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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ____
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Commission File Number 000-25269
VERTICALNET, INC.
Pennsylvania 23-2815834
(State of incorporation) (I.R.S. ID)
700 DRESHER ROAD, HORSHAM, PENNSYLVANIA 19044
(215) 328-6100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2000 was $4,777,895,863.
The number of shares outstanding of the registrant's common stock as of March
15, 2000 was 36,692,198. (This number has not been adjusted to reflect the 2-
for-1 stock split to be effected on or about March 31, 2000.)
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the annual meeting of shareholders to be held in 2000,
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this report
relates.
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VERTICALNET, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 1999
INDEX
Page
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Part I
Item 1. Business............................................................................. 1
Executive Officers of the Registrant................................................. 21
Item 2. Properties........................................................................... 22
Item 3. Legal Proceedings.................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................. 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 23
Item 6. Selected Financial Data.............................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7a. Quantitative and Qualitative Disclosure about Market Risk............................ 49
Item 8. Financial Statement and Supplementary Data........................................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 78
PART III
Item 10. Directors of the Registrant.......................................................... 79
Item 11. Executive Compensation............................................................... 79
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 79
Item 13. Certain Relationships and Related Transactions....................................... 79
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 80
Signatures........................................................................... 82
i
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," "will,"
"would," "should," "could," "estimates," "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 e-commerce solution, including our
proposed on-line exchange; the integration of our traditional off-line exchange
business with our proposed on-line exchange; the growth of the Internet and
business-to-business advertising and e-commerce; the strategies underlying our
business objectives; the completion of pending transactions, including
Microsoft's proposed investment in our company; our anticipated performance of
our obligations or the anticipated performance of the obligations of those
parties with which we have contractual relationships; our sales and marketing
strategies and efforts; the value of our investments in other companies; our
liquidity and capital resources; and the impact of our acquisitions and
investments on our business, financial condition and operating results. Our
forward-looking statements are not meant to predict future events or
circumstances and may not be realized because they are based upon current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ materially from those currently expected as a
result of these risks and uncertainties. Factors that may cause or contribute to
a difference between the expected or desired results and actual results include,
but are not limited to, competition in the market for vertical trade communities
and exchanges in general and in our specific communities and exchange business;
changes in prevailing interest rates and the availability of and terms of equity
and debt financing to fund the growth of our business; inflation; changes in
costs of goods and services; economic conditions in general and in our specific
target markets; changes in preferences and tastes of users, buyers and
suppliers; demographic changes; changes in, or failure to comply with, federal,
state, local or foreign laws and regulations; changes in our evolving business
strategy and model; our ability to use and protect our intellectual property;
and our ability to attract and retain qualified personnel, as well as the risks
discussed in the section of this report entitled "Factors Affecting our Business
Condition." Given these uncertainties, investors are cautioned not to place
undue reliance on our forward-looking statements. We disclaim any obligation to
update these factors or to announce publicly the results of any revisions to any
of the forward-looking statements contained in this report to reflect future
events or developments.
Information in this report has been adjusted to reflect two separate
two-for-one splits of our common stock, the first of which was effected on
August 20, 1999 and the second to be effected on or about March 31, 2000.
OUR BUSINESS
COMPANY OVERVIEW
VerticalNet owns and operates 55 industry-specific Web sites designed as
on-line business-to-business communities, known as vertical trade communities.
These vertical trade communities provide users with comprehensive sources of
information, interaction and e-commerce.
Each of our communities is individually branded, focuses on one business
sector and caters to individuals with similar professional interests. We design
each of our vertical trade communities to attract professionals responsible for
selecting and purchasing highly specialized industry-related products and
services.
Our communities combine:
. Information: product information (storefronts), industry news,
directories, classifieds and job listings
. Interaction: requests for proposals, on-line professional education
courses, training and discussion forums, and e-mail
. E-commerce: e-commerce centers, storefronts and auctions
1
Our vertical trade communities utilize the Internet's ability to allow
users around the world to contact each other online, allowing buyers to
research, source, contact and purchase from suppliers through new business
models such as electronic marketplaces, exchanges and auctions.
In December 1999, we acquired NECX.com LLC, a business-to-business market
maker for the electronic component and hardware markets, which includes
electronic, computer and network-related components, parts, systems and
peripherals. NECX acts as a third party intermediary, purchasing electronic
hardware and components from various vendors for resale to foreign and domestic
companies. The exchange operates quickly and anonymously to match buyers' and
suppliers' needs, providing a solution to inventory imbalances that result from
over-capacity or shortages within existing contractual relationships. In
addition to providing real-time tracking, pricing and availability information
for its customers, NECX also has back office functionality to support its
purchase and sales transactions, including procurement, quality assessment,
fulfillment and distribution. In February 2000, NECX announced the acquisition
of R.W. Electronics, Inc., a company that operates as a business-to-business
market maker for the electronic components market, with a focus primarily on
microprocessors, memory, storage devices, semiconductors and passive components.
We plan to integrate the traditional businesses of NECX and RW Electronics with
an on-line exchange to allow the businesses to operate on the Internet.
In March 2000, we acquired Tradeum, Inc., which is a development-stage
company engaged principally in the development of technology designed to enable
the building and hosting of business-to-business exchanges, auctions and
sourcing activities. We intend to integrate Tradeum's technology into NECX's
on-line exchange. We have retained Computer Sciences Corporation to help us
design and build NECX's on-line exchange.
With the acquisition of NECX and the pending acquisition of RW Electronics,
management has segmented the business into two operating segments, consisting of
vertical trade communities and our exchange business. Note 15 of the
consolidated financial statements (see Item 8) provides additional disclosure on
segment information.
INDUSTRY OVERVIEW
Growth of Business-to-Business, On-Line Advertising and E-Commerce
The Internet has emerged as a mass communications medium enabling millions
of people worldwide to share information, create community among individuals
with similar interests and conduct business electronically. The Internet has
features and functions that are unavailable in traditional media, as they enable
on-line merchants to communicate and interact effectively with customers and
advertisers to target users with specific needs and interests. As a result, the
Internet has emerged as an attractive medium for advertising and e-commerce.
Along with the impressive overall growth of the Internet,
business-to-business usage of the Internet has also grown rapidly. Increasingly,
businesses are leveraging the Internet's ability to reach customers globally,
deliver personalized content and open new distribution channels.
Recently, the widespread adoption of intranets and the acceptance of the
Internet as a business communications platform has created a foundation for
business-to-business e-commerce that offers the potential to:
. address structural inefficiencies of the traditional marketplace:
streamline complex processes, lower costs and improve productivity;
and
. provide new opportunities: increase seller reach and buyer access,
eliminate intermediaries and provide previously unavailable
information.
Internet advertising and e-commerce are projected to experience significant
growth:
. The number of global Internet users, according to International Data
Corporation, is projected to grow from 196.0 million in 1999 to 399.0
million in 2002.
. Forrester predicts that business marketers will spend $2.5 billion for
on- line advertising by 2002.
2
. Advertising and specialty media spending, according to Veronis, Suhler
& Associates, for the business-to-business market was more than $77.0
billion in 1999.
. According to Forrester, business-to-business e-commerce is projected
to grow from $406.2 billion in 2000 to $1.8 trillion in 2003 and $2.7
trillion in 2004.
. Forrester projects strong growth in business auctions from $8.7
billion in 1998 to $52.6 billion by 2002.
Need for On-Line Vertical Trade Communities
Traditionally, buyers and sellers have employed a variety of
well-recognized media in business-to-business advertising, information delivery
and communications to identify, qualify and facilitate commerce, including trade
magazines, trade shows, buyer's guides, direct mail, catalogs and others. In
many industries, particularly in highly specialized, technically-oriented
industries, these traditional media have performed a role in the distribution
channel by enabling buyers and sellers to interact by exchanging information,
and ultimately conducting business with one another. However, most of these
media do not enable immediate transaction execution.
As the Internet continues to evolve, new classes of business models are
emerging. These classes include e-commerce centers, electronic storefronts,
marketplaces, auctions and exchanges, each trying to improve on current market
inefficiencies. Electronic marketplaces concentrate demand to create searchable
product catalogs with pre-fixed prices. Auctions enable more efficient pricing
in the liquidation of excess and obsolete inventory, as well as the sale of new
and used industrial products. Exchanges create a more effective marketplace for
commodity-type products.
Inefficient Electronic Hardware Market
The electronic hardware market consists of buyers and sellers of electronic
components and hardware used in computers, peripherals, telecommunication and
medical equipment, machinery and other high technology systems. Inventory
imbalances in this market result from over-capacity or shortages within
contractual customer and supply relationships between component manufacturers,
original equipment manufacturers, franchised component distributors and
commercial computer products resellers.
Over-capacity or shortages occur primarily because of imperfect information
at the time the order is placed, unexpected delivery problems, accelerated
consumer demand for end products, limitations on franchised distributors, and
other inefficiencies. These inefficiencies create the need for a "spot" market
focused on matching buyers and sellers.
OUR SOLUTION
We own and operate a portfolio of 55 industry-specific Web sites designed
as on-line business-to-business communities. These vertical trade communities
provide users with comprehensive sources of information, interaction and e-
commerce.
We offer a new medium of interaction and exchange for the
business-to-business market. Our portfolio of vertical trade communities targets
separate industrial sectors to provide businesses and professionals with high
quality content, community and e-commerce that include the following attributes:
. Comprehensive content, services and features: The editors of our
vertical trade communities provide valuable information on products,
technology, industry regulations, news and management. We archive
historical content, enabling users to research through large databases
of information. We also operate requests for proposals and related
posting and response areas.
. Active community participation: We provide features and services such
as "Ask the Expert," discussion forums, chat rooms, bulletin boards
and career centers, all of which foster active community participation
among our users. We believe active community participation creates
loyalty and affinity among our users.
3
. Electronic marketplaces that connect buyers and sellers globally:
Vertical trade communities provide an on-line electronic marketplace
and auction area that allows buyers and sellers worldwide to exchange
information, source products, execute on-line transactions and have
the ability to sell products at our e-commerce center storefronts and
auction site (industrydeals.com).
. Targeted cost-effective medium for business-to-business advertising:
The narrow focus of each of our communities and the attractive
demographics of our audiences permit us to command premium advertising
rates.
. High quality sales leads: Our communities generate high quality sales
leads that are timely and effective and contain detailed buyer
information. Robust sales leads left by buyers allow sellers to
respond more effectively.
We believe that targeted content, focused audiences and robust sales leads,
combined with our existing and planned interactive platforms, create a premier
marketplace for e-commerce.
We also act as a market-maker in the electronics components market to
provide a solution and address the inefficiencies of the electronic components
industry. Our exchange currently offers the following benefits:
. Product Breadth: NECX monitors the daily pricing and availability of
numerous electronic components, personal computers and peripherals and
networking products from over 5,500 suppliers and thousands of other
sources worldwide. NECX has created direct, international, electronic
communication with its largest channel partners, which enables NECX to
aggregate this information into a single, centralized database. NECX's
database contains one of the most comprehensive sources of historical
electronic hardware transactions in existence, with detailed
information on approximately 600,000 transactions compiled over 19
years.
NECX's products include all types of semiconductors, including
computer hardware, memory devices and other integrated circuits
including logic chips, microprocessors, computer hardware and
networking products. Using NECX's proprietary database, its sales
force is able to quickly locate hard-to-find electronic products or
assist in the liquidation of large inventories held by manufacturers
or distributors.
. Real-Time Information: NECX's customers are able to access NECX's
exchanges via phone, fax or electronically through its Web site.
NECX's database of suppliers, products and transactions is updated
frequently in order to provide customers with meaningful and current
information.
. Full Suite of Services: NECX provides tailored services to address
buy-side and sell-side needs in the market. Buy-side services include:
. sourcing products at times of shortage or when primary
arrangements fail;
. buying products in the spot and open markets to lower overall
acquisition cost;
. assisting franchised distributors to acquire products outside
their product line to satisfy their customer requirements;
. buying products at the end of their manufacturing cycle; and
. warehousing services.
Sell-side services include:
. inventory liquidation services;
. advising customers on the appropriate levels of inventory to
carry; and
. assisting with the resale of returned products.
. Anonymity: Market participants who utilize the spot and open markets
are typically sensitive to information flow to possible competitors
and transaction partners. By acting as a trusted third party and
taking title to inventory, NECX allows its customers to transact
anonymously. For example, when NECX
4
fulfills a transaction, the products are repackaged in an NECX branded
shipping box. In addition, information regarding a customer's buy and
sell orders are not divulged to other buyers and sellers on the
exchange.
. Quality Assurance: NECX has spent the past two decades developing a
stringent quality control process that is intended to assure high
product quality. Suppliers are admitted only after they have met a
rigorous set of dependability certification standards. Additionally,
NECX uses quality control centers to provide seamless logistics
management and to ensure that products are delivered accurately and
promptly.
. Fulfillment and Distribution: Once a sale has been completed, the
product is shipped from the supplier to one of our quality control
centers for inspection and then shipped to the customer within the
same day. The orders are usually sent via United Parcel Service,
Federal Express or other reputable ground or air cargo transport
companies. NECX will make special arrangements with its customers to
accommodate time constraints. NECX offers shipment tracking on its Web
site.
OUR STRATEGIES
Our objective is to continue to be a leading owner and operator of
industry-specific vertical trade communities on the Internet. Key strategies to
achieve our objective include:
Expand User Base and Enhance User Experience with New Features, Services
and Content
We intend to continue increasing the number of users that visit each
community by:
. introducing additional services and features that appeal to the
specific needs of professionals using the Internet;
. continuing to direct users to our vertical trade communities through
marketing and distribution relationships with search engine providers
and other strategic partners;
. continuing to provide professionals the opportunity to buy products
online that satisfy their product-sourcing needs; and
. creating brand awareness through traditional as well as on-line
venues, including industry trade shows, conferences, advertising
campaigns with trade publications and alliances with important
industry trade associations.
As our user base continues to grow, we anticipate advertisers, suppliers
and buyers will find our vertical trade communities an attractive cost-effective
medium for advertising and sales.
Establish and Expand Multiple Revenue Streams
. Advertising: To date, most of our revenues have been derived from
selling storefronts, banner advertisements and newsletter sponsorships
to the industry suppliers in our communities. For the year ended
December 31, 1999, we generated approximately 83% of our revenues from
the sales of storefronts, banner advertisements and newsletter
sponsorships.
. Exchanges: In December 1999, we acquired NECX, a leading business-to-
business market maker for electronic, computer and network-related
components, parts, systems and peripherals. For the year ended
December 31, 1999, we generated approximately 11% of our combined
revenues from NECX exchange transactions. In February 2000, we
announced the pending acquisition of RW Electronics to add to the NECX
platform. RW Electronics operates in the same markets as NECX and adds
additional capacity, which facilitates our ability to operate our
exchange business. We intend to incorporate the future e-commerce
capabilities of NECX and RW Electronics into our existing vertical
communities. Additionally, we intend to offer exchanges that are
typical for commodity-type markets across our vertical trade
5
communities. We expect to be able to offer additional commodity
exchanges through strategic partnerships or as a result of additional
acquisitions of Internet-based or traditional exchanges.
. E-commerce: We believe that e-commerce is a natural extension of our
vertical trade communities. As we continue to grow the number of
registered users, user sessions and advertisers, we enhance our
ability to leverage those users to facilitate e-commerce transactions.
In addition, we expect to pursue e- commerce opportunities through
marketing relationships with retailers and service providers focused
on product distribution. For example, we currently sell books and
software in our communities where we receive a fee for the sale. For
the year ended December 31, 1999, we generated approximately 6% of our
revenues from e-commerce. Our current e-commerce initiatives include:
. E-commerce centers: In August 1999, we launched our e-commerce
centers that enable our visitors to connect directly to our
advertisers. The e-commerce centers allow our users to view
pictures, specifications and descriptions of our advertisers'
products and facilitate the purchase of products displayed in our
storefronts.
. Auctions: We have deployed a licensed auction platform across 34
of our vertical trade communities to create a competitive forum
for the sale of excess and obsolete inventory, as well as new and
used industrial products. We have launched our central auction
site--industrydeals.com-- that enables auctions to occur across
all of our communities in a single location.
. Education: We have the technology that allows professionals to
complete educational courses over the Internet. Our acquisition
of CertiSource in August 1999, an on-line reseller of
professional training products, classes and services, strengthens
our ability to offer educational products and services to our
users across our vertical trade communities. We are in the
process of making on-line classes and course registration
available across our vertical trade communities and forming
partnerships with course and courseware providers for industry
professionals.
. Electronic Marketplaces: We intend to launch one-stop shopping
marketplaces that will combine product catalogs of multiple
sellers across our vertical trade communities enabling buyers to
search, compare and source products. Isadra, a software company
acquired in August 1999, will provide us with the technology to
integrate product data from multiple distributed business systems
in real-time through a Java-based agent software and to create a
dynamic market-maker platform. The benefits of marketplaces exist
in their ability to simplify purchasing across fragmented markets
while reducing costs for sellers.
. Requests for Proposals/Quotations: We intend to further enhance
the features of our RFP/RFQ capabilities by providing buyers with
a more interactive and dynamic communications architecture to
request proposals and quotes from suppliers on our storefronts.
Continue to Identify and Rapidly Develop New Vertical Trade Communities
We intend to expand our portfolio by building and launching new vertical
trade communities in industries that we believe possess significant
opportunities for advertising and e-commerce. We determine whether a potential
vertical trade community fits our strategy by looking for specific industry
characteristics, including:
. a substantial number of buyers and suppliers worldwide;
. a high degree of fragmentation on both the supply and demand sides;
. defined target audiences (e.g. chemical engineers) with similar product and
informational needs;
. meaningful growth in trade advertising spending;
. significant new product introductions;
. on-line access; and
. growth in trade show attendance.
6
Leverage the Benefits of a Portfolio Approach
We believe that operating a portfolio of vertical trade communities permits
us to:
. offer a comprehensive, consistent set of services and features;
. attract a large business-to-business audience, in aggregate, making
our individual sites appealing to a broad array of advertisers and
e-commerce suppliers; and . realize cost savings and operating
efficiencies in our technology, marketing, customer service,
infrastructure and management resources.
Pursue Strategic Acquisitions
We intend to continue to pursue acquisitions of both Internet and
traditional businesses and assets that compliment our existing operations. We
evaluate prospective acquisitions by assessing whether the business or asset:
. broadens the scope of services we offer;
. enhances our presence in existing or new markets;
. offers technology that would allow us to better serve our clients; or
. offers the opportunity to enhance revenues, especially in our
e-commerce initiatives.
Create Partnerships to Expand Reach of Vertical Communities
We intend to enter into partnerships, joint ventures and other strategic
relationships with traditional industrial entities to leverage the reach of our
vertical communities. In March 2000, we announced the formation of
PaintandCoatings.com Inc., a joint venture with Eastman Chemical Company, to
transform our Paint and Coatings vertical trade community into a one-stop,
independent Internet marketplace for the paint and coatings industry. We will be
the minority shareholder in the joint venture, which was funded with $1.5
million from the two partners. In addition to our $600,000 cash contribution, we
will provide administrative and other support services and will license
intellectual property related to the maintenance and operation of the Web site.
Expand Globally
The anticipated growth of Internet usage worldwide presents significant
opportunities to extend the global reach of our communities and exchanges.
Approximately 44% of the visits to our vertical trade communities during 1999
originated outside the United States. As shown by their usage levels,
international users provide significant opportunity to our domestic advertisers,
providing both sources of leads and, eventually, purchasers of their products
and services. Our vertical trade communities also provide foreign advertisers
with access to our targeted audience in the United States.
We intend to expand globally by pursuing strategic partnerships and
entering into marketing relationships. To date we have initiated four global
strategic alliances:
. In February 2000, we announced the formation of VerticalNet Europe, a
joint venture with British Telecommunications, plc ("BT") and Internet
Capital Group, Inc. ("ICG"). We will be the majority shareholder in
the joint venture, which will be funded with $107.0 million in cash
from the three partners. We are contributing to the joint venture $7.0
million in cash and intellectual property for the operations of
vertical trade communities within Europe. VerticalNet Europe and BT
have agreed to create VerticalNet UK Ltd. as part of the joint
venture.
. In January 2000, we announced plans to form a joint venture with
Softbank Commerce Corp. ("Softbank"), a wholly-owned subsidiary of
Softbank Corporation. The goal of the new company, to be called
VerticalNet Japan, is to develop, maintain and operate Japanese
language vertical trade communities in Japan.
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. In December 1999, through our acquisition of NECX, we acquired a 50%
ownership interest in Electronic Commodity Exchange Asia Pte. Ltd.
("NECX Asia"), a joint venture with Sumitomo Corporation and
Sumitomo's wholly-owned electronics trading house, Sumitronics of Asia
Holding Pte. Ltd. NECX Asia is creating a centralized global exchange
for the purchase and sale of electronic components, personal
computers, peripherals and networking products. NECX also has foreign
sales offices in Sweden and Ireland. We intend to integrate RW
Electronics' branch office in Korea into NECX Asia's operations.
. In June 1999, we entered into a co-branding relationship with
Metropolis, which is designed to create and operate at least 10
vertical trade communities focusing on the African market.
OUR VERTICAL TRADE COMMUNITIES
As of March 15, 2000, we owned and operated 55 vertical trade communities
that target the industries identified beneath each community:
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SECTORS COMMUNITIES
- -------------------------------------------------------------------------------------------------------------------------------
ADVANCED
TECHNOLOGIES GROUP . AEROSPACE ONLINE . PLANT AUTOMATION.COM
(aerospaceonline.com) (plantautomation.com)
Serves Engineers, Managers, Government Officials Hardware and Software Used in Industrial
and Consultants in the Aerospace Industry Manufacturing Including Robotics and Automated
Control Systems
. AUTO CENTRAL.COM
(autocentral.com) . SEMICONDUCTOR ONLINE
Development and Design of Advanced Automotive (semiconductoronline.com)
Technologies Applications, Manufacturing and Processing of
Semiconductor Components
. COMPUTER OEM ONLINE
(computeroemonline.com) . TEST AND MEASUREMENT.COM
Design and Manufacturing of Computers and (testandmeasurement.com)
Computerized Electronic Devices Design, Manufacturing and Procurement of Test,
Measurement, Data Acquisition, Data Analysis and
. EMBEDDED TECHNOLOGY.COM Instrumentation Equipment
(embeddedtechnology.com)
Serves the Needs of Designers, Engineers, System
Integrators, Product Specifiers, Technical
Managers, Consultants and Others Involved in the
Design and Manufacturing of Embedded Systems,
Computers, Controls, Software and Devices
- -------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS GROUP . DIGITAL BROADCASTING.COM . PREMISES NETWORKS.COM
(digitalbroadcasting.com) (premisesnetworks.com)
Business and Technical Information about Video Facilities and Network Infrastructure Design and
and Digital Television Administration
. EC ONLINE . RF GLOBALNET
(econline.com) (rfglobalnet.com)
Design and Installation of Electrical and Information, Bookstore and Educational Center for
Voice/Data Systems Radio Frequency, Wireless and Microwave Engineers
. FIBER OPTICS ONLINE . WIRELESS DESIGN ONLINE
(fiberopticsonline.com) (wirelessdesignonline.com)
Design and Production of Fiber Optic Networks Design and Development of Wireless Communications
and Network Components Systems and Equipment
. PHOTONICS ONLINE . WIRELESS NETWORKS ONLINE
(photonicsonline.com) (wirelessnetworksonline.com)
Design and Manufacturing of Lasers, Optics, Design of Wireless Networks
Optoelectronics, Fiber Optics and Imaging Devices
- -------------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL GROUP . ELECTRICNET . PULP AND PAPER ONLINE
(electricnet.com) (pulpandpaperonline.com)
Electric Utility Industry Manufacturing, Processing and Treatment of Pulp
and Paper
. POLLUTION ONLINE
(pollutiononline.com) . SOLID WASTE ONLINE
Industrial Pollution Control (solidwaste.com)
Disposal of Solid Waste
. POWER ONLINE
(poweronline.com) . WATER ONLINE
Power Generation, Electric Utility Deregulation, (wateronline.com)
Emissions Control, Alternative Fuels, Power Municipal Water Supply and Municipal and
Industry Legislation Wastewater Treatment
. PUBLIC WORKS ONLINE
(publicworks.com)
Services Public Works and Municipal Maintenance
Professionals
- ------------------------------------------------------------------------------------------------------------------------------------
9
- -------------------------------------------------------------------------------------------------------------------------------
FOOD & PACKAGING
GROUP . BAKERY ONLINE . FOOD ONLINE
(bakeryonline.com) (foodonline.com)
Production and Procurement of Baking Ingredients Manufacturing and Processing of Food Products
. BEVERAGE ONLINE . MEAT AND POULTRY ONLINE
(beverageonline.com) (meatandpoultryonline.com)
Production and Procurement of Equipment used in Production, Procurement and Distribution of Meat
the Production of Beverages and Poultry Products
. DAIRY NETWORK.COM . PACKAGING NETWORK.COM
(dairynetwork.com) (packagingnetwork.com)
Production, Procurement and Distribution of Packaging for all Consumer and Industrial Products
Dairy Products
. FOOD INGREDIENTS ONLINE
(foodingredientsonline.com)
Manufacturing and Processing of Food Ingredients
- -------------------------------------------------------------------------------------------------------------------------------
FOODSERVICE/
HOSPITALITY GROUP . E-HOSPITALITY.COM . FOODSERVICE CENTRAL.COM
(e-hospitality.com) (foodservicecentral.com)
Serves those who Work in the Hospitality Market Strategic Management of Commercial and
Institutional Foodservice Industry Operations
- -------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE/
SCIENCE GROUP . BIORESEARCH ONLINE . HOSPITAL NETWORK.COM
(bioresearchonline.com) (hospitalnetwork.com)
Provides Information on Drug Discovery, Research Serves those Involved in Hospital Purchasing
and Development and Life Sciences
. LABORATORY NETWORK.COM
. DRUG DISCOVERY ONLINE (laboratorynetwork.com)
(drugdiscoveryonline.com) Production and Manufacturing of Laboratory
Information on Pharmaceutical Discovery and Equipment, Chemicals and Supplies
Development
. LONG TERM CARE PROVIDER.COM
. E-DENTAL.COM (longtermcareprovider.com)
(e-dental.com) Information for Professionals who Deliver
Serves those who Work in General Dentistry and Post-Acute Care
Related Fields
. MEDICAL DESIGN ONLINE
. HOME HEALTH PROVIDER.COM (medicaldesignonline.com)
(homehealthprovider.com) Design, Manufacturing and Procurement of Medical
Information on Medicare, Medical Assistance, Devices
Managed Care and Private Insurers
. NURSES.COM
(nurses.com)
Serves Nurses and Related Jobs
- -------------------------------------------------------------------------------------------------------------------------------
MANUFACTURING &
METALS GROUP . MACHINE TOOLS ONLINE . SURFACE FINISHING.COM
(machinetoolsonline.com) (surfacefinishing.com)
Provides Information on Machine Tools Provides information on Metal Finishing
. METROLOGY WORLD.COM . TOOLING ONLINE
(metrologyworld.com) (toolingonline.com)
Provides Information in Measurement, Inspection Provides Information on the Cutting Tools Industry
and Related Industries
. SAFETY ONLINE
(safetyonline.com)
Industrial and Environmental Safety
- -------------------------------------------------------------------------------------------------------------------------------
10
- -------------------------------------------------------------------------------------------------------------------------------
PROCESS GROUP . ADHESIVES AND SEALANTS.COM . OIL AND GAS ONLINE
(adhesivesandsealants.com) (oilandgasonline.com)
Manufacturing and Production of Adhesive, Production and Exploration of Oil and Gas
Sealant, and Grout Materials
. PHARMACEUTICAL ONLINE
. CHEMICAL ONLINE (pharmaceuticalonline.com)
(chemicalonline.com) Development, Design and Manufacturing of
Manufacturing and Processing Chemicals Pharmaceuticals
. HYDROCARBON ONLINE
(hydrocarbononline.com)
Processing Hydrocarbons and Petrochemicals
- ------------------------------------------------------------------------------------------------------------------------------------
PUBLIC SECTOR . GOVCON.COM
(govcon.com)
Provides Bidders Information on Federal
Government Contracts
- -------------------------------------------------------------------------------------------------------------------------------
SERVICE GROUP . HR HUB.COM . LOGISTICS ONLINE
(hrhub.com) (logisticsonline.com)
Information on Human Resource Issues Serves Logistics Directors, Managers, Vice
Presidents and Other Decision-Makers in Logistics
. PROPERTY AND CASUALTY.COM Divisions or Logistics-Service Companies
(propertyandcasualty.com)
Property and Casualty Insurance
- -------------------------------------------------------------------------------------------------------------------------------
TEXTILES AND APPAREL . TEXTILEWEB.COM
(textileweb.com)
Provides Information about the Textile Industry
- -------------------------------------------------------------------------------------------------------------------------------
FEATURES OF OUR VERTICAL TRADE COMMUNITIES
Listed below is a selection of features of a vertical trade community. Most
of the services listed below are available in each of our vertical trade
communities.
. Marketplace: Shopping resource containing books, software, video
products, access to auctions and business services center.
Professionals are able to purchase these products over the Internet.
. Product Center:
. Comprehensive Buyer's Guide: Fully searchable by product name and
supplier. In response to a key word search, companies serving the
industry are listed with storefront advertisers presented first.
Links to company storefronts allow users to research advertisers'
products and services, and send direct inquiries to advertisers
about pricing, delivery and product specifications (i.e.,
ultimately submit sales leads).
. Requests for Proposals/Quotations/Bids (RFQ/RFP): Internationally
posted projects open to bid.
. Consulting Services
. Product Showcase: Comprehensive resource for industry
professionals with information on the latest products in the
industry. Site editors act as independent third parties with
objective analysis of products and their uses.
. Suppliers: E-commerce centers where customers can make on-line
purchases and gather information on other business services.
. Storefronts: Where individual suppliers show products and
services along with links to their home pages.
. Business Service Centers: Access to business services from
suppliers and advertisers.
11
. News and Analysis: Current news and commentary by the vertical trade
community's editorial team. Includes feature articles and product case
studies; daily update of press releases and news stories targeted to each
respective industry.
. Resources: ''Freeware'' and demo-software download library, industry
association guides, real-time discussion forums for industry professionals;
bulletin boards; trade show information and other useful industry events.
. Career Center: Resume postings for job seekers, help-wanted listings,
employer descriptions, recruiters centers and career support material.
. Training: Course directory with on-line registration, on-line classes and
directory of class suppliers.
. ''Push'' Newsletters: Subscription-based e-mail services with specific
content focus. Subscribers are able to receive e-mail-based newsletters on
topics of interest to them.
. E-mail Service: Free e-mail accounts to users/registrants in each vertical
trade community. The addresses are indicative of the specific vertical
trade community (e.g., mark@poweronline.com). This service is provided by a
third- party partner and will be supported by the sale of advertising on
the e-mail pages.
FEATURES OF OUR STOREFRONTS
The following are descriptions of the features that are available on a
typical advertiser's storefront.
. Corporate Profile: Information on the advertiser's background and overview
of its products.
. Contact Us: Enables buyers and specifiers to request further information
via e-mail. Requests are often regarded as sales leads by advertisers.
Requests are typically for product pricing and other inquiries about
advertisers' products.
. Career Center: Advertisers list open employment opportunities.
. Purchase Online: Advertisers with e-commerce capabilities sell their
products online.
. Associated Articles: Feature articles, case studies and other informational
materials about the advertiser.
. Product Releases/More Products: New product announcements.
. Press Releases: Advertiser-issued press releases.
. Hyperlinked gateway into advertiser's Web site.
FEATURES OF OUR E-COMMERCE CENTERS AND CATALOGS
The following are descriptions of the features that are available on a
typical customer's e-commerce center.
. Company Logo and Introduction: Provides company and brand awareness.
. Catalog Features:
. Flexible catalog formats with search and browse capabilities
. Photos and product information
. Integrated shopping cart technology for on-line sales
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. Online Auction Link: Provides access to additional sales outlet.
. Career Center Links: Provides cost-effective means of getting highly-
job candidates.
. Hot Products: Introduces featured products to boost customer interest.
. Articles and Reviews: Provides customers product and company
developments
OUR VIRTUAL OFFICE
Our Virtual Office feature offers storefront advertisers the ability to
monitor and evaluate storefront and e-commerce center activity. Advertisers can
track the number of visitors and leads generated from a storefront or banner
advertisement. E-commerce center advertisers can track orders, billing, shipping
data, customer profiles and demographics. Virtual Office also serves as an
inquiry management tool for advertisers.
MARKETING AND DISTRIBUTION ALLIANCES
We have recently entered into the following alliances:
Microsoft Corporation
On January 17, 2000, we entered into a binding letter agreement with
Microsoft Corporation with respect to a strategic relationship. Under the terms
of the letter agreement, we agreed with Microsoft to a three-year commercial
relationship and an equity investment by Microsoft in VerticalNet.
On March 29, 2000, we entered into a definitive agreement with Microsoft
with respect to the commercial relationship. Our commercial relationship with
Microsoft has a three-year term during which Microsoft will purchase from us,
and then distribute to third party businesses, at least 80,000 of our
storefronts and e-commerce centers. We will assist Microsoft in distributing
30,000 of these storefronts and e-commerce centers. Microsoft will pay us a
minimum of approximately $161.9 million in the aggregate over the term for the
storefronts and e-commerce centers. Microsoft will provide the storefronts and
e-commerce centers it purchases from us to business customers for the 12 month
subscription period. For each customer, we will build the storefront or e-
commerce center to be placed on one of our vertical trade communities. Our
intent is that customers would purchase renewals of the storefront or e-commerce
center and additional storefronts or e-commerce centers on our other vertical
trade communities. If a customer then renews its storefront or e-commerce center
beyond the initial 12 month period, we will pay an amount to Microsoft based on
the aggregate amount of such renewals. We will also pay an amount to Microsoft
based on the amount of sales of additional storefronts and e-commerce centers on
other vertical trade communities. We will also pay to Microsoft an amount based
on the amount of the revenues we receive from transactions that take place on
the e-commerce centers distributed under the agreement. We will pay Microsoft an
aggregate of $60 million during the term for advertising and promotional
placements in The Microsoft Network and on Microsoft's bCentral website and, if
the pace of Microsoft's distribution of storefronts and e-commerce centers does
not meet agreed upon goals, additional amounts for advertising and promotional
placements not to exceed $15 million in the aggregate.
Microsoft will pay to us a portion of revenues from transactions that
occur in The Microsoft Network and on Microsoft's bCentral website and originate
via a link from our vertical trade communities or the VerticalNet home page.
Microsoft will pay us an aggregate of $60 million during the term for
advertising and promotional placements in our vertical trade communities. We
will pay Microsoft an aggregate of $18.5 million over the term to be directed
toward the development and enhancement of products and services relating to the
business-to-business marketplace and database software technology.
We will use commercially reasonable efforts during the term to adopt and
use Microsoft products to operate our vertical trade communities when
appropriate and feasible. We will pay Microsoft an aggregate of $56.5 million
over the term towards the licensing of Microsoft products and the provision of
Microsoft services.
13
In connection with the strategic relationship, and in accordance with the
letter agreement dated January 17, 2000, Microsoft will make an initial $100.0
million equity investment in VerticalNet through the purchase of shares of our
Series A 6% convertible redeemable preferred stock, which would be convertible
into 1,151,080 shares of our common stock. Microsoft will be entitled to
registration rights and will receive the right to nominate one member of our
board of directors. In addition, Microsoft will receive warrants entitling
Microsoft to purchase 1,500,000 shares of our common stock at an exercise price
of $69.50 per share. The share numbers and the exercise price mentioned in this
paragraph (along with other information in this report) are adjusted to reflect
the split of our common stock to be effected on or about March 31, 2000. We
expect that the equity investment by Microsoft in VerticalNet will close in late
March or April of 2000.
Community of Science
In December 1999, we created a strategic alliance with Community of
Science, a company that operates a portal for scientists and researchers.
Pursuant to the terms of a co-branding agreement, we have developed and
currently host and maintain Web sites on behalf of Community of Science.
Additionally, we made an $800,000 equity investment in Community of Science.
BioSupplies.com
In December 1999, we created a strategic alliance with BioSupplies.com, an
on- line marketplace for life-science research products. In accordance with the
terms of a co-branding agreement, we have developed a BioSupplies branded
version of LabX, our laboratory equipment auction community. Additionally, we
have committed to make a $1.4 million equity investment in BioSupplies.
Neoforma.com
In November 1999, we created a strategic alliance with Neoforma.com, a
provider of business-to-business e-commerce services in the market for medical
products, supplies and equipment. Pursuant to the terms of the agreement, our
users have access to Neoforma's on-line medical product catalog, while Neoforma
has access to our established sales force and e-commerce infrastructure.
Additionally, we made a $2.0 million equity investment in Neoforma. In January
2000, Neoforma consummated an initial public offering of its common stock.
Zillacast.com
In November 1999, we created a strategic alliance with Zillacast.com, a
provider of business-to-business Web casting and streaming video services.
Pursuant to the terms of the agreement, we have designed and developed and
currently host a Web site where its users and clients can learn about the
benefits of ZillaCast's services. Additionally, we made a $1.5 million equity
investment in ZillaCast.
RealNames Corporation
In November 1999, we entered into a two year marketing agreement with
RealNames Corporation that requires us to pay a $10.0 million license fee over
the term of the agreement. RealNames owns technology that simplifies Internet
navigation for users by eliminating the need to know a specific URL address. In
connection with the marketing agreement, RealNames agreed to purchase $8.0
million in newsletter sponsorships from us.
Tradex Technologies
In May 1999, we entered into discussions with Tradex Technologies, Inc.
regarding a possible licensing arrangement of its software technology as a
platform to power our digital marketplaces. We were unable to reach mutual
agreement with Tradex on certain terms of the licensing arrangement and a
definitive agreement was never executed. However, in connection with our initial
discussions with Tradex, we made a $1.0 million equity investment in Tradex in
July 1999. In December 1999, Tradex entered into an Agreement and Plan of
Reorganization with Ariba, Inc. On March 10, 2000, Ariba announced that it had
completed the acquisition of Tradex. Pursuant to the terms of the Agreement and
Plan of Reorganization, our investment in Tradex will be exchanged into
approximately 283,153 shares of Ariba's common stock.
14
IBM Agreement
In October 1999, we entered into an agreement with IBM pursuant to which we
promote IBM products and services across approximately 50 vertical communities.
IBM will work with its customers to create e-commerce solutions and integrate
those solutions into VerticalNet's communities. The contract requires IBM to
initially purchase 375 storefronts over a 12-month period.
Lycos Agreement
We have entered into a one year co-branding agreement with Lycos, the owner
and operator of a leading Internet search engine, to create co-branded versions
of each of our vertical trade communities. Lycos will place links on the Lycos
network to these co-branded sites and may place our original content on pages of
its network. If Lycos places any of our original content on pages of the Lycos
network, we will receive 30% of the net advertising revenue from such pages. We
are paying Lycos $1.0 million for the integration of our vertical trade
communities with Lycos's network and a click through fee for each user who
clicks on one of the links to our vertical trade communities from the Lycos
network. Additionally, each company will provide the other with $3.0 million in
barter advertising during the term of the agreement.
Metropolis Agreement
In June 1999, we entered into a three-year renewable co-branding agreement
with Metropolis, a South African company that creates on-line communities
throughout Africa, to create and operate at least ten vertical trade communities
focusing on the African market. These Africa-focused vertical trade communities
will contain our brand marks as well as those of Metropolis and will be either
based on our vertical trade communities or newly created vertical trade
communities. Metropolis paid us an initial set-up fee of $150,000 and an
additional $850,000 for 195 storefronts to be placed on our vertical trade
communities. Metropolis will pay us royalties for the use of our technology to
operate the Africa-focused vertical trade communities.
CUSTOMERS
As of December 31, 1999, nearly 1,795 companies, who have purchased over 2,900
storefronts, advertised in one or more of our vertical trade communities.
Customers advertising on our vertical trade communities included:
Asea Brown Boveri Ltd.
Avnet, Inc.
BetzDearborn Inc.
Canon U.S.A., Inc., Semiconductor Equipment Division
Caterpillar Inc.
Culligan Water Technologies, Inc.
Dresser Industries Inc., Instruments Division
Rosemount Analytical Inc.
FMC Corporation
Graybar Electric Co., Inc.
Hewlett-Packard Company
Honeywell Inc.
Ionics, Incorporated
Kimberly-Clark Corporation
Koch Industries, Inc.
Lucent Technologies Inc.
Microsoft Corporation
Milltronics, Inc.
Motorola, Inc.
Nokia Group, Inc.
Osmonics, Inc.
Raytheon Company
Richardson Electronics, Ltd.
Schlumberger Industries, Inc.
Siemens Microelectronics, Inc.
U.S. Filter Corporation
Visio Corporation
Waterlink, Inc.
Wheelabrator Air Pollution Control, Inc.
Zurich-American Insurance Group
15
During fiscal 1999, NECX transacted business with over 1,000 customers,
many of which are large multinational electronic hardware manufacturers.
For the years ended December 31, 1999, 1998 and 1997, no single customer
accounted for more than 10% of our revenues.
SALES AND MARKETING
Sales and Distribution
We use a variety of programs to stimulate demand for our products,
including telesales, a direct sales force and reseller arrangements with
advertising agencies.
Direct Sales: Our direct sales force targets organizations that sell the
products and services that are utilized and purchased by the professionals that
visit our vertical trade communities. As of December 31, 1999, we had 90 direct
sales and support personnel. We often employ individuals with a background in
advertising sales with trade publishing companies.
Telesales: We currently maintain an in-house telesales group for use in
customer prospecting, lead generation and lead follow-up. As of December 31,
1999, we had 28 people in our telesales group and we are expanding the products
sold by the group, such as job listings and banner advertisements.
International: We intend to market our products and services to
international markets directly over the Internet, as well as through resellers
and affiliate relationships. For the year ended December 31, 1999, we derived
approximately 5% of revenues from international customers, including exchange
sales. Approximately 44% of the visits to our vertical trade communities
originated outside the United States in 1999. We believe that the large
percentage of international users are attractive to advertisers who want to
reach customers globally. We are pursuing the global market through joint
ventures in Europe and Asia. Additionally, our exchange operations have sales
offices in Ireland and Sweden.
Marketing
We use a variety of marketing programs to increase brand awareness. Our
marketing goals are designed to create and enhance the awareness of each branded
vertical trade community as a destination for professionals in each industry
sector and to promote the VerticalNet brand with suppliers, media buyers and
interactive services companies. Our marketing strategy for each contains a mix
of print advertising, outbound e-mail, telemarketing, new media banner
campaigns, trade shows and direct mail. We also participate in industry specific
events, industry association activities and partnerships with interactive
services companies. We believe that forming strategic marketing and distribution
alliances with partners in the Internet, print publishing and industry
associations will be important for rapid market penetration.
TECHNOLOGY
VerticalNet Technology
We have developed and implemented a broad array of technologies, including
site management, search, customer interaction and transaction processing
systems, using a combination of our own proprietary technologies and
commercially available, licensed technologies. Approximately 20% of the
technology we currently use is licensed technology; the remaining 80% is
proprietary technology. We spent approximately $8.5 million in 1999, $1.4
million in 1998 and $711,000 in 1997 on product development. The amount for 1999
also includes internal software costs that were capitalized in accordance with
Statement of Position 98-1, Accounting for Costs of Computer Software Developed
or Obtained for Internal Use (see note 1 of the consolidated financial
statements).
16
For example, we developed an application available on our Web sites that
allows our clients to track the success of their advertising campaigns. We also
developed an application using the Microsoft Site Server Suite of development
tools that allows clients to sell products over the Internet. Our current
strategy is to license commercially available, non-strategic technology whenever
possible rather than invest in internally developed systems. We expect that such
technology will continue to be available at reasonable costs.
The scalable structure of our hardware and software is designed to allow
for rapid deployment of multiple vertical trade communities while maintaining
desired user performance standards. In the rapidly changing Internet
environment, the ability to update an application to stay current with new
technologies is important. Our template technology and component design allow
for the addition, modification or replacement of Web site based applications in
a cost-efficient and expeditious manner.
We have engineered the production environment at VerticalNet to provide
high availability through the use of redundant hardware and software where
prudent. A load-balancer distributes the incoming Web traffic among the multiple
servers. Additionally, firewall software is used to protect our Web servers from
unauthorized access. Our production machines are located at Exodus
Communications Inc., which provides professional data center hosting facilities
and redundant high-speed Internet connectivity. Exodus provides around-the-clock
monitoring and support, supplementing our system administrators.
We have developed our own content and Web site management tools to
facilitate the maintenance and updating of our vertical trade communities. Our
Web site management tools allow our editors to update our Web sites from remote
locations throughout the day.
Through our acquisition of Isadra, we plan to offer a knowledge-based
distributed catalog architecture. This architecture consists of a collaborative
commerce hub, a distributed business publisher agent and an ontology tool. With
the Isadra technology, we expect to be able to provide a fully scalable platform
that avoids the keying of supplier product information to facilitate an
aggregated catalog, and obtain real-time pricing and availability information.
We continue to enhance the proprietary Training Intelligence Portal ("TIP")
technology that we acquired in connection with the CertiSource purchase. This
technology was designed to enable commerce between buyers and sellers of
training products. The technology is backed by a Microsoft SQL Server V7
database.
TIPs are deployed within enterprise class clients and automate the
transactions associated with managing a training department and its training
activities, including class and student scheduling, registrations,
cancellations, confirmations, evaluation, billing, reporting and budgeting. The
technology allows sellers of the training products to lower their client
acquisition costs and better manage pricing and inventory. Suppliers are also
able to use this system to analyze purchasing statistics associated with each
client to determine and adjust their merchandising and pricing strategy.
NECX Information Technology Infrastructure
To date, NECX's technology efforts have focused on creating proprietary,
best- in-class systems. NECX has devoted significant effort to develop an open,
scalable technology platform that provides an easy-to-use experience for end-
customers. NECX's technical environment consists of its Web site, sales force
automation applications and back office business applications.
. Web site: NECX's Web site is an external customer-focused application. The
site displays product content, manufacturer information, product
descriptions, pricing and availability. The application also includes
features such as a searchable catalogue for integrated circuits, computer
products and peripherals; price trending (provides historical price
information both numerically and graphically); and NetCall (enables users
to immediately contact NECX's traders). Furthermore, users can send
requests to buy and/or sell products to sales representatives who fulfill
those requests The Web site can be found at www.NECX.com.
17
. Sales Force Automation: NECX uses proprietary technology to support our
sales representatives and buyers. The software provides NECX with the
ability to search global and in-stock product availability, view prices and
match supply with demand. Users can select products, perform side-by-side
comparisons, select alternatives, view product specifications and review
similar transactions executed by NECX over the past ten years.
. Back Office: The back office technology solution is focused on business
applications required to process customer, vendor and product data. To
support logistics, NECX incorporates an in-house developed warehouse
application, vendor provided shipping automation system and uses shipment
and package tracking services of the major carriers.
. Development Plan: We have engaged Computer Sciences Corporation to work
with NECX to design and integrate the next generation on-line platform for
the electronic components industry. Computer Sciences Corporation will
assist NECX in leveraging its back office and logistics infrastructure to
operate a comprehensive open-market sourcing and trading solution. NECX
expects to develop full on-line exchange capability which would integrate
its current Web site, its existing trading system, Tradeum technology and
components of the Oracle enterprise resource package system to provide a
transaction capable solution for customers who wish to conduct spot and
open market trading online. Trading formats will include catalog sales,
auctions and reverse auctions and a dynamic bid/ask exchange. NECX's
technology implementation plan calls for rolling out the on-line exchange
in three phases over 18 to 24 months beginning in the second half of 2000.
Additionally, NECX plans to develop a proprietary operations logistics
system to improve its ability to monitor all aspects of shipping logistics,
traffic control and customer service. This system will be integrated with
the new trading platforms.
Tradeum Technology
Tradeum helps create optimal, real-time trading environments for the
procurement of production or direct goods within a digital marketplace.
Tradeum's principal product is Xchange Suite, an XML and Java-based
commerce platform for building dynamic digital marketplaces that support
multiple transaction types, including auctions, exchanges and catalogs. Xchange
Suite enables multiple buyers, sellers and third parties to be matched real-time
on a parameter-by-parameter basis within a marketplace. A number of patents are
currently being prepared covering the architecture and detailed algorithmic
innovations of Xchange Suite.
Tradeum's solution is based on the Transaction Discovery(TM) model.
Transaction Discovery(TM) enables trading parties within each marketplace to
quickly find and transact the right bundle of products and services for their
unique requirements - including product features, financing and logistics.
Tradeum also provides its customers with a complete set of professional
service offerings, including front-end design, implementation and integration
services and back-end market hosting.
PROPRIETARY RIGHTS
Proprietary rights are important to our success and our competitive
position. To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws, confidentiality agreements with employees and
third parties and license agreements with consultants, vendors and customers.
Despite such protections, a third party could, without authorization, copy or
otherwise appropriate information from our vertical trade community sites. Our
agreements with employees, consultants and others who participate in development
activities could be breached. If so, we may not have adequate remedies for any
breach, and our trade secrets may otherwise become known or independently
developed by competitors.
We rely upon license agreements for the majority of our content and
technology. Such license agreements may not continue to be available to us on
acceptable terms, or at all. We do not, however, believe that we are dependent
upon any single licensor of technology or content.
18
As of March 20, 2000, we own and use 22 trademarks registered with the
United States Patent and Trademark Office ("PTO"). Additionally, we have 23
applications for registration of various trademarks pending with the PTO.
Outside of the United States, we own and use 6 trademarks registered with
various foreign patent and trademark offices and have 26 applications pending
with foreign patent and trademark offices. Generally, we cannot protect our Web
addresses for our vertical trade communities as trademarks because they are
considered "generic" under applicable law. The laws of some foreign countries do
not protect our proprietary rights to the same extent as do the laws of the
United States, and effective copyright, trademark and trade secret protection
may not be available in such jurisdictions.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property assets. Third parties may claim infringement by
us with respect to current and future products, trademarks or other proprietary
rights, or we may counterclaim against such parties in such actions. Any such
claims or counterclaims could be time-consuming, result in costly litigation,
diversion of management's attention, cause product release delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our business,
financial condition and operating results. Such royalty and licensing
agreements, if required, may not be available on terms acceptable to us, or at
all.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
We are subject to various laws and regulations relating to our business.
Few laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations may be adopted. Such laws and regulations may cover issues
such as:
. user privacy;
. freedom of expression;
. pricing;
. content;
. characteristics and quality of products and services;
. taxation;
. advertising;
. intellectual property rights, including domain name policies;
. access charges; and
. information security.
In addition, the growth of the Internet and e-commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional consumer protection laws or
regulations may impede the growth of the Internet, which could decrease our
potential revenues from e- commerce or otherwise adversely affect our business,
financial condition and operating results.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. Congress has recently enacted
Internet laws regarding on-line copyright infringement, restrictions on access
to materials deemed obscene or harmful to minors, and limitations on the online
collection of personal information from children under 13. Although not yet
enacted, Congress is considering laws regarding Internet commerce, content and
access. The European Union enacted new privacy regulations in October 1998.
These are recent enactments, and there is uncertainty regarding their
marketplace impact. In addition, various jurisdictions already have enacted laws
that are not specifically directed to e-commerce but that could affect our
business. The applicability of many of these laws to the Internet is uncertain
and could expose us to substantial liability.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could materially
adversely affect us. If we were alleged to violate federal, state or foreign,
civil or criminal law, even if we could successfully defend such claims, it
could materially adversely affect us.
On February 8, 2000, the United States Federal Trade Commission ("FTC")
commenced an informal inquiry into whether Doubleclick, Inc. had engaged in
unfair or deceptive practices as a result of Doubleclick's collection
19
and retention of information concerning Internet users. In addition, Doubleclick
is the defendant in several state and federal lawsuits brought by consumers
regarding Doubleclick's data collection and other business practices. We are not
subject to an FTC inquiry or any suits brought by consumers similar to those
brought against Doubleclick. We do, however, collect and retain some information
from users and visitors to our sites. Accordingly, depending on how the
Doubleclick matters are ultimately resolved, our future business practices may
be materially affected, as will those of many other commercial Web site
operators.
We believe that our use of third party material on our vertical trade
communities is permitted under current provisions of copyright law. However,
because legal rights to certain aspects of Internet content and commerce are not
clearly settled, our ability to rely upon exemptions or defenses under copyright
law is uncertain.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission in the same
manner as other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet service providers and on-line service providers in a manner similar to
long distance telephone carriers and to impose access fees on such providers. In
May 1997, however, the FCC confirmed that Internet service providers will
continue to be exempt from interstate access charges. In August 1998, the Eighth
Circuit Court of Appeals upheld the FCC's authority to maintain the exemption.
If the FCC were to withdraw the exemption or take other action responding to
telecommunications carrier concerns, the costs of communicating on the Internet
could increase substantially. This, in turn, could slow the growth in the use of
the Internet. Any such legislation or regulation could materially adversely
affect our business, financial condition and operating results.
COMPETITION
The market for vertical trade communities is new and rapidly evolving.
Competition for advertising, e-commerce and business users is intense and is
expected to increase significantly in the future. Technological barriers to
entry are relatively insubstantial. We believe that the principal competitive
factors for companies seeking to create vertical trade communities on the
Internet are targeted advertising, services and features, real-time information
access, quality sales leads, detailed user information, global reach and
business user affinity and loyalty. Several companies are primarily focused on
operating business-to-business trade communities on the Internet, but most
existing on-line competition is ancillary to the traditional business of trade
publishers, industry and trade associations and directory companies.
We will likely face intensified competition in the future from various
sources, including:
. traditional trade publishers--McGraw Hill and Reed Elsevier
. directory registry companies--Thomas Register
. companies with broadbased strategies relating to the Internet--SAP and
Oracle
. horizontal business to business companies--Ariba and Commerce One
. vertical communities with one industry focus--SciQuest, Anderson
Unicom Group
. vertical communities with multiple industry focus--Ventro
. Internet holding companies--Internet Capital Group, CMGI, divine
interVentures
. Internet electronic exchanges--Partminer, FastParts, Virtual Chip
Exchange
Further, our potential competitors may develop vertical trade communities
that are equal or superior to ours. We also compete with traditional forms of
business-to-business advertising and commerce, such as trade magazines, trade
shows, and trade associations for advertisers and advertising revenue. We also
compete with independent distributors that operate electronic exchanges.
We believe that the principal competitive factors in attracting advertisers
include the demographics of our users, our ability to offer targeted audiences
and the overall cost-effectiveness of the advertising medium offered by us. We
believe that the number of business-to-business Internet companies relying on
Internet-based advertising revenue will increase significantly in the future,
which would increase pricing pressure on our advertising rates.
20
EMPLOYEES
As of December 31, 1999, we had 669 employees, of which approximately 654
are located in the United States and approximately 15 are located outside of the
United States. We consider our relationships with our employees to be good. None
of our employees are covered by collective bargaining agreements.
EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
persons who were serving as executive officers as of March 15, 2000.
NAME AGE POSITION
- ------------------------------------ ------ ---------------------------------------------------------------
Mark L. Walsh....................... 45 President, Chief Executive Officer and Director
Michael J. Hagan.................... 37 Executive Vice President, Chief Operating Officer and Director
Gene S. Godick...................... 34 Senior Vice President and Chief Financial Officer
Blair LaCorte....................... 37 Senior Vice President, Strategy and e-Commerce
James W. McKenzie, Jr............... 40 Senior Vice President, General Counsel and Secretary
Dean Sivley......................... 42 Senior Vice President, Product Development and e-Commerce
Set forth below is biographical information about each of our executive
officers.
MARK L. WALSH has served as our President and Chief Executive Officer and
as one of our directors since August 1997. Prior to joining us, he was a Senior
Vice President and corporate officer at America Online, Inc. from 1995 to 1997.
He founded and managed AOL Enterprise, the business-to-business division of AOL.
Prior to his position with AOL, Mr. Walsh was the President of GEnie, General
Electric's online service from 1994 to 1995. He also was the President of
Information Kinetics, Inc., a venture capital backed interactive information
company focusing on the recruitment and classified advertising market from 1993
to 1994. He received his MBA from Harvard Business School and B.A. from Union
College of Schenectady, N.Y. He is the past chairman of the Interactive Services
Association. Mr. Walsh was a board member of the Information Industry
Association, a 500 member-company trade group for the business information
market. Mr. Walsh also serves as a director of worldwideangler.com, Investors
Broadcast Network, HiFusion.com and as an advisory board member of New York
Times Digital and Net Gift Registry, LLC.
MICHAEL J. HAGAN co-founded VerticalNet in 1995 and currently serves as our
Executive Vice President and Chief Operating Officer. He also serves as one of
our directors. Prior to our founding, Mr. Hagan was Vice President and Senior
Manager at Merrill Lynch Asset Management from 1990 to 1995. He served at
Merrill Lynch in the areas of finance, technology and accounting. Prior to that
time, Mr. Hagan worked for Bristol Myers Squibb from 1988 to 1990. Mr. Hagan
received a B.S. from St. Joseph's University and is a Certified Public
Accountant. Mr. Hagan also serves on the board of directors of eVulkan, Inc.
d/b/a beMANY!
GENE S. GODICK has served as our Chief Financial Officer since June 1998
and as a Senior Vice President since October 1999. Prior to joining us, he
worked from 1997 until 1998 as a senior manager at KPMG LLP, where he worked in
their information, communications and entertainment practice, with a focus on
high technology companies. During 1997, prior to joining KPMG LLP, Mr. Godick
provided consulting services advising companies on financing and turnaround
strategies. Prior thereto, Mr. Godick was hired in early 1994 as Chief Financial
Officer of Industrial Construction, Inc., a privately owned environmental
remediation firm, to help that firm remedy its financial problems. Industrial
Construction began experiencing financial difficulty in late 1993 due to poor
project management and a slowdown in the environmental remediation industry as a
whole. Mr. Godick was President and Chief Financial Officer of Industrial from
1996 until 1997. Industrial filed for Chapter 7 bankruptcy in May 1997 after
failing to achieve profitability or generate enough cash to continue operations.
From 1987 until 1994, Mr. Godick was an accountant and manager for Arthur
Andersen LLP's Enterprise Group, which provided services to emerging growth
companies in high technology, biotechnology and software. Mr. Godick also serves
on the board of directors of Novasoft Information Technology Corp. and Internos
Corporation. Mr. Godick received a B.S. from Villanova University and is a
Certified Public Accountant.
BLAIR LACORTE has served as our Senior Vice President of Strategy and e-
Commerce since January 1999 and was a consultant for us between October 1998 and
January 1999. From 1997 to 1998, Mr. LaCorte was the President
21
of the Internet Technology Group and Senior Vice President of Partnerships at
CADIS Inc., a software company specializing in e-commerce and procurement in
business-to-business markets. From 1993 to 1997, Mr. LaCorte held positions at
Autodesk where he founded three divisions, the last of which was Autodesk Data
Publishing, an electronic business-to-business publisher of engineering graphics
for design and procurement. Prior to his employment with Autodesk, from 1992 to
1993, Mr. LaCorte was Manager of Worldwide Strategy and Market Planning for Sun
Microsystems, and a Senior Consultant at Gemini Consulting where he specialized
in process engineering. In 1996, Mr. LaCorte was named one of the top ten
business-to-business marketers of the year by Business Marketing and Advertising
Age. He received a B.A. from the University of Maine, holds a FMP degree from
General Electric and an MBA from the Amos Tuck School at Dartmouth College. Mr.
LaCorte serves on the board of directors of DecisionPoint Systems, BrainPower
and HotSamba, Inc.
JAMES W. MCKENZIE, JR. has served as our Senior Vice President, General
Counsel and Secretary since January 2000. From October 1995 to January 2000, Mr.
McKenzie was a partner of Morgan, Lewis & Bockius LLP. Between October 1987 and
September 1995, Mr. McKenzie was an associate of Morgan, Lewis & Bockius LLP. He
received an A.B. from Dartmouth College, an MBA from The Wharton School at the
University of Pennsylvania and a JD from the University of Pennsylvania Law
School.
DEAN SIVLEY has served as our Senior Vice President of Product Development
and e-Commerce since November 1999. Prior to joining VerticalNet, Mr. Sivley was
the President and Chief Executive Officer of Atlas Travel Technologies Inc., an
Internet company for booking leisure vacation packages online, where he was
employed between November 1997 and November 1999. From September 1995 to
November 1997, he was the Vice President of Marketing and Chief Information
Officer at Rosenbluth International. Prior to such time, Mr. Sivley held
numerous operative positions with Duracell Batteries for over 14 years. Mr.
Sivley received a B.S. from the University of Wisconsin - Parkside and an MBA
with honors (Beta Gamma Sigma) from Columbia University.
ITEM 2. PROPERTIES
Our corporate headquarters are located in an office facility at 700 Dresher
Road in Horsham, Pennsylvania, where we lease approximately 58,863 square feet
for a monthly fee of $75,222 under a lease that expires in September 2009. The
total obligation under the lease is approximately $9.0 million. We also lease
sales and editorial offices in Parsippany, New Jersey; Washington, D.C.;
Deerfield, Illinois; Palo Alto and San Francisco, California; Houston, Texas;
Greensboro, North Carolina and Boulder, Colorado. NECX, our exchange operation,
is headquartered in Peabody, Massachusetts where we lease approximately 51,800
square feet for a monthly fee of $100,000 under a lease that expires in December
2004. NECX also has sales offices in Sweden and Ireland.
We maintain most of our computer systems in a leased Web-hosting facility
in New Jersey. We entered into a one year services agreement relating to the
facility that expires on July 31, 2000 for a monthly rent of $7,550.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS'
Our common stock is traded on the Nasdaq National Market under the symbol
"VERT." The following table sets forth, for the periods indicated, the range of
the high and low closing sales prices of our common stock as reported on the
Nasdaq National Market.
HIGH LOW
-------- --------
FISCAL YEAR 1999
First Quarter (from February 11, 1999) $27.13 $ 8.75
Second Quarter 35.00 14.17
Third Quarter 28.77 14.63
Fourth Quarter 86.00 19.86
The prices above have been restated to reflect two separate two-for-one
stock splits, each effected in the form of a stock dividend. The record dates
for our stock splits were August 9, 1999 and March 17, 2000.
At March 15, 2000, we had 245 shareholders of record.
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
expand our business. Any future determination to pay cash dividends will be at
the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant.
During the fourth quarter, we sold the following unregistered securities
pursuant to the following transactions:
. On December 16, 1999, we issued $70.0 million of convertible notes to
NECX Exchange Trust in exchange for assets acquired and liabilities
assumed. These notes are convertible into our common stock based upon
the average market price of our common stock during the 20 trading
days immediately prior to the date on which the Securities and
Exchange Commission declares effective a registration statement
covering the shares of common stock underlying the notes. If these
notes were converted on November 16, 1999, the date on which we signed
the definitive agreement to acquire NECX, the notes would have
converted into 2,008,738 shares of our common stock.
. On December 29, 1999, we issued 76,600 shares of our common stock
valued at $6.1 million in connection with the acquisition of
TextileWeb, Inc., in exchange for the assets acquired and liabilities
assumed.
. On December 29, 1999, we issued 150,000 shares of our common stock
valued at $12.0 million in connection with the acquisition of GovCon,
Inc., in exchange for the assets acquired and liabilities assumed.
These transactions were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The transactions were privately negotiated
and did not include any general solicitation or advertising. Each purchaser
represented that he, she, or it was acquiring the shares without a view to
distribution and was afforded an opportunity to review all publicly filed
documents and to ask questions and receive answers from our officers.
On February 10, 1999, the Securities and Exchange Commission declared
effective a registration statement (Commission file no. 333-68053) covering 16.1
million shares of our common stock in connection with our initial public
offering. From the effective date of the registration statement to December 31,
1999, approximately $38.6 million and $19.6 million of the net proceeds were
used for acquisitions of other businesses (including transaction costs) and
working capital, respectively. The use of proceeds listed above is based on our
reasonable estimates. The
23
payments were direct or indirect payments to persons other than (i) directors,
officers or their associates; (ii) persons owning ten percent (10%) or more of
our common stock; or (iii) affiliates.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the related
notes thereto, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
JULY 28, 1995
Year Ended December 31, (INCEPTION) TO
DECEMBER 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ---------------
(in thousands, except share and per share data)
Statement of Operations
DATA:
Exchange sales transactions............ $ 16,501 $ -- $ -- $ -- $ --
Cost of exchange transactions 14,171 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net exchange revenue.................. 2,330 -- -- -- --
Advertising and e-commerce
revenues.............................. 18,428 3,135 792 285 16
----------- ----------- ----------- ----------- ----------
Combined revenues...................... 20,758 3,135 792 285 16
----------- ----------- ----------- ----------- ----------
Expenses:
Editorial and
operational ........................ 8,611 3,238 1,056 214 24
Product development ................. 7,396 1,405 711 214 22
Sales and marketing ................. 26,269 7,895 2,301 268 147
General and
administrative ..................... 11,887 3,823 1,388 291 33
Amortization expense ................ 7,819 283 -- -- --
In-process research and
development charge .................. 13,600 -- -- -- --
----------- ----------- ----------- ----------- ----------
Operating loss ...................... (54,824) (13,509) (4,664) (702) (210)
Interest, net and other
income .............................. 1,344 (85) (115) (7) (1)
----------- ----------- ----------- ----------- ----------
Net loss ............................ $ (53,480) $ (13,594) $ (4,779) $ (709) $ (211)
=========== =========== =========== =========== ==========
Basic and diluted net loss
per share .......................... $(0.86) $(1.32) $(0.47) $(0.07) $(0.05)
Shares outstanding used in
basic and diluted net loss
per share calculation .............. 62,391,416 10,282,200 10,107,460 10,334,592 4,386,716
Pro forma basic and diluted
net loss per share(1) ............ $(0.80) $(0.32) $(0.19) $(0.05) $(0.05)
Shares outstanding used in
pro forma basic and
diluted net loss per share
calculation ....................... 66,658,742 42,541,956 24,737,304 13,305,136 4,386,716
- ----------
(1) Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
convertible preferred stock issued prior to our initial public offering as if
converted at the original issuance date. All of such convertible preferred
stock was converted into our common stock on the date of our initial public
offering.
24
The following balance sheet data is presented on an actual basis.
As of December 31,
------------------------------------------------------------
------------ -------------- --------------- -------------
1999 1998 1997 1996
------------ -------------- --------------- -------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents ........... $ 14,254 $ 5,663 $ 755 $ 329
Working capital (deficit) ........... 69,878 938 (2,536) 150
Short-term investments................ 44,131 -- -- --
Long-term investments................. 16,885 -- -- --
Other investments..................... 6,700 -- -- --
Total assets . ...................... 340,904 12,343 2,104 637
Short-term borrowings . ............. 1,372 2,288 2,651 --
Deferred revenues . ................. 9,768 2,177 710 216
Long-term debt, less current portion . 116,750 5,352 400 167
Total shareholders' equity (deficit) 178,397 (276) (2,424) 105
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with the consolidated financial
statements and the related notes thereto appearing elsewhere in this report.
OVERVIEW
We currently own and operate 55 vertical trade communities on the Internet.
We sell storefront and banner advertising and newsletter sponsorships on our
vertical trade communities. The duration of storefront and banner advertisements
is typically for a period of one year, although a few contracts are for multiple
years. All advertising revenues are recognized ratably over the period in which
the advertisement is displayed, provided that collection is reasonably assured.
Revenues from newsletter sponsorships are recognized when the newsletters are e-
mailed. As of December 31, 1999, we had approximately $9.8 million of deferred
revenues.
We also generate revenues from career, auctions, education services and e-
commerce centers. We offer for sale to our visitors: books, software, videos,
on-line classes and other goods offered by third party Web sites. Additionally,
we offer auction sites with goods posted by inventory liquidators. We receive a
portion of the revenue generated from the products sold on our commerce center
storefronts and our auction sites.
In 1999, we also entered into a number of strategic co-marketing agreements
where we were responsible for creating co-branded sites. Revenues from the
development of these sites are recognized as earned. Additional revenues from
advertising and maintenance services are recognized as earned over the term of
the contract.
In December 1999, we acquired NECX, a business-to-buinsess market maker for
the electronic components and hardware markets. NECX acts as a third party
intermediary, purchasing electronic hardware and components from various vendors
for resale to foreign and domestic companies. The exchange operates quickly and
anonymously to match buyers' and suppliers' needs, providing a solution to
inventory imbalances that result from over-capacity or shortages within existing
contractual relationships. Exchange revenues are recognized when products are
shipped to customers. We reflect gross revenues and related product costs of
exchange transactions in our consolidated financial statements since NECX takes
title to the products exchanged in such transactions and is exposed to both
inventory and credit risk related to the execution of the transactions. However,
we believe that the amount of net revenue resulting from exchange transactions
is an important performance measure for the exchange business, and have
presented this amount as a subtotal in the consolidated statements of
operations.
Although advertising revenues contributed the majority of our revenues for
the year ended December 31, 1999, it is expected that net revenue from the
exchange business will become a substantial portion of our total revenues in the
future.
25
We plan to expand and improve our e-commerce capabilities through:
. selling goods and services promoted on our advertisers' storefronts
and e- commerce centers;
. auctions;
. electronic marketplaces;
. additional exchanges; and
. selling goods and services from our proprietary virtual store.
In these types of transactions, we receive either a fee per transaction, a
percentage of sales revenue or some other minimum guaranteed payment. To date,
we have not derived a significant portion of our revenue from these types of
transactions; however, this type of revenue sharing or commission sharing
relationship is typical of e-commerce transactions and relationships on the
Internet.
We incurred net losses of approximately $53.5 million for the year ended
December 31, 1999, $13.6 million for the year ended December 31, 1998 and $4.8
million for the year ended December 31, 1997. At December 31, 1999, we had an
accumulated deficit of $72.8 million. The net losses and accumulated deficit
resulted from our lack of substantial revenues, the costs of our significant
infrastructure expansion, the costs related to acquisitions, including
amortization expense and an in-process research and development charge, and
other costs incurred for the development of vertical trade communities and
additional community features. Because of our aggressive expansion plans, we
expect to incur significant operating losses for the foreseeable future.
Although we have experienced revenue growth in recent periods, such growth may
not be sustainable and should not be considered indicative of future
performance. We may never achieve significant revenues or profitability, or if
we achieve profitability, it may not be sustained.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998
Revenues. Combined revenues were $20.8 million for the year ended December
31, 1999 and $3.1 million for the year ended December 31, 1998. The increase in
revenues was due primarily to an increase in (i) the number of storefronts from
1,300 as of December 31, 1998 to 2,900 as of December 31, 1999 and (ii) the
number of vertical trade communities from 33 as of December 31, 1998 to 55 as of
December 31, 1999. Advertising revenues, including the development of the
storefronts, accounted for the majority of revenues for the years ended December
31, 1999 and December 31, 1998. The operations of NECX, which was acquired in
December 1999, contributed approximately $2.3 million of net exchange revenues
for the fiscal year ended December 31, 1999. At December 31, 1999, we had
deferred revenues of $9.8 million. We expect that net exchange revenue will
begin to account for a substantial portion of our total revenues in the future.
Editorial and Operational Expenses. Editorial and operational expenses
consist primarily of Internet connection charges, cost of acquired content,
depreciation, salaries and benefits of operating and editorial personnel and
other related operating costs. Editorial and operational expenses were $8.6
million for the year ended December 31, 1999 and $3.2 million for the year ended
December 31, 1998. From the year ended December 31, 1998 to the year ended
December 31, 1999, expenses increased by $4.6 million for salaries and benefits
of operating and editorial personnel and $800,000 for other related operating
costs, including depreciation, direct product costs, internet connections,
acquired content and other miscellaneous costs. Increases were primarily related
to additional personnel required to maintain a larger number of vertical trade
communities. We expect editorial and operational costs to increase as we
continue to hire additional editors for new verticals and additional operational
personnel to maintain the new features that are being added to our vertical
trade communities.
Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related
expenditures. Product development expenses were $7.4 million for the year ended
December 31, 1999 and $1.4 million for the year ended December 31, 1998. From
the year ended December 31, 1998 to December 31, 1999, expenses increased by
$3.7 million for salaries and benefit costs, $1.3 million for consulting
expenses and $1.0 million for other expenditures, including recruiting costs,
depreciation, travel and other miscellaneous costs. This increase in expenses
resulted primarily from increased staffing and the costs of enhancing the
features, content and services of our vertical trade communities, as well as
increasing the overall number of trade communities. Continued investment in
product development is critical to attaining our goals and we
26
expect product development expenses to increase significantly in the future. In
1999, we began capitalizing certain internal software development costs as
required by Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel,
advertising, travel and entertainment, including the costs of attending trade
shows. Sales and marketing expenses were $26.3 million for the year ended
December 31, 1999 and $7.9 million for the year ended December 31, 1998. From
the year ended December 31, 1998, expenses increased by $7.2 million for
advertising including barter expense, $8.6 million for salary, commissions and
benefits, and $2.6 million for travel and entertainment expenses (including
tradeshow attendance) and other expenses, including depreciation, recruiting
costs and other miscellaneous costs. This was primarily due to increasing the
number of sales and marketing personnel, increased sales commissions and
increased expenses related to promoting our vertical trade communities. NECX's
operations contributed approximately $1.0 million to fiscal year end sales and
marketing expenses related primarily to personnel and brand advertising. We
expect these expenses will continue to grow significantly, as we pursue an
aggressive growth strategy and hire additional sales and marketing personnel for
both our vertical trade communities and the newly acquired exchange operations.
Additionally, we plan to focus heavily on branding and advertising for both our
vertical trade communities and our exchange platforms.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, legal, human resources and business development
personnel, as well as support services and professional service fees. General
and administrative expenses were $11.9 million for the year ended December 31,
1999 and $3.8 million for the year ended December 31, 1998. Between December 31,
1998 and December 31, 1999, expenses increased by $2.0 million for salaries and
benefits costs, $1.3 million for professional fees, $1.9 million for facility
costs, $500,000 for depreciation and $2.4 million for other general and
administrative costs including recruiting, bad debt, travel and entertainment
and other miscellaneous costs. These increases were due primarily to increased
staffing levels, higher facility costs, including supporting offices of newly
acquired businesses, and professional fees to support the growth of our
infrastructure. NECX's operations contributed approximately $1.2 million to
general and administrative expenses, primarily in facility costs and salaries,
for the year ended December 31, 1999. We expect to hire additional support
personnel as we develop new vertical communities, expand business services and
newly acquired businesses, specifically the exchange operations.
Amortization Expense. Amortization expense consists primarily of goodwill
resulting from acquisitions. Also included in amortization expense are the
amortization of capitalized intangible assets such as covenants-not-to-compete,
assembled workforces, strategic relationships and acquired technologies obtained
from acquisitions. Amortization periods for goodwill range from 36 to 60 months
due to constantly changing technology. Amortization expense was $7.8 million for
the year ended December 31, 1999 and $283,000 for the year ended December 31,
1998. The increase in amortization expense is attributable primarily to the
eleven acquisitions we completed during the year ended December 31, 1999.
Amortization expense is expected to increase as we continue our acquisition
strategy.
In-Process Research and Development Expense. A one time non recurring
charge of $13.6 million for in-process research and development was expensed in
August 1999. The in-process research and development written-off relates to the
acquisition of Isadra.
Interest, Net. Interest income net of expense includes income from our cash
and cash equivalents and from investments and expenses related to our financing
obligations. We incurred net interest expense of $85,000 (net of $212,000 of
interest income) for the year ended December 31, 1998 and generated net interest
income of $1.3 million (net of $2.1 million of interest expense) for the year
ended December 31, 1999. The net increase is due to the higher investment
balances held during fiscal year 1999 from cash raised in the initial public
offering and our convertible debt offering. Interest expense increased during
the period because of our outstanding convertible debt. We invest the majority
of our cash balances in debt instruments of the United States Government and its
agencies, and in high-quality corporate issuers.
Income Taxes. As of December 31, 1999, we had approximatel