<PAGE>
[Logo of Internet Capital Group]
MEMORANDUM
----------
May 16, 2000
TO: RightWorks Shareholders
FROM: Internet Capital Group
RE: Exchange Offer of Common Stock of Internet Capital Group for RightWorks
Preferred Stock
Internet Capital Group's Quarterly Financials
- --------------------------------------------------------------------------------
Enclosed please find Internet Capital Group's 10-Q, as filed with the
Securities and Exchange Commission on May 15, 2000. We are mailing this to you
to provide you with our most recent financial information as a supplement to the
prospectus, dated May 10, 2000, which we recently mailed to you.
THIS COMMUNICATION IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO RULES 165 AND 425 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
INVESTORS AND STOCKHOLDERS ARE URGED TO READ THE VARIOUS FILINGS OF INTERNET
CAPITAL GROUP, INC. THAT HAVE BEEN MADE WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING INTERNET CAPITAL GROUP'S REGISTRATION STATEMENT ON FORM S-
4, WHICH RELATES TO THE EXCHANGE OFFER BEING MADE BY INTERNET CAPITAL GROUP FOR
SHARES OF RIGHTWORKS. INVESTORS AND STOCKHOLDERS MAY OBTAIN A COPY OF THE
REGISTRATION STATEMENT FROM COMMERCIAL RETRIEVAL SERVICES AND FOR NO CHARGE AT
THE WEB SITE MAINTAINED BY THE SECURITIES AND EXCHANGE COMMISSION AT
http://www.sec.gov.
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000
Commission File Number 0-26929
-------------------
INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2996071
(I.R.S. EmployerIdentification
(State of other jurisdiction Number)
ofincorporation or organization)
600 Building, 435 Devon Park Drive, 19087
Wayne, PA
(Zip Code)
(Address of principal executive
offices)
(610) 989-0111
(Registrant's telephone number, including area code)
-------------------
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 and 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. [X] Yes [_] No
Number of shares of Common Stock outstanding as of May 12, 2000: 264,616,889
shares.
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<PAGE>
INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION
Item Page No.
- ---- --------
<S> <C>
Item 1--Financial Statements:
Consolidated Balance Sheets--March 31, 2000 (unaudited) and December
31, 1999............................................................ 4
Consolidated Statements of Operations (unaudited)--Three Months Ended
March 31, 2000
and 1999............................................................ 5
Consolidated Statements of Cash Flows (unaudited)--Three Months Ended
March 31, 2000
and 1999............................................................ 6
Notes to Consolidated Financial Statements........................... 7
Item 2--Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 17
Item 3--Quantitative and Qualitative Disclosures About Market Risk... 29
PART II--OTHER INFORMATION
Item 1--Legal Proceedings............................................ 30
Item 2--Changes in Securities and Use of Proceeds.................... 30
Item 3--Defaults Upon Senior Securities.............................. 30
Item 4--Submission of Matters to a Vote of Security Holders.......... 30
Item 5--Other Information............................................ 30
Item 6--Exhibits and Reports on Form 8-K............................. 31
SIGNATURES........................................................... 32
Exhibit Index........................................................ 33
</TABLE>
2
<PAGE>
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us and our partner companies, that may
cause our actual results, levels of activity, performance, or achievements to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of
such terms or other similar expressions. Factors that might cause or contribute
to such a discrepancy include, but are not limited to, those discussed
elsewhere in this Report and the risks discussed in our other Securities and
Exchange Commission ("SEC") filings, including our Registration on Form S-4
declared effective on May 10, 2000 by the SEC (File No. 333-34722).
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we have a
"partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power
or authority to legally bind any of our partner companies, and we do not have
the types of liabilities in relation to our partner companies that a general
partner of a partnership would have.
3
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents........................... $ 858,567 $1,343,459
Short-term investments.............................. -- 3,359
Accounts receivable, net............................ 3,403 1,207
Prepaid expenses and other current assets........... 41,544 6,347
---------- ----------
Total current assets................................ 903,514 1,354,372
Fixed assets, net................................... 9,459 4,015
Ownership interests in and advances to Partner
Companies.......................................... 1,157,635 547,339
Available-for-sale securities....................... 350,596 46,767
Intangible assets, net.............................. 21,477 23,649
Deferred taxes...................................... -- 34,388
Other............................................... 28,376 39,854
---------- ----------
Total Assets...................................... $2,471,057 $2,050,384
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt................ $ 2,612 $ 3,000
Line of credit...................................... 754 --
Accounts payable.................................... 8,170 6,750
Accrued expenses.................................... 21,348 4,205
Notes payable to Partner Companies.................. 24,704 34,134
Other............................................... 1,348 903
---------- ----------
Total current liabilities......................... 58,936 48,992
Long-term debt...................................... 2,690 3,185
Other liability..................................... 4,880 4,255
Deferred taxes...................................... 84,685 --
Minority interest................................... 4,553 7,481
Convertible subordinated notes (Note 5)............. 566,250 566,250
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.0l par value; 10,000 shares
authorized; None issued............................ -- --
Common stock, $.001 par value; authorized 300,000
shares; 264,293 (2000) and 263,579 (1999) issued
and outstanding.................................... 264 264
Additional paid-in capital.......................... 1,583,022 1,513,615
Retained earnings (accumulated deficit)............. 325,436 (26,539)
Unamortized deferred compensation................... (11,720) (11,846)
Notes receivable--shareholders...................... (79,396) (79,790)
Accumulated other comprehensive income (loss)....... (68,543) 24,517
---------- ----------
Total shareholders' equity........................ 1,749,063 1,420,221
---------- ----------
Total Liabilities and Shareholders' Equity...... $2,471,057 $2,050,384
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
(in thousands
except per share
data)
<S> <C> <C>
Revenue.................................................. $ 1,830 $ 3,111
--------- --------
Operating expenses
Cost of revenue........................................ 689 1,553
Selling, general and administrative.................... 32,663 3,848
--------- --------
Total operating expenses............................... 33,352 5,401
--------- --------
(31,522) (2,290)
Other income, net........................................ 657,686 28,677
Interest income.......................................... 18,800 310
Interest expense......................................... (9,340) (14)
--------- --------
Income before income taxes, minority interest and equity
income (loss)........................................... 635,624 26,683
Income taxes............................................. (209,499) 663
Minority interest........................................ 5,901 146
Equity income (loss)..................................... (80,051) (7,413)
--------- --------
Net Income............................................... $ 351,975 $ 20,079
========= ========
Net Income Per Share
Basic.................................................. $1.33 $0.14
Diluted................................................ $1.30 $0.14
Weighted Average Shares Outstanding
Basic.................................................. 264,191 145,292
Diluted................................................ 270,132 147,400
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
(in thousands)
<S> <C> <C>
Operating Activities
Net income................................................ $ 351,975 $ 20,079
Adjustments to reconcile net cash used in operating
activities
Depreciation and amortization........................... 5,691 551
Deferred taxes.......................................... 209,499 (914)
Equity (income) loss.................................... 80,051 7,413
Other income............................................ (657,686) (28,685)
Minority interest....................................... (5,901) (146)
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable, net................................ (2,132) (674)
Prepaid expenses and other assets....................... (4,620) 70
Accounts payable...................................... 1,119 (332)
Accrued expenses...................................... 17,812 903
Deferred revenue........................................ 498 (97)
--------- --------
Net cash used in operating activities..................... (3,694) (1,832)
--------- --------
Investing Activities
Capital expenditures.................................... (6,212) (156)
Proceeds from sales of available-for-sale securities.... -- 2,574
Proceeds from sales of Partner Company ownership
interests and advances to a shareholder................ -- 2,655
Advances to Partner Companies........................... (6,092) (1,892)
Repayment of advances to Partner Companies.............. 2,809 1,913
Acquisitions of ownership interests in Partner Companies.. (477,202) (22,481)
Proceeds from short-term investments.................... 3,362 --
Increase in cash surrender value of life insurance...... -- (62)
Reduction in cash due to deconsolidation of
VerticalNet............................................ -- (5,646)
--------- --------
Net cash used in investing activities..................... (483,335) (23,095)
--------- --------
Financing Activities
Issuance of common stock, net........................... 650 31,980
Long-term debt and capital lease obligations............ (746) (59)
Line of credit borrowing................................ -- 576
Proceeds from convertible notes......................... 1,926 --
Distribution to former LLC members...................... -- (10,676)
Repayments of advances to employees..................... 46 --
Treasury stock purchase by subsidiary................... -- (4,463)
Issuance of stock by subsidiary......................... 261 100
--------- --------
Net cash provided by financing activities................. 2,137 17,458
--------- --------
Net decrease in Cash and Cash Equivalents................. (484,892) (7,469)
Cash and Cash Equivalents at the beginning of period...... 1,343,459 26,841
--------- --------
Cash and Cash Equivalents at the End of Period............ 858,567 $ 19,372
========= ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of the Company
Internet Capital Group, Inc. (the "Company") was formed on March 4, 1996. The
Company is an Internet company actively engaged in business-to-business, or
B2B, e-commerce through a network of companies. The Company defines e-commerce
as conducting or facilitating business transactions over the Internet. As of
March 31, 2000, the Company owned interests in 63 companies engaged in e-
commerce, which the Company calls its "Partner Companies". The Company's goal
is to become the premier B2B e-commerce company. The Company's operating
strategy is to integrate its Partner Companies into a collaborative network
that leverages the collective knowledge and resources of the Company and the
network.
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general
partner of a partnership would have.
Basis of Presentation
On February 2, 1999, the Company converted from a Limited Liability Company
("LLC") to a corporation. All shareholder transactions have been presented as
if the conversion occurred on March 4, 1996 (inception).
The accompanying unaudited consolidated financial statements of the Company
for the three months ended March 31, 2000 and 1999, included herein, have been
prepared by the Company pursuant to the interim financial statements rules and
regulations of the SEC. In the opinion of management, the accompanying
unaudited consolidated interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the results of the Company's operations and its cash flows for the three months
ended March 31, 2000 and 1999 and are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000 or for any other
interim period. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. The information included
in this Form 10-Q should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Company's
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, Internet Capital Group Operations, Inc. (the
"Operations Company") and its majority owned subsidiary Breakaway Solutions,
Inc. ("Breakaway Solutions") for the three months ended March 31, 1999. For the
three months ended March 31, 2000, the consolidated financial statements
include the accounts of the Company, its wholly owned subsidiaries, the
Operations Company and Internet Capital Group (Europe) Limited, and its
majority owned subsidiaries, Animated Images, Inc. ("Animated Images"),
CyberCrop.com, Inc. ("CyberCrop.com"), EmployeeLife.com, ICG Commerce, Inc.
("ICG Commerce") and iParts, each of which was consolidated since its date of
acquisition.
In December 1999, the Company recorded a two for one stock split effected as
a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
7
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on the
Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or indirectly
owns more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, a Partner
Company's results of operations are reflected within the Company's Consolidated
Statements of Operations. All significant intercompany accounts and
transactions have been eliminated. Participation of other Partner Company
shareholders in the earnings or losses of a consolidated Partner Company is
reflected in the caption "Minority interest" in the Company's Consolidated
Statements of Operations. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's share of the earnings or
losses of the consolidated Partner Company. The results of operations and cash
flows of a Consolidated Partner Company are included through the latest interim
period in which the Company owned a greater than 50% direct or indirect voting
interest for the entire interim period. Upon dilution of control below 50%, the
accounting method is adjusted to the equity or cost method of accounting, as
appropriate, for subsequent periods.
In 1999, the Company acquired a controlling majority interest in Breakaway
Solutions for $17.2 million and in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts ("Other Majority Owned Subsidiaries")
for $29.8 million in the aggregate. Breakaway Solutions' operations have
historically consisted primarily of implementation of customer relational
management systems and custom integration to other related applications. In
1999, Breakaway Solutions expanded to provide service offerings in custom web
development and application hosting both through internal expansion and
acquisitions. Breakaway Solutions' revenue is generally recognized upon
performance of services. ICG Commerce provides strategic sourcing consulting
and online Internet purchasing. The Other Majority Owned Subsidiaries,
excluding ICG Commerce, are development stage companies that have generated
negligible revenue since their inception. In connection with the acquisition of
its ownership interest in Breakaway Solutions and the Other Majority Owned
Subsidiaries, the Company recorded the excess of cost over net assets acquired
of $13.0 million and $11.8 million, respectively, as goodwill which is being
amortized over three years.
The Company's direct and indirect voting interest in Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts at March 31, 2000 was
50.1%, 75%, 52%, 50.2% and 67%, respectively.
Equity Method. Partner Companies whose results are not consolidated, but over
whom the Company exercises significant influence, are accounted for under the
equity method of accounting. Whether or not the Company exercises significant
influence with respect to a Partner Company depends on an evaluation of several
factors including, among others, representation on the Partner Company's Board
of Directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the Partner Company, including voting rights
associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, the Company's share of the
earnings or losses of the Partner Company is reflected in the caption "Equity
income (loss)" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the
consolidation or equity method of accounting is amortized on a
8
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
straight-line basis over three to five years which adjusts the Company's share
of the Partner Company's earnings or losses.
Cost Method. Partner Companies not accounted for under the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method Partner Company impairment charges are recognized in the
Consolidated Statement of Operations with the new cost basis not written-up if
circumstances suggest that the value of the Partner Company has subsequently
recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost because it has the
ability and intent to hold these securities until maturity. The Company records
its ownership interest in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily
determinable fair values based on quoted market prices, in which case these
interests are valued at fair value and classified as available-for-sale
securities or some other classification in accordance with SFAS No. 115. In
addition to the Company's investments in voting and non-voting equity and debt
securities, it also periodically makes advances to its Partner Companies in the
form of promissory notes which are accounted for in accordance with SFAS No.
114.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have invested or have committed to invest in the Partner Companies.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
accumulated other comprehensive income in shareholders' equity.
Unrealized gains or losses related to available-for-sale securities are
recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Short-term investments
Short-term investments are debt securities maturing in less than one year and
are carried at amortized cost, which approximates fair value.
Derivative Financial Instruments
The Company selectively uses derivative financial instruments, including
cashless collar agreements ("Collars") to manage its exposure to fluctuations
in certain of its investments in publicly held equity securities. The Company
has recorded these Collars at their estimated fair market value, with
unrealized gains
9
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
and losses resulting from changes in fair value recorded as a component of
accumulated other comprehensive income (loss). Unrealized gains and losses as a
result of these instruments are recognized in the consolidated statement of
operations when the underlying hedged item is extinguished or otherwise
terminated. The Company does not hold or issue any derivative financial
instruments for trading purposes and is not a party to leveraged instruments.
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed to
losses in the event of nonperformance by the counterparties, the Company does
not expect such losses, if any, to be significant.
In March 2000, the Company entered into cashless collar agreements (the
"Equity Collars") to hedge 2.2 million shares of its holdings of Ariba, Inc.
accounted for at fair value. The Equity Collars limit the Company's exposure to
and benefits from price fluctuations in the underlying equity securities. The
Equity Collars mature between 2001 and 2003. As the Company accounts for the
Equity Collars as a hedge, changes in the value of the Equity Collars are
substantially offset by changes in the value of the underlying investment
securities. Each of these changes are marked-to-market through accumulated
other comprehensive income (loss) in the Company's Consolidated Balance Sheets.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis over three to
five years. Goodwill and other intangible assets at March 31, 2000 of $21.5
million, net of accumulated amortization of $2.2 million, is attributable to
the Company's acquisitions of ownership interests in Animated Images ($5.9
million), CyberCrop.com ($.7 million), EmployeeLife.com ($1.0 million), ICG
Commerce ($2.0 million), and iParts ($0.1 million) and ICG Commerce's
acquisitions of Purchasing Group, Inc. and Integrated Sourcing, LLC ($11.8
million). The carrying value of goodwill is evaluated for possible impairment
based on achievement of business plan objectives and milestones, the fair value
of each ownership interest in and advances to the Partner Company relative to
carrying value, the financial condition and prospects of the Partner Company,
and other relevant factors. If impairment exists, the carrying amount of the
goodwill will be reduced by the estimated shortfall of undiscounted cash flows.
Income Taxes
From the Company's inception in March 1996 to February 1999, the Company was
not subject to federal and state income taxes. On February 2, 1999, the Company
converted from an LLC to a Corporation. The Company's accumulated deficit of
$8.7 million at that date was reclassed to additional paid-in capital.
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company's effective tax rate for the three months ended March 31, 2000
differed from the federal statutory rate of 35% principally due to the impact
of state taxes and certain nondeductible expenses. The Company's effective tax
rate for the three months ended March 31, 1999 differed from the federal
statutory rate
10
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
of 35% principally due to the impact of changing its tax status from an LLC to
a corporation on February 2, 1999 and nondeductible permanent differences,
principally related to stock compensation. On February 2, 1999, the Company
recorded a deferred tax benefit and related deferred tax asset of $7.7 million
which primarily represented the excess of tax basis over book basis of its
ownership interests in and advances to Partner Companies.
The Company's net deferred tax liability of $84.7 million at March 31, 2000
consists of deferred tax liabilities of $166.2 million relating primarily to
the gain on the sale of a Partner Company for marketable securities, offset by
net deferred tax assets of $81.5 million relating primarily to the excess of
tax carrying values over book carrying values of its Partner Companies and net
unrealized depreciation in available-for-sale securities.
Net Income (Loss) Per Share
Net income (loss) per share (EPS) is computed using the weighted average
number of common shares outstanding during each period. Diluted EPS includes
common stock equivalents (unless anti-dilutive) which would arise from the
exercise of stock options and conversion of other convertible securities and is
adjusted, if applicable, for the effect on net income (loss) of such
transactions.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Gain or Loss on Issuances of stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
issues its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations.
2. Comprehensive Income
Comprehensive income is the change in equity of a business enterprise during
a period resulting from transactions and other events and circumstances from
non-owner sources. Excluding net income, the Company's source of comprehensive
income (loss) is net unrealized appreciation (depreciation) related to its
available-for-sale securities. The following summarizes the components of
comprehensive income:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-----------------
2000 1999
-------- -------
(in thousands)
(Unaudited)
<S> <C> <C>
Net income................................................. 351,975 20,079
Other comprehensive income (loss):
Unrealized appreciation (depreciation), net of tax....... (76,140) 2,946
Reclassification adjustments, net of tax................. (16,882) (1,940)
Foreign currency translation adjustment.................. (40) --
-------- -------
Comprehensive income....................................... $258,913 $21,085
======== =======
</TABLE>
11
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Net Income Per Share
The calculations of Net Income Per Share were:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
------------------
2000 1999
-------- --------
(in thousands
except per share
data)
(Unaudited)
<S> <C> <C>
Basic
Net income................................................ $351,975 $ 20,079
======== ========
Average common shares outstanding......................... 264,191 145,292
Basic..................................................... $ 1.33 $ .14
======== ========
Diluted
Net income................................................ $351,975 $ 20,079
Partner Company equity adjustment........................... (1,338) --
-------- --------
Adjusted net income......................................... $350,637 $ 20,079
======== ========
Average common shares outstanding......................... 264,191 145,292
Effect of:
Dilutive options........................................ 2,976 2,108
Dilutive securities..................................... 2,965 --
-------- --------
Average common shares assuming dilution................... 270,132 147,400
======== ========
Diluted................................................... $ 1.30 $ .14
======== ========
</TABLE>
If a consolidated or equity method partner company has dilutive options or
securities outstanding, diluted net income per share is computed first by
deducting from income (loss) from continuing operations the income attributable
to the potential exercise of the dilutive options or securities of the partner
company. For the three months ended March 31, 2000, the impact of a partner
company's dilutive securities has been shown as an adjustment to net income for
purposes of calculating diluted net income per share. The impact of the
conversion of the Company's convertible subordinated notes has not been
included as its impact would be anti-dilutive.
4. Ownership Interests In and Advances to Partner Companies
The following summarizes the Company's ownership interests in and advances to
Partner Companies accounted for under the equity and cost method of accounting.
The ownership interests are classified according to applicable accounting
methods at the respective dates presented. Cost basis represents the Company's
original acquisition cost less any impairment charges recognized for such
companies to date.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------- -----------------
Carrying Cost Carrying Cost
Value Basis Value Basis
---------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Equity Method............................ $1,093,500 $ 971,158 $491,977 $578,922
Cost Method.............................. 64,136 64,136 55,362 55,362
---------- --------
$1,157,635 $547,339
========== ========
</TABLE>
12
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Ownership Interests In and Advances to Partner Companies (Continued)
At March 31, 2000, the Company's carrying value in its Partner Companies
accounted for under the equity method exceeded its share of the underlying
equity in the net assets of such companies by $503.5 million. This excess
relates to ownership interests acquired through March 31, 2000 and is being
amortized over a three year period. Amortization expense of $37.4 million is
included in "Equity income (loss)" in the accompanying Consolidated Statements
of Operations for the three months ended March 31, 2000.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at March 31, 2000
and 1999 has been compiled from the financial statements of the respective
Partner Companies:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue................................................. $ 150,998 $ 10,895
Net Loss................................................ $(140,704) $(17,891)
</TABLE>
5. Debt
Convertible Subordinated Notes
In December, 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and
mature in December, 2004. The notes are convertible at the option of the
holder, at any time on or before maturity into shares of the Company's common
stock at a conversion price of $127.44 per share, which is equal to a
conversion rate of 7.8468 shares per $1,000 principal of notes. Additionally,
the notes may be redeemed by the Company if the Company's closing stock price
exceeds 150% of the conversion price then in effect for at least 20 trading
days within a period of 30 consecutive trading days. The conversion rate is
subject to adjustment. The Company recorded interest expense of $7.8 million
relating to these notes during the three months ended March 31, 2000 with the
first interest payment due June 21, 2000 and subsequent interest payments due
each six months following through December 21, 2004. Issuance costs of $18.3
million were recorded in other assets and are being amortized as interest
expense over the term of the notes using the effective interest method.
Credit Facilities
In March 2000, the Company's revolving bank credit facility was amended to,
among other things, increase the Company's credit facility to provide for
borrowings up to $250 million, including the issuance of letters of credit up
to $125 million. The agreement includes a $125 million 364-day secured line of
credit and a $125 million two-year secured revolving credit facility. Prior to
this amendment, the credit facility was structured as a $50 million term
revolving credit facility bearing interest at the Company's option at prime or
LIBOR plus 2.5%.
The revolving facility and line of credit are subject to .375% and .25%
unused commitment fees, respectively, bear interest, at the Company's option at
LIBOR plus 2.0% or the lenders' Base Rate (the lenders' Base Rate being the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and are
secured by substantially all of the Company's assets (including the Company's
holdings in Partner Companies). Borrowing availability under the facility is
based on the fair market value of the Company's holdings of publicly traded
Partner Companies and the value, as defined in the facility, of the Company's
private Partner Companies. The credit facility contains certain financial
covenants which include restrictions on, among other things, dispositions,
certain other indebtedness and payment of dividends and similar distributions.
No amounts were outstanding on these facilities as of March 31, 2000.
13
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Debt (Continued)
EmployeeLife.com has a $1,000,000 revolving credit facility and a $500,000
equipment line of credit at March 31, 2000. Borrowings under the credit
facility accrue interest at a rate of prime plus .75% and the equipment line of
credit accrues interest at the two year treasury rate plus 1.75%. No amounts
were outstanding at March 31, 2000. The revolving credit facility expires in
March 2001 and the equipment line expires in June 2000.
Long-Term Debt
The Company's long-term debt of $2.7 million (net of current portion of $2.6
million) relates to its Consolidated Partner Companies, is non-recourse to the
Company, and primarily consists secured notes due to shareholders of ICG
Commerce and EmployeeLife.com and capital lease commitments.
6. Segment Information
The Company's reportable using the "management approach" under SFAS 131,
Disclosures About Segments of a Business Enterprise and Related Information,
consist of Partner Company Operations and General ICG Operations. Partner
Company Operations includes the effect of consolidating, Breakaway Solutions
for the three months ended March 31, 1999 and Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts for the three months ended March 31,
2000, and recording the Company's share of earnings and losses of Partner
Companies accounted for under the equity method of accounting.
Breakaway Solutions' operations include implementation of various computer
applications. Animated Images' operations include software development and
consulting services and ICG Commerce's operations include purchasing services
and consulting services. CyberCrop.com, EmployeeLife.com and iParts are
development stage companies that have generated negligible revenue since their
inception. Partner Companies accounted for under the equity method of
accounting operate in various businesses. General ICG Operations represents the
expenses of providing strategic and operational support to the Internet-related
Partner Companies, as well as the related administrative costs. General ICG
Operations also includes the effect of transactions and other events incidental
to the Company's general operations and the Company's ownership interests in
and advances to Partner Companies. The Company's and Partner Companies'
operations were principally in the United States of America during all periods
presented.
14
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the unaudited information related to the Company's
segments. All significant intersegment activity has been eliminated. Assets are
owned or allocated assets used by each operating segment.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
(in thousands)
(Unaudited)
<S> <C> <C>
Partner Company Operations
Revenue................................................. $ 1,830 $ 3,111
--------- --------
Operating expenses
Cost of revenue......................................... 689 1,553
Selling, general and administrative..................... 15,774 2,115
--------- --------
Total operating expenses................................ 16,463 3,668
--------- --------
(14,633) (557)
Other income (expense), net............................. -- (7)
Interest income......................................... 129 32
Interest expense........................................ (127) (14)
--------- --------
Income (loss) before income taxes, minority interest and
equity income (loss)................................... (14,631) (546)
Income taxes............................................ 771 --
Minority interest....................................... 5,901 146
Equity income (loss).................................... (80,051) (7,413)
--------- --------
Loss from Partner Company Operations...................... $ (88,010) $ (7,813)
========= ========
General ICG Operations
General and administrative.............................. $ 16,889 $ 1,733
--------- --------
Other income, net....................................... 657,686 28,684
Interest income (expense), net.......................... 9,458 278
Income taxes............................................ (210,270) 663
--------- --------
Income (loss) from General ICG Operations................. $ 439,985 $ 27,892
========= ========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Assets
Partner Company Operations
Carrying value of equity method Partner Companies.... $1,093,500 $ 491,977
Other................................................ 53,794 45,075
---------- ----------
1,147,294 537,052
---------- ----------
General ICG Operations
Cash and cash equivalents............................ 834,181 1,326,560
Carrying value of cost method Partner Companies...... 64,135 55,362
Other................................................ 425,447 131,410
---------- ----------
1,323,763 1,513,332
---------- ----------
$2,471,057 $2,050,384
========== ==========
</TABLE>
15
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Parent Company Financial Information
Parent Company Financial information is provided to present the financial
position and results of operations of the Company as if Animated Images,
Breakaway Solutions, Cybercrop.com, EmployeeLife.com, ICG Commerce, and iParts
("consolidated companies") were accounted for under the equity method of
accounting for all applicable periods presented. The Company's share of the
consolidated companies' losses is included in "Equity income (loss)" in the
Parent Company Statements of Operations for all periods presented based on the
Company's ownership percentage in each period. The carrying value of the
consolidated companies as of March 31, 2000 and December 31, 1999 is included
in "Ownership interests in and advances to Partner Companies" in the Parent
Company Balance Sheets.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Assets
Current assets...................................... $ 876,672 $1,332,803
Ownership interests in and advances to Partner
Companies.......................................... 1,187,596 571,706
Other............................................... 382,955 125,166
---------- ----------
Total assets...................................... 2,447,223 2,029,675
---------- ----------
Liabilities and shareholders' equity
Current liabilities................................. 47,224 43,204
Non-current liabilities............................. 650,934 566,250
Shareholders' equity................................ 1,749,063 1,420,221
---------- ----------
Total liabilities and shareholders' equity........ $2,447,223 $2,029,675
========== ==========
</TABLE>
Parent Company Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
(in thousands)
(Unaudited)
<S> <C> <C>
Revenue.................................................... $ -- $ --
Operating expenses
General and administrative............................... 16,889 1,733
--------- --------
Total operating expenses............................... 16,889 1,733
--------- --------
(16,889) (1,733)
Other income, net.......................................... 657,686 28,684
Interest income, net....................................... 9,458 278
--------- --------
Income before income taxes and equity income (loss)........ 650,255 27,229
Income taxes............................................... (210,270) 663
Equity income (loss)....................................... (88,010) (7,813)
--------- --------
Net income................................................. $ 351,975 $ 20,079
========= ========
</TABLE>
16
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward looking statements are subject to risks,
uncertainties and assumptions about us and our partner companies, including,
among other things:
-- development of an e-commerce market,
-- our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the changing
needs of these markets,
-- our ability to successfully execute our business model,
-- our partner companies' ability to compete successfully against direct
and indirect competitors,
-- our ability to acquire interests in additional companies,
-- growth in demand for Internet products and services,
-- adoption of the Internet as an advertising medium, and
-- our ability to successfully expand our business internationally.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these factors.
General
Internet Capital Group, Inc. ("ICG") is an Internet company actively engaged
in B2B e-commerce through a network of partner companies. As of March 31, 2000
we owned interests in 63 B2B e-commerce companies which we refer to as our
partner companies. We focus on two types of B2B e-commerce companies, which we
call market makers and enabling service providers.
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we have a
"partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power
or authority to legally bind any of our partner companies, and we do not have
the types of liabilities in relation to our partner companies that a general
partner of a partnership would have.
Because we acquire significant interests in B2B e-commerce companies, many of
which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. While our partner
companies have consistently reported losses, we have recorded net income in
certain periods and experienced significant volatility from period to period
due to one-time transactions and other events incidental to our ownership
interests in and advances to partner companies. We do not know if we will
report net income in any period. These transactions and events are described in
more detail under "Net Results of Operations--General ICG Operations--Other
Income" and include dispositions of, and changes to, our partner company
ownership interests, dispositions of our holdings of available-for-sale
securities, and impairment charges. On a continuous basis, but no less
frequently than at the end of each quarterly reporting period, we evaluate the
carrying value of our ownership interests in and advances to each of our
partner companies for possible impairment based on achievement of business plan
objectives and milestones, the fair value of each ownership interest and
advance in the partner company relative to carrying value, the financial
condition and prospects of the partner company, and other relevant factors. The
business plan objectives and milestones we consider include, among others,
those related to financial performance such as achievement of planned financial
17
<PAGE>
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of a web site or the hiring
of key employees. The fair value of our ownership interests in and advances to
privately held partner companies is generally determined based on the value at
which independent third parties have invested or have committed to invest in
our partner companies.
The presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements of our
partner companies. To the extent our partner companies change the presentation
or content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of our financial statements may also change.
On August 23, 1999 we received an exemptive order from the Securities and
Exchange Commission under Section 3(b)(2) of the Investment Company Act of 1940
declaring us to be primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are accounted
for under three broad methods: consolidation, equity method and cost method.
The applicable accounting method is generally determined based on our voting
interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own more
than 50% of the outstanding voting securities are generally accounted for under
the consolidation method of accounting. Under this method, a partner company's
accounts are reflected within our Consolidated Statements of Operations.
Participation of other partner company shareholders in the earnings or losses
of a consolidated partner company is reflected in the caption "Minority
interest" in our Consolidated Statements of Operations. Minority interest
adjusts our consolidated net results of operations to reflect only our share of
the earnings or losses of the consolidated partner company.
We acquired controlling majority ownership interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts
during the three months ended June 30, 1999, CyberCrop.com during the three
months ended September 30, 1999 and Animated Images and ICG Commerce during the
three months ended December 31, 1999, each of which was consolidated from the
date of its acquisition. Due to Breakaway Solutions' initial public offering in
October 1999, our voting ownership interest in Breakaway Solutions decreased
below 50% and we have accounted for Breakaway Solutions under the equity method
of accounting since October 1999. As of March 31, 2000, Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts were our only
consolidated partner companies.
The effect of a partner company's net results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of a partner company is
reflected in our net results of operations in the Consolidated Statements of
Operations.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the partner company, including voting rights
associated with our holdings in common, preferred and other convertible
instruments in the partner company. Under the equity method of accounting, a
partner company's accounts are not reflected within our Consolidated Statements
of Operations; however, our share of the earnings or losses of the partner
company is reflected in the caption "Equity income (loss)" in the Consolidated
Statements of Operations. As of December 31, 1999, we accounted for 31 of our
partner companies under the equity method of accounting. As of March 31, 2000,
we accounted for 48 of our partner companies under this method.
18
<PAGE>
Our partner companies accounted for under the equity method of accounting at
December 31, 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner ----------------------
Company December 31, March 31,
Since 1999 2000
------- ------------ ---------
<S> <C> <C> <C>
EQUITY METHOD:
AssetTRADE.com, Inc............................ 1999 17% 30%
AUTOVIA Corporation............................ 1998 N/A 20%
BidCom, Inc.................................... 1999 35% 30%
Blackbird...................................... 2000 N/A 32%
Blackboard, Inc................................ 1998 29% 28%
Breakaway Solutions, Inc....................... 1999 40% 40%
BuyMedia, Inc.................................. 2000 N/A 34%
CapSpan LLC.................................... 2000 N/A 33%
CentriMed.com, Inc............................. 2000 N/A 47%
CommerceQuest, Inc............................. 1998 28% 28%
CommerX, Inc................................... 1998 40% 39%
ComputerJobs.com, Inc.......................... 1998 33% 33%
CourtLink, Inc................................. 1999 19% 34%
e-Chemicals, Inc............................... 1998 N/A 20%
eMarketWorld, Inc.............................. 1999 42% 42%
eMerge Interactive, Inc........................ 1999 45% 39%
eMetra Ltd..................................... 2000 N/A 45%
eumediX........................................ 2000 N/A 31%
Eu-supply.com.................................. 2000 N/A 29%
FarmingOnline Limited.......................... 2000 N/A 32%
Freeborders.com, Inc........................... 2000 N/A 46%
Industrial America, Inc........................ 2000 N/A 50%
Internet Commerce Systems, Inc................. 1999 43% 43%
Internet Healthcare Group...................... 2000 N/A 30%
InvestorForce.com, Inc......................... 1999 49% 43%
iSky, Inc...................................... 1996 31% 34%
Jamcracker, Inc................................ 1999 24% 24%
JusticeLink, Inc............................... 1999 37% 37%
LinkShare Corporation.......................... 1998 34% 39%
Logistics.com, Inc............................. 2000 N/A 36%
MetalSite General Partner, LLC................. 1999 44% 39%
NationStreet, Inc.............................. 1999 38% 38%
NetVendor, Inc................................. 1999 27% 26%
ONVIA.com, Inc................................. 1999 23% 23%
PaperExchange.com, LLC......................... 1999 24% 23%
Retail Exchange, Inc........................... 1999 30% 32%
SageMaker, Inc................................. 1998 21% 21%
Simplexis.com Corporation...................... 2000 N/A 47%
StarCite, Inc.................................. 1999 43% 40%
Syncra Software, Inc........................... 1998 35% 35%
TALPX Inc...................................... 2000 N/A 28%
TeamOn.com, Inc................................ 2000 N/A 34%
traffic.com, Inc............................... 1999 20% 32%
United Messaging, Inc.......................... 1999 37% 37%
Universal Access, Inc.......................... 1999 24% 25%
USgift.com..................................... 1999 38% 38%
VerticalNet, Inc............................... 1996 34% 32%
Vivant! Corporation............................ 1998 31% 39%
</TABLE>
19
<PAGE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Breakaway Solutions, eMerge Interactive, ONVIA.com,
Universal Access and VerticalNet, in which we owned voting common stock and e-
Chemicals, in which we owned non-voting convertible debentures. We also owned
voting common stock in a number of these partner companies and have
representation on the board of directors of all of the above partner companies.
During the period ended March 31, 2000 Plan Sponsor Exchange, Inc. changed its
name to InvestorForce.com. Subsequent to March 31, 2000 CourtLink, Inc. merged
with JusticeLink, Inc., and Residential Delivery Services, Inc. changed its
name to NationStreet, Inc.
Those Partner Companies listed with a voting ownership of "N/A" at December
31, 1999 reflects that either these companies were accounted for under a
different method at that time (AUTOVIA Corporation and e-Chemicals were
accounted for under the cost method of accounting at December 31, 1999) or we
had not acquired an interest in the Partner Company as of December 31, 1999.
Most of our equity method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most
equity method partner companies incurred substantial losses in 1999 and are
expected to continue to incur substantial losses in 2000. Additionally, we
recognize goodwill amortization expense related to the excess basis of our
equity method partner companies.
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations.
Our partner companies accounted for under the cost method of accounting at
December 31, 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
------------------------------
Partner
Company December 31, March 31,
Since 1999 2000
------- ------------ ---------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc.................... 1999 8% 8%
AUTOVIA Corporation............................ 1998 16% N/A
Benchmarking Partners, Inc..................... 1996 12% 13%
ClearCommerce Corp............................. 1997 15% 11%
Collabria, Inc................................. 1999 11% 11%
Context Integration, Inc....................... 1997 14% 12%
Deja.com, Inc.................................. 1997 2% 2%
e-Chemicals, Inc............................... 1998 0% N/A
Entegrity Solutions Corporation................ 1996 11% 9%
PrivaSeek, Inc................................. 1998 8% 7%
Servicesoft Technologies, Inc.................. 1998 5% 5%
TRADEX Technologies, Inc....................... 1999 10% N/A
US Interactive, Inc............................ 1996 3% 3%
</TABLE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Deja.com, in which we owned non-voting convertible
preferred stock and voting common stock, and US Interactive, Inc., in which we
owned voting common stock. We also owned voting common stock in a number of
these partner companies and in most cases have representation on the board of
directors of the above partner companies. We record our ownership in debt
securities at cost as we have the ability and intent to hold these securities
until maturity. In addition to our investments in voting and non-voting equity
and debt securities, we also periodically make advances to our partner
companies in the form of promissory notes. There were advances to cost method
partner companies totaling $1.1 million at March 31, 2000.
20
<PAGE>
Those Partner Companies listed with a voting ownership of "N/A" at March 31,
2000 reflects that either these companies were accounted for under a different
method at that time (AUTOVIA Corporation and e-Chemicals changed from cost
method companies at December 31, 1999 to equity method companies at March 31,
2000) or, in the case of TRADEX, we sold our ownership interest during the
period ended March 31, 2000.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1999 and are expected
to continue to incur substantial losses in 2000. None of our cost method
partner companies have paid dividends during our period of ownership and they
generally do not intend to pay dividends in the foreseeable future. US
Interactive is accounted for under Statement of Financial and Accounting
Standards No. 115.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to period
primarily due to whether or not we apply the consolidation method of accounting
or the equity method of accounting. For example, we consolidated Breakaway
Solutions' financial statements from the date of acquisition (January 6, 1999)
through September 30, 1999. Due to Breakaway Solutions' initial public offering
in October 1999, however, our voting ownership interest in Breakaway Solutions
decreased to below 50%. Therefore, we have applied the equity method of
accounting since October 1999.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts
during the three months ended June 30, 1999, and CyberCrop.com during the three
months ended September 30, 1999, and Animated Images and ICG Commerce during
the three months ended December 31, 1999, each of which was consolidated from
the date of its acquisition. The presentation of our consolidated financial
statements looks substantially different as a result of consolidating Animated
Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts and no longer
consolidating Breakaway Solutions in our financial statements for the three
months ended March 31, 2000 versus comparable periods in the prior year.
To understand our net results of operations and financial position without
the effect of consolidating our majority owned subsidiaries, Note 7 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets which treat our majority owned subsidiaries as if
they were accounted for under the equity method of accounting for all periods
presented. Our share of the losses of Animated Images, Breakaway Solutions,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts is included in "Equity
income (loss)" in the Parent Company Statements of Operations. The carrying
value of Animated Images, Breakaway Solutions, CyberCrop.com, EmployeeLife.com,
ICG Commerce and iParts as of March 31, 2000 is included in "Ownership
interests in and advances to Partner Companies" in the Parent Company Balance
Sheets.
Net Results of Operations
Our reportable segments determined in accordance with Statement of Financial
Accounting Standards No. 131 are Partner Company Operations and General ICG
Operations. Partner Company Operations includes the effect of consolidating
Breakaway Solutions for the three months ended March 31, 1999 and Animated
Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts for the three
months ended March 31, 2000, and recording our share of earnings or losses of
partner companies accounted for under the equity method of accounting. General
ICG Operations represents the expenses of providing strategic and operational
support to our partner companies, as well as the related administrative costs
related to these expenses. General ICG Operations also includes the effect of
transactions and other events incidental to our ownership interests in our
partner companies and our operations in general.
21
<PAGE>
Net Results of Operations-Partner Company Operations
Consolidated Companies--Analysis of the period ended March 31, 2000
For the three months ended March 31, 1999, Breakaway Solutions was
consolidated and accounted for nearly all of our consolidated revenue and a
significant portion of our consolidated operating expenses. Breakaway Solutions
has been accounted for under the equity method since October 1999 and
discussion related to Breakaway Solutions' results of operations can be found
under the heading "Equity Income (Loss)".
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated during the period ended March 31, 2000 and accounted for $1.8
million and $15.5 million of our Partner Company Operations' revenue and
operating expenses, respectively. CyberCrop.com, EmployeeLife.com and iParts
are development stage companies, have generated negligible revenue since their
inception, and incurred aggregate operating expenses of $3.6 million during the
period ended March 31, 2000. Animated Images and ICG Commerce generated
aggregate revenues of approximately $1.8 million during the period and incurred
aggregate operating expenses of $11.9 million, primarily selling, general and
administrative expenses as they deploy their business models. Also included in
selling, general and administrative expenses for the period ended March 31,
2000 was $1 million of goodwill amortization related to our acquisitions of
these partner companies.
Equity Income (Loss)
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity
income (loss) fluctuates with the number of companies accounted for under the
equity method, our voting ownership percentage in these companies, the
amortization of goodwill related to newly acquired ownership interests in
equity method companies, and the net results of operations of these companies.
During the three months ended March 31, 2000 and the years ended December 31,
1999 and 1998 we utilized cash, stock, or notes payable totalling $486.9
million, $495.6 million and $23.7 million, respectively, to acquire partner
company interests accounted for under the equity method of accounting which
resulted in goodwill of $241.7 million, $293.7 million and $15.1 million,
respectively, which is being amortized over 3 years. Without giving effect to
additional acquisitions in equity method companies subsequent to March 31,
2000, we expect goodwill amortization related to equity method companies to
approximate $140 million through the remainder of 2000. The extent to which
actual goodwill amortization in 2000 related to equity method companies exceeds
this estimate will depend primarily upon the amount of capital we deploy in
2000 for the acquisition of additional ownership interests in equity method
companies.
During the period ended March 31, 2000 we accounted for 48 companies under
the equity method of accounting, compared to 13 for the period ended March 31,
1999. All of the companies, with the exception of VerticalNet, incurred losses
in the period ended March 31, 2000. VerticalNet recorded net income as the
result of a one time gain from the sale of its interest in Tradex Technologies,
Inc. Our equity loss of $80.1 million for the period ended March 31, 2000
consisted of $42.6 million related to our share of the equity method companies'
income and losses and $37.5 million of amortization of the goodwill of these
companies. Of the $42.6 million equity loss related to our share of the income
and losses of companies accounted for under the equity method for the period
ended March 31, 2000, $13.4 million in income was attributable to VerticalNet
and $5.6 million, $2.1 million, $1.3 million and 1.2 million, respectively,
were attributable to ONVIA.com's, Universal Access', Breakaway Solutions' and
eMerge Interactive's net losses, while the other 43 companies accounted for the
remaining equity losses ranging from less than $0.1 million to $4.3 million.
For the period ended March 31, 2000, VerticalNet had revenues of $27.5
million and net income of $42.1 million, compared to revenue of $1.9 million
and a net loss of $15.3 million in the comparable period in 1999. VerticalNet's
revenue increased period to period primarily due to a significant increase in
the number of storefronts as it grew the number of its vertical trade
communities from 35 as of March 31, 1999 to 55 as of
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March 31, 2000. In addition, transaction revenues from one of VerticalNet's
subsidiaries acquired after March 31, 1999 reached $14.6 million and
represented 53 percent of the total revenues for the quarter. Advertising
revenues accounted for $11.9 million, or 43 percent of the total. E-commerce
revenues (including slotting fees, product sales, commissions, education,
training and auction listing fees) increased to $1.0 million. Advertising
revenue accounted for the majority of revenues in the period ended March 31,
1999. VerticalNet recorded net income of $42.1 million, net of tax, primarily
related to the sale of its interest in Tradex Technologies to Ariba, Inc.,
resulting in a one time pre-tax gain of $79.9 million. Excluding this gain,
VerticalNet's losses increased period to period due to its costs of
maintaining, operating, promoting and increasing the number of its vertical
trade communities increasing more than revenue, increased amortization of
goodwill associated with acquisitions and a $10 million charge for in-process
research and development expensed during the period relating to VerticalNet's
acquisition of Tradeum.
For the period ended March 31, 2000, Onvia.com had revenue of $21.5 million
and a net loss of $26.1 million compared to revenue of $1.5 million and a net
loss of $1.6 million for the comparable period in 1999. The company has
generated substantially all of its revenue from product sales. Onvia.com's
revenue increased period to period due to increased product sales to new and
existing customers. Onvia.com's losses increased period to period as a result
of negative gross margins as it build its customer base, its increased
operating expenses related to marketing and advertising programs designed to
build its brand and drive customer acquisition, increases in personnel and non-
cash equity compensation charges.
For the period ended March 31, 2000, Universal Access had revenue of $7.3
million and a net loss of $9 million compared to revenue of $1.5 million and a
net loss of $1 million for the comparable period in 1999. The company has
generated substantially all of its revenue from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client
contracts with terms ranging from 12 to 60 months. The increase in revenues was
attributable to an increase in the volume of circuits sold, some of which were
higher capacity and, therefore, generated greater revenues per circuit. In
addition, there was an increase in the number of clients and additional sales
to existing clients. Universal Access' losses increased period to period as a
result of its increased costs to provide circuit access and increased operating
expenses as the result of increases in personnel, depreciation, amortization
and marketing expenses and non-cash equity compensation charges.
For the period ended March 31, 2000, Breakaway Solutions had revenue of $18.1
million and a net loss of $3.2 million compared to revenue of $3.1 million and
a net loss of $.2 million for the comparable period in 1999. Breakaway
Solutions' operating activities primarily consisted of providing strategy
consulting and systems integration services. Prior to Breakaway Solutions'
acquisition of Applica in 1999, Breakaway Solutions derived no revenues from
application hosting. Breakaway Solutions believes, however, that application
hosting will account for a significantly greater portion of revenues in the
future. The increase in revenues was attributable to an increase in billable
consultants and billing rates as well as $2.8 million in application hosting
revenues which did not exist at March 31, 1999. Breakaway Solutions' losses
increased period to period as a result of increases in personnel, marketing,
increased depreciation and amortization expenses.
For the period ended March 31, 2000, eMerge Interactive, Inc. had revenue of
$38.6 million and a net loss of $5.5 million compared to revenue of $.6 million
and a net loss of $2 million for the comparable period in 1999. Substantially
all revenue for the period was derived from cattle sales and comparisons to the
comparable period in 1999 are not meaningful. Gross margins were less than 1%
during the quarter and significant sales and marketing and research and
development costs have contributed to eMerge Interactive's net loss.
Due to the early stage of development of the other companies in which we
acquire interests, existing and new partner companies accounted for under the
equity method are expected to incur substantial losses. Our share of these
losses is expected to be significant.
While most of the companies accounted for under the equity method of
accounting have generated losses to date, and therefore in most cases did not
incur income tax liabilities, these companies may generate taxable
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income in the future. Our share of these companies' net income, if generated,
would be reduced to the extent of our share of these companies' tax expense.
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. We commenced operations in March 1996 with offices in
Wayne, Pennsylvania and San Francisco, California. As the number of our
employees grew to support our operations and those of our partner companies,
our general and administrative costs increased. In late 1998, we opened an
office in Boston, Massachusetts, and in 1999 we established operations in
Seattle, Washington and London, England and we significantly increased the
number of our employees. As a result of these initiatives, our general and
administrative costs increased $15.2 million for the period ended March 31,
2000 compared to the comparable period in 1999. We plan to continue to hire new
employees, open new offices, and build our overall infrastructure, therefore we
expect these costs to continue to be substantially higher compared to
historical periods.
During the years ended December 31, 1999 and 1998, we recorded aggregate
unearned compensation expense of $16.4 million and $0.7 million, respectively,
in connection with the grant of stock options to non-employees and the grant of
employee stock options with exercise prices less than the deemed fair value on
the respective dates of grant. General and administrative costs for the periods
ended March 31, 2000 and 1999 included $1.8 million and $0.1 million of
amortization expense related to stock option grants. Without giving effect to
any unearned compensation expense related to equity granted subsequent to March
31, 2000, we expect to recognize amortization of deferred compensation expense
of $5.6 million in 2000 and $3.4 million in 2001, $1.9 million in 2002, $0.9
million in 2003 and $0.2 million in 2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the issuances of stock by our partner companies to reflect the change in our
share of the net equity of these companies, and impairment charges related to
our ownership interests in and advances to partner companies.
General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Three Months
Ended,
March 31,
----------------
2000 1999
-------- -------
<S> <C> <C>
Sales of Excite holdings...................................... $ -- $ 2,051
Sale of i2 Technologies holdings.............................. 26,967 --
Issuance of stock by VerticalNet.............................. 176,794 28,254
Issuance of stock by Universal Access......................... 4,641 --
Tradex Sale to Ariba.......................................... 449,284 --
Partner company impairment charges............................ -- (1,620)
-------- -------
$657,686 $28,684
======== =======
</TABLE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. Throughout the remainder of 1998 we sold 716,082
shares of Excite. During the three month period ended March 31, 1999, we sold
23,738 shares of Excite which resulted in $2.5 million of proceeds and $2.1
million of gains.
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In August 1999, we divested our ownership interest in SMART Technologies,
Inc. due to the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. During the period ended March
31, 2000 we sold 180,176 shares of i2 Technologies which resulted in $31
million in proceeds received in April 2000 and a $27 million gain.
As a result of VerticalNet issuing additional shares for acquisitions and
Universal Access completing its initial public offering during the period ended
March 31, 2000, our share of VerticalNet's and Universal Access' net equity
increased by approximately $176.8 million and $4.6 million respectively. These
increases adjust our carrying value in VerticalNet and Universal Access and
result in non-operating gains of $176.8 million and $4.6 million, before
deferred taxes of $66.1 million and $1.7 million, respectively, for the period
ended March 31, 2000. Additionally, as a result of VerticalNet completing its
initial public offering in February 1999, our share of VerticalNet's net equity
increased by $28.3 million. This increase adjusts our carrying value in
VerticalNet and results in a non-operating gain of $28.3 million, before
deferred taxes of $10.5 million, in the three months ended March 31, 1999.
These gains were recorded in accordance with SEC Staff Accounting Bulletin No.
84 and our accounting policy with respect to such transactions. We believe
there is a high likelihood that transactions similar to these, in which a
partner company we account for under the consolidation or equity method of
accounting issues shares of its common stock, will occur in the future and we
expect to record gains or losses related to such transactions provided they
meet the requirements of SEC Staff Accounting Bulletin No. 84 and our
accounting policy. In some cases, as described in SEC Staff Accounting Bulletin
No. 84, the occurrence of similar transactions may not result in a non-
operating gain or loss but would result in a direct increase or decrease to our
shareholders' equity.
In March 2000 we exchanged all of our interest in Tradex Technologies, Inc.
for approximately 2.9 million shares of Ariba Inc. common stock. Based on
Ariba's closing price on March 9, 2000, the closing date of the transaction, we
recorded a pre-tax gain of $449.3 million. Our holdings of Ariba are accounted
for as available-for-sale securities and will be marked to market, with the
difference between carrying value and market value, net of deferred taxes,
recorded in "Accumulated other comprehensive income" in the shareholders'
equity section of our Consolidated Balance Sheets in accordance with Statement
of Financial Accounting Standards No. 115.
For the three months ended March 31, 1999, we recorded an impairment charge
of $1.6 million for the other than temporary decline in the fair value of a
cost method partner company. From the date we initially acquired an ownership
interest in this partner company, our funding to this partner company
represented all of the outside capital the company had available to fund its
net losses and capital asset requirements. During the three months ended March
31, 1999 we fully guaranteed the partner company's new bank loan and agreed to
provide additional funding. We acquired additional non-voting convertible
debentures of this partner company for $5.0 million in April 1999. The
impairment charges we recorded were determined by the decrease in net book
value of the partner company caused by its net losses, which were funded
entirely based on our funding and bank guarantee.
Interest Income
Our cash and cash equivalents at March 31, 2000 are invested primarily in
money market accounts and highly liquid, high quality debt instruments. During
the three months ended December 31, 1999, we received approximately $831
million in our follow-on stock offering and approximately $549.9 million from
the sale of convertible subordinated notes. The increase in interest income in
the three months ended March 31, 2000 was primarily due to the significant
increase in our cash and cash equivalents as a result of these transactions.
Interest Expense
Interest expense increased during the period primarily as the result of the
December 1999 issuance of approximately $566.3 million in convertible
subordinated notes due 2004 bearing interest at 5.5%.
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Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were organized as
a limited liability company and were treated as a partnership for income tax
purposes. As a result of our converting from an LLC to a corporation on
February 2, 1999, we are subject to corporate federal and state income taxes.
At the time of our conversion to a corporation, we recorded a deferred tax
benefit and related deferred tax asset of $7.7 million which primarily
represented the excess of tax basis over book basis of our partner companies.
The Company's net deferred tax liability of $84.7 million at March 31, 2000
consists of deferred tax liabilities of $166.2 million relating primarily to
the gain on the sale of a partner company for marketable securities, offset by
net deferred tax assets of $81.5 million relating primarily to the excess of
tax carrying values over book carrying values of our partner companies and net
unrealized depreciation in available-for-sale securities.
We have not recorded a valuation allowance related to our gross deferred tax
assets because we believe it is more likely than not that we will realize the
benefits of these assets. The assets relate primarily to the excess of tax
basis over book basis of our partner companies. These differences in basis
represent capital losses for tax purposes which, if recognized, can only be
deducted to the extent of capital gains. Additionally, these losses may be
carried back three years and carried forward five years from the year in which
they occur. While selling any portion of our ownership interests in partner
companies is something we will not do in the ordinary course of business, we
would consider pursuing such a sale at the minimum amount necessary to prevent
any capital losses from expiring unutilized. If we do not believe such a
strategy, or an alternative strategy, will be available in the time periods
allowed for carrying back and carrying forward losses, we will establish a
valuation allowance at that time. Most of our partner companies are in an early
stage of development, currently generate significant losses and are expected to
generate significant losses in the future. The marketability of the securities
we own of our partner companies is generally limited as they primarily
represent ownership interests in companies whose stock is not publicly traded.
As of March 31, 2000, our only publicly traded partner companies are
VerticalNet, Breakaway Solutions, eMerge Interactive, ONVIA.com, Universal
Access, and US Interactive. As a result, there is significant risk that we may
not be able to realize the benefits of expiring carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds, proceeds
from the issuance of convertible notes, proceeds from the sales of marketable
securities, and borrowings under bank credit facilities. From 1996 through
December 31, 1999 we received approximately $1.79 billion in proceeds including
our initial public offering, follow-on public offering and debt issuances.
In March 2000, our revolving bank credit facility was amended to, among other
things, increase our credit facility to provide for borrowings up to $250
million, including the issuance of letters of credit up to $125 million. The
agreement includes a $125 million 364-day secured line of credit and a $125
million two-year secured revolving credit facility. The revolving facility and
line of credit are subject to .375% and .25% unused commitment fees
respectively, bear interest, at our option at LIBOR plus 2.0% or the lenders'
Base Rate (the lenders' Base Rate being the greater of (i) the prime rate or
(ii) the Federal Funds Rate plus .5%) and are secured by substantially all of
our assets (including our holdings in partner companies). Borrowing
availability under the facility is based on the fair market value of our
holdings of publicly traded Partner Companies and the value, as defined in the
facility, of our private partner companies. The full amount of these facilities
were available at May 12, 2000. No amounts were outstanding on these facilities
as of March 31, 2000 or May 12, 2000.
Existing cash, cash equivalents and short-term investments, availability
under our bank credit facility, proceeds from the potential sales of all or a
portion of our minority interests and other internal sources of cash flow are
expected to be sufficient to fund our cash requirements through the next 12
months, including commitments to new and existing partner companies and general
operations requirements. As of May 12, 2000, we were contingently obligated for
approximately $5.5 million of guarantee commitments and commitments to
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new and existing partner companies that may require funding in the next 12
months totaled $42.2 million. We will continue to evaluate acquisition
opportunities and we expect to acquire additional ownership interests in new
and existing partner companies in the next 12 months which may make it
necessary for us to raise additional funds. We will likely have to raise
additional funds through the issuance of equity securities or obtain additional
bank or other financing. If additional funds are raised through the issuance of
equity securities, our existing shareholders may experience significant
dilution.
Consolidated working capital decreased to $844.6 million at March 31, 2000,
compared to $1.3 billion at December 31, 1999 primarily as a result of the cost
of ownership interests we acquired and other net cash outflows during the three
months ended March 31, 2000.
Cash used in operating activities in the three months ended March 31, 2000
compared to the same prior year period increased due to the increased cost of
General ICG Operations' general and administrative expenses.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies.
We utilized $494.5 million in the aggregate to acquire interests in or make
advances to new and existing partner companies during the three months ended
March 31, 2000. These companies included: Arbinet Communications,
AssetTRADE.com, AUTOVIA, Blackboard, Benchmarking Partners, BuyMedia,
Centrimed, ClearCommerce, Collabria, CommerceQuest, ComputerJobs.com,
CourtLink, e-Chemicals, Entegrity Solutions, eumediX, eu-supply, FarmingOnLine,
Freeborders, ICG Commerce, Industrial America, Internet Healthcare Group, iSky,
LinkShare, Logistics.com, MetalSite, NetVendor, ONVIA.com, PaperExchange,
Servicesoft Technologies, Simplexis.com, StarCite, TALPX, TeamOn.com,
Traffic.com, Universal Access, and Vivant!.
During the period from April 1, 2000 through May 12, 2000 we utilized $323.7
million to acquire interests in or make advances to new and existing partner
companies. These companies included:, Arbinet Communications, AssetTRADE.com,
Breakaway Solutions, Buy.com, eColony, Emptoris, ComputerJobs.com,
Cybercrop.com, Deja.com, ICG AsiaWorks, ICG Commerce, ICS FoodOne,
Logistics.com, MetalSite, NetVendor, Print Mountain, Retail Exchange, StarCite
and Tibersoft.
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
In February 2000, we entered into an agreement to form a joint venture with
DuPont which will provide management, growth capital, financial, technical, and
infrastructure capabilities designed to accelerate the development of B2B e-
commerce.
In February 2000, we entered into an agreement to acquire a significant
interest in eCredit.com, a leading provider of Internet based credit, financing
and related services. We will issue common stock valued at approximately $450
million to eCredit.com shareholders, which is subject to customary closing
conditions and regulatory approval. We expect the transaction to close in the
quarter ending June 30, 2000.
In March 2000, we entered into an agreement to acquire a majority interest in
RightWorks, a leading provider of e-procurement software that powers B2B
exchanges. We will issue approximately $635 million of our common stock (valued
at $111.48 per share) to tendering RightWorks' preferred shareholders (subject
to adjustment based on the number of RightWorks' shares tendered) and also will
purchase newly issued RightWorks' shares for $22 million in cash. The
transaction is subject to customary closing conditions and regulatory approval.
We expect the transaction to close in the quarter ending June 30, 2000.
In March 2000, we entered into an agreement with Hutchinson Whampoa Ltd., a
Hong Kong based multi-national conglomerate, to acquire a majority interest in
Harbour Ring International Holdings, which will be renamed ICG AsiaWorks
Limited. We will expand approximately $117 million upon the closing of this
transaction which is expected to take place in the quarter ending June 30,
2000, subject to customary closing conditions and regulatory approval.
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During April 2000, we acquired an additional interest in an existing partner
company from a shareholder of the partner company for 323,509 shares of our
common stock valued at $39 million.
In March 2000 Ariba Inc. purchased all the outstanding shares of Tradex
Technologies. In connection with this transaction we exchanged all of our
interest in Tradex Technologies for approximately 2.9 million shares of Ariba's
common stock. Based on Ariba's closing price on March 9, 2000 we recorded a
pre-tax gain of $449.3 million. We also entered into cashless collar agreements
to hedge 2.2 million shares of our holdings of Ariba's common stock accounted
for at fair value. The cashless collar agreements limit our exposure to and
benefits from price fluctuations in the underlying equity securities. The
cashless collar agreements mature between 2001 and 2003. As we account for the
cashless collar agreements as a hedge, changes in the value of the cashless
collar agreements are substantially offset by changes in the value of the
underlying investment securities which are both marked-to-market through
accumulated other comprehensive income in our Consolidated Balance Sheet in
accordance with Statement of Financial Accounting Standards No. 115.
In January 2000, Breakaway Solutions announced it had signed a definitive
agreement to acquire EggRock Partners for 3,636,000 shares of its common stock
valued at $250 million at the date of signing the definitive agreement. The
transaction closed in April 2000. Upon closing, our voting ownership in
Breakaway Solutions will decrease from 40% to approximately 33%. In addition,
we expect to record a non-operating gain due to the increase in our share of
Breakaway Solutions' net equity as a result of their issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We committed funds in 2000 to the buildout of our larger new
corporate headquarters in Wayne, Pennsylvania, our international expansion, and
the development of our information technology infrastructure. There were no
material capital asset purchase commitments as of March 31, 2000.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We are currently
analyzing the potential impact of SFAS No. 133 on our results of operations,
financial position and cash flows upon the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission required that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses. The Securities and Exchange
Commission identified twenty issues for which they believed some form of
standard setting or guidance may be appropriate either because (i) there
appears to be diversity in practice or (ii) the issues are not specifically
addressed in current accounting literature or (iii) the Securities and Exchange
Commission staff is concerned that developing practice may be inappropriate
under generally accepted accounting principles. Many of the issues identified
by the Securities and Exchange Commission, including those which address barter
and revenue recognition, are potentially applicable to us. Althought the EITF
has begun to deliberate these issues, formal guidance has not been issued to
date for the majority of them. In addition, in December 1999, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements, which is required to be
implemented in the quarter ended June 30, 2000. Although we believe our
historical accounting policies and practices conform with generally accepted
accounting principles, there can be no assurance that final consensus reached
by the EITF on the Internet issues referred to above, or other actions by
standard setting bodies, will not result in changes to our historical
accounting policies and practices or to the manner in which certain
transactions are presented and disclosed in our consolidated financial
statements.
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Year 2000 Compliance
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates. Most reports to date, however, have indicated that computer
systems are functioning normally and the compliance and remediation work
accomplished leading up to 2000 was effective to prevent any problems. However,
computer experts have warned that there may still be residual consequences of
the change in centuries. It is also possible that errors or defects may remain
undetected, or that dates other than January 1, or February 29, 2000, may
trigger Year 2000 type problems. As a result, although we have not experienced
any significant Year 2000 problems to date, it is possible that we could face
problems or disruptions during 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our equity
securities. Our public holdings at March 31, 2000 include equity positions in
companies in the Internet industry sector, including Ariba, Inc., Excite@Home;
Breakaway Solutions, Inc.; i2 Technologies, Inc.; eMerge Interactive, Inc.;
Universal Access, Inc.; ONVIA. com, Inc.; Lycos, Inc.; US Interactive, Inc.;
and VerticalNet, Inc., many of which have experienced significant historical
volatility in their stock prices. We typically do not attempt to reduce or
eliminate our market exposure on these securities, particularly with respect to
securities of our partner companies. A 20% adverse change in equity prices,
based on a sensitivity analysis of our public holdings as of March 31, 2000,
would result in an approximate $937 million decrease in the fair value of our
public holdings. A significant portion of the value of the potential decrease
in equity securities, or $340.1 million, consisted of our holdings in
VerticalNet.
We entered into cashless collar agreements with respect to 2.2 million shares
of our holdings of Ariba's common stock accounted for at fair value of $230.6
million at March 31, 2000. The collar arrangements limit our exposure to and
benefits from price fluctuations in the underlying equity securities. The
collar arrangements mature between 2001 and 2003. We account for the collar
arrangements as a hedge, and changes in the value of the collar arrangements
are substantially offset by changes in the value of the underlying investment
securities which are both marked-to-market through accumulated other
comprehensive income (loss) in our consolidated balance sheet in accordance
with Statement of Financial Accounting Standards No. 115. The combined value of
the collars and the underlying hedged securities at March 31, 2000 was $259.3
million. We may enter into similar collar arrangements in the future,
particularly with respect to available for sale securities which do not
constitute ownership interests in our partner companies.
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
fair value of convertible subordinated notes is approximately $502.5 million
versus a carrying value of $566.3 million. The carrying value of other long-
term debt approximates its fair value, as estimated by using discounted future
cash flows based on our current incremental borrowing rates for similar types
of borrowing arrangements.
Availability under our credit facility is determined by the market value of
the publicly traded and privately held securities pledged as collateral. As of
March 31, 2000, we had sufficient collateral to enable us to fully utilize this
facility. Additionally, we are exposed to interest rate risk primarily through
our bank credit facility. At March 31, 2000, there were no borrowings
outstanding.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may dramatically increase.
Therefore, in the future, we may consider utilizing derivative instruments to
mitigate such risks.
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PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
Private Placements
(1) On January 4, 2000, Internet Capital Group issued 140,000 shares Common
Stock in a private placement to Alfred Sherk in exchange for 2,250,000 shares
of common stock of e-Chemicals, Inc.
(2) On January 4, 2000, Internet Capital Group issued 10,000 shares of Common
Stock in a private placement to Community Foundation for Southeastern Michigan
in exchange for 150,000 shares of common stock of e-Chemicals, Inc.
The sale and issuance of securities in the transactions described above were
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act or Regulation D promulgated thereunder as transactions by
an issuer not involving a public offering, where the purchasers were
sophisticated investors who represented their intention to acquire securities
for investment only and not with a view to distribution and received or had
access to adequate information about Internet Capital Group.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit
Number Document
----------- --------
<C> <S>
10.1 Internet Capital Group, Inc. Long-Term Incentive Plan
10.2 Amendment No. 3 to the 1999 Credit Agreement dated February 25,
2000 by and among Internet Capital Group, Inc., Internet Capital
Group Operations, Inc., the Banks named therein and PNC Bank, N.A.
(incorporated by reference to Exhibit 10.15.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999
(Registration No. 000-26929) (the "10-K"))
10.3 Press Release regarding Acquisition of eCredit.com (incorporated
by reference to the Registrant's filing on Form 425 filed February
24, 2000 (File No. 132-01812))
10.4 Sublease Agreement dated January 6, 2000 between SP Investments
Inc. and Internet Capital Group, Inc. for premises located in
Seattle, Washington (incorporated by reference to Exhibit 10.30 to
the 10-K)
10.5 Amended and Restated Credit Agreement by and among Internet
Capital Group, Inc., ICG Holdings, Inc., The Banks Party Thereto,
PNC Bank, National Association, as Administrative Agent, Bank of
America, N.A., and Deutsche Bank AG New York Branch/Cayman Island
Branch, as Co-Syndication Agents and PNC Capital Markets, Inc., as
Lead Arranger (incorporated by reference to Exhibit 10.31 to the
Registrant's Registration Statement on Form S-4 filed April 13,
2000 (Registration No. 333-34722) (the "S-4"))
10.6 Press Release regarding Acquisition of RightWorks (incorporated by
reference to the Registrant's filing on Form 425 filed March 31,
2000 (File No. 132-01830))
10.7 Exchange Offer Agreement dated as of February 24, 2000 by and
among eCredit.com, Inc., Internet Capital Group, Inc. and ICG
Holdings, Inc. (incorporated by reference to Exhibit 2.2 of the S-
4)
10.8 Recapitalization and Exchange Offer Agreement and Plan of
Reorganization by and among Internet Capital Group, Inc., Rain
Acquisition Corp., RightWorks Corporation, Suhas Patal, as
Shareholder Representative, and Chase Manhattan Trust Company,
National Association, as Escrow Agent, dated as of March 7, 2000
(incorporated by reference to Exhibit 2.3 of the S-4)
11.1 Statement Regarding Computation of Per Share Earnings (included
herein at Note 1-"Significant Accounting Policies" in the
subsection "Net Income (Loss) Per Share" to the Consolidated
Financial Statements on page 11 and Note 3-"Net Income (Loss) Per
Share" to the Consolidated Financial Statements on page 12)
27.1 Financial Data Schedule for the Quarter ended March 31, 2000
</TABLE>
(b) Reports on Form 8-K
On January 11, 2000, we filed a Current Report on Form 8-K dated December 29,
1999 to report under Item 2 the execution of the Securities Purchase Agreement
between Internet Capital Group and Weirton Steel Corporation. The financial
statements required were omitted and were filed by amendment.
On March 13, 2000, we filed an amended Current Report on Form 8-K/A dated
December 29, 1999 to report under Item 5 (Other Events) the execution of the
Securities Purchase Agreement between Internet Capital Group and Weirton Steel
Corporation. The filing included the required financial statements and pro
forma financial information.
31
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: May 15, 2000
Internet Capital Group, Inc.
/s/ David D. Gathman
By:__________________________________
Name: David D. Gathman
Title: Chief Financial Officer and
Treasurer
(Principal Financial and Principal
Accounting Officer) (Duly
Authorized Officer)
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1 Internet Capital Group, Inc. Long-Term Incentive Plan
27.1 Financial Data Schedule (Electronic filing only)
</TABLE>
33
