-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P0qYy9rTZJKeq5Q88R5GBDNqUYkxJbe2o8ecG2hzH6IYxoDcCBhMJ1Bh6KQINqgp Bq4QIVe46PgBIVpS4B0IDQ== 0000893220-02-000402.txt : 20020415 0000893220-02-000402.hdr.sgml : 20020415 ACCESSION NUMBER: 0000893220-02-000402 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERTICALNET INC CENTRAL INDEX KEY: 0001043946 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 232815834 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25269 FILM NUMBER: 02597627 BUSINESS ADDRESS: STREET 1: 700 DRESHER RD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2153286100 MAIL ADDRESS: STREET 1: 700 DRESHER RD CITY: HORSHAM STATE: PA ZIP: 19044 10-K405 1 w58938e10-k405.txt FORM 10-K405 - VERTICALNET, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
------------------------ COMMISSION FILE NUMBER 000-25269 VERTICALNET, INC. PENNSYLVANIA 23-281834 - ------------------------------------ ------------------------------------ (STATE OF INCORPORATION) (I.R.S. ID)
300 CHESTER FIELD PARKWAY MALVERN, PENNSYLVANIA 19355 (610) 240-0600 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. [X] The aggregate market value of common stock held by non-affiliates of the registrant as of March 15, 2002 was approximately $70,486,742. The number of shares outstanding of the registrant's common stock as of March 15, 2002 was 115,224,458. 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 June 2002, 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VERTICALNET, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 INDEX
PAGE ---- Cautionary Statement Regarding Forward-Looking Statements............. ii Informational Note Regarding Prior Stock Splits....................... ii PART I ITEM 1. Business.................................................... 1 ITEM 2. Properties.................................................. 15 ITEM 3. Legal Proceedings........................................... 15 ITEM 4. Submission of Matters to a Vote of Security Holders......... 17 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 17 ITEM 6. Selected Financial Data..................................... 18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 19 Factors Affecting our Business Condition.................... 38 ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk... 46 ITEM 8. Financial Statements and Supplementary Data................. 48 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................................... 91 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 91 ITEM 11. Executive Compensation...................................... 91 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 91 ITEM 13. Certain Relationships and Related Transactions.............. 91 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 92 Signatures............................................................ 95
i CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The information in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Words such as "may," "might," "will," "would," "should," "could," "project," "estimate," "pro forma," "predict," "potential," "strategy," "anticipate," "plan to," "believe," "continue," "intend," "expect" and words of similar expression (including the negative of any of the foregoing) are intended to identify forward-looking statements. Additionally, forward-looking statements in this report include statements relating to the design, development and implementation of our products; the strategies underlying our business objectives; the benefits to our customers and their trading partners of our products; our liquidity and capital resources; and the impact of our acquisitions and investments on our business, financial condition and operating results. Our forward-looking statements are not meant to predict future events or circumstances and may not be realized because they are based upon current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from those currently expected as a result of these risks and uncertainties. Factors that may cause or contribute to a difference between the expected or desired results and actual results include, but are not limited to, the availability of and terms of equity and debt financing to fund our business; our reliance on the development of our enterprise software business; the timing and terms of any sale of our SMB unit; competition in our target markets; economic conditions in general and in our specific target markets; our ability to use and protect our intellectual property; and our ability to attract and retain qualified personnel, as well as the risks discussed in the section of this report entitled "Factors Affecting our Business Condition." Given these uncertainties, investors are cautioned not to place undue reliance on our forward-looking statements. We disclaim any obligation to update these factors or to announce publicly the results of any revisions to any of the forward-looking statements contained in this report to reflect future events or developments. INFORMATIONAL NOTE REGARDING PRIOR STOCK SPLITS Information in this report has been adjusted to reflect two separate two-for-one splits of our common stock, the first of which was effected on August 20, 1999 and the second of which was effected on March 31, 2000. ii PART I ITEM 1. BUSINESS Verticalnet, Inc., which was incorporated on July 28, 1995 under the laws of Pennsylvania, is referred to throughout this report as "Verticalnet," "the registrant," "we," "us" or through similar expressions. For financial information about our reportable business segments, we refer you to our consolidated financial statements and the related notes thereto found in Item 8 of this report. We are a leading provider of collaborative supply chain solutions that enable companies, and their supply and demand chain partners to communicate, collaborate, and conduct commerce more effectively. With a comprehensive set of collaborative supply chain software applications including spend management, strategic sourcing, collaborative planning, and order management, we offer a broad integrated supply chain solution delivered through a multi-party platform. With our completion of the acquisition of Atlas Commerce in December 2001 and the February 2002 announcement of our decision to sell our Small/Medium Business ("SMB") unit that operates and manages the 59 industry-specific on-line marketplaces, we have completed a business transformation from our origins as an operator of online public vertical communities to a business solely focused on delivering supply chain solutions to enterprise customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Company Overview" for a discussion of the significant changes in our business in 2001. COMPANY OVERVIEW Collaborative Supply Chain Solutions Our collaborative supply chain solutions enable companies and their entire network of business partners to reap the benefits of working together and sharing information. Verticalnet(TM) Strategic Sourcing, Collaborative Planning, and Order Management enable supply- and demand-chain partners to communicate, collaborate and conduct commerce more effectively and efficiently on a global scale. A collaborative supply chain is composed of a company and its customers, distributors, contract manufacturers and multiple tiers of suppliers, all securely connected to enable the rapid sharing of important, time-sensitive information about demand, supply, inventory and orders, and the sharing of workflow across the entire network of business partners to improve business performance. Verticalnet(TM) Strategic Sourcing Our strategic sourcing solution helps an enterprise analyze all of its purchasing -- across disparate divisions, locations and information systems. Our software highlights areas where companies can save money and also helps them identify and negotiate with suppliers. Additionally, our strategic sourcing solution enables our customers to measure and report on supplier performance, savings and other pertinent aspects of the sourcing process. Companies that implement our strategic sourcing solution can save on direct and indirect materials purchases. Verticalnet(TM) Collaborative Planning Our collaborative planning solution communicates changes in market demand throughout the supply chain on a real-time basis, increasing information visibility and velocity across multiple layers of the supply chain. Instead of waiting weeks for information to flow through multiple planning systems, supply chain partners receive and can react to changes immediately, revising production plans and coordinating with their suppliers to optimize production and customer service. Everyone within an extended supply chain has access to timely, relevant, critical information. Traditionally, organizations deal with stagnant information by holding excess inventory. Our collaborative planning solution gives companies and their suppliers access to accurate and timely information that they can use to reduce excess inventory levels. 1 Verticalnet(TM) Order Management Our order management solution enables companies to ensure that the right amount of the right products and materials gets to the right place at the right time by optimizing complex, global supply chain processes such as outsourced manufacturing, vendor-managed inventory, and multi-currency, multi-company order management. Our order management software can help companies improve the time it takes to fill their orders and reduce the cost of their order processing and materials. Competitive Advantage Over the past several years, we have developed a suite of integrated, multi-enterprise software applications that co-exist with the existing information technology (IT) infrastructures of our customers. The technology behind this suite of applications, our eXtended Enterprise Management Foundation, allows us to offer solutions that we believe are more effective, as well as faster and easier to implement than those of our competitors. Our entire suite of collaborative supply chain applications operates in a non-intrusive layer above a company's IT infrastructures, and takes advantage of that infrastructure, unlike other solutions that require a company to replace their existing technology or make extensive system modifications. We believe our solutions provide the following benefits: Multi-enterprise: - Extensive sharing of data and business processes among and across businesses. - Inexpensive integration through the Internet -- no software is required for trading partners. Our system is available throughout the world using a standard web browser. Non-intrusive: - Our software extends the value of a company's existing supply chain and enterprise resource planning systems to include supply chain trading partners. Our non-invasive solutions help businesses achieve the full value they may not have been able to achieve using their existing systems, without disrupting the current systems. Secure and Scalable: - Scalable technology, which a customer has used to connect over 10,000 of its buyers and suppliers at one time. - Built-in security rules ensure that information is seen only by the trading partners who are supposed to have access to it, and in the right format, language and currency. Fast: - Implementation of our software ranges from 3 to 6 months. - With rapid implementation our solutions can provide a more rapid return on the investment in our software. Value Proposition Our solutions should deliver measurable, sustainable value to our customers. We believe our applications improve both our customers' financial performance and the customer satisfaction for our customers and their trading partners in their business transactions: Income Statement: - Revenues can increase because of a better inventory in-stock position and faster response to demand changes. - Costs of goods sold can decrease because of more effective purchasing and reduced inventory obsolescence write-offs due to better supply planning. 2 - General and administrative costs can decrease because of increased automation, reduction in planning and order cycle-times, and a reduction in planning and order errors. - Interest and financing costs can decrease because of reductions in capital needed to finance excess inventory and buffer stocks. Balance Sheet: - Inventory can decrease because of better ability to see anticipated demand, allowing for direct reductions in buffer stocks. Greater visibility spans the entire supply chain, which can provide better supply and demand collaboration and reduced supplier lead times. Customer Satisfaction: - Customer satisfaction can increase due to higher order-fill rates, on-time deliveries and a reliable supplier base. OUR SOLUTIONS We offer three collaborative supply chain solutions: strategic sourcing, collaborative planning and order management. We have designed each one to address a specific set of supply chain challenges. All three applications are architected on our eXtended Enterprise Management Foundation. Strategic Sourcing Solution Overview Verticalnet(TM) Strategic Sourcing provides an enterprise with the ability to see where and how spending occurs across its entire enterprise. Our software extracts this information from a customer's disparate divisions and different information systems. Our solution provides this visibility to customers on a real-time basis, without costly modifications to their existing technology systems and business processes. Our solution has easy-to-use analytical reports, charts, and graphs to make it simple for procurement and financial professionals to aggregate spend across divisions, suppliers, and locations. We also deliver on-line sourcing mechanisms that help an enterprise complete faster sourcing cycles among broader sets of suppliers to increase competition for selecting suppliers, to analyze bids and to negotiate contracts. Finally, our software helps customers manage the performance of their supplier base and procurement organization so they can manage the performance of their suppliers and manage contracts to realize their full value. We offer a full suite of strategic sourcing capabilities. We believe that offering a full suite separates us from solutions targeted at a narrow sourcing problem or a single division. We offer strategic sourcing that serves as a starting point for enhancing the value of the collaborative supply chain. We believe there are two differences that set us apart from other competitors offering strategic sourcing solutions: - We provide cross-enterprise views of both spending activity and supplier activity, pulling data from disparate systems and normalizing this data on an as needed basis. This allows a customer to identify the best opportunities for sourcing and to monitor its supplier management processes. - We enable suppliers to quickly and seamlessly connect to a trading community for sourcing events. This improves our customer's flexibility to include different suppliers and decreases difficulties that suppliers may have in participating. Where other solutions require a predefined supplier set for each sourced category, our technology allows easy integration and flexible supplier involvement. 3 Our applications enable the customer to approach the strategic sourcing process in three steps, designed to bring them continuous improvement through better sourcing decisions and more proactive sourcing behavior: - Identify savings, through our spend management solution - Realize savings, through our sourcing events solutions - Maintain savings, through our spend management solution Identify Savings Our software enables procurement professionals and executives to see and analyze spend information across the entire enterprise. Verticalnet(TM) Spend Management aggregates and normalizes spend information from multiple systems -- allowing robust spend analysis without disrupting a customer's existing information technology infrastructure. We believe the benefits of this application include the following: - A single view of spend activities across the entire enterprise - On-demand access to timely spend data -- providing new cost structure insights, and enabling faster, more efficient sourcing cycles - Rapid identification of time sensitive cost savings opportunities - Ability to monitor supplier price/cost performance - Ability to maintain divisional data integrity (naming conventions, stock keeping unit numbering) while gaining enterprise visibility - No changes to existing enterprise resource planning and/or legacy systems Verticalnet(TM) Spend Management provides the insight and analytics to measure ongoing purchasing behavior, resulting in optimized sourcing decisions. We include reporting and analytical capabilities with our spend management solution. This provides our customers with the ability to see where and how they are spending throughout the world, identify supply management problems, highlight opportunities to reduce costs, support supplier negotiations, monitor savings, and measure supply management effectiveness. Realize Savings We developed Verticalnet(TM) Sourcing Events to help customers realize savings by automating their sourcing business processes and providing most of their sourcing alternatives, from auctions and catalogs to sophisticated online negotiations among multiple parties. These include: request for information (RFI), requests for quotation (RFQ), request for proposal (RFP), auction, structured negotiations, bid analysis, and contract awarding. We support sourcing processes for indirect goods, direct materials, and finished goods. Our customers can create value by effectively communicating requirements to potential suppliers, then negotiating the best strategic terms to minimize total costs. Our software offers the ability for our customer's authorized suppliers to gain visibility into any request for quotation or sourcing, even for products that they may not currently be selling to the company. Our technology enables seamless management of suppliers in a sourcing community, allowing for any qualified supplier to participate in any sourcing event. We believe this increases the speed with which sourcing events can be completed, and leads to participation by a greater number of potential suppliers, which delivers significant potential cost savings for our customers. 4 Maintain Savings After sourcing cycles are complete, Verticalnet(TM) Spend Management helps a customer's organization monitor and manage the performance of its supplier base. Spend management features include supplier scorecards and contract management. Our flexible supplier scorecard solution allows a customer to collect supplier performance information from disparate enterprise systems and create scorecards to measure supplier performance. Supplier scorecards include company-specific performance criteria, such as pricing, service levels, quality, and on-time shipments. Supplier scorecards also include weightings for each criterion, resulting in an overall supplier rating. A customer can also track supplier performance against historical data to examine trends in supplier performance. Our collaborative capabilities allow suppliers to log in over the Internet on a standard web browser and view their own scorecard information as allowed by their authorized profile. This benefits our customer by facilitating corrective action planning for under-performing suppliers and improving overall service levels. Supplier performance ratings become part of the sourcing process, aiding supplier selection and negotiation for future sourcing cycles. Verticalnet(TM) Spend Management can help our customers continue to maintain the savings they generate through the sourcing cycle and foster better relationships with their supplier community. Collaborative Planning Solution Verticalnet(TM) Collaborative Planning enables an enterprise to share sensitive information on a secure and confidential basis with trading partners and other strategic partners in its supply chain. The enterprise has the ability to control which trading partners see what information, down to detailed levels of data. It also helps an enterprise work more effectively with its trading partners through the sharing of: - Real time demand data - Demand forecasts - Schedules - Inventory plans - Inventory positions - Production plans We designed Verticalnet(TM) Collaborative Planning for enterprises that recognize the need to shift their focus from internal planning and demand forecasting to collaborative planning and improved response to actual changes in their customer demand. Our solution enables signals of changes in demand to move quickly back through the supply chain. An enterprise can use the demand plans collected from its customers to create supply plans with the enterprise's vendors and contract manufacturers. This collaborative planning allows the enterprise to reduce both its raw materials and its finished goods inventories and eliminate stock-outs that can cause lost sales and costly production delays. Our collaborative planning solution helps an enterprise reconcile supply with demand, enabling collaboration with among its customers, distribution partners, logistics providers, contract manufacturers, suppliers and suppliers' suppliers to ensure that plans and schedules are aligned across the complex set of relationships that comprise the supply chain. Under current supply chain models, there is often a delay of 4-8 weeks, or more, between the time a retailer can accurately forecast demand for a product, and the time that suppliers are able to respond to that demand. While the demand information sits in the retailer's corporate headquarters or in an OEM's production planning system, raw materials and component suppliers are forced to hold excess inventory or risk stock-outs. This results in higher demand volatility for suppliers further up the supply chain. The inability of an enterprise and its suppliers to see demand signals, understand them, and rapidly adapt production plans can result in problems including: excess inventory and product obsolescence, shortages and lost sales, misallocation of production facilities, inability to plan material costs, sub-scale purchasing of raw materials, decreased customer satisfaction, and increased delivery costs. 5 When an enterprise uses our solution to collaborate with its trading partners, we believe that our customers and their supply chain partners can realize the following kinds of benefits: - Our customer's suppliers receive real-time insight into the demand that our customer's distribution channels are facing, rather than experiencing a delay of several weeks for data to move through multiple planning cycles. This allows the suppliers to maximize their production resources. - Our customer receives supply commitments for changes in demand, and automatically rebalances its production and customer delivery schedules. Communication of production and delivery schedule revisions are routed to all effected parties automatically through the application. - Retailers increase their ability to rapidly respond to market shifts, improving sell-through of products and reducing stock-outs, leading to increased revenue from sales that would have been lost. - Our customer sells more of its available product, increasing revenue while improving the satisfaction of its retail customer. - The retailer gains improved visibility into the availability of the products it purchases from our customer, and can plan its sales and promotion strategy accordingly. The retailer also may be more likely to increase business with our customer because of our customer's ability to help the retailer meet its demand forecasts. - Our customer may also increase sales because of a competitor's failure to meet product demand. Our customer keeps fill rates up, due to its ability to mitigate capacity constraints. Order Management Solution Verticalnet(TM) Order Management enables an enterprise to improve its ordering process so that the right amount of the right products and materials gets to the right place at the right time. When our customer receives an order for its products, our order management software automatically routes the order to the appropriate members of the extended supply chain. This gives suppliers, and suppliers' suppliers, advance notice of orders. When parties change orders, our software lets suppliers approve or reject changes on-line, avoiding standard change-order process delays. This same process occurs for inventory tracking notices and invoices. Our solution can reduce or eliminate the reams of paper documents shuttling back and forth between customers, suppliers, and suppliers' suppliers. Our solution gives an enterprise the ability to send documents -- purchase orders, invoice information, or inventory tracking notices -- to the right trading partners in real-time, which can cut weeks out of the ordering process. Our software can automatically segment orders that impact multiple suppliers, with each supplier only receiving and having visibility to the information relating to its products or services. The traditional process of passing order information from customers to suppliers is slow and manual -- causing long response times and significant manpower activity, even in an uncomplicated supply chain. For example, when a customer sends a purchase order, the sales staff likely converts the purchase order into a sales order. If the order contains items that are provided by a contract manufacturer or key supplier, the purchasing department will then cut a purchase order, which is converted to a sales order by the supplier, and so on, and so on up the supply chain. Often the time lag from customer order to the second-tier supplier can be as long as 4-8 weeks. Our order management solution can significantly reduce this time lag because order information is routed automatically throughout the supply chain. As supply chains become increasingly complex, businesses must work with multiple tiers of suppliers, contract manufacturers, and distribution and logistics partners. Businesses continue to implement more complicated supply chain strategies to improve their supply chain efficiency, such as multi-channel selling, outsourced packaging and manufacturing, and vendor-managed inventory. This leads to increased difficulty and complexity for enterprises in managing orders, logistics, and financial cash flows. Increasing supply chain complexity leads to several business challenges including the need to manage inventory at each tier of the supply chain, the challenge of lost purchasing power due to outsourcing, and the difficulty of tracking orders and goods as they move across the supply chain. 6 We believe our order management software is particularly suited for complex supply chains. Our solution helps our customers obtain the optimum benefit from their supply chain strategies. Our solution can improve visibility into the process of moving orders, materials, and financial settlements among the multiple parties in the extended supply chain. We expect that increased visibility throughout the supply chain allows all parties to achieve the following benefits: - Reduced inventory cycle time -- key suppliers can see and respond to orders that pertain to them as they are entered, rather than waiting until the order works its way through the chain - Reduced inventory levels -- safety stock and buffers can be reduced at every step in the supply chain due to the velocity and response enabled by order management - Reduced costs by leveraging the purchase volumes of key suppliers - Better visibility and coordination with outsourced production and logistics providers - Reduced supply chain complexity -- save time and paperwork from automated activities - Increased customer fill rate -- leading to customer satisfaction The use of offshore and contract manufacturing has strategic and cost benefits, but has also resulted in a loss of control in managing cross-enterprise business processes and critical supply and demand information. Our solution helps our customers give their manufacturers immediate insight into orders, gain full visibility into outbound logistics, and manage the integrated, multi-party financial settlement process that has become more and more complex -- driving up costs and driving down both system flexibility and customer service. Our order management software turns the fragmented supply chain into a "virtual enterprise," enabling our customers to manage these complex relationships through a multi-lingual, multi-currency solution. Services Solutions We offer a full complement of consulting, integration, training and customer support services. Our team is committed to delivering a quick and efficient implementation with seamless integration and a smooth operation so that our customers can achieve their targeted return on investment. Consulting and Integration Services Consulting and integration services help customers plan, implement and manage our software so they achieve their business objectives. At the heart of our consulting services are straightforward processes and tools that make software implementations smooth and efficient. The methodology approaches implementation in well-defined, manageable phases -- rolling out categories, suppliers and customers over discrete intervals and targets the first actual customer transaction generally in less than 90 days. Our project teams are experienced at building and implementing private exchanges for Global 2000 companies. Our teams are focused with clearly defined goals, roles and responsibilities. Members of our customer team typically include: - Account director -- The person ultimately responsible for the success of the consulting relationship. This person works with customers to define goals and assemble resources. - Project manager -- The person responsible for the success of the implementation project. This person develops the implementation plan, guides the team through each step of the implementation process and regularly measures progress against business goals, providing continuous feedback and communication to the customer throughout the project term. - Business consultants -- The people responsible for defining functional requirements and mapping the software to the customer's business processes. - Design consultant -- The person responsible for branding the software and developing custom reports. 7 - Technical consultants -- The people responsible for mapping the technical architecture, establishing production, test and development environments, performing software customization where required, installing the software and integrating external systems. Our project teams are flexible. Customers may choose to use our consulting services exclusively, or use our services with their own internal resources or in association with our network of systems integration and consulting partners. Our partners are trained and certified on our products. They provide consulting, design, and installation services to ensure that all parts of the solution are seamlessly integrated into a scalable, well-performing system. Our consulting partners include KPMG Consulting, Inc., Arthur Andersen Business Consulting KB, Cap Gemini Ernst & Young, Deloitte Consulting, and PWC Consulting. Training Our training services help organizations develop the knowledge and skills required to successfully deploy, maintain and use our products. Participants engage in discussions, work on projects and gain hands-on experience using our software. We tailor our training to meet the needs of the customer. We can deliver training in a variety of formats, including: - Pre-designed courses - Self-directed training - On-site instructor-led training - Train-the-trainer instruction - Computer-based training
Customer Support Our customer support services provide all the information, tools and assistance customers need, including support representatives to respond to service requests ranging from simple technical inquiries to mission critical problems. We provide customer support 24 hours a day, 7 days a week, 365 days a year. OUR TECHNOLOGY eXtended Enterprise Management Foundation All our applications are powered by our patent-pending eXtended Enterprise Management Foundation technology that enables collaboration among companies and across the supply chain. Our foundation operates in a non-intrusive layer above a company's existing enterprise resource planning and enterprise systems. We designed our technology to leverage and drive additional return on a company's existing information technology investments. Our technology offers capabilities and functionality not available from software vendors that focus on the enterprise's own systems and operations. Companies have made significant investments in enterprise resource planning (ERP) systems to link demand from sales offices with inventory in distribution centers and manufacturing orders and purchase orders in the plants, all within the enterprise. However, as companies have extended their supply chains and networks of trading partners outside the enterprise, an enterprise-centric solution alone cannot provide the efficient supply chain integration required. While ERP systems provide visibility and process automation within the enterprise, they were not designed to integrate a company's extended enterprise, which often contains hundreds, if not thousands, of other companies. In developing our collaborative supply chain solutions, we set the following goals: - Provide visibility into critical business information for the network of businesses that make up the extended enterprise - Enable automated multi-enterprise business processes to reduce the costs of supply chain functions such as sourcing, planning and order management To meet those goals, we designed our collaborative supply chain solutions on a technology foundation that overlays and leverages, our customers' existing enterprise systems for multi-enterprise business relationships. 8 Our technology is comprised of business and technical components described below that form the base for our collaborative supply chain solutions. Security and relationship management form the core of our Extended Enterprise Management Foundation. Our applications contain robust capabilities designed so extended enterprises can maintain their private relationships with their trading partners. Our foundation also does not discriminate between buyers and sellers but defines all participants as members, enabling shifts in role definition depending on the authorized relationship. All businesses are members of our customers' collaborative supply chain. Companies participating in an extended supply chain have certain relationships with many others in the chain -- they buy from some, sell to others, and have no relationship at all with many more. Traditional enterprise systems create redundancy and limit flexibility by only registering companies as either a buyer or a seller. Through controlled access, all trading partners can use the system to source, sell, plan, and analyze. Our foundation provides security and confidentiality for the external trading partners that are incorporated into a company's collaborative supply chain. Traditional enterprise systems provide some security, but cannot handle the complexity of multi-enterprise access without significant modifications. We developed our technology to provide the security that confidential business information is only viewable by those companies that are authorized to do so. Member Enablement We designed our patent pending solutions to support multiple ways for a company and its trading partners to connect their internal systems. In a multi-enterprise world, the technology challenge is to connect thousands of companies with different ERP systems, data formats and communication protocols. Our technology features connectors that handle industry standard data formats and communication protocols to integrate with back-end applications. Trading partners can connect through an Internet connection, XML connection, EDI, email, fax, pager, or custom services. Our foundation also includes a library of industry standard transaction sets designed to support integration of trading partners' systems with minimal effort. Our solution does not force a customer to impose expensive and time-consuming standardization among trading partners. Business partners need to maintain their own data on product, price, order, inventory, and planning and provide restricted access to this data. For typical ERP systems, segregating the data appropriately involves a manual, redundant and costly effort. With our technology, trading partners can continue using their own approaches for categorization, product identification and specification. Our solution utilizes a patent pending rules-based ontology system to help automate the process of bringing together disparate, multi-company data on a regular basis. Our solution results in a normalized, cross-referenced database that allows each organization to view information in the terms to which they are accustomed. This approach minimizes the internal changes required for each trading partner and speeds up the overall adoption process. Business Process Management Our software is designed so that trading partners require no software to connect to our customers through the Internet. By automating business processes, more trading partners are able to easily participate across the full breath of the solution. When action is required, such as updating a plan or committing to a forecast, the trading partner moves directly from their email into the system to complete the required action. Our technology allows trading partners to control the level of communications they receive, how they receive them, and exactly who has access to them. Some enterprise-centric systems send out email communications to trading partners to signify events, such as changes in manufacturing plans, but these communications often do not meet the trading partner's requirements. Our solution has a powerful patent pending rules-based transaction processing engine that can dynamically route documents, update documents, create new documents and process workflow events without human intervention. Many systems rely on human action to move from step to step, resulting in information moving slowly through the supply chain. Our technology automatically generates information among trading partners. 9 This machine-to-machine communication can reduce administrative costs, reduce inventory cycle times and eliminate human error for processes that follow standard business rules. Catalog Management Using our solutions, companies throughout the supply chain can maintain catalogs in their own format, with their own hierarchy structure and numbering system. While some businesses use the standard UNSPSC system to categorize their products, most companies use some form of their own product hierarchies, product numbering systems and supplier identification scheme. We offer simple, patent pending mapping tools that allow a business in the supply chain to maintain its catalog data in its own format, yet that information can be viewed by other businesses in the supply chain in their own formats. We believe this permits greater trading partner participation than enterprise-centric systems. When connecting to an extended enterprise, or a customer's e-procurement system under an enterprise-centric system, the trading partner will have to conform to standards that are not their own. This may require significant time and investment or force the trading partner not to participate. Contracts and Pricing Management Our contracts and pricing management capabilities are flexible. We designed them for multi-entity use because businesses with multiple divisions, locations and disparate enterprise systems have difficulty leveraging national or global contracts with suppliers or customers, because of differences in freight, taxes, currency, discounts and rebates. For example, if our customer negotiated a national contract with a supplier, but freight calculations are different for locations in Alaska and Hawaii, our foundation treats this as a single contact with exceptions for ship-to locations in Alaska and Hawaii. Most enterprise-centric systems require a business to set up individual contracts for these locations, increasing complexity, and diluting some of the benefits of a national contract. Analytical Services We offer patent pending analytical tools and scorecards built on our extended enterprise management foundation. Our customers' management teams use analytical tools and reports to measure and control their businesses. In a multi-enterprise world, there are few tools that allow multiple companies to work together and set joint targets, measure performance, share reports and scorecards with trading partners, and develop improvement plans. Our solution provides tools that can be viewed by multiple enterprises -- with security built in -- so that each company only sees what it is supposed to see. For example, a company may create a scorecard to measure the accuracy of its planning processes. Each of it customers and suppliers would have access to that scorecard, but only be able to see their own performance. Application Services We designed our application services to address the difficulty inherent in collaborative supply chains where each trading partner needs to access the same system and the same information in different languages simultaneously. Our solution allows the co-existence of synchronized, multi-language environments around the world on a single system. We use individual user profiles to identify which language each user sees. Most solutions that support multiple languages can support only one language on the system at a time. Our solution also supports different date formats and allows trading partners to utilize their own planning horizons on shared plans. Converting pounds to kilograms is not an issue for most systems, however, in a collaborative supply chain, each partner may have different unit of measure definitions for the same product, depending on how each partner manages their business. For example, a case of product at a manufacturer may be split into smaller cases at a distributor, resulting in a very different meaning for the product. Our solution supports not only standard conversion approaches, but also company-product specific unit-of-measure conversion calculations, which is necessary in supporting multi-company sourcing, planning, and ordering processes. 10 Platforms We believe our solutions are highly scalable due to the separation of various layers. Our solution has supported 1,200 buyers completing more than $1 billion in transactions with over 12,000 suppliers. We designed the architecture of our solutions to be available to a customer's supply chain trading partners completely over the Internet. No software is required for trading partners because they can access the extended enterprise through the Internet. We believe this can significantly lower the cost of their participation and their maintenance costs. The operating system for our software is based upon standard open technologies, allowing our solution to be deliverable on both Microsoft and Unix based platforms. Our product architecture has the following features: - Web Server: Our software uses standard HTTP(S) communication at the web server level. The user interface is HTML delivered in a JSP framework. - Application Server: Our software is developed based upon J2EE specifications and utilizes industry leading application server technologies. - Database Server: Our software leverages standard connectivity methods for data interaction including database connection pooling and JDBC. - Middleware: Our software uses standard middleware processes for high-transaction communication environments. Our software uses the JMS standard for communicating with middleware solutions. SALES AND MARKETING Our sales operation headquarters are in Malvern, PA. Our direct sales organization focuses on licensing our collaborative supply chain solutions to large, multi-national enterprises, as well as to mid-sized enterprises with complex supply chain issues. Account executives have deep experience in enterprise software sales, including sales experience from SAP, Accenture, SCT, and Adexa. We also market our solutions in Europe, Australia and Asia. Our geographically oriented direct sales force is teamed with pre-sales consultants that work with prospects to select the proper applications to meet customer requirements and deliver the greatest value. We also use indirect sales channels, such as third-party alliances, to market our solutions, and increase the market penetration of our solutions through joint marketing and sales activities. Our relationships with KPMG Consulting, Inc., Arthur Andersen Business Consulting KB, Cap Gemini Ernst & Young, Deloitte Consulting, and PWC Consulting provide us with access to thought leaders, industry and supply chain experts that have established relationships with our key prospects. Such relationships allow us to extend the reach of our sales efforts without increasing headcount. We support our sales activities by conducting a variety of marketing programs, and participate in industry conferences. We maintain relationships with recognized industry analysts including AMR and Forrester. These firms advise our target client base as well as provide us with critical feedback into our product management process. We also conduct lead-generation programs including advertising, direct mail, e-mail marketing, public relations and ongoing client communication programs. PROPRIETARY RIGHTS We regard our software as proprietary and rely on a combination of trade secret, patent, copyright and trademark laws, license agreements, confidentiality agreements with our employees and nondisclosure and other contractual requirements imposed on our clients, consulting partners and others to help protect proprietary rights in our products. We distribute our collaborative supply chain applications under software license agreements, which typically grant clients nonexclusive, nontransferable licenses to our products and have perpetual terms unless terminated for breach. Under such typical license agreements, we retain all rights to market our products. 11 Use of the licensed software is usually restricted to clients' internal operations and to designated users. Use is subject to terms and conditions that prohibit unauthorized reproduction or transfer of the software. We also seek to protect the source code of our software as a trade secret and as an unpublished, copyrighted work. RESEARCH AND DEVELOPMENT We direct our efforts in research and development to new products, enhancements of the capabilities in existing products, and expansion of our collaborative supply chain capabilities. Our internal research and development team, which is a combination of the Verticalnet and Atlas Commerce staffs, has developed all of our current products, although we obtained some underlying technology through acquisition. In developing new products or enhancements, we work closely with current and prospective clients, as well as with industry experts, to ensure that our products address critical supply chain needs of today's businesses. We believe that this collaboration is necessary to develop and improve our software and products. Our product group works closely with our marketing, sales, and services groups to develop products that meet real customer needs. As of March 15, 2002, our research and development staff consisted of 71 employees. COMPETITION The markets for our solutions are highly competitive. Our competitors are diverse and offer a variety of solutions targeting various segments of the extended supply chain as well as the enterprise as a whole. Some competitors, such as enterprise resource planning companies and supply chain management companies, compete with suites of applications designed to offer out-of-the-box integration, while most of our competitors offer point solutions designed specifically to target particular functions or industries. We bring together our applications in an integrated environment to capture the advantages of both approaches, and to offer our customers a one-stop shop for their collaborative supply chain needs. More specifically, we compete with: - Large enterprise resource planning (ERP) software vendors, including Oracle, Peoplesoft and SAP, who have added or are attempting to add capabilities for supply chain planning or business-to-business collaboration to their transaction system products. - Supply chain management (SCM) companies, including i2, Adexa, and Manugistics, who compete principally with our supply chain management applications. - Point solution providers, such as Ariba and Commerce One and others that compete principally with our strategic sourcing and order management applications. - Other point solution providers, such as Frictionless Commerce, Emptoris and eBreviate that compete principally with our strategic sourcing applications. - Internal development efforts by corporate information technology departments. We believe that the principal competitive factors affecting our market include breadth and depth of solution, product quality and performance, customer service, core technology, product features, ability to implement solutions, value of solutions, and a base of reference customers. Although we believe that our solutions currently compete favorably with respect to these factors, our market is evolving rapidly, and we may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. SMB BUSINESS In February 2002 we announced our intention to sell the SMB business unit, which we will account for as a discontinued operation beginning in the first quarter of 2002. Our SMB division is a leading provider of internet enabled, industry-specific supplier networks designed to allow small- to medium-sized companies to conduct business with enterprise buyers over the Web. It is a 12 leader in connecting suppliers with large pools of buyers through an open market model. This is accomplished by delivering suppliers' products and services into: - SMB's 59 industry-specific on-line marketplaces; - Relevant industry-specific third-party marketplaces through the Syndicated Buyers Guide program; and - Large enterprise buyers. Our SMB unit operates 59 industry-specific on-line marketplaces within the following industries: Communications (7) Energy (4) Environment/Utilities (4) Food/Packaging (7) Healthcare (5) High Tech (5) Manufacturing (8) Metals (4) Public Sector (2) Science (3) Services (8) Transportation (2) NOTE: The numbers in parenthesis represent the number of individual communities within each sector. SMB generates revenue from multiple sources, including supplier enablement solutions ("Marketplace Managers" and "Business Card Listings"), company- or industry-specific purchasing networks ("Private Supplier Networks"), enterprise software solutions to manage a PSN ("Content Portal"), traditional industry buyer/supplier communities ("Verticals"), alliances and advertising. SMB was created through six years of development, which resulted in a commerce platform, with the following components: - 59 industry-specific on-line marketplaces; - Over 27,000 enabled suppliers; - 2.0 million registered users; - 600,000 unique visitors monthly; - Over 6 million page views per month; and - Over 9 million newsletters sent monthly. SMB offers products and services to small- and medium-sized businesses that are designed to generate leads, which ultimately can be turned into sales. SMB's products and services are described below: Marketplace Manager is a hosted software supplier enablement solution that allows clients to create a digital storefront. These storefronts enable clients to promote their products and services across an array of public and private marketplaces on the Web. With marketplace manager a supplier with self-help tools can quickly and easily: - Create, store and manage structured and unstructured digital content in a central data repository; - Customize and publish content from this single repository discretely into multiple public and private marketplaces; - Generate qualified leads; - Manage and respond to leads with online reporting tools; - Build brand awareness; - Drive traffic to its Web sites; - List its company by keyword and product category; and - Create a customized electronic transactable catalog. 13 Marketplace Manager is available with a catalog component of $5,500 per annual subscription, and without a catalog at $3,500 per annual subscription. Business Card Listings are low-cost ($1,000 annually) hosted Web offerings for small suppliers. Business card listings display the company's name, location, product overview and contact information and are offered in two variants: purchase order management; and electronic data interchange (EDI) messaging. Business card listings are mapped into one or more of SMB's online industry-specific marketplaces, enabling users to click-through to the supplier's Web site. Advertising -- With over six million page views per month from business users SMB offers a platform for advertisers to reach targeted prospects through banner ads, e-mail lists and newsletters. To take advantage of some of this potential, SMB recently reached an agreement with DoubleClick whereby it will handle the sales of SMB's ad space inventory, on a non-exclusive basis. Private Supplier Networks (PSNs) are a recent addition to SMB's supplier enablement products. PSNs are targeted at discrete and process manufacturing companies with complex inbound supply chains that do not have deep integration with their multiple suppliers. PSNs leverage SMB's portal, marketplace and enablement assets to create dynamic supplier networks that offer benefits to both enterprises and suppliers. EMPLOYEES As of March 15, 2002, we had 164 employees in our enterprise software business and 67 in our SMB unit. 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 person who was serving as an executive officer as of March 15, 2002.
NAME AGE POSITION - ---- --- -------- Michael J. Hagan.......................... 39 Chairman of the Board and Director Kevin S. McKay............................ 48 President, Chief Executive Officer and Director David Kostman............................. 37 Chief Operating Officer Christopher Larsen........................ 43 Executive Vice President of Sales and Marketing James W. McKenzie, Jr..................... 42 Executive Vice President, General Counsel and Secretary John A. Milana............................ 46 Chief Financial Officer
Set forth below is biographical information about each of our executive officers. MICHAEL J. HAGAN co-founded Verticalnet in 1995 and has served as Chairman of the Board since February 2002. Prior to that, he served as our President and Chief Executive Officer since January 2001. Since our founding, Mr. Hagan has held various executive positions with us, including Executive Vice President and Chief Operating Officer immediately before becoming President and Chief Executive Officer. Prior to our founding, Mr. Hagan was Vice President and Senior Manager at Merrill Lynch Asset Management from 1990 to 1995. He served at Merrill Lynch in the areas of finance, technology and accounting. Prior to that time, Mr. Hagan worked for Bristol Myers Squibb from 1988 to 1990. Mr. Hagan received a B.S. from St. Joseph's University and is a Certified Public Accountant. KEVIN S. MCKAY has served as our President and Chief Executive Officer since February 2002 and as a director since July 2001. Most recently, Mr. McKay was President and Chief Executive Officer of Capita Technologies, a leading technology service provider in the Interpublic Group. Mr. McKay previously served as Chief Executive Officer of SAP America, Inc., where he had responsibility for the company's North and Latin American operations, including all sales and marketing efforts, customer implementation and support. Prior to that, Mr. McKay was the Chief Operating Officer and the Chief Financial Officer at SAP America, where his primary duties spanned the financial, accounting, and operational management of SAP subsidiaries in the 14 United States, Canada and Latin America. He was also a member of the SAP AG Extended Management board and the SAP America, Inc. board of directors. DAVID KOSTMAN has served as our Chief Operating Officer since March 2001, and as our Interim Chief Financial Officer from October 2001 to February 2002. Mr. Kostman also served as President of Verticalnet International from July 2000 to October 2001. From 1994 to July 2000, Mr. Kostman worked in Lehman Brothers' Investment Banking Division. At Lehman Brothers, Mr. Kostman was a Managing Director, head of the Internet B2B Group and responsible for coverage of Israeli technology companies. From 1992 to 1994, Mr. Kostman was an investment banker at N M Rothschild & Sons in London, focusing on Latin American mergers and acquisitions and privatizations. He has a law degree from Tel Aviv University and an MBA from INSEAD, Fontainebleau. CHRISTOPHER LARSEN has served as our Executive Vice President of Sales and Marketing since April 2001. Prior to this, Mr. Larsen was employed by SAP America, Inc. from January 1993 to February 2001 in various sales management positions and most recently as President. Preceding his employment at SAP America, Inc., Mr. Larsen was a southeast area manager at Software 2000, Inc. from October 1991 to December 1992. Mr. Larsen was also formerly employed from August 1988 to October 1991 as a senior account executive at Datalogix, Inc. He received his B.A. from Wake Forest University. JAMES W. MCKENZIE, JR. has served as an Executive Vice President since March 2001 and as our General Counsel and Secretary since January 2000. Mr. McKenzie was Senior Vice President from January 2000 to March 2001. From October 1995 to January 2000, Mr. McKenzie was a partner at Morgan, Lewis & Bockius LLP, where he worked in their business and finance practice, with a focus on securities law and mergers and acquisitions. Between October 1987 and September 1995, Mr. McKenzie was an associate at Morgan, Lewis & Bockius LLP. He received an A.B. from Dartmouth College, an MBA from The Wharton School at the University of Pennsylvania and a JD from the University of Pennsylvania Law School. JOHN A. MILANA has served as our Chief Financial Officer since February 2002, and prior to that was the Chief Financial Officer of Atlas Commerce since January 2000. Mr. Milana most recently served as the Chief Financial Officer of SAP America, Inc. where he had responsibility for the financial and administrative support functions, including investor relations, financial reporting, accounting, taxes, financial systems, treasury, purchasing and facilities. Prior to joining SAP America, Inc. Mr. Milana was Vice President of Finance for Sony Electronics, Inc. Prior to that, from 1977 through 1988, he served as a member of Price Waterhouse (now PricewaterhouseCoopers) in their Assurance practice. John Milana is a Certified Public Accountant and graduated summa cum laude with a B.S. in Commerce (Accounting) from Rider University. ITEM 2. PROPERTIES Our corporate headquarters is located in Malvern, Pennsylvania, where we lease approximately 27,300 square feet for a monthly fee of approximately $43,000 under a lease that expires June 2006. We lease a development facility in Endicott, New York, consisting of approximately 7,700 square feet for a monthly fee of approximately $3,500 under a lease that expires November 2002. Our SMB unit is headquartered in Horsham, Pennsylvania, where it uses approximately 12,000 square feet of a 83,860 square foot facility which we are actively marketing. ITEM 3. LEGAL PROCEEDINGS On June 12, 2001, a class action lawsuit was filed against us and several of our officers and directors in U.S. Federal Court for the Southern District of New York in an action captioned CJA Acquisition, Inc. v. Verticalnet, et al., C.A. No. 01-CV-5241 (the "CJA Action"). Also named as defendants were four underwriters involved in the issuance and initial public offering of 3,500,000 shares of Verticalnet common stock in February 1999 -- Lehman Brothers Inc., Hambrecht & Quist LLC, Volpe Brown Whelan & Company LLC and WIT Capital Corporation. The complaint in the CJA Action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on, among other things, claims that the four underwriters awarded material portions of the initial shares to certain favored customers in exchange for excessive 15 commissions. The plaintiff also asserts that the underwriters engaged in a practice known as "laddering," whereby the clients or customers agreed that in exchange for IPO shares they would purchase additional shares at progressively higher prices after the IPO. With respect to Verticalnet, the complaint alleges that the company and its officers and directors failed to disclose in the prospectus and the registration statement the existence of these purported excessive commissions and laddering agreements. After the CJA Action was filed, several "copycat" complaints were filed in U.S. Federal Court for the Southern District of New York. Those complaints, whose allegations mirror those found in the CJA Action, include Ezra Charitable Trust v. Verticalnet, et al., C.A. No. 01-CV-5350; Kofsky v. Verticalnet, et al., C.A. No. 01-CV-5628; Reeberg v. Verticalnet, C.A. No. 01-CV-5730; Lee v. Verticalnet, et al., C.A. No. 01-CV-7385; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864; Morris v. Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet, et al., C.A. No. 01-CV-8084. None of the complaints state the amount of any damages being sought, but do ask the court to award "rescissory damages." We have retained counsel and intend to vigorously defend ourselves in connection with the allegations raised in the CJA Action and the other complaints. In addition, we intend to enforce our indemnity rights with respect to the underwriters who are also named as defendants in the complaints. On August 13, 2001, a lawsuit was filed against us in Massachusetts Superior Court (Peter L. LeSaffre, Robert R. Benedict and R.W. Electronics, Inc. v. NECX.com LLC and Verticalnet, Inc., C.A. No. 01-3724-B.L.S.). The suit alleges that, in connection with our acquisition of R.W. Electronics in March 2000, certain Verticalnet and NECX officials made representations about certain technologies that the companies would be using to make them more successful and profitable. As a result of the alleged failure to use this technology, plaintiffs claim they only received $43.0 million on the sale of R.W. Electronics, rather than the $78.0 million that they claim they were entitled to. We have retained counsel to defend against the lawsuit and filed a motion to dismiss the action on October 12, 2001. The plaintiffs filed an amended complaint on October 24, 2001, and we answered the amended complaint on November 13, 2001. We intend to defend ourselves vigorously in the lawsuit and to enforce our rights pursuant to the acquisition of R.W. Electronics. On December 4, 2001, a lawsuit was filed against us in the Montgomery County (Pa.) Court of Common Pleas in an action captioned Belcher-Pregmon Commercial Real Estate Co. v. Verticalnet, C.A. No. 01-22968. The suit alleges that the plaintiff is entitled to a broker commission in excess of $0.4 million in connection with our former lease of a building in Horsham, Pa. We have retained counsel to defend against the lawsuit and have filed preliminary objections asking that the suit be dismissed. Atlas Commerce filed a lawsuit on June 14, 2001 against a former senior vice president of Atlas Commerce in the Chester County (Pa.) Court of Common Pleas in an action captioned Atlas Commerce U.S., Inc., C.A. No. 01-05017. The lawsuit seeks to recover in excess of $0.6 million in principal and interest in connection with a loan made to the executive. The former executive answered the suit on July 30, 2001 and filed counterclaims against Atlas Commerce asserting breach of an oral agreement. Atlas Commerce asked the Court to dismiss the counterclaims on August 17, 2001. In a related action, the same executive filed a lawsuit on December 7, 2001, against Atlas Commerce in federal district court for the Eastern District of Pennsylvania in an action captioned Barr v. Atlas Commerce U.S., Inc., C.A. No. 01-CV-6129. The suit alleges violation of the federal Age Discrimination and Employment Act, and seeks damages in an unspecified amount. We have retained counsel and answered the complaint on February 11, 2002. We are also party to various litigations and claims that arise in the ordinary course of business. In the opinion of management, the ultimate resolutions with respect to these actions will not have a material adverse effect on our financial position or results of operations. 16 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 2001. 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 2001 First Quarter............................................. $ 6.25 $ 1.62 Second Quarter............................................ 3.29 1.34 Third Quarter............................................. 2.16 0.36 Fourth Quarter............................................ 2.09 0.34 FISCAL YEAR 2000 First Quarter............................................. $138.88 $67.50 Second Quarter............................................ 59.75 28.00 Third Quarter............................................. 62.05 30.25 Fourth Quarter............................................ 32.63 4.53
The share price data set forth above reflects a two-for-one stock split effected in the form of a stock dividend. The record date for the stock split was March 17, 2000. At March 15, 2002, we had 787 shareholders of record. We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and expand our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements and other factors the board of directors deems relevant. Additionally, under the terms of our Series A preferred stock, we may not declare or pay, or set aside funds to pay, any dividend or other distribution to the holders of our common stock or any other security ranking junior to our Series A preferred stock unless we have previously declared or paid, or set aside funds to pay, all dividends for preceding dividend periods to which the holders of our Series A preferred stock are entitled. During the quarter ended December 31, 2001, we issued the following unregistered securities pursuant to the following transactions: (i) On October 11, 2001 we paid quarterly dividend payments totaling $1.6 million to the holder of our Series A preferred stock in the form of 1,615 shares of our Series A preferred stock. (ii) On December 28, 2001, we issued 14,157,630 shares of our common stock valued at approximately $19.3 million in exchange for the outstanding capital stock of Atlas Commerce, Inc. 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. 17 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto (see Item 8), as well as Management's Discussion and Analysis of Financial Condition and Results of Operations (see Item 7).
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Revenues......................... $ 125,570 $ 112,454 $ 18,428 $ 3,135 $ 792 Net loss from continuing operations.................... (756,949) (202,330) (52,589) (13,594) (4,779) Basic and diluted net loss per common share from continuing operations.................... $ (7.89) $ (2.50) $ (0.84) $ (1.32) $ (0.47)
AS OF DECEMBER 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- -------- -------- ------- (IN THOUSANDS) Balance Sheet Data: Total assets..................... $ 125,631 $ 923,284 $318,981 $ 12,343 $ 2,104 Long-term debt................... 24,854 45,287 116,750 5,352 400 Redeemable preferred stock....... 102,180 94,760 -- -- --
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes thereto appearing in Item 8 of this report. COMPANY OVERVIEW Verticalnet, through its subsidiaries, is a leading provider of collaborative supply chain solutions that enable companies, and their supply and demand chain partners to communicate, collaborate, and conduct commerce more effectively. With a comprehensive set of collaborative supply chain software applications including spend management, strategic sourcing, collaborative planning, and order management, we offer a broad integrated supply chain solution delivered through a multi-party platform. With our completion of the acquisition of Atlas Commerce in December 2001 and the February 2002 announcement of our decision to sell our Small/Medium Business ("SMB") unit that operates and manages 59 industry-specific on-line marketplaces, we have completed a business transformation from our origins as an operator of online public vertical communities to a business solely focused on delivering supply chain solutions to enterprise customers. The SMB business is a leading provider of internet enabled industry-specific supplier networks designed to allow small- to medium-sized companies to conduct business with enterprise buyers over the Web. Verticalnet was founded in 1995 as a provider of industry-specific on-line marketplaces, starting with WaterOnline.com. We completed our initial public offering in February 1999. During 1999 and 2000, we acquired companies of three types to enhance the development of our industry marketplace business: additional on-line marketplaces to complement our portfolio; transactional and services businesses and exchanges that we could offer across multiple on-line marketplaces; and two software companies, Isadra in 1999 to accelerate our research and development efforts and Tradeum in 2000 to launch a stand-alone software unit targeting exchanges and on-line market places. In September 2000, we established three divisions: Verticalnet Markets, our portfolio of on-line industry marketplaces; Verticalnet Solutions, our software unit built on the combination of Isadra and Tradeum technology; and Verticalnet Exchanges, an exchange for trading electronic components and hardware, also known as NECX. On January 7, 2001, we appointed Michael J. Hagan, our co-founder and chief operating officer at the time, to become our president and chief executive officer upon the departure of president and chief executive officer Joseph Galli, Jr. With an effort to focus the business on its software offerings already underway through our December 2000 license and services agreements with Converge, Mr. Hagan led a thorough re-evaluation of the Verticalnet Markets and Verticalnet Solutions businesses in the first quarter of 2001, with a focus on core elements needed to develop a profitable software business in a difficult economic environment. As a result of this scrutiny, we began implementing significant changes in our business. The steps that we took in each quarter during 2001 resulted in significantly reduced staffing requirements in stages. We, therefore, completed four major restructuring efforts to reduce costs and streamline operations. During fiscal year 2001 we modified the business significantly in a series of steps to transform it into an enterprise software business. The following events occurred: - on January 31, 2001, we completed the sale of Verticalnet Exchanges to Converge, allowing management to focus solely on the two remaining business units, SMB and Enterprise (formerly referred to as Verticalnet Markets and Verticalnet Solutions) and eliminate redundancies between them; - on April 26, 2001, we restructured the Microsoft agreement to focus on supplier enablement solutions; - on July 26, 2001, we announced changes in the SMB business; - on October 9, 2001, we restructured the Converge license and services agreements as Converge restructured its strategic direction; and - on December 28, 2001, we acquired Atlas Commerce in an effort to expand our product and customer base in the software business. 19 Subsequently, we announced the following recent events in 2002 that further position us to transform the company into an enterprise software business: - on February 13, 2002, we announced our intention to sell the SMB unit. Our board of directors authorized this action to complete our strategic realignment to an enterprise software business. Beginning in the first quarter of 2002, we will report the SMB unit as a discontinued operation; and - the addition of experienced software executives to our management team: On February 19, 2002, Kevin S. McKay, a member of our board of directors, was appointed president and chief executive officer of Verticalnet. Mr. McKay, a former chief executive officer of SAP America, succeeded Michael Hagan, who was appointed chairman of Verticalnet. On February 13, 2002, John Milana, former chief financial officer of Atlas Commerce, and a former chief financial officer of SAP America, was appointed as Verticalnet's chief financial officer replacing interim chief financial officer, David Kostman. RESTRUCTURING AND ASSET IMPAIRMENTS During the year ended December 31, 2001, we announced and executed four major restructuring efforts designed to reduce overall costs and streamline operations. Our goals were to eliminate redundant positions and facilities primarily related to previous acquisitions that had not been fully integrated, to eliminate several unprofitable business initiatives, to improve our operating efficiency and margins, and to redefine the business as a software company. Our aggregate restructuring and asset impairment charge for the year ended December 31, 2001 was approximately $345.5 million, including non-cash related charges of approximately $321.3 million (see Note 6 to our consolidated financial statements). Our cost cutting measures during the year ended December 31, 2001 included an aggregate work force reduction of approximately 1,090 employees throughout the organization and various office facility closures. A significant portion of our headcount reduction was in conjunction with the restructuring of the Microsoft agreement, the change in focus of the SMB business and the restructuring of the Converge agreements. As part of our restructuring efforts we also impaired assets, such as leasehold improvements for abandoned facilities; excess furniture, office and computer equipment; purchased and internally developed software; and prepaid assets, which have no future use in the ongoing operations of the business. As of December 31, 2001 we have approximately $7.1 million in accrued restructuring expenses primarily related to employee severance and lease termination costs. This amount is expected to adequately cover actual amounts to be paid. Differences, if any, between the estimated amounts accrued and the actual amounts paid will be reflected in operating expenses in future periods. We intend to continue focusing on revenue growth, achieving profitability and reviewing our operations for cost-cutting opportunities that will improve our operating margins. We expect to continue to streamline our operations, including making additional headcount reductions if the revenues expected from our product and service offerings do not materialize. We operate in an industry that is rapidly evolving and extremely competitive. Recently, many software businesses have experienced difficulty in raising capital necessary to fund operating losses and ongoing investments in strategic relationships. Valuations of public companies in the software sector have declined significantly since the first quarter of 2000. During the year ended December 31, 1999 and in the first quarter of 2000, we announced several acquisitions, the most significant of which was Tradeum, that were financed principally with shares of our common stock and valued based on the price of our common stock at that time. We regularly perform reviews to determine whether events or changes in circumstances indicate that the carrying value of the goodwill and other intangible assets may not be recoverable. As a result of these reviews during the year ended December 31, 2001, we recorded impairment charges of approximately $284.4 million for identifiable intangible assets and goodwill in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Aggregate impairment charges of approximately $231.1 million were related to the write-off of goodwill and other identified intangible assets associated with our Tradeum acquisition. Tradeum was a development stage software company purchased in March 2000. The acquisition was financed 20 principally with shares of our common stock. We initially recorded an impairment in the second quarter of 2001 to reduce identifiable intangible assets and goodwill to their estimated fair value, which was based upon the valuation of comparable publicly held businesses. Subsequently in the fourth quarter of 2001, we recorded an additional impairment to write-off the remaining goodwill and identified intangibles. The decision to impair the remaining Tradeum goodwill was primarily based on our acquisition of Atlas Commerce in December 2001 and our decision to migrate to the Atlas Commerce platform which will replace the various Tradeum based components of our Enterprise products. The remaining aggregate impairment charge of approximately $53.3 million recorded during the year ended December 31, 2001 related to the write off of goodwill and other intangible assets associated with various acquisitions that are part of the SMB business, including approximately $20.6 million related to our acquisition of Verticalnet Europe B.V. ("Verticalnet Europe"). We estimated the fair value of the continuing SMB business based upon the amounts we could reasonably expect to realize upon the sale of those assets. We also recorded an aggregate charge of approximately $231.3 million, included in other income (expense), net on the consolidated statement of operations, for impairments to our cost method, equity method and available-for-sale investments during the year ended December 31, 2001. These charges for other than temporary declines in the fair value of our investments are based on reviews of the market conditions and the assumptions underlying the operating performance and cash flow forecasts. Information obtained is used in assessing the recoverability of our carrying values for the individual investments. Approximately $207.2 million of this amount is a write down of our Converge investment which was previously valued at $215.0 million (see Notes 5 and 9 to our consolidated financial statements). The impairment charge was based on independent valuations of our Converge investment which we obtained subsequent to Converge's announcement that it would restructure its business. At December 31, 2001 as a result of significant losses incurred in 2001, primarily related to restructuring, goodwill impairment and investment impairment charges, we had an accumulated deficit in excess of $1.1 billion. The table below summarizes the loss from continuing operations attributable to common shareholders (including preferred dividends) and the loss attributable to common shareholders, which includes discontinued operations, during the specified periods:
LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO LOSS ATTRIBUTABLE TO PERIOD COMMON SHAREHOLDERS COMMON SHAREHOLDERS - ------ -------------------------- -------------------- (IN MILLIONS) Year ended December 31, 2001................. $764.4 $768.3 Year ended December 31, 2000................. 207.6 316.6 Year ended December 31, 1999................. 52.6 53.5 Year ended December 31, 1998................. 13.6 13.6
SALE OF VERTICALNET EXCHANGES (NECX) On January 31, 2001, we completed the sale of our Verticalnet Exchanges segment to Converge. Verticalnet Exchanges was comprised of NECX.com LLC, a business purchased in December 1999, and its subsequent acquisitions of R.W. Electronics, Inc. ("RWE") and F&G Capital, Inc. d/b/a American IC Exchange ("AICE"). In consideration for the sale to Converge, we received 10,371,319 shares of Series B convertible preferred stock and 1,094,751 shares of non-voting common stock, representing approximately 18.0% and 1.9%, respectively, of Converge's equity at the closing of the transaction. The final net worth and working capital adjustment calculation performed in the second quarter of 2001, following a post-closing audit, resulted in us making an aggregate payment of $12.8 million to Converge. We used the fair value of Verticalnet Exchanges of $215.0 million, as determined by an independent appraisal, to record our investment in Converge. The investment in Converge is being accounted for under the cost method of accounting for investments (see Notes 5 and 9 to our consolidated financial statements). The sale of Verticalnet Exchanges represented the disposal of a business segment under Accounting Principles Board Opinion ("APB") No. 30, Reporting the Results of Operations -- Reporting the Effects of 21 Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Accordingly, results of this segment have been shown separately as a discontinued operation, and all prior periods have been restated. MICROSOFT On March 29, 2000, we entered into a definitive agreement with Microsoft (the "Original Microsoft Agreement") with respect to a commercial relationship. Our commercial relationship with Microsoft had a three-year term during which Microsoft would purchase storefronts and e-commerce centers from us, and then either distribute them directly or have us distribute them to third party businesses. Our intent was that customers would purchase renewals of the storefront or e-commerce center and additional storefronts or e-commerce centers on our other e-marketplaces. The Original Microsoft Agreement also included joint advertising, our use of Microsoft products and services, and funding of joint development projects. On April 26, 2001, we entered into a new agreement with Microsoft (the "New Microsoft Agreement"), which terminated and replaced the Original Microsoft Agreement. Under the New Microsoft Agreement, Microsoft prepaid to us $40.0 million for the upsell or deployment of enablement products (storefronts, e-commerce centers and marketplace managers) on their behalf through April 2002. We received approximately $40.0 million and $67.6 million during the years ended December 31, 2001 and 2000, respectively, from Microsoft under these agreements. Under the terms of the Original Microsoft Agreement we paid approximately $0.5 million and $29.4 million to Microsoft during the years ended December 31, 2001 and 2000, respectively. Under the Original Microsoft Agreement we also made royalty payments to Microsoft of approximately $0.2 million and $0.5 million for the years ended December 31, 2001 and 2000, respectively, related to additional storefronts and e-commerce centers sold by us. Collectively, under the Original and New Microsoft Agreements, during the years ended December 31, 2001 and 2000, we recognized approximately $60.0 million and $30.5 million, respectively, in e-enablement and advertising revenue. As of December 31, 2001, we have approximately $17.1 million of deferred revenue related to our Microsoft Agreements. We also had expenses of approximately $17.9 million and $12.0 million during the years ended December 31, 2001 and 2000, respectively, for advertising, software licensing and support under the Original Microsoft Agreement. SMB BUSINESS In July 2001 we refocused our SMB business on lead generation to its suppliers rather than e-commerce transactions. We began outsourcing various functions of the portal business including, content management, advertising sales and online book sales. By March 15, 2002 we had restructured the SMB business to 67 employees, which we anticipate will reduce operating costs. CONVERGE In December 2000, we entered into a subscription license agreement and professional services agreements with Converge, which among other things, provided for us to receive an aggregate of $108.0 million during the three-year term of the agreements. On October 9, 2001, Verticalnet and Converge terminated the professional services agreements, amended and restated the subscription license agreement and entered into a maintenance and support agreement. The amended and restated subscription license agreement as well as the maintenance and support agreement had a term of 18 months ending in March 2003. 22 Below are the contractual payments, including revisions, either made or still expected from Converge under the revised terms of the agreements:
CONTRACTUAL PAYMENTS UNDER ADJUSTMENTS DUE TO CASH RECEIVED REMAINING ORIGINAL OCTOBER 2001 DURING THE YEAR ENDED CONTRACTUAL PAYMENTS AGREEMENTS CONTRACTUAL CHANGES DECEMBER 31, 2001 AS OF DECEMBER 31, 2001 -------------- ------------------- --------------------- ----------------------- (IN THOUSANDS) Subscription license.... $ 73,000 $(23,000) $(41,000) $ 9,000 Professional services... 35,000 (23,750) (11,250) -- Maintenance and support............... -- 4,500 (750) 3,750 -------- -------- -------- ------- $108,000 $(42,250) $(53,000) $12,750 ======== ======== ======== =======
During the year ended December 31, 2001, we recognized revenues of approximately $30.9 million under the Converge agreements. Deferred revenue related to the Converge agreements is approximately $23.2 million at December 31, 2001. Verticalnet and Converge entered into a first amendment to the amended and restated subscription license agreement and a first amendment to the maintenance and support agreement, both as of February 1, 2002. As a result of these amendments, the term of each agreement was extended to December 31, 2003. The amendment to the maintenance agreement reduced our required level of service, accelerated the payment terms and reduced their aggregate obligation by $0.5 million. From January 1, 2002 through March 15, 2002, we have received approximately $6.1 million from Converge, with the remaining aggregate payments of approximately $6.2 million expected over the balance of fiscal year 2002 per the terms of the amended agreements. The expected contractual payments under the new agreements plus the remaining deferred revenue under the original agreements will be recognized on a straight-line basis through December 2003. On February 15, 2002, we invested $3.5 million in Converge LLC, an indirect subsidiary of Converge, and received a subordinated promissory note with a face value of $8.75 million. The note is payable in four equal installments on February 15th of 2006 through 2009. Repayment of the note is accelerated upon certain triggering events, including a change of control. In connection with the investment, we also received a warrant to purchase 3,500,000 shares of preferred stock in Converge Financial Corporation, a wholly owned subsidiary of Converge and an indirect parent of Converge LLC, at an initial exercise price of $.01 per share. ACQUISITION OF ATLAS COMMERCE On December 28, 2001, we acquired all of the outstanding capital stock of Atlas Commerce, a privately held software company that provides private exchange software and strategic sourcing applications. As a result of the acquisition, we expect to significantly accelerate our enterprise software business by offering an integrated collaborative sourcing solution that represents a combination of both companies' technologies. Atlas Commerce's results of operations will be consolidated starting January 1, 2002. The aggregate purchase price was approximately $26.8 million, including transaction costs. The consideration included $3.5 million in cash, 14,305,708 shares of our common stock valued at approximately $19.5 million and issuance of employee options to purchase 1,630,075 of our common stock valued as of the date of acquisition at $1.4 million based on an independent valuation. Included in the stock consideration are 148,078 shares of our common stock to be issued to a former Atlas Commerce executive in January 2003. A portion of the value of the common stock given as consideration was reduced by an illiquidity discount ranging from 5% to 10% based on restrictions detailed in a registration and lock up agreement executed in connection with the transaction. The Merger Agreement for the Atlas Commerce acquisition provides a put option to Atlas Commerce's former common shareholders. These shareholders have the ability to put a maximum of approximately $1.1 million worth of our common shares back to us for cash. At the acquisition date the put liability covered 728,883 shares of our common stock. The put is recorded in temporary equity pursuant to the guidance in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock. 23 Of the $3.2 million of acquired intangible assets, $0.4 million was assigned to in-process research and development and charged to expense as a non-recurring charge upon consummation of the acquisition since the in-process research and development has not yet reached technological feasibility and has no alternative future use (see Note 4 to our consolidated financial statements). The remaining $2.8 million of acquired intangible assets have a weighted-average useful life of 35 months. These intangibles include developed technology of approximately $1.9 million with a useful life of 36 months and customer contracts of approximately $0.9 million with a weighted average useful life of 32 months. The $21.6 million of goodwill was assigned to the enterprise software segment. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Accounting policies, methods and estimates are an integral part of the consolidated financial statements prepared by management and are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management's current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements as described in Note 1 to our consolidated financial statements, areas that are particularly significant include revenue recognition policies, the assessment of recoverability of long-lived assets, specifically goodwill and other intangible assets, the valuation of non-publicly traded investments and estimates made in calculating restructuring reserves for operating leases related to abandoned facilities. Revenue Recognition Through December 31, 2001, a significant portion of our revenues were derived from e-enablement, e-commerce, advertising and other services which are all sources of revenue from the SMB group. Our revenue from software licensing and related services increased during the year ended 2001 as we began to grow our Enterprise software business, however the majority of the revenue resulted from one customer, Converge. Enterprise Through December 31, 2001, our software licensing and related services revenues have been principally derived from one customer, Converge. The original arrangement with Converge entailed a right to use our existing software as well as any future software that we developed, the provision of professional services, and maintenance and support services over the life of the agreements. Due to the type of professional services that we were providing to Converge, as well as the fact that Converge is entitled to use free of charge any of our future software products, revenue related to Converge is being recognized on a straight-line basis over the term of the arrangements. Software licensing and related services revenues other than from Converge have been principally derived from the licensing of our products, from maintenance and support contracts and from the delivery of professional services. Customers who license our products also generally purchase maintenance contracts which provide software updates and technical support over a stated term, which is usually a twelve-month period. Customers may also purchase implementation services from us. We license our products through our direct sales force. The license agreements for our products do not provide for a right of return other than during the warranty period, and historically product returns have not been significant. We do not recognize revenue for refundable fees or agreements with cancellation rights until such rights to refund or cancellation have expired. Our products are either purchased under a perpetual license model or under a time-based license model. We recognize revenue in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product has occurred; the fee is fixed and determinable; and collectibility is probable. We consider all arrangements with payment terms extending 24 beyond one year to not be fixed and determinable, and revenue under these agreements is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as maintenance and support services and professional services, based on the relative fair values of the elements specific to us. Our determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence ("VSOE"). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue allocated to maintenance and support is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. The proportion of revenue recognized upon delivery may vary from quarter to quarter depending upon the relative mix of licensing arrangements and the availability of VSOE of fair value for undelivered elements. Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are not considered essential, the revenue allocable to the professional services is recognized as the services are performed. If we provide professional services that are considered essential to the functionality of the software products, both the software product revenue and professional service revenue are recognized in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. To date most of our professional services have been considered essential to the functionality and therefore, the majority of our contracts that involved licenses and professional services were recognized on a percentage of completion basis. Deferred revenue includes amounts received from customers for which revenue has not been recognized, which in most cases relates to maintenance or license fees that are deferred until they can be recognized. The majority of our deferred revenue at December 31, 2001 is related to payments received from Converge. Such amounts will be recognized as revenue on a straight-line basis over the contract term. SMB E-enablement revenue includes storefront, e-commerce center and marketplace manager fees which are recognized ratably over the period of the contract. Contracts for storefronts, e-commerce centers and marketplace managers are normally for a one-year term. E-commerce fees in the form of transaction fees or percentage of sale fees are recognized upon receipt of payment. These types of fees, which have been insignificant to date, included auction, training classes and e-commerce center transaction related revenues where we received a percentage of the sales price. E-commerce fees also relate to product sales specifically in our asset remarketing business, where we take title to the product and recognize the gross sales amount and cost of product in the period the products are shipped. Each e-commerce fee revenue stream was analyzed under the gross versus net guidance provided by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, and EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The factors we prioritized for gross revenue recognition were inventory risk, credit risk and ability to negotiate sale price. Advertising revenue includes buttons and banners on the industry marketplaces as well as ads in electronic newsletters delivered to our registered users. If the advertising is sold as a time-based service button and banner revenue is recognized ratably over the service period, whereas, if the advertising is sold as an 25 impression based service, then revenue is recognized as impressions are delivered. Newsletter revenue is recognized when the newsletters are e-mailed. Other types of revenue historically related to the SMB business included web development, hosting and maintenance services, normally included in strategic co-marketing agreements. Web development revenue is recognized on a percentage of completion basis while hosting and maintenance services are recognized ratably. It is common for customers to buy services as a package deal. For example, we may market to our customers a marketplace manager with a banner advertisement and two newsletter distributions. For these "multiple-element" arrangements, we allocate revenue to each element based on its' fair value to the extent objectively determinable, and recognize revenue for each element as the earnings process is complete for each element. Barter contracts, which normally consist of advertising and e-enablement type services, are evaluated under the guidance of Emerging Issues Task Force ("EITF") Issue No. 99-17, Accounting for Advertising Barter Transactions, which requires that barter transactions be recorded at the estimated fair value of the advertisements or other services given, based on recent historical cash transactions. Barter revenue is recognized based on the service provided as described above and barter expense is recognized as the services are received. A prepaid barter asset or liability is recorded if there are timing difference between our delivery of service and our counterpart's delivery of services to us. Our barter revenue is declining and, due to our intention to sell the SMB business, we do not expect to enter into new barter contracts. Deferred revenue for the SMB business is primarily related to e-enablements products such as storefronts and marketplace managers which were distributed under our Microsoft agreement. Recoverability of Goodwill, Other Intangible Assets and Investments As discussed in Note 1 to our consolidated financial statements, we regularly perform reviews to determine whether events or circumstances indicate that the carrying value of long-lived assets, including goodwill and other intangible assets, may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and our market capitalization relative to net book value. When we determine that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, we perform an undiscounted cash flow analysis to evaluate whether future cash flows from the long-lived asset is below its current carrying value. If the result from this analysis yields that an impairment charge is required, we measure the impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. Significant judgment is required in the development of projected cash flows for these purposes, including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future revenue and expense. We have recorded significant impairment charges for goodwill and intangible assets in the past and to the extent that events or circumstances cause our assumptions to change, additional charges may be required in future periods and such charges could be material. We have also recorded significant impairment charges for non-publicly traded investments which we review quarterly for potential impairment. In addition to the procedures described above, for one significant privately held cost method investment, we have obtained independent valuations to assist in determining the estimated fair value of the investment. Restructuring Reserves for Abandoned Operating Leases As discussed in Note 6 to our consolidated financial statements, we have recorded restructuring charges in connection with our abandonment of certain facilities which are leased under long-term operating leases. These charges relate to facilities and portions of facilities we no longer utilize and either seek to terminate early or sublease. Lease termination costs for the abandoned facilities were estimated for the remaining lease 26 obligations based on current negotiations with each respective landlord and brokerage fees offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to locate and contract with suitable sub-lessees and sublease rates which can be achieved using market trend information analyses provided by a commercial real estate brokerage retained by us. Each reporting period we review these estimates and to the extent that these assumptions change due to continued negotiations with landlords or changes in the market, the ultimate restructuring expenses for these abandoned facilities could vary by material amounts. RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 The following discussion and comparison regarding results of continuing operations do not reflect the results of NECX. Revenues. Revenues were $125.6 million for the year ended December 31, 2001 and $112.5 million for the year ended December 31, 2000. Revenues from the SMB group, which include e-enablement, e-commerce, advertising and other services, were $90.0 million for the year ended December 31, 2001 and $104.6 million for the year ended December 31, 2000. A substantial portion of our SMB revenues for the years ended December 31, 2001 and 2000 (approximately $60.0 million, or 67%, and $30.5 million, or 29%, respectively) were from our Original and New Microsoft Agreements (see Note 10 to our consolidated financial statements). Although there was a significant increase in e-enablement revenues (storefronts, e-commerce centers and marketplace managers) from our Original and New Microsoft Agreements during the year ended 2001, we have experienced a significant decline in new advertising and e-enablement revenues. Additionally, revenues from various horizontal businesses have declined, such as our education and training business, which was eliminated earlier this year as part of our cost reduction effort, as well as our asset remarketing business, which has experienced difficulty sustaining revenues in the current economic environment. Our deferred revenue balance at December 31, 2001 is composed of approximately $20.1 million from the SMB group, of which approximately $17.1 million relates to our Original and New Microsoft Agreements. Revenues from the Enterprise group, which include software licensing and related services, were $35.6 million for the year ended December 31, 2001 and $7.9 million for the year ended December 31, 2000. Approximately $30.9 million, or 87%, of our Enterprise group revenues for the year ended December 31, 2001 were from our software licensing and services contracts with Converge. Our deferred revenue balance at December 31, 2001 is composed of approximately $24.4 million from the Enterprise group, of which approximately $23.2 million relates to our Converge contracts. Cost of E-enablement, E-commerce, Advertising and Other Services Revenues. Cost of e-enablement, e-commerce, advertising and other services revenues consist primarily of salaries and benefits of editorial and operational personnel, product costs, depreciation, amortization of internally developed software and other related operating costs. Cost of e-enablement, e-commerce, advertising and other services revenues was $21.2 million for the year ended December 31, 2001 and $39.3 million for the year ended December 31, 2000. Expenses decreased by: - $10.8 million for salaries and benefits; - $3.0 million for direct product costs, including inventory write-down; and - $4.3 million for other related operating costs. The decrease was primarily related to staffing reductions, a decrease in sales from our asset remarketing business and overall cost cutting efforts during 2001. Cost of Software Licensing and Related Services. Cost of software licensing and related services consist primarily of salaries and benefits of personnel, third party contractor costs, amortization of capitalized software and third party software license fees. Cost of software licensing and related services was $17.4 million for the year ended December 31, 2001 and $4.5 million for the year ended December 31, 2000. The increase was primarily due to personnel and third party contractors costs related to our Converge contract. 27 Research and Development Expenses. Research and development expenses consist primarily of salaries and benefits, consulting expenses and related expenditures. Research and development expenses were $27.0 million for the year ended December 31, 2001 and $34.2 million for the year ended December 31, 2000. Expenses decreased by: - $1.7 million for salaries and benefits; and - $5.5 million for consulting and other related expenditures. This decrease in research and development expenses resulted primarily from staffing reductions designed to eliminate redundant positions and streamline our development processes, as well as a company-wide initiative to reduce the use of external consultants. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and commissions for sales and marketing personnel, advertising and travel and entertainment, including the costs of attending trade shows. Sales and marketing expenses were $63.4 million for the year ended December 31, 2001 and $80.6 million for the year ended December 31, 2000. Expenses decreased by: - $12.2 million for advertising, including barter expense; - $4.2 million for salaries, commissions and benefits; and - $0.8 million for other expenditures. This decrease resulted primarily from staffing reductions as well as an overall initiative to reduce costs. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for our executive, administrative, finance, legal, human resources and business and corporate development personnel, as well as support services and professional service fees. General and administrative expenses were $49.6 million for the year ended December 31, 2001 and $56.9 million (including $5.6 million of nonrecurring items related to terminated deal costs and obsolete software) for the year ended December 31, 2000. Expenses increased (decreased) by: - $(4.1) million for salaries and benefits; - $(3.4) million for professional fees; - $4.9 million for facility costs; and - $(4.7) million for other general and administrative costs. This net decrease resulted primarily from staffing reductions as well as an overall company-wide initiative to reduce costs. Higher facility costs resulted from acquired businesses as well as facility expansions which were initially started in fiscal year 2000. Amortization Expense. Amortization expense primarily reflects the amortization of goodwill from purchase business combinations. Also included in amortization expense is the amortization of identified intangible assets acquired in such acquisitions and the amortization of deferred costs related to the issuance of warrants and Series A preferred stock to Microsoft (see Note 15 to our consolidated financial statements). The amortization period for goodwill is 36 months and for other intangible assets it ranges from 24 to 36 months. Amortization expense was $121.7 million and $139.8 million (including $3.8 million and $1.7 million of deferred cost amortization related to Microsoft) for the year ended December 31, 2001 and 2000, respectively. The decrease in amortization expense is primarily attributable to goodwill impairment charges recorded during fiscal year 2001 (see Note 6 to our consolidated financial statements). Restructuring and Asset Impairment Charges. During the year ended December 31, 2001, we recorded a $345.5 million charge related to employee terminations, facility closures and asset write-downs (see Note 6 to our consolidated financial statements). 28 Other Income and Expenses. Other income (expense) includes the following:
YEAR ENDED DECEMBER 31, ---------------- 2001 2000 ------- ------ (IN MILLIONS) Net gain (loss) on investments(1)........................... $ (3.8) $ 79.9 Impairment charge related to cost method, equity method and available-for-sale investments(2)......................... (231.3) (6.4) Conversion inducement payment(3)............................ -- (11.2) Equity in loss from affiliates.............................. (2.3) (2.8) Other income (expense) items................................ 1.1 -- ------- ------ Other income (expense), net............................ $(236.3) $ 59.5 ======= ======
- --------------- (1) We invested $1.0 million in Tradex Technologies Inc. ("Tradex") in July 1999. In March 2000, Tradex was acquired by Ariba, Inc. ("Ariba") and we received 566,306 shares of Ariba, of which 64,310 shares were placed in escrow for one year subsequent to the transaction closing, in exchange for our shares of Tradex. We recorded an $85.5 million gain upon the receipt of the Ariba common stock and subsequently sold 140,000 shares in March 2000 at a loss of $5.6 million, resulting in a net investment gain of $79.9 million. In March 2001, 49,982 of our escrowed Ariba shares were released, with the remaining 14,328 shares being held in escrow due to a dispute under the Agreement and Plan of Reorganization. In March 2001, we wrote off the remaining shares held in escrow which resulted in a $2.2 million loss on investment (see Note 9 to our consolidated financial statements). Additional losses on investments during 2001 related to sales of other available-for-sale investments. (2) This write-down includes a $207.2 million impairment to our cost method investment in Converge (see Note 9 to our consolidated financial statements). (3) In April 2000, approximately $93.3 million of our 5 1/4% convertible subordinated debentures were converted into 4,664,750 shares of our common stock. In connection with the conversion, we made an inducement payment of approximately $11.2 million to our debtholders (see Note 12 to our consolidated financial statements). In-Process Research and Development Charge. In December 2001, we incurred a one-time in-process research and development charge of $0.4 million in connection with our acquisition of Atlas Commerce (see Note 4 to our consolidated financial statements). Interest Income (Expense), Net. Net interest income was $38,000 and $2.6 million (net of $3.8 million and $3.5 million of expense) for the year ended December 31, 2001 and 2000, respectively. Interest income decreased as a result of lower cash balances and interest rates in 2001. Preferred Stock Dividends. For the year ended December 31, 2001, preferred stock dividends and accretion were approximately $7.4 million. As of December 31, 2001, cumulative dividends of $10.9 million have been earned by Microsoft, the holder of our Series A preferred stock. Through December 31, 2001, dividends of $9.3 million were paid to Microsoft through the issuance of additional shares of our Series A preferred stock. The remaining $1.6 million remains payable as of December 31, 2001. The dividends may be paid in cash, additional shares of Series A preferred stock or common stock, at our option. The preferred stock dividend amount also includes approximately $1.0 million of accretion. In connection with our acquisition of Atlas Commerce, we filed a registration statement on Form S-3 with the SEC registering shares of our common stock issued to acquire Atlas Commerce. In connection with a routine review and comment letter process related to this filing, we have received comments from the SEC. The remaining open comments relate primarily to the classification of certain previously reported revenue and expense items of our SMB business and therefore, we do not believe the ultimate resolution of such comments will change our previously reported cumulative net loss. As previously announced on February 13, 2002, we intend to sell our SMB business, and accordingly that business will be accounted for prospectively from 29 January 1, 2002 forward, as a discontinued operation. Such presentation requires that all elements of revenue and expense be netted as a single line item to report net results of operations. As a result, revenues and expenses of our SMB business will no longer be separately presented in our financial statements. We are currently in the process of resolving these matters with the SEC and believe the historical classifications of revenue and expense for the SMB business are appropriate. As of the date of this filing, we cannot provide assurance that the SEC will declare the Form S-3 effective without us first amending the reports that are incorporated into the S-3. The remaining open SEC comments do not relate in any way to our ongoing collaborative supply chain software operations. RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 The following discussion and comparison regarding results of continuing operations do not reflect the results of NECX. Revenues. Revenues were $112.5 million for the year ended December 31, 2000 and $18.4 million for the year ended December 31, 1999. Revenues from the SMB group, which include e-enablement, e-commerce, advertising and other services, were $104.6 million for the year ended December 31, 2000 and $18.4 million for the year ended December 31, 1999. The increase in revenues resulted primarily from: - the Microsoft commercial agreement, which was primarily responsible for the increase in the number of storefronts on our e-marketplaces from approximately 2,900 as of December 31, 1999 to approximately 18,700 as of December 31, 2000; and - additional revenues generated by our horizontal business services, such as asset remarketing, training and education and career services. Microsoft was our largest SMB customer during the year ended 2000, resulting in approximately $30.5 million in revenue, or 29%, of our total SMB revenues. At December 31, 2000 and 1999, we had deferred revenues from the SMB group of $50.6 million and $9.8 million, respectively. Our deferred revenue balance at December 31, 2000 is primarily associated with e-enablement and advertising revenue of which approximately $37.1 million relates to our commercial arrangement with Microsoft. Revenues from the Enterprise group, which include software licensing and related services, were $7.9 million for the year ended December 31, 2000. This new business unit was created by the acquisition of Tradeum in March 2000, so there were no revenues for this business unit for the year ended December 31, 1999. At December 31, 2000, we had deferred revenue of $6.7 million from the Enterprise group. Cost of E-enablement, E-commerce, Advertising and Other Services. Cost of e-enablement, e-commerce, advertising and other services revenues was $39.3 million for the year ended December 31, 2000 and $8.6 million for the year ended December 31, 1999. Expenses increased by: - $11.5 million for salaries and benefits of operating and editorial personnel; - $9.0 million for direct product costs; and - $10.2 million for other related operating costs. Increases were primarily attributable to additional personnel and direct product costs. Additional personnel were required to provide services to an increased number of customers as a result of our Microsoft arrangement, as well as maintaining the increasing number of features and functionalities that had been added to our e-marketplaces and horizontal business services. Direct product costs increased due to our growth in the asset remarketing and training and education businesses in which, under certain circumstances, we took title to the goods being sold. Cost of Software Licensing and Related Services. Cost of software licensing and related services revenues was $4.5 million for the year ended 2000. 30 Research and Development Expenses. Research and development expenses were $34.2 million for the year ended December 31, 2000 and $7.4 million for the year ended December 31, 1999. Expenses increased by: - $14.1 million for salaries and benefits; - $8.1 million for consulting expenses; and - $4.6 million for other expenditures. This increase in research and development expenses resulted primarily from increased staffing and consulting costs to develop and enhance the features, content and services of our e-marketplaces, as well as developing software products related to our SMB community building technology and development of the acquired technology of Tradeum and Isadra. Sales and Marketing Expenses. Sales and marketing expenses were $80.6 million for the year ended December 31, 2000 and $25.3 million for the year ended December 31, 1999. Expenses increased by: - $29.4 million for advertising, including barter expense; - $18.5 million for salaries, commissions and benefits; and - $7.4 million for travel and entertainment expenses (including trade show attendance) and other expenses. These increases resulted primarily from an increased number of sales and marketing personnel across our business units, increased sales commissions and increased expenses related to promoting the new businesses and services we had acquired or created. General and Administrative Expenses. General and administrative expenses were $56.9 million (including $5.6 million of non-recurring items related to terminated deal costs and obsolete software) for the year ended December 31, 2000 and $10.6 million for the year ended December 31, 1999. Expenses increased by: - $17.5 million for salaries and benefits; - $7.4 million for professional fees; - $5.3 million for facility costs; and - $16.1 million for other general and administrative costs, including non-recurring items. These increases resulted primarily from increased staffing levels, higher facility costs, including those incurred as a result of acquired businesses, and professional fees to support the growth of our infrastructure and business operations. Amortization Expense. Amortization expense was $139.8 million (including $1.7 million of deferred cost amortization related to Microsoft) for the year ended December 31, 2000 and $6.8 million for the year ended December 31, 1999. The increase in amortization expense is primarily attributable to the acquisitions we completed during the year ended December 31, 2000. Goodwill Impairment. We recorded an impairment charge of approximately $11.5 million in 2000 related to goodwill based on our analysis of projected undiscounted cash flows (see Note 6 to our consolidated financial statements). In-Process Research and Development Charge. In March 2000, we incurred a one-time in-process research and development charge of $10.0 million in connection with our acquisition of Tradeum (see Note 4 to our consolidated financial statements). 31 Other Income and Expenses. For the year ended December 31, 2000, other income (expenses) includes:
(IN MILLIONS) Net gain on investment(1)................................... $ 79.9 Conversion payment to debt holders(2)....................... (11.2) Impairment charge related to cost method investments(3)..... (6.4) Equity in loss of affiliates................................ (2.8) ------ $ 59.5 ======
- --------------- (1) We invested $1.0 million in Tradex in July 1999. In March 2000, Tradex was acquired by Ariba and we received 566,306 shares of Ariba in exchange for our shares of Tradex. We recorded an $85.5 million gain upon the receipt of the Ariba common stock and subsequently sold 140,000 shares in March 2000 at a loss of $5.6 million, resulting in a net investment gain of $79.9 million (see Note 9 to our consolidated financial statements). (2) In April 2000, approximately $93.3 million of our 5 1/4% convertible subordinated debentures were converted into 4,664,750 shares of our common stock. In connection with the conversion, we made an inducement payment of approximately $11.2 million to the debt holders (see Note 12 to our consolidated financial statements). (3) We recorded an impairment charge of $6.4 million for an other than temporary decline in the fair value of cost method investments (see Note 9 to our consolidated financial statements). Interest Income, Net. Interest income, net of expense, includes income from temporarily invested cash and cash equivalents and from investments and expenses related to our financing obligations. Net interest income was $2.6 million (net of $3.5 million of expense) for the year ended December 31, 2000 and $1.3 million (net of $2.1 million of expense) for the year ended December 31, 1999. Interest income increased as a result of the cash we received from the issuance of Series A preferred stock in April 2000 and the forward sale of our Ariba investment in July 2000 (see Note 9 to our consolidated financial statements). We invest the majority of our cash balances in debt instruments of the United States Government and its agencies, and in high-quality corporate issuers. Interest expense increased during the period because of our outstanding convertible debt. Preferred Stock Dividends. For the year ended December 31, 2000, preferred stock dividends and accretion were approximately $5.3 million. As of December 31, 2000, cumulative dividends of $4.5 million have been earned by the holder of our Series A preferred stock. In August 2000, dividends of $1.5 million were paid to Microsoft through the issuance of additional shares of our Series A Preferred Stock. The remaining $3.0 million remains payable as of December 31, 2000. The dividends may be paid in cash, additional shares of Series A Preferred Stock or common stock, at our option. The preferred stock dividend amount also includes approximately $0.8 million of accretion. 32 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain results of operations data for the eight quarters ended between March 31, 2000 and December 31, 2001. The information for each quarter has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this report and, in the opinion of management, includes all adjustments necessary for a fair presentation of the results of operations for such periods. Historical results are not indicative of the results to be expected in the future, and the results of the interim periods are not indicative of results of any future period.
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2000 2000 2000 2000 --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Revenues................... $ 12,863 $ 24,445 $ 34,455 $ 40,690 Operating loss............. (32,412) (73,125) (73,176) (85,635) Income (loss) from continuing operations attributable to common shareholders............. 46,699 (84,217) (76,082) (93,994) Income (loss) from discontinued operations............... (4,606) (2,931) 68 (19,549) Loss on disposal of discontinued operations............... -- -- -- (81,968) Income (loss) attributable to common shareholders, including effect of preferred stock dividends and accretion............ 42,093 (87,148) (76,014) (195,511) Basic net income (loss) per share Continuing operations.... $ 0.62 $ (1.01) $ (0.88) $ (1.07) Discontinued operations............. (0.06) (0.04) -- (0.23) Estimated loss on disposal of discontinued operations............. -- -- -- (0.93) -------- -------- -------- --------- $ 0.56 $ (1.05) $ (0.88) $ (2.23) ======== ======== ======== ========= Diluted net income (loss) per share Continuing operations.... $ 0.49 $ (1.01) $ (0.88) $ (1.07) Discontinued operations............. (0.04) (0.04) -- (0.23) Estimated loss on disposal of discontinued operations............. -- -- -- (0.93) -------- -------- -------- --------- $ 0.45 $ (1.05) $ (0.88) $ (2.23) ======== ======== ======== ========= THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2001 2001 2001 2001 --------- --------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Revenues................... $ 36,687 $ 33,056 $ 31,755 $ 24,072 Operating loss............. (80,783) (287,684) (40,001) (112,169) Income (loss) from continuing operations attributable to common shareholders............. (91,644) (302,481) (241,649) (128,595) Income (loss) from discontinued operations............... -- -- -- -- Loss on disposal of discontinued operations............... (522) (3,381) -- -- Income (loss) attributable to common shareholders, including effect of preferred stock dividends and accretion............ (92,166) (305,862) (241,649) (128,595) Basic net income (loss) per share Continuing operations.... $ (0.99) $ (3.10) $ (2.46) $ (1.30) Discontinued operations............. -- -- -- -- Estimated loss on disposal of discontinued operations............. -- (0.03) -- -- -------- --------- --------- --------- $ (0.99) $ (3.13) $ (2.46) $ (1.30) ======== ========= ========= ========= Diluted net income (loss) per share Continuing operations.... $ (0.99) $ (3.10) $ (2.46) $ (1.30) Discontinued operations............. -- -- -- -- Estimated loss on disposal of discontinued operations............. -- (0.03) -- -- -------- --------- --------- --------- $ (0.99) $ (3.13) $ (2.46) $ (1.30) ======== ========= ========= =========
Our operating results have varied on a quarterly basis during our short operating history and may fluctuate significantly in the future. In addition, the results of any quarter do not indicate results to be expected for a full fiscal year. Finally, our annual or quarterly results of operations may be below the expectations of public market analysts or investors, in which case the market price of our common stock could be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, our primary source of liquidity consisted of cash and cash equivalents. We intend to make the majority of such funds readily available for operating purposes. At December 31, 2001, we had cash and cash equivalents and short-term investments totaling $50.3 million, compared to $145.2 million at December 31, 2000. At December 31, 2001 we had negative working capital of $26.6 million. Net cash used in operating activities was $72.0 million for the year ended December 31, 2001. Net cash used in operating activities consisted primarily of net operating losses and a decrease in accrued expenses, 33 accounts payable and deferred revenue, offset by decreases in accounts receivable and prepaid expenses and other assets. Net cash used in investing activities was $15.2 million for the year ended December 31, 2001. Cash provided by investing activities include $21.5 million for the sale and maturities of available-for-sale securities, $0.5 million for the sale of assets and $7.2 million for the release of previously restricted funds. Cash used in investing activities included capital expenditures and capitalized software costs of $14.8 million, business acquisitions net of cash acquired of $26.6 million, and investments made in companies accounted for under the equity or cost method, net of cash received from liquidation, of $2.9 million. The capital expenditures consisted primarily of the purchase of office furniture, computer hardware and communications equipment. We have generally funded our capital expenditures through funds generated from operations and the use of capital leases and expect to continue to do so in the foreseeable future. Net cash provided by financing activities was $13.6 million for the year ended December 31, 2001. Net cash provided by financing activities consists of net proceeds from the issuance of common stock to Sumitomo of $15.0 million and net proceeds from the exercise of employee stock options and stock purchase plan transactions of $1.4 million. Cash used in financing activities includes principal payments on capital leases of $2.8 million. As of December 31, 2001, we have approximately $5.1 million of accrued restructuring costs related to facility leases, $0.5 million of which were assumed as part of the Atlas Commerce acquisition. We have made significant efforts to estimate the expected costs to early terminate the leases or sublease facilities. If these facilities can not be sublet or the leases early terminated, our contractual lease payments of approximately $13.5 million related to these leases will be due over the respective lease terms in addition to aggregate contractual lease payments of approximately $3.3 million related to facilities we continue to use. We are a party to a put/call agreement with British Telecommunications, plc ("BT") whereby we can purchase their remaining 10% interest in Verticalnet Europe at any time after March 13, 2001 and BT may sell its investment to us at any time after March 13, 2002. The fair value of the put/call price of approximately $13.6 million is included in other current liabilities on the consolidated balance sheet as of December 31, 2001. The amount is payable in Euros, therefore, we mark the liability to market quarterly. The variable component of the price based on the LIBOR rate is accrued quarterly through the date the put or call is exercised. In February 2002 we agreed with BT to amend the put/call agreement to allow for an early partial exercise of our call using our common stock. As of March 15, 2002, we have issued 2,000,000 shares of our common stock to BT with an aggregate value of approximately $1.8 million towards the put/call obligation. As of March 15, 2002, our put/call liability is approximately $11.8 million (see Note 11 to our consolidated financial statements). Our capital lease obligations of approximately $1.9 million are payable in the following amounts: $1.3 million, $0.4 million, and $0.2 million during the years ended December 31, 2002, 2003 and 2004, respectively (see Note 12 to our consolidated financial statements). In September and October of 1999, we completed the sale of an aggregate of $115.0 million of 5 1/4% convertible subordinated debentures in a private placement transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended, resulting in net proceeds of $110.9 million. The debentures have a maturity date of September 27, 2004, with semi-annual interest payments due on March 27 and September 27 of each year beginning on March 27, 2000. The debentures are convertible into shares of our common stock at an initial conversion price of $20 per share, subject to adjustment under certain circumstances. Approximately $93.3 million of the debentures were converted into shares of our common stock in April 2000. Our outstanding convertible debt as of December 31, 2001 is approximately $21.7 million (see Note 12 to our consolidated financial statements). As of March 15, 2002, we anticipate receiving the remaining contractual payments of approximately $6.2 million due from Converge under the amended and restated agreements during the year ended December 31, 2002. Currently, a significant portion of our cash flow requirements will be met through these agreements with Converge. A failure by Converge to make all or part of these payments on a timely basis, 34 including any restructuring of these payments (whether in terms of amount, timing or otherwise) could have a material adverse effect on our business, financial condition and operating results. During 2001, our available cash, cash equivalent and short-term investments resources declined by approximately $95.0 million, principally as a result of continued operating losses. Accounts receivable also declined by approximately $30.0 million in 2001 to a balance of less than $2.0 million as of December 31, 2001. Cash flows from two significant customers, Microsoft and Converge, were instrumental in financing our business during 2001. As of December 31, 2001, the Microsoft contractual arrangements have been terminated and anticipated cash flows under the Converge contractual arrangements have been significantly curtailed (see Note 10 to our consolidated financial statements). As a result, we will become increasingly dependent on generating revenues and operating cash flows from new customers in 2002. We believe that our current level of liquid assets and the expected cash flows from contractual arrangements will be sufficient to finance our capital requirements and anticipated operating losses for at least the next 12 months. However, to the extent our current level of liquid assets proves to be insufficient, we may need to obtain additional debt or equity financing. Additionally, we may, if the capital markets present attractive opportunities, raise cash through the sale of debt or equity. We can provide no assurance that our liquid assets will be sufficient to fund our operations or that we will be successful in obtaining any required or desired financing either on acceptable terms or at all. Should funding not be available on acceptable terms, we may implement additional cost reduction initiatives, including headcount reduction. While such initiatives may enable us to continue to satisfy our short-term obligations and working capital requirements, they may negatively impact our ability to successfully execute our business plan over the longer term. ACQUISITIONS 2001 Acquisitions During the year ended December 31, 2001, in addition to the Atlas Commerce acquisition previously mentioned, we completed two additional acquisitions, including Net Commerce and Plasticsnet. The aggregate purchase price of these acquisitions was approximately $2.0 million in cash. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of net assets acquired of approximately $2.2 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. Tradeum On March 23, 2000, we acquired all of the outstanding capital stock of Tradeum, Inc. ("Tradeum") for approximately $453.1 million, including transaction costs. The consideration included 2,573,837 shares of our common stock, valued at approximately $325.0 million and 1,426,148 employee options to purchase our common stock, valued as of the date of acquisition at approximately $122.6 million, based on an independent valuation. A portion of the common stock given as consideration was reduced by an illiquidity discount based on restrictions detailed in the lock up agreements signed by the individuals receiving the stock. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $452.6 million was allocated to in-process research and development, existing technology, assembled workforce and goodwill in the amounts of approximately $10.0 million, $7.0 million, $1.0 million and $434.6 million, respectively. The $10.0 million was charged to expense as a non-recurring charge upon consummation of the acquisition since the in-process research and development had not yet reached technological feasibility and had no alternative future use. The existing technology, assembled workforce and goodwill were being amortized on a straight-line basis over 36 months. As of December 31, 2001, all goodwill and intangible assets related to the Tradeum acquisition have been impaired and written off (see Note 6 to our consolidated financial statements). 35 Verticalnet Europe In June 2000, we formed Verticalnet Europe, a joint venture with BT and Internet Capital Group, Inc. ("ICG"). The joint venture was funded with 109.5 million Euros (approximately $114.7 million as of the closing date) from the three partners. We contributed to Verticalnet Europe approximately $6.8 million in cash and intellectual property independently valued at approximately $120.0 million for the operation of e-marketplaces within Europe in exchange for a 56% ownership interest in Verticalnet Europe. Additionally, Verticalnet Europe and BT created Verticalnet UK Ltd. as part of the joint venture agreement. Our ownership of Verticalnet Europe increased from 56% to 72% on December 29, 2000 when Verticalnet Europe redeemed some of its shares held by BT. Due to minority shareholder governance provisions in the original agreement, we were previously accounting for Verticalnet Europe using the equity method. As a result of our increased ownership, certain governance provisions regarding minority shareholders were amended to give us control over Verticalnet Europe's operations. Accordingly, we consolidated Verticalnet Europe in our consolidated balance sheet at December 31, 2000 and began consolidating Verticalnet Europe's operations starting January 1, 2001. The increase in ownership was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $3.4 million was allocated to goodwill. Additionally, in December 2000 Verticalnet Europe obtained full ownership of Verticalnet UK Ltd. During the three months ended March 31, 2001, our percentage ownership of Verticalnet Europe increased to approximately 90%. Verticalnet Europe redeemed a portion of its shares held by ICG, and ICG sold the remaining portion directly to us for approximately $2.3 million in cash. We also purchased a portion of BT's ownership of Verticalnet Europe for approximately $6.4 million in cash and 4,993,173 shares of our common stock. The shares of common stock issued to BT were registered under our acquisition shelf registration statement. We also entered into a put/call agreement with BT whereby we can buy their remaining 10% interest in Verticalnet Europe at any time after closing and BT may sell its investment to us at any time after March 13, 2002 (see Notes 11 and 22 to our consolidated financial statements). The increase in ownership was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $20.0 million was allocated to goodwill and was being amortized over 36 months. As of December 31, 2001 all goodwill related to the Verticalnet Europe acquisition has been impaired and written off (see Note 6 to our consolidated financial statements). Other 2000 Acquisitions During the year ended December 31, 2000, we completed six additional acquisitions, including Career Mag, Leasend, J.M. Computer Services, BidLine, FedAmerica and Oralis. The aggregate purchase price of these acquisitions was approximately $5.3 million in cash and 474,060 shares of common stock valued at approximately $36.8 million. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of tangible net assets acquired of approximately $41.6 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. Isadra In August 1999, we acquired all of the outstanding capital stock of Isadra, Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common stock valued at approximately $37.8 million, based on an independent valuation, and 81,526 options to purchase our common stock, valued at approximately $1.5 million at the date of acquisition using the Black-Scholes model. The common stock given as consideration was reduced by an illiquidity discount based on restrictions detailed in the lock up agreements signed by the individuals receiving the stock. The acquisition was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $43.9 million was allocated to in-process research and development, existing technology, assembled work force and goodwill in the amounts of approximately $13.6 million, $2.1 million, $0.5 million and $27.7 million, respectively. The $13.6 million was charged to expense as a non-recurring charge upon consummation of the acquisition since 36 the in-process research and development had not yet reached technological feasibility and had no alternative future use (see Note 4 to our consolidated financial statements). The existing technology and assembled work force were amortized on a straight-line basis over 24 months, while goodwill is being amortized on a straight-line basis over 36 months. Other 1999 Acquisitions During the year ended December 31, 1999, we completed nine additional acquisitions, including Safety Online, Techspex, Oillink, ElectricNet, LabX Technologies, Industry OnLine, CertiSource, GovCon and TextileWeb. The aggregate purchase price for these acquisitions was approximately $3.9 million in cash and 781,488 shares of common stock valued at approximately $27.9 million. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $33.0 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS No. 141 also specifies criteria that must be met for intangible assets acquired in a purchase method business combination to be recognized and reported separately from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142, which is effective January 1, 2002, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121. As of January 1, 2002, the adoption date of SFAS No. 142, the remaining unamortized goodwill and identifiable intangible assets of $27.6 million and $3.2 million, respectively, will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill and other intangible assets was approximately $119.1 million, $146.8 million and $6.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Because of the extensive effort required to adopt SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on our financial statements as of the date of this report. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, and the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. We plan to adopt SFAS No. 144 effective January 1, 2002. We do not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on our financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. 37 FACTORS AFFECTING OUR BUSINESS CONDITION RISKS RELATED TO OUR CONTINUING OPERATIONS We may require additional capital for our operations and obligations, which we may not be able to raise or, even if we do, could be dilutive to our shareholders. Although, based on our most recent projections, we believe our current level of liquid assets and the expected cash flows from contractual arrangements will be sufficient to finance our capital requirements and anticipated operating losses for at least the next 12 months, any projection of future long-term cash needs and cash flows are inherently subject to uncertainty. There is no assurance that our resources will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements during this period. We may need, or find it advantageous, to raise additional funds in the future to fund our growth, pursue sales and licensing opportunities, develop new or enhanced products and services, respond to competitive pressures or acquire complementary businesses, technologies or services. If we are ultimately unable, for any reason, to receive cash payments expected from our customers, in particular scheduled payments from Converge, our business, financial condition and results of operations will be materially and adversely affected. We also have a 15.4 million Euro (approximately $13.6 million as of December 31, 2001) put/call agreement with British Telecommunications whereby BT has the right to sell its remaining investment in Verticalnet Europe beginning in March 2002. In February 2002 we agreed with BT to amend the put/call agreement to allow for an early partial exercise of our call using our common stock. As of March 15, 2002, we have issued 2,000,000 shares of our common stock to BT with an aggregate value of approximately $1.8 million towards the put/call obligation. Our ability to continue to use our stock to pay this obligation may be limited by our stock price and trading volume, so we may have to use cash to satisfy some or substantially all of this obligation, which could increase our need to obtain additional financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders will be reduced and shareholders will experience additional dilution. These new securities may also have powers, preferences and rights that are senior to those of the rights of our common stock. We cannot be certain that additional financing will be available on terms favorable to us, if at all. If adequate funds are not available or not available on acceptable terms, we may be unable to fund our operations adequately, promote our brand identity, take advantage of acquisition opportunities, develop or enhance products or services or respond to competitive pressures. Any inability to do so could have a negative effect on our business, financial condition and results of operations. We may never generate an operating profit. As of December 31, 2001, our accumulated deficit was in excess of $1.1 billion. For the year ended December 31, 2001, we sustained a $768.3 million loss attributable to common shareholders (including preferred stock dividends). We expect to incur operating losses for the foreseeable future. We may never generate an operating profit or, even if we do become profitable from operations at some point, we may be unable to sustain that profitability. The revenues and operating results of our SMB unit will no longer be reported in the results from continuing operations beginning in the first quarter of 2002. For the year ended December 31, 2001, $90.0 million, or approximately 72% of our overall revenues, were generated primarily from sales of storefronts, marketplace managers and advertising on our SMB unit's industry marketplaces. Because the SMB unit will be treated as a discontinued operation, we will not report future revenues from the SMB unit as part of our continuing operations. As a result of our decision to sell the SMB unit, we anticipate that the composition of our reported revenues will change substantially in future periods. Beginning in 2002, we will be increasingly dependent on generating revenues from enterprise software licensing and professional services. In the foreseeable future, we may not be able to generate revenues from our continuing operations at the levels we did when we included the revenues of the SMB unit in our continuing operations. 38 If the business, revenues and operating results of our SMB unit decline prior to a sale of that business, it could delay or impede our ability to sell the SMB unit, which would negatively impact our cash flow and increase our net loss. We announced on February 13, 2002, that we intend to sell the SMB unit and will treat it for accounting purposes as a discontinued operation in the first quarter of 2002, based on our expectation that we will sell that business within a reasonable period of time. Although the results of operations of the SMB unit will not be included in our operating results from continuing operations after 2001, we will report the net loss from the SMB unit as discontinued operations on a quarterly basis in determining our total net loss, and we will continue to fund any net cash used in the SMB unit until we complete the sale of the business. If the financial performance of the SMB unit declines, then it could be more difficult for us to sell the SMB unit at an acceptable purchase price, or it could significantly delay our ability to complete a sale. If we continue to own the SMB unit for an extended time period during which its financial performance declines significantly or it has significant unexpected cash needs, then our total net loss and cash flows could be negatively impacted. We may not develop significant revenues from enterprise software licensing and professional services, which could adversely affect our future revenue growth and ability to achieve profitability. If we do not develop and consistently generate significant revenues from enterprise software licensing and professional services, our business, financial condition and operating results will be impaired. Our ability to generate software revenues depends on the overall demand for enterprise software solutions and professional services, as well as general economic and business conditions. Suppressed demand for software solutions and services caused by a weakening economy and reduced levels of spending on technology solutions may result in less revenue growth than expected or even a decline in revenues. We cannot offer any assurances that we will be able to develop, enhance or promote our enterprise software solutions and professional services effectively, whether as a result of general economic conditions or otherwise. If we cannot further reduce our expenses, our operating results will suffer. Our expense reductions and layoffs throughout 2001 may not have sufficiently reduced our ongoing operating expenses to a level necessary to achieve operating profits. If we cannot further reduce our expenses, some of which are fixed, including those related to non-cancelable agreements, equipment leases and real estate leases, then our operating results will suffer. In addition, we may not be successful in further identifying and eliminating redundancies within our business, or in streamlining our overall operations as necessary to reduce our expenses. Fluctuations in our quarterly operating results may cause our stock price to decline. Our quarterly operating results are difficult to forecast and could vary significantly. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied on as indicators of future performance. If our operating results in a future quarter or quarters do not meet the expectations of securities analysts or investors, the price of our common stock may fall. Our quarterly operating results will be substantially dependent on software licenses booked and delivered in that quarter. Any delay in the recognition of revenue for any of our license transactions could cause significant variations in our quarterly operating results and could cause our revenues to fall significantly short of anticipated levels. We also expect that our quarterly operating results will fluctuate significantly due to other factors, many of which are beyond our control, including: - anticipated lengthy sales cycles for our products; - the size and timing of individual license transactions; - intense and increased competition in our target markets; - our ability to develop, introduce and bring to market new products and services, or enhancements to our existing products and services, on a timely basis; and - risks associated with past and future acquisitions. 39 We may be unable to maintain our listing on the Nasdaq National Market, which could cause our stock price to fall and decrease the liquidity of our common stock. Our common stock is currently listed on the Nasdaq National Market, which has requirements for the continued listing of stock. One of the continued listing requirements is that our common stock maintain a minimum bid price of $1.00 per share. Since August 2001, the bid price for our common stock has dropped below $1.00 during extended periods. If our common stock trades below $1.00 for 30 consecutive trading days, or if we fail to meet any of the other listing requirements, our common stock may be delisted from the Nasdaq National Market and the trading market for our common stock could decline, which could depress our stock price and adversely affect the liquidity of our common stock. We anticipate lengthy sales and implementation cycles for our software products. We anticipate the sales cycles for our enterprise software products to average approximately six to nine months. In selling our products, we may be asking potential customers in many cases to change their established business practices and conduct business in new ways. In addition, potential customers must generally consider additional issues, such as product benefits, ease of installation, ability to work with existing technology, functionality and reliability, before committing to purchase our products. Additionally, we believe that the purchase of our products is often discretionary and generally involves a significant commitment of capital and other resources by a customer, which frequently requires approval at a number of management levels within the customer organization. Likewise, the implementation and deployment of our enterprise software products requires a significant commitment of resources by our customers and our professional services organization. The challenges we face in attempting to obtain commitments and approvals from our customers may be exacerbated by worsening economic conditions in general and in our target markets, as well as by competition from other software solution providers whose brands, products and services may be better known to, and more widely accepted by, potential customers than ours. We expect to rely on third parties to implement our products. We expect to rely increasingly on third parties to implement our software products at customer sites. If we are unable to establish and maintain effective, long-term relationships with implementation providers, or if these providers do not meet the needs or expectations of our customers, our business could be seriously harmed. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to establish or maintain relationships with third parties having sufficient resources to provide the necessary implementation services to support our needs. If these resources are unavailable, we will be required to provide these services internally, which could significantly limit our ability to meet our customers' implementation needs. A number of our competitors have significantly more well-established relationships with third parties that we may potentially partner with. As a result, these third parties may be more likely to recommend competitors products and services rather than our own. In addition, we would not be able to control the level and quality of service provided by our implementation partners. New versions and releases of our products may contain errors or defects. Our enterprise software products may contain undetected errors or failures when first introduced or as new versions are released. This may result in loss of, or delay in, market acceptance of our products. Errors in new releases and new products after their introduction could result in delays in release, lost revenues and customer frustration during the period required to correct these errors. We may in the future discover errors and defects in new releases or new products after they are shipped or released. Our target markets are evolving and characterized by rapid technological change, which we may not be able to keep pace with. The markets for our products and services are evolving and characterized by rapid technological change, changing customer needs, evolving industry standards and frequent new product and service announcements. The introduction of products employing new technologies and emerging industry standards could render our existing products or services obsolete or unmarketable. If we are unable to respond to these developments successfully or do not respond in a cost-effective way, our business, financial condition and operating results 40 will suffer. To be successful, we must continually improve and enhance the responsiveness, services and features of our enterprise software products and introduce and deliver new product and service offerings and new releases of existing products. We may fail to improve or enhance our software products or introduce and deliver new releases or new offerings on a timely and cost-effective basis or at all. If we experience delays in the future with respect to our software products, or if our improvements, enhancements, offerings or releases to these products do not achieve market acceptance, we could experience a delay or loss of revenues and customer dissatisfaction. Our success will also depend in part on our ability to acquire or license third party technologies that are useful in our business, which we may not be able to do. We may ultimately be unable to compete in the markets for the products and services we offer. The markets for our software products and services are intensely competitive, which may result in low or negative profit margins and difficulty in achieving market share, either of which could seriously harm our business. We expect the competition in our markets to remain intense and to increase. Our enterprise software products and services face competition from software companies whose products or services compete with a particular aspect of the solution we provide, as well as several major enterprise software developers. Many of our competitors have longer operating histories, greater brand recognition and greater financial, technical, marketing and other resources than we do, and may have well-established relationships with our existing and prospective customers. This may place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. Our competitors may also develop products or services that are superior to or have greater market acceptance than ours. If we are unable to compete successfully against our competitors, our business, financial condition and operating results would be negatively impacted. We are exposed to risks associated with decreases in the fair value, or a complete loss, of our equity investments. We may invest in equity instruments of privately-held companies for business and strategic purposes. Such items are included in other investments on our balance sheet. As of December 31, 2001, we held cost method investments of $10.6 million, of which our Converge investment was $7.8 million. We may never realize any return on our equity interests in Converge or these other entities, or we may suffer a complete loss of these equity interests, which could materially and adversely affect our business, financial condition and operating results. In addition, our quarterly results may be materially reduced if we determine that an impairment in the fair value of one of our equity positions is other than temporary, which would require us to write down or write off the carrying value of those securities. During the year ended December 31, 2001, we recorded an aggregate of $231.3 million in impairment charges for other than temporary declines in the fair value of several of our cost method, equity method and available-for-sale investments, $207.2 million of which was a write-down of our investment in Converge. Acquisitions may negatively impact our business. We have grown, and may continue to grow, our business through acquisitions that complement our existing products and services. If we are unable to complete future acquisitions, our business, financial condition and operating results could be negatively impacted. We may not be able to identify additional suitable businesses that are available for sale at reasonable prices or on reasonable terms. Even if we are able to identify appropriate acquisition candidates, we may not be able to negotiate the terms of any acquisition successfully, finance the acquisition or integrate the acquired business (including its products, services, technologies or personnel) into our existing business operations. Our acquisition strategy is also subject to numerous other risks including, without limitation, the following: - acquisitions may cause a disruption in our ongoing business, distract our management and other resources and make it difficult to maintain our standards, controls and procedures; - we may acquire companies in markets in which we have little experience; 41 - we may not be able to retain key employees from acquired companies or from our own company after the acquisition, and may face competition from employees that leave before or after an acquisition is complete; - to pay for acquisitions, we may be required to issue equity securities, which may be dilutive to existing shareholders, or we may be required to incur debt or spend cash, which would negatively impact our liquidity and could impair our ability to fund our operations; - we may not realize any return on our investment in the acquired companies and may even lose our entire investment and incur significant additional losses; - our share price could decline following market reaction to our acquisitions; and - our interest deductions may be disallowed for federal income tax purposes. If we do not develop the "Verticalnet" brand in the enterprise software industry, our revenues might not increase. To be successful, we must establish and continuously strengthen the awareness of the "Verticalnet" brand in the enterprise software industry. If our brand awareness as a maker of enterprise software does not develop, or if developed, is not sustained as a respected brand, it could decrease the attractiveness of our products and services to potential customers, which could result in decreased revenues. Our interests may conflict with those of Internet Capital Group, our largest shareholder, which may affect our business strategy and operations negatively. As a result of its stock ownership and board representation, Internet Capital Group is in a position to affect our business strategy and operations, including corporate actions such as mergers or takeover attempts, in a manner that could conflict with the interests of our public shareholders. At December 31, 2001, Internet Capital Group beneficially owned 25,318,644 shares, or approximately 22.3%, of our common stock, which includes 250,000 shares of our common stock underlying $5.0 million of our 5 1/4% convertible subordinated debt, and 478,624 shares of our common stock underlying warrants issued to Internet Capital Group prior to our initial public offering. One representative of Internet Capital Group is a member of our board of directors. We may compete with Internet Capital Group for business opportunities. Internet Capital Group, therefore, may seek to acquire or invest in companies that we would find attractive. While we may partner with Internet Capital Group on future acquisitions or investments, we have no current contractual obligations to do so. We do not have any contracts or other understandings that would govern resolution of this potential conflict. This competition, and the potential conflict posed by the designated director, may deter companies from partnering with us and may limit our business opportunities. Internet Capital Group may have to buy or sell our stock to avoid registration under the Investment Company Act of 1940, which may negatively affect our stock price. To avoid registration under the Investment Company Act of 1940, Internet Capital Group may need to continue to own more than 25% of our voting securities and to continue to have a representative on our board of directors. Under the Investment Company Act, a company is considered to control another company if it owns more than 25% of that company's voting securities and is the largest stockholder of such company. A company may be required to register as an investment company if more than 45% of its total assets consist of, and more than 45% of its income/loss and revenue attributable to it over the last four quarters is derived from, ownership interests in companies it does not control. Internet Capital Group has publicly stated that it is not feasible to be regulated as an investment company because the Investment Company Act rules are inconsistent with their corporate strategy. As of December 31, 2001, Internet Capital Group's ownership interest in us was 22.3%. On March 15, 2002, Internet Capital Group filed a Schedule 13D stating that it had increased its beneficial ownership in us to 35,841,747, or 31.6% of our common stock, because it had reached an agreement with Safeguard Scientifics that provides it with the right of first refusal to purchase the 10,523,103 shares of our stock that Safeguard owns. If its ownership interest falls below 25%, Internet Capital Group may need to purchase additional voting securities to return to an ownership interest of at least 25% to avoid having to register as an investment company. The possible need of Internet Capital Group to maintain a 42 25% ownership position could adversely influence its decisions regarding actions that may otherwise be in the best interests of our public shareholders. If Internet Capital Group sells all or part of its investment in us, whether to comply with the Investment Company Act of 1940, to raise additional capital or otherwise, it could adversely affect our common stock's market price. Our success depends on our key management and experienced software personnel, whom we may not be able to retain or hire. We believe that our success depends on continued employment of our senior management team and on having a highly trained research and development staff, sales force and professional service organization. If one or more members of our senior management team were unable or unwilling to continue in their present positions, our business, financial condition and operating results could be materially adversely affected. If we are unable to retain or hire trained technical personnel and experienced software sales and service professionals, it could limit our ability to design, develop and implement our products, or increase sales of our products and services. Ultimately, our business, financial condition and operating results will be impaired if we cannot hire and retain suitable personnel. We may not be able to protect our proprietary rights and may infringe the proprietary rights of others. Proprietary rights are important to our success and our competitive position. We may be unable to register, maintain and protect our proprietary rights adequately or to prevent others from claiming violations of their proprietary rights. Although we file copyright registrations for the source code underlying our software, enforcement of our rights might be too difficult and costly for us to pursue effectively. We have filed patent applications for the proprietary technology underlying our software, but our ability to fully protect this technology is contingent upon the ultimate issuance of the corresponding patents. Effective patent, copyright and trade secret protection of our software may be unavailable or limited in certain countries. Several lawsuits have been brought against us and the outcome of these lawsuits is uncertain. Several lawsuits have been brought against us and the underwriters of our stock in our initial public offering. These lawsuits allege, among other things, that the underwriters engaged in sales practices that had the effect of inflating our stock price, and that our prospectus for that offering was materially misleading because it did not disclose these sales practices. We intend to vigorously defend against these lawsuits. No assurance can be given as to the outcome of these lawsuits. We may not have sufficient cash flow from operations to service our debt. As of December 31, 2001, we had approximately $24.9 million in long-term debt (including $21.7 million of our outstanding 5 1/4% convertible subordinated debentures due 2004). Currently, we are not generating sufficient cash flow from our operations to satisfy our annual debt service payment obligations. If we are unable to satisfy our debt service requirements, substantial liquidity problems could result, which would negatively impact our future prospects. Shares eligible for future sale by our current or future shareholders may cause our stock price to decline. If our shareholders or optionholders sell substantial amounts of our common stock in the public market, including shares issued in completed or future acquisitions or upon the exercise of outstanding options and warrants, then the market price of our common stock could fall. As of March 15, 2002, the holders of 42,151,578 shares of common stock (which includes the 14,157,630 shares issued in the acquisition of Atlas Commerce), warrants to purchase 2,127,038 shares of common stock and 110,930 shares of Series A preferred stock, which are convertible into approximately 1,276,890 shares of common stock, have demand and/or piggyback registration rights. The exercise of such rights could adversely affect the market price of our common stock. We also have filed a shelf registration statement to facilitate our acquisition strategy, as well as registration statements to register shares of common stock under our stock option and employee stock purchase plans. Shares issued pursuant to existing or future shelf registration statements, upon exercise of stock options and in connection with our employee stock purchase plan will be eligible for resale in the public market without restriction. 43 Anti-takeover provisions and our right to issue preferred stock could make a third-party acquisition of us difficult. Verticalnet is a Pennsylvania corporation. Anti-takeover provisions of Pennsylvania law could make it more difficult for a third party to acquire control of us, even if such change in control would be beneficial to our shareholders. Our articles of incorporation provide that our board of directors may issue preferred stock without shareholder approval. In addition, our bylaws provide for a classified board, with each board member serving a staggered three-year term. The issuance of preferred stock and the existence of a classified board could make it more difficult for a third party to acquire us. Our common stock price is likely to remain highly volatile. The market for stocks of technology companies has been highly volatile since our initial public offering in 1999. Throughout this period, the market price of our common stock has reached extreme highs and lows, and our daily trading volume has been, and will likely continue to be, highly volatile. Investors may not be able to resell their shares of our common stock following periods of price or trading volume volatility because of the market's adverse reaction to such volatility. Factors that could cause volatility in our stock, in some cases regardless of our operating performance, include, among other things: - general economic conditions, including suppressed demand for technology products and services; - actual or anticipated variations in quarterly operating results; - announcements of technological innovations; - new products or services; - changes in financial estimates by securities analysts; - conditions or trends in business-to-business usage of software and related technology; - changes in the market valuations of other Internet, software or technology companies; - failure to meet analysts' or investors' expectations; - announcements by us or our competitors of significant acquisitions, strategic partnerships or joint ventures; - capital commitments; - additions or departures of key personnel; and - sales of common stock or instruments convertible into common stock. We have not yet cleared all of the SEC's comments relating to our recent filing. In connection with our acquisition of Atlas Commerce, we filed a registration statement on Form S-3 with the SEC registering shares of our common stock issued to acquire Atlas Commerce. In connection with a routine review and comment letter process related to this filing, we have received comments from the SEC. The remaining open comments relate primarily to the classification of certain previously reported revenue and expense items of our SMB business and therefore, we do not believe the ultimate resolution of such comments will change our previously reported cumulative net loss. As previously announced on February 13, 2002, we intend to sell our SMB business, and accordingly that business will be accounted for prospectively from January 1, 2002 forward, as a discontinued operation. Such presentation requires that all elements of revenue and expense be netted as a single line item to report net results of operations. As a result, revenues and expenses of our SMB business will no longer be separately presented in our financial statements. We are currently in the process of resolving these matters with the SEC and believe the historical classifications of revenue and expense for the SMB business are appropriate. As of the date of this filing, we cannot provide assurance that the SEC will declare the Form S-3 effective without us first amending the reports that are incorporated into the S-3. 44 The remaining open SEC comments do not relate in any way to our ongoing collaborative supply chain software operations. To the extent we are required to amend the filings in a manner that is inconsistent with the presentation in our previous filings, including our financial statements, our business and the market price of our common stock could be materially and adversely affected. RISKS RELATED TO OUR SMALL/MEDIUM BUSINESS UNIT THAT WE INTEND TO SELL, WHICH THEREFORE WILL BE TREATED FOR ACCOUNTING PURPOSES AS A DISCONTINUED OPERATION AFTER 2001. If we are unable to provide new customer leads to the suppliers, buyers and other users of our industry marketplaces, it may negatively impact the operating results of our SMB unit. The success of our SMB unit depends on our ability to provide sales leads to the suppliers, buyers and other users of our industry marketplaces. If we are unable to attract buyers to visit our industry marketplaces then they will be unlikely to leave sales leads for our suppliers. If we are unable to consistently provide sales leads to suppliers, they will be unlikely to purchase or renew our marketplace manager tools. If suppliers have an unsatisfactory experience receiving sales leads, we would have difficulty in cross-marketing to them to leave sales leads in buying for their own businesses from other suppliers. If the sales leads that suppliers do receive are of such poor quality that they consistently fail to result in sales, then they will be unlikely to purchase or renew our marketplace manager tools. The success of our SMB unit depends on the development of alliances with third-party marketplaces to drive additional leads to our suppliers, which is uncertain. The success of the SMB unit depends in part upon our ability to drive more leads to our suppliers by syndicating our suppliers' content into industry marketplaces maintained by other parties. We expect to rely increasingly on alliances with third-party marketplaces to syndicate our suppliers' content into other industry marketplaces. Our failure to maintain relationships and build new ones with third-party industry marketplaces. could result in our failure to provide leads to our suppliers. If we cannot generate new revenues from the sale of marketplace manager products, then our SMB business would suffer. Our SMB unit currently relies for a material part of its revenues on the sale of our marketplace manager tool, which helps customers generate sales leads on our industry marketplaces. If we are not able to increase our level of new revenues from marketplace manager sales, our SMB business may suffer. Our ability to increase our new sales or renewals of our marketplace manager tools depends on many factors, including, without limitation: - general economic conditions and their impact on demand for online sales tools; - acceptance of the Internet as a legitimate, effective and measurable medium for business-to-business activity; - the development of a large base of users on our industry marketplaces who possess demographic characteristics attractive to suppliers; and - our ability to develop effective marketing programs and build relationships with third-party providers to help generate sales leads. The content on our SMB unit industry marketplaces may not attract a significant number of users with demographic characteristics valuable to suppliers. The future success of the SMB unit depends in part upon our ability to deliver compelling business content on our industry marketplaces that will attract a significant number of buyers and other users with demographic characteristics valuable to business suppliers. Our inability to deliver business content that attracts a loyal buyer base with demographic characteristics attractive to suppliers could impair the business, financial condition and operating results of the SMB unit. We face the challenge of delivering content that is 45 attractive to users in an environment characterized by rapidly changing user preferences, as well as the ease with which users can freely navigate and instantly switch among a large number of Internet sites, many of which offer business content that may be more attractive than ours. If we cannot consistently anticipate or respond quickly to changes in user preferences or distinguish our content from that offered on other Web sites, our SMB unit industry marketplaces may not attract a significant number of users with demographic characteristics that buyers and suppliers are seeking. We may not be able to protect the proprietary rights of our SMB unit and may infringe the proprietary rights of others. Generally, our domain names for our SMB unit industry marketplaces cannot be protected as trademarks because they are considered "generic" under applicable law. In addition, effective copyright, trademark, patent and trade secret protection may be unavailable or limited in certain countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our work. We also license content from third parties for our industry marketplaces, which makes it possible that we could become subject to infringement actions based upon the content licensed from those third parties. Our failure to maintain relationships with third-party content providers may impair the operating results of our SMB unit. We have relied on, and expect to rely increasingly on, third parties such as news wires to provide content for our industry marketplaces. If we are unable to maintain our relationships with third-party content providers, or replace them with other content providers on comparable terms, then we could suffer decreased traffic on, and customer leads through, our industry marketplaces. We may be subject to legal liability for publishing or distributing content on our industry marketplaces over the Internet. Providers of Internet products and services have been sued in the past, sometimes successfully, based on the content they offer. We may be subject to legal claims relating to the content on our industry marketplaces, or the downloading and distribution of such content. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, some of the content provided on our industry marketplaces is drawn from data compiled by other parties, including governmental and commercial sources, and we re-key the data. This data may have errors. If our content is improperly used or if we supply incorrect information, it could result in unexpected liability. Our insurance may not cover claims of this type, or may not provide sufficient coverage. Our SMB unit's business, financial condition and operating results could suffer materially if costs resulting from these claims are not covered by our insurance or exceed our coverage. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our exposure to market risk related changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high quality credit standards, as specified in our investment policy. The policy also limits the amount of credit exposure we may have to any one issue, issuer or type of investment. As of December 31, 2001, our portfolio of investments included $50.3 million in cash and cash equivalents. Due to the conservative nature of our investment portfolio, we believe that a sudden change in interest rates would not have a material effect on the value of the portfolio. We estimate that if the average yield of our investments had decreased by 100 basis points, our interest income for the year ended December 31, 2001 would have decreased by less than $0.5 million. This estimate assumes that the decrease occurred on the first day of the year and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income and future changes in investment yields will depend largely on the gross amount of our investment portfolio. We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are included in other investments and are accounted for under the cost method when ownership is less than 20% and we do not have the ability to exercise significant influence over operations. As of December 31, 2001 we hold cost method investments of approximately $10.6 million, of which our Converge investment is $7.8 million. For these investments in privately-held companies, our policy is to regularly review 46 the assumptions underlying the operating performance and cash flow forecasts in assessing the recoverability of the carrying values. We identify and record impairment losses when events and circumstances indicate that such assets might be impaired. During the year ended December 31, 2001, we recorded $219.2 million of impairment charges for other than temporary declines in the fair value of several of our cost method investments. Approximately $207.2 million of the impairment charge was related to write-downs of our Converge investment, which was initially valued at $215.0 million in January 2001. Since our initial investments, certain of these investments in privately-held companies have become marketable equity securities upon the investees' completion of initial public offerings or the acquisition of the investee by a public company. Such investments, most of which are in the Internet industry, are subject to significant fluctuations in fair market value due to the volatility of the stock market. As of December 31, 2001, the fair market value of these marketable equity securities included in short-term and long-term investments was $2.6 million. In connection with Ariba's acquisition of Tradex Technologies, Inc., we received Ariba common stock. In July 2000, we entered into forward sale contracts relating to our investment in Ariba. Under these contracts, we pledged our shares of Ariba's common stock to the counterparty for a three-year period in return for approximately $47.4 million of cash. At the conclusion of the three-year period, we have the option of delivering either cash or the pledged Ariba shares to satisfy the forward sale. However, we will not be required to deliver shares in excess of those we pledged. If we choose to deliver Ariba shares to satisfy the forward sale, the number of Ariba shares to be delivered at maturity may vary depending on the then market price of Ariba's common stock. We have only limited involvement with derivative financial instruments and do not use them for trading purposes. Our risk of loss in the event of nonperformance by the counterparty under the forward sales contract is not considered to be significant. Although the forward sales contract exposes us to market risk, fluctuations in the fair value of these contracts are mitigated by expected offsetting fluctuations in the value of the pledged securities. 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Financial Statements: Independent Auditors' Report.............................. 49 Consolidated Balance Sheets at December 31, 2001 and 2000................................................... 50 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999....................... 51 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999....................... 52 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999... 53 Consolidated Statements of Other Comprehensive Loss for the years ended December 31, 2001, 2000 and 1999....... 55 Notes to Consolidated Financial Statements................ 56
48 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Verticalnet, Inc.: We have audited the accompanying consolidated balance sheets of Verticalnet, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, cash flows, shareholders' equity (deficit) and other comprehensive loss for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Verticalnet, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Philadelphia, Pennsylvania February 12, 2002, except for Note 22, which is as of March 15, 2002 49 VERTICALNET, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------------- 2001 2000 ----------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 50,252 $ 123,803 Short-term investments.................................... 36 21,349 Accounts receivable, net of allowance for doubtful accounts of $987 in 2001 and $2,072 in 2000............ 1,891 31,932 Prepaid expenses and other assets......................... 10,091 37,264 ----------- ---------- Total current assets.............................. 62,270 214,348 ----------- ---------- Property and equipment, net................................. 11,421 32,398 Net assets of discontinued operations....................... -- 215,000 Goodwill and other intangibles, net of accumulated amortization of $24,462 in 2001 and $149,015 in 2000...... 30,775 388,341 Long-term investments....................................... 2,599 22,861 Other investments........................................... 10,831 17,543 Other assets................................................ 7,735 32,793 ----------- ---------- Total assets...................................... $ 125,631 $ 923,284 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 3,919 $ 10,821 Accrued expenses.......................................... 25,528 67,251 Deferred revenues......................................... 44,483 57,323 Other current liabilities................................. 14,949 1,597 ----------- ---------- Total current liabilities......................... 88,879 136,992 ----------- ---------- Long-term debt.............................................. 550 952 Other long-term liabilities................................. 2,599 22,630 Convertible notes........................................... 21,705 21,705 ----------- ---------- Total liabilities................................. 113,733 182,279 ----------- ---------- Commitments and contingencies (see Notes 13 and 14) Minority interest........................................... -- 40,843 ----------- ---------- Series A 6.00% convertible redeemable preferred stock, $.01 par value issued 250,000 shares authorized, 109,290 shares issued in 2001 and 101,450 shares in 2000 plus accrued dividends of $1,639 in 2001 (liquidation value of $109,290)................................................. 102,180 94,760 ----------- ---------- Put arrangement involving common stock...................... 1,057 -- ----------- ---------- Shareholders' equity (deficit): Preferred stock $.01 par value, 9,750,000 shares authorized, none issued in 2001 and 2000............... -- -- Common stock $.01 par value, 1,000,000,000 shares authorized, 113,006,208 shares issued in 2001 and 88,047,949 shares issued in 2000....................... 1,130 880 Additional paid-in capital................................ 1,054,334 1,004,149 Deferred compensation..................................... (98) (363) Accumulated other comprehensive loss...................... (959) (14,370) Accumulated deficit....................................... (1,144,941) (384,089) ----------- ---------- (90,534) 606,207 Treasury stock, at cost 656,356 shares in 2001 and 2000... (805) (805) ----------- ---------- Total shareholders' equity (deficit).............. (91,339) 605,402 ----------- ---------- Total liabilities and shareholders' equity (deficit)....................................... $ 125,631 $ 923,284 =========== ==========
See accompanying notes to consolidated financial statements. 50 VERTICALNET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 --------- --------- -------- REVENUES: E-enablement, e-commerce, advertising and other services............................................... $ 89,962 $ 104,548 $ 18,428 Software licensing and related services.................. 35,608 7,906 -- --------- --------- -------- Total revenues........................................... 125,570 112,454 18,428 COSTS AND EXPENSES: Cost of e-enablement, e-commerce, advertising and other services............................................... 21,157 39,247 8,611 Cost of software licensing and related services.......... 17,354 4,503 -- Research and development................................. 27,037 34,178 7,396 Sales and marketing...................................... 63,421 80,578 25,303 General and administrative............................... 49,550 56,924 10,637 Amortization............................................. 121,726 139,841 6,814 Restructuring and asset impairment charges............... 345,542 11,530 -- In-process research and development charges.............. 420 10,000 13,600 --------- --------- -------- Operating loss........................................... (520,637) (264,347) (53,933) --------- --------- -------- Other income (expense), net.............................. (236,350) 59,460 -- Interest income, net..................................... 38 2,557 1,344 --------- --------- -------- Net loss from continuing operations...................... (756,949) (202,330) (52,589) Discontinued operations: Loss from operations of the Verticalnet Exchanges segment............................................. -- (27,018) (891) Loss on disposal of the Verticalnet Exchanges segment............................................. (3,903) (81,968) -- --------- --------- -------- Net loss................................................. (760,852) (311,316) (53,480) Preferred stock dividends and accretion.................. (7,420) (5,264) -- --------- --------- -------- Loss attributable to common shareholders................. $(768,272) $(316,580) $(53,480) ========= ========= ======== Basic and diluted loss per common share: Continuing operations.................................. $ (7.89) $ (2.50) $ (0.84) Loss from discontinued operations...................... -- (0.32) (0.02) Loss on disposal of discontinued operations............ (0.04) (0.99) -- --------- --------- -------- Loss per common share.................................. $ (7.93) $ (3.81) $ (0.86) ========= ========= ======== Weighted average common shares outstanding used in basic and diluted per share calculation...................... 96,921 83,127 62,391 ========= ========= ========
See accompanying notes to consolidated financial statements. 51 VERTICALNET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- Net loss.................................................... $(760,852) $(311,316) $ (53,480) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................. 135,622 147,286 8,086 Noncash restructuring charges............................. 37,475 -- -- Intangible asset impairment............................... 284,353 11,530 -- Write-down related to cost method, equity method and available-for-sale investments.......................... 231,327 6,439 -- Other noncash charges..................................... 2,408 312 632 Loss on disposal of property and equipment................ 286 -- 31 Loss from equity method investments....................... 2,312 2,769 -- Loss on disposal of discontinued operations............... 3,903 81,968 -- Net loss (gain) on investments............................ 3,829 (79,875) -- In-process research and development charge................ 420 10,000 13,600 Discontinued operations -- working capital changes and noncash charges......................................... -- 109,778 7,609 Change in assets and liabilities, net of effect of acquisitions: Accounts receivable....................................... 30,231 (21,172) (7,741) Prepaid expenses and other assets......................... 15,200 (13,904) (6,874) Accounts payable.......................................... (6,684) 5,495 528 Accrued restructuring charge expenses..................... 7,082 -- -- Other accrued expenses.................................... (46,521) 17,128 7,156 Deferred revenues......................................... (12,347) 47,146 7,033 --------- --------- --------- Net cash provided by (used in) operating activities..... (71,956) 13,584 (23,420) --------- --------- --------- Investing activities: Acquisitions, net of cash acquired........................ (26,616) 15,231 (61,898) Purchase of available-for-sale investments................ -- (88,975) (195,043) Purchase of cost and equity method company investments, net of liquidation proceeds............................. (2,914) (19,011) (6,700) Proceeds from sale and redemption of available-for-sale investments............................................. 21,499 141,569 133,783 Advances.................................................. -- -- (965) Restricted cash........................................... 7,165 (9,900) (1,220) Proceeds from sale of assets.............................. 500 -- -- Capital expenditures...................................... (14,784) (28,972) (5,052) Discontinued operations -- investing activities........... -- (38,008) (5,287) --------- --------- --------- Net cash used in investing activities................... (15,150) (28,066) (142,382) --------- --------- --------- Financing activities: Repayments of line of credit.............................. -- -- (2,000) Proceeds from forward sale................................ -- 47,441 -- Principal payments on long-term debt and obligations under capital leases.......................................... (2,802) (2,083) (1,507) Proceeds from issuance of common stock.................... 15,000 -- -- Net proceeds from issuance of common stock in initial public offering......................................... -- -- 58,459 Net proceeds from convertible debt issuance............... -- -- 110,870 Net proceeds from issuance of convertible preferred stock and warrants............................................ -- 99,900 -- Proceeds from exercise of stock options and employee stock purchase plan........................................... 1,357 28,784 1,953 Discontinued operations -- financing activities........... -- (43,393) -- --------- --------- --------- Net cash provided by financing activities............... 13,555 130,649 167,775 --------- --------- --------- Net increase (decrease) in cash............................. (73,551) 116,167 1,973 Cash and cash equivalents -- beginning of period............ 123,803 7,636 5,663 --------- --------- --------- Cash and cash equivalents -- end of period.................. $ 50,252 $ 123,803 $ 7,636 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest (includes conversion payment to debt holders of approximately $11,200 in 2000)........................................ $ 1,379 $ 14,917 $ 301 ========= ========= ========= Supplemental schedule of noncash investing and financing activities: Equipment acquired under capital leases................... $ -- $ 736 $ 3,120 Issuance of common stock as consideration for acquisitions............................................ 42,250 620,336 67,155 Common stock to be issued as consideration for an acquisition............................................. -- -- 99,546 Warrant exercises......................................... -- 653 92 Preferred dividends....................................... 7,420 5,264 -- Conversion of convertible debt, notes and related party loans to common stock................................... -- 90,400 5,000
See accompanying notes to consolidated financial statements. 52 VERTICALNET, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED OTHER ----------------- ----------------- COMMON STOCK PAID-IN DEFERRED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION LOSS ------ -------- -------- ------ ------------ ---------- ------------ ----------------- Balance, December 31, 1998.................... 7,806 $ 78 10,538 $ 105 $ -- $ 19,488 $(594) $ -- Conversion to common stock................... (7,806) (78) 38,939 389 -- (311) -- -- Sale of common stock in initial public offering................ -- -- 16,100 161 -- 58,126 -- -- Common stock to be issued.................. -- -- -- -- 99,546 -- -- -- Notes converted to common stock................... -- -- 1,250 13 -- 4,987 -- -- Exercise of options....... -- -- 2,215 22 -- 1,358 -- -- Shares issued through employee stock purchase plan.................... -- -- 143 2 -- 571 -- -- Shares issued as consideration for acquisitions............ -- -- 2,788 28 -- 67,127 -- -- Exercise of warrants...... -- -- 148 1 -- 91 -- -- Unearned compensation..... -- -- -- -- -- 438 (495) -- Amortization of unearned compensation............ -- -- -- -- -- -- 488 -- Net loss.................. -- -- -- -- -- -- -- -- Other comprehensive loss.................... -- -- -- -- -- -- -- (219) ------ -------- -------- ------ -------- ---------- ----- -------- Balance, December 31, 1999.................... -- -- 72,121 721 99,546 151,875 (601) (219) ------ -------- -------- ------ -------- ---------- ----- -------- Issuance of warrants...... -- -- -- -- -- 18,007 -- -- Issuance of Series A 6.00% convertible redeemable preferred stock......... 100 89,496 -- -- -- -- -- -- Series A 6.00% convertible redeemable preferred stock dividends issued.................. 1 1,450 -- -- -- (1,450) -- -- Series A 6.00% convertible redeemable preferred stock dividends accrued and accretion........... -- 3,814 -- -- -- (3,814) -- -- Reclassification of Series A 6.00% convertible redeemable preferred stock (see Note 15)..... (101) (94,760) -- -- -- -- -- -- Conversion of convertible debt.................... -- -- 4,665 46 -- 90,354 -- -- Exercise of options....... -- -- 3,806 38 -- 26,003 -- -- TOTAL ACCUMULATED TREASURY SHAREHOLDERS' DEFICIT STOCK EQUITY (DEFICIT) ----------- -------- ---------------- Balance, December 31, 1998.................... $ (19,293) $ (60) $ (276) Conversion to common stock................... -- -- -- Sale of common stock in initial public offering................ -- -- 58,287 Common stock to be issued.................. -- -- 99,546 Notes converted to common stock................... -- -- 5,000 Exercise of options....... -- -- 1,380 Shares issued through employee stock purchase plan.................... -- -- 573 Shares issued as consideration for acquisitions............ -- -- 67,155 Exercise of warrants...... -- (92) -- Unearned compensation..... -- -- (57) Amortization of unearned compensation............ -- -- 488 Net loss.................. (53,480) -- (53,480) Other comprehensive loss.................... -- -- (219) ----------- ----- ---------------- Balance, December 31, 1999.................... (72,773) (152) 178,397 ----------- ----- ---------------- Issuance of warrants...... -- -- 18,007 Issuance of Series A 6.00% convertible redeemable preferred stock......... -- -- 89,496 Series A 6.00% convertible redeemable preferred stock dividends issued.................. -- -- -- Series A 6.00% convertible redeemable preferred stock dividends accrued and accretion........... -- -- -- Reclassification of Series A 6.00% convertible redeemable preferred stock (see Note 15)..... -- -- (94,760) Conversion of convertible debt.................... -- -- 90,400 Exercise of options....... -- -- 26,041
53
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED OTHER ----------------- ----------------- COMMON STOCK PAID-IN DEFERRED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION LOSS ------ -------- -------- ------ ------------ ---------- ------------ ----------------- Shares issued through employee stock purchase plan.................... -- -- 113 1 -- 2,742 -- -- Shares issued as consideration for acquisitions............ -- -- 7,186 72 (99,546) 719,810 -- -- Exercise of warrants...... -- -- 157 2 -- 651 -- -- Unearned compensation..... -- -- -- -- -- (29) 29 -- Amortization of unearned compensation............ -- -- -- -- -- -- 209 -- Net loss.................. -- -- -- -- -- -- -- -- Other comprehensive loss.................... -- -- -- -- -- -- -- (14,151) ------ -------- -------- ------ -------- ---------- ----- -------- Balance, December 31, 2000.................... -- -- 88,048 880 -- 1,004,149 (363) (14,370) ------ -------- -------- ------ -------- ---------- ----- -------- Series A 6.00% convertible redeemable preferred stock dividends accrued and accretion........... -- -- -- -- -- (7,420) -- -- Exercise and acceleration of options.............. -- -- 1,519 15 -- 1,475 -- -- Shares issued through employee stock purchase plan.................... -- -- 262 3 -- 332 -- -- Shares issued pursuant to private investment (see Note 15)................ -- -- 2,763 28 -- 14,972 -- -- Shares issued as consideration for acquisitions............ -- -- 20,414 204 -- 42,046 -- -- Reclassification of put arrangement (see Note 3)...................... -- -- -- -- -- (1,057) -- -- Unearned compensation..... -- -- -- -- -- (163) 163 -- Amortization of unearned compensation............ -- -- -- -- -- -- 102 -- Net loss.................. -- -- -- -- -- -- -- -- Other comprehensive income.................. -- -- -- -- -- -- -- 13,411 ------ -------- -------- ------ -------- ---------- ----- -------- Balance, December 31, 2001.................... -- $ -- $113,006 $1,130 $ -- $1,054,334 $ (98) $ (959) ====== ======== ======== ====== ======== ========== ===== ======== TOTAL ACCUMULATED TREASURY SHAREHOLDERS' DEFICIT STOCK EQUITY (DEFICIT) ----------- -------- ---------------- Shares issued through employee stock purchase plan.................... -- -- 2,743 Shares issued as consideration for acquisitions............ -- -- 620,336 Exercise of warrants...... -- (653) -- Unearned compensation..... -- -- -- Amortization of unearned compensation............ -- -- 209 Net loss.................. (311,316) -- (311,316) Other comprehensive loss.................... -- -- (14,151) ----------- ----- ---------------- Balance, December 31, 2000.................... (384,089) (805) 605,402 ----------- ----- ---------------- Series A 6.00% convertible redeemable preferred stock dividends accrued and accretion........... -- -- (7,420) Exercise and acceleration of options.............. -- -- 1,490 Shares issued through employee stock purchase plan.................... -- -- 335 Shares issued pursuant to private investment (see Note 15)................ -- -- 15,000 Shares issued as consideration for acquisitions............ -- -- 42,250 Reclassification of put arrangement (see Note 3)...................... -- -- (1,057) Unearned compensation..... -- -- -- Amortization of unearned compensation............ -- -- 102 Net loss.................. (760,852) -- (760,852) Other comprehensive income.................. -- -- 13,411 ----------- ----- ---------------- Balance, December 31, 2001.................... $(1,144,941) $(805) $ (91,339) =========== ===== ================
See accompanying notes to consolidated financial statements. 54 VERTICALNET, INC. CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- Net loss................................................... $(760,852) $(311,316) $(53,480) Unrealized gain on forward sale............................ 20,030 29,768 -- Foreign currency translation adjustment.................... (699) 169 -- Unrealized loss on investments: Unrealized loss.......................................... (18,106) (44,088) (219) Reclassification adjustment for realized loss included in net loss.............................................. 12,186 -- -- --------- --------- -------- Comprehensive loss......................................... $(747,441) $(325,467) $(53,699) ========= ========= ========
See accompanying notes to consolidated financial statements. 55 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Company Verticalnet, Inc. was incorporated in Pennsylvania on July 28, 1995. We are a leading provider of collaborative supply chain solutions that enable companies, and their supply and demand chain partners to communicate, collaborate, and conduct commerce more effectively. With a comprehensive set of collaborative supply chain software applications including spend management, strategic sourcing, collaborative planning, and order management, we offer a broad integrated supply chain solution delivered through a multi-party platform. Additionally, we have the Small/Medium Business ("SMB") group (formerly referred to as Verticalnet Markets) that operates and manages the 59 industry-specific on-line marketplaces. Our SMB business is a leading provider of internet enabled, industry-specific supplier networks designed to allow small-to medium-sized companies to conduct business with enterprise buyers over the Web. On January 31, 2001, we completed the sale of our Verticalnet Exchanges ("NECX") business unit, which focused on trading electronic components and hardware in open and spot markets. The operating results of this unit have been reflected as a discontinued operation in our consolidated financial statements. The net assets of this unit were reflected at December 31, 2000 as net assets of discontinued operations on our consolidated balance sheet. Basis of Presentation Our consolidated financial statements include the financial statements of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for comparability with the current year's financial statement presentation. On January 20, 2000 and July 21, 1999, our board of directors approved a two-for-one stock split of our common stock effected on March 31, 2000 and August 20, 1999, respectively. All references in the consolidated financial statements to shares, share prices and per share amounts have been adjusted retroactively for these splits. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for accounts receivable; inventory write-downs; carrying values for intangible assets and non-publicly held investments; and restructuring charges for abandoned operating leases. Cash and Cash Equivalents Cash and cash equivalents include cash, money market investments and other highly liquid investments with maturities of three months or less. Restricted Cash Restricted cash represents certificates of deposit held pursuant to building lease agreements and other financing arrangements. At December 31, 2001, we had approximately $2.0 million and $1.7 million of restricted cash classified in current and non-current other assets, respectively, on the consolidated balance 56 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) sheet. At December 31, 2000, we had approximately $7.9 million and $3.7 million of restricted cash classified in current and non-current other assets, respectively, on the consolidated balance sheet. Investments We account for debt securities and marketable equity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. These available-for-sale investments are classified as short-term and long-term investments on the consolidated balance sheet and are reported at fair value, with unrealized gains and losses recorded in other comprehensive income (loss). Realized gains or losses and other than temporary declines in fair value of available-for-sale securities are reported in other income (expense), as incurred. We hold equity instruments of privately-held companies for business and strategic purposes. These investments are included in other investments on the consolidated balance sheet and are accounted for under the cost method since our ownership percentage is less than 20% and we do not have the ability to exercise significant influence over the investees. For these non-publicly traded investments, our policy is to regularly review the market conditions and the assumptions underlying the operating performance and cash flow forecasts in assessing the recoverability of the carrying values. Investments in privately owned companies whose results are not consolidated, but over whom we exercise significant influence are accounted for under the equity method of accounting and included in other investments on the consolidated balance sheet. Determining whether we exercise significant influence with respect to a particular investment depends on an evaluation of several factors including, among others, representation on the investee's board of directors, as well as our overall ownership level of the investee, including voting rights associated with our holdings in common, preferred and other convertible instruments in the investee. Under the equity method of accounting, our share of the earnings or losses of the investee is reflected in other income (expense) on our consolidated statement of operations. Inventory Inventory consists of merchandise purchased for resale in our asset remarketing business, which is part of the SMB group. Inventory is recorded at the lower of cost or market with cost determined on a specific identification basis. During the year ended December 31, 2001, we recorded an inventory write-down of approximately $2.6 million, which is included in cost of e-enablement, e-commerce, advertising and other services revenue. The inventory balance included in prepaid expenses and other assets, is approximately $2.6 million and $1.3 million at December 31, 2001 and 2000, respectively. Property and Equipment Property and equipment are originally stated at cost. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the lease term. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
Computer equipment and software............................. 1.5-3 years Office equipment and furniture.............................. 5 years Trade show equipment........................................ 7 years Leasehold improvements...................................... 3-5 years
Capitalized Software Under the provisions of Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, we capitalize costs associated with internally developed 57 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and/or purchased software systems for new products and enhancements to existing products that have reached the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software project and interest costs incurred, if material, while developing internal-use software. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These capitalized costs are amortized on a straight-line basis over the economic useful life, beginning when the asset is ready for its intended use. Under the provisions of SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, certain development costs of our software products are capitalized subsequent to the establishment of technological feasibility and up to the time the product becomes available for general release. Amortization is provided on a product-by-product basis on the straight-line method over the remaining estimated economic life of the product. Software costs capitalized under SOP 98-1 and SFAS No. 86 approximated $0.4 million and $6.1 million as of December 31, 2001 and 2000, respectively, and are included in property and equipment on the consolidated balance sheet. Amortization expense for the years ended December 31, 2001 and 2000 was approximately $2.7 million and $2.0 million. The carrying value of the software is regularly reviewed and an impairment is recognized if the value of the estimated undiscounted cash flow benefits related to the asset is less than the remaining unamortized cost. Approximately $4.0 million and $1.0 million of capitalized software costs were impaired and included in the restructuring and asset impairment charges during the years ended December 31, 2001 and 2000, respectively. Intangible and Other Long-Lived Assets Goodwill is amortized using the straight-line method from the date of acquisition over the period of the expected benefits, which is three years. Other intangible assets resulting from acquisitions, including covenants not-to-compete, acquired technology and contractual arrangements, are also amortized using the straight-line method from the date of acquisition over the period of the expected benefits, ranging from 3 to 36 months. We regularly perform reviews to determine whether events or changes in circumstances indicate that the carrying value of the goodwill and other intangible assets may not be recoverable. We assess long-lived assets for impairment under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. It is reasonably possible that our accounting estimates with respect to the useful life and ultimate recoverability of goodwill and other intangible assets could change in the near term and that the effect of such changes on the consolidated financial statements could be material. While we currently believe that the recorded amount of goodwill and other intangible assets at December 31, 2001 is not impaired, a significant write-down or write off may be required in the future. Self Insurance We are self-insured for certain losses related to employee medical benefits. We have purchased stop-loss coverage in order to limit our exposure. Self insurance losses are accrued based on our estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry. At December 31, 2001 and 2000, the accrued liability for self-insured losses is included in accrued expenses and approximates $0.8 million and $1.3 million, respectively. Financial Instruments In accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, we have determined the estimated fair value of our financial instruments using available market 58 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) information and valuation methodologies. Our financial instruments consist of cash and cash equivalents, available-for-sale investments, accounts receivable, accounts payable, capital leases and convertible notes. Considerable judgment is required to develop the estimates of fair value; thus, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. However, we believe the carrying values of these assets and liabilities, with the exception of the convertible notes, is a reasonable estimate of their fair market values at December 31, 2001 and 2000 due to the short maturities of such items. Based on their quoted market value as of December 31, 2001 and 2000, the convertible notes are estimated to have an aggregate fair market value of approximately $5.4 million and $11.5 million, respectively. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents in bank deposits accounts, short-term investments and trade receivables. Cash and cash equivalents are held with high quality financial institutions. Short-term investments are primarily held in high quality corporate debt instruments and government obligations. We periodically perform credit evaluations of our customers and maintain reserves for potential losses. We do not anticipate losses from these receivables in excess of the provided allowances. Total revenues from Microsoft were approximately $60.0 million, or 48%, of total revenues for the year ended December 31, 2001 and $30.5 million, or 27%, of total revenues for the year ended December 31, 2000. Approximately 38% of our deferred revenue balance as of December 31, 2001 relates to Microsoft. Total revenues from Converge, Inc. ("Converge") were approximately $30.9 million, or 25%, of total revenues for the year ended December 31, 2001. Approximately 52% of our deferred revenue balance as of December 31, 2001 relates to Converge. No single customer accounted for greater than 10% of total revenues during the year ended December 31, 1999. Revenue Recognition We generate revenue from three primary sources: e-enablement and e-commerce; advertising and services; and software licensing and related services. E-enablement and e-commerce revenues include storefront, marketplace manager and e-commerce center fees and e-commerce fees. Storefront, marketplace manager and e-commerce center fees are recognized ratably over the period of the contract. E-commerce fees in the form of transaction fees and percentage of sale fees are recognized upon receipt of payment. E-commerce fees from books and other product sales are recognized in the period in which the products are shipped. Advertising revenues, including buttons and banners, are recognized ratably over the period of the applicable contract if time based or as delivered if impression based. Newsletter sponsorship revenues are recognized when the newsletters are e-mailed. Although advertising contracts generally do not extend beyond one year, certain contracts are for multiple years. Previously we also entered into strategic co-marketing agreements to develop co-branded Web sites. Hosting and maintenance service revenues under these co-marketing arrangements are recognized ratably over the term of the contract. In the normal course of business, we enter into "multiple-element" arrangements. We allocate revenue under such arrangements based on the fair value of each element, to the extent objectively determinable, and recognize revenue upon delivery or consummation of the separable earnings process attributable to each element. Revenues from software licensing and related services are accounted for under SOP 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and related guidance in the form of technical questions and answers published by the American Institute of Certified Public Accountants' task force on software revenue recognition. SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple 59 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) elements to be allocated to each element based on vendor specific objective evidence of fair values of the elements. License revenue allocated to software products is recognized upon delivery of the software products or ratably over a contractual period if unspecified software products are to be delivered during that period. Revenue allocated to hosting and maintenance services is recognized ratably over the contract term and revenue allocated to professional services is recognized as the services are performed. For certain agreements where the professional services provided are essential to the functionality of the software or are for significant production, modification or customization of the software products, both the software product revenue and service revenue are recognized on a straight-line basis or in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. At December 31, 2001 and December 31, 2000, approximately $0.6 million and $4.2 million, respectively, of the accounts receivable balance was unbilled due to customer payment terms. Pursuant to the consensus reached by the Emerging Issues Task Force ("EITF") in Issue No. 99-17, Accounting for Advertising Barter Transactions, barter transactions are recorded at the estimated fair value of the advertisements or other services given, based on recent historical cash transactions. Barter revenue is recognized when the advertising impressions or other services are delivered to the customer, and advertising expense is recorded when the advertising impressions or other services are received from the customer. If we receive the advertising impressions or other services from the customer prior to our delivery of the advertising impressions, a liability is recorded on the consolidated balance sheet. If we deliver the advertising impressions to the customer prior to receiving the advertising impressions or other services, a prepaid expense is recorded on the consolidated balance sheet. For the years ended December 31, 2001, 2000 and 1999, we recognized approximately $6.4 million, $9.4 million and $3.8 million of advertising revenues, respectively, and $8.4 million, $7.7 million and $3.0 million of advertising expenses, respectively, from barter transactions. We have recorded approximately $0.2 million and $2.3 million in prepaid expenses related to barter transactions as of December 31, 2001 and 2000, respectively. Research and Development Research and development costs consist primarily of salaries and benefits, consulting and other related expenses, which are expensed as incurred. Advertising Costs We expense advertising costs as incurred and report such costs as a component of sales and marketing expense. Advertising expenses, exclusive of barter advertising discussed above, were approximately $19.5 million, $32.4 million and $4.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Stock Options Stock-based employee compensation is recognized using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. For disclosure purposes, pro forma net loss and loss per share data are provided in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, as if the fair value method had been applied. Foreign Currency Translation We translate the assets and liabilities of international subsidiaries into U.S. dollars at the current rates of exchange in effect as of each balance sheet date. Revenues and expenses are translated using average rates in effect during the period. Gains and losses from translation adjustments are included in accumulated other comprehensive loss on the consolidated balance sheet. Foreign currency transaction gains or losses, are 60 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized in current operations and have not been significant to our operating results in any period. The effect of foreign currency rate changes on cash and cash equivalents has not been significant in any period. Comprehensive Income (Loss) We report comprehensive income or loss in accordance with the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Comprehensive income or loss, as defined, includes all changes in equity (net assets) during a period from non-owner sources. Income Taxes We record income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the tax effect of net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is more likely than not that such assets will not be realized. Computation of Historical Net Loss Per Share Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, including incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and the conversion of our 5 1/4% convertible subordinated debentures and our Series A 6.00% convertible redeemable preferred stock (using the if-converted method). Common equivalent shares are excluded from the calculation if their effect is anti-dilutive. Common stock issued upon the conversion of the convertible notes given as consideration in connection with the purchase of NECX.com LLC was included in the calculation from the date of acquisition in December 1999 because the related securities were accounted for as equity. New Pronouncements Effective January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in other income (expense). If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income (loss) and is recognized in other income (expense) when the hedged item affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized in other income (expense). We use derivative instruments to manage exposures to foreign currency and security prices. Our objective for holding derivatives is to effectively eliminate or reduce the impact of these exposures. In July 2000, we entered into forward sale contracts relating to a security classified as an available-for-sale investment under SFAS No. 115. Under these contracts, we pledged the securities to the counterparty for a three-year period in return for approximately $47.4 million of cash, which was net of the initial cost of the 61 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transaction of $5.0 million. At the conclusion of the three-year period, we have the option of delivering either cash or the pledged securities to satisfy the forward sale. However, we will not be required to deliver shares in excess of those we pledged. The forward sale has been designated as a cash flow hedge with corresponding gains and losses recorded in other comprehensive loss. The amounts recorded in other comprehensive loss will be recognized in other income (expense) when the forward sale is settled in July 2003. The unrealized gain on the forward sale included in other comprehensive income (loss) was $49.8 million and $29.8 million for the years ended December 31, 2001 and 2000, respectively (see Note 9). During the year ended December 31, 2001, we also had fixed obligations denominated in Euros that we hedged with foreign currency forwards to reduce the foreign currency fluctuation risk. These foreign currency forward agreements, which were all settled as of December 31, 2001, had been classified as fair value hedges. The transition adjustment from adopting SFAS No. 133 for these agreements was immaterial. During the year ended December 31, 2001, we recorded approximately $0.2 million in other income (expense) related to these foreign currency forward contracts. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS No. 141 also specifies criteria that must be met for intangible assets acquired in a purchase method business combination to be recognized and reported separately from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142, which is effective January 1, 2002, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121. As of January 1, 2002, the adoption date of SFAS No. 142, the remaining unamortized goodwill and identifiable intangible assets of $27.6 million and $3.2 million, respectively, will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill and other intangible assets was approximately $119.1 million, $146.8 million and $6.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Because of the extensive effort required to adopt SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on our financial statements as of the date of this report. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, and the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. We plan to adopt SFAS No. 144 effective January 1, 2002. We do not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on our financial statements because the 62 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. (2) LIQUIDITY During 2001, our available cash, cash equivalent and short-term investments resources declined by approximately $95.0 million, principally as a result of continued operating losses. Accounts receivable also declined by approximately $30.0 million in 2001 to a balance of less than $2.0 million as of December 31, 2001. Cash flows from two significant customers, Microsoft and Converge, were instrumental in financing our business during 2001. As of December 31, 2001, the Microsoft contractual arrangements have been terminated and anticipated cash flows under the Converge contractual arrangements have been significantly curtailed (see Note 10). As a result, we will become increasingly dependent on generating revenues and operating cash flows from new customers in 2002. We believe that our current level of liquid assets and the expected cash flows from contractual arrangements will be sufficient to finance our capital requirements and anticipated operating losses for at least the next 12 months. However, to the extent our current level of liquid assets proves to be insufficient, we may need to obtain additional debt or equity financing. Additionally, we may, if the capital markets present attractive opportunities, raise cash through the sale of debt or equity. We can provide no assurance that our liquid assets will be sufficient to fund our operations or that we will be successful in obtaining any required or desired financing either on acceptable terms or at all. Should funding not be available on acceptable terms, we may implement additional cost reduction initiatives, including headcount reduction. While such initiatives may enable us to continue to satisfy our short-term obligations and working capital requirements, they may negatively impact our ability to successfully execute our business plan over the longer term. (3) ACQUISITIONS Atlas Commerce On December 28, 2001, we acquired all of the outstanding capital stock of Atlas Commerce, Inc. ("Atlas Commerce"), a privately held software company that provides private exchange software and strategic sourcing applications. As a result of the acquisition, we expect to significantly accelerate our enterprise software business by offering an integrated collaborative sourcing solution that represents a combination of both companies' technologies. Atlas Commerce's results of operations will be consolidated starting January 1, 2002. The aggregate purchase price was approximately $26.8 million, including transaction costs. The consideration included $3.5 million in cash, 14,305,708 shares of our common stock valued at approximately $19.5 million and issuance of employee options to purchase 1,630,075 of our common stock valued as of the date of acquisition at $1.4 million based on an independent valuation. Included in the stock consideration are 148,078 shares of our common stock to be issued to a former Atlas Commerce executive in January 2003. A portion of the value of the common stock given as consideration was reduced by an illiquidity discount ranging from 5% to 10% based on restrictions detailed in a registration and lock up agreement executed in connection with the transaction. The Merger Agreement for the Atlas Commerce acquisition provides a put option to Atlas Commerce's former common shareholders. These shareholders have the ability to put a maximum of approximately $1.1 million worth of our common shares back to us for cash. At the acquisition date the put liability covered 728,883 shares of our common stock. The put is recorded in temporary equity pursuant to the guidance in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock. 63 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. We obtained an independent valuation of certain intangible assets.
(IN THOUSANDS) Current assets.............................................. $ 4,285 Property and equipment, net................................. 2,048 Other non-current assets.................................... 566 Intangible assets........................................... 3,235 Goodwill.................................................... 21,562 ------- Total assets acquired.................................. 31,696 Current liabilities......................................... (4,919) Long-term debt.............................................. (12) ------- Total liabilities assumed.............................. (4,931) ------- Net assets acquired.................................... $26,765 =======
Of the $3.2 million of acquired intangible assets, $0.4 million was assigned to in-process research and development and charged to expense as a non-recurring charge upon consummation of the acquisition since the in-process research and development has not yet reached technological feasibility and has no alternative future use (see Note 4). The remaining $2.8 million of acquired intangible assets have a weighted-average useful life of 35 months. These intangibles include developed technology of approximately $1.9 million with a useful life of 36 months and customer contracts of approximately $0.9 million with a weighted average useful life of 32 months. The $21.6 million of goodwill was assigned to the enterprise software segment. Approximately $1.6 million of the current liabilities assumed in the Atlas Commerce transaction relate to restructuring initiatives taken by management as part of the integration plan. The accrual includes approximately $1.1 million of severance related costs for six employees and approximately $0.5 million of lease termination costs for three facilities. The lease termination costs were estimated based on the present value of future lease payments. Other 2001 Acquisitions During the year ended December 31, 2001, we completed two additional acquisitions, including Net Commerce and Plasticsnet. The aggregate purchase price of these acquisitions was approximately $2.0 million in cash. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of net assets acquired of approximately $2.2 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. Tradeum On March 23, 2000, we acquired all of the outstanding capital stock of Tradeum, Inc. ("Tradeum") for approximately $453.1 million, including transaction costs. The consideration included 2,573,837 shares of our common stock, valued at approximately $325.0 million and 1,426,148 employee options to purchase our common stock, valued as of the date of acquisition at approximately $122.6 million, based on an independent valuation. A portion of the common stock given as consideration was reduced by an illiquidity discount based on restrictions detailed in the lock up agreements signed by the individuals receiving the stock. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $452.6 million was allocated to in-process research and development, existing technology, assembled workforce and goodwill in the amounts of approximately $10.0 million, $7.0 million, $1.0 million and $434.6 million, respectively. The $10.0 million was charged to expense as a non-recurring charge upon consummation of the acquisition since the in-process research and development had not yet 64 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reached technological feasibility and had no alternative future use. The existing technology, assembled workforce and goodwill were being amortized on a straight-line basis over 36 months. As of December 31, 2001, all goodwill and intangible assets related to the Tradeum acquisition have been impaired and written off (see Note 6). Verticalnet Europe In June 2000, we formed Verticalnet Europe B.V. ("Verticalnet Europe"), a joint venture with British Telecommunications, plc ("BT") and Internet Capital Group, Inc. ("ICG"). The joint venture was funded with 109.5 million Euros (approximately $114.7 million as of the closing date) from the three partners. We contributed to Verticalnet Europe approximately $6.8 million in cash and intellectual property independently valued at approximately $120.0 million for the operation of e-marketplaces within Europe in exchange for a 56% ownership interest in Verticalnet Europe. Additionally, Verticalnet Europe and BT created Verticalnet UK Ltd. as part of the joint venture agreement. Our ownership of Verticalnet Europe increased from 56% to 72% on December 29, 2000 when Verticalnet Europe redeemed some of its shares held by BT. Due to minority shareholder governance provisions in the original agreement, we were previously accounting for Verticalnet Europe using the equity method. As a result of our increased ownership, certain governance provisions regarding minority shareholders were amended to give us control over Verticalnet Europe's operations. Accordingly, we consolidated Verticalnet Europe in our consolidated balance sheet at December 31, 2000 and began consolidating Verticalnet Europe's operations starting January 1, 2001. The increase in ownership was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $3.4 million was allocated to goodwill. Additionally, in December 2000 Verticalnet Europe obtained full ownership of Verticalnet UK Ltd. During the three months ended March 31, 2001, our percentage ownership of Verticalnet Europe increased to approximately 90%. Verticalnet Europe redeemed a portion of its shares held by ICG, and ICG sold the remaining portion directly to us for approximately $2.3 million in cash. We also purchased a portion of BT's ownership of Verticalnet Europe for approximately $6.4 million in cash and 4,993,173 shares of our common stock. The shares of common stock issued to BT were registered under our acquisition shelf registration statement. We also entered into a put/call agreement with BT whereby we can purchase their remaining 10% interest in Verticalnet Europe at any time after closing and BT may sell its investment to us at any time after March 13, 2002 (see Notes 11 and 22). The increase in ownership was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $20.0 million was allocated to goodwill and was being amortized over 36 months. As of December 31, 2001 all goodwill related to the Verticalnet Europe acquisition has been impaired and written off (see Note 6). Other 2000 Acquisitions During the year ended December 31, 2000, we completed six additional acquisitions, including Career Mag, Leasend, J.M. Computer Services, BidLine, FedAmerica and Oralis. The aggregate purchase price of these acquisitions was approximately $5.3 million in cash and 474,060 shares of common stock valued at approximately $36.8 million. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of tangible net assets acquired of approximately $41.6 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. 65 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Isadra In August 1999, we acquired all of the outstanding capital stock of Isadra, Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common stock valued at approximately $37.8 million, based on an independent valuation, and 81,526 options to purchase our common stock, valued at approximately $1.5 million at the date of acquisition using the Black-Scholes model. The common stock given as consideration was reduced by an illiquidity discount based on restrictions detailed in the lock up agreements signed by the individuals receiving the stock. The acquisition was accounted for as a purchase and the estimated excess of the purchase price over the fair value of the tangible net assets acquired of approximately $43.9 million was allocated to in-process research and development, existing technology, assembled work force and goodwill in the amounts of approximately $13.6 million, $2.1 million, $0.5 million and $27.7 million, respectively. The $13.6 million was charged to expense as a non-recurring charge upon consummation of the acquisition since the in-process research and development had not yet reached technological feasibility and had no alternative future use (see Note 4). The existing technology and assembled work force were amortized on a straight-line basis over 24 months, while goodwill is being amortized on a straight-line basis over 36 months. The remaining goodwill balance of approximately $6.0 million at December 31, 2001 will be evaluated as part of the Enterprise software business for the implementation of SFAS No. 142 in 2002. Other 1999 Acquisitions During the year ended December 31, 1999, we completed nine additional acquisitions, including Safety Online, Techspex, Oillink, ElectricNet, LabX Technologies, Industry OnLine, CertiSource, GovCon and TextileWeb. The aggregate purchase price for these acquisitions was approximately $3.9 million in cash and 781,488 shares of common stock valued at approximately $27.9 million. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $33.0 million was allocated to goodwill and other intangibles. The results of operations from these acquisitions were not material to our financial position or results of operations. For all of the acquisitions described above, the results of the acquired companies have been included in our financial statements from the date of acquisition. Other Information Acquisitions related to the Verticalnet Exchanges segment are described in Note 5. The following unaudited pro forma financial information presents the combined results of operations of Verticalnet and Tradeum (the material acquisition related to our continuing operations) as if the acquisition occurred on January 1, 2000, after giving effect to certain adjustments, including amortization expense. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had Verticalnet and Tradeum constituted a single entity during such periods. The unaudited pro forma financial information does not include the operations of the Verticalnet Exchanges segment, which is accounted for as a discontinued operation (in thousands, except per share data).
YEAR ENDED DECEMBER 31, 2000 ------------ Revenues.................................................... $112,508 Loss attributable to common shareholders.................... (361,987) Loss per common share....................................... (4.32)
66 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) IN-PROCESS RESEARCH AND DEVELOPMENT In various software company acquisitions, we have allocated a portion of the purchase price to in-process research and development ("IPR&D"). These allocations to IPR&D, which were determined by independent valuations, represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of these acquisitions, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the date of the acquisition. Atlas Commerce In connection with the acquisition of Atlas Commerce in December 2001 (refer to Note 3), we allocated $0.4 million of the purchase price to IPR&D. At the acquisition date, Atlas Commerce was developing new code and technology for version 3.3 of their Metaprise Platform and Application product. The project under development was specifically reviewed in terms of overall objectives, progress toward the objectives and the uniqueness of the developments under these objectives. The new code and technology under development were approximately 20% complete, based on project man-months and costs. The discounted cash flow analysis used to value the IPR&D was based on management's forecast of future revenues, gross profit, selling costs, maintenance development costs and administrative expenses. Forecasted revenue and costs were then allocated to IPR&D based on management's estimate that approximately 80% of the technology in a specific version of the software was taken from the previous release and the remaining 20% was newly developed. A risk-adjusted discount rate of 60% was used to discount the forecasted cash flows allocated to IPR&D. Tradeum In connection with the acquisition of Tradeum in March 2000 (refer to Note 3), we allocated $10.0 million of the purchase price to IPR&D. At the acquisition date, Tradeum was conducting design, development, engineering testing activities associated with the development of next-generation technologies that were expected to address emerging market demands for business-to-business e-commerce. The technologies under development were between 20% and 25% complete, based on project man-months and costs. Tradeum had spent approximately $1.1 million on the IPR&D projects, and expected to spend approximately $3.9 million to complete the research and development. In making the purchase price allocation, we considered present value calculations of income, an analysis of project accomplishments and completion costs, an assessment of overall contributions, as well as project risks. The value assigned to IPR&D was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the IPR&D was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on management's estimates of cost of sales, operating expenses and income taxes from such projects. A risk-adjusted discount rate of 25% was utilized to discount projected cash flows. Isadra In connection with the acquisition of Isadra in August 1999 (refer to Note 3), we allocated $13.6 million of the purchase price to IPR&D. At the acquisition date, Isadra was conducting development, engineering and testing activities associated with the completion of next generation technologies. The projects under development, at the valuation date, were expected to address emerging market demands for business-to-business e-commerce. At the acquisition date, the technologies under development were between 70% and 67 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 80% complete, based on project man-months and costs. Isadra had spent approximately $3.0 million on the IPR&D projects and expected to spend approximately $1.0 million to complete the IPR&D projects. In allocating the purchase price, we considered present value calculations of income, an analysis of project accomplishments and completion costs, an assessment of overall contributions, as well as project risks. The values assigned to IPR&D were determined by estimating the costs to develop the purchased technology into commercially viable products, estimating the resulting net cash flows from each project, excluding the cash flows related to the portion of each project that was incomplete at the acquisition date, and discounting the resulting net cash flows to their present value. Each of the project forecasts were based upon future discounted cash flows, taking into account the state of development of each in-process project, the cost to complete that project, the expected income stream, the life cycle of the product ultimately developed and the associated risks. A risk-adjusted discount rate of 50% was utilized to discount projected cash flows. (5) DISCONTINUED OPERATIONS On January 31, 2001, we completed the sale of our Verticalnet Exchanges segment to Converge, a private company. Verticalnet Exchanges was comprised of NECX.com LLC, a business purchased in December 1999, and its subsequent acquisitions of R.W. Electronics, Inc. ("RWE") and F&G Capital, Inc. d/b/a American IC Exchange ("AICE"). In consideration for the sale to Converge, we received 10,371,319 shares of Series B convertible preferred stock and 1,094,751 shares of non-voting common stock, representing approximately 18.0% and 1.9%, respectively, of Converge's equity at the closing of the transaction. In the second quarter of 2001 following a post-closing audit, the final net worth and working capital adjustment calculation was performed. The calculation, which was based on a comparison of Verticalnet Exchanges' net worth and working capital as of October 31, 2000 and as of the closing date, resulted in us making an aggregate payment of $12.8 million to Converge. The sale of Verticalnet Exchanges was treated as a nonmonetary exchange pursuant to the guidance in APB No. 29, Accounting for Nonmonetary Transactions, and EITF Issue No. 00-05, Determining Whether a Nonmonetary Transaction is an Exchange of Similar Productive Assets. Accordingly, we used the fair value of Verticalnet Exchanges of $215.0 million, as determined by an independent appraisal, to value our investment in Converge (see Note 9). We are accounting for our investment in Converge under the cost method of accounting for investments. We recorded an estimated loss on disposal of Verticalnet Exchanges of $82.0 million during the year ended December 31, 2000, which included an estimated loss from operations of $9.0 million for the month of January 2001. During the year ended December 31, 2001, we recorded an additional $3.9 million loss on disposal due to the final calculation of the net worth and working capital adjustment payment. Also in January 2001, in connection with the sale of Verticalnet Exchanges to Converge, we settled AICE's remaining earnout provisions by issuing 1,101,549 shares of our common stock, valued at approximately $10.0 million, which was considered in calculating our original loss on disposal. The sale of Verticalnet Exchanges represented the disposal of a business segment. Accordingly, the results of this segment have been shown separately as a discontinued operation, and prior periods have been restated. The net assets of the discontinued operation have been classified separately on the December 31, 2000 consolidated balance sheet. 68 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues and losses from the discontinued operation are as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 ------- -------- ------- (IN THOUSANDS) Exchange transaction sales........................... $ -- $633,762 $16,501 Cost of exchange transaction sales................... -- 525,182 14,171 ------- -------- ------- Net exchange revenues.............................. $ -- $108,580 $ 2,330 ======= ======== ======= Loss from discontinued operations.................... $ -- $(27,018) $ (891) ======= ======== ======= Loss on disposal of discontinued operations.......... $(3,903) $(81,968) $ -- ======= ======== =======
The assets and liabilities of the Verticalnet Exchanges segment as of December 31, 2000 were as follows:
DECEMBER 31, 2000 --------------- (IN THOUSANDS) Current assets.............................................. $ 27,573 Property and equipment, net................................. 22,809 Intangible assets........................................... 155,680 Other non-current assets.................................... 9,424 Current liabilities......................................... (486) -------- Net assets of discontinued operations....................... $215,000 ========
The following are businesses acquired in 1999 and 2000, which have been disposed of as part of the sale of our Verticalnet Exchanges segment: NECX In December 1999, we acquired substantially all of the assets and liabilities of NECX for approximately $14.1 million in cash and $70.0 million of notes convertible into common stock. The notes were valued at the estimated fair value of the shares into which they were convertible, based on the average of the stock price for a few days before and after the date the transaction was announced. On the date of the definitive agreement, the notes were convertible into 2,008,738 shares of our common stock valued at approximately $99.5 million. Since the notes were required to be paid in common stock and it was our intention to convert the notes once a registration statement was declared effective, the notes were accounted for as common stock to be issued. In April 2000, a registration statement registering the underlying shares of the convertible notes was declared effective and the actual number of shares issued upon the conversion of the notes was 1,768,034. Additionally, we assumed certain liabilities including $10.0 million in debt and a $22.0 million line of credit, which were paid off upon the transaction closing. NECX was a privately held leader in buying and selling semiconductors, electronic components, computer products and networking equipment. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $115.5 million was allocated to strategic relationships, including customer and vendor lists, assembled workforce and goodwill in the amounts of approximately $13.0 million, $2.5 million and $100.0 million, respectively. The assembled workforce was being amortized on a straight-line basis over 48 months, while strategic relationships and goodwill were being amortized on a straight-line basis over 60 months. 69 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RW Electronics On March 31, 2000, NECX acquired substantially all of the assets and liabilities of RWE for approximately $14.5 million in cash and 720,652 shares of our common stock valued at approximately $73.0 million. Based on the purchase agreement terms, an additional 311,741 shares of common stock were issued to the RWE shareholders due to a decline in the market value of our common stock upon the registration of the shares with the Securities and Exchange Commission in May 2000. Additionally, NECX assumed certain liabilities, including a $22.9 million line of credit, which was paid off upon the transaction closing. RWE was a privately held company engaged in buying and selling semiconductors, electronic components, computer products and networking equipment. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $76.3 million was allocated to strategic relationships, including customer and vendor lists, assembled workforce and goodwill in the amounts of approximately $15.0 million, $0.5 million and $60.8 million, respectively. The assembled workforce was being amortized on a straight-line basis over 48 months, while strategic relationships and goodwill were being amortized on a straight-line basis over 60 months. American IC Exchange On July 13, 2000, NECX acquired substantially all of the assets and assumed certain of the liabilities of AICE for 1,097,457 shares of our common stock valued at approximately $54.9 million. We agreed to pay additional consideration (payable in shares of our common stock) upon the achievement of negotiated financial and operating targets. As of December 31, 2000, we had issued an additional 239,552 shares of our common stock valued at approximately $8.1 million for earnout provisions that had been earned. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the tangible net assets acquired of approximately $51.3 million was allocated to developed technology, trade name, strategic relationships, assembled workforce and goodwill in the amounts of approximately $8.0 million, $5.4 million, $4.7 million, $0.6 million and $32.6 million, respectively. In January 2001, in connection with the sale of NECX to Converge, we settled AICE's remaining earnout provisions by issuing an additional 1,101,549 shares of our common stock valued at approximately $10.0 million. (6) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES During the year ended December 31, 2001, we announced and implemented several strategic and organizational initiatives designed to realign business operations, eliminate acquisition related redundancies and reduce costs. As a result of these restructuring initiatives we recorded an aggregate restructuring and asset impairment charge of approximately $345.5 million during the year ended December 31, 2001. The aggregate remaining restructuring accrual at December 31, 2001 of approximately $7.1 million, included in accrued expenses on the consolidated balance sheet, is expected to be adequate to cover actual amounts to be paid. Differences, if any, between the estimated amounts accrued and the actual amounts paid will be reflected in operating expenses in future periods. 70 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) First Quarter 2001 Restructuring and Asset Impairment During the first quarter of 2001, we recorded a restructuring and asset impairment charge of approximately $7.5 million. The following table provides a summary by category and a rollforward of the changes in the restructuring accrual for the year ended December 31, 2001:
RESTRUCTURING AND ASSET ACCRUAL AT IMPAIRMENT CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS CHARGES OTHER 2001 ------------- -------- -------- ----- ------------ (IN THOUSANDS) Lease termination costs............... $1,593 $(1,450) $ -- $153 $296 Employee severance and related benefits............................ 2,847 (2,975) -- 138 10 Other exit costs...................... 36 (38) -- 2 -- Asset disposals, net of cash received............................ 1,496 -- (1,600) 104 -- Goodwill and other intangible assets.............................. 1,493 -- (1,493) -- -- ------ ------- ------- ---- ---- $7,465 $(4,463) $(3,093) $397 $306 ====== ======= ======= ==== ====
The amount accrued at December 31, 2001 for lease termination costs relates to one lease, out of the original twenty leases included in the restructuring charge, that has not yet been terminated. The amount represents the net expense expected to be incurred to sublet the facility. The amount accrued at December 31, 2001 for employee severance and related benefits relates to severance payments which have not yet been made to employees whose positions were eliminated as part of the reduction in workforce. The reduction in workforce included approximately 240 people. Asset disposals included software, leasehold improvements, furniture, computer equipment and prepaid assets that will no longer be utilized in the ongoing operations due to the restructuring. During the second, third, and fourth quarters of 2001, we recorded additional expenses of approximately $0.2 million, $0.1 million and $0.1 million related to lease termination costs, employee termination benefits and asset disposals, respectively, due to changes in estimates from the original charges. The additional expenses recorded in the second, third, and fourth quarters of 2001 are reflected in restructuring and asset impairment charges in the consolidated statements of operations. Second Quarter 2001 Restructuring and Asset Impairment During the second quarter of 2001 we recorded a restructuring and asset impairment charge of approximately $218.4 million. The following table provides a summary by category and a rollforward of the changes in the restructuring accrual for the year ended December 31, 2001:
RESTRUCTURING AND ASSET ACCRUAL AT IMPAIRMENT CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS CHARGES OTHER 2001 ------------- -------- --------- ------- ------------ (IN THOUSANDS)} Lease termination costs............... $ 3,244 $(1,072) $ -- $(2,092) $ 80 Employee severance and related benefits............................ 4,170 (3,961) (63) 62 208 Other exit costs...................... 60 (115) - 55 -- Asset disposals, net of cash received............................ 8,847 -- (8,743) (104) -- Goodwill and other intangible assets.............................. 202,073 -- (201,879) (194) -- -------- ------- --------- ------- ---- $218,394 $(5,148) $(210,685) $(2,273) $288 ======== ======= ========= ======= ====
71 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount accrued at December 31, 2001 for lease termination costs relates to one lease, out of the original four leases included in the restructuring charge, that has not yet been terminated. The amount represents the net expense expected to be incurred to sublet the facility. The amount accrued at December 31, 2001 for employee severance and related benefits relates to severance payments which have not yet been made to employees whose positions were eliminated as part of the reduction in workforce. The reduction in workforce included approximately 310 people. Asset disposals included software, leasehold improvements, furniture, computer equipment and prepaid assets that will no longer be utilized in the ongoing operations due to the restructuring. We also impaired $202.1 million of identifiable intangible assets and goodwill in accordance with SFAS No. 121. The impairment assessment was performed primarily due to the significant decline in our stock price, which resulted in the net book value of our assets significantly exceeding our market capitalization and the overall decline in industry growth rates which indicated that this trend may continue for an indefinite period. As a result, we recorded a $155.0 million impairment charge in the second quarter of fiscal year 2001 to reduce goodwill and other intangible assets associated with our Tradeum acquisition to their estimated fair value. The estimate of fair value was based upon the valuation of comparable publicly held businesses. We also recorded a $47.1 million impairment charge in the second quarter of fiscal year 2001 to write off goodwill and other intangible assets associated with various acquisitions related to our SMB group, including approximately $20.6 million related to our acquisition of Verticalnet Europe. We estimated the fair value of the continuing SMB business based upon the amounts we could reasonably expect to realize in the sale of those assets. During the third and fourth quarters of 2001, we recorded adjustments of approximately $(2.1) million, $0.1 million, $(0.1) million and $(0.2) million related to lease termination costs, employee termination benefits and other exit costs, asset disposals and goodwill write downs, respectively, due to changes in estimates from the original charges. The adjustments recorded in the third and fourth quarters of 2001 are reflected in restructuring and asset impairment charges in the consolidated statements of operations. Third Quarter 2001 Restructuring and Asset Impairment During the third quarter we recorded a restructuring and asset impairment charge of $15.3 million. The following table provides a summary by category and a rollforward of the changes in the restructuring accrual for the year ended December 31, 2001:
RESTRUCTURING AND ASSET ACCRUAL AT IMPAIRMENT CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS CHARGES OTHER 2001 -------------- -------- -------- ----- ------------ (IN THOUSANDS) Lease termination costs.................. $ 1,730 $(1,654) $ -- $ 1 $ 77 Employee severance and related benefits............................... 4,725 (4,744) -- 54 35 Other exit costs......................... 177 (95) -- (82) -- Asset disposals, net of cash received.... 8,656 -- (9,092) 436 -- ------- ------- ------- ---- ---- $15,288 $(6,493) $(9,092) $409 $112 ======= ======= ======= ==== ====
The amount accrued at December 31, 2001 for lease termination costs relates to three leases, out of the original six leases included in the restructuring charge, that have not yet been terminated. The amount represents the net expense expected to be incurred to sublet the facilities or the estimated cost of terminating the lease contracts before the end of their respective terms. 72 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount accrued at December 31, 2001 for employee severance and related benefits relates to severance payments which have not yet been made to employees whose positions were eliminated as part of the reduction in workforce. The reduction in workforce included approximately 420 people. Asset disposals include software, leasehold improvements, furniture, computer equipment and prepaid assets that will not be used in our ongoing operations due to the restructuring. During the fourth quarter of 2001, we recorded adjustments of approximately $0.1 million, $(0.1) million and $0.4 million related to employee termination benefits, other exit costs, and asset disposals, respectively, due to changes in estimates from the original charges. The adjustments recorded in the fourth quarter of 2001 are reflected in restructuring and asset impairment charges in the consolidated statements of operations. Fourth Quarter 2001 Restructuring and Asset Impairment During the fourth quarter of 2001 we recorded a restructuring and impairment charge of approximately $105.9 million. The following table provides a summary of the charges and cash payments made by category as well as the amounts accrued as of December 31, 2001:
RESTRUCTURING AND ASSET ACCRUAL AT IMPAIRMENT CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS CHARGES 2001 ------------- -------- -------- ------------ (IN THOUSANDS) Lease termination costs................. $ 4,405 $ (95) $ -- $4,310 Employee severance and related benefits.............................. 2,823 (433) (349) 2,041 Other exit costs........................ 25 -- -- 25 Asset disposals, net of cash received... 17,628 -- (17,628) -- Goodwill and other intangible assets.... 80,981 -- (80,981) -- -------- ----- -------- ------ $105,862 $(528) $(98,958) $6,376 ======== ===== ======== ======
Lease termination costs include the estimated cost to close two office facilities and to terminate a capital lease contract. The charge represents the amount required to fulfill our obligation under signed lease contracts, the net expense expected to be incurred to sublet the facilities, or the estimated amount to be paid to terminate the lease contracts before the end of their terms. The reduction in workforce included approximately 120 employees from the following areas: cost of revenues, research and development, sales and marketing, and general and administrative. Asset disposals include software, leasehold improvements, furniture, telephone equipment and prepaid assets that will not be used in our ongoing operations due to the restructuring. We also impaired $81.0 million of identifiable intangible assets and goodwill in accordance with SFAS No. 121. We wrote-off our remaining goodwill balance of approximately $76.1 million related to our Tradeum acquisition. The decision to impair the remaining Tradeum goodwill was primarily based on our acquisition of Atlas Commerce and our decision to migrate to the Atlas Commerce platform which will replace the various Tradeum based components of our Enterprise software products. The remaining goodwill impairment of $4.9 million was related to an asset remarketing business which is part of our SMB unit. We estimated the fair value of this business based upon the amounts we could reasonably expect to realize in the sale of those assets. 2000 Asset Impairments During the year ended December 31, 2000, we recorded a goodwill impairment charge of approximately $11.5 million based on an analysis of projected undiscounted cash flows. Additionally, included in general and 73 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) administrative expenses for the year ended December 31, 2000 is approximately $5.6 million in write-offs for obsolete software, prepaid assets and deferred costs for terminated acquisitions. (7) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------- 2001 2000 -------- ------- (IN THOUSANDS) Software................................................ $ 8,198 $16,166 Computer equipment...................................... 11,703 16,227 Office equipment and furniture.......................... 2,197 6,404 Trade show equipment.................................... 360 349 Leasehold improvements.................................. 356 2,614 -------- ------- 22,814 41,760 Less: accumulated depreciation and amortization......... (11,393) (9,362) -------- ------- Property and equipment, net............................. $ 11,421 $32,398 ======== =======
Amortization applicable to property and equipment under capital leases is included in depreciation expense. During the year ended December 31, 2001, we recorded a charge of approximately $23.3 million related to the impairments of leasehold improvements for abandoned facilities, as well as impairments to furniture, office and computer equipment and software no longer being utilized in the ongoing operations of the business (see Note 6). (8) INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, --------------------- 2001 2000 -------- --------- (IN THOUSANDS) Goodwill.............................................. $ 49,297 $ 525,206 Covenant not-to-compete............................... -- 850 Existing technology................................... 4,550 9,600 Customer contracts.................................... 890 -- Assembled workforce................................... 500 1,700 -------- --------- 55,237 537,356 Less: accumulated amortization........................ (24,462) (149,015) -------- --------- Intangible assets, net................................ $ 30,775 $ 388,341 ======== =========
Amortization expense was $119.1 million, $146.8 million and $6.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Goodwill and other intangible asset impairments were approximately $284.4 million and $11.5 million for the years ended December 31, 2001 and 2000, respectively. 74 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) INVESTMENTS Investments categorized as available-for-sale securities were as follows:
GROSS GROSS UNREALIZED UNREALIZED HOLDING HOLDING MARKET COST GAINS LOSSES VALUE ------- ---------- ---------- ------- (IN THOUSANDS) DECEMBER 31, 2001 Marketable equity securities................. $52,862 $2 $(50,229) $ 2,635 ======= == ======== ======= DECEMBER 31, 2000 Corporate debt obligations................... $ 9,925 $1 $ (8) $ 9,918 U.S. Government & Government Agency obligations................................ 11,000 5 (4) 11,001 Marketable equity securities................. 67,592 -- (44,301) 23,291 ------- -- -------- ------- $88,517 $6 $(44,313) $44,210 ======= == ======== =======
Our marketable equity securities, which consist of investments in publicly traded companies for which we do not have the ability to exercise significant influence, are classified as available-for-sale and are stated at fair market value based on quoted market prices. Our investment in Ariba, Inc. ("Ariba") common stock of approximately $2.6 million and $22.9 million at December 31, 2001 and 2000, respectively, is classified as long-term due to a forward sale of the majority of our shares (see Note 11). During the year ended December 31, 2001, we recognized an impairment charge, included in other income (expense), of approximately $10.5 million on our Ariba investment for an other than temporary decline, based on the difference between the original recorded cost of the investment and the fair market value of the shares as of the forward sale contract execution date. Proceeds from sales of available-for-sale investments were approximately $21.5 million and $141.6 million, respectively, for the years ended December 31, 2001 and 2000. Gross realized losses were approximately $1.6 million for the year ended December 31, 2001. Gross realized losses and gains were approximately $5.6 million and $85.5 million, respectively, for the year ended December 31, 2000. Realized gains and losses are computed on a specific identification basis. In July 1999, we acquired 414,233 shares of the Series C preferred stock of Tradex Technologies, Inc. ("Tradex") for $1.0 million. In December 1999, Tradex entered into an Agreement and Plan of Reorganization with Ariba. On March 10, 2000, pursuant to the terms of the Agreement and Plan of Reorganization, our investment in Tradex was exchanged for 566,306 shares of Ariba's common stock, of which 64,310 shares were placed in escrow for one year subsequent to the transaction's closing. Based on the fair market value of Ariba's common stock on March 10, 2000, we recorded an $85.5 million gain on the disposition of the Tradex investment. After selling 140,000 shares in March 2000 at a loss of $5.6 million, we recorded a net investment gain of $79.9 million for the three months ended March 31, 2000. In March 2001, 49,982 of our escrowed Ariba shares were released, with the remaining 14,328 shares withheld due to a dispute under the Agreement and Plan of Reorganization. In March 2001, we wrote off the remaining shares held in escrow which resulted in a $2.2 million loss on investment. Cost Method Investments At December 31, 2001 and 2000, cost method investments were approximately $10.6 million and $12.2 million, respectively. During the year ended December 31, 2001, we recorded an aggregate impairment charge of $207.2 million related to our Converge investment which was initially valued at $215.0 million (see 75 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Note 5). The impairment charge was based on independent valuations of our Converge investment which we obtained subsequent to Converge's announcement that it would restructure its business. During the years ended December 31, 2001 and 2000, we recorded additional impairment charges of approximately $12.0 million and approximately $6.4 million, respectively, which are included in other income (expense), for an other than temporary decline in the fair value of several of our other cost method investments. Equity Method Investments At December 31, 2001 and December 31, 2000, our equity method investments were approximately $0.2 million and $5.4 million, respectively. During the year ended December 31, 2001 all of our equity method investments have either been dissolved by mutual agreement of the investors or we have sold our ownership to the other investors. At December 31, 2001, our remaining investment balance of $0.2 million relates to the proceeds expected from the current liquidation of Verticalnet Kabushiki Kaisha (Verticalnet Japan). Our loss from equity method investments, which is included in other income (expense), is approximately $2.3 million and $2.8 million for the years ended December 31, 2001 and 2000, respectively. During the year ended December 31, 2001, we recorded impairment charges (net of cash returned from the sale or liquidation of investments), of approximately $1.6 million which is included in other income (expense). Long-Term Investments and Other Long-Term Liabilities In July 2000, we entered into forward sale contracts relating to our investment in Ariba. Under these contracts, we pledged our shares of Ariba common stock to the counterparty for a three-year period in return for approximately $47.4 million of cash. At the conclusion of the three-year period, we have the option of delivering either cash or the pledged Ariba shares to satisfy the forward sale. However, we will not be required to deliver shares in excess of those we pledged. If we choose to deliver Ariba shares to satisfy the forward sale, the number of Ariba shares to be delivered at maturity may vary depending on the then market price of Ariba's common stock. The fair value of our Ariba shares at December 31, 2001 was approximately $2.6 million and is included in long-term investments. The fair value of the obligation in connection with the forward sale is $2.6 million as of December 31, 2001 and is reflected in other long-term liabilities. The initial cost of the transaction, which was approximately $5.0 million, is being amortized over the life of the agreement. The remaining carrying value of approximately $2.5 million at December 31, 2001 is included in other assets. (10) STRATEGIC RELATIONSHIPS Microsoft On March 29, 2000, we entered into a definitive agreement with Microsoft (the "Original Microsoft Agreement") with respect to a commercial relationship. Our commercial relationship with Microsoft had a three-year term during which Microsoft would purchase storefronts and e-commerce centers from us, and then either distribute them directly or have us distribute them to third party businesses. Our intent was that customers would purchase renewals of the storefront or e-commerce center and additional storefronts or e-commerce centers on our other e-marketplaces. The Original Microsoft Agreement also included joint advertising, our use of Microsoft products and services, and funding of joint development projects. On April 26, 2001, we entered into a new agreement with Microsoft (the "New Microsoft Agreement"), which terminated and replaced the Original Microsoft Agreement. Under the New Microsoft Agreement, Microsoft prepaid to us $40.0 million for the upsell or deployment of enablement products (storefronts, e- commerce centers and marketplace managers) on their behalf through April 2002. We received approximately $40.0 million and $67.6 million during the years ended December 31, 2001 and 2000, respectively, from Microsoft under these agreements. Under the terms of the Original Microsoft 76 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Agreement we paid approximately $0.5 million and $29.4 million to Microsoft during the years ended December 31, 2001 and 2000, respectively. Under the Original Microsoft Agreement we also made royalty payments to Microsoft of approximately $0.2 million and $0.5 million for the years ended December 31, 2001 and 2000, respectively, related to additional storefronts and e-commerce centers sold by us. Collectively, under the Original and New Microsoft Agreements, during the years ended December 31, 2001 and 2000, we recognized approximately $60.0 million and $30.5 million, respectively, in e-enablement and advertising revenue. As of December 31, 2001, we have approximately $17.1 million of deferred revenue related to our Microsoft Agreements. We also had expenses of approximately $17.9 million and $12.0 million during the years ended December 31, 2001 and 2000, respectively, for advertising, software licensing and support under the Original Microsoft Agreement. Converge In December 2000, we entered into a subscription license agreement and professional services agreements with Converge, which among other things, provided for us to receive an aggregate of $108.0 million during the three-year term of the agreements. On October 9, 2001, Verticalnet and Converge terminated the professional services agreements, amended and restated the subscription license agreement and entered into a maintenance and support agreement. The amended and restated subscription license agreement as well as the maintenance and support agreement had a term of 18 months ending in March 2003. The expected contractual payments under the new agreements plus the remaining deferred revenue under the original agreements are being recognized on a straight-line basis through March 2003. The agreements were subsequently amended in February 2002 (see Note 22). Below are the contractual payments, including revisions, either made or still expected from Converge under the revised terms of the agreements:
CONTRACTUAL REMAINING PAYMENTS UNDER ADJUSTMENTS DUE TO CASH RECEIVED CONTRACTUAL PAYMENTS ORIGINAL OCTOBER 2001 DURING THE YEAR ENDED AS OF AGREEMENTS CONTRACTUAL CHANGES DECEMBER 31, 2001 DECEMBER 31, 2001 -------------- ------------------- ---------------------- -------------------- (IN THOUSANDS) Subscription license...... $ 73,000 $(23,000) $(41,000) $ 9,000 Professional services..... 35,000 (23,750) (11,250) -- Maintenance and support... -- 4,500 (750) 3,750 -------- -------- -------- ------- $108,000 $(42,250) $(53,000) $12,750 ======== ======== ======== =======
During the year ended December 31, 2001, we recognized revenues of approximately $30.9 million under the Converge agreements. Deferred revenue related to the Converge agreements is approximately $23.2 million at December 31, 2001. 77 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued Expenses Accrued expenses consist of the following:
DECEMBER 31, ------------------ 2001 2000 ------- ------- (IN THOUSANDS) Accrued costs of disposal of discontinued operations..... $ -- $49,037 Accrued compensation and related costs................... 6,407 13,286 Accrued acquisition related costs........................ 5,469 92 Accrued restructuring costs.............................. 7,082 -- Accrued taxes............................................ 2,586 1,894 Accrued professional fees................................ 808 1,017 Accrued interest payable................................. 825 298 Other.................................................... 2,351 1,627 ------- ------- $25,528 $67,251 ======= =======
Other Current Liabilities We have a put/call agreement with BT whereby we can purchase their remaining 10% interest in Verticalnet Europe at any time after March 13, 2002 and BT may sell its investment to us at any time after March 13, 2002 (see Notes 3 and 22). The fair value of the put/call price of approximately $13.6 million is included in other current liabilities on the consolidated balance sheet as of December 31, 2001. The amount is payable in Euros, therefore, we mark the liability to market quarterly. The variable component of the price based on the LIBOR rate is accrued quarterly through the date the put or call is exercised. (12) LONG-TERM DEBT AND CONVERTIBLE NOTES Long-term debt and convertible notes consist of the following:
DECEMBER 31, ------------------ 2001 2000 ------- ------- (IN THOUSANDS) Capital leases........................................... $ 1,896 $ 2,549 Convertible notes,....................................... 21,705 21,705 ------- ------- 23,601 24,254 Less: current portion.................................... (1,346) (1,597) ------- ------- Long-term debt and convertible notes..................... $22,255 $22,657 ======= =======
In September and October of 1999, we completed the sale of $115.0 million of 5 1/4% convertible subordinated debentures in a private placement transaction pursuant to Section 4(2) of the Securities Act of 1933, resulting in net proceeds of $110.9 million. The debentures have a maturity date of September 27, 2004 with semi-annual interest payments due on March 27 and September 27 of each year beginning March 27, 2000. The debentures are convertible into shares of our common stock at an initial conversion price of $20 per share, subject to adjustment under certain circumstances. On February 11, 2000, we filed a registration statement with the Securities and Exchange Commission covering the convertible subordinated debentures and the shares of common stock underlying the debentures. The registration statement was declared effective on April 7, 2000. We may redeem the debentures if the price of our common stock is above $34 per share for at least 20 trading days during the 30-day trading period ending on the trading day before we mail notice that 78 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) we intend to redeem the debentures. If we redeem the debentures, we must redeem at a price equal to 101.3125% of the principal amount, pay any accrued but unpaid interest and make an interest make-whole payment equal to the present value of the interest that would have accrued from the redemption date through September 26, 2002. In April 2000, approximately $93.3 million of the 5 1/4% convertible subordinated debentures were converted into 4,664,750 shares of common stock. In connection with the conversion, we made an inducement payment of approximately $11.2 million to the related debt holders which is included in other income (expense) and wrote off against additional paid-in capital approximately $2.9 million in deferred debt offering costs attributable to the portion of debt converted to equity. We have several capital leases with various financial institutions for computer and communications equipment used in operations with lease terms ranging from three to five years. Additionally, we have an insurance premium financing agreement for directors and officers liability insurance. The interest rates under the leases and insurance premium financing agreement range from 8% to 20%. At December 31, 2001 and 2000, the book value of assets held under capital leases were approximately $0.3 million and $2.6 million, respectively, and the aggregate remaining minimum lease and financing agreement payments at December 31, 2001 were approximately $2.1 million, including interest of approximately $0.2 million. At December 31, 2001, long-term debt and capital lease obligations will mature as follows (in thousands):
2002....................................................... $ 1,347 2003....................................................... 392 2004....................................................... 21,855 2005....................................................... 7 ------- Total................................................. $23,601 =======
(13) COMMITMENTS AND CONTINGENCIES We have entered into non-cancelable obligations with service providers. Under these agreements, our commitments as of December 31, 2001 are as follows (in thousands):
2002...................................................... $862 2003...................................................... 50
Future minimum lease payments as of December 31, 2001 for our buildings leases are as follows (in thousands):
2002...................................................... $3,310 2003...................................................... 3,034 2004...................................................... 2,881 2005...................................................... 2,203 2006...................................................... 1,748 Thereafter.................................................. 3,613
These future minimum lease payments include all building leases for which we are contractually committed to make payments. We are in the process, however, of trying to terminate various facility leases which represent approximately $13.5 million of the payments in the above amounts. We currently estimate the termination costs of these leases to be approximately $5.1 million, which is included in accrued expenses. Rent 79 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expense under noncancelable operating leases was approximately $3.1 million, $4.1 million and $1.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. In connection with our acquisition of Atlas Commerce, we filed a registration statement on Form S-3 with the SEC registering shares of our common stock issued to acquire Atlas Commerce. In connection with a routine review and comment letter process related to this filing, we have received comments from the SEC. The remaining open comments relate primarily to the classification of certain previously reported revenue and expense items of our SMB business and therefore, we do not believe the ultimate resolution of such comments will change our previously reported cumulative net loss. As previously announced on February 13, 2002, we intend to sell our SMB business, and accordingly that business will be accounted for prospectively from January 1, 2002 forward, as a discontinued operation. Such presentation requires that all elements of revenue and expense be netted as a single line item to report net results of operations. As a result, revenues and expenses of our SMB business will no longer be separately presented in our financial statements. We are currently in the process of resolving these matters with the SEC and believe the historical classifications of revenue and expense for the SMB business are appropriate. As of the date of this filing, we cannot provide assurance that the SEC will declare the Form S-3 effective without us first amending the reports that are incorporated into the S-3. The remaining open SEC comments do not relate in any way to our ongoing collaborative supply chain software operations. (14) LITIGATION On June 12, 2001, a class action lawsuit was filed against us and several of our officers and directors in U.S. Federal Court for the Southern District of New York in an action captioned CJA Acquisition, Inc. v. Verticalnet, et al., C.A. No. 01-CV-5241 (the "CJA Action"). Also named as defendants were four underwriters involved in the issuance and initial public offering of 3,500,000 shares of Verticalnet common stock in February 1999 -- Lehman Brothers Inc., Hambrecht & Quist LLC, Volpe Brown Whelan & Company LLC and WIT Capital Corporation. The complaint in the CJA Action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on, among other things, claims that the four underwriters awarded material portions of the initial shares to certain favored customers in exchange for excessive commissions. The plaintiff also asserts that the underwriters engaged in a practice known as "laddering," whereby the clients or customers agreed that in exchange for IPO shares they would purchase additional shares at progressively higher prices after the IPO. With respect to Verticalnet, the complaint alleges that the company and its officers and directors failed to disclose in the prospectus and the registration statement the existence of these purported excessive commissions and laddering agreements. After the CJA Action was filed, several "copycat" complaints were filed in U.S. Federal Court for the Southern District of New York. Those complaints, whose allegations mirror those found in the CJA Action, include Ezra Charitable Trust v. Verticalnet, et al., C.A. No. 01-CV-5350; Kofsky v. Verticalnet, et al., C.A. No. 01-CV-5628; Reeberg v. Verticalnet, C.A. No. 01-CV-5730; Lee v. Verticalnet, et al., C.A. No. 01-CV-7385; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864; Morris v. Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet, et al., C.A. No. 01-CV-8084. None of the complaints state the amount of any damages being sought, but do ask the court to award "rescissory damages." We have retained counsel and intend to vigorously defend ourselves in connection with the allegations raised in the CJA Action and the other complaints. In addition, we intend to enforce our indemnity rights with respect to the underwriters who are also named as defendants in the complaints. On August 13, 2001, a lawsuit was filed against us in Massachusetts Superior Court (Peter L. LeSaffre, Robert R. Benedict and R.W. Electronics, Inc. v. NECX.com LLC and Verticalnet, Inc., C.A. No. 01-3724-B.L.S.). The suit alleges that, in connection with our acquisition of RWE in March 2000, certain Verticalnet and NECX officials made representations about certain technologies that the companies would be using to make them more successful and profitable. As a result of the alleged failure to use this technology, 80 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) plaintiffs claim they only received $43.0 million on the sale of RWE, rather than the $78.0 million that they claim they were entitled to. We have retained counsel to defend against the lawsuit and filed a motion to dismiss the action on October 12, 2001. The plaintiffs filed an amended complaint on October 24, 2001, and we answered the amended complaint on November 13, 2001. We intend to defend ourselves vigorously in the lawsuit and to enforce our rights pursuant to the acquisition of RWE. On December 4, 2001, a lawsuit was filed against us in the Montgomery County (Pa.) Court of Common Pleas in an action captioned Belcher-Pregmon Commercial Real Estate Co. v. Verticalnet, C.A. No. 01-22968. The suit alleges that the plaintiff is entitled to a broker commission in excess of $0.4 million in connection with our former lease of a building in Horsham, Pa. We have retained counsel to defend against the lawsuit and have filed preliminary objections asking that the suit be dismissed. Atlas Commerce filed a lawsuit on June 14, 2001 against a former senior vice president of Atlas Commerce in the Chester County (Pa.) Court of Common Pleas in an action captioned Atlas Commerce U.S., Inc., C.A. No. 01-05017. The lawsuit seeks to recover in excess of $0.6 million in principal and interest in connection with a loan made to the executive. The former executive answered the suit on July 30, 2001 and filed counterclaims against Atlas Commerce asserting breach of an oral agreement. Atlas Commerce asked the Court to dismiss the counterclaims on August 17, 2001. In a related action, the same executive filed a lawsuit on December 7, 2001, against Atlas Commerce in federal district court for the Eastern District of Pennsylvania in an action captioned Barr v. Atlas Commerce U.S., Inc., C.A. No. 01-CV-6129. The suit alleges violation of the federal Age Discrimination and Employment Act, and seeks damages in an unspecified amount. We have retained counsel and answered the complaint on February 11, 2002. We are also party to various litigations and claims that arise in the ordinary course of business. In the opinion of management, the ultimate resolutions with respect to these actions will not have a material adverse effect on our financial position or results of operations. (15) CAPITAL STOCK At December 31, 2001, our amended and restated Articles of Incorporation provide us the authority to issue 1,000,000,000 shares of common stock and 10,000,000 shares of blank check preferred stock. Common Stock On January 22, 2001, we sold approximately 2,800,000 shares of our common stock to Sumitomo for $15.0 million. Under the agreement, Sumitomo may not transfer the purchased shares for one year from the closing date of the transaction. Sumitomo was also granted limited demand and piggyback registration rights exercisable after the first anniversary of the closing. Series A 6.00% Convertible Redeemable Preferred Stock In April 2000, Microsoft made a $100.0 million equity investment in Verticalnet through the purchase of 100,000 shares of our Series A 6.00% convertible redeemable preferred stock ("Series A Preferred Stock"), which were initially convertible into 1,151,080 shares of our common stock, and the warrants described below. On April 1, 2010, at the election of the holder of the Series A Preferred Stock, we shall be required to redeem all outstanding shares of Series A Preferred Stock at a specified price. In addition, at our option, each share of Series A Preferred Stock will be subject to redemption at a calculated price if certain conditions are met. Microsoft is entitled to registration rights and has the right to nominate one member of our board of directors. The warrants Microsoft received entitle Microsoft to purchase 1,500,000 shares of our common stock at an exercise price of $69.50 per share, subject to adjustment under certain circumstances. Based on an independent valuation of the Series A Preferred Stock and the warrants issued to Microsoft, fair values of $89.5 million and $18.0 million were recorded, respectively. The fair value of the warrants was 81 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded as additional paid-in capital. The approximately $7.6 million excess of the fair value over the actual cash received was recorded as a deferred cost in other assets and is being amortized to expense on a straight-line basis over the period of the commercial agreement. Holders of the Series A Preferred Stock are entitled to cumulative preferred dividends accumulating at a rate of 6.00% of the liquidation preference ($1,000 per share) per year, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Dividends may be paid in cash, additional Series A Preferred Stock or common stock. As of December 31, 2001, cumulative dividends of approximately $10.9 million have been earned, of which approximately $9.3 million have been paid to Microsoft through the issuance of additional shares of Series A Preferred Stock. Additionally, the accretion related to the Series A Preferred Stock was approximately $1.0 million and $0.8 million, respectively, during the years ended December 31, 2001 and 2000. We may not declare or pay, or set aside funds to pay, any dividend or other distribution to the holders of our common stock or any other security ranking junior to the Series A Preferred Stock unless we have previously declared and paid, or set aside funds to pay, all dividends for preceding dividend periods to which the holders of the Series A Preferred Stock are entitled. In the event of liquidation, the holders of the Series A Preferred Stock will receive a liquidation preference in the amount of $1,000 per share, plus any accumulated and unpaid dividends, before any distribution is made to common shareholders. Based on the guidance in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, for which a consensus was reached in the fourth quarter of 2000, the Series A Preferred Stock has been classified outside of shareholders' equity (deficit). Warrants Outstanding warrants as of December 31, 2001 and 2000 consist of the following:
NUMBER OF DATE GRANTED WARRANTS EXERCISE PRICE EXPIRATION DATE ------------ --------- -------------- --------------- April 1997 15,480 $ 0.19 April 2007 November 1998 364,672 0.88 November 2008 November 1998 246,878 4.00 November 2008 April 2000 1,500,000 69.50 April 2010
Stock Option Plans In December 1996, our board of directors adopted the 1996 Equity Compensation Plan. Employees, key advisors and non-employee directors are eligible to receive awards under this plan. A total of 14,400,000 shares of common stock are reserved for issuance under this plan. At December 31, 2001, approximately 2,000,000 of these shares remain available for grant. In August 1999, our board of directors adopted the 1999 Equity Compensation Plan. A total of 1,200,000 shares of common stock are reserved for issuance to our employees under this plan. At December 31, 2001, approximately 400,000 of these shares remain available for grant. In October 1999, our board of directors adopted the Equity Compensation Plan for Employees (1999). A total of 18,500,000 shares of common stock are reserved for issuance to our employees under this plan. At December 31, 2001, approximately 6,700,000 of these shares remain available for grant. In April 2000, our board of directors adopted the Verticalnet, Inc. 2000 Equity Compensation Plan. It was approved by our shareholders in June 2000. A total of 10,000,000 shares of common stock are reserved for 82 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) issuance to our employees, non-employee directors, consultants and advisors under this plan. At December 31, 2001, approximately 1,800,000 of these shares remain available for grant. In December 2001, our board of directors assumed the Atlas Commerce, Inc. 1999 Long Term Incentive Plan. A total of approximately 2,600,000 shares of common stock are reserved for issuance to our employees, non-employee directors, consultants and advisors under this plan. At December 31, 2001 approximately 1,000,000 of these shares remain available for grant. The exercise price for the options is determined by our board of directors, but shall not be less than 100% of the fair market value of the common stock on the date of grant. Generally, the options vest over a two-year period after the date of grant and expire ten years after the date of grant. Option holders that terminate their employment generally forfeit all non-vested options. The following table summarizes the activity for stock option plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- -------------- Outstanding at December 31, 1998.................. 8,335,444 $ 0.67 Options granted................................... 9,928,620 30.46 Options exercised................................. (2,214,908) 0.63 Options cancelled................................. (544,140) 4.35 ----------- Outstanding at December 31, 1999.................. 15,505,016 19.58 Options granted................................... 21,126,782 43.65 Options exercised................................. (3,806,101) 6.84 Options cancelled................................. (6,544,936) 40.52 ----------- Outstanding at December 31, 2000.................. 26,280,761 34.44 Options granted................................... 27,162,810 1.52 Options exercised................................. (1,473,566) 0.68 Options cancelled................................. (23,572,686) 28.13 ----------- Outstanding at December 31, 2001.................. 28,397,319 10.02 ===========
83 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables summarize information about stock options outstanding at December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - --------------- ----------- ----------- -------- ----------- -------- $ 0.00 - 0.01 54,049 8.7 $ 0.01 54,049 $ 0.01 0.07 - 0.07 40,063 5.3 0.07 40,063 0.07 0.20 - 0.29 1,202,340 5.9 0.21 1,182,875 0.21 0.34 - 0.48 9,546,361 9.6 0.35 100,500 0.34 0.62 - 0.91 1,040,712 6.3 0.67 746,958 0.66 0.97 - 1.45 301,760 8.1 1.22 196,704 1.20 1.55 - 2.10 6,811,760 8.0 1.93 3,142,177 1.94 2.36 - 3.13 646,735 9.8 2.42 572,120 2.43 3.91 - 4.53 1,861,544 2.2 4.43 1,741,127 4.46 5.91 - 6.66 802,536 7.9 6.04 718,786 6.05 11.01 - 16.50 334,052 5.9 14.32 262,581 14.12 16.97 - 25.06 1,361,779 7.1 19.71 964,319 19.38 25.69 - 38.31 2,057,132 6.0 30.79 1,460,028 30.01 38.63 - 57.19 780,932 7.5 43.92 372,572 43.94 58.00 - 77.75 1,099,068 5.3 68.58 742,986 68.85 91.50 - 136.59 452,496 4.7 103.77 315,340 103.80 138.88 - 138.88 4,000 0.2 138.88 4,000 138.88 ---------- ---------- 28,397,319 12,617,185 ========== ==========
We apply APB No. 25 and related interpretations in accounting for our stock option plans. Had compensation cost been recognized pursuant to SFAS No. 123, our net loss would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 --------- --------- -------- Loss attributable to common shareholders: As reported.................................... $(768,272) $(316,580) $(53,480) Pro forma...................................... $(788,748) $(518,031) $(54,926) Pro forma loss per common share: As reported.................................... $ (7.93) $ (3.81) $ (0.86) Pro forma...................................... $ (8.14) $ (6.23) $ (0.88)
The per share weighted-average fair value of options issued by us during 2001, 2000 and 1999 was $1.20, $40.14 and $21.77, respectively. The following range of assumptions were used to determine the fair value of stock options:
2001 2000 1999 ---------- ---------- ---------- Dividend yield.................................. 0% 0% 0% Expected volatility............................. 120% 120% 100% Average expected option life.................... 3.97 years 3.85 years 4.09 years Risk-free interest rate......................... 4.2% 6.2% 5.7%
84 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee Stock Purchase Plan In January 1999, our board of directors adopted the Employee Stock Purchase Plan for all employees meeting its eligibility criteria. Under this plan, eligible employees may purchase shares of our common stock, subject to certain limitations, at 85% of the market value. Purchases are limited to 10% of an employee's eligible compensation, up to a maximum of 4,000 shares per purchase period. In April 2000, our board of directors approved an amendment, approved by the shareholders in June 2000, to increase the number of shares reserved under the plan from 1,200,000 to 2,000,000. At December 31, 2001, approximately 1,500,000 of these shares remain available. (16) LOSS PER SHARE The following table sets forth the computation of net loss per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 --------- --------- -------- Loss from continuing operations.................. $(756,949) $(202,330) $(52,589) Less: Series A convertible redeemable preferred stock dividends and accretion.................. (7,420) (5,264) -- --------- --------- -------- Loss from continuing operations attributable to common shareholders............................ (764,369) (207,594) (52,589) Loss from discontinued operations................ -- (27,018) (891) Loss on disposal of discontinued operations...... (3,903) (81,968) -- --------- --------- -------- Net loss attributable to common shareholders..... $(768,272) $(316,580) $(53,480) ========= ========= ======== Basic and diluted loss per common share: Continuing operations.......................... $ (7.89) $ (2.50) $ (0.84) Loss from discontinued operations.............. -- (0.32) (0.02) Loss on disposal of discontinued operations.... (0.04) (0.99) -- --------- --------- -------- Loss per common share............................ $ (7.93) $ (3.81) $ (0.86) ========= ========= ========
Common stock equivalents of approximately 7,200,000, 15,600,000 and 17,600,000, have been excluded from the calculation because their effect was anti-dilutive for the years ended December 31, 2001, 2000 and 1999, respectively. (17) DEFINED CONTRIBUTION PLAN In 1997, we established a defined contribution plan for qualified employees as defined under the plan. Participants may contribute 1% to 15% of their pre-tax compensation, as defined, to the plan. Under the plan, we can make discretionary contributions. To date, we have not made any contributions to the plan. 85 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (18) INCOME TAXES The components of the net deferred tax assets as of December 31, 2001 and 2000 consist of the following:
DECEMBER 31, ---------------------- 2001 2000 --------- --------- (IN THOUSANDS) Deferred tax assets: Net operating losses............................... $ 233,910 $ 182,955 Reserves........................................... 1,309 2,321 Depreciation and amortization...................... 13,992 7,798 Deferred revenue and other......................... 12,048 6,156 Disposition of segment............................. -- 35,986 Investment impairment.............................. 96,411 -- --------- --------- Total gross deferred tax assets................. 357,670 235,216 Valuation allowance.................................. (336,247) (202,632) --------- --------- 21,423 32,584 Deferred tax liabilities: Internally developed software costs................ (2,372) (2,461) Identifiable intangibles........................... -- (2,966) Gain on investment................................. (19,051) (27,157) --------- --------- Total deferred tax liabilities.................. (21,423) (32,584) --------- --------- Net deferred tax asset............................... $ -- $ -- ========= =========
Deferred income taxes reflect the net effects of net operating loss carryforwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of our ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at December 31, 2001 and 2000. The net change in the valuation allowance for deferred tax assets at December 31, 2001 and 2000 was an increase of $133.6 million and $163.4 million, respectively. As of December 31, 2001, we have approximately $554.5 million of net operating loss carryforwards for federal income tax purposes. These carryforwards will begin expiring in 2011 if not utilized. In addition, we have net operating loss carryforwards of approximately $554.5 million in certain states with various expiration periods beginning in 2002. The majority of state net operating losses are subject to a $2.0 million annual limitation and begin expiring in 2006. Under the Tax Reform Act of 1986, the utilization of a corporation's net operating loss carryforwards is limited following a change in ownership of greater than 50% within a three-year period. Due to our prior equity transactions, our net operating loss carryforwards are subject to an annual limitation generally determined by multiplying our market value on the date of the ownership change by the federal long-term tax exempt rate. Any amount exceeding the annual limitation may be carried forward to future years for the balance of the net operating loss carryforward period. Included in the pre-limitation net operating loss carryforwards are losses that were generated by companies acquired in 2001, 2000 and 1999. The losses generated by acquired companies prior to their 86 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) acquisition generally are available to offset future taxable income of the acquiring company. However, upon the acquisition of these companies, their net operating losses of approximately $28.1 million became subject to an annual limitation of approximately $3.6 million. Additionally, at December 31, 2001, approximately $87.2 million of the gross deferred tax asset will reduce equity and approximately $9.5 million of the gross deferred tax asset will reduce goodwill to the extent such assets are realized. (19) OTHER INCOME (EXPENSE) Other income (expense) was comprised of the following:
YEAR ENDED DECEMBER 31, ----------------------- 2001 2000 ---------- --------- (IN THOUSANDS) Net gain (loss) on investments (see Note 9)........... $ (3,829) $ 79,875 Conversion inducement payment (see Note 12)........... -- (11,207) Impairment charge related to cost method, equity method and available-for-sale investments (see Note 9).................................................. (231,327) (6,439) Loss from equity method investments (see Note 9)...... (2,312) (2,769) Other income (expense) items.......................... 1,118 -- --------- -------- Other income (expense), net...................... $(236,350) $ 59,460 ========= ========
(20) SEGMENT INFORMATION Following the sale of Verticalnet Exchanges in the first quarter of 2001, management began evaluating the financial operating performance of the business as two distinct business units, the SMB group and the Enterprise group, formerly referred to as Verticalnet Markets and Verticalnet Solutions, respectively. All prior segment information for Verticalnet Exchanges has been classified as a discontinued operation. In April 2001, we announced our intention to consolidate our two business units into a single operating segment in order to streamline operations and reduce redundant positions and costs. Although we unified operations during the second quarter, we continue to evaluate the financial performance of the Company based on our two segments. These segments include the SMB group, which consists of the operations of our 59 industry marketplaces, including e-enablement and e-commerce revenues and advertising and services revenues; and the Enterprise group, which consists of our enterprise software, professional services and related services operations. The reporting segments follow the same accounting policies used for our consolidated financial statements. Management evaluates the segments' performance primarily on revenues generated and income (loss) excluding non-cash expenses, other non recurring items and preferred stock dividends. Corporate costs, such as senior executive, finance, human resources, legal, facilities and technology expenses, are currently included in the Enterprise group information since we do not internally allocate any portion of these costs to the SMB group. Corporate costs were approximately $30.1 million and $37.0 million, respectively, for the years ended December 31, 2001 and 2000. 87 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2001 ------------------------------------------ ENTERPRISE GROUP (INCLUDING SMB GROUP CORPORATE COSTS) TOTAL --------- ---------------- --------- (IN THOUSANDS) Revenues...................................... $ 89,962 $ 35,608 $ 125,570 Income (loss), excluding non-cash expenses, other non recurring items and preferred stock dividends............................. 1,410 (55,515) (54,105) Restructuring and asset impairment charge..... (76,917) (268,625) (345,542) Amortization of goodwill and other intangible assets, net................................. (10,002) (111,724) (121,726) In-process research and development charge.... -- (420) (420) Investment impairments........................ -- (231,327) (231,327) Net loss on investments....................... -- (3,829) (3,829) Discontinued operations....................... -- (3,903) (3,903) Preferred stock dividends and accretion....... -- (7,420) (7,420) Loss attributable to common shareholders...... (85,509) (682,763) (768,272) Segment assets................................ 15,107 110,524 125,631
YEAR ENDED DECEMBER 31, 2000 ------------------------------------------ ENTERPRISE GROUP (INCLUDING SMB GROUP CORPORATE COSTS) TOTAL --------- ---------------- --------- (IN THOUSANDS) Revenues...................................... $104,548 $ 7,906 $ 112,454 Loss, excluding non-cash expenses, other non recurring items and preferred stock dividends................................... (31,235) (66,381) (97,616) Restructuring and asset impairment charges.... (11,530) -- (11,530) Non-cash, general and administrative expenses including stock compensation expense, terminated deal costs and write-off of obsolete assets............................. -- (5,572) (5,572) Amortization of goodwill and other intangible assets, net................................. (13,771) (126,070) (139,841) In-process research and development charge.... -- (10,000) (10,000) Investment impairments........................ -- (6,439) (6,439) Net gain on investments....................... -- 79,875 79,875 Conversion payment to debt holders............ -- (11,207) (11,207) Discontinued operations....................... -- (108,986) (108,986) Preferred stock dividends and accretion....... -- (5,264) (5,264) Loss attributable to common shareholders...... (56,536) (260,044) (316,580) Segment assets................................ 168,547 754,737 923,284
"Income (loss), excluding non-cash expenses, other non recurring items and preferred stock dividends" is used by our management for purposes of making decisions about allocating resources and assessing performance of our segments. However this caption is not intended to reflect segment results of operations in accordance with generally accepted accounting principles. Capital expenditures including capitalized software costs were $9.1 million and $5.7 million for the SMB group and Enterprise group, respectively, for the year ended December 31, 2001. Prior year comparative information is not readily available. 88 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (21) SUMMARIZED QUARTERLY DATA (UNAUDITED) The quarterly results of operations for the years ended December 31, 2001 and 2000 were as follows (in thousands, except per share data):
QUARTER ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- --------- ------------ ----------- 2001 Revenues........................... $ 36,687 $ 33,056 $ 31,755 $ 24,072 Loss from continuing operations attributable to common shareholders..................... $(91,644) $(302,481) $(241,649) $(128,595) Loss on disposal of discontinued operations....................... (522) (3,381) -- -- -------- --------- --------- --------- Loss attributable to common shareholders..................... $(92,166) $(305,862) $(241,649) $(128,595) ======== ========= ========= ========= Basic and diluted loss per share: Continuing operations............ $ (0.99) $ (3.10) $ (2.46) $ (1.30) Loss on disposal of discontinued operations.................... -- (0.03) -- -- -------- --------- --------- --------- $ (0.99) $ (3.13) $ (2.46) $ (1.30) ======== ========= ========= =========
QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 2000 Revenues............................. $12,863 $ 24,445 $ 34,455 $ 40,690 Income (loss) from continuing operations attributable to common shareholders....................... $46,699 $(84,217) $(76,082) $ (93,994) Income (loss) from discontinued operations......................... (4,606) (2,931) 68 (19,549) Loss on disposal of discontinued operations......................... -- -- -- (81,968) ------- -------- -------- --------- Income (loss) attributable to common shareholders....................... $42,093 $(87,148) $(76,014) $(195,511) ======= ======== ======== ========= Basic income (loss) per common share: Continuing operations.............. $ 0.62 $ (1.01) $ (0.88) $ (1.07) Loss from discontinued operations...................... (0.06) (0.04) -- (0.23) Loss on disposal of discontinued operations...................... -- -- -- (0.93) ------- -------- -------- --------- $ 0.56 $ (1.05) $ (0.88) $ (2.23) ======= ======== ======== ========= Diluted income (loss) per common share: Continuing operations.............. $ 0.49 $ (1.01) $ (0.88) $ (1.07) Loss from discontinued operations...................... (0.04) (0.04) -- (0.23) Loss on disposal of discontinued operations...................... -- -- -- (0.93) ------- -------- -------- --------- $ 0.45 $ (1.05) $ (0.88) $ (2.23) ======= ======== ======== =========
89 VERTICALNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (22) SUBSEQUENT EVENTS Amendments to the Converge Agreements Verticalnet and Converge entered into a first amendment to the amended and restated subscription license agreement and a first amendment to the maintenance and support agreement, both as of February 1, 2002. As a result of these amendments, the term of each agreement was extended to December 31, 2003. The amendment to the maintenance agreement reduced our required level of service, accelerated the payment terms and reduced their aggregate obligation by $0.5 million. From January 1, 2002 through March 15, 2002, we have received approximately $6.1 million from Converge in 2002, with the remaining aggregate payments of approximately $6.2 million expected over the balance of fiscal year 2002 per the terms of the amended. The expected contractual payments under the new agreements plus the remaining deferred revenue under the original agreements will be recognized on a straight-line basis through December 2003 (see Note 10). Announcement of Our Intention to Sell SMB On February 13, 2002, we announced our intention to sell the SMB group. Our board of directors authorized this action to complete our strategic realignment to an enterprise software business. Beginning in the first quarter of 2002, we will report the SMB group as a discontinued operation. Converge Investment On February 15, 2002, we invested $3.5 million in Converge LLC, an indirect subsidiary of Converge, and received a subordinated promissory note with a face value of $8.75 million. The note is payable in four equal installments on February 15th of 2006 through 2009. Repayment of the note is accelerated upon certain triggering events, including a change of control. In connection with the investment, we also received a warrant to purchase 3,500,000 shares of preferred stock in Converge Financial Corporation, a wholly owned subsidiary of Converge and an indirect parent of Converge LLC, at an initial exercise price of $.01 per share. Appointment of Chief Executive Officer and Chief Financial Officer On February 19, 2002, Kevin S. McKay, a member of our board of directors, was appointed president and chief executive officer of Verticalnet. Mr. McKay succeeded Michael Hagan, who was appointed chairman of Verticalnet. On February 13, 2002, John A. Milana, former chief financial officer of Atlas Commerce, was appointed as Verticalnet's chief financial officer replacing interim chief financial officer, David Kostman. Put/Call Arrangement with BT In February 2002 we agreed with BT to amend the put/call agreement to allow for an early partial exercise of our call using our common stock. As of March 15, 2002, we have issued 2,000,000 shares of our common stock to BT with an aggregate value of approximately $1.8 million towards the put and call obligation. As of March 15, 2002, our put/call liability is approximately $11.8 million (see Note 11). 90 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to our directors may be found under the caption "Proposal No. 1 -- Election of Directors" in our proxy statement for the 2002 Annual Meeting of Shareholders to be held on June 5, 2002 (the "Proxy Statement"). Information with respect to our executive officers may be found under the caption "Executive and Senior Officers" included in Part I of this report. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information in the Proxy Statement set forth under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the Proxy Statement set forth under the caption entitled "Stock Ownership" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the Proxy Statement set forth under the caption entitled "Certain Relationships and Related Transactions" is incorporated herein by reference. 91 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. See Item 8 of this report. 2. Financial Statement Schedules. The following financial statement schedule is filed as part of this report under Schedule II immediately following the signature page: Schedule II -- Valuation and Qualifying Accounts. Schedule II should be read in conjunction with the consolidated financial statements and related notes thereto set forth under Item 8 of this report. Schedules other than those listed above have been omitted because they are either not required, not applicable, or the information has otherwise been included. 3. Exhibits. See paragraph (c) below. (b) Reports on Form 8-K. Verticalnet, Inc. filed the following Reports on Form 8-K during the quarter ended December 31, 2001. On October 11, 2001, we filed our Current Report on Form 8-K, dated October 10, 2001, regarding (a) an amendment to Verticalnet's software licensing and professional services agreements with Converge, Inc., and (b) Verticalnet's expected write-down of its investment in Converge, Inc. (Item 5) On October 16, 2001, we filed our Current Report on Form 8-K, dated October 12, 2001, announcing the resignation of Gene S. Godick as Verticalnet's Chief Financial Officer and the appointment of David Kostman as Interim Chief Financial Officer. (Item 5) (c) Exhibits The following exhibits are filed as part of this report.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Amended and Restated Articles of Incorporation(1) 3.2 Articles of Amendment to Amended and Restated Articles of Incorporation(2) 3.3 Articles of Amendment to Amended and Restated Articles of Incorporation(2) 3.4 Amended and Restated Bylaws(1) 4.1 Indenture, dated September 27, 1999, between Verticalnet, Inc. and Bankers Trust Company(3) 4.2 Registration Rights Agreement, dated September 27, 1999, between Verticalnet, Inc. and the initial purchasers of its 5 1/4% Convertible Subordinated Debentures(3) 4.3 Statement with Respect to Shares of Series A 6.00% Convertible Redeemable Preferred Stock Due 2010 of Verticalnet, Inc.(4) 4.4 Registration and Lock-Up Agreement, dated as of December 28, 2001, by and among Verticalnet, Inc. and certain stockholders of Atlas Commerce, Inc.(20) 10.1 Common Stock Purchase Warrant to purchase 40,026 shares of Common Stock, dated November 25, 1998, issued to Progress Capital, Inc.(1) 10.2 Form of Common Stock Purchase Warrant, dated November 25, 1998, issued in connection with the Convertible Note(1) 10.3 Series A Preferred Stock Purchase Agreement, dated as of September 12, 1996, between Internet Capital Group, L.L.C. and Verticalnet, Inc.(1) 10.4 Series D Investor Rights Agreement, dated as of May 8, 1998, by and among Verticalnet, Inc. and certain Investors(1)
92
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.5 Registration Rights Agreement, dated as of November 25, 1998, between Verticalnet, Inc. and the Convertible Note Holders(1) 10.6 Agreement of Lease, dated April 21, 1999, between Liberty Property Limited Partnership and Verticalnet, Inc., as amended by the First Amendment to Lease Agreement, dated May 15, 1999, between Liberty Property Limited Partnership and Verticalnet, Inc. (700 Dresher Road, Horsham, Pennsylvania)(5) 10.7 Second Amendment to Lease Agreement, dated March 2, 2000, between Liberty Property Limited Partnership and Verticalnet, Inc. (700 Dresher Road, Horsham, Pennsylvania)(19) 10.8 Third Amendment to Lease Agreement, dated August 1, 2000, between Liberty Property Limited Partnership and Verticalnet, Inc. (700 Dresher Road, Horsham, Pennsylvania)(19) 10.9 Agreement of Lease, dated April 13, 2000, between Liberty Property Limited Partnership and Atlas Commerce (U.S.) Inc. (300 Chester Field Parkway, Malvern, Pennsylvania)* 10.10 Agreement and Plan of Merger, dated as of March 8, 2000, by and among Verticalnet, Inc., VERT Acquisition Corp., Tradeum, Inc. and Zvi Schreiber(11) 10.11 Asset Purchase Agreement, dated as of February 16, 2000, by and among Verticalnet, Inc., NECX.com LLC, RW Electronics, Inc., RW Electronics Trust, Robert R. Benedict and Peter L. LeSaffre(12) 10.12 Agreement and Plan of Reorganization, dated as of June 30, 2000, by and among Verticalnet, Inc. NECX.com LLC, F&G Capital, Inc., trustees of the Binford Living Trust, trustees of the Carracino Family Trust, trustees of the Radach Family Trust, James D. Binford, Daniel N. Carracino and Russel R. Radach(13) 10.13 Membership Interest Purchase Agreement, dated as of December 19, 2000, by and among Converge, Inc., NECX.com LLC and Verticalnet, Inc.(14) 10.14 Amendment No. 1 to Membership Interest Purchase Agreement, dated as of January 31, 2001, by and among Converge, Inc., NECX.com LLC, Verticalnet, Inc. and Converge International, Ltd.(15) 10.15 Agreement of Merger, dated December 28, 2001, by and among Verticalnet, Inc. and Atlas Commerce, Inc.(20) 10.16 Subscription License Agreement, dated as of December 19, 2000, among Verticalnet, Inc., Tradeum, Inc. d/b/a Verticalnet Solutions and Converge, Inc.* 10.17 First Amendment to Subscription License Agreement, dated as of January 31, 2001, among Verticalnet, Inc., Verticalnet Solutions LLC and Converge, Inc.* 10.18 Amended and Restated Subscription License Agreement, dated as of October 9, 2001, between Verticalnet, Inc., Verticalnet Enterprises LLC and Converge, Inc.* 10.19 Maintenance and Support Agreement, dated October 9, 2001, between Verticalnet, Inc., Verticalnet Enterprises LLC and Converge, Inc.* 10.20 First Amendment to the Amended and Restated Subscription License Agreement, dated as of February 1, 2002, between Verticalnet, Inc., Verticalnet Enterprises LLC and Converge, Inc.* 10.21 First Amendment to Maintenance and Support Agreement, dated as of February 1, 2002, between Verticalnet, Inc., Verticalnet Enterprises LLC and Converge, Inc.* 10.22 Amended and Restated 1996 Equity Compensation Plan(1)(18) 10.23 1999 Equity Compensation Plan(3)(18) 10.24 Verticalnet, Inc. 2000 Equity Compensation Plan(16)(18) 10.25 Amended and Restated Equity Compensation Plan for Employees(17)(18) 10.26 Employment Agreement, dated April 25, 2001, between Verticalnet, Inc. and Christopher Larsen*
93
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.27 Employment Agreement, dated October 1, 2001, between Verticalnet, Inc. and James W. McKenzie, Jr.* 10.28 Employment Agreement, dated October 1, 2001, between Verticalnet, Inc. and Michael J. Hagan* 10.29 Employment Agreement, dated October 1, 2001, between Verticalnet, Inc. and David Kostman* 21 Subsidiaries of the Registrant* 23 Consent of KPMG LLP* 99.1 Promissory Note, dated as of December 31, 2000(14)
- --------------- * Filed herewith. (1) Filed as an exhibit to the registrant's Registration Statement on Form S-1 (Registration No. 333-68053) filed with the Commission on November 27, 1998, as amended. (2) Filed as an exhibit to the registrant's report on Form 10-Q dated September 30, 2000. (3) Filed as an exhibit to the registrant's report on Form 10-Q dated September 30, 1999. (4) Filed as an exhibit to the registrant's report on Form 8-K dated April 14, 2000. (5) Filed as an exhibit to the registrant's report on Form 10-Q dated June 30, 1999. (6) Filed as an exhibit to the registrant's report on Form 8-K dated June 29, 1999. (7) Filed as an exhibit to the registrant's report on Form 8-K dated July 29, 1999. (8) Filed as an exhibit to the registrant's report on Form 8-K dated August 10, 1999. (9) Filed as an exhibit to the registrant's report on Form 8-K dated August 25, 1999. (10) Filed as an exhibit to the registrant's report on Form 8-K dated December 16, 1999. (11) Filed as an exhibit to the registrant's report on Form 8-K dated March 23, 2000. (12) Filed as an exhibit to the registrant's report on Form 8-K dated March 31, 2000. (13) Filed as an exhibit to the registrant's report on Form 8-K dated July 13, 2000. (14) Filed as an exhibit to the registrant's report on Form 8-K dated December 19, 2000. (15) Filed as an exhibit to the registrant's report on Form 8-K dated January 31, 2001. (16) Filed as Annex B to the registrant's definitive proxy statement on Schedule 14A, which was filed on April 27, 2000. This exhibit was approved by the registrant's shareholders at the registrant's 2000 Annual Meeting. (17) Filed as an exhibit to the registrant's report on Form 10-K dated December 31, 1999. (18) Compensatory plans and arrangements for executives and others. (19) Filed as an exhibit to the registrant's report on Form 10-K dated December 31, 2000. (20) Filed as an exhibit to the registrant's report on Form 8-K dated January 4, 2002. 94 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Horsham, Pennsylvania, on April 1, 2002. VERTICALNET, INC. BY: /s/ JOHN A. MILANA ------------------------------------ John A. Milana Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities indicated on April 1, 2002.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL J. HAGAN Chairman of the Board and Director April 1, 2002 - --------------------------------------------------- Michael J. Hagan /s/ KEVIN S. MCKAY President, Chief Executive Officer April 1, 2002 - --------------------------------------------------- and Director (principal executive Kevin S. McKay officer) /s/ JOHN A. MILANA Chief Financial Officer (principal April 1, 2002 - --------------------------------------------------- financial officer and accounting John A. Milana officer) /s/ JEFFREY C. BALLOWE Director April 1, 2002 - --------------------------------------------------- Jeffrey C. Ballowe /s/ ROBERT F. BERNSTOCK Director April 1, 2002 - --------------------------------------------------- Robert F. Bernstock /s/ WALTER W. BUCKLEY, III Director April 1, 2002 - --------------------------------------------------- Walter W. Buckley, III /s/ HOWARD D. ROSS Director April 1, 2002 - --------------------------------------------------- Howard D. Ross /s/ MARK L. WALSH Director April 1, 2002 - --------------------------------------------------- Mark L. Walsh
95 VERTICALNET, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (IN THOUSANDS)
BALANCE AT THE CHARGE TO BALANCE AT BEGINNING OF COSTS AND THE END OF THE YEAR EXPENSES WRITE-OFFS OTHER(1) THE YEAR -------------- ---------- ----------- -------- ---------- Allowance for doubtful accounts: December 31, 1999......... $ 61 $ 807 $ (127) $ 61 $ 802 December 31, 2000......... 802 2,372 (1,102) -- 2,072 December 31, 2001......... 2,072 1,237 (2,308) (14) 987
- --------------- (1) Allowance balances were recorded in connection with acquisitions and dispositions during fiscal years 1999, 2000 and 2001. All amounts reflect activity from continuing operations. 96 EX-10.9 3 w58938ex10-9.txt AGREEMENT OF LEASE Exhibit 10.9 AGREEMENT OF LEASE BETWEEN LIBERTY PROPERTY LIMITED PARTNERSHIP AND AATLAS COMMERCE, INC. FOR SUITE 100 300 CHESTERFIELD PARKWAY MALVERN, PENNSYLVANIA LEASE AGREEMENT (Multi-Tenant Office) INDEX
SECTION PAGE ------- ---- 1. Summary of Terms and Certain Definitions ............................. 1 2. Premises.............................................................. 2 3. Acceptance of Premises................................................ 2 4. Use; Compliance ...................................................... 2 5. Term ................................................................. 2 6. Minimum Annual Rent .................................................. 3 7. Operation of Property; Payment of Expenses ........................... 3 8. Signs ................................................................ 4 9. Alterations and Fixtures ............................................. 5 10. Mechanics' Liens ..................................................... 5 11. Landlord's Right to Relocate Tenant; Right of Entry .................. 5 12. Damage by Fire or Other Casualty ..................................... 5 13. Condemnation ......................................................... 6 14. Non-Abatement of Rent ................................................ 6 15. Indemnification of Landlord .......................................... 6 16. Waiver of Claims ..................................................... 6 17. Quiet Enjoyment ...................................................... 6 18. Assignment and Subletting ............................................ 6 19. Subordination; Mortgagee's Rights .................................... 7 20. Recording; Tenant's Certificate ...................................... 7 21. Surrender; Abandoned Property ........................................ 8 22. Curing Tenant's Defaults ............................................. 8 23. Defaults - Remedies .................................................. 8 24. Representations of Tenant ............................................ 9 25. Liability of Landlord ................................................ 9 26. Interpretation; Definitions .......................................... 10 27. Notices .............................................................. 10 28. Security Deposit ..................................................... 11
RIDERS 29. PA Additional Remedies ............................................... R-1 30. Modification of Section 7. Operation of Property; Payment of Expenses R-2 31. Modification of Section 9. Alterations and Fixtures .................. R-2 32. Modification of Section 10. Mechanics' Liens ......................... R-2 33. Modification of Section 11. Landlord's Right to Relocate Tenant; Right of Entry ............................................................. R-2 34. Modification of Section 18. Assignment and Subletting ................ R-2 35. Modification of Section 20. Recording; Tenant's Certificate .......... R-2 36. Modification of Section 29. PA Additional Remedies ................... R-2 37. Tenant Improvements. Completion by Tenant ............................ R-3 38. Tenant Allowance ..................................................... R-3 39. Renewal Option ....................................................... R-4 40. Existing Lease Obligation ............................................ R-4
THIS LEASE AGREEMENT is made by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership ("LANDLORD") with its address at 65 Valley Stream Parkway, Suite 100, Malvern, Pennsylvania 19355 and AATLAS COMMERCE, INC. a Corporation organized under the laws of Pennsylvania ("TENANT") with its address at 300 Chester Field Parkway, Suite 100, Malvern, Pennsylvania 19355 and is dated as of the date on which this lease has been fully executed by Landlord and Tenant. 1. SUMMARY OF TERMS AND CERTAIN DEFINITIONS. (a) "PREMISES": Approximate rentable square feet: 27,260 (Section 2) Suite: 100 (b) "BUILDING": Approximate rentable square feet: 27,260 (Section 2) Address: 300 Chesterfield Parkway Malvern, Pennsylvania, 19355 (c) "TERM": Seventy Two (72) months plus any partial month (Section 5) from the Commencement Date until the first day of the first full calendar month during the term. (i) "COMMENCEMENT DATE": July 1, 2000 (ii) "EXPIRATION DATE": See Section 5 (d) MINIMUM RENT (Section 6) & OPERATING EXPENSES (Section 7) (i) "MINIMUM ANNUAL RENT": Four Hundred Ninety Seven Thousand, Four Hundred Ninety Five and 00/100 (497,495.00), payable in monthly installments of Forty One Thousand Four Hundred Fifty Seven and 92/100 (41,457.92), increased as follows:
Lease Year Annual Monthly Lease Year Annual Monthly - ---------- ------ ------- ---------- ------ ------- 2 $511,125.00 $42,593.75 4 $538,385.00 $44,865.42 3 $524,755.00 $43,729.58 5 $552,015.00 $46,001.25 6 $565,645.00 $47,137.08
(ii) ESTIMATED "ANNUAL OPERATING AND ELECTRICITY EXPENSES": Two Hundred Twenty Four Thousand Eight Hundred Ninety Five and 00/100 (224,895.00), payable in monthly installments of Eighteen Thousand Seven Hundred Forty One and 25/100 (18,741.25) subject to adjustment. (e) "PROPORTIONATE SHARE" (Section 7(a)): 100% (Ratio of approximate rentable square feet in the Premises to approximate rentable square feet in the Building) (f) "USE" (Section 4): General office purposes (excluding any "place of public accommodation") (g) "SECURITY DEPOSIT" (Section 28): $53,952.09 (Fifty Three Thousand Nine Hundred Fifty Two and 09/100 Dollars) (h) CONTENTS: This lease consists of the Index, pages 1 through 11 containing Sections 1 through 28 and the following, all of which are attached hereto and made a part of this lease: Rider with Section 29 through 39 Exhibits: "A" - Plan showing Premises "B" - Commencement Certificate Form "C" - Building Rules "D" - Cleaning Schedule "E" - Estoppel Certificate Form "F" - Description of Work 2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises as shown on attached Exhibit "A" within the Building (the Building and the lot on which it is located, the "PROPERTY"), together with the non-exclusive right with Landlord and other occupants of the Building to use all areas and facilities provided by Landlord for the use of all tenants in the Property including any driveways, sidewalks and parking, loading and landscaped areas (the "COMMON AREAS"). 3. ACCEPTANCE OF PREMISES. Tenant has examined and knows the condition of the Property, the zoning, streets, sidewalks, parking areas, curbs and access ways adjoining it, visible easements, any surface conditions and the present uses, and Tenant accepts them in the condition in which they now are, without relying on any representation, covenant or warranty by Landlord. Tenant and its agents shall have the right, at Tenant's own risk, expense and responsibility, at all reasonable times prior to the Commencement Date, to enter the Premises for the purpose of taking measurements and installing its furnishings and equipment; provided that the Premises are vacant and Tenant obtains Landlord's prior written consent. 4. USE; COMPLIANCE. (a) PERMITTED USE. Tenant shall occupy and use the Premises for and only for the Use specified in Section 1(f) above and in such a manner as is lawful, reputable and will not create any nuisance or otherwise interfere with any other tenant's normal operations or the management of the Building. Without limiting the foregoing, such Use shall exclude any use that would cause the Premises or the Property to be deemed a "place of public accommodation" under the Americans with Disabilities Act (the "ADA") as further described in the Building Rules (defined below). All Common Areas shall be subject to Landlord's exclusive control and management at all times. Tenant shall not use or permit the use of any portion of the Property for outdoor storage or installations outside of the Premises nor for any use that would interfere with any other person's use of any portion of the Property outside of the Premises. (b) COMPLIANCE. Landlord represents that, as of the date of this lease, there is no action required with respect to the Premises or Common Areas under any laws (including Title III of the ADA), ordinances, notices, orders, rules, regulations and requirements applicable to the Premises or to the Common Areas. From and after the Commencement Date, Tenant shall comply promptly, at its sole expense, (including making any alterations or improvements) with all laws (including the ADA), ordinances, notices, orders, rules, regulations and requirements regulating the Property during the Term which impose any duty upon Landlord or Tenant with respect to Tenant's use, occupancy or alteration of, or Tenant's installations in or upon, the Property including the Premises, (as the same may be amended, the "LAWS AND REQUIREMENTS") and the building rules attached as Exhibit "C", as amended by Landlord from time to time (the "BUILDING RULES"). Provided, however, that Tenant shall not be required to comply with the Laws and Requirements with respect to the footings, foundations, structural steel columns and girders forming a part of the Property unless the need for such compliance arises out of Tenant's use, occupancy or alteration of the Property, or by any act or omission of Tenant or any employees, agents, contractors, licensees or invitees ("AGENTS") of Tenant. With respect to Tenant's obligations as to the Property, other than the Premises, at Landlord's option and at Tenant's expense, Landlord may comply with any repair, replacement or other construction requirements of the Laws and Requirements and Tenant shall pay to Landlord all costs thereof as additional rent. (c) ENVIRONMENTAL. Tenant shall comply, at its sole expense, with all Laws and Requirements as set forth above, all manufacturers' instructions and all requirements of insurers relating to the treatment, production, storage, handling, transfer, processing, transporting, use, disposal and release of hazardous substances, hazardous mixtures, chemicals, pollutants, petroleum products, toxic or radioactive matter (the "RESTRICTED ACTIVITIES"). Tenant shall deliver to Landlord copies of all Material Safety Data Sheets or other written information prepared by manufacturers, importers or suppliers of any chemical and ALL notices, filings, permits and any other written communications from or to Tenant and any entity regulating any Restricted Activities. (d) NOTICE. If at any time during or after the Term, Tenant becomes aware of any inquiry, investigation or proceeding regarding the Restricted Activities or becomes aware of any claims, actions or investigations regarding the ADA, Tenant shall give Landlord written notice, within 5 days after first learning thereof, providing all available information and copies of any notices. 5. TERM. The Term of this lease shall commence on the Commencement Date and shall end at 11:59 p.m. on the last day of the Term (the "EXPIRATION DATE"), without the necessity for notice from either party, unless sooner terminated in accordance with the terms hereof. At Landlord's request, Tenant shall confirm the Commencement Date and Expiration Date by executing a lease commencement certificate in the form attached as Exhibit "B". 6. MINIMUM ANNUAL RENT. Tenant agrees to pay to Landlord the Minimum Annual Rent in equal monthly installments in the amount set forth in Section 1(d) (as increased at the beginning of each lease year as set forth in Section 1(d)), in advance, on the first day of each calendar month during the Term, without notice, demand or setoff, at Landlord's address designated at the beginning of 2 this lease unless Landlord designates otherwise; provided that rent for the first full month shall be paid at the signing of this lease. If the Commencement Date falls on a day other than the first day of a calendar month, the rent shall be apportioned pro rata on a per diem basis for the period from the Commencement Date until the first day of the following calendar month and shall be paid on or before the Commencement Date. As used in this lease, the term "LEASE YEAR" means the period from the Commencement Date through the succeeding 12 full calendar months (including for the first lease year any partial month from the Commencement Date until the first day of the first full calendar month) and each successive 12 month period thereafter during the Term. 7. OPERATION OF PROPERTY; PAYMENT OF EXPENSES. (a) PAYMENT OF OPERATING EXPENSES. Tenant shall pay to Landlord the Annual Operating Expenses in equal monthly installments in the amount set forth in Section 1(d) (prorated for any partial month), from the Commencement Date and continuing throughout the Term on the first day of each calendar month during the Term, as additional rent, without notice, demand or setoff, provided that the monthly installment for the first full month shall be paid at the signing of this lease. Landlord shall apply such payments to the operating expenses owed to Landlord by Tenant pursuant to the following Sections 7(b)-(f). The amount of the Annual Operating Expenses set forth in Section 1(d) represents Tenant's Proportionate Share of the estimated operating expenses during the first calendar year of the Term on an annualized basis; from time to time Landlord may adjust such estimated amount if the estimated operating expenses increase. By April 30th of each year (and as soon as practical after the expiration or termination of this lease or at any time in the event of a sale of the Property), Landlord shall provide Tenant with a statement of the actual amount of such expenses for the preceding calendar year or part thereof. Landlord or Tenant shall pay to the other the amount of any deficiency or overpayment then due from one to the other or, at Landlord's option, Landlord may credit Tenant's account for any overpayment. Tenant's obligation to pay the Annual Operating Expenses pursuant to this Section 7 shall survive the expiration or termination of this lease. (b) TAXES AND OTHER IMPOSITIONS. Tenant shall pay prior to delinquency all levies, taxes (including sales taxes and gross receipt taxes), assessments, liens, license and permit fees, which are applicable to the Term, and which are imposed by any authority or under any law, ordinance or regulation thereof, or pursuant to any recorded covenants or agreements, and the reasonable cost of contesting any of the foregoing (the "IMPOSITIONS") upon or with respect to the Premises, or any improvements thereto, or directly upon this lease or the Rent (defined in Section 7(f)) or amounts payable by any subtenants or other occupants of the Premises, or against Landlord because of Landlord's estate or interest herein. Additionally, Tenant shall pay as aforesaid its Proportionate Share of any Imposition which is not imposed upon the Premises as a separate entity but which is imposed upon all or part of the Property or upon the leases or rents relating to the Property. (i) Nothing herein contained shall be interpreted as requiring Tenant to pay any income, excess profits or corporate capital stock tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed in lieu of all or any part of any Imposition or an increase in any Imposition. (ii) If it shall not be lawful for Tenant to reimburse Landlord for any of the Impositions, the Minimum Annual Rent shall be increased by the amount of the portion of such Imposition allocable to Tenant, unless prohibited by law. (c) INSURANCE. (i) PROPERTY. Landlord shall keep in effect, and Tenant shall pay to Landlord its Proportionate Share of the cost of, insurance against loss or damage to the Building or the Property by fire and such other casualties as may be included within fire, extended coverage and special form insurance covering the full replacement cost of the Building (but excluding coverage of Tenant's personal property in, and any alterations by Tenant to, the Premises), and such other insurance as Landlord may reasonably deem appropriate or as may be required from time-to-time by any mortgagee. (ii) LIABILITY. Tenant, at its own expense, shall keep in effect comprehensive general public liability insurance with respect to the Premises and the Property, including contractual liability insurance, with such limits of liability for bodily injury (including death) and property damage as reasonably may be required by Landlord from time-to-time, but not less than a combined single limit of $1,000,000 per occurrence and a general aggregate limit of not less than $3,000,000 (which aggregate limit shall apply separately to each of Tenant's locations if more than the Premises); however, such limits shall not limit the liability of Tenant hereunder. The policy of comprehensive general public liability insurance also shall name Landlord and Landlord's agent as insured parties with respect to the Premises, shall be written on an "occurrence" basis and not on a "claims made" basis, shall provide that it is primary with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, shall provide that it shall not be cancelable or reduced without at least 30 days prior written notice to Landlord and shall be issued in form satisfactory to Landlord. The insurer shall be a responsible insurance carrier which is authorized to issue such insurance and licensed to do business in the state in which the Property is located and which has at all times during the Term a rating of no less than A VII in the most current edition of Best's Insurance Reports. Tenant shall deliver to Landlord on or before the 3 Commencement Date, and subsequently renewals of, a certificate of insurance evidencing such coverage and the waiver of subrogation described below. (iii) WAIVER OF SUBROGATION. Landlord and Tenant shall have included in their respective property insurance policies waivers of their respective insurers' right of subrogation against the other party. If such a waiver should be unobtainable or unenforceable, then such policies of insurance shall state expressly that such policies shall not be invalidated if, before a casualty, the insured waives the right of recovery against any party responsible for a casualty covered by the policy. (iv) INCREASE OF PREMIUMS. Tenant agrees not to do anything or fail to do anything which will increase the cost of Landlord's insurance or which will prevent Landlord from procuring policies (including public liability) from companies and in a form satisfactory to Landlord. If any breach of the preceding sentence by Tenant causes the rate of fire or other insurance to be increase, tenant shall pay the amount of such increase as additional rent promptly upon being billed. (d) REPAIRS AND MAINTENANCE; COMMON AREAS; BUILDING MANAGEMENT. Except as specifically otherwise provided in this Section (d), Tenant at its sole expense shall maintain the Premises in good order and condition, promptly make all repairs necessary to maintain such condition, and repair any damage to the Premises caused by Tenant or its Agents. All repairs made by Tenant shall utilize materials and equipment which are comparable to those originally used in constructing the Building and Premises. When used in this Section (d), the term "REPAIRS" shall include replacements and renewals when necessary. (i) Landlord, at its sole expense, shall make all necessary repairs to the footings, foundations, structural steel columns and girders forming a part of the premises, provided that Landlord shall have no responsibility to make any repair until Landlord receives written notice of the need for such repair. (ii) Landlord, at Tenant's sole expense, shall maintain and repair the HVAC systems appurtenant to the Premises. (iii) Landlord shall make all necessary repairs to the roof, exterior portions of the premises and the Building, utility and communications lines, equipment and facilities in the Building, which serve more than one tenant, and to the Common Areas, the cost of which shall be an operating expense of which Tenant shall pay its Proportionate Share, provided that Landlord shall have no responsibility to make any repair until Landlord receives written notice of the need for such repair. Landlord shall operate and manage the Property and shall maintain all Common Areas and any paved areas appurtenant to the Property in a clean and orderly condition. Landlord reserves the right to make alterations to the Common Areas from time to time. Operating expenses also shall include (A) all sums expended by Landlord for the supervision, maintenance, repair, replacement and operation of the Common Areas (including the costs of utility services), (B) any costs of building improvements made by Landlord to the Property that are required by any governmental authority or for the purpose of reducing operating expenses and (C) a management and administrative fee applicable to the overall operation of the Property. (iv) Notwithstanding anything herein to the contrary, repairs and replacements to the Property including the Premises made necessary by Tenant's use, occupancy or alteration of, or Tenant's installation in or upon the Property or by any act or omission of Tenant or its Agents shall be made at the sole expense of Tenant to the extent not covered by any applicable insurance proceeds paid to Landlord. Tenant shall not bear the expense of any repairs or replacements to the Property arising out of or caused by any other tenant's use, occupancy or alteration of, or any other tenant's installation in or upon, the Property or by any act or omission of any other tenant or any other tenant's Agents. (e) UTILITY CHARGES. Tenant shall pay for water, sewer, gas, electricity, heat, power, telephone and other communication services and any other utilities supplied to or consumed in or on the Premises. Landlord shall not be responsible or liable for any interruption in utility service, nor shall such interruption affect the continuation or validity of this lease. (f) NET LEASE. Except for the obligations of Landlord expressly set forth herein, this lease is a "triple net lease" and Landlord shall receive the Minimum Annual Rent as net income from the Premises, not diminished by any expenses other than payments under any mortgages, and Landlord is not and shall not be required to render any services of any kind to Tenant. The term "RENT" as used in this lease means the Minimum Annual Rent, Annual Operating Expenses and any other additional rent or sums payable by Tenant to Landlord pursuant to this lease, all of which shall be deemed rent for purposes of Landlord's rights and remedies with respect thereto. Tenant shall pay all Rent to Landlord within 30 days after Tenant is billed, unless otherwise provided in this lease, and interest shall accrue on all sums due but unpaid. 8. SIGNS. Except for signs which are located wholly within the interior of the Premises and not visible from the exterior of the Premises, no signs shall be placed on the Property without the prior written consent of Landlord. All signs installed by Tenant shall 4 be maintained by Tenant in good condition and Tenant shall remove all such signs at the termination of this lease and shall repair any damage caused by such installation, existence or removal. 9. ALTERATIONS AND FIXTURES. (a) Subject to Section 10, Tenant shall have the right to install its trade fixtures in the Premises, provided that no such installation or removal thereof shall affect any structural portion of the Property nor any utility lines, communications lines, equipment or facilities in the Building, serving any tenant other than Tenant. At the expiration or termination of this lease and at the option of Landlord or Tenant, Tenant shall remove such installation(s) and, in the event of such removal, Tenant shall repair any damage caused by such installation or removal; if Tenant, with Landlord's written consent, elects not to remove such installation(s) at the expiration or termination of this lease, all such installations shall remain on the Property and become the property of Landlord without payment by Landlord. (b) Except for non-structural changes which do not exceed $5000 in the aggregate, Tenant shall not make or permit to be made any alterations to the Premises without Landlord's prior written consent. Tenant shall pay the costs of any required architectural/engineering reviews. In making any alterations, (i) Tenant shall deliver to Landlord the plans, specifications and necessary permits, together with certificates evidencing that Tenant's contractors and subcontractors have adequate insurance coverage naming Landlord and Landlord's agent as additional insureds, at least 10 days prior to commencement thereof, (ii) such alterations shall not impair the structural strength of the Building or any other improvements or reduce the value of the Property or affect any utility lines, communications lines, equipment or facilities in the Building, serving any tenant other than Tenant, (iii) Tenant shall comply with Section 10 and (iv) the occupants of the Building and of any adjoining property shall not be disturbed thereby. All alterations to the Premises by Tenant shall be the property of Tenant until the expiration or termination of this lease; at that time all such alterations shall remain on the Property and become the property of Landlord without payment by Landlord unless Landlord gives written notice to Tenant to remove the same, in which event Tenant will remove such alterations and repair any resulting damage. At Tenant's request prior to Tenant making any alterations, Landlord shall notify Tenant in writing, whether Tenant is required to remove such alterations at the expiration or termination of this lease. 10. MECHANICS' LIENS. Tenant shall pay promptly any contractors and materialmen who supply labor, work or materials, to Tenant at the Property and shall take all steps permitted by law in order to avoid the imposition of any mechanic's lien upon all or any portion of the Property. Should any such lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall bond against or discharge the same within 5 days after Tenant has notice that the lien or claim is filed regardless of the validity of such lien or claim. Nothing in this lease is intended to authorize Tenant to do or cause any work to be done or materials to be supplied for the account of Landlord, all of the same to be solely for Tenant's account and at Tenant's risk and expense. Throughout this lease the term "MECHANIC'S LIEN" is used to include any lien, encumbrance or charge levied or imposed upon all or any portion of, interest in or income from the Property on account of any mechanic's, laborer's, materialman's or construction lien or arising out of any debt or liability to or any claim of any contractor, mechanic, supplier, materialman or laborer and shall include any mechanic's notice of intention to file a lien given to Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and any injunctive or equitable action brought by any person claiming to be entitled to any mechanic's lien. 11. LANDLORD'S RIGHT OF ENTRY. Tenant shall permit Landlord and its Agents to enter the Premises at all reasonable times following reasonable notice (except in the event of an emergency), for the purpose of inspection, maintenance or making repairs, alterations or additions as well as to exhibit the Premises for the purpose of sale or mortgage and, during the last 12 months of the Term, to exhibit the Premises to any prospective tenant. Landlord will make reasonable efforts not to inconvenience Tenant in exercising the foregoing rights, but shall not be liable for any loss of occupation or quiet enjoyment thereby occasioned. 12. DAMAGE BY FIRE OR OTHER CASUALTY. (a) If the Premises or Building shall be damaged or destroyed by fire or other casualty, Tenant promptly shall notify Landlord and Landlord, subject to the conditions set forth in this Section 12, shall repair such damage and restore the Premises to substantially the same condition in which they were immediately prior to such damage or destruction, but not including the repair, restoration or replacement of the fixtures or alterations installed by Tenant. Landlord shall notify Tenant in writing, within 30 days after the date of the casualty, if Landlord anticipates that the restoration will take more than 180 days from the date of the casualty to complete; in such event, either Landlord or Tenant may terminate this lease effective as of the date of casualty by giving written notice to the other within 10 days after Landlord's notice. Further, if a casualty occurs during the last 12 months of the Term or any extension thereof, Landlord may cancel this lease unless Tenant has the right to extend the Term for at least 3 more years and does so within 30 days after the date of the casualty. 5 (b) Landlord shall maintain a 12 month rental coverage endorsement or other comparable form of coverage as part of its fire, extended coverage and special form insurance. Tenant will receive an abatement of its Minimum Annual Rent and Annual Operating Expenses to the extent the Premises are rendered untenantable as determined by the carrier providing the rental coverage endorsement. 13. CONDEMNATION. (a) TERMINATION. If (i) all of the premises are taken by a condemnation or otherwise for any public or quasi-public use, (ii) any part of the premises is so taken and the remainder thereof is insufficient for the reasonable operation of Tenant's business or (iii) any of the Property is so taken, and, in Landlord's opinion, it would be impractical or the condemnation proceeds are insufficient to restore the remainder of the Property, then this lease shall terminate and all unaccrued obligations hereunder shall cease as of the day before possession is taken by the condemnor. (b) PARTIAL TAKING. If there is a condemnation and this lease has not been terminated pursuant to this Section, (i) Landlord shall restore the Building and the improvements which are a part of the Premises to a condition and size as nearly comparable as reasonably possible to the condition and size thereof immediately prior to the date upon which the condemnor took possession and (ii) the obligations of Landlord and Tenant shall be unaffected by such condemnation except that there shall be an equitable abatement of the Minimum Annual Rent according to the rental value of the Premises before and after the date upon which the condemnor took possession and/or the date Landlord completes such restoration. (c) AWARD. In the event of a condemnation affecting Tenant, Tenant shall have the right to make a claim against the condemnor for moving expenses and business dislocation damages to the extent that such claim does not reduce the sums otherwise payable by the condemnor to Landlord. Except as aforesaid and except as set forth in (d) below, Tenant hereby assigns all claims against the condemnor to Landlord. (d) TEMPORARY TAKING. No temporary taking of the Premises shall terminate this lease or give Tenant any right to any rental abatement. Such a temporary taking will be treated as if Tenant had sublet the Premises to the condemnor and had assigned the proceeds of the subletting to Landlord to be applied on account of Tenant's obligations hereunder. Any award for such a temporary taking during the Term shall be applied first, to Landlord's costs of collection and, second, on account of sums owing by Tenant hereunder, and if such amounts applied on account of sums owing by Tenant hereunder should exceed the entire amount owing by Tenant for the remainder of the Term, the excess will be paid to Tenant. 14. NON-ABATEMENT OF RENT. Except as otherwise expressly provided as to damage by fire or other casualty in Section 12(b) and as to condemnation in Section 13(b), there shall be no abatement or reduction of the Rent for any cause whatsoever, and this lease shall not terminate, and Tenant shall not be entitled to surrender the Premises. 15. INDEMNIFICATION OF LANDLORD. Subject to sections 7(c)(iii) and 16. Tenant will protect, indemnify and hold harmless Landlord and its Agents from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) in connection with loss of life, personal injury or damage to property in or about the Premises or arising out of the occupancy or use of the Premises by Tenant or its Agents or occasioned wholly or in part by any act or omission of Tenant or its Agents, whether prior to, during or after the Term, except to the extent such loss, injury or damage was caused by the negligence of Landlord or its Agents. In case any action or proceeding is brought against Landlord and/or its Agents by reason of the foregoing. Tenant, at its expense, shall resist and defend such action or proceeding, or cause the same to be resisted and defended by counsel (reasonably acceptable to Landlord and its Agents) designated by the insurer whose policy covers such occurrence or by counsel designated by Tenant and approved by Landlord and its Agents. Tenant's obligations pursuant to this Section 15 shall survive the expiration or termination of this lease. 16. WAIVER OF CLAIMS. Landlord and Tenant each hereby waives all claims for recovery against the other for any loss or damage which may be inflicted upon the property of such party even if such loss or damage shall be brought about by the fault or negligence of the other party or its Agents; provided, however, that such waiver by Landlord shall not be effective with respect to any liability of Tenant described in sections 4(c) and 7(d)(iv). 17. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performing all of its covenants, agreements and conditions of this lease, shall have quiet and peaceful possession of the Premises as against anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this lease. 6 18. ASSIGNMENT AND SUBLETTING. (a) LIMITATION. Tenant shall not transfer this lease, voluntarily or by operation of law, without the prior written consent of Landlord which shall not be withheld unreasonably. However, Landlord's consent shall not be required in the event of any transfer by Tenant to an affiliate of Tenant which is at least as creditworthy as Tenant as of the date of this lease and provided Tenant delivers to Landlord the instrument described in Section (c)(iii) below, together with a certification of such creditworthiness by Tenant and such affiliate. Any transfer not in conformity with this Section 18 shall be void at the option of Landlord, and Landlord may exercise any or all of its rights under Section 23. A consent to one transfer shall not be deemed to be a consent to any subsequent transfer. "Transfer" shall include any sublease, assignment, license or concession agreement, change in ownership or control of Tenant, mortgage or hypothecation of this lease or Tenant's interest therein or in all or a portion of the Premises. (b) OFFER TO LANDLORD. Tenant acknowledges that the terms of this lease, including the Minimum Annual Rent, have been based on the understanding that Tenant physically shall occupy the Premises for the entire Term. Therefore, upon Tenant's request to transfer all or a portion of the Premises, at the option of Landlord, Tenant and Landlord shall execute an amendment to this lease removing such space from the Premises, Tenant shall be relieved of any liability with respect to such space and Landlord shall have the right to lease such space to any party, including Tenant's proposed transferee. (c) CONDITIONS. Notwithstanding the above, the following shall apply to any transfer, with or without Landlord's consent: (i) As of the date of any transfer, Tenant shall not be in default under this lease nor shall any act or omission have occurred which would constitute a default with the giving of notice and/or the passage of time. (ii) No transfer shall relieve Tenant of its obligation to pay the Rent and to perform all its other obligations hereunder. The acceptance of Rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this lease or to be a consent to any transfer. (iii) Each transfer shall be by a written instrument in form and substance satisfactory to Landlord which shall (A) include an assumption of liability by any transferee of all Tenant's obligations and the transferee's ratification of and agreement to be bound by all the provisions of this lease, (B) afford Landlord the right of direct action against the transferee pursuant to the same remedies as are available to Landlord against Tenant and (C) be executed by Tenant and the transferee. (iv) Tenant shall pay, within 10 days of receipt of an invoice which shall be no less than $250, Landlord's reasonable attorneys' fees and costs in connection with the review, processing and documentation of any transfer for which Landlord's consent is requested. 19. SUBORDINATION; MORTGAGEE'S RIGHTS. (a) This lease shall be subordinate to any first mortgage or other primary encumbrance now or hereafter affecting the Premises. Although the subordination is self-operative, within 10 days after written request, Tenant shall execute and deliver any further instruments confirming such subordination of this lease and any further instruments of attornment that may be desired by any such mortgagee or Landlord. However, any mortgagee may at any time subordinate its mortgage to this lease, without Tenant's consent, by giving written notice to Tenant, and thereupon this lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery; provided, however, that such subordination shall not affect any mortgagee's right to condemnation awards, casualty insurance proceeds, intervening liens or any right which shall arise between the recording of such mortgage and the execution of this lease. (b) It is understood and agreed that any mortgagee shall not be liable to Tenant for any funds paid by Tenant to Landlord unless such funds actually have been transferred to such mortgage by Landlord. (c) Notwithstanding the provisions of Sections 12 and 13 above, Landlord's obligation to restore the Premises after a casualty or condemnation shall be subject to the consent and prior rights of Landlord's first mortgagee. 20. RECORDING; TENANT'S CERTIFICATE. Tenant shall not record this lease or a memorandum thereof without Landlord's prior written consent. Within 10 days after Landlord's written request from time to time: (a) Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying the Commencement Date and Expiration Date of this lease, that this lease is in full force and effect and has not been modified and otherwise as set forth in the 7 form of estoppel certificate attached as Exhibit "D" or with such modifications as may be necessary to reflect accurately the stated facts and/or such other certifications as may be requested by a mortgage or purchaser. Tenant understands that its failure to execute such documents may cause Landlord serious financial damage by causing the failure of a financing or sale transaction. (b) Tenant shall furnish to Landlord, Landlord's mortgagee, prospective mortgagee or purchaser reasonably requested financial information. 21. SURRENDER: ABANDONED PROPERTY. (a) Subject to the terms of Section 9(b), 12(a) and 13(b), at the expiration or termination of this lease, Tenant promptly shall yield up in the same condition, order and repair in which they are required to be kept throughout the Term, the Premises and all improvements thereto, and all fixtures and equipment servicing the Building, ordinary wear and tear excepted. (b) Upon or prior to the expiration or termination of this lease, Tenant shall remove any personal property from the Property. Any personal property remaining thereafter shall be deemed conclusively to have been abandoned, and Landlord, at Tenant's expense, may remove, store, sell or otherwise dispose of such property in such manner as Landlord may see fit and/or Landlord may retain such property as its property. If any part thereof shall be sold, then Landlord may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of moving and storage and any Rent due under this lease. (c) If Tenant, or any person claiming through Tenant, shall continue to occupy the Premises after the expiration or termination of this lease or any renewal thereof, such occupancy shall be deemed to be under a month-to-month tenancy under the same terms and conditions set forth in this lease, except that the monthly installment of the Minimum Annual Rent during such continued occupancy shall be double the amount applicable to the last month of the Term. Anything to the contrary notwithstanding, any holding over by Tenant without Landlord's prior written consent shall constitute a default hereunder and shall be subject to all the remedies available to Landlord. 22. CURING TENANT'S DEFAULTS. If Tenant shall be in default in the performance of any of its obligations hereunder, Landlord, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect to cure such default on behalf of Tenant after written notice (except in the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord in curing such default, including interest thereon from the respective dates of Landlord's incurring such costs, which sums and costs together with interest shall be deemed additional rent. 23. DEFAULTS - REMEDIES (a) DEFAULTS. It shall be an event of default: (i) If Tenant does not pay in full when due any and all Rent; (ii) If Tenant fails to observe and perform or otherwise breaches any other provision of this lease; (iii) If Tenant abandons the Premises, which shall be conclusively presumed if the Premises remain unoccupied for more than 10 consecutive days, or removes or attempts to remove Tenant's goods or property other than in the ordinary course of business; (iv) If Tenant becomes insolvent or bankrupt in any sense or makes a general assignment for the benefit of creditors or offers a settlement to creditors, or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law if filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver for any of Tenant's assets is commenced, or if any of the real or personal property of Tenant shall be levied upon; provided, however, that any proceeding brought by anyone other than Landlord or Tenant under any bankruptcy, insolvency, receivership or similar law shall not constitute a default until such proceeding has continued unstayed for more than 60 consecutive days. (b) REMEDIES. Then, and in any such event, Landlord shall have the following rights: (i) To charge a late payment fee equal to the greater of $100 or 5% of any amount owed to Landlord pursuant to this lease which is not paid within 5 days after the due date. (ii) To enter and repossess the Premises, by breaking open locked doors if necessary, and remove all persons and all or any property therefrom, by action at law or otherwise, without being liable for prosecution or damages therefor, and Landlord may, 8 at Landlord's option, make alterations and repairs in order to relet the Premises and relet all or any part(s) of the Premises for Tenant's account. Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting. In the event of reletting without termination of this lease, Landlord may at any time thereafter elect to terminate this lease for such previous breach. (iii) To accelerate the whole or any part of the Rent for the balance of the Term, and declare the same to be immediately due and payable. (iv) To terminate this lease and the Term without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken. (c) GRACE PERIOD. Notwithstanding anything hereinabove stated, neither party will exercise any available right because of any default of the other, except those remedies contained in subsection (b)(i) of this Section, unless such party shall have first given 10 days written notice thereof to the defaulting party, and the defaulting party shall have failed to cure the default within such period; provided, however, that: (i) No such notice shall be required if Tenant fails to comply with the provisions of Sections 10 or 20(a), in the case of emergency as set forth in Section 22 or in the event of any default enumerated in subsections (a)(iii) and (iv) of this Section. (ii) Landlord shall not be required to give such 10 days notice more than 2 times during any 12 month period. (iii) If the default consists of something other than the failure to pay money which cannot reasonably be cured within 10 days, neither party will exercise any right if the defaulting party begins to cure the default within 10 days and continues actively and diligently in good faith to completely cure said default. (iv) Tenant agrees that any notice given by Landlord pursuant to this Section which is served in compliance with Section 27 shall be adequate notice for the purpose of Landlord's exercise of any available remedies. (d) NON-WAIVER: NON-EXCLUSIVE. No waiver by Landlord of any breach by Tenant shall be a waiver of any subsequent breach, nor shall any forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent breach. Efforts by Landlord to mitigate the damages caused by Tenant's default shall not constitute a waiver of Landlord's right to recover damages hereunder. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the total amount due Landlord under this lease shall be deemed to be other than on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of Rent due, or Landlord's right to pursue any other available remedy. (e) COSTS AND ATTORNEYS' FEES. If either party commences an action against the other party arising out of or in connection with this lease, the prevailing party shall be entitled to have and recover from the losing party attorneys' fees, costs of suit, investigation expenses and discovery costs, including costs of appeal. 24. REPRESENTATIONS OF TENANT. Tenant represents to Landlord and agrees that: (a) The word "TENANT" as used herein includes the Tenant named above as well as its successors and assigns, each of which shall be under the same obligations and liabilities and each of which shall have the same rights, privileges and powers as it would have possessed had it originally signed this lease as Tenant. Each and every of the persons named above as Tenant shall be bound jointly and severally by the terms, covenants and agreements contained herein. However, no such rights, privileges or powers shall inure to the benefit of any assignee of Tenant immediate or remote, unless Tenant has complied with the terms of Section 18 and the assignment to such assignee is permitted or has been approved in writing by Landlord. Any notice required or permitted by the terms of this lease may be given by or to any one of the persons named above as Tenant, and shall have the same force and effect as if given by or to all thereof. (b) If Tenant is a corporation, partnership or any other form of business association or entity, Tenant is duly formed and in good standing, and has full corporate or partnership power and authority, as the case may be, to enter into this lease and has taken all corporate or partnership action, as the case may be, necessary to carry out the transaction contemplated herein, so that when executed, this lease constitutes a valid and binding obligation enforceable in accordance with its terms. Tenant shall provide 9 Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of this lease at the time of such execution. 25. LIABILITY OF LANDLORD. The word "Landlord" as used herein includes the Landlord named above as well as its successors and assigns, each of which shall have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this lease as Landlord. Any such person or entity, whether or not named herein, shall have no liability hereunder after it ceases to hold title to the Premises except for obligations already accrued (and, as to any unapplied portion of Tenant's Security Deposit, Landlord shall be relieved of all liability therefor upon transfer of such portion to its successor in interest) and Tenant shall look solely to Landlord's successor in interest for the performance of the covenants and obligations of the Landlord hereunder which thereafter shall accrue. Neither Landlord nor any principal of Landlord nor any owner of the Property, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this lease or the Premises, and if Landlord is in breach or default with respect to Landlord's obligations under this lease or otherwise, Tenant shall look solely to the equity of Landlord in the Property for the satisfaction of Tenant's claims. Notwithstanding the foregoing, no mortgagee or ground lessor succeeding to the interest of Landlord hereunder (either in terms of ownership or possessory rights) shall be (a) liable for any previous act or omission of a prior landlord, (b) subject to any rental offsets or defenses against a prior landlord or (c) bound by any amendment of this lease made without its written consent, or by payment by Tenant of Minimum Annual Rent in advance in excess of one monthly installment. 26. INTERPRETATION; DEFINITIONS. (a) CAPTIONS. The captions in this lease are for convenience only and are not a part of this lease and do not in any way define, limit, describe or amplify the terms and provisions of this lease or the scope or intent thereof. (b) ENTIRE AGREEMENT. This lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Property. No rights, easements or licenses are acquired in the Property or any land adjacent to the Property by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. This lease shall not be modified in any manner except by an instrument in writing executed by the parties. The masculine (or neuter) pronoun and the singular number shall include the masculine, feminine and neuter genders and the singular and plural number. The word "INCLUDING" followed by any specific item(s) is deemed to refer to examples rather than to be words of limitation. Both parties having participated fully and equally in the negotiation and preparation of this lease, this lease shall not be more strictly construed, nor any ambiguities in this lease resolved, against either Landlord or Tenant. (c) COVENANTS. Each covenant, agreement, obligation, term, condition or other provision herein contained shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this lease unless otherwise expressly provided. All of the terms and conditions set forth in this lease shall apply throughout the Term unless otherwise expressly set forth herein. (d) INTEREST. Wherever interest is required to be paid hereunder, such interest shall be at the highest rate permitted under law but not in excess of 15% per annum. (e) SEVERABILITY; GOVERNING LAW. If any provisions of this lease shall be declared unenforceable in any respect, such unenforceability shall not affect any other provision of this lease, and each such provision shall be deemed to be modified, if possible, in such a manner as to render it enforceable and to preserve to the extent possible the intent of the parties as set forth herein. This lease shall be construed and enforced in accordance with the laws of the state in which the Property is located. (f) "MORTGAGE" AND "MORTGAGEE." The word "MORTGAGE" as used herein includes any lien or encumbrance on the Premises or the Property or on any part of or interest in our appurtenance to any of the foregoing, including without limitation any ground rent or ground lease if Landlord's interest is or becomes a leasehold estate. The word "MORTGAGEE" as used herein includes the holder of any mortgage, including any ground lessor if Landlord's interest is or becomes a leasehold estate. Wherever any right is given to a mortgagee, that right may be exercised on behalf of such mortgagee by any representative or servicing agent of such mortgagee. (g) "PERSON." The word "person" is used herein to include a natural person, a partnership, a corporation, an association and any other form of business association or entity. (h) PROPORTIONATE SHARE. At any time or times, upon request of Landlord or of any tenant of the Building, the method for allocating Tenant's Proportionate Share of any Impositions, cost, charge, rent, expense or payment then or thereafter payable shall be redetermined by an independent qualified expert. The cost of such redetermination shall be borne by the tenants of the Building in 10 (e) SEVERABILITY; GOVERNING LAW. If any provisions of this lease shall be declared unenforceable in any respect, such unenforceability shall not affect any other provision of this lease, and each such provision shall be deemed to be modified, if possible, in such a manner as to render it enforceable and to preserve to the extent possible the intent of the parties as set forth herein. This lease shall be construed and enforced in accordance with the laws of the state in which the Property is located. (f) "MORTGAGE" AND "MORTGAGEE." The word "mortgage" as used herein includes any lien or encumbrance on the Premises or the Property or on any part of or interest in or appurtenance to any of the foregoing, including without limitation any ground rent or ground lease if Landlord's interest is or becomes a leasehold estate. The word "mortgagee" as used herein includes the holder of any mortgage, including any ground lessor if Landlord's interest is or becomes a leasehold estate. Wherever any right is given to a mortgage, that right may be exercised on behalf of such mortgagee by any representative or servicing agent of such mortgagee. (g) "PERSON." The work "person" is used herein to include a natural person, a partnership, a corporation, an association and any other form of business association or entity. 27. NOTICES. Any notice or other communications under this lease shall be in writing and addressed to Landlord or Tenant at their respective addresses specified at the beginning of this lease, except that after the Commencement Date Tenant's address shall be at the Premises, (or to such other address as either may designate by notice to the other) with a copy to any mortgagee or other party designated by Landlord. Each notice or other communication shall be deemed given if sent by prepaid overnight delivery service or by certified mail, return receipt requested, postage prepaid or in any other manner, with delivery in any case evidenced by a receipt, and shall be deemed received on the day of actual receipt by the intended recipient or on the business day delivery is refused. The giving of notice by Landlord's attorneys, representatives and agents under this Section shall be deemed to be the acts of Landlord; however, the foregoing provisions governing the date on which a notice deemed to have been received shall mean and refer to the date on which a party to this lease, and not its counsel or other recipient to which a copy of the notice may be sent, is deemed to have received the notice. 28. SECURITY DEPOSIT. At the time of signing this lease, Tenant shall deposit with Landlord the Security Deposit to be retained by Landlord as cash security for the faithful performance and observance by Tenant of the provisions of this lease. Tenant shall not be entitled to any interest whatever on the Security Deposit. Landlord shall have the right to commingle the Security Deposit with its other funds. Landlord may use the whole or any part of the Security Deposit for the payment of any amount as to which Tenant is in default hereunder or to compensate Landlord for any loss or damage it may suffer by reason of Tenant's default under this lease. If Landlord uses all or any portion of the Security Deposit as herein provided, within 10 days after written demand therefor, Tenant shall pay Landlord cash in amount equal to that portion of the Security Deposit used by Landlord. If Tenant shall comply fully and faithfully with all the provisions of this lease, the Security Deposit shall be returned to Tenant after the Expiration Date and surrender of the Premises to Landlord. IN WITNESS WHEREOF, and in consideration of the mutual entry into this lease and for other good and valuable consideration, and intending to be legally bound, Landlord and Tenant have executed this lease. LANDLORD: LIBERTY PROPERTY LIMITED PARTNERSHIP Date Signed: By: Liberty Property Trust, Sole General Partner By: - ----------------- ------------------------------------ Leslie R. Price, Senior Vice President TENANT: AATLAS COMMERCE, INC. Date Signed: By: - ----------------- ------------------------------------ 29. PA ADDITIONAL REMEDIES. (a) When this lease and the Term or any extension thereof shall have been terminated on account of any default by Tenant or when the Term or any extension thereof shall have expired, Tenant hereby authorizes an attorney of any court of record of the Commonwealth of Pennsylvania to appear for Tenant and for anyone claiming by, through or under Tenant and to confess judgement against all such paries, and in favor of Landlord, ?? ejectment and for the recovery of possession of the Premises, of which this lease or a true and correct copy hereof shall be good and sufficient warrant. AFTER THE ENTRY OF ANY SUCH JUDGEMENT A WRIT OF POSSESSION MAY BE ISSUED THEREON WITHOUT FURTHER NOTICE TO TENANT AND WITHOUT A HEARING. If for any reason after such action shall have been commenced it shall be determined and possession of the Premises remain in or be restored to Tenant, Landlord shall have the right for the same default and upon any subsequent default(s) or upon the termination of this lease or Tenant's right of possession as herein set forth, to again confess judgement as herein provided, for which this lease or a true and correct copy hereof shall be good and sufficient warrant. (b) If Tenant shall default in payment of the Rent due hereunder, Tenant hereby authorizes any attorney of any court of record of the Commonwealth of Pennsylvania to appear for Tenant and to confess judgement against Tenant, and in favor of Landlord, for all sums due hereunder plus interest, costs and an attorney's collection commission equal to the greater of 10% of all such sums or $1,000, for which this lease or a true and correct copy hereof shall be good and sufficient warrant. TENANT UNDERSTANDS THAT THE FOREGOING PERMITS LANDLORD TO ENTER A JUDGEMENT AGAINST TENANT WITHOUT PRIOR NOTICE OR HEARING. ONCE SUCH JUDGEMENT HAS BEEN ENTERED AGAINST TENANT, ONE OR MORE WRITS OF EXECUTION OR WRITS OF GARNISHMENT MAY BE ISSUED THEREON WITHOUT FURTHER NOTICE TO TENANT AND WITHOUT A HEARING, AND, PURSUANT TO SUCH WRITS, LANDLORD MAY CAUSE THE SHERIFF OF THE COUNTY IN WHICH ANY PROPERTY OF TENANT IS LOCATED TO SEIZE TENANT'S PROPERTY BY LEVY OR ATTACHMENT. IF THE JUDGEMENT AGAINST TENANT REMAINS UNPAID AFTER SUCH LEVY OR ATTACHMENT, LANDLORD CAN CAUSE SUCH PROPERTY TO BE SOLD BY THE SHERIFF EXECUTING THE WRITS, OR, IF SUCH PROPERTY CONSISTS OF A DEBT OWED TO TENANT BY ANOTHER ENTITY, LANDLORD CAN CAUSE SUCH DEBT TO BE PAID DIRECTLY TO LANDLORD IN AN AMOUNT UP TO BUT NOT TO EXCEED THE AMOUNT OF THE JUDGEMENT OBTAINED BY LANDLORD AGAINST TENANT, PLUS THE COSTS OF THE EXECUTION. Such authority shall not be exhausted by one exercise thereof, but judgement may be confessed as foresaid from time to time as often as any of said rental and other sums shall fall due or be in arrears, and such owners may be exercised as well after the expiration of the initial term of this lease and during any extended or renewal term of this lease and after the expiration of any extended or renewal term of this lease. (c) The warrants to confess judgement set forth above shall continue in full force and effect and be unaffected by amendments to this lease or other agreements between Landlord and Tenant even if any such amendments or other agreements increase Tenant's obligations or expand the size of the Premises. Tenant waives any procedural errors in connection with the entry of any such judgement or in the issuance of any one or more writs of possession or execution or garnishment thereon. (d) TENANT KNOWINGLY AND EXPRESSLY WAIVES (I) ANY RIGHT, INCLUDING, WITHOUT LIMITATION, UNDER ANY APPLICABLE STATUTE, WHICH TENANT MAY HAVE OR RECEIVE A NOTICE TO QUIT PRIOR TO LANDLORD COMMENCING AN ACTION FOR REPOSSESSION OF THE PREMISES AND (II) ANY RIGHT WHICH TENANT MAY HAVE TO NOTICE AND TO HEARING PRIOR TO A LEVY UPON OR ATTACHMENT OF TENANT'S PROPERTY OR THEREAFTER. INITIALS ON BEHALF OF TENANT: -------------------- R-1 30. MODIFICATION TO SECTION 7. OPERATION OF PROPERTY; PAYMENT OF EXPENSES. In line 12 change "for the purpose of reducing operating expenses" to "for the purpose of reducing operating expenses (to the extent of such savings realized)" Add at end of 7(a): "For purposes of this section, the term "overhead expenses" shall mean those expenses incurred by Landlord in connection and that are necessary for the proper management of the Property." 31. MODIFICATION TO SECTION 9. ALTERATIONS AND FIXTURES. At end of the first sentence of section 9(b) insert: "which shall not be unreasonably withheld." 32. MODIFICATION TO SECTION 10. MECHANICS' LIENS. Change reference from "5 days" to "15 days". 33. MODIFICATION TO SECTION 11. LANDLORD'S RIGHT TO RELOCATE TENANT; RIGHT OF ENTRY. Section 11(a) is deleted in its entirety. 34. MODIFICATION TO SECTION 18. ASSIGNMENT AND SUBLETTING. Revise second sentence of 18(a) to read as follows: "However, Landlord's consent shall not be required in the event of any transfer by Tenant to an affiliate of Tenant, merger by Tenant with a corporation, or acquisition of Tenant by an acquiring corporation, provided that the surviving entity is at least as creditworthy as Tenant as of the date of this lease and provided Tenant delivers to landlord the instrument described in Section (c)(iii) below, together with a certification of such creditworthiness by Tenant and said new entity." 35. MODIFICATION TO SECTION 20. RECORDING; TENANT'S CERTIFICATE. At the end of Section 20 insert the following: "(c) Upon written request Landlord shall execute and deliver to Tenant a written statement certifying the commencement Date and Expiration Date of this Lease, that this Lease is in full force and effect and has not been modified and otherwise as set forth in the form of estoppel certificate attached as Exhibit "E" or with such modification as may be necessary to reflect accurately the stated facts." 36. MODIFICATION OF SECTION 29. PA ADDITIONAL REMEDIES. Notwithstanding anything in Sections 29(a) and (b) to the contrary, Landlord will provide fifteen (15) days prior written notice prior to obtaining a writ of possession or writ of execution and Tenant is entitled to written notice of the entry of the judgment entered by confession and thereafter, thirty days to respond or as otherwise permitted by law. 37. TENANT IMPROVEMENTS. COMPLETION BY TENANT. Landlord shall complete the Premises on behalf of Tenant and its contractor(s), at Tenant's sole expense, in accordance with the plans or the description of improvements attached as Exhibit "A" and the specifications attached as Exhibit "F". Landlord shall consent to the alterations Tenant intends to make to the Premises in accordance with the Plans provided that Tenant complies with Sections 13 and 14 of this Lease and the following conditions: (a) Completion Walk Through by Landlord: In addition to the right of Landlord and its Agents to inspect the Premises as set forth in Section 15 of this Lease, Landlord and its Agents shall have the right to conduct a walk-through inspection of the Premises as completed by Tenant. (b) Warranties: Any warranties from Tenant's contractor(s) shall be for the benefit of Landlord as well as Tenant and Tenant shall deliver such warranties to Landlord upon receipt. (c) Workmanship: All construction shall be done in a good and workmanlike manner and shall comply at the time of completion with all laws and requirements. Tenant acknowledges that Landlord, on behalf of Tenant, shall complete the Tenant Improvements during normal working hours while Tenant is occupying portions of the Premises. Tenant shall work with Landlord to complete all Tenant Improvements in a timely fashion. 38. TENANT ALLOWANCE. (a) Allowance Amount: Landlord agrees to provide Tenant with an allowance equal to the lesser of the Tenant's Cost or Three Hundred Six Thousand Six Hundred Seventy Five Dollars ($306,675.00) (the lesser of which shall hereinafter be referred to as the "Tenant Allowance"). For purposes of this section, the "Tenant's Cost" shall be the aggregate of all costs, expenses and fees incurred by or on behalf of Tenant in connection with the improvements to be made by Tenant to the Premises in accordance with the Plans that have been approved by Landlord. The Tenant's Cost shall include without limitation (i) the cost charged to Tenant by Tenant's general contractor and all subcontractors for performing such construction and (ii) the cost to Landlord of performing directly any portion of such construction. (b) Landlord agrees to provide an additional allowance of up to Fifty Four Thousand Five Hundred Twenty Dollars ($54,520.00) ("Excess Allowance") in connection with the improvements subject to (i) review of Tenant's financial statements and possible additional security required by Landlord and (ii) the actual Excess Allowance used amortized over the length of the Lease at a cost of Fifteen Percent (15%) which will then become an increase in Minimum Annual Rent. By way of example, should Tenant utilize $25,000.00 of Excess Allowance the calculation shall be $25,000.00 (present value), 15% annual interest, six (6) year term, additional Minimum Annual Rent of Six Thousand Three Hundred Forty Three 50/100 Dollars ($6,343.50). (c) Acceptance of Premises: As of the date of this Lease, Tenant has examined and knows the condition of the Property, the zoning, streets, sidewalks, parking areas, curbs and access ways adjoining it, visible easements, any surface conditions and the present uses, and Tenant accepts them in the condition in which they now are, without relying on any representation, covenant or warranty by Landlord. Tenant and its agent shall have the right, at Tenant's own risk, expense and responsibility, at all reasonable times prior to the Commencement Date, to enter 300 Chesterfield Parkway for the purpose of taking measurements and installing its furnishings and equipment; provided that Tenant obtains Landlord's prior written consent. Landlord shall negotiate in good faith with the current tenant of 300 Chesterfield Parkway for access for the purpose of taking measurements and installing its furnishings and equipment, subject to the same qualifications as provided above. If no such access can be arranged, Landlord will make available any available building or leasehold plans and specifications to assist Tenant in the design of improvements. Landlord represents to Tenant that as of the Commencement Date, the following Building systems will be in good working order and repair: electrical, plumbing, and HVAC systems. 39. RENEWAL OPTION. Provided that Landlord has not given Tenant notice of default more than two (2) times preceding the Expiration Date, that there then exists no event of default by Tenant under this lease nor any event that with the giving of notice and/or the passage of time would constitute a default, and that Tenant is the sole occupant of the Premises, Tenant shall have the right and option to extend the Term for one (1) additional period of five (5) years, exercisable by giving Landlord prior written notice, at least twelve (12) months in advance of the Expiration Date, of Tenant's election to extend the Term; it being agreed that time is of the essence and that this option is personal to Tenant and is non-transferable to any assignee or sublessee (regardless of whether any such assignment or sublease was made with or without Landlord's consent) or other party. Such extension shall be under the same terms and conditions as provided in this lease except as follows: (a) the additional period shall begin on the Expiration Date and thereafter the Expiration Date shall be deemed to be extended by five years; (b) all references to the Term in this lease shall be deemed to mean the Term as extended pursuant to this Section; (c) there shall be no further options to extend; and (d) the Minimum Annual Rent payable by Tenant for the additional period shall be computed based upon the then "Fair Market Rental Rate" of the Premises, based upon the rental rate then being quoted for comparable office space in similar office buildings located in the Great Valley, Pennsylvania market area, taking into account among other factors rental rate, lease term, and tenant improvements offered to renewal tenants but in no event shall the new rent be less than the Minimum Annual Rent payable at the end of the immediately preceding Term of the Lease. Within one (1) month after Landlord receivers Tenant's notice of the exercise of this option, Landlord will notify Tenant to the "Fair Market Rental Rate" which shall be Landlord's good faith determination of the rental rate applicable at such time for office space in similar buildings located in the Malvern, Pennsylvania Market Area ("Landlord's Rental Notice"). If Tenant objects to the Fair Market Rental Rate as so established, Tenant may rescind its exercise of this option to extend term, providing Tenant gives notice of such recision to Landlord on or before two (2) weeks after Tenant receives Landlord's Rental Notice, time being of the essence. If Tenant so rescinds its exercise, Tenant's option to extend term shall be deemed both unexercised and extinguished. If Tenant does not so rescind its exercise, the term of this Lease shall be extended as provided before, with the Minimum Annual Rent applicable to such additional period being computed based upon the Fair Market Rental Rate as stated in the Landlord's Rental Notice. 40. EXISTING LEASE OBLIGATION. Notwithstanding anything to the contrary contained herein, Landlord and Tenant acknowledge that the premises are currently leased by AmeriSource Corporation. Landlord and AmeriSource are negotiating a Lease Termination Agreement for the Premises under which the AmeriSource Lease would terminate on June 16, 2000. If Landlord and AmeriSource do not execute a Lease Termination Agreement by April 15, 2000, or AmeriSource executes said Lease Termination Agreement by April 15, 2000, but does not vacate the Premises on or before June 16, 2000, Landlord shall notify Tenant when the Premises will first become available for occupancy ("Occupancy Date") and take possession of the Premises should the Occupancy Date be prior to August 31, 2000. If Landlord is unable to provide Tenant possession prior to August 31, 2000, Tenant may terminate ("Termination Option") this Agreement upon fifteen (15) days written notice to Landlord. This Termination Option shall expire on August 31, 2000. In the event this agreement is terminated, then neither party shall have any further rights or obligations under this agreement. EX-10.16 4 w58938ex10-16.txt SUBSCRIPTION LICENSE AGREEMENT EXHIBIT 10.16 SUBSCRIPTION LICENSE AGREEMENT This Subscription License Agreement (this "Agreement") executed this 19th day of December, 2000 is by and between VerticalNet, Inc. ("VNI") and Tradeum, Inc., dba VerticalNet Solutions ("VNS"), on the one hand, and Converge, Inc., a Delaware corporation formerly known as eHITEX, Inc. ("Converge"), on the other hand. RECITALS WHEREAS, VNI through one or more VNI Subsidiaries (as defined below), including, but not limited to, VNS (collectively, "Vert") is in the business of licensing various proprietary products for use in connection with electronic marketplaces and other business-related information management systems; and WHEREAS, Converge wishes broad rights and licenses to such products on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth below, the parties agree as follows: AGREEMENT 1. Definitions. 1.1 "Affiliate" means, when used with reference to a party, any individual or entity directly or indirectly Controlling, Controlled by or under common Control with such party. 1.2 "API Documentation" means documentation for a Trade Secret Module that describes its input and output formats and content, and that is sufficient for a person of ordinary skill in the industry to enhance, update and maintain the Products with respect to which the Trade Secret Module's application program interface(s) interact. 1.3 "Business Day" means a day other than a Saturday, Sunday or federal holiday. 1.4 "Cataclysmic Event" means a situation in which a Converge Marketplace is unable to provide Trading Functionality to its users, which situation (i) is caused by an Error, and (ii) occurs at a time during which the Marketplace Protection Measures for such Converge Marketplace are being implemented in all material respects. 1.5 "Cataclysmic Event Cure" means substantial restoration of the ability of the Converge Marketplace to provide Trading Functionality to its users, which restoration is not followed by a subsequent Cataclysmic Event within the following 24-hour period. 1.6 "Control" (including all derivations thereof) means, with respect to a party, the direct or indirect ownership of at least 50% of the outstanding voting securities of a party, or the right to control the policy decisions of such party. 1.7 "Converge Link" shall mean a Link that contains a Converge Mark and will take users of other web sites to a mutually agreed upon Converge Web Site. 1.8 "Converge Marketplace" means a Public Marketplace operated by or for Converge or any Converge Subsidiary, which Public Marketplace serves (other than through incidental use) only the High Technology Industry, including, without limitation, the Converge Web Site. 1.9 "Converge Marks" shall mean trademarks, service marks, trade names, domain names, designs or logos of Converge. 1.10 "Converge Remedy Election Date" means the date on which a Converge Remedy Election (as such term is defined in Section 10.3.2) occurs. 1.11 "Converge Subsidiary" means any corporation or other entity that is wholly-owned, directly or indirectly, by Converge. 1.12 "Converge Web Site" means a web site owned and operated by or for Converge or any Converge Subsidiary, such as the web site at www.ehitex.com, or any successor(s) to such web site (including, without limitation, www.converge.com), which web site or successor(s) shall be designed to serve primarily the High Technology Industry. 1.13 "Deliverables" shall have the meaning ascribed to such term under the Professional Services Agreement. 1.14 "Deliverables in Process" means Deliverables with respect to which, as of the date on which the Product Term ends, material development or implementation work is being or has been performed under the Professional Services Agreement. 1.15 "Deployed Products" means Products being tested, implemented or utilized by Converge, as of the date on which the Product Term ends, on an ongoing basis in conjunction with the maintenance, enhancement and operation of any Converge Marketplace, but excluding any Vert-Owned Deliverables. 1.16 "Deployed Product Upgrades" means any modification of or improvement to a functional component of a Deployed Product, which functional component is utilized by Converge on an ongoing basis as of the end of the Product Term, and which functional component is made generally available on its own or as a part of a broader release of a Product, Enhancement, or Upgrade, whether or not such modification or improvement adds new program features or functions to such functional component of the Deployed Product. 1.17 "Derivative Works" means works that are based on underlying works and that would be copyright infringements if prepared without the authorization of the copyright owners of the underlying works. 1.18 "Documentation" means the documentation for the Products that is made generally available by Vert to users or licensees of such Products or other third parties to whom the documentation is directed. 2 1.19 "Effective Date" means the "Closing Date" under the Membership Interest Purchase Agreement, dated as of even date herewith, among VNI, NECX.com LLC and Converge, it being understood and agreed that the respective rights and obligations of the parties to this Agreement are subject to the consummation of the transactions contemplated by such Membership Interest Purchase Agreement. 1.20 "Enhancements" means any modifications or improvements to a Product that adds new program features or functions to such Product, including, without limitation, any new version or new release of a Product. 1.21 "Error" means a failure of a Product to substantially conform to its corresponding Documentation (or if there is no such Documentation, to its closest reasonable equivalent), as such Documentation is provided by Vert to Converge hereunder. 1.22 "Future Products" means Products not existing as of the Effective Date. 1.23 "High Technology Industry" means entities doing business in the computing, telecommunications and/or consumer electronics markets. 1.24 "Industry Standard" means generally-recognized standards of practice and procedure within the information technology industry for the design, maintenance and operation of mission-critical data centers supporting critical business applications for a Public Marketplace substantially similar to the Converge Marketplace in question. 1.25 "Intellectual Property" shall mean any and all trade secrets, patents, copyrights, trademarks, service marks, trade names, domain names, trade dress, URLs, brand features, know-how and similar rights of any type under the laws of any applicable governmental authority, including, without limitation, all applications and registrations relating to any of the foregoing. 1.26 "Intellectual Property Rights" shall mean all rights in and to Intellectual Property. 1.27 "Link" shall mean a link (including, but not limited to, a hyperlink, button or banner) that connects two web sites in a manner so that when a user clicks on the link, the user is transferred from one web site to a second web site. A "Link from web site A to web site B" indicates that web site A is the web site of origin and web site B is the web site to which the user is linked. 1.28 "Maintenance & Support Services" means (a) Error correction and other support services for Products in accordance with the provisions of Exhibit C and (b) Updates and Enhancements to Products as they become generally available. 1.29 "Marketplace Protection Measures" means Industry Standard policies and practices designed to ensure that all hardware and software associated with any Converge Marketplace provide Industry Standard levels of reliability and availability. Such Industry Standard policies and procedures for each Converge Web Site, at a minimum, shall include the policies and procedures specified in Exhibit I hereto. Such Industry Standard policies and 3 procedures for other types of Converge Marketplaces shall be mutually agreed upon by the parties in writing prior to the date each such other type of Converge Marketplace is first launched by Converge, and Exhibit I hereto shall be promptly amended to incorporate said additional Marketplace Protection Measures. Should any relevant Industry Standard policies and practices be revised at any time, the parties shall revise the Marketplace Protection Measures accordingly, with due consideration for the cost and effect on operations in relation to the expected improvement in reliability and availability, and Exhibit I hereto shall be promptly amended to incorporate such revised policies and practices. The parties will consult with the objective of determining mutually agreeable Marketplace Protection Measures; provided, however, that Vert's approval of such measures shall not imply an endorsement or recommendation of the adequacy of such measures, except for the purpose of determining whether a Trigger Event has occurred. 1.30 "Marketplace Response Procedures" means, with respect to any Converge Web Site, the measures specified in Exhibit I hereto. With respect to other types of Converge Marketplaces, the Marketplace Response Procedures shall be mutually agreed upon by the parties in writing prior to the date each such other type of Converge Marketplace is first launched by Converge, and Exhibit I hereto shall be promptly amended to incorporate said additional Marketplace Response Procedures. 1.31 "Object Code" means computer programming code in compiled, machine readable format, running, to the extent available, on each of Unix (at least Tru64 and HP-UX) and Windows NT (or their successor operating systems), together with all related end-user or installation manuals and other similar Documentation. 1.32 "Personnel" means agents, employees, independent contractors, temporary employees or subcontractors engaged or appointed by Converge, VNI or VNS, respectively. 1.33 "Problem" means a Severity Level 1, 2, 3 or 4 problem with a Product, as such problems are described in greater detail in Exhibit C hereto. 1.34 "Product Term" means the period commencing on the Effective Date and ending on the soonest of (a) the date immediately preceding the third anniversary of the Effective Date, (b) the Converge Remedy Election Date or (c) the Vert Remedy Election Date. 1.35 "Products" means (a) all present and future software products and tools, including separately identified modules contained therein, that are owned by VNI or any VNI Subsidiary or licensed by Vert with the right to grant the necessary sublicense right to Converge, except where such sublicense right has been granted to Vert solely for the purpose of reselling the third party software on a stand-alone basis and for which Vert customarily separately charges a substantial additional license fee to its sublicensees, and that are made generally available by VNI or any VNI Subsidiary, on either a stand-alone basis or as part or component of a service or another Product provided by or for VNI or any VNI Subsidiary, during the Product Term (whether or not generally available, in development or planned as of the Effective Date), including, without limitation, the products, tools and separately identified modules on Exhibit A hereto; and (b) all Updates and Enhancements to such present and future products, tools and modules that typically are identified separately in VNI documentation describing the product 4 structure and functionality that are owned by VNI or any VNI Subsidiary or licensed by VNI or any VNI Subsidiary with the right to grant the necessary sublicense rights to Converge, and that are made generally available by VNI or any VNI Subsidiary, on either a stand-alone basis or as part or component of a service or another Product provided by or for VNI or any VNI Subsidiary, during the Product Term; (c) all Deployed Product Upgrades that are owned by VNI or any VNI Subsidiary or licensed by VNI or any VNI Subsidiary with the right to grant the necessary sublicense rights to Converge; and (d) all Vert-Owned Deliverables. 1.36 "Professional Services Agreement" means the Professional Services Agreement, dated as of even date herewith, among VNS and Converge. 1.37 "Public Marketplace" means (a) an electronic marketplace or exchange through which products or services are offered or sold, which marketplace or exchange may be accessed concurrently by more than one buyer and more than one seller ("many-to-many"), including, without limitation, the public marketplaces or exchanges of the following entities: e2Open, Inc., eChip, Inc. and eConnections, Inc., and (b) virtually private views or instantiations operating within or as a subset of a Public Marketplace ("one-to-many"). Public Marketplace does not include (a) instantiations of an electronic marketplace designed to facilitate purchase and sale transactions solely between only one unique and constant buyer buying from one or many sellers in that marketplace or (b) instantiations of an electronic marketplace designed to facilitate purchase and sale transactions solely between only one unique and constant seller selling to one or many buyers in that marketplace. To the extent a single entity uses any Trade Product to buy and sell using the same instantiation of such Trade Product, it shall be considered a Public Marketplace. For the purposes of this definition, when determining whether one or more buyers or sellers has access to an electronic marketplace or exchange, the following rules shall apply: (i) if one or more Affiliates of a person or entity that has access to an electronic marketplace or exchange have access to the marketplace or exchange, such person or entity and its Affiliate(s) that have access to the marketplace or exchange shall be counted as one buyer or seller, as the case may be, (ii) if one or more divisions or operating units of an entity have access to an electronic marketplace or exchange, such divisions and/or operating units and the entity shall be counted as one buyer or seller, as the case may be, and (iii) if one or more divisions or operating units of Affiliates have access to an electronic marketplace or exchange, such divisions and/or operating units and the Affiliates shall be counted as one buyer or seller, as the case may be. 1.38 "Response Initiation Date/Time" means, with respect to a Cataclysmic Event, (i) 30 minutes following VNS' receipt of the corresponding Cataclysmic Event Notice if such Cataclysmic Event Notice is received by VNS during Support Hours; and (ii) 90 minutes following VNS' receipt of the corresponding Cataclysmic Event Notice if such Cataclysmic Event Notice is received by VNS outside of Support Hours. 1.39 "Source Code" means computer programming code in human readable, high-level language format, together with all related Documentation (including programmers' notes and annotations, logic flows, etc.). 1.40 "Support Day" means, for each location where VNS (or, if applicable for the Product in question, VNI or any VNI Subsidiary) provides Maintenance & Support Services, 5 the greater of (a) the normal business days typical for that location (e.g., for VNS' location in California, Monday through Friday, excluding VNS holidays), or (b) the actual business days of operation at that location. 1.41 "Support Hours" means, for each location where VNS (or, if applicable for the Product in question, VNI or any VNI Subsidiary) provides Maintenance & Support Services, the greater of (a) the normal business hours typical for that location (e.g., for VNS' location in California, between the hours of 8 a.m. and 5 p.m., Pacific Time on Support Days for such location), or (b) the actual hours of operation at that location. 1.42 "Trade Product" means the following Products: (a) VerticalNet Auction; (b) VerticalNet Structured Negotiation; (c) VerticalNet RFP/RFQ; (d) VerticalNet Exchange; (e) VerticalNet Catalogs; and (f) all other generally-available Products that enable buyers and sellers to transact through an electronic marketplace or exchange. Separately identified modules will only be considered Trade Products when used in conjunction with Trade Products. 1.43 "Trade Secret Module" means any functionally discrete, separately compilable component of a Product, the design of which is not generally known or easily discovered by observation or examination, and with respect to which the Source Code is treated by Vert with a degree of care significantly above and beyond the level with which it normally treats other Source Code, provided that such component includes application program interface(s) sufficient to allow Converge to enjoy benefits substantially similar to those that Converge would have enjoyed if it had obtained Source Code for such component. As of the Effective Date, such Trade Secret Modules include: the Parametric Matching Engine, C2SF engine, C2Hub, Business Publisher and Business Publisher Agent. Trade Secret Modules also shall include functionally discrete components of Future Products that meet the requirements set forth in the first sentence of this paragraph. 1.44 "Trading Functionality" means the ability for users of the relevant Converge Marketplace to access substantially all of the functionality provided by the Trade Products, as then deployed, within the relevant Converge Marketplace. 1.45 "Trigger Event" means, with respect to any Converge Marketplace, the date on which Converge first implements the applicable Marketplace Protection Measures in all material respects for such Converge Marketplace. For each Converge Marketplace, Converge shall provide Vert with written notice of the date on which Converge believes a Trigger Event has occurred, which notice shall be accompanied by reasonable supporting documentation of the Marketplace Protection Measures that Converge has implemented. Said date shall be the date of the Trigger Event for such Converge Marketplace unless Vert disputes Converge's claim thereof in writing within 10 Business Days following receipt of Converge's written notice. Said notice of dispute shall indicate with reasonable specificity the reasons for such dispute. In the event of a dispute concerning the date of a Trigger Event, the parties shall mutually agree upon an independent industry expert who shall resolve the dispute. 1.46 "Updates" means any modifications or improvements to a Product that does not add new program features or functions to such Product, including, without limitation, 6 any workaround, bug fix, modification or improvement that corrects a programming error, a failure of the Product to conform to its corresponding Documentation or other software problem. 1.47 "Vert Link" shall mean a Link that contains a Vert Mark and will take users of other web sites to a mutually agreed upon Vert Web Site. 1.48 "Vert Marks" shall mean trademarks, service marks, trade names, domain names, designs or logos of VNI or a VNI Subsidiary. 1.49 "Vert-Owned Deliverables" means any "Deliverable" under the Professional Services Agreement that is owned by VNS in accordance with the terms of that Agreement. 1.50 "Vert Remedy Election Date" means the date on which a Vert Remedy Election (as such term is defined in Section 10.3.1) occurs. 1.51 "Vert Web Site" means a web site owned and operated by or for VNI or a VNI Subsidiary. 1.52 "VNI Subsidiary" means any corporation or other entity that is wholly-owned, directly or indirectly, by VNI, including, without limitation, VNS. 1.53 "Year" means a twelve-month period commencing on the Effective Date or an anniversary of the Effective Date. 2. Products Licenses and Usage. 2.1 License Grant: Converge Marketplace Usage. Vert grants to Converge and the Converge Subsidiaries, on the terms of this Agreement, an irrevocable, perpetual, worldwide (subject to qualification as set forth in Section 2.5), non-exclusive (except as expressly set forth in Section 2.6), non-transferable (except in the event of a permitted transfer of this Agreement under Section 14.11), and non-sublicensable (except as expressly permitted under Section 2.3) right and license: 2.1.1 to use, load, store, transmit, execute, copy, distribute internally and as otherwise permitted under this Section 2.1, in any medium or distribution technology whatsoever, known or unknown, display and perform the Products, in Object Code format only, in connection with the creation, maintenance, enhancement and operation of any Converge Marketplace, including unlimited instantiations of the Products in connection therewith; 2.1.2 to use the Products in connection with other software products, tools and services that are part of any Converge Marketplace or that are offered on any Converge Marketplace; 2.1.3 to allow third parties to access and use the Products, in Object Code format only, at any Converge Marketplace using browser or other access technology contemplated by the designs of the Products; and 7 2.1.4 to market, provide and sell to third parties any Converge products and services based on, using, enabled, facilitated and/or implemented by the Products, which products and services are provided by Converge through or via any Converge Marketplace. 2.2 Additional Terms: Converge Marketplace Usage. 2.2.1 No Restrictions on Number of Users. There shall be no restriction on the number of subscribers to or registered users of, or numbers of transactions conducted on or through, any Converge Marketplace. 2.2.2 No Additional Fees. Except as otherwise expressly stated herein, neither Converge nor any Converge Subsidiary shall be obligated to pay any fees to Vert based upon the number of subscribers to or registered users of, or numbers of transactions conducted on or through, any Converge Marketplace. Except as otherwise expressly stated herein, Vert shall not directly charge, or attempt to assess or collect fees from, third-party users for any use of Products through or via use of any Converge Marketplace. 2.2.3 Third Party Licenses. When considering whether to implement any new instantiations of Products, Converge shall consult with Vert and Vert shall inform Converge whether such new instantiations would require Vert to pay any significant third-party license fees in connection therewith. In determining whether to implement such instantiations, Converge shall, in good faith, consider the financial impact on Vert of multiple or additional instantiations and will take that factor, as well as Converge's legitimate, good faith business, financial and technical reasons, into account in making its determination as to the number of instantiations. 2.2.4 Terms of Use. The Converge Marketplace shall include terms and conditions of use substantially similar legal effect to those included in Exhibit G hereto (the "Terms of Use"). The Terms of Use shall be displayed on the Converge Marketplace in a manner consistent with customary industry practice and users of the Converge Marketplace shall be required to assent to the Terms of Use via click-through, in writing or in some other reasonable manner. Converge shall permit Vert to enforce, and, to the extent reasonably requested, assist Vert in enforcing its respective rights under the Terms of Use against persons and entities acting in violation thereof, to the extent Converge is permitted to do so by law. 2.3 Sublicenses. 2.3.1 Sublicenses to End Users. Converge and the Converge Subsidiaries may grant to third parties ("End Users") non-sublicensable, non-transferable sublicenses to install and use components of the Products required to be installed within such third parties' computing environments (i.e., within their firewalls) for the sole and limited purpose of permitting such End Users to interact, integrate and/or interact with any Converge Marketplace, to include the use of services and products offered at any Converge Marketplace (each, an "End User License"). Converge shall cause all members of the Converge Marketplace to accept membership agreements that are (a) at least as protective of Vert's Intellectual Property Rights as this Agreement and (b) are otherwise consistent with customary and usual agreements of that type in the industry. Converge or the applicable Converge Subsidiary shall provide VNS 8 with the total number of instantiations of each Product component being deployed by End Users each quarter; provided, however, that during any quarter after the first Year in which the number of instantiations of a Product component is less than ten, Converge shall not have to report the number of instantiations of such Product component during such quarter. 2.3.2 Other Sublicenses. Should Converge or the Converge Subsidiaries desire to grant any other sublicenses with respect to the Products, the parties shall in good faith discuss and consider whether and under what conditions Converge and the Converge Subsidiaries would be permitted to grant such other sublicenses, and any license fees and/or revenue share payments with respect thereto. 2.3.3 No Additional Sublicenses. Except as expressly set forth in this Agreement, Converge and the Converge Subsidiaries shall have no rights to sublicense the license rights granted to them hereunder. 2.4 Source Code. 2.4.1 License to Source Code. Subject to the other terms of this Agreement, Vert grants to Converge and the Converge Subsidiaries an irrevocable and perpetual (subject to termination as permitted under Section 2.4.4), worldwide (subject to qualification as set forth in Section 2.5), non-exclusive (except as expressly set forth in Section 2.6), non-transferable (except in the event of a permitted transfer of this Agreement under Section 14.11), and non-sublicensable right and license to internally use, load, store, transmit, test, execute, distribute, in any medium or distribution technology whatsoever, known or unknown, display, modify and have modified, and make and have made Derivative Works of, any Source Code furnished to Converge under this Agreement and of the Object Code forms thereof, solely in connection with use of the Products by Converge and the Converge Subsidiaries as permitted under this Agreement. All such modifications and Derivative Works to the Source Code, together with all Object Code forms thereof, shall be owned by Converge without divesting Vert or its licensor's ownership of the underlying Source Code and the Object Code forms thereof, and (b) Converge shall remain permitted to use the underlying Object Code only as part of the Products licensed to Converge hereunder. Converge shall have the right to engage third-party consultants that are Converge-certified system integrators to perform such activities on behalf of Converge; provided, however, that each such third-party consultant shall agree in advance and in writing to be bound by obligations of nondisclosure and nonuse no less stringent than those set forth in this Section 2.4.1 and in Section 9. Subject to the foregoing sentence, Converge and the Converge Subsidiaries shall not provide any other persons or entities with access to any of the Source Code furnished to Converge under this Agreement. 2.4.2 Delivery of Source Code. In the event of a Converge PSA Termination or a Converge PSA Conversion Election (as such terms are used in the Professional Services Agreement), Vert shall deliver to Converge, within 30 days thereafter, the Source Code for all Deployed Products and Deliverables in Process (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation) to the extent such Source Code is owned by VNI or any of the VNI Subsidiaries. Thereafter, Vert shall deliver to Converge the Source Code for all Deployed Product Upgrades (including, with respect to Trade Secret Modules, either the Source Code for 9 such Trade Secret Modules or their corresponding API Documentation) that Vert makes generally available during the remainder of the three-year period commencing on the Effective Date, to the extent such Source Code is owned by VNI or any of the VNI Subsidiaries. Each such delivery of the Source Code for Deployed Product Upgrades shall occur within 30 days after Vert makes such Deployed Product Upgrades generally available, whether as part of an Update or Enhancement or otherwise. In the event Vert contests the occurrence of the Event of Default underlying the Converge PSA Termination Event or the Converge PSA Conversion Election, the matter shall be resolved as expeditiously as possible in accordance with the dispute resolution provisions of the Professional Services Agreement and no delivery of Source Code hereunder shall occur until such time as the matter is resolved. 2.4.3 Source Code for Third-Party Products. With respect to Products that are licensed to VNI or the VNI Subsidiaries by third parties, Vert will reasonably cooperate with Converge to arrange for delivery of the Source Code for such Products to Converge in accordance with the provisions of Section 2.4.2. 2.4.4 Loss of Rights to Source Code. In the event of a Vert Remedy Election all rights of Converge under Section 2.4.1 to use, load, store, transmit, execute, distribute internally, display, modify and have modified, and make and have made derivative works of, any Source Code delivered to Converge under Section 2.4.2, and to receive further Source Code for Deployed Products, Deployed Product Upgrades and Deliverables in Process under Section 2.4.2, shall automatically cease. Furthermore, in the event of a Vert Remedy Election, Converge shall erase, destroy or return to Vert all Source Code delivered to Converge under Section 2.4.2, together with all copies, modifications and derivative works thereof, and, upon Vert's written request, shall certify its compliance with this Section 2.4.4 to Vert in writing. 2.5 Limitation on Worldwide Rights. Notwithstanding any provision in this Agreement or the Professional Services Agreement to the contrary, no right or license is granted by Vert to Converge or any of the Converge Subsidiaries to: (a) use, copy, display, perform or transmit the Products listed in Exhibit E as "Japan-Restricted Community Products" or "Japan-Restricted Content Products" (the "Japan-Restricted Community and Content Products") in Japan in connection with the development, marketing, implementation, operation or provision of any Internet-based business-to-business vertical trade community that is based on an industry segment and combines content, community interaction and the ability to conduct business transactions on-line, including sales of products and services to businesses, and that has a URL that ends in the top level domain "________________.co.jp" (a "Japanese Site"); (b) adapt or translate the Japan-Restricted Community and Content Products into Japanese in connection with the development, marketing, implementation, operation or provision of a Japanese Site; or (c) use a Japanese translation of the software code enabling the Japan-Restricted Community and Content Products in Japan. Notwithstanding the foregoing, neither Converge nor any Converge Subsidiary shall be deemed to be using, reproducing, displaying, performing or transmitting the software code enabling the Japan-Restricted Community and Content Products, or a Japanese translation thereof, in Japan if a Converge Web Site containing software code enabling the Japan-Restricted Community and Content Products, or a Japanese translation thereof, is hosted outside Japan and is accessed by a third party inside Japan. 10 2.6 Limited Exclusivity. Neither VNI nor any of its Affiliates shall license, sell, assign or otherwise transfer Trade Products and other Vert-Owned Deliverables to any person, entity or licensee to create, maintain, enhance or operate, or be accessed or used via or in connection with, or be marketed or offered as a service on, any Public Marketplace principally serving the High Technology Industry, other than a Converge Marketplace, without the prior written consent of Converge; provided, however, that neither VNI nor any of its Affiliates shall be deemed to violate the foregoing restriction by operating a VNI "Industry Marketplace" that has and remains based on substantially the same elements of its business model as exist on the Effective Date in the VNI "E-Commerce Centers." The restriction set forth in this Section 2.6 shall be effective from the Effective Date until the soonest to occur of (a) the date immediately preceding the Limited Exclusivity Expiration Date (defined below), (b) the Vert Remedy Election Date or (c) the date immediately preceding the first anniversary of the date that VNS exercises its right to terminate the Professional Services Agreement following an "Event of Default" by Converge under the Professional Services Agreement. For purposes of this Section 2.6 only, the application known as "AutoMatch" shall be deemed a "Trade Product." As used herein, the term "Limited Exclusivity Expiration Date" means the date immediately preceding the third anniversary of the Effective Date unless Converge validly exercises its option set forth in the following sentence, in which case the "Limited Exclusivity Expiration Date" shall be the date immediately preceding the fourth anniversary of the Effective Date. Converge shall have the option to extend the Limited Exclusivity Expiration Date by one year from the date immediately preceding the third anniversary of the Effective Date to the date immediately preceding the fourth anniversary of the Effective Date, exercisable by Converge (i) delivering written notice of exercise to Vert at least 60 days prior to the date immediately preceding the third anniversary of the Effective Date and (ii) transferring to VNS $5,000,000 in immediately available funds (to an account or accounts designated by VNS) on the second Business Day of the first quarter of Year 4. 2.7 Exclusive Use of Products. The following shall be effective from the Effective Date until the sooner to occur of (a) the date immediately preceding the third anniversary of the Effective Date, (b) the Vert Remedy Election Date or (c) the Converge Remedy Election Date: Converge will use best efforts to implement, use and deploy Trade Products in connection with the creation, maintenance, enhancement or operation of any Converge Marketplace, to the exclusion of any alternative third party software solution, provided that the Trade Products, in comparison with such third party software solution, (i) provide equal or superior features, functionality, usability and performance in all material respects and (ii) cost a reasonably equivalent or lesser amount to implement and maintain. The parties will work in good faith to identify and implement pilot releases of Products that are mutually beneficial. 2.8 Use of Documentation. Subject to the other terms of this Agreement, Converge and the Converge Subsidiaries may access and use the Documentation, including by private-labeling said Documentation and by excerpting and/or modifying portions thereof in a manner that is not confusing or misleading, solely in connection with their use (including ancillary uses, such as training, marketing and promotion, etc.) of the Products as permitted under this Agreement. 2.9 Copies. Converge and the Converge Subsidiaries shall be permitted to make a reasonable number of copies of the Products and the Documentation for the purposes 11 allowed by this Agreement, which copies shall be stored at locations under the control of Converge or at the facilities of Converge's third party hosting and disaster recovery service provider(s). Converge agrees to maintain, and shall require the Converge Subsidiaries to maintain, accurate and complete written or electronic records of the number and location of all copies or partial copies of the Products in their possession or control, including all back-up and archival copies. 2.10 Third-Party Hosting. Converge and the Converge Subsidiaries shall have the right to sublicense one or more third-party hosting entities to reproduce, install, publicly perform, publicly display and host any of the Products, in Object Code form, on such third party's servers, subject to the terms of this Agreement. Such sublicenses shall be granted pursuant to written agreements that authorize such third-party hosting entities to host, operate and/or maintain such Products solely on behalf of Converge and the Converge Subsidiaries as permitted hereunder. 2.11 Audit Rights. Each party (the "Auditing Party") shall have the right reasonably to audit, at its expense, the compliance with this Agreement by the other party (the "Audited Party") and its Subsidiaries (together with the Audited Party, the "Auditees"), provided that such audit(s) shall be conducted during normal business hours and in such a manner as not to unreasonably interfere with the operations of the Auditees. Any such audit will be conducted by accountants from a nationally recognized public accounting firm chosen and engaged by the Auditing Party. If any such audit discloses substantial unlicensed use of the Products, the Audited Party shall reimburse the Auditing Party for the reasonable fees and other amounts payable by the Auditing Party to the public accounting firm that conducts the audit. The Auditing Party shall use the information obtained or observed in the audit solely for the purposes of (a) determining whether the Auditees have sufficient license rights for their use of the Products and are otherwise complying with the terms and conditions of this Agreement respecting such use, and (b) enforcing its rights under this Agreement and any applicable laws. All such information shall be treated as Confidential Information of the Audited Party for purposes of this Agreement; provided, however, that the Auditing Party may use such information as permitted under clause (b) of the foregoing sentence. Each party shall require each of its Subsidiaries to permit the other party to conduct the audits authorized hereunder. 2.12 Notice to Users. Converge shall, and shall require the Converge Subsidiaries to, use reasonable efforts to make all users of the Products hereunder (including, without limitation, users of any Converge Marketplace that are permitted to access or use the Products) aware that the Products (a) may only be used subject to the terms and conditions contained in this Agreement and the corresponding Documentation for such Products and (b) may not be copied, transferred or otherwise used in violation of such terms and conditions. 2.13 No Implied Licenses. No license or other rights to the Products or the Documentation are granted, by implication or otherwise, except as expressly set forth in this Agreement. 12 2.14 Maintenance & Support Services. 2.14.1 During the Product Term. Except as set forth in Section 2.14.2 or Section 2.14.3, Vert will provide Converge and the Converge Subsidiaries with Maintenance & Support Services for all Products (excluding Vert-Owned Deliverables) during the Product Term, and the cost of such services is included in the amounts paid pursuant to Section 3.1. 2.14.2 Post-Product Term - No Remedy Election. In the event the Product Term ends other than due to a Converge Remedy Election or a Vert Remedy Election, Converge may purchase continued Maintenance & Support Services for any individual Products (excluding Vert-Owned Deliverables) on a year-by-year basis by paying Vert the then-standard fees for maintenance and support for such Products that VNI or the applicable VNI Subsidiaries charge to similarly situated licensees. In such circumstance, the Maintenance & Support Services provided by Vert after the Product Term shall not include the right to receive any Enhancements, unless such Enhancements are made generally available as part Maintenance & Support Services provided to similarly situated licensees of the Products in question. 2.14.3 Post-Product Term - Vert Remedy Election. In the event the Product Term ends due to a Vert Remedy Election, Converge shall be entitled to continued Maintenance & Support Services for any Deployed Products at no additional cost for the remainder of the initial three-year period commencing on the Effective Date. Thereafter, Converge may purchase continued Maintenance & Support Services for any Deployed Products on a year-by-year basis by paying Vert the then-standard fees for maintenance and support for such Deployed Products that VNI or the applicable VNI Subsidiaries charge to similarly situated licensees. In either of the foregoing circumstances, the Maintenance & Support Services provided by Vert after the Product Term shall not include the right to receive any Enhancements, unless such Enhancements are made generally available as part Maintenance & Support Services provided to similarly situated licensees of the Deployed Products in question. 2.14.4 Post-Product Term - Converge Remedy Election. In the event the Product Term ends due to a Converge Remedy Election, Converge may purchase continued Maintenance & Support Services for any Deployed Products on a year-by-year basis by paying Vert the then-standard fees for maintenance and support for such Deployed Products that VNI or the applicable VNI Subsidiaries charge to similarly situated licensees. In such circumstance, the Maintenance & Support Services provided by Vert for the remainder of the initial three-year period following the end of the Product Term shall include the right to receive Upgrades to Deployed Products, but not other Enhancements, unless such other Enhancements are made generally available as part of the Maintenance & Support Services provided to similarly situated licensees of the Deployed Products in question. Thereafter, the Maintenance & Support Services shall not include the right to receive any Enhancements, unless such other Enhancements are made generally available as part Maintenance & Support Services provided to similarly situated licensees of the Deployed Products in question. 2.15 Delivery and Acceptance. Vert will transfer the Products and all Documentation by remote telecommunications from the Vert place of business, to a Converge computer located in the State of California. If the Products and Documentation cannot be delivered via remote telecommunications to a Converge computer located in the State of 13 California, the Products and Documentation will be installed by Vert on the Converge computer located in the State of California. Converge will not obtain title or possession of any tangible personal property, including any storage media, as a result of the delivery of any Product under this Agreement. All Products and Documentation existing as of the Effective Date shall be delivered to Converge within 30 days following the Effective Date. Other Products shall be delivered to Converge (a) promptly following the date on which they are available as a beta or other early release version (provided, however, that Vert shall not be obligated to provide Maintenance & Support Services for such pre-release versions, and such pre-release versions shall not be used in a production environment without Vert consent) and (b) promptly following the date on which they become generally available. Without exception, all Products including, but not limited to, Updates and Enhancements shall be delivered to Converge as they become generally available and in accordance with the delivery procedure outlined in this Section 2.15. Each Product, Update and Enhancement will be deemed accepted by Converge upon Converge's receipt of the complete delivery to the Converge computer located in the State of California thereof. 2.16 Product List. Vert represents that Exhibit A, in the form initially attached to this Agreement, is a reasonably complete and correct list of all Products existing as of the Effective Date. Vert agrees to promptly amend and update Exhibit A, from time to time, to reflect Future Products. 2.17 Promotion Efforts and Responsibilities. The parties will participate in mutually acceptable joint promotional activities that may include those of the type set forth in Exhibit D. 2.18 Marketplace Integration. 2.18.1 Converge Links and Converge Marks. Within 30 days after the Effective Date and thereafter during the Product Term, Vert shall place a Converge Link from each of VNI's "Industry Marketplaces" in the High Technology Industry to any and all Converge Web Sites in a mutually agreed upon manner. Converge hereby grants Vert a non-exclusive, non-transferable, royalty-free right and license to (a) link to the Converge Web Sites through Converge Links as described in this Section 2.18.1 and (b) use a Converge Mark(s) in connection with such Link. Vert agrees to use the Converge Mark(s) in accordance with this Agreement, with the trademark and usage guidelines of Converge in Exhibit F hereto, and with good trademark practices, including, but not limited to, protecting the value of the goodwill residing in such intellectual property. 2.18.2 Vert Links and Vert Marks. Within 30 days after the Effective Date and thereafter during the Product Term, Converge shall place a Vert Link from each Converge Web Site within the Converge Marketplace to any and all of VNI's "Industry Marketplaces" in the High Technology Industry. Vert hereby grants Converge a non-exclusive, non-transferable, royalty-free right and license to (a) link to VNI's "Industry Marketplaces" in the High Technology Industry through Vert Links as described in this Section 2.18.2 and (b) use a Vert Mark in connection with (i) such Link and (ii) the promotion of certain Products in connection with Exhibit D. Converge agrees to use the Vert Marks in accordance with this Agreement, with the trademark usage guidelines of Vert in Exhibit G hereto, and with good 14 trademark practices, including, but not limited to, protecting the value of the goodwill residing in such intellectual property. 2.18.3 Integration. The parties will explore and pursue further integration opportunities to link the Converge Marketplace with VNI's "Industry Marketplaces" in the High Tech Industry. 2.18.4 Ownership of Vert Marks. Vert owns all right, title and interest in and to the Vert Marks and all Intellectual Property Rights and goodwill (including, but not limited to, goodwill accruing during the term of this Agreement) associated therewith. Except for the express rights granted to Converge under this Agreement, Converge acknowledges and agrees that the Intellectual Property owned, acquired or developed by Vert (including all Intellectual Property Rights associated therewith), including, but not limited to the Vert Marks, is and shall remain the sole property of Vert and nothing in this Agreement shall confer in Converge any right of ownership or license rights in Vert's Intellectual Property (including all Intellectual Property Rights associated therewith). 2.18.5 Ownership of Converge Marks. Converge owns all right, title and interest in and to the Converge Marks and all Intellectual Property Rights and goodwill (including, but not limited to, goodwill accruing during the term of this Agreement) associated therewith. Except for the express rights granted to Vert under this Agreement, VNI acknowledges and agrees that the Intellectual Property owned, acquired or developed by Converge (including all Intellectual Property Rights associated therewith), including, but not limited to the Converge Marks, is and shall remain the sole property of Converge and nothing in this Agreement shall confer in Vert any right of ownership or license rights in Converge's Intellectual Property (including all Intellectual Property Rights associated therewith). 2.19 Marketplace Protection Measures. Unless otherwise agreed upon by the parties in writing, Converge shall implement and operate the Marketplace Protection Measures for the Converge Web Site at www.converge.com within four months following the Effective Date. With respect to any other Converge Marketplace utilizing any Trading Functionality, unless otherwise agreed upon by the parties in writing, Converge shall implement the applicable Marketplace Protection Measures within three months following the date on which such Trading Functionality is first utilized on such other Converge Marketplace in a production environment. For so long as any Converge Marketplace continues to utilize any Trading Functionality, Converge agrees to continue implementing and operating all applicable Marketplace Protection Measures in all material respects with respect to such Converge Marketplace. 3. Fees and Payments. 3.1 Fees for Products. 3.1.1 General. The fees for the license rights granted to the Products and for Maintenance & Support Services to be provided during the Product Term are set forth in Exhibit B hereto. Converge shall pay such fees to VNS in accordance with the provisions of Exhibit B. 15 3.1.2 Converge Remedy Election. The only event that shall relieve Converge of its obligation to pay the fees set forth in Exhibit B shall be a Converge Remedy Election, which event shall relieve Converge of its obligation to pay those fees set forth in Exhibit B that first become due and payable after the Converge Remedy Election Date. For the sake of clarity, Converge shall remain obligated to pay all fees set forth in Exhibit B that become due on or before the Converge Remedy Election Date, but that have not been paid by Converge on or before the Converge Remedy Election Date. 3.1.3 Vert Remedy Election. Notwithstanding the occurrence of a Vert Remedy Election, Converge shall remain obligated to pay the full amount of all fees set forth in Exhibit B, whether such fees become due before, on or after the Vert Remedy Election Date. 3.2 On-Site Maintenance. Converge shall pay Vert's then-standard charges for any on-site Maintenance & Support Services provided by Vert under this Agreement. The amounts payable under this Section 3.2 shall be in addition to the fees payable by Converge under Section 3.1. 3.3 Commissions Due to Converge. Commissions due to Converge with respect to the joint promotional activities conducted under Exhibit D shall be paid by VNS as set forth therein. 3.4 Payments. All payments will be made in U.S. dollars, without setoff or deduction. Amounts due under Section 3.2 will be invoiced to Converge by VNS. Payment of such invoiced amounts shall be due within 30 days of Converge's receipt of invoice. All fees and other payments not paid when due shall be subject to late charges of the lesser of (a) 1.5% per month of the overdue amount or (b) the maximum permitted under applicable law. 3.5 Taxes. 3.5.1 Generally. The fees and other payments specified in this Agreement are exclusive of any sales, use and other taxes on consumption of goods and services ("Sales Taxes"), however designated or levied, based on this Agreement, the delivery of the Products or services under this Agreement, or Converge's or the Converge Subsidiaries' use thereof. In those jurisdictions in which VNS determines it is required to register, collect and remit Sales Taxes, VNS will separately invoice Converge for such Sales Taxes (which invoices shall be payable by Converge as set forth in Section 3.4), collect such Sales Taxes from Converge and remit such Sales Taxes to the proper taxing authority. In those jurisdictions in which VNS has determined that it does not have a collection responsibility, Converge will be required to self-assess and remit any Sales Taxes due on the purchase of taxable property and services acquired under this Agreement. Converge will retain ultimate responsibility and liability for remitting any Sales Taxes due on the purchase of any property and/or services acquired under this Agreement, including, without limitation, any interest, penalties or additions attributable to or imposed on or with respect to any such assessment excluding any taxes imposed upon the net income of either party). 3.5.2 Certain Sales Taxes. The parties will cooperate and use their commercially reasonable efforts to minimize or avoid, to the maximum extent allowed by law, 16 the obligation to pay any Sales Taxes that may be levied on payments made under this Agreement or otherwise are chargeable to or against VNS by any applicable government authority with respect to the Services and the Deliverables. To that end, the parties will conduct transactions using an electronic commerce approach under which Vert will provide all Services (where applicable) and all Deliverables to Converge using an electronic medium of delivery, electronically via the Internet, by "drop and load" to an Converge computer from a CD-ROM that is in the possession and control of Vert Personnel at all times, or in any other mutually agreeable intangible form or by such other means as is mutually agreed upon by the parties. Additionally, the parties will electronically transmit and receive SOWs, invoices and other applicable documentation. Each party, at its own expense, will provide and maintain the equipment, software, services and testing necessary for it to transmit and receive such documentation. Any amount of Sales Tax that legally could have been avoided but for the acts or omissions of a party will be payable by that party. Sales Taxes that may not be avoided will be payable (a) one-half by Converge and one-half by VNS if due to a US federal, state or local taxing authority and (b) by Converge if due to a non-US taxing authority. Taxes chargeable against the income or gross receipts of VNS shall be paid by VNS. Taxes chargeable against the income or gross receipts of Converge shall be paid by Converge. 3.6 Tax Withholding. If laws, rules or regulations require withholding of any taxes imposed upon amounts payable to a party hereunder, the other party shall make such withholding payments as required and subtract such withholding payments from the amounts payable to such party. The other party shall submit reasonable proof of payment of the withholding taxes to such party within 30 days after obtaining such proof. The parties agree to fully cooperate with each other, including, without limitation, in the filing of appropriate certificates of tax exemption, to ensure that any withholding payments required to be made by the other party are reduced or avoided to the fullest extent permitted by law. Converge shall be deemed to be the sole payor of payments owed to VNS under this Agreement and shall not have the right to substitute any domestic or foreign affiliate for that purpose, and if Converge reincorporates or otherwise reorganizes as a foreign person that would thereupon cause payments hereunder to VNS to become subject to withholding, then Converge shall comply with applicable laws to the extent required and shall gross up the payments otherwise owed to VNS so that VNS receives, net of withholding taxes, the amounts VNS would have received if Converge had not substituted a foreign person or had remained a domestic person. 3.7 Most Favored Nation. If at any time following the Product Term, Converge purchases software product(s) and/or maintenance & support services (including, but not limited to, Maintenance & Support Services purchased pursuant to Section 2.4), the provisions of this Section 3.7 shall apply. Notwithstanding anything to the contrary herein, all fees, charges and rates charged or invoiced by Vert in connection with such software products and maintenance & support services shall be as low as or lower than the fees, charges and rates charged or invoiced at the relevant time by Vert to any of its other similarly situated customers for software products or for maintenance & support services of the same or a substantially similar nature. 17 4. Warranty. 4.1 Scope of Warranty. Vert warrants that for the shorter of six months after receipt by Converge of each Product (which for purposes of this Section 4.1, shall include Enhancements to existing Products, but not Updates to such Products) or 90 days after the date of deployment of the Product by Converge in a production environment (the "Warranty Period") such Product, as delivered by Vert to Converge, will be free from Errors, provided that such Product has not been modified by Converge or any third party. In the event that a Problem occurs with respect to a Product, which Problem is attributable to an Error, and provided that Converge reports such Problem to Vert within the Warranty Period, Vert, as its sole obligation and Converge's sole and exclusive remedy, shall respond to such Problem and correct any associated Errors, subject to and in accordance with the provisions of Exhibit C. The warranty set forth in this Section 4.1 shall not apply with respect to Vert-Owned Deliverables, which shall be warranted, if at all, as set forth in the Professional Services Agreement, nor shall the warranty set forth in this Section 4.1 apply to any beta or other early release versions of Products provided to Converge under Section 2.15. 4.2 Disclaimer. WITH THE EXCEPTION OF THE EXPRESS WARRANTY PROVIDED IN SECTION 4.1 AND THE INDEMNITY PROVIDED IN SECTION 8, VNI AND ALL AFFILIATES OF VNI SPECIFICALLY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS RELATING TO THE PRODUCTS AND ANY SERVICES FURNISHED OR OTHERWISE PROVIDED HEREUNDER, IF ANY. IN ADDITION, ALL BETA OR OTHER EARLY RELEASE VERSIONS OF PRODUCTS PROVIDED TO CONVERGE UNDER SECTION 2.15 ARE PROVIDED BY VNI AND ALL AFFILIATES OF VNI "AS IS" AND "WITH ALL FAULTS" AND VNI AND ALL AFFILIATTES OF VNI DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT THERETO. 5. Proprietary Rights. The Products and the Documentation are protected by applicable copyright and other intellectual property laws and international treaty provisions. As between Vert and Converge, but subject to any contrary provisions in the Professional Services Agreement with respect to Deliverables (as defined therein) provided thereunder, and to the rights and licenses granted to Converge hereunder, Vert and its licensors own all right, title and interest (including but not limited to all copyrights, patents, trademarks, trade names and trade secrets and other proprietary rights) in and to the Products and the Documentation. Converge agrees to reproduce all copyright, trademark and other proprietary notices contained on or in the Products or the Documentation, as delivered to Converge, on all copies thereof, and Converge further agrees not to remove or obscure any such notices. Except as expressly set forth in this Agreement or the Professional Services Agreement, Converge acknowledges and agrees that Vert has no obligation to deliver Source Code under the terms of this Agreement, or to grant Converge any license to use the Source Code form of the Products. Except as expressly permitted hereunder, the Products are not to be licensed, sold, rented, leased or otherwise transferred by Converge. Converge agrees not to (a) decompile, reverse engineer or disassemble or otherwise attempt to reconstruct or discover any Source Code or underlying algorithms of the Products that are provided solely in Object Code form or (b) separate or disassociate any 18 component parts of the Products (it being understood that this restriction shall not restrict Converge from separating or disassociating separately identified modules from Products containing them). Except as expressly set forth in this Agreement and in the Professional Services Agreement, Converge shall not modify or change the Products or the Documentation (except to configure the Products by means of their user-enabled features) in any manner, nor may Converge create any derivative works of the Products or the Documentation. The provisions of this Section 5 shall apply equally to the Converge Subsidiaries and Converge shall ensure that any Converge Subsidiaries provided with access to or use of the Products are bound thereby. 6. Source Code Escrow. 6.1 Escrow Materials. Within 30 days following the Effective Date, the parties shall put in place a mutually acceptable escrow agreement pursuant to which Vert shall place in escrow with Fort Knox or other escrow agent mutually agreeable to the parties (the "Escrow Agent") true and complete copies of the Source Code for the Products (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation, with the understanding that Vert may remove the Source Code for any Trade Secret Module from escrow at the time it places its corresponding API Documentation into escrow) owned by VNI or any of the VNI Subsidiaries and existing as of the Effective Date. Promptly following the date on which any other Product, Update or Enhancement owned by VNI or any the VNI Subsidiaries becomes generally available, or any Vert-Owned Deliverable is provided to Converge under the Professional Services Agreement, but in any event at least once per calendar quarter, Vert shall deliver to the Escrow Agent the Source Code for such other Products, Updates, Enhancements and Vert-Owned Deliverables (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation, with the understanding that Vert may remove the Source Code for any Trade Secret Module from escrow at the time it places its corresponding API Documentation into escrow). All of the foregoing materials delivered by Vert to the Escrow Agent are referred to herein as the "Escrow Materials." 6.2 Release Events. For purposes of this Agreement, the following shall be deemed "Release Events": (a) VNI becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days, or makes a general assignment for the benefit of its creditors; (b) Vert ceases to offer any maintenance services for a Product; or (c) Converge makes a Priority Remedy Election. Notwithstanding anything to the contrary herein, if the claimed Release Event is under clause (b) or clause (c) above, only the Escrow Materials for the Product that is the subject of the Release Event, together with all associated Updates and Enhancements, shall be subject to release to Converge hereunder. 6.3 Delivery of Escrow Materials. Should Converge desire to obtain any Escrow Materials due to the occurrence of a Release Event, Converge shall provide Vert and the Escrow Agent with written notice thereof. The Escrow Agent shall be instructed to promptly provide a copy of such notice to Vert. Unless the Escrow Agent receives written notice from Vert contesting the occurrence of such Release Event within 15 days after Vert receives such copy of Converge's notice (48 hours in the event the Release Event is a Priority Remedy Election by Converge), the Escrow Agent shall be instructed to deliver the relevant Escrow 19 Materials to Converge forthwith. In the event Vert contests the occurrence of the Release Event, the matter shall be resolved as expeditiously as possible in accordance with the dispute resolution provisions of the Escrow Agreement and the Escrow Materials shall remain in escrow until such time as the matter is resolved. 6.4 Fees of Escrow Agent. Converge shall pay all fees and other amounts payable to the Escrow Agent under the Escrow Agreement. 6.5 Escrow of Third-Party Products. With respect to Products that are licensed to VNI or the VNI Subsidiaries by third parties, Vert will reasonably cooperate with Converge to arrange for true and complete copies of the Source Code for such Products to be deposited with the Escrow Agent and to be held in escrow in accordance with the provisions of this Section 6 and the Escrow Agreement. 6.6 Loss of Rights to Source Code. Should Vert cure a Priority Event of Default by effectuating a Cataclysmic Event Cure with respect to the Cataclysmic Event giving rise thereto prior to a Priority Remedy Election, then: (i) the rights of Converge under Section 2.4.1 to use, load, store, transmit, execute, distribute internally, display, modify and have modified, and make and have made derivative works of, the Source Code delivered to Converge under this Section 6 by reason of such Priority Event of Default shall automatically cease; (ii) Converge shall erase, destroy or return to the Escrow Agent all such Source Code, together with all copies, modifications and derivative works thereof; and (iii) upon Vert' written request, shall certify its compliance with this Section 6.6 to Vert in writing. 7. Limitation of Liability. 7.1 Disclaimer of Certain Damages. TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, REVENUES OR BUSINESS OPPORTUNITIES) HOWEVER CAUSED AND REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF THE PARTY HAS BEEN INFORMED OF THE POSSIBILITY OF ANY SUCH DAMAGES IN ADVANCE. VERT DOES NOT GUARANTEE THAT THE PRODUCTS WILL OPERATE WITHOUT ERROR OR INTERRUPTION AND VERT SHALL NOT BE RESPONSIBLE FOR ANY DAMAGES ASSOCIATED WITH LOSS OF DATA OR INTERRUPTION OR LOSS OF USE OF PRODUCTS RESULTING THEREFROM. 7.2 Sole Remedy. IF A CLAIM OR CAUSE OF ACTION IS ATTRIBUTABLE TO A PRODUCT OR ANY SERVICES PROVIDED UNDER THIS AGREEMENT (BUT EXCLUDING ANY VERT-OWNED DELIVERABLES), THE REMEDIES SET FORTH IN THIS AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. IF A CLAIM OR CAUSE OF ACTION IS 20 ATTRIBUTABLE TO A DELIVERABLE OR ANY SERVICES PROVIDED UNDER THE PROFESSIONAL SERVICE AGREEMENT (EXCLUDING ANY UNDERLYING PRODUCTS (OTHER THAN VERT-OWNED DELIVERABLES) INCLUDED IN SUCH DELIVERABLES), THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THIS AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. NO LIABILITY SHALL EXTEND UNDER THIS AGREEMENT TO ANY THIRD PARTY (INCLUDING, BUT NOT LIMITED TO, ANY AFFILIATES OF VNI OTHER THAN VNS, OR THEIR LICENSORS) IF NOT INVOLVED IN THE DEVELOPMENT, LICENSING OR DELIVERY OF THE PRODUCTS OR ANY SERVICES HEREUNDER. 7.3 Maximum Aggregate Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE MAXIMUM LIABILITY OF EACH PARTY TO THE OTHER OR TO ANY THIRD PARTY FOR DAMAGES RELATING TO THIS AGREEMENT OR THE PRODUCTS OR SERVICES, IF ANY, THAT ARE THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER FOR BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE OR OTHER TORT, STRICT PRODUCT LIABILITY, THE FAILURE OF ANY LIMITED REMEDY TO ACHIEVE ITS ESSENTIAL PURPOSE, OR OTHERWISE, SHALL NOT EXCEED: (I) $10,000,000 IN THE AGGREGATE, AND (II) THE GREATER OF $1,000,000 PER PRODUCT OR THE LIST PRICE OF SUCH PRODUCT AS OF THE DATE ON WHICH THE CLAIM OR CAUSE OF ACTION FIRST AROSE. THE FOREGOING LIMITATIONS ON EACH PARTY'S AGGREGATE LIABILITY TO THE OTHER SHALL BE IN ADDITION TO ANY FEES AND OTHER AMOUNTS DUE AND OWING UNDER SECTION 3. 7.4 Exceptions. THE LIMITATIONS OF LIABILITY CONTAINED IN THIS SECTION 7 SHALL NOT APPLY WITH RESPECT TO (A) ANY CLAIMS OF BODILY INJURY OR DAMAGE TO TANGIBLE PERSONAL PROPERTY RESULTING FROM WILLFUL MISCONDUCT OR GROSS NEGLIGENCE, (B) THE RESPECTIVE INDEMNIFICATION OBLIGATIONS OF THE PARTIES UNDER SECTION 8, (C) ANY BREACH OF THE PROVISIONS GOVERNING LICENSE RIGHTS AND RESTRICTIONS IN SECTION 2, (D) ANY BREACH OF THE CONFIDENTIALITY OBLIGATIONS IN SECTION 9, OR (E) LIABILITY FOR PAYMENT OF INTEREST ADDED BY A COURT OF LAW OR AN ARBITRATION PANEL TO A JUDGMENT ENTERED IN ANY ACTION OR PROCEEDING UNDER THIS AGREEMENT. 7.5 Duty to Mitigate. Each party will have a duty to take reasonable steps to mitigate damages for which the other party is responsible. 7.6 Acknowledgement. Each of the parties acknowledge that the disclaimers and limitations set forth in this Section 7 are an essential element of this Agreement between the parties and that the parties would not have entered into this Agreement without such disclaimers and limitations. 21 8. Indemnification. 8.1 By Vert. 8.1.1 Vert Indemnity. Vert agrees to defend and hold Converge and its officers, directors, employees and agents harmless from and against any suit, claim or action by any unaffiliated third party (a "Converge Claim") alleging that any of the Products, when used within the scope of this Agreement and its corresponding Documentation, infringe upon or misappropriate any U.S. patent, European Union Office patent, patent of a country in the European Union, copyright or trade secret of a third party. Vert further agrees to indemnify Converge and its officers, directors, employees and agents for any damages, costs, liabilities, expenses (including, without limitation, attorneys fees) and settlement amounts payable to unaffiliated third parties in connection with such Converge Claims. The foregoing obligations shall not extend to any Converge Claims arising out of or related to (a) a modification of the Products by or at the direction of anyone other than Vert, to the extent that such modification is the cause of such infringement; (b) a combination of the Products with any third party software or equipment neither recommended, approved or authorized by Vert in writing, whether in any Documentation for the Product or otherwise, to the extent that such combination is the cause of such infringement; (c) portions of the Products based on unique specifications or requirements provided or selected by Converge, to the extent that such portion is the cause of such infringement; or (d) solely with respect to infringement claims concerning U.S. patent, European Union Office patent or patent of a country in the European Union, any infringement claims to the extent based on or arising out of Future Products. For the purposes of this Section 8.1, the term "Products" shall exclude the Vert-Owned Deliverables. 8.1.2 Converge Obligation. Vert's obligations to defend, indemnify and hold Converge harmless are subject to Converge (a) giving Vert prompt written notice of any such Converge Claim; (b) giving Vert sole control over the defense and settlement of any such Converge Claim; (c) providing full cooperation for the defense of any such Converge Claim, at Vert's expense; and (d) not entering into any settlement or compromise of any such Converge Claim without Vert's prior written approval. 8.1.3 Mitigation. If Converge is enjoined or is reasonably likely to be enjoined from using any Products as permitted hereunder, Vert will, at its own expense, exercise the first of the following remedies that is practicable: (i) obtain for Converge the right to continue to use, sell and license the Products as permitted under this Agreement; (ii) modify Products so they are non-infringing and functionally equivalent in all material respects to the infringing Products; or (iii) replace the Products, or other affected Products, with non-infringing ones that are functionally equivalent in all material respects to the infringing Services and Deliverables; provided, however, that Vert may seek to provide the remedies in (ii) or (iii) above prior to seeking to provide the remedy in (i) above only if such decision would not have a significant adverse impact on Converge's ability to provide uninterrupted products or services to its customers; provided, however, that with respect to infringement claims concerning U.S. patents, European Union Office patents or patents of a country in the European Union, Vert shall in no event be required to incur costs or expenses in excess of $1,000,000, in the aggregate and regardless of the number of claims involved, in performing its obligations under this Section 8.1.3. If all of the remedies set forth in the preceding sentence are neither technically feasible 22 nor available on commercially reasonable terms, then Vert may, or if the following remedy is requested by Converge, then Vert shall, require the return of the affected Deliverables and pay to Converge the list price charged by Vert for such Products. 8.1.4 Sole Remedy. IF A CLAIM OR CAUSE OF ACTION RELATING TO THE INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHT IS ATTRIBUTABLE TO A PRODUCT (BUT EXCLUDING ANY VERT-OWNED DELIVERABLES), THE REMEDIES SET FORTH IN THIS SECTION 8, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO CONVERGE FOR SUCH CLAIM OR CAUSE OF ACTION. IF A CLAIM OR CAUSE OF ACTION RELATING TO THE INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHT IS ATTRIBUTABLE TO A DELIVERABLE OR ANY SERVICES PROVIDED UNDER THE PROFESSIONAL SERVICE AGREEMENT (EXCLUDING ANY UNDERLYING PRODUCTS (OTHER THAN VERT-OWNED DELIVERABLES) INCLUDED IN SUCH DELIVERABLES), THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THIS AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO CONVERGE FOR SUCH CLAIM OR CAUSE OF ACTION. 8.2 By Converge. 8.2.1 Converge Indemnity. Converge agrees to defend and hold Vert and its officers, directors, employees and agents harmless from and against any suit, claim or action by any unaffiliated third party (a "Vert Claim") relating to (a) the operation of and/or business conducted on or through any Converge Marketplace, except to the extent that the occurrence giving rise to such Vert Claim is a suit, claim or action by any unaffiliated third party alleging that any Product, when used within the scope of the rights granted to Converge under this Agreement, infringes upon or misappropriates any U.S. or foreign patent copyright, trade secret or other intellectual property rights of a third party; (b) the use of any Product outside the scope the rights granted to Converge under this Agreement; or (c) any claim associated with any Converge product or service to the extent not based on Products or service provided by Vert hereunder. Converge further agrees to indemnify Vert and its officers, directors, employees and agents for any damages, costs, liabilities, expenses (including, without limitation, attorneys fees) and settlement amounts payable to unaffiliated third parties in connection with such Vert Claims. 8.2.2 Vert Obligation. Converge's obligations to defend, indemnify and hold harmless Vert are subject to Vert (a) giving Converge prompt written notice of any such Vert Claim; (b) giving Converge sole control over the defense and settlement of any such Vert Claim; (c) providing full cooperation for the defense of any such Vert Claim, at Converge's expense; and (d) not entering into any settlement or compromise of any such Vert Claim without Converge's prior written approval. 23 9. Confidential Information. 9.1 Definition of Confidential Information. "Confidential Information" as used in this Agreement shall mean any and all proprietary or non-public information of a party (including, without limitation, any Source Code furnished by or to Converge hereunder) whether in oral, written or other tangible form that the party disclosing the information (the "Discloser") designates as being confidential or which, under the circumstances surrounding disclosure, the receiving party (the "Recipient") knows or has reason to know should be treated as confidential. 9.2 Nondisclosure and Nonuse Obligations. Each of the parties, as Recipient, agrees that such Recipient will not use, disseminate, or in any way disclose any Confidential Information of the other party, as Discloser, to any person, firm or business, except to the extent necessary for the performance of such party's obligations or the enjoyment of such party's rights and benefits hereunder, and for any other purpose such Discloser may hereafter authorize in writing. Each of the parties, as Recipient, agrees that such Recipient shall treat all Confidential Information of the other party, as Discloser, with the same degree of care as such Recipient accords to such Recipient's own Confidential Information, but in no case less than reasonable care. Each of the parties, as Recipient, agrees that such Recipient shall disclose Confidential Information of the other party, as Discloser, only to those of such Recipient's employees who need to know such information, and such Recipient certifies that such Recipient employees have previously agreed, either as a condition to employment or in order to obtain the Confidential Information of the Discloser, to be bound by terms and conditions substantially similar to those terms and conditions applicable to such Recipient under this Agreement. Each of the parties, as Recipient, shall immediately give notice to the other party, as Discloser, of any unauthorized use or disclosure of Discloser's Confidential Information. Each of the parties, as Recipient, agrees to assist the other party, as Discloser, in remedying any such unauthorized use or disclosure of Discloser's Confidential Information. 9.3 Exclusions from Nondisclosure and Nonuse Obligations. The obligations under this Section 9 of each of the parties, as Recipient, with respect to any portion of the Confidential Information of the other party, as Discloser, shall not apply to such portion that Recipient can document: (a) was in the public domain at or subsequent to the time such portion was communicated to Recipient by Discloser through no fault of Recipient; (b) was rightfully in Recipient's possession free of any obligation of confidence at or subsequent to the time such portion was communicated to Recipient by Discloser; (c) was developed by employees or agents of Recipient independently of and without reference to any information communicated to Recipient by Discloser; or (d) was communicated by Discloser to an unaffiliated third party free of any obligation of confidence. A disclosure by either of the parties, as Recipient, of Confidential Information of the other party, as Discloser, either (i) in response to a valid order by a court or other governmental body; (ii) as otherwise required by law; or (iii) as necessary to establish the rights of either party under this Agreement, shall not be considered to be a breach of this Agreement by Recipient or a waiver of confidentiality for other purposes; provided, however, that Recipient shall provide prompt prior written notice thereof to Discloser to enable Discloser to seek a protective order or otherwise prevent such disclosure. 9.4 Confidentiality of this Agreement. The parties hereto agree to keep the terms of this Agreement confidential and not to divulge any part thereof to any third party 24 except: (a) with the prior written consent of the other party; (b) to any governmental body having jurisdiction to request and to read the same; (c) as otherwise may be required by law or legal process; or (d) to legal counsel representing either party. Notwithstanding the foregoing, no disclosure of this Agreement shall be made pursuant to clauses (b) or (c) of the foregoing sentence without the disclosing party first giving the other party reasonable notice prior to the intended disclosure so as to allow the other party sufficient time to seek a protective order or otherwise assure the confidentiality of this Agreement as that other party shall deem appropriate. Each party agrees not to file this Agreement as an exhibit to its SEC filings without first redacting and requesting confidential treatment for any information reasonably considered by the other party to be confidential. Such other party shall inform the first party of any such information it wishes to redact and request confidential treatment for within five Business Days following the date such other party is requested to do so in writing. Nothing herein shall prohibit either party from complying with applicable securities or other laws, rules or regulations. 10. Term; Events of Default; and Remedies. 10.1 Term. The term of this Agreement shall commence upon the Effective Date and continue in perpetuity. 10.2 Events of Default. The occurrence of any one or more of the following acts, events or occurrences shall constitute an "Event of Default" under this Agreement: (a) either party becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days, or makes a general assignment for the benefit of its creditors; (b) either party breaches any material provision of this Agreement (excluding (i) a breach by either party of the provisions of Section 2.17 or Exhibit D hereto, which may not result in an "Event of Default," and (ii) a payment breach by Converge of the type described in clause (c) below, which is covered by such clause (c)) and the result is that the non-breaching party experiencing a substantial deprivation of the benefits to which the non-breaching party is entitled under this Agreement, which material breach is not cured by the breaching party within 45 days after the breaching party's receipt of the non-breaching party's written notice specifying the breach in detail; provided, however, that if the breach is of such a nature that it may be cured, but it may not reasonably be cured within such 45-day period, the non-breaching party may not terminate this Agreement unless such breach is not cured by the breaching party on or before the 90th day after the breaching party's receipt of the non-breaching party's notice of breach if breaching party has commenced substantial efforts to cure the breach within the initial 45-day period and has continued in good faith to work to cure the breach as soon as reasonably practicable thereafter, or (c) Converge fails to pay when due any amounts payable under Section 3.1 and Exhibit B hereto and fails to cure such breach within 10 Business Days after Vert gives Converge written notice specifying the breach. 10.3 Remedies. 10.3.1 Remedies of Vert. Immediately upon the occurrence of an Event of Default by Converge under Section 10.2, Vert shall have the right, but not the obligation, to make a "Vert Remedy Election," exercisable by delivering written notice thereof to Converge within 10 Business Days after the occurrence of such Event of Default by Converge. Vert shall 25 not have the right to terminate this Agreement upon the occurrence of an Event of Default by Converge under Section 10.2 or any other breach by Converge under this Agreement. 10.3.2 Remedies of Converge. Immediately upon the occurrence of an Event of Default by Vert under Section 10.2, Converge shall have the right, but not the obligation, to make a "Converge Remedy Election," exercisable by delivering written notice thereof to Vert within 10 Business Days after the occurrence of such Event of Default by Vert. Converge shall not have the right to terminate this Agreement upon the occurrence of an Event of Default by Vert under Section 10.2 or any other breach by Vert under this Agreement. 10.4 Cataclysmic Event. 10.4.1 Notice and Response. Should a Cataclysmic Event occur, Converge shall provide Vert with notice thereof as immediately as possible (a "Cataclysmic Event Notice"). Each Cataclysmic Event Notice shall be provided to Vert via telephone, pager and e-mail in accordance with VNS' Maintenance & Support procedures for the reporting of a Severity Level 1 Problem, and the Converge Tech Support representative or other Converge Personnel reporting the Cataclysmic Event shall indicate to VNS that they are reporting a Severity Level 1 Problem. Vert shall respond to a Cataclysmic Event Notice and seek to provide a Cataclysmic Event Cure in accordance with the provisions of Exhibit C respecting Severity Level 1 Problems. 10.4.2 Efforts of Converge. Converge shall fully cooperate with and assist Vert, as reasonably requested by Vert, in Vert's efforts to characterize and diagnose the cause of any Cataclysmic Event and to effectuate a Cataclysmic Event Cure with respect thereto. Without limiting the foregoing, at any point when the Converge Marketplace is experiencing an interruption in Trade Functionality, Converge shall use best efforts to restore such functionality to the Converge Marketplace as soon as possible, such efforts to be in coordination with Vert's efforts to effectuate a Cataclysmic Event Cure. Converge's efforts under this Section 10.4.2, at a minimum, shall include implementing all applicable Marketplace Response Procedures as immediately as practicable. 10.4.3 Priority Event of Default. In the event that a Cataclysmic Event Cure is not effectuated within three days (72 hours) following its corresponding Response Initiation Date/Time, Vert shall be in default of its obligations under this Agreement (a "Priority Event of Default"). Should a Cataclysmic Event Cure for such Priority Event of Default not be effectuated within 11 days (264 hours) following the occurrence of such Priority Event of Default, Converge shall have the right, but not the obligation, to make a "Priority Remedy Election," exercisable by delivering written notice thereof to Vert within 10 Business Days after the occurrence of such Priority Event of Default. Converge shall not have the right to terminate this Agreement upon the occurrence of a Priority Event of Default hereunder. For purposes of the provisions of this Agreement other than those set forth in Section 10.2 and Section 10.3, the consequences of a Priority Remedy Election by Converge shall be the same as the consequences of a Converge Remedy Election by Converge, unless otherwise expressly stated in this Agreement. 26 10.4.4 Tolling. The time periods specified in Section 10.4.3, Section 10.4.5 and Section 6.6 shall be tolled for any time during which Converge substantially fails to comply with its obligations under Section 10.4.2 to implement the applicable Marketplace Response Procedures. 10.4.5 Payments by Vert. In the event that Vert does not effectuate a Cataclysmic Event Cure by the end of the third day (72nd hour) following its corresponding Response Initiation Date/Time, Vert shall pay Converge as liquidated damages, with respect to monetary claims, and without limiting Converge's right to make a Priority Remedy Election (with such liquidated damages and Priority Remedy Election being Converge's sole remedies in connection with such Cataclysmic Event so long as this Section 10.4 applies), the following amounts, depending on the length of time that such failure continues:
Length of Failure to Effectuate a Cataclysmic Event Cure (from the Response Initiation Date/Time) Amount of Payment 3 days (72 hours) $100,000 4 days (96 hours) $100,000 5 days (120 hours) $200,000 6 days (144 hours) $200,000 7 days (168 hours) $400,000 8 days (192 hours) $400,000 9 days (216 hours) $800,000 10 days (240 hours) $800,000 11 days (264 hours) $1,600,000 12 days (288 hours) $1,600,000 13 days (312 hours) $3,200,000
Such payments shall be made within 30 days following the date on which the total amount due under this Section 10.4.5 with respect to the Cataclysmic Event in question becomes fixed. 10.4.6 Trigger Events. Notwithstanding anything to the contrary in this Section 10.4, the provisions of this Section 10.4 shall not apply with respect to any Converge Marketplace that is the subject of a Cataclysmic Event unless and until a Trigger Event has occurred with respect to such Converge Marketplace. Furthermore, the amounts payable by Vert to Converge under Section 10.4.5 above with respect to a particular Converge Marketplace shall be reduced as follows: (i) by 66 2/3% if the Cataclysmic Event occurs during the initial four month period commencing on the date that the first Trigger Event for such Converge Marketplace occurs, and (ii) by 33 1/3% if the Cataclysmic Event occurs during the four month period commencing on the first day of the fifth month after such date. 10.4.7 Limitation on Priority Remedy Election. The provisions of this Section 10.4 shall not apply, and Converge shall not be entitled to provide a Cataclysmic Event Notice or make a Priority Remedy Election at any time subsequent to the date on which Converge makes a Converge Remedy Election or a Priority Remedy Election, or the date on which Vert makes a Vert Remedy Election. The provisions of this Section 10.4 shall be Converge's sole remedy in the event this Section 10.4 applies. In addition, the provisions of this 27 Section 10.4 shall apply subsequent to the Product Term only (i) with respect to those Products for which Converge is then purchasing Maintenance & Support Services and (ii) if Converge is then paying for Maintenance & Support Services at an annualized rate of at least $1,750,000 per year. 11. Effect of Remedy Election. Upon the occurrence of a Vert Remedy Election or a Converge Remedy Election, each party shall erase, destroy or return to the other party all copies of the Confidential Information of or provided by such party (which in the case of Converge as the erasing, destroying or returning party shall include the Products and the Documentation), and, upon such other party's written request, shall certify its compliance with this Section 11 to the other party in writing. Notwithstanding the foregoing provisions of this Section 11, with respect to and for so long as any licenses granted to Converge respecting Products and/or Source Code survive a Vert Remedy Election or a Converge Remedy Election, Converge shall not be required to erase, destroy or return any Confidential Information of VNI or any of the VNI Subsidiaries respecting such Products and/or Source Code. 12. Compliance with U.S. Export Laws. Converge acknowledges that the laws and regulations of the United States may restrict the export and re-export of commodities and technical data of United States origin, including the Products and the Documentation in any medium. Each party agrees that it will not export or re-export the Products or the Documentation in any form without the appropriate United States and foreign government licenses. 13. Publicity. Neither party will issue any press release, marketing or similar materials discussing this Agreement or either party's performance hereunder except with the other party's prior written agreement to the content and distribution of such material. Within 60 days after the Effective Date, the parties may mutually agree upon a joint marketing program. Notwithstanding the foregoing, Vert will be entitled to list Converge as a customer of Vert and as a reference without submitting such lists to Converge. Converge will provide Vert with a mutually agreed upon name (and contact information) for an employee of Converge who will accept reference calls. 14. General. 14.1 Termination and Survival. This Agreement and all rights and licenses granted herein may be terminated only upon written agreement of the parties. Upon any such termination, Section 1, Section 2.11, Section 4.2, Section 5, Section 7, Section 8, Section 9, Section 12, Section 13 and Section 14 shall survive. 14.2 Notices. All notices permitted or required under this Agreement ("Notices") shall be in writing and shall be delivered as follows with notice deemed given as indicated (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; or (c) by certified or registered mail, return receipt requested, five days after deposit in the mail. All Notices shall be properly addressed as follows, or to such other addresses as may be specified in a Notice given hereunder: 28 If to VNI: with a copy to: Attn: Chief Executive Officer Attn: General Counsel VerticalNet, Inc. VerticalNet, Inc. 700 Dresher Road, Suite 100 700 Dresher Road, Suite 100 Horsham, Pennsylvania 19044 Horsham, Pennsylvania 19044 If to VNS: with a copy to: Attn: David Smith, V.P. Enterprise Solutions Attn: General Counsel VerticalNet Solutions Tradeum, Inc. dba VerticalNet Solutions 301 Howard Street 700 Dresher Road, Suite 100 San Francisco, CA 94105 Horsham, Pennsylvania 19044 If to Converge: with a copy to: Attn: EVP, Product Strategy & Development Attn: General Counsel Converge, Inc. Converge, Inc. 10400 Ridgeview Court, Suite 100 10400 Ridgeview Court, Suite 100 Cupertino, CA 95104-0704 Cupertino, CA 95104-0704
14.3 Force Majeure. Except for the obligation to pay monies due, neither party shall be liable hereunder by reason of any failure or delay in the performance of its obligations hereunder (except for the payment of money) on account of strikes, riots, insurrection, fires, flood, storm, explosions, acts of God, war, governmental action, labor conditions, earthquakes, or any other cause which is beyond the control of such party. 14.4 Waiver. An effective waiver under this Agreement must be in writing signed by the party waiving its right. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of subsequent breaches of that or any other provision hereof. 14.5 Severability. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable or invalid as a whole, and, in such event, such provision shall be changed and interpreted so as to best accomplish the objectives of such provisions within the limits of applicable law or applicable court decisions. 14.6 Headings. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. 14.7 No Solicitation. During the three-year period commencing on the Effective Date, and for a period of one year thereafter, Converge and Vert each agree not to directly or indirectly solicit, encourage or cause others to solicit or encourage any employees or 29 individual independent contractors of the other party to terminate their employment or independent contracting relationship with the other party and become an employee or independent contractor of the soliciting party or its Affiliate. This provision does not prohibit a party's responding to unsolicited employment inquiries and/or any indirect solicitations and other employment activities (e.g., job postings, advertising of positions) that are not specifically targeted at any particular individual. 14.8 Choice of Law and Forum; Waiver of Jury Trial; Limitation of Action. This Agreement and performance under this Agreement shall be governed by the laws of the United States of America and of the State of California as applied to agreements entered into and to be performed entirely within California between California residents, excluding its conflicts of law provisions. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. Both parties consent to the jurisdiction of the state and federal courts located in the County of Santa Clara, California and in the County of San Francisco, California to hear and resolve any and all actions and proceedings arising from or relating to this Agreement or the Software. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to this Agreement must be commenced no later than two years from the date on which the cause of action arose. 14.9 No Agency. Nothing contained herein shall be construed as creating any agency, partnership or other form of joint enterprise between the parties or to allow either party to bind the other or incur any obligation on its behalf. 14.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of both parties hereto. For the purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed an original. 14.11 Assignment. A party may assign this Agreement to any Affiliate. Otherwise, neither party may assign this Agreement without the other party's prior written consent (not to be unreasonably withheld). No transfer of this Agreement by operation of law or change in Control of a party, including, without limitation, by merger, consolidation or sale or other transfer of equity interests, shall be considered an assignment for purposes of this Section 14.11. This Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 14.12 No Third-Party Beneficiaries. Except as expressly stated in Section 8, nothing in this Agreement is intended to confer benefits, rights or remedies unto any person or entity other than the parties and their successors and permitted assigns. 14.13 Non-Exclusive Agreement. Except as expressly stated herein, this Agreement is not exclusive as to either party, and, subject to the express provisions of this 30 Agreement, each party will have the right to conduct any other business in which it may now or hereafter be engaged. 14.14 Entire Agreement. This Agreement, together with the Professional Services Agreement, are the entire agreement between Vert and Converge relating to the subject matter of this Agreement. This Agreement shall supersede any prior agreement or understanding, whether written or oral, and any other communications between Vert and Converge relating to the subject matter of this Agreement. This Agreement may only be amended by a writing specifically referencing this Agreement, which has been signed by authorized representatives of each party. 31 IN WITNESS WHEREOF, the undersigned do hereby execute this parties have caused this Agreement to be signed by their duly authorized representatives as of the date first written above in this Agreement. VerticalNet, Inc. Converge, Inc. By: By: ------------------------------------ ------------------------------- - ---------------------------------------- ----------------------------------- (Print Name) (Print Name) Title: Title: --------------------------------- ---------------------------- Tradeum, Inc., dba VerticalNet Solutions By: ------------------------------------ - ---------------------------------------- (Print Name) Title: --------------------------------- 32 Exhibit A Current Products Community Products: VerticalNet Community Builder VerticalNet Community Manager Content Products: VerticalNet Content Builder VerticalNet Content Syndicator VerticalNet Content Manager Commerce Products: VerticalNet Auctions VerticalNet Exchange VerticalNet Aggregated Catalog VerticalNet Distributed Catalog VerticalNet RFP/RFQ (available 1/31/01) VerticalNet Structured Negotiations (available 1/31/01) Tools (for internal development use only): VerticalNet Ontology Builder VerticalNet C2 Hub VerticalNet Business Publisher VerticalNet Business Publisher Agent Platform Products: VerticalNet Trade Server 33 Exhibit B Payment of Certain Fees The fees due and owing from Converge under Section 3.1 are as follows: Contract Year 1 - $28,000,000, payable as follows: $13,000,000 on the Effective Date, and of $15,000,000 on the first day of the third quarter in Year 1. Contract Year 2 - $25,000,000, payable in equal semi-annual payments of $12,500,000 on the first day of each of the first and third quarters in Year 2. Contract Year 3 - $20,000,000, payable as follows: $12,500,000 on the first day of the first quarter in Year 3, and $7,500,000 on the first day of the third quarter in Year 3. 34 Exhibit C Maintenance & Support Services 1.0 Problem Handling. VNS shall be responsible for responding to Problems as set forth in this Exhibit C. Only authorized personnel designated by Converge will report Problems to VNS technical support personnel ("Converge Tech Support"), the number of such Converge personnel will not exceed 50 without VNS approval. Unless otherwise agreed in writing in a SOW executed under the PSA, Converge and the Converge Subsidiaries shall be responsible for providing "Level 1" (help desk-type support) support to both Converge Personnel (internal help desk) and Converge users (external help desk), for each of the Deployed Products on which VNS has provided the necessary training as described herein. VNS shall be responsible for providing "Level 2" (technical inquiries and support) and "Level 3" (code fixes) support for such Deployed Products and Level 1, 2 and 3 support for all other Products. Converge Tech Support will be the "single point of contact" for support of the Products and the escalation of Problems in accordance with this Exhibit C. In the case of a Deployed Product for which Converge is proving Level 1 support, Problems will be escalated to VNS only after such Problems have been reasonably escalated through the "Level 1" support procedures of Converge and the Converge Subsidiaries. With respect to Problems reported to VNS, Converge shall provide, to the extent known to Converge, information to enable VNS to reproduce, verify, diagnose and correct such Problems. VNS will attempt to resolve Problems reported by Converge to VNS as set forth below. VNS will provide all reasonable training and available training materials to enable Converge to provide Level 1 support for the Deployed Products ("Support Training"). Support Training will include both introductory training reasonably in advance of when new Deployed Products are put into production by Converge and periodic refreshers as appropriate when Updates and Enhancements of Deployed Products are released. Support Training will be provided at mutually agreed locations and schedules, and each party will bear its own costs and expenses (except for reasonable travel for VNS Personnel and out-of-pocket costs for training materials, which Converge will reimburse to VNS at cost). All Problems shall be reported by Converge and the Converge Subsidiaries to designated VNS technical support personnel via telephone, e-mail and/or in some other manner agreed to by the parties. VNS will establish a process to check incoming electronic requests for Level 2 at least once every two hours and Level 3 support at least once every four hours. VNS will maintain procedures and systems designed to ensure that Problems are properly logged and track and all new Error corrections are compatible with previous Error corrections. Packaging of Error corrections will be done as mutually agreed to by the parties. VNS will provide to Converge the names, phone numbers and 24X7 pager numbers of the VNS support personnel to contact outside of Business Hours when high priority Problems are encountered that require immediate assistance. 35 2.0 Problem Severity Levels. The following chart describes the distinctions between the different severity levels for Problems reported by Converge and the Converge Subsidiaries. Severity Level Definition 1 A "Severity Level 1" Problem is one where critical or central functionality of the Product is unavailable and the Product cannot reasonably be used and/or performance of the Product is severely degraded. The adverse impact of a Severity 1 Problem on Converge's business is severe and immediate, and requires an immediate solution. - A "Severity Level 1" Problem may have one or more of the following characteristics: - Data is corrupt or Product corrupts or loses data - Complete or severe lack of ability to use the Product - Product crashes repeatedly - Product is not operational - The Product fails to run to completion or returns incorrect results 2 A "Severity Level 2" Problem is one where critical, central or important functionality of the Product is restricted and/or performance of the Product is significantly degraded. Use of the Product can continue in a restricted fashion or the user experiences a significant degradation of Product functionality and/or performance. o A "Severity Level 2" Problem may have one or more of the following characteristics: o A substantial loss of use of certain functionality of the Product for which there is an insufficient workaround o Performance of the Product is severely degraded o Some important Product functionality is unavailable or improperly functioning, but the Product can continue to operate in a restricted fashion 3 A "Severity Level 3" Problem causes minimal interruption to non-central or non-important functionality. The Problem has a minor impact or is inconvenient. o A "Severity Level 3" Problem may have one or more of the following characteristics: o Performance of the Product is degraded in a non-critical manner o Performance of the Product is minimally impaired 4 A "Severity Level 4" Problem causes no loss of use of the Product. o Cosmetic Problem with the Product o Documentation error o Minor incorrect behavior of the Product that does not impede its operation 3.0 Problem Response and Resolution. VNS will review all Problems reported by Converge to determine whether they are caused by Errors. In the event of a reasonable uncertainty, the parties will assume the higher level until they have sufficient information to make a determination. VNS shall conduct such review and use best efforts to provide Converge 36 with an initial response and status reports as set forth in the table below. Should VNS determine that a Problem is caused by one or more Errors, VNS will use best efforts to resolve such Errors as set forth in the table below. If Converge unreasonably reports a Problem as being at a Severity Level that is higher than what proves to be the actual Severity Level of the Problem, Converge shall pay or reimburse VNS for all incremental costs and expenses incurred by VNS in reviewing and responding to the Problem as a higher Severity Level Problem. If VNS' review of, or response to, a Problem reported by Converge establishes that the Problem was not due to an Error, Converge shall pay or reimburse VNS for all costs and expenses reasonably incurred by VNS in reviewing and responding to the Problem. In addition to individual Problem reporting as described below, commencing not later than July 1, 2001, VNS will provide to Converge a weekly status log of Problem tickets to include: severity level of Problem as reported by Converge, severity level of Problem as determined by VNS, date and time each Problem was reported, date and time of initial response for each reported Problems, date and time of status for each reported, date and time of diagnosis for each reported, and date and time of work-around or fix. Between the Effective Date and July 1, 2001, VNS shall provide coverage with all reasonably available information of a similar nature.
Severity Level Response Time and Status Reports Resolution Efforts 1 - 30 minutes if the Problem is reported to Continuous efforts (24x7) with best available VNS during Business Hours - resources to provide a workaround, patch, fix or other - 90 minutes if the Problem is reported to solution for the Error as quickly and efficiently as VNS outside of Business Hours possible, beginning as soon as practicable after the - Problem Diagnosis within 12 hours Error is reproduced by VNS. - Status reports every 24 hours or upon - If a workaround, patch, fix or other solution is not request provided within 24 hours after VNS has reproduced the Error, providing Converge with an assessment and action plan detailing the proposed method of resolution and a time schedule for delivery of a correction. - Severity Level 1 requires maximum effort support until an emergency fix or bypass is developed and available for shipment to Converge. Critical situations may require customer, Converge and VNS personnel to be at their respective work locations or available on an around-the-clock basis. - Providing a final fix or work-around within 24 hours that down grades the Problem to Severity Level 3 or less and that does not substantially impair performance or functionality. 2 - Two hours if the Problem is reported to - Continuous efforts (24x7) to provide a workaround, VNS during Business Hours patch, fix or other solution for the Error as quickly and - Two hours following the resumption of efficiently as possible, beginning as soon as practicable Business Hours if the Problem is reported after the Error is reproduced by VNS. outside of Business Hours - If a workaround, patch, fix or other solution is not - Problem Diagnosis within 24 hours provided within 48 hours after VNS has reproduced the - Status reports every 24 hours or upon Error, providing Converge with an assessment and action request plan detailing the proposed method of resolution and a time schedule for delivery of a correction. - Providing a final fix or work-around within 72 hours that down grades the Problem to Severity Level 3 or less and that does not substantially impair performance or functionality.
37
Severity Level Response Time and Status Reports Resolution Efforts 3 - One Business Day after the Problem is - Reasonable efforts during Business Hours to provide reported to VNS a workaround, patch, fix or other solution for the Error - Progress and status reports as within 5 Business Days, beginning within a reasonable appropriate but at least weekly period of time after the Error is reproduced by VNS. 4 - Five Business Days after the Error is - Reasonable efforts to resolve the Error in a future reported to VNS Update. - Progress and status reports as appropriate
38 Exhibit D Promotion 1. Definitions. In addition to other terms defined elsewhere in this Exhibit D, the following defined terms used in this Exhibit D shall have the meanings set forth below: 1.1 "End User" shall mean a Qualified Lead that has entered into an End User License Agreement with VNS for one or more Products. 1.2 "End User License Agreement" shall mean the agreement(s) used from time to time by VNS to license Products to a customer for such customer's internal business purposes and not for service bureau or time-sharing purposes. 1.3 "Net Revenue" shall mean the aggregate of the license fees received by Vert from each End User (a) if an End User License Agreement for the Referable Product(s) listed on the applicable Registration Form is entered into between VNS and a Qualified Lead during the six-month period following the acceptance of a registration or a re-registration pursuant to Section 2.2 of this Exhibit D, the license fees received by VNS from such Qualified Lead during the term of the applicable End User License Agreement (including any renewal terms) and (b) if an End User License Agreement for Referable Product(s) other than those listed on the applicable Registration Form is entered into between VNS and a Qualified Lead during the six-month period following the acceptance of a registration or a re-registration pursuant to Section 2.2 of this Exhibit D, the license fees received by VNS from such Qualified Lead during the period commencing on the date of the registration or re-registration and ending on the first anniversary of such date, less any allowances, discounts, surcharges, cancellation charges, taxes and collection costs paid to third parties in connection with the license of Referable Product(s) to such Qualified Lead. 1.4 "Referable Products" means the Products listed on Schedule D-1. 1.5 "Referring Party" means Converge, Inc., a Delaware corporation, the Permitted Subcontractors (as defined below) and any other permitted subcontractors (subject to VNS' approval pursuant to Section 2.1 of this Exhibit D). 1.6 "Registration Form" means a registration form in the format attached hereto as Schedule D-2. 2. Referral of Prospective End Users by a Referring Party to VNS. 2.1 Referrals of Prospective End Users. From time to time during the Product Term, at the discretion of Converge and/or the Referring Parties, as applicable, Converge and/or the Referring Parties may (a) contact by telephone or in person an individual with authority to purchase one or more Referable Products for himself/herself or on behalf of an entity or a division or operating unit of an entity, (b) identify that such individual, or the entity, division or operating unit that he/she represents, has a need for such Referable Product(s) and (c) confirm that such individual, or the entity, division or operating unit that he/she represents, has an interest in purchasing such Referable Product(s). Converge shall not, and shall cause the Referring 39 Parties to not, enter into agreements or arrangements with resellers or agents to sell, market or promote the Referable Products without the prior written consent of VNS, which consent may be withheld in VNS' sole discretion; provided, however that VNS hereby consents to Converge entering into subcontracts to sell, market and promote the Referable Products in accordance with this Schedule D with mutually acceptable third parties ("Permitted Subcontractors"). The form of each subcontract under this Schedule D shall be subject to the prior approval of VNS, such approval not to be unreasonably withheld or delayed. 2.2 Registration of Referrals. To register an individual as a prospective End User or authorized representative of a prospective End User with VNS, Converge or the Referring Party must (a) submit the name of the individual and the prospective End User and other required information to VNS using a Registration Form and (b) receive written confirmation from VNS that VNS accepts the registration of the individual and the prospective End User. VNS shall accept a fully completed registration unless the applicable prospective End User is already a customer of VNS, or the applicable individual is being actively pursued as a previously identified lead by VNS. 2.3 Qualification of Referrals. After VNS' acceptance of a registration of an individual and a prospective End User, VNS shall either qualify such individual and prospective End User in VNS' reasonable business discretion (a "Qualified Lead") or notify Converge or the Referring Party, as applicable, that, in the exercise of its reasonable discretion, VNS has declined to qualify such individual and prospective End User. If, within 180 days after the referral of an individual and a prospective End User that VNS did not qualify, VNS enters into an End User License Agreement with such prospective End User through such individual (or any individual who was directly contacted by the referred individual in connection with making the decision to become an End User), such prospective End User shall be deemed to be a Qualified Lead for the purposes of Section 1.3 of this Exhibit D and Section 2.7 of this Exhibit D. 2.4 Additional Assistance. From time to time, the parties may mutually agree (such agreement not to be unreasonably withheld or delayed) that Converge may provide additional assistance to VNS in connection with the execution and delivery of an End User License Agreements by a certain Qualified Lead. 2.5 Execution and Delivery of End User License Agreement. After receipt of the name of a Qualified Lead, VNS shall use good faith efforts to enter into the then-current standard End User License Agreement with such Qualified Lead. 2.6 No Authority. VNS shall have sole and complete control over the pricing, terms and conditions for the transactions related to the Referable Products. The Referring Parties shall not represent to any prospective End User that Converge or any other Referring Party, if any, has any power whatsoever to bind VNS as to any arrangement with such prospective End Users. 2.7 Payment of Referral Fees by VNS. VNS shall pay commissions (the "Commissions") to Converge, as mutually agreed upon by the parties, within 30 days after the end of each calendar quarter during the term of this Schedule D on all Net Revenue received by VNS during such calendar quarter. All payments will be made in U.S. dollars. All fees and 40 other payments not paid when due shall be subject to late charges of the lesser of (a) 1.5% per month of the overdue amount or (b) the maximum permitted under applicable law. 2.8 Commission or Referral Fee Sharing. Notwithstanding anything to the contrary herein, if Converge works with one or more third party Referring Parties (subject to VNS' approval as set forth in Section 2.1 of this Schedule D) to refer End Users for which Commissions are payable hereunder, VNS shall pay all Commissions to Converge and Converge shall divide such Commissions between Converge and any such third party Referring Parties as agreed upon by Converge and such Referring Parties. 2.9 Expenses. Converge shall be responsible for all costs and expenses, including, but not limited to, travel, trade show and other sales, marketing and promotional expenses incurred in connection with (a) the sale, marketing and promotion of the Referable Products by Converge or a Referring Party and (b) any other responsibilities of, and activities by, Converge or a Referring Party under this Exhibit D. 3. Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH HEREIN, EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THIS EXHIBIT D, THE REFERABLE PRODUCTS AND ITS PERFORMANCE HEREUNDER, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT. 4. Limitations on Liability. EITHER PARTY'S MAXIMUM AGGREGATE LIABILITY TO THE OTHER PARTY HERETO OR ANY THIRD PARTY FOR DAMAGES RELATED TO THIS EXHIBIT D OR THE REFERABLE PRODUCTS OR ITS PERFORMANCE HEREUNDER, WHETHER FOR BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, SHALL NOT EXCEED THE COMMISSIONS PAID TO CONVERGE UNDER THIS EXHIBIT D. IN NO EVENT SHALL EITHER PARTY BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING, BUT NOT LIMITED TO, DAMAGES OR COSTS INCURRED AS A RESULT OF LOSS OF TIME, LOSS OF DATA, LOSS OF PROFITS OR REVENUE), REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF VNS HAS BEEN INFORMED OF THE POSSIBILITY OF ANY SUCH DAMAGES IN ADVANCE. 5. Term and Termination of this Schedule D. 5.1 Term. The provisions of this Exhibit D shall be effective during the Product Term, unless terminated earlier pursuant to Section 5.2 of this Exhibit D. 5.2 Termination. Either party may immediately terminate this Schedule D during the Product Term (a) for cause by written notice to the other party if the other party materially breaches any provision of this Exhibit D and such breach is not remedied within 30 days of such party's receipt of written notice thereof, or (b) if the other party becomes insolvent, files for 41 bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days or makes a general assignment for the benefit of its creditors. 5.3 Effect of Termination. The license rights granted to Converge under this Exhibit D shall automatically terminate upon the effective date of any termination of this Exhibit D. 6. Survival. The following sections of this Schedule D shall survive the termination of expiration of this Schedule D: Section 2.6, Section 2.7, Section 2.8, Section 2.9, Section 3, Section 4, Section 5.3 and this Section 5.4. 42 Schedule D-1 Referable Products Community Products: VerticalNet Community Builder VerticalNet Community Manager Content Products: VerticalNet Content Builder VerticalNet Content Syndicator VerticalNet Content Manager Commerce Products: VerticalNet Auction VerticalNet Exchange VerticalNet Aggregated Catalog VerticalNet Distributed Catalog VerticalNet RFP/RFQ (available 1/31/01) VerticalNet Structured Negotiations (available 1/31/01) Platform: VerticalNet Trade Server 43 Schedule D-2 Registration Form Prospect Information Name and Contact Information of Referred Individual: Estimated licensed Product Net Revenue: Name of Applicable Company, Division or Business Unit (End User): US$____________________________________ Referring Party Sales Executive: Contact History DATE FORMAT COMMENTS Engagement Information List Referable Products to be sold: Brief description of Prospective End User's requirements: Submitted By Converge Manager: Signature and Date: Name: Title: Telephone Number: Email: Acceptance Acknowledgement Approving VNS Manager: Signature and Date: 44 Exhibit E Japan-Restricted Community and Content Products VerticalNet Content Repository Virtual Products - - Article Editor - Virtual Workplace - - Download Editor - Virtual Office - - Storefront Editor - Virtual Eckfield - - E-commerce Center Editor - - Storefront Migration Q/A - - Document Editor - - Document Bucket Editor - - Link Bucket Editor - - Query Editor - - Author Editor - - Source Editor - - Tag Creator - - Tag Editor - - External Tag Treeview - - External Editor Tools VerticalNet Online Tools - - New Online Creation Management - - Existing Online Management Tools VerticalNet Editor Tools - - Online Management - - Ad Manager - - Newsletter Management - - Association Creation/Management - - Buyer's Guide Database Management - - Career Center Creation/Management - - Chat Management - - RFP/RFQ management - - Admin User Management - - Events Calendar Management - - Industry Deals Interface - - Editor's Biography Management - - Discussion Forum Interface - - Survey Management - - User Registration Management - - Bookstore Market Place Management 45 Exhibit F Converge Trademark Usage Guidelines Converge Marks shall always be used in accordance with generally-accepted good trademark practices. 46 Exhibit G Vert Trademark Usage Guidelines 1. Vert Marks must always be used as proper adjectives and must be followed by generic descriptors ending in nouns that are appropriate for the particular Vert Mark. 2. Vert Marks shall never be used in the following manners: (i) as a verb, (ii) as a possessive, (iii) as a noun or (iv) in a plural form. 3. Vert Marks shall never be combined with any other entity's Marks, trade names or product/service names. 4. Vert Marks shall never be shortened, abbreviated, translated into another language or made into acronyms. 5. Vert Marks shall be followed by the appropriate trademark symbol. 6. Vert Marks shall never be used as "meta-tags" or "keywords." 7. Vert Marks shall be identified as belonging to Vert Tech LLC, or used by permission of Vert Tech LLC. 8. If you are licensed to use a Vert Mark consisting of a logo ("Logo"), Vert will provide you with artwork for the Logo. You may not alter this artwork in any way without Vert's prior written permission. 9. Each use of the Logo must include the notice: "This Logo is a registered trademark or service mark of Vert Tech LLC in the United States and/or other countries." 10. All Logos (including, but not limited to, logotypes, trade dress and other elements of product packaging and web sites) may not be imitated in any of your materials without Vert's prior written permission. 11. All Logos may not appear larger and/or more prominent than your own company name, service name, product name, or trademark on any materials. 12. You may not combine the Logo with any other object, including, but not limited to, other logos, words, icons, graphics, photos, slogans, numbers or other design elements. 13. The Logo may not be used as a design feature on any of your materials. 14. Minimum size for the Logo is 1/2" wide. 15. The Logo must stand alone. A minimum amount of empty space must surround the Logo separating it from any other object, such as type, photography, borders, edges, and so on. The required area of empty space around the Logo must be 1/2x, where x equals the height of the Logo. 16. The color version is the preferred way of reproducing the Logo. The Logo consists of a three-dimensional orange, yellow, brown and red-orange upper case "V" suspended above a light blue oblong disk. The color version can be reproduced only as described here. The designated colors are as follows: Color Pantone Four-color process RGB (8-bit) Hex# Orange PMS 157 / M51% Y85% / 254-125-29 / FF6633 Yellow PMS 141 / C04% M30% Y86% / 243-177-34 / FFCC33 Brown PMS 1815 / C30% M97% Y100% K26% / 131-8-1 / 990000 Red-Orange PMS 180 / C02% M91% Y95% / 253-26-9 / FF0000 Light Blue PMS 3125 / C77% Y33% / 58-175-155 / 00CCCC 47 Exhibit H Terms of Use LIMITED LICENSE The Converge Marketplace contains technology, information and other materials, such as text, graphics, logos, button icons, images, audio clips, features and functionality that we have licensed from third parties (collectively "Third-Party Content"). You may use, access and display the Third-Party Content solely in connection with your use of the Converge Marketplace and any services we provide through the Converge Marketplace, and only for so long as you comply with these terms and conditions of use. Any other use, reproduction, modification, distribution or republication of the Third-Party Content without the prior written consent of our third-party licensors is strictly prohibited. COPYRIGHT AND PROPRIETARY RIGHTS The Third-Party Content is the property of our third-party licensors or their licensors and is protected by United States and international copyright law, trademark law and/or patent law, as well as other state, federal and international laws and regulations. Except as expressly stated above, neither we nor our third-party licensors grant any rights to you under any copyrights, trademarks, patents or other laws and regulations respecting the Third-Party Content. DISCLAIMERS NEITHER WE NOR OUR THIRD-PARTY LICENSORS REPRESENT OR WARRANT THAT THE THIRD-PARTY CONTENT IS ERROR-FREE, OR THAT ANY ERRORS IN THE THIRD-PARTY CONTENT CAN OR WILL BE CORRECTED. NOR DO WE OR OUR THIRD PARTY LICENSORS MAKE ANY REPRESENTATIONS OR WARRANTIES ABOUT THE ACCURACY, RELIABILITY, CURRENCY, QUALITY, PERFORMANCE OR SUITABILITY OF ANY THIRD-PARTY CONTENT. TO THE FULLEST EXTENT PERMISSIBLE BY LAW, WE AND OUR LICENSORS DISCLAIM ALL WARRANTIES OF ANY KIND RESPECTING THE THIRD-PARTY CONTENT, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LIMITATIONS OF LIABILITY IN THE EVENT OF ANY PROBLEM WITH THE THIRD-PARTY CONTENT, YOU AGREE THAT YOUR SOLE REMEDY IS TO CEASE USING SUCH CONTENT. UNDER NO CIRCUMSTANCES SHALL WE OR OUR THIRD-PARTY LICENSORS, OR ANY OF OUR OR THEIR RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, DIRECT, INDIRECT, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES, ARISING FROM OR IN CONNECTION WITH THE THIRD-PARTY CONTENT OR YOUR USE OF SUCH CONTENT, WHETHER UNDER A THEORY OF BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, EVEN WE OR OUR THIRD-PARTY LICENSORS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH 48 DAMAGES. THESE LIMITATIONS OF LIABILITY SHALL NOT APPLY TO THE EXTENT PROHIBITED BY LAW. INDEMNIFICATION You agree to defend, indemnify and hold harmless us and our third-party licensors, and our and their respective officers, directors, shareholders, employees, agents and representatives, from and against any and all claims, actions, demands, liabilities, losses or damages (including reasonable legal and accounting fees) arising out of or related to your use of the Third-Party Content or any violation of these terms and conditions of use. THIRD-PARTY BENEFICIARY Our licensors of the Third-Party Content shall be third-party beneficiaries of these terms and conditions of use, and shall be entitled to separately enforce such terms and conditions of use against you. 49 Exhibit I Marketplace Protection Measures and Procedures Converge Web Sites - Marketplace Protection Measures - Deployment of a data-reliability architecture relying on multiple data centers in geographically disparate locations for all core functions of the Converge Web Site - Industry-Standard efforts to restrict access to data centers. - Industry-Standard hardware and software designed to provide transparent failover from one data center to another. - Industry-Standard measures to protect the data centers from damage due to fire, water, storms, flood, vandalism, and other similar events. - Industry Standard use of uninterruptible power supplies for all appropriate data center components. - Deployment of reliable storage media, such as RAID 5 disks. - Active monitoring of failures so as to allow restart of failed systems and replacement of systems in the event of failure, without loss of significant data. - Industry Standard techniques for monitoring of disk and memory usage, including "water-level"-based alarm approaches designed to identify storage media approaching their capacities. Converge Web Sites - Marketplace Response Procedures - Immediately dedicating a team of not less than five Converge Personnel with in-depth knowledge of the hardware and software affected by the applicable Cataclysmic Event to work on a 24X7 basis with Vert Personnel to characterize, diagnose, and resolve any third-party software errors that may be contributing to the Cataclysmic Event. - Providing Vert with a description of the Problem and the conditions that caused it, to the extent know by Converge Personnel. - Supporting Vert's efforts to classify, replicate, diagnose, and correct any Errors that could have caused the Cataclysmic Event. - Providing Vert with access to Converge's computing environment, both electronically and physically. - Providing Vert with access to Converge Personnel and users of the Converge Web Site who may have knowledge of the possible causes of the Error that could have caused the Cataclysmic Event. - Ensuring the availability on an as-needed basis of Converge Personnel from such other providers of software and hardware to Converge as may be necessary to effectuate a Cataclysmic Event Cure. - Providing Vert with access to all documentation, data backups, code libraries, third-party software documentation, third-party software customer support services, and other information and materials as may be necessary to effectuate a Cataclysmic Event Cure. 50 EX-10.17 5 w58938ex10-17.txt 1ST AMENDMENT TO SUBSCRIPTION LICENSE AGREEMENT EXHIBIT 10.17 First Amendment to Subscription License Agreement This First Amendment to Subscription License Agreement ("Amendment") is entered into as of January 31, 2001 by and among VerticalNet, Inc., a Pennsylvania corporation ("VNI"), and VerticalNet Solutions LLC, a Delaware limited liability company that is the successor by merger to Tradeum, Inc. ("VNS"), on the one hand, and Converge, Inc., a Delaware corporation formerly known as eHITEX, Inc. ("Converge"), on the other hand. Background A. VNI, VNS and Converge entered into a Subscription License Agreement dated December 19, 2000 (the "License Agreement"). B. VNI, VNS and Converge desire to amend the License Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definition of High Technology Industry. The definition of "High Technology Industry," set forth in Section 1.23 of the License Agreement, is hereby amended and restated as follows: 1.23 "High Technology Industry" means entities doing business in the computing, electronic components, telecommunications (including cellular) equipment, networking equipment and/or consumer electronics markets. 2. Promotion Efforts and Responsibilities. Section 2.17 of the License Agreement is hereby amended and restated as follows: 2.17 Marketing and Promotion Efforts and Responsibilities. The parties will comply with the provisions set forth in Exhibit D, and will participate in other joint marketing and promotional activities as mutually agreed from time to time. 3. Exhibit D and Related Schedules. The Exhibit D and Schedule D-1, Schedule D-2 and Schedule D-3 attached to the License Agreement upon its execution are deleted in their entirety and replaced with the Exhibit D and Schedule D-1, Schedule D-2, Schedule D-3 and Schedule D-4 attached to this Amendment. 4. Governing Law. This Amendment shall be governed by the laws of the United States of America and of the State of California as applied to agreements entered into and to be performed entirely within California between California residents, excluding its conflicts of law provisions. 5. Ratification. Except as specifically modified by this Amendment, all of the provisions of the License Agreement are hereby ratified and confirmed to be in full force and effect. 1 6. Binding Effect. This Amendment shall be binding upon, and shall inure to the benefit of, VNI, VNS and Converge and their respective successors and permitted assigns. 7. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Amendment shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of authorized representatives of each of VNI, VNS and Converge. For the purposes hereof, a facsimile copy of this Amendment, including the signature pages hereto, shall be deemed an original. IN WITNESS WHEREOF, the undersigned do hereby execute this parties have caused this Amendment to be signed by their duly authorized representatives as of the date first written above in this Amendment. VerticalNet, Inc. Converge, Inc. By: By: ------------------------------- ------------------------------ - ----------------------------------- ---------------------------------- (Print Name) (Print Name) Title: Title: ---------------------------- --------------------------- VerticalNet Solutions LLC By: ------------------------------- - ----------------------------------- (Print Name) Title: ---------------------------- 2 Exhibit D Promotion 1. Definitions. In addition to other terms defined in the Agreement to which this Exhibit D is attached (the "Agreement"), the following defined terms shall have the meanings set forth below when used in this Exhibit D: 1.1. "Commissionable Fees" means (i) any and all License Fees paid under a Qualifying End User License Agreement with respect to either (a) the term (including any renewal term(s)) of such Qualifying End User License Agreement, for any Referable Product(s) licensed thereunder that are listed on the applicable Registration Form registering or re-registering the Qualified Lead with respect to such Qualified End User License Agreement or (b) the period commencing on the commencement date of such Qualifying End User License Agreement and ending on the first anniversary of such date, for all Referable Product(s) other than those listed on such Registration Form, plus (ii) any and all fees and payments (excluding the amount of any payment made to reimburse an expense of VNS or an Affiliate of VNS) paid by a Qualified Lead to VNS or its Affiliate for professional services (including, without limitation, implementation and customization services) and/or Maintenance and Support relating to each such Referable Product during or with respect to its respective time period under clause (i)(a) or (i)(b) as applicable. 1.2. "End User" means a person or entity that has entered into or is licensed under an End User License Agreement with VNS or an Affiliate of VNS to access and use one or more Referable Products. 1.3. "End User License Agreement" means an agreement between VNS or an Affiliate of VNS and a third party to grant such third party (alone or with others (e.g., with one or more of such third party's Affiliates)) any right and/or license to install the Referable Product on computers owned and operated by or for such third party and to access, use and/or enjoy the benefit of such Referable Product. For avoidance of doubt, licensing the access and use of Products as part of or through or via any Converge Marketplace is not an "End User License Agreement." 1.4. "License Fees" means any and all fees and payments, regardless of how denominated, paid for the right to access, use and/or enjoy the benefit of a Referable Product (including without limitation license fees, royalties, user fees, subscription fees, transaction fees and so forth) and/or Maintenance and Support of such Referable Product; provided, however, that (a) "License Fees" with respect to a Referable Product do not include fees and payments for professional services (including, without limitation, implementation and customization services) except to the extent in excess of the then standard rates of VNS and its Affiliates (which standard rates may or may not be the then published list rates of VNS and its Affiliates) and (b) if a Referable Product is licensed in a bundle with other product(s) (including any other Product(s)) or services, in one transaction or a series of reasonably related transactions, then the License Fees attributable to such Referable Product will be its pro rata share of the total fees and payments for 3 all the products and services in the bundle, allocated based on their respective published list prices. 1.5. "Net Revenue" means, with respect to a period of time, the aggregate, world-wide amount of the following: (a) the total Commissionable Fees received by VNI, on a consolidated basis, for such period minus (b) total refunds, returns, surcharges, cancellation charges, taxes, delivery or shipping costs and collection costs associated with Commissionable Fees, if any, suffered or paid by VNI, on a consolidated basis in such period. Net Revenue will be calculated in US Dollars, and Commissionable Fees and other applicable amounts hereunder that are paid in foreign currencies shall be converted into US Dollars for that purpose using the applicable rate of exchange as published in The Wall Street Journal on the date of such payment. 1.6. "Permitted Systems Integrator" means an entity listed on Schedule D-3 and any additional providers of systems integration professional services added to Schedule D-3 by written notice from Converge (subject to VNS' approval pursuant to Section 2.1 of this Exhibit D). Permitted Systems Integrators may be, but are not required to be, subcontractors of Converge. 1.7. "Qualified Lead" means an entity or a division or operating unit of an entity that is both (a) registered or re-registered by via a bona fide, properly completed Registration Form submitted pursuant to Section 2.2 of this Exhibit D and (b) qualified pursuant to Section 2.3 of this Exhibit D. 1.8. "Qualifying End User License Agreement" means an End User License Agreement entered into by VNS or its Affiliate with a Qualified Lead during the period commencing on the date VNS receives a bona fide, properly completed Registration Form registering or re-registering such Qualified Lead pursuant to Section 2.2 of this Exhibit D and ending 180 days after the date such Qualified Lead is qualified pursuant to Section 2.3 of this Exhibit D. 1.9 "Referable Products" means the Products listed on Schedule D-1 plus any additional Products added to Schedule D-1 by mutual written agreement of the parties (not to be unreasonably withheld). 1.10. "Referring Party" means Converge, a Converge Affiliate or a Permitted Systems Integrator, as the case may be. 1.11. "Registration Form" means a registration form in the form of Schedule D-2 to this Exhibit D, pursuant to which a Qualified Lead is registered or re-registered pursuant to Section 2.2 of this Exhibit D. 2. Referral of Prospective End Users by a Referring Party. 2.1. Referrals of Prospective End Users. From time to time during the Product Term, a Referring Party, at its discretion, may: (a) contact individual(s) with authority to purchase licenses for one or more Referable Products under End User License Agreement(s) for himself/herself or on behalf of an entity or a division or operating unit of an entity; (b) identify 4 that such individual, or the entity, division or operating unit that he/she represents, has a need for licensing Referable Product(s) under End User License Agreement(s); and (c) confirm that such individual, or the entity, division or operating unit that he/she represents, has an interest in purchasing licenses to such Referable Product(s) under End User License Agreement(s). Converge and its Affiliates shall not, and each agreement between Converge and Referring Party shall require the applicable Referring Party to not, enter into agreements or arrangements with resellers or sales agents to sell, market or promote the Referable Products without the prior written consent of VNS, which consent may be withheld in VNS' sole discretion; provided, however that VNS hereby consents to Converge entering into subcontracts to sell, market and promote the Referable Products in accordance with this Exhibit D with the Permitted Systems Integrators. Each agreement between Converge and a Referring Party (including, but not limited to, the Permitted Systems Integrators) relating to this Exhibit D shall be substantially consistent with the terms of this Exhibit D and shall be subject to VNS' reasonable approval as to whether such agreement is consistent with this Exhibit D. 2.2. Registration of Referrals. To register or re-register an individual as a prospective End User or authorized representative of a prospective End User with VNS, the Referring Party must submit to VNS a completed Registration Form, with the name of the referred individual that is the prospective End User (or, if the prospective End User is an entity or a division or operating unit of an entity, then the name of the referred individual and the name of such prospective End User) and other information required to complete the Registration Form. A registration shall be deemed accepted by VNS unless, within 10 Business Days after VNS' receipt of the properly completed Registration Form, VNS notifies the Referring Party in writing (with a copy to Converge, if it is not the Referring Party) that the prospective End User identified in the Registration Form is already a customer of VNS or the applicable referred individual is being actively pursued by the VNS sales force as a lead previously identified by VNS, which shall be the only reasons for which VNS may reject a registration proffered by Converge by a properly completed Registration Form. 2.3. Qualification of Referrals. After VNS' acceptance of the registration or re-registration of an individual and prospective End User pursuant to Section 2.2 of this Exhibit D, VNS shall either qualify such referred individual and prospective End User in VNS' reasonable business discretion as a "Qualified Lead" or, within 20 Business Days after VNS' receipt of the completed Registration Form, notify the Referring Party in writing (with a copy to Converge, if it is not the Referring Party) that, in the exercise of its reasonable discretion, VNS has declined to qualify such individual and prospective End User. If, within 180 days after the date VNS declines to qualify a referred individual and a prospective End User, VNS enters into an End User License Agreement with such prospective End User through such referred individual (or any individual who was directly contacted by the referred individual in connection with making the decision to become an End User), then such decline notwithstanding, such prospective End User shall be deemed to be a Qualified Lead, and such End User License Agreement shall be deemed a Qualifying End User License Agreement, for the purposes of this Exhibit D. 2.4. Additional Assistance. From time to time, Converge or another Referring Party may provide such additional assistance to VNS as the parties may mutually agree (such 5 agreement not to be unreasonably withheld or delayed), in connection with the execution and delivery of a Qualifying End User License Agreements by specific Qualified Lead(s). 2.5. Execution and Delivery of a Qualifying End User License Agreement. After registration and certification of a Qualified Lead pursuant to this Exhibit D, VNS shall use commercially reasonable efforts to enter into the then-current standard End User License Agreement with such Qualified Lead within the applicable time period specified in Section 1.9 of this Exhibit D. 2.6. No Authority. VNS shall have sole and complete control over the pricing, terms and conditions for the transactions related to the Referable Products. The Referring Parties shall not represent to any prospective End User that Converge or any other Referring Party has any power whatsoever to bind VNS as to any arrangement with such prospective End Users. 3. Payment. 3.1. Payment of Commissions by VNS. VNS shall pay commissions to Converge as set forth in Schedule D-4 (the "Commissions"), on all Net Revenue for each whole or partial calendar quarter during the term of this Exhibit D. Within 30 days after the end of such calendar quarter, VNS shall report in writing to Converge, by individual Referring Party and in reasonable detail, the Net Revenue and Commissions due for such calendar quarter. VNS' payment to Converge in full of the aggregate total amount of Commissions due (for all Referring Parties; see Section 3.2 of this Exhibit D) shall accompany the report. Commissions shall be calculated and paid in U.S. dollars. All amounts not paid when due shall be subject to late charges of the lesser of (a) 1.5% per month of the overdue amount or (b) the maximum permitted under applicable law. 3.2. Commission Sharing. If the Referring Party is not Converge or if Converge works with one or more other Referring Parties with respect to the registration or re-registration of a Qualified Lead and if a Commission is payable with respect to Net Revenue generated therefrom, then VNS shall pay the resulting Commission to Converge as described in Section 3.1 of this Exhibit D (only the one Commission shall be owing by VNS) and Converge shall be responsible for paying the share of such Commissions owed such Referring Party, in accordance with Converge's separate agreement between Converge and such Referring Party. Said Referring Party shall not be a third party beneficiary hereunder, however. 3.3. Expenses. Except as otherwise agreed pursuant to Section 2.4 of this Exhibit D, VNS shall not be responsible for any costs and expenses, including, but not limited to, travel, trade show and other sales, marketing and promotional expenses, incurred by a Referring Party in connection with (a) the sale, marketing and promotion of the Referable Products by such Referring Party and (b) any other responsibilities of, and activities by, such Referring Party under this Exhibit D. 3.4. Audit Rights. During the term of this Exhibit D and the one year period commencing on the date that the term of this Exhibit D expires or is terminated, Converge shall have the right reasonably to audit, at its expense, the compliance with this Exhibit D by VNS (the 6 "Audited Party") and its Affiliates (together with the Audited Party, the "Auditees"), provided that such audit(s) shall be conducted during normal business hours and in such a manner as not to unreasonably interfere with the operations of the Auditees. Any such audit will be conducted by accountants from a nationally recognized public accounting firm chosen and engaged by Converge. Converge may only conduct one such audit in any 12-month period. If any such audit discloses (a) an underpayment or overpayment of Commissions, then the appropriate party will promptly make the requisite correcting payment to the other party, and (b) an underpayment of Commissions of 10% or more for the period being audited, then the Audited Party shall reimburse Converge for the reasonable fees and other amounts payable by Converge to the public accounting firm that conducts the audit. Converge shall use the information obtained or observed in the audit solely for the purposes of (a) determining whether the Auditees are complying with the terms and conditions of this Exhibit D, and (b) enforcing its rights under this Exhibit D, the Agreement and any applicable laws. All such information shall be treated as Confidential Information of the Audited Party for purposes of the Agreement; provided, however, that Converge may use such information as permitted under clause (b) of the foregoing sentence. VNS shall require each of its Affiliates to permit Converge to conduct the audits authorized hereunder. Converge and its auditor shall not disclose any Confidential Information of the Auditees except as permitted under the Agreement. 4. Disclaimer of Warranties; Limitation of Liability. 4.1. Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH HEREIN, WITH RESPECT TO THIS EXHIBIT D ONLY, EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, THE REFERABLE PRODUCTS AND ITS PERFORMANCE UNDER THIS EXHIBIT D, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON INFRINGEMENT. With respect to this Exhibit D only, Converge shall not, and each agreement between Converge and a Referring Party shall require the applicable Referring Party to not, make any warranty, guarantee or other promise or agreement with respect to the Products. This limitation shall not affect the rights of any End User pursuant to the provisions of the applicable Qualifying End User License Agreement. 4.2. Limitations of Liability. WITH RESPECT TO THIS EXHIBIT D ONLY, EITHER PARTY'S MAXIMUM AGGREGATE LIABILITY TO THE OTHER PARTY HERETO OR ANY THIRD PARTY FOR DAMAGES RELATED TO THIS EXHIBIT D OR THE REFERABLE PRODUCTS OR ITS PERFORMANCE UNDER THIS EXHIBIT D, WHETHER FOR BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, SHALL NOT EXCEED THE COMMISSIONS PAYABLE TO CONVERGE UNDER THIS EXHIBIT D. WITH RESPECT TO THIS EXHIBIT D ONLY, IN NO EVENT SHALL EITHER PARTY BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING, BUT NOT LIMITED TO, DAMAGES OR COSTS INCURRED AS A RESULT OF LOSS OF TIME, LOSS OF DATA, LOSS OF PROFITS OR REVENUE), REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, 7 NEGLIGENCE, STRICT PRODUCT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN INFORMED OF THE POSSIBILITY OF ANY SUCH DAMAGES IN ADVANCE. 5. Term and Termination of this Exhibit D. 5.1. Term. The provisions of this Exhibit D shall be effective during the Product Term, unless terminated earlier pursuant to Section 5.2 of this Exhibit D. 5.2. Termination. Either party may terminate this Exhibit D during the Product Term (a) for cause by written notice to the other party if the other party materially breaches any provision of this Exhibit D and such breach is not remedied within 30 days after such party's receipt of written notice thereof, or (b) if the other party becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days or makes a general assignment for the benefit of its creditors. In addition, if the breach is by VNS of a payment obligation under this Exhibit D, Converge shall also have the right (whether or not Converge has exercised its right to terminate this Exhibit D and notwithstanding anything to the contrary in the Agreement) to offset the amount that is the subject of VNS' breach against any amounts that thereafter may become due and owing by Converge pursuant to the provisions of the Agreement. No breach by VNS of any of its payment obligations under this Exhibit D shall give rise to a right to terminate the Agreement or any rights or obligations of VNS or Converge thereunder except this Exhibit D. The balance of the Agreement shall remain in full force and effect, it being understood that the promotional activities of the parties are not a material part of the bargain between the parties under the Agreement. 5.3. Effect of Termination. Except as specified in Section 5.4 of this Exhibit D, the respective rights and obligations of the parties under this Exhibit D shall automatically terminate upon the effective date of any termination of this Exhibit D. Section 5.2 of this Exhibit D shall apply to this Exhibit D only, and termination of this Exhibit D shall not automatically cause termination of the Agreement to which this Exhibit D is attached nor will it give rise to any rights of any party to terminate the Agreement, it being understood that the promotional activities of the parties are not a material part of the bargain between the parties under the Agreement. Termination of the Agreement shall be governed solely by the applicable provisions of Section 10 thereof. 5.4. Survival. The following sections of this Exhibit D shall survive the termination of expiration of this Exhibit D: Section 1, Section 2.6, Sections 3.1-3.3 with respect to amounts due for periods prior to the date of termination, Section 3.4, Section 4, Section 5.3 and this Section 5.4. 8 Schedule D-1 Referable Products All versions and releases and logical successors of the following Products: Community Products: VerticalNet Community Builder VerticalNet Community Manager Content Products: VerticalNet Content Builder VerticalNet Content Syndicator VerticalNet Content Manager Commerce Products: VerticalNet Auction VerticalNet Exchange VerticalNet Aggregated Catalog VerticalNet Distributed Catalog VerticalNet RFP/RFQ (available 3/31/01) VerticalNet Structured Negotiations (available 3/31/01) Platform: VerticalNet Trade Server 9 Schedule D-2 Registration Form Prospect Information Name and Contact Information of Referred Individual: Name of Applicable End User (either Referred Individual or Company, Division or Business that Referred Individual Represents): Referring Party Sales Executive: Contact History DATE FORMAT COMMENTS Engagement Information Brief description of prospective End User's requirements: List Referable Products applicable to End User's requirements: Submitted By Referring Party: Signature and Date: Name: Title: Telephone Number: Email: Acceptance Acknowledgement Approving VNS Manager: Signature and Date: 10 Schedule D-3 Permitted Systems Integrators* CapGemini Ernst & Young NEC Systems, Inc. H-P Consulting Deloitte Consulting Compaq Global Services * The entities listed on this Schedule D-3 are deemed to include their Affiliates that (a) provide systems integration and other professional services and (b) have been certified by Converge under its Integration Services program. 11 Schedule D-4 Commissions The Commissions due to Converge shall be calculated on a calendar year basis ending on (a) December 31 of the first (partial) calendar year and each full calendar year thereafter and (b) the last day of the term of this Exhibit D for the last (partial) calendar year. The applicable Commissions due for each calendar year shall be determined based upon the aggregate Net Revenues for such year. During the course of each such year, the Commissions paid by VNS to Converge for each calendar quarter shall be determined on a "step" basis pursuant to the chart below, based upon the aggregate Net Revenues through and including the end of such calendar quarter. On or before the first day of the second calendar quarter following the end of each calendar year, VNS shall pay to Converge an amount equal to the difference between the Commissions owing by VNS to Converge for such calendar year and the Commissions paid by VNS to Converge during such calendar year.
Net Revenue Amount Applicable Commission Percentage $1 to $5,000,000 12.5% of such Net Revenue (Greater Than)$5,000,000 to $10,000,000 15.0% of such Net Revenue (Greater Than)$10,000,000 to $20,000,000 17.5% of such Net Revenue (Greater Than)$20,000,000 20.0% of such Net Revenue
The following example illustrates the foregoing: If, during a given calendar year during the term of this Schedule D, VNS receives $15,000,000 of Net Revenue ($2,000,000 during Q1, $3,000,000 during Q2, $4,000,000 during Q3 and $6,000,000 during Q4), the total Commissions due to Converge for such calendar year would equal $2,625,000 ($15,000,000 x 17.5%). Such amount would be paid as follows: $ 250,000 within 30 days after the end of Q1 $ 375,000 within 30 days after the end of Q2 $ 600,000 within 30 days after the end of Q3 $1,050,000 within 30 days after the end of Q4 $ 350,000 on or before the first day of Q2 of the following year 12 EX-10.18 6 w58938ex10-18.txt AMENDED & RESTATED SUBSCRIPTION LICENSE AGREEMENT EXHIBIT 10.18 AMENDED AND RESTATED SUBSCRIPTION LICENSE AGREEMENT This Amended and Restated Subscription License Agreement (this "Agreement") is entered into on this 9th day of October, 2001 and is deemed effective as of October 1, 2001 ("Effective Date") by and between VerticalNet, Inc. ("VNI") and VerticalNet Enterprises LLC, formerly known as Tradeum, Inc. which d/b/a VerticalNet Solutions ("VNS"), on the one hand, and Converge, Inc., a Delaware corporation ("Converge"), on the other hand. RECITALS WHEREAS, VNI, VNS and Converge entered into a Subscription License Agreement dated December 19, 2001, and amended same pursuant to a First Amendment to Subscription License Agreement dated as of January 31, 2001 (the "Original SLA"); and WHEREAS, as a financial accommodation in favor of Converge, VNI, VNS and Converge desire to enter into this Agreement which, as of the Effective Date, will supersede the Original SLA in its entirety, except as specified herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth below, and intending to be legally bound, the parties agree as follows: 1. Amendment and Restatement of Original SLA; Definitions. 1.1 Amendment and Restatement of Original SLA. This Agreement amends and restates the Original SLA in its entirety, except as specified herein. The provisions of this Agreement including, without limitation, the provisions of Section 3.1.1, reflect a financial accommodation in favor of Converge. 1.2 Definitions. As used in this Agreement, the following terms shall have the respective meanings assigned to them below: 1.2.1 "Affiliate" means, when used with reference to a party, any individual or entity directly or indirectly Controlling, Controlled by or under common Control with such party. 1.2.2 "API Documentation" means documentation for a Trade Secret Module that describes its input and output formats and content, and that is sufficient for a person of ordinary skill in the industry to enhance, update and maintain the Products with respect to which the Trade Secret Module's application program interface(s) interact. 1.2.3 "Business Day" means a day other than a Saturday, Sunday or federal holiday. 1.2.4 "Control" (including all derivations thereof) means, with respect to a party, the direct or indirect ownership of at least 50% of the outstanding voting securities of a party, or the right to control the policy decisions of such party. 1.2.5 "Converge Marketplace" means a Public Marketplace operated by or for Converge or any Converge Subsidiary, which Public Marketplace serves (other than through incidental use) only the High Technology Industry, including, without limitation, the Converge Web Site. 1.2.6 "Converge Non-Renewal Election" has the meaning ascribed to such term in Section 9.6 of the Maintenance and Support Agreement. 1.2.7 "Converge Remedy Election Date" means the date on which a Converge Remedy Election (as such term is defined in Section 10.3.2) occurs. 1.2.8 "Converge-Requested Enhancement" has the meaning ascribed to such term in the Maintenance and Support Agreement. 1.2.9 "Converge Subsidiary" means any corporation or other entity that is wholly-owned, directly or indirectly, by Converge. 1.2.10 "Converge Web Site" means a web site owned and operated by or for Converge or any Converge Subsidiary, such as the web site at www.converge.com, or any successor(s) to such web site, which web site or successor(s) shall be designed to serve primarily the High Technology Industry. 1.2.11 "Deliverables" shall mean the "Deliverables" provided by VNS to Converge under the PSA. 1.2.12 "Deployed Products" means Products that have been implemented and are being utilized by Converge, or that are the subject of a statement of work or other similar document executed by Vert and Converge as of the relevant date in question and pursuant to which such Products will be implemented for utilization by Converge, on an ongoing basis in conjunction with the maintenance, enhancement and operation of any Converge Marketplace, including any Enhancements and Maintenance Updates to such Products that have been released as of such date. 1.2.13 "Derivative Works" means works that are based on underlying works and that would be copyright infringements if prepared without the authorization of the copyright owners of the underlying works. 1.2.14 "Documentation" means the documentation for the Products that is made generally available by Vert to users or licensees of such Products and, with respect to Products that have been customized for Converge, any supplemental documentation for such Products that is provided by VNS to Converge pursuant to the Maintenance and Support Agreement. 2 1.2.15 "Enhancement" means a Vert-General Release Enhancement or a Converge-Requested Enhancement. 1.2.16 "Escrow Agreement" means the Software Escrow Agreement among VNI, VNS, Converge and the Escrow Agent entered into pursuant to the Original SLA. 1.2.17 "Escrow Agent" means Fort Knox Escrow Services, Inc. 1.2.18 "Future Products" means any Products of the type described in clause (a) of Section 1.2.30 that are released by Vert after the Effective Date. 1.2.19 "High Technology Industry" means entities doing business in the computing, electronic components, telecommunications (including cellular) equipment, networking equipment and/or consumer electronics markets. 1.2.20 "Initial Deployed Products" means the Deployed Products as of the Effective Date. 1.2.21 "Intellectual Property" shall mean any and all trade secrets, patents, copyrights, trademarks, service marks, trade names, domain names, trade dress, URLs, brand features, know-how and similar rights of any type under the laws of any applicable governmental authority, including, without limitation, all applications and registrations relating to any of the foregoing. 1.2.22 "Intellectual Property Rights" shall mean all rights in and to Intellectual Property. 1.2.23 "Maintenance and Support Agreement" means the Maintenance and Support Agreement dated as of the Effective Date among VNS, VNI and Converge. 1.2.24 "Maintenance and Support Services" has the meaning ascribed to such term in the Maintenance and Support Agreement. 1.2.25 "Maintenance Updates" has the meaning ascribed to such term in the Maintenance and Support Agreement. 1.2.26 "Object Code" means computer programming code in compiled, machine readable format, running, to the extent available, on each of Unix (at least Tru64 and HP-UX) and Windows NT (or their successor operating systems), together with all related end-user or installation manuals and other similar Documentation. 1.2.27 "Party" or "party" means Vert, VNI and/or VNS, as applicable, on the one hand, and Converge on the other hand. 1.2.28 "Personnel" means agents, employees, independent contractors, temporary employees or subcontractors engaged or appointed by Converge, VNI or VNS, respectively. 3 1.2.29 "Product Term" means the period that commenced on the "Effective Date" under the Original SLA and shall end on the soonest of (a) March 31, 2003, (b) the Converge Remedy Election Date, or (c) the Vert Remedy Election Date. 1.2.30 "Products" means (a) all present and future software products and tools, including separately identified modules contained therein, that are owned by VNI or any VNI Subsidiary or licensed by Vert with the right to grant the necessary sublicense right to Converge, except where such sublicense right has been granted to Vert solely for the purpose of reselling the third party software on a stand-alone basis and for which Vert customarily separately charges a substantial additional license fee to its sublicensees, and that are made generally available by VNI or any VNI Subsidiary, on either a stand-alone basis or as part or component of a service or another Product provided by or for VNI or any VNI Subsidiary, during the Product Term (whether or not generally available, in development or planned as of the Effective Date), including, without limitation, the products, tools and separately identified modules on Exhibit A hereto; and (b) all Vert-General Release Enhancements to such software products and tools that are released by Vert during the Product Term, and (c) all Maintenance Updates provided by Vert to Converge under the Maintenance and Support Agreement; and (d) all Converge-Requested Enhancements provided by Vert to Converge under the Maintenance and Support Agreement; and (e) all Vert-Owned Deliverables. 1.2.31 "Professional Services Agreement" means the Professional Services Agreement, dated as of December 19, 2000, between VNS and Converge, which was terminated as of the Effective Date pursuant to the PSA Termination Agreement. 1.2.32 "Prohibited Change in Control of Converge" means the occurrence of (a) a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split or other transaction, as a result of which any person or entity that is a competitor of Vert at the time of such occurrence (i) becomes the beneficial owner (as defined in Rule 13-d under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Converge (or any of its successors or permitted assigns) representing more than 50% of the voting stock of Converge (or of any of its successors or permitted assigns) or representing more than 50% of the combined voting power with respect to the election of directors of Converge's then outstanding securities (or those any of Converge's successors or permitted assigns), (ii) obtains the ability to appoint a majority of the Board of Directors of Converge (or of the Board of Directors or equivalent governing body of any of Converge's successors or permitted assigns), or (iii) obtains the ability to direct the operations or management of Converge (or of any of its successors or permitted assigns), or (b) the sale or other transfer by Converge (or any of its successors or permitted assigns) of all or substantially all of its assets to a competitor of Vert at the time of such sale or transfer or a liquidation or dissolution of Converge (or any of its successors or permitted assigns) where all or substantially all of its assets are distributed to a competitor of Vert at the time of such distribution or transfer. 1.2.33 "Prohibited Change in Control Remedy Election Date" means the date on which a Prohibited Change in Control Remedy Election (as such term is defined in Section 12) occurs. 4 1.2.34 "PSA Termination Agreement" means the Termination Agreement dated as of the Effective Date between VNS and Converge, pursuant to which the Professional Services Agreement was terminated as of the Effective Date. 1.2.35 "Public Marketplace" means (a) an electronic marketplace or exchange through which products or services are offered or sold, which marketplace or exchange may be accessed concurrently by more than one buyer and more than one seller ("many-to-many"), including, without limitation, the public marketplaces or exchanges of the following entities: e2Open, Inc., eChip, Inc. and eConnections, Inc., and (b) virtually private views or instantiations operating within or as a subset of a Public Marketplace ("one-to-many"). Public Marketplace does not include (a) instantiations of an electronic marketplace designed to facilitate purchase and sale transactions solely between only one unique and constant buyer buying from one or many sellers in that marketplace or (b) instantiations of an electronic marketplace designed to facilitate purchase and sale transactions solely between only one unique and constant seller selling to one or many buyers in that marketplace. To the extent a single entity uses any Trade Product to buy and sell using the same instantiation of such Trade Product, it shall be considered a Public Marketplace. For the purposes of this definition, when determining whether one or more buyers or sellers has access to an electronic marketplace or exchange, the following rules shall apply: (i) if one or more Affiliates of a person or entity that has access to an electronic marketplace or exchange have access to the marketplace or exchange, such person or entity and its Affiliate(s) that have access to the marketplace or exchange shall be counted as one buyer or seller, as the case may be, (ii) if one or more divisions or operating units of an entity have access to an electronic marketplace or exchange, such divisions and/or operating units and the entity shall be counted as one buyer or seller, as the case may be, and (iii) if one or more divisions or operating units of Affiliates have access to an electronic marketplace or exchange, such divisions and/or operating units and the Affiliates shall be counted as one buyer or seller, as the case may be. 1.2.36 "Source Code" means computer programming code in human readable, high-level language format, together with all related Documentation (including programmers' notes and annotations, logic flows, etc.). 1.2.37 "Structured Negotiations Product" means the Product that is Structured Negotiation 3.0.6 with Converge customization, as delivered by Vert to Converge for production on August 4, 2001 pursuant to the Original SLA and the Professional Services Agreement. 1.2.38 "Trade Product" means the following Products: (a) VerticalNet Auction; (b) Structured Negotiations Product; (c) VerticalNet RFP/RFQ; (d) VerticalNet Exchange; (e) VerticalNet Catalogs; and (f) all other generally-available Products that enable buyers and sellers to transact through an electronic marketplace or exchange. Separately identified modules will only be considered Trade Products when used in conjunction with Trade Products. 1.2.39 "Trade Secret Module" means any functionally discrete, separately compilable component of a Product, the design of which is not generally known or easily discovered by observation or examination, and with respect to which the Source Code is treated 5 by Vert with a degree of care significantly above and beyond the level with which it normally treats other Source Code, provided that such component includes application program interface(s) sufficient to allow Converge to enjoy benefits substantially similar to those that Converge would have enjoyed if it had obtained Source Code for such component. As of the Effective Date, such Trade Secret Modules include: the Parametric Matching Engine, C2SF engine, C2Hub, Business Publisher and Business Publisher Agent. Trade Secret Modules also shall include functionally discrete components of Future Products that meet the requirements set forth in the first sentence of this paragraph. 1.2.40 "Vert" means VNI, acting through one or more of the VNI Subsidiaries, including, without limitation, VNS. 1.2.41 "Vert-General Release Enhancement" means any modification, improvement or enhancement to a Product that adds program features or functions not previously included therein, including, without limitation, any new version or new release of such Product, but excluding any Converge-Requested Enhancement and/or any Maintenance Update. 1.2.42 "Vert Non-Renewal Election" has the meaning ascribed to such term in Section 9.5 of the Maintenance and Support Agreement. 1.2.43 "Vert-Owned Deliverables" means any "Deliverable" under the Professional Services Agreement that is owned by VNS in accordance with the terms of that Agreement. 1.2.44 "Vert Remedy Election Date" means the date on which a Vert Remedy Election (as such term is defined in Section 10.3.1) occurs. 1.2.45 "VNI Subsidiary" means any corporation or other entity that is wholly-owned, directly or indirectly, by VNI, including, without limitation, VNS. 1.2.46 "Year" means a twelve-month period commencing on the Effective Date or an anniversary of the Effective Date. 2. Products Licenses and Usage. 2.1 License Grant: Converge Marketplace Usage. Vert grants to Converge and the Converge Subsidiaries, on the terms of this Agreement, an irrevocable, perpetual and worldwide (subject to qualification as set forth in Section 2.5), non-exclusive, non-transferable (except in the event of a permitted transfer of this Agreement under Section 14.11), and non-sublicensable (except as expressly permitted under Section 2.3) right and license: 2.1.1 to use, load, store, transmit, execute, copy, distribute internally and as otherwise permitted under this Section 2.1, in any medium or distribution technology whatsoever, known or unknown, display and perform the Products, in Object Code format only, in connection with the creation, maintenance, enhancement and operation of any Converge Marketplace, including unlimited instantiations of the Products in connection therewith; 6 2.1.2 to use the Products in connection with other software products, tools and services that are part of any Converge Marketplace or that are offered on any Converge Marketplace; 2.1.3 to allow third parties to access and use the Products, in Object Code format only, at any Converge Marketplace using browser or other access technology contemplated by the designs of the Products; and 2.1.4 to market, provide and sell to third parties any Converge products and services based on, using, enabled, facilitated and/or implemented by the Products, which products and services are provided by Converge through or via any Converge Marketplace. 2.2 Additional Terms: Converge Marketplace Usage. 2.2.1 No Restrictions on Number of Users. There shall be no restriction on the number of subscribers to or registered users of, or numbers of transactions conducted on or through, any Converge Marketplace. 2.2.2 No Additional Fees. Except as otherwise expressly stated herein, neither Converge nor any Converge Subsidiary shall be obligated to pay any fees to Vert based upon the number of subscribers to or registered users of, or numbers of transactions conducted on or through, any Converge Marketplace. Except as otherwise expressly stated herein, Vert shall not directly charge, or attempt to assess or collect fees from, third-party users for any use of Products through or via use of any Converge Marketplace. 2.2.3 Third Party Licenses. When considering whether to implement any new instantiations of Products, Converge shall consult with Vert and Vert shall inform Converge whether such new instantiations would require Vert to pay any significant third-party license fees in connection therewith. In determining whether to implement such instantiations, Converge shall, in good faith, consider the financial impact on Vert of multiple or additional instantiations and will take that factor, as well as Converge's legitimate, good faith business, financial and technical reasons, into account in making its determination as to the number of instantiations. 2.2.4 Terms of Use. The Converge Marketplace shall include terms and conditions of use with substantially similar legal effect to those included in Exhibit D hereto (the "Terms of Use"). The Terms of Use shall be displayed on the Converge Marketplace in a manner consistent with customary industry practice and users of the Converge Marketplace shall be required to assent to the Terms of Use via click-through, in writing or in some other reasonable manner. Converge shall permit Vert to enforce, and, to the extent reasonably requested, assist Vert in enforcing its respective rights under the Terms of Use against persons and entities acting in violation thereof, to the extent Converge is permitted to do so by law. 2.3 Sublicenses. 2.3.1 Sublicenses to End Users. Converge and the Converge Subsidiaries may grant to third parties ("End Users") non-sublicensable, non-transferable sublicenses to install and use components of the Products required to be installed within such 7 third parties' computing environments (i.e., within their firewalls) for the sole and limited purpose of permitting such End Users to interact, integrate and/or interact with any Converge Marketplace, to include the use of services and products offered at any Converge Marketplace (each, an "End User License"). Converge shall cause all members of the Converge Marketplace to accept membership agreements that are (a) at least as protective of Vert's Intellectual Property Rights as this Agreement and (b) are otherwise consistent with customary and usual agreements of that type in the industry. Converge or the applicable Converge Subsidiary shall provide VNS with the total number of instantiations of each Product component being deployed by End Users each quarter; provided, however, that during any quarter after the first Year in which the number of instantiations of a Product component is less than ten, Converge shall not have to report the number of instantiations of such Product component during such quarter. 2.3.2 Other Sublicenses. Should Converge or the Converge Subsidiaries desire to grant any other sublicenses with respect to the Products, the parties shall in good faith discuss and consider whether and under what conditions Converge and the Converge Subsidiaries would be permitted to grant such other sublicenses, and any license fees and/or revenue share payments with respect thereto. 2.3.3 No Additional Sublicenses. Except as expressly set forth in this Agreement, Converge and the Converge Subsidiaries shall have no rights to sublicense the license rights granted to them hereunder. 2.4 Source Code Delivery and License Rights. 2.4.1 License to Source Code. Subject to the other terms of this Agreement, Vert grants to Converge and the Converge Subsidiaries an irrevocable and perpetual (subject to termination as permitted under Section 2.4.5), worldwide (subject to qualification as set forth in Section 2.5), non-exclusive, non-transferable (except in the event of a permitted transfer of this Agreement under Section 14.11), and non-sublicensable right and license to internally use, load, store, transmit, test, execute, distribute, in any medium or distribution technology whatsoever, known or unknown, display, modify and have modified, and make and have made Derivative Works of, any Source Code furnished to Converge under this Agreement and of the Object Code forms thereof, solely in connection with use of the Products by Converge and the Converge Subsidiaries as permitted under this Agreement. All such modifications and Derivative Works to the Source Code, together with all Object Code forms thereof, shall be owned by Converge without divesting Vert or its licensor's ownership of the underlying Source Code and the Object Code forms thereof, and (b) Converge shall remain permitted to use the underlying Object Code only as part of the Products licensed to Converge hereunder. Converge shall have the right to engage third-party consultants that are Converge-certified system integrators to perform such activities on behalf of Converge; provided, however, that each such third-party consultant shall agree in advance and in writing to be bound by obligations of nondisclosure and nonuse no less stringent than those set forth in this Section 2.4 and in Section 9. Subject to the foregoing sentence, Converge and the Converge Subsidiaries shall not provide any other persons or entities with access to any of the Source Code furnished to Converge under this Agreement. 8 2.4.2 Delivery of Source Code for Structured Negotiations Product. In consideration of the fact that Vert is not obligated to provide Converge with Maintenance and Support Services for the Structured Negotiations Product under the Maintenance and Support Agreement or any other agreement, Vert shall deliver to Converge, within 30 days following the Effective Date, the Source Code for the Structured Negotiations Product (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation) to the extent such Source Code is owned by VNI or any of the VNI Subsidiaries. Except as otherwise expressly stated in Section 2.4.3 below, Vert shall have no obligation to deliver to Converge the Source Code for any Vert-General Release Enhancements or Maintenance Updates to the Structured Negotiations Product. 2.4.3 Delivery of Source Code on Non-Renewal Election. In the event of a Vert Non-Renewal Election under the Maintenance and Support Agreement, Vert shall deliver to Converge, within 30 days following the end of the then-current term of the Maintenance and Support Agreement, the Source Code for all Products that are Deployed Products as of the end of such term (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation), to the extent such Source Code is owned by VNI or any of the VNI Subsidiaries. In the event of a Converge Non-Renewal Election under the Maintenance and Support Agreement, Vert shall deliver to Converge, within 30 days following the end of the then-current term of the Maintenance and Support Agreement, the Source Code for all Initial Deployed Products (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation), to the extent such Source Code is owned by VNI or any of the VNI Subsidiaries. 2.4.4 Source Code for Third-Party Products. With respect to Products that are licensed to VNI or the VNI Subsidiaries by third parties, Vert will reasonably cooperate with Converge to arrange for delivery of the Source Code for such Products to Converge in accordance with the provisions of Section 2.4.2 and Section 2.4.3. 2.4.5 Loss of Rights to Source Code. In the event of a Vert Remedy Election all rights of Converge under Section 2.4.1 to use, load, store, transmit, execute, distribute internally, display, modify and have modified, and make and have made Derivative Works of, any Source Code delivered to Converge under Section 2.4.2 or Section 2.4.3, and to receive further Source Code for any Deployed Products or Initial Deployed Products under Section 2.4.3, shall automatically cease. Furthermore, in the event of a Vert Remedy Election, Converge shall erase, destroy or return to Vert all Source Code delivered to Converge under Section 2.4.2 or Section 2.4.3, together with all copies, modifications and Derivative Works thereof, and, upon Vert's written request, shall certify its compliance with this Section 2.4.5 to Vert in writing. 2.5 Limitation on Worldwide Rights. Notwithstanding any provision to the contrary in this Agreement or in the provisions of the Professional Services Agreement that survive the termination thereof (as set forth in the PSA Termination Agreement), no right or license is granted by Vert to Converge or any of the Converge Subsidiaries to: (a) use, copy, display, perform or transmit the Products listed in Exhibit C as "Japan-Restricted Community Products" or "Japan-Restricted Content Products" (the "Japan-Restricted Community and 9 Content Products") in Japan in connection with the development, marketing, implementation, operation or provision of any Internet-based business-to-business vertical trade community that is based on an industry segment and combines content, community interaction and the ability to conduct business transactions on-line, including sales of products and services to businesses, and that has a URL that ends in the top level domain "________________.co.jp" (a "Japanese Site"); (b) adapt or translate the Japan-Restricted Community and Content Products into Japanese in connection with the development, marketing, implementation, operation or provision of a Japanese Site; or (c) use a Japanese translation of the software code enabling the Japan-Restricted Community and Content Products in Japan. Notwithstanding the foregoing, neither Converge nor any Converge Subsidiary shall be deemed to be using, reproducing, displaying, performing or transmitting the software code enabling the Japan-Restricted Community and Content Products, or a Japanese translation thereof, in Japan if a Converge Web Site containing software code enabling the Japan-Restricted Community and Content Products, or a Japanese translation thereof, is hosted outside Japan and is accessed by a third party inside Japan. 2.6 Use of Documentation. Subject to the other terms of this Agreement, Converge and the Converge Subsidiaries may access and use the Documentation, including by private-labeling said Documentation and by excerpting and/or modifying portions thereof in a manner that is not confusing or misleading, solely in connection with their use (including ancillary uses, such as training, marketing and promotion, etc.) of the Products as permitted under this Agreement. 2.7 Copies. Converge and the Converge Subsidiaries shall be permitted to make a reasonable number of copies of the Products and the Documentation for the purposes allowed by this Agreement, which copies shall be stored at locations under the control of Converge or at the facilities of Converge's third party hosting and disaster recovery service provider(s). Converge agrees to maintain, and shall require the Converge Subsidiaries to maintain, accurate and complete written or electronic records of the number and location of all copies or partial copies of the Products in their possession or control, including all back-up and archival copies. 2.8 Third-Party Hosting. Converge and the Converge Subsidiaries shall have the right to sublicense one or more third-party hosting entities to reproduce, install, publicly perform, publicly display and host any of the Products, in Object Code form, on such third party's servers, subject to the terms of this Agreement. Such sublicenses shall be granted pursuant to written agreements that authorize such third-party hosting entities to host, operate and/or maintain such Products solely on behalf of Converge and the Converge Subsidiaries as permitted hereunder. 2.9 Audit Rights. Each party (the "Auditing Party") shall have the right reasonably to audit, at its expense, the compliance with this Agreement by the other party (the "Audited Party") and its Subsidiaries (together with the Audited Party, the "Auditees"), provided that such audit(s) shall be conducted during normal business hours and in such a manner as not to unreasonably interfere with the operations of the Auditees. Any such audit will be conducted by accountants from a nationally recognized public accounting firm chosen and engaged by the Auditing Party. If any such audit discloses substantial unlicensed use of the Products, the Audited Party shall reimburse the Auditing Party for the reasonable fees and other amounts 10 payable by the Auditing Party to the public accounting firm that conducts the audit. The Auditing Party shall use the information obtained or observed in the audit solely for the purposes of (a) determining whether the Auditees have sufficient license rights for their use of the Products and are otherwise complying with the terms and conditions of this Agreement respecting such use, and (b) enforcing its rights under this Agreement and any applicable laws. All such information shall be treated as Confidential Information of the Audited Party for purposes of this Agreement; provided, however, that the Auditing Party may use such information as permitted under clause (b) of the foregoing sentence. Each party shall require each of its Subsidiaries to permit the other party to conduct the audits authorized hereunder. 2.10 Notice to Users. Converge shall, and shall require the Converge Subsidiaries to, use reasonable efforts to make all users of the Products hereunder (including, without limitation, users of any Converge Marketplace that are permitted to access or use the Products) aware that the Products (a) may only be used subject to the terms and conditions contained in this Agreement and the corresponding Documentation for such Products and (b) may not be copied, transferred or otherwise used in violation of such terms and conditions. 2.11 No Implied Licenses. No license or other rights to the Products or the Documentation are granted, by implication or otherwise, except as expressly set forth in this Agreement. 2.12 Delivery. During the Product Term, subject to the provisions of Section 12, Vert shall offer to deliver to Converge all Future Products and any Vert-General Release Enhancements promptly following the date on which Vert makes the same generally available to its other customers, or, if Vert makes such items available as beta or other early release versions, promptly following the date on which Vert makes the same available in such format to any of its other customers; provided, however, that Vert shall not be obligated to provide Maintenance and Support Services under the Maintenance and Support Agreement for such pre-release versions, and such pre-release versions shall not be used in a production environment without Vert's consent). If Converge elects to implement and deploy any such Future Product or Vert-General Release Enhancement, Vert shall deliver same to Converge pursuant to Section 2.13. As set forth in Section 12 and notwithstanding any other provision in this Agreement to the contrary, the Product Term shall not end upon the occurrence of a Prohibited Change in Control Remedy Election, but Converge's right to receive Future Products released by Vert after the Prohibited Change in Control Remedy Election Date, as well as any Vert-General Release Enhancements to such Future Products, shall automatically terminate. From and after the Prohibited Change in Control Remedy Election Date, until the end of the Product Term, Vert shall only be obligated to deliver to Converge Vert-General Release Enhancements to Products that are Deployed Products as of the occurrence of the Prohibited Change in Control. 2.13 Method of Delivery and Acceptance. Vert will transfer Products and any associated Documentation by remote telecommunications from the Vert place of business, to a Converge computer at a Converge place of business located in the Commonwealth of Massachusetts. If any such Product and/or associated Documentation cannot be delivered via remote telecommunications to a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, such Product and/or Documentation will be installed by Vert on a Converge computer located at a Converge place of business in the Commonwealth of 11 Massachusetts, if any. Converge will not obtain title or possession of any tangible personal property, including any storage media, as a result of the delivery of any Product or associated Documentation under this Agreement. Each Product delivered by Vert to Converge will be deemed accepted by Converge upon Converge's receipt of the complete delivery to a Converge computer located at a Converge place of business. 2.14 Product List. Vert represents that Exhibit A, in the form initially attached to this Agreement, is a reasonably complete and correct list of all Products existing as of the Effective Date. 3. Fees and Payments. 3.1 Fees for Products. 3.1.1 General. (A) The fees for the license rights granted to the Products and for Maintenance and Support Services to be provided during the Product Term are set forth in Part I of Exhibit B hereto. Converge shall pay such fees to VNS in accordance with the provisions of Part I of Exhibit B. In addition, Converge's payment obligations under Section 3.1 and Exhibit B of the Original SLA (described in Part II of Exhibit B hereto) shall survive the amendment and restatement of the Original SLA pursuant to this Agreement on a deferred basis (i.e., not be due and payable as long as the payments described in the first two sentences of this Section 3.1 and in Part I of Exhibit B hereto are made), and such surviving payment obligations are subject to being released in full in accordance with the following provisions of this Section 3.1.1. (B) Subject to the conditions (which may be waived by VNS pursuant to a written waiver signed by an authorized officer of VNS) that (i) Converge pays when due each of the payments required to be made by it under the Part I of Exhibit B hereto and the Maintenance and Support Agreement (and VerticalNet receives good funds in the amount of each such payment) for the period from and including the Effective Date to and including May 1, 2002, (ii) no such payment made by Converge is recovered, recaptured or avoided including, without limitation, by or on behalf of Converge or any bankruptcy trustee or creditor of Converge, on or before the Release Date (defined below), and (iii) Converge does not file for bankruptcy on or before the Release Date, is not subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days or if earlier, the Release Date, and Converge does not make a general assignment for the benefit of its creditors on or before the Release Date, then: (a) upon the receipt by VNS of each payment by Converge under Part I of Exhibit B hereto, Converge's surviving and deferred payment obligations under the Original SLA (set forth in Part II of Exhibit B hereto) shall be reduced by an amount equal to the payment made by Converge (50% of each payment made shall be applied to reduce Converge's surviving payment obligations under the Original SLA next becoming due at the time of application; and 50% of each payment made shall be applied to reduce Converge's surviving payment obligations under the Original SLA last becoming due at the time of application); and (b) effective on the later date (the "Release Date") to occur of August 1, 2002 or the 91st day after Converge has made the payments required to be made by it on May 1, 2002 under Part I of Exhibit B hereto and the 12 Maintenance Agreement, Converge's surviving and deferred payment obligations under the Original SLA (set forth in Part II of Exhibit B hereto) shall be forgiven in full and Converge shall be released from all such surviving and deferred payment obligations in full. (C) If (1) Converge fails to pay when due any of the payments required to be made by it under the Part I of Exhibit B hereto or the Maintenance and Support Agreement (or if VerticalNet does not receive good funds in the amount of any such payment) for the period from and including the Effective Date to and including May 1, 2002 and fails to cure such breach within the applicable cure period specified in this Agreement or in the Maintenance Agreement, as applicable (and Vert does not waive such default and Vert's right to receive such payment pursuant to a written waiver signed by an authorized officer of Vert), or (2) any such payment made by Converge is recovered, recaptured or avoided, or (3) if Converge files for bankruptcy on or before the Release Date, is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days or if earlier, the Release Date, or if Converge makes a general assignment for the benefit of its creditors on or before the Release Date, and Vert does not waive such failure, recovery, recapture, avoidance, filing or occurrence pursuant to a written waiver signed by an authorized officer of Vert, then the conditional reduction of, and agreement to forgive Converge's surviving and deferred payment obligations under the Original SLA (set forth in Part II of Exhibit B hereto) pursuant to the preceding sentence shall automatically be terminated, null and void without any further action by Vert. In such event, any reduction of Converge's surviving and deferred payment obligations under the Original SLA (set forth in Part II of Exhibit B hereto) shall be reversed and all such amounts shall be due and owing by Converge, but such amounts shall be reduced by the amount of any payments that were made by Converge to Vert under Part I of Exhibit B and were not recovered, recaptured or avoided after payment was made. (D) The provisions of this Agreement including, without limitation, the provisions of this Section 3.1, reflect a financial accommodation in favor of Converge. 3.1.2 Converge Remedy Election. Subject to the provisions of Section 3.1.1 relating to the deferral, reduction and release of Converge's payment obligations under Section 3.1 and Exhibit B of the Original SLA (described in Part II of Exhibit B hereto), the only event that shall relieve Converge of its obligation to pay the fees pursuant to Exhibit B shall be a Converge Remedy Election, which event shall relieve Converge of its obligation to pay those fees set forth in Exhibit B that first become due and payable after the Converge Remedy Election Date. For the sake of clarity, subject to the provisions of Section 3.1.1 relating to the deferral, reduction and release of Converge's payment obligations under Section 3.1 and Exhibit B of the Original SLA (described in Part II of Exhibit B hereto), Converge shall remain obligated to pay all fees set forth in Exhibit B that become due on or before the Converge Remedy Election Date, but that have not been paid by Converge on or before the Converge Remedy Election Date. 3.1.3 Vert Remedy Election or Prohibited Change in Control Remedy Election. Notwithstanding the occurrence of a Vert Remedy Election or a Prohibited Change in Control Remedy Election, subject to the provisions of Section 3.1.1 relating to the deferral, reduction and release of Converge's payment obligations under Section 3.1 and Exhibit B of the Original SLA (described in Part II of Exhibit B hereto), Converge shall remain obligated to pay 13 the full amount of all fees set forth in Exhibit B, whether such fees become due before, on or after the Vert Remedy Election Date or the Prohibited Change in Control Remedy Election Date. 3.2 Payments. All payments will be made by Converge in U.S. dollars, without setoff, recoupment or deduction. Amount payable hereunder (other than fees payable under Section 3.1) will be invoiced to Converge by VNS. Payment of such invoiced amounts shall be due within 30 days of Converge's receipt of invoice. All fees and other payments not paid when due shall be subject to late charges of the lesser of (a) 1.5% per month of the overdue amount or (b) the maximum permitted under applicable law. 3.3 Taxes. The fees and other payments specified in this Agreement are exclusive of any sales, use and other taxes on consumption of goods and services ("Sales Taxes"), however designated or levied, based on this Agreement, the delivery of the Products or services under this Agreement, or Converge's or the Converge Subsidiaries' use thereof. In those jurisdictions in which VNS determines it is required to register, collect and remit Sales Taxes, VNS will separately invoice Converge for such Sales Taxes (which invoices shall be payable by Converge as set forth in Section 3.2), collect such Sales Taxes from Converge and remit such Sales Taxes to the proper taxing authority. In those jurisdictions in which VNS has determined that it does not have a collection responsibility, Converge will be required to self-assess and remit any Sales Taxes due on the purchase of taxable property and services acquired under this Agreement. Converge will retain ultimate responsibility and liability for remitting any Sales Taxes due on the purchase of any property and/or services acquired under this Agreement, including, without limitation, any interest, penalties or additions attributable to or imposed on or with respect to any such assessment excluding any taxes imposed upon the net income of either party). Subject to the express provisions of this Agreement, the parties will cooperate and use their commercially reasonable efforts to minimize or avoid, to the maximum extent allowed by law, the obligation to pay any Sales Taxes that may be levied on payments made under this Agreement or otherwise are chargeable by any applicable government authority with respect to the Products or services under this Agreement. 3.4 Tax Withholding. If laws, rules or regulations require withholding of any taxes imposed upon amounts payable to a party hereunder, the other party shall make such withholding payments as required and subtract such withholding payments from the amounts payable to such party. The other party shall submit reasonable proof of payment of the withholding taxes to such party within 30 days after obtaining such proof. The parties agree to fully cooperate with each other, including, without limitation, in the filing of appropriate certificates of tax exemption, to ensure that any withholding payments required to be made by the other party are reduced or avoided to the fullest extent permitted by law. Converge shall be deemed to be the sole payor of payments owed to VNS under this Agreement and shall not have the right to substitute any domestic or foreign affiliate for that purpose, and if Converge reincorporates or otherwise reorganizes as a foreign person that would thereupon cause payments hereunder to VNS to become subject to withholding, then Converge shall comply with applicable laws to the extent required and shall gross up the payments otherwise owed to VNS so that VNS receives, net of withholding taxes, the amounts VNS would have received if Converge had not substituted a foreign person or had remained a domestic person. 14 4. Disclaimer of Warranties. WITH THE EXCEPTION OF THE INDEMNITY PROVIDED IN SECTION 8, VNI AND ALL AFFILIATES OF VNI SPECIFICALLY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, ACCURACY, FITNESS FOR A PARTICULAR PURPOSE, QUIET ENJOYMENT AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS RELATING TO THE PRODUCTS AND ANY SERVICES FURNISHED OR OTHERWISE PROVIDED OR TO BE PROVIDED HEREUNDER. 5. Proprietary Rights. The Products and the Documentation are protected by applicable copyright and other intellectual property laws and international treaty provisions. As between Vert and Converge, but subject to any contrary surviving provisions of the Professional Services Agreement (specified in the PSA Termination Agreement) with respect to Deliverables provided thereunder, and to the rights and licenses granted to Converge hereunder, Vert and its licensors own all right, title and interest (including but not limited to all copyrights, patents, trademarks, trade names and trade secrets and other proprietary rights) in and to the Products and the Documentation. Converge agrees to reproduce all copyright, trademark and other proprietary notices contained on or in the Products or the Documentation, as delivered to Converge, on all copies thereof, and Converge further agrees not to remove or obscure any such notices. Except as expressly set forth in this Agreement, Converge acknowledges and agrees that Vert has no obligation to deliver Source Code under the terms of this Agreement, or to grant Converge any license to use the Source Code form of the Products. Except as expressly permitted hereunder, the Products are not to be licensed, sold, rented, leased or otherwise transferred by Converge. Converge agrees not to (a) decompile, reverse engineer or disassemble or otherwise attempt to reconstruct or discover any Source Code or underlying algorithms of the Products that are provided solely in Object Code form or (b) separate or disassociate any component parts of the Products (it being understood that this restriction shall not restrict Converge from separating or disassociating separately identified modules from Products containing them). Except as expressly set forth in this Agreement and in the surviving provisions of the Professional Services Agreement (set forth in the PSA Termination Agreement), Converge shall not modify or change the Products or the Documentation (except to configure the Products by means of their user-enabled features) in any manner, nor may Converge create any Derivative Works of the Products or the Documentation. The provisions of this Section 5 shall apply equally to the Converge Subsidiaries and Converge shall ensure that any Converge Subsidiaries provided with access to or use of the Products are bound thereby. 6. Source Code Escrow. 6.1 Escrow Materials. Vert has delivered to the Escrow Agent, to be held in escrow pursuant to the Escrow Agreement, true and complete copies of the Source Code for the Initial Deployed Products (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation, with the understanding that Vert may remove the Source Code for any Trade Secret Module from escrow at the time it places its corresponding API Documentation into escrow, but excluding the Source Code for the Structured Negotiations Product) owned by VNI or any of the VNI Subsidiaries and existing as of the Effective Date. Promptly following the date on which any other Product owned by VNI or any the VNI Subsidiaries becomes a Deployed Product under this Agreement, 15 or an Enhancement or Maintenance Update for a Deployed Product becomes generally available, but in any event at least once per calendar quarter, Vert shall deliver to the Escrow Agent the Source Code for such other Deployed Products, Enhancements and Maintenance Updates (including, with respect to Trade Secret Modules, either the Source Code for such Trade Secret Modules or their corresponding API Documentation, with the understanding that Vert may remove the Source Code for any Trade Secret Module from escrow at the time it places its corresponding API Documentation into escrow) to be held in escrow pursuant to the provisions of the Escrow Agreement. All of the foregoing materials delivered by Vert to the Escrow Agent are referred to herein as the "Escrow Materials." 6.2 Release Events. For purposes of this Agreement, the following shall be deemed "Release Events": (a) VNI becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days, or makes a general assignment for the benefit of its creditors; (b) Vert ceases to offer any Maintenance and Support Services for a Deployed Product other than as a result of the expiration or termination of the Maintenance and Support Agreement in accordance with its terms; (c) a Vert Non-Renewal Election occurs and Vert fails to deliver to Converge the Source Code for all Deployed Products within the time period specified in Section 2.4.3 above; or (d) a Converge Non-Renewal Election occurs and Vert fails to deliver to Converge the Source Code for all Initial Deployed Products within the time period specified in Section 2.4.3 above. Notwithstanding anything to the contrary herein, (i) if the claimed Release Event is under clause (b) above, only the Escrow Materials for the Product that is the subject of the Release Event, together with all associated Maintenance Updates and Enhancements, shall be subject to release to Converge hereunder; (ii) if the claimed Release Event is under clause (c) above, only the Escrow Materials for the Deployed Products, together with all associated Maintenance Updates and Enhancements, shall be subject to release to Converge hereunder; and (iii) if the claimed Release Event is under clause (d) above, only the Escrow Materials for the Initial Deployed Products, together with all associated Maintenance Updates and Enhancements, shall be subject to release to Converge hereunder. 6.3 Delivery of Escrow Materials. Should Converge desire to obtain any Escrow Materials due to the occurrence of a Release Event, Converge shall provide Vert and the Escrow Agent with written notice thereof. The Escrow Agent shall be instructed to promptly provide a copy of such notice to Vert. Unless the Escrow Agent receives written notice from Vert contesting the occurrence of such Release Event within 15 days after Vert receives such copy of Converge's notice, the Escrow Agent shall be instructed to deliver the relevant Escrow Materials to Converge forthwith. In the event Vert contests the occurrence of the Release Event, the matter shall be resolved as expeditiously as possible in accordance with the dispute resolution provisions of the Escrow Agreement and the Escrow Materials shall remain in escrow until such time as the matter is resolved. 6.4 Fees of Escrow Agent. Converge shall pay all fees and other amounts payable to the Escrow Agent under the Escrow Agreement. 6.5 Escrow of Third-Party Products. With respect to Products that are licensed to VNI or the VNI Subsidiaries by third parties, Vert will reasonably cooperate with Converge to arrange for true and complete copies of the Source Code for such Products to be 16 deposited with the Escrow Agent and to be held in escrow in accordance with the provisions of this Section 6 and the Escrow Agreement. 7. Limitation of Liability. 7.1 Disclaimer of Certain Damages. 7.1.1 Consequential and Similar Damages. TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, REVENUES OR BUSINESS OPPORTUNITIES) HOWEVER CAUSED AND REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF THE PARTY HAS BEEN INFORMED OF THE POSSIBILITY OF ANY SUCH DAMAGES IN ADVANCE. The foregoing limitation is independent of any exclusive remedies available to either party under this Agreement including any failure of such remedies. 7.1.2 Loss of Data, Usage, Etc. VERT DOES NOT GUARANTEE THAT THE PRODUCTS WILL OPERATE WITHOUT ERROR OR INTERRUPTION AND VERT SHALL NOT BE RESPONSIBLE FOR ANY DAMAGES ASSOCIATED WITH LOSS OF DATA OR INTERRUPTION OR LOSS OF USE OF PRODUCTS RESULTING THEREFROM. 7.2 Sole Remedy. IF A CLAIM OR CAUSE OF ACTION IS ATTRIBUTABLE TO A PRODUCT OR ANY SERVICES PROVIDED OR TO BE PROVIDED UNDER THIS AGREEMENT, THE REMEDIES SET FORTH IN THIS AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THE MAINTENANCE AND SUPPORT AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. IF A CLAIM OR CAUSE OF ACTION IS ATTRIBUTABLE TO A MAINTENANCE UPDATE, ENHANCEMENT OR ANY SERVICES PROVIDED UNDER THE MAINTENANCE AND SUPPORT AGREEMENT, THE REMEDIES SET FORTH IN THE MAINTENANCE AND SUPPORT AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THIS AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. For the sake of clarity, the parties acknowledge that claims concerning Vert's ownership of and Converge's license rights to any Maintenance Updates, Enhancements or associated Documentation shall be deemed to have arisen under this Agreement, that claims with respect to Vert's delivery of any Vert-General Release Enhancements or associated Documentation, or the performance or non-performance of any Vert-General Release Enhancements, shall be deemed to have arisen under this Agreement, and that claims with respect to Vert's delivery of any Maintenance Updates, Converge-Requested Enhancements or associated Documentation, or the performance or non-performance of any Maintenance Updates or Converge-Requested Enhancements, shall be deemed to have arisen under the Maintenance and Support Agreement. NO LIABILITY SHALL EXTEND UNDER THIS AGREEMENT TO 17 ANY THIRD PARTY (INCLUDING, BUT NOT LIMITED TO, ANY AFFILIATES OF VNI OTHER THAN VNS, OR THEIR LICENSORS) IF NOT INVOLVED IN THE DEVELOPMENT, LICENSING OR DELIVERY OF THE PRODUCTS OR ANY SERVICES HEREUNDER. 7.3 Maximum Aggregate Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE MAXIMUM LIABILITY OF EACH PARTY TO THE OTHER OR TO ANY THIRD PARTY FOR CLAIMS FOR DAMAGES, OR CLAIMS FOR INDEMNIFICATION UNDER SECTION 8, IF ANY, RELATING TO THIS AGREEMENT OR THE PRODUCTS OR SERVICES PROVIDED OR TO BE PROVIDED HEREUNDER, WHETHER FOR BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE OR OTHER TORT, STRICT PRODUCT LIABILITY, THE FAILURE OF ANY LIMITED REMEDY TO ACHIEVE ITS ESSENTIAL PURPOSE, OR OTHERWISE, SHALL NOT EXCEED: (I) FOR ALL CLAIMS IN THE AGGREGATE, $3,000,000, AND (II) FOR ANY INDIVIDUAL CLAIM, THE GREATER OF $1,000,000 PER PRODUCT OR THE LIST PRICE OF SUCH PRODUCT AS OF THE DATE ON WHICH THE CLAIM OR CAUSE OF ACTION FIRST AROSE. THE FOREGOING LIMITATIONS ON EACH PARTY'S AGGREGATE LIABILITY TO THE OTHER SHALL BE IN ADDITION TO ANY FEES AND OTHER AMOUNTS DUE AND OWING UNDER SECTION 3. FOR PURPOSES OF THIS SECTION 7.3, THE TERM "PARTY" MEANS CONVERGE ON THE ONE HAND, AND VNI AND VNS COLLECTIVELY ON THE OTHER HAND, SO THAT AS TO VNI AND VNS THE LIMITATIONS IN THIS SECTION 7.3 ARE COLLECTIVE LIMITATIONS AND NOT SEPARATE LIMITATIONS FOR EACH OF VNI AND VNS. 7.4 Exceptions. THE LIMITATIONS OF LIABILITY CONTAINED IN THIS SECTION 7 SHALL NOT APPLY WITH RESPECT TO (A) ANY CLAIMS OF BODILY INJURY OR DAMAGE TO TANGIBLE PERSONAL PROPERTY RESULTING FROM WILLFUL MISCONDUCT OR GROSS NEGLIGENCE, (B) ANY BREACH OF THE PROVISIONS GOVERNING LICENSE RIGHTS AND RESTRICTIONS IN SECTION 2, (C) ANY BREACH OF THE CONFIDENTIALITY OBLIGATIONS IN SECTION 9, OR (D) LIABILITY FOR PAYMENT OF INTEREST ADDED BY A COURT OF LAW OR AN ARBITRATION PANEL TO A JUDGMENT ENTERED IN ANY ACTION OR PROCEEDING UNDER THIS AGREEMENT. 7.5 Duty to Mitigate. Each party will have a duty to take reasonable steps to mitigate damages for which the other party is responsible. 7.6 Acknowledgement. Each of the parties acknowledge that the disclaimers and limitations set forth in this Section 7 are an essential element of this Agreement between the parties and that the parties would not have entered into this Agreement without such disclaimers and limitations. 18 8. Indemnification. 8.1 By Vert. 8.1.1 Vert Indemnity. Vert agrees to defend and hold Converge and its officers, directors, employees and agents harmless from and against any suit, claim or action by any unaffiliated third party (a "Converge Claim") alleging that any of the Products, when used within the scope of this Agreement and its corresponding Documentation, infringe upon or misappropriate any U.S. patent, European Union Office patent, patent of a country in the European Union, copyright or trade secret of a third party. Vert further agrees to indemnify Converge and its officers, directors, employees and agents for any damages, costs, liabilities, expenses (including, without limitation, attorneys fees) and settlement amounts payable to unaffiliated third parties in connection with such Converge Claims. The foregoing obligations shall not extend to any Converge Claims arising out of or related to (a) a modification of the Products by or at the direction of anyone other than Vert, to the extent that such modification is the cause of such infringement; (b) a combination of the Products with any third party software or equipment neither recommended, approved or authorized by Vert in writing, whether in any Documentation for the Product or otherwise, to the extent that such combination is the cause of such infringement; (c) portions of the Products that are developed based on unique specifications or requirements provided or selected by Converge, to the extent that such portion is the cause of such infringement; (d) with respect to any Initial Deployed Product, any infringement claims concerning any U.S. patent, European Union Office patent or patent of a country in the European Union issued after the Effective Date; and (e) with respect to any other Product, any infringement claims concerning any U.S. patent, European Union Office patent or patent of a country in the European Union issued after the date such Product becomes a Deployed Product. For the purposes of this Section 8.1, the term "Products" shall exclude the Vert-Owned Deliverables and Converge-Requested Enhancements. 8.1.2 Converge Obligation. Vert's obligations to defend, indemnify and hold Converge harmless are subject to Converge (a) giving Vert prompt written notice of any such Converge Claim; (b) giving Vert sole control over the defense and settlement of any such Converge Claim; (c) providing full cooperation for the defense of any such Converge Claim, at Vert's expense; and (d) not entering into any settlement or compromise of any such Converge Claim without Vert's prior written approval. 8.1.3 Mitigation. If Converge is enjoined or is reasonably likely to be enjoined from using any Products as permitted hereunder by reason of any actual or threatened Converge Claim for which Vert is required to indemnify Converge under Section 8.1.1, Vert will, at its own expense, exercise the first of the following remedies that is practicable: (i) obtain for Converge the right to continue to use, sell and license the Products as permitted under this Agreement; (ii) modify Products so they are non-infringing and functionally equivalent in all material respects to the infringing Products; or (iii) replace the Products, or other affected Products, with non-infringing ones that are functionally equivalent in all material respects to the infringing Products; provided, however, that Vert may seek to provide the remedies in (ii) or (iii) above prior to seeking to provide the remedy in (i) above only if such decision would not have a significant adverse impact on Converge's ability to provide uninterrupted products or services to its customers; provided, however, that with respect to infringement claims concerning U.S. 19 patents, European Union Office patents or patents of a country in the European Union, Vert shall in no event be required to incur costs or expenses in excess of $1,000,000, in the aggregate and regardless of the number of claims involved, in performing its obligations under this Section 8.1.3. If all of the remedies set forth in the preceding sentence are neither technically feasible nor available on commercially reasonable terms, then Vert may, or if the following remedy is requested by Converge, then Vert shall, require the return of the affected Products and pay to Converge the list price charged by Vert for such Products and, with respect to Converge-Requested Enhancements, the amount paid by Converge for such Enhancements. 8.1.4 Sole Remedy. IF A CLAIM OR CAUSE OF ACTION RELATING TO THE INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHT IS ATTRIBUTABLE TO A PRODUCT (BUT EXCLUDING ANY VERT-OWNED DELIVERABLES), THE REMEDIES SET FORTH IN THIS SECTION 8, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT THAT SURVIVE IN ACCORDANCE WITH THE PSA TERMINATION AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO CONVERGE FOR SUCH CLAIM OR CAUSE OF ACTION. IF A CLAIM OR CAUSE OF ACTION RELATING TO THE INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHT IS ATTRIBUTABLE TO A DELIVERABLE OR ANY SERVICES PROVIDED UNDER THE PROFESSIONAL SERVICE AGREEMENT (EXCLUDING ANY UNDERLYING PRODUCTS (OTHER THAN VERT-OWNED DELIVERABLES) INCLUDED IN SUCH DELIVERABLES), THE REMEDIES SET FORTH IN THE PROFESSIONAL SERVICES AGREEMENT THAT SURVIVE IN ACCORDANCE WITH THE PSA TERMINATION AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THIS AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO CONVERGE FOR SUCH CLAIM OR CAUSE OF ACTION. 8.2 By Converge. 8.2.1 Converge Indemnity. Converge agrees to defend and hold Vert and its officers, directors, employees and agents harmless from and against any suit, claim or action by any unaffiliated third party (a "Vert Claim") relating to (a) the operation of and/or business conducted on or through any Converge Marketplace, except to the extent that the occurrence giving rise to such Vert Claim is a suit, claim or action by any unaffiliated third party alleging that any Product, when used within the scope of the rights granted to Converge under this Agreement, infringes upon or misappropriates any U.S. or foreign patent copyright, trade secret or other intellectual property rights of a third party, but such exception shall not apply to the extent that the alleged infringement or misappropriation (1) arises out of or relates to (A) a modification of the Product by Converge or at the direction of Converge by anyone other than Vert, to the extent that such modification is the cause of such infringement; (B) a combination of the Product with any third party software or equipment neither recommended, approved or authorized by Vert in writing, whether in any Documentation for the Product or otherwise, to the extent that such combination is the cause of such infringement; or (C) portions of the Product that are developed based on unique specifications or requirements provided or selected by Converge, to the extent that such portion is the cause of such infringement; and (2) concerns any 20 U.S. patent, European Union Office patent or patent of a country in the European Union issued on or before the date on which such modified, combined or developed Product is first implemented or utilized by Converge on an ongoing basis in conjunction with the maintenance, enhancement and operation of the Converge Marketplace (such date, a "Converge Modification Deployment Date"); (b) the use of any Product outside the scope the rights granted to Converge under this Agreement; or (c) any claim associated with any Converge product or service to the extent not based on Products or service provided by Vert hereunder. Converge further agrees to indemnify Vert and its officers, directors, employees and agents for any damages, costs, liabilities, expenses (including, without limitation, attorneys fees) and settlement amounts payable to unaffiliated third parties in connection with such Vert Claims. 8.2.2 Vert Obligation. Converge's obligations to defend, indemnify and hold harmless Vert are subject to Vert (a) giving Converge prompt written notice of any such Vert Claim; (b) giving Converge sole control over the defense and settlement of any such Vert Claim; (c) providing full cooperation for the defense of any such Vert Claim, at Converge's expense; and (d) not entering into any settlement or compromise of any such Vert Claim without Converge's prior written approval. 8.3 Expiration of Obligations. The rights and obligations of each party under this Section 8 shall automatically terminate with respect to any Converge Claims not identified by Converge to Vert in writing, and any Vert Claims not identified by Vert to Converge in writing, as of the second anniversary of (a) with respect to Converge Claims concerning any Initial Deployed Product, the Effective Date; (b) with respect to Converge Claims concerning any other Product, the date on which such Product becomes a Deployed Product; and (c) with respect to Vert Claims, the sooner of the applicable Converge Modification Deployment Date or the date the Product Term ends. 9. Confidential Information. 9.1 Definition of Confidential Information. "Confidential Information" as used in this Agreement shall mean any and all proprietary or non-public information of a party (including, without limitation, any Source Code furnished by or to Converge hereunder) whether in oral, written or other tangible form that the party disclosing the information (the "Discloser") designates as being confidential or which, under the circumstances surrounding disclosure, the receiving party (the "Recipient") knows or has reason to know should be treated as confidential. 9.2 Nondisclosure and Nonuse Obligations. Each of the parties, as Recipient, agrees that such Recipient will not use, disseminate, or in any way disclose any Confidential Information of the other party, as Discloser, to any person, firm or business, except to the extent necessary for the performance of such party's obligations or the enjoyment of such party's rights and benefits hereunder, and for any other purpose such Discloser may hereafter authorize in writing. Each of the parties, as Recipient, agrees that such Recipient shall treat all Confidential Information of the other party, as Discloser, with the same degree of care as such Recipient accords to such Recipient's own Confidential Information, but in no case less than reasonable care. Each of the parties, as Recipient, agrees that such Recipient shall disclose Confidential Information of the other party, as Discloser, only to those of such Recipient's employees who need to know such information, and such Recipient certifies that such Recipient employees have 21 previously agreed, either as a condition to employment or in order to obtain the Confidential Information of the Discloser, to be bound by terms and conditions substantially similar to those terms and conditions applicable to such Recipient under this Agreement. Each of the parties, as Recipient, shall immediately give notice to the other party, as Discloser, of any unauthorized use or disclosure of Discloser's Confidential Information. Each of the parties, as Recipient, agrees to assist the other party, as Discloser, in remedying any such unauthorized use or disclosure of Discloser's Confidential Information. 9.3 Exclusions from Nondisclosure and Nonuse Obligations. The obligations under this Section 9 of each of the parties, as Recipient, with respect to any portion of the Confidential Information of the other party, as Discloser, shall not apply to such portion that Recipient can document: (a) was in the public domain at or subsequent to the time such portion was communicated to Recipient by Discloser through no fault of Recipient; (b) was rightfully in Recipient's possession free of any obligation of confidence at or subsequent to the time such portion was communicated to Recipient by Discloser; (c) was developed by employees or agents of Recipient independently of and without reference to any information communicated to Recipient by Discloser; or (d) was communicated by Discloser to an unaffiliated third party free of any obligation of confidence. A disclosure by either of the parties, as Recipient, of Confidential Information of the other party, as Discloser, either (i) in response to a valid order by a court or other governmental body; (ii) as otherwise required by law; or (iii) as necessary to establish the rights of either party under this Agreement, shall not be considered to be a breach of this Agreement by Recipient or a waiver of confidentiality for other purposes; provided, however, that Recipient shall provide prompt prior written notice thereof to Discloser to enable Discloser to seek a protective order or otherwise prevent such disclosure. 9.4 Confidentiality of this Agreement. The parties hereto agree to keep the terms of this Agreement confidential and not to divulge any part thereof to any third party except: (a) with the prior written consent of the other party; (b) to any governmental body having jurisdiction to request and to read the same; (c) as otherwise may be required by law or legal process; or (d) to legal counsel representing either party. Notwithstanding the foregoing, no disclosure of this Agreement shall be made pursuant to clauses (b) or (c) of the foregoing sentence without the disclosing party first giving the other party reasonable notice prior to the intended disclosure so as to allow the other party sufficient time to seek a protective order or otherwise assure the confidentiality of this Agreement as that other party shall deem appropriate. Each party agrees not to file this Agreement as an exhibit to its SEC filings without first redacting and requesting confidential treatment for any information reasonably considered by the other party to be confidential. Such other party shall inform the first party of any such information it wishes to redact and request confidential treatment for within five Business Days following the date such other party is requested to do so in writing. Nothing herein shall prohibit either party from complying with applicable securities or other laws, rules or regulations. 10. Term; Events of Default; and Remedies. 10.1 Term. The term of this Agreement shall commence upon the Effective Date and continue in perpetuity unless terminated by parties in accordance with the provisions of Section 14.1. 22 10.2 Events of Default. The occurrence of any one or more of the following acts, events or occurrences shall constitute an "Event of Default" under this Agreement: (a) either party becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days, or makes a general assignment for the benefit of its creditors; (b) either party breaches any material provision of this Agreement (excluding a payment breach by Converge of the type described in clause (c) below, which is covered by such clause (c)) and the result is the non-breaching party experiencing a substantial deprivation of the benefits to which the non-breaching party is entitled under this Agreement, or of the value of the non-breaching party's Intellectual Property Rights, which material breach is not cured by the breaching party within 45 days after the breaching party's receipt of the non-breaching party's written notice specifying the breach in detail; provided, however, that if the breach is of such a nature that it may be cured, but it may not reasonably be cured within such 45-day period, the non-breaching party may not terminate this Agreement unless such breach is not cured by the breaching party on or before the 90th day after the breaching party's receipt of the non-breaching party's notice of breach if breaching party has commenced substantial efforts to cure the breach within the initial 45-day period and has continued in good faith to work to cure the breach as soon as reasonably practicable thereafter, or (c) Converge fails to pay when due any amounts payable under Section 3.1 and Exhibit B hereto and fails to cure such breach within three (3) Business Days after Vert gives Converge written notice specifying the breach. 10.3 Remedies. 10.3.1 Remedies of Vert. Immediately upon the occurrence of an Event of Default by Converge under Section 10.2(a), (b) or (c), Vert shall have the right, but not the obligation, to make a "Vert Remedy Election," exercisable by delivering written notice thereof to Converge within 10 Business Days after the occurrence of such Event of Default by Converge. Vert shall not have the right to terminate this Agreement upon the occurrence of an Event of Default by Converge under Section 10.2(a), (b) or (c) or any other breach by Converge under this Agreement. 10.3.2 Remedies of Converge. Immediately upon the occurrence of an Event of Default by Vert under Section 10.2, Converge shall have the right, but not the obligation, to make a "Converge Remedy Election," exercisable by delivering written notice thereof to Vert within 10 Business Days after the occurrence of such Event of Default by Vert. Converge shall not have the right to terminate this Agreement upon the occurrence of an Event of Default by Vert under Section 10.2 or any other breach by Vert under this Agreement. 11. Effect of Remedy Election. Upon the occurrence of a Vert Remedy Election or a Converge Remedy Election, the Product Term shall end effective on the Vert Remedy Election Date or the Converge Remedy Election Date, as applicable, and each party shall erase, destroy or return to the other party all copies of the Confidential Information of or provided by such party, and, upon such other party's written request, shall certify its compliance with this Section 11 to the other party in writing. Effective as of the Vert Remedy Election Date or the Converge Remedy Election Date, as applicable, Converge's right to receive Future Products released by Vert thereafter, as well as any Vert-General Release Enhancements to such Future Products, shall automatically terminate. Notwithstanding the foregoing provisions of this Section 11, (a) with respect to and for so long as any licenses granted to Converge respecting Products survive a 23 Vert Remedy Election or a Converge Remedy Election, as applicable, Converge shall not be required to erase, destroy or return such Products or any Confidential Information of VNI or any of the VNI Subsidiaries respecting such Products, and (b) with respect to and for so long as any licenses granted to Converge respecting Source Code survive a Converge Remedy Election, Converge shall not be required to erase, destroy or return such Source Code or any Confidential Information of VNI or any of the VNI Subsidiaries respecting such Source Code. With respect to the payment obligations of Converge relating to the effect or lack of effect of a Converge Remedy Election or Vert Remedy Election, respectively, the provisions of Section 3.1.2 and/or Section 3.1.3 shall apply. 12. Prohibited Change in Control of Converge. If a Prohibited Change in Control of Converge shall occur at any time during the term of this Agreement, Vert shall have the right, but not the obligation, to make a "Prohibited Change in Control Remedy Election," exercisable by delivering written notice thereof to Converge within 10 Business Days after Vert receives written notice of the occurrence of the Prohibited Change in Control of Converge, or the Prohibited Change in Control of Converge is publicly announced. Upon the occurrence of a Prohibited Change in Control Remedy Election, the Product Term shall not end but Converge's right to receive Future Products released by Vert after the Prohibited Change in Control Remedy Election Date, as well as any Vert-General Release Enhancements to such Future Products, shall automatically terminate. From and after the Prohibited Change in Control Remedy Election Date, until the end of the Product Term, Vert shall only be obligated to deliver to Converge Vert-General Release Enhancements to Products that are Deployed Products as of the occurrence of the Prohibited Change in Control. With respect to the payment obligations of Converge relating to the lack of effect of a Prohibited Change in Control Remedy Election the provisions of Section 3.1.3 shall apply. 13. Compliance with U.S. Export Laws. Converge acknowledges that the laws and regulations of the United States may restrict the export and re-export of commodities and technical data of United States origin, including the Products and the Documentation in any medium. Each party agrees that it will not export or re-export the Products or the Documentation in any form without the appropriate United States and foreign government licenses. 14. General. 14.1 Termination and Survival. This Agreement and all rights and licenses granted herein may be terminated only upon written agreement of the parties. Upon any such termination, Section 1, Section 2.9, Section 4, Section 5, Section 7, Section 8, Section 9, Section 13 and Section 14 shall survive. 14.2 Notices. All notices permitted or required under this Agreement ("Notices") shall be in writing and shall be delivered as follows with notice deemed given as indicated (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; or (c) by certified or registered mail, return receipt requested, five days after deposit in the mail. All Notices shall be properly addressed as follows, or to such other addresses as may be specified in a Notice given hereunder: 24 If to VNI or VNS: with a copy to: Attn: General Counsel Attn: Michael L. Pillion VerticalNet, Inc. Morgan, Lewis & Bockius, LLP 507 Prudential Road 1701 Market Street Horsham, Pennsylvania 19044 Philadelphia, Pennsylvania 19103 If to Converge: Attn: General Counsel Converge, Inc. Four Technology Drive Peabody, MA 01960 14.3 Force Majeure. Except for the obligation to pay monies due, neither party shall be liable hereunder by reason of any failure or delay in the performance of its obligations hereunder (except for the payment of money) on account of strikes, riots, insurrection, fires, flood, storm, explosions, acts of God, war, governmental action, labor conditions, earthquakes, or any other cause which is beyond the control of such party. 14.4 Waiver. An effective waiver under this Agreement must be in writing signed by the party waiving its right. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of subsequent breaches of that or any other provision hereof. 14.5 Severability. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable or invalid as a whole, and, in such event, such provision shall be changed and interpreted so as to best accomplish the objectives of such provisions within the limits of applicable law or applicable court decisions. 14.6 Headings. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. 14.7 No Solicitation. During the Product Term and for a period of one year thereafter, Converge and Vert each agree not to directly or indirectly solicit, encourage or cause others to solicit or encourage any employees or individual independent contractors of the other party to terminate their employment or independent contracting relationship with the other party and become an employee or independent contractor of the soliciting party or its Affiliate. This provision does not prohibit a party's responding to unsolicited employment inquiries and/or any indirect solicitations and other employment activities (e.g., job postings, advertising of positions) that are not specifically targeted at any particular individual. In the event of a Vert-Non-Renewal Election, the provisions of this Section 14.7 shall cease to apply with respect to Converge's solicitation or encouragement of any of the VNE Service Personnel (as such term is 25 defined in the Maintenance and Support Agreement) to terminate their employment or independent contracting relationship with Vert and become an employee or independent contractor of Converge or its Affiliate. 14.8 Choice of Law; Waiver of Jury Trial; Limitation of Action. This Agreement and performance under this Agreement shall be governed by the laws of the United States of America and of the Commonwealth of Pennsylvania as applied to agreements entered into and to be performed entirely within Pennsylvania between Pennsylvania residents, excluding its conflicts of law provisions. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to this Agreement must be commenced no later than two years from the date on which the cause of action arose. 14.9 No Agency. Nothing contained herein shall be construed as creating any agency, partnership or other form of joint enterprise between the parties or to allow either party to bind the other or incur any obligation on its behalf. 14.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of both parties hereto. For the purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed an original. 14.11 Assignment. A party may assign this Agreement to any Affiliate. Otherwise, neither party may assign this Agreement without the other party's prior written consent (not to be unreasonably withheld). No transfer of this Agreement by operation of law or change in Control of a party, including, without limitation, by merger, consolidation or sale or other transfer of equity interests, shall be considered an assignment for purposes of this Section 14.11. However, if a Prohibited Change in Control of Converge occurs, Vert shall have the right to make a Prohibited Change in Control Remedy Election under Section 12. This Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 14.12 No Third-Party Beneficiaries. Except as expressly stated in Section 8, nothing in this Agreement is intended to confer benefits, rights or remedies unto any person or entity other than the parties and their successors and permitted assigns. 14.13 Non-Exclusive Agreement. Except as expressly stated herein, this Agreement is not exclusive as to either party, and, subject to the express provisions of this Agreement, each party will have the right to conduct any other business in which it may now or hereafter be engaged. 14.14 Entire Agreement. This Agreement, together with the PSA Termination Agreement, the Maintenance and Support Agreement and the Escrow Agreement, are the entire 26 agreement between Vert and Converge relating to the subject matter of this Agreement. This Agreement shall supersede any prior agreement or understanding, whether written or oral, and any other communications between Vert and Converge relating to the subject matter of this Agreement. This Agreement may only be amended by a writing specifically referencing this Agreement, which has been signed by authorized representatives of each party. 27 IN WITNESS WHEREOF, the undersigned do hereby execute this parties have caused this Agreement to be signed by their duly authorized representatives as of the date first written above in this Agreement. VerticalNet, Inc. Converge, Inc. By:__________________________________ By:________________________________ _____________________________________ ___________________________________ (Print Name) (Print Name) Title:_______________________________ Title:_____________________________ VerticalNet Enterprises LLC By:__________________________________ _____________________________________ (Print Name) Title:_______________________________ 28 Exhibit A Current Products VERTICALNET(TM) APPLICATIONS: Auction/Reverse Auction Exchange Aggregated Catalog Distributed Catalog RFQ Structured Negotiations Spend Analysis VERTICALNET(TM) TOOLS (FOR INTERNAL DEVELOPMENT USE ONLY): Ontology Builder XEM Visibility Portal Content Publisher Intelligent Publishing Agent VERTICALNET(TM) PLATFORM: XEM Platform 29 Exhibit B Fees Part I The fees due and owing from Converge under Section 3.1 of the Agreement to which this Exhibit is Attached are as follows: $4,500,000 payable on the Effective Date $4,500,000 payable on November 1, 2001 $4,000,000 payable on December 1, 2001 $4,500,000 payable on February 1, 2002 $4,500,000 payable on May 1, 2002 Part II Converge's payment obligations under the Original SLA that survive the amendment and restatement of the Original SLA but are to be deferred and reduced pursuant to Section 3.1 of the Agreement to which this Exhibit is Attached, subject to the conditions set forth in such Section 3.1, are as follows: $12,500,000 payable on January 31, 2002 $12,500,000 payable on July 31, 2002 $12,500,000 payable on January 31, 2003 $7,500,000 payable on July 31, 2003 30 Exhibit C Japan-Restricted Community and Content Products VERTICALNET CONTENT REPOSITORY VIRTUAL PRODUCTS - - Article Editor - Virtual Workplace - - Download Editor - Virtual Office - - Storefront Editor - Virtual Eckfield - - E-commerce Center Editor - - Storefront Migration Q/A - - Document Editor - - Document Bucket Editor - - Link Bucket Editor - - Query Editor - - Author Editor - - Source Editor - - Tag Creator - - Tag Editor - - External Tag Treeview - - External Editor Tools VERTICALNET ONLINE TOOLS - - New Online Creation Management - - Existing Online Management Tools VERTICALNET EDITOR TOOLS - - Online Management - - Ad Manager - - Newsletter Management - - Association Creation/Management - - Buyer's Guide Database Management - - Career Center Creation/Management - - Chat Management - - RFP/RFQ management - - Admin User Management - - Events Calendar Management - - Industry Deals Interface - - Editor's Biography Management - - Discussion Forum Interface - - Survey Management - - User Registration Management - - Bookstore Market Place Management 31 Exhibit D Terms of Use LIMITED LICENSE The Converge Marketplace contains technology, information and other materials, such as text, graphics, logos, button icons, images, audio clips, features and functionality that we have licensed from third parties (collectively "Third-Party Content"). You may use, access and display the Third-Party Content solely in connection with your use of the Converge Marketplace and any services we provide through the Converge Marketplace, and only for so long as you comply with these terms and conditions of use. Any other use, reproduction, modification, distribution or republication of the Third-Party Content without the prior written consent of our third-party licensors is strictly prohibited. COPYRIGHT AND PROPRIETARY RIGHTS The Third-Party Content is the property of our third-party licensors or their licensors and is protected by United States and international copyright law, trademark law and/or patent law, as well as other state, federal and international laws and regulations. Except as expressly stated above, neither we nor our third-party licensors grant any rights to you under any copyrights, trademarks, patents or other laws and regulations respecting the Third-Party Content. DISCLAIMERS NEITHER WE NOR OUR THIRD-PARTY LICENSORS REPRESENT OR WARRANT THAT THE THIRD-PARTY CONTENT IS ERROR-FREE, OR THAT ANY ERRORS IN THE THIRD-PARTY CONTENT CAN OR WILL BE CORRECTED. NOR DO WE OR OUR THIRD PARTY LICENSORS MAKE ANY REPRESENTATIONS OR WARRANTIES ABOUT THE ACCURACY, RELIABILITY, CURRENCY, QUALITY, PERFORMANCE OR SUITABILITY OF ANY THIRD-PARTY CONTENT. TO THE FULLEST EXTENT PERMISSIBLE BY LAW, WE AND OUR LICENSORS DISCLAIM ALL WARRANTIES OF ANY KIND RESPECTING THE THIRD-PARTY CONTENT, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LIMITATIONS OF LIABILITY IN THE EVENT OF ANY PROBLEM WITH THE THIRD-PARTY CONTENT, YOU AGREE THAT YOUR SOLE REMEDY IS TO CEASE USING SUCH CONTENT. UNDER NO CIRCUMSTANCES SHALL WE OR OUR THIRD-PARTY LICENSORS, OR ANY OF OUR OR THEIR RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, DIRECT, INDIRECT, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES, ARISING FROM OR IN CONNECTION WITH THE THIRD-PARTY CONTENT OR YOUR USE OF SUCH CONTENT, WHETHER UNDER A THEORY OF BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, EVEN WE OR OUR THIRD-PARTY LICENSORS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH 32 DAMAGES. THESE LIMITATIONS OF LIABILITY SHALL NOT APPLY TO THE EXTENT PROHIBITED BY LAW. INDEMNIFICATION You agree to defend, indemnify and hold harmless us and our third-party licensors, and our and their respective officers, directors, shareholders, employees, agents and representatives, from and against any and all claims, actions, demands, liabilities, losses or damages (including reasonable legal and accounting fees) arising out of or related to your use of the Third-Party Content or any violation of these terms and conditions of use. THIRD-PARTY BENEFICIARY Our licensors of the Third-Party Content shall be third-party beneficiaries of these terms and conditions of use, and shall be entitled to separately enforce such terms and conditions of use against you. 33 EX-10.19 7 w58938ex10-19.txt MAINTENANCE AND SUPPORT AGREEMENT EXHIBIT 10.19 MAINTENANCE AND SUPPORT AGREEMENT This Maintenance and Support Agreement (this "Agreement") is entered on this 9th day of October, 2001 and is deemed effective as of October 1, 2001 (the "Effective Date"), by and between VerticalNet, Inc. ("VNI") and VerticalNet Enterprises LLC, formerly known as Tradeum, Inc. which d/b/a VerticalNet Solutions ("VNE"; collectively with VNI, "Vert"), on the one hand, and Converge, Inc. ("Converge") on the other hand. RECITALS WHEREAS, VNI, VNE and Converge have entered into Amended and Restated Subscription License Agreement effective as of the date hereof (the "Subscription License Agreement") pursuant to which Vert has licensed to Converge certain proprietary software products; and WHEREAS, Converge desires to obtain and VNE is willing to provide certain maintenance and support services with respect to such products on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth below, and intending to be legally bound, the parties agree as follows: AGREEMENT 1. Definitions. 1.1 "Affiliate" means, when used with reference to a party, any individual or entity directly or indirectly Controlling, Controlled by or under common Control with such party. 1.2 "Business Day" means a day other than a Saturday, Sunday or federal holiday. 1.3 "Control" (including all derivations thereof) means, with respect to a party, the direct or indirect ownership of at least 50% of the outstanding voting securities of a party, or the right to control the policy decisions of such party. 1.4 "Converge-Requested Enhancement" means any modification, improvement or enhancement to a Product that is developed by VNE at the specific request of Converge as part of the Professional Services provided hereunder. 1.5 "Documentation" means the documentation for the Supported Products that is made generally available by Vert to users or licensees of such Supported Products and, with respect to Supported Products that have been customized for Converge, any supplemental documentation for such Supported Products that is provided by VNE to Converge. 1.6 "Enhancement" means a Vert-General Release Enhancement or a Converge-Requested Enhancement. 1.7 "Error" means a failure of a Supported Product to substantially conform to its corresponding Documentation (or if there is no such Documentation, to its closest reasonable equivalent). 1.8 "Initial Term" is defined in Section 9.1 below. 1.9 "Intellectual Property" shall mean any and all trade secrets, patents, copyrights, trademarks, service marks, trade names, domain names, trade dress, URLs, brand features, know-how and similar rights of any type under the laws of any applicable governmental authority, including, without limitation, all applications and registrations relating to any of the foregoing. 1.10 "Intellectual Property Rights" shall mean all rights in and to Intellectual Property. 1.11 "Maintenance and Support Services" means the services described in Section 2 below. 1.12 "Maintenance Update" means any workaround, bug fix or other software code for a Supported Product that is primarily designed to correct an Error in or other Problem caused by such Supported Product. 1.13 "Object Code" means computer programming code in compiled, machine readable format, running, to the extent requested under a Work Plan or SOW, on each of Unix (at least Tru64 and HP-UX) and Windows NT (or their successor operating systems), together with all related end-user or installation manuals and other similar documentation. 1.14 "Party" or "party" means Vert, VNI and/or VNE, as applicable, on the one hand, and Converge on the other hand. 1.15 "Personnel" means agents, employees, independent contractors, temporary employees or subcontractors engaged or appointed by Converge, VNI or VNE, respectively. 1.16 "Problem" means a Severity Level 1, 2, 3 or 4 problem with a Supported Product (whether or not attributable or believed to be attributable to an Error), as such problems are described in greater detail in Exhibit A hereto. 1.17 "Problem Report" means a report by Converge of a Problem with respect to a Supported Product, which report indicates the Problem and identifies its Severity Level. 1.18 "Professional Services" means services performed or to be performed by VNE hereunder with respect to the development of Converge-Requested Enhancements, the implementation of or migration to new Products or Enhancements, customer installations of the Products, training with respect to use or operation of the Products or any Enhancements (including training designed to enable Converge to provide Level 1 support for the Supported Products), consulting services with respect to the Products or their hardware or other application and system software environments, or any other services described in Section 3 below. 2 1.19 "Quarterly Allocation" means the quarterly allocation of Services being made available to Converge hereunder, as specified in greater detail in Exhibit C attached hereto. 1.20 "Renewal Term" is defined in Section 9.1 below. 1.21 "Services" means all of the services provided or to be provided by VNE under this Agreement, including, without limitation, the Maintenance and Support Services and the Professional Services. 1.22 "Source Code" means computer programming code in human readable, high-level language format, together with all related documentation (including programmers' notes and annotations, logic flows, etc.). 1.23 "Support Day" means Monday through Friday, excluding VNE-recognized holidays. 1.24 "Support Hours" means the hours between 8:00 a.m., Eastern Time, and 5:00 p.m., Eastern Time on Support Days. 1.25 "Support Request" means a question, inquiry or other support request by Converge with respect to a Deployed Product, but excluding any Problem Report or request for an Enhancement. Should any question, inquiry or other support request by Converge include or encompass a Problem Report, the portion of such question, inquiry or other support request that is a Problem Report shall be treated as such and the remainder shall be treated as a Support Request. 1.26 "Supported Products" means the Deployed Products, as such term is defined under the Subscription License Agreement, but excluding the Structured Negotiations Product, as such term is defined under the Subscription License Agreement. 1.27 "Term" means the Initial Term and any Renewal Term(s). 1.28 "Vert-General Release Enhancement" shall have the meaning ascribed to such term under the Subscription License Agreement. 1.29 "VNE Service Personnel" means the VNE personnel primarily responsible for performing the Services hereunder, including any such personnel identified on Exhibit C attached hereto. 2. Maintenance and Support Services. 2.1 General. The Maintenance and Support Services provided by VNE hereunder shall encompass responding to Problem Reports and Support Requests, and providing Converge with Maintenance Updates, as more particularly described in, and subject to the provisions of, this Agreement. 2.2 Converge Support Personnel. Only authorized personnel designated by Converge ("Converge Support Personnel") may communicate Problem Reports and Support 3 Requests to VNE. The number of Converge Support Personnel will not exceed seven persons without VNE's prior approval. The initial Converge Support Personnel shall be identified to VNE in writing within 10 business days following the Effective Date. Converge may change the Converge Support Personnel on written notice to VNE; provided, however, that Converge shall use reasonable efforts not to change the Converge Support Personnel more frequently than once every 30 days. All replacement personnel shall be required to participate in Support Training as described in Section 3.3 below. Converge Support Personnel will be the "single point of contact" for the Maintenance and Support Services provided by VNE under this Section 2. 2.3 Method of Reporting. All Problem Reports and Support Requests shall be communicated by the Converge Support Personnel to VNE as follows: (1) via telephone at 1-877-249-1423, or such other telephone number(s) as VNE may provide to Converge from time to time, or (2) via electronic mail to support.solutions@verticalnet.com, or such other e-mail address(es) as VNE may provide to Converge from time to time, or (3) in person to VNE Service Personnel (if any) on Converge premises at the time; provided, however, that the Converge Support Personnel shall communicate all Severity Level 1 and Severity Level 2 Problems to VNE via method (1) or method (3) above. Converge shall classify all Problems reported to VNE according to the Problem Severity Levels listed in Exhibit A attached hereto. 2.4 Support Responsibilities. Converge and the Converge Support Personnel shall be responsible for providing "Level 1" (help desk-type support) support to both Converge personnel (internal help desk) and Converge users (external help desk), for each of the Supported Products on which VNE has provided training as set forth in Section 3.3 below. Subject to the provisions of this Section 2, VNE shall be responsible for providing "Level 2" (responding to technical inquiries) and "Level 3" (code fixes) support for such Supported Products. In the case of Supported Products for which Converge is providing Level 1 support, Converge shall not escalate Problem Reports or Support Requests to VNE until such Problem Reports or Support Requests have been reasonably escalated through the "Level 1" support procedures of Converge. In addition, Converge shall conduct reasonable problem identification and isolation activities to determine whether or not a given problem relates to the Products (i.e., whether a "Problem" as defined exists). Converge shall not escalate Problem Reports or Support Requests to VNE prior to conducting such activities or if Converge has determined that the Problem Report or Support Request does not relate to the Supported Products. 2.5 Additional Information for Problems. With respect to each Problem reported to VNE, Converge shall provide, at the time the Problem Report is communicated to VNE and to the extent known to or reasonably ascertainable by Converge, information that will enable VNE to reproduce (in as complete a step-by-step manner as is reasonably possible), or verify the existence of the Problem, plus any additional information regarding the Problem that Converge believes will assist in the diagnosis thereof and response thereto. The parties shall reasonably cooperate to obtain and provide to VNE any additional information about the reported Problem that may be relevant to diagnosing and responding thereto. In the event that Converge is unable to make a determination based on the problem identification and isolation activities described in Section 2.4 or reproduce, or provide the information necessary for VNE to diagnose or reproduce, any Problem, Converge may request VNE's assistance in performing identification and isolation or reproducing the Problem and/or generating or documenting such information. 4 2.6 Response to Problem Reports. VNE shall use its reasonable best efforts to provide Converge with an initial response to and status reports for all Problems reported by Converge, and to resolve all Problems identified, in accordance with the provisions of Exhibit B attached hereto; provided, however, that VNE shall have no further obligation to respond to or attempt to diagnose or resolve a Problem once it is determined not to be attributable to Errors. VNE will review all Problem Requests submitted by Converge at the Problem Severity Level indicated by Converge unless another Problem Severity Level is clearly warranted. In the event of a reasonable uncertainty, the parties will assume a higher Severity Level for a Problem until they have sufficient information to make a determination that a lower Severity Level is warranted. If, at Converge's request, VNE responds to a Problem at a Severity Level that is higher than what proves to be the actual Severity Level of the Problem, or if VNE's review of a Problem reported by Converge establishes that the Problem was not due to an Error, Converge shall pay or reimburse VNE for all incremental fees and expenses reasonably incurred by VNE in performing such activities. 2.7 Response to Support Requests. VNE shall respond to all Support Requests submitted by Converge within a reasonable period of time, taking into consideration the nature of the Support Request, its impact on Converge's business operations and any Problem Reports or other Support Requests VNE is responding to at such time. 2.8 Tracking Procedures. VNE will maintain procedures and systems designed to ensure that Problem Reports and Support Requests submitted by Converge are properly logged and tracked. In addition, VNE will provide to Converge a weekly status log of Problem Reports and Support Requests currently being tracked. Such report shall identify, as appropriate, each Problem Report or Support Request as submitted by Converge, the Severity Level for each identified Problem, the date and time each Problem Report or Support Request was received by VNE, an assessment of the Problem Report or Support Request and an action plan detailing the proposed method of resolution, and an estimated time schedule for delivery of any necessary Error corrections. 2.9 Remote Access. Converge shall provide VNE with remote access, via modem, the Internet or some other remote communications method mutually agreed-upon by the parties and subject to Converge's network security procedures and requirements, to Converge's servers on which the Supported Products are installed for the sole and limited purpose of enabling VNE to fulfill its obligation to provide Maintenance and Support Services hereunder. Converge shall be responsible for all costs associated with providing data network connectivity at the point of connectivity to Converge's data network. The parties will share equally in the cost of such connectivity between VNE's facilities and Converge's facilities (including all associated telecommunications charges). VNE shall not be responsible for any delay in providing Maintenance and Support Services under this Agreement to the extent such delay is due to Converge's adoption of unreasonable network security procedures or requirements. 2.10 Provision of Maintenance Updates. VNE shall provide Converge with Maintenance Updates as VNE makes them generally available to its other customers. Converge agrees to install in the recommend environments all Maintenance Updates within a reasonable time following the date they are provided by VNE, taking into consideration any testing and customization required by Converge (the parties expect that the time for such installation 5 generally will not exceed 90 days). Should Converge find one or more material deficiencies in any Maintenance Update, Converge shall promptly identify such deficiencies to VNE in reasonable detail. 2.11 Method of Delivery. VNE will transfer to Converge all Maintenance Updates, and any associated Documentation, by remote telecommunications from the VNE place of business, to a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, if any. If any such Maintenance Update and/or associated Documentation cannot be delivered via remote telecommunications to a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, such Maintenance Update and/or Documentation will be installed by VNE on a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, if any. Converge will not obtain title or possession of any tangible personal property, including any storage media, as a result of the delivery of any Maintenance Update or associated Documentation under this Agreement. 2.12 Acceptance. Each Maintenance Update will be deemed accepted by Converge upon Converge's receipt of the complete delivery thereof to a Converge computer located at a Converge place of business. 2.13 License Rights. The scope of Converge's license rights to all Maintenance Updates shall be as set forth in the Subscription License Agreement. Except as may be set forth in the Subscription License Agreement, Converge acknowledges and agrees that Vert has no obligation to deliver Source Code for any Maintenance Update, or to grant Converge any license to use the Source Code form of any Maintenance Update. 2.14 Tracking of Maintenance Updates. VNE will maintain procedures and systems designed to ensure that all Maintenance Updates are compatible with previous versions of the Supported Products and any previously provided Maintenance Updates and Enhancements. 2.15 Modifications by Converge. Converge may notify VNE at least 10 Business Days in advance, through the Problem reporting process above, of Converge's desire to modify any Supported Product, or the hardware and other application and system software environment for any Supported Product. Within 10 Business Days of VNE's receipt of Converge's written notice, VNE will provide Converge with any recommendations that VNE may have as to how Converge should implement the desired modification. VNE shall have no responsibility for any Problems, Errors or other issues with respect to the Supported Products that are due to Converge's failure to ask for or follow any such recommendations of VNE. 3. Professional Services. 3.1 Project Managers. Each of Converge and VNE shall appoint a Project Manager to coordinate such party's activities with respect to the Professional Services hereunder. The initial VNE Project Manager shall be Michael Decker and the initial Converge Project Manager shall be Farooq Ahmad. Either party may change its Project Manager on notice (via e-mail or in some other reasonable fashion not necessarily in accordance with the express notice 6 provisions of this Agreement) to the other party's Project Manager and Relationship Manager at any time. 3.2 Monthly Work Plans. As reasonably requested by either party, the Converge Project Manager and the VNE Project Manager will conduct planning meetings to determine the Professional Services that VNE will provide to Converge for each month during the Term. In connection with each such planning meeting, the Converge Project Manager and the VNE Project Manager will jointly prepare a written work summary or plan (each, a "Work Plan") indicating the Professional Services to be performed by VNE for such month. The Work Plan shall identify those Professional Services that the Project Managers anticipate can be performed without causing VNE to materially exceed (on a pro-rata monthly basis for the given quarter, unless otherwise mutually agreed upon in writing) the Quarterly Allocation for any quarter during the Term. All Professional Services that the Project Managers anticipate will cause VNE to materially exceed (on a pro-rata monthly basis for the given quarter, unless otherwise mutually agreed upon in writing) the Quarterly Allocation shall either be separately identified in the applicable Work Plan or performed by VNE pursuant to a Statement of Work prepared in accordance with the following provisions of this Section 3. The Converge Project Manager and the VNE Project Manager may amend any Work Plan upon their written agreement at any time. 3.3 Training to Converge. VNE will provide, and the Work Plans will encompass as appropriate, VNE providing reasonable training and available training materials to enable Converge to provide Level 1 support for the Supported Products ("Support Training"). Support Training will include both introductory training reasonably in advance of when new Supported Products are put into production by Converge and periodic refreshers as appropriate when Maintenance Updates and Vert-General Release Enhancements are released. Support Training will be provided at mutually agreed locations and times. 3.4 Environment and Deployment Process. As part of the Professional Services provided by VNE, VNE will create a document entitled, "Environment and Deployment Process." This document will detail the recommended Supported Product environments and the build and deployment process for the Supported Products. VNE agrees to complete a draft of this document for Converge's review within 30 days following the Effective Date. Converge agrees to review and provide final comments on this draft document within 30 days after receipt thereof. Both parties shall use commercially reasonable efforts to reach a mutual agreement on the document and execute the final document within 90 days following the Effective Date. 3.5 Initial Request and Response. If Converge desires that VNE perform any Professional Services that the Project Managers anticipate would cause VNE to materially exceed (on a pro-rata monthly basis for the given quarter, unless otherwise mutually agreed upon in writing) the Quarterly Allocation, Converge shall submit to VNE a written request for such Professional Services, which request shall detail the Professional Services being requested in reasonable detail. Within 45 days after VNE's receipt of Converge's request for VNE to perform any such Professional Services, VNE shall furnish to Converge a preliminary statement of work (including proposed pricing, which shall take into account any portion of such work that will be covered by a portion of the Quarterly Allocation) under which VNE would be willing to perform such Professional Services for Converge (each, a "Proposed SOW"). VNE may respond to 7 separate requests for Professional Services in a single Proposed SOW; provided, however, that the Proposed SOW will itemize the foregoing information separately for each of the requested Professional Services. 3.6 Finalization of Proposed SOWs. If Converge desires to have VNE provide any Professional Services under the terms of a Proposed SOW, Converge shall notify VNE thereof in writing. Should Converge wish to negotiate the terms of the Proposed SOW, the Converge Project Manager and the VNE Project Manager shall promptly and in good faith discuss and agree upon what revisions, if any, should be made to the Proposed SOW. Should the Converge Project Manager and the VNE Project Manager reach mutual agreement on such revisions, if any, the Proposed SOW shall be finalized and executed by both parties in writing (each, a "Final SOW"). 3.7 Change Orders. Either party may request changes to a previously agreed upon Final SOW. In such event, VNE will inform Converge the impact of such changes. Changes to any Final SOW will be specified in a written change order or amendment to the Final SOW. Neither party shall be bound by any change order or amendment to a Final SOW unless and until such change order or amendment has been executed by both parties in writing. 3.8 Implementation. VNE will use commercially reasonable efforts to perform all Professional Services covered by a Work Plan or Final SOW in accordance with the schedule for performance of such Services set forth therein (or within a reasonable time, with due regard for the consequences of delayed performance, if no such schedule is set forth). Converge will reasonably cooperate with VNE in connection with its performance of such Professional Services as specified in the corresponding Work Plan or Final SOW and as may otherwise be reasonably requested by VNE. VNE shall not be liable for any default or delay in performance of such Professional Services to the extent the same is attributable to the failure of Converge to comply in any material respect with its obligations under this Agreement or any Work Plan or Final SOW. 3.9 Method of Delivery. VNE will transfer to Converge all Converge-Requested Enhancements to Converge, and any associated Documentation, by remote telecommunications from the VNE place of business, to a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, if any. If any such Converge-Requested Enhancement and/or associated Documentation cannot be delivered via remote telecommunications to a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, such Enhancement and/or Documentation will be installed by VNE on a Converge computer located at a Converge place of business in the Commonwealth of Massachusetts, if any. Converge will not obtain title or possession of any tangible personal property, including any storage media, as a result of the delivery of any Converge-Requested Enhancement or associated Documentation under this Agreement. 3.10 Acceptance. Each Converge-Requested Enhancement provided to Converge under a Final SOW will be subject to acceptance testing by Converge in accordance with the provisions of its corresponding Final SOW. All other Converge-Requested Enhancements provided to Converge under this Agreement will be deemed accepted by 8 Converge upon Converge's receipt of the complete delivery thereof to a Converge computer located at a Converge place of business. 3.11 Ownership; License to Vert. Unless otherwise expressly stated in an applicable Work Plan or Final SOW, Vert shall be the sole and exclusive owner of all Converge-Requested Enhancements, but excluding any portions thereof that are or were developed independently by Converge or its Affiliates ("Converge-Independent Materials") and any portions thereof that are Converge Brand Features or Third-Party Materials. Except as the parties may otherwise agree in writing, Converge, to the extent it has the legal right to do so, hereby grants to Vert an irrevocable, perpetual, world-wide, non-exclusive right and license to use, load, store, transmit, execute, copy, market, distribute, in any medium or distribution technology whatsoever, known or unknown, display, perform and sublicense the Converge-Independent Materials and the Third-Party Materials, in both Source Code and Object Code formats, and to make unlimited instantiations thereof, for any and all purposes. As used herein, "Converge Brand Features" means all logos, trademarks, service marks and trade names, brand names and other brand features of Converge and its licensors (other than Vert). As used herein, "Third-Party Materials" means any products or materials of third parties (including Converge's licensors and third-party contractors) to be incorporated into or provided as part of any Converge-Requested Enhancement. Converge shall use reasonable efforts to identify to VNE all relevant Third-Party Materials in the applicable Work Plan or Final SOW. 3.12 License Rights of Converge. The scope of Converge's license rights to each Converge-Requested Enhancement shall be as set forth in the Subscription License Agreement and, if relevant, the applicable Final SOW. Except as may be set forth in the Subscription License Agreement or as the parties may otherwise expressly agree in writing, Converge acknowledges and agrees that Vert has no obligation to deliver Source Code for any Converge-Requested Enhancement, or to grant Converge any license to use the Source Code form of any Converge-Requested Enhancement. 3.13 Installation and Configuration. Converge shall be responsible for installing and configuring any Converge-Requested Enhancements provided by VNE hereunder. Converge may request, and VNE will provide, reasonable assistance to Converge in its efforts to install and configure such Enhancements as part of the Professional Services provided hereunder. 3.14 Third-Party Technology. Except as the parties may otherwise expressly agree in writing, Converge shall be responsible for paying for and, with VNE's assistance, securing license rights to any third-party technology required for the provision or use of any Converge-Requested Enhancements provided under this Agreement. Vert shall use reasonable efforts to identify to Converge all required license rights to third-party technology in the applicable Work Plan or Final SOW. 3.15 Unforseen Costs and Expenses. Notwithstanding anything to the contrary in this Section 3, neither party shall be obligated to incur any costs or expenses in connection with the performance or implementation of a Work Plan or Final SOW unless such Work Plan or Final SOW reasonably contemplates that such party shall be responsible for such costs or expenses, or such party otherwise agrees in writing to incur such costs and expenses. 9 3.16 Escalation Procedures. Should the Converge Project Manager and the VNE Project Manager be unable to reach agreement on any matter within the scope of their discretion under this Section 3, the matter shall be escalated to the parties' respective Relationship Managers for discussion. In addition, should either party believe that the other party has failed to fulfill its obligations under Section 2 or this Section 3 above, the matter shall be escalated to the parties' respective Relationship Managers for discussion. The initial VNE Relationship Manager shall be William Swank and the initial Converge Relationship Manager shall be Francesco DeMarchis. Either party may change its Relationship Manager on notice (via e-mail or in some other reasonable fashion not necessarily in accordance with the express notice provisions of this Agreement) to the other party's Project Manager and Relationship Manager at any time, except that the Relationship Manager always shall be at the director level or higher. 4. Fees and Payments. 4.1 Minimum Fee During Initial Term. Converge shall pay to VNE a minimum fee of Four and One-Half Million Dollars ($4,500,000) for VNE's provision of the Services during the Initial Term (the "Initial Term Minimum Fee"). Converge shall pay the Initial Term Minimum Fee to VNE in 18 equal installments of Two Hundred Fifty Thousand Dollars ($250,000) (each, a "Monthly Installment"). Converge shall pay the first such Monthly Installment to VNE on the date this Agreement is executed and delivered by both parties. Thereafter, Converge shall pay each such Monthly Installment to VNE no later than the first day of each month during the Initial Term (November 2001 and through March 2003). All such Monthly Installments are non-refundable. 4.2 Minimum Fee During Each Renewal Term. If the Parties mutually agree in writing to renew this Agreement pursuant to Section 9.1, the minimum fee payable by Converge to VNE during any such renewal period shall be as mutually determined by the Parties. 4.3 Application of Quarterly Allocation; Out-Of-Scope Services. For each quarter during the Term of this Agreement that Converge pays the applicable Monthly Installments, Converge shall be entitled to receive Services in an amount equal to the Quarterly Allocation; provided, however, that VNE shall provide all Maintenance and Support Services with respect to Problem Reports (but not with respect to Support Requests) reported during such quarter, and all Maintenance Updates released by VNE during such quarter, regardless of whether the provision of such Services would cause VNE to exceed the Quarterly Allocation for such quarter; and provided further, however, that if Converge fails to make a Monthly Installment when due (subject to the cure period in Section 9.2(c)), VNE shall not be required to provided additional Services during the remaining portion of the applicable quarter until such payment is made. Should Converge request and VNE provide any Professional Services, or any Maintenance and Support Services with respect to Support Requests, that would cause VNE to exceed the Quarterly Allocation for any quarter, then Converge shall pay VNE's then-current time charges, or such other charges as the parties may otherwise agree in any Final SOW ("Out-Of-Scope Services"), for such Out-Of-Scope Services. VNE shall use commercially reasonable efforts to inform Converge that any Professional Services requested by Converge would be Out-Of-Scope Services prior to VNE's performance of such Professional Services. Converge shall not be required to pay for and VNS shall not be required to perform any such Services that have not been approved in a Work Plan or Final SOW, or otherwise approved by Converge in writing. 10 4.4 Materials Costs and Expenses. Converge will reimburse VNE for all reasonable materials costs and expenses actually incurred by VNE in providing the Services under this Agreement, including travel and related expenses; provided, however, that VNE shall bear any travel or related expenses incurred by VNE at its sole option or as may be required in connection with the correction of any Error. Notwithstanding the foregoing, if travel is required due to the unavailability of remote access (see Section 2.9), then Converge shall reimburse VNE for the reasonable costs of such travel and related expenses. Upon Converge's request, the parties shall prepare budgets of any materials costs and expenses to be incurred by VNE in its performance of any Professional Services hereunder and any costs or expenses in excess of the applicable budgeted amounts shall be subject to Converge's written approval, such approval not to be unreasonably withheld or delayed. VNE's invoices for all travel and related expenses shall be reasonably itemized and list all such expenses by category/person/trip, and be accompanied by reasonable documentation sufficient to support the deductibility by Converge of the reimbursable expense. 4.5 Invoicing and Payments. Converge shall pay the Monthly Installments to VNE on the dates specified in Section 4.1 and, if applicable, Section 4.2 above. All other amounts due under this Agreement will be invoiced by VNE to Converge on a monthly basis in arrears. All such invoiced amounts shall be due to VNE within 30 days following Converge's receipt of VNE's invoice. All payments will be made by Converge in U.S. dollars, without setoff, recoupment or deduction. All fees and other amounts not paid when due shall be subject to late charges of the lesser of (a) 1.5% per month of the overdue amount or (b) the maximum permitted under applicable law. 4.6 Taxes. The fees and other payments specified in this Agreement are exclusive of any sales, use and other taxes on consumption of goods and services ("Sales Taxes"), however designated or levied, based on this Agreement, delivery of the Services under this Agreement, or Converge's or its Affiliates' use thereof. In those jurisdictions in which VNE determines it is required to register, collect and remit Sales Taxes, VNE will separately invoice Converge for such Sales Taxes (which invoices shall be payable by Converge as set forth in Section 4.5), collect such Sales Taxes from Converge and remit such Sales Taxes to the proper taxing authority. In those jurisdictions in which VNE has determined that it does not have a collection responsibility, Converge will be required to self-assess and remit any Sales Taxes due on the purchase of taxable property and services acquired under this Agreement. Converge will retain ultimate responsibility and liability for remitting any Sales Taxes due on the purchase of any property and/or services acquired under this Agreement, including, without limitation, any interest, penalties or additions attributable to or imposed on or with respect to any such assessment excluding any taxes imposed upon the net income of either party). Subject to the express provisions of this Agreement, the parties will cooperate and use their commercially reasonable efforts to minimize or avoid, to the maximum extent allowed by law, the obligation to pay any Sales Taxes that may be levied on payments made under this Agreement or otherwise are chargeable by any applicable government authority with respect to the Services. 4.7 Tax Withholding. If laws, rules or regulations require withholding of any taxes imposed upon amounts payable to a party hereunder, the other party shall make such withholding payments as required and subtract such withholding payments from the amounts payable to such party. The other party shall submit reasonable proof of payment of the 11 withholding taxes to such party within 30 days after obtaining such proof. The parties agree to fully cooperate with each other, including, without limitation, in the filing of appropriate certificates of tax exemption, to ensure that any withholding payments required to be made by the other party are reduced or avoided to the fullest extent permitted by law. Converge shall be deemed to be the sole payor of payments owed to VNE under this Agreement and shall not have the right to substitute any domestic or foreign affiliate for that purpose, and if Converge reincorporates or otherwise reorganizes as a foreign person that would thereupon cause payments hereunder to VNE to become subject to withholding, then Converge shall comply with applicable laws to the extent required and shall gross up the payments otherwise owed to VNE so that VNE receives, net of withholding taxes, the amounts VNE would have received if Converge had not substituted a foreign person or had remained a domestic person. 5. Warranty. 5.1 Services Warranty. VNE warrants that the Services provided hereunder will be provided in accordance with generally-accepted industry standards applicable to the performance of services of a similar nature. In the event of any breach of the foregoing warranty, and provided that Converge reports such breach to VNE in writing within 90 days following the date of performance of the Services in question, VNE shall, as its sole obligation and Converge's sole and exclusive remedy, promptly repair, replace or re-perform the Services in question, without additional cost to Converge, so as to correct the warranty non-compliance as promptly as practicable (within 30 days to the extent technically feasible). 5.2 Disclaimer. WITH THE EXCEPTION OF THE EXPRESS WARRANTY PROVIDED IN SECTION 5.1 AND AS THE PARTIES MAY OTHERWISE AGREE IN ANY WORK PLAN, VNI AND ALL AFFILIATES OF VNI SPECIFICALLY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, ACCURACY, FITNESS FOR A PARTICULAR PURPOSE, QUIET ENJOYMENT AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS RELATING TO ANY SERVICES, MAINTENANCE UPDATES OR ENHANCEMENTS PROVIDED OR TO BE PROVIDED HEREUNDER. 6. Limitation of Liability. 6.1 Disclaimer of Liability for Certain Damages. 6.1.1 Consequential and Similar Damages. TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, REVENUES OR BUSINESS OPPORTUNITIES) HOWEVER CAUSED AND REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF THE PARTY HAS BEEN INFORMED OF THE POSSIBILITY OF ANY SUCH DAMAGES IN ADVANCE. The foregoing limitation 12 is independent of any exclusive remedies available to either party under this Agreement, including any failure of such remedies. 6.1.2 Loss of Data, Usage, Etc. VERT DOES NOT GUARANTEE THAT ANY MAINTENANCE UPDATES OR ENHANCEMENTS WILL OPERATE WITHOUT ERROR OR INTERRUPTION AND VERT SHALL NOT BE RESPONSIBLE FOR ANY DAMAGES ASSOCIATED WITH LOSS OF DATA OR INTERRUPTION OR LOSS OF USE OF ANY PRODUCTS, MAINTENANCE UPDATES OR ENHANCEMENTS RESULTING THEREFROM. 6.2 Sole Remedy. IF A CLAIM OR CAUSE OF ACTION IS ATTRIBUTABLE TO ANY MAINTENANCE UPDATE, ENHANCEMENT OR SERVICES PROVIDED OR TO BE PROVIDED UNDER THIS AGREEMENT, THE REMEDIES SET FORTH IN THIS AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THE SUBSCRIPTION LICENSE AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. IF A CLAIM OR CAUSE OF ACTION IS ATTRIBUTABLE TO A PRODUCT OR ANY SERVICES PROVIDED UNDER THE SUBSCRIPTION LICENSE AGREEMENT, THE REMEDIES SET FORTH IN THE SUBSCRIPTION LICENSE AGREEMENT, TO THE EXCLUSION OF THE REMEDIES SET FORTH IN THIS AGREEMENT, SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO A PARTY FOR SUCH CLAIM OR CAUSE OF ACTION. For the sake of clarity, the parties acknowledge that claims concerning Vert's ownership of and Converge's license rights to any Maintenance Updates, Enhancements or associated Documentation shall be deemed to have arisen under the Subscription License Agreement, that claims with respect to VNE's delivery of any Vert-General Release Enhancements or associated Documentation, or the performance or non-performance of any Vert-General Release Enhancements, shall be deemed to have arisen under the Subscription License Agreement, and that claims with respect to VNE's delivery of any Maintenance Updates, Converge-Requested Enhancements or associated Documentation, or the performance or non-performance of any Maintenance Updates or Converge-Requested Enhancements, shall be deemed to have arisen under this Agreement. NO LIABILITY SHALL EXTEND UNDER THIS AGREEMENT TO ANY THIRD PARTY (INCLUDING, BUT NOT LIMITED TO, ANY AFFILIATES OF VNI OTHER THAN VNE, OR THEIR LICENSORS) IF NOT INVOLVED IN THE DEVELOPMENT OR DELIVERY OF ANY MAINTENANCE UPDATE, ENHANCEMENT OR SERVICES HEREUNDER. 6.3 Maximum Aggregate Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE MAXIMUM LIABILITY OF EACH PARTY TO THE OTHER OR TO ANY THIRD PARTY FOR DAMAGES, IF ANY, RELATING TO THIS AGREEMENT OR ANY MAINTENANCE UPDATE, ENHANCEMENT OR SERVICES PROVIDED OR TO BE PROVIDED HEREUNDER, WHETHER FOR BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE OR OTHER TORT, STRICT PRODUCT LIABILITY, THE FAILURE OF ANY LIMITED REMEDY TO ACHIEVE ITS ESSENTIAL PURPOSE, OR OTHERWISE, SHALL NOT EXCEED (I) WITH RESPECT TO ANY ENHANCEMENT PROVIDED HEREUNDER, THE AMOUNTS PAID BY CONVERGE TO VERT FOR SUCH ENHANCEMENT, AND (II) WITH RESPECT TO ANY MAINTENANCE AND SUPPORT SERVICES, THE AMOUNTS PAID BY 13 CONVERGE TO VERT FOR SUCH MAINTENANCE AND SUPPORT SERVICES DURING THE THREE MONTH PERIOD IMMEDIATELY PRECEDING THE DATE ON WHICH THE CLAIM OR CAUSE OF ACTION FOR ANY SUCH DAMAGES FIRST AROSE. THE FOREGOING LIMITATIONS ON EACH PARTY'S AGGREGATE LIABILITY TO THE OTHER SHALL BE IN ADDITION TO ANY FEES AND OTHER AMOUNTS DUE AND OWING UNDER SECTION 4. FOR PURPOSES OF THIS SECTION 6.3, THE TERM "PARTY" MEANS CONVERGE ON THE ONE HAND, AND VNI AND VNE COLLECTIVELY ON THE OTHER HAND, SO THAT AS TO VNI AND VNE THE LIMITATIONS IN THIS SECTION 6.3 ARE COLLECTIVE LIMITATIONS AND NOT SEPARATE LIMITATIONS FOR EACH OF VNI AND VNE. 6.4 Exceptions. THE LIMITATIONS OF LIABILITY CONTAINED IN THIS SECTION 6 SHALL NOT APPLY WITH RESPECT TO (A) ANY CLAIMS OF BODILY INJURY OR DAMAGE TO TANGIBLE PERSONAL PROPERTY RESULTING FROM WILLFUL MISCONDUCT OR GROSS NEGLIGENCE, (B) ANY BREACH OF THE CONFIDENTIALITY OBLIGATIONS IN SECTION 7, OR (C) LIABILITY FOR PAYMENT OF INTEREST ADDED BY A COURT OF LAW OR AN ARBITRATION PANEL TO A JUDGMENT ENTERED IN ANY ACTION OR PROCEEDING UNDER THIS AGREEMENT. 6.5 Duty to Mitigate. Each party will have a duty to take reasonable steps to mitigate damages for which the other party is responsible. 6.6 Acknowledgement. Each of the parties acknowledge that the disclaimers and limitations set forth in this Section 6 are an essential element of this Agreement between the parties and that the parties would not have entered into this Agreement without such disclaimers and limitations. 7. Confidential Information. 7.1 Definition of Confidential Information. "Confidential Information" as used in this Agreement shall mean any and all proprietary or non-public information of a party whether in oral, written or other tangible form that the party disclosing the information (the "Discloser") designates as being confidential or which, under the circumstances surrounding disclosure, the receiving party (the "Recipient") knows or has reason to know should be treated as confidential. 7.2 Nondisclosure and Nonuse Obligations. Each of the parties, as Recipient, agrees that such Recipient will not use, disseminate, or in any way disclose any Confidential Information of the other party, as Discloser, to any person, firm or business, except to the extent necessary for the performance of such party's obligations or the enjoyment of such party's rights and benefits hereunder, and for any other purpose such Discloser may hereafter authorize in writing. Each of the parties, as Recipient, agrees that such Recipient shall treat all Confidential Information of the other party, as Discloser, with the same degree of care as such Recipient accords to such Recipient's own Confidential Information, but in no case less than reasonable care. Each of the parties, as Recipient, agrees that such Recipient shall disclose Confidential Information of the other party, as Discloser, only to those of such Recipient's employees who need to know such information, and such Recipient certifies that such Recipient employees have 14 previously agreed, either as a condition to employment or in order to obtain the Confidential Information of the Discloser, to be bound by terms and conditions substantially similar to those terms and conditions applicable to such Recipient under this Agreement. Each of the parties, as Recipient, shall immediately give notice to the other party, as Discloser, of any unauthorized use or disclosure of Discloser's Confidential Information. Each of the parties, as Recipient, agrees to assist the other party, as Discloser, in remedying any such unauthorized use or disclosure of Discloser's Confidential Information. 7.3 Exclusions from Nondisclosure and Nonuse Obligations. The obligations under this Section 7 of each of the parties, as Recipient, with respect to any portion of the Confidential Information of the other party, as Discloser, shall not apply to such portion that Recipient can document: (a) was in the public domain at or subsequent to the time such portion was communicated to Recipient by Discloser through no fault of Recipient; (b) was rightfully in Recipient's possession free of any obligation of confidence at or subsequent to the time such portion was communicated to Recipient by Discloser; (c) was developed by employees or agents of Recipient independently of and without reference to any information communicated to Recipient by Discloser; or (d) was communicated by Discloser to an unaffiliated third party free of any obligation of confidence. A disclosure by either of the parties, as Recipient, of Confidential Information of the other party, as Discloser, either (i) in response to a valid order by a court or other governmental body; (ii) as otherwise required by law; or (iii) as necessary to establish the rights of either party under this Agreement, shall not be considered to be a breach of this Agreement by Recipient or a waiver of confidentiality for other purposes; provided, however, that Recipient shall provide prompt prior written notice thereof to Discloser to enable Discloser to seek a protective order or otherwise prevent such disclosure. 7.4 Confidentiality of this Agreement. The parties hereto agree to keep the terms of this Agreement confidential and not to divulge any part thereof to any third party except: (a) with the prior written consent of the other party; (b) to any governmental body having jurisdiction to request and to read the same; (c) as otherwise may be required by law or legal process; or (d) to legal counsel representing either party. Notwithstanding the foregoing, no disclosure of this Agreement shall be made pursuant to clauses (b) or (c) of the foregoing sentence without the disclosing party first giving the other party reasonable notice prior to the intended disclosure so as to allow the other party sufficient time to seek a protective order or otherwise assure the confidentiality of this Agreement as that other party shall deem appropriate. Each party agrees not to file this Agreement as an exhibit to its SEC filings without first redacting and requesting confidential treatment for any information reasonably considered by the other party to be confidential. Such other party shall inform the first party of any such information it wishes to redact and request confidential treatment for within five Business Days following the date such other party is requested to do so in writing. Nothing herein shall prohibit either party from complying with applicable securities or other laws, rules or regulations. 8. Non-Solicitation. During the Term of this Agreement and for a period of one year thereafter, Converge and Vert each agree not to directly or indirectly solicit, encourage or cause others to solicit or encourage any employees or individual independent contractors of the other party to terminate their employment or independent contracting relationship with the other party and become an employee or independent contractor of the soliciting party or its Affiliate. This provision does not prohibit a party's responding to unsolicited employment inquiries and/or any 15 indirect solicitations and other employment activities (e.g., job postings, advertising of positions) that are not specifically targeted at any particular individual. 9. Term; Events of Default; and Termination. 9.1 Term. The initial period of this Agreement (the "Initial Term") shall commence upon the Effective Date and continue until March 31, 2003. Thereafter, this Agreement shall renew only upon the mutual written agreement of the parties for up to three additional renewal terms of one year each (each, a "Renewal Term"). Notwithstanding the foregoing provisions of this Section 9.1, in the event any Services or other obligations of either party (including payment obligations) with respect to any Final Work Plan have not been completed or discharged as of the date on which this Agreement would otherwise expire, this Agreement shall remain in effect solely with respect to such Work Plan until such Services or other obligations have been completed or discharged. 9.2 Events of Default. The occurrence of any one or more of the following acts, events or occurrences shall constitute an "Event of Default" under this Agreement: (a) either party becomes insolvent, files for bankruptcy or is subjected to involuntary bankruptcy proceedings that are not dismissed within 60 days, or makes a general assignment for the benefit of its creditors; (b) either party breaches any material provision of this Agreement and the result is the non-breaching party experiencing a substantial deprivation of the benefits to which the non-breaching party is entitled under this Agreement, which material breach is not cured by the breaching party within 30 days after the breaching party's receipt of the non-breaching party's written notice specifying the breach in detail; provided, however, that if the breach is of such a nature that it may be cured, but it may not reasonably be cured within such 30-day period, the non-breaching party may not terminate this Agreement unless such breach is not cured by the breaching party on or before the 60th day after the breaching party's receipt of the non-breaching party's notice of breach if breaching party has commenced substantial efforts to cure the breach within the initial 30-day period and has continued in good faith to work to cure the breach as soon as reasonably practicable thereafter, or (c) Converge fails to pay when due any amounts payable under Section 4 and fails to cure such breach within 3 Business Days after VNE gives Converge written notice specifying the breach. 9.3 Termination. Immediately upon the occurrence of an Event of Default by either party, the other party shall have the right, but not the obligation, to terminate this Agreement, exercisable by such other party giving written notice thereof to first party within 10 Business Days after the occurrence of such Event of Default. In addition, this Agreement shall automatically terminate upon any termination of the Subscription License Agreement as permitted thereunder. 9.4 Effect of Termination. Upon the expiration or termination of this Agreement, each party shall erase, destroy or return to the other party all copies of the Confidential Information of or provided by such party under this Agreement and, upon such other party's written request, shall certify its compliance with this Section 9.4 to the other party in writing. Notwithstanding the foregoing provisions of this Section 9.4, with respect to and for so long as any licenses granted to Converge respecting Deployed Products and/or Source Code under the Subscription License Agreement survive the expiration or termination of this 16 Agreement, Converge shall not be required to erase, destroy or return any Confidential Information of Vert or its Affiliates respecting such Deployed Products and/or Source Code. 9.5 Effect of Vert Non-Renewal Election. If VNE or VNI is unwilling to renew this Agreement on its existing terms for any Renewal Term, a "Vert Non-Renewal Election" shall be deemed to have occurred. In the event of a Vert-Non-Renewal Election, in addition to any rights or remedies that may be available to Converge under the Subscription License Agreement, the provisions of Section 8 above shall cease to apply with respect to Converge's solicitation or encouragement of any of the VNE Service Personnel to terminate their employment or independent contracting relationship with VNE and become an employee or independent contractor of Converge or its Affiliate. 9.6 Effect of Converge Non-Renewal Election. If VNE or VNI is willing to renew this Agreement on its existing terms for any Renewal Term, but Converge elects not to renew this Agreement for any for any reason, a "Converge Non-Renewal Election" shall be deemed to have occurred. In the event of a Converge-Non-Renewal Election, the rights or remedies that may be available to Converge under the Subscription License Agreement, if any, shall apply. 9.7 Survival. Sections 3.11, 3.12, 4.1, 4.2, 4.6, 4.7, 5.2, 6, 7, 8, 9.4, 9.5, 9.6, 9.7 and 10 shall survive any expiration or termination of this Agreement. In addition, all payment obligations under Section 5 that pertain to Services provided or otherwise accrue prior to the effective date of expiration or termination of this Agreement shall survive such expiration or termination. 10. General. 10.1 Notices. All notices permitted or required under this Agreement ("Notices") shall be in writing and shall be delivered as follows with notice deemed given as indicated (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; or (c) by certified or registered mail, return receipt requested, five days after deposit in the mail. All Notices shall be properly addressed as follows, or to such other addresses as may be specified in a Notice given hereunder: If to VNI or VNE: with a copy to: Attn: General Counsel Attn: Michael L. Pillion VerticalNet, Inc. Morgan, Lewis & Bockius, LLP 507 Prudential Road 1701 Market Street Horsham, Pennsylvania 19044 Philadelphia, Pennsylvania 19103 17 If to Converge: Attn: General Counsel Converge, Inc. Four Technology Drive Peabody, MA 01960 10.2 Force Majeure. Except for the obligation to pay monies due, neither party shall be liable hereunder by reason of any failure or delay in the performance of its obligations hereunder (except for the payment of money) on account of strikes, riots, insurrection, fires, flood, storm, explosions, acts of God, war, governmental action, labor conditions, earthquakes, or any other cause which is beyond the control of such party. 10.3 Waiver. An effective waiver under this Agreement must be in writing signed by the party waiving its right. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of subsequent breaches of that or any other provision hereof. 10.4 Severability. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable or invalid as a whole, and, in such event, such provision shall be changed and interpreted so as to best accomplish the objectives of such provisions within the limits of applicable law or applicable court decisions. 10.5 Headings. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. 10.6 Choice of Law; Waiver of Jury Trial; Limitation of Action. This Agreement and performance under this Agreement shall be governed by the laws of the United States of America and of the Commonwealth of Pennsylvania as applied to agreements entered into and to be performed entirely within Pennsylvania between Pennsylvania residents, excluding its conflicts of law provisions. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to this Agreement must be commenced no later than two years from the date on which the cause of action arose. 10.7 No Agency. Nothing contained herein shall be construed as creating any agency, partnership or other form of joint enterprise between the parties or to allow either party to bind the other or incur any obligation on its behalf. 10.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute 18 one and the same instrument. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of both parties hereto. For the purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed an original. 10.9 Assignment. A party may assign this Agreement to any Affiliate. Otherwise, neither party may assign this Agreement without the other party's prior written consent (not to be unreasonably withheld). No transfer of this Agreement by operation of law or change in Control of a party, including, without limitation, by merger, consolidation or sale or other transfer of equity interests, shall be considered an assignment for purposes of this Section 11.9. This Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 10.10 No Third-Party Beneficiaries. Nothing in this Agreement is intended to confer benefits, rights or remedies unto any person or entity other than the parties and their successors and permitted assigns. 10.11 Non-Exclusive Agreement. Except as expressly stated herein, this Agreement is not exclusive as to either party, and, subject to the express provisions of this Agreement, each party will have the right to conduct any other business in which it may now or hereafter be engaged. 10.12 Entire Agreement. This Agreement, together with the Subscription License Agreement and the other agreements referenced therein, are the entire agreement between Vert and Converge relating to the subject matter of this Agreement. This Agreement shall supersede any prior agreement or understanding, whether written or oral, and any other communications between Vert and Converge relating to the subject matter of this Agreement. This Agreement may only be amended by a writing specifically referencing this Agreement, which has been signed by authorized representatives of each party. 19 IN WITNESS WHEREOF, the undersigned do hereby execute this parties have caused this Agreement to be signed by their duly authorized representatives as of the date first written above in this Agreement. VerticalNet, Inc. Converge, Inc. By:__________________________________ By:________________________________ _____________________________________ ___________________________________ (Print Name) (Print Name) Title:_______________________________ Title:_____________________________ VerticalNet Enterprises LLC By:__________________________________ _____________________________________ (Print Name) Title:_______________________________ 20 Exhibit A Severity Levels of Problems The following chart describes the distinctions between the different severity levels for Problems reported by Converge.
Severity Definition Level 1 A "Severity Level 1" Problem is one where critical or central functionality of the Supported Product is unavailable and the Supported Product cannot reasonably be used, or performance of critical or central functionality of the Supported Product is severely degraded, and in either such case Converge does not have or cannot implement a reasonable workaround. The adverse impact of a Severity 1 Problem on Converge's business is severe and immediate, and requires an immediate solution. A "Severity Level 1" Problem may have one or more of the following characteristics, in each case without Converge being able to implement a reasonable workaround: - Data is corrupted or lost by the Supported Product, or the Supported Product returns incorrect results, and such corruption, loss or incorrect results have a material adverse impact on critical or central functionality of the Supported Product - Complete or severe lack of ability to use the critical or central functionality of the Supported Product - The Supported Product crashes repeatedly - Critical or central functionality of the Supported Product is not operational or is severely degraded - Critical or central functionality of the Supported Product fails to run to completion 2 A "Severity Level 2" Problem is one where critical or central functionality of the Supported Product is unavailable, or performance of critical or central functionality of the Supported Product is severely degraded, but in either such case Converge can implement a reasonable workaround but such workaround does not downgrade the Problem to Severity Level 3 or 4. Use of critical or central functionality of the Supported Product can continue in a restricted fashion through use of such workaround, but the user still experiences a significant degradation of performance of such functionality. A "Severity Level 2" Problem may have one or more of the characteristics of a "Severity Level 1" Problem, but critical or central functionality of - the Supported Product can continue to operate in a restricted fashion through use of such workaround. 3 A "Severity Level 3" Problem causes minimal interruption to non-central or non-important functionality. The Problem has a minor impact or is inconvenient. A "Severity Level 3" Problem may have one or more of the following characteristics: - Performance of the Supported Product is degraded in a non-critical manner - Performance of the Supported Product is minimally impaired
21 4 A "Severity Level 4" Problem causes no loss of use of the Supported Product. The following would be "Severity Level 4" Problems: - Cosmetic problem with the Supported Product - Documentation error - Minor incorrect behavior of the Supported Product that does not impede its operation
22 Exhibit B Problem Response and Resolution Efforts
SEVERITY RESPONSE TIME AND STATUS REPORTS RESOLUTION EFFORTS LEVEL 1 - "Initial Response" (defined - Continuous efforts (24x7) with below) within 30 minutes after best available resources to the Problem is reported to VNE provide a workaround, patch, if the Problem is reported fix or other solution for the during Support Hours. Problem as quickly and - Initial Response within two efficiently as possible, hours if the Problem is beginning as soon as reported to VNE outside of practicable after diagnosis of Support Hours, or within 30 the Problem commences. minutes following the - If a workaround, patch, fix or resumption of Support Hours, other solution is not provided whichever is sooner. within 24 hours after - Diagnosis commences as soon as diagnosis of the Problem is reasonably practicable. commences, provide Converge - Status reports every 24 hours with an assessment and action thereafter. plan detailing the proposed method of resolution and a time schedule for delivery of a correction. - Severity Level 1 requires maximum effort support until an emergency fix or bypass is developed and available for shipment to Converge. Critical situations may require customer, Converge and VNE personnel to be at their respective work locations or available on an around-the-clock basis. - Provide a final patch, fix or other solution within 24 hours that down grades the Problem to Severity Level 3 or less and that does not substantially impair performance or functionality. 2 - Initial Response within two - Continuous efforts during hours after the Problem is Support Hours to provide a reported to VNE if the Problem patch, fix or other solution is reported during Support for the Problem as quickly and Hours. efficiently as possible, - Initial Response within two beginning as soon as hours after the resumption of practicable after diagnosis of Support Hours if the Problem the Problem commences. is reported to VNE outside of - If a patch, fix or other Support Hours. solution is not provided - Diagnosis commences within one within 48 hours after Support Day after the Problem diagnosis of the Problem is reported to VNE. commences, provide Converge - Status reports every other with an assessment and action Support Day thereafter. plan detailing the proposed method of resolution and a time schedule for delivery of a correction. - Provide a final patch, fix or other solution within 72 hours that down grades the Problem to Severity Level 3 or less and that does not substantially impair performance or functionality. 3 - Initial Response by the end of - Reasonable efforts during the Support Day immediately Support Hours to provide a following the day on which the workaround, patch, fix or Problem is reported to VNE. other solution for the Problem - Diagnosis commences within two within five Support Days, Support Days after the Initial beginning within a reasonable Response period of time after diagnosis - Progress and status reports as of the Problem commences. appropriate thereafter, but at least weekly. 4 - Reasonable efforts to commence - Reasonable efforts to resolve the Problem in a
23
SEVERITY RESPONSE TIME AND STATUS REPORTS RESOLUTION EFFORTS LEVEL diagnosis of the Problem future Maintenance Update. within five Support Days after the Problem is reported to VNE. - Progress and status reports as appropriate thereafter.
For purposes of this Exhibit B, "Initial Response" means (a) communication back to the Converge Support Personnel by the appropriate VNE personnel acknowledging receipt of the applicable Problem Report; and (b) consistent with the nature and extent of the information provided by Converge to VNE, communication by VNE to the Converge Support Personnel of VNE's initial analysis of the nature and/or cause of the Problem and suggestions for a possible temporary or interim solution to the Problem, including any interim work-around or other temporary "quick fix." 24 Exhibit C Quarterly Allocation and VNE Support Personnel
ESTIMATED ESTIMATED ESTIMATED VERTICALNET TITLE PERCENTAGE HOURS PER NUMBER OF TOTAL TEAM MEMBER OF TIME WEEK WEEKS HOURS Stephen Project Manager 50% 20 12 240 DePalantino Mike Decker Support Mgr 50% 20 12 240 Christian Programmer Analyst 50% 20 12 240 Torstensson Roland Ngokila Programmer Analyst 50% 20 12 240 Ken Ridler Programmer Analyst 100% 40 12 480 Kelley Nelson Programmer Analyst 100% 40 12 480 ---- TOTAL HOURS 1920 ====
Upon notice (via e-mail or in some other reasonable fashion not necessarily in accordance with the express notice provisions of this Agreement) to and in consultation with the Converge Project Manager, VNE shall be entitled to replace (or substitute temporarily for) the VNE Service Personnel identified above. Any replacement personnel shall be reasonably qualified to perform the Services they are to perform under this Agreement, and VNE will use reasonable efforts to maintain continuity of assignment with respect to the VNE personnel assigned to provide essential Services. VNE shall use commercially reasonable efforts to limit the replacement of (or substitution for) the persons identified above during the 90 day period immediately following the Effective Date. VNE, in the reasonable discretion of the VNE Project Manager, shall make Mark Rodriguez reasonably available to perform any Maintenance and Support Services that would be materially benefited by his participation, and, notwithstanding the foregoing sentence, VNE shall be free to substitute Mark Rodriguez for any of the persons identified above for such purposes. 25 EX-10.20 8 w58938ex10-20.txt 1ST AMEND. TO AMENDED RESTATED SUB LIC AGREEMENT EXHIBIT 10.20 FIRST AMENDMENT TO AMENDED AND RESTATED SUBSCRIPTION LICENSE AGREEMENT This First Amendment to Amended and Restated Subscription License Agreement ("Amendment") is entered into as of February 1, 2002 on this 28th day of February, 2002, by and among VerticalNet, Inc., ("VNI"), VerticalNet Enterprises LLC d/b/a VerticalNet Solutions ("VNE; and collectively with VNI, "Vert""), and Converge, Inc., a Delaware corporation ("Converge"). BACKGROUND A. VNI, VNE and Converge entered into an Amended and Restated Subscription License Agreement dated as of October 1, 2001 (the "Restated SLA"). B. VNI, VNE and Converge desire to amend the Restated SLA effective as of February 1, 2002. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. EXTENSION OF PRODUCT TERM. Section 1.2.29 of the Restated SLA is hereby amended by deleting the date "March 31, 2003" in clause (a) thereof and inserting the date "December 31, 2003" in its place. 2. SECURITY INTEREST. In consideration for the execution and delivery of this Amendment by Vert, Converge has, pursuant to a Security Agreement dated as of February 28, 2002 (the "Security Agreement"), granted to Vert a lien upon and security interest in certain Collateral (as defined in the Security Agreement) in order to secure the timely payment of all amounts owing by Converge to Vert under the Restated SLA, as amended by this Amendment. 3. PREPAYMENT. On March 1, 2002, Converge shall make without penalty a partial prepayment, in the amount of $750,000, of the $4,500,000 payment that is due and owing by Converge on May 1, 2002 under Section 3.1 of, and Exhibit B to, the Restated SLA. 4. GOVERNING LAW. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania as applied to agreements entered into and to be performed entirely within Pennsylvania between Pennsylvania residents, excluding its conflicts of law provisions. 5. RATIFICATION. Except as specifically modified by this Amendment, all of the provisions of the Restated SLA are hereby ratified and confirmed to be in full force and effect. 1 6. BINDING EFFECT. This Amendment shall be binding upon, and shall inure to the benefit of, VNI, VNE and Converge and their respective successors and permitted assigns. 7. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Amendment shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of authorized representatives of each of VNI, VNE and Converge. For the purposes hereof, a facsimile copy of this Amendment, including the signature pages hereto, shall be deemed an original. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives as of the date first written above in this Agreement. VerticalNet, Inc. Converge, Inc. By:__________________________________ By:________________________________ _____________________________________ ___________________________________ (Print Name) (Print Name) Title:_______________________________ Title:_____________________________ VerticalNet Enterprises LLC By:__________________________________ _____________________________________ (Print Name) Title:_______________________________ 2 EX-10.21 9 w58938ex10-21.txt 1ST AMENDMENT TO MAINTENANCE & SUPPORT AGREEMENT EXHIBIT 10.21 FIRST AMENDMENT TO MAINTENANCE AND SUPPORT AGREEMENT This First Amendment to Maintenance and Support Agreement ("Amendment") is entered into as of February 1, 2002 on this 28th day of February, 2002, by and among VerticalNet, Inc., ("VNI"), VerticalNet Enterprises LLC d/b/a VerticalNet Solutions ("VNE"; and collectively with VNI, "Vert"), and Converge, Inc., a Delaware corporation ("Converge"). BACKGROUND A. VNI, VNE and Converge entered into a Maintenance and Support Agreement dated as of October 1, 2001 (the "M&S Agreement"). B. VNI, VNE and Converge desire to amend the M&S Agreement effective as of February 1, 2002. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. MINIMUM FEE DURING INITIAL TERM. Effective as of February 1, 2002, Section 4.1 of the M&S Agreement is hereby amended and restated in its entirety as follows: "4.1 Minimum Fee During Initial Term. Converge shall pay to VNE a minimum fee of Three Million Dollars ($3,000,000) for VNE's provision of the Services during the balance of the Initial Term from February 1, 2002 through December 31, 2003 (the "Initial Term Minimum Fee"). Converge shall pay the Initial Term Minimum Fee to VNE in 11 equal monthly installments of Two Hundred Seventy-Two Thousand Seven Hundred and Twenty-Seven Dollars and 27 Cents ($272,727.27) (each, a "Monthly Installment"). Converge shall pay such Monthly Installments to Vert no later than the first day of each month during the period from February, 2002 through December, 2002. All such Monthly Installments are non-refundable." Vert acknowledges its receipt prior to the execution and delivery of this Amendment by the parties of a payment by Converge in the amount of $250,000, being a partial payment of the $272,727.27 installment due by Converge under the above amended and restated Section 4.1 for February, 2002. All payments made by Converge to Vert under Section 4.1 of the M&S Agreement prior to February 1, 2002 are non-refundable and shall not be credited against any of the payments owing by Converge under the above amended and restated Section 4.1. 2. MODIFICATION OF SECTION 4.3. Effective as of February 1, 2002, Section 4.3 of the M&S Agreement is hereby amended and restated in its entirety as follows: 1 "4.3 Application of Quarterly Allocation; Out-Of-Scope Services. Subject to Converge's payment of all Monthly Installments owing by Converge under Section 4.1 and Section 4.2 (if applicable), for each quarter during the balance of the Initial Term from February 1, 2002 through December 31, 2003 and for each quarter during any Renewal Term (if applicable), Converge shall be entitled to receive Services in an amount equal to the Quarterly Allocation; provided, however, that if Converge fails to pay any Monthly Installment when due (subject to the cure period in Section 9.2(c)), VNE shall not be required to provide Services during the remaining portion of the applicable quarter or any subsequent quarter until all past due payments have been made by Converge to Vert. Should Converge request and VNE provide any Services that would cause VNE to exceed the Quarterly Allocation for any quarter, then Converge shall pay VNE's then-current time charges, or such other charges as the parties may otherwise agree in any Final SOW ("Out-Of-Scope Services"), for such Out-Of-Scope Services. VNE shall use commercially reasonable efforts to inform Converge that any Services requested by Converge would be Out-Of-Scope Services prior to VNE's performance of such Services. Converge shall not be required to pay for and VNS shall not be required to perform any such Services that have not been approved in a Work Plan or Final SOW, or otherwise approved by Converge in writing." 3. EXTENSION OF INITIAL TERM. Effective as of February 1, 2002, Section 9.1 of the M&S Agreement is hereby amended by deleting the date "March 31, 2003" in the first sentence thereof and inserting the date "December 31, 2003" in its place. 4. ADJUSTMENT OF QUARTERLY ALLOCATION. Effective as of February 1, 2002, Exhibit C to the M&S Agreement, which specifies the Quarterly Allocation of Services being made available by Vert to Converge under the M&S Agreement, is hereby amended and restated in its entirety in the form attached to this Amendment as Exhibit C. 5. SECURITY INTEREST. In consideration for the execution and delivery of this Amendment by VNI and VNE, Converge has, pursuant to a Security Agreement dated as of February 28, 2002 (the "Security Agreement"), granted to Vert a lien upon and security interest in certain Collateral (as defined in the Security Agreement) in order to secure the timely payment of all amounts owing by Converge to Vert under the M&S Agreement, as amended by this Amendment. 6. GOVERNING LAW. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania as applied to agreements entered into and to be performed entirely within Pennsylvania between Pennsylvania residents, excluding its conflicts of law provisions. 7. RATIFICATION. Except as specifically modified by this Amendment, all of the provisions of the M&S Agreement are hereby ratified and confirmed to be in full force and effect. 2 8. BINDING EFFECT. This Amendment shall be binding upon, and shall inure to the benefit of, VNI, VNE and Converge and their respective successors and permitted assigns. 9. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Amendment shall become binding when any one or more counterparts hereof, individually or taken together, bear the signatures of authorized representatives of each of VNI, VNE and Converge. For the purposes hereof, a facsimile copy of this Amendment, including the signature pages hereto, shall be deemed an original. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives as of the date first written above in this Agreement. VerticalNet, Inc. Converge, Inc. By:__________________________________ By:________________________________ _____________________________________ ___________________________________ (Print Name) (Print Name) Title:_______________________________ Title:_____________________________ VerticalNet Enterprises LLC By:__________________________________ _____________________________________ (Print Name) Title:_______________________________ 3 EXHIBIT C QUARTERLY ALLOCATION AND VNE SUPPORT PERSONNEL
VERTICAL NET TITLE PERCENTAGE ESTIMATED ESTIMATED ESTIMATED TEAM MEMBER OF TIME HOURS PER NUMBER OF TOTAL HOURS WEEK WEEKS Kelley Nelson Programmer 100% 40 12 480 Analyst --- TOTAL 480 HOURS ===
Upon notice (via e-mail or in some other reasonable fashion not necessarily in accordance with the express notice provisions of this Agreement) to and in consultation with the Converge Project Manager, VNE shall be entitled to replace (or substitute temporarily for) the VNE Service Personnel identified above. Any replacement personnel shall be reasonably qualified to perform the Services they are to perform under this Agreement, and VNE will use reasonable efforts to maintain continuity of assignment with respect to the VNE personnel assigned to provide essential Services. 4 EX-10.26 10 w58938ex10-26.txt EMPLOYMENT AGREEMENT FOR CHRISTOPHER LARSEN EXHIBIT 10.26 [VERTICALNET LOGO](SM) VerticalNet(R) MICHAEL J. HAGAN 700 Dresher Rd., Ste. 100 Horsham, PA 19044 215-315-3115 April 23, 2001 Mr. Christopher Larsen 192 Dam View Drive Media, PA 19063 Dear Chris: I am pleased to confirm VerticalNet's employment offer to you. Details are as follows: JOB TITLE: Executive Vice President REPORTING TO: Michael Hagan, President and CEO START DATE: April 25, 2001 COMPENSATION | | Monthly base salary of $25,000 to be paid in equal installments on the 15th and last day of each month. (Annualized $300,000). (For payroll purposes, you must start work prior to the 8th of the month to be paid on the 15th or the 22nd of the month to be paid on the last day of the month). | | You will be eligible to participate in the VerticalNet Executive Bonus Plan. Your annual bonus target will be 50% of base pay, payable at the discretion of the Board of Directors. For 2001, your bonus award will be guaranteed in the amount of $200,000, provided that you are still employed on the date that bonus awards are paid to other senior executives and remain employed by VerticalNet for at least 90 days following that date. | | You will be paid a starting bonus of $25,000, which you will receive in your second paycheck. | | Within 60 days of your Start Date, you and the CEO will mutually determine an annual bonus for you based upon performance metrics for VerticalNet, taking into account the overall compensation structure that you will establish for the overall VerticalNet sales organization. | | On April 27, 2001, you will be granted the option to purchase 400,000 VerticalNet, Inc. shares of common stock, subject to vesting, at a price per share equal to the last trade on NASDAQ on the date of grant. They will vest 25% each six-month period, with full vesting on your two-year employment anniversary. These shares are granted to you pursuant to the terms of the company's Stock Option Plan. EMPLOYEE BENEFITS | | You will be eligible to participate in the VerticalNet LLC 401(k) Plan on the first day of the calendar quarter (July 1) following your date of hire. | | You will be eligible to participate in the Employee Stock Purchase Plan effective October 1, 2001. 1 | | You will become eligible to participate in VerticalNet's flexible benefits plan on the first day of the month following your date of hire, subject to the terms and conditions as stated in the Company's benefit plan documents. A Summary of Benefits is included in your new hire packet, with the exception that you will receive 4 weeks vacation. Questions regarding benefits should be addressed to Paige Tilley, our Benefits Administrator at 215-315-4313. TERMINATION OF EMPLOYMENT | | If, during the 12 month period beginning on your Start Date, your employment is terminated by VerticalNet without Cause or by you for Good Reason, then in exchange for a general release, and in exchange for you being subject to the VerticalNet, "Employment, Confidential Information, Invention and Non-Competition Agreement" for a period of 6 months following your termination (which supercedes the time periods set forth in such agreement), (1) we will continue to pay to you your base salary for a period of 6 months following your termination, (2) we will pay to you for 2001 your 2001 guaranteed bonus, and thereafter, your annual target bonus for the year in which your termination occurs, within thirty (30) days following your termination date, and (3) an additional 6 months of the vesting of your VerticalNet stock options will become immediately vested and all your vested options will remain exercisable for a period of at least 180 days following your termination. VerticalNet intends to enter into employment agreements with its senior executive officers within 90 days, including you the COO and the other EVPs, and the agreement that you enter into may contain different (with greater or less of a benefit to you) terms than set forth herein, in which case you will receive an agreement with terms with that replace the foregoing matters that are no less favorable than the most favorable terms made to any officer of VerticalNet. For purposes of this letter agreement, "Cause" means (i) you are convicted of a felony, or (ii) in the reasonable determination of the Board, you have (w) committed an act of fraud, embezzlement, or theft in connection with your duties in the course of your employment with VerticalNet, (x) caused intentional, wrongful damage to the property of VerticalNet, (y) engaged in gross misconduct or gross negligence in the course of your employment with VerticalNet, or (z) you materially breached your obligations under this agreement or under any written confidentiality, non-competition, or non-solicitation agreement between you and VerticalNet, and shall not have remedied such breach within 30 days after receiving written notice from the Board specifying the details thereof. For purposes of this letter agreement, "Good Reason" means (1) if you are transferred, without your written consent, to a location that is more than 50 miles from your principal place of business immediately preceding the transfer, (2) a material reduction of your authority, duties or responsibilities after you have provided us with reasonable notice and an opportunity to cure, or (3) any failure of VerticalNet materially to comply with and satisfy any of the terms of this letter agreement. CHANGE OF CONTROL | | In the event of a Change of Control of VerticalNet, your vesting in any unvested options will be accelerated on terms that are no less favorable than the most favorable terms made available to any senior officer of VerticalNet other than the CEO. For example, if all unvested options of the COO of VerticalNet become fully vested upon a Change of Control, all of your options will become fully vested upon a Change of Control. For purposes of this letter agreement, "Change of Control" shall mean: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of VerticalNet representing more than 50% of the voting power of the then outstanding securities of VerticalNet; or 2 (ii) The shareholders of VerticalNet approve (or, if shareholder is not required, the Board approves) an agreement providing for (x) the merger or consolidation of VerticalNet with another corporation where the shareholders of VerticalNet, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote), (y) the sale or other disposition of all or substantially all of the assets of VerticalNet, or (z) a liquidation or dissolution of VerticalNet. NEXT STEPS This offer is contingent upon: | | Completion of a VerticalNet Employment Application (enclosed). | | Satisfactory evidence of your legal eligibility to work in the U.S. in accordance with the Immigration Reform and Control Act and completion of the "I-9" form which is included in this package. | | Your agreement that at no time following your Start Date will you use or disclose to any other person or entity any proprietary or confidential information about VerticalNet, or its parent, subsidiaries or affiliates, including without limitation, technical data, research, product, or business plans, products, services, projects, proposals, customer lists, software developments, marketing and financial plans, sales methods and systems, and financial information. Please be aware that VerticalNet is an employer at-will. As a result, both you and VerticalNet may terminate the employment relationship at any time, for any lawful reason or no reason at all, with or without notice; provided, however, that you will be entitled to receive the payments and rights set forth under the "Termination of Employment" section upon the occurrence of the events set forth under that section. Nothing in this offer letter or in any oral or written statement creates a contract of employment or limits the right to terminate employment at will. If you have any questions concerning this or any other information, please feel free to contact Monica Haley, Vice President of Human Resources, at 215-315-3297. We look forward to having you join the VerticalNet team! Sincerely, Michael J. Hagan President and CEO cc: Monica Haley Jim McKenzie _____________________________________ ___________________________ Signature Date _____________________________________ Social Security Number (required for Stock Option grant) 3 EX-10.27 11 w58938ex10-27.txt EMPLOYMENT AGREEMENT FOR JAMES W. MCKENZIE, JR. EXHIBIT 10.27 EMPLOYMENT AGREEMENT (James W. McKenzie, Jr.) This EMPLOYMENT AGREEMENT, dated October 1, 2001 (this "Agreement"), is between VerticalNet, Inc., a Pennsylvania corporation (the "Company"), and James W. McKenzie, Jr. (the "Employee"). The Company and the Employee, each intending to be legally bound by this Agreement, agree as follows: 1. Employment This Agreement is effective October 1, 2001 (the "EFFECTIVE DATE"). The Employee shall be the Executive Vice President and General Counsel of the Company and shall perform duties consistent with this position as are assigned by the Chief Executive Officer or the Board of Directors of the Company (the "BOARD"). The Employee shall report directly to the Chief Executive Officer and be an executive officer of the Company. 2. Performance The Employee shall devote substantially all of his business time and efforts to the performance of his duties under this Agreement, however, the Employee may (a) serve on civic or charitable boards or committees, (b) serve on corporate boards as a non-employee board member and (c) manage Employee's personal investments. The Employee must inform the Company of any corporate boards on which he serves. The Employee cannot serve on any corporate board that would violate the Employee's non-competition restrictions. 3. Term The initial term of employment under this Agreement (the "INITIAL TERM") begins on the Effective Date and extends for 2 years. This Agreement renews automatically for one year renewal terms (a "RENEWAL TERM") unless either the Employee or the Company gives the other party written notice of nonrenewal at least one year before the end of the Initial Term or any Renewal Term then in effect. The Agreement renews automatically for a 2 year Renewal Term upon a Change of Control, as defined in Section 12, beginning on the date of the Change of Control. The Initial Term plus any Renewal Term then in effect are the term of this Agreement (the "EMPLOYMENT TERM"). The Employment Term may be terminated early as provided in Sections 7 through 12 of this Agreement. 4. Salary The Employee's annual salary (the "SALARY") is payable in installments when the Company customarily pays its officers (but no less often than twice per month). The Salary is at the initial rate of $250,000 (the "INITIAL SALARY"). The Board or the Compensation Committee shall review the Salary at least once a year. The Salary shall never be less than the Initial Salary. 5. Bonus The Employee shall be entitled to participate in any bonus programs established by the Board or the Compensation Committee for executive officers generally. The Employee's target bonus shall be equal to 35% of the Salary (the "TARGET BONUS"). All bonus programs, as well as the goals for achieving the Target Bonus, are at the discretion of the Board or the Compensation Committee. 6. Confidential Information, Non-Competition and Non-Solicitation The Employee agrees to continue to be covered by the terms of the Employment, Confidential Information, Invention and Non-Competition Agreement that the Employee entered into upon the commencement of employment with the Company, except that the restrictive period after termination of employment in Section 6 (titled: Non-Solicitation of Customers and Employees; Non-Competition) shall be 12 months instead of 18 months. 7. Death If the Employee dies during the Employment Term, then the Employment Term shall terminate, and thereafter the Company shall not have any further liability or obligation to the Employee, the Employee's executors, administrators, heirs, assigns or any other person claiming under or through the Employee, except (a) that the Employee's estate shall receive any unpaid Salary that has accrued through the date of termination, and (b) the Employee's outstanding options are accelerated for an additional period of 6 months that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates. 8. Total Disability If the Employee becomes "totally disabled," then the Employment Term shall terminate, and thereafter the Company shall have no further liability or obligation to the Employee hereunder, except as follows: the Employee shall receive (a) any unpaid Salary that has accrued through the date of termination, (b) continued Salary for 3 months following the 2 date the Employee is considered totally disabled, and (c) whatever benefits that he may be entitled to receive under any then existing disability benefit plans of the Company. The term "TOTALLY DISABLED" means: (a) if the Employee is considered totally disabled under the Company's group disability plan in effect at that time, if any, or (b) in the absence of any such plan, under applicable Social Security regulations. 9. Termination for Cause The Company may terminate the Employee for "cause" immediately upon notice from the Company. If the Employee is terminated for "cause", then the Employment Term shall terminate and thereafter the Company shall not have any further liability or obligation to the Employee, except that the Employee shall receive any unpaid Salary that has accrued through the date of termination. The term "CAUSE" means: (a) the Employee is convicted of a felony, or (b) in the reasonable determination of the Board, the Employee has done any one of the following: (1) committed an act of fraud, embezzlement, or theft in connection with the Employee's duties in the course of his employment with the Company, (2) caused intentional, wrongful damage to the property of the Company, (3) materially breached (other than by reason of illness, injury or incapacity) the Employee's obligations under this Agreement or under any written confidentiality, non-competition, or non-solicitation agreement between the Employee and the Company, that the Employee shall not have remedied within 30 days after receiving written notice from the Board specifying the details of the breach, or (4) engaged in gross misconduct or gross negligence in the course of the Employee's employment with the Company. 10. Termination by the Employee The Employee may terminate this Agreement by giving the Company written notice of termination one month in advance of the termination date. The Company may waive this notice period and set an earlier termination date. If the Employee terminates this Agreement, then on the termination date, the Employment Term shall terminate and thereafter the Company shall have no further liability or obligation to the Employee under this Agreement, except that the Employee shall receive any unpaid Salary that has accrued through the termination date. After the termination date, the Employee shall be required to adhere to the covenants against non-competition and non-solicitation described in Section 6 of this Agreement. 11. Termination without Cause by the Company The Company may terminate the Employee without "cause" by giving the Employee written notice of termination one month in advance of the termination date. The 3 Employee may waive this notice period and set an earlier termination date. If the Employee is terminated without "cause," then the Employment Term shall terminate and thereafter the Employee shall be entitled only to the following under this Agreement: (1) the Company will pay to the Employee a lump sum severance payment (the "Severance Payment") in the amount equal to either: 6 months of the Salary then in effect if the Employee has been employed by the Company for less than one year; or one year of the Salary then in effect if the Employee has been employed by the Company for one year or more, and (2) the Employee's group healthcare, group life and AD&D coverage will be continued for one year, to be paid in full by the Company, and (3) the Employee's covenants against non-competition (as described in Section 6 of this Agreement) shall be reduced to a 6 month period from the termination date, from 12 month period contained in Section 6 of this Agreement, and (4) unvested options granted to the Employee in 2001 are accelerated for a total period equal to 6 months plus one additional month for each month that the Employee has been employed by the Company, that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates, and (5) all options granted in 2001 that are vested (including accelerated vesting) at termination will remain exercisable for 5 years after termination of employment, but not longer than the total life of the options, and (6) the Employee will not receive any accrued vacation or bonus payments, and (7) the Employee and the Company will enter into a mutual general release. 12. Change of Control During the 2 year period after a Change of Control, if the Company terminates the Employee without cause, or if the Employee terminates this Agreement for "Good Reason" by giving the Company written notice of termination one month in advance of the termination date (which the Employee shall have the right to do during this 2 year period), then: 4 (1) all the rights, benefits and obligations under Section 11 of this Agreement for termination without "cause" by the Company shall apply, and (2) in addition to the Severance Payment, the Company will pay the Employee a lump sum payment at the same time as the Severance Payment (the "CHANGE OF CONTROL PAYMENT") equal to: (a) the Target Bonus for the year in which the termination occurs, plus (b) either: 6 additional months of the Salary then in effect if the Employee has been employed by the Company for less than one year; or one additional year of the Salary then in effect if the Employee has been employed by the Company for one year or more. The term "CHANGE OF CONTROL" means: (a) any sale, lease, exchange, or other transfer of all or substantially all of the assets of the Company to any other person or entity other than a wholly-owned subsidiary of the Company (in one transaction or a series of related transactions), (b) dissolution or liquidation of the Company, (c) when any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting securities (based upon voting power), or (d) any reorganization, merger, consolidation, or similar transaction or series of transactions that results in the record holders of the voting stock of the Company immediately prior to such transaction or series of transactions holding immediately following such transaction or series of transactions less than 50% of the outstanding shares of any of the voting securities (based upon voting power) of any one of the following: (1) the Company, (2) any entity which owns (directly or indirectly) the stock of the Company, (3) any entity with which the Company has merged, or (3) any entity that owns an entity with which the Company has merged. The term "GOOD REASON" means: (a) the transfer, without the Employee's prior written consent, to a location that is more than 50 miles from the Employee's principal place of business immediately preceding the transfer, 5 (b) a material reduction of the Employee's authority, duties or responsibilities after the Employee has provided the Company with reasonable notice and an opportunity to cure, (c) any failure of the Company materially to comply with and satisfy the terms of this Agreement, or (d) the nonrenewal of this Agreement by the Company. 13. Parachute Payment Notwithstanding anything to the contrary in this Agreement, if the Employee is a "disqualified individual" (as defined in Section 280G(c) of the Code), and any severance benefit provided for in this Agreement, together with any other payments which Employee has the right to receive from the Company and its affiliates, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then Severance Payment together with the Change of Control Payment provided hereunder shall be either: (a) reduced (but not below zero) so that the present value of such total amounts received by Employee will be one dollar ($1.00) less than three times the Employee's "base amount" (as defined in Section 280G of the Code) and so that no portion of such amounts received by the Employee shall be subject to the excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever of (a) or (b) produces the better net after-tax position to the Employee (taking into account any applicable excise tax under Section 4999 of the Code and any applicable income tax). The determination as to whether any such reduction in the amount of the severance benefit is necessary shall be made initially by the Company in good faith. If a reduced payment is made and through error or otherwise that payment, when aggregated with other payments from the Company (or its affiliates) used in determining if a "parachute payment" exists, exceeds one dollar ($1.00) less than three times the Employee's base amount, then the Employee shall immediately repay such excess to the Company upon notification that an overpayment has been made. 14. Governing Law This Agreement is governed by Pennsylvania law. 6 15. Entire Agreement; Amendments This Agreement sets forth the entire understanding among the parties hereto, and shall supercede all prior employment, severance and change of control agreements and any related agreements that the Employee has with the Company or any subsidiary, or any predecessor company. This Agreement may not be modified or amended in any way except by a written amendment executed by the Employee and the Company. 16. No Assignment All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit and be enforceable by the respective heirs, representatives, successors (including any successor as a result of a merger or similar reorganization) and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. [Remainder of this page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto duly executed this Employment Agreement as of the day and year first written above. VERTICALNET, INC: By:_________________________________ Name: Michael J. Hagan Title: President and CEO EMPLOYEE: _________________________________ Name: James W. McKenzie, Jr. 8 EX-10.28 12 w58938ex10-28.txt EMPLOYMENT AGREEMENT FOR MICHAEL J. HAGAN EXHIBIT 10.28 EMPLOYMENT AGREEMENT (Michael J. Hagan) This EMPLOYMENT AGREEMENT, dated October 1, 2001 (this "Agreement"), is between VerticalNet, Inc., a Pennsylvania corporation (the "Company"), and Michael J. Hagan (the "Employee"). The Company and the Employee, each intending to be legally bound by this Agreement, agree as follows: 1. Employment This Agreement is effective October 1, 2001 (the "EFFECTIVE DATE"). The Employee shall be the Chief Executive Officer of the Company and shall perform duties consistent with this position as are assigned by the Board of Directors of the Company (the "BOARD"). 2. Performance The Employee shall devote substantially all of his business time and efforts to the performance of his duties under this Agreement, however, the Employee may (a) serve on civic or charitable boards or committees, (b) serve on corporate boards as a non-employee board member and (c) manage Employee's personal investments. The Employee must inform the Company of any corporate boards on which he serves. The Employee cannot serve on any corporate board that would violate the Employee's non-competition restrictions. 3. Term The initial term of employment under this Agreement (the "INITIAL TERM") begins on the Effective Date and extends for 2 years. This Agreement renews automatically for one year renewal terms (a "RENEWAL TERM") unless either the Employee or the Company gives the other party written notice of nonrenewal at least one year before the end of the Initial Term or any Renewal Term then in effect. The Agreement renews automatically for a 2 year Renewal Term upon a Change of Control, as defined in Section 12, beginning on the date of the Change of Control. The Initial Term plus any Renewal Term then in effect are the term of this Agreement (the "EMPLOYMENT TERM"). The Employment Term may be terminated early as provided in Sections 7 through 12 of this Agreement. 4. Salary The Employee's annual salary (the "SALARY") is payable in installments when the Company customarily pays its officers (but no less often than twice per month). The Salary is at the initial rate of $150,000 (the "INITIAL SALARY"). The Board or the Compensation Committee shall review the Salary at least once a year. The Salary shall never be less than the Initial Salary. 5. Bonus The Employee shall be entitled to participate in any bonus programs established by the Board or the Compensation Committee for executive officers generally. The Employee's target bonus shall be equal to 50% of the Salary (the "TARGET BONUS"). All bonus programs, as well as the goals for achieving the Target Bonus, are at the discretion of the Board or the Compensation Committee. 6. Confidential Information, Non-Competition and Non-Solicitation The Employee agrees to continue to be covered by the terms of the Employment, Confidential Information, Invention and Non-Competition Agreement that the Employee entered into with the Company, except that the restrictive period after termination of employment in Section 6 (titled: Non-Solicitation of Customers and Employees; Non-Competition) shall be 12 months instead of 18 months. 7. Death If the Employee dies during the Employment Term, then the Employment Term shall terminate, and thereafter the Company shall not have any further liability or obligation to the Employee, the Employee's executors, administrators, heirs, assigns or any other person claiming under or through the Employee, except (a) that the Employee's estate shall receive any unpaid Salary that has accrued through the date of termination, and (b) the Employee's outstanding options are accelerated for an additional period of 6 months that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates. 8. Total Disability If the Employee becomes "totally disabled," then the Employment Term shall terminate, and thereafter the Company shall have no further liability or obligation to the Employee hereunder, except as follows: the Employee shall receive (a) any unpaid Salary that has accrued through the date of termination, (b) continued Salary for 3 months following the 2 date the Employee is considered totally disabled, and (c) whatever benefits that he may be entitled to receive under any then existing disability benefit plans of the Company. The term "TOTALLY DISABLED" means: (a) if the Employee is considered totally disabled under the Company's group disability plan in effect at that time, if any, or (b) in the absence of any such plan, under applicable Social Security regulations. 9. Termination for Cause The Company may terminate the Employee for "cause" immediately upon notice from the Company. If the Employee is terminated for "cause", then the Employment Term shall terminate and thereafter the Company shall not have any further liability or obligation to the Employee, except that the Employee shall receive any unpaid Salary that has accrued through the date of termination. The term "CAUSE" means: (a) the Employee is convicted of a felony, or (b) in the reasonable determination of the Board, the Employee has done any one of the following: (1) committed an act of fraud, embezzlement, or theft in connection with the Employee's duties in the course of his employment with the Company, (2) caused intentional, wrongful damage to the property of the Company, (3) materially breached (other than by reason of illness, injury or incapacity) the Employee's obligations under this Agreement or under any written confidentiality, non-competition, or non-solicitation agreement between the Employee and the Company, that the Employee shall not have remedied within 30 days after receiving written notice from the Board specifying the details of the breach, or (4) engaged in gross misconduct or gross negligence in the course of the Employee's employment with the Company. 10. Termination by the Employee The Employee may terminate this Agreement by giving the Company written notice of termination one month in advance of the termination date. The Company may waive this notice period and set an earlier termination date. If the Employee terminates this Agreement, then on the termination date, the Employment Term shall terminate and thereafter the Company shall have no further liability or obligation to the Employee under this Agreement, except that the Employee shall receive any unpaid Salary that has accrued through the termination date. After the termination date, the Employee shall be required to adhere to the covenants against non-competition and non-solicitation described in Section 6 of this Agreement. 11. Termination without Cause by the Company The Company may terminate the Employee without "cause" by giving the Employee written notice of termination one month in advance of the termination date. The 3 Employee may waive this notice period and set an earlier termination date. If the Employee is terminated without "cause," then the Employment Term shall terminate and thereafter the Employee shall be entitled only to the following under this Agreement: (1) the Company will pay to the Employee a lump sum severance payment (the "Severance Payment") in the amount equal to either: one year of the Salary then in effect if the Employee has been employed by the Company for less than one year; or 2 years of the Salary then in effect if the Employee has been employed by the Company for one year or more, and (2) the Employee's group healthcare, group life and AD&D coverage will be continued for one year, to be paid in full by the Company, and (3) the Employee's covenants against non-competition (as described in Section 6 of this Agreement) shall be reduced to a 6 month period from the termination date, from 12 month period contained in Section 6 of this Agreement, and (4) unvested options granted to the Employee in 2001 are accelerated for a total period equal to 6 months plus one additional month for each month that the Employee has been employed by the Company, that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates, and (5) all options granted in 2001 that are vested (including accelerated vesting) at termination will remain exercisable for 5 years after termination of employment, but not longer than the total life of the options, and (6) the Employee will not receive any accrued vacation or bonus payments, and (7) the Employee and the Company will enter into a mutual general release. 12. Change of Control During the 2 year period after a Change of Control, if the Company terminates the Employee without cause, or if the Employee terminates this Agreement for "Good Reason" by giving the Company written notice of termination one month in advance of the termination date (which the Employee shall have the right to do during this 2 year period), then: 4 (1) all the rights, benefits and obligations under Section 11 of this Agreement for termination without "cause" by the Company shall apply, and (2) in addition to the Severance Payment, the Company will pay the Employee a lump sum payment at the same time as the Severance Payment (the "CHANGE OF CONTROL PAYMENT") equal to: (a) 300% of the Target Bonus for the year in which the termination occurs, plus (b) one additional year of the Salary. The term "CHANGE OF CONTROL" means: (a) any sale, lease, exchange, or other transfer of all or substantially all of the assets of the Company to any other person or entity other than a wholly-owned subsidiary of the Company (in one transaction or a series of related transactions), (b) dissolution or liquidation of the Company, (c) when any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting securities (based upon voting power), or (d) any reorganization, merger, consolidation, or similar transaction or series of transactions that results in the record holders of the voting stock of the Company immediately prior to such transaction or series of transactions holding immediately following such transaction or series of transactions less than 50% of the outstanding shares of any of the voting securities (based upon voting power) of any one of the following: (1) the Company, (2) any entity which owns (directly or indirectly) the stock of the Company, (3) any entity with which the Company has merged, or (3) any entity that owns an entity with which the Company has merged. The term "GOOD REASON" means: (a) the transfer, without the Employee's prior written consent, to a location that is more than 50 miles from the Employee's principal place of business immediately preceding the transfer, (b) a material reduction of the Employee's authority, duties or responsibilities after the Employee has provided the Company with reasonable notice and an opportunity to cure, 5 (c) any failure of the Company materially to comply with and satisfy the terms of this Agreement, or (d) the nonrenewal of this Agreement by the Company. 13. Parachute Payment Notwithstanding anything to the contrary in this Agreement, if the Employee is a "disqualified individual" (as defined in Section 280G(c) of the Code), and any severance benefit provided for in this Agreement, together with any other payments which Employee has the right to receive from the Company and its affiliates, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then Severance Payment together with the Change of Control Payment provided hereunder shall be either: (a) reduced (but not below zero) so that the present value of such total amounts received by Employee will be one dollar ($1.00) less than three times the Employee's "base amount" (as defined in Section 280G of the Code) and so that no portion of such amounts received by the Employee shall be subject to the excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever of (a) or (b) produces the better net after-tax position to the Employee (taking into account any applicable excise tax under Section 4999 of the Code and any applicable income tax). The determination as to whether any such reduction in the amount of the severance benefit is necessary shall be made initially by the Company in good faith. If a reduced payment is made and through error or otherwise that payment, when aggregated with other payments from the Company (or its affiliates) used in determining if a "parachute payment" exists, exceeds one dollar ($1.00) less than three times the Employee's base amount, then the Employee shall immediately repay such excess to the Company upon notification that an overpayment has been made. 14. Governing Law This Agreement is governed by Pennsylvania law. 15. Entire Agreement; Amendments This Agreement sets forth the entire understanding among the parties hereto, and shall supercede all prior employment, severance and change of control agreements and any 6 related agreements that the Employee has with the Company or any subsidiary, or any predecessor company. This Agreement may not be modified or amended in any way except by a written amendment executed by the Employee and the Company. 16. No Assignment All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit and be enforceable by the respective heirs, representatives, successors (including any successor as a result of a merger or similar reorganization) and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. [Remainder of this page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto duly executed this Employment Agreement as of the day and year first written above. VERTICALNET, INC: By:_________________________________ Name: James W. McKenzie, Jr. Title: Executive Vice President EMPLOYEE: _________________________________ Name: Michael J. Hagan 8 EX-10.29 13 w58938ex10-29.txt EMPLOYMENT AGREEMENT FOR DAVID KOSTMAN EXHIBIT 10.29 EMPLOYMENT AGREEMENT (David Kostman) This EMPLOYMENT AGREEMENT, dated October 1, 2001 (this "Agreement"), is between VerticalNet, Inc., a Pennsylvania corporation (the "Company"), and David Kostman (the "Employee"). The Company and the Employee, each intending to be legally bound by this Agreement, agree as follows: 1. Employment This Agreement is effective October 1, 2001 (the "EFFECTIVE DATE"). The Employee shall be the Chief Operating Officer of the Company and shall perform duties consistent with this position as are assigned by the Chief Executive Officer or the Board of Directors of the Company (the "BOARD"). The Employee shall report directly to the Chief Executive Officer and be an executive officer of the Company. 2. Performance The Employee shall devote substantially all of his business time and efforts to the performance of his duties under this Agreement, however, the Employee may (a) serve on civic or charitable boards or committees, (b) serve on corporate boards as a non-employee board member and (c) manage Employee's personal investments. The Employee must inform the Company of any corporate boards on which he serves. The Employee cannot serve on any corporate board that would violate the Employee's non-competition restrictions. 3. Term The initial term of employment under this Agreement (the "INITIAL TERM") begins on the Effective Date and extends for 2 years. This Agreement renews automatically for one year renewal terms (a "RENEWAL TERM") unless either the Employee or the Company gives the other party written notice of nonrenewal at least one year before the end of the Initial Term or any Renewal Term then in effect. The Agreement renews automatically for a 2 year Renewal Term upon a Change of Control, as defined in Section 12, beginning on the date of the Change of Control. The Initial Term plus any Renewal Term then in effect are the term of this Agreement (the "EMPLOYMENT TERM"). The Employment Term may be terminated early as provided in Sections 7 through 12 of this Agreement. 4. Salary The Employee's annual salary (the "SALARY") is payable in installments when the Company customarily pays its officers (but no less often than twice per month). The Salary is at the initial rate of $250,000 (the "INITIAL SALARY"). The Board or the Compensation Committee shall review the Salary at least once a year. The Salary shall never be less than the Initial Salary. 5. Bonus The Employee shall be entitled to participate in any bonus programs established by the Board or the Compensation Committee for executive officers generally. The Employee's target bonus shall be equal to 35% of the Salary (the "TARGET BONUS"). All bonus programs, as well as the goals for achieving the Target Bonus, are at the discretion of the Board or the Compensation Committee. 6. Confidential Information, Non-Competition and Non-Solicitation The Employee agrees to continue to be covered by the terms of the Employment, Confidential Information, Invention and Non-Competition Agreement that the Employee entered into upon the commencement of employment with the Company, except that the restrictive period after termination of employment in Section 6 (titled: Non-Solicitation of Customers and Employees; Non-Competition) shall be 12 months instead of 18 months. 7. Death If the Employee dies during the Employment Term, then the Employment Term shall terminate, and thereafter the Company shall not have any further liability or obligation to the Employee, the Employee's executors, administrators, heirs, assigns or any other person claiming under or through the Employee, except (a) that the Employee's estate shall receive any unpaid Salary that has accrued through the date of termination, and (b) the Employee's outstanding options are accelerated for an additional period of 6 months that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates. 8. Total Disability If the Employee becomes "totally disabled," then the Employment Term shall terminate, and thereafter the Company shall have no further liability or obligation to the Employee hereunder, except as follows: the Employee shall receive (a) any unpaid Salary that has accrued through the date of termination, (b) continued Salary for 3 months following the 2 date the Employee is considered totally disabled, and (c) whatever benefits that he may be entitled to receive under any then existing disability benefit plans of the Company. The term "TOTALLY DISABLED" means: (a) if the Employee is considered totally disabled under the Company's group disability plan in effect at that time, if any, or (b) in the absence of any such plan, under applicable Social Security regulations. 9. Termination for Cause The Company may terminate the Employee for "cause" immediately upon notice from the Company. If the Employee is terminated for "cause", then the Employment Term shall terminate and thereafter the Company shall not have any further liability or obligation to the Employee, except that the Employee shall receive any unpaid Salary that has accrued through the date of termination. The term "CAUSE" means: (a) the Employee is convicted of a felony, or (b) in the reasonable determination of the Board, the Employee has done any one of the following: (1) committed an act of fraud, embezzlement, or theft in connection with the Employee's duties in the course of his employment with the Company, (2) caused intentional, wrongful damage to the property of the Company, (3) materially breached (other than by reason of illness, injury or incapacity) the Employee's obligations under this Agreement or under any written confidentiality, non-competition, or non-solicitation agreement between the Employee and the Company, that the Employee shall not have remedied within 30 days after receiving written notice from the Board specifying the details of the breach, or (4) engaged in gross misconduct or gross negligence in the course of the Employee's employment with the Company. 10. Termination by the Employee The Employee may terminate this Agreement by giving the Company written notice of termination one month in advance of the termination date. The Company may waive this notice period and set an earlier termination date. If the Employee terminates this Agreement, then on the termination date, the Employment Term shall terminate and thereafter the Company shall have no further liability or obligation to the Employee under this Agreement, except that the Employee shall receive any unpaid Salary that has accrued through the termination date. After the termination date, the Employee shall be required to adhere to the covenants against non-competition and non-solicitation described in Section 6 of this Agreement. 11. Termination without Cause by the Company The Company may terminate the Employee without "cause" by giving the Employee written notice of termination one month in advance of the termination date. The 3 Employee may waive this notice period and set an earlier termination date. If the Employee is terminated without "cause," then the Employment Term shall terminate and thereafter the Employee shall be entitled only to the following under this Agreement: (1) the Company will pay to the Employee a lump sum severance payment (the "Severance Payment") in the amount equal to either: 6 months of the Salary then in effect if the Employee has been employed by the Company for less than one year; or one year of the Salary then in effect if the Employee has been employed by the Company for one year or more, and (2) the Employee's group healthcare, group life and AD&D coverage will be continued for one year, to be paid in full by the Company, and (3) the Employee's covenants against non-competition (as described in Section 6 of this Agreement) shall be reduced to a 6 month period from the termination date, from 12 month period contained in Section 6 of this Agreement, and (4) unvested options granted to the Employee in 2001 are accelerated for a total period equal to 6 months plus one additional month for each month that the Employee has been employed by the Company, that is applied between scheduled vesting dates to accelerate vesting on the pro rata portion of the option vesting schedule using a monthly basis instead of the scheduled vesting dates, and (5) all options granted in 2001 that are vested (including accelerated vesting) at termination will remain exercisable for 5 years after termination of employment, but not longer than the total life of the options, and (6) the Employee will not receive any accrued vacation or bonus payments, and (7) the Employee and the Company will enter into a mutual general release. 12. Change of Control During the 2 year period after a Change of Control, if the Company terminates the Employee without cause, or if the Employee terminates this Agreement for "Good Reason" by giving the Company written notice of termination one month in advance of the termination date (which the Employee shall have the right to do during this 2 year period), then: 4 (1) all the rights, benefits and obligations under Section 11 of this Agreement for termination without "cause" by the Company shall apply, and (2) in addition to the Severance Payment, the Company will pay the Employee a lump sum payment at the same time as the Severance Payment (the "CHANGE OF CONTROL PAYMENT") equal to: (a) the Target Bonus for the year in which the termination occurs, plus (b) either: 6 additional months of the Salary then in effect if the Employee has been employed by the Company for less than one year; or one additional year of the Salary then in effect if the Employee has been employed by the Company for one year or more. The term "CHANGE OF CONTROL" means: (a) any sale, lease, exchange, or other transfer of all or substantially all of the assets of the Company to any other person or entity other than a wholly-owned subsidiary of the Company (in one transaction or a series of related transactions), (b) dissolution or liquidation of the Company, (c) when any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting securities (based upon voting power), or (d) any reorganization, merger, consolidation, or similar transaction or series of transactions that results in the record holders of the voting stock of the Company immediately prior to such transaction or series of transactions holding immediately following such transaction or series of transactions less than 50% of the outstanding shares of any of the voting securities (based upon voting power) of any one of the following: (1) the Company, (2) any entity which owns (directly or indirectly) the stock of the Company, (3) any entity with which the Company has merged, or (3) any entity that owns an entity with which the Company has merged. The term "GOOD REASON" means: (a) the transfer, without the Employee's prior written consent, to a location that is more than 50 miles from the Employee's principal place of business immediately preceding the transfer, 5 (b) a material reduction of the Employee's authority, duties or responsibilities after the Employee has provided the Company with reasonable notice and an opportunity to cure, (c) any failure of the Company materially to comply with and satisfy the terms of this Agreement, or (d) the nonrenewal of this Agreement by the Company. 13. Parachute Payment Notwithstanding anything to the contrary in this Agreement, if the Employee is a "disqualified individual" (as defined in Section 280G(c) of the Code), and any severance benefit provided for in this Agreement, together with any other payments which Employee has the right to receive from the Company and its affiliates, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then Severance Payment together with the Change of Control Payment provided hereunder shall be either: (a) reduced (but not below zero) so that the present value of such total amounts received by Employee will be one dollar ($1.00) less than three times the Employee's "base amount" (as defined in Section 280G of the Code) and so that no portion of such amounts received by the Employee shall be subject to the excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever of (a) or (b) produces the better net after-tax position to the Employee (taking into account any applicable excise tax under Section 4999 of the Code and any applicable income tax). The determination as to whether any such reduction in the amount of the severance benefit is necessary shall be made initially by the Company in good faith. If a reduced payment is made and through error or otherwise that payment, when aggregated with other payments from the Company (or its affiliates) used in determining if a "parachute payment" exists, exceeds one dollar ($1.00) less than three times the Employee's base amount, then the Employee shall immediately repay such excess to the Company upon notification that an overpayment has been made. 14. Governing Law This Agreement is governed by Pennsylvania law. 6 15. Entire Agreement; Amendments This Agreement sets forth the entire understanding among the parties hereto, and shall supercede all prior employment, severance and change of control agreements and any related agreements that the Employee has with the Company or any subsidiary, or any predecessor company. This Agreement may not be modified or amended in any way except by a written amendment executed by the Employee and the Company. 16. No Assignment All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit and be enforceable by the respective heirs, representatives, successors (including any successor as a result of a merger or similar reorganization) and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee. [Remainder of this page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto duly executed this Employment Agreement as of the day and year first written above. VERTICALNET, INC: By:_________________________________ Name: Michael J. Hagan Title: President and CEO EMPLOYEE: _________________________________ Name: David Kostman 8 EX-21 14 w58938ex21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following list sets forth the direct and indirect subsidiaries of the registrant as of March 15, 2002 and their respective jurisdictions of incorporation or organization:
SUBSIDIARY JURISDICTION ---------- ------------ Vert Tech LLC Delaware Verticalnet LLC Delaware Verticalnet Africa Pty Ltd. South Africa Verticalnet Enterprises Delaware Verticalnet Ltd. Israel Boulder Interactive Technology Services Co. Colorado VNI Holdings Inc. Delaware Verticalnet Solutions LTD England and Wales LabX Technologies Inc. Manitoba, Canada Verticalnet International LLC Delaware Verticalnet Europe B.V. Amsterdam, Netherlands BT Fifty Five England and Wales Verticalnet LTD England and Wales Verticalnet Europe LTD England and Wales Verticalnet UK Employees Ltd. England and Wales Verticalnet Software LLC Delaware Atlas Commerce, Inc. Delaware Verticalnet Software, Inc. Delaware Atlas Commerce Finance Inc. Delaware Atlas Commerce Ltd. England and Wales Atlas Commerce S.A. France
EX-23 15 w58938ex23.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 Consent of Independent Accountants The Board of Directors Verticalnet, Inc.: The audits referred to in our report dated February 12, 2002, except as to Note 22, which is as of March 15, 2002, included the related financial statement schedule as of December 31, 2001, and for each of the years in the three-year period ended December 31, 2001, included in this annual report on Form 10-K of Verticalnet, Inc. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-72143, No. 333-89305 and No. 333-76328), in the registration statements on Form S-3 (No. 333-30254, No. 333-30408, No. 333-34860 and No. 333-76334) and in the registration statement on Form S-4 (No. 333-38170) of Verticalnet, Inc. of our report dated February 12, 2002, except as to Note 22, which is as of March 15, 2002, relating to the consolidated balance sheets of Verticalnet, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows, shareholders' equity (deficit) and other comprehensive loss for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Verticalnet, Inc. /s/ KPMG LLP Philadelphia, Pennsylvania March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----