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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X]Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
COMMISSION FILE NUMBER: 000-25269
VERTICALNET, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2815834
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization
300 CHESTER FIELD PARKWAY
MALVERN, PENNSYLVANIA 19355
(Address of principal
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(610) 240-0600
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 the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
As of August 8, 2002 12,659,894 shares of the Registrant's common stock were
outstanding.
VERTICALNET, INC.
FORM 10-Q
(For the Quarterly Period Ended June 30, 2002)
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements ............................... 1
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk ...... 31
Part II. OTHER INFORMATION
Item 1 Legal Proceedings .............................................. 30
Item 2 Changes in Securities and Use of Proceeds ...................... 31
Item 3 Defaults Upon Senior Securities ................................ 31
Item 4 Submission of Matters to a Vote of Security Holders ............ 32
Item 5 Other Information .............................................. 32
Item 6 Exhibits and Reports on Form 8-K ............................... 32
i
VERTICALNET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
PRO FORMA
JUNE 30,
2002 JUNE 30, DECEMBER 31,
(SEE NOTE 12) 2002 2001
------------- -------------- --------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 22,631 $ 25,983 $ 50,252
Short-term investments 81 81 36
Accounts receivable, net of allowance for doubtful accounts of
$1,001 in 2002 and $101 in 2001 2,490 2,490 692
Prepaid expenses and other assets 4,565 4,565 5,922
Assets held for disposal - - 10,319
------------- -------------- --------------
Total current assets 29,767 33,119 67,221
------------- -------------- --------------
Property and equipment, net 5,286 5,286 6,896
Goodwill and other intangibles, net of accumulated amortization of
$24,867 in 2002 and $24,302 in 2001 29,757 29,757 30,410
Long-term investments - - 2,599
Other investments 8,881 8,881 10,831
Other assets 4,582 4,796 7,674
------------- -------------- --------------
Total assets $ 78,273 $ 81,839 $ 125,631
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,683 $ 3,683 $ 3,563
Accrued expenses 14,422 14,604 23,707
Deferred revenues 25,967 25,967 24,381
Other current liabilities 13,557 13,557 14,949
Liabilities held for disposal - - 22,279
------------- -------------- --------------
Total current liabilities 57,629 57,811 88,879
------------- -------------- --------------
Long-term debt 312 312 550
Other long-term liabilities - - 2,599
Convertible notes 7,855 21,705 21,705
------------- -------------- --------------
Total liabilities 65,796 79,828 113,733
------------- -------------- --------------
Commitments and contingencies (see Notes 10 and 11)
Series A 6.00% convertible redeemable preferred stock, $.01 par value
250,000 shares authorized, none issued in 2002
and 109,290 shares issued in 2001 - - 102,180
Put arrangement involving common stock - 1,057 1,057
Shareholders' equity (deficit):
Preferred stock $.01 par value, 10,000,000 shares authorized, - - -
none issued in 2002 and 2001
Common stock $.01 par value, 100,000,000 shares
authorized, 11,653,314 shares issued in 2002 and
11,300,621 shares issued in 2001 128 117 113
Additional paid-in capital 1,170,358 1,154,955 1,055,351
Deferred compensation (241) (241) (98)
Accumulated other comprehensive loss (853) (853) (959)
Accumulated deficit (1,155,097) (1,152,219) (1,144,941)
------------- -------------- --------------
14,295 1,759 (90,534)
Treasury stock at cost, 65,636 shares in 2002 and 2001 (1,818) (805) (805)
------------- -------------- --------------
Total shareholders' equity (deficit) 12,477 954 (91,339)
------------- -------------- --------------
Total liabilities and shareholders' equity (deficit) $ 78,273 $ 81,839 $ 125,631
============= ============== ==============
See accompanying notes to consolidated financial statements.
1
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ------------------------------------
2002 2001 2002 2001
--------------- --------------- ------------------ ----------------
(unaudited) (unaudited)
REVENUES:
Software license $ 4,649 $ 6,505 $ 10,907 $ 12,905
Services and maintenance 1,593 3,289 3,341 6,181
--------------- --------------- ------------------ ----------------
Total revenue 6,242 9,794 14,248 19,086
COST OF REVENUE:
Cost of license 99 340 365 697
Cost of acquired technology 160 1,025 321 1,875
--------------- --------------- ------------------ ----------------
Cost of software 259 1,365 686 2,572
Cost of services and maintenance 1,470 7,300 2,933 14,855
--------------- --------------- ------------------ ----------------
Total cost of revenue 1,729 8,665 3,619 17,427
Research and development 2,841 6,458 6,358 12,986
Sales and marketing 1,450 4,701 3,199 11,302
General and administrative 2,706 6,703 6,256 14,771
Restructuring and asset impairment charges 411 166,229 1,765 167,719
Amortization of intangibles 1,056 39,541 2,112 78,826
--------------- ----------------- ------------------ ----------------
10,193 232,297 23,309 303,031
--------------- --------------- ------------------ ----------------
Operating loss (3,951) (222,503) (9,061) (283,945)
--------------- --------------- ------------------ ----------------
Net interest expense and other (5,907) (12,954) (6,560) (21,995)
--------------- --------------- ------------------ ----------------
Loss from continuing operations (9,858) (235,457) (15,621) (305,940)
Discontinued operations:
Income (loss) from operations of the SMB unit 1,027 (65,182) 8,508 (84,524)
Loss on disposal of discontinued operations (165) (3,381) (165) (3,903)
--------------- --------------- ------------------ ----------------
Net loss (8,996) (304,020) (7,278) (394,367)
Preferred stock dividends and accretion (1,943) (1,842) (3,861) (3,661)
Repurchase of convertible preferred stock and warrants 101,041 - 101,041 -
--------------- --------------- ------------------ ----------------
Income (loss) attributable to common shareholders $ 90,102 $ (305,862) $ 89,902 $ (398,028)
=============== =============== ================== ================
Basic income (loss) per common share:
Income (loss) from continuing operations $ 7.69 $ (24.28) $ 7.10 $ (32.52)
Income (loss) from discontinued operations 0.09 (6.67) 0.74 (8.88)
Loss on disposal of discontinued operations (0.01) (0.35) (0.02) (0.41)
--------------- --------------- ------------------ ----------------
Income (loss) per common share
attributable to common shareholders $ 7.77 $ (31.30) $ 7.82 $ (41.81)
=============== =============== ================== ================
Diluted income (loss) per common share:
Income (loss) from continuing operations $ 7.59 $ (24.28) $ 6.89 $ (32.52)
Income (loss) from discontinued operations 0.09 (6.67) 0.71 (8.88)
Loss on disposal of discontinued operations (0.02) (0.35) (0.02) (0.41)
--------------- --------------- ------------------ ----------------
Income (loss) per common share
attributable to common shareholders $ 7.66 $ (31.30) $ 7.58 $ (41.81)
=============== =============== ================== ================
Weighted average common shares outstanding:
Basic 11,599 9,772 11,494 9,520
Diluted 11,795 9,772 11,928 9,520
See accompanying notes to consolidated financial statements.
2
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
----------------------------
2002 2001
------------- -------------
(UNAUDITED)
Net loss $ (7,278) $ (394,367)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,182 97,438
Intangible asset impairment - 205,058
Write-down related to cost method investments, equity method, and available-
for-sale investments 5,250 20,784
Other noncash charges 1,579 7,702
Loss (gain) on disposal of property and equipment (95) 286
Loss from equity method investments - 1,808
Loss on disposal of discontinued operations 165 3,903
Net loss on investments - 2,188
Change in assets and liabilities, net of effect of acquisitions:
Accounts receivable (811) 24,678
Prepaid expenses and other assets 5,958 10,530
Accounts payable (236) (1,931)
Accrued restructuring charge expenses (1,942) 5,329
Other accrued expenses (8,934) (45,073)
Deferred revenues (16,085) 8,968
------------- -------------
Net cash used in operating activities (16,247) (52,699)
------------- -------------
Investing activities:
Acquisitions, net of cash acquired -- (24,601)
Purchase of cost and equity method company investments, net of
liquidation proceeds (3,195) (2,959)
Proceeds from sale and redemption of available-for-sale investments - 17,200
Proceeds from sale of SMB unit 2,350 -
Restricted cash 1,531 7,094
Proceeds from sale of assets 343 -
Capital expenditures (717) (13,523)
------------- -------------
Net cash provided by (used in) investing activities 312 (16,789)
------------- -------------
Financing activities:
Payments to repurchase convertible redeemable preferred stock (5,000) -
Payment to reduce BT put and call (2,076) -
Principal payments on long-term debt and obligations under capital leases (1,669) (1,235)
Proceeds from issuance of common stock - 15,000
Proceeds from exercise of stock options and employee stock purchase plan 411 976
------------- -------------
Net cash provided by (used in) financing activities (8,334) 14,741
------------- -------------
Net decrease in cash (24,269) (54,747)
Cash and cash equivalents--beginning of period 50,252 123,803
------------- -------------
Cash and cash equivalents--end of period $ 25,983 $ 69,056
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,527 $ 686
============= =============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock as consideration for acquisitions $ - $ 21,290
Preferred dividends 3,861 3,661
Shares issued to BT under put and call agreement 1,755 -
See accompanying notes to consolidated financial statements.
3
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(in thousands)
Three months ended June 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
2002 2001 2002 2001
-------------- -------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Net loss $ (8,996) $ (304,020) $ (7,278) $ (394,367)
Unrealized gain on forward sale 529 1,015 1,253 20,308
Foreign currency translation adjustment (6) (350) 62 (1,517)
Unrealized loss on investments:
Unrealized loss (481) (1,134) (1,209) (18,411)
Reclassification adjustment for loss included in net
loss - 10,545 - 10,545
-------------- -------------- ------------- --------------
Comprehensive loss $ (8,954) $ (293,944) $ (7,172) $ (383,442)
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
4
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
Balance, December 31, 2001 11,301 $ 113 $ 1,055,351 $ (98)
Series A 6.00% convertible redeemable
preferred stock dividends accrued and
accretion - - (3,861) -
Exercise and acceleration of options 137 1 410 -
Shares issued through employee
stock purchase plan 15 1 43 -
Repurchase of Series A 6.00% convertible
redeemable preferred stock and warrants - - 101,041 -
Shared issued to reduce BT put and call
liability (See Note 5) 200 2 1,753 -
Unearned compensation - - 218 (218)
Amortization of unearned compensation - - - 75
Net loss - - - -
Other comprehensive income - - - -
------ ----- ----------- ------
Balance, June 30, 2002 (unaudited) 11,653 $ 117 $ 1,154,955 $ (241)
====== ===== =========== ======
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY SHAREHOLDERS'
LOSS DEFICIT STOCK EQUITY (DEFICIT)
Balance, December 31, 2001 $ (959) $ (1,144,941) $ (805) $ (91,339)
Series A 6.00% convertible redeemable
preferred stock dividends accrued and
accretion - - - (3,861)
Exercise and acceleration of options - - - 411
Shares issued through employee
stock purchase plan - - - 44
Repurchase of Series A 6.00% convertible
redeemable preferred stock and warrants - - - 101,041
Shared issued to reduce BT put and call
liability (See Note 5) - - - 1,755
Unearned compensation - - - -
Amortization of unearned compensation - - - 75
Net loss - (7,278) - (7,278)
Other comprehensive income 106 - - 106
------ ------------ ------ ---------
Balance, June 30, 2002 (unaudited) $ (853) $ (1,152,219) $ (805) $ 954
====== ============ ====== =========
See accompanying notes to consolidated financial statements.
5
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BACKGROUND AND BASIS OF PRESENTATION
Description of the Company
Verticalnet, Inc. was incorporated in Pennsylvania on July 28, 1995. We
are a leading provider of collaborative supply chain solutions that enable
companies and their supply and demand chain partners to communicate,
collaborate, and conduct commerce more effectively. With a comprehensive set of
collaborative supply chain software applications including spend management,
strategic sourcing, collaborative planning, and order management, we offer a
broad integrated supply chain solution delivered through a multi-party platform.
On February 13, 2002, we announced our intention to sell the
Small/Medium Business ("SMB") unit (formerly referred to as Verticalnet
Markets). We completed the sale of the SMB group on June 28, 2002. The SMB group
operated and managed 59 industry-specific on-line marketplaces. The operating
results of this unit have been reflected as discontinued operations in our
consolidated financial statements. The assets and liabilities of this unit at
December 31, 2001 are reflected as held for disposal in our consolidated balance
sheet.
On January 31, 2001, we completed the sale of our Verticalnet Exchanges
("NECX") business unit, which focused on trading electronic components and
hardware in open and spot markets. The operating results of this unit through
January 31, 2001, are reflected as a discontinued operation in our consolidated
financial statements.
Our consolidated financial statements as of and for the three and six
months ended June 30, 2002 and 2001 have been prepared without audit pursuant to
the rules and regulations of the United States Securities and Exchange
Commission ("SEC"). In the opinion of management, the unaudited interim
consolidated financial statements that accompany these notes reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly our financial position as of June 30, 2002 and December 31, 2001
and the results of operations and cash flows for the six months ended
June 30, 2002 and 2001. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC's rules
and regulations relating to interim financial statements. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes included in our Annual Report on Form 10-K for
the year ended December 31, 2001.
As we have completed our transformation to a software business, we have
reclassified the statement of operations to present our results on a basis
comparable with other companies in the software industry. Reclassifications
include the systematic allocation of certain overhead expenses, such as
facilities, infrastructure and depreciation, from general and administrative to
other expense categories in the statement of operations based on the relative
benefits provided to each applicable business function. All prior period
information has been reclassified to conform with the current year's
presentation.
On July 15, 2002, the Company effected a 1-for-10 reverse stock split
of its common stock. All references to shares, share prices and per share
amounts have been adjusted retroactively for this reverse split.
Revenue Recognition
Revenues from software licensing and related services are accounted for
under SOP 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions, 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, as amended, 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 is recognized upon delivery of the
software products or ratably over a contractual period if unspecified software
6
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. For certain agreements where the professional services provided are
essential to the functionality of the software or are for significant
production, modification or customization of the software products, both the
software product revenue and service revenue are recognized on a straight-line
basis or in accordance with the provisions of SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
Adoption of New Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated or completed after June 30,
2001. SFAS No. 141 also specifies criteria that must be met for intangible
assets acquired in a purchase method business combination to be recognized and
reported separately from goodwill, noting that any purchase price allocable to
an assembled workforce may not be accounted for separately. SFAS No. 142, which
became effective January 1, 2002, requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed of.
Accordingly, there has been no amortization of goodwill since December 31, 2001.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121,
and the accounting and reporting provisions of 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,
for the disposal of a segment of a business. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142. We adopted and implemented SFAS No. 144 as of
January 1, 2002 in conjunction with our accounting for our SMB unit.
In November 2001, the FASB issued Topic D-103, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. The FASB staff believes that reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the income statement.
This guidance was to be applied in financial reporting periods beginning after
December 15, 2001 and comparative financial statements for prior periods were to
be reclassified to comply with the guidance. Accordingly, the consolidated
financial statements of operations have been reclassified pursuant to this
guidance.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections, which is effective for fiscal years beginning after May 15, 2002
for provisions related to SFAS No. 4, effective for all transactions occurring
after May 15, 2002 for provisions related to SFAS No. 13 and effective for all
financial statements issued on or after May 15, 2002 for all other provisions of
this Statement. The Company believes the provisions of this Statement will not
have a material impact to the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses the
financial accounting and reporting of expenses related to restructurings
initiated after 2002, and applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and
7
contracts, and relocating plan facilities or personnel. Under SFAS No. 146, a
company will record a liability for a cost associated with an exit or disposal
activity when the liability is incurred and can be measured at fair value. The
provisions of this Statement are effective prospectively for exit or disposal
activities initiated after December 31, 2002. We have not determined the impact
of the adoption of this Statement on future periods.
(2) DISCONTINUED OPERATIONS
On June 28, 2002, we completed the sale of the SMB unit to Vert
Markets, Inc., an affiliate of Corry Publishing, Inc. The SMB unit generated
revenue from e-enablement and e-commerce, as well as advertising and services.
In consideration for the transaction, we received cash of $2.35 million. In
addition, we may receive up to an additional $6.5 million based on a four-year
performance-based earn-out provision. We accounted for the SMB unit as a
discontinued operation beginning in the first quarter of 2002. We recorded a
loss on disposal of approximately $0.2 million in the quarter ended June 30,
2002 for the sale of the SMB unit.
The results of the SMB unit have been shown separately as a
discontinued operation and prior periods have been restated. The assets and
liabilities of the discontinued operation have been classified separately on the
December 31, 2001 consolidated balance sheet.
The assets held for sale as of December 31, 2001 also included certain
assets that were not sold to Corry Publishing, Inc., but sold during the
ordinary course of the SMB unit's operations.
Revenues and losses from this discontinued operation are as follows
(also refer to Note 10 -- Commitments and Contingencies regarding the
presentation of revenue and expenses under certain transactions that are the
subject of comments received from the SEC in connection with a recent filing on
Form S-3):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands)
E-enablement, e-commerce, advertising and other..... $ 8,042 $ 23,617 $ 21,094 $ 51,1684
Income (loss) from discontinued operations.......... 1,027 (65,182) 8,508 (84,524)
Loss on disposal of discontinued operations......... (165) -- (165) --
The assets and liabilities of the SMB unit as of December 31, 2001 are as
follows (in thousands):
Current assets................................ $ 5,368
Property and equipment, net................... 4,525
Intangible assets............................. 365
Other non-current assets...................... 61
---------
Total assets.................................. $ 10,319
======
Deferred revenue.............................. 20,102
Other liabilities............................. 2,177
-------
Total liabilities............................. $ 22,279
======
Accounts receivable of approximately $0.5 million and current
liabilities of approximately $1.6 million of the SMB unit were reclassified
during the quarter ended June 30, 2002 out of assets and liabilities held for
disposal, as these assets and liabilities were not included in the sale of the
SMB unit.
The income from discontinued operations for the three and six
months ended June 30, 2002 includes $0, and $0.3 million in restructuring
charges, respectively. For the three and six months ending June 30, 2001, the
loss from discontinued operations includes $52.7 million and $58.6
million in restructuring charges, respectively.
Microsoft Relationship
On March 29, 2000, we entered into a commercial arrangement with
Microsoft (the "Original Microsoft Agreement"), which was terminated and
replaced on April 26, 2001 (the "New Microsoft Agreement"). Collectively, under
the Original and New Microsoft Agreements, during the three and six months ended
June 30,
8
2002 we recognized approximately $5.9 million and $16.9 million, respectively,
in e-enablement and advertising revenue and $0 of expense for advertising,
software licensing and support. For the three and six months ended June 30,
2001, we recognized approximately $13.7 million and $23.5 million, respectively,
in e-enablement and advertising revenue and $4.5 million and $8.9 million,
respectively, of expense for advertising, software licensing and support.
Revenues and expenses recognized under these agreements are presented in income
(loss) from operations of the SMB business.
(3) INVESTMENTS
Available-For-Sale
As of June 30, 2002 and December 31, 2001, we have short-term
available-for-sale investments of approximately $0.1 million and $0,
respectively. These are investments in publicly traded companies for which we do
not have the ability to exercise significant influence and are stated at fair
market value based on quoted market prices. Our investment in Ariba, Inc.
("Ariba") common stock of approximately $1.3 million at June 30, 2002 is
included in prepaid expenses and other assets due to a forward sale of our
shares, which expires in June of 2003.
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,
of which 64,310 shares were placed in escrow for one year subsequent to the
transaction's closing. 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 three months
ended March 31, 2000. In March 2001, 49,982 of our escrowed Ariba shares were
released, with the remaining 14,328 shares being held in escrow pending the
resolution of a dispute under the Agreement and Plan of Reorganization. In light
of the continued uncertainty around whether the Ariba shares remaining in escrow
will eventually be released to us, we recorded a $2.2 million loss on investment
during the three months ended March 31, 2001 to adjust the original investment
gain we recorded when the transaction closed. To the extent the pending dispute
is resolved in whole or in part in Tradex's favor, we will subsequently record
an additional adjustment.
Cost Method Investments
At June 30, 2002 and December 31, 2001, cost method investments were
approximately $5.4 million and $10.6 million, respectively. For the three
months and six months ended June 30, 2002, we recorded an impairment charge of
$3.8 million related to our Converge investment, which was valued at $7.8
million at December 31, 2001, based on an independent valuation of our Converge
investment. The Company's carrying value of its investment in Converge is $7.5
million as of June 30, 2002, including the $3.5 million investment by the
Company during February 2002 (as discussed below). During the three months and
six months ended June 30, 2002, we recorded additional impairment charges of
approximately $1.4 million for other than temporary declines in the fair values
of our other cost method investments. These impairment charges are included in
net interest expense and other.
Other Investments
On February 15, 2002, we invested $3.5 million in Converge LLC, an indirect
subsidiary of Converge, and received a subordinated promissory note with a face
value of $8.75 million. The note is payable in four equal installments on
February 15th of 2006 through 2009. Repayment of the note is accelerated upon
certain triggering events, including a change of control. In connection with the
investment, we also received a warrant to purchase 3,500,000 shares of preferred
stock in Converge Financial Corporation, a wholly owned subsidiary of Converge
and an indirect parent of Converge LLC, at an exercise price of $.01 per share.
The note is included in other investments on the consolidated balance sheet at
its cost basis of $3.5 million.
9
(4) GOODWILL AND OTHER INTANGIBLES
We adopted SFAS No. 142 effective January 1, 2002. Under SFAS No. 142,
goodwill is no longer amortized but is reviewed for impairment annually, or more
frequently if certain indicators arise. In addition, the Statement requires
reassessment of the useful lives of previously recognized intangible assets.
With the adoption of the Statement, we ceased amortization of goodwill
as of January 1, 2002. The following table provides a reconciliation of reported
income attributable to common shareholders for the three and six months ended
June 30, 2001 to the adjusted loss attributable to common shareholders excluding
amortization expense relating to goodwill and assembled workforce:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands, except per share data)
Reported income (loss) attributable to common
shareholders $ 90,102 $ (305,862) $ 89,902 $ (398,028)
Add back: Goodwill and assembled workforce
amortization -- 38,660 -- 77,320
----------- ----------- ----------- -----------
Adjusted income (loss) attributable to common
shareholders $ 90,102 $ (267,202) $ 89,902 $ (320,708)
=========== =========== =========== ===========
Basic income (loss) per common share:
Reported income (loss) per common share
attributable to common shareholders $ 7.77 $ (31.30) $ 7.82 $ (41.81)
Goodwill and assembled workforce amortization -- 3.96 -- 8.12
----------- ----------- ----------- -----------
Adjusted income (loss) per common share
attributable to common shareholders $ 7.77 $ (27.34) $ 7.82 $ (33.69)
=========== =========== =========== ===========
Diluted income (loss) per common share:
Reported income (loss) per common share
attributable to common shareholders $ 7.66 $ (31.30) $ 7.58 $ (41.81)
Goodwill and assembled workforce amortization -- 3.96 -- 8.12
----------- ----------- ----------- -----------
Adjusted income (loss) per common share
attributable to common shareholders $ 7.66 $ (27.34) $ 7.58 $ (33.69)
=========== =========== =========== ===========
During the three months ended June 30, 2002, we completed a goodwill
impairment test as of January 1, 2002. This test involved the use of estimates
related to the fair value of the Enterprise Group reporting unit, with which the
goodwill was associated. No impairment was indicated as a result of the
assessment.
The following table reflects the components of amortizable intangible
assets:
JUNE 30, 2002 DECEMBER 31, 2001
------------------------ ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
(in thousands)
Amortizable intangible assets:
Existing technology $4,025 $2,421 $4,025 $2,100
Customer contracts 890 244 890 --
------ ------ ------ ------
$4,915 $2,665 $4,915 $2,100
====== ====== ====== ======
The carrying amount of goodwill at June 30, 2002 is $27.6 million and
relates to the ongoing software operations of the Company.
For the three and six months ended June 30, 2002, amortization expense
on intangible assets, excluding goodwill, was $0.3 million and $0.6 million,
respectively.
During the three and six months ended June 30, 2001, we recognized $0.8
million and $1.7 million, respectively, in amortization expense on intangible
assets, excluding goodwill.
10
The following sets forth the estimated remaining amortization expense
on intangible assets for the fiscal years ending in December 31:
(in thousands)
2002........................................... $ 450
2003........................................... 900
2004........................................... 900
(5) OTHER CURRENT LIABILITIES
We have a put and call agreement with British Telecommunications Plc.
("BT") whereby we could purchase the remaining 10% interest in Verticalnet
Europe B.V. ("Verticalnet Europe") held by BT at any time after March 13, 2001
and BT could sell its investment to us at any time after March 13, 2002. The
carrying value of the put/call price of approximately $11.1 million, including
accrued interest, is included in current liabilities on the consolidated balance
sheet as of June 30, 2002. The amount is payable in Euros, therefore, we
mark the liability to market quarterly. The variable interest component of the
price based on the LIBOR rate was accrued quarterly through April 19, 2002, the
date BT exercised their put option. In March 2002, we issued 200,000 shares of
our common stock to BT with an aggregate value of approximately $1.8 million. In
May 2002, we made a principal and interest payment of $3.0 million to BT toward
this liability. As of August 14, 2002, the remaining liability remains unpaid.
(6) STRATEGIC RELATIONSHIP
Verticalnet and Converge entered into a first amendment to the amended
and restated subscription license agreement and a first amendment to the
maintenance and support agreement, both as of February 1, 2002. As a result of
these amendments, the term of each agreement was extended to December 31, 2003.
The amendment to the maintenance agreement reduced our required level of
service, accelerated the payment terms and reduced Converge's aggregate
obligation by $0.5 million. The expected contractual payments under the new
agreements plus the remaining deferred revenue under the original agreements
will be recognized on a straight-line basis through December 2003. From January
1, 2002 through June 30, 2002, we have received approximately $10.3 million from
Converge. We believe a risk exists related to the remaining $1.9 million due
through December 31, 2002 under the existing agreements. To the extent that all
or a portion of the $1.9 million is not collected, revenue recognized through
December 31, 2003 will be adversely affected by such shortfall. However, as
collections under this agreement are recorded as deferred revenue when invoiced,
the Company does not expect to recognize any asset impairments associated with
non collection of all or a portion of the amounts due.
Below are the contractual payments, including revisions, either made or
still due from Converge under the revised terms of the agreements:
REMAINING
CONTRACTUAL ADJUSTMENTS DUE TO REMAINING
PAYMENTS AS OF FEBRUARY 2002 CASH RECEIVED DURING CONTRACTUAL
DECEMBER 31, CONTRACTUAL THE SIX MONTHS ENDED PAYMENTS AS OF
2001 REVISIONS JUNE 30, 2002 JUNE 30, 2002
(in thousands)
Subscription license $ 9,000 $ -- $ (9,000) $ --
Maintenance and support 3,750 (500) (1,341) 1,909
-------- -------- -------- ------
$ 12,750 $ (500) $(10,341) $1,909
======== ======== ======== ======
During the three and six months ended June 30, 2002, we recognized
revenues of approximately $4.3 million, and $9.6 million, respectively, under
the Converge agreements. For the three and six months ended June 30, 2001,
revenues of approximately $8.8 million and $14.7 million, respectively, were
recognized under the Converge agreements. Deferred revenue related to the
Converge agreements is approximately $24.3 million at June 30, 2002.
(7) RESTRUCTURING CHARGES AND ASSET WRITE-DOWN
During the year ended December 31, 2001, we announced and implemented
several strategic and organizational initiatives designed to realign business
operations, eliminate acquisition related redundancies and reduce costs. As a
result of these restructuring initiatives we recorded a separate restructuring
and asset impairment charge in each of the four quarters of 2001. The aggregate
remaining restructuring accrual at June 30, 2002 of approximately $5.1 million,
included in accrued expenses on the consolidated balance sheet, is expected to
be adequate to cover actual
11
amounts to be paid. Differences, if any, between the estimated amounts accrued
and the actual amounts paid will be reflected in operating expenses in future
periods.
The following table provides a summary by category and a rollforward of
the changes in the restructuring accrual for the six months ended June 30, 2002:
RESTRUCTURING RESTRUCTURING
ACCRUAL AT ACCRUAL AT
DECEMBER 31, CASH JUNE 30,
2001 PAYMENTS ADJUSTMENTS 2002
(in thousands)
Lease termination costs......................... $ 4,763 $(1,430) $ 1,383 $ 4,716
Employee severance and related benefits......... 2,294 (2,522) 653 425
Other exit costs................................ 25 (3) (22) --
------- -------- ------- ---------
$ 7,082 $(3,955) $ 2,014 $ 5,141
===== ===== ===== =====
During the three and six months ended June 30, 2002, we recorded
adjustments of approximately $0.4 million and $1.4 million, respectively,
related to lease termination costs and $0 and $0.7 million, respectively,
related to employee termination benefits and other exit costs, due to changes in
estimates. For the three and six months ended June 30, 2002, these adjustments
included $0 and $0.3 million, respectively, of lease termination costs reflected
in income from discontinued operations. During the three and six months ended
June 30, 2002, the remaining $0.4 million and $1.8 million, respectively, of
expenses are recorded in restructuring and asset impairment charges in the
consolidated statements of operations.
The amount accrued at June 30, 2002 for lease termination costs relates to
three leases for office facilities and one capital lease for excess equipment
that have not yet been terminated, as well as two leases for office facilities
that were terminated in July 2002. The accrual represents the amount required to
fulfill our obligation under signed lease contracts, the net expense expected to
be incurred to sublet the facilities, or the estimated amounts to be paid to
terminate the lease contracts before the end of their terms.
The amount accrued at June 30, 2002 for employee severance and related
benefits relates to severance payments which have not yet been made to employees
whose positions were eliminated as part of the reductions in workforce.
During the three and six months ended June 30, 2001, we recorded
restructuring and asset impairment charges of approximately $218.9 million and
$226.4 million, respectively. For the three months ended June 30, 2001, this
charge included an impairment of $202.1 million of identifiable assets and
goodwill in accordance with SFAS No. 121, and $16.8 million for lease
termination costs, employee termination benefits, and asset disposals. The first
quarter 2001 restructuring charge of $7.5 million related to lease termination
costs, employee termination benefits and asset disposals. For the three and six
month periods ended June 30, 2001, these charges included $166.2 million and
$167.7 million, respectively, in restructuring and asset impairment charges in
loss from continuing operations, and $52.7 million and $58.7 million,
respectively, included in loss from discontinued operations of the SMB unit.
(8) PREFERRED STOCK
On June 28, 2002, we completed the repurchase of 100% of our outstanding
shares of Series A 6.00% Convertible Redeemable Preferred Stock due 2010, plus
accrued dividends thereon, for a purchase price of $5.0 million, and agreed to
the cancellation of a Common Stock Purchase Warrant, dated April 7, 2000. The
difference between the carrying amount and the amount paid in the repurchase of
approximately $101.0 million is recorded in additional paid in capital and
included in income attributable to common shareholders.
(9) INCOME (LOSS) PER SHARE
All share and per share amounts in these financial statements give
retroactive effect to the 1-for-10 reverse stock split which became effective on
July 15, 2002.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and dilutive
potential common 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
12
(using the if-converted method). Potential common shares are excluded from the
calculation if their effect is anti-dilutive.
The following table sets forth the computation of net income (loss) per
common share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands, except per share data)
Loss from continuing operations $ (9,858) $ (235,457) $ (15,621) $ (305,940)
Less: Series A convertible redeemable preferred
stock dividends and accretion (1,943) (1,842) (3,861) (3,661)
Add: Repurchase of preferred stock 101,041 -- 101,041 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations
attributable to 89,240 (237,299) 81,559 (309,601)
common shareholders
Income (loss) from discontinued operations 1,027 (65,182) 8,508 (84,524)
Loss on disposal of discontinued operations (165) (3,381) (165) (3,903)
----------- ----------- ----------- -----------
Net income (loss) attributable to common shareholders $ 90,102 $ (305,862) $ 89,902 $ (398,028)
=========== =========== =========== ===========
Basic income (loss) per common share:
Income (loss) from continuing operations $ 7.69 $ (24.28) $ 7.10 $ (32.52)
Income (loss) from discontinued operations 0.09 (6.67) 0.74 (8.88)
Loss on disposal of discontinued operations (0.01) (0.35) (0.02) (0.41)
----------- ----------- ----------- -----------
Income (loss) per common share attributable to
common shareholders $ 7.77 $ (31.30) $ 7.82 $ (41.81)
=========== =========== =========== ===========
Diluted income (loss) per common share:
Income (loss) from continuing operations $ 7.59 $ (24.28) $ 6.89 $ (32.52)
Income (loss) from discontinued operations 0.09 (6.67) 0.71 (8.88)
Loss on disposal of discontinued operations (0.02) (0.35) (0.02) (0.41)
----------- ----------- ----------- -----------
Income (loss) per common share attributable to
common shareholders $ 7.66 $ (31.30) $ 7.58 $ (41.81)
=========== =========== =========== ===========
The diluted income (loss) per share calculation includes shares issuable
upon conversion of convertible debt and adds back interest expense related to
the convertible debt of $0.3 million and $0.6 million for the three and six
month periods ended June 30, 2002, respectively.
(10) COMMITMENTS AND CONTINGENCIES
We have entered into non-cancelable obligations with service providers.
Under these agreements, our remaining commitments for the fiscal years ending
December 31 are as follows (in thousands):
2002.................................................. $ 119
2003.................................................. 50
Future minimum lease payments remaining under our facility leases for the
fiscal years ending December 31 are as follows (in thousands):
2002.................................................. $ 1,500
2003.................................................. 2,680
2004.................................................. 2,565
2005.................................................. 2,002
2006.................................................. 1,655
Thereafter............................................ 3,597
These future minimum lease payments include all facility leases for which
we are contractually committed to make payments. We are in the process of
negotiating sublease arrangements and/or terminations of certain facility
13
leases, which represent approximately $11.8 million of these obligations. We
currently estimate the remaining termination costs of these leases to be
approximately $5.1 million, which is included in accrued expenses.
In connection with our acquisition of Atlas Commerce, Inc., we filed a
registration statement on Form S-3 with the SEC registering the resale of shares
of our common stock issued to acquire Atlas Commerce. In connection with a
routine review and comment letter process related to this filing, we have
received comments from the SEC. The remaining open comments relate primarily to
the presentation and recognition of certain previously reported revenue and
expense items of our SMB business and whether one element of a material
agreement should be accounted for as "barter" in accordance with EITF No. 99-17,
- -- Accounting for Advertising Barter Transactions. During the six-month periods
ended June 30, 2002 and 2001, Verticalnet recognized advertising revenues under
the subject agreement of $0 and $5.0 million, respectively. During the same
periods, Verticalnet recognized advertising expenses of $0 and $7.8 million,
respectively. From inception of the agreement through completion, Verticalnet
recorded advertising revenues of $22.2 million and advertising expenses of $19.3
million. We believe the ultimate resolution of such comments would not change
our accumulated deficit at June 30, 2002, although there could be differences in
reported quarterly operating results. For the six-month periods ended June 30,
2002 and 2001, these differences are estimated to be $0 and a reduction of net
reported expense of $5.7 million, respectively. The balance sheets of
Verticalnet as of June 30, 2002 and December 31, 2001 do not include any assets
or liabilities associated with advertising activities under the subject
agreement. We further believe the cash flows from operations for the six-month
periods ended June 30, 2002 and 2001 would be unaffected by any potential change
in presentation.
Additionally, there were certain other "barter" transactions recognized
by Verticalnet in accordance with EITF No. 99-17, which could be impacted by the
comments provided by the SEC as noted above. The Company is currently evaluating
the impact that a change in presentation would have should such change be
required. We believe that any change in presentation or recognition of revenues
and expenses for these transactions would not result in a change to our
accumulated deficit at June 30, 2002.
During February 2002, the Company announced its intention to sell the
SMB unit of Verticalnet. Accordingly, effective January 1, 2002, that business
unit is reflected in our financial statements as a discontinued operation for
all periods presented. Such presentation requires that all elements of revenue
and expense of the SMB unit be netted as a single line item to report net
results of discontinued operations. As a result, we believe that any potential
change in the presentation or recognition of revenues and expenses under
"barter" arrangements would have an immaterial effect on the presentation of our
statements of operations since January 1, 2002. The SMB unit was sold on June
28, 2002.
We are currently in the process of resolving these matters with the SEC
and believe the historical classifications of revenue and expense for the SMB
unit are appropriate. As of the date of this filing, we cannot provide assurance
that the SEC will declare the Form S-3 effective without us first amending the
reports that are incorporated into the Form S-3. The remaining open SEC comments
do not relate in any way to our ongoing collaborative supply chain software
operations.
(11) LITIGATION
On June 12, 2001, a class action lawsuit was filed against us and
several of our officers and directors in U.S. Federal Court for the Southern
District of New York in an action captioned CJA Acquisition, Inc. v.
Verticalnet, et al., C.A. No. 01-CV-5241 (the "CJA Action"). Also named as
defendants were four underwriters involved in the issuance and initial public
offering of 3,500,000 shares of our common stock in February 1999 -- Lehman
Brothers Inc., Hambrecht & Quist LLC, Volpe Brown Whelan & Company LLC and WIT
Capital Corporation. The complaint in the CJA Action alleges violations of
Sections 11 and 15 of the Securities Act of 1933 and Section 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on,
among other things, claims that the four underwriters awarded material portions
of the initial shares to certain favored customers in exchange for excessive
commissions. The plaintiff also asserts that the underwriters engaged in a
practice known as "laddering," whereby the clients or customers agreed that in
exchange for IPO shares they would purchase additional shares at progressively
higher prices after the IPO. With respect to Verticalnet, the complaint alleges
that the company and its officers and directors failed to disclose in the
prospectus and the registration statement the existence of these purported
excessive commissions and laddering agreements. After the CJA Action was filed,
several "copycat" complaints were filed in U.S. Federal Court for the Southern
District of New York. Those complaints, whose allegations mirror those found in
the CJA Action, include Ezra Charitable Trust v. Verticalnet, et al., C.A. No.
01-CV-5350; Kofsky v. Verticalnet, et al., C.A. No. 01-CV-5628; Reeberg v.
Verticalnet, C.A. No. 01-CV-5730; Lee v. Verticalnet, et al., C.A. No.
01-CV-7385; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864; Morris v.
Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet, et al.,
C.A. No. 01-CV-8084. None of the complaints state the amount of any damages
being sought, but do ask the court to award "rescissory damages." All of the
foregoing suits were amended and consolidated into a single complaint that was
filed with the federal court on April 19, 2002. This amended complaint contains
additional factual allegations concerning the events discussed in the original
complaints, and asserts that, in addition to Sections 11 and 15 of the
Securities Act, the Company and our officers and directors also violated
Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with the
IPO. In addition to this amended and consolidated complaint, the plaintiffs in
this lawsuit and in the hundreds of other similar suits filed against other
companies in connection with IPOs that occurred in the late 1990s have filed
"master allegations" that primarily focus on the conduct of the underwriters of
the IPOs, including our IPO. We have retained counsel and intend to vigorously
defend ourselves in connection with the allegations raised in the amended and
consolidated complaint. In addition, we intend to enforce our indemnity rights
with respect to the underwriters who are also named as defendants in the amended
and consolidated complaint.
On December 4, 2001, a lawsuit was filed against us in the Montgomery
County (Pa.) Court of Common Pleas in an action captioned Belcher-Pregmon
Commercial Real Estate Co. v. Verticalnet, C.A. No. 01-22968. The suit alleges
that the plaintiff is entitled to a broker commission in excess of $0.4 million
in connection with our former lease of a building in Horsham, Pa. We have
retained counsel to defend against the lawsuit. Our motion to dismiss the
lawsuit outright was denied, and we have filed answer to the action, along with
affirmative defenses and a counterclaim against the plaintiff.
14
Atlas Commerce filed a lawsuit on June 14, 2001 against a former senior
vice president of Atlas Commerce in the Chester County (Pa.) Court of Common
Pleas in an action captioned Atlas Commerce U.S., Inc., C.A. No. 01-05017. The
lawsuit seeks to recover in excess of $0.6 million in principal and interest in
connection with a loan made to the executive. The former executive answered the
suit on July 30, 2001 and filed counterclaims against Atlas Commerce asserting
breach of an oral agreement. In a related action, the same executive filed a
lawsuit on December 7, 2001, against Atlas Commerce in federal district court
for the Eastern District of Pennsylvania in an action captioned Barr v. Atlas
Commerce U.S., Inc., C.A. No. 01-CV-6129. The suit alleges violation of the
federal Age Discrimination and Employment Act, and sought damages in an
unspecified amount. On July 29, 2002, the parties entered a global settlement
agreement resolving all of the lawsuits. The terms of the settlement agreement
are confidential.
We are also 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 material adverse
effect on our financial position or results of operations.
(12) SUBSEQUENT EVENTS
On July 30, 2002, Verticalnet completed the repurchase of $13.85
million of its 5-1/4% Convertible Subordinated Debentures due September 2004 for
total consideration of $2.9 million. This consideration included $0.8 million,
or 1,270,854 shares, in common stock consideration, and $2.1 million in cash
consideration. Additionally, we made a payment for accrued but unpaid interest
of $0.3 million, also in cash. In connection with the transaction, we also
recognized a charge of $0.2 million for deferred debt offering costs
attributable to the portion of debt repurchased. In connection with the
repurchase, the Company also expects to record a charge to operations of $2.8
million representing an inducement for conversion of the convertible debentures,
in accordance with SFAS No. 84, Induced Conversions of Convertible Debt. The net
effect on shareholders' equity is an increase of $11.4 million.
This transaction was completed, under the same terms and conditions,
with two separate bondholders - one, a third party unaffiliated bondholder, and
the other, a subsidiary of a principal shareholder of the company - Internet
Capital Group. As a result of this transaction, Internet Capital Group's common
stock beneficial ownership in Verticalnet has been increased to 31.0%.
The pro forma balance sheet gives effect to the repurchase of the
convertible debt transaction as if the transaction had occurred as of June 30,
2002.
On July 1, 2002 the Company announced that its Board of Directors had
approved a 1-for-10 reverse stock split effective with the commencement of
trading on July 15, 2002. Previously, on July 5, 2002, the Company's
shareholders authorized the Board of Directors to effect a reverse stock split
in the range of 1:5 to 1:10, with the specific exchange rate to be determined at
the discretion of the Board of Directors.
On August 1, 2002, the Company completed the repurchase of 235,552
shares of common stock from former holders of Atlas Commerce common shares under
the terms of a put that they had the right to exercise through July 29, 2002.
The put was entered into in connection with the acquisition of Atlas Commerce on
December 28, 2001. The aggregate purchase price for the put shares was $1.0
million. The effect of this transaction and the expiration of the put terms for
the unexercised portion are also reflected in the pro forma balance sheet as of
June 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 the design, development and implementation of our products; the
strategies underlying our business objectives; the benefits to our customers and
their trading partners of our products; 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, the availability of and terms of equity and debt
financing to fund our business; our reliance on the development of our
enterprise software business; our ability to continue to remain listed on The
Nasdaq Stock Market; competition in our target markets; economic conditions in
general and in our specific target markets; our ability to use and protect our
intellectual property; and our ability to attract and retain qualified
15
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.
OVERVIEW
Verticalnet, through its subsidiaries, is a leading provider of
collaborative supply chain solutions that enable companies and their supply and
demand chain partners to communicate, collaborate, and conduct commerce more
effectively. With a comprehensive set of collaborative supply chain software
applications including spend management, strategic sourcing, collaborative
planning, and order management, we offer a broad integrated supply chain
solution delivered through a multi-party platform. With our completion of the
acquisition of Atlas Commerce in December 2001 and the sale of our Small/Medium
Business ("SMB") unit that operates and manages 59 industry-specific on-line
marketplaces in June 2002, we have completed a business transformation from our
origins as an operator of online public vertical communities to a business
solely focused on delivering supply chain solutions to enterprise customers.
With this transformation, the presentation of our consolidated statements
of operations has been modified. Most significantly, the operations of the SMB
unit have been classified as discontinued operations in all periods presented.
Also, the classification of our revenues and costs of revenues and expenses have
changed, and certain overhead expenses previously categorized as general and
administrative expenses have been allocated to the business functions receiving
the benefits attributable to such expenses. These changes to the presentation of
the statement of operations were made for all periods presented. We believe
these changes will provide more clarity into the ongoing operations, and present
a more traditional view of software companies' statements of operations.
Significant management actions were taken since the beginning of 2001 to
complete the transformation from an operator of online public vertical
communities to an enterprise software company. These actions are itemized below:
- On January 7, 2001, we appointed Michael J. Hagan, our
co-founder and chief operating officer at the time, to become
our president and chief executive officer upon the departure
of president and chief executive officer Joseph Galli, Jr.
With an effort to focus the business on its software offerings
already underway through our December 2000 license and
services agreements with Converge, Mr. Hagan led a thorough
re-evaluation of the Verticalnet Markets and Verticalnet
Solutions businesses in the first quarter of 2001, with a
focus on core elements needed to develop a profitable software
business in a difficult economic environment. As a result of
this scrutiny, we began implementing significant changes in
our business. The steps that we took in each quarter during
2001 resulted in significantly reduced staffing requirements
in stages. We, therefore, completed four major restructuring
efforts to reduce costs and streamline operations;
- On January 31, 2001, we completed the sale of Verticalnet
Exchanges to Converge, allowing management to focus solely on
the two remaining business units, the SMB unit and the
Enterprise group (formerly referred to as Verticalnet Markets
and Verticalnet Solutions) and eliminate redundancies between
them;
- On April 26, 2001, we restructured the Microsoft agreement to
focus on supplier enablement solutions;
- On July 26, 2001, we announced changes in the SMB business;
- On October 9, 2001, we restructured the Converge license and
services agreements as Converge restructured its strategic
direction;
- On December 28, 2001, we acquired Atlas Commerce in an effort
to expand our product and customer base in the software
business;
16
- On February 13, 2002, we announced our intention to sell the
SMB unit, which we completed in June 2002. Our board of
directors authorized this action to complete our strategic
realignment to an enterprise software business. Beginning in
the first quarter of 2002, we have reported the SMB unit as a
discontinued operation;
- The addition of experienced software executives to our
management team: On February 19, 2002, Kevin S. McKay, a
member of our board of directors, was appointed president and
chief executive officer of Verticalnet. Mr. McKay, a former
chief executive officer of SAP America, succeeded Michael
Hagan, who was appointed chairman of Verticalnet. On February
13, 2002, John A. Milana, former chief financial officer of
Atlas Commerce, and a former chief financial officer of SAP
America, was appointed as Verticalnet's chief financial
officer replacing interim chief financial officer, David
Kostman;
- On June 28, 2002, we completed the sale of certain of the
assets of the SMB unit to Corry Publishing for $2.35 million
in cash consideration, plus up to an additional $6.5 million
as an earn-out over the four-year period after the closing
date. Additionally, during the quarter ended June 30, 2002,
other assets in the SMB unit were sold under a separate
agreement. Together, the transactions substantially finalized
the operations of the SMB unit as part of Verticalnet, Inc.;
and
- Also on June 28, 2002, the Company completed the repurchase of
100% of its outstanding shares of Series A 6.00% Convertible
Redeemable Preferred Stock due 2010, plus accrued dividends
thereon, for a purchase price of $5.0 million, and agreed to
the cancellation of a Common Stock Purchase Warrant, dated
April 7, 2000. The effect of the transaction was a net
increase to shareholders' equity of $101.0 million.
With our transformation to an enterprise software business model complete,
management has taken another significant action since the second quarter of 2002
to restructure our balance sheet and improve the financial viability of our
business:
- On July 30, 2002, we completed the repurchase of $13.85
million of the 5-1/4% Convertible Subordinated Debentures due
September 2004 for total consideration of $2.9 million. This
consideration included $0.8 million, or 1,270,854 shares, in
common stock consideration, and $2.1 million in cash
consideration. Additionally, we made a payment for accrued but
unpaid interest of $0.3 million, also in cash. In connection
with the transaction, we also recognized a charge of $0.2
million for deferred debt offering costs attributable to the
portion of debt repurchased. The transactions improved our
shareholders' equity by $11.4 million. The Company also
expects to record a charge to operations of $2.8 million
representing an inducement for conversion of the convertible
debentures, in accordance with SFAS No. 84, Induced
Conversions of Convertible Debt.
In addition, on July 1, 2002, the Company announced that its Board of
Directors had approved a 1-for-10 reverse stock split effective with the
commencement of trading on July 15, 2002.
REVENUE RECOGNITION
Through June 30, 2002, our software licensing and related services revenues
have been principally derived from one customer, Converge. The original
arrangement with Converge entailed a right to use our existing software as well
as any future software that we developed, the provision of professional
services, and maintenance and support services over the life of the agreements.
Due to the type of professional services that we were providing to Converge, as
well as the fact that Converge is entitled to use, free of charge, any of our
future software products, revenue related to Converge is being recognized on a
straight-line basis over the term of the arrangements.
Software licensing and related services revenues other than from Converge
have been principally derived from the licensing of our products, from
maintenance and support contracts and from the delivery of professional
services. Customers who license our products also generally purchase maintenance
contracts which provide software updates and technical support over a stated
term, which is usually a twelve-month period. Customers may also purchase
implementation services from us.
We license our products through our direct sales force. The license
agreements for our products do not provide for a right of return other than
during the warranty period, and historically product returns have not been
significant. We do not recognize revenue for refundable fees or agreements with
cancellation rights until such rights to refund or cancellation have expired.
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Our products are either purchased under a perpetual license model or under a
time-based license model.
We recognize revenue in accordance with Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended by SOP 98-9. We recognize revenue when
all of the following criteria are met: persuasive evidence of an arrangement
exists; delivery of the product has occurred; the fee is fixed and determinable;
and collectibility is probable. We consider all arrangements with payment terms
extending beyond one year to not be fixed and determinable, and revenue under
these agreements is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Our determination of fair value of
each element in multi-element arrangements is based on vendor-specific objective
evidence ("VSOE"). We limit our assessment of VSOE for each element to either
the price charged when the same element is sold separately or the price
established by management, having the relevant authority to do so, for an
element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue allocated to maintenance and support is
recognized ratably over the maintenance term and revenue allocated to training
and other service elements is recognized as the services are performed. The
proportion of revenue recognized upon delivery may vary from quarter to quarter
depending upon the relative mix of licensing arrangements and the availability
of VSOE of fair value for all of the undelivered elements.
Arrangements that include professional services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not considered essential, the revenue
allocable to the professional services is recognized as the services are
performed. If we provide professional services that are considered essential to
the functionality of the software products, both the software product revenue
and professional service revenue are recognized in accordance with the
provisions of SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. To date most of our professional services
have been considered essential to the functionality and therefore, the majority
of our contracts that involved licenses and professional services were
recognized on a percentage of completion basis.
Deferred revenue includes amounts received from customers for which revenue
has not been recognized, which in most cases relates to maintenance or license
fees that are deferred until they can be recognized. The majority of our
deferred revenue at June 30, 2002 is related to payments received from Converge.
Such amounts will be recognized as revenue on a straight-line basis over the
contract term, which ends December 31, 2003.
RESULTS OF CONTINUING OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE
30, 2002 AND JUNE 30, 2001
The following discussion and comparison regarding results of continuing
operations do not include the results of the SMB unit or the Verticalnet
Exchanges unit. The discussion also follows the new (year 2002) presentation of
the consolidated statements of operations.
Revenues in the ongoing business are comprised of software license revenue
and services and maintenance revenue. For the three month periods ended June 30,
2002 and 2001, software license revenue was $4.6 million versus $6.5 million,
respectively. For the six month periods ended June 30, 2002 and 2001, software
license revenue was $10.9 million and $12.9 million, respectively. The declines
in both the three and six-month periods are primarily due to the February 2002
restructuring of the Converge license agreement, as well as a more difficult
macro economic market for software. Services and maintenance revenues were $1.6
million in the second quarter of 2002 as compared to $3.3 million in the same
period last year. For the six month periods ended June 30, 2002 and 2001,
services and maintenance revenue were $3.3 million and $6.2 million,
respectively. The significant decline in services and maintenance revenue is due
primarily to the restructured Converge agreement, partially offset by increased
services revenues generated from new customers acquired during the first quarter
of 2002.
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The cost of revenue is comprised of the cost of software and the cost of
services and maintenance. The cost of software itself is comprised of the cost
of licenses, which primarily represents royalties, and the cost of acquired
technology, which is the non-cash amortization of currently used technologies
acquired through acquisitions. The cost of software decreased approximately $1.1
million from the second quarter of 2001 to the second quarter of 2002. For the
six month periods ended June 30, 2002 and 2001, the cost of software decreased
approximately $1.9 million. These decreases for both the three and six-month
periods were due primarily to the decrease in the amortization of the technology
acquired in the Isadra and Tradeum acquisitions which, as of December 31, 2001,
had been fully amortized. The year 2002 cost of acquired technology relates
primarily to the Atlas Commerce acquisition which occurred in December 2001.
The cost of services and maintenance includes the cost of the Company's
consultants who are primarily responsible for the software implementations and
configurations. Also included is the cost of the Company's customer support
function, which is provided to customers as part of the recurring maintenance
fees. These costs decreased from approximately $7.3 million to $1.5 million in
the quarters ended June 30, 2001 and 2002, respectively, and from approximately
$14.9 million to $2.9 million for the six month periods ended June 30, 2001 and
2002, respectively. The decrease relates substantially to reduced third-party
consulting costs and a significant reduction in headcount as a result of the
restructuring charges that occurred during 2001. The combination of these costs
accounted for approximately $3.9 million and $7.9 million, respectively, of the
decreases for the three and six month periods ended June 30, 2002 as compared to
the same periods in 2001. Also related to the headcount reductions, travel and
entertainment expenses declined approximately $0.9 million and $1.4 million,
respectively, in the three-month and six-month periods ended June 30, 2002 as
compared to the same periods in 2001. In addition, the facilities and
infrastructure costs attributable to the consulting and support group functions
decreased approximately $0.6 million and $1.7 million, respectively, for the
three and six-month periods ended June 30, 2002 as compared to the same periods
in 2001, also largely due to the restructuring charges incurred throughout 2001.
Research and development costs consist primarily of salaries and fringe
benefits costs of our product strategy, development, and testing employees. The
research and development costs decreased from approximately $6.5 million in the
second quarter of 2001 to approximately $2.8 million in the second quarter of
2002 primarily due to headcount reductions associated with the restructuring
charges that occurred during 2001. For the six-month periods ended June 30, 2001
and 2002, research and development costs decreased from approximately $13.0
million to approximately $6.4 million, respectively. Salary and fringe related
costs accounted for the majority of the decreases, approximately $1.2 million
and $2.9 million, respectively, for the three and six-month periods ended June
30, 2002 as compared to the same periods in 2001. In addition, third-party
consulting costs decreased approximately $0.9 million and $1.4 million,
respectively, for the three and six-month periods ended June 30, 2002 as
compared to the same periods in 2001. Facilities and infrastructure costs
attributable to the research and development group contributed approximately
$1.1 million and $1.8 million, respectively, to the overall decrease for the
three and six-month periods ended June 30, 2002 as compared to the same periods
in 2001.
Sales and marketing expenses consist primarily of salaries and fringe
benefits costs, as well as commissions for sales and marketing employees. Also,
the travel costs associated with business development are included in sales and
marketing expenses. The sales and marketing expenses for the three month periods
ended June 30, 2002 and 2001 were approximately $1.5 million and $4.7 million,
respectively. The sales and marketing expenses for the six month periods ended
June 30, 2002 and 2001 were $3.2 million and $11.3 million, respectively. The
significant decreases in sales and marketing expenses are primarily headcount
related, as salary and fringe reductions amounted to approximately $1.1 million
for the three-month period ended June 30, 2002 as compared to the same period in
2001, while the reduction was approximately $3.2 million between the six-month
periods ended June 30, 2002 and 2001. In addition, travel related expenses
declined $0.4 million and $1.3 million between the comparable three and
six-month periods ended June 30, 2002 and 2001, respectively. Direct marketing
expenses such as advertising, public relations and trade shows declined
approximately $0.5 million and $1.2 million between the comparable three and
six-month periods ended June 30, 2002 and 2001, respectively.
General and administrative expenses consist primarily of salaries and
related costs for our executive, administrative, finance, legal and human
resources personnel. General and administrative expenses were approximately $2.7
million in the quarter ended June 30, 2002 as compared to $6.7 million in second
quarter of 2001. For the six months ended June 30, 2002, general and
administrative expenses were $6.3 million as compared
19
to $14.8 million for the six months ended June 30, 2001. These expenses declined
primarily as a result of the restructuring charges incurred in 2001. Headcount
related cost reductions accounted for approximately $2.2 million and $5.0
million of the decrease between the three and six-month periods ended June 30,
2002 and 2001, respectively. Professional services expenses declined
approximately $1.0 million and $2.3 million, respectively, between the
comparable three and six-month periods ended June 30, 2002 and 2001. General and
administrative facilities and infrastructure related reductions accounted for
approximately $0.8 million and $1.8 million of the decline, respectively,
between the comparable quarterly and six-month periods ended June 30, 2002 and
2001.
Restructuring and impairment charges for the second quarter and six months
ended June 30, 2002 include adjustments to the charge recognized in the fourth
quarter of 2001. The $0.4 million and $1.8 million adjustments for the quarter
and six months ended June 30, 2002, respectively, relate primarily to facility
leases, and in the six-month period include $0.7 million which relates to
severance costs incurred as a result of the Atlas Commerce acquisition and
integration. The lease adjustments are indicative of the difficult sublet market
that exists for office space in certain markets where the Company currently
leases office space. We are actively engaged in marketing the excess office
space. For the three and six months ended June 30, 2001, restructuring and asset
impairment charges totaled $166.2 million and $167.7 million, respectively, of
which, approximately $155.0 million was a second quarter goodwill impairment
related to the Tradeum acquisition. The remainder of the 2001 charges related
primarily to lease termination and severance costs.
Amortization of intangibles for the second quarter and six months ended
June 30, 2002 totaled approximately $1.1 million and $2.1 million, respectively,
which represents the non-cash amortization of deferred costs related to the
warrants and Series A preferred stock issued to Microsoft. As of June 30, 2002,
the warrants were fully amortized. Also, on June 28, 2002, the Company completed
a repurchase of 100% of the Series A preferred stock and warrants (see Note 8 to
the consolidated financial statements). Pursuant to the Company's adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", the Company discontinued
its amortization of goodwill beginning January 1, 2002. For the same periods
last year, amortization of intangibles totaled approximately $39.5 million and
$78.8 million, which primarily represents goodwill amortization.
Net interest expense and other for the three and six-month periods ended
June 30, 2002 was approximately $5.9 million and $6.6 million, respectively.
Approximately $5.3 million of those amounts related to write-downs of the
Company's cost method investments. The remainder of the amounts are comprised of
interest expense related to the convertible debt, offset in part by interest and
other income. For the three and six-month periods ended June 30, 2001, net
interest expense and other was approximately $13.0 million and $22.0 million,
respectively. For the three month period, the amount includes approximately
$13.1 million of write-downs associated with cost method, equity method and
available-for-sale investments. The six-month period includes approximately
$23.0 million of similar write-downs, including a realized loss of approximately
$2.2 million on a marketable security. The remainder of the amounts consisted
primarily of interest expense related to the convertible debt, offset in part by
interest and other income.
Preferred stock dividends and accretion for the three and six months ended
June 30, 2002 were approximately $1.9 million and $3.9 million, respectively.
For the three and six-month periods ended June 30, 2001, the amounts
approximated $1.8 million and $3.7 million, respectively. On June 28, 2002, the
Company repurchased 100% of its outstanding Series A 6% convertible redeemable
preferred stock. At the time of the repurchase, the carrying value of the
preferred stock and the related accumulated dividends was approximately $106.0
million. The Company paid $5.0 million in cash consideration for the preferred
shares, resulting in an increase in paid in capital of $101.0 million which is
included in income attributable to common shareholders.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, our primary source of liquidity consisted of cash and
short-term investments. The majority of such funds are readily available for
operating purposes. At June 30, 2002, we had cash, cash equivalents and
short-term investments totaling approximately $26.1 million, compared to $50.3
million at December 31, 2001. At June 30, 2002 we had negative working capital
of approximately $24.7 million. Excluding deferred revenue of continuing
operations, which represents non-cash obligations to provide products or
services to customers, working capital at June 30, 2002 was $1.3 million.
20
Net cash used in operating activities was approximately $16.2 million for
the six months ended June 30, 2002. Net cash used in operating activities
consisted primarily of losses from continuing and discontinued operations,
changes in deferred revenues, accrued expenses, accrued restructuring, accounts
payable, and accounts receivable, offset in part by decreases in prepaid
expenses and other assets and non-cash expenses and charges.
Net cash provided by investing activities was $0.3 million for the six
months ended June 30, 2002. Cash provided by investing activities include $2.4
million from the sale of the SMB unit, and $1.5 million from the release of
previously restricted funds. Cash used in investing activities included the
Company's additional investment for $3.5 million in Converge, shown net of the
liquidation proceeds of $0.3 million from the sale of a cost method investment.
Capital expenditures and capitalized software costs for the six-month period
ended June 30, 2002 were approximately $0.7 million, which consists primarily of
capitalized software related to the development of the Verticalnet products.
Net cash used in financing activities was approximately $8.3 million for
the six months ended June 30, 2002. Net cash used in financing activities
includes $5.0 million for the repurchase of 100% of the Company's outstanding
preferred stock, and approximately $2.1 million toward principal of the BT put
and call agreement, as well as $1.7 million of principal payments on capital
leases.
As of June 30, 2002, we have approximately $5.1 million of accrued
restructuring costs related to facility leases, $0.4 million of which were
assumed as part of the Atlas Commerce acquisition. We have made significant
efforts to estimate the expected costs to early terminate the leases or sublease
facilities. If these facilities cannot be sublet or the leases early terminated,
our contractual lease payments of approximately $11.8 million related to these
leases will be due over the respective lease terms in addition to aggregate
contractual lease payments of approximately $2.2 million related to facilities
we continue to use.
We have a put and call agreement with British Telecommunications, Plc
("BT") whereby we could purchase their remaining 10% interest in Verticalnet
Europe at any time after March 13, 2001 and BT could sell its investment to us
at any time after March 13, 2002. In March 2002, we issued 200,000 shares of our
common stock to BT with an aggregate value of approximately $1.8 million as a
prepayment towards the put/call obligation. BT attempted to sell its remaining
interest in Verticalnet Europe to us on April 19, 2002. In May 2002, we paid
$3.0 million in cash toward the liability. As of June 30, 2002 11.1 million Euro
(approximately $11.1 million) remains unpaid. This amount, including accrued
interest, is recorded in current liabilities on the consolidated balance sheet
as of June 30, 2002. The Company has been in discussions with BT regarding this
unpaid amount.
Our capital lease obligations of approximately $1.3 million as of June 30,
2002, are payable in the following amounts: $0.7 million, $0.4 million, and $0.2
million during the years ended December 31, 2002, 2003 and 2004, respectively.
On July 30, 2002, we completed the repurchase of $13.85 million of our
5-1/4% Convertible Subordinated Debentures due September 2004 for total
consideration of $2.9 million. This consideration included $0.8 million, or
1,270,854 shares, in common stock consideration, and $2.1 million in cash
consideration. Additionally, we made a payment for accrued but unpaid interest
of $0.2 million. The remaining $7.86 million of debentures continue to accrue
interest and obligate the Company to make semi-annual interest payments
accordingly.
As of June 30, 2002, there are approximately $1.9 million of scheduled
maintenance payments due from Converge under the amended and restated
agreements. A failure by Converge to make all or part of these payments on a
timely basis, including any restructuring of these payments (whether in terms of
amount, timing or otherwise) could have an adverse effect on our business,
financial condition and operating results.
During the first six months of 2002, our available cash, cash equivalent
and short-term investments resources declined by approximately $24.3 million,
principally as a result of continued operating losses, the repurchase of all
outstanding Series A preferred stock, and a payment toward the BT put/call
agreement. In addition, in July 2002, we used $2.4 million in cash to repurchase
a portion of our outstanding debentures. Cash flows from two significant
customers, Microsoft and Converge, were instrumental in financing our business
during 2001. As of December 31, 2001, the Microsoft contractual arrangements
have been terminated and anticipated cash flows under the Converge
21
contractual arrangements have been significantly curtailed (see Note 6 to our
consolidated financial statements). As a result, we will become increasingly
dependent on generating revenues and operating cash flows from new customers for
the remainder of 2002 and beyond.
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 three
quarters. However, to the extent our current level of liquid assets proves to be
insufficient, we may need to obtain additional debt or equity financing.
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.
Should funding not be available on acceptable terms, we may implement
additional cost reduction initiatives, including headcount reduction. While such
initiatives may enable us to continue to satisfy our short-term obligations and
working capital requirements, they may negatively impact our ability to
successfully execute our business plan over the longer term.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated or completed after June 30, 2001. SFAS No.
141 also specifies criteria that must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported separately
from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142, which became
effective January 1, 2002, requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.
Accordingly, there has been no amortization of existing goodwill since December
31, 2001.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, and the
accounting and reporting provisions of 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, for
the disposal of a segment of a business. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS No. 144 retains the basic provisions of APB No. 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under SFAS No. 142. We adopted and implemented SFAS No. 144 as of January 1,
2002 in conjunction with our accounting for our SMB business.
In November 2001, the FASB issued Topic D-103, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. The FASB staff believes that reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the income statement.
This guidance should be applied in financial reporting periods beginning after
December 15, 2001 and comparative financial statements for prior periods should
be reclassified to comply with the guidance. Accordingly,