<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999 Commission File Number 0-26929
------------------ -------
INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2996071
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Building 800, 435 Devon Park Drive, Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 989-0111
--------------
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.
Yes X No
Number of shares of Common Stock outstanding as of November 15, 1999:
126,613,076 shares
<PAGE>
INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<S> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings 34
Item 2 - Changes in Securities and Use of Proceeds 34
Item 3 - Defaults Upon Senior Securities 34
Item 4 - Submission of Matters to a Vote of Security Holders 34
Item 5 - Other Information 34
Item 6 - Exhibits and Reports on Form 8-K 34
Signatures 36
Exhibit Index 37
</TABLE>
2
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $186,137,151 $26,840,904
Short-term investments 22,845,079 -
Accounts receivable, less allowances for doubtful,
accounts ($208,645-1999; $61,037-1998) 8,531,879 1,842,137
Prepaid expenses and other current assets 7,024,086 1,119,062
------------ -----------
Total current assets 224,538,195 29,802,103
Fixed assets, net 6,169,802 1,151,268
Ownership interests in and advances to Partner Companies 168,690,379 59,491,940
Available-for-sale securities 19,233,805 3,251,136
Intangible assets, net 22,854,350 2,476,135
Deferred taxes 18,845,639 -
Other 9,895,199 613,393
------------ -----------
Total Assets $470,227,369 $96,785,975
============ ===========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 735,885 $ 288,016
Line of credit - 2,000,000
Accounts payable 4,478,916 1,348,293
Accrued expenses 10,336,185 1,823,407
Note payable to partner company - 1,713,364
Deferred revenue 117,523 2,176,585
Convertible note (note 4) 8,499,942 -
------------ -----------
Total current liabilities 24,168,451 9,349,665
Long-term debt 1,633,360 351,924
Minority interest 25,908,961 6,360,008
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.0l par value; no shares authorized - -
Common stock, $.001 par value; authorized 300,000,000
shares; 126,507,043 (1999); 66,043,625 (1998)
issued and outstanding 126,507 66,044
Additional paid-in capital 510,452,388 74,998,459
Retained earnings (Accumulated deficit) (3,165,920) 5,256,815
Unamortized deferred compensation (14,371,190) (1,330,011)
Notes receivable - shareholders (81,147,592) -
Accumulated other comprehensive income 6,622,404 1,733,071
------------ -----------
Total shareholders' equity 418,516,597 80,724,378
------------ -----------
Total Liabilities and Shareholders' Equity $470,227,369 $96,785,975
============ ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenue $ 7,192,202 $ 897,006 $ 14,783,096 $ 1,861,799
------------ ----------- ------------ ------------
Operating expenses
Cost of revenue 3,420,920 1,195,465 7,424,594 2,898,700
Selling,
general and
administrative 17,727,338 4,150,673 31,002,518 9,829,594
------------ ----------- ------------ ------------
Total operating
expenses 21,148,258 5,346,138 38,427,112 12,728,294
------------ ----------- ------------ ------------
(13,956,056) (4,449,132) (23,644,016) (10,866,495)
Other income, net 15,926,764 (534,417) 47,001,191 23,514,321
Interest income 2,892,430 443,328 4,176,770 746,769
Interest expense (803,296) (14,941) (1,770,324) (233,117)
------------ ----------- ------------ ------------
Income (loss) before
income taxes,
minority
interest and
equity income
(loss) 4,059,842 (4,555,162) 25,763,621 13,161,478
Income taxes 7,043,678 - 12,840,423 -
Minority interest 2,684,796 1,722,798 4,133,057 2,699,112
Equity income
(loss) (29,062,685) (1,289,516) (49,141,961) (3,969,734)
------------ ----------- ------------ ------------
Net Income (Loss) $(15,274,369) $(4,121,880) $ (6,404,860) $ 11,890,856
============ =========== ============ ============
Net Income (Loss)
Per Share
Basic $(.13) $(.07) $(.07) $.23
Diluted $(.13) $(.07) $(.07) $.23
Weighted Average
Shares
Outstanding
Basic 116,413,715 60,869,209 92,551,879 52,813,836
Diluted 116,413,715 60,869,209 92,551,879 52,837,336
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Operating Activities
Net income $ (6,404,860) $ 11,890,856
Adjustments to reconcile net cash used
in operating activities
Depreciation and amortization 8,103,725 438,769
Deferred taxes (13,090,907) -
Equity (income) loss 49,141,961 3,969,734
Other income (46,973,584) (23,514,321)
Minority interest (4,133,057) (2,699,112)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (5,528,323) (332,010)
Prepaid expenses and other assets (7,282,894) (464,814)
Accounts payable 3,150,538 1,072,999
Accrued expenses 9,119,022 1,731,545
Deferred revenue (78,702) 579,915
------------------- --------------------
Net cash used in operating activities (13,977,081) (7,326,439)
------------------- --------------------
Investing Activities
Capital expenditures (5,187,261) (426,945)
Proceeds from sales of available-for-sale securities 2,495,842 20,460,424
Proceeds from sales of Partner Company ownership interests and 3,446,972 -
advances to a shareholder
Advances to Partner Companies (3,758,702) (2,604,800)
Repayment of advances to Partner Companies 4,590,272 500,000
Acquisitions of ownership interests in Partner Companies (123,976,262) (21,059,795)
Other acquisitions (2,103,165) (1858,389)
Purchase of short-term investments (22,845,079) -
Reduction in cash due to deconsolidation of VerticalNet (5,645,895) -
------------------- --------------------
Net cash used in investing activities (152,983,278) (4,989,505)
------------------- --------------------
Financing Activities
Issuance of common stock, net 241,226,510 29,546,443
Long-term debt and capital lease obligations (448,205) (255,761)
Proceeds from subordinated convertible notes 90,000,000 -
Line of credit repayments (280,942) (2,500,000)
Distribution to former LLC members (10,675,811) -
Advances to employees (8,765,483) -
Treasury stock purchase by subsidiary (4,468,980) -
Issuance of stock by subsidiary 19,669,517 11,291,961
------------------- --------------------
Net cash provided by financing activities 326,256,606 38,082,643
------------------- --------------------
Net Increase in Cash and Cash Equivalents 159,296,247 25,766,699
Cash and Cash Equivalents at the beginning of period 26,840,904 5,967,459
------------------- --------------------
Cash and Cash Equivalents at the End of Period $ 186,137,151 $ 31,734,158
=================== ====================
</TABLE>
Non-cash investing and financing activities - Notes 4, 5 and 8.
See notes to consolidated financial statements.
5
<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 holding 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 September 30, 1999, the Company owned interests in 39 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
Corporation ("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 and nine months ended September 30, 1999 and 1998, included
herein, have been prepared by the Company, without audit, pursuant to the
interim financial statements rules and regulations of the SEC. In the opinion of
management, the accompanying unaudited 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 and nine months ended September 30, 1999 and 1998. 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. These consolidated financial statements should be read in
conjunction with financial statements and notes thereto in the Company's
Registration Statement on Form S-1 which was declared effective on August 4,
1999.
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 subsidiaries, VerticalNet, Inc.
("VerticalNet") for the three and nine months ended September 30, 1998 and
Breakaway Solutions, Inc. ("Breakaway Solutions") for the three and nine months
ended September 30, 1999 and EmployeeLife.com and iParts for the three and nine
months ended September 30, 1999 and Ag Producer Network, Inc. ("Ag Producer")
for the three months ended September 30, 1999, all of which were consolidated
since their date of acquisition.
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.
6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
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. Breakaway Solutions has been
consolidated since January 1999, when the Company acquired a controlling
majority interest in Breakaway Solutions for $8.3 million. Breakaway Solutions'
operating activities have historically consisted primarily of implementation of
customer relational management systems and custom integration to other related
applications. In 1999, Breakaway Solutions has 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.
The Company's direct and indirect voting interest in Ag Producer Network,
Inc., Breakaway Solutions, EmployeeLife.com and iParts at September 30, 1999 was
75.1%, 50.1%, 52.3% and 85.0%, respectively.
During the periods ending December 31, 1996, 1997 and 1998 the Company
acquired equity ownership interests in VerticalNet for $1.0 million, $2.0
million and $4.0 million, respectively. The excess of cost over net assets
acquired related to the 1996 and 1997 acquisitions was $.7 million and $.8
million, respectively. The Company's carrying value in VerticalNet, including
the excess of cost over net assets acquired related to the 1996 and 1997
acquisitions, was reduced to below zero and became a liability as a result of
consolidating VerticalNet's losses after amounts attributed to Minority interest
were exhausted. For the same reason, the 1998 acquisition did not result in an
intangible asset. In 1998, the Company made advances in the form of convertible
notes to VerticalNet of $5.0 million. Of this amount, $.8 million was repaid by
VerticalNet, $2.1 million was purchased from the Company by one of its principal
shareholders, and $2.1 million was converted into common stock during the nine
months ended September 30, 1999. The Company's direct and indirect voting
interest in VerticalNet at December 31, 1998 was 52%. The unaudited interim
consolidated financial statements for the three and nine months ended September
30, 1999, reflect VerticalNet accounted for on the equity method of accounting
due to the decrease in the Company's ownership interest to below 50% in February
1999 as a result of VerticalNet's initial public offering.
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 straight-line basis over three
to five years which adjusts the Company's share of the Partner Company's
earnings or losses.
7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
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.
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 September 30, 1999 of $22.9
million, net of accumulated amortization of $3.7 million, is attributable to the
Company's acquisitions of ownership interests in Breakaway Solutions,
AgProducer, EmployeeLife.com and iparts ($9.1 million) and Breakaway's
acquisitions of Applica, WPL and Web Yes ($13.8 million). Goodwill at December
31, 1998 of $2.5 million, net of accumulated amortization of $.3 million, was
attributable to acquisitions by VerticalNet.
8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
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 and nine months ended
September 30, 1999 differed from the federal statutory rate 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 asset of $18.8 million at September 30, 1999
consists of a deferred tax asset of $25.6 million relating primarily to the
excess of tax carrying values over book carrying values of its Partner Companies
and the tax effect of stock option compensation and a deferred tax liability of
$6.8 million relating primarily to the tax effect of stock option compensation
and net unrealized appreciation 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.
9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
2. Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss), 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 (loss):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ (15,274,369) $ (4,121,880) $ (6,404,860) $ 11,890,856
Other comprehensive income (loss):
Unrealized appreciation
(depreciation), net of tax 5,998,081 (2,283,879) 4,889,333 8,217,313
------------- ------------ ------------ ------------
Comprehensive income (loss) $ (9,276,288) $ (6,405,759) $ (1,515,527) $ 20,108,169
============= ============ ============ ============
</TABLE>
3. Net Income (Loss) Per Share
The calculations of Net Income (Loss) Per Share were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------
1999 1998 1999 1998
-------------------------------- -------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic
Net income (loss) $(15,274,369) $(4,121,880) $(6,404,860) $11,890,856
============ =========== =========== ===========
Average common shares outstanding 116,413,715 60,869,209 92,551,879 52,813,836
============ =========== =========== ===========
Basic $ (.13) $ (.07) $ (.07) $ .23
============ =========== =========== ===========
Diluted
Net income (loss) $(15,274,369) $(4,121,880) $(6,404,860) $11,890,856
============ =========== =========== ===========
Average common shares outstanding 116,413,715 60,869,209 92,551,879 52,813,836
Effect of:
Dilutive options - - - 23,500
Dilutive securities - - - -
Average common shares assuming
dilution 116,413,715 60,869,209 92,551,879 52,837,336
============ =========== =========== ===========
Diluted $ (.13) $ (.07) $ (.07) $ .23
============ =========== =========== ===========
</TABLE>
10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
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>
September 30, 1999 December 31, 1998
---------------------------- ------------------------------
(UNAUDITED)
Carrying Cost Basis Carrying Cost Basis
Value Value Value Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Equity Method $120,034,751 $175,453,649 $21,311,324 $27,588,451
Cost Method 48,655,628 56,064,893 38,180,616 40,249,591
------------ -----------
$168,690,379 $59,491,940
============= ===========
</TABLE>
At September 30, 1999, 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 $65.9 million. This
excess relates to ownership interests acquired through September 30, 1999 and
is being amortized over a three year period. Amortization expense of $6.2
million and $11.1 million is included in "Equity income (loss)" in the
accompanying Consolidated Statements of Operations for the three and nine
months ended September 30, 1999, respectively.
During the nine months ended September 30, 1999 the Company acquired an
interest in a new Partner Company from shareholders of the Partner Company who
have an option, exercisable at any time through August 2000, of electing to
receive cash of $11.3 million or 1,041,666 shares of the Company's common
stock. As of September 30, 1999, $2.8 million of the obligation has been
converted into 254,635 shares of the Company's common stock.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at September 30,
1999 and 1998 has been compiled from the financial statements of the respective
Partner Companies:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 34,850,715 $ 5,505,213 $ 73,392,631 $15,454,936
Net Loss (73,907,965) (3,393,762) (123,736,382) (7,115,480)
</TABLE>
11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
5. Debt
Revolving Credit Facilities
In March 1998, the Company entered into an unsecured $3 million revolving
credit facility. Borrowings under this facility accrued interest at a premium
to prime ranging from .75% to 1.5%. The Company borrowed up to $2 million under
this facility during 1998. No amounts were outstanding at December 31, 1998 and
the facility expired in March 1999.
In April 1999, the Company entered into a $50 million revolving bank credit
facility. The facility matures in April 2000, is subject to a .25% unused
commitment fee, bears interest, at the Company's option, at prime and/or LIBOR
plus 2.5%, and is secured by substantially all of the Company's assets
(including the Company's holdings in publicly traded 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. During the
nine months ended September 30, 1999, the Company borrowed and repaid $25
million under the facility. In connection with the facility, the Company issued
200,000 warrants exercisable for seven years at $10 per share. The warrants,
valued at $1.0 million, were recorded as debt issuance costs in "Other Assets"
and "Additional Paid-In Capital" and are being amortized to interest expense
over the one year term of credit facility.
Subordinated Convertible Notes
In May 1999, the Company issued $90 million of convertible subordinated
notes which converted to 7,499,866 shares of the Company's common stock upon
the completion of the Company's initial public offering in August 1999. In
connection with the conversion of these notes, the Company issued 1,500,000
warrants to purchase the Company's common stock at $12 per share through May
2002 which will increase Additional Paid-In Capital upon exercise. None of the
warrants were exercised during the three months ended September 30, 1999. In
accordance with the terms of the notes, all accrued interest was waived and
reclassed to Additional Paid-in-Capital upon conversion of the notes.
12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
6. Segment Information
In 1998, the Company adopted SFAS 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of
Partner Company Operations and General ICG Operations. Partner Company
Operations includes the effect of consolidating VerticalNet for the three and
nine months ended September 30, 1998, Breakaway, EmployeeLife.com, iParts and
Ag Producer for the period from acquisition in 1999 through September 30, 1999,
and recording the Company's share of earnings and losses of Partner Companies
accounted for under the equity method. VerticalNet's operations include
creating and operating industry-specific trade communities on the Internet.
Breakaway Solutions' operations include implementation of various computer
applications. Partner Companies accounted for under the equity method of
accounting operate in various Internet-related businesses. General ICG
Operations represents the expenses of providing strategic and operational
support to the 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 1998 and 1999.
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 Nine Months Ended
September 30, September 30,
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Partner Company Operations
Revenue $ 7,192,202 $ 897,006 $ 14,783,096 $ 1,861,799
------------ ----------- ------------ -----------
Operating expenses
Cost of revenue 3,420,920 1,195,465 7,424,594 2,898,700
Selling, general and administrative 10,510,736 3,156,386 18,267,184 7,312,682
------------ ----------- ------------ -----------
Total operating expenses 13,931,656 4,351,851 25,691,778 10,211,382
------------ ----------- ------------ -----------
(6,739,454) (3,454,845) (10,908,682) (8,349,583)
Other income (expense), net 35,101 - 27,607 -
Interest income 24,436 93,035 85,946 164,535
Interest expense - (16,226) (53,969) (149,369)
------------ ----------- ------------ -----------
Income (loss) before income taxes,
minority interest and equity income (loss) (6,679,917) (3,378,036) (10,849,098) (8,334,417)
Income taxes - - - -
Minority interest 2,684,796 1,722,798 4,133,057 2,699,112
Equity income (loss) (29,062,685) (1,289,516) (49,141,961) (3,969,734)
------------ ----------- ------------ -----------
Loss from Partner Company Operations $(33,057,806) $(2,944,754) $(55,858,002) $(9,605,039)
============ =========== ============ ===========
General ICG Operations
General and administrative $ 7,216,602 $ 994,287 $ 12,735,334 $ 2,516,912
------------ ----------- ------------ -----------
Other income, net 15,891,663 (534,417) 46,973,584 23,514,321
Interest income (expense), net 2,064,698 351,578 2,374,469 498,486
Income taxes 7,043,678 - 12,840,423 -
------------ ----------- ------------ -----------
Income (loss) from General ICG Operations $ 17,783,437 $(1,177,126) $ 49,453,142 $21,495,895
============ =========== ============ ===========
</TABLE>
13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Assets
Partner Company Operations
Carrying value of equity method Partner Companies $120,034,751 $21,311,324
Other 57,608,628 12,342,975
------------ -----------
177,643,379 33,654,299
------------ -----------
General ICG Operations
Cash and cash equivalents 173,658,018 21,178,055
Carrying value of cost method Partner Companies 48,655,628 38,180,616
Other 70,270,344 3,773,005
------------ -----------
292,583,990 63,131,676
------------ -----------
$470,227,369 $96,785,975
============ ===========
</TABLE>
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 VerticalNet, Ag
Producer Network, Inc., Breakaway Solutions, EmployeeLife.com and iParts
("consolidated companies") were accounted for under the equity method of
accounting for all 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 losses recorded in excess of carrying
value of VerticalNet at December 31, 1998 are included in "Non-current
liabilities" and the carrying value of the consolidated companies as of
September 30, 1999 are included in "Ownership interests in and advances to
Partner Companies" in the Parent Company Balance Sheets.
14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
<TABLE>
<CAPTION>
Parent Company Balance Sheets
September 30, December 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets $194,524,991 $21,596,575
Ownership interests in and advances to Partner Companies 187,997,023 59,491,940
Other 49,403,371 3,354,485
------------ -----------
Total assets 431,925,385 84,443,000
------------ -----------
Liabilities and shareholders' equity
Current liabilities 13,408,788 2,082,463
Non-current liabilities - 1,636,159
Shareholders' equity 418,516,597 80,724,378
------------ -----------
Total liabilities and shareholders' equity $431,925,385 $84,443,000
============ ===========
</TABLE>
Parent Company Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------
1999 1998 1999 1998
-------------------------- --------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
------------ ----------- ------------ -----------
Operating expenses
General and administrative 7,216,602 994,287 12,735,334 2,516,912
------------ ----------- ------------ -----------
Total operating expenses 7,216,602 994,287 12,735,334 2,516,912
------------ ----------- ------------ -----------
(7,216,602) (994,287) (12,735,334) (2,516,912)
Other income, net 15,891,663 (534,417) 46,973,584 23,514,321
Interest income, net 2,064,698 351,578 2,374,469 498,486
------------ ----------- ------------ -----------
Income before income taxes
and equity income (loss) 10,739,759 (1,177,126) 36,612,719 21,495,895
Income taxes 7,043,678 - 12,840,423 -
Equity income (loss) (33,057,806) (2,944,754) (55,858,002) (9,605,039)
------------ ----------- ------------ -----------
Net income (loss) $(15,274,369) $(4,121,880) $ (6,404,860) $11,890,856
============ =========== ============ ===========
</TABLE>
15
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements--(Continued)
8. Shareholders' Equity
Issuance of Common Stock
The Company issued 15,990,000 shares of common stock for net proceeds of
$32 million from January through March, 1999.
In April through July 1999 the Company's Board of Directors authorized the
acceptance of full recourse promissory notes totaling $81.1 million from its
employees and a director as consideration for exercising all or a portion of
their vested and unvested stock options. (A total of 17,995,750 shares of common
stock were issued). The $81.1 million notes receivable from employees is
recorded as a reduction of Shareholders' Equity at September 30, 1999 to offset
the increase in Additional Paid-In Capital as a result of the common stock
issuance. The Company has the right, but not the obligation, to repurchase
unvested shares under certain circumstances. The exercise of unvested options
by the employees and director and the acceptance of promissory notes by the
Company was in accordance with the terms of the Company's equity compensation
plans and related option agreements. The Company's Board of Directors also
approved loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in connection with the
option exercises. These loans totaled $8.1 million and are classified as Other
Assets.
Through September 30, 1999, the Company recorded aggregate unearned
compensation expense of $18.3 million, net of approximately $3.9 million in
accumulated amortization at September 30, 1999, 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.
Tax Distribution
In March 1999 the Company made a distribution of $10.7 million to former
LLC members in accordance with the LLC agreements to satisfy the members' tax
liabilities.
Initial Public Offering
In August 1999, the Company completed its initial public offering ("IPO")
of 15,310,000 shares of its common stock at $12.00 per share. Concurrently, the
Company completed a private placement of 3,750,000 shares of its common stock at
the $12.00 IPO price. Net proceeds to the Company from these transactions
aggregated approximately $209.1 million (net of underwriters' commission and
offering expenses of approximately $19.6 million).
16
<PAGE>
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 sucessfully 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 sucessfully 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 holding company
actively engaged in B2B e-commerce through a network of partner companies. As of
September 30, 1999 we owned interests in 39 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 infrastructure service providers.
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. We do not know if
we will report net income in any period, and we expect that we will report net
losses in many quarters for the foreseeable future. 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. 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 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.
17
<PAGE>
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. VerticalNet
was our only consolidated partner company through December 31, 1998. However,
due to VerticalNet's initial public offering in February 1999, our voting
ownership interest in VerticalNet decreased below 50%. Therefore, we applied the
equity method of accounting beginning in February 1999. During the three months
ended March 31, 1999, the three months ended June 30, 1999 and the three months
ended September 30, 1999 we acquired a controlling majority voting interest in
Breakaway, EmployeeLife.com and iParts and Ag Producer Networks, Inc.,
respectively, all of which were consolidated from the date of acquisition. As of
September 30, 1999, Ag Producer Networks, Inc., Breakaway Solutions,
EmployeeLife.com 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, 1998, we accounted for eight of our partner
companies under the equity method of accounting. As of September 30, 1999, we
accounted for 22 of our partner companies under this method.
18
<PAGE>
Our partner companies accounted for under the equity method of accounting at
September 30, 1999 and December 31, 1998 included:
<TABLE>
<CAPTION>
Voting Ownership
----------------
Partner
Company September 30, December 31,
Since 1999 1998
----- ---- ----
<S> <C> <C> <C>
EQUITY METHOD:
asseTrade.com, Inc. 1999 26% N/A
BidCom, Inc. 1999 24% N/A
Blackboard, Inc. 1998 30% 35%
CommerceQuest 1998 29% N/A
CommerX, Inc. 1998 42% 34%
ComputerJobs.com, Inc. 1998 33% 33%
eMarketWorld, Inc. 1999 42% N/A
Internet Commerce Systems, Inc. 1999 43% N/A
LinkShare Corporation 1998 34% 34%
NetVendor Systems, Inc. 1999 26% N/A
ONVIA.com, Inc. 1999 20% N/A
PaperExchange.com, LLC 1999 27% N/A
PlanSponsor Exchange 1999 46% N/A
Residential Delivery Services, Inc. 1999 38% N/A
SageMaker, Inc. 1998 27% 22%
Sky Alland Marketing, Inc. 1996 31% 31%
Star-Cite! 1999 43% N/A
Syncra Software, Inc. 1998 35% 53%
United Messaging, Inc. 1999 41% N/A
Universal Access, Inc. 1999 26% N/A
VerticalNet, Inc. 1996 35% N/A
Vivant! Corporation 1998 23% 23%
</TABLE>
As of September 30, 1999, we owned voting convertible preferred stock in
all companies listed except VerticalNet. We also owned common stock in
CommerceQuest, SageMaker, Sky Alland and Universal Access, Inc. Our voting
ownership in VerticalNet consisted only of common stock at September 30, 1999.
VerticalNet was consolidated at December 31, 1998. CommerceQuest and Universal
Access, Inc. were accounted for under the cost method of accounting at December
31, 1998. We have representation on the board of directors of all of the above
partner companies.
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 1998 and are
expected to continue to incur substantial losses in 1999. One equity method
partner company at December 31, 1998 generated a net profit of less than $1
million in 1998; however, this partner company is not expected to generate a
profit in 1999.
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.
19
<PAGE>
Our partner companies accounted for under the cost method of accounting at
September 30, 1999 and December 31, 1998 included:
<TABLE>
<CAPTION>
Voting Ownership
----------------
Partner
Company September 30, December 31,
Since 1999 1998
----- ---- ----
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc. 1999 16% N/A
Autovia 1998 15% 15%
Benchmarking Partners, Inc. 1996 13% 13%
ClearCommerce Corp. 1997 15% 17%
Collabria, Inc. 1999 12% N/A
CommerceQuest, Inc. 1998 N/A 0%
Context Integration, Inc. 1997 18% 18%
Deja.com, Inc. 1997 1% 0%
e-Chemicals, Inc. 1998 0% 0%
Entegrity Solutions 1996 12% 12%
PrivaSeek, Inc. 1998 16% 16%
ServiceSoft Technologies, Inc. 1998 6% 12%
Tradex Technologies, Inc. 1999 10% N/A
US Interactive, Inc. 1996 3% 4%
</TABLE>
In most cases, we have representation on the board of directors of the
above companies, including those in which we hold non-voting securities. As of
September 30, 1999, we owned voting convertible preferred stock in all companies
listed except Deja.com, in which we owned non-voting convertible preferred stock
and common stock, and e-Chemicals, in which we owned non-voting convertible
debentures. 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 $0.8
million at September 30, 1999. During the three months ended September 30, 1999,
RapidAutoNet Corporation changed its name to Autovia.
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 1998 and are expected to
continue to incur substantial losses in 1999. Two cost method partner companies
at December 31, 1998 were profitable in 1998, one of which is not expected to be
profitable in 1999. 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.
20
<PAGE>
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, since our
inception through December 31, 1998 we consolidated VerticalNet's financial
statements with our own. However, due to VerticalNet's initial public offering
in February 1999, our voting ownership interest in VerticalNet decreased to
below 50%. Therefore, we have applied the equity method of accounting since
February 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 Ag Producer Networks,
Inc. during the three months ended September 30, 1999, all of which were
consolidated from the date of acquisition. The presentation of our financial
statements looks substantially different as a result of consolidating Ag
Producer Networks, Inc., Breakaway Solutions, EmployeeLife.com and iParts and
no longer consolidating VerticalNet in our financial statements for the three
and nine months ended September 30, 1999 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 VerticalNet, Ag Producer Network, Inc.,
Breakaway Solutions, EmployeeLife.com and iParts is included in "Equity income
(loss)" in the Parent Company Statements of Operations. The losses recorded in
excess of the carrying value of VerticalNet at December 31, 1998 are included
in "Non-current liabilities" and the carrying value of VerticalNet, Ag Producer
Network, Inc., Breakaway Solutions, EmployeeLife.com and iParts as of September
30, 1999 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 VerticalNet for the period from our inception on March 4, 1996
through December 31, 1998 and Ag Producer Network, Inc., Breakaway Solutions,
EmployeeLife.com and iParts from their dates of acquisition in 1999, 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
VerticalNet was our only consolidated partner company through December 31,
1998. All of our consolidated revenue and a significant portion of our
consolidated operating expenses from our inception on March 4, 1996 through
December 31, 1998 were attributable to VerticalNet. For the three and nine
months ended September 30, 1999, Breakaway Solutions was consolidated and
accounted for nearly all of our consolidated revenue and a significant portion
of our consolidated operating expenses. Ag Producer Network, Inc.,
EmployeeLife.com and iParts were consolidated during the periods ended
September 30, 1999. These companies are development stage companies, have
generated negligible revenue since their inception, and incurred operating
expenses of $1.0 million and $1.4 million during the three and nine months
ended September 30, 1999, respectively.
Breakaway Solutions is a full service provider of e-business solutions that
allow growing enterprises to capitalize on the power of the Internet to reach
and support customers and markets. Breakaway's services consist of Breakaway
strategy consulting, Breakaway Internet solutions, Breakaway eCRM solutions and
Breakaway application hosting. From Breakaway's inception in 1992 through
1998, Breakaway's operating activities primarily consisted of providing
strategy consulting and systems integration services. Prior to Breakaway's
acquisition of Applica in 1999, Breakaway derived no revenues from application
hosting. Breakaway believes, however, that application hosting will account
for a significantly greater portion of revenues in the future. Breakaway
Solutions generated $3.5 million, $6.1 million and $10.0 million of revenue in
1996, 1997 and 1998, respectively, resulting in net income in 1996 and 1997 of
$.6 million and $1.1 million respectively and a net loss in 1998 of $.6
million.
The following is a discussion of Breakaway Solutions' net results of
operations for the three and nine months ended September 30, 1999. Breakaway
Solutions' comparative results of operations for the three and nine months
ended September 30, 1998 are not meaningful.
Revenue. Breakaway Solutions' revenue of $7.2 million and $14.7 million for
the three and nine months ended September 30, 1999, respectively, was derived
primarily from Internet professional services and eCRM solutions. Through
organic growth and acquisitions, Breakaway Solutions has expanded in 1999 into
custom Web development and application hosting.
Cost of revenue. Cost of revenue of $3.4 million and $7.0 million for the
three and nine months ended September 30, 1999, respectively, consists
primarily of Breakaway Solutions' personnel-related costs of providing its
services. As Breakaway Solutions expands into custom Web development and
application hosting, it is incurring the direct costs of these operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $8.3 million and $14.7 million for the three and
nine months ended September 30, 1999, respectively, consist of trade show
expenses, personnel costs, facility costs, professional fees and general costs
to support operations. Breakaway Solutions expects selling, general and
administrative expenses to increase significantly in future periods due to the
expected growth in its infrastructure, hiring of additional dedicated sales and
marketing employees and the expected significant amortization of intangible
assets from its acquisitions. Also included in selling, general and
administrative expenses for the three and nine months ended September 30, 1999
was $1.2 million and $2.5 million, respectively, of goodwill amortization
related to the acquisition of our ownership interest in Breakaway Solutions.
Equity Income (Loss)
A significant portion of our net results of operations is derived from
corporations in which we hold a significant minority ownership interest
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,
22
<PAGE>
the amortization of goodwill related to newly acquired equity method companies,
and the net results of operations of these companies. As of December 31, 1998,
we accounted for eight of our partner companies under the equity method of
accounting. As of September 30, 1999, we accounted for 22 of our partner
companies under this method. Under this method, the net results of operations
of these entities are not reflected within our Consolidated Statements of
Operations; however, our share of these companies' earnings or losses is
reflected in the caption "Equity income (loss)" in the Consolidated Statements
of Operations.
Our ownership interest in VerticalNet is not consolidated in our financial
statements for periods after December 31, 1998 but is accounted for under the
equity method of accounting as a result of our lower ownership interest in
VerticalNet following the completion of its initial public offering in February
1999. For the three and nine months ended September 30, 1999, VerticalNet had
revenue of $5.2 million and $10.7 million, respectively, and net loss of $25.8
million and $38.2 million, respectively, compared to revenue of $.9 million and
$1.9 million, respectively, and net loss of $3.4 million and $8.3 million,
respectively, for the comparable periods in 1998. 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 29 as of September 30, 1998 to 51 as of September 30, 1999. In addition,
barter transactions, in which VerticalNet received advertising or other
services in exchange for advertising on its Web sites, accounted for 23% of
revenues for the nine months ended September 30, 1999 compared to 19% for the
same period in 1998. VerticalNet's losses increased period to period due to
the costs of maintaining, operating, promoting and increasing the number of its
vertical trade communities increasing more than revenue and a one time non-
recurring charge of $13.6 million for in-process research and development
expensed in August 1999 relating to VerticalNet's acquisition of Isadra, Inc.
During the three and nine months ended September 30, 1999 we accounted for
22 companies under the equity method of accounting, including VerticalNet,
compared to five companies during the comparable 1998 periods. All 22 of the
companies incurred losses in the period ended September 30, 1999. Our equity
loss of $29.1 million and $49.1 million for the three and nine months ended
September 30, 1999 consisted of $22.8 million and $37.9 million, respectively,
related to our share of the equity method companies' losses and $6.3 million
and $11.2 million, respectively, of amortization of the excess of cost over net
book value of these companies. Of the $22.8 million and $37.9 million of
equity loss related to our share of the losses of companies accounted for under
the equity method for the three and nine months ended September 30, 1999, $9.0
million and $14.0 million, respectively, was attributable to VerticalNet, while
the other 21 companies accounted for the remaining equity losses.
VerticalNet expects to incur significant net losses for the foreseeable
future because of its aggressive expansion plans. 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
substantial in 1999.
While VerticalNet and most of the companies accounted for under the equity
method of accounting have generated losses in each of the 1998 and 1999
periods, and therefore in most cases did not incur income tax liabilities,
these companies may generate taxable 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 significantly increased the number of
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our employees nationwide. As a result of these initiatives, our general and
administrative costs increased 626% and 406%, respectively, for the three and
nine months ended September 30, 1999 compared to the comparable periods in
1998. We plan to continue to hire a substantial number of new employees, open
new offices domestically and internationally, and build our overall
infrastructure. We expect these costs to continue to be substantially higher
compared to historical periods.
During the year ended December 31, 1998 and the nine months ended September
30, 1999, we recorded aggregate unearned compensation expense of $.7 million
and $16.6 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 three and nine months ended September 30, 1999
include $2.6 million and $3.3 million, respectively, of amortization expense
related to stock grants. Amortization of deferred compensation expense for the
year ended December 31, 1999 is expected to approximate $5.7 million. We
expect to recognize amortization of deferred compensation expense of $5.6
million in 2000, $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, Nine Months Ended,
------------------- ------------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sale of Matchlogic to Excite $ - $ - $ - $12,822,162
Sales of Excite holdings - - 2,050,837 7,303,162
Sale of Excite to @Home Corporation - - 2,719,466 -
Sale of WiseWire to Lycos - - - 3,324,238
Sales of Lycos holdings - - - 1,202,944
Sale of SMART Technologies, Inc. to i2 2,941,806 - 2,941,806 -
Issuance of stock by VerticalNet 14,992,678 - 44,595,738 -
Partner company impairment charges (2,042,821) (643,049) (5,340,293) (643,049)
Other - 108,632 6,030 (495,136)
----------- ---------- ----------- -----------
$15,891,663 $ (534,417) $46,973,584 $23,514,321
=========== =========== =========== ===========
</TABLE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. The $14.3 million market value of the Excite
shares received on the date of exchange was used to determine the gain of $12.8
million. Throughout the remainder of 1998, we sold 716,082 shares of Excite
which resulted in $30.2 million of proceeds and $16.8 million of gains,
including 400,000 shares resulting in proceeds of $14.8 million and a gain of
$7.3 million during the three months ended June 30, 1998. 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.
In May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in
a non-operating gain before taxes of $2.7 million.
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In April 1998, we exchanged all of our holdings of WiseWire for 191,922
shares of Lycos, Inc. The $5.3 million market value of the Lycos shares
received on the date of exchange was used to determine the gain of $3.3
million. Throughout the remainder of 1998, we sold 169,548 shares of Lycos
which resulted in $6.2 million of proceeds and $1.5 million of gains, including
160,000 shares resulting in proceeds of $ 5.6 million and a gain of $1.2
million during the three months ended June 30, 1998.
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. Our non-operating gain before
taxes from this transaction was $2.9 million.
Our remaining holdings of @Home Corporation, Lycos and i2 Technologies,
Inc. at September 30, 1999 are accounted for as available-for-sale securities
and are 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.
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for acquisitions in 1999, our share
of VerticalNet's net equity increased by $28.3 million, $1.3 million and $15.0
million, respectively. These increases adjust our carrying value in
VerticalNet and result in non-operating gains of $15.0 million and $44.6
million, before deferred taxes of $5.3 million and $15.6 million, in the three
and nine months ended September 30, 1999, respectively. 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.
For the three and nine months ended September 30, 1999, we recorded
impairment charges of $2.0 million and $5.3 million, respectively, 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 through September 30, 1999, 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 nine months ended
September 30, 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. Given its continuing losses,
we will continue to determine and record impairment charges in a similar manner
for this partner company until the status of its financial position improves.
Interest Income
Our cash, cash equivalents and short term investments at September 30, 1999
are invested primarily in money market accounts and highly liquid, high quality
debt instruments. During the nine months ended September 30, 1999, we received
$32 million of proceeds from the sale of shares of our common stock, $90
million in convertible notes and approximately $209 million in our initial
public offering. The increase in interest income in the three and nine months
ended September 30, 1999 was primarily due to the significant increase in our
cash and cash equivalents throughout 1999 as a result of these transactions.
Interest Expense
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During the nine months ended September 30, 1999, we issued $90 million in
convertible notes bearing interest at 4.99%. The increase in interest expense
in the three and nine months ended September 30, 1999 was a result of this
transaction. In accordance with the terms of the notes, interest accrued
through August 5, 1999, the date of our IPO, was waived and reclassed to
Additional Paid-in-Capital as a result of the conversion of the convertible
notes in connection with our IPO.
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.
For the period from the date of our conversion to a corporation through
September 30, 1999, we recorded additional tax benefit of $5.1 million related
to our consolidated results of operations for that period, net of deferred tax
expense of $15.6 million relating to our gain on VerticalNet's common stock
issuances.
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 September 30, 1999, our only publicly traded partner
companies are VerticalNet 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 a
portion of our Excite and Lycos holdings, and borrowings under bank credit
facilities.
We received equity commitments of $40 million in 1996, of which $13.7
million and $20.1 million was received in 1996 and 1997, respectively, and $6.2
million of which was funded with an in-kind contribution of holdings of a
partner company in 1996. We received additional commitments of $70 million in
1998, of which $38 million was received in 1998 and $32 million was received
during the nine months ended September 30, 1999.
In August 1999, we completed our initial public offering ("IPO") of
15,310,000 shares of our common stock at $12.00 per share. Concurrently, we
completed a private placement of 3,750,000 shares at the $12.00 IPO price. Net
proceeds to us from these transactions aggregated approximately $209.1 million
(net of underwriters' commission and offering expenses of approximately $19.6
million).
In May 1999, we issued $90 million of convertible subordinated notes which
converted to 7,499,866 shares of the Company's common stock upon the completion
of our initial public offering in August 1999. Upon the conversion of
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<PAGE>
these notes, we issued 1,500,000 warrants to purchase our common stock at $12
per share through May 2002. In accordance with the terms of the notes, all
accrued interest was waived upon conversion.
Sales of Excite and Lycos stock generated proceeds of $36.4 million in 1998
and sales of Excite stock generated proceeds of $2.5 million during the nine
months ended September 30, 1999.
In April 1999, we entered into a $50 million revolving bank credit
facility. In connection with the facility, we issued warrants to purchase
200,000 shares of common stock for an exercise price of $10.00 per share
exercisable for seven years. We valued these warrants at $1.0 million and
account for them as debt issuance costs. The facility matures in April 2000,
is subject to a .25% unused commitment fee, bears interest, at our option, at
prime and/or LIBOR plus 2.5%, and is secured by substantially all of our assets
(including all of our holdings in VerticalNet). Borrowing availability under
the facility is based on the fair market value of our holdings of publicly-
traded partner companies (VerticalNet, Breakaway Solutions, Inc. and US
Interactive as of November 12, 1999) and the value, as defined in the
facility,of our private partner companies. If the market price of our
publicly-traded partner companies declines, availability under the credit
facility could be reduced significantly and could have an adverse effect on our
ability to borrow under the facility and could require an immediate repayment
of a portion of our outstanding borrowings, if any. Based on the provisions of
the borrowing base, borrowing availability at September 30, 1999 was $50
million, none of which was outstanding.
Existing cash, cash equivalents and short-term investments, availability
under our revolving 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 September 30, 1999, we were
contingently obligated for approximately $3.3 million of guarantee commitments
and as of November 12, 1999, commitments to new and existing partner companies
that may require funding in the next 12 months totaled $32 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. Our revolving bank credit facility
matures in April 2000, at which time we may not be able to renew the facility
or obtain additional bank financing, or may only be able to do so on terms not
favorable or acceptable to us.
Prior to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and leases. In
January 1999, we acquired a majority interest in Breakaway Solutions for $8.3
million, of which Breakaway Solutions used $4.5 million to repurchase treasury
stock. In July 1999, Breakaway Solutions completed a private placement of
equity securities of about $19.1 million, of which we contributed $5.0 million.
In October 1999, Breakaway Solutions completed its initial public offering
raising approximately $45 million. Our ownership interest in Breakaway
Solutions after their initial public offering will be approximately 41% and
will be accounted for under the equity method. Breakaway Solutions expects its
existing cash resources will be sufficient to fund its operations through the
next 12 months. We have no obligation to provide additional funding to
Breakaway Solutions or with respect to its outstanding debt arrangements.
Consolidated working capital increased to $200.4 million at September 30,
1999, compared to $20.5 million at December 31, 1998 primarily as a result of
equity proceeds we raised early in 1999 and from our IPO more than offsetting
the cost of the ownership interests we acquired and the tax distribution to
shareholders during the nine months ended September 30, 1999.
Cash used in operating activities in the nine months ended September 30,
1999 compared to the same prior year period increased due to the increased cost
of General ICG Operations' general and administrative expenses.
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<PAGE>
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies,
offset in the nine months ended September 30, 1999 and 1998 by the proceeds of
$20.5 million and $2.5 million, respectively, from the sales of a portion of
Excite and Lycos holdings.
We utilized $145.9 million, including $13.2 million contributed directly to
Breakaway Solutions and an additional $4.0 million used to purchase an
additional ownership interest in Breakaway Solutions directly from shareholders
of Breakaway Solutions, and including $8.8 million in the aggregate to acquire
our majority ownership interests in Ag Producer Network, Inc., EmployeeLife.com
and iParts, to acquire interests in or make advances to new and existing
partner companies during the nine months ended September 30, 1999. These
companies included: Arbinet Communications, asseTrade.com, BidCom, Blackboard,
ClearCommerce, Collabria, CommerceQuest, CommerX, Deja.com, e-Chemicals,
eMarketWorld, Entegrity Solutions, Internet Commerce Systems, Net Vendor
System, Inc., ONVIA.com, PlanSponsor Exchange, PrivaSeek, Residential Delivery
Services, Inc., SageMaker, ServiceSoft, Star-Cite!, SMART Technologies, Syncra
Software, Tradex Technologies, United Messaging, and Universal Access.
During the nine months ended September 30, 1999 we acquired an interest in
a new partner company from shareholders of the partner company who have an
option, exercisable at any time through August 2000, of electing to receive
cash of $11.3 million or 1,041,666 shares of our common stock. As of September
30, 1999, $2.8 million of the obligation has been converted into 254,635
shares of our common stock.
We utilized $68.3 million to acquire interests in or make advances to new
and existing partner companies during the period from October 1, 1999 through
November 12, 1999. These companies included: Animated Images, Inc.,
Benchmarking Partners, Inc., ClearCommerce, CommerceQuest, JusticeLink, Inc.,
ONVIA.com, PaperExchange.com, LLC, PrivaSeek, Purchasing Solutions, Inc.,
SageMaker, traffic.com ,VerticalNet, Inc., VitalTone, Inc. and Vivant!
Corporation.
In October 1999, we entered into an agreement to acquire an interest in
eMerge Interactive Inc. for a combination of cash at closing of $27 million and
a note due one year after issuance of $23 million, of which $5.0 million may be
payable earlier under certain circumstances. The agreement is expected to
close in the second half of November 1999.
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 expect to commit funds in 1999 and 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 September 30,
1999.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements
to have a significant impact on our net results of operations, financial
position or cash flows.
Year 2000 Readiness Disclosure
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This poses a problem at the end of the
century because these computer programs may recognize a date using "00" as the
year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 issue.
We currently use the information technology systems and many non-
information technology systems of Safeguard Scientifics, Inc., one of our
principal shareholders, as well as some of our own systems. Our own systems
are new, and we have received assurances from all of the vendors providing
these systems that they will function properly into the new millenium.
Safeguard has completed its assessment of its computer information systems.
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Safeguard has replaced all computer systems and software which were determined
to be Year 2000 non-compliant. Safeguard has completed testing and
implementation of its computer systems. Safeguard has received verification
from its vendors that its information systems are Year 2000 ready and expects
to complete any necessary remediation of non-information systems during 1999.
Safeguard has a back-up generator in its data center which enables a "disaster
recovery" area to support critical computer and telecommunications in the case
of power loss. We plan to survey our vendors of the non-information technology
systems that we use independently of Safeguard and we expect to complete
remediation, if necessary, during 1999. If we determine that these systems are
non-compliant and are at risk to not be remedied in time, we will develop a
contingency plan.
The Year 2000 readiness of VerticalNet and Breakaway Solutions is described
below. Our partner companies are in varying stages of assessing, remediating
and testing their internal systems and assessing Year 2000 readiness of their
vendors, business partners, and customers. Our partner companies are also in
varying stages of developing contingency plans to operate in the event of a
Year 2000 problem. The total cost and time which will be incurred by our
partner-companies on the Year 2000 readiness effort has not been determined.
There can be no assurance that all necessary work will be completed in time, or
that such costs will not materially adversely impact one or more of such
partner companies. In addition, required spending on the Year 2000 effort will
cause customers of most of our partner companies to reallocate at least part of
their information systems budgets. Although some of our partner companies have
offerings which may be useful in such efforts, such reallocations could
materially adversely affect the results of operations of our partner companies.
VerticalNet
VerticalNet may realize exposure and risk if the systems on which it is
dependent to conduct its operations are not Year 2000 compliant. VerticalNet's
potential areas of exposure include products purchased from third parties,
information technology including computers and software, and non-information
technology including telephone systems and other equipment used internally.
The internally-developed production and operation systems for VerticalNet's Web
sites have recently undergone a complete re-engineering. All new programs have
been substantially tested and validated for Year 2000 compliance.
VerticalNet's communications infrastructure was recently overhauled,
including a full conversion of its telephone and voicemail systems.
VerticalNet believes all non-information technology upon which it is materially
dependent is Year 2000 compliant. Additionally, with respect to information
technology, VerticalNet has resolved all Year 2000 compliance issues primarily
through normal upgrades of its software or replacements included in
VerticalNet's capital expenditure budget and these costs are not expected to be
material to VerticalNet's financial position or results of operations.
VerticalNet's original Year 2000 compliance cost estimate did not exceed
$250,000 and remains valid. However, such upgrades and replacements may not
successfully address VerticalNet's Year 2000 compliance issues as represented
by VerticalNet's distributors, vendors and suppliers.
VerticalNet has completed its Year 2000 compliance assessment plan. This
plan includes assessing both its information and non-information technology as
well as its internally-developed production and operation systems. Based on
this assessment, VerticalNet believes that all non-information technology, all
internally-developed production and operations systems and all of its
technology are Year 2000 compliant.
In addition, VerticalNet has obtained verification from its key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not fully compliant, to provide a description of their plans to become
so. VerticalNet has received certification from 100% of its distributors,
vendors and suppliers that they are either complete or in accordance with their
scheduled Year 2000 compliance plan. VerticalNet will continue to monitor the
status of all of its key vendors with the intent of terminating and replacing
those relationships which may jeopardize its own Year 2000 compliance plan.
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In the event that VerticalNet's production and operational facilities that
support its Web sites are disrupted, small portions of its Web sites may become
unavailable. VerticalNet's review of its systems has shown that there is no
single application that would make its Web sites totally unavailable and
VerticalNet believes that it can quickly address any difficulties that may
arise. Having completed a specific analysis of its Web-hosting facilities, all
functionalities are in compliance with VerticalNet's Year 2000 compliance
assessment plan. In the event that VerticalNet's Web-hosting facilities are not
Year 2000 compliant, its Web sites would be unavailable and it would not be
able to deliver services to its users.
VerticalNet has developed a comprehensive list of contingency models to
forecast the worst-case scenario that might occur if technologies it is
dependent upon are not Year 2000 compliant and fail to operate effectively
after the Year 2000. All identified scenarios have been determined to be
resolveable by an on-site staff which will be maintained throughout the Year
2000 date changeover with the exception of the Exodus hosting functionalities.
Exodus has remitted Year 2000 certification and VerticalNet is in the process
of reviewing potential back-up sites within its disaster recovery planning.
If VerticalNet's present efforts to address the Year 2000 compliance issues
are not successful, or if distributors, suppliers and other third parties with
which is conducts business do not successfully address such issues, its
business, operating results and financial position could be materially and
adversely affected.
Breakaway Solutions
Breakaway Solutions ("Breakaway") has established a Year 2000 readiness
team to carry out a program for the assessment of its vulnerability to the Year
2000 issues and remediation of identified problems. The team consists of
senior information technology and business professionals and meets on a regular
basis. An outside consultant is also working with the readiness team on a
temporary basis to assist them in carrying out their tasks.
The readiness team has developed a program with the following key phases to
assess its state of Year 2000 readiness:
. Develop a complete inventory of its hardware and software, and assess
whether that hardware and software is Year 2000 ready;
. Test its internal hardware and software which Breakaway believes have a
significant impact on its daily operations to assess whether it is Year
2000 ready;
. Upgrade, remediate or replace any other hardware or software that is not
Year 2000 ready; and
. Develop a business continuity plan to address possible Year 2000
consequences which Breakaway cannot control directly or which it has not
been able to test or remediate.
Breakaway has completed a number of the tasks which its program requires,
as follows;
. Completed the inventory of hardware and software at all of its locations
and have determined that all of the inventoried hardware and software that
it believes have a significant impact on it daily operations is Year 2000
ready or can be made ready with a nominal change or replacement, based on
its vendors' web site certifications statements and commercially available
Year 2000 testing products;
. Implemented internal policies to require that a senior information
technology professional approves as Year 2000 ready any hardware or
software that its plans to purchase;
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. Developed a list of all vendors which it deems to have a significant
business relationship with Breakaway. Of the approximately 20 vendors it
has identified, it has obtained web site certifications or made written
inquiries for information or assurances with respect to the Year 2000
readiness of products or services that it purchases from those vendors;
. Prepared test plans for date sensitive applications which it believes
have a significant impact on its daily operations and have scheduled dates
to perform this testing in the third quarter of 1999;
. Completed an internal review to determine the commitments it has made to
its customers with respect to the Year 2000 readiness of solutions which it
has provided to those customers; and
. Formulated a business continuity plan that encompasses Breakaway's
strategy for preparation, notification and recovery in the event of a
failure due to the year 2000 issue. The plan includes procedures to
minimize downtime and expedite resumption of business operations and other
solutions for responding to internal failures with its information
technology department as well as widespread external failures related to
the Year 2000 issue.
Breakaway has specific tasks to complete with respect to our Year 2000
program, including;
. Evaluations of questionnaires regarding Year 2000 readiness to its
critical vendors as they are returned;
. Testing of its internal hardware and software which it believes have a
significant impact on its daily operations to confirm its Year 2000
readiness;
. Implementation of any necessary changes, identified as a result of
testing, to its internal software and hardware.
Costs
To date, Breakaway has not incurred material expenses in connection with
its Year 2000 readiness program. It may need to purchase replacement
products, hire additional consultants or other third parties to assist it,
although it does not currently expect that it will need to take such steps.
It currently estimates that the cost of its Year 2000 readiness program
will be approximately $100,000. This amount includes internal labor cost,
legal and outside consulting costs and additional hardware and software
purchases. Breakaway expects that it will refine this estimate as it
completes the final phase of its Year 2000 readiness program.
Risks
If Breakaway fails to solve a Year 2000 problem with respect to any of its
systems, it could experience a significant interruption of its normal
business operations. It believes that the most reasonably likely worst
case scenarios related to the Year 2000 issue for its business are as
follows:
. If a solution which it provided to a client causes damage or injury to
that client because the solution was not Year 2000 compliant, it could be
liable to the client for breach of warranty. In a number of cases, its
contracts with clients do not limit our liability for this type of
breach;
. If there is a significant and protracted interruption of
telecommunication services to its main office, it would be unable to
conduct business because of its reliance on telecommunication systems to
support daily operations, such as internal communications through e-mail;
and
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. If there is a significant and protracted interruption of electrical
power or telecommunications services to its application hosting
facilities, it would be unable to provide its application hosting
services. This failure could significantly slow the growth of its
application hosting business which is an important part of its strategic
plan. It has sought to locate its application hosting facilities in
leased space in co-location facilities which have back-up power systems
and redundant telecommunications services.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Internet Capital Group is exposed to equity price risks on its ownership
interests in publicly traded and other securities. These companies are
considered small capitalization stocks. Internet Capital Group typically does
not attempt to reduce or eliminate its market exposure on securities. A 20%
decrease in equity prices would result in an approximate $95 million decrease
in the fair value of our publicly traded securities accounted for on the equity
method or classified as available-for-sale at September 30, 1999.
Substantially all of the value of these equity securities at September 30, 1999
consisted of our holdings in VerticalNet.
Availability under Internet Capital Group bank credit facilities is
determined by the market value of the publicly traded and privately held
securities pledged as collateral. As of September 30, 1999, Internet Capital
Group had sufficient collateral to enable it to fully utilize this facility.
Additionally, Internet Capital Group is exposed to interest rate risk primarily
through its bank credit facility. At September 30, 1999, there were no
borrowings outstanding.
33
<PAGE>
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
CHANGES IN SECURITIES
- ----------------------
Private Placement
IBM Corporation entered into an agreement with the Company under which it has
purchased directly from us 3,750,000 shares of our common stock at the $12
initial public offering price per share. The aggregate offering proceeds to the
Company was $45,000,000. Merrill Lynch & Co. acted as the placement agent in
connection with this transaction. The Company paid $2,250,000 in placement
agency fees to Merrill Lynch & Co.
Options to purchase Common Stock
Internet Capital Group from time to time has granted stock options to employees,
directors, advisory board members and certain employees of its partner
companies. For the three months ended September 30, 1999, options to purchase
1,473,000 shares of common stock were granted at a weighted average exercise
price of $8.71 per share.
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
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
(a) Exhibits Number Description
--------------- -----------
<S> <C>
10.1 Stock Purchase Agreement between Internet Capital Group, Inc.
and Safeguard Scientifics, Inc.
10.2 Stock Purchase Agreement between Internet Capital Group, Inc.
and International Business Machines Corporation (incorporated
by reference to Exhibit 10.23.1 to Amendment No. 2 to the
Registration Statement on Form S-1 filed by the Registrant on
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
July 16, 1999 (Registration No. 333-78193))
10.3 Amendment to Benchmarking Partners Option Agreement dated July
19, 1999 by and between Christopher H. Greendale and Internet
Capital Group, Inc. (incorporated by reference to Exhibit
10.29.1 to Amendment No. 3 to the Registration Statement on
Form S-1 filed by the Registrant on August 2, 1999
(Registration No. 333-79193))
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K - None
</TABLE>
35
<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.
INTERNET CAPITAL GROUP, INC.
(Registrant)
Date: November 15, 1999 /s/ David D. Gathman
-------------------------------------------------
David D. Gathman
Chief Financial Officer (Principal Financial
and Principal Accounting Officer)
(Duly Authorized Officer)
36
<PAGE>
EXHIBIT INDEX
Exhibit number Description
- -------------- -----------
10.1 Stock Purchase Agreement between Internet Capital Group,
Inc. and Safeguard Scientifics, Inc.
10.2 Stock Purchase Agreement between Internet Capital Group,
Inc. and International Business Machines Corporation
(incorporated by reference to Exhibit 10.23.1 to Amendment
No. 2 to the Registration Statement on Form S-1 filed by the
Registrant on July 16, 1999 (Registration No. 333-78193))
10.3 Amendment to Benchmarking Partners Option Agreement dated
July 19, 1999 by and between Christopher H. Greendale and
Internet Capital Group, Inc. (incorporated by reference to
Exhibit 10.29.1 to Amendment No. 3 to the Registration
Statement on Form S-1 filed by the Registrant on August 2,
1999 (Registration No. 333-78193))
27.1 Financial Data Schedule
(Electronic filing only)
37
<PAGE>
Exhibit 10.1
STOCK PURCHASE AGREEMENT
------------------------
THIS IS A STOCK PURCHASE AGREEMENT (the "Agreement") dated August 4,
1999, by and between SAFEGUARD SCIENTIFICS, INC., a Pennsylvania corporation
("Safeguard"), and INTERNET CAPITAL GROUP, INC., a Delaware corporation (the
"Company").
Background
----------
A. The Company is contemplating an initial public offering (the
"Public Offering") of its common stock, par value $.001 per share (the "Common
Stock").
B. As part of the Public Offering, the Company will offer 2,200,000
shares of Common Stock (the "Offered Common Stock") to certain shareholders of
Safeguard pursuant to a directed share subscription program (the "Directed Share
Subscription Program").
C. In the event that any of the shares of Offered Common Stock are
not subscribed for or, if subscribed for, are not purchased by the shareholders
of Safeguard under the Directed Share Subscription Program, Safeguard and the
Company wish to provide for Safeguard's purchase of these remaining shares.
D. In the event that the shareholders of Safeguard subscribe for more
shares of Common Stock than the number of shares of Offered Common Stock,
Safeguard will make an offer of up to 1,300,000 shares of common stock of the
Company, par value $.001 per share, owned by it prior to the Public Offering
(the "Safeguard ICG Stock"), and the Safeguard ICG Stock shall be included in
the Directed Share Subscription Program.
E. ChaseMellon Shareholders Services, L.L.C. will act as the offering
agent (the "Offering Agent") for the Directed Share Subscription Program and as
the Company's transfer agent. The Offering Agent will determine the record date
shareholders eligible to participate in the Directed Share Subscription Program
and will collect subscriptions and subscriptions payments from the eligible
shareholders until 5:00 p.m. on the fourth business day following the date the
Company determines the initial public offering price of its shares.
Terms
-----
In consideration of the mutual covenants contained herein and
intending to be legally bound hereby, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
THE TRANSACTION
---------------
1.1. Purchase Price.
--------------
(a) Purchase Price. The purchase price for the Common Stock (the
--------------
"Purchase Price") shall be equal to the product of (i) the aggregate number of
shares of Offered Common Stock, and (ii) the price per share of Common Stock
sold pursuant to the Public Offering.
(b) Advance of Amount Equal to Purchase Price. Safeguard, on behalf
-----------------------------------------
of its shareholders participating in the Directed Share Subscription Program,
shall transfer, or cause the Offering Agent to pay out of subscription funds
received, to the Company an amount equal to the Purchase Price on the day of the
closing of the Public Offering by wire transfer.
1.2. Closing.
-------
(a) Time and Place. The closing under this Agreement (the "Closing")
--------------
will take place at 10:00 a.m., Philadelphia, Pennsylvania time, on the day of
the closing of the Public Offering, at the offices of Dechert Price & Rhoads, or
at such other time, date or place as the parties shall mutually agree. The date
on which the Closing occurs is sometimes referred to herein as the "Closing
Date."
(b) Deliveries and Proceedings. On the Closing Date, the Company
--------------------------
shall instruct the transfer agent to accept instructions from Deirdre Blackburn,
or her designee at Safeguard, for:
(i) delivery of the subscription funds collected by the
Offering Agent to the extent not paid to the Company at the Closing;
(ii) delivery of the shares of Offered Common Stock purchased in
the Directed Share Subscription Program;
(iii) delivery to Safeguard of shares of Offered Common Stock not
purchased by Safeguard shareholders; and
(iv) the return to Safeguard of any shares of Safeguard ICG
Stock that were not purchased in the Directed Share Subscription Program.
<PAGE>
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company hereby represents and warrants to Safeguard as follows:
2.1. Organization. The Company is a corporation duly incorporated,
------------
validly existing and in good standing under the laws of the State of Delaware.
2.2. Power and Authority. The Company has full corporate power and
-------------------
authority to make, execute, deliver and perform this Agreement.
2.3. Authorization and Enforceability. The execution, delivery and
--------------------------------
performance of this Agreement by the Company have been duly authorized by all
necessary corporate action on the part of the Company, and this Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
ARTICLE 3
REPRESENTATION AND WARRANTIES OF SAFEGUARD
------------------------------------------
Safeguard represents and warrants to Sellers as follows:
3.1. Organization. Safeguard is a corporation duly incorporated, validly
------------
existing and in good standing under the laws of the State of Delaware.
3.2. Power and Authority. Safeguard has full corporate power and
-------------------
authority to make, execute, deliver and perform this Agreement.
3.3. Authorization and Enforceability. The execution, delivery and
--------------------------------
performance of this Agreement by Safeguard have been duly authorized by all
necessary corporate action on the part of Safeguard, and this Agreement
constitutes the legal, valid and binding obligation of Safeguard, enforceable
against Safeguard in accordance with its terms.
ARTICLE 4
CONDITIONS TO CLOSING; TERMINATION
4.1. Conditions Precedent to Obligations of Safeguard. The obligations of
------------------------------------------------
Safeguard to proceed with the Closing under this Agreement are subject to the
fulfillment prior to or at Closing of the following conditions (any one or more
of which may be waived in whole or in part by Safeguard at Safeguard's option):
(a) Bringdown of Representations and Warranties. The representations
-------------------------------------------
and warranties of the Company contained in this Agreement shall be true and
correct on and as of the time of Closing, with the same force and effect as
though such representations and warranties
<PAGE>
had been made on, as of and with reference to such time, and Safeguard shall
have received a certificate, signed by an executive officer of the Company, to
such effect.
(b) Performance and Compliance. The Company shall have performed all
--------------------------
of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by it on or before the Closing, and
Safeguard shall have received a certificate, signed by an executive officer of
the Company, to such effect.
(c) Public Offering. The closing of the Public Offering shall have
---------------
occurred.
4.2. Conditions Precedent to the Obligations of the Company. The
------------------------------------------------------
obligations of the Company to proceed with the Closing hereunder are subject to
the fulfillment prior to or at Closing of the following conditions (any one or
more of which may be waived in whole or in part by the Company at the Company's
option):
(a) Bringdown of Representations and Warranties. The representations
-------------------------------------------
and warranties of Safeguard contained in this Agreement shall be true and
correct on and as of the time of Closing, with the same force and effect as
though such representations and warranties had been made on, as of and with
reference to such time, and Safeguard shall have delivered to the Company a
certificate, signed by an executive officer of Safeguard, to such effect.
(b) Performance and Compliance. Safeguard shall have performed all of
--------------------------
the covenants and complied with all the provisions required by this Agreement to
be performed or complied with by it on or before the Closing and Safeguard shall
have delivered to the Company a certificate, signed by an executive officer of
Safeguard, to such effect.
(c) Public Offering. The closing of the Public Offering shall have
---------------
occurred.
4.3. Termination.
-----------
(a) When Agreement May Be Terminated. This Agreement may be
--------------------------------
terminated at any time prior to Closing:
(i) by mutual consent of Safeguard and the Company; or
(ii) by Safeguard or the Company, if the Company shall have
withdrawn its Registration Statement on Form S-1 relating to the Public Offering
(Reg. No. 333-78193).
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement by either Safeguard or the Company, as provided above, this Agreement
shall forthwith terminate and there shall be no liability on the part of either
Safeguard or the Company, except for liabilities arising from a breach of this
Agreement prior to such termination; provided, however, that the obligations set
-------- -------
forth in Article 5 hereof shall survive such termination.
<PAGE>
ARTICLE 5
CERTAIN ADDITIONAL COVENANTS
----------------------------
5.1. Indemnification.
---------------
(a) Safeguard hereby agrees to indemnify the Company and its
underwriters, affiliates, officers, employees, representatives and directors
(the "Indemnified Persons") against, and hold them harmless from, any loss,
liability, claim, damage or expense, joint or several ("Losses"), arising
directly or indirectly, out of or in connection with, the Directed Share
Subscription Program, including, without limitation, (i) costs and expenses
associated with the failure of any shareholders of Safeguard to consummate
purchases of Offered Common Stock for which they have subscribed, (ii) any
claims by shareholders of Safeguard or other persons arising from the Directed
Share Subscription Program, and (iii) other costs and expenses, including
printing costs and legal fees and expenses, arising from the establishment,
execution and performance of the Directed Share Subscription Program.
Notwithstanding the foregoing, Safeguard shall not indemnify the Company
against, and the term "Losses" shall not include, liabilities arising from any
untrue or allegedly untrue statement of a material fact, or omission or alleged
omission of a material fact required to be stated to make the statements not
misleading, in the prospectus contained in the Company's Registration Statement
on Form S-1 (Reg. No. 333-78193) (the "Prospectus"), except for statements or
omissions regarding the Directed Share Subscription Program and except for any
materials related to the Directed Share Subscription Program delivered to
Safeguard's shareholders and not to other recipients of the Prospectus
generally. Safeguard agrees to reimburse the Indemnified Persons, as incurred,
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any Losses.
(b) Promptly after receipt by an Indemnified Person of notice of the
commencement of any action for which indemnification or contribution may be
sought hereunder, such Indemnified Person will notify Safeguard in writing of
the commencement thereof. The failure to so notify Safeguard will not relieve
Safeguard from liability under Section 5.1(a) above unless and to the extent
that Safeguard did not otherwise learn of such action and such failure results
in the forfeiture of substantial rights and defenses. Safeguard shall be
entitled to appoint counsel at Safeguard's expense to represent the Indemnified
Person in any action for which indemnification is sought (in which case
Safeguard shall not thereafter be liable for the fees and expenses of separate
counsel retained by the Indemnified Person except as set forth below); provided,
however, that such counsel shall be reasonably satisfactory to the Indemnified
Person. Notwithstanding Safeguard's election to appoint counsel to represent
the Indemnified Person in an action, the Indemnified Person shall have the right
to employ separate counsel (including local counsel), and Safeguard shall bear
the reasonable fees, costs and expenses of such counsel if (i) the use of
counsel chosen by Safeguard to represent the Indemnified Person would present
such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both Safeguard and the
Indemnified Person and the Indemnified Person shall have reasonably concluded
that there may be legal
<PAGE>
defenses available to it that are different from or in addition to those
available to Safeguard, (iii) Safeguard shall not have employed counsel
reasonably satisfactory to the Indemnified Person within a reasonable time after
notification of the commencement of such action or (iv) Safeguard shall have
authorized the Indemnified Person to employ separate counsel at the expense of
Safeguard.
(c) Safeguard shall not, without the prior written consent of the
relevant Indemnified Person, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder unless such settlement, compromise or consent includes an
unconditional release of such Indemnified Person from all liability arising from
such claim, action, suit or proceeding. An Indemnified Person may not settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder without the consent of
Safeguard, such consent not to be unreasonably withheld.
(d) In the event that the indemnity provided for in this Article 5 is
unavailable to or insufficient to hold harmless an Indemnified Person for any
reason, the Indemnified Persons and Safeguard shall contribute to the Losses
(including the legal and other expenses attributable to investigating or
defending same) to which the Indemnified Person may be subject in such
proportion as is appropriate to reflect the relative fault of the Indemnified
Person and Safeguard in connection with the statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations,
including that the Company performed the Directed Share Subscription Program as
an accommodation to Safeguard without any legal obligation to do so. Relative
fault shall be determined by reference to, among other things, whether any
untrue or allegedly untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information provided by the
Indemnified Person or Safeguard, the intent of the Indemnified Person and
Safeguard, and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The parties agree that
it would not be just and equitable if contribution was determined by any method
of allocation that does not take into account the equitable considerations
discussed above.
ARTICLE 6
MISCELLANEOUS
-------------
6.1. Nature and Survival of Representations. The representations, warranties,
--------------------------------------
covenants and agreements of Safeguard and the Company contained in this
Agreement, and all statements contained in this Agreement or any exhibit hereto
or any certificate or other document delivered pursuant to this Agreement or in
connection with the transactions contemplated hereby, shall be deemed to
constitute representations, warranties, covenants and agreements of the
respective party delivering the same. All such representations, warranties,
covenants and agreements shall survive the Closing.
<PAGE>
6.2. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered or, if mailed, when mailed by United States
first-class, certified or registered mail, postage prepaid, to the other party
at the following addresses (or at such other address as shall be given in
writing by any party to the other):
(a) If to Safeguard, to:
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: James A. Ounsworth, Esq.
---------
(b) If to the Company, to:
Internet Capital Group, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: Henry N. Nassau, Esq.
---------
With a required copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attention: Christopher G. Karras, Esq.
---------
6.3. Third Party Beneficiaries. Safeguard acknowledges that each of
-------------------------
the underwriters of the Public Offering shall be a third party beneficiary
entitled to exercise the rights and remedies provided for herein directly
against Safeguard. The Company shall cooperate with and assist each of the
underwriters of the Public Offering with respect to any action such underwriters
take to exercise such rights and remedies directly against Safeguard.
6.4. Successors and Assigns. This Agreement, and all rights and powers
----------------------
granted hereby, will bind and inure to the benefit of the parties hereto
and their respective successors and permitted assigns but shall not be
assignable or delegable by any party without the prior written consent of the
other party.
6.5. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the Commonwealth of
Pennsylvania, without giving effect to principles of conflicts of laws.
<PAGE>
6.6. Headings. The headings preceding the text of the sections and
--------
subsections hereof are inserted solely for convenience of reference, and shall
not constitute a part of this Agreement, nor shall they affect its meaning,
construction or effect.
6.7. Counterparts. This Agreement may be executed in two
------------
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
6.8. Further Assurances. Each party shall cooperate and take such
------------------
action as may be reasonably requested by the other party in order to carry out
the provisions and purposes of this Agreement and the transactions contemplated
hereby.
6.9. Amendment and Waiver. The parties may by mutual agreement amend
--------------------
this Agreement in any respect, and either party, as to such party, may (a)
extend the time for the performance of any of the obligations of the other
party, (b) waive any inaccuracies in representations by the other party, (c)
waive compliance by the other party with any of the agreements contained herein
and performance of any obligations by the other party, and (d) waive the
fulfillment of any condition that is precedent to the performance by such party
of any of its obligations under this Agreement. To be effective, any such
amendment or waiver must be in writing and be signed by the party against whom
enforcement of the same is sought.
6.10. Entire Agreement. This Agreement sets forth all of the promises,
----------------
covenants, agreements, conditions and undertakings between the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written.
6.11. Interpretations. No party to this Agreement shall be considered
---------------
the draftsman. This Agreement has been reviewed, negotiated and accepted by all
parties and their attorneys and shall be construed and interpreted according to
the ordinary meaning of the words used so as fairly to accomplish the purposes
and intentions of all parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
SAFEGUARD SCIENTIFICS, INC.
By: /s/ James A. Ounsworth
--------------------------
Name: James A. Ounsworth
Title: SVP
INTERNET CAPITAL GROUP, INC.
By: /s/ John N. Nickolas
-------------------------
Name: John N. Nickolas
Title: Managing Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 AND
THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> USD
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 26,840,904 186,137,151
<SECURITIES> 0 0
<RECEIVABLES> 1,903,174 8,740,524
<ALLOWANCES> (61,037) (208,645)
<INVENTORY> 0 0
<CURRENT-ASSETS> 29,802,103 224,538,195
<PP&E> 1,206,738 7,733,159
<DEPRECIATION> (55,470) (1,563,357)
<TOTAL-ASSETS> 96,785,975 470,227,369
<CURRENT-LIABILITIES> 9,349,665 24,168,451
<BONDS> 351,924 735,885
0 0
0 0
<COMMON> 66,044 126,507
<OTHER-SE> 80,658,334 418,390,090
<TOTAL-LIABILITY-AND-EQUITY> 96,785,975 470,227,369
<SALES> 0 0
<TOTAL-REVENUES> 964,793 14,783,096
<CGS> 0 0
<TOTAL-COSTS> 1,703,235 7,424,594
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 62,206 0
<INTEREST-EXPENSE> (85,265) (1,770,324)
<INCOME-PRETAX> 17,716,640 25,763,621
<INCOME-TAX> 0 (12,840,423)
<INCOME-CONTINUING> 16,012,736 (6,404,860)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,012,736 (6,404,860)
<EPS-BASIC> 0.33 (0.07)
<EPS-DILUTED> 0.33 (0.07)
</TABLE>
