public offering
as if converted at the original issuance date. All of such convertible
preferred stock was converted into our common stock on the date of our
initial public offering.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with the consolidated financial
statements and the related notes thereto appearing in Item 8 of this report.
OVERVIEW
Following the NECX.com LLC ("NECX") acquisition in December 1999,
management segmented our business into two operating segments consisting of
vertical trade communities (currently referred to as e-marketplaces) and the
electronics exchange business. In September 2000, we announced plans to organize
our business into three strategic business units: VerticalNet Markets,
VerticalNet Solutions and VerticalNet Exchanges. Due to the early stage of
VerticalNet Solutions' operations and our need to determine the allocation of
resources between VerticalNet Markets and VerticalNet Solutions, management
continued to operate and measure the performance of VerticalNet Markets and
VerticalNet Solutions as one unit for the remainder of fiscal 2000. Management
expects to have the ability to begin evaluating VerticalNet Solutions as a
separate segment in the first quarter of 2001. On December 19, 2000, management
entered into an agreement to sell NECX, which together with two other
acquisitions, constituted the VerticalNet Exchanges business segment. Therefore,
all results of this segment have been reflected as a discontinued operation.
During the year ended December 31, 2000, we substantially enhanced the
composition of our senior management team, consummated several acquisitions and
entered into a contract to sell our VerticalNet Exchanges segment. In fiscal
2001, we intend to focus on balancing revenue growth and achieving
profitability. Over the last several months, we have streamlined our operations
by removing several unprofitable initiatives from our business, and we expect to
continue reviewing our operations and looking for opportunities to reduce costs
and improve our operating margins. We will look to streamline operations or
reduce headcount if the revenues expected from our product and service offerings
do not materialize.
VerticalNet Markets operates 59 industry-specific e-marketplaces through
which we provide hosted e-commerce and community capabilities for corporate
divisions and small and medium sized businesses. These e-marketplaces act as
industry-specific comprehensive sources of information, interaction and
electronic commerce, and are expected to focus increasingly on offering supplier
enablement products and channel management solutions for public and private
e-marketplaces. Each e-marketplace focuses on a single business sector and
caters to individuals with similar professional interests. We have designed our
e-marketplaces to attract technical and purchasing professionals with
specialized product requirements and purchasing authority or influence.
VerticalNet Solutions offers software solutions to industry alliances,
independent net market makers and global 2000 enterprises. VerticalNet
Solutions' e-marketplace solutions offer a comprehensive and innovative open
platform, multiple market mechanisms and transaction types, multi-party system
interaction and a broad range of buy- and sell-side services, integrated with
tools for community and content development and market design. In addition,
VerticalNet Solutions is developing and offering software solutions that focus
on direct materials procurement targeted towards discrete manufacturing
processes within large enterprises. As part of this offering, VerticalNet
Solutions expects to deliver a supplier relationship management application
suite to automate (and better enable) supplier sourcing decision analysis,
provide for collaborative execution of contract fulfillment and monitor supplier
performance. VerticalNet Solutions' product offerings are complemented by a
complete set of professional service offerings.
Subsequent to management's decision to sell the VerticalNet Exchanges
business unit, the majority of our fiscal 2000 revenue was generated from two
primary sources attributable to our VerticalNet Markets business unit:
e-enablement and e-commerce; and advertising and services. For the year ended
December 31, 2000, approximately $7.9 million of revenue was generated from
software licensing, related professional services and other business operations
services.
E-enablement and e-commerce revenues include storefront and e-commerce
center fees, Web site development fees and e-commerce fees. Storefront and
e-commerce center fees are recognized ratably over
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the period of the contract. Web site development fees are recognized as the
services are performed. E-commerce fees in the form of transaction fees,
percentage of sale fees or minimum guaranteed fees, are recognized upon receipt
of payment. E-commerce fees from educational courses are recognized in the
period in which the course is completed. E-commerce fees from books and other
product sales are recognized in the period in which the products are shipped.
Auction transaction fees are recognized when the auction is successfully
concluded.
Advertising and services revenues, including buttons and banners, are
recognized ratably over the period of the applicable contract. Newsletter
sponsorship revenues are recognized when the newsletters are e-mailed.
Advertising contracts generally do not extend beyond one year, although certain
contracts are for multiple years. We also enter into strategic co-marketing
agreements under which we develop co-branded sites. Revenues from hosting and
maintenance services under these co-marketing arrangements are recognized
ratably over the term of the contract. In the normal course of business, we
enter into "multiple-element" arrangements. We allocate revenue under such
arrangements based on the fair value of each element to the extent it is
objectively determinable, and recognize revenue upon delivery or consummation of
the separable earnings process attributable to each element.
Revenues from software licensing, related professional services and other
business operations services are generally accounted for under Statement of
Position ("SOP") 97-2, Software Revenue Recognition, and related guidance in the
form of technical questions and answers published by the American Institute of
Certified Public Accountants' task force on software revenue recognition. SOP
97-2 requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on vendor specific objective
evidence of fair values of the elements. License revenue allocated to software
products generally is recognized upon delivery of the software products or
ratably over a contractual period if unspecified software products are to be
delivered during that period. Revenue allocated to hosting and maintenance
services is recognized ratably over the contract term and revenue allocated to
professional services is recognized as the services are performed. If the
professional services provided are essential to the functionality or are for
significant production, modification or customization of the software products,
both the software product revenue and service revenue are recognized in
accordance with the provisions of SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Under SOP 81-1,
revenues and costs are recognized based on the labor hours incurred to date,
compared to total estimated labor hours over the term of the contract using the
percentage of completion method.
For the year ended December 31, 2000, revenues of approximately $47.1
million, $57.5 million and $7.9 million were derived from e-commerce and
e-enablement; advertising and services; and software licensing, professional
services and related operating services, respectively. We are expecting
significant software licensing and professional services revenue growth from our
VerticalNet Solutions segment with the signing of the three-year software
licensing and professional services agreement with Converge.
At December 31, 2000, we had an accumulated deficit of $384.1 million. The
table below illustrates the loss from continuing operations attributable to
common shareholders (including preferred dividends) and loss attributable to
common shareholders, which includes discontinued operations, during the
specified periods:
LOSS FROM
CONTINUING OPERATIONS LOSS
ATTRIBUTABLE TO ATTRIBUTABLE TO
COMMON COMMON
PERIOD SHAREHOLDERS SHAREHOLDERS
------ --------------------- ---------------
(IN MILLIONS)
Year ended December 31, 2000.......................... $207.6 $316.6
Year ended December 31, 1999.......................... 52.6 53.5
Year ended December 31, 1998.......................... 13.6 13.6
Year ended December 31, 1997.......................... 4.8 4.8
The losses from continuing operations and accumulated deficit have resulted
primarily from our lack of revenues relative to the costs of our significant
infrastructure expansion, the costs related to acquisitions, including
amortization expense and in-process research and development charges, and other
costs incurred for
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the development of e-marketplaces, horizontal business services and software
products, as well as sales and marketing for the e-marketplaces and other
businesses we have acquired. We expect to continue to incur significant
operating losses for the foreseeable future. Although we have experienced
greater revenue growth in recent periods, such growth may not be sustainable and
should not be considered indicative of future performance. We may never maintain
or increase revenues or generate an operating profit.
SALE OF VERTICALNET EXCHANGES (NECX)
On December 19, 2000, we entered into a definitive agreement to sell our
VerticalNet Exchanges business unit (also referred to as "NECX") to Converge,
Inc. ("Converge"), an independent marketplace that serves the high-tech
supply-chain community. VerticalNet Exchanges was comprised of NECX.com LLC, a
business purchased in December 1999, and its subsequent acquisitions of RW
Electronics and American IC Exchange in March 2000 and July 2000, respectively.
We completed the sale on January 31, 2001. In consideration for the transaction,
we received 10,371,319 shares of Series B convertible preferred stock and
1,094,751 shares of non-voting common stock, representing approximately 18.0%
and 1.9% of Converge's equity, respectively. We were also entitled to receive
$60.0 million of cash at closing, subject to adjustment based on a comparison of
NECX's net worth and working capital as of October 31, 2000 and as of the
closing date. Based on a preliminary calculation performed on January 31, 2001,
the closing date, VerticalNet paid $6.5 million to Converge. This cash payment
is subject to further adjustment based on a final calculation of NECX's closing
date net worth and working capital following a post-closing audit. We expect to
pay Converge an additional $6.0 million based on the final net worth and working
capital adjustment calculation.
We will use the fair value of NECX of approximately $215.0 million, as
determined by an independent appraisal, to record our investment in Converge. In
addition, we used this amount in determining the loss on disposition of
approximately $82.0 million, which includes estimated losses of $9.0 million
through January 2001. This loss is reflected separately in our consolidated
statement of operations. The investment in Converge will be accounted for under
the cost method of accounting for investments.
In connection with the sale of NECX to Converge in January 2001, we settled
the remaining earnout provisions in the American IC Exchange acquisition by
issuing 1,101,549 shares of our common stock valued at approximately $10.0
million.
The sale of the VerticalNet Exchanges segment represents the disposal of a
business segment under Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Accordingly, results of this segment have been shown separately as
a discontinued operation, and all prior periods have been restated.
RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND
DECEMBER 31, 1999
The following discussion and comparison regarding results of continuing
operations do not reflect the results of NECX.
Revenues. Revenues were $112.5 million for the year ended December 31,
2000 and $18.4 million for the year ended December 31, 1999. The increase in
revenues resulted primarily from:
- the Microsoft commercial agreement, which was primarily responsible for
the increase in the number of storefronts on our e-marketplaces from
approximately 2,900 as of December 31, 1999 to approximately 18,700 as of
December 31, 2000; and
- additional revenues generated by our horizontal business services, such
as asset remarketing, training and education and career services.
At December 31, 2000 and 1999, we had deferred revenues of $57.3 million
and $9.8 million, respectively. Our deferred revenue balance is primarily
associated with e-enablement and advertising revenue.
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Approximately $37.1 million of our deferred revenue balance at December 31, 2000
relates to our commercial arrangement with Microsoft.
Editorial and Operational Expenses. Editorial and operational expenses
consist primarily of salaries and benefits of operating and editorial personnel,
product costs (including costs of professional services provided to customers),
depreciation, amortization of internally developed software and other related
operating costs. Editorial and operational expenses were $43.8 million for the
year ended December 31, 2000 and $8.6 million for the year ended December 31,
1999. Expenses increased by:
- $11.7 million for salaries and benefits of operating and editorial
personnel;
- $10.1 million for direct product costs, including costs of professional
services provided to our VerticalNet Markets and VerticalNet Solutions
customers; and
- $13.4 million for other related operating costs.
Increases were primarily attributable to additional personnel and direct
product costs. Additional personnel were required to provide services to an
increased number of customers as a result of our Microsoft arrangement, as well
as maintaining the increasing number of features and functionalities that have
been added to our e-marketplaces and horizontal business services. Direct
product costs increased due to our growth in the asset remarketing and training
and education businesses in which, under certain circumstances, we take title to
the goods being sold. We expect professional services costs to increase as we
grow the VerticalNet Solutions business, specifically in relation to our
contract with Converge.
Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related
expenditures. Product development expenses were $34.2 million for the year ended
December 31, 2000 and $7.4 million for the year ended December 31, 1999.
Expenses increased by:
- $14.1 million for salaries and benefits;
- $8.1 million for consulting expenses; and
- $4.6 million for other expenditures.
This increase in product development expenses resulted primarily from
increased staffing and consulting costs to develop and enhance the features,
content and services of our e-marketplaces, as well as developing software
products related to our VerticalNet Markets' community building technology and
development of the acquired technology of Tradeum and Isadra. Product
development is critical to attaining our goals. However we do not expect
significant increases due to our ability to leverage our product development
efforts for both the VerticalNet Markets and VerticalNet Solutions business
segments.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel,
advertising and travel and entertainment, including the costs of attending trade
shows. Sales and marketing expenses were $80.6 million for the year ended
December 31, 2000 and $25.3 million for the year ended December 31, 1999.
Expenses increased by:
- $29.4 million for advertising, including barter expense;
- $18.5 million for salaries, commissions and benefits; and
- $7.4 million for travel and entertainment expenses (including trade show
attendance) and other expenses.
These increases resulted primarily from an increased number of sales and
marketing personnel across our business units, increased sales commissions and
increased expenses related to promoting the new businesses and services we have
acquired or created. We expect sales and marketing expenses will continue to
grow as we pursue our growth strategy.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, legal, human resources and business and corporate
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development personnel, as well as support services and professional service
fees. General and administrative expenses were $56.9 million (including $5.6
million of non-recurring items related to terminated deal costs and obsolete
software) for the year ended December 31, 2000 and $10.6 million for the year
ended December 31, 1999. Expenses increased by:
- $17.5 million for salaries and benefits;
- $7.4 million for professional fees;
- $5.3 million for facility costs; and
- $16.1 million for other general and administrative costs, including
non-recurring items.
These increases resulted primarily from increased staffing levels, higher
facility costs, including those incurred as a result of newly acquired
businesses, and professional fees to support the growth of our infrastructure
and business operations.
Amortization Expense. Amortization expense primarily reflects the
amortization of goodwill from purchase business combinations. Also included in
amortization expense is the amortization of identified intangible assets
acquired in such acquisitions and the amortization of deferred costs related to
the issuance of warrants and Series A preferred stock to Microsoft (see Note 13
to our consolidated financial statements). Amortization periods for goodwill and
other intangible assets are 36 months and range from 24 to 36 months,
respectively. Amortization expense was $139.8 million (including $1.7 million of
deferred cost amortization related to Microsoft) for the year ended December 31,
2000 and $6.8 million for the year ended December 31, 1999. The increase in
amortization expense is primarily attributable to the acquisitions we completed
during the year ended December 31, 2000.
Goodwill Impairment. We recorded an impairment charge of approximately
$11.5 million related to goodwill based on our analysis of projected
undiscounted cash flows (see Note 6 to our consolidated financial statements).
In-Process Research and Development Charge. In March 2000, we incurred a
one-time in-process research and development charge of $10.0 million in
connection with our acquisition of Tradeum.
Other Income and Expenses. For the year ended December 31, 2000, other
income (expenses) includes:
(IN MILLIONS)
Net gain on investments(1).................................. $ 73.5
Conversion payment to debt holders(2)....................... (11.2)
Equity in loss of affiliates................................ (2.8)
------
$ 59.5
======
- ---------------
(1) During 1999, we entered into discussions with Tradex Technologies, Inc.
regarding a possible licensing arrangement. Although we could not reach
agreement on the terms of a licensing arrangement, we acquired $1.0 million
of equity in Tradex in July 1999. In March 2000, Tradex was acquired by
Ariba, Inc. ("Ariba") and we received 566,306 shares of Ariba in exchange
for our shares of Tradex. We recorded an $85.5 million gain upon the receipt
of the Ariba common stock and subsequently sold 140,000 shares in March 2000
at a loss of $5.6 million, resulting in a net investment gain of $79.9
million (see Note 7 to our consolidated financial statements). Additionally,
we recorded an impairment charge of $6.4 million for an other than temporary
decline in the fair value of cost method investments (see Note 7 to our
consolidated financial statements).
(2) In April 2000, approximately $93.3 million of our 5 1/4% convertible
subordinated debentures were converted into 4,664,750 shares of our common
stock. In connection with the conversion, we made an inducement payment of
approximately $11.2 million to the debt holders (see Note 11 to our
consolidated financial statements).
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Interest Income, Net. Interest income, net of expense, includes income
from temporarily invested cash and cash equivalents and from investments and
expenses related to our financing obligations. Net interest income was $2.6
million (net of $3.5 million of expense) for the year ended December 31, 2000
and $1.3 million (net of $2.1 million of expense) for the year ended December
31, 1999. Interest income increased as a result of the cash we received from the
issuance of Series A preferred stock in April 2000 and the forward sale of our
Ariba investment in July 2000 (see Note 8 to our consolidated financial
statements). We invest the majority of our cash balances in debt instruments of
the United States Government and its agencies, and in high-quality corporate
issuers. Interest expense increased during the period because of our outstanding
convertible debt.
Preferred Stock Dividends. For the year ended December 31, 2000, preferred
stock dividends and accretion were approximately $5.3 million. As of December
31, 2000, cumulative dividends of $4.5 million have been earned by the holder of
our Series A preferred stock. In August 2000, dividends of $1.5 million were
paid to Microsoft through the issuance of additional shares of our Series A
Preferred Stock. The remaining $3.0 million remains payable as of December 31,
2000. The dividends may be paid in cash, additional shares of Series A Preferred
Stock or common stock, at our option. The preferred stock dividend amount also
includes approximately $0.8 million of accretion (see Note 13 to our
consolidated financial statements).
RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
The following discussion and comparison regarding results of continuing
operations do not reflect the results of NECX.
Revenues. Revenues were $18.4 million for the year ended December 31, 1999
and $3.1 million for the year ended December 31, 1998. The increase in revenues
resulted primarily from:
- the increase in storefronts from approximately 1,300 as of December 31,
1998 to approximately 2,900 as of December 31, 1999; and
- the increase in e-marketplaces from 33 as of December 31, 1998 to 55 as
of December 31, 1999.
At December 31, 1999, we had deferred revenues of $9.8 million.
Editorial and Operational Expenses. Editorial and operational expenses
were $8.6 million for the year ended December 31, 1999 and $3.2 million for the
year ended December 31, 1998. Expenses increased by:
- $4.6 million for salaries and benefits; and
- $0.8 for other expenditures.
Increases were primarily related to additional personnel required to
maintain a larger number of e-marketplaces.
Product Development Expenses. Product development expenses were $7.4
million for the year ended December 31, 1999 and $1.4 million for the year ended
December 31, 1998. Expenses increased by:
- $3.7 million for salaries and benefits;
- $1.3 million for consulting expenses; and
- $1.0 million for other expenditures.
This increase in expenses resulted primarily from increased staffing and
the costs of enhancing the features, content and services of our e-marketplaces,
as well as increasing the overall number of e-marketplaces. In 1999, we began
capitalizing certain internal software development costs as required by SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.
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31
Sales and Marketing Expenses. Sales and marketing expenses were $25.3
million for the year ended December 31, 1999 and $7.9 million for the year ended
December 31, 1998. Expenses increased by:
- $7.0 million for advertising, including barter expense;
- $7.9 million for salary, commissions and benefits, and
- $2.5 million for travel and entertainment expenses (including tradeshow
attendance) and other expenses.
This was primarily due to increasing the number of sales and marketing
personnel, increased sales commissions and increased expenses related to
promoting our e-marketplaces.
General and Administrative Expenses. General and administrative expenses
were $10.6 million for the year ended December 31, 1999 and $3.8 million for the
year ended December 31, 1998. Expenses increased by:
- $1.6 million for salaries and benefits;
- $0.9 million for professional fees;
- $1.8 million for facility costs; and
- $2.5 for other general and administrative costs.
These increases were due primarily to increased staffing levels, higher
facility costs, including supporting offices of newly acquired businesses, and
professional fees to support the growth of our infrastructure.
Amortization Expense. Amortization of goodwill and identified intangible
assets was $6.8 million for the year ended December 31, 1999 and $0.3 million
for the year ended December 31, 1998. The increase in amortization expense is
attributable primarily to the acquisitions we completed during the year ended
December 31, 1999.
In-Process Research and Development Expense. In August 1999, we incurred a
one-time in-process research and development charge of $13.6 million in
connection with the acquisition of Isadra.
Interest Income, Net. Interest income, net of expense, includes income
from our cash and cash equivalents and from investments and expenses related to
our financing obligations. We incurred net interest expense of $0.1 million (net
of $0.2 million of interest income) for the year ended December 31, 1998 and
generated net interest income of $1.3 million (net of $2.1 million of interest
expense) for the year ended December 31, 1999. The net increase is due to the
higher investment balances held during fiscal year 1999 from cash raised in the
initial public offering and our convertible debt offering. Interest expense
increased during the period because of our outstanding convertible debt.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain results of operations data for the
eight quarters ended between March 31, 1999 and December 31, 2000. The
information for each quarter has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this report and, in the
opinion of management, includes all adjustments necessary for a fair
presentation of the results of operations for such periods. Historical results
are not indicative of the results to be expected in the future, and the results
of the interim periods are not indicative of results of any future period. All
prior periods have been restated due to the discontinued operations treatment
for the sale of our VerticalNet Exchanges segment.
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
Revenues................... $ 1,934 $ 3,551 $ 5,182 $ 7,761 $ 12,863 $ 24,445
Operating loss............. (5,756) (7,476) (26,296) (14,405) (32,412) (73,125)
Income (loss) from
continuing operations.... (5,608) (6,761) (25,827) (14,393) 46,699 (82,767)
Income (loss) from
discontinued
operations............... -- -- -- (891) (4,606) (2,931)
Estimated loss on disposal
of discontinued
operations............... -- -- -- -- -- --
Income (loss) attributable
to common shareholders,
including effect of
preferred stock dividends
and
accretion................ (5,608) (6,761) (25,827) (15,284) 42,093 (87,148)
Basic net income (loss) per
common share:
Continuing operations.... $ (0.14) $ (0.10) $ (0.38) $ (0.20) $ 0.62 $ (1.01)
Discontinued
operations............. -- -- -- (0.01) (0.06) (0.04)
Estimated loss on
disposal of
discontinued
operations............. -- -- -- -- -- --
------- ------- -------- -------- -------- --------
$ (0.14) $ (0.10) $ (0.38) $ (0.21) $ 0.56 $ (1.05)
======= ======= ======== ======== ======== ========
Diluted net income (loss)
per common share:
Continuing operations.... $ (0.14) $ (0.10) $ (0.38) $ (0.20) $ 0.49 $ (1.01)
Discontinued
operations............. -- -- -- (0.01) (0.04) (0.04)
Estimated loss on
disposal of
discontinued
operations............. -- -- -- -- -- --
------- ------- -------- -------- -------- --------
$ (0.14) $ (0.10) $ (0.38) $ (0.21) $ 0.45 $ (1.05)
======= ======= ======== ======== ======== ========
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
2000 2000
------------- ------------
Revenues................... $ 34,455 $ 40,690
Operating loss............. (73,176) (85,635)
Income (loss) from
continuing operations.... (74,560) (91,702)
Income (loss) from
discontinued
operations............... 68 (19,549)
Estimated loss on disposal
of discontinued
operations............... -- (81,968)
Income (loss) attributable
to common shareholders,
including effect of
preferred stock dividends
and
accretion................ (76,014) (195,511)
Basic net income (loss) per
common share:
Continuing operations.... $ (0.88) $ (1.07)
Discontinued
operations............. -- (0.23)
Estimated loss on
disposal of
discontinued
operations............. -- (0.93)
-------- ---------
$ (0.88) $ (2.23)
======== =========
Diluted net income (loss)
per common share:
Continuing operations.... $ (0.88) $ (1.07)
Discontinued
operations............. -- (0.23)
Estimated loss on
disposal of
discontinued
operations............. -- (0.93)
-------- ---------
$ (0.88) $ (2.23)
======== =========
The amounts previously reported on Forms 10-Q and Form 10-K differ from the
amounts reported above due to our December 19, 2000 agreement to sell our
VerticalNet Exchanges segment to Converge (see Note 4 to our consolidated
financial statements).
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future. In addition,
the results of any quarter do not indicate results to be expected for a full
fiscal year. Finally, our annual or quarterly results of operations may be below
the expectations of public market analysts or investors, in which case the
market price of our common stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, our primary source of liquidity consisted of cash,
cash equivalents and highly liquid, high-quality debt instruments acquired
primarily with the proceeds from our issuance of the Series A preferred stock
and warrants to Microsoft for $99.9 million (net of issuance costs) in April
2000 (see Note 13 to our consolidated financial statements) and our $75.0
million accounts receivables securitization facility (see Note 4 to our
consolidated financial statements). Our intent is to make the majority of such
funds readily
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33
available for operating purposes. At December 31, 2000, we had cash and cash
equivalents and short-term investments totaling approximately $145.2 million,
compared to $51.8 million at December 31, 1999.
Net cash provided by operating activities was $13.6 million for the year
ended December 31, 2000. Net cash provided by operating activities consisted of
net operating losses and increases in accounts receivable and prepaid expenses,
offset by increases in deferred revenues, accounts payable and accrued expenses.
The large increase in deferred revenues is related primarily to our commercial
agreement with Microsoft.
Net cash used in investing activities was $28.1 million for the year ended
December 31, 2000. Cash from investing activities include the sale and
maturities of available-for-sale securities of $52.6 million (net of purchases
of such securities) and acquisitions of $15.2 million, net of cash acquired.
Cash used in investing activities included capital expenditures and capitalized
software costs of $29.0 million, investments made in companies accounted for
under the equity or cost method of $19.0 million, restricted cash of $9.9
million and investing activities of discontinued operations of $38.0 million.
The capital expenditures consisted primarily of the purchase of office
furniture, computer hardware, communications equipment and costs capitalized in
connection with the internal development of software. We have generally funded
our capital expenditures through funds generated from operations and the use of
capital leases and expect to continue to do so in the foreseeable future.
Net cash provided by financing activities was $130.6 million for the year
ended December 31, 2000. Net cash provided by financing activities consist of
net proceeds from the issuance of the Series A preferred stock and warrants of
$99.9 million, proceeds from the forward sale of our Ariba investment of $47.4
million (see Note 8 to our consolidated financial statements) and net proceeds
from the exercise of employee stock options and stock purchase plan transactions
of $28.8 million. Cash used in financing activities include payments made for
capital leases of $2.1 million and financing activities of discontinued
operations of $43.4 million related to lines of credit borrowings and
repayments. Due to current market conditions, proceeds from the exercise of
employee stock options and stock purchase plan transactions are expected to
decrease.
In September and October of 1999, we completed the sale of an aggregate of
$115.0 million of 5 1/4% convertible subordinated debentures in a private
placement transaction pursuant to Section 4(2) of the Securities Act of 1933, as
amended, resulting in net proceeds of $110.9 million. The debentures have a
maturity date of September 27, 2004, with semi-annual interest payments due on
March 27 and September 27 of each year beginning on March 27, 2000. The
debentures are convertible into shares of our common stock at an initial
conversion price of $20 per share, subject to adjustment under certain
circumstances. On April 7, 2000, the Securities and Exchange Commission declared
effective a registration statement covering the convertible subordinated
debentures and the shares of our common stock underlying the debentures. We may
redeem the debentures if the price of our common stock is above $34 per share
for at least 20 trading days during the 30-day trading period ending on the
trading day before we mail notice that we intend to redeem the debentures. If we
redeem the debentures, we must redeem at a price equal to 101.3125% of the
principal amount, pay any accrued but unpaid interest and make an interest
make-whole payment equal to the present value of the interest that would have
accrued from the redemption date though September 26, 2002. In April 2000,
certain holders of the debentures converted approximately $93.3 million of the
debentures into 4,664,750 shares of our common stock. We made a conversion
inducement payment of $11.2 million to the holders. We recorded as a reduction
of additional paid-in capital approximately $2.9 million in deferred debt
offering costs attributable to the portion of the debt converted to equity (see
Note 11 to our consolidated financial statements).
In March 2000, we entered into an agreement with Microsoft with respect to
a strategic relationship (see Note 9 to our consolidated financial statements).
As part of the strategic relationship, in April 2000, Microsoft made a $100.0
million equity investment in VerticalNet through the purchase of shares of our
Series A preferred stock, which are initially convertible into 1,151,080 shares
of our common stock, and the warrants described below. On April 1, 2010, at the
election of the holder of the Series A preferred stock, we must redeem all
outstanding shares of Series A preferred stock at a specified price. In
addition, at our option, each share of Series A preferred stock will be subject
to redemption at a calculated price if certain conditions are met. The warrants
Microsoft received entitle Microsoft to purchase 1,500,000 shares of our common
stock at
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an exercise price of $69.50 per share, subject to adjustment under certain
circumstances (see Note 13 to our consolidated financial statements).
In July 2000 we formed a Japanese joint venture, VerticalNet Japan, with
Softbank. During the year ended December 31, 2000 we contributed approximately
$1.9 million to the joint venture. Through March 15, 2001, we made additional
contributions of approximately $1.7 million. Our remaining maximum funding
obligation is approximately 400 million Yen (approximately $3.3 million as of
March 15, 2001) to the joint venture through its first two years of operations.
In July 2000, we entered into forward sale contracts relating to our
investment in Ariba (see Note 8 to our consolidated financial statements). Under
these contracts, we pledged our shares of Ariba common stock to the counterparty
for a three-year period in return for approximately $47.4 million of cash. At
the conclusion of the three-year period, we have the option of delivering either
cash or the pledged Ariba shares to satisfy the forward sale. However, we will
not be required to deliver shares in excess of those we pledged. If we choose to
deliver Ariba shares to satisfy the forward sale, the number of Ariba shares to
be delivered at maturity may vary depending on the then market price of Ariba's
common stock.
We have only limited involvement with derivative financial instruments and
do not use them for trading purposes. Our risk of loss in the event of
nonperformance by the counterparty under the forward sales contract is not
considered to be significant. Although the forward sales contract exposes us to
market risk, fluctuations in the fair value of this contract are mitigated by
expected offsetting fluctuations in the value of the pledged securities.
We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some within the
business-to-business e-commerce industry, have experienced difficulty in raising
additional capital necessary to fund operating losses and ongoing investments in
strategic relationships. Valuations of public companies operating in the
Internet business-to-business e-commerce sector have declined significantly
since the first quarter of 2000. During the year ended December 31, 1999 and in
the first quarter of 2000, we announced several acquisitions, the most
significant of which was Tradeum, that were financed principally with shares of
our common stock and based on the price of our common stock at that time. Based
on our periodic reviews to determine if the carrying value of goodwill and other
intangible assets is impaired, we recorded a goodwill impairment charge of
approximately $11.5 million during the quarter ended December 31, 2000. It is
reasonably possible that our accounting estimates with respect to the useful
life and ultimate recoverability of goodwill and other intangible assets could
change in the near term and that the effect of such changes on the consolidated
financial statements could be material. While we currently believe that the
recorded amount of goodwill and other intangible assets is not impaired, a
significant write-down or write-off may be required in the future.
As we continue to grow, we expect to utilize cash resources to fund
operating losses, acquisitions, strategic investments, technologies and the
infrastructure necessary to support our growth. Additionally, we expect that our
acquisitions will have a negative impact on our liquidity and cash flow in the
near term as we integrate acquired businesses with ours. We believe that our
current level of liquid assets and the expected cash flows from contractual
arrangements will be sufficient to finance our capital requirements and
anticipated operating losses for at least the next 12 months. However, to the
extent our current level of liquid assets proves to be insufficient, we may need
to obtain additional debt or equity financing. Our contractual arrangements
include a three-year software licensing and professional services agreement with
Converge for approximately $108.0 million (see Note 21 to our consolidated
financial statements) and a commercial arrangement with Microsoft (see Note 9 to
our consolidated financial statements). Expected cash flows from these two
arrangements, net of cash payments we are required to make, are approximately
$92.2 million, $40.1 million and $30.0 million in 2001, 2002 and 2003,
respectively. Additionally, we may, if the capital markets present attractive
opportunities, raise cash through the sale of debt or equity. We can provide no
assurance that our liquid assets will be sufficient to fund our operations or
that we will be successful in obtaining any required or desired financing either
on acceptable terms or at all.
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ACQUISITIONS
We intend to continue to pursue acquisitions that complement our existing
products and services. We evaluate prospective acquisitions by assessing whether
the business or asset broadens the scope of services we offer, enhances our
presence in existing or new markets, offers technology that would allow us to
better serve our clients or offers the opportunity to enhance revenues as well
as profitability.
TRADEUM
On March 23, 2000, we acquired all of the outstanding capital stock of
Tradeum, Inc. ("Tradeum") for approximately $453.1 million, including
transaction costs. The consideration included 2,573,837 shares of our common
stock, valued at approximately $325.0 million and 1,426,148 employee options to
purchase our common stock, valued as of the date of acquisition at approximately
$122.6 million, based on an independent valuation. A portion of the common stock
given as consideration was reduced by an illiquidity discount based on
restrictions detailed in the lock up agreements signed by the individuals
receiving the stock. The acquisition was accounted for as a purchase and the
excess of the purchase price over the fair value of the tangible net assets
acquired of approximately $452.6 million was allocated to in-process research
and development, existing technology, assembled workforce and goodwill in the
amounts of approximately $10.0 million, $7.0 million, $1.0 million and $434.6
million, respectively. The $10.0 million was charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development had not yet reached technological feasibility and had
no alternative future uses (see Note 3 to our consolidated financial
statements). The existing technology, assembled workforce and goodwill are being
amortized on a straight-line basis over 36 months.
VERTICALNET EUROPE
In June 2000, we formed VerticalNet Europe B.V. ("VerticalNet Europe"), a
joint venture with British Telecommunications, plc ("BT") and Internet Capital
Group, Inc. ("ICG"). The joint venture was funded with 109.5 million Euros
(approximately $114.7 million as of the closing date) from the three partners.
We contributed to VerticalNet Europe approximately $6.8 million in cash and
intellectual property independently valued at approximately $120.0 million for
the operation of e-marketplaces within Europe for a 56% ownership interest in
VerticalNet Europe. Additionally, VerticalNet Europe and BT created VerticalNet
UK Ltd. as part of the joint venture agreement.
Our ownership of VerticalNet Europe increased from 56% to 72% on December
29, 2000 when VerticalNet Europe redeemed some of its shares held by BT. Due to
minority shareholder governance provisions in the original agreement, we were
accounting for VerticalNet Europe using the equity method. As a result of our
increased ownership, certain governance provisions regarding minority
shareholders were amended giving us control over VerticalNet Europe's
operations. Accordingly, we have consolidated VerticalNet Europe in our
consolidated balance sheet at December 31, 2000 and will begin consolidating
VerticalNet Europe's operations starting January 1, 2001. The increase in
ownership was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$3.4 million was allocated to goodwill. Additionally in December 2000,
VerticalNet Europe obtained full ownership of VerticalNet UK Ltd.
OTHER 2000 ACQUISITIONS
During the year ended December 31, 2000, we completed six additional
acquisitions, including Career Mag, Leasend, J.M. Computer Services, BidLine,
FedAmerica and Oralis. The aggregate purchase price of these acquisitions was
approximately $5.3 million in cash and 474,060 shares of common stock valued at
approximately $36.8 million. These acquisitions were accounted for as purchases
and the excess of the purchase price over the fair value of net assets acquired
of approximately $41.6 million was allocated to goodwill and other intangibles.
The results of operations from these acquisitions are not material to our
financial position or results of operations.
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ISADRA
In August 1999, we acquired all of the outstanding capital stock of Isadra,
Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common stock
valued at approximately $37.8 million, based on an independent valuation, and
81,526 options to purchase our common stock, valued at approximately $1.5
million at the date of acquisition using the Black-Scholes model. The common
stock given as consideration was reduced by an illiquidity discount based on
restrictions detailed in the lock up agreements signed by the individuals
receiving the stock. In connection with this transaction, we agreed to lend up
to $1.0 million to Isadra prior to the closing of this transaction. As of the
acquisition date, we had advanced Isadra approximately $1.0 million. The
acquisition was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the tangible net assets acquired of
approximately $43.9 million was allocated to in-process research and
development, existing technology, assembled work force and goodwill in the
amounts of approximately $13.6 million, $2.1 million, $0.5 million and $27.7
million, respectively. The $13.6 million was charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development had not yet reached technological feasibility and had
no alternative future use (see Note 3 to our consolidated financial statements).
The existing technology and assembled work force are being amortized on a
straight-line basis over 24 months, while goodwill is being amortized on a
straight-line basis over 36 months.
OTHER 1999 ACQUISITIONS
During the year ended December 31, 1999, we completed nine additional
acquisitions, including Safety Online, Techspex, Oillink, ElectricNet, LabX
Technologies, Industry OnLine, CertiSource, GovCon and TextileWeb. The aggregate
purchase price for these acquisitions was approximately $3.9 million in cash and
781,488 shares of common stock valued at approximately $27.9 million. These
acquisitions were accounted for as purchases and the excess of the purchase
price over the fair value of the tangible net assets acquired of approximately
$33.0 million was allocated to goodwill and other intangibles. The results of
operations from these acquisitions are not material to our financial position or
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (referred to as derivatives),
and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of SFAS No. 133, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of SFAS No. 133, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect SFAS No. 133, as amended, to have a material impact on our
results of operations, financial position and cash flows.
The Emerging Issues Task Force ("EITF") has begun discussion on Issue No.
00-21, Accounting for Multiple-Element Revenue Arrangements. Issues currently
being addressed by an EITF working group include: (a) determining when elements
of multiple-element arrangements should be evaluated separately; (b) allocation
of consideration to the individual elements; and (c) accounting for certain
direct costs incurred related to the arrangement. No consensuses have been
reached yet on these issues. However, because we engage in these types of
transactions, we anticipate that guidance ultimately issued by the EITF on this
issue may impact us in the future.
SUBSEQUENT EVENTS
In January 2001, we sold $15.0 million of our common stock to Sumitomo.
Under the agreement, Sumitomo may not transfer the purchased shares for one year
from the closing date of the transaction. Sumitomo was also granted limited
demand and piggyback registration rights exercisable after the first anniversary
of the closing.
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In January 2001, as part of a strategic and organizational initiative, we
announced a workforce reduction of approximately 150 employees. Employee
termination and facility closing costs will result in a one-time restructuring
charge of approximately $2.0 to $3.0 million in the first quarter of 2001. We
expect this reduction to generate savings of approximately $11.0 million on an
annualized basis.
In December 2000, we entered into a three-year software licensing and
professional services contract with Converge, valued at approximately $108.0
million. Performance under the contract began in January 2001 following the
closing of the NECX sale. The agreement provides for aggregate cash payments to
us of $43.0 million, $35.0 million and $30.0 million during the years ending
December 31, 2001, 2002 and 2003, respectively. The agreement also includes a
commitment to link Converge with each of our 14 technology-focused
e-marketplaces.
Pursuant to agreements entered into with the shareholders of VerticalNet
Europe, our percentage ownership of VerticalNet Europe increased to
approximately 90% in the first quarter of 2001. We paid approximately $6.4
million in cash and issued 4,993,173 shares of our common stock to BT, as well
as entered into a put and call agreement whereby we can buy BT's remaining
investment in VerticalNet Europe at any time and BT may put its investment to us
at any time after the first anniversary of the date of the agreement. In 2001,
ICG had a portion of its VerticalNet Europe shares redeemed and sold the
remaining portion directly to us for approximately $2.3 million.
On March 16, 2001, we issued an aggregate grant of approximately 13.4
million stock options to our employees. These options vest quarterly over a two
year period starting on May 15, 2001.
In connection with the sale of NECX, a total of 3.0 million non-vested
options were forfeited. Additionally, we expect approximately 1.5 million vested
options to expire unexercised.
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FACTORS AFFECTING OUR BUSINESS CONDITION
In addition to the information included elsewhere in this report, the
following factors should be carefully considered when evaluating our business
and future prospects.
Our limited operating history and evolving revenue model make it difficult
to predict our future operating results and evaluate our future prospects.
We launched our first e-marketplace in October 1995. This relatively
limited operating history, together with our evolving revenue model and rapid
changes in our target markets, makes predicting our future operating results and
evaluating our future prospects very difficult. For the year ended December 31,
2000, an overwhelming percentage of our overall revenues were generated from
VerticalNet Markets' operations, primarily from sales of storefronts, e-commerce
centers and advertising on our e-marketplaces. In the foreseeable future, we
expect to continue generating a significant percentage of our overall revenues
from VerticalNet's Markets' operations, while generating additional revenues
from software licensing, professional services and business operations services.
We may not be able to sustain our current revenues or generate additional
revenues as expected. If we do not sustain our current revenues or generate
additional revenues from each of our business units, our business, financial
condition and operating results will suffer.
We may never generate operating profit.
As of December 31, 2000, our accumulated deficit was $384.1 million. For
the year ended December 31, 2000, we sustained a $316.6 million net loss
attributable to common shareholders (including preferred stock dividends). We
expect to incur operating losses for the foreseeable future. We may never
generate operating profit or, even if we do become profitable from operations at
some point, we may be unable to sustain that profitability.
We may not develop significant revenues from software licensing and related
services, which could adversely affect our future revenue growth and ability to
achieve profitability.
One of the many challenges we face in growing future revenues and achieving
profitability is the successful refocusing of our efforts on developing,
enhancing and promoting our software solutions and related services. If we do
not generate significant additional revenues from software licensing and related
services, our business, financial condition and operating results will be
impaired. Our ability to generate additional revenues depends on the overall
demand for software solutions and related services, as well as general economic
and business conditions. Suppressed demand for software solutions and related
services caused by a weakening economy may result in our revenues growing less
than expected or even declining. We cannot assure you that we will be able to
develop, enhance or promote our software solutions and related services
effectively, whether as a result of general economic conditions or otherwise.
If we cannot reduce or contain our expenses, our operating results will
suffer.
Our limited operating history and our evolving revenue model make it
difficult to predict our future operating expenses. If we cannot reduce or
contain our expenses, our operating results will suffer. Some of our expenses
are fixed, including those related to non-cancelable agreements, equipment
leases and real estate leases. In addition, as we continually refine our
business strategies, we may find it necessary to increase operating expenses to
achieve our business goals. However, we may not be successful in identifying and
eliminating redundancies between our two business units, as well as in
streamlining our overall operations as necessary to reduce our expenses, so as
to offset any such increases in our operating expenses.
Fluctuations in our quarterly operating results may cause our stock price
to decline.
Our quarterly operating results are difficult to forecast and could vary
significantly. We believe that period-to-period comparisons of our operating
results are not meaningful and should not be relied on as indicators of future
performance. If our operating results in a future quarter or quarters do not
meet the expectations of securities analysts or investors, the price of our
common stock may fall.
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We expect that our quarterly operating results will fluctuate significantly
due to various factors, many of which are beyond our control, including:
- anticipated lengthy sales cycles for our products;
- the size and timing of individual license transactions;
- intense and increased competition in our target markets;
- our ability to develop, introduce and market new products and services,
as well as enhancements to our existing products and services, on a
timely basis;
- the level of demand for our products and services;
- risks associated with past and future acquisitions;
- management of our growth; and
- the seasonality of our revenues and user traffic.
If we generate additional revenues from software licensing and related services
as intended, our quarterly operating results will be substantially dependent on
orders booked and shipped in that quarter. Any delay in the recognition of
revenue for any of our license transactions could likewise cause significant
variations in our quarterly operating results and could cause our revenues to
fall significantly short of anticipated levels.
In the course of our business, we may acquire securities of privately-held
companies with whom we form strategic relationships. Our quarterly operating
results may also fluctuate significantly due to accounting rules governing the
treatment of these securities. Specifically, before the market value of these
securities becomes readily determinable as a result of being tradable in a
public market, they are carried on our consolidated balance sheet at cost.
However, if these non-public securities become salable in the public market as a
result of a transaction in which such securities are exchanged for public
securities, accounting rules require us to record a non-operating gain or loss
equal to the difference between our cost and the market value of the public
securities received, regardless of whether we sell or retain the securities. Our
holdings in public securities are then marked to market at the end of each
quarter. If the market value of an equity security we own becomes readily
determinable and we sell that security, we will realize a gain or loss on the
transaction. These non-recurring gains or losses may occur from time to time and
could cause significant fluctuations in our quarterly results. Similarly, our
quarterly results may also fluctuate if we determine that a decline in the fair
value of one of our equity positions is other than temporary, which would
require us to write down or write off the carrying value of those securities.
During the year ended December 31, 2000, we recorded an aggregate of $6.4
million in impairment charges for other than temporary declines in the fair
value of several of our cost method investments.
If our strategic relationships with Microsoft and Converge do not provide
the benefits we expect, our business will be materially and adversely affected.
If we are ultimately unable, for any reason, to realize the benefits we
expect from our strategic relationships with Microsoft and Converge, our
business, financial condition and results of operations will be materially and
adversely affected. We believe these relationships are critical to our success
because they offer the possibility for further acceptance and validation of our
business strategy and model and opportunities to generate additional revenues in
each our current revenue streams: software licensing and related services;
e-commerce and e-enablement, and advertising and services. In particular, the
Microsoft relationship offers the possibility of additional users of our
e-marketplaces, whereas the Converge relationship is our first material software
development and licensing transaction with a private exchange. However, we may
never generate any significant additional revenues or realize any of the other
benefits expected from these relationships. For example, if a significant
percentage of businesses fail to renew the storefronts or e-commerce centers
that were purchased on their behalf by Microsoft or if we fail to enter in other
material software development and licensing transactions, our financial
condition and operating results will be adversely affected.
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To reap any such benefits, we must first fulfill our obligations in these
relationships, which include, among other things, building and assisting with
the distribution of storefronts and e-commerce centers, in the case of
Microsoft, and providing software maintenance, professional services and support
services for the licensed software and for platform and community building, in
the case of Converge. Meeting these obligations has required, and may continue
to require, substantial resources on our part, including retraining existing
employees and hiring additional personnel. It may also be necessary for our
management and other key personnel to divert their attention from other aspects
of our business in order to focus on our implementation of these relationships
and to ensure that our other strategic relationships take them into account.
Additionally, if we fail to meet the performance goals established under these
relationships, we will need to pay additional amounts to Microsoft, while
Converge may avoid paying any further license and development fees to us and we
will need to pay additional material amounts to Converge. Accordingly, if we
fail to realize the anticipated benefits from these relationships, the resulting
material adverse effect on our business would be magnified by our dedication of
substantial resources to these relationships, the loss of revenues and the
payment of monetary penalties.
We anticipate lengthy sales and implementation cycles for our software
offerings.
In our VerticalNet Solutions unit, we anticipate our sales cycles to
average approximately six to nine months. In selling our products, we are asking
potential customers in many cases to change their established business practices
and conduct business in new ways. In addition, potential customers must
generally consider additional issues, such as product benefits, ease of
installation, ability to work with existing computer systems, functionality and
reliability, before committing to purchase our products. Additionally, we
believe that the purchase of our products is often discretionary and generally
involves a significant commitment of capital and other resources by a customer,
which frequently requires approval at a number of management levels within the
customer organization. Likewise, the implementation and deployment of our
products requires a significant commitment of resources by our customers and our
professional services organization. The challenges we face in attempting to
obtain commitments and approvals from our customers are exacerbated by worsening
economic conditions in general and in our target markets.
We expect to rely on third parties to implement our products.
We expect to rely increasingly on third parties to implement our products
at customer sites. If we are unable to establish and maintain effective,
long-term relationships with implementation providers, or if these providers do
not meet the needs or expectations of our customers, our business would be
seriously harmed. As a result of the limited resources and capacities of many
third-party implementation providers, we may be unable to establish or maintain
relationships with third parties having sufficient resources to provide the
necessary implementation services to support our needs. If these resources are
unavailable, we will be required to provide these services internally, which
would significantly limit our ability to meet our customers' implementation
needs. A number of our competitors have significantly more well-established
relationships with third parties that we may potentially partner with. As a
result, these third parties may be more likely to recommend competitors'
products and services rather than our own. In addition, we would not be able to
control the level and quality of service provided by our implementation
partners.
New versions and releases of our products may contain errors or defects.
Our products may contain undetected errors or failures when first
introduced or as new versions are released. This may result in loss of, or delay
in, market acceptance of our products. We have in the past discovered software
errors in new releases and new products after their introduction. We have
experienced delays in release, lost revenues and customer frustration during the
period required to correct these errors. We may in the future discover errors
and defects in new releases or new products after they are shipped or released.
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Our target markets are evolving and characterized by rapid technological
change, which we may not be able to keep pace with.
The markets for our products and services are evolving and characterized by
rapid technological change, changing customer needs, evolving industry standards
and frequent new product and service announcements. The introduction of products
employing new technologies and emerging industry standards could render our
existing products or services obsolete or unmarketable. If we are unable to
respond to these developments successfully or do not respond in a cost-effective
way, our business, financial condition and operating results will suffer. To be
successful, we must continually improve and enhance the responsiveness, services
and features of our e-marketplaces and introduce and deliver new product and
service offerings and new releases. We may fail to improve or enhance our
e-marketplaces or introduce and deliver new releases or new offerings on a
timely and cost-effective manner basis or at all. In addition, we have
experienced delays in improving and enhancing our e-marketplaces and in
introducing and delivering new product offerings and releases in the past. If we
experience similar delays in the future, or if our improvements, enhancements,
offerings or releases do not achieve market acceptance, we could experience a
delay or loss of revenues and customer dissatisfaction. Our success will also
depend in part on our ability to acquire or license third party technologies
useful in our business, which we may not to be able to do.
We may ultimately be unable to compete in the markets for the products and
services we offer.
The markets for our products and services are intensely competitive.
Increased competition may result in reduced margins and loss of market share,
either of which would seriously harm our business. We expect the intensity of
competition in our target markets to increase as the amount of e-commerce
transacted over the Internet grows, current competitors expand their product and
service offerings and new competitors enter the market.
We are facing increased competition in each of our strategic business
units:
- VerticalNet Markets. Several companies offer competitive e-marketplaces
and supplier enablement and channel management applications. We expect
that additional companies will offer competing e-marketplaces on a
standalone or portfolio basis because competitors can launch new Web
sites at a relatively low cost. We also compete for a share of a
customer's advertising budget with online services and traditional
off-line media, such as print publications and trade associations.
- VerticalNet Solutions. As we implement our strategy regarding licensing
e-commerce and e-marketplace software and providing related professional
and business operations services, we are facing competition from software
companies whose products or services compete with a particular aspect of
the solution we provide, as well as several major enterprise software
developers.
Many of our competitors have longer operating histories, greater brand
recognition and greater financial, technical, marketing and other resources than
we do, and may have well-established relationships with our existing and
prospective customers. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. Our competitors may also develop
products or services that are superior to, or have greater market acceptance
than, ours. If we are unable to compete successfully against our competitors,
our business, financial condition and operating results would be negatively
impacted.
We may not realize any return on, and may even suffer a complete loss of,
our equity interests in Converge and our strategic partners.
Our sale of NECX resulted in our becoming the largest stockholder in
Converge, which is a privately-held company. Additionally, we are increasingly
asked to acquire equity interests, generally ranging from $500,000 to $3.0
million in any given instance, in companies with whom we form strategic
relationships. We may never realize any return on our equity interests in
Converge or these other entities. In fact, we may suffer a complete loss of
these equity interests, which would materially and adversely affect our
business, financial condition and operating results. Our ability to realize a
return on any of these equity positions is far from
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certain, given that these companies have limited financial and other resources,
yet are subject to many of the same risks and uncertainties that we face in our
business, including limited operating histories, evolving revenue models and
uncertain market acceptance of their products and services. Moreover, we are
often unable to require terms and conditions related to equity interests in our
strategic partners (e.g., board membership or observer rights) that are
particularly favorable to us vis-a-vis other investors. Allocating our financial
resources to these types of strategic relationships, rather than reinvesting
those funds directly in our own business, may ultimately cause our business to
suffer.
Acquisitions may negatively impact our business.
We have grown, and plan to continue to grow, our business through
acquisitions that complement our existing products and services. If we are
unable to complete future acquisitions, our business, financial condition and
operating results could be negatively impacted. We may not be able to identify
additional suitable businesses that are available for sale at reasonable prices
or on reasonable terms. Even if we are able to identify appropriate acquisition
candidates, we may not be able to negotiate the terms of any acquisition
successfully, finance the acquisition or integrate the acquired business
(including its products, services, technologies or personnel) into our existing
business operations.
Our acquisition strategy is also subject to numerous other risks including,
without limitation, the following:
- acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures;
- we may acquire companies in markets in which we have little experience;
- we may not be able to retain key employees from acquired companies, and
may face competition from employees that leave before or after an
acquisition is complete;
- to pay for acquisitions, we may be required to incur debt or may issue
equity securities, which may be dilutive to existing shareholders;
- we may not realize any return on our investment in the acquired companies
and may even lose our entire investment and incur significant additional
losses;
- our share price could decline following the market's reaction to our
acquisitions;
- our amortization expense will increase as a result of acquisitions; and
- our interest deductions may be disallowed for federal income tax
purposes.
If our advertising revenues decline, our business would suffer.
We currently rely on revenues generated from the sale of advertising on our
e-marketplaces for a material portion of our revenues. If we are not able to
increase or even maintain our current level of advertising revenues, our
business may suffer. Our ability to increase or maintain our advertising
revenues depends on many factors, including, without limitation:
- general economic conditions and their impact on demand for online
advertising;
- acceptance of the Internet as a legitimate, effective and measurable
medium for advertising and e-commerce;
- the development of a large base of users on our e-marketplaces who
possess demographic characteristics attractive to advertisers;
- changes in industry pricing practices for advertising; and
- the evolving focus of our sales and marketing efforts.
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Other factors could also adversely affect our advertising revenues and,
thus, impair our business, financial condition and operating results. For
example, widespread use of "filter" software programs that limit access to our
storefronts and other hosted solutions from the Internet user's browser could
deter companies from advertising on the Internet. Additionally, no standards
have been widely accepted to measure the effectiveness of Internet advertising.
If such standards do not develop, companies may not continue their current
levels of Internet advertising, or if they are not currently advertising on the
Internet, they may be reluctant to do so.
For some of our customers, we provide extended payment terms over the
length of the contract, rather than collecting the entire payment up front. To
the extent that these amounts are not collected, our advertising revenues, bad
debt expense and cash flows may be negatively impacted. We also have barter
arrangements where we provide banner advertisements, storefronts and newsletter
sponsorships to some of our customers in exchange for advertising on their Web
sites or in their publications. If our barter arrangements do not continue, our
advertising revenues may decline. For the year ended December 31, 2000,
approximately $9.4 million, or 8.3%, of our reported revenue was generated by
barter advertising arrangements.
The content on our e-marketplaces may not attract a significant number of
users with demographic characteristics valuable to advertisers.
Our future success depends in part upon our ability to deliver compelling
Internet content that will attract a significant number of users with
demographic characteristics valuable to advertisers. Our inability to deliver
Internet content that attracts a loyal user base with demographic
characteristics attractive to advertisers could impair our business, financial
condition and operating results. We face the challenge of delivering content
that is attractive to users in an environment characterized by rapidly changing
user preferences, as well as the ease with which users can freely navigate and
instantly switch among a large number of Web sites, many of which offer content
that may be more attractive than ours. If we cannot consistently anticipate or
respond quickly to changes in user preferences or distinguish our content from
that offered on other Web sites, we may never attract a significant number of
users with demographic characteristics that advertisers are seeking.
Our failure to build and maintain relationships with third-party content
providers may impair our operating results.
We have relied on, and expect to rely increasingly on, third parties, such
as freelance authors, trade publications and news wires, to provide content for
our e-marketplaces. It is critical to our business that we maintain and build
existing and new relationships with content providers. However, we may not be
able to do so, which could result in decreased traffic on our e-marketplaces and
decreased advertising revenues. Many of our agreements with content providers
are for initial terms of one to two years. Content providers may choose not to
renew the agreements or terminate the agreements early if we do not fulfill our
contractual obligations. Moreover, like our existing agreements with some of our
content providers, our new and renewal agreements for third-party content may be
non-exclusive, which means that competitors may offer the same content we offer
or similar content. Additionally, the terms of any new or renewal agreements we
enter into may be less favorable to us than our existing agreements. In
particular, as competition for content increases, the licensing fees we pay to
our content providers may correspondingly increase, which would negatively
impact our operating results.
If we do not develop the "VerticalNet" brand and our other brands, our
revenues could decrease.
To be successful, we must establish and strengthen the brand awareness of
the "VerticalNet" brand and our other brands. If our brand awareness is
weakened, it could decrease the attractiveness of our products and services to
our suppliers, buyers and users, which could result in decreased revenues. We
believe that brand recognition will become increasingly important in the future
with the growing number of Internet sites and e-commerce solution providers. If
customers do not begin to associate secondary meaning with our brands, then our
ability to gain market share will be diminished, which could impair our
business, financial condition and operating results.
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If we are unable to provide our suppliers, buyers and users with accurate
product information, our e-commerce strategy will not succeed.
To enable suppliers to conduct e-commerce through our e-marketplaces, we
currently are responsible for loading suppliers' product information into our
database and categorizing the information for search purposes. This process
entails a number of risks, including dependence on our suppliers to provide us
in a timely manner with accurate, complete and current information about their
products and to update this information promptly when it changes. The actual
loading of these products in our database may be delayed, depending upon a
number of factors, including the formatting of the data provided to us and our
ability to further automate and expand our operations to load this data
accurately in our product database.
We are generally obligated under our supplier agreements to load and update
product data into our database within a specified period of time following its
delivery. While we intend to further automate the loading and updating of
supplier data on our system, we may not be able to do so in a timely manner, in
part because achieving the highest level of this automation is dependent upon
our suppliers' automating their delivery of product data to us. If our suppliers
do not provide us in a timely manner with accurate, complete and current
information about the products we offer, our database may not be useful to our
customers and users and may even expose us to liability. Although we screen our
suppliers' information before we make it available to our customers and users,
we cannot guarantee that the product information available in our database will
always be accurate, complete and current, or comply with governmental
regulations. Any resulting exposure to liability or decreased adoption and use
of our e-marketplaces could reduce our revenues and therefore have a negative
effect on our business, results of operations and financial condition.
If our suppliers do not provide professional, safe and timely delivery of
products to customers, our business will be harmed.
We rely on our suppliers to deliver products to customers in a
professional, safe and timely manner. If our suppliers do not deliver products
to customers in this manner, then our service will not meet user expectations
and our reputation and brand will be damaged. In addition, deliveries that are
nonconforming, late or are not accompanied by information required by applicable
law or regulations could expose us to liability or result in decreased adoption
and use of our e-marketplaces, which could have a negative effect on our
business, results of operations and financial condition. In some instances, we
bear the responsibility for product refunds and returns and the risk of
non-collectibility of accounts receivable from our customers.
Managing our rapid growth effectively is difficult.
We have rapidly and significantly expanded our operations by adding new
products and services, hiring new employees and acquiring new businesses. This
growth has placed, and is expected to continue to place, a significant strain on
our resources and systems. To manage our growth, we must implement systems and
train and manage our employees. If we fail to implement systems, train and
manage our employees or integrate our recent and future acquisitions
successfully, our business, financial condition and operating results could be
negatively impacted.
Our business is susceptible to numerous risks associated with international
operations.
We are subject to a number of risks and uncertainties associated with our
international business activities. These risks and uncertainties generally
include:
- difficulties in the enforcement of contractual obligations and
intellectual property rights, including licensing rights, against foreign
entities or in foreign jurisdictions;
- currency exchange rate fluctuations and higher duty rates;
- unexpected changes in regulatory requirements;
- tariffs, import and export controls and regulations and other trade
barriers;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
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- increased costs and difficulties in managing and staffing international
operations;
- compliance with applicable United States and foreign laws, especially
import/export requirements;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the costs and burdens of complying with a wide variety of foreign laws
and differing trade customs and practices;
- political instability; and
- potential transportation delays.
These factors may have a negative effect on current and future
international operations and, consequently, on our business, results of
operations and financial condition.
Our international operations are difficult to manage and may not succeed.
We have undertaken several international initiatives, including VerticalNet
Europe and our VerticalNet Japan joint venture with SOFTBANK E-COMMERCE CORP.,
and have hired senior management to oversee our international operations. We
intend to strengthen our presence in our target international markets. However,
this strategy may fail if we cannot create or sustain international demand for
our evolving business model and the products and services we offer. Moreover, in
entering into our target international markets, we have partnered with companies
who have the experience and relationships in those markets. However, as we
pursue our strategy of strengthening our global presence, we have increased our
control over some of the initiatives we have undertaken. Thus, we are
increasingly becoming less dependent on our joint venture partners that have
more experience and relationships than we do in these markets. Our relative lack
of experience and relationships could adversely affect our international
operations, which would in turn negatively impact our overall business,
financial condition and operations. Pursuing this strategy will likewise
continue to require significant management attention and financial resources and
could have a similar negative effect.
Risk of failure of our computer and communications hardware systems
increases without back-up facilities.
The performance of our computer and communications hardware systems is
critical to our business and reputation, as well as our ability to process
transactions, provide high quality customer service and attract and retain
customers, suppliers, users and strategic partners. Any system interruptions
that cause our e-marketplaces and other hosted applications to be unavailable
may reduce their attractiveness to users, buyers and suppliers and could impair
our business, financial condition and operating results. We do not currently
have back-up or redundant facilities for our computer or communications hardware
systems.
Our interests may conflict with those of Internet Capital Group, our
largest shareholder, which may affect our business strategy and operations
negatively.
As a result of its stock ownership and board representation, Internet
Capital Group is in a position to affect our business strategy and operations,
including corporate actions such as mergers or takeover attempts, in a manner
that could conflict with the interests of our public shareholders. At March 16,
2001, Internet Capital Group beneficially owned 25,318,644 shares, or
approximately 25.8%, of our common stock, which includes 250,000 shares of our
common stock underlying $5.0 million of our 5 1/4% convertible subordinated
debt, and 478,624 shares of our common stock underlying warrants issued to
Internet Capital Group prior to our initial public offering. Two representatives
of Internet Capital Group are members of our board of directors. We may compete
with Internet Capital Group for Internet-related opportunities as it seeks to
expand its number of business-to-business assets, in part through acquisitions
and investments. Internet Capital Group, therefore, may seek to acquire or
invest in companies that we would find attractive. While we may partner with
Internet Capital Group on future acquisitions or investments, we have no current
contractual obligations to do so. We do not have any contracts or other
understandings that would govern resolution of this
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potential conflict. This competition, and the potential conflict posed by the
designated directors, may deter companies from partnering with us and may limit
our business opportunities.
Additionally, in order to avoid registration under the Investment Company
Act of 1940, Internet Capital Group may need to own more than 25% of our voting
securities. If its ownership interest falls below 25%, Internet Capital Group
may need to purchase additional voting securities to return to an ownership
interest of at least 25% in order to avoid having to register as an investment
company. The possible need of Internet Capital Group to maintain a 25% ownership
position could adversely influence its decisions regarding actions that may
otherwise be in the best interests of our public shareholders.
Additionally, significant changes in Internet Capital Group's ownership of
our common stock could adversely affect our common stock's market price. For
example, rather than purchase additional voting securities as described in the
preceding paragraph, Internet Capital Group may choose to liquidate its position
entirely to avoid having to register as an investment company. If Internet
Capital Group sells all or part of its investment in us, whether to comply with
the Investment Company Act of 1940, to raise additional capital or otherwise,
then the market price of our common stock could fall.
Our success depends on our key personnel who we may not be able to retain,
and we may not be able to hire enough additional personnel to meet our needs.
We believe that our success depends on continued employment of our senior
management team. If one or more members of our senior management team were
unable or unwilling to continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected. As of March 16, 2001, only one member of our executive management team
had an employment agreement.
Our success also depends on having a highly trained technical staff, sales
force and customer service organization. We will need to continue to hire
personnel with the skill sets necessary to operate our business as we refine our
business strategies and as our business grows. Competition for personnel,
particularly for employees with technical expertise, is intense. A shortage in
the number of trained technical personnel, salespeople and customer service
professionals could limit our ability to design, develop and implement our
products, increase sales of our existing products and services and make new
sales as we offer new products and services. Ultimately, our business, financial
condition and operating results will be impaired if we cannot hire and retain
suitable personnel.
Our success depends on the development of the e-commerce market, which is
uncertain.
Business-to-business e-commerce is a new and emerging business practice
that remains largely untested in the marketplace and depends on the increased
acceptance and use of the Internet as a medium of commerce. If e-commerce does
not grow or grows more slowly than expected, our business will suffer. Our
long-term success depends on widespread market acceptance of e-commerce.
A number of factors could prevent such acceptance, including the following:
- buyers may be unwilling to shift their purchasing from traditional
vendors to online vendors;
- the necessary network infrastructure for substantial growth in usage of
the Internet may not be adequately developed;
- buyers and suppliers may be unwilling to use online vendors due to
security and confidentiality concerns;
- increased government regulation or taxation may adversely affect the
viability of e-commerce;
- insufficient availability of, or changes in, telecommunication services
could result in slower response times or inconsistent service quality;
- online transactions generally lack the human contact that offline
transactions offer; and
- lack of availability of cost-effective, high-speed Internet service.
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Security risks and concerns may deter the use of the Internet for
conducting e-commerce.
The secure transmission of confidential information over the Internet is
essential to maintaining customer and supplier confidence. Concerns regarding
security of transactions and transmitting confidential information over the
Internet may negatively impact our business. We believe that concerns regarding
the security of confidential information transmitted over the Internet, such as
credit card numbers, prevent many potential customers from engaging in online
transactions. If we do not add sufficient security features to future product
releases, our products may not gain market acceptance or we may incur additional
legal exposure. We have included basic security features in some of our products
to protect the privacy and integrity of customer data, such as password
requirements for access to portions of our e-marketplaces. We currently use
authentication technology, which requires passwords and other information to
prevent unauthorized persons from accessing a supplier's information. We also
use encryption technology, which transforms information into a "code" designed
to be unreadable by third parties, to protect confidential information such as
credit card numbers in commerce transactions.
Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more prevalent, our suppliers will
become more concerned about security. Our failure to address these concerns
adequately could impair our business, financial condition and operating results.
Limited Internet infrastructure may harm our business.
The significant growth of Internet traffic over a relatively short period
of time has caused frequent periods of decreased Internet performance, delays
and, in some cases, system outages. These problems are caused by limitations
inherent in the technology infrastructure supporting the Internet and the
internal networks of Internet users. If our existing or potential suppliers and
users experience frequent outages or delays on the Internet, our business may
grow more slowly than we expect or even decline. Our ability to grow our
business is limited by and depends upon the reliability of both the Internet and
the internal networks of our existing and potential suppliers, buyers and users.
If improvements in the infrastructure supporting both the Internet and the
internal networks of our users, buyers and suppliers are not made timely, we may
have difficulty obtaining new customers or maintaining our existing ones, either
of which could reduce our potential revenues and have a negative impact on our
business, results of operations and financial condition.
We may not be able to protect our proprietary rights and may infringe the
proprietary rights of others.
Proprietary rights are important to our success and our competitive
position. We may be unable to register, maintain and protect our proprietary
rights adequately or to prevent others from claiming violations of their
proprietary rights. Generally, our domain names for our e-marketplaces cannot be
protected as trademarks because they are considered "generic" under applicable
law. In addition, effective copyright, trademark, patent and trade secret
protection may be unavailable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of our work. We also license content from third parties, which makes it possible
that we could become subject to infringement actions based upon the content
licensed from those third parties. We generally obtain representations as to the
origin and ownership of such licensed content and indemnification from those
third parties; however, this may not adequately protect us. Any of these claims,
regardless of their merit, could subject us to costly litigation and the
diversion of our technical and management personnel.
We may be subject to legal liability for publishing or distributing content
over the Internet.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content they offer. We may be subject to
legal claims relating to the content on our e-marketplaces, or the
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48
downloading and distribution of such content. Claims could also involve matters
such as defamation, invasion of privacy and copyright infringement. In addition,
some of the content provided on our e-marketplaces is drawn from data compiled
by other parties, including governmental and commercial sources, and we re-key
the data. This data may have errors. If our content is improperly used or if we
supply incorrect information, it could result in unexpected liability. Our
insurance may not cover claims of this type, or may not provide sufficient
coverage. Our business, financial condition and operating results could suffer
materially if costs resulting from these claims are not covered by our insurance
or exceed our coverage.
We may be exposed to product liability and other commercial claims.
We face potential liability for claims based on the nature of the products
that we sell and distribute, including claims for breach of warranty, product
liability, misrepresentation, violation of governmental regulations and other
commercial claims. Most of the manufacturers whose products we distribute have
warranties on those products. We pass that warranty through to our customers
whenever possible. However, in some instances we bear the risk of loss of
revenue from the product sale if a purchaser does not pay for a defective
product. Although we maintain general liability insurance, our insurance may not
cover some claims or penalties, is subject to policy limits and exclusions and
may not adequately indemnify us or our employees from any civil, governmental or
criminal liability. Furthermore, this insurance may not be available at
commercially reasonable rates in the future. Any liability not covered by our
insurance or in excess of our insurance coverage could have a negative effect on
our business, financial condition and operating results.
We are subject to government regulation that exposes us to potential
liability and negative publicity.
We currently rely upon our suppliers to meet all packaging, distribution,
labeling, hazard and health information notices to purchasers, record keeping
and licensing requirements applicable to our business during the entire
transaction. However, our reliance on our suppliers may not be sufficient to
protect our legal interests. For example, if we are held to be a seller or a
distributor of regulated products because we took legal title, we may have
inadvertently violated some governmental regulations by not having the
appropriate license or permit. We are unable to verify that our suppliers have
in the past complied, or will in the future comply, with all governmental or
other legal requirements that may be applicable to our sales. We could be fined
or exposed to potentially severe civil or criminal liability, including monetary
fines and injunctions, and we could receive potential negative publicity, if the
applicable governmental regulatory requirements have not been, or are not being,
fully met by our suppliers or by us directly. Negative publicity, fines and
liabilities could also occur if an unqualified person, or even a qualified
supplier, lacks the appropriate license or permits to sell, use or ship, or
improperly receives a dangerous or unlicensed product through us. We do not
maintain any reserve for potential liabilities resulting from government
regulation.
It is also possible that a number of laws and regulations may be adopted or
interpreted in the United States and abroad with particular applicability to the
Internet. These laws and regulations may, for example, cover issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights, access charges
and information security. The enactment of such laws could have a negative
effect on our business, financial condition and operating results.
We may not have sufficient cash flow from operations to service our debt.
As of December 31, 2000, we had approximately $22.7 million in long term
debt (including our outstanding 5 1/4% convertible subordinated debentures).
Currently, we are not generating sufficient cash flow from our operations to
satisfy our annual debt service payment obligations. If we are unable to satisfy
our debt service requirements, substantial liquidity problems could result,
which would negatively impact our future prospects.
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We may require additional capital for our operations, which we may not be
able to raise or, even if we do, could have dilutive and other negative effects
on our shareholders.
We currently anticipate that our cash on hand, current investments
(including equity interests in other entities) and other available funds will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. However, we cannot assure that
these resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements during this period. We may need, or
find it advantageous, to raise additional funds in the future to fund our
growth, pursue sales and licensing opportunities, develop new or enhanced
products and services, respond to competitive pressures or acquire complementary
businesses, technologies or services.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders will be reduced
and shareholders may experience additional dilution. These securities may also
have powers, preferences and rights that are senior to those of the rights of
our common stock. We cannot be certain that additional financing will be
available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
operations adequately, promote our brand identity, take advantage of acquisition
opportunities, develop or enhance products or services or respond to competitive
pressures. Any inability to do so could have a negative effect on our business,
financial condition and results of operations.
Shares eligible for future sale by our current or future shareholders may
cause our stock price to decline.
If our shareholders or optionholders sell substantial amounts of our common
stock in the public market, including shares issued in connection with completed
or future acquisitions or upon the exercise of outstanding options and warrants,
then the market price of our common stock could fall.
As of March 15, 2001, the holders of up to approximately 27,353,408 shares
of common stock, warrants to purchase 2,127,038 shares of common stock and
101,450 shares of Series A preferred stock, which are convertible into
approximately 1,167,770 shares of common stock, have demand and/or piggyback
registration rights. Under the terms of the Series A preferred stock, we may
elect to pay the dividends payable thereunder by issuing shares of Series A
preferred stock or shares of common stock, rather than paying cash dividends. As
of December 31, 2000, cumulative dividends of $4.5 million had been earned by
the holder of our Series A preferred stock, of which $1.5 million were paid in
the form of additional shares of Series A preferred stock and the remainder of
which are accrued and remain payable. The shares of common stock underlying any
dividended shares of Series A preferred stock and any dividended shares of
common stock are also subject to demand and piggyback registration rights. The
exercise of such rights could adversely affect the market price of our common
stock.
We have filed a shelf registration statement to facilitate our acquisition
strategy, as well as registration statements to register shares of common stock
under our stock option and employee stock purchase plans. Shares issued pursuant
to the shelf registration statement, upon exercise of stock options and in
connection with our employee stock purchase plan will be eligible for resale in
the public market without restriction.
Anti-takeover provisions and our right to issue preferred stock could make
a third-party acquisition of us difficult.
VerticalNet is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to our
shareholders. Our articles of incorporation provide that our board of directors
may issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a staggered
three-year term. The issuance of preferred stock and the existence of a
classified board could make it more difficult for a third party to acquire us.
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50
Our common stock price is likely to remain highly volatile.
The stock market in general, and the market for stocks of Internet-related
and technology companies in particular, have been highly volatile. The market
price of our common stock and our daily trading volume have been, and will
likely continue to be, similarly volatile. Investors may not be able to resell
their shares of our common stock following periods of volatility because of the
market's adverse reaction to such volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected relative valuations substantially
above historical levels. During the same period, many of these companies' stocks
have also recorded lows well below their historical highs. Our stock may not
trade at the same levels as other Internet-related or technology stocks.
Factors that could cause such volatility may include, among other things:
- general economic conditions, including suppressed demand for technology
and related services;
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services;
- changes in financial estimates by securities analysts;
- conditions or trends in business-to-business usage of the Internet or the
software and related services industry;
- changes in the market valuations of other Internet or technology
companies;
- failure to meet analysts' or investors' expectations;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock or instruments convertible into common stock.
Many of these factors are beyond our control. These factors may cause the
market price of our common stock to fall, regardless of our operating
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to risks associated with interest rate changes and changes
in the market value of our investments.
Interest Rate Risk. Our exposure to market risk related changes in
interest rates relates primarily to our investment portfolio. We invest in
instruments that meet high quality credit standards, as specified in our
investment policy. The policy also limits the amount of credit exposure we may
have to any one issue, issuer or type of investment.
As of December 31, 2000, our portfolio investments consisted of $123.8
million in cash and cash equivalents and $20.9 million in available-for-sale
debt instruments included in short-term investments. Due to the conservative
nature of our investment portfolio, a sudden change in interest rates would not
have a material effect on the value of the portfolio. We estimate that if the
average yield of our investments had decreased by 100 basis points, our interest
income for the year ended December 31, 2000 would have decreased by less than
$0.5 million. This estimate assumes that the decrease occurred on the first day
of the year and reduced the yield of each investment instrument by 100 basis
points. The impact on our future interest income and future changes in
investment yields will depend largely on the gross amount of our investment
portfolio.
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Investment Risk. We invest in equity instruments of privately-held
companies for business and strategic purposes. These investments are included in
other assets and are accounted for under the cost method when ownership is less
than 20% and we do not have the ability to exercise significant influence over
operations. For these investments in privately-held companies, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the recoverability of the carrying values. We
identify and record impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired. As of December 31,
2000, we had recorded a $6.4 million impairment charge for an other than
temporary decline in fair value of certain of our cost method investments. Since
our initial investment, certain of these investments in privately-held companies
have become marketable equity securities upon the investees' completion of
initial public offerings or the acquisition of the investee by a public company.
Such investments, most of which are in the Internet industry, are subject to
significant fluctuations in fair market value due to the volatility of the stock
market. As of December 31, 2000, the fair market value of these investments
included in short-term and long-term investments was $23.3 million.
In connection with Ariba, Inc.'s acquisition of Tradex Technologies, Inc.,
we received Ariba common stock (see Notes 7 and 8 to our consolidated financial
statements). In July 2000, we entered into forward sale contracts relating to
our investment in Ariba. Under these contracts, we pledged our shares of Ariba's
common stock to the counterparty for a three-year period in return for
approximately $47.4 million of cash. At the conclusion of the three-year period,
we have the option of delivering either cash or the pledged Ariba shares to
satisfy the forward sale. However, we will not be required to deliver shares in
excess of those we pledged. If we choose to deliver Ariba shares to satisfy the
forward sale, the number of Ariba shares to be delivered at maturity may vary
depending on the then market price of Ariba's common stock. We have only limited
involvement with derivative financial instruments and do not use them for
trading purposes. Our risk of loss in the event of nonperformance by the
counterparty under the forward sales contract is not considered to be
significant. Although the forward sales contract exposes us to market risk,
fluctuations in the fair value of this contract are mitigated by expected
offsetting fluctuations in the value of the pledged securities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements:
Independent Auditors' Report.............................. 50
Consolidated Balance Sheets at December 31, 2000 and
1999................................................... 51
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................... 52
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... 53
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998... 54
Consolidated Statements of Other Comprehensive Loss for
the years ended December 31, 2000, 1999 and 1998....... 56
Notes to Consolidated Financial Statements................ 57
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of VerticalNet, Inc.:
We have audited the accompanying consolidated balance sheets of
VerticalNet, Inc. and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations, cash flows, shareholders' equity
(deficit) and other comprehensive loss for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VerticalNet,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Philadelphia, Pennsylvania
February 13, 2001, except for the
last two paragraphs of Note 21,
which are as of March 16, 2001
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VERTICALNET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
DECEMBER 31,
---------------------
2000 1999
---------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 123,803 $ 7,636
Short-term investments.................................... 21,349 44,131
Accounts receivable, net of allowance for doubtful
accounts of $2,072 in 2000 and $802 in 1999............. 31,932 10,101
Prepaid expenses and other assets......................... 37,264 4,148
---------- --------
Total current assets............................... 214,348 66,016
---------- --------
Property and equipment, net................................. 32,398 8,031
Net assets of discontinued operations....................... 215,000 151,755
Goodwill, net of accumulated amortization of $144,485 in
2000 and $6,452 in 1999................................... 380,721 55,672
Other intangibles, net of accumulated amortization of $4,530
in 2000 and
$645 in 1999.............................................. 7,620 3,305
Long-term investments....................................... 22,861 16,885
Other investments........................................... 17,543 6,700
Other assets................................................ 32,793 10,617
---------- --------
Total assets....................................... $ 923,284 $318,981
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,821 $ 2,510
Accrued expenses.......................................... 67,251 10,184
Deferred revenues......................................... 57,323 9,768
Other current liabilities................................. 1,597 1,372
---------- --------
Total current liabilities.......................... 136,992 23,834
---------- --------
Long-term debt.............................................. 952 1,750
Other long-term liabilities................................. 22,630 --
Convertible notes........................................... 21,705 115,000
---------- --------
Total liabilities.................................. 182,279 140,584
---------- --------
Commitments and contingencies (see Note 12)
Minority interest........................................... 40,843 --
---------- --------
Series A 6.00% convertible redeemable preferred stock, $.01
par value, 250,000 shares authorized, 101,450 shares
issued in 2000 plus accrued dividends of $3,066
(liquidation value of $104,516), none issued in 1999...... 94,760 --
---------- --------
Shareholders' equity:
Preferred stock, $.01 par value, 9,750,000 shares
authorized, none issued in 2000 and 1999................ -- --
Common stock, $.01 par value, 1,000,000,000 shares
authorized, 88,047,949 shares issued in 2000 and
72,120,866 shares issued in 1999........................ 880 721
Common stock to be issued................................. -- 99,546
Additional paid-in capital................................ 1,004,149 151,875
Deferred compensation..................................... (363) (601)
Accumulated other comprehensive loss...................... (14,370) (219)
Accumulated deficit....................................... (384,089) (72,773)
---------- --------
606,207 178,549
Treasury stock at cost, 656,356 shares in 2000 and 649,936
shares in 1999.......................................... (805) (152)
---------- --------
Total shareholders' equity......................... 605,402 178,397
---------- --------
Total liabilities and shareholders' equity......... $ 923,284 $318,981
========== ========
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Revenues.................................................... $ 112,454 $ 18,428 $ 3,135
--------- -------- --------
Costs and Expenses:
Editorial and operational................................. 43,750 8,611 3,238
Product development....................................... 34,178 7,396 1,404
Sales and marketing....................................... 80,578 25,303 7,895
General and administrative................................ 56,924 10,637 3,824
Amortization expense...................................... 139,841 6,814 283
Goodwill impairment....................................... 11,530 -- --
In-process research and development charge................ 10,000 13,600 --
--------- -------- --------
Operating loss.............................................. (264,347) (53,933) (13,509)
--------- -------- --------
Other income (expense)...................................... 59,460 -- --
Interest income (expense), net.............................. 2,557 1,344 (85)
--------- -------- --------
Net loss from continuing operations......................... (202,330) (52,589) (13,594)
Discontinued operations:
Loss from operations of the VerticalNet Exchanges
segment................................................ (27,018) (891) --
Estimated loss on disposal of the VerticalNet Exchanges
segment, including provision for operating losses of
$9,050 for the period prior to closing................. (81,968) -- --
--------- -------- --------
Net loss.................................................... (311,316) (53,480) (13,594)
Preferred stock dividends and accretion..................... (5,264) -- --
--------- -------- --------
Loss attributable to common shareholders.................... $(316,580) $(53,480) $(13,594)
========= ======== ========
Basic and diluted net loss per common share:
Continuing operations..................................... $ (2.50) $ (0.84) $ (1.32)
Loss from discontinued operations......................... (0.32) (0.02) --
Estimated loss on disposal of discontinued operations..... (0.99) -- --
--------- -------- --------
Net loss per common share................................. $ (3.81) $ (0.86) $ (1.32)
========= ======== ========
Weighted average common shares outstanding used in basic and
diluted per share calculation............................. 83,127 62,391 10,282
========= ======== ========
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Net loss.................................................... $(311,316) $(53,480) $(13,594)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, amortization and other noncash charges...... 165,567 8,718 838
Loss on disposal of fixed assets.......................... -- 31 --
Loss from equity method investments....................... 2,769 -- --
Loss on disposal of discontinued operations............... 81,968 -- --
Net gain on investment.................................... (79,875) -- --
In-process research and development charges............... 10,000 13,600 --
Discontinued operations -- working capital changes and
noncash charges......................................... 109,778 7,609 --
Change in assets, net of effect of acquisitions:
Accounts receivable....................................... (21,172) (7,741) (1,058)
Prepaid expenses and other assets......................... (13,904) (6,874) (1,085)
Change in liabilities, net of effect of acquisitions:
Accounts payable.......................................... 5,495 528 581
Accrued expenses.......................................... 17,128 7,156 1,403
Deferred revenues......................................... 47,146 7,033 1,250
--------- -------- --------
Net cash provided by (used in) operating activities... 13,584 (23,420) (11,665)
--------- -------- --------
Investing activities:
Acquisitions, net of cash acquired........................ 15,231 (61,898) (1,858)
Purchase of available-for-sale investments................ (88,975) (195,043) --
Purchase of cost and equity method company investments.... (19,011) (6,700) --
Proceeds from sale and redemption of available-for-sale
investments............................................. 141,569 133,783 --
Discontinued operations -- investing activities........... (38,008) (5,287) --
Restricted cash........................................... (9,900) (1,220) --
Advances.................................................. -- (965) (556)
Capital expenditures...................................... (28,972) (5,052) (484)
--------- -------- --------
Net cash used in investing activities................. (28,066) (142,382) (2,898)
--------- -------- --------
Financing activities:
Borrowings under line of credit........................... -- -- 2,000
Loans from related party.................................. -- -- 6,550
Repayments of line of credit.............................. -- (2,000) (2,500)
Repayments of related party loans......................... -- -- (100)
Proceeds from forward sale................................ 47,441 -- --
Principal payments on long-term debt and obligations under
capital leases.......................................... (2,083) (1,507) (222)
Discontinued operations -- financing activities........... (43,393) -- --
Net proceeds from issuance of common stock in initial
public offering......................................... -- 58,459 --
Net proceeds from convertible debt issuance............... -- 110,870 --
Net proceeds from issuance of convertible preferred stock
and warrants............................................ 99,900 -- 13,742
Proceeds from exercise of stock options and employee stock
purchase plan........................................... 28,784 1,953 1
--------- -------- --------
Net cash provided by financing activities............. 130,649 167,775 19,471
--------- -------- --------
Net increase in cash........................................ 116,167 1,973 4,908
Cash and cash equivalents--beginning of period.............. 7,636 5,663 755
--------- -------- --------
Cash and cash equivalents--end of period.................... $ 123,803 $ 7,636 $ 5,663
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (includes
conversion payment to debt holders of approximately
$11.2 million in 2000)................................. $ 14,917 $ 301 $ 199
========= ======== ========
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital leases................. $ 736 $ 3,120 $ 384
Issuance of common stock as consideration for
acquisitions........................................... 620,336 67,155 160
Common stock to be issued as consideration for an
acquisition............................................ -- 99,546 --
Issuance of common stock as consideration for private
placement fees......................................... -- -- 150
Issuance of warrants in connection with debt
refinancing............................................ -- -- 200
Warrant exercises....................................... 653 92 --
Preferred dividends..................................... 5,264 -- --
Conversion of convertible debt, notes and related party
loans to common stock.................................. 90,400 5,000 1,550
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------- COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION
------ -------- ------ ------ ------------ ---------- ------------
Balance, December 31, 1997........ 3,248 $ 32 10,107 $101 $ -- $ 3,202 $ --
Issuance of Series D preferred
stock, net of issuance costs.... 4,558 46 -- -- -- 15,090 --
Issuance of common stock as
consideration for private
placement fees.................. -- -- 228 2 -- 148 --
Issuance of fully vested options
to non-employees................ -- -- -- -- -- 19 --
Shares issued as consideration for
acquisitions.................... -- -- 194 2 -- 158 --
Exercise of options............... -- -- 9 -- -- 1 --
Unearned compensation............. -- -- -- -- -- 670 (670)
Amortization of unearned
compensation.................... -- -- -- -- -- -- 76
Issuance of warrants
in connection with
debt financing.................. -- -- -- -- -- 200 --
Net loss.......................... -- -- -- -- -- -- --
------ -------- ------ ---- -------- ---------- -----
Balance, December 31, 1998........ 7,806 78 10,538 105 -- 19,488 (594)
------ -------- ------ ---- -------- ---------- -----
Conversion to common stock........ (7,806) (78) 38,939 389 -- (311) --
Sale of common stock in initial
public offering................. -- -- 16,100 161 -- 58,126 --
Common stock to be issued......... -- -- -- -- 99,546 -- --
Notes converted to
common stock.................... -- -- 1,250 13 -- 4,987 --
Exercise of options............... -- -- 2,215 22 -- 1,358 --
Shares issued through employee
stock
purchase plan................... -- -- 143 2 -- 571 --
Shares issued as consideration for
acquisitions.................... -- -- 2,788 28 -- 67,127 --
Exercise of warrants.............. -- -- 148 1 -- 91 --
Unearned compensation............. -- -- -- -- -- 438 (495)
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY SHAREHOLDERS'
LOSS DEFICIT STOCK EQUITY (DEFICIT)
----------------- ----------- -------- ----------------
Balance, December 31, 1997........ $ -- $ (5,699) $ (60) $ (2,424)
Issuance of Series D preferred
stock, net of issuance costs.... -- -- -- 15,136
Issuance of common stock as
consideration for private
placement fees.................. -- -- -- 150
Issuance of fully vested options
to non-employees................ -- -- -- 19
Shares issued as consideration for
acquisitions.................... -- -- -- 160
Exercise of options............... -- -- -- 1
Unearned compensation............. -- -- -- --
Amortization of unearned
compensation.................... -- -- -- 76
Issuance of warrants
in connection with
debt financing.................. -- -- -- 200
Net loss.......................... -- (13,594) -- (13,594)
-------- --------- ----- ---------
Balance, December 31, 1998........ -- (19,293) (60) (276)
-------- --------- ----- ---------
Conversion to common stock........ -- -- -- --
Sale of common stock in initial
public offering................. -- -- -- 58,287
Common stock to be issued......... -- -- -- 99,546
Notes converted to
common stock.................... -- -- -- 5,000
Exercise of options............... -- -- -- 1,380
Shares issued through employee
stock
purchase plan................... -- -- -- 573
Shares issued as consideration for
acquisitions.................... -- -- -- 67,155
Exercise of warrants.............. -- -- (92) --
Unearned compensation............. -- -- -- (57)
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------- COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION
------ -------- ------ ------ ------------ ---------- ------------
Amortization of unearned
compensation.................... -- -- -- -- -- -- 488
Net loss.......................... -- -- -- -- -- -- --
Other comprehensive loss.......... -- -- -- -- -- -- --
------ -------- ------ ---- -------- ---------- -----
Balance, December 31, 1999........ -- -- 72,121 721 99,546 151,875 (601)
------ -------- ------ ---- -------- ---------- -----
Issuance of warrants.............. -- -- -- -- -- 18,007 --
Issuance of Series A 6.00%
convertible redeemable preferred
stock........................... 100 89,496 -- -- -- -- --
Series A 6.00% convertible
redeemable preferred stock
dividends issued................ 1 1,450 -- -- -- (1,450) --
Series A 6.00% convertible
redeemable preferred stock
dividends accrued and
accretion....................... -- 3,814 -- -- -- (3,814) --
Reclassification of Series A 6.00%
convertible redeemable preferred
stock (see Note 13)............. (101) (94,760) -- -- -- -- --
Conversion of convertible debt.... -- -- 4,665 46 -- 90,354 --
Exercise of options............... -- -- 3,806 38 -- 26,003 --
Shares issued through employee
stock purchase plan............. -- -- 113 1 -- 2,742 --
Shares issued as consideration for
acquisitions.................... -- -- 7,186 72 (99,546) 719,810 --
Exercise of warrants.............. -- -- 157 2 -- 651 --
Unearned compensation............. -- -- -- -- -- (29) 29
Amortization of unearned
compensation.................... -- -- -- -- -- -- 209
Net loss.......................... -- -- -- -- -- -- --
Other comprehensive loss.......... -- -- -- -- -- -- --
------ -------- ------ ---- -------- ---------- -----
Balance, December 31, 2000........ -- $ -- 88,048 $880 $ -- $1,004,149 $(363)
====== ======== ====== ==== ======== ========== =====
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY SHAREHOLDERS'
LOSS DEFICIT STOCK EQUITY (DEFICIT)
----------------- ----------- -------- ----------------
Amortization of unearned
compensation.................... -- -- -- 488
Net loss.......................... -- (53,480) -- (53,480)
Other comprehensive loss.......... (219) -- -- (219)
-------- --------- ----- ---------
Balance, December 31, 1999........ (219) (72,773) (152) 178,397
-------- --------- ----- ---------
Issuance of warrants.............. -- -- -- 18,007
Issuance of Series A 6.00%
convertible redeemable preferred
stock........................... -- -- -- 89,496
Series A 6.00% convertible
redeemable preferred stock
dividends issued................ -- -- -- --
Series A 6.00% convertible
redeemable preferred stock
dividends accrued and
accretion....................... -- -- -- --
Reclassification of Series A 6.00%
convertible redeemable preferred
stock (see Note 13)............. -- -- -- (94,760)
Conversion of convertible debt.... -- -- -- 90,400
Exercise of options............... -- -- -- 26,041
Shares issued through employee
stock purchase plan............. -- -- -- 2,743
Shares issued as consideration for
acquisitions.................... -- -- -- 620,336
Exercise of warrants.............. -- -- (653) --
Unearned compensation............. -- -- -- --
Amortization of unearned
compensation.................... -- -- -- 209
Net loss.......................... -- (311,316) -- (311,316)
Other comprehensive loss.......... (14,151) -- -- (14,151)
-------- --------- ----- ---------
Balance, December 31, 2000........ $(14,370) $(384,089) $(805) $ 605,402
======== ========= ===== =========
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Net loss.................................................... $(311,316) $(53,480) $(13,594)
Unrealized loss on investments.............................. (44,088) (219) --
Unrealized gain on forward sale............................. 29,768 -- --
Foreign currency translation adjustment..................... 169 -- --
--------- -------- --------
Comprehensive loss.......................................... $(325,467) $(53,699) $(13,594)
========= ======== ========
See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
During the year ended December 31, 2000, VerticalNet, Inc. ("VerticalNet"
or referred to as "we," "us" and other similar expressions), through its
subsidiaries, provides end-to-end e-commerce solutions targeted at distinct
business segments through three strategic business units:
- VerticalNet Markets operates 59 industry-specific e-marketplaces through
which we provide hosted e-commerce and community capabilities for
corporate divisions and small and medium sized businesses.
- VerticalNet Solutions offers software solutions to industry alliances,
independent net market makers and global 2000 enterprises.
- VerticalNet Exchanges focused on trading electronic components and
hardware in open and spot markets.
On December 19, 2000, we entered into an agreement to sell our VerticalNet
Exchanges business unit. Therefore, the operating results of this unit have been
reflected as a discontinued operation. Additionally, the net assets of this unit
are reflected as net assets of discontinued operations (see Note 4).
VerticalNet was founded on July 28, 1995 and completed its initial public
offering (the "IPO") of 16,100,000 shares of its common stock at $4.00 per share
(on a post-split basis) on February 17, 1999. Net proceeds were approximately
$58.3 million (net of underwriters' commissions and offering expenses of $6.1
million).
As we continue to grow, we expect to utilize cash resources to fund
operating losses, acquisitions, strategic investments, technologies and the
infrastructure necessary to support our growth. Additionally, we expect that our
acquisitions will have a negative impact on our liquidity and cash flow in the
near term as we integrate acquired businesses with ours. We believe that our
current level of liquid assets and the expected cash flows from contractual
arrangements will be sufficient to finance our capital requirements and
anticipated operating losses for at least the next 12 months. However, to the
extent our current level of liquid assets proves to be insufficient, we may need
to obtain additional debt or equity financing. Our contractual arrangements
include a three-year software licensing and professional services agreement with
Converge, Inc. (see Note 21) and a commercial arrangement with Microsoft (see
Note 9). Additionally, we may, if the capital markets present attractive
opportunities, raise cash through the sale of debt or equity. We can provide no
assurance that our liquid assets will be sufficient to fund our operations or
that we will be successful in obtaining any required or desired financing either
on acceptable terms or at all.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Our consolidated financial statements include the financial statements of
our wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
VerticalNet's ownership of VerticalNet Europe B.V. ("VerticalNet Europe")
increased from 56% to 72% on December 29, 2000 when VerticalNet Europe redeemed
some of its shares held by British Telecommunications, plc ("BT"). Due to
minority shareholder governance provisions in the original agreement, we
previously were accounting for VerticalNet Europe using the equity method. As a
result of our increased ownership, certain governance provisions regarding
minority shareholders were amended, giving us control over VerticalNet Europe's
operations. Accordingly, we have consolidated VerticalNet Europe in our
consolidated balance sheet at December 31, 2000 and will begin consolidating
VerticalNet Europe's operations starting January 1, 2001.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Subsequent to management's decision to sell the VerticalNet Exchanges
segment, the majority of our fiscal 2000 revenue was generated from two primary
sources attributable to our VerticalNet Markets segment: e-enablement and
e-commerce; and advertising and services. For the year ended December 31, 2000,
approximately $7.9 million of revenue was generated from software licensing,
related professional services and other business operations services.
E-enablement and e-commerce revenues include storefront and e-commerce
center fees, Web site development fees and e-commerce fees. Storefront and
e-commerce center fees are recognized ratably over the period of the contract.
Web site development fees are recognized as the services are performed.
E-commerce fees in the form of transaction fees, percentage of sale fees or
minimum guaranteed fees, are recognized upon receipt of payment. E-commerce fees
from educational courses are recognized in the period in which the course is
completed. E-commerce fees from books and other product sales are recognized in
the period in which the products are shipped. Auction transaction fees are
recognized when the auction is successfully concluded.
Advertising and services revenues, including buttons and banners, are
recognized ratably over the period of the applicable contract. Newsletter
sponsorship revenues are recognized when the newsletters are e-mailed.
Advertising contracts generally do not extend beyond one year, although certain
contracts are for multiple years. We also enter into strategic co-marketing
agreements under which we develop co-branded sites. Revenues from hosting and
maintenance services under these co-marketing arrangements are recognized
ratably over the term of the contract. In the normal course of business, we
enter into "multiple-element" arrangements. We allocate revenue under such
arrangements based on the fair value of each element to the extent it is
objectively determinable, and recognize revenue upon delivery or consummation of
the separable earnings process attributable to each element.
Revenues from software licensing, related professional services and other
business operations services are generally accounted for under Statement of
Position ("SOP") 97-2, Software Revenue Recognition, and related guidance in the
form of technical questions and answers published by the American Institute of
Certified Public Accountants' task force on software revenue recognition. SOP
97-2 requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on vendor specific objective
evidence of fair values of the elements. License revenue allocated to software
products generally is recognized upon delivery of the software products or
ratably over a contractual period if unspecified software products are to be
delivered during that period. Revenue allocated to hosting and maintenance
services is recognized ratably over the contract term and revenue allocated to
professional services is recognized as the services are performed. If the
professional services provided are essential to the functionality or are for
significant production, modification or customization of the software products,
both the software product revenue and service revenue are recognized in
accordance with the provisions of SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Under SOP 81-1,
revenues and costs are recognized based on the labor hours incurred to date,
compared to total estimated labor hours over the term of the contract using the
percentage of completion method.
At December 31, 2000 and 1999, approximately $4.2 million and $3.0 million
that is included in the respective accounts receivable balance was unbilled due
to customer payment terms.
Pursuant to the consensus reached by the Emerging Issues Task Force
("EITF") in Issue No. 99-17, Accounting for Barter Advertising Transactions,
barter transactions are recorded at the estimated fair value of the
advertisements given, based on recent historical cash transactions. Barter
revenue is recognized when the advertising impressions or other services are
delivered to the customer and advertising expense is recorded when the
advertising impressions or other services are received from the customer. If we
receive the advertising impressions or other services from the customer prior to
our delivery of the advertising impressions,
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a liability is recorded, and if we deliver the advertising impressions to the
customer prior to receiving the advertising impressions or other services, a
prepaid expense is recorded on the consolidated balance sheets. For the years
ended December 31, 2000, 1999 and 1998, we recognized approximately $9.4
million, $3.8 million and $0.7 million of advertising revenues, respectively,
and $7.7 million, $3.0 million and $0.5 million of advertising expenses,
respectively, from barter transactions. We have recorded approximately $2.3
million and $1.0 million in prepaid expenses related to barter transactions as
of December 31, 2000 and 1999, respectively.
EDITORIAL AND OPERATIONAL EXPENSES
Editorial and operational expenses consist primarily of salaries and
benefits of operating and editorial personnel, Internet connection charges,
depreciation, purchased content, product costs (including costs of professional
services provided to customers) and other related operating costs, which are
expensed as incurred.
PRODUCT DEVELOPMENT
Product development costs consist primarily of salaries and benefits,
consulting and other related expenses, which are expensed as incurred.
ADVERTISING COSTS
We expense advertising costs as incurred. Advertising expenses, exclusive
of barter advertising discussed above, were approximately $32.4 million, $4.3
million and $1.9 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, money market investments and other
highly liquid investments with maturities of three months or less.
RESTRICTED CASH
Restricted cash represents certificates of deposit held pursuant to
building lease agreements and other financing arrangements. At December 31,
2000, we had approximately $7.9 million and $3.7 million of restricted cash
classified in current and non-current other assets, respectively, on the
consolidated balance sheet. At December 31, 1999, we had approximately $1.2
million of restricted cash classified in non-current other assets.
INVESTMENTS
We account for debt securities and marketable equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. These
available-for-sale investments are classified as short-term and long-term
investments on the consolidated balance sheet and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in other comprehensive
income (loss). Realized gains or losses and other than temporary declines in
fair value, if any, on available-for-sale securities are reported in other
income (expense), as incurred.
We hold equity instruments of privately-held companies for business and
strategic purposes. These investments are included in other investments on the
consolidated balance sheet and are accounted for under the cost method since our
ownership percentage is less than 20% and we do not have the ability to exercise
significant influence over the investees. For the years ended December 31, 2000
and 1999, we recognized revenue of $5.3 million and $1.4 million, respectively,
from commercial arrangements with cost method investees. For these non-publicly
traded investments, our policy is to regularly review the market conditions
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the assumptions underlying the operating performance and cash flow forecasts
in assessing the recoverability of the carrying values.
We have investments in privately owned companies whose results are not
consolidated, but over whom we exercise significant influence. These investments
are accounted for under the equity method of accounting and included in other
investments on the consolidated balance sheet. Determining whether we exercise
significant influence with respect to a particular investment depends on an
evaluation of several factors including, among others, representation on the
investee's board of directors, as well as our overall ownership level of the
investee, including voting rights associated with our holdings in common,
preferred and other convertible instruments in the investee. Under the equity
method of accounting, our share of the earnings or losses of the investee is
reflected in other income (expense) on our consolidated statement of operations.
Revenues earned from equity method companies are eliminated based on our
pro-rata ownership percentage.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets as follows:
Computer equipment and software............................. 1.5-5 years
Office equipment and furniture.............................. 5-7 years
Trade show equipment........................................ 7 years
Leasehold improvements...................................... 3 years
CAPITALIZED SOFTWARE
Under the provisions of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, we capitalize costs associated
with internally developed and/or purchased software systems for new products and
enhancements to existing products that have reached the application development
stage and meet recoverability tests. Capitalized costs include external direct
costs of materials and services utilized in developing or obtaining internal-use
software, payroll and payroll-related expenses for employees who are directly
associated with and devote time to the internal-use software project and
interest costs incurred, if material, while developing internal-use software.
Capitalization of such costs begins when the preliminary project stage is
complete and ceases no later than the point at which the project is
substantially complete and ready for its intended purpose. The carrying value of
the software is regularly reviewed and a loss is recognized if the value of the
estimated undiscounted cash flow benefits related to the asset falls below the
remaining unamortized cost. These capitalized costs are amortized on a
straight-line basis over the economic useful life, beginning when the asset is
ready for its intended use.
Under the provisions of SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, certain development costs of
our software products are capitalized subsequent to the establishment of
technological feasibility and up to the time the product becomes available for
general release. Amortization is provided on a product-by-product basis on the
straight-line method over the remaining estimated economic life of the product.
Software costs capitalized under SOP 98-1 and SFAS No. 86 approximated $6.1
million and $1.0 million as of December 31, 2000 and 1999, respectively, and are
included in property and equipment on the consolidated balance sheet.
Amortization expense for the year ended December 31, 2000 was approximately $2.0
million. No amortization expense was recorded for the year ended December 31,
1999.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE AND OTHER LONG-LIVED ASSETS
Goodwill is amortized using the straight-line method from the date of
acquisition over the period of the expected benefits, which is expected to be
three years. Other intangible assets resulting from acquisitions, including
covenants not-to-compete, acquired technology and acquired workforce, are also
amortized using the straight-line method from the date of acquisition over the
period of the expected benefits, ranging from two to three years.
We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some within the
business-to-business e-commerce industry, have experienced difficulty in raising
additional capital necessary to fund operating losses and ongoing investments in
strategic relationships. Valuations of public companies operating in the
Internet business-to-business e-commerce sector have declined significantly
since the first quarter of 2000.
We regularly perform reviews to determine whether events or changes in
circumstances indicate that the carrying value of the goodwill and other
intangible assets may not be recoverable. We assess long-lived assets for
impairment under SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. During the year ended
December 31, 2000, we recorded a goodwill impairment charge of approximately
$11.5 million based on an analysis of projected undiscounted cash flows.
Additionally, during the year ended December 31, 2000, we wrote off
approximately $5.6 million in obsolete software, prepaid assets and deferred
costs for terminated acquisitions. It is reasonably possible that our accounting
estimates with respect to the useful life and ultimate recoverability of
goodwill and other intangible assets could change in the near term and that the
effect of such changes on the consolidated financial statements could be
material. While we currently believe that the recorded amount of goodwill and
other intangible assets is not impaired, a significant write-down or write-off
may be required in the future.
DEBT ISSUANCE COSTS
Specific costs related to our convertible debt offering in September 1999
were capitalized upon issuance of the debt and are being amortized to interest
expense using the effective interest rate method over the five year term of the
debt. Upon conversion of $93.3 million of our convertible debt in April 2000,
approximately $2.9 million of debt issuance costs were written off against
additional paid-in capital. As of December 31, 2000, the remaining debt issuance
costs of $0.6 million are classified in other assets on the consolidated balance
sheet.
SELF INSURANCE
We are self-insured for certain losses related to employee medical benefits
as of December 31, 2000. We have purchased stop-loss coverage in order to limit
our exposure. Self insurance losses are accrued based on our estimates of the
aggregate liability for uninsured claims incurred using certain actuarial
assumptions followed in the insurance industry. At December 31, 2000 and 1999,
the accrued liability for self-insured losses is included in accrued expenses
and approximates $1.3 million and $0.2 million, respectively.
INCOME TAXES
We record income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
enactment date. A valuation allowance is recorded against deferred tax assets if
it is more likely than not that such assets will not be realized.
STOCK OPTIONS
Stock-based employee compensation is recognized using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees. For disclosure purposes, pro forma net
loss and loss per share data are provided in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, as if the fair value method had been
applied.
STOCK SPLITS
On January 20, 2000 and July 21, 1999, our board of directors approved a
two-for-one stock split of our common stock effected on March 31, 2000 and
August 20, 1999, respectively.
All references in the consolidated financial statements to shares, share
prices and per share amounts have been adjusted retroactively for these splits.
COMPREHENSIVE INCOME (LOSS)
We report comprehensive income or loss in accordance with the provisions of
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting comprehensive income (loss) and its components in financial
statements. Comprehensive income or loss, as defined, includes all changes in
equity (net assets) during a period from non-owner sources.
FOREIGN CURRENCY TRANSLATION
We translate the assets and liabilities of international subsidiaries into
U.S. dollars at the current rates of exchange in effect as of each balance sheet
date. Revenues and expenses are translated using average rates in effect during
the period. Gains and losses from translation adjustments are included in
accumulated other comprehensive loss on the consolidated balance sheet. Foreign
currency transaction gains or losses, are recognized in current operations and
have not been significant to our operating results in any period. The effect of
foreign currency rate changes on cash and cash equivalents has not been
significant in any period.
FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, we have determined the estimated fair value of
our financial instruments using available market information and valuation
methodologies. Our financial instruments consist of cash and cash equivalents,
available-for-sale investments, accounts receivable, accounts payable, capital
leases and convertible notes. Considerable judgment is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. However, we
believe the carrying values of these assets and liabilities, with the exception
of the convertible notes, is a reasonable estimate of their fair market values
at December 31, 2000 and 1999 due to the short maturities of such items. Based
on their quoted market value as of December 31, 2000, the convertible notes are
estimated to have an aggregate fair market value of approximately $11.5 million.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash and cash equivalents in bank deposits
accounts, short-term investments and trade receivables. Cash and cash
equivalents are held with high quality financial institutions. Short-term
investments are primarily held in high quality corporate debt instruments and
government obligations. We periodically perform credit evaluations of
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
our customers and maintain reserves for potential losses. We do not anticipate
any losses from these receivables in excess of the provided allowances.
Microsoft accounted for approximately $30.5 million or 27% of total revenues for
the year ended December 31, 2000 and comprises 65% of our deferred revenue
balance as of December 31, 2000. No single customer accounted for greater than
10% of total revenues during the years ended December 31, 1999 and 1998.
COMPUTATION OF HISTORICAL NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net loss per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, including incremental common
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method) and the conversion of our 5 1/4% convertible subordinated
debentures and our Series A 6.00% convertible redeemable preferred stock (using
the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Common stock issued upon the
conversion of the convertible notes given as consideration in connection with
the purchase of NECX.com LLC was included in the calculation from the date of
acquisition in December 1999 because the related securities were accounted for
as equity.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (referred to as derivatives),
and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of SFAS No. 133, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of SFAS No. 133, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect SFAS No. 133, as amended, to have a material impact on our
results of operations, financial position and cash flows.
The EITF has begun discussion on Issue No. 00-21, Accounting for
Multiple-Element Revenue Arrangements. Issues currently being addressed by an
EITF working group include: (a) determining when elements of multiple-element
arrangements should be evaluated separately; (b) allocation of consideration to
the individual elements; and (c) accounting for certain direct costs incurred
related to the arrangement. No consensuses have been reached yet on these
issues. However, because we engage in these types of transactions, we anticipate
that guidance ultimately issued by the EITF on this issue may impact us in the
future.
(2) ACQUISITIONS
TRADEUM
On March 23, 2000, we acquired all of the outstanding capital stock of
Tradeum, Inc. ("Tradeum") for approximately $453.1 million, including
transaction costs. The consideration included 2,573,837 shares of our common
stock, valued at approximately $325.0 million and 1,426,148 employee options to
purchase our
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock, valued as of the date of acquisition at approximately $122.6
million, based on an independent valuation. A portion of the common stock given
as consideration was reduced by an illiquidity discount based on restrictions
detailed in the lock up agreements signed by the individuals receiving the
stock. The acquisition was accounted for as a purchase and the excess of the
purchase price over the fair value of the tangible net assets acquired of
approximately $452.6 million was allocated to in-process research and
development, existing technology, assembled workforce and goodwill in the
amounts of approximately $10.0 million, $7.0 million, $1.0 million and $434.6
million, respectively. The $10.0 million was charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development had not yet reached technological feasibility and had
no alternative future uses (see Note 3). The existing technology, assembled
workforce and goodwill are being amortized on a straight-line basis over 36
months.
VERTICALNET EUROPE
In June 2000, we formed VerticalNet Europe, a joint venture with BT and
Internet Capital Group, Inc. ("ICG"). The joint venture was funded with 109.5
million Euros (approximately $114.7 million as of the closing date) from the
three partners. We contributed to VerticalNet Europe approximately $6.8 million
in cash and intellectual property independently valued at approximately $120.0
million for the operation of e-marketplaces within Europe for a 56% ownership
interest in VerticalNet Europe. Additionally, VerticalNet Europe and BT created
VerticalNet UK Ltd. as part of the joint venture agreement.
Our ownership of VerticalNet Europe increased from 56% to 72% on December
29, 2000 when VerticalNet Europe redeemed some of its shares held by BT. Due to
minority shareholder governance provisions in the original agreement, we were
previously accounting for VerticalNet Europe using the equity method. As a
result of our increased ownership, certain governance provisions regarding
minority shareholders were amended giving us control over VerticalNet Europe's
operations. Accordingly, we have consolidated VerticalNet Europe in our
consolidated balance sheet at December 31, 2000 and will begin consolidating
VerticalNet Europe's operations starting January 1, 2001. The increase in
ownership was accounted for as a purchase and the estimated excess of the
purchase price over the fair value of the net assets acquired of approximately
$3.4 million was allocated to goodwill. Additionally, in December 2000,
VerticalNet Europe obtained full ownership of VerticalNet UK Ltd.
During the year ended December 31, 2000, we entered into a commercial
arrangement with BT under which we recognized approximately $4.0 million in
revenues. Also in a separate agreement, a BT affiliate agreed to license
VerticalNet Solutions' products for distribution in selected regions worldwide.
OTHER 2000 ACQUISITIONS
During the year ended December 31, 2000, we completed six additional
acquisitions, including Career Mag, Leasend, J.M. Computer Services, BidLine,
FedAmerica and Oralis. The aggregate purchase price of these acquisitions was
approximately $5.3 million in cash and 474,060 shares of common stock valued at
approximately $36.8 million. These acquisitions were accounted for as purchases
and the excess of the purchase price over the fair value of net assets acquired
of approximately $41.6 million was allocated to goodwill and other intangibles.
The results of operations from these acquisitions are not material to our
financial position or results of operations.
ISADRA
In August 1999, we acquired all of the outstanding capital stock of Isadra,
Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common stock
valued at approximately $37.8 million, based on an independent valuation, and
81,526 options to purchase our common stock, valued at approximately $1.5
million at the date of acquisition using the Black-Scholes model. The common
stock given as consideration was reduced by an illiquidity discount based on
restrictions detailed in the lock up agreements signed by the individuals
receiving the stock. In connection
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with this transaction, we agreed to lend up to $1.0 million to Isadra prior to
the closing of this transaction. As of the acquisition date, we had advanced
Isadra approximately $1.0 million. The acquisition was accounted for as a
purchase and the estimated excess of the purchase price over the fair value of
the tangible net assets acquired of approximately $43.9 million was allocated to
in-process research and development, existing technology, assembled work force
and goodwill in the amounts of approximately $13.6 million, $2.1 million, $0.5
million and $27.7 million, respectively. The $13.6 million was charged to
expense as a non-recurring charge upon consummation of the acquisition since the
in-process research and development had not yet reached technological
feasibility and had no alternative future use (see Note 3). The existing
technology and assembled work force are being amortized on a straight-line basis
over 24 months, while goodwill is being amortized on a straight-line basis over
36 months.
OTHER 1999 ACQUISITIONS
During the year ended December 31, 1999, we completed nine additional
acquisitions, including Safety Online, Techspex, Oillink, ElectricNet, LabX
Technologies, Industry OnLine, CertiSource, GovCon and TextileWeb. The aggregate
purchase price for these acquisitions was approximately $3.9 million in cash and
781,488 shares of common stock valued at approximately $27.9 million. These
acquisitions were accounted for as purchases and the excess of the purchase
price over the fair value of the tangible net assets acquired of approximately
$33.0 million was allocated to goodwill and other intangibles. The results of
operations from these acquisitions are not material to our financial position or
results of operations.
For all of the acquisitions described above, the results of the acquired
companies have been included in our financial statements from the date of
acquisition.
OTHER INFORMATION
Acquisitions related to the VerticalNet Exchanges segment are described in
Note 4.
The following unaudited pro forma financial information presents the
combined results of operations of VerticalNet, Isadra and Tradeum (the material
acquisitions related to our continuing operations) as if the acquisitions
occurred on January 1, 1999, after giving effect to certain adjustments,
including amortization expense. The unaudited pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had VerticalNet, Isadra and Tradeum constituted a single entity during such
periods. The unaudited pro forma financial information does not include the
operations of the VerticalNet Exchanges segment, which is being accounted for as
a discontinued operation (in thousands, except per share data).
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- -----------
Revenues............................................... $112,508 $ 18,478
Net loss attributable to common shareholders........... (361,987) (217,220)
Net loss per common share.............................. (4.32) (3.28)
(3) IN-PROCESS RESEARCH AND DEVELOPMENT
TRADEUM ACQUISITION
In connection with the acquisition of Tradeum, we allocated $10.0 million
of the purchase price to in-process research and development ("IPR&D"). This
allocation represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete research and development projects. At the date
of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date. At the acquisition date, Tradeum was conducting design,
development, engineering and
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
testing activities associated with the development of next-generation
technologies that were expected to address emerging market demands for
business-to-business e-commerce.
At the acquisition date, the technologies under development were between
20% and 25% complete, based on project man-months and costs. Tradeum had spent
approximately $1.1 million on the IPR&D projects, and expected to spend
approximately $3.9 million to complete the research and development.
In making the purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and completion
costs, an assessment of overall contributions, as well as project risks. The
value assigned to IPR&D was determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting
net cash flows from the projects, and discounting the net cash flows to their
present value. The revenue projection used to value the IPR&D was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by us
and our competitors. The resulting net cash flows from such projects were based
on management's estimates of cost of sales, operating expenses and income taxes
from such projects. A risk-adjusted discount rate of 25% was utilized to
discount projected cash flows.
ISADRA ACQUISITION
The write-off of IPR&D related to the acquisition of Isadra totaled $13.6
million, which was expensed as a one time non-recurring charge. The allocation
of $13.6 million represents the estimated fair value related to incomplete
projects based on risk adjusted cash flows. At the date of the acquisition, the
projects associated with the IPR&D efforts had not yet reached technological
feasibility and had no alternative future uses. Accordingly, these costs were
expensed. At the acquisition date, Isadra was conducting development,
engineering and testing activities associated with the completion of next
generation technologies. The projects under development, at the valuation date,
were expected to address emerging market demands for business-to-business
e-commerce.
At the acquisition date, the technologies under development were between
70% and 80% complete, based on project man-months and costs. Isadra had spent
approximately $3.0 million on the IPR&D projects and expected to spend
approximately $1.0 million to complete the IPR&D projects.
In allocating the purchase price, we considered present value calculations
of income, an analysis of project accomplishments and completion costs, an
assessment of overall contributions, as well as project risks. The values
assigned to IPR&D were determined by estimating the costs to develop the
purchased technology into commercially viable products, estimating the resulting
net cash flows from each project, excluding the cash flows related to the
portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts were based upon future discounted cash flows, taking into
account the state of development of each in-process project, the cost to
complete that project, the expected income stream, the life cycle of the product
ultimately developed and the associated risks. A risk-adjusted discount rate of
50% was utilized to discount projected cash flows.
(4) DISCONTINUED OPERATIONS
On December 19, 2000, we entered into a definitive agreement to sell our
VerticalNet Exchanges segment to Converge, Inc. ("Converge"), an independent
marketplace that serves the high-tech supply-chain community. VerticalNet
Exchanges was comprised of NECX, a business purchased in December 1999, and its
subsequent acquisitions of RW Electronics and F&G Capital, Inc. d/b/a American
IC Exchange ("AICE") in March 2000 and July 2000, respectively. In consideration
for the transaction, we received 10,371,319 shares of Series B convertible
preferred stock and 1,094,751 shares of non-voting common stock, representing
approximately 18.0% and 1.9% of Converge's equity, respectively. We were also
entitled to receive $60.0 million of cash at closing, subject to adjustment
based on a comparison of NECX's net worth
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and working capital as of October 31, 2000 and as of the closing date. Based on
a preliminary calculation performed on January 31, 2001, the closing date, we
paid $6.5 million to Converge. This cash payment is subject to further
adjustment based on a final calculation of NECX's closing date net worth and
working capital following a post-closing audit. We expect to pay Converge an
additional $6.0 million based on the final net worth and working capital
adjustment calculation.
The sale of NECX was treated as a nonmonetary exchange pursuant to the
guidance in APB No. 29, Accounting for Nonmonetary Transactions, and EITF Issue
No. 00-05, Determining Whether a Nonmonetary Transaction is an Exchange of
Similar Productive Assets. Accordingly, we will use the fair value of NECX of
approximately $215.0 million, as determined by an independent appraisal, to
value our investment in Converge. In addition, we used this amount in
determining the loss on disposition of approximately $82.0 million, which
includes estimated losses of $9.0 million through January 31, 2001, the date the
transaction closed. The investment in Converge will be accounted for under the
cost method of accounting for investments based on the guidance in APB No. 18,
The Equity Method of Accounting for Investments in Common Stock.
The sale of NECX represents the disposal of a business segment under APB
No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Accordingly, the results of this segment have
been shown separately as a discontinued operation, and prior periods have been
restated. Additionally, the net assets of the discontinued operation have been
classified separately on the consolidated balance sheets.
Revenues and losses from the discontinued operation are as follows:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
Exchange transaction sales.................................. $633,762 $16,501
Cost of exchange transaction sales.......................... 525,182 14,171
-------- -------
Net exchange revenues..................................... $108,580 $ 2,330
======== =======
Loss from discontinued operations........................... $(27,018) $ (891)
======== =======
Estimated loss on disposal of discontinued operations....... $(81,968) $ --
======== =======
The assets and liabilities of the VerticalNet Exchanges segment are as
follows:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Current assets.............................................. $ 27,573 $ 49,620
Property and equipment, net................................. 22,809 5,117
Intangible assets, net...................................... 155,680 118,947
Other non-current assets.................................... 9,424 5,331
Current liabilities......................................... (486) (27,260)
-------- --------
Net assets of discontinued operations....................... $215,000 $151,755
======== ========
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are businesses acquired in 1999 and 2000, which have been
disposed of as part of the sale of our VerticalNet Exchanges segment:
NECX
In December 1999, we acquired substantially all of the assets and
liabilities of NECX for approximately $14.1 million cash and $70.0 million of
notes convertible into common stock. The notes were valued at the estimated fair
value of the shares into which they were convertible, based on the average of
the stock price for a few days before and after the date the transaction was
announced. On the date of the definitive agreement, the notes were convertible
into 2,008,738 shares of our common stock valued at approximately $99.5 million.
Since the notes were required to be paid in common stock and it was our
intention to convert the notes once a registration statement was declared
effective, the notes were accounted for as common stock to be issued. In April
2000, a registration statement registering the underlying shares of the
convertible notes was declared effective and the actual number of shares issued
upon the conversion of the notes was 1,768,034. Additionally, we assumed certain
liabilities including $10.0 million in debt and a $22.0 million line of credit,
which were paid off upon the transaction closing.
NECX was a privately-held leader in buying and selling semiconductors,
electronic components, computer products and networking equipment. The
acquisition was accounted for as a purchase and the excess of the purchase price
over the fair value of the tangible net assets acquired of approximately $115.5
million was allocated to strategic relationships, including customer and vendor
lists, assembled workforce and goodwill in the amounts of approximately $13.0
million, $2.5 million and $100.0 million, respectively. The assembled workforce
was being amortized on a straight-line basis over 48 months, while strategic
relationships and goodwill were being amortized on a straight-line basis over 60
months.
RW ELECTRONICS
On March 31, 2000, NECX acquired substantially all of the assets and
liabilities of RW Electronics for approximately $14.5 million in cash and
720,652 shares of our common stock valued at approximately $73.0 million. Based
on the purchase agreement terms, an additional 311,741 shares of common stock
were issued to the RW Electronics shareholders due to a decline in the market
value of our common stock upon the registration of the shares with the
Securities and Exchange Commission in May 2000. Additionally, NECX assumed
certain liabilities, including a $22.9 million line of credit, which was paid
off upon the transaction closing. RW Electronics was a privately-held company
engaged in buying and selling semiconductors, electronic components, computer
products and networking equipment. The acquisition was accounted for as a
purchase and the excess of the purchase price over the fair value of the
tangible net assets acquired of approximately $76.3 million was allocated to
strategic relationships, including customer and vendor lists, assembled
workforce and goodwill in the amounts of approximately $15.0 million, $0.5
million and $60.8 million, respectively. The assembled workforce is being
amortized on a straight-line basis over 48 months, while strategic relationships
and goodwill are being amortized on a straight-line basis over 60 months.
AMERICAN IC EXCHANGE
On July 13, 2000, NECX acquired substantially all of the assets and assumed
certain of the liabilities of AICE for 1,097,457 shares of our common stock
valued at approximately $54.9 million. We agreed to pay additional consideration
(payable in shares of our common stock) upon the achievement of negotiated
financial and operating targets. As of December 31, 2000, we had issued an
additional 239,552 shares of our common stock valued at approximately $8.1
million for earnout provisions that had been earned. The acquisition was
accounted for as a purchase and the excess of the purchase price over the fair
value of the tangible net assets acquired of approximately $51.3 million was
allocated to developed technology, trade name,
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
strategic relationships, assembled workforce and goodwill in the amounts of
approximately $8.0 million, $5.4 million, $4.7 million, $0.6 million and $32.6
million, respectively. In January 2001, in connection with the sale of NECX to
Converge, we settled AICE's remaining earnout provisions by issuing an
additional 1,101,549 shares of our common stock valued at approximately $10.0
million.
DISCONTINUED OPERATION -- LINE OF CREDIT AND SECURITIZATION FACILITY
In February 2000, NECX entered into a $33.0 million revolving line of
credit, which was amended in March 2000 to increase the line amount to $50.0
million. In conjunction with the completion of a securitization facility in
September 2000, we repaid the outstanding line of credit borrowing and
terminated the agreement.
In September 2000, NECX entered into a five year $75.0 million agreement to
sell, on an ongoing basis, a pool of its trade accounts receivable to a
wholly-owned bankruptcy-remote special purpose subsidiary (the "SPS"). The SPS
sold an undivided ownership interest in the pool of receivables to a financial
institution (the "Conduit"). Under the terms of the agreement, new receivables
were added to the pool as collections reduced previously sold receivables. NECX
serviced, administered and collected the receivables on behalf of the SPS and
the Conduit. Proceeds of approximately $130.0 million were received during the
year ended December 31, 2000 from the sale of receivables. During the year ended
December 31, 2000, the SPS recorded a net loss of approximately $0.7 million
from the related sales to the Conduit. The proceeds were used to repay the NECX
line of credit and for working capital purposes. The securitization facility was
transferred to Converge as part of the sale of NECX and was no longer available
to us as of January 31, 2001.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-----------------
2000 1999
------- ------
(IN THOUSANDS)
Software.................................................... $16,166 $2,225
Computer equipment.......................................... 16,227 4,498
Office equipment and furniture.............................. 6,404 2,327
Trade show equipment........................................ 349 41
Leasehold improvements...................................... 2,614 857
------- ------
41,760 9,948
Less: accumulated depreciation and amortization............. (9,362) (1,917)
------- ------
Property and equipment, net................................. $32,398 $8,031
======= ======
Amortization applicable to property and equipment under capital leases is
included in depreciation expense.
During the year ended December 31, 2000, we recorded an asset impairment
charge of approximately $1.0 million for various purchased and internally
developed capitalized software which are no longer in use and deemed obsolete by
management. The charge is included in general and administrative expenses.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
--------------------
2000 1999
--------- -------
(IN THOUSANDS)
Goodwill.................................................... $ 525,206 $62,124
Covenants not-to-compete.................................... 850 850
Existing technology......................................... 9,600 2,600
Assembled workforce......................................... 1,700 500
--------- -------
537,356 66,074
Less: accumulated amortization.............................. (149,015) (7,097)
--------- -------
Intangible assets, net...................................... $ 388,341 $58,977
========= =======
Amortization expense was $146.8 million and $6.8 million for the years
ended December 31, 2000 and 1999, respectively. During the year ended December
31, 2000, we recorded an impairment charge of approximately $11.5 million
related to goodwill based on analyses of projected undiscounted cash flows.
(7) INVESTMENTS
AVAILABLE-FOR-SALE
Investments categorized as available-for-sale securities were as follows as
of December 31, 2000 and December 31, 1999:
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
DECEMBER 31, 2000 ------- ---------- ---------- -------
(IN THOUSANDS)
Corporate debt obligations -- maturity less than 1
year................................................ $ 9,925 $ 1 $ (8) $ 9,918
U.S. government & government agency
obligations -- maturity less than 1 year............ 11,000 5 (4) 11,001
Marketable equity securities.......................... 67,592 -- (44,301) 23,291
------- ------- -------- -------
$88,517 $ 6 $(44,313) $44,210
======= ======= ======== =======
Our marketable equity securities, which consist of investments in publicly
traded companies for which we do not have the ability to exercise significant
influence, are classified as available-for-sale and are stated at fair market
value based on quoted market prices. Our investment in Ariba, Inc. ("Ariba")
common stock of approximately $22.9 million is classified as long-term due to a
forward sale of the majority of our shares (see Note 8).
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
DECEMBER 31, 1999 ------- ---------- ---------- ------------
(IN THOUSANDS)
Corporate debt obligations -- maturity less than 1
year............................................. $23,221 $ -- $ (31) $23,190
Corporate debt obligations -- maturity between 1
and 5 years...................................... 10,005 -- (64) 9,941
U.S. government & government agency obligations --
maturity less than 1 year........................ 21,009 -- (68) 20,941
U.S. government & government agency obligations --
maturity between 1 and 5 years................... 7,000 -- (56) 6,944
------- -------- ----- -------
$61,235 $ -- $(219) $61,016
======= ======== ===== =======
Available-for-sale investments are classified on the consolidated balance
sheet as current assets of $44.1 million and non-current assets of $16.9 million
at December 31, 1999.
Proceeds from sales of available-for-sale investments were approximately
$141.6 million and $133.8 million, respectively, for the years ended December
31, 2000 and 1999. Gross realized losses and gains were approximately $5.6
million and $85.5 million, respectively, for the year ended December 31, 2000.
Gross realized losses and gains were immaterial for the year ended December 31,
1999. Realized gains and losses are computed on a specific identification basis.
In July 1999, we acquired 414,233 shares of the Series C preferred stock of
Tradex Technologies, Inc. ("Tradex") for $1.0 million. In December 1999, Tradex
entered into an Agreement and Plan of Reorganization with Ariba. On March 10,
2000, pursuant to the terms of the Agreement and Plan of Reorganization, our
investment in Tradex was exchanged for 566,306 shares of Ariba's common stock.
Based on the fair market value of Ariba's common stock on March 10, 2000, we
recorded an $85.5 million gain on the disposition of the Tradex investment.
After selling 140,000 shares in March 2000 at a loss of $5.6 million, we
recorded a net investment gain of $79.9 million for the year ended December 31,
2000.
COST METHOD INVESTMENTS
Investments held at cost were approximately $12.2 million and $6.7 million
at December 31, 2000 and 1999, respectively. During the year ended December 31,
2000, we recorded a $6.4 million impairment charge, which is included in other
income (expense) for an other than temporary decline in the fair value of
certain of these investments.
EQUITY METHOD INVESTMENTS
As of December 31, 2000, equity method investments consisted of the
following:
BALANCE AT
ORIGINAL DECEMBER 31, OWNERSHIP
INVESTMENT 2000 PERCENTAGE
---------- ---------------- ----------
(IN THOUSANDS)
PaintandCoatings.com Inc......................... $1,965 $1,099 40%
e-Catalysts, Inc................................. 3,042 3,042 33%
VerticalNet Kabushiki Kaisha (VerticalNet
Japan)......................................... 2,162 1,241 40%
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our loss from equity method investments, which is included in other income
(expense), is approximately $2.8 million for the year ended December 31, 2000.
There were no equity method investments held during the year ended December 31,
1999. During the year ended December 31, 2000, we recognized revenue, net of
proportional eliminations, of approximately $2.5 million from our equity method
investees. Operations for the year ended December 31, 2000 and total assets as
of December 31, 2000 for our equity method investments were not material to our
operations or financial position.
(8) LONG-TERM INVESTMENTS AND OTHER LONG-TERM LIABILITIES
In July 2000, we entered into forward sale contracts relating to our
investment in Ariba. Under these contracts, we pledged our shares of Ariba
common stock to the counterparty for a three-year period in return for
approximately $47.4 million of cash. At the conclusion of the three-year period,
we have the option of delivering either cash or the pledged Ariba shares to
satisfy the forward sale. However, we will not be required to deliver shares in
excess of those we pledged. If we choose to deliver Ariba shares to satisfy the
forward sale, the number of Ariba shares to be delivered at maturity may vary
depending on the then market price of Ariba's common stock. The fair value of
our Ariba shares at December 31, 2000 was approximately $22.9 million and is
included in long-term investments.
The fair value of the obligation in connection with the forward sale is
$22.6 million as of December 31, 2000 and is reflected in other long-term
liabilities. The initial cost of the transaction, which was approximately $5.0
million, is being amortized over the life of the agreement.
(9) MICROSOFT RELATIONSHIP
On March 29, 2000, we entered into a definitive agreement with Microsoft
with respect to a commercial relationship. Our commercial relationship with
Microsoft has a three-year term during which Microsoft will purchase from us,
and then distribute to third party businesses, at least 80,000 of our
storefronts and e-commerce centers. We will assist Microsoft in distributing
30,000 of these storefronts and e-commerce centers. Microsoft will pay us a
minimum of approximately $161.9 million in the aggregate over the term for the
storefronts and e-commerce centers. Microsoft will provide the storefronts and
e-commerce centers it purchases from us to business customers for a 12 month
subscription period. We will build the storefront or e-commerce center for each
customer, which will be placed on one of our e-marketplaces. Our intent is that
customers would purchase renewals of the storefront or e-commerce center and
additional storefronts or e-commerce centers on our other e-marketplaces. If a
customer renews its storefront or e-commerce center beyond the initial 12 month
period, we will pay an amount to Microsoft based on the aggregate amount of such
renewals. We will also pay an amount to Microsoft based on the amount of sales
of additional storefronts and e-commerce centers on other e-marketplaces. We are
also obligated to pay to Microsoft an amount based on the amount of the revenues
we receive from transactions that take place on the e-commerce centers
distributed under the agreement. We will pay Microsoft an aggregate of $60.0
million during the term for advertising and promotional placements in The
Microsoft Network and on Microsoft's bCentral Web site and, if the pace of
Microsoft's distribution of storefronts and e-commerce centers does not meet
agreed upon goals, additional amounts for advertising and promotional placements
not to exceed $15.0 million in the aggregate.
Microsoft will pay to us a portion of revenues from transactions that occur
in The Microsoft Network and on Microsoft's bCentral Web site and originate via
a link from our e-marketplaces or the VerticalNet home page. Microsoft will pay
us an aggregate of $60.0 million during the term for advertising and promotional
placements in our e-marketplaces. We will pay Microsoft an aggregate of $18.5
million over the term to be directed toward the development and enhancement of
products and services relating to the business-to-business marketplace and
database software technology.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We will use commercially reasonable efforts during the term to adopt and
use Microsoft products to operate our e-marketplaces when appropriate and
feasible. We will pay Microsoft an aggregate of $56.5 million over the term
towards the licensing of Microsoft products and the provision of Microsoft
services.
Expected cash flows from this arrangement, net of cash payments we are
required to make to Microsoft, are approximately $49.2 million and $5.1 million
in 2001 and 2002, respectively.
During the year ended December 31, 2000, we received $67.6 million from
Microsoft, of which approximately $30.5 million was recognized as advertising
and e-enablement revenue and approximately $37.1 million remains in deferred
revenue on the December 31, 2000 consolidated balance sheet. Additionally,
during the year ended December 31, 2000, we paid $29.9 million (including
royalty expenses of $0.5 million) to Microsoft, of which approximately $12.0
million was expensed for advertising, royalties, licensing and support services,
approximately $0.5 million was capitalized and approximately $17.4 million is
recorded as a prepaid expense (of which $5.5 million is included in non-current
other assets) for future advertising, licensing of Microsoft products and the
use of Microsoft services.
(10) ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
Accrued costs of disposal of discontinued operations...... $49,037 $ --
Accrued compensation and related costs.................... 13,286 2,791
Accrued professional fees................................. 1,017 950
Accrued interest payable.................................. 298 1,588
Accrued acquisition and debt offering costs............... 92 2,693
Other..................................................... 3,521 2,162
------- -------
$67,251 $10,184
======= =======
(11) LONG-TERM DEBT AND CONVERTIBLE NOTES
Long-term debt and convertible notes consist of the following:
DECEMBER 31,
------------------
2000 1999
------- --------
(IN THOUSANDS)
Capital leases........................................... $ 2,549 $ 3,122
Convertible notes........................................ 21,705 115,000
------- --------
24,254 118,122
Less: current portion.................................... (1,597) (1,372)
------- --------
Long-term debt and convertible notes..................... $22,657 $116,750
======= ========
On September 27, 1999, we completed the sale of $100.0 million of 5 1/4%
convertible subordinated debentures in a private placement transaction pursuant
to Section 4(2) of the Securities Act of 1933, resulting in net proceeds of
$96.3 million. Additionally, on October 12, 1999, the over-allotment option on
the convertible debt offering was exercised in full, resulting in additional
convertible debt of $15.0 million and net proceeds of $14.6 million. The
debentures have a maturity date of September 27, 2004 with semi-annual interest
payments due on March 27 and September 27 of each year beginning March 27, 2000.
The
73
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debentures are convertible into shares of our common stock at an initial
conversion price of $20 per share, subject to adjustment under certain
circumstances. On February 11, 2000, we filed a registration statement with the
Securities and Exchange Commission covering the convertible subordinated
debentures and the shares of common stock underlying the debentures. The
registration statement was declared effective on April 7, 2000. We may redeem
the debentures if the price of our common stock is above $34 per share for at
least 20 trading days during the 30-day trading period ending on the trading day
before we mail notice that we intend to redeem the debentures. If we redeem the
debentures, we must redeem at a price equal to 101.3125% of the principal
amount, pay any accrued but unpaid interest and make an interest make-whole
payment equal to the present value of the interest that would have accrued from
the redemption date through September 26, 2002.
In April 2000, approximately $93.3 million of the 5 1/4% convertible
subordinated debentures were converted into 4,664,750 shares of common stock. In
connection with the conversion, we made an inducement payment of approximately
$11.2 million to the related debt holders which is included in other income
(expense) and wrote off against additional paid-in capital approximately $2.9
million in deferred debt offering costs attributable to the portion of debt
converted to equity.
We have several capital leases with various financial institutions for
computer and communications equipment used in operations with lease terms
ranging from three to five years. Additionally, we have an insurance premium
financing agreement for directors and officers liability insurance. The interest
rates under the leases and insurance premium financing agreement range from 8%
to 20%. At December 31, 2000 and 1999, the book value of assets held under
capital leases were approximately $2.6 million and $2.8 million, respectively,
and the aggregate remaining minimum lease and financing agreement payments at
December 31, 2000 were approximately $2.7 million, including interest of
approximately $0.2 million.
At December 31, 2000, long-term debt will mature as follows (in thousands):
2001........................................................ $1,597
2002........................................................ 801
2003........................................................ 115
2004........................................................ 21,734
2005........................................................ 7
-------
Total.................................................. $24,254
=======
(12) COMMITMENTS AND CONTINGENCIES
We have entered into non-cancelable obligations with several content
service providers, Internet search engines and strategic partners. Under these
agreements, exclusive of the Microsoft agreement discussed in Note 9, our
commitments are as follows (in thousands):
2001........................................................ $8,400
2002........................................................ 4,100
2003........................................................ 500
For the years ended December 31, 2000 and 1999, we recognized revenues of
approximately $7.0 million and $0.3 million, respectively, from commercial
agreements entered into with companies that we also have commitments to for
services to be provided to us.
We also had a maximum aggregate obligation to contribute 800 million Yen to
VerticalNet Japan. As of December 31, 2000, we had contributed approximately
$1.9 million. As of December 31, 2000, our remaining
74
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
funding obligation to the joint venture through the first two years of
operations was approximately 600 million Yen (approximately $5.2 million).
Future minimum lease payments as of December 31, 2000 for our buildings
leases are as follows (in thousands):
2001........................................................ $4,300
2002........................................................ 3,600
2003........................................................ 3,400
2004........................................................ 3,200
2005........................................................ 2,700
Thereafter.................................................. 9,100
Rent expense under noncancelable operating leases was approximately $4.1
million, $1.3 million and $0.3 million for the years ended December 31, 2000,
1999 and 1998, respectively.
We are a party to various litigations and claims that arise in the ordinary
course of business. In the opinion of management, the ultimate resolutions with
respect to these actions will not have a materially adverse effect on our
financial position or results of operations.
(13) CAPITAL STOCK
At December 31, 1999, VerticalNet's restated Articles of Incorporation
provided the authority to issue 90,000,000 shares of common stock and 10,000,000
shares of blank check preferred stock.
To accommodate the split of our common stock effected on March 31, 2000, we
filed an amendment to our amended and restated Articles of Incorporation on
March 29, 2000 to increase the number of authorized shares of our common stock
by 36,787,533 to 126,787,533 shares. The amendment was filed to increase the
number of authorized shares of common stock by the number of outstanding shares
of common stock as of March 17, 2000, the record date for the split of our
common stock.
On January 15, 2000 and June 14, 2000, the board of directors and the
shareholders of VerticalNet, respectively, approved an amendment to our amended
and restated Articles of Incorporation to increase the number of authorized
shares of our common stock to 1,000,000,000 shares. On July 28, 2000, we filed
this amendment with the Secretary of State of the Commonwealth of Pennsylvania.
SERIES A 6.00% CONVERTIBLE REDEEMABLE PREFERRED STOCK
In April 2000, Microsoft made a $100.0 million equity investment in
VerticalNet through the purchase of 100,000 shares of our Series A 6.00%
convertible redeemable preferred stock ("Series A Preferred Stock"), which are
initially convertible into 1,151,080 shares of our common stock, and the
warrants described below. On April 1, 2010, at the election of the holder of the
Series A Preferred Stock, we shall be required to redeem all outstanding shares
of Series A Preferred Stock at a specified price. In addition, at our option,
each share of Series A Preferred Stock will be subject to redemption at a
calculated price if certain conditions are met. Microsoft is entitled to
registration rights and has the right to nominate one member of our board of
directors, which it has done. The warrants Microsoft received entitle Microsoft
to purchase 1,500,000 shares of our common stock at an exercise price of $69.50
per share, subject to adjustment under certain circumstances.
Based on an independent valuation of the Series A Preferred Stock and the
warrants issued to Microsoft, fair values of $89.5 million and $18.0 million
were recorded, respectively. The fair value of the warrants was recorded as
additional paid-in capital. The approximately $7.6 million excess of the fair
value over the actual cash received was recorded as a deferred cost in other
assets and is being amortized to expense on a straight-line basis over the
period of the commercial agreement.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of the Series A Preferred Stock are entitled to cumulative
preferred dividends accumulating at a rate of 6.00% of the liquidation
preference ($1,000 per share) per year, payable quarterly in arrears on each
January 1, April 1, July 1 and October 1 of each year. As of December 31, 2000,
cumulative dividends of approximately $4.5 million had been earned by the holder
of the Series A Preferred Stock. Dividends may be paid in cash, additional
Series A Preferred Stock or common stock. In August 2000, cumulative dividends
of approximately $1.5 million were paid to Microsoft through the issuance of
additional shares of Series A Preferred Stock. Additionally the accretion
related to the Series A Preferred Stock was approximately $0.8 million during
the year ended December 31, 2000.
We may not declare or pay, or set aside funds to pay, any dividend or other
distribution to the holders of our common stock or any other security ranking
junior to the Series A Preferred Stock unless we have previously declared and
paid, or set aside funds to pay, all dividends for preceding dividend periods to
which the holders of the Series A Preferred Stock are entitled. In the event of
a liquidation, the holders of the Series A Preferred Stock will receive a
liquidation preference in the amount of $1,000 per share, plus any accumulated
and unpaid dividends, before any distribution is made to common shareholders.
Based on the guidance in EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock, for which a consensus was reached in the fourth quarter of 2000, the
Series A Preferred Stock has been classified outside of shareholders' equity.
WARRANTS
Outstanding warrants as of December 31, 2000 consisted of the following:
NUMBER OF EXERCISE
DATE GRANTED WARRANTS PRICE EXPIRATION DATE
------------ --------- ---------- ---------------
April 1997.............................. 15,480 $ 0.19 April 2007
November 1998........................... 364,672 0.88 November 2008
November 1998........................... 246,878 4.00 November 2008
April 2000.............................. 1,500,000 69.50 April 2010
STOCK OPTION PLANS
In December 1996, our board of directors adopted the 1996 Equity
Compensation Plan. Employees, key advisors and non-employee directors are
eligible to receive awards under this plan. A total of 14.4 million shares of
common stock were reserved for issuance under this plan. At December 31, 2000,
approximately 1.5 million of these shares remain available for grant.
In August 1999, our board of directors adopted the 1999 Equity Compensation
Plan. A total of 1.2 million shares of common stock were reserved for issuance
to our employees under this plan. At December 31, 2000, approximately 0.01
million of these shares remain available for grant.
In October 1999, our board of directors adopted the Equity Compensation
Plan for Employees (1999). A total of 2.8 million shares of common stock were
reserved for issuance to our employees under this plan. The plan was amended and
restated to increase the shares of common stock authorized for issuance to 18.5
million. At December 31, 2000, approximately 4.0 million of these shares remain
available for grant.
In April 2000, our board of directors adopted the VerticalNet, Inc. 2000
Equity Compensation Plan. It was approved by our shareholders in June 2000. A
total of 10.0 million shares of common stock were reserved for issuance to our
employees, non-employee directors, consultants and advisors under this plan. At
December 31, 2000, approximately 7.5 million of these shares remain available
for grant.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price for the options is determined by our board of directors,
but shall not be less than 100% of the fair market value of the common stock on
the date of grant. Generally, the options vest over a four-year period after the
date of grant and expire ten years after the date of grant. Option holders that
terminate their employment generally forfeit all non-vested options.
The following table summarizes the activity for stock option plans:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
Outstanding at December 31, 1997....................... 2,220,852 $ 0.16
Options granted........................................ 6,655,608 0.83
Options exercised...................................... (8,720) 0.05
Options cancelled...................................... (532,296) 0.53
---------- ------
Outstanding at December 31, 1998....................... 8,335,444 0.67
Options granted........................................ 9,928,620 30.46
Options exercised...................................... (2,214,908) 0.63
Options cancelled...................................... (544,140) 4.35
---------- ------
Outstanding at December 31, 1999....................... 15,505,016 19.58
Options granted........................................ 21,126,782 43.65
Options exercised...................................... (3,806,101) 6.84
Options cancelled...................................... (6,544,936) 40.52
---------- ------
Outstanding at December 31, 2000....................... 26,280,761 $34.44
========== ======
The following tables summarize information about stock options outstanding
at December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
$ 0.07 - 0.07 97,652 6.3 $ 0.07 67,013 $ 0.07
0.20 - 0.29 2,184,292 7.4 0.23 1,269,907 0.21
0.66 - 0.83 1,520,824 7.3 0.69 708,118 0.67
1.42 - 1.42 31,302 8.1 1.42 7,056 1.42
2.88 - 4.00 727,170 7.7 3.99 217,628 4.00
4.53 - 6.66 1,605,827 2.5 4.67 1,605,827 4.67
9.50 - 14.17 379,314 9.3 11.96 153,231 10.91
14.50 - 21.75 4,212,164 8.1 18.43 1,473,680 18.19
21.94 - 32.06 5,017,782 9.3 27.72 1,560,792 28.11
33.63 - 50.31 3,199,634 9.5 40.89 312,482 39.41
50.81 - 76.16 5,412,400 9.0 63.58 751,928 63.22
76.28 - 113.00 1,481,100 8.8 98.77 116,700 92.40
114.81 - 138.88 411,300 9.2 123.31 -- --
---------- --------- ------
26,280,761 8,244,362 $18.45
========== ========= ======
77
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We apply APB No. 25 and related interpretations in accounting for our stock
option plans. Had compensation cost been recognized pursuant to SFAS No. 123,
our net loss would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Loss attributable to common shareholders:
As reported........................................ $(316,580) $(53,480) $(13,594)
Pro forma.......................................... $(518,031) $(54,926) $(13,777)
Pro forma loss per common share:
As reported........................................ $ (3.81) $ (0.86) $ (1.32)
Pro forma.......................................... $ (6.23) $ (0.88) $ (1.34)
The per share weighted-average fair value of options issued by us during
2000, 1999 and 1998 was $40.14, $21.77 and $0.26, respectively.
The following range of assumptions were used to determine the fair value of
stock options granted (the minimum value method was used for 1998 prior to our
IPO):
2000 1999 1998
---------- ---------- -------
Dividend yield.................................... 0% 0% 0%
Expected volatility............................... 120% 100% 0%
Average expected option life...................... 3.85 years 4.09 years 5 years
Risk-free interest rate........................... 6.2% 5.7% 5.3%
EMPLOYEE STOCK PURCHASE PLAN
In January 1999, the board of directors adopted our Employee Stock Purchase
Plan for all employees meeting its eligibility criteria. Under this plan,
eligible employees may purchase shares of our common stock, subject to certain
limitations, at 85% of the market value. Purchases are limited to 10% of an
employee's eligible compensation, up to a maximum of 4,000 shares per purchase
period. In April 2000, our board of directors approved an amendment, approved by
the shareholders in June 2000, to increase the number of shares reserved under
the plan from 1.2 million to 2.0 million. At December 31, 2000, approximately
1.7 million of these shares remain available.
(14) LOSS PER SHARE
The following table sets forth the reconciliation between the weighted
average shares outstanding for basic and diluted and pro forma net loss per
share computations (in thousands):
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Weighted average shares outstanding -- basic and diluted.... 83,127 62,391 10,282
======
Effect of convertible preferred stock....................... 4,268 32,260
------ ------
Pro forma weighted average shares outstanding -- basic and
diluted................................................... 66,659 42,542
====== ======
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of net loss per share (in
thousands, except per share data):
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Loss from continuing operations...................... $(202,330) $(52,589) $(13,594)
Less: Series A convertible redeemable preferred stock
dividends and accretion............................ (5,264) -- --
--------- -------- --------
Loss from continuing operations attributable to
common shareholders................................ (207,594) (52,589) (13,594)
Loss from discontinued operations.................... (27,018) (891) --
Estimated loss on disposal of discontinued
operations......................................... (81,968) -- --
--------- -------- --------
Net loss attributable to common shareholders......... $(316,580) $(53,480) $(13,594)
========= ======== ========
Pro forma basic and pro forma diluted net loss per
share:
Continuing operations.............................. $ (2.50) $ (0.79) $ (0.32)
Loss from discontinued operations.................. (0.32) (0.01) --
Estimated loss on disposal of discontinued
operations...................................... (0.99) -- --
--------- -------- --------
Pro forma net loss per common share.................. $ (3.81) $ (0.80) $ (0.32)
========= ======== ========
The conversion of outstanding options, warrants, convertible debt and
convertible redeemable preferred stock resulting in 15.6 million, 17.6 million
and 2.7 million common stock equivalents, respectively, would have been
anti-dilutive and were excluded from the calculations for the years ended
December 31, 2000, 1999 and 1998.
Pro forma net loss per share for the years ended December 31, 1999 and 1998
is computed using the weighted average number of common shares outstanding,
including common equivalent shares from the convertible preferred stock issued
prior to our IPO (using the if-converted method), which converted automatically
into common stock upon the consummation of the IPO, as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is anti-dilutive.
(15) DEFINED CONTRIBUTION PLAN
In 1997, we established a defined contribution plan for qualified employees
as defined under the plan. Participants may contribute 1% to 15% of their
pre-tax compensation, as defined, to the plan. Under the plan, we can make
discretionary contributions. To date, we have not made any contributions to the
plan.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) INCOME TAXES
The components of the net deferred tax assets as of December 31, 2000 and
1999 consist of the following:
DECEMBER 31,
---------------------
2000 1999
-------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating losses...................................... $182,955 $33,567
Reserves.................................................. 2,321 1,245
Depreciation and amortization............................. 7,798 142
Deferred revenue and other................................ 6,156 4,285
Disposition of business unit.............................. 35,986 --
-------- -------
Total gross deferred tax assets................... 235,216 39,239
Valuation allowance......................................... (202,632) (39,239)
-------- -------
32,584 --
Deferred tax liabilities:
Internally developed software costs....................... (2,461) --
Identifiable intangibles.................................. (2,966) --
Gain on investment........................................ (27,157) --
-------- -------
Total deferred tax liabilities.................... (32,584) --
-------- -------
Net deferred tax asset...................................... $ -- $ --
======== =======
Deferred income taxes reflect the net effects of net operating loss
carryforwards and temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which temporary differences representing net future deductible
amounts become deductible. Due to the uncertainty of our ability to realize the
benefit of the deferred tax assets, the deferred tax assets are fully offset by
a valuation allowance at December 31, 2000 and 1999. The net change in the
valuation allowance for deferred tax assets at December 31, 2000 and 1999 was an
increase of $163.4 million and $31.6 million, respectively.
As of December 31, 2000, we have approximately $410.2 million of net
operating loss carryforwards for federal income tax purposes. These
carryforwards will begin expiring in 2011 if not utilized. In addition, we have
net operating loss carryforwards of approximately $410.2 million in certain
states with various expiration periods beginning in 2002. The majority of state
net operating losses are subject to a $2.0 million annual limitation and begin
expiring in 2006.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership within a three year period. Due to our prior and current equity
transactions, a portion of our net operating loss carryforwards are subject to
an annual limitation. At December 31, 2000, we had consolidated pre-limitation
net operating loss carryforwards available for future use of approximately $24.1
million. This amount is subject to an annual limitation of approximately $20.9
million.
Included in the pre-limitation net operating loss carryforwards are losses
that were generated by companies acquired in 2000 and 1999. The losses generated
by acquired companies prior to their acquisition generally are available to
offset future taxable income of the acquiring company. However, upon the
80
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition of these companies, their net operating losses of approximately
$10.3 million became subject to an annual limitation of approximately $2.0
million.
Additionally, at December 31, 2000, approximately $85.0 million of the
gross deferred tax asset will reduce equity and approximately $3.5 million of
the gross deferred tax asset will reduce goodwill to the extent such assets are
realized.
(17) OTHER INCOME (EXPENSE)
Other income (expense) was comprised of the following for the year ended
December 31, 2000 (in thousands):
Net gain on investment (see Note 7)......................... $ 79,875
Conversion inducement payment (see Note 11)................. (11,207)
Impairment charge related to cost method investments (see
Note 7)................................................... (6,439)
Loss from equity method investments (see Note 7)............ (2,769)
--------
Other income (expense)............................... $ 59,460
========
(18) SEGMENT INFORMATION
Following the NECX acquisition in December 1999, management segmented our
business into two operating segments consisting of vertical trade communities
(currently referred to as e-marketplaces) and the electronics exchange business.
In September 2000, we announced plans to organize our business into three
strategic business units: VerticalNet Markets, VerticalNet Solutions and
VerticalNet Exchanges. Due to the early stage of VerticalNet Solutions'
operations and our need to determine the allocation of resources between
VerticalNet Markets and VerticalNet Solutions, management continued to operate
and measure the performance of VerticalNet Markets and VerticalNet Solutions as
one unit for the remainder of fiscal 2000. Management expects to have the
ability to begin evaluating VerticalNet Solutions as a separate segment in the
first quarter of 2001. For the year ended December 31, 2000, approximately $7.9
million of our total revenue was attributable to VerticalNet Solutions.
Due to management's decision to sell the VerticalNet Exchanges segment, all
prior segment information for VerticalNet Exchanges has been classified as a
discontinued operation.
(19) APPOINTMENT AND RESIGNATION OF CHIEF EXECUTIVE OFFICER
On July 27, 2000, Joseph Galli, Jr. joined VerticalNet as our president,
chief executive officer and a member of the board of directors. On December 29,
2000, Mr. Galli resigned his positions with VerticalNet.
In July 2000, we granted 3.0 million stock options to Mr. Galli at an
exercise price of $7.00 below the closing per share price on the date of grant.
This grant resulted in the recording of $21.0 million of deferred compensation,
which we had begun to recognize over the vesting period of the options. All of
Mr. Galli's options expired unvested upon his resignation. Therefore, the
remaining deferred compensation balance, as well as the stock compensation
expense recorded during the year, were reversed.
On July 27, 2000, we advanced $4.0 million to Mr. Galli upon the
commencement of his employment with VerticalNet in the form of a non-interest
bearing loan until September 1, 2000, at which time the note was cancelled. On
September 1, 2000, we loaned him approximately $1.4 million under a note bearing
interest at 6.5% per annum with a term expiring on November 10, 2000, on which
date he repaid in full all principal and accrued interest on the note. On
December 29, 2000, Mr. Galli signed a $2.3 million promissory note payable to
VerticalNet bearing interest at 6.5% per annum, with $2.0 million in principal
and accrued interest
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
due on June 30, 2001 and the remaining principal amount of $0.3 million and
accrued interest due on June 1, 2002.
(20) SUMMARIZED QUARTERLY DATA (UNAUDITED)
The quarterly results of operations for the years ended December 31, 2000
and December 31, 1999 were as follows (in thousands, except per share data):
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
2000
Revenues........................................... $12,863 $ 24,445 $ 34,455 $ 40,690
Income (loss) from continuing operations
attributable to common shareholders.............. $46,699 $(84,217) $(76,082) $ (93,994)
Income (loss) from discontinued operations......... (4,606) (2,931) 68 (19,549)
Estimated loss on disposal of discontinued
operations....................................... -- -- -- (81,968)
------- -------- -------- ---------
Net income (loss) attributable to common
shareholders..................................... $42,093 $(87,148) $(76,014) $(195,511)
======= ======== ======== =========
Basic net income (loss) per common share:
Continuing operations......................... $ 0.62 $ (1.01) $ (0.88) $ (1.07)
Loss from discontinued operations............. (0.06) (0.04) -- (0.23)
Estimated loss on disposal of discontinued
operations.................................. -- -- -- (0.93)
------- -------- -------- ---------
$ 0.56 $ (1.05) $ (0.88) $ (2.23)
======= ======== ======== =========
Diluted net income (loss) per common share:
Continuing operations......................... $ 0.49 $ (1.01) $ (0.88) $ (1.07)
Loss from discontinued operations............. (0.04) (0.04) -- (0.23)
Estimated loss on disposal of discontinued
operations.................................. -- -- -- (0.93)
------- -------- -------- ---------
$ 0.45 $ (1.05) $ (0.88) $ (2.23)
======= ======== ======== =========
1999
Revenues........................................... $ 1,934 $ 3,551 $ 5,182 $ 7,761
Loss from continuing operations attributable to
common shareholders.............................. $(5,608) $ (6,761) $(25,827) $ (14,393)
Loss from discontinued operations.................. -- -- -- (891)
------- -------- -------- ---------
Net loss attributable to common shareholders....... $(5,608) $ (6,761) $(25,827) $ (15,284)
======= ======== ======== =========
Basic and diluted net loss per common share:
Continuing operations......................... $ (0.14) $ (0.10) $ (0.38) $ (0.20)
Loss from discontinued operations............. -- -- -- (0.01)
------- -------- -------- ---------
$ (0.14) $ (0.10) $ (0.38) $ (0.21)
======= ======== ======== =========
(21) SUBSEQUENT EVENTS
SUMITOMO INVESTMENT
On January 22, 2001, we sold $15.0 million of our common stock to Sumitomo.
Under the agreement, Sumitomo may not transfer the purchased shares for one year
from the closing date of the transaction. Sumitomo was also granted limited
demand and piggyback registration rights exercisable after the first anniversary
of the closing.
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VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of our agreement with Sumitomo, we agreed to cooperate with
Sumitomo on a variety of joint initiatives, including Sumitomo's participation
as an equity partner in our other international endeavors, and Sumitomo's
licensing and distributing of technology, products and services for VerticalNet
Solutions and VerticalNet Markets. However, the parties have not reached, and
may never enter into, any definitive agreement concerning any additional
commercial relationship between them. During the year ended December 31, 2000,
we recognized approximately $0.9 million in revenue under a separate software
licensing agreement with Sumitomo.
RESTRUCTURING CHARGE
In January 2001, as part of a strategic and organizational initiative, we
announced a workforce reduction of approximately 150 employees. Employee
termination and facility closing costs will result in a one-time restructuring
charge of approximately $2.0 to $3.0 million in the first quarter of 2001.
CONVERGE
In December 2000, we entered into a three-year software licensing and
professional services contract with Converge, valued at approximately $108.0
million. Performance under the contract began in 2001 following the closing of
the NECX sale. The contract provides for aggregate cash payments to us of $43.0
million, $35.0 million and $30.0 million during the years ending December 31,
2001, 2002 and 2003, respectively. The commercial agreement also includes a
commitment to link Converge with each of our 14 technology-focused
e-marketplaces.
VERTICALNET EUROPE
Pursuant to agreements entered into with the shareholders of VerticalNet
Europe, our percentage ownership of VerticalNet Europe increased to
approximately 90% in the first quarter of 2001. We paid approximately $6.4
million in cash and issued 4,993,173 shares of our common stock to BT as well as
entered into a put and call agreement whereby we can buy their remaining
investment in VerticalNet Europe at any time after closing and they may put
their investment to us at any time after the first anniversary of the date of
this agreement. In 2001, ICG had a portion of their VerticalNet Europe shares
redeemed and sold the remaining portion directly to us for approximately $2.3
million in cash.
STOCK OPTIONS
On March 16, 2001, we issued an aggregate grant of approximately 13.4
million stock options to our employees. These options vest quarterly over a two
year period starting on May 15, 2001.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to our directors may be found under the caption
"Proposal No. 1 -- Election of Directors" in our proxy statement for the 2001
Annual Meeting of Shareholders to be held on May 15, 2001 (the "Proxy
Statement"). Information with respect to our executive officers may be found
under the caption "Executive and Senior Officers" included in Part I of this
report. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Proxy Statement set forth under the caption entitled
"Stock Ownership" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Proxy Statement set forth under the caption entitled
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 of this report.
(a) 2. Financial Statement Schedules.
The following financial statement schedule is filed as part of this report
under Schedule II immediately following the signature page: Schedule
II -- Valuation and Qualifying Accounts. Schedule II should be read in
conjunction with the consolidated financial statements and related notes thereto
set forth under Item 8 of this report. Schedules other than those listed above
have been omitted because they are either not required, not applicable, or the
information has otherwise been included.
(a) 3. Exhibits.
The following exhibits are filed as part of this report.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Articles of Amendment to Amended and Restated Articles of
Incorporation(2)
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation(2)
3.4 Amended and Restated Bylaws(1)
4.1 Indenture, dated September 27, 1999, between VerticalNet,
Inc. and Bankers Trust Company(3)
4.2 Registration Rights Agreement, dated September 27, 1999,
between VerticalNet, Inc. and the initial purchasers of its
5 1/4% Convertible Subordinated Debentures(3)
4.3 Statement with Respect to Shares of Series A 6.00%
Convertible Redeemable Preferred Stock Due 2010 of
VerticalNet, Inc.(4)
10.1 Amended and Restated 1996 Equity Compensation Plan(1)(18)
10.2 Common Stock Purchase Warrant to purchase 40,026 shares of
Common Stock, dated November 25, 1998, issued to Progress
Capital, Inc.(1)
10.3 Form of Common Stock Purchase Warrant, dated November 25,
1998, issued in connection with the Convertible Note(1)
10.4 Series A Preferred Stock Purchase Agreement, dated as of
September 12, 1996, between Internet Capital Group, L.L.C.
and VerticalNet, Inc.(1)
10.5 Series D Investor Rights Agreement, dated as of May 8, 1998,
by and among VerticalNet, Inc. and certain Investors(1)
10.6 Registration Rights Agreement, dated as of November 25,
1998, between VerticalNet, Inc. and the Convertible Note
Holders(1)
10.7 Agreement of Lease, dated April 21, 1999, between Liberty
Property Limited Partnership and VerticalNet, Inc., as
amended by the First Amendment to Lease Agreement, dated May
15, 1999, between Liberty Property Limited Partnership and
VerticalNet, Inc. (700 Dresher Road)(5)
10.8 Second Amendment to Lease Agreement, dated March 2, 2000,
between Liberty Property Limited Partnership and
VerticalNet, Inc. (700 Dresher Road)*
10.9 Third Amendment to Lease Agreement, dated August 1, 2000,
between Liberty Property Limited Partnership and
VerticalNet, Inc. (700 Dresher Road)*
10.10 Agreement of Lease, dated September 21, 2000, between
Liberty Property Limited Partnership and VerticalNet, Inc.
(507 Prudential Road)*
10.11 Agreement and Plan of Merger, dated June 14, 1999, among
VerticalNet, Inc., TSX Acquisition Corp., Techspex and the
stockholders of Techspex(6)
10.12 Stock Purchase Agreement, dated July 29, 1999, among
VerticalNet, Inc., 4052995 Manitoba Ltd., LabX Technologies
and the stockholders of LabX(7)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13 Agreement and Plan of Merger, dated August 10, 1999, among
VerticalNet, Inc., CertiSource Acquisition Co., Inc.,
CertiSource, Inc. and stockholders of CertiSource(8)
10.14 Agreement and Plan of Merger, dated May 24, 1999, among
VerticalNet, Inc., Isadra Acquisition Corp., Isadra, Inc.,
Hugo Daley, Mastafa Syed and Tira Capital Management as
Shareholders' Representative(9)
10.15 1999 Equity Compensation Plan(3)(18)
10.16 Asset Purchase Agreement, dated November 16, 1999, by and
among VerticalNet, Inc., NECX Acquisition LLC, New England
Circuit Sales, Inc., NECX Exchange LLC, NECX Exchange Trust
and Henry J. Bertolon, Jr.(10)
10.17 Agreement and Plan of Merger, dated as of March 8, 2000, by
and among VerticalNet, Inc., VERT Acquisition Corp.,
Tradeum, Inc. and Zvi Schreiber(11)
10.18 Asset Purchase Agreement, dated as of February 16, 2000, by
and among VerticalNet, Inc., NECX.com LLC, RW Electronics,
Inc., RW Electronics Trust, Robert R. Benedict and Peter L.
LeSaffre(12)
10.19 Agreement and Plan of Reorganization, dated as of June 30,
2000, by and among VerticalNet, Inc., NECX.com LLC, F&G
Capital, Inc., trustees of the Binford Living Trust,
trustees of the Carracino Family Trust, trustees of the
Radach Family Trust, James D. Binford, Daniel N. Carracino
and Russel R. Radach(13)
10.20 Membership Interest Purchase Agreement, dated as of December
19, 2000, by and among Converge, Inc., NECX.com LLC and
VerticalNet, Inc.(14)
10.21 Amendment No. 1 to Membership Interest Purchase Agreement,
dated as of January 31, 2001, by and among Converge, Inc.,
NECX.com LLC, VerticalNet, Inc. and Converge International,
Ltd.(15)
10.22 Subscription License Agreement, dated as of December 19,
2000, among VerticalNet, Inc., Tradeum, Inc. d/b/a
VerticalNet Solutions and Converge, Inc.*
10.23 First Amendment to Subscription License Agreement, dated as
of January 31, 2001, among VerticalNet, Inc., VerticalNet
Solutions LLC and Converge, Inc.*
10.24 Professional Services Agreement, dated as of December 19,
2000, among Tradeum, Inc. d/b/a VerticalNet Solutions and
Converge, Inc.*
10.25 First Amendment to Professional Services Agreement, dated as
of January 31, 2001, between VerticalNet Solutions LLC and
Converge, Inc.*
10.26 1999 Equity Compensation Plan(3)(18)
10.27 VerticalNet, Inc. 2000 Equity Compensation Plan(16)(18)
10.28 Amended and Restated Equity Compensation Plan for
Employees(17)(18)
21 Subsidiaries of the Registrant*
23 Consent of KPMG LLP*
99.1 Promissory Note, dated as of December 31, 2000(14)
- ---------------
* Filed herewith.
(1) Filed as an exhibit to the registrant's Registration
Statement on Form S-1 (Registration No. 333-68053) filed
with the Commission on November 27, 1998, as amended.
(2) Filed as an Exhibit to the registrant's report on Form 10-Q
dated September 30, 2000.
(3) Filed as an exhibit to the registrant's report on Form 10-Q
dated September 30, 1999.
(4) Filed as an exhibit to the registrant's report on Form 8-K
dated April 14, 2000.
(5) Filed as an exhibit to the registrant's report on Form 10-Q
dated June 30, 1999.
(6) Filed as an exhibit to the registrant's report on Form 8-K
dated June 29, 1999.
(7) Filed as an exhibit to the registrant's report on Form 8-K
dated July 29, 1999.
(8) Filed as an exhibit to the registrant's report on Form 8-K
dated August 10, 1999.
(9) Filed as an exhibit to the registrant's report on Form 8-K
dated August 25, 1999.
(10) Filed as an exhibit to the registrant's report on Form 8-K
dated December 16, 1999.
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(11) Filed as an exhibit to the registrant's report on Form 8-K
dated March 23, 2000.
(12) Filed as an exhibit to the registrant's report on Form 8-K
dated March 31, 2000.
(13) Filed as an exhibit to the registrant's report on Form 8-K
dated July 13, 2000.
(14) Filed as an exhibit to the registrant's report on Form 8-K
dated December 19, 2000.
(15) Filed as an exhibit to the registrant's report on Form 8-K
dated January 31, 2001.
(16) Filed as Annex B to the registrant's definitive proxy
statement on Schedule 14A, which was filed on April 27,
2000. This exhibit was approved by the registrant's
shareholders at the registrant's 2000 Annual Meeting.
(17) Filed as an exhibit to the registrant's report on Form 10-K
dated December 31, 1999.
(18) Compensatory plans and arrangements for executives and
others.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during
the last quarter of 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Horsham,
Pennsylvania, on April 2, 2001.
VERTICALNET, INC.
BY: /s/ GENE S. GODICK
------------------------------------
Gene S. Godick
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and in the capacities indicated on April 2, 2001.
SIGNATURE TITLE
--------- -----
/s/ MARK L. WALSH Chairman of the Board of Directors
- ---------------------------------------------------
Mark L. Walsh
/s/ MICHAEL J. HAGAN President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Michael J. Hagan
/s/ GENE S. GODICK Executive Vice President and Chief Financial
- --------------------------------------------------- Officer (principal financial and accounting
Gene S. Godick officer)
/s/ DOUGLAS A. ALEXANDER Vice-Chairman of the Board of Directors
- ---------------------------------------------------
Douglas A. Alexander
/s/ JEFFREY C. BALLOWE Director
- ---------------------------------------------------
Jeffrey C. Ballowe
/s/ WALTER W. BUCKLEY, III Director
- ---------------------------------------------------
Walter W. Buckley, III
Director
- ---------------------------------------------------
Satya Nadella
/s/ HOWARD D. ROSS Director
- ---------------------------------------------------
Howard D. Ross
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VERTICALNET, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
BALANCE AT THE CHARGE TO BALANCE AT
BEGINNING OF COSTS AND THE END OF
THE YEAR EXPENSES WRITE-OFFS OTHER(1) THE YEAR
-------------- ---------- ----------- -------- ----------
Allowance for doubtful accounts:
December 31, 1998............. $ 30,000 $ 62,206 $ (31,169) $ -- $ 61,037
December 31, 1999............. 61,037 807,071 (127,042) 61,000 802,066
December 31, 2000............. 802,066 2,372,352 (1,102,756) -- 2,071,662
Note receivable:
December 31, 1998............. 80,000 -- (80,000) -- --
December 31, 1999............. -- -- -- -- --
December 31, 2000............. -- -- -- -- --
Allowance for inventory:
December 31, 1998............. -- -- -- -- --
December 31, 1999............. -- -- -- -- --
December 31, 2000............. -- -- -- 45,700 45,700
- ---------------
(1) Allowance balances were recorded in connection with acquisitions during
fiscal years 1999 and 2000.
All amounts reflect activity from continuing operations.